Washington Policy Shifts & the Infrastructure Funding Challenge Ahead

What has transpired so far in Washington this year and what does it mean for the public finance industry? Panelists will delve into the legislative and tax policy changes, from private activity bonds to tax credits to  what it all means for the state and local governments that fund and build the vast majority of U.S. infrastructure. How has the regulatory landscape changed?

Transcription:

Michael Lexton (00:08):
Thank you, Chris. As you mentioned, I'm Michael Lexton. I established Lexton Infrastructure Solutions last year primarily to advise private sector developers and investors who are looking to deploy private capital and public infrastructure, but also public agencies who are looking at alternative delivery models and P3, et cetera. So we just heard from Tim Monaghan and Kristen Steffans about the outlook for infrastructure from a policy perspective. Of course, 2025 ushered in a new administration, a flurry of executive orders, tariff increases, a high degree of uncertainty regarding federal policy and also interest rates. All that is combined with the impacts from the One Big Beautiful Bill Act. So this afternoon our panel will take a look at the policy shifts and infrastructure funding challenges ahead from the perspective of a public finance investment banker. Paul Creedon, who's the managing director and head of national infrastructure at Janney Montgomery Scott; a rating analyst, Kurt Forsgren, managing director at S&P Global Ratings and sector head for transportation;

(01:31):
And attorney David Narefsky, a partner at Mayer Brown and expert in P3 expertise; and a DC regulator, Ernie Lanza, who is the Chief Regulatory and Policy Officer for the MSRB. So with that, I'm going to dive into a couple of questions here and I'll start at the far end with Paul. So Paul, what is the status of public finance infrastructure issuance in 2025 and what have been the drivers of issuance compared to general market trends? Are there certain sectors in which issuance has been concentrated and what is your outlook for 2026?

Paul Creedon (02:19):
Thanks, Michael. Thank you to the Bond Buyer. It's always great to be here and always great to be on a Bond Buyer panel. Yeah, there's a lot. I mean, let's face it, 2025 has been a pretty exciting year so far, so there are a lot of interesting things to talk about. But in prepping for this, I was thinking about when I attended the conference last year around this time; there was a lot of hopefulness and people were using phrases like "beginning of a new infrastructure finance era," and it has been interesting to see how that's unfolded. I don't think the way that everybody saw it in October-ish 2024 is the same way as we see it now, but a lot of those drivers actually did come through. There's no doubt that we all live and breathe this business.

(03:22):
It's been a heck of an issuance year across the board. The question is sort of what do those numbers mean and what do they mean in the context of what's happened in these first nine months, particularly with regard to federal funding, which I know is a question we'll get to as a panel a little later. But what were those drivers when we all sat here last year and felt like it was going to be building up to a really significant issuance year and we were seeing fuller implementation of the IIJA and the IRA? I think generally there was a feeling at the time that some of the broad-based directives out of that piece of legislation, which as we heard Tim mention expires next year, were going to be a real driver for people utilizing it, understanding its components and going forward. We'd seen expansion of application of TIFIA and WIFIA across the line on all of the typical loan programs.

(04:40):
We saw discretionary grants have a broader base of types of projects, and we've seen some non-traditional categories put into that infra bill that were going to drive the issuance. I think overlaying all of that, there was a general sense in the years post-COVID that there was this real infrastructure need building. The American Society of Civil Engineers had moved the US infrastructure rating from a D to a C. We had started to make some progress on that and that progress was going to continue. Then overlaying even all of that was the general sense at the time that rates would drop really quickly once we got into 2026 and we'd move forward in that manner. So what did happen? Well, what happened was a lot of issuance and, in a broad-based way to look at it, issuance on a year-to-date basis right now—and I think everybody in this room is probably deeply familiar with these statistics, particularly on the banking side.

