Michigan and the Meaning of Flint (Mar. 8)

Mike & Co.  —

Tomorrow’s Michigan primary election may end up being “yugge” if it seriously opens up the possibility that Trump can put the state in play in November — “A normal Republican cannot think of bringing in Michigan,” said Trump — nothing any other GOP presidential candidate could do, now, or for the past 25 years.

Flint crystallizes so many of the issues that give rise to this new tectonic possibility.  There had to be a debate in Flint because there had to be a debate about it… and the Secretary deserves far more credit than she’s getting for making sure it happened.

In Washington, the Senate is readying to vote on a bipartisan package for drinking water aid.  It’s not a slam dunk, however, as Mike Lee has maintained a hold on the bill, saying political grandstanding is taking the place of policy.  More on all this below.




Flint — Bills and Broad Strokes

The Michigan legislature approved in January a $28 million appropriation to provide immediate aid to Flint.  Some critics maintain that the need to do so demonstrates the sorry condition of the state’s tax policy.

The tax base in Flint was eroded significantly during the 1980’s and 90’s as industry jobs left and the population fell.  To deal with the resulting fiscal imbalance the Flint city manager was instructed to cut costs – he did so partly by switching the source of Flint’s drinking water. The broad and deep cuts to state and local budgets affected basic public services most profoundly.  Now, as a direct cause of these cuts, the residents of Flint are grappling with an issue no American ever considered possible – they do not have access to fresh drinking water.

For all the talk of federal aid in infrastructure financing there must be a place made for regular tax payers.  These people bear a significant portion of direct funding for infrastructure projects both in their states and municipalities.  When those tax revenues are redirected, or when state spending is cut to the point that basic services can’t be provided then taxpayers are right to question what, in fact, their taxes are paying for.

Congressional update:

At the insistence of Democrats, the Flint agreement has been attached to a Senate energy bill introduced by Sen. Murkowski, S. 2012, which is next in line in the Senate following the opioid addiction bill.  The energy bill will be voted on soon, providing that things moves quickly (not a sure bet, since Dems may want to vote on certain amendments to the opioid bill).  Despite these potential hang ups, Senateleadership hopes to wrap up the energy bill by the end of the week – giving them some breathing room before the Senate adjourns for Easter recess by March 21.

While Sen. Cruz lifted his hold on the bill last week, Mike Lee has continued to block movement on the legislation.  Sen. Lee is claiming that federal aid is not necessary to deal with Flint: “The state of Michigan has an enormous budget surplus this year and a large rainy-day fund, totaling hundreds of millions of dollars,” the Senator said in a statement.

Flint agreement:

The bill provides $250 million to assist the residents of Flint, Michigan and other American cities experiencing critical problems with their water supplies by increasing funding for Drinking Water Act State Revolving Funds and provide start-up funding for the new Water Infrastructure Finance and Innovation Act.  It includes:

·       $100 million for Drinking Water State Revolving Funds (SRFs) accessible by any state with a drinking water emergency.  It requires states to submit plans explaining how the money will be spent to address the emergency before funding is provided.   Funds that remain after 18 months will be distributed to all states under the existing SRF formula.

·       $70 million in funding to back secured loans made under the new Water Infrastructure Finance and Innovation Act (WIFIA).  A federal investment of $70 million could support secured loans of up to $4.2 billion to address water and wastewater infrastructure needs across the country, according to Sen. Inhofe’s office.  All states and all communities with clean water and drinking water infrastructure needs are eligible for this assistance.

·       $50 million for various in authorized health programs for national use to address and prevent impacts from exposure to lead.

“Flint” is more than Flint

Flint is a crisis of governance – there is a disconnect in the relationship between citizens and government, and it bridges every demographic.  Just as the poor drink water so do the wealthy, and when a service as basic and fundamental is undermined to the point that an entire town of nearly a hundred thousands is poisoned by its own government, voters will express themselves, given the chance.

Residents, customers, consumers, taxpayers –- citizens at the end of the day  –- are seeing their government in a significantly different light and thus far are voting differently this year accordingly. Donald Trump would not likely be able to put Michigan in play without this new perspective animation politics in Michigan as much as anywhere.



