Two academics from New York University’s Tandon School of Engineering are proposing a new variation of tax-exempt infrastructure bonds that would not pay interest to investors for the first four or five years.
These so-called American Renewal Bonds would help finance a national infrastructure initiative until the economy sufficiently recovers from the pandemic, according to Michael Horodniceanu and William G. Raisch, the codirectors of NYU’s Project NEXT.
Horodniceanu, a professor of civil engineering and a former construction company CEO, said in an interview that while COVID-19 vaccines are addressing the health issues related to the pandemic, Project NEXT is exploring how to spur an economic rebound.
Their proposal would serve a threefold purpose: helping to revive the economy, limit the cash expenditures by local governments in the initial years, and control inflationary pressure on the overall economy.
“Bold and targeted investment in America’s infrastructure can deliver both short-term jobs and urgently-needed business stimulus now as well as establish the launchpad for a renaissance of American industry,” they wrote in a four-page summary of their plan. “Renewed updated infrastructure will bolster America’s global competitiveness by creating sustainable, resilient, and more efficient transportation, energy, and communications systems and other key supports that nurture the growth of industry and a vibrant workforce.”
The only federal role in issuing American Renewal Bonds would be as a guarantor. But that wouldn’t be critical to their creation because the overall default on municipal bonds is “almost negligible,” Horodniceanu said.
NYU’s Project NEXT was formed last year as an initiative on adapting and re-imagining operations in response to infectious disease and other current and emerging threats.
Horodniceanu said Project NEXT and the NYU Tandon School of Engineering are planning a conference tentatively scheduled for the first week of June to bring together stakeholders to discuss further details on how to create American Renewal Bonds. The stakeholders will include experts from transportation, energy, communications, housing, construction, labor, public finance, and banking along with legislative and executive branch representatives.
Five investment banks that potentially would help bring these new bonds to market have already been consulted about the proposal, said Raisch.
"All of them saw value in it," Raisch said. "Some of them will be continuing in helping us with the evolution of this." The goal is developing a clear model and tactics for building a coalition to bring it to market.
"Foundationally it's not a complex proposal," he said.
Raisch said the American Renewal Bonds might be complementary to whatever legislation is enacted by Congress.
Among the key advantages of this approach is that local governments would have the financial flexibility to decide what infrastructure their jurisdiction needs rather than having it dictated from Washington.
The NYU academics say the bonds would be “based on building blocks that already exist; are proven and readily actionable; and, can deliver both dramatic near-term and longterm impacts.”
This approach would ensure state and local governments would have “skin in the game” with financial responsibility for the repayment of principal and interest on the bonds, they said.
In addition, locally issued bonds will minimize direct federal government outlays from the national budget and mitigate pressures on inflation.
Future considerations might include the issuance of taxable bonds with federal support on a portion of the interest costs, as was done with the Build America Bond Program, they said.
House Democrats last year included a revival of direct-pay bonds similar to Build America Bonds in their infrastructure legislation that failed to receive a vote in the Republican-controlled Senate.
However, Republican Sen. Roger Wicker of Mississippi was the co-author in the last Congress with Sen. Michael Bennet, D-Colo. of bipartisan legislation to restore direct-pay bonds for financing infrastructure.
The Wicker-Bennet American Infrastructure Bonds Act as proposed in the last Congress would provide a 35% federal subsidy to taxable bonds from the date of enactment through 2026, when the subsidy would drop to an estimated revenue-neutral rate of 28%.