(05:57):
We've got issuance at 14.5% or 14.7% ahead of where it was last year. In general, that's a run rate right now as where we stand. If you believe in run rates, the year could wind up at a $550 or $520 billion issuance year across the whole industry. That would be, without a doubt, a record. I think we all sat here last year and said we thought that 2025 was going to be a record year, and I think it's going to prove to be, even though it feels like it's maybe slowing down a little bit here in the fourth quarter. It's also in the bounds of what the predictions were, which were as low as 525 and as high as 600 plus, so well within that timeframe.

(07:03):
But I think you have to go a little deeper to figure out whether you really had infrastructure investment because we're a unique market and we have these things called refinancings and refundings, so the waters can get a little muddied as to what you did really to build new infra. I think the gut instinct last year was that there was going to be more new money investment and the facts bear that out. I know for anybody who's ever been an analyst or an associate at an investment bank, you know that these SDC numbers can be sliced and diced a lot of different ways. As a former associate, you can slice and dice them, but I chose to just define it as true new money issuance and new money and combined. There's a little bit of funding noise in there, I guess, if you think of it that way.

(08:04):
But if you look at those numbers well ahead of 2024 as far as new money financing issuance—that would be direct investment building things—the new money and combined areas in SDC are up 21% from '24. So that's a lot of new investment. We saw a lot of mega projects. The proliferation in the last two years of mega project deal financings is just extraordinary. It used to be that if you had a billion-plus financing of direct infra investment in a given year, you had five or six of them. That was a lot. We're now deep into double digits every year. So interesting pattern. Where was all of that focused? Again, rough justice numbers: water/wastewater was up 11%. New money investment in primary and secondary schools up over 50%. A lot of that was obviously what occurred in Texas and Texas school districts getting in front of some proposed legislation. Higher ed up 50% on a new money basis.

(09:25):
We've all seen how universities and their interaction with the new administration have chosen to take their investment dollars now when they need them. Some of that is obviously budget. Surface transportation without transit is up 38%. Airports are up, depending on how you want to measure it; it could be as much as 60% of just new money investment. Public power, taking gas prepay out, up again double digits, almost 50%. P3s, particularly with the addition of the SR 400 transaction that was mentioned earlier, up pretty significantly. I'd say the only entity when you go across the board—and it varies by category—but the only large category down was mass transit, with new money investment down about 13%. That wasn't actually, as a transportation guy, very troubling to me because mass transit investment does tend to jump around a lot and it also can get a little muddied depending on how SDC categorizes it.

(10:41):
So what were the real drivers? Because we know a lot has changed since inauguration day on how people think about transportation funding and infra funding in the US. I think a lot of it was the nature that there were a lot of these mega projects that are long-lived that had just come to their time post-COVID. I think a lot of concerns related to the loss or potential loss or partial loss of tax exemption as a result of having to extend the 2017 tax act. And lastly, I think when some of the volatility occurred and the assertive and rapid actions of the administration upon getting into office, people decided it was a good time to lock in their project, particularly if it had some sort of federal funding component. I think there were a lot of drivers, maybe not the ones we thought last year when we all sat in this room together, but it certainly has been an extraordinary year so far.

Michael Lexton (11:51):
Great. Well thank you, Paul, for that comprehensive overview. I think we can also safely say that the wind is behind our sails as we look to 2026, particularly as the prospect for interest rates continues to improve. For sure, I hear UBS may go back into the business. Switching gears to credit trends, Kurt, at a high level, what have been the observable credit rating trends year-to-date across public finance portfolios, both in terms of rating changes and intermediate outlook revisions, and what do you think has driven these changes? And again, similar to my question to Paul, what do you see for 2026?