Flint Bill:  Provisions & Prospects (Mar. 2)

Mike & Co. —

I hope everyone’s had a chance to reflect on the magnitude of Tuesday’s hard fought primary wins — with gratitude to those who toiled in the field. 

On Sunday night, the campaign debate turns to Flint, Michigan — to the town and the issues it has come to symbolize.   The town’s water contamination and related problems finally move center stage. 

Congress has moved with uncommon alacrity and bipartisanship in recent weeks on legislation to direct funding to address the water issue in Flint and elsewhere.   Here, we look at the bill’s provisions, its funding stream, and its prospects.  





The Flint Bill — Provisions & Prospects

A bipartisan deal has been reached in the Senate last week to aid the beleaguered city of Flint, Michigan as it tries to remedy its drinking water issues.  Sen. Inhofe, the lead GOP Senator on the bill, called it “common-sense,” and noted that the spending is already programmed and involves no supplemental appropriation.   The bill may be ready to move forward after Sen. Cruz lifted a hold he had placed on thebill last week.  Sen. Mike Lee is still a hold-out.

The bill provides $250 million to assist the residents of Flint, Michigan and other American cities experiencing critical problems with their water supplies by increasing funding for Drinking Water Act State Revolving Funds and provide start-up funding for the new Water Infrastructure Finance and Innovation Act.  It also provides:

  •   $100 million for Drinking Water State Revolving Funds (SRFs) accessible by any state with a drinking water emergency.  It requires states to submit plans explaining how the money will be spent to address the emergency before funding isprovided.   Funds that remain after 18 months will be distributed to all states under the existing SRF formula.
  •   $70 million in funding to back secured loans made under the new Water Infrastructure Finance and Innovation Act (WIFIA).  A federal investment of $70 million could support secured loans of up to $4.2 billion to address water and wastewater infrastructure needs across the country, according to Sen. Inhofe’s office.  All states and all communities with clean water and drinking water infrastructure needs are eligible for this assistance.
  •   $50 million for various in authorized health programs for national use to address and prevent impacts from exposure to lead.


Where will the money come from?   The package has been fully paid for — it redirects appropriations by taking funds from the Advanced Technology Vehicles Manufacturing (ATVM) Fund, which offers loans for auto companies.

Does that matter?   Per Sen. Inhofe “[the ATVM is] a failed program that hasn’t been used in more than a year and has only issued five loans since 2008.”

More on ATVM: The ATVM program is authorized to award up to $25 billion in loans; there is no deadline for completing such loan commitments. Congress funded the program in 2009, when it appropriated $7.5 billion to cover the subsidy cost for the $25 billion in loans, as well as $10 million for program implementation. Since the start of the program, DOE has awarded $8.4 billion in loans to five companies. As of January 2015, ATVM has $16.6 billion in remaining loan authority. No new loans have been made since 2011. Two companies — Fisker and the Vehicle Production Group — were unable to make payments on their loans, and DOE auctioned the loans off in the fall of 2013. Tesla paid off all of its loan in 2013, nine years ahead of schedule.

Criticisms of ATVM: The unobligated funds remaining for the program have been a point of contention in recent appropriations debates. The House has voted several times to transfer some of the unused appropriation for the ATVM subsidy costs to other purposes. None of these transfers were enacted. Other legislators have sought to expand the program. Two recent federal reports call for rescinding the program’s unobligated balance: the FY2015 budget resolution reported by the House Budget Committee calls for outright rescission, and an April 2014 GAO report recommends Congress consider taking the same step unless DOE can generate new demand for the program.

Legislative Strategy:   Architects of the bipartisan deal put out a hotline request to see if anyone would object to a series of procedural moves that would split Flint aid off the energy bill (S. 2012), attach it to a House bill (H.R. 4470) sponsored by Reps. Dan Kildee and Fred Upton, allow voice votes on 30 amendments to the energy bill, and allow roll call votes on eight additional amendments. Michigan Sens. Debbie Stabenow and Gary Peters said Democrats are on board, but in order to achieve unanimous consent, Republicans need to sign on.

