Increasing the Use of Private Activity Bonds for Infrastructure Projects

For several years, the public-private partnership community has sought congressional support to increase the $15 billion cap on tax-exempt private activity bonds for surface transportation infrastructure. Most of the effort has focused on increasing the cap by $4 billion, but the proposal failed to get included in either the Senate Environment and Public Works Committee’s surface transportation reauthorization bill or the five-year, $494 billion transportation bill that the House passed along partisan lines in 2020.  

With a new Congress starting over on those items this month—and the prospect of the incoming Biden administration pushing for a major infrastructure bill and additional economic stimulus spending—it is time for the public-private partnership (P3) community to think bigger about the potential for private investment in transportation infrastructure and hence the need for a much larger private activity bonds (PABs) authorization.

First of all, with the recent approvals of $503 million in PABs for the Georgia SR 400 Express Lanes project and $296 million for a Fargo-Moorhead project, total issuance and approvals have reached the legislated $15 billion cap.

In the next five years, a $9 billion Maryland express toll lanes project and Interstate bridge replacements in Alabama, Kentucky, Louisiana, and Oregon—all good candidates for toll-financed P3s—could total $20 billion in costs. And if private activity bonds constituted 40 percent of their financing, that would require $8 billion in new PABs authorization—not including any other potential toll-financed Interstate bridge or corridor reconstruction or replacement projects. So the transportation community should up the ante and push for at least $10 billion in new private activity bonds—i.e., raising the cap from $15 billion to $25 billion.

Why have recent requests been so timid?

The answer likely boils down to budget scoring. Under current budgetary rules, the Joint Committee on Taxation (JCT) must estimate the 10-year impact of any spending or credit-provision legislation, and that makes many members of Congress skittish about new bonding proposals.

Twice in recent years, the JCT has scored proposals for a $4 billion increase in the cap. The number they came up with was $250 to $280 million over 10 years ($25 to $28 million a year). Under long-established scoring rules, the JCT makes assumptions on the issuance of the resulting bonds over the following 10 years, and also assumes that many of the projects so financed would otherwise have been done via taxable bonds. Hence, the use of PABs would deprive the Treasury of the income taxes paid on those hypothetical taxable bonds. (In my view, it is far more likely that if no PABs existed, megaprojects such as these would more likely be eventually financed via tax-exempt muni bonds, but that’s irrelevant because the JCT scoring rules are not likely to be changed any time soon.)

Since PABs for P3-type transportation infrastructure are no longer an experiment but a proven financing tool, there should no longer be a federal cap on their issuance, any more than there is a federal cap on tax-exempt muni bonds. And it’s therefore interesting to look at how JCT scored the Obama administration’s proposal for its proposed qualified public infrastructure bonds (QPIBs) since the legislation introduced to create QPIBs did not include any cap. Those unlimited tax-exempt bonds were scored at $4.7 to $4.8 billion over the required 10-year period. QPIBs were proposed for a vast array of infrastructure, not just for surface transportation. 

There are two potential opportunities for the new Congress to increase the amount of private activity bonds available for public-private partnership transportation infrastructure: the reauthorization of the Fixing America’s Surface Transportation Act (FAST Act), needed when the current one-year extension runs out on Sept. 30, 2021, or if there is a large infrastructure or stimulus bill as a priority of the new Biden administration. The public-private partnership community should tailor its proposal differently, depending on which legislative vehicle looks more promising.

For the FAST Act reauthorization, a simple addition of $10 billion to the existing PABs cap would be a prudent way forward. In the context of what could be a $400 billion bill over a potential five-year life, a JCT score for the first five years might be in the vicinity of $300 million. To many, that’s a rounding error in a $400 billion reauthorization bill. And in exchange for that modest score, the resulting PABs could leverage something like $20 billion in new investment in much-needed highways and other projects.

On the other hand, if support exists for, say, a $1 trillion infrastructure bill or stimulus bill, the entire infrastructure community should mobilize for reviving the Obama administration’s qualified public infrastructure bonds proposal—with no cap. This would be a genuinely bipartisan proposal, given its Obama administration origin and the similar provisions that were in the Trump administration’s “Legislative Outline for Rebuilding Infrastructure in America” drafted by D. J. Gribbin (see pp. 13-16 for the details).

Together with the existing Transportation Infrastructure Finance and Innovation Act (TIFIA) program, expanded private activity bonds would leverage whatever amount of new grants Congress provides, open the door to much larger private capital investment in infrastructure mega-projects, and shift many of the usual megaproject risks from taxpayers to investors. That is a powerful story if explained early and often during the 2021 congressional session.

A few more words on the politics of this.  One of the lesser-known trends of the past five years is the growing involvement of U.S. public pension funds in infrastructure investment. They mostly place allocations with global infrastructure investment funds, but because there are so few P3 projects in the United States to invest in, most of the public pension fund money actually supports such projects in Europe, Asia, or Latin America. If prominent pension fund leaders spoke out in favor of more opportunities for them to invest equity in U.S. infrastructure projects that could increase bipartisan support for expanding private activity bonds in the upcoming congressional session.