Obama Administration promotes AFF bonds in ambitious infrastructure plan.

This week President Obama released his plan to repair and rebuild the nation’s infrastructure as outlined in his recent State of the Union Speech.  Overall, the infrastructure plan calls for an immediate $50 billion investment into the nation’s transportation infrastructure, attracting private investments through federal, state, and local government partnerships, and streamlining and incentivizing the infrastructure project process.  While the legislative language on the proposal has not been released, much of the funding is expected to be distributed through existing formulas.

To attract private investments, the infrastructure plan includes the creation of America Fast Forward (AFF) Bonds.  Modeled after the Build America Bonds (BAB) Program, the White House believes AFF bonds would attract new sources of capital such as pension and foreign investments for surface transportation infrastructure projects by including private-activity bonds (which are taxable) and relaxing certain limitations on how the bonds could be used.  The White House did not specify a subsidy rate for AFF bonds, but the president in the past has proposed reinstating BABs at a 28% subsidy rate.

There is concern that the Obama Administration and/or Congress would use the AFF program as a replacement for capping or eliminating the tax exempt status of municipal bonds.  However, AFF bonds could only be used to finance select transportation projects and most likely at higher borrowing costs.  Any proposal to substitute tax exempt bonds would dramatically reduce municipal bond demand and result in higher borrowing costs for states and local governments.

Organizations such as the National League of Cities and the Government Finance Officers Association are extremely wary that AFF bonds may jeopardize the future of tax exempt bonds.  Both issued statements on the importance of maintaining the tax exempt status of municipal bonds as the primary source of funding for local infrastructure projects.

A copy of the White House infrastructure plan is available here


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