Senators Propose Financing Option to Boost Investment in Local Projects
U.S. Senators Roger Wicker, R-Miss., and Michael Bennet, D-Colo., were joined by Senators Roy Blunt, R-Mo., Debbie Stabenow, D-Mich., Shelley Moore Capito, R-W.Va., Tim Kaine, D-Va., and Cynthia Lummis, R-Wyo., in reintroducing the “American Infrastructure Bonds Act of 2021,” legislation that would create a new class of “direct-pay” taxable municipal bonds to help governments finance critical public projects as the nation seeks to renew its infrastructure. The senators’ proposed “American Infrastructure Bonds (AIBs)” would improve upon the model of “Build America Bonds (BABs)” that were issued after the 2008 financial crisis to attract more investment in public infrastructure.
“Empowering local leaders to launch new infrastructure projects is a proven way to support local economic growth,” Wicker said. “This legislation would improve upon previous efforts to expand investment in the state and local bond market by increasing flexibility for communities and adding assurances for bondholders. As our nation looks to invest in public works, now is the right time for Congress to allow state and local governments to seize this opportunity and renew infrastructure across the nation.”
“To build an economy that delivers opportunity for all, we have to invest in 21st century American infrastructure. This bipartisan proposal builds on a proven and successful model for drawing investment in our infrastructure – from our roads and bridges to our water systems and broadband,” Bennet said. “The American Infrastructure Bonds Act would help state and local leaders finance the much-needed projects that are critical to building stronger and more resilient communities.”
This legislation would allow state and local governments to issue taxable bonds for any public expenditure that would be eligible to be financed by tax-exempt bonds. These bonds could be used to support a wide range of infrastructure projects, including roads, bridges, water systems, and broadband internet.
The bonds would be modeled as a “direct-pay” taxable bond, with the U.S. Treasury paying a percentage of the bond’s interest to the issuing entity to reduce costs for state and local governments. These payments would be issued for projects at 28% of the bond’s interest.
In plain terms, this legislation is expected to boost investment in infrastructure and other important public projects at a critical time by providing affordable access to the large taxable bond market. The higher interest rates offered by the taxable AIBs increase the expected value of the bonds to some types of investors, such as pension funds, insurance companies, and foreign investors, who do not receive the tax advantage from traditional tax-exempt bonds. Expanding the market for municipal bonds increases private investment in the public sector and equips local governments with more options for financing projects. Importantly, AIBs would incentivize private capital to invest in rural areas, where financing can often be harder to secure.
This legislation provides important flexibilities to state and local governments. With AIBs, local communities can develop their infrastructure strategically without the burden of a centralized bureaucracy or the constraint of a state cap on allocation. As an additional benefit, the payments from the U.S. Treasury to issuers would be exempt from sequestration, which would increase the confidence in the bonds by the bondholder and bond issuer alike.
The American Infrastructure Bonds Act of 2021 is supported by: The National League of Cities, the National Association of Counties, the Government Finance Officers Association, the American Council of Life Insurers, the American Public Gas Association, the National Association of Bond Lawyers, the Bond Dealers of America, the American Society of Civil Engineers, the American Council on Education, the Securities Industry and Financial Markets Association, the American Planning Association, Bipartisan Policy Center Action, the International City/County Management Association, Ambac, National Railroad Construction and Maintenance Association, American Institute of Architects, the Insured Retirement Institute (IRI), and the Mississippi Municipal League.
For a one-page explanation of the legislation click here.
To read the bill text click here.