Bonds

An update from Washington

Enjoy complimentary access to top ideas and insights — selected by our editors.

Transcription:
Kyle Glazier (00:03):
Welcome to another Bond Buyer podcast. I’m Kyle Glazier, Executive Editor of The Bond Buyer, and I’m joined today by Caitlin Devitt, a Senior Reporter at the Bond Buyer. Caitlin, thank you for jumping on here with me today. 

Caitlin Devitt (00:15):
Hi, Kyle. Nice to be here. 

Kyle Glazier (00:17):
Well, there’s a fair amount to talk about, but I think we’d be remiss not to mention the elephant in the room here. Congress is really, really running out of time to address the funding problem, which is to say that the government will cease to function just over a week from right now if lawmakers are not able to come together on a budget agreement. The talk I hear around town myself, and you can tell me your own experience, Caitlin, with your sources, is that this is starting to become, unfortunately, routine. There is a fair amount at stake for the public finance community if the government shuts down. It doesn’t erupt the flow of some federal monies that are important, particularly to some issuers who rely on them and count on them. But it seems like this sort of political brinkmanship over the funding has sort of become a same old song and dance to folks at this point. I saw Eric Kim from Fitch just the other day say they expect this to resolve itself and it’s starting to feel routine to them. What’s the sense that you’re getting, what are you hearing from your sources and what else can you tell us about this whole situation? 

Caitlin Devitt (01:39):
Yeah, and of course Fitch downgraded the U.S. in early August, which now seems so long ago. And I think as part of one of those reasons, they cited the governance sort of this, like you’re saying, the increasing brinkmanship that we’re seeing. I saw somewhere there’s been 20 government shutdowns since 1976, so this is something that we’ve seen a lot of, but it does, like you say, kind of seem inevitable. We’re recording this on Friday the 22nd, and everybody’s the House last night abandoned its stopgap measure. The Senate’s taking one up the House might take one up next week. There’s a lot of disagreement between the two chambers, but then also an enormous respondent disagreement in the House, which is causing its own sort of problems. So from my sources, when you look back at those 20 government shutdowns, I can’t remember where I read this, but I think in general they, they’re considered to have had limited economic impact and I think you kind of see that a little bit in the muni market reaction right now. 

(02:58)
I think it all sort of depends on how long it goes on. Investors seem like they’re not expecting ratings actions as a result of it. There’s some credits that are super linked to federal funding that would be hurt. That’s like military housing, bonds, Garvees, those kind of bonds. So you might see some impact from that. But in general, investors are saying that they don’t seem too worried about it right now. I think the market itself, I mean it’s never good volatility, uncertainty. You’ve seen that in the stock market the last couple of days, but at the same time, there might be some upside if there’s some flight to quality, if munis are perceived as safe. So there might be a little bit of that public transit, which we’re all worried about anyway because of the fiscal cliff from funding. That’s something that I think people will be watching, but there’s just really not a significant portion of the muni market that’s directly linked either to the U.S. rating or to what’s going on with the potential shutdown. I mean, of course it is going to interrupt the flow of funds to cities and states and transit agencies. They’re going to have to use reserves. 

(04:23)
And so again, it sort of depends on how long it goes on and to see what kind of impact it has. It could delay some infrastructure projects. I mean, I think state departments of transportation would be able to handle any short-term thing, but if it goes on for a while, they might start slowing down or even halting the procurement of projects. So those are all ways in which I think the muni market is looking at it right now. 

Kyle Glazier (04:51):
Yeah, it seems that investors are feeling pretty confident. It just seems that we all know issuers, they live and breathe the certainty of that federal funding. So I was wondering, as you mentioned about those issuers of Garvee bonds, for example, they pencil those federal funds in and if there’s a scenario where they’re not coming in anymore, I think it’s vexing for issuers, even if realistically of course they’re going to be able to get by on their reserves for the foreseeable future. 

Caitlin Devitt (05:24):
Yeah, I mean I think the other thing is FEMA. I mean that’s a cash outlay too, but I think FEMA has a deficit right now. That’s sort of a separate issue, but I think it’s getting wrapped up into the continuing resolution if there is one or into the 2024 appropriations. The White House wants $12 billion, but that’s a reimbursement issue and we’ve kind of been through this historic year of all these climate problems. So I think in the muni market, a lot of people are watching FEMA and watching to see if those disaster funds get replenished and then those reimbursements start to flow or are at least queued up to flow pretty quickly. 

