Mercator advisors LLc

By: Mercator Advisors  09-12-2011
Keywords: Tax Credit Bonds

Federal Infrastructure Finance

Mercator Advisors has considerable experience working with federal assistance programs – especially federal credit programs. While we offer consulting services in various sectors, our core practice is in transportation finance. One of Mercator's distinguishing features is its ability to integrate federal policies and programs with capital markets initiatives. We draw upon substantial federal experience to help clients make effective use of the USDOT tool box (TIFIA, SIBs, SEP-15, PABs, GARVEEs, etc.) in developing and implementing project financial plans. We also have advised federal agencies – including the USDOT as well as the Department of Education, the Rural Utilities Service and the Transportation Security Administration – in designing, managing and evaluating financial assistance programs for major capital projects.

  • Mercator principals David Seltzer and Bryan Grote helped to conceive, develop and implement the Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program.
  • Mercator was part of the consulting team engaged by USDOT/FHWA to perform a TIFIA program review as part of a mandated Report to Congress on the status of the program and projects assisted by it as well as an analysis of options for achieving program objectives in the future.
  • Mercator prepared briefing papers for the National Surface Transportation Policy and Revenue Study Commission: Evaluation of Tax-Preferred Investment Products as a Transportation Financing Mechanism; and Evaluation of Innovative Finance Tools as a Transportation Financing Mechanism.
  • Mercator principal Bryan Grote was appointed to the National Surface Transportation Infrastructure Financing Commission and Mercator staff provided research and technical assistance for the Commission's Report to Congress: Paying Our Way: A New Framework for Transportation Finance.
  • Working through AASHTO's Center for Excellence in Project Finance, Mercator has helped to assemble TIFIA outreach sessions for industry participants to discuss various federal credit policy issues relating to matters such as subordination, refinancing and equity distributions.
  • Mercator has prepared briefings for senior staff at FHWA and USDOT on the budgetary and policy implications of tax credit bond financing proposals.
  • Mercator is part of a consulting team performing a review of the GARVEE Bond, State Infrastructure Bank, and other "innovative financing" programs for FHWA.

Mercator advises its state and local clients sponsoring major projects on the potential use and financial benefit of TIFIA assistance and other federal credit and tax incentives.

Mercator was among the first firms to recognize the tremendous investment potential of using tax credit bonds to assist projects, as an alternative to seeking increasingly-constrained discretionary grants. Tax credit bonds are long-term debt instruments issued by state or local governments where, in lieu of receiving annual cash interest payments, the investor receives annual federal tax credits. The tax credits may be used to offset other taxable income of the investor. Some programs allow the issuer to present "refundable credits" to the IRS and receive interest reimbursements directly, resulting in taxable obligations that are indistinguishable from conventional interest-bearing bonds to investors. From the state/local issuer's perspective, tax credit bonds represent zero-interest borrowing, since the federal government effectively pays the "interest."

Tax code incentives are an important federal policy tool for stimulating investment in targeted sectors. Unlike direct grants, which are fully scored upfront, or federal credit, where the present value of the interest and/or default risk premium is scored when the loan or guarantee is obligated, the tax expenditures (foregone Treasury revenues) associated with tax code measures are scored annually. This spreading of the fiscal impact produces a better alignment of costs and benefits associated with long-lived infrastructure investments, and it effectively enables quasi capital budgeting at the federal level.

Over the last decade, Mercator has worked with several public agencies and trade organizations in advancing tax code incentives to help finance critical infrastructure.

Keywords: Tax Credit Bonds