Trump Infrastructure – First Take

Author: Patricia Healy, CFA, Post Date: February 12, 2018
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The President’s infrastructure vision is now in the hands of Congress, which is tasked with devising a plan that promotes investment in our nation’s well-being. The vision includes over $1 trillion in investment over the next ten years. Infrastructure investment is sorely needed, as is demonstrated by the Association of Civil Engineers’ report card on our nation’s infrastructure, which gives the US a D+ rating. See https://www.infrastructurereportcard.org. The vision includes leveraging of federal funds, better coordination and partnering of federal and local stakeholders in the development of projects, and streamlining of the regulatory permitting process by eliminating redundancies in an effort to shorten the time frame for projects.

An expanded version of the plan is expected to be released today. Public-private partnerships have been touted in the rebuilding of our infrastructure; however municipalities will remain major stakeholders. The municipal finance industry is encouraging a number of recommendations that would make investment less costly and less confusing. Education will be paramount, as some stakeholders are worried that relaxation of certain processes will have environmental or economic development ramifications.

Private activity bonds (PABs), which finance transportation, utility, housing, higher education, and other infrastructure projects on a tax-exempt basis were threatened in the tax reform bill. The tax exemption was saved as legislators realized that needed infrastructure was financed with PABs. However, these bonds are subject to volume caps with no escalation provisions. Market participants are advocating for the elimination of AMT on interest on PABs and  that volume caps be eliminated, or at least increased, to allow more projects.

A number of recommendations resurrect items lost in the recent tax reform bill, including the ability to issue advance refunding bonds, which allow borrowers to refinance higher-coupon bonds to yield savings. See John Mousseau’s commentary at http://www.cumber.com/the-muni-take-on-the-tax-bill-round-two/. This move may be advisable, because other structures such as taxable bonds, variable-rate debt, and swaps, which could be used to refinance debt and produce similar outcomes, are more expensive or more complicated and expose issuers to different risks than do traditional advance refunding bonds.

Other recommendations that municipal market participants will support include making adjustments to arbitrage restrictions (or at least simplifying rules), insulating Build America Bond credit payments to municipalities from reductions during sequestration, and increasing the ability of issuers to designate their bonds as bank-qualified by raising the bond size limit from $10 million to $30 million with an escalation for inflation and an expansion of the issuers that can take advantage of the designation. The bank-qualified designation allows the issuer to bypass traditional underwriting and sell tax-exempt bonds directly to local banks. It especially benefits smaller municipalities.

Some complain that the President’s comments are short on detail; however, since infrastructure is important to all in America, it is imperative that Congress and other interested parties make their positions known so that a bipartisan plan can be arrived at. One bipartisan bill, proposed by US Senators John Cornyn (R-TX) and Mark Warner (D-VA), is titled “Building United States Infrastructure Projects and Leveraging Development,” or BUILD. The bill would allow governments to enter into additional public-private partnerships to finance surface transportation projects and increase the amount of PABs that could be issued by state and local governments by $5.8 billion. Another bipartisan bill would create $5 billion in PABs for public buildings such as schools, colleges, libraries, and courthouses.

There needs to be a program for other sectors of the municipal market, including water and wastewater projects, hospitals, public power, and other transportation projects. WIFIA, the Water Infrastructure Finance and Innovation Act, which is already established but has yet to approve a project, will help finance utilities with low-interest loans and flexible repayment programs. TIFIA, the Transportation Infrastructure Finance and Innovation Act, has done the same for public-private partnership financing structures for roads and bridges. Possibly, these programs will be expanded. Since progress on how to best finance infrastructure is slow in coming, many jurisdictions are working on their own plans and have raised gas taxes and other taxes to help fund projects. Some states doing so include Tennessee, South Carolina, and New Jersey. Municipalities have competing expenses such as pension payments, which are a growing portion of budgets; however, it remains important to fund improvement of our infrastructure to attract growth and development, as well as to improve safety.

Infrastructure Week in Washington DC is May 14th through the 21st. Here is a link to a site devoted to it: http://infrastructureweek.org/.  I found articles on needed investment but not any on how to finance the $1 trillion needed over 10 years. During the week, Municipal Bonds for America is planning an educational outreach day for members of Congress and their staff. Municipal Bonds for America is a nonpartisan coalition of municipal market participants, from issuers to investors, that helps increase awareness of the benefits of municipal bonds. See http://www.munibondsforamerica.org/.

Regarding infrastructure, one of the elephants in the room is the rebuilding of Puerto Rico. Federal aid remains largely undetermined or pending. In particular, FEMA rebuilding funds are for replacing infrastructure to its condition before a disaster; but Puerto Rico already needed more-reliable, storm-resistant electric and water systems; and so changes to the FEMA regulations are being discussed. As has been well publicized, the lack of electrical service since the storm has hampered the ability of merchants to remain open, reducing their ability to remit sales taxes to the Commonwealth, employ workers, or reinvest in their businesses – and has resulted in an exodus of citizens. As of Friday the island reported that 72.98% of power had been restored. On February 28th there is a hearing before Congress regarding the slow rebuilding process and plans for the future. Possibly, the President’s infrastructure plan to be released Monday will address Puerto Rico and/or national storm resiliency.

Those who are interested in a deeper discussion of issues affecting the Caribbean, please join us February 22 at the University of Southern Florida in Sarasota for the program “Cuba and the Caribbean: What Now?” The full program and registration information can be found here: https://www.wusf.usf.edu/cuba_and_the_caribbean_what_now.

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
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