Transcription:
Mike Scarchilli (00:04):
Hi everyone, and welcome to the Bond Buyer Podcast, your go-to source for insights on all things municipal finance. I'm Mike Scarchilli, editor in Chief of the Bond Buyer, and in today's episode, Bond Buyer executive editor Kyle Glazier, sits down with our senior infrastructure reporter, Caitlyn Devitt, to discuss the latest developments in Washington that could have major implications for the municipal market with tax reform moving forward, the industry is closely watching how Congress will approach the tax exemption from municipal bonds. Kyle and Caitlin break down the market's reaction, the key players shaping the debate and what we might expect in the weeks ahead. They also dive into the evolving federal infrastructure landscape under the Trump administration and what the next surface transportation bill could mean for future funding and project development. Let's get into the conversation.
Kyle Glazier (01:01):
Hello and welcome to another Bond Buyer podcast. I'm Kyle Glazier executive editor at the Bond Buyer. I'm joined today by Caitlin Devitt, senior reporter at the Bond Buyer, and we're going to talk about all of the hottest topics in Washington. Caitlin, thank you for joining us.
Caitlin Devitt (01:16):
Thank you.
Kyle Glazier (01:18):
So let's tackle the elephant in the room at the tax reform. This appears to be a critical moment for tax policy and for the municipal market. What is the level of anxiety among UNI lobbyists right now? Are they feeling confident that their message to Congress is landing? And I understand that this could be a very different answer depending on who you're talking to because the municipal finance community is so diverse.
Caitlin Devitt (01:46):
Yeah, I would say it sounds like they're optimistic but cautious. A lot of 'em have been meeting, holding, have been holding meetings on the hill with staff, mostly staff on the two tax committees that are going to craft the final bill House Ways and means and Senate Finance and the ones we've talked to have said that the staff they're talking to and the lawmakers are receptive and seem to understand the importance of the tax exemption and the importance of the stakes. But that the key phrase is everything that's on the table, the Public finance network and lead advocates like GFOA, government Finance Officers Association and the Bond dealers of America have armed themselves with this new data about bonds and a new website that attempt to explain the importance of tax exemption on the ground level. For example, how many projects have been financed, how much state and locals have saved by using the tax exemption information like that.
(02:46):
The University of Chicago has developed a lot of the data which we've written about, but the other aspect to it is there's sort of a lack of transparency. I mean, I don't think it's quite clear what's seriously being considered at this point as a potential pay for the cost of the tax reform bill. It seems as if a small group of lawmakers and staff are going to be the ones involved in crafting the final bill, and no one's going to know anything for sure until probably until the tax of a bill comes out. I was looking at some of our reporting from 2017 when the first tax Cut Jobs Act bill came out under the first Trump administration, and the market was really blindsided when House Republicans released the bill, an early draft of the reconciliation bill that terminated tax exempt private activity bonds and advanced refunding.
(03:36):
In fact, lawmakers had told the industry that munis were likely safe, and we reported at the time that GFOA had said they'd had over 90 meetings on the hill and they'd heard no talk during all those meetings of advanced Refundings or PS being on the chopping block. So this time around, of course, everybody's waiting for it, but the point is, like I said, kind of it's a small group and there's sort of a lack of information about what they're considering. The other lesson when I look back from 2017 is the speed with which a final bill came out. A draft reconciliation bill was released on November 2nd, and Congress passed it on December 20th and Trump signed it into law on the 22nd. So that's just a matter very few weeks there. This time around House speaker Mike Johnson has set an ambitious schedule. He wants to send Trump a final reconciliation bill by early May.
