MuniLand -– Fiscal Stimulus, P3s and Municipal Debt Supply

President Obama will ask Congress for an increase of $68B, or 7%, in discretionary spending in the Fiscal Year 2016 Federal Budget. The additional funding will go to national security and domestic projects in a proposed budget plan that totals nearly $4 trillion. An expanding U.S. economy, improved corporate profits and job growth have reversed years of revenue shortfalls. A detailed spending plan will be sent to Congress on February 2nd, but early indications are that domestic spending will go to education and scientific research. Therefore, the proposed 2016 Federal Budget does little to directly support infrastructure rehabilitation or increase municipal debt supply. However, early Friday morning, the Obama Administration did propose a new class of municipal bond to help support aging U.S. infrastructure. The program is called “Qualified Public Infrastructure Bonds,” or QPIBs, and proposes to indefinitely extend the tax-exempt benefits of municipal bonds to public private partnerships, or P3s. In addition, QPIBs’ interest will not be subject to the alternative minimum tax. P3s bring together private sector capital and management to public infrastructure projects such as water systems, toll roads and airports. The Brookings Institute does an excellent job of outlining the benefits and challenges of P3s, emphasizing that P3s are neither a panacea for U.S. infrastructure challenges nor a corporate takeover of critical public assets. In general, P3s are a “risk and reward sharing structure between a public entity and private company that designs, builds, finances, operates and maintains the infrastructure asset for a period of time” – often structured in a lease-like agreement. In exchange for specific services, the public entity provides an ongoing payment or allows the private company to collect tolls or fees generated by the project. If the QPIBs program takes off, it could be a driver of municipal debt supply. Nonetheless, Fitch Ratings cautions that without direct government and taxpayer support, accurately forecasting demand for toll and fee generating infrastructure is a key vulnerability and credit risk. The QPIBs would be a welcomed source of municipal debt, but because idiosyncratic risks are inherent in these activities, conducting credit homework remains essential.

Sources: Bloomberg News, WhiteHouse.gov, Brookings Institute and FitchRatings