Money Market
March 2019

Municipal Money Market Funds - Investing in the Nation’s Infrastructure

Municipal Money Market Funds - Investing in the Nation’s Infrastructure
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There is general consensus that current investment in the nation’s infrastructure is lagging far behind the requirements for a safe and efficient system. The productivity of our national economy relies on a robust, modernized transportation network. The American Society of Civil Engineers estimates that there will be a $2 trillion infrastructure funding gap over the next 10 years.1 While infrastructure is clearly a bipartisan concern, a broad plan to address the issue presented by the Trump administration in early 2018 was met with widespread resistance, dissatisfaction and overall skepticism on both sides of the Congressional aisle.

We found merit in several features of the White House’s “Legislative Outline for Rebuilding Infrastructure in America.”2 Among these were the expansive definition of “infrastructure,” including not only the needs of highways, bridges, airports and drinking water and sewer systems, but the inclusion of ports, inland waterways and even rural broadband. The outline also emphasized more state oversight and control in project selection, as well as a streamlining and simplification of the permit and approval process.

A critical aspect of the plan which was roundly criticized as inadequate featured the use of a specific and finite level of federal spending, designed to leverage and stimulate state and private funding. Most infrastructure experts found the level of federal involvement to be inadequate. Recently, the White House released its fiscal 2020 budget, which includes a proposal for $200 billion in federal infrastructure investment. Unlike the previous outline, this proposal is vague in highlighting specific priorities, and the administration has left details to Congress. We note, however, that the federal government has long been involved in state and local infrastructure projects, particularly in the areas of surface transportation, clean water and aviation.

Overwhelmingly, states have been creative and successful in leveraging resources from a variety of federal programs to finance construction projects.

There are numerous types of high-quality, tax-exempt securities that have historically been purchased by money market funds as vehicles to invest in crucial infrastructure projects.
 

  • For example, states have historically issued transportation revenue bonds to finance highway, road and bridge improvements and surface transportation network expansion. These highway revenue bonds are secured by various transportation-related taxes and user fees. Pledged revenue sources are most commonly disbursements from the Federal Highway Trust Fund (which receives the federal motor fuel excise tax) and, in certain instances, these are combined with the state’s own gasoline tax, motor vehicle registration fees and license fees. Depending upon the amount of leverage employed, these securities have generally produced annual debt service coverage above 2x,3 with ratings in the AA to AAA range, and are typically attractive investment options for money market funds.4
  • A program within the United States Department of Agriculture (USDA), administered by its Rural Development Agency (RDA), provides long-term, low-cost financing for a variety of essential projects in rural areas, such as clean water, wastewater treatment, colleges and hospitals. Issuers will often first access the short-term, tax-exempt market to provide interim funds for construction of USDA/RDA-approved projects, with permanent federal funding secured at completion. The USDA issues a Letter of Commitment for the project as security for the note financing. Due to the essential nature of these projects and strong oversight by the USDA, these short-term securities are typically rated among the highest categories by the rating agencies.
  • In the area of clean water, almost all of the states have created State Revolving Funds (SRFs), which are used to leverage federal funds through the Clean Water Act (CWA). Bonds issued by the SRFs will finance loans to a diverse pool of municipalities with the state, with the debt secured by loan repayments. Due to annual distributions under CWA appropriations, over-collateralization of the SRF bonds typically result in AA and AAA ratings. These are generally considered high-quality, suitable investment options for money market funds.
  • The Department of Transportation also assists with the financing and funding of a wide variety of municipal projects at the state and local level. For example, a program known as the Transportation Infrastructure Finance and Innovation Act (TIFIA) is used to finance selected large-scale transportation ventures. These have included the Mario Cuomo Bridge in New York, which replaced the aging and inadequate Tappan Zee Bridge. The New York State Thruway Authority has issued relatively short-maturity revenue bonds secured in part by a draw on the TIFIA under bridge completion. These bonds are currently money market-eligible. Infrastructure is also a prime concern of the general public. For example, at the November 2018 midterm elections, voters approved $40 billion in transportation-related bond and tax hike ballot measures. The Eno Center for Transportation estimates that this was nearly 60% of the total proposals.5

    An obstacle to transportation system renewal and replacement has been the fact that the federal excise tax rate on gasoline has remained stagnant and not indexed for inflation over the past 25 years. In response, over one half of the states have proactively raised their own tax rates to generate needed resources.

    While it is uncertain if the currently seated 116th Congress will aggressively approach a comprehensive infrastructure funding vehicle during this session, it is likely that the states will continue to access the tax-exempt bonds and money markets to fund projects vital to the nation’s safety and economic growth.

Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Contact a financial advisor or visit Dreyfus.com to obtain a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.

You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

1According to the ASCE “Infrastructure Report Card 2017” released March 2017. 2Outline released February 2018. 3The Debt Service Coverage Ratio (DSCR) measures the ability of a company to use its operating income to repay all its debt obligations, including repayment of principal and interest on both short-term and long-term debt. A Debt Service Coverage Ratio of 1 or above indicates that a company is generating sufficient operating income to cover its annual debt and interest payments. As a general rule of thumb, an ideal debt service coverage ratio should be 2 or higher. A ratio that high suggests that the company is capable of taking on more debt. 4Bond ratings reflect a rating entity’s evaluation of the issuer’s ability to pay interest and repay a principal on the bond on a timely basis. Bonds rated BBB/Baa or higher are considered investment grade, while bonds rated BB/Ba or lower are considered speculative as to the timely payment of interest and principal. Credit ratings referenced are those assigned by S&P and are subject to change. 5Eno Center for Transportation made this estimate based on the January 2019 report called “Transportation at the Ballot Box.”

The amount of public information available about municipal securities is generally less than that for corporate equities or bonds. Legislative changes, state and local economic and business developments, may adversely affect the yield and/or value of municipal securities. Other factors include the general conditions of the municipal securities market, the size of the particular offering, maturity of the obligation, and the rating of the issue. Income for national municipal funds may be subject to state and local taxes. Income may be subject to state and local taxes for out-of-state residents. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. The Dreyfus Corporation and MBSC Securities Corporation are companies of BNY Mellon. ©2019 MBSC Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.

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