While bond investors have mostly "doubted" that President Trump and the Republican Congress will get their act together and change the way America finances roads, bridges, and other big public projects, the pro-corporate advisers who are taking over the Trump White House are showing signs of ending the disorganization and taking steps to "reduce the value" of the long-standing muni-bond tax exemption, in favor of new financing schemes, warns Thomas G. Doe, founder of Municipal Market Advisers, the Connecticut-based investment firm.
"A successful tax reform" would "reduce the value of the exemption to investors and issuers," Doe writes in today's MMA note to clients. Even without an end to the tax exemption, "a reduction in corporate and personal rates" would cut munis' advantage. States, cities, and local authorities would have to pay higher rates to stay competitive.
And that could make private financing for public projects (including so-called "public-private partnerships" or P3s) more attractive — even if that ends up boosting public borrowing costs, tolls and other fees.
Bond investors have long memories. Critics dating back past liberal presidents FDR and JFK to conservative Treasury Secretary Andrew Mellon in the 1920s have long complained that public-finance tax breaks:
• Help the rich avoid taxes
• Compete with private borrowing, driving up the cost
• Costs the U.S. Treasury too much
• Unfairly enrich politically-connected muni-bond bankers, lawyers and fund managers
• Are relentlessly abused by private political and business interests whose friends in government use public finance to back pet projects.
Trump's Wall Street allies don't "openly" articulate their preference for private finance generally and P3 in particular — but have made it "evident in the policies put forth for consideration," Doe adds.
Private companies involved in the P3 business have advocated that P3s offer better procurement, more efficient risk allocation and a less expensive way to deliver new infrastructure.
But despite their aggressive marketing, Doe warns, "P3s do not provide risk or debt-free capital to states or municipalities, and would require Federal funding to seed projects to entice private capital and expertise to join large projects."
For an extreme example of what can go wrong, he writes, check out socialist Venezuela, "where a default on the state-owned oil company’s debt could place the country’s assets in the hands of a foreign government."
(I would argue that the rapid inflation in the costs of U.S. college education, medical care, and, at times, home mortgages and military procurement, also shows what can go wrong when public financing is applied to privately-run industries.)
Worse, Doe writes, P3 plans risk putting large regional projects under the control of a federal financial structure "that facilitates the effectiveness of lobby efforts by private enterprise."
The current "idiosyncratic" and decentralized muni-bond system, in Doe's view, "has largely represented a defense against corporate abuse, disruptive lobbying, egregious borrowing, and loss of local control."
Who exactly is trying to pull that system down and fund much larger public projects with private cash, to be reimbursed by taxpayers over many years?
"P3’s prioritization can be attributed to a key player in the restructuring of the municipal industry, DJ Gribbin, Special Assistant to the President for Infrastructure Policy," Doe writes.
"Mr. Gribbin has held positions at Macquarie Capital [Australia-based owners of Philadelphia-based Delaware Investments], Koch Industries [whose controlling owners are leading Republican donors,] and HDR," the giant engineering construction company, with offices in Philadelphia and dozens more cities, which lately financed its Omaha headquarters "using tax-increment financing," among the "riskier" forms of municipal finance.
"Mr. Gribbin is not a supporter of the municipal industry and exemption — perhaps because it simply does not produce substantial opportunities for large projects and the even larger companies Mr. Gribbin has represented," Doe notes.
"Mr. Gribbin brings an evangelical passion to his P3 advocacy, which can be beguiling. He also works with [and] for Gary Cohn, current Director of the National Economic Council, formerly Goldman Sachs’ President and a Democrat, who may soon ascend to President Trump’s Chief of Staff.
"A Cohn-led administration is apt to reflect the 'tough operator' characteristics of the Chief of Staff and, as a Democrat, he may be more effective in crafting bipartisan support to push through agendas of tax reform and infrastructure policy." After all, pre-Clinton-era Democrats were historic critics of the muni-bond tax exemption, which they saw as "a benefit for the wealthy to shield taxes."
So the new wave of Trumpers, Doe suggests, could build a corporate/left coalition to expand Obama's embryonic "Build America Transportation Investment Center" office in the Department of Transportation that advocates for P3s as a way of bringing in private (U.S. and foreign) investment to a cash-strapped federal government.
"Trump wants wins now, and Cohn may simply be the guy to deliver," Doe adds.
Treasury Secretary Steve Mnuchin, another ex-Goldman Sachser, and Commerce Secretary Wilbur Ross, the buyout billionaire, understand munis, Doe added.
Under "the hands-off management style of Trump, these 'four horsemen,' with unprecedented latitude, could restructure municipal finance and eliminate the exemption," aiding corporate America "under the guise of efficiency, savings, and jobs for the middle class."
Unless states, cities, and muni-investor lobbyists get their act together fast, Doe concludes, "the status quo is at risk."