Municipal bonds still have a role to play in financing infrastructure despite the billions unleashed by the new federal law and state and local governments that are brimming with cash.
“There is of course the need to leverage this money in order to get projects done,” said Patrick Brett, managing director of municipal debt capital markets at Citigroup, during an online briefing on the deployment of the Infrastructure and Investment Jobs Act hosted by the Volcker Alliance and Penn Institute for Urban Research.
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The $1.2 trillion IIJA includes about $550 billion in new money, which will be spent over the next five years, roughly $100 billion a year, Brett said. Brett is also chair of the Municipal Securities Rulemaking Board, but was not acting in that capacity.
The nation faces an infrastructure funding gap of around $2.5 trillion over 10 years, Brett said.
So even as states enjoy strong surpluses and the federal IIJA funding starts to flow, borrowing will be necessary because of the “scale of the challenge,” Brett said. “You add it all up, there’s still a big gap.”
The rollout of the IIJA funding and hundreds of new programs as well as its impact on the muni market is of chief importance this year to state and local governments and infrastructure finance market participants.
Despite the size of the new law, there’s the risk that the funding falls short of its transformative potential if states and locals use it to fund generic infrastructure programs or even offset tax cuts, said panelist Larry Parks, co-founder of consulting firm Forethought Advisors.
In the “zeal” to get the funding, Congress failed to include things like minority contracting requirements or benchmarks for success, said Parks.
To correct that, the federal government should now design the programs to ensure collaboration and with an eye on multiplier effects, Parks said.
“The federal government has to step in one more time,” Parks said. “In the old world it would have been a technical corrections bill requiring that there be some kind of competitive point system that encourages locals coming together. In the new world in which we live, where it’s hard to get things through Congress, it’s going to have to be done at the regulatory level,” he said.
Applicants could win points when they partner with other governments or businesses and nonprofits, he said. “So, we create a federal pool and take away the likelihood of just doing shovel-ready projects.”
The potential for public opposition that often faces larger, more complex projects poses another obstacle as does the immediate pressures to hire workers, said Providence, R.I. Mayor Jorge Elorza.
“All of the incentives seem to steer us in the direction of doing the easy thing and not the transformational thing,” Elorza said. “While this is an incredible boon and an amazing opportunity for us, it might be so much of an opportunity that it prevents us from being a little bolder and thinking a little bigger.”
Meanwhile, inflation is eating away at the power of the $1.2 trillion, panelists said.
“We’re evaluating every capital project for cost overruns and asking do they need rescoping,” said Lauren Larson, director of Colorado Governor’s Office of State Planning and Budgeting. “It’s having a major impact.”
High constructions are “a serious headwind and something we’re going to have to deal with,” Brett said.