Addressing the Shortfalls in US Infrastructure
Investment:
Building on Success
Presentation to the National League of Cities
Finance, Administration, and Intergovernmental Relations Committee
June 20, 2017
Privileged and Confidential
Agenda
•
State of the Municipal Bond Market
– Interest rates remain low
– Net demand for municipal bonds remains strong
– Investors are taking an increasingly nuanced view of credit quality
•
Infrastructure Investment
– Who Really Pays for U.S. Infrastructure
– Why Is This An Issue Now?
– Current Trends
• Steady, but slow, uptick in investment
• Increasing voter support for new capital spending
• Continuing low borrowing costs
• Continuing tight budgets
•
The Trump Administration Infrastructure Plan
•
Update on Credit Enhancement and BAM
2
Section I.
Municipal Bond Market Update
Still a good time to be selling municipal bonds
3
Borrowing Costs Remain Near All-Time Lows
Causes include low inflation, strong investor demand, low supply of new bonds
6%
Lowest long-term
financing cost in
50 years
5%
4%
3%
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: The Bond Buyer 20-Bond Index;
2000-2014 data reflects annual averages; 2015 data is for 2/19/15
4
Investors Continue to Pursue a Limited Universe of Municipal
Bonds
Banks have slowly displaced individual retail investors
Holders of Municipal Debt
4500
4000
•
Money is “leaving the
system” because
investors cannot find
enough new bonds to
purchase (at attractive
rates)
•
Open Question: Will
individual buying of
municipals increase
when interest rates rise?
3500
3000
2500
2000
1500
1000
500
0
2013
2014
Households
Banks
Other
2015
2016
2017
Mutual Funds
Insurance Companies
5
Municipal Credit Quality is Stronger Overall
Economic growth is strengthening most budgets, but exceptions are common
2016 Municipal Ratings
Changes
•
Upgrades have outpaced
downgrades two years in a
row, and the trend is
continuing in 2017
•
City and local ratings remain
heavily influenced by their
states’ credit strength
•
Analysts increasingly see
divergence between ratings in
states with well-funded
pension plans and those with
poorly funded plans
1200
1000
800
600
400
200
0
S&P Global Ratings
Upgrades
Moody's Investors
Service
Downgrades
6
Section II.
Infrastructure Investment Outlook
Cities are not waiting to build
7
Who Really Pays for U.S. Infrastructure?
City, State, and Local Government Spending Dwarfs the Federal Share
8
Why Was Infrastructure a Major Issue in 2016?
Spending is failing to keep pace with needs
9
Why Was Infrastructure a Major Issue in 2016?
Operations and maintenance spending is crowding out new construction.
10
State and local governments have begun the reinvestment
process
“New-money” bond sales fell dramatically after 2010, but investment has
accelerated in the past three years as deferred maintenance and other needs
have become more urgent
30%
20%
10%
0%
-10%
2009
2010
2011
2012
2013
2014
2015
2016
2017
-20%
-30%
-40%
-50%
Source: The Bond Buyer
11
Voter support for infrastructure bonds is rising
2016 marked the strongest year for municipal bond elections since 2006; pent-up
demand for investment in projects that were deferred during the recession was a
key factor.
$120,000
$100,000
$80,000
+392%
$60,000
$40,000
$20,000
$-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Par Approved
Par Rejected
Source: Ipreo
12
The municipal bond market has ample capacity to finance
additional infrastructure investment
Net new issuance remains nominal, and the ratio of Municipal to Treasury bond
yields is low despite the recent uptick in borrowing
$400
$350
$300
Gap between
pre- and post2010 average =
~$85 billion /
year
$250
$200
$150
$100
$50
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$0
Build America Bonds
Source: The Bond Buyer
13
Identifying sustainable funding for infrastructure projects is the
principal obstacle to increased spending
State and local government infrastructure budgets have been squeezed by both
below-trend revenue growth and dramatic increases in other spending priorities
– most notably public pension costs
$350
$300
$250
$200
$150
$100
$50
$0
2008
2009
2010
2011
2012
2013
2014
2015
2016
State and Local Construction Spending
State and Local Pension Contributions
Source: US Census Bureau
14
Section III.
The Trump Administration Infrastructure Plan
Will it be “huge?”
15
The Trump Infrastructure Plan
Taking a comprehensive look at obstacles to investment
•
Create $1 trillion of infrastructure investment in the next 10 years
–
–
Starting Point: Ross/Navarro Paper: “Trump vs. Clinton on Infrastructure”
• $167 billion of Federal incentives will leverage $1 trillion of infrastructure spending
from the private sector
• Additional tax revenues will cover 100% of the cost of the incentives
Current Thinking
• Use Federal spending of $200 billion to leverage $1 trillion in spending
– “Budget Scoring” will come later
• Additional spending will come from the private AND public sector
• Generally focused on traditional municipal infrastructure projects: Transportation
and Water systems, in particular
16
What are the Administration’s Goals?
•
What they are getting right
– Funding, not financing, is the principal obstacle to increased infrastructure investment
• Administration’s solutions are currently focused more on generating revenues from
the projects, rather than Federal grants
– Existing tools (tax-exempt bonds, TIFIA, WIFIA, TIGER) should be retained and
expanded
• New tools, particularly focused on easing P3s, should be added
– Federal bureaucracy slows projects and makes them more expensive
– Certain infrastructure (particularly in rural areas) will never be “self-supporting” and
needs special attention
•
Where the jury is still out
– How will they find room in the budget to finance these initiatives?