Will it pass?  The Flint package and the energy bill amendments would come to a vote only after the Senate gets unanimous consent to some procedural maneuvers. Lee’s hold went unnoticed earlier when GOP presidential candidate Sen. Ted Cruz had a hold of his own, which he has now lifted. The Senate had hoped to hold votes on Flint and end debate on the energy bill as early as next week.

What’s Next?   Sen. Stabenow, a key leader on the bill, predicted that “one way or another” the package would be voted on in the Senate this week.  And while the House hasn’t decided what it will do if the Flintbill clears the Senate, Energy and Commerce Committee Chairman Fred Upton said it would move quickly.

The Obama administration, which declared Flint a federal emergency in January freeing up much-needed funds for the distressed city, has not issued an official stance on the Flint deal.  Early in the year the President also made available to the state of Michigan $80 million from a revolving fund for infrastructure repair and improvement.

A number of important events are scheduled for the month of March, listed below.

  •  March 3 — Flint is supposed to begin its lead service line replacement project.
  •  March 6 — The 7th Democratic debate will take place in the city of Flint, MI.
  •  March 15 — House Committee on Oversight and Government Reform will hold its next hearing on theFlint crisis.  On schedule is testimony on the Safe Drinking Water Act (SDWA) by various policy professionals.
  •  March 17 —  Hearings resume on SDWA oversight, with Michigan Governor Rick Snyder and EPA Administrator Gina McCarthy scheduled to testify.





Infrastructure Finance Update (Feb. 18)

Mike & Co. –

One week ago, the House passed a bill that could alter and perhaps ease the way state and local infrastructure is financed in the capital markets, when HR.2209, a bill to “require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes” was adopted by the House with a voice vote.  

Thought the bill has flown below the media radar, it is significant.  Municipal obligations, including bonds, are at the heart of infrastructure investment in America.  And infrastructure investment has been a large focus of this primary.  Both Democratic candidates have proposed multi-hundred billion dollar infrastructure investment proposals.

Details below…




Infrastructure is mostly funded at the state or local level through the use of municipal bonds.  Between 2003 and 2012, counties, states, and other localities invested $3.2 trillion in infrastructure through long-term tax-exempt municipal bonds, 2.5 times more than the federal investment.

The Bill

HR 2209 requires federal banking regulators to include municipal bonds under the Liquidity Coverage Ratio (LCR).  The LCR is designed to ensure that financial institutions have the necessary assets available to handle a liquidity disruption.  Local officials have said that if the new rules aren’t changed, it will saddle them with higher borrowing costs by eliminating incentives banks have to purchase their bonds. Without bonds, these governments will lose a significant source of their funding.  Per Indiana State Treasurer Kelly Mitchell: “This bill helps ensure cash-strapped school districts and municipalities will continue to have access to bonds to finance projects they think are best for their communities.”

Rep. Luke Messer, an Indiana Republican who wrote the bill:  “Put simply, our bill requires the federal government to recognize the obvious, that our municipal bonds are some of the safest investments in the world and that we shouldn’t have rules that give preferential treatment to corporate bonds or other countries’ bonds over our own.”

After passing the House with unanimous bipartisan support, a companion bill is expected to be introduced in the Senate this year.

Municipal Bond Issue

After the crisis of 2008, federal regulators adopted international banking standards that require banks to have enough “High-Quality Liquid Assets” to cover their cash outflows for 30 days in case of a future financial meltdown.  Now, municipal bonds are not considered liquid assets and therefore cannot be included under the  LCR.   As a result, financial institutions have been discouraged from holding municipal debt, which means that cash strapped municipalities and school districts may eventually be forced to reduce or even stop work on projects  financed with municipal bonds.

