Tax Implications Overlooked
That tax exemption is useless to a pension fund that is not liable for federal taxes is obvious to knowledgeable people. Yet, it seems to have been overlooked in public policy discussions about possible investment in toll roads by state pension funds. A number of Texas legislators, for example, have urged entities like the $24 billion Texas Employees Retirement System and the $107 billion Teachers Retirement System to invest in toll roads and other infrastructure.
But how many of them realize that the only toll roads those funds could responsibly invest in are those developed under long-term concession agreements (called CDAs in Texas) by the private sector? They won't be investing in the tax-exempt revenue bonds of the Harris County Toll Roads Authority or the North Texas Tollway Authority. Yet as of mid-2008, the Texas legislature has imposed a two-year moratorium on private sector toll projects in that state.
This point also seems not to have dawned on Andy Stern, president of the powerful Service Employees International Union (SEIU). In February 2008, Stern raised the idea of forming an investment pool of money from state retirement systems to invest in U.S. infrastructure projects, "with the idea of keeping the assets under some degree of public control." A Financial Times article reported discussions between New Jersey officials and SEIU about such an infrastructure fund.
Let me emphasize once again: tax-exempt pension funds do not buy tax-exempt bonds. Hence, the only toll road revenue bonds they can buy are taxable bonds, which are almost exclusively issued by private toll roads. If we want pension funds to have good infrastructure investment opportunities, we need to expand the scope for privatized airports, toll roads, water and wastewater systems, and other infrastructure.