Kudos to Representative Sander Levin for offering legislation (H.R. 992, the Building American Jobs Act of 2011) to extend the Build America Bonds (BABs) program through 2012. While the subsidy payments would be dropped from the previous 35% to 32% in 2011 and 31% in 2012, the extension would provide state and local governments with another option for governmental bonds (those that qualify as fully tax-exempt). BABs have been one of the few truly innovative, new financing mechnisms to be brought to the transportation industry and, by not relying on providing a set of individuals with tax benefits to establish a market, BABs bring new classes of investors into the municipal bond market.

H.R. 992 would exempt tax-exempt bonds, including private activity (or AMT) bonds from the AMTfor 2011. In the period after the passage of The American Recovery and Reinvestment Act (ARRA), it was these two provisions that stimulated new activity in the debt markets and, most importantly, new transportation investments by state and local governments. Economic data validate that these provisions helped promote the economic recovery now underway.

While these provisions can be part of the answer for transportation investments in future multi-year surface and aviation authorizations, they are but a small part. In order to encourage additional infrastructure investments, policymakers need to get serious about shoring up the financial states of the Highway Trust Fund and the Airport and Airway Trust Fund, as well as put in place long-term predictability for rail and port investments. While they are at it, they can also chart out clearer rules for public-private partnerships (PPPs) and privatizations to encourage more private money to flow into transportation infrastructure. To do that, they need to look no further than our northerly neighbor, Canada, which is far ahead of us in putting private and public money together on projects.

We were pleased to hear Sen. Ron Wyden (D-Ore.) talk about resurrecting the Build American Bonds program for the transportation industry during the Budget Committee’s hearing on Thursday. Airports utilized roughly $2 billion in Build American Bonds for large-scale projects during 2009 and 2010 and would welcome an authorization for the program during 2011. Airports’ use of the Build American Bonds program was limited since these bonds can only be used for projects deemed public purpose. An expansion of the types of infrastructure projects that could be funded by Build American Bonds would also be welcome by the airport community.

Airports are increasingly turning to bonds as a means of financing projects; however, in most cases airports use private activity bonds. During 2009 and 2010, these bonds were exempt from the Alternative Minimum Tax (AMT), which significantly lowered the cost of debt. In fact, over the course of the two years, airports sold over $11 billion in such bonds with savings totaling $1 billion. As Senator Wyden and his colleagues look to help the transportation industry leverage bonds, they need to look no further than exempting private activity bonds from the AMT to help build and maintain airport infrastructure.

Can Build American Bonds (BABs) close the gap between revenues and expenses in proposals for a long-term reauthorization of federal Highway Trust Fund programs? In my opinion, probably not.

Studies by the Congressional Budget Office (CBO) show that over the next six years the revenues paid into the Highway Trust Fund will be at least $150 billion or more, less than is needed to cover the expanded federal highway and transit programs of $450-$500 billion supported by the Administration and many in Congress. Indeed, the revenues paid into the Trust Fund are likely to fall $50-$75 billion short of the amounts needed to cover a continuation of existing programs, which will cost about $315 billion over six years.

Could a reauthorization of the Build America Bond program close this gap? In a superficial sense, yes. We could authorize a $150 billion dollar program of Build America Bonds and declare victory. But this would not deal with what I believe to be the real question—would a $150 billion BAB program mean that the federal government and the states would invest $150 billion more on transportation. In my judgment, the added national investment in transportation is likely to be considerably less.

It is important to bear in mind that authorization of $150 billion in BABs does not mean that the federal government will spend this amount on transportation. The BAB program does not authorize the federal government to issue bonds and spend the proceeds on transportation. Rather the program gives discretionary authority to the States to issue bonds in this amount and use the proceeds for transportation. This will not be a free lunch for the States. They will be responsible for setting aside enough funding each year to pay interest to the bondholders and to repay the principle. The annual amount will be less than the full value of the bonds, since the cost of redemption can be spread over the term of the bond (probably at least ten years). But the annual expense to the States will not be trivial and will have to be collected for many years after the proceeds are spent.

The federal expense will be the subsidy needed to cover part of the interest paid to bondholders.