– Will tax-law changes undermine the gains?
– How will cities, states and other local governments respond to relatively low-cost
Federal incentives?
– How much savings can you really generate from streamlining Federal permitting?
17
Infrastructure Support is Nearly Universal … Right?
Press coverage highlights potential obstacles to new legislation
•
•
•
•
•
“Trump's infrastructure plan is a pillar of his agenda. It also isn't very smart”
– The Guardian
– Criticism about lack of focus on new technologies and sustainable energy
“Trump is selling a privatization scam and calling it an infrastructure plan” –
Salon
– General public opposition to privatizing public assets / concern about not
getting fair value (focused on the FAA privatization proposal)
“Trump pushing for public-private partnership, but Pence's Indiana a
cautionary tale”
– Pittsburgh Post Gazette
– P3s are proven elsewhere, but the playbook in the U.S. is limited, which means
there are risks of mistakes
“Trump’s cynical infrastructure plan” – New York Daily News
– Focused on the lack of direct Federal spending
“World offers cautionary tale for Trump’s infrastructure plan” – New York
Times
– Oversight of private-sector builders needs to be solid to avoid substandard
construction from taking place
18
Section IV.
Bond Insurance and BAM Update
Protecting market access for cities
19
BAM’s Mission
To be the premier Financial Guaranty insurance company,
serving investors with durable, transparent protection against default
while acting as an industry utility providing efficient funding
and savings to small- and medium-sized issuers.
•
BAM has been an NLC Business Partner since before its launch
•
BAM only insures bonds from U.S. Municipal issuers who provide essential public
services
• Eligible projects include general obligation and revenue bonds for transportation,
water and sewer utilities, and school districts
•
Mutual insurance structure
• U.S. Municipalities “own” (are members of) the mutual company
20
BAM’s Insured Portfolio: Diversified and Low Risk
•
BAM’s insured portfolio is
– of lowest risk and highest credit quality of its peers
– broadly diversified geographically (within U.S.)
– diversified among lowest risk municipal sectors
Gross Par In-Force $35.2 billion1
Estimated Issuer Savings: $535 million
Rating Distribution2
State Distribution
Sector Distribution
based on Par Outstanding
*Other includes AR, AZ, CO, CT, GA HI, IN,
IA, KS, KY, LA, MA, ME, MI, MN, MS, MO,
NC, ND, NM, NV, OK, OR, RI, SC, SD, TN,
UT, VA, VT, WA, WI, WV
(1)
(2)
As of March 31, 2017.
Based on BAM internal ratings.
21
BAM’s Financial Strength: Growing at an Accelerating
Rate
As premiums written increase, BAM’s highly scalable
technology infrastructure keeps expense increases under control
Claims Paying Resources
Claims Paying Resources ($M)
$700
$660
$662
$644
$620
$601
$600
$580
$584
$579
$581
12/31/13
12/31/14
$540
$500
Inception
12/31/12
12/31/15
12/31/16
3/31/17
22
Small- and Medium-Sized Cities Benefit Most From Insurance
BAM’s entry led to a sharp increase in insurance utilization
After years of decline through the financial crisis, BAM’s entry to the market marked a
turning point, and use of insurance has grown steadily since then; small and medium-sized
issuers benefit most, although a wide range of infrastructure projects have utilized insurance
30%
25%
20%
23.8%
18.6%
17.2%
16.0%
14.5%
15%
12.3%
10%
12.9%
11.6%
8.9%
8.6%
9.1%
6.2%
5.6%
5.3%
5%
14.0%
3.5%
6.4%
5.7%
5.8%
3.6%
0%
2008
2009
2010
2011
By Par Value
Source: The Bond Buyer / Thomson Financial
* - Through April 30
2012
2013
2014
2015
2016
2017*
By # of Transactions
23
Recent Developments – Credit Ratings
•
On June 6th, S&P Global Ratings placed the ratings of both BAM (AA) and National Public Finance
Guarantee (AA-minus) on CreditWatch Negative
–
In a statement, S&P said the action was due to the insurers’ “competitive position” and focused
primarily on the fact that BAM only insures U.S. municipal bonds from essential public purpose issuers
–
This CreditWatch assignment represented a substantial departure from S&P’s previous
communications to the market
• S&P had previously said insuring only U.S. municipal bonds was a source of strength in its
analysis
• In its 2016 report, S&P identified five key metrics that BAM would have to achieve by the end of
2017 to satisfy its “base case” and retain its rating. BAM achieved every one by the end of Q1
2017
• S&P has not questioned BAM’s capital adequacy: BAM has never incurred an insured loss in its
lifetime, and does not anticipate any losses from its existing insured portfolio
• Broader municipal market behavior indicates no competitive advantage for either BAM or AGM:
Similar bonds insured by each company trade at parity
–
BAM will continue to engage with S&P to demonstrate that its current rating is correct and should be
maintained
Cities should prepare to make appropriate disclosures to the marketplace if the
ratings are changed
24
Contacts
Michael Stanton, Head of Corporate Strategy and
Communications
[email protected] | 212.235.2575
Build America Mutual Assurance Company
200 Liberty Street, 27th Floor
New York, NY 10281
212.235.2500 | www.buildamerica.com
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