(04:26):
We're recording this on Wednesday, February 26th, and last night the house passed its budget resolution, which is the first step towards its reconciliation bill. It was a very narrow vote that showed how difficult it's going to be for the GOP to gather its party while they're having these intraparty disputes over a lot of these important measures. But it also showed it's capable of doing it. So now they're going to need to conference with the Senate for a final budget resolution and then vote on that and then begin the process of writing the full tax and spending. Bill,
Kyle Glazier (04:56):
I'm happy you brought up that house vote that just happened because one of the key questions coming along this whole process has been the house approach versus the Senate approach. Right? The House, as you mentioned, speaker Johnson really wants to advance a one bill, one reconciliation bill to handle everything and do it on an ambitious timetable. The Senate on the other hand, arguably a backup approach, splitting the bills up into something that they could do now without the most contentious items and pushing the tax questions, especially the ones that we're so focused on to a later date. Is there any sense among market participants that either approach is better or worse for the future of Muni priorities? Would they like to just see this process over now or do they think that having more time would be advantageous?
Caitlin Devitt (06:01):
Well, I think that people think that having more time would be somewhat advantageous, but I haven't really heard that people think there's a big difference in timing in terms of the threat to the tax exemption. In terms of the one bill versus two bill process, the Senate did pass its own slimmer budget resolution thing, I think two weeks ago or last week, late last week. And like you said, it's kind of a plan B. They also think that they're really pushing the house. That move really kind of pushed the house to advance its process. But so on the timing thing, I'm not sure if people think there's a big difference, but I have heard that the scoring math that the two chambers end up using could make a big difference. The Senate right now is pushing hard to make the TCGA permanent, and to do that they would have to use a scoring method called Current Policy baseline, current Policy Baseline versus Current Law Baseline, which the policy baseline argues that because the tax provisions are already law, they don't really constitute new expenses. So in that case, it would bring the cost of extending the TCGA extension down to zero. So for the muni market, the lower the price tag, the lower threat to the tax exemption because the lawmakers aren't going to have to be looking for pay fors. The house meanwhile, so far used the current law baseline, which is the traditional scoring method used by the CBO and the Joint Committee for Taxation.
(07:23):
The cost of extending the TCGA under that is about 4.7 trillion, I think is the number from the CBA and A separate debate turns on is about whether Congress should rely on so-called dynamic scoring, which takes into account the macroeconomic impacts of tax policy changes. And that scoring method most people think is much more flexible. And in that way, it would be more favorable to the tax exemption than conventional scoring, which does not take into account economic changes in 2017 with the Tax Cut and Jobs Act, the house relied on a dynamic score, but the Senate did not because the Senate parliamentarian ruled it would not comply with the reconciliation instructions. So that could signal a debate with the parliamentarian in the future in the Senate down the pike.
Kyle Glazier (08:09):
Sounds like the situation's still pretty fluid in terms of what the number is even going to be that Congress thinks it needs to get to.
Caitlin Devitt (08:20):
Yeah, I mean to
Kyle Glazier (08:21):
Follow those developments it seems,
Caitlin Devitt (08:23):
Yeah, we'll have to follow the Senate saying that the house resolution that they passed last night calls for up to 4.5 trillion or 4 trillion or 4.5 trillion in tax cuts, which the Senate is saying is not nearly enough to implement Trump's whole tax plan, which is not just the TCJ extensions, but also things like no tips on social security and no taxes on social security and no taxes on tips. So that's going to cost extra. So they're already really pushing back and as they head into conference, we'll have to wait and see not only what numbers they decide on, but with scoring, which really gets in the weeds that budget math scoring issue
Kyle Glazier (09:04):
On the same topic or at least a closely related topic, as much ass a coalition of muni issuers and broker dealer firms, Doug and Bond lawyers dug in to fight any attempt to curb or eliminate the tax exemption in particular. But the buy side seems much less perturbed about all of this. I know you've spent a lot of time talking to the buy side. Where does their attitude stem from on this? Do they just not believe that this will ultimately happen or do they just not view it as a particularly negative development, even if it does?
Caitlin Devitt (09:45):
Yeah, I agree. The buy-side doesn't seem as concerned as other market participants about the prospect of it. Most of 'em just don't seem convinced that Congress is going to do it. They think that the amount of money it generates is like pennies compared to what they're looking for. Basically, it's not worth the hassle. A recent House Ways and means document that included the tax exemption as a provincial, as a potential pay for which we wrote about when it came out in late January, I think scored it at the saving of two 50 billion over 10 years. No one I've talked to is quite sure where they got those numbers from. But anyway, the cost of the full thing is, like I said, about 4.7 trillion. So a lot of the byers are saying it's just not even worth it because it's not going to offset really anything thing.
