An opportunity to bring back direct-pay financing
While political pundits and a large number of Americans focus on President Trump’s impeachment trial, market participants are rightly focused on what happens after Trump’s acquittal, at this point a foregone conclusion.
What that means for the muni market is that Trump will remain in office for at least the rest of his first term and maintain the power to wield influence over Senate Republicans.
It also means there is an opportunity to create something for the municipal market and for the country in the coming months, if the White House and House Democrats can summon the political will to do it.
A new direct-pay bond program aimed at jump-starting infrastructure investment makes all the sense in the world for both sides.
There’s no doubt that the muni market would welcome such a program. The nearly two-year Build America Bonds program introduced as part of the American Recovery and Reinvestment Act of 2009 was wildly popular, accounting for more than $180 billion of issuance from April 2009 to its expiration on Dec. 31, 2010.
The taxable bonds were marketable to investors who don’t focus on tax-exempt bonds or have the need for exempt income. But the direct-pay subsidy (35% in the case of the BABs program) made them very attractive to issuers, who saved upward of $20 billion in borrowing costs over the life of the program.
A number of muni market groups have time and again pushed for a BABs-like product revival in the years since it expired, but congressional Republicans have not been as warm to the idea, particularly in the Senate. The now-retired Sen. Orrin Hatch of Utah, formerly chair of the Senate Finance Committee, once called them “a disguised state bailout.” Proposals have been floated for a program that would have a reduced subsidy rate, but those have similarly met with little support from Republicans.
A decade later, what has changed since Republicans first blocked attempts to bring BABs or a similar program back and why do those changes matter? A couple of things.
The first is that we have gone nine more years without any decisive federal action on infrastructure, during which time the infrastructure funding gap has by some estimates exploded into a full-fledged infrastructure crisis. By 2017 the American Society of Civil Engineers was already estimating that the U.S. required some $2 trillion of additional infrastructure investment to avoid trillions of dollars of losses to GDP and millions of lost jobs.
The existence of an infrastructure crisis isn’t a universally accepted truth, to be sure. A Brookings Institution study published one year ago concluded that “this situation is not obviously worse than it was 20 years ago.”
But crucially, a key theoretical believer in the infrastructure need has been Donald Trump, who as a candidate railed against America’s “Third World” airports and who once proposed a $2 trillion infrastructure plan that died after the president opted to use his early-term political capital on tax reform and a mostly failed attempt to undo Obama’s signature healthcare law.
That’s the other change since 2011: We now have a president who very much views himself as a builder and a dealmaker and who is in key position to both make a deal and build on a huge scale by exerting his influence with the Senate Republicans who have mostly shown him unswerving loyalty throughout most of his presidency.
One Democratic House staffer told me he doubted the Senate GOP had any interest in a new direct-pay bond program. But Treasury Secretary Steven Mnuchin, directed by Trump to make a deal with House Ways and Means Committee Chairman Richard Neal, D-Mass., could alter the calculus.
“Neal and Mnuchin could work something out,” that staffer told me, “and that could change the math in the Senate pretty quickly.”
So there lies an opportunity for everyone to benefit. Issuers could get access to low-cost capital to tackle the infrastructure challenge, however severe it may be. The industry benefits from a glut of new deals and opens up the market to a broader investor pool. Democrats get a program they like.
And in exchange for his efforts to sway Senate Republicans, Trump gets to claim credit for billions of dollars in new investments and thousands of new jobs. For a man who routinely boasts of his ability to keep getting things done despite ceaseless Democratic efforts to undo him, what could be sweeter?
There is certainly some trickiness to the execution. The administration would have to work with Neal and other lawmakers to arrive at a subsidy level that everyone could live with, not to mention pay for. The rapid approach of the November elections also means that Trump, as well as much of Congress, could be operating on borrowed time.
But Americans elect their leaders to work through challenges like those. The opportunity is there. Do our leaders have the will to grasp it?