social investing — Public policy and government

BY LIZ FARMER | NOVEMBER 18, 2016

2 Takes on Trump's Impact on Muni Bonds

President-elect Donald Trump’s proposed policies could partially change the landscape of the municipal bond market for investors in two primary ways.

First, his election could put Build America Bonds (BABs) -- or a program like it -- back on the table for government issuers. BABs were introduced in 2009 and 2010 by the Obama administration as a way to stimulate the economy and create jobs. Republicans on Capitol Hill killed the program, but Trump has spoken favorably about it. He's interested in stimulating more investment in infrastructure.

Unlike regular municipal bonds, BABs aren’t tax exempt, making them more appealing to investors such as international bondholders or institutional investors who aren’t eligible to claim an exemption. Thus, they broaden the municipal bond market.

Second, an analysis by the Court Street Group Research (CSGR) says Trump’s income tax plan could affect the municipal market because it would eliminate or reduce the tax exemption for municipal bondholders. “The CSGR approaches the reality of a Trump administration with some trepidation as it applies to municipal bonds,” the analysis said.

The first-ever environmental impact bond gives an agency some of its money back if its idea doesn't pan out.

BY LIZ FARMER | NOVEMBER 10, 2016

As the drive for accountability in government spending increases, many are looking for ways to keep from paying the full price for programs that don't work.

In Washington, D.C., that desire has led to the first-ever environmental impact bond, issued this fall by DC Water, the city's water and sewer authority. The $25 million bond will pay for new, green infrastructure like rain gardens and permeable pavement to reduce stormwater runoff.

But if the projects don't work as expected, that's where the new financing structure comes in. Under the terms of the bond, which DC Water sold directly to Goldman Sachs Urban Investment Group and the nonprofit Calvert Foundation, the utility stands to get a multimillion discount on its total borrowing costs if the project doesn't meet a certain threshold.

It's essentially an insurance policy on the project's effectiveness. Here's how it works: After five years, the new infrastructure will be evaluated. If stormwater runoff isn't reduced by at least 18.6 percent, investors will owe DC Water a $3.3 million "risk share" payment. The payment represents a near-full refund of the 3.43 percent interest rate payments DC Water made during the first five years of the bond. After that, the bonds would likely be refinanced into 25-year bonds. DC Water would also drop green infrastructure projects and go back to so-called gray ones (like pumps and water tunnels) to reduce runoff.