Municipal Bonds and Infrastructure Development – Past, Present, and Future


By Ronald P. Bernardi

We thought you might find the attached white paper interesting.  It is sponsored jointly by GFOA and IMCA and is authored by Justin Marlowe, professor at the University of Washington.

The paper describes the important role tax-exempt financing plays in funding infrastructure investment and how access to tax-exempt financing shapes state and local government investment in public purpose projects.

The paper addresses three critical issues facing municipal bond issuers:

  1. The sensitive nature of capital investment to fluctuating tax-exempt interest rates
  2. The lower cost of capital benefitting state and local governments due to tax exemption
  3. The effect on cost of capital if Congress repeals or sets an arbitrary cap on tax exemption

Here are several notable points detailed in the report:

  • If federal tax exemption for municipal bonds did not exist, state and local governments would have paid more than $700 BILLION in added interest expense between 2000-2014.
  • Approximately 90 percent of state and local capital spending is financed with debt.  At the moment, alternative financing methods such as pay-as-you-go and public-private partnerships are effective for some types of capital projects, but are not a robust alternative to traditional municipal bonds.
  • There is considerable elasticity in the supply of municipal bonds.  Therefore, the presence of factors like high interest rates, threat to tax-exemption or capping the value of municipal bond interest at 28% does affect whether issues come to market and the interest rates paid.
  • Calculations made by a number of groups overstate how much revenue the U.S. Treasury foregoes each year as result of the municipal exemption.  In fact, Professors Poterba and Verdugo (2009) estimate the cost of the exemption is $14 billion each year.  Their calculation is FIFTY PERCENT lower than recent calculations put forth by critics of municipal bond tax exemption.

We have written and spoken extensively on this topic over the last several years.  Below are links to several of our publications on the topic:

White Paper: Tax-Exempt Municipal Bonds

Market Commentary: A Century of Tax-Exempt Municipal Bonds: The Good, the Bad and the Ugly

It is important that proponents of tax-exemption remain vigilant and informed to the ongoing threat.  It is important that proponents continue to educate Congress, congressional staff and administration officials as to the important role tax-exempt bonds play in our communities.

Tax-exempt bonds are an established, time tested means for financing public purpose infrastructure projects for communities across our nation.  Radical changes to the current market structure will result in higher financing costs for all, less infrastructure investment and a reduction in local control over the financing of community projects.

Please feel free to contact me if you have any questions or wish to further discuss this topic.


Ronald P. Bernardi
President and CEO
August 27, 2015

Download White Paper Here>