Bonds and Financing

Trump's infrastructure plans: first fix the bonds

In Trump's Infrastructure Mistake, a Dec. 18, 2016 Wall Street Journal article, authors Alan Blinder and Alan Krueger (@Alan_Krueger) correctly point out that President-Elect Donald Trump's plan to encourage private investment in infrastructure will not, by itself, provide funding for all our nation's infrastructure needs.

However, I do not think solely private investment was the intention and believe President-Elect Trump himself said as much recently in expressing his support for municipal bonds during a meeting with representatives of the U.S. Conference of Mayors.

The WSJ article explains that there are better alternatives to private investment for public infrastructure projects. Blinder and Krueger elaborate: "One example is Build American Bonds (BABs), a special breed of municipal bonds whereby municipalities issue taxable debt but receive a subsidy from the federal government — 35% under the 2009 Recovery Act. In the two years the program lasted, more than $180 billion of bonds were issued, financing thousands of projects from community college construction to road maintenance_ — _.BABs leave project selection to municipalities, which can use them for routine maintenance and other projects that lack a revenue stream_ — _But for the great bulk of infrastructure needs, BABs would be a far superior solution."

Tax-exempt municipal bonds have financed $2 trillion in new investments in the last decade and will finance another $2 trillion in the decade ahead if left alone.

However, where Blinder and Krueger are mistaken is in their belief that Build America Bonds are their own panacea. The credit payments to issuers of these taxable bonds certainly encouraged new investments in 2009 and 2010, but the federal government has since reneged on the deal, sequestering $1 billion in payments to issuers since 2013. Treasury will likely cut another $2 billion from these previously promised payments before sequestration runs out in 2026.

This is not only unfair to issuers, but certainly sours potential issuers should Washington reauthorize the BABs program in 2017. The American Municipal Power, Inc. organization is a prime example of the frustration of those issuing BABs. AMP issued nearly $3 billion in BABs to help finance investments in new coal and hydroelectric generating assets. Sequestration is estimated to cost the ratepayers in our 84 participating public power communities in five states more than $65 million.

We certainly encourage novel approaches to supplement tax-exempt municipal bonds, but Congress will have to fix the current BABs program, before looking to new BABs to be part of that solution."

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