Kurt Forsgren (12:39):
Okay, it's a loaded question. Can you hear me all right? That does better. Thanks, Michael. Well, it all comes back to the economy, I think, largely. I'd say overall, things have fared better than expected. We, in fact, just released last week an update to our forecast for this year and for next year, which shows a slowing growth rate. It was about 2.8% GDP growth last year; we're seeing about 1.9% GDP growth this year and then about the same next year. That's assuming two 25 basis point interest rate cuts this year and a combined 50 basis point cut for next year. So again, better than expected, there's still some things to play out in terms of tariffs and inflation. I think the tailwinds were probably the passage of HR 1, which added some certainty and some confidence in terms of what to expect with the federal policy and the marketplace.

(13:42):
We also had on the downside, or the headwind side, sort of a frozen housing market and really negative net migration. As we know, immigration has really been a supporting factor in our workforce, so the decline of that and also some federal cutbacks in employment are things that weighed on that. On the whole, better than expected, but a slower growth rate being forecast. That translates and mirrors into our view of the credit trends year-to-date. I'd say if it were a weather app—and I can't tell the difference between partly cloudy or partly sunny—I probably err on the partly cloudy side because I'm a credit analyst. But mostly because if you just look at rating trends and upgrades to downgrades this year, we're kind of 1.6 to the positive. We have a universe that's largely dominated by state and local governments.

(14:42):
That volume skews a bit of the numbers, but by and large, if you just looked at that snapshot, you'd say, "Hey, things look pretty good." When you take another look and dig a little deeper into the outlook revisions, which is our leading indicator of where we think credit trends are headed, it's a bit more negative. That's the cloudy part of the analogy. That's about two and a half times negative to positive. That looks at rating changes as well as outlook revisions to negative or from positive to stable. It's a leading indicator, and that's to the negative. I think a lot of it has to do with specific segments of the credit market. I look at public power, for example, and the challenges there with the need to generate capacity.

(15:38):
They've got resiliency issues as we've all observed this past year. On water and sewer, again, a lot of issues related to deferred maintenance. A lot of these happening are at the lower end of the credit spectrum—the names maybe that are not showing up at this conference but are nonetheless being affected by credit trends and macro factors. Higher ed was mentioned. Headline news are institutions that have ratings higher than the US government, so we're not as focused on that. There is a lot of noise, but again, trends in the lower end of the credit spectrum with regard to enrollment. And then, of course, on the positive side, we've seen state and local governments as well as transportation entities actually fare very well this year. So a bit of a mixed bag; on the whole positive, but if you look ahead, some clouds on the horizon to finish my weather analogy. Thank you very much.

Michael Lexton (16:33):
No, that's great. Thank you. Diving specifically into the P3 sector of the market: higher yields, lower credit ratings typically, if at all. We're certainly seeing a lot of activity in that. As Paul mentioned, the largest P3 financing to date with SR 400 happened this year. And we have a reverse P3, if you will, coming up with $1.8 billion for TDO, who is buying back a P3 project to be government-owned. So it goes both ways, I guess. But from that perspective, David, there were also early indications that the new administration is trying to encourage more private sector investment. Transportation Secretary Duffy set up a transportation advisory board where that was one of the stated goals: to get private sector investment, and specifically US private sector investment, into more projects. How has this all been borne out and what do you see as the outlook for the P3 world?

David Narefsky (17:49):
Thanks, Michael. Well, first I'd say it's too early to say how it's been borne out. We're only nine or ten months into the new administration. So there's a timing consideration, but also—and I suspect everyone in the room doesn't need a reminder of this, but just to frame the point—the federal government, whoever the administration is, can be helpful with respect to financing tools for infrastructure or supporting public-private partnerships. But the federal government doesn't own very much of US infrastructure. It's owned by state and local governments of one kind or another, and they're the ones who are really making decisions about whether P3s make sense in a particular context. I think it's important to talk about what may be on the horizon from the federal perspective, but again, a reminder that decisions tend to ultimately get made under our federal system at one or two levels down.

