On Infrastructure Bill, a Fight Over Funds, Not Funding

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

While Congress may be tied up debating an infrastructure bill, cities are virtually unanimous: Funds for fixing roads, water systems, mass transit and other essential public assets is their No. 1 priority.

That was the message from 596 local leaders surveyed by the National League of Cities.

On infrastructure bill, a fight over funds, not funding

“The best time to invest in infrastructure was years ago. The second-best time is right now,” said Vince Williams, of the National League of Cities and mayor of Union City, Georgia. “The needs of America’s communities, families and workers are simply not being met by the current level of funding and support from the federal government on this critical issue.”

Despite years of talk (“Trump Surprises Mayors, Supports Muni Tax Exemption”), a large-scale infrastructure bill has yet to be enacted, though current discussions are drawing a lot of attention.

Tax-free munis a key tool amid infrastructure bill debate

The Biden administration originally proposed a $2.3 trillion bill, but cut it to $1.7 trillion. Senate Republicans recently unveiled a counterproposal of $928 billion.

Although they disagree on how much to spend, lawmakers from both parties agree a variety of funding methods should be used.

In a House Ways and Means Committee meeting last week, tax-free bonds were once again top-of-mind in various proposals.

One bill calls for increasing the amount of tax-exempt debt that can be used for a bank-qualified issuance to $30 million, up from $10 million. The limit hasn’t budged since bank-qualified loans were created in 1986. They were designed to encourage banks to invest in tax-free bonds from smaller issuers while giving cities access to lower-cost borrowing for public works projects.

Another proposal calls for expanding and renewing the New Markets Tax Credit, a program created in 2000 to attract private investment in distressed communities.

Reinstate advance refunding bonds

For Michigan State Treasurer Rachel Eubanks, though, restoring advance refunding bonds is key. She said advance refundings have saved the state of Michigan and its local governments and school districts $771 million from 2007 to 2017, according to The Bond Buyer.

“In that same time, state and local governments across the nation issued more than 12,000 advance refunding bonds to save a minimum of $18 billion in borrowing costs,” she said, testifying on behalf of the National Association of State Treasurers.

In a low-interest rate environment, advance refunding bonds can save issuers money by replacing older, higher-interest rate bonds. They were eliminated in 2017 as part of the tax overhaul (“Restore Advance Refunding Bonds, Break Gridlock”).

Also discussed in the meeting was reviving Build America Bonds, a successful program used in the wake of the Great Recession (“A Comeback for Direct-pay Muni Bonds?“).

It’s impossible to predict whether a plan to rebuild America’s infrastructure will finally pass. But if it does, tax-free municipal bonds will likely play an important role in financing the effort.

Muni investors should keep this in mind amid contradicting headlines and financial stories that falsely frame the municipal bond market through the lense of equities. For more than 100 years, municipal bonds have played an important role across the country and are poised to continue to do so.

James A. Klotz is the President of FMSbonds, Inc.
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May 27, 2021

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