Infrastructure Financing — Alternative Financing

  •   Tax-exempt bonds:  Exemption from federal taxes and many state and local taxes is possible through the use of municipal bonds.   In recent years, with the increasing use of PPPs, barriers to this tax exemption have arisen.  Treasury has reviewed relevant tax rules and based on their findings and have put forth a proposal for an expanded and permanent America Fast Forward Bond Program as an alternative to tax-exempt bonds.  Based on the successful Build America Bond program, “would provide an efficient borrowing subsidy to state and local governments while appealing to a broader investor base than traditional tax-exempt bonds [and] would cover a broad range of projects for which tax-exempt bonds can be used.”
  •  Obama’s budget proposal:  Obama has also put forth a plan to strengthen local and state government infrastructure projects. His plan relies on a new Federal credit program to support public-private partnerships within the Department of the Treasury. It will provide direct loans to US infrastructure projects developed through PPPs. The Obama Administration believes that private investment is crucial for infrastructure development moving forward, so there should be more flexibility in regards to what PPP is subject to. In addition to that, President Obama has proposed the taxable, direct-pay America Fast Forward bond program to help finance infrastructure.


State Infrastructure Banks

Local governments receive financing in a number of ways.  Traditional sources such as tax revenues have been dwindling and local authorities have been relying on federal government loan programs, public-private partnerships, and State Revolving Funds (SRFs).  State Infrastructure Banks (SIBs) are a subset of SRFs — the funds act like a bank, because they don’t own the infrastructure asset, but act as a lender or guarantor to the project sponsor. Per Brookings:  “SRFs rely on principal repayments, bonds, interest and fees to re-capitalize and replenish the fund as a perpetual source of debt financing.”

SIBs generate more investment per dollar than traditional federal and state grant programs.  They only exist in 33 states and 10 of those SIBs are currently inactive. A large problem may be compliance with federal regulations.  Brookings again:

“We found that many SIB officials cite compliance with federal regulations as slowing down the investment process either because of environmental and contractual requirements or due to the lack of flexibility in projects that are not Title 23 or 49 eligible. For states with smaller projects, this may be prohibitively costly compared to the advantage of using the low-cost SIB financing.”

Just being called a bank subjects SIBs to regulations that commercial banks are subject to.  SIBs are non-for-profit organizations with a goal of increasing infrastructure investment, so they don’t quite fit into the category of the average bank.  SIBs may be more successful outside this classification.

For or Against Dodd-Frank

Before Dodd-Frank, particularly in the case of relatively small municipalities, many underwriters forged long-term relationships with municipalities and would provide financial advice before and after a bond issuance.  With Dodd-Frank, that relationship changed, with a new “municipal adviser” category that must register with the SEC and be regulated by the Municipal Securities Rulemaking Board (MSR).  Now, it is widely illegal to provide advice to governmental entities concerning the issuance of municipal bonds, the use of financial derivatives, and the investment of the proceeds of a bond issue to, or on behalf, of a municipal entity or an obligated person unless the adviser is registered with the SEC.

HR 2209 appears to address a problem within Dodd-Frank, but it is unclear if it vitiates the law materially.  At face value, it appears to be more a technical fix. Dodd-Frank expanded regulations for banking institutions, but the entities that fund state and local governments are far unlike the TBTF institutions that Dodd-Frank was meant to regulate.

Groups like Americans for Financial Reform oppose HR 2209: “While we sympathize with the belief that municipal debt was incorrectly treated under the initial LCR rule, we believe that it is inappropriate to classify such debt as a Level 2A asset. AFR therefore opposes this bill unless a more appropriate liquidity classification is used.”  AFR has previously said it supports treating municipal bonds as more liquid and does not approve the type of classification used in HR 2209, because it goes too far in its treatment of municipal debt as level 2A liquid assets and specifically with micromanaging regulators with this kind of detail and they prefer a Level 2B classification.

The bill could provide relief for smaller institutions, so that they can fund infrastructure investment more easily. In terms of Dodd-Frank, it is yet to be decided if it is simply a necessary tweak or a criticism.

Looking Ahead

HR 2209 could end up being an important issue in the national infrastructure discussion.  It brings up questions about how far a state or local government can go before its activities begin to resemble an actual bank.  With the growth of PPPs, the private sector is being even more integrated into the process – should those companies be given tax exemptions, as well?