The BAB program, authorized by the American Recovery and Reinvestment Act of 2010 (ARRA), was highly popular. CBO found that the states issued about $43 billion of BAB bonds for transportation infrastructure in 2009 and 2010. (See CBO Report on Public Spending on Transportation and Infrastructure, November 2010. The annual cost to the federal budget was much less. The federal expense was a subsidy payment of 35% of the interest paid on the bonds. This was estimated (after considering a number of complexities) to cost the federal budget a total of about $12 billion over a ten-year period.

But the success of the BAB program did not mean that the States invested $43 billion more for transportation than they would have without the program. The question for BABs under ARRA, and under any new BAB program, is whether the States would offset BABs spending by reducing the amounts they would otherwise have spent for transportation. This could include reductions in spending for other types of bonds used to support transportation (e.g. tax exempt bonds) and reductions in “regular” grant programs for funding transportation. Given the continuing crisis in overall state finances, I think it unlikely that they would not make at least some of these offsets. Every increase in the dollars spent for transportation will take money away from other State programs (such as education and Medicaid) that are also feeling the pressures of the financial crisis.

By raising these concerns I do not mean to suggest that BABs should not be authorized. BAB appears to be a superior way to assist State programs to use debt financing to invest in transportation. But before we decide how effective BAB will be in closing the gap between revenue and expenses in the federal program, there needs to be a careful analysis to determine how much each dollar spent under BABs will actually increase national spending on transportation.

We have a guest response from Brad Guilmino, chief financial consultant, HNTB Corporation:

As President Obama calls for reinvestment in America’s infrastructure, let’s not overlook the success of Build America Bonds and the alternative minimum tax suspension in financing critical transportation projects. With experts forecasting a 4.4 percent drop in overall
road construction, 2011 could be the toughest year yet for state and municipal transportation budgets. If reinstated, BABs (as Sen. Wyden points out) along with AMT, both introduced by the 2009 American Reinvestment and Recovery Act, could provide much-needed relief. House Ways and Means Committee Ranking Member Sander Levin hailed BABs as one of the economic recovery effort’s biggest successes.

BABs are a solid financing enhancement that will save transportation entities dollars, if/when they issue debt. Just ask the New Jersey Turnpike Authority which can proceed at full speed with its 10-year, $7-billion capital program because of highly successful BABs sales. The bonds put the Authority $3.225 billion closer to its goal.

In the program’s short, two-year life span, issuers sold approximately $185 billion of the securities (27 percent of total market volume) for transportation and non-transportation infrastructure. BABs financed more than $42 billion worth of critical highway, transit, parking, airport, port and marina improvements and were largely responsible for a 37 percent spike in transportation bond volume —from $48.8 billion in 2009 to $66.9 billion in 2010.

Another proven and preferred financing method to come out of the economic stimulus package was the temporary suspension of the alternative minimum tax requirement for private activity bonds. Prior to the ARRA, SAFETEA-LU authorized $15 billion in PABs for highway and freight transfer facility projects, reflecting the federal government’s desire to increase private sector investment in U.S. transportation infrastructure.

PABs give private entities that deliver transportation and other qualified projects through public-private partnerships the option of accessing the low-cost, tax-exempt bond market. Although tax-exempt, PABs carry a higher yield (approximately 0.5 percent in the current market) than traditional tax-exempt bonds because the interest earnings are subject to the alternative minimum tax for investors. The ARRA’s temporary suspension of that tax through Dec. 31, 2010, lowered the cost of capital and enhanced investment prospects in many critical transportation projects. With the tax lifted, PABs became the preferred method of debt in financing public-private partnerships projects while improving bid packages for public owners.

PAB allocations were instrumental in advancing major projects, including the Capital Beltway HOT Lanes in Virginia and the North Tarrant Express and Interstate 635 (LBJ Freeway) projects in Texas.

The AMT’s repeal and the BABs program expiration have dealt a one-two punch to public entities’ financing abilities. While we search for solutions to enhance the financing capability of transportation agencies, let’s not overlook the potential of these proven, preferred methods.
For more, see white paper: http://www.hntb.com/sites/default/files/issues/BuildAmericaBonds_Guilmino_2011.pdf