Change can be exasperating. Change can be exciting. Change can be both simultaneously. When one thinks of an early adapter, the Municipal Market is not always the first thought. However, the industry has grown and deepened with many changes over the years. Some of these changes are self-induced and others are brought by regulation or markets. Policy changes are perhaps the category of changes that we are most accustomed to dealing with over time. Administrations change; parties change; and priorities change. States are often agents of change. The policy priorities shift and suddenly there is a new or renewed policy interest. That shift will often direct the financing program and will guide some of the localities towards the shift. When we have a change at the federal level, the change can be particularly acute. Remember New Federalism?
Now the Municipal Market is appreciating the fact that the whole world beyond this market has discovered "infrastructure" and the importance of same. We have been extolling the virtues of the benefits of investing in infrastructure for a very long time. Obtaining buy-in from legislators has not always been as forthcoming as it is now. The longer commuters sit in traffic or on the train to get to work, the greater the level of intensity.
The new administration in our nation's capital has definitely put the focus on infrastructure. How to finance the $1 trillion of proposed improvements to the physical asset base has been intensified by the discussion of the application of tax credits to leverage many dollars. The funding provided by any new approach should be used as a supplement tax exempt financing and should not be employed to replace tax exempt financing. We only need to think back to the beginnings of the TIFIA program. At inception, the rules were plentiful and bankers had to work within the confines of those rules. There was a perception at the time that the TIFIA program was unwieldy. With the passage of time, certain modifications were made to TIFIA to make them more "user friendly." As of today, the TIFIA program is well established and has been of great use in major projects such as the Tappan Zee Bridge.
Yes, it is true that few details concerning the new federal programs are available at this point in time. There is a short list of worthy top infrastructure projects, but exactly how the projects are to be funded is presently a work in progress. The short list compares with over 55,710 deficient bridges across the nation for starters. We know that details will be forthcoming even if they become known after the first hundred days. In the meantime, we must continue to demonstrate the strengths of the tax exempt Municipal Market that we have today. An extraordinary number of projects have been funded at extremely low rates over the last several years. And cash flow has been "discovered" for many projects through the mountain of refundings that have been accomplished. We in this industry often find ourselves proselytizing on the merits of tax exempt financing and on the right to do so.
Tax exempt financing is clearly preferred, but when it makes economic sense, we are also quite proficient in bringing taxable municipal paper to market. Build America Bonds proved that the Municipal Market can adapt and can do so quite well. In the beginning of the BABs program, there was a lot of debate and discovery over the traditional municipal call provisions versus the make-whole call provisions of the taxable markets. Eventually after some initial doubts, Issuers and the market became much more comfortable with the make-whole provisions. What did lead to some consternation with the BAB program was the eventual effect of Sequestration on the level of subsidy. The paring back of the subsidies was easy for many larger credits to absorb but for smaller credits the programs were somewhat challenged with the reductions.
Any new programs that are initiated by the federal level have to have a certain degree of predictability. Entering into financing programs for the projects on a grand scale that are being considered cannot endure many changes large and small along the path to completion. Large transportation projects with multiyear construction timetables are especially diligent about planning for random events such as weather, suppliers, labor and materials, and many other countless factors. I recall one instance in a P-3 where the team was refining its approach to forecasting the needs for rock salt to maintain the roads in the Midwest for 99 years. There is a margin of error that may be covered by a contingency or other provisions. But any change in a federal funding approach that could change mid-stream is much more difficult to cope with in an overall plan of finance.
The bottom line is that we have some nervous anticipation about what the details of the federal infrastructure program may be. We think such details should be made to be compatible with a program of tax exempt financing. The possibility that the tax exemption may be revisited in any tax reform overhaul is a very great concern. Some pundits think the exemption of the interest from taxation may be vulnerable to viable threats on some level with any new proposal. Only time will indicate the future course for this policy. It may be August before we have any real handle on the future direction for tax reform. In the meantime, there is a good argument to keep the financing robust until we learn of any date certain when any new policy and law will become effective.
And there is the matter of independent revenue streams. These revenue streams are critical to the repayment of debt for new programs. The question that gives me pause is given all of the revenue bonds outstanding, how many unencumbered revenue streams are out there? We do have bonds that have fourth and fifth liens with a diminishing ability to service much par. Perhaps, new streams may be created that have not been contemplated, or, better yet, carve outs from existing revenue streams will become more commonplace. We do not doubt that Issuers and Bankers will employ their respective creativities to address the challenges.