(10:30):
In saying that, of course they're relying on Congress being rational, which other market participants say is a risk right there. And also if it does happen from buy sider perspective, it's likely not going to make outstanding tax exempt bonds. I mean, it is going to make tax exempt bonds outstanding. Tax exempt bonds go up in value. Though our reporting shows that some investors think it's just going to go up modestly. So in some ways, they're not that worried about it on that front. I mean, that's assuming that what Congress passes isn't retroactive, which would strip away the tax exemption outstanding bonds, which would throw everybody up in the air. But if it would just make outstanding tax exempt bonds, I mean, if it would make tax exempt bonds in the future go away, it would obviously increase the value of existing tax exempt bonds. And also it would probably cause a rush to market and the demand would be there. So there'd be a lot of action going on in the market, but while they're acting more relaxed about it than other participants, I think that if Congress does end up stripping the tax exemption, it would really shake up the buy side just so it would shake up the whole market. I mean, it would be completely transformational for the entire 3.5 trillion tax exempt bond market.
Kyle Glazier (11:44):
Yeah, I mean it would presumably cause an entire shift in philosophy about what investing in municipals even means, correct?
Caitlin Devitt (11:54):
Yeah. I mean, well, it would broaden the base for one thing. I mean, that's the other kind of buy side look at it. You'd have all these people who, all these taxable buyers who would, as some buy siders have told me, would love to invest in muni credits that have never really been able to or wanted to. So now it would really broaden the base and yeah, it would just really kind of change the market. We've been gaming that out and talking a little bit about that. I think one, it would cause a lot more, or it would probably prompt a lot more, for example, pooled financings. But most people agree that it would really mean for smaller issuers, it would really pose the biggest problem. For smaller issuers, it would really cause a major increase in the amount of financing costs. And for small issuers that aren't the most frequent issuers, that would pose probably the most pressing challenge.
Kyle Glazier (12:48):
Changing gears a little bit to a topic I know is very near and dear to you. What about the future of infrastructure under the Trump administration? Obviously it's still early days. It's difficult to believe it's only been about a month of the Trump administration at this point, so perhaps it's difficult to judge what's been going on at the DOT under new transportation secretary Sean Duffy, who I know the market did react positively to his nomination and confirmation, but what, how's work coming along on a successor to the Biden administration's work on infrastructure investment? Is that proceeding in a way that should make us expect that we'll see that? Or is there a risk of stagnation and kind of a return to the prebi status quo infrastructure funding?
Caitlin Devitt (13:51):
Well, the next big infrastructure measure is going to be the next surface transportation bill most likely, and that's something that Congress has always passed on. Biden's infrastructure Investment Jobs Act expires next September in 2026, so September after this one, and the next bill is going to take us then from 2027 through 2031. And everybody's very focused. Republicans that control the Congress, very, very focused on getting that thing passed. They're already holding hearings on it just today, the Senate Committee on Environment and Public Works, which oversees it held a hearing. It was sort of ostensibly on the implementation of the IJA, but really it was just sort of a launch pad for them to start to talk about the next service transportation bill, reviewing the IIJ and talking about what worked with it and what didn't as they start thinking about what they want to do.
(14:46):
So industry lobbyists like aashto have already gotten started talking about their priorities, and I think we should probably expect to see some changes. One thing I'm expecting is to see more formula funds and less discretionary grants. IJ had a huge amount of discretionary grants, and that allowed the Biden administration to really shape what got funded and what didn't get funded. And I think the industry, well Ash, which represents state transportation departments and Republicans are really going to push for return to more traditional funding through the states. A lot of those discretionary programs had a little bit tougher time getting off the ground and some of the smaller cities had, it was tough for them to apply for those federal funds, which was a worry as the Biden administration was writing the IJ, they were worried about that, and I think in fact, that kind of turned out to be true.
