EXECUTIVE SUMMARY Skip Summary
Infrastructure in the U.S. is showing its age as many of our roads, water and electric transmission systems, and bridges that were built over 50 years ago arguably have depreciated beyond their useful lives.
Chronic underinvestment in U.S. infrastructure has by some measures put America at economic disadvantage, in addition to presenting a safety risk.
State and local governments are a vital part of the solution for our nation’s infrastructure needs, providing over three-quarters of capital for development and modernization.
Municipal infrastructure revenue bonds represent a growing investment opportunity with the potential to capture real current income, relatively stable credit quality, and the chance to enhance the overall risk and return profile of a diversified investment portfolio.
MUNI BOND MARKET IS VITAL TO U.S. INFRASTRUCTURE FUNDING
The overall condition of U.S. infrastructure is worsening as systems and structures age while maintenance and new investment have not kept up with overall demand growth. Recent support from Washington has featured initiatives that are designed to incent investors to commit to infrastructure projects, but history would indicate that state and local government funding via municipal bonds plays a critical role in sustaining domestic bricks and mortar. Over the last 100 years, state and local government bonds have funded over three-quarters of the capital for our nation’s network of highways, roads, bridges, water systems, energy transmission and other facilities.
AGING U.S. INFRASTRUCTURE WOES CONTINUE
Spending on core U.S. infrastructure underwent peaks during the Great Depression era and the 1950-60s, when the interstate highway system was constructed. Since the mid-70s however, the pace of investment has slowed, and our aged infrastructure has arguably passed its planned useful life. According to the U.S. government, nearly 70,000 bridges in America — one out of every nine — is now considered to be structurally deficient and many are nearing the end of their useful lives as approximately 250 million vehicles cross them daily. The American Society of Civil Engineers reports that 32 percent of the major roads in America are no win poor condition and in need of major repairs. The water systems, bridges and highways that were constructed in the latter part of the 19th century and throughout much of the 20th century have increasingly shown signs of stress and in some cases failure. In the U.S. there are reportedly 240,000 water main breaks per year and one break every two minutes because of aging pipes. According to the Economic Bureau of Analysis, the average age of state and local government infrastructure has increased dramatically over the last 50 years with our nation’s highways and streets nearly doubling to the current average age of 28 years.
U.S. INFRASTRUCTURE PLAGUED BY UNDERINVESTMENT
A November 23, 2014 segment from 60 Minutestitled “Falling Apart” highlighted the overall dilapidated state of U.S. transportation infrastructure as roads and bridges across America continue to age and deteriorate. While there has been no clear consensus in politically-gridlocked Washington on how to best source the massive funds needed to help alleviate the infrastructure problem, there has been no shortage of ideas ranging from raising the federal gas tax, which has remained unchanged since 1993, to funding projects through corporate tax reform. One of the latest proposals from the administration calls for a new class of tax-exempt municipal bonds called Qualified Public Infrastructure Bonds (QPIB), which would permit public-private partnerships to collaborate with state and local governments tofinance airport, port, mass transit, solid waste, sewer, water, and transportation projects. If approved by Congress, QPIBs would be less restrictive than typical private activity bonds with no issuance cap or program expiration and would not be subject to the Alternative Minimum Tax (AMT). Due to the chaos and historical lack of meaningful funding from the federal government, traditional tax-exempt municipal bonds remain the primary tool for the financing of much of America’s infrastructure needs, although funding has lagged in recent years due to fiscal austerity. The chart below indicates that among developed nations, America has the largest negative gap between the estimated need and actual expenditure on infrastructure spending.
Since the financial crisis of 2008, total federal, state, and local construction investment toward infrastructure projects has declined precipitously. When looked at as a percentage of GDP, U.S. public construction spending dropped 30% to reach a decades-low 1.55%. While the U.S. economy has exhibited positive GDP growth in recent years and stock market returns have trended positive, public spending on infrastructure still remains muted.
Furthermore, the American Society of Civil Engineers (ASCE) indicates that over the past four years, the state of America’s infrastructure has improved from a grade of D to D+, but a spending shortfall of $1.6 trillion is anticipated by 2020. The ASCE estimates that the United States needs to invest $3.6 trillion by 2020 across the entire 16 sectors. Currently, only about $2 trillion in infrastructure spending is projected, leaving the estimated shortfall of roughly $1.6 trillion.
INVESTMENT OPPORTUNITY — MUNI INFRASTRUCTURE REVENUE BONDS
America’s infrastructure is not keeping pace with the demands or needs of our growing economy, for today or for future generations. The municipal bond market presents the best opportunity to address this alarming handicap to our nation’s competitive position. The graph below shows the level of new investments required in different infrastructure systems like roads, rail, energy and freight according to the Center for American Progress. We expect state and local governments to play a key role in increasing funding for infrastructure projects as fiscal conditions continue to improve and pent-up demand for postponed and essential projects rises.
COMPELLING YIELD, STABILITY AND DIVERSIFICATION ADVANTAGES
Tax exempt municipal infrastructure bonds are compelling investments that provide investors relatively attractive levels of income from vitally essential long-term projects. While maintaining relatively stable credit quality, municipal infrastructure revenue bonds can offer the potential for both real and after-tax current income.
Infrastructure investments may also provide credit stability over market cycles. For over a century, tax exempt municipal bonds have been the source of funding to finance infrastructure projects that benefit our citizens. From roads and schools to utility plants, bridges, hospitals, and airports, the maintenance and development of these long-lived projects are essential to our everyday living. For the right investor, U.S. infrastructure investments also offer an expanding opportunity for exposure in “real assets” and can be structured as partnerships between the public and private sectors. There has been a growing participation on infrastructure from the private sector as these investors look for new sources of return.
Municipal infrastructure revenue bonds, defined as water/sewer, transportation, and utility, have historically exhibited a low correlation to other asset classes. These sectors within the Barclays Municipal Index present a 0.51 correlation to the Barclays U.S. Aggregate Index and a 0.10 correlation to the S&P 500 stock index for the 10-year period ending December 31, 2014. Municipal infrastructure revenue bonds offer diversification benefits with a chance to enhance the overall risk and return profile of a portfolio. Investors should be aware of the potentially growing investment opportunity in U.S. municipal bonds as this country addresses its structural safety and economic competitiveness in an environment of aged infrastructure.