Brown on HTF (Dec. 4)

Mike & Co. —

The November jobs report (200,000-plus net jobs added) is another key green light to a Fed primed to lift rates in two weeks.

FWIW, reported from Shelby last night re talks with Tester on Shelby 2.0: “We’ve been talking even tonight — we’re trying to see if we can work out some things with the Democrats.   Haven’t been able to yet but still talking back and forth, specifics.”

If you were among those who wanted to know more about the “big parts” that Senate Banking’s Ranking Member Sherrod Brown meant he had successfully advocated for in the  transportation bill now headed for the president’s desk, the Senator’s inventory of provisions and lightly edited remarks are below.



 Export-Import Bank Renewal

“The Export-Import Bank is one of the best tools we have to help businesses of all sizes in Ohio and across our country grow, create jobs, and compete in the global economy. Renewing the Ex-Im Bank will ensure that American businesses aren’t put at a disadvantage to our foreign competitors.”

Buy America Provisions

Brown pushed for a provision that would increase the amount of American-made steel and other components that will go into buses and subway cars.  The bill requires transit rolling stock (buses and rail cars) to include 70 percent domestic content, such as steel, by 2020, up from 60 percent under current law.

Regulatory Relief for Community Banks and Credit Unions

The transportation bill “provides the kind of targeted relief for community banks and credit unions that Democrats and Republicans agree is long overdue. It will help America’s smallest financial institutions be more efficient, cut some of their administrative costs, and still protect consumers.”

Key provisions:

  •  Boosting the number of small banks that could be eligible for Federal Deposit Insurance Corporation examinations on an 18-month cycle, instead of an annual cycle.
  •  Eliminating the requirement that financial institutions send annual privacy notices to their customers, if their privacy policy hasn’t changed.
  •  Allowing privately insured credit unions to be eligible for membership in the Federal Home Loan Bank (FHLB) system and receive FHLB funding.




HTF Conference Report (Dec. 3)

Mike & Co. —

Below, a closer look at some of the many distinctive features of the Highway Trust Fund reauthorization that is likely to be voted on in the House today and the Senate next week, focusing on the offset provisions.   Also note the coda on the Zadroga saga. 




Section by Section Summary: http://transportation.house.gov/uploadedfiles/joint_explanatory_statement.pdf

CBO Score: https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/costestimate/hr22_1.pdf

The House will vote later today on a $253 billion, five-year reauthorization of the  Highway Trust Fund, which expires tomorrow.  The bill provides $205 billion in highway spending and $48 billion in transit projects over the next five years and is the first long-term highway bill in ten years.  The bill also reopens the shuttered Export-Import Bank until 2019.

The Senate is expected to follow suit quickly.  Said the White House:  “We would actually view this legislation as a step in the right direction, but only a first step because we believe that there are more infrastructure projects that are worthy of funding that would create jobs in the short-term and lay a long-term foundation for our ongoing economic strength over the long-term.”  Obama proposed a six-year, $478 billion highway bill earlier this year.

The Fixing America’s Surface Transportation Act, or the FAST Act formally reauthorizes the collection of the unindexed 18.4 cents per gallon gas tax that is used to pay for transportation projects and includes $70 billion in pay-fors to close a $16 billion deficit in annual transportation funding that has developed as U.S. cars have become more fuel-efficient.

The federal government typically spends about $50 billion per year on transportation projects; the gas tax only brings in $34 billion annually.   Spending from the Fund has outpaced dwindling gas tax receipts for several years, resulting in the average annual shortfall of about $16 billion.  Congress has been struggling for years to come up with ways to pay for a long-term transportation funding extension without raising taxes

In a surprise, the Fed gets dinged for a chunk of the rest of the check this time.  The two biggest offsets: 1) capping the Fed’s surplus account at $10 billion and sweep the rest to Treasury, and; 2) reducing the dividend rate for capital that banks with more than $10 billion of assets in the Federal Reserve system.
Several conferees said they begrudgingly swallowed many of the pay-fors, including a plan to dig into the Federal Reserve’s pockets and a separate idea to funnel revenue from a customs fee levied on airline and cruise passengers to the Fund.  House Ways and Means Chair Kevin Brady said he opposed using revenue from the customs fees but ultimately signed off the conference report.
The offsets also include changes to passport rules for applicants delinquent on taxes.  Other mechanisms include contracting out some tax collection services to private companies — over the objection of unions that represent federal IRS workers. These and the other major offsets are detailed below.

