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The Washington Weekly

Outlook 2022: What is Possible for Munis?

BDA’s bi-weekly federal legislative, regulatory and political report on policy impacting US bond markets.

A new year brings renewed hope and a renewed sense of legislative possibilities in Washington, DC. Talks of reviving the social infrastructure Build Back Better Act have begun to flourish, but how long will this optimism last? 2021 brought the passage of the Bipartisan Infrastructure Law (BIL) which included an expansion of PABs, but failed to include several key muni provisions. This historic legislation set the stage for the larger, and more partisan Build Back Better Act (BBB) providing additional opportunities for infrastructure and muni priorities.

Alongside our state and local partners in the Public Finance Network, both the BDA and MBFA advocated for munis in the BIL and have continued to advocate for inclusion in the Build Back Better Act, a sprawling social infrastructure spending package in which debate continues in early 2022.

What are the next steps for BBB and is additional legislative action likely or even possible pre-November midterms? Is it most likely that the bill will be divided into multiple smaller bills for passage and what fate do key muni provisions such as the reinstatement of tax-exempt advance refunding and a new direct pay bond have this Congress? We discus these questions in depth below.

Muni Watch 2022: Next Steps for the BBB/Any Potential Paths Forward for Munis?

After months of negotiation, the Biden Administration along with Republican support in both the House and Senate got a major bipartisan win in passage of a massive infrastructure spending bill, the Bipartisan Infrastructure Law (BIL). After extensive advocacy from the PFN with the support of the BDA and MBFA, the BIL passed in late 2021, the $1 trillion-dollar bipartisan package provides nearly $600 billion in new grant money while expanding usage of private activity bonds.

The PAB provisions include:

The BIL adds broadband as an allowable use for private activity bonds (PAB). This would allow states to issue PAB to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have access to broadband.
The bill allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds are 75% exempt from the volume cap.
The bill increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). At time of passage, it was estimated that $14,989,529,000 billion of the $15 billion caps had been issued or allocated.
Grant money from the package will be funneled through the Department of Transportation and other agencies for distribution to state and localities over the coming years, and the BDA continues to work with the Department of Transportation key financing issues and plans to be involved with the Treasury rules/regs process with the new PAB products.

Bipartisan Infrastructure Law of 2021 Expands PABs

2021 started with much optimism in muni-land. Following passage of the Bipartisan Infrastructure Framework, Congress continued to press forward on a sprawling social infrastructure spending package, the Build Back Better Act. Initial drafts that totaled nearly $3.5 trillion in new spending and included a vast expansion of municipal finance tools following the guideline of Rep. Terri Sewells (D-AL) LIFT Act.

The PAB provisions include:

The reinstatement of tax-exempt advance refundings
Raise the BQ debt limit to 30 million and tie it to inflation,
Creation of a new direct-pay bond with a varied reimbursement rate over its life span, and
Expand the definition of exempt facility bonds.

In an effort to rein in spending to court Senate moderates, House and Senate Democratic leaders widdled away at the original package, that included removing all muni provisions from the package while also removing provisions not directly impacting health care, education, or climate bringing the overall price tag to $1.75 trillion.

In late December, the ongoing legislative disagreements between the moderate and progressive segments of the Democratic party came to a head in a very public manor with Senator Joe Manchin (D-WV) all but killing the bill stating that he could no longer get to “yes” as the package stands.

But as noted above, a new year brings renewed optimism and as the calendar turned so did Joe Manchin stance on the package. In early January, the Senator from West Virginia promptly returned to the negotiating table, however at this time it is too early to tell if his potential demands are good faith offers. The remains a good chance that the BBB will be divided into multiple smaller packages focusing on climate and healthcare, but at this time is remains too early to handicap if any additional rider provisions such as muni legislation could be included in any of the smaller bills.

As we have previously noted, all muni provisions were trimmed out of the package earlier this fall in an effort to cut the overall cost of the package in half. While probabilities remain low that the provisions could be brought back into a revamped package, the longer the debate is prolonged, the more opportunity the time provides for additional advocacy. We continue to advocate for this possibility and press for inclusion in other future spending and tax packages in 2022.

Beyond the inter-party spat, time is ticking towards the November midterms which will shorten the years legislative outlook at least in half. If no major progress is made in the coming 6 weeks, the BBB will almost certainly not pass in 2022, and if polls hold firm, Democrats are on track to lose both Chambers of Congress all but killing the BBB.

Next steps continue to remain unknown, however Senate Leaders claim that they will bring the package to the floor for debate and vote in early 2022 regardless of Manchin’s status.