A Better Way to Pay for Infrastructure Investments - Title Image

A Better Way to Pay for Infrastructure Investments

A revival of the Obama-era Build America Bonds would raise funds with less taxes.

July 26, 2021   |    By Scott Minerd, Global CIO

A version of this article appeared in the Financial Times.

There’s plenty to like about the Biden Administration’s proposed infrastructure plan: who doesn’t want better roads, clean water and faster broadband to binge on Netflix? But while the ends are laudable, it’s the means to get there that are more politically contentious. As in, how to pay for the $1tn wish list?

There are only so many wealthy people and corporations to tax, as the left would prefer, and many have access to smart accountants. With bouts of inflation scares in the markets, and rising prices already walloping consumers at the grocery store and on car lots, printing money will not go over well.

Others can argue over the specifics of the president’s plan. My concern, and that of many taxpayers who will foot the bill, is where the money comes from. Buried in the Biden’s proposal is a passing reference to “direct pay bonds”, which I believe is the single best way to finance much of the plan.

Despite the generic name, these are essentially juiced-up municipal bonds issued by state and local governments. The interest payments are subsidized by the federal government, and they are taxable, which expands the potential market to pension funds, endowments and sovereign-wealth funds. Tax-exempt munis are of little use to that type of investor which prefers to have the higher yields on offer for taxable equivalents.

The president should be familiar with the bonds since they’re an updated version of the Obama-era Build America Bonds. The American Recovery and Reinvestment act of 2009 introduced BABs, taxable debt securities that were issued by states and municipalities to finance capital expenditures.

The coupon paid by the issuer of each bond carried a 35 per cent subsidy provided by the federal government, which lowered the cost of borrowing for state and local governments. More than $180bn of them were sold before the program lapsed at the end of 2010.

A more recent, bipartisan, version was introduced in April as the American Infrastructure Bonds Act of 2021. This would create a new bond with a flat 28 per cent reimbursement rate to the issuers.

The advantage of BABs, as opposed to Treasuries, is that they finance spending at the local level, which effectively makes cities, states and investors partners in infrastructure investments, instead of passive bystanders to the Feds.

The advantage of BABs, as opposed to Treasuries, is that they finance spending at the local level, which effectively makes cities, states and investors partners in infrastructure investments, instead of passive bystanders to the Feds.

Not that deficits seem to matter anymore, but BABs also would not add to the bulging national debt like Treasuries. State and local governments already supply almost 60 per cent of the capital costs and a whopping 90 per cent of the operation and maintenance expenses of the nation’s  infrastructure, according to the Congressional Budget Office.

An expanded version of the Build America Bonds program — call it BAB 2.0 — could meet a significant portion of the country’s estimated $4tn in infrastructure needs, including the Biden administration’s spending plans. 

Under BAB 2.0, states and cities would issue $4tn over two years to fund a ramped-up schedule of infrastructure projects, with the federal government this time subsidizing up to 100 per cent of the interest expense, reflecting the nation’s dire need for infrastructure. 

At the current interest rate on taxable muni bonds of about 2.0 per cent, this would cost the federal government $80bn a year. Federal tax receipts on investors’ interest income would lower the net budgetary impact. Assuming that half the investors are taxed, and using the highest marginal federal income tax rate of 37 per cent, the annual cost would be reduced to $65bn.

The interest subsidy could be adjusted depending on the appeal of the intended project, with clean-energy technologies, for instance, receiving more support than something producing a large carbon footprint.

One thing we have learned from prior experience is that a new version of BABs would need to be exempt from sequestration, automatic federal spending cuts that occur through the withdrawal of funding for government programs. These create uncertainty among issuers. Sequestration is expected to reduce the federal interest subsidies paid to the bond issuers by 5.7 per cent between 2021 and 2030.

But with that and other concerns addressed, BABs would be a smart way to address the nation’s infrastructure needs without overly burdening taxpayers. Given the current state of our infrastructure and a mixed economic outlook, Washington needs a bold plan. Bringing back Build America Bonds will not only meet our capital spending needs, but it will put people back to work and set the stage for a more productive economy in the long run.

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

© 2021 Guggenheim Partners, LLC. All rights reserved.



Credit Yields Look Attractive Despite Rising Recession Risks - Featured Perspectives
August 24, 2022

Credit Yields Look Attractive Despite Rising Recession Risks

Signposts for credit investors as the next recession approaches.

Stocks Are in Trouble if S&P Fails to Break Above its 200-day Moving Average  - Featured Perspectives
August 19, 2022

Stocks Are in Trouble if S&P Fails to Break Above its 200-day Moving Average

Deeper losses for equities may lay ahead.

Third Quarter 2022 Fixed-Income Sector Views - Featured Perspectives
August 02, 2022

Third Quarter 2022 Fixed-Income Sector Views

Relative value and performance drivers across fixed-income sectors.


Market Outlook 

Recession ‘Inevitable’ as the Fed Fights Inflation

Scott Minerd, Chairman of Investments and Guggenheim Partners Global CIO, joins Bloomberg TV on Fed Day to discuss the Federal Reserve’s largest rate hike since 1994.

Macro Markets Podcast 

Macro Markets Podcast Episode 18: Investment-Grade Corporates and the Macro Backdrop

Managing Director Justin Takata discusses the technical and fundamental drivers of value in investment grade corporates, and U.S. Economist Matt Bush addresses recession timing and the possible progression of policy.