In written music one repeats the phrase after the coda. In municipals, we repeat the infrastructure phrase as an expression of hope. This time truly does feel different. The Civil Engineers gave us their report card of C+ for the status of infrastructure recently. Many of the asset designations still have significant deficits although in some categories progress has been made. Clearly, a lot more needs to be accomplished.
The current administration is sincere about wanting to grow the economy and they view infrastructure as a means to accomplish the goal. Coming off the approval of the $1.9 trillion stimulus there appears to be momentum to think big. It is also appreciated that the administration has a desire to benefit the unions who helped put them in office. We will learn more of the details of the $3+ trillion proposal for infrastructure later this week.
Our new Secretary of Transportation has alluded to the need to consider approving more Private Activity Bond authorization for the states. He is also open to consider a vehicle mileage tax or VMT instead of or in addition to just calling for an increase in the federal gas tax that has not been increased since the early 1990’s. There have also been positive comments about reviving the BABs (Build America Bonds) program that had a great deal of success in 2009 & 2010 and that had the added benefit of expanding the market for municipal paper to non-traditional buyers. Public Private Partnerships or P3s may also receive more attention in this proposal due to the need for additional capital beyond just raising taxes.
The little we do know is that there is an intent to split the package into two parts. The first installment that covers roads, bridges, highways, and other important transportation projects would account for approximately half of the dollar amount. This part of the package would appear to have the most bipartisan support and would appear to be easier to pass with the wider support.
The second installment of the legislation would include funds for education and for achieving softer assets that do not necessarily include hard assets but would achieve more social objectives along with funds for climate change. The benefits from these projects or goals would also be longer term in nature. I believe that this part of the legislation will foment a great deal more of discussion and objections. One might begin this line of reasoning with the fact that the various stimulus packages have already included a significant amount of fund for education, although, the greatest proportion of the funds was dedicated to immediate Covid-19 mitigation. Improving HVAC in schools along with other projects does require more capital funds.
Reports have indicated that the funding may be over a period as long as ten years. This aspect may take some of the sting out of such a large number.
On the climate change front, there would need to be a refreshed rank ordering of projects. Going about this exercise is no simple matter. Who is to say that the potential for flooding in Miami is more important than containing wildfires in California or vice versa? Running scenarios and estimating the impacts on a revised basis will take some time and expense but a fair amount of work in this area has already been accomplished. As many pundits have concluded, the incidence of further impacts is just a matter of when and not if.
Many of the infrastructure related companies such as CAT, Deere and Vulcan Materials among others have been trading up of late in the equity markets. These market moves are also reflecting the probability that some legislation of significance will be approved this time.
Classic economics reminds us that there should be a considerable economic benefit provided by the multiplier effect due to the implementation of any approved infrastructure plan. The leverage that may be achieved should approach 3:1 or 4:1 or more. I will leave it to others to develop a more precise measure.
Once any legislation is approved, it is imperative that the funds be applied swiftly. We should not spend too much time on drafting bureaucratic rules for implementation. Many projects are already well defined and scoped out and just need to be cash funded. States and other governments will need to provide some match funding. Given the relatively low level of rates, one would think that a fair proportion of the funding will be raised in the municipal market.
Assuming the infrastructure legislation passes, strategists will be revising their issuance volume projections for the year.
One of the standout projects that should be funded in this round is the Gateway Project in the greater New York area. The multiple benefits of such a project have been highlighted on numerous occasions in the media and elsewhere.
Given the prospects for passage are much greater this time, I am looking forward to parsing more of the details. The municipal market will have a fine opportunity to prove itself once again.
John Hallacy
John Hallacy Consulting LLC
03/29/21
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