WASHINGTON – Two public finance advisors have announced a proposal to free up as much as $1 trillion that could be used to promote infrastructure spending, assist with comprehensive tax reform, and positively impact issuers, investors, and participants in the municipal securities marketplace.
Larry Kidwell, president of Tennessee-based Kidwell & Company, and Robbi Jones, president of Texas-based Kipling Jones & Co., have been fine tuning their proposal while discussing it with members and staff in Congress, Trump administration officials, and the capital markets community over the past several months.
Their efforts have included a response to a request for proposals to foster economic growth that was issued by Sens. Mike Crapo, R-Idaho, and Sherrod Brown, D-Ohio, who lead the Senate Banking Committee.
The proposal calls for Congress to pass legislation that would enable federal government agencies to sell debt and lease assets, which may total $2 trillion, according to Kidwell and Jones. The two say that such legislation could allow the government to collect more than $1 trillion without increasing taxes or federal debt.
“As fiduciaries who have served as public finance advisors to governments of all sizes, we recommend refinancing agency debt assets as one component of an overall strategy to raise proceeds that will be available for redeployment in the near term,” Jones said. “We are especially enthusiastic about the opportunity for state and local issuers to leverage a portion of these funds for much needed infrastructure projects.”
Kidwell said Trump’s election “creates an historic opportunity to rethink the way government works, revitalize our nation’s infrastructure and reform our tax code.”
“This government refinancing plan can be an integral and important mechanism to finance these priorities quickly, or to simply pay down the national debt,” Kidwell said.
The idea for the proposed legislation is not new, and is borrowed from the Omnibus Budget Reconciliation Act of 1986, which required federal agencies to sell debt assets. The previous program raised billions for the U.S. government, Kidwell and Jones said.
The draft legislative language included with their proposal to the Senate Banking Committee would require federal agencies to give existing borrowers a yet-to-be-determined amount of time to pay off their loans at a significant discount to the par value, said Kidwell and Jones. The twosaid they have met with a number of financial institutions willing to establish programs so borrowers will have ready outlets to take advantage the benefits of the proposal.
Any loans that remain outstanding after the set amount of time the borrower has to pay off the loans would be sold to investors with no recourse or liability to the federal government. The investors could include asset managers, insurance companies, pension funds, and community banks, among others.
Federal departments and agencies would be required to ensure that any investors offering to buy the debt that has not been refinanced have a demonstrated capacity to effectively service such loans, according to the proposal and the sale of the notes or obligations would not change any existing debt terms. Additionally, the government would have to pursue the highest possible return for the sales of debt, whether that is through a negotiated or competitive process, and would have to work with financial advisors from micro, women-, and minority-owned businesses so that they could be sure they are getting the highest return, according to the draft language.
The idea has garnered support from outside Congress and the administration as well, including from Grover Norquist, president of American for Tax Reform.
"The accounting rules used by the government since 1990 systematically underprice the risk of federal loan programs and therefore the true cost to taxpayers," Norquist said. "These loans should be sold to investors to raise cash that could be used to pay down the federal debt, or to help finance some of the Administration's priorities, including tax reform."
The proposal may, among other things: allow the government to fully fund the $1 trillion in infrastructure spending Trump has said he would like to see; benefit original borrowers who would get to purchase their loans at a discount; return lending and servicing programs to the “more efficient private sector;” and eliminate credit risk associated with assets sold, according to Kidwell and Jones.
The two advisors point to a 2017 Georgetown University McCourt School of Public Policy report that says the enactment of President Trump’s $1 trillion infrastructure plan, which their proposal and associated legislation could enable, may provide for the creation of 11 million new jobs, 81% of which would be blue-collar going to individuals who do not possess a college degree. The Georgetown report says President Trump’s infrastructure plan would, at least temporarily, revitalize the blue-collar economy.
It would also allow the U.S. to address its ailing infrastructure, which recently got a “D+” grade on the American Society of Civil Engineers’ 2017 report card. The only type of infrastructure to earn a grade above “C+” on the report card was rail, which got a “B.” The majority of other types of infrastructure, including aviation, drinking water, and roads got a “D+” or below.