(18:56):
With that as background, I guess it's useful to think about a couple of areas here. One, you mentioned the transportation advisory panel that got set up in July by DOT—a 12-member panel of high-quality people across the transportation sectors. A number of folks were previously in the federal government and a bunch are in the private sector with real quality expertise, and they have a directive to try to be helpful and supportive. It's too early to judge, of course. They just met maybe once or twice so far, so we'll have to see what they come up with, but there's a lot of brainpower there. On the funding side, I think a bunch of people in the room probably lived the drama of where the government's going to go with surface transportation funding, particularly private activity bonds.

(20:07):
Over the last 20 years, we've had $30 billion of surface transportation private activity bonds authorized. It took a number of years for the market to really get its arms around how that could be used. But in the last several years, there's been a very high demand, and I think right now we're in a situation where of that $30 billion, there's slightly more than $1 billion that has not been allocated or issued. In the unallocated amount, there's probably a little bit more than a billion, and there's clearly a very large supply and demand imbalance. We're working on a number of projects at various stages that recognize they're not in an immediate position to get an allocation of private activity bonds. There was some hope earlier this year that maybe in the reconciliation bill an increase in the PABs authorization would occur.

(21:01):
That didn't happen. It looks now like it's going to be kicked to next year. So that's going to be a challenge for a number of projects in the pipeline. I've had some conversations with projects at an early stage in which people are now starting to think about the possibility of issuing what the market refers to as "Cinderella bonds," where you might go out initially with a bond issue that would be taxable and could flip from taxable to tax-exempt status if and when the project was able to receive surface transportation authorization. We'll see how that works, but the real point is the market really needs more of this authorization, and I think it's very much a bipartisan issue. It's just a question of when Congress will focus on it. The other area I wanted to focus on from a federal funding perspective is the RIF and TIFIA programs, where again, this is designed to be helpful and supportive of private sector involvement in transportation related projects.

(22:12):
There are a couple of things to note. One is the administration earlier this year said that essentially all projects applying for TIFIA assistance could get up to 49% as opposed to the 33% which was generally the case before. Most of the projects that I think people in the room know about were subject to the 33% limitation. There were really only limited areas, like rural TIFIA projects, where there was an ability to get up to 49%. So that's good news. The other thing that's interesting—and this slightly predates the new administration, but it's being implemented more so now—is the ability to have both the RIF and the TIFIA programs available not just for pure transportation projects, but for TOD (Transit-Oriented Development) projects that were related to other transportation modes.

(23:14):
I was just looking—I know there are folks from the Build America Bureau here—and I was struck in preparing for the panel by the TIFIA scoreboard that shows up on the website. For the current fiscal year, which we're now coming to the end of, there were something like 50 projects that either had completed letters of interest or letters of interest that had been submitted and were being worked on, and about 20 that had been completed. This is across the TIFIA and RIF landscape. More specifically on the TOD projects, there are probably 20 or 25 mostly in a draft stage, but still a really healthy amount of interest and activity in this area. Now the challenge is how they get processed. That's clearly a challenge right now. So let's talk again in a year and we'll see how some of these preliminary activities are accomplishing what's intended.

Michael Lexton (24:44):
I think the panel right after the break has Morteza Farajian from the Build America Bureau, so somebody should just ask him that question. Speaking of those issues, let's shift to the regulatory environment. Ernie, in an administration that seems to be tacking towards regulatory easing, what is it like to be a rule writer in an environment when writing rules has swung from a high priority to something to be avoided or even reversed?

Ernie Lanza (25:26):
Good question. First of all, thank you to the Bond Buyer for having me here. It has been an interesting year in Washington. Just before coming up here on stage, I was talking to someone back in the office to see if we can get some business done with the SEC tomorrow morning before the shutdown proceedings go into place. We sit in a unique position; we're not part of government. We are an independent self-regulatory organization created by Congress. We have a board of experts—some market participants, some public members. In that vast, tumultuous sea of Washington DC, we see ourselves as a quieter lagoon on the side, but the impacts are there.

