Below is a very funny video from the Colbert Report on Amtrak’s efforts at infrastructure security.  Nice try guys.

Virginia Governor Bob McDonnell recently authorized the elimination of state-level safety inspection requirements for interstate trucks.  Interstate trucks will still be required to comply with Federal-level safety inspections, assuring that Virginia drivers are just as safe as they were before the proclamation.

While this may seem like a seemingly insignificant item, it is actually a big help to Virginia based businesses engaged in interstate commerce.  Prior to the elimination of the requirement, if you registered your interstate trucks in Virginia, once a year each registered vehicle would have to come back to the state to be inspected.  That is in addition to the federally mandated safety inspection.  Depending on the size of your fleet, you may have registered trucks that never even enter the state in their normal route patterns.  However, those trucks would still have to find a time to come back to Virginia to undergo the duplicative inspection.  For the larger companies, that is an expensive and inconvenient proposition and could drive them to register their fleet in another state that does not have that requirement, thus taking registration fee revenue away from Virginia.

Now that the state-level inspection requirement has been removed, trucks will still need to have their annual federal inspection, but will not need to also have an inspection performed in state.  For a UPS Freight or Estes Express Lines, both with headquarters in Virginia and large interstate fleets, that is a huge time and cost saver.  In addition, as Virginia pursues new companies to locate within the state they have now added to their competitive position.

“To us, it’s a fairly important step,” UPS spokesman Norman Black told the Richmond Times-Dispatch. “It avoids a duplicative inspection that didn’t make things very friendly for transportation companies in Virginia.”

All in all this is a very low cost, high impact move for the state.

Citing an excessive amount of existing debt, Fitch Ratings cut the rating for the State of Connecticut’s $956 million bond issuance.  Already the state with the highest level of tax supported debt, Connecticut is issuing these bonds to close a nearly billion dollar budget gap.  Last year the state borrowed over $947 million to cover a  similar budget gap rather than cut spending.  Fitch, apparently, had seen enough and reduced the States rating one level to AA.

“The downgrade reflects the state’s reduced financial flexibility, illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps in the context of already high liabilities,” Fitch said.

While Connecticut does have the largest amount of outstanding tax supported debt of any of the 50 states at over $13.7 billion, it also boasts being the wealthiest of the 50 states with a per capita personal income of $54,397 in 2009.  I believe much of Fitch’s concern is due to how the state is using the funds it borrows.  Spending for long term capital improvements that benefit Connecticut citizens is one thing.  At least then you have a hard asset to show for it.  What Connecticut is doing, borrowing to finance a budget deficit, is akin to running up your credit card debt to finance a lavish lifestyle.  Frankly, it is unsustainable.

One has to wonder if this is the first of many such downgrades to come as we witness the consequences internationally (Think PIIGS – Portugal, Ireland, Italy, Greece and Spain) of excessive borrowing to support an unsustainable spending pace.

I know I’ve been talking about this for a while and now Moody’s has weighed in on the subject – Build America Bonds are fraught with peril.  In their most recent Credit Outlook newsletter, Moody’s has an article about how the IRS’ meddling into Build America Bonds may cause them to be seen as a “negative” on the credit of the issuing entities.  Their concern, rightfully so, is that if the IRS does not pay 100% of the interest rate subsidy that the issuing locality was expecting that the locality will have to divert funds from other projects and services to keep the bond holders whole.  In a time when all funds are scare, this diversion of funds to supplement bondholders may significantly reduce the quality of services provided and thus negatively affect their credit rating.

According to the IRS, the interest rate subsidy provided via the Build America Bond structure is considered a “tax refund” and is subject to the IRS’ right of offset or counterclaim.  One of the really troubling aspects of this is that the locality could owe the IRS for programs totally unrelated to the bond issuance yet the bond payments will be garnered.

“Conceivably, if the federal government believes that an issuer is in violation of an environmental regulation or any other federal disallowance or repayment, the IRS will also withhold the subsidy.” – Moody’s Credit Watch – May 31, 2010

In addition, the IRS has indicated that it plans to review ALL of the Build America Bonds that have been issued to date to see if they had been priced properly at issuance.  In question is the BABs had been issued with a premium greater than the “de minimus” amount allowed by law.  Issuing the BABs with a greater premium would increase the interest rate payed making them more attractive to investors, but also increasing the amount of subsidy provided by the federal government.  Should the IRS determine that a BAB was indeed issued with an out-sized premium, they will disallow ALL interest rate subsidies for that bond.  That could have a very significant negative impact on localities if they are forced to continue to pay bondholders 100% of the interest promised, but not be able to receive the 35% subsidy they had planned on.  At that point, they would either default on the bonds or reallocated funds away from other programs.

