Infrastructure Policy: A Golden Age for the U.S.?
June 1, 2021
By Tom Kozlik, Head of Strategy and Credit for HilltopSecurities
In 1812, a long financial tradition began with what is commonly referred to as the first recorded municipal bond sale, a deal done by New York City. Over two centuries later, this practice continues as state and local governments and other public finance and infrastructure-related entities continue to tap the municipal bond market for capital.
The municipal bond market is a source of effective and efficient infrastructure financing for public finance entities across the United States. Public finance entities sold a record $484 billion of municipal bonds in 2020. About 30 percent of this debt is incurred by state and local governments; nearly one-third nearly one-third of total issuance was attributed to the education sector last year and alittle over 40% was sold to investors by utilities, health care, housing, and transportation issuers.
Issuance data through the first part of 2021 is even higher year-over-year. This is good news considering the American Society of Civil Engineers (ASCE) 2021 Report Card for America’s Infrastructure results show the ASCE grade for the nation’s infrastructure GPA is still only a C-, even though it notched up from a D+ in 2017. Overall, this tells us that U.S. infrastructure remains below average and indicates there is still work to be done that necessitates additional infrastructure funding.
We have long said the only way municipal bond issuance would rise meaningfully is if there is an increase in U.S. economic growth or an increase in federal, state, and/or local resources devoted to financing the debt. It is not certain if the higher-than-average level of economic growth will continue past 2022. What is certain already in 2021 is that lawmakers in Washington, D.C. are paying closer attention to funding strategies that could support public finance entities’ ability to close the U.S. infrastructure gap. Some of these strategies could be included in potential infrastructure legislation coming out of Washington sometime this year. The inclusion of these municipal bond-friendly strategies in infrastructure legislation could help solidify a near-term ‘Golden Age’ for U.S. Public Finance.
How Support for Infrastructure Materialized
I expected that a Democrat ‘Blue Wave’ result in the 2020 elections was likely to have a more impactful result on near-term policy than other potential outcomes. I predicted another phase of COVID-19 relief was likely to materialize, and that infrastructure policy was very likely to be substantial, with details released in early 2021. The only reason the nation is moving toward major infrastructure spending right now, entering June 2021 is because the Democrats made an improbable run in the January Georgia runoff elections, winning both U.S. Senate seats.
As a result, President Joe Biden and the Democrats were able to pass the $1.9 trillion American Rescue Plan Act on March 11, 2021 using budget reconciliation. The president since proposed another $4 trillion-plus of spending for the American Jobs Plan and American Families Plan. The Jobs Plan includes some traditional infrastructure spending line-items, but the definition of infrastructure is still one of the fundamental roadblocks to a potential bipartisan agreement. Currently, Washington lawmakers are still trying to find common ground and iron out a bipartisan infrastructure agreement. I believe that if there is a bipartisan agreement on any leading issue, infrastructure is that topic. Infrastructure is the area with a smaller partisan divide compared to others, according to Gallup polling.
Potential for Municipal Bond-Friendly Elements Remains Strong
Many municipal bond market observers are watching these negotiations closely. Many observers expect that it is very possible that several municipal bond-friendly elements could be included in an infrastructure-focused piece of legislation, just as they were included in the $1.5 trillion Moving Forward Act or H.R. 2 package that the U.S. House passed at the beginning of last summer. The package included the reinstatement of tax-exempt advance refundings, a new taxable direct pay bond, and a permanent increase to the bank qualified limit of $30 million.
This year, several lawmakers have proposed legislation with municipal bond-friendly elements as well. This activity strengthens the argument that Congress is giving importance consideration to the financing needs of state and local governments and other public finance entities.
Now we are waiting to see how infrastructure policy negotiations play out. Republican support still remains elusive. If a bipartisan agreement is not possible, there could be implications on the effectiveness of municipal bond-friendly elements. For example, it is important to state and local issuers that a direct-pay bond be sequestration-proof. However, a Democrat-only path using the budget sequestration process is not a slam dunk either. The state and local government tax (SALT) cap deduction remains a contentious issue for Democrats.