Creating securities that would encourage pension plans to invest in public facilities was a novel idea because private pension plans do not generally invest in public projects within the United States. Objectives, Scope, and Methodology

Given continuing congressional interest in infrastructure and pension issues, and at the request of the Chairman and the Ranking Minority Member of the House Committee on Transportation and Infrastructure, we initiated a study to identify the role that current federal policies play in providing incentives for private pension plans to invest in infrastructure projects and analyze the Infrastructure Commission’s 1993 proposals relating to pension plan investment to determine how pension plans might respond. Federal law also exempts the plans’ earnings from taxation. The lower return on tax-exempt municipal bonds means that the securities cannot compete effectively for pension plan assets. This means that the justification for an expanded government role to encourage investment in infrastructure can depend on the values expressed by the voters. Private Pension Plan Managers Cite Disincentives to Infrastructure Investment

Earlier, we discussed the fundamental disincentive for pension plan investment in infrastructure that results from the tax-exempt status of the plans and the use of tax-exempt municipal bonds as a common vehicle to finance infrastructure. At any rate, alternative investment portfolios are small. The goal of attracting pension capital to infrastructure is problematic.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the role that pension plans play in expanding public investment in infrastructure projects.

What GAO Found

GAO found that: (1) pension plans have not been investing in domestic public infrastructure because of the combined effects of federal law, which requires plans to seek the highest rate of return on investments and encourages growth by exempting earnings from taxation; (2) to encourage public investment in infrastructure, federal law provides a tax exemption on interest income to those who invest in municipal bonds; (3) pension plans have no incentive to invest in lower-interest municipal bonds, since plan earnings are already tax exempt; (4) although the Infrastructure Commission recommended creating two federal financing entities to attract pension plans to invest, the share of plan assets that might go to infrastructure would likely be small; and (5) the federal capitalization of state revolving funds may be an option to expand infrastructure investment without relying on pension plans.