All in all, I believe it would be wise for investors and localities alike to be very cautious of Build America Bonds going forward.  For the localities, you may end up paying more out of pocket than you expected.  For the investors, BABs may carry a greater than normal risk of default if the locality runs afoul of the IRS.

In March I wrote about how Florida had suspended its issuance of Build America Bonds because of concerns that the IRS could, and would, reduce the BAB subsidy if the municipality owed the IRS for separate, unrelated, issues (See Link).

Well, as reported yesterday by Bloomberg (See Link), the City of Austin is finding out the hard way that the IRS fully intends to exercise its ability to garnish BAB subsidies.  In February, Austin received a letter from the IRS stating that the IRS would be withholding $617,284 from the March 1 payment.  Luckily, Austin was prepared to transfer funds from a reserve account and continue to make the payments to bond holders.  The City continues to negotiate with the IRS over additional payments and may have more withheld from the next payment.

Since their inception, US municipalities have issued over $105 billion of Build America Bonds to the point where they represent the fastest growing segment of the municipal bond market.  The IRS’ willingness to withhold portions of its subsidy is very troubling.  While it appears that Austin and the IRS had been negotiating the withheld amount for some time and knew this was coming, the City of Los Angeles only found out about its reduction in payment when they performed an internal audit.  Fortunately, their’s was a small amount – $28.

As the use of BABs continues to grow, how long is it before the IRS withhold a subsidy from a locality that can’t afford to make up the difference for bond holders?  Or an even scarier thought, how long before the government decides it has the right (and obligation) to withhold BAB subsidies until the locality fully funds it pension plan!?!  Nothing good, for the locality or the bond holder, comes from this…

Well, here’s the official announcement: LINK

Just remember that you heard it here first…

I have a sneaking suspicion that Governor McDonnell will announce tonight the completion of the VPA lease of the Norfolk APM terminal. This is a great deal for both APM and the Port of Virginia. You heard it here first…

Yesterday, the Motley Fool website ran an interesting article by Nick Kapur titled “Why do we still listen to the ratings agencies“.  The general premise of the article is that the ratings agencies are either unable or unwilling to provide an accurate assessment of a company’s financial strength.  The author goes on to contemplate what role the ratings agencies played in the recent financial meltdown and how much responsibility we should assign them.

“The line here between ignorance and dutiful compliance is thin and not meaningful. Though many have alleged that the ratings agencies were on the take outright, it doesn’t really matter if they were or weren’t. Essentially, the ratings agencies were either crooked or they were stupid. Either way, they’re guilty.”

The article raises an interesting question of what role should a Moody’s or S&P rating play in an investors analysis?  Should they still be trusted, or have they lost all investor confidence?  Finally, is there an opportunity for a new player to emerge as a truly unbiased opinion, and what would that new player have to do to earn the respect of the investing community?

I believe there is an opportunity, but the road to respect will be a long one.  Thorough, independent analysis will always be worth much more than a 3rd party report from a vendor whose motivations may be cloudy at best.

Yesterday, Governor Bob McDonnell had the pleasure of being able to announce that the Commonwealth of Virginia had been awarded Site Selection magazine’s 2010 Competitiveness Award.  Since its inception in 2003, the award is given annually to a state that excels in 10 criteria related to its ability to attract new companies, facilities and jobs.  2009 was an extremely difficult year for many businesses and Virginia’s ability to attract new business is a testament to the hard work and dedication of the Virginia Economic Development Partnership.  VEDP does an exceptional job of growing and enhancing Virginia’s economic base and this award is a great start towards getting them the recognition they deserve.

Shortly after President Obama signed the healthcare reform legislation into law, several states have filed lawsuits because the new Medicaid requirements will potentially bust their budgets.  So, what does this have to do with Infrastructure?

To begin with, anything that strains the state or municipal budget will limit their ability to fund new projects.  That’s not good news.  But, there is another tie in here that will severely limit localities access to capital.

As I mentioned a few days ago, Florida suspended its issuance of Build America Bonds (BAB) because of the potential that the IRS would reduce their subsidy amount by any amounts owned from other programs.  The new healthcare reform will significantly increase the costs to the states for Medicaid expenses.  If they are unable to cover the increased costs, the IRS will start taking from their BAB subsidy to get whole.  That puts even more pressure on the states and compounds the issue.  Florida estimates that the new healthcare reform law will add $1.6 billion of Medicaid expenses and force them to hire an additional 1,000 employees.  That’s $1.6 billion that they won’t have available to build schools, maintain roads, or repay bonds.

In a time when the states and municipalities are being hit financially as hard as ever, I struggle to understand the rational behind increasing the burden on them.  Maybe someone can explain it to me…