(26:23):
I mentioned working with the SEC and other regulators and being able to have a sense of where the winds are blowing. We continue working pretty well with the SEC, but no matter the administration, we have two big sets of forces that tee off against each other. One is the ability to say, "Can we do something more to amp up our investor protection or issuer protection type of rules?" And then the other force being, of course, to make sure that the burdens of doing that are not overstated and that we're able to make things easier to comply with. Those two things always battle with each other. It's not brand new to us to have to deal with those types of different forces.

(27:23):
No question, we are in a more regulatory easing mode. The fact of the matter is we had started naturally moving in that direction even before the election. The MSRB had a rulebook that we think is pretty much complete; we're not sitting there writing a whole bunch of brand-new rules. It is really a matter of being a curator of the rulebook to understand where there are potential gaps or areas to strengthen or make more efficient. We had already been moving towards what we're calling "rulebook modernization" and a series of retrospective rule reviews. We step back and ask: does our rulebook work right in the marketplace with current products and trajectories? Are we able to recalibrate the sense of how much benefit we get in return for the burden?

(28:15):
I'll mention a couple of initiatives people paid attention to this last year. One is we had gone out with a concept release on pre-trade transparency. We thought maybe this wasn't the right time and decided we were going to pull that back. We had also been involved in rulemaking along with FINRA as a collaborative effort to potentially speed up the reporting timeframe for trades. We did get that approved last year. We had gone through the cost-benefit calculus and saw that the benefits did tip over the burden side based on information we had then. It might not have been our preferred approach, but we decided it made sense. Since then, we were able to see new data for another two years of that market activity.

(29:02):
You would think maybe people would struggle with their timing of trade reporting, but in fact, trade reporting got better over that two-year period. That better market-driven timing, together with hearing more anecdotal information from market participants who are now asking how to implement these new requirements, caused the balance to shift. So we did go back and look at it again. In this environment, it was easier to look at it again and say maybe it no longer makes sense. We did file to pull back that movement from 15-minute to one-minute reporting. We did retain one aspect of it—to report as soon as practicable. That change in tone or emphasis did help us step back. We don't have a whole bunch of new rules that we expect to write; instead, we're going to concentrate on making our rulebook work better and more efficiently.

Michael Lexton (30:43):
Well, thank you. I think that also helps address what your priorities are going forward in this unpredictable environment. Paul, turning back to some of the unpredictability: we've seen the federal government change course on a few things, including defunding certain projects where federal grants had already been promised. How do you see this affecting market participants and their outlook and approach to funding and credit engineering going forward?

Paul Creedon (31:20):
Thank you for the layup question, Michael. The volatility is—and I really do not like the use of the word "unprecedented," I think it's overused—but we are definitely looking at an unprecedented approach to executive branch intervention and executive power with regard to setting infrastructure policy. I don't mean that as a good or bad statement, because every administration has put its own stamp on infra. ARRA was a similar attempt; it was just a slower process, more congressionally driven. But it is unprecedented because it is not just implementation of existing bills; it is very assertive federal control—not just reprioritizing what types of projects are important, but actually DOT utilizing its tools for legal compliance reviews, rescissions, reallocation, and pausing programs.

(33:52):
And that has included, at least for the first time that I can remember, reviews and rescissions of obligated federal dollars; California High-Speed Rail is a classic example. But at the same time, we see this desire to have RIF and TIFIA finance more deals, hopefully implementing private investment to a greater degree. Where's the balance in that, and what does that process mean for us as capital market participants to have a very assertive DOT and executive branch on projects that were in some cases already in the pipeline?

(34:40):
The one addition that has also been really interesting to see unfold is the direct intervention, whether it's Washington Union Station because National Rail is one of the priorities of the new DOT secretary, or attempts to unwind congestion pricing. I think where we are now is that it's raised a lot more questions than answers, but our market seems to be functioning well. Other than projects that don't specifically fit the priorities of the new administration, you are seeing them proceed and they're getting those projects done. But there's no doubt that nine months in, we're in uncharted territory. Where I go to is: how do we restore that consistency of approach? For decades, the formula for credit for large infra in America has been state and local contribution, perhaps private contribution, and federal contribution in many different forms.