  •  FRB Dividend— effective January 1, the dividend paid to big banks will drop from 6 percent to the latest high yield on 10-year Treasurys (currently around 2.15 percent, higher than the originally proposed 1.5 percent ), but no higher than 6 .  That is, banks would retain the lesser percent of the 6 percent and the 10-year Treasury rate.  Banks with assets under $10 billion would be exempted from the rate cut; the $10 billion cutoff would be indexed to inflation.

Fed Chair Janet Yellen opposed the provision but not vociferously and the House in its own bill had replaced the provision with a permanent liquidation of a surplus fund the Fed keeps as a cushion against losses.

The conferees did agree to shield banks with less than $10 billion in assets from the dividend reduction.  Banks above the asset threshold would likely receive a smaller dividend linked to the yield of a 10-year Treasury note.

Originally adopted in the Senate as a cut in the dividend to 1.5 percent this summer but removed by the House, it is back in this modified version in the final deal.  But the Treasury yield is rarely below 2 percent and could rise when the Fed raises interest rates so losses to banks will be marginal compared to the 6 to 1.5 percent cut first floated in July.

  • Rainy Day Fund—  A trim off a reserve fund held by the Fed capping the Fed’s surplus account at $10 billion and transferring the rest to the Treasury to finance the Fund.   Conferees agreed to let the central bank keep up to $10 billion in its surplus fund and send the rest to the Treasury.  That fund today is around $29 billion. The Fed has argued that the budget maneuver threatens its independence.  Congress has tapped the Fund in the past but not to this extent.
  • SPR Sales— Sale of 66 million barrels of crude oil from the Strategic Petroleum Reserve and tax compliance measures.  Sales of 16 million in FY23, 25 mil in FY24, and 25 mil. in FY25.
  •   GSE Fees—  Extension of GSE guarantee fees from October 1, 2021 to October 1, 2025.
  •   Automatic Extension— Repeal of the 3½ month automatic extension for filing returns of employee benefit plans, Form 5500.
  •  Debt Collection—  Authorization for the IRS to hire private debt collectors and to revoke passports of those with more than $50,000 of seriously delinquent debt.  Efforts to use private collection agencies to collect federal taxes were scuttled twice in the past 20 years — both times revenue fell.
  •  Indexation—  Inflation adjustment of certain customs fees.

With this latest bill, Congress once again looks the other way on the issue, meaning lawmakers will be back to square one on the funding shortfall in just a few years.

The conference expanded a suite of regulatory changes that went beyond some that the House passed in its draft of the highway bill.  The changes target a range of issues from a key CFPB rule to legal barriers getting in the way of derivatives reporting.

It would extend legal protections to lenders on mortgages with ballooning payments made in rural or underserved areas even if the lender does not predominately operate there.  This would expand the amount of loans that would be considered “qualified mortgages” and thus meet the CFPB’s ability-to-repay requirements that went into effect last year.  The bill would also force the CFPB to accept petition requests to designate certain areas as rural or underserved that the bureau hasn’t designated already — one of the community banking sector’s top priorities.

By the way, there is a coda on the  Zadroga bill here.   Sen. Boxer, confirming that the Zadroga provisions for 9/11first responders were ultimately not included called it “really a big disappointment that that didn’t get added at the end.  I think we should have done it, but you know what? It’s a negotiation. I didn’t get everything I wanted.”

All but three Democratic conferees signed the report.  Sen. Schumer didn’t because the Zadroga bill was left out.  Sens. Sherrod Brown and Ron Wyden didn’t agree to the deal either for unrelated reasons.