Kyle Glazier (06:07):
Of course, we don’t think of FEMA typically in the muni market, but that kind of federal disaster relief could be crucial for the economic wellbeing of an area that does experience one of these devastating events. Right, a wildfire flooding, that sort of thing. 

Caitlin Devitt (06:24):
Yeah, for sure. I mean, they have to spend the money for it and for states, they have a lot of money. I mean, you see Florida, they put out a lot of money. I think there was a $1.5 billion estimate from the most recent hurricane, which I forgot its name, the one from a couple of weeks ago. For states, it’s one thing for a smaller communities it’s a little bit harder, and like I said, it’s based on its reimbursement, so they have to be able to cover that. But also a lot of times after disasters, we see economic activity go up as sales taxes go up as people start spending to rebuild. So there’s kind of that little bit of a difference there. But on the rating side, I mean rating analysts really, or I should put it this way, ratings are often protected by FEMA because everybody sort of expects FEMA to come in and cover those costs. And so in that way, FEMA really acts as a layer of protection to ratings. 

Kyle Glazier (07:23):
Alright, well we’re going to take a short break for a word from our sponsor and we’re back again. I’m Kyle Glaser, Executive Editor with The Bond Buyer, here with Caitlyn Devitt, a Senior Reporter of The Bond Buyer. Moving on to maybe a happier topic, we’re coming up on a landmark anniversary here for the Infrastructure Investments and Jobs Act. What can you tell us about how the rollout of this historic infrastructure package is going? 

Caitlin Devitt (08:00):
Right, so it’s going to be the two year anniversary come November since Biden signed the Infrastructure Investment and Jobs Act, also known as bipartisan infrastructure law. Everybody’s still calling it both and it’s being rolled out. It was interesting, it was a big topic on Wednesday at a House transportation infrastructure committee oversight hearing where Pete Buttigieg, Transportation Secretary, was the only witness and it really was a big topic. So it was kind of good timing in terms of the anniversary coming along. And what Buttigieg said many times during the committee was, I’ll just quote what he was saying. One way to think about it is our first year was about the bill passing. The second year was about the programs launching and now this is about the money moving so we can get the dirt flying. We had lots of verbs in there, but his point is that he kept saying repeatedly was that the first year was about standing up the bill or kind of ironing that out. 

(09:01)
I guess the second year was about launching all those programs. I think there’s dozens and dozens. I think there’s over a hundred new programs in there that they had to stand up. They had to hire a ton of people. So that was what they were preoccupied with the second year, and now they really are trying to get the money moving and out the door. There was a lot of Republican criticism on that front, and we’ve also heard criticism from issuers who have said that there’s this, there’s some delays in getting the money out the door sometimes. I think a big delay from the issuer side that we’ve heard is in between even after the grants have been awarded, the gap between the grants being awarded and the grant agreement being in place, which is what unlocks the money, that that’s really a long time. And Buttigieg also admitted that, or kind of talked about that a little bit during the committee hearing in response to Republican lawmakers that were criticizing it. 

(09:59)
I have a couple of quotes here. He said the gap between the fiscal year in which it’s authorized or appropriated in the moment when that construction takes place, that’s a very real gap. He said it could take one or two calendar years. And then he also said it depends on the project projects that are funded through formula funding, which is a big bulk of it, often move more quickly than more complicated projects that are coming from different agencies or work across state lines or depend on competitive grants, which that money has been moving slower. So it’s an issue, and one of the reasons why it’s an issue to issuers is because the longer it takes, the more we’re seeing inflation, which is really high in construction, it’s higher than it is in consumer goods and other rising costs erode the value of the money. So any increase is often eaten up by that inflation the longer it takes. 

