Double the Cap on Private Activity Bonds
Congress’ extension of U.S. surface transportation policy for another two months provides a little more time to improve current policies. With the added time, I want to offer a ninth recommendation for reforming U.S. surface transportation policy. Robert Poole and I recommend that Congress double the lifetime cap on private activity bonds (PABs).
State and local governments are embracing public-private partnerships (P3s) for large-scale transportation infrastructure projects. Because these projects leverage limited state funds with significant private capital, Congress, in SAFETEA-LU allowed state or local entities on behalf of P3 developer/operators to issue up to $15 billion in tax-exempt revenue bonds. The bonds are an obligation of the P3 project, not government. But with the increasing pace of P3 projects, two-thirds of the $15 billion has already been allocated. In a four- to six-year reauthorization, the remaining $5 billion worth of PABs will likely be far less than the demand for using this financing tool.
Increasing the $15 billion cap will likely match the flow of P3 deals suitable for PAB financing. This is consistent with the length of the reauthorization bill, for a six-year bill, the cap should be increased to $30 billion, for a four-year bill the cap should be increased to $25 billion and for a two-year bill the cap should be increased to $20 billion.
There are several reasons why increasing the cap it vital. The combination of tax-exempt PABs and supplemental Transportation Infrastructure Finance and Innovation Act (TIFIA) loans has generated considerable P3 investment in much-needed infrastructure. As of September 2014, these financing tools enabled states and other governments to obtain $23.4 billion worth of highway, transit and intermodal projects for total government outlays of $5.56 billion — more than four times the direct outlay of traditional tax funding. Both PABs and TIFIA are examples of “project finance,” in which dedicated project revenues (such as tolls) are the funding sources to pay off the Private Activity Bonds and repay the TIFIA loans. This kind of leverage is critically important at a time when Congress has difficulty increasing the amount of funding it can provide to the states under traditional highway and transit programs. But without an increase in the cap on PABs, that source of financing will likely dry up within the time frame of the 2015 reauthorization bill.
The principal benefit of an increase in the cap on PABs is the continued robust growth in P3 transportation infrastructure projects, which makes limited state highway and transit funds go much further. Federal taxpayers are not at risk, since the debt service on PABs comes from dedicated project revenues such as tolls. Some federal accountants view the tax exemption on these bonds as costing the Treasury tax revenue that bond-buyers would have paid if the bonds had been taxable. But in many cases, in the absence of tax-exempt bonds, the project might not pencil out as a P3 and would either be built by a tax-exempt government entity or not be constructed.