(15:39):
And so some of the testimony today was about that. It was sort of interesting hearing about it. There's a lot of uncertainty right now though that new DOT has expressed its own priorities. We've written about it recently. Duffy has put out a memo that said that they'd like to build in areas with high birth and marriage rates, for example, and only in cities that have complied with federal immigration laws. And so that's going to create a lot of uncertainty. I mean, as a reminder, the Biden administration had put out its own sort of memo talking about its priorities that Republicans at the time said, went outside the IJA sort of statutory intent. And now the Democrats are saying the same thing about the Trump administration's memo. So it'll be interesting to see how that plays out. And then of course, there's a bunch of uncertainty.
(16:31):
The Trump administration is attempting to freeze a lot of the federal funds that affects transportation funds. So states and cities are kind of trying to figure out how to deal with that. Even some of the grant funding agreements might be a little uncertain. So I think that we're in this time when a time of uncertainty, dots are really wanting to see more certainty in funding levels, and they want to get through this sort of period that the Trump administration is calling a review period while they make sure that all the federal funds that are going out comply with some of their priorities. But Duffy said he has a mandate from Donald Trump to build things because President Trump is a builder. So he says that's one of his mandates. So we expect to see that they're going to at least try to make an effort to make that happen.
Kyle Glazier (17:20):
To the point you just raised, it seems like we could see both house Republicans and the administration at times really putting the scrutiny on some certain projects, particularly in places like California we saw with the high speed rail recently. Is that something you expect that is going to continue?
Caitlin Devitt (17:44):
Yeah. They've launched an investigation in the HighSpeed Rail, the federal funds used for that, and they also paused or they withdrew approval for New York City's congestion pricing. So those are two major high profile projects that they're trying to put the kibosh on. In both those cases actually, but especially for California high-speed rail during the first Trump administration, that happened as well. They rescinded funds for that, and then when Biden came in, they restarted the funds. So it's sort of some of that back and forth. But I kind of think that, and I would imagine a lot of stuff is going to go to court. I mean, some of this has to do with this impoundment issue, how much ability the Trump administration has over federal funds that Congress has already appropriated. That's something that's probably going to have to play out in the courts. I mean, that's not just transportation infrastructure. Of course, that's everything. And so we're going to have to wait to see how that plays out. But I do feel like when it comes to California HighSpeed Rail, that I would imagine over the next four years, we're going to see some sort of resolution to that project just so over budget and so delayed, and with no federal funds going toward it, I don't know if the state itself is going to be able to push that forward.
Kyle Glazier (19:03):
Well, whatever ends up happening with all of those things, we certainly, we'll keep an eye on it, and we will make sure to keep all of our listeners and readers informed.
Caitlin Devitt (19:16):
Yep.
Kyle Glazier (19:17):
That about wraps us up. Thank you for listening to the Bonfire podcast. Thank you, Kaylin, for being here.
Caitlin Devitt (19:24):
Thank you.
Kyle Glazier (19:25):
And thank you to when Mr. Young Marie who did the audio production for this episode. Please don't forget to rate us, review us and subscribe@www.bond buyer.com/subscribe From the bond buyer, I'm Kyle Glaser. Thank you for listening.
Mike Scarchilli (19:39):
We hope you enjoyed this episode of the Bond Buyer Podcast. A big thank you to Kyle and Caitlin for breaking down the tax policy debate and its potential impact on the municipal bond market. Here are three key takeaways from today's conversation. One, Congress is moving quickly on tax reform and while Muni lobbyists remain cautiously optimistic, past precedent shows that the tax exemption could still be in play as lawmakers seek revenue offsets two, the next surface transportation bill is already taking shape with a likely shift toward more formula-based funding and a move away from the Biden era focus on discretionary grants. And three, the Trump administration is taking a closer look at federal infrastructure funding with major projects like California's High-Speed Rail and New York's congestion pricing, already facing challenges, signaling potential hurdles ahead for other initiatives. Thanks for listening to the Bomb Buyer Podcast. This episode was produced by the bomb buyer. If you enjoyed the conversation, please subscribe on your favorite podcast platform. We us a review and visit www.bondbuyer.com for the latest coverage. Until next time, I'm Mike Scarchilli signing off.