(10:54)
And federal officials have admitted this. They know this, they’re working on it. They’re saying it’s one of the main threats to the successful implementation of the bill, is this the coincident rise in inflation that’s taken place. So that’s sort of where we’re at. I mean, when it comes to the grants, the competitive grants, we’ve seen a lot of NOFO — notice of funding — opportunities go out as feared before the OR as the law is being written. A lot of the smaller and less resourced communities have a more difficult time applying for some of these competitive grants. They just don’t have, in some cases the staff or the savvy to do it. And the cost can be expensive. There was a hearing over the winter where a Texas Department of Transportation officials said that it can cost like $100,000 or even more than $200,000 to write one of these grant applications. 

(11:53)
So that’s a lot. And then he also said it could take up to 15 to 18 months for the grant agreement to be finalized even if the award is won. So these are all sort of reasons why the money’s flowing. But again, what Buttigieg was saying the other day was the third year and the fourth year this year, meaning next year, fiscal 2024 and 2025 is when we’re really going to start to see that money flow. Of course, we have an election coming up next November, so that’s going to probably help. And also, as a reminder, it’s a five-year bill. The appropriations go out through 2026. Also, just a couple things that we’re still waiting for that I wanted to mention. I mean, there’s a lot of things like Build America rules, which everybody’s waiting eagerly to see because that could really affect some of the projects. 

(12:43)
But there’s a couple other interesting things. One is P3 related and the other’s related to the Federal Highway Trust fund that were built into the new law that we haven’t seen yet. So on the P3 front, there’s several ways in which the IIJA was considered sort of friendly to P3s, although the final bill didn’t have as much in it as an earlier, as earlier iterations did. But one thing that it did have in there was this requirement that certain federal projects that cost over a certain amount complete a value for money analysis to determine the best delivery approach. Should it be public or should it be a P3? This was a provision to help but get across the finish line in a bipartisan way.

Kyle Glazier (13:22):
Right. 

Caitlin Devitt (13:25):
Yeah, I’m sure. Yeah. Like I said, it was kind of whittled down from a lot of the earlier stuff, but this was one thing that survived that value for money analysis. So the Build American Bureau, which is the Department of Transportation’s P3 focused office, is in charge of developing standards for how that value for money analysis is going to happen. And we haven’t seen those yet. We haven’t seen those standards come up for the value for money analysis, but I, last week was talking to an official from the Build America Bureau and he said, Build America Bureau, and he said, that should be coming out this fall. So that’s something that’s going to be important that a lot of the P3 industry and then, which is adjacent a lot to our industry and people in our industry are going to be looking at. 

(14:08)
Because if what those standards are, there haven’t been industry standards. And so what the federal, it’s not going to be rules, but the federal guidance for that, the value for money analysis require applicants to consider things like the lifestyle cost and project delivery schedule, the cost of using public funds versus private financing and a forecast of user fees. And so it’s real helpful. It’s going to be really interesting when that comes out. So that’s one thing. And then the other thing that we’re waiting for that’s delayed, they’re behind on is the road user fees pilot program. IIJA allocated $125 million for a national per mile road usage fee pilot program. 

(14:51)
That’s important because as most of our listeners know, the gas taxes are continuing to dwindle. They’re not covering nearly as much as it used to. As cars become more fuel efficient, and the Highway Trust Fund remains on track to insolvency because of this, and with the growth of electric cars, the Biden administration has a goal of 50% electric. He wants 50% of cars sold by 2030 to be electric vehicles. That’s all going to contribute to the decreased efficiency that gas tax. So programs like the national per mile road usage fee are going to become increasingly important. So the DOJ set aside this money to launch one, it’ll be the first one. Several states have done them, but this will be the first national one, but they’re behind and they haven’t done it. So we’re waiting to see what happens on that 

Kyle Glazier (15:43):
Lot to look forward to here. It’s going to be a crucial few months, it sounds like, for our nation’s infrastructure. 

Caitlin Devitt (15:49):
Yep. It sounds like it. 

Kyle Glazier (15:51):
Well, Caitlin, I really appreciate you joining us for this, and thank you so much for sharing your knowledge with us. 

Caitlin Devitt (15:58):
Thank you. 

Kyle Glazier (15:59):
Well, thank you for listening. Thank you to Kevin Parise who did the audio production for this episode. And please don’t forget to rate us, review us and subscribe at www.bondbuyer.com/subscribe. From the Bond Buyer, I’m Kyle Glazier. Thank you for listening.

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