When Talking Infrastructure, Remember the Municipal Securities Market

This is a guest post by Susan Collet, Director of Government Relations for the Municipal Securities Rulemaking Board.

The National League of Cities’ City Fiscal Conditions 2017 study arrived this fall at a time of heightened discussion at the White House and on Capitol Hill regarding policies that can spur more investment in the nation’s infrastructure. The report’s results speak to the need for policy action on this front: 55% of cities report that infrastructure needs are among the three factors most negatively impacting their city’s budget, and 92% report infrastructure as a factor that has increased over the last year in determining fiscal conditions.

What’s more, current tax proposals before Congress could further complicate infrastructure financing.

State and local governments own more than 90 percent of non-defense public infrastructure assets, and pay approximately 75 percent of the costs to maintain those assets, according to Congressional Budget Office data. Infrastructure maintenance and new projects are mostly financed with tax-exempt municipal securities, which enable over 50,000 state and local government issuers to affordably access capital markets to finance important public facilities from roadways to sidewalks, and from universities to elementary schools.

Experts at every level of government are grappling with how to meet the need for infrastructure investment and seeking ways to coordinate infrastructure financing at the state and local level with federal incentives and private sector involvement. To ensure that the municipal securities market essential to infrastructure finance remains in sharp focus in that equation, my organization, the Municipal Securities Rulemaking Board (MSRB), has published a market primer with key considerations for policymakers, Municipal Securities: Financing the Nation’s Infrastructure. As the primer illuminates, state and local investment in infrastructure overall dwarfs federal and private sector involvement.

While state and local governments shoulder much of the responsibility for public assets, Congress does direct a significant portion of its agenda toward the federal contribution to infrastructure, with particular attention to federal transportation and water infrastructure funding. And, its focus on infrastructure goes beyond highway and water bills to envisioning ways to jump start economic growth.

In this regard, the Trump Administration has considered federal tax credits and public-private partnerships (P3s) for stimulus, while Obama-era stimulus legislation established new types of subsidized municipal securities that have since expired, including certain tax-credit bonds and direct-pay, “Build America Bonds.”

Congress may yet address a wide array of programs and proposals to stimulate investment—from infrastructure banks to public private partnerships, and from tax incentives to federal loan programs. Sometimes overlooked in the policy alphabet soup of federal programs is the very foundation for successful infrastructure: efficient capital markets. The municipal securities market must function well to maintain current state and local government priorities, and must thrive to support policies aimed at bridging the nation’s infrastructure funding gap.

Each day, the municipal market brings capital to communities, with  state and local governments issuing an average annual $430 billion in municipal securities since 2010. The volume of bonds issued for new projects (“new money”) has, in recent years, roughly matched the volume representing refundings that replace existing debt with lower interest rate debt.

However, as reflected in the chart below, this recent volume for new projects has lagged significantly behind the volume seen from 2002 to 2010, with a precipitous drop in volume occurring once the 2009 Build America Bond stimulus program ended in 2010.

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Source: Thomson Reuters


Although new money volume lags, savings from refundings seen in the current low interest rate environment could open more capacity for infrastructure investment by state and local governments in the future – absent other budget pressures.

But as the NLC study shows, the infrastructure investment need felt by local governments is pronounced. Congress and the Administration are feeling the pressure as well, and taking stock of the policies that could unlock the full potential of capital markets and provide growth against a backdrop of growing deficits.

As policymakers balance these considerations, the MSRB keeps top of mind its mission to promote a fair, efficient and transparent municipal securities market. As we seek to protect municipal securities investors and issuers, we are aware that Congress may enact a tax reform and infrastructure legislation that unleashes or stymies the potential of capital markets as a whole — and may put the $3.8 trillion municipal securities market to work, or to rest. Arguably, the municipal market can adapt, having endured previous tax reforms, sequestration and economic recessions. It is a resilient market, borne of the founding principles of a nation that reserves power, decision making authority and access to capital for state and local government.

Yet hazards for the market should be avoided or overcome, and consequences of tax proposals — such as eliminating tax-exempt private activity bonds that finance public works, or limiting the flexibility of refundings — carefully considered. An efficiently operating municipal securities market is the basis from which to advance essential priorities. As policymaking brings disparate ideas into focus, it is important to keep in mind that the municipal securities market is in our nation’s DNA as the primary means of financing its infrastructure.

3bb623c.jpgSusan Collet is the Director of Government Relations for the Municipal Securities Rulemaking Board (MSRB), the congressionally chartered organization that ensures the integrity of the municipal securities market by overseeing firms and financial professionals engaged in municipal securities and municipal advisory activities, making municipal market data widely available and providing market leadership, outreach and education.