WASHINGTON - Pension funds would be encouraged to invest in tax-exempt and taxable infrastructure bonds under legislation introduced this week by two Democratic House law-makers.

The proposal by Rep. Rosa DeLauro, D-Conn., and House Majority Leader Richard Gephardt, D-Mo., would permit distributions that retirees receive from pension funds to be tax-exempt, to the extent that the funds are invested in bonds to finance infrastructure facilities.

The pension fund proposal is part of a larger bill the two introduced that would also create a federal agency to guarantee loans and finance state revolving funds for infrastructure projects.

The legislation, introduced with only a couple of weeks left in the 103d Congress, will die when lawmakers adjourn for the year. But the legislators wanted to go ahead with the introduction of their bill "to start the dialogue as soon as possible" on infrastructure financing, a spokesman said.

The plan to encourage pension fund investment would probably be most appropriate for so-called self-directed pension funds, such as 401(k) plans, where an employee saves for retirement through payroll deductions and matching contributions from his employer, according to an analysis by Lehman Brothers.

"Because plan members themselves would elect whether they wished to accept a lower pretax yield in exchange for 100% tax-free income based on their own tax position, [the proposal] is well suited to self-directed defined contribution plans," Lehman Brothers said.

Currently, investments in self-directed pension plans total nearly $700 billion and "represent the fastest-growing sector of retirement assets," according to Lehman Brothers. About half of those assets belong to individuals who will be at or above the 28% marginal income tax rate when they retire, the firm said.

The head of the Public Securities Association said his group supports the legislation, particularly the pension fund proposal. "By tapping the investment power of our nation's pension and retirement plans, the act would mobilize a vast new source of capital for infrastructure finance," said PSA chairman R. Feen Putman.

The bill would also create the National Infrastructure Development Corp., which would indirectly sponsor pooled and insured tax-exempt bond offerings through state revolving loan funds.

Also created under the legislation would be a subsidiary known as the National Infrastructure Insurance Corp., which would insure marginal financings not picked up by private insurance companies and provide reinsurance for more creditworthy projects.

Under the legislation, the federal government would capitalize the insurance agency to the tune of $3 billion spread over the years, though a summary of the bill did not explain how Congress would come up with the funding. After three years, the agency would be required to be self supporting, and the agency's obligations would not carry a federal guarantee.

The proposals for creating the agency and encouraging pension fund investments originally surfaced in the findings of the Infrastructure Investment Commission, created by Congress in 1992 to make recommendations on expanding federal investment in infrastructure.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.