The Federal Role in Investment in Infrastructure Financing

The Government Finance Officers Association (GFOA) supports greater investment in public infrastructure and recommends a renewed commitment on the part of the federal government to promote, encourage and participate in investment in infrastructure and other public capital facilities. Various mechanisms have been proposed for ways in which such a commitment could be carried out. Among them are proposals for the

• creation of a new category of tax-exempt bonds for the financing or refinancing of infrastructure facilities called "public benefit bonds,"
• designation of certain tax-exempt bonds as "mandated infrastructure facility bonds," and
• establishment of a national corporation that would make loans to and purchase debt and equity securities of governments and public-private partnerships as a means of leveraging federal resources with other public and private resources.

Public benefit bonds would be free of the restrictions on tax-exempt financing contained in the federal tax code and, if purchased by pension plans, interest received could be treated as tax free upon distribution to plan members at retirement. Mandated Infrastructure Facility (MIF) Bonds would provide relief from some of the federal restrictions on tax-exempt bonds used to finance facilities that are built in response to a federal mandate. The corporation, called the National Infrastructure Development Corporation, would be a wholly owned, self-supporting government corporation that would, after a period of transition, become a government-sponsored enterprise with the expectation that pension plans would be the initial purchasers of the securities of the corporation. GFOA has long supported the removal or modification of overly burdensome restrictions, particularly for infrastructure financing purposes. However, it has several concerns about the public benefit bond proposal and does not support it because the rules governing such bonds would circumvent an already existing body of laws governing the issuance of tax-exempt bonds and provide opportunities for abusive transactions.

As an alternative, GFOA supports designating certain tax-exempt bonds as mandated infrastructure facility bonds to provide more flexibility to governmental entities for the construction, renovation or rehabilitation of infrastructure facilities. This would be accomplished for governmentally owned infrastructure facilities through the easing of restrictions that are present in the current laws governing tax-exempt financing and through targeting the use of mandated infrastructure facility bonds to facilities that are mandated by federal law or federal regulations. While GFOA believes that all governmental bonds should be accorded the treatment that is proposed for MIF bonds, it proposes this new category of public purpose tax-exempt bond so state and local governments will be able to use debt in a more efficient and economic manner in order to comply with federal infrastructure mandates.

GFOA questions whether the establishment of a new, national level entity to provide federal resources for infrastructure financing is good public policy and would meet the financing needs of state and local governments, and accordingly opposes its establishment.

• Publication date: June 1995