(35:47):
The issue for us is whether this represents a new paradigm of that relationship. Will the volatility continue because the genie is now out of the bottle? Is this the action of an administration to try and put its imprint on infrastructure because everybody's vision is valid on what that means? Does it mean this is going to unfold repeatedly administration after administration now that we've seen the potential extent of the executive branch's ability to influence ongoing programs? So I think it's that consistency that we should be thinking about on deals going forward. Will there have to be mid-transaction backstops? Will there have to be more state and local or more private contribution to the capital stack because the grant programs are vulnerable? I don't think any of us know that now, and I think it would be a mistake to assume everything is running downhill. I don't think that's true, but it may require some adjustments to be thoughtful about the capital stacks. I don't know how you feel about that, David.

David Narefsky (37:29):
Who takes the risk? There's some risk allocation here, which no one has really had to think about before.

Paul Creedon (37:37):
Yeah. Those three stacks were always sort of set in cement.

Michael Lexton (37:42):
It's an additional investor concern for sure as we look at the markets. We are running a little short on time, but I do have a couple of quick questions. Kurt, one issue that hasn't gotten a lot of attention is potential labor shortages and what that impact might have on credit. If you could answer that in 30 seconds or less.

Kurt Forsgren (38:12):
I think it's one of those sticky factors. We've seen commodity prices change, supply chains have been resolved, but it's really been the labor availability. It goes beyond just do we have enough people, but do we have the right people to get the projects done? As a demographic angle, people are retiring, and the number one cause of project delays has really been the labor at its core. There's really no solution other than it'll be higher costs and a net import of talent, either organically grown through training, which takes a long time, or from other countries.

Michael Lexton (38:55):
For sure. And David, in the P3 world, where have you seen talk about regulatory easing and environmental easing with the new administration?

David Narefsky (39:14):
One very quick answer I heard on a podcast the other day is asking about the difference between the US and China. An expert political scientist said, "China's a country run by engineers and America's a country run by lawyers." The point being, I think there is a bipartisan consensus across the branches of government that regulatory reform is needed. This was true even before the election. The current administration has certainly taken that and is trying to move it forward. In particular on the environmental side, the Supreme Court in a decision last year really tried to limit the scope of NEPA. Even in Congress, there's a growing consensus that we've really got to do something to get projects approved more quickly and to have limits on when they can be challenged. I think the country as a whole is moving in a direction where we've realized we've gone too far in the whole permitting and NEPA process.

Michael Lexton (40:42):
And we could probably also have a whole panel on post-approval litigation reform as well.

David Narefsky (40:48):
That's right.

Michael Lexton (40:49):
Which is another hold-up. And then finally, Ernie, technology is impacting every industry and the bond market is not exempt. Blockchain and decentralized finance (DeFi) approaches are all the talk these days. How do you see DeFi affecting our market and what is the MSRB thinking about?

Ernie Lanza (41:13):
It's hard to predict when and how it'll come to our market. It is one of the areas we're doing our retrospective rule review in. All the securities markets have spent the last several decades moving to greater centralization and centralized processes to have transactions occur. Of course, DeFi is the exact opposite. One of the things we're going to look at is our rules regarding how you use those central utilities and what happens when you have transactions that don't use those utilities. We want to make sure that if finance processes use decentralized finance, we don't lose market data that's important for the marketplace to understand.

Michael Lexton (42:22):
Great. Well, thank you, panelists. I think we have time for one or two other questions from the audience. We were going to talk about upcoming surface transportation issues, but thankfully the panel right after this one is on surface transportation, so I'm sure they'll be covering that as well. But if anyone has any questions for this distinguished panel, now's the time. Otherwise, it's time for a coffee break. I'd like to thank everyone.