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.