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Municipal Perspective published on January 20, 2017

Is It Morning Again in America for Infrastructure?

In his January 20th inaugural address, President Trump reiterated his desire to rebuild American infrastructure:

“We will build new roads and highways and bridges and airports and tunnels and railways all across our wonderful nation. We will get our people off of welfare and back to work, rebuilding our country with American hands and American labor.”

The President’s continued emphasis on infrastructure investment is not entirely shared by Congress, which has prioritized replacing the Affordable Care Act (ACA) and revamping the federal tax code. Nonetheless, a sustained commitment by the new president to fund infrastructure would impact the municipal market.

To date, President Trump’s infrastructure policy proposals have been wide-ranging. He has expressed interest in more funding for the federal Clean Water State Revolving Fund program. His transportation secretary, Elaine Chao, hinted at more direct federal funding of the Highway Trust Fund. During the campaign, he proposed leveraging up to $1 trillion in private financing through a $137 billion tax credit program. Public-private partnerships (P3s) are expected to be part of his plans, as well. Finally, Trump told the U.S. Conference of Mayors in December that he supports the tax exemption for municipal bonds.

Precisely which mix of Trump infrastructure proposals will materialize over the next several months is unclear. Certainly, more federal infrastructure funding would be a credit positive for the municipal market, whether directed to water utilities, bridges, roads, highways, airports, or mass transit projects. The graph below shows that infrastructure funding has not kept pace with economic growth over the past several decades.

However, Trump’s most fleshed-out policy prescription – his $137 billion tax credit proposal – has significant weaknesses.

First, the projects to which those tax credits could be directed are few. Private investors are interested in larger projects that produce reliable income from user fees. In contrast, most municipal borrowing is for smaller projects that produce no income (such as borrowing for schools, locally-maintained roads and police stations). In short, Trump’s tax credit proposal is helpful but insufficient.

Second, Trump’s interest in more private financing and P3s could inject more credit risk into the municipal market. The tax credit plan is premised on an increased role for large pools of private capital, including pension funds, endowments and private equity. These kinds of investors sometimes favor opaque private placements or unorthodox one-off lending structures that may complicate issuers’ debt portfolios.

A federal P3 effort would also dovetail with state and local efforts to increase P3s in infrastructure funding. P3s can be complex and sometimes involve disguising debt as leases on municipal balance sheets. This, in turn, enables issuers to understate their debt for purposes of calculating debt limits.

We expect more public debate over the size and contours of federal infrastructure policy in the coming months, and we continue to monitor Trump’s infrastructure policies and their effects on the municipal market.

 

DISCLAIMER: This material has been prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors, Inc. Information and opinions are current as of the date(s) indicated and are subject to change without notice. Any specific securities or portfolio characteristics are for illustrative purposes and example only. They may not reflect historical, current or future investments in any client portfolio. Nothing in this document should be construed or relied upon as tax, legal or financial advice. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. This document may include projections or other forward-looking statements, which are based on Breckinridge’s research, analysis, and assumptions. There can be no assurances that such projections will occur and the actual results may differ materially. Other events that were not taken into account in formulating such projections may occur and may significantly affect the returns or performance of any account. Past performance is not indicative of future results. This document includes information from companies not affiliated with Breckinridge (“third party content”). Breckinridge reasonably believes the third party content is reliable but cannot guarantee its accuracy or completeness.