Invest in Infrastructure with Qualified Infrastructure Bonds

We are experiencing interlocking and mutually reinforcing crises. Some, like COVID-19 and the resulting recession and massive unemployment, are sudden, like falling off a cliff.

Others, like droughts, floods, fires, sea level rise, and severe storms and mass extinctions caused by climate change, we are experiencing slowly like the frog in the proverbial pot; or explosively, like a punch to the gut.

The infrastructure crisis undergirds the COVID-19 and climate crises and saps our ability to be resilient. The lack of robust, well designed, operated and maintained infrastructure—including roads, bridges and tunnels, water and energy facilities, mobility and transit projects, levees and sea walls, and communications networks but also schools, hospitals, and public and private buildings—is both a threat and damage multiplier. Better infrastructure softens and manages impacts, and also can create jobs and help address structural racism and inequality.

The problem is that infrastructure has a high sticker price and we pay for it primarily through taxes and fees, but due to the COVID lockdown and resulting recession, there are even less taxes and fees available for infrastructure at the local level, creating a very un-virtuous cycle.

A new bill moving through the House of Representatives, called the “Moving Forward Act” calls for bold investments in infrastructure through an array of new and existing programs and regulatory changes targeting everything from water to energy to broadband to mass transit to roads to electric vehicle infrastructure, and NRDC is supporting it.

One important element of the bill that will provide cheaper financing for infrastructure projects around the country is the Qualified Infrastructure Bond Program ("QIB"). QIBs are taxable municipal bonds that provide for a direct interest subsidy payment by the federal government to the municipal issuer instead of tax-exempt interest. This will help keep funding costs low for infrastructure projects all around the country

Here’s how that program works and why it is important.

The federal government contributes to local infrastructure in part by making the interest income on the municipal bonds that state and local governments issue for infrastructure tax free to the investor. As a result, the investor accepts a lower interest rate, or “yield’, from the bond issuer, and the local government saves money on interest payments. By giving up the tax on the interest, the federal government reduces the cost of local infrastructure.

But there is a significant disadvantage to the federal subsidy provided by making interest on municipal bonds tax-exempt: It only benefits investors who would otherwise pay tax on the interest income. Investors that are tax-exempt, such as pension funds, university endowments and private foundations, do not generally pay tax on the interest earned on their investments. Similarly, foreign investors generally do not pay tax on the interest they receive on U.S. bonds. Bringing these investors into the muni market would provide a much-needed influx of new money into U.S. infrastructure.

This is where the Moving Forward Act comes in. It would deliver the federal interest rate subsidy differently so that this much larger pool of investors would invest in municipal bonds. This was the approach taken in the original Build America Bonds program, which was instituted as part of the financial crisis stimulus statute, the American Recovery and Reinvestment Act of 2009 (ARRA). The BAB program allowed municipalities to issue taxable bonds and to receive a direct subsidy from the federal government equal to 35% of the interest payments on the bonds. Consequently, the net interest cost to the issuer was 65% of the taxable bond rate, which approximated the tax-exempt bond rate.

The BAB program was extremely popular. From April 2009 through December 2010, about $181 billion of municipal bonds were issued under the program, constituting about one third of the supply of new long-term municipal bonds during that period. There were 2,275 separate issues of bonds, issued by each of the 50 states and the District of Columbia. Treasury estimated that issuers realized a savings of approximately 84 basis points on 30-year bonds and significant savings on shorter maturities, largely because, as taxable bonds, the BABs appealed to a larger market of investors than traditional tax-exempt bonds.

The new BABs program improves on the old one in three critical respects:

• First, it is permanent, which should be a boon to the market.
• Second, it has larger subsidies in the early years—42 percent from 2020 to 2024 then stepping down to 40 percent from 2024 to 2026, before stabilizing at 30 percent from 2027. This is important during the current economic crisis.
• Third, if the subsidy gets reduced through the automatic budget cutting process known as sequestration, the legislation requires that the issuers be made whole (“grossed up”) to offset the losses.

The new program is a missed opportunity in one important and timely respect, though.

If COVID-19 and climate change are teaching us anything, it’s that all infrastructure is not created equal.

A health care system that can respond to surge in cases during a pandemic is better than one that cannot.

Teachers and students who have high quality, affordable broadband have a shot at teaching and learning effectively. Those who don’t probably do not.

Poorly designed buildings cannot deal with extreme heat and cold. Unfortified shorelines expose communities to deadly storms.

A bus and subway system than cannot reduce the transmission of airborne viruses cannot operate during a pandemic.

A highway that bisects a vibrant community, destroys that community.

To address this, the Moving Forward Act should provide additional incentives for bonds—call them “Build Back Better Bonds” or “B4s”—that clearly demonstrate that they are reducing emissions, increasing resilience and protecting our most vulnerable communities. The growing green and sustainable bond market shows that there is growing demand of these kinds of investments.

This preferential treatment would be more than justified since these projects create jobs and reduce pollution while saving money, property and lives.