By Gabe Rubin
December 1, 2015 at 1:16 pm ET
Surplus dollars from the Fed and member-bank dividend money will help to fund a long-term highway bill released Tuesday by House and Senate conferees.
The legislation, which would fund highway maintenance and construction for up to five years, is slated to receive votes in the House and Senate this week. It will be the first time in 10 years a highway bill of this length has passed. President Obama is likely to sign it.
Senate Banking Committee ranking member Sherrod Brown (D-Ohio) told reporters Tuesday that the conference report includes two Fed-related provisions to put dollars into the highway trust fund. The first provision would tap the Fed’s capital reserves and the second would cut the central bank’s dividend to member banks with over $10 billion in assets.
The conference report, released on Tuesday afternoon, states that Fed capital reserves will be capped at $10 billion, and all excess funds will go to fund infrastructure projects. That is a slight concession to the Fed, which had warned Congress against taking its capital reserves that are intended to be used as a buffer against possible losses. As for the Fed dividend adjustment, banks over $10 billion in assets would have their dividend cut from 6 percent to “the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of such dividend.” Last month, that yield was 2.3 percent, a figure that will likely be bemoaned by banks.
“It’s my understanding that it’s a combination of the Fed [capital reserve] offset and going back to the way it was done in the Senate bill originally, but in smaller amounts for the regional banks, for banks $10 billion and up,” Brown said. “I don’t like any of the way it’s done, I think it should be done by user fees,” he said.
The House and Senate considered two different funding plans that would have drawn on the Fed when they voted on their separate highway bills. The Senate version would have cut the dividend that the Fed pays to its member banks from 6 percent to 1.5 percent for banks with more than $1 billion in assets. The House version would have stripped that provision and replaced it with a plan to use Fed capital reserves as a funding pot instead.
The final version is, in essence, a melding of the two provisions. Finance gurus don’t like it, but lawmakers seem to concur that it’s the best worst option.
Senators from both parties have criticized the House plan to use the Fed surplus to fund transportation legislation, though they admit it is slightly more preferable than cutting into the dividend paid to Fed member banks. Senate Banking Committee Chairman Richard Shelby (R-Ala.) told Morning Consult earlier this month that draining the Fed’s capital reserves was “marginally better” than the dividend cut, although it still had little real connection to highway spending. Brown criticized the plan for not focusing on user fees.
Transportation bills have historically relied on user fees, such as the gas tax, for the bulk of their funding. But there is little political appetite to raise the federal gas tax, even with oil prices hovering around $40 per barrel.
“The big issue is whether this is a precedent. We’ve long had a history of in the transportation space that we’ve used a user tax to pay for it, like the gas tax. The question is whether this represents the long-term severing of that arrangement,” said Mark Calabria, a former Senate Banking Committee staffer and now the Director of Financial Regulation Studies at the Cato Institute. “It erodes fiscal discipline on Congress when you just get the Fed to pay for stuff.”
The Fed returns the vast majority of the earnings from its portfolio to the Treasury Department, but keeps some of the funds to serve as a buffer against possible losses. The Fed currently holds some $29.3 billion in its capital reserves, and it strongly opposes any plan to use those reserves for other purposes. The highway legislation would continuously drain the fund to pay for infrastructure projects.
Update: This story has been updated to reflect the details in the conference report.