SRF leverage for additional loan capacity should be encouraged. If SRFs use tax-exempt debt, it’ll cost about $1 billion in lost federal tax revenues. If they use WIFIA loans instead, FCRA cost is about $100 million. Why not expand WIFIA funding specifically for this purpose?

By far the biggest item in CBO’s scoring of the DWWIA 2021 bill is the loss of federal tax revenue caused by increased issuance of tax-exempt debt. JCT is assuming that SRFs will leverage additional grant funding with tax-exempt munis in order to expand their loan making capacity. That’s a good outcome in itself. But more tax-exempt debt means less federal tax revenues, so DWWIA has an indirect additional cost of about $1 billion.

Assuming that JCT is using their static portfolio bond substitution methodology, it’s possible to reverse engineer some of the numbers likely involved in the $1 billion estimate:

The basic logic of the substitution methodology is straightforward: If the SRFs did not issue tax-exempt debt, investors would have bought equivalent taxable bonds instead to fill up their ‘static portfolios’. The federal revenue loss is the income taxes that would have been paid on these taxable bonds — a kind of opportunity cost.

Assuming a 25% tax rate (which seems pretty standard in JCT analyses), the taxable income that would result in $1 billion of taxes over ten years is about $4 billion. Next, assuming that the AAA taxable yield averages about 3.75% over the period, an average taxable bond portfolio of about $11 billion is implied. But this portfolio is built up over time, as indicated by the increasing annual revenue loss in the JCT numbers. The 2031 revenue loss number of $215 million implies a final taxable bond portfolio of about $23 billion.

The US EPA’s WIFIA Loan Program is an institutional lender that offers unique interest rate management loan products for infrastructure finance to the US water sector. A surprisingly successful federal program. But now it’s time for a bigger mission.

The US EPA’s WIFIA water infrastructure loan program has in fact established itself as an institutional lender to the US state & local public sector.

That’s not as easy as it sounds. Most state & local infrastructure agencies are highly rated and can issue tax-exempt bonds. In effect, state & local borrowers already have a long-established source of cost-effective, federally subsidized debt. How did a relatively new federal loan program make any headway against this alternative?

It’s not the interest rate on a WIFIA loan — the US Treasury rate WIFIA offers isn’t that different than the overall yield on a highly rated muni bond series for a highly rated issuer. But although WIFIA loans are similar to muni bonds, federal loans can include special features that make them especially attractive to public-sector infrastructure agencies. Currently, WIFIA’s primary loan product is a costless interest rate lock, which highly rated borrowers can use as an interest rate call option on long-term financing.

The free interest rate call option feature transformed WIFIA from what is was likely intended to be, an infrequently used project finance lender, to effectively a participant in the mainstream US state & local public-sector market.

Offering a free call option on long-duration debt is a great way to build a loan portfolio. But is that the point of a federal infrastructure loan program? Not exactly — the loans should have a real-world outcome that wouldn’t have happened otherwise. Free call options, though of course very welcome to borrowers, don’t really accomplish that.

But new WIFIA loan features — focused on current federal policy objectives like climate adaptation, water affordability & equity and SRF leverage — could. This potential to make a large-scale impact in US water infrastructure is the real significance of the WIFIA Bank. The federal government has built an efficient institutional lender to the US state & local public sector, an unusual achievement. Now what are policymakers going to do with it?

As noted at the end of a prior post on innovative infrastructure-related innovation, a straightforward way to inspire more innovation in the uses of WIFIA loan benefits is simply to combine data sets.

The key elements are data about current and selected WIFIA projects (plenty of that online from EPA and local water systems), data that might be relevant to the affected communities (ranging from economic statistics to climate exposure – also widely available) and estimates of the financial value of WIFIA loan benefits connected to the project’s financing.

This last data set defines the funding that might be available for innovative initiatives, so it’s obviously the core element of inspiration for any realistic plan.  But estimates for the actual value of WIFIA loan benefits are not directly available.  Press releases for WIFIA financings often include simple totals of interest rate savings, but this is not the same as the type of value required to establish additional funding capacity, which is the real point.  In any case, press releases are (understandably) not going to follow a rigorous or consistent methodology in the numbers they report.

Fortunately, however, since the relevant WIFIA borrowers are all highly rated public water systems, there’s plenty of raw material from publicly available financial information to model WIFIA loan value estimates accurately, if not precisely.  A standardized model, with specific project and borrower data input for the variables, will provide a uniform and consistent approach.  It’s also a practical and efficient way to generate value numbers for the dozens of individual projects involved.  This part of the exercise, though it involves an extra step, is pretty straightforward too.

Piles of statistics and financial numbers are…well, not exactly the best material to spark fires of innovation, however important they might be for actual implementation and consensus-building.  But since a WIFIA financing is ultimately grounded in a physical project, with a specific real-world location and a clearly defined zone of impact, the piles of data can be anchored around a physical place.  The obvious way to start with data visualization in this case (the kind of presentation that does spark innovation) is a map overlay.  The graphic at the top of this post shows what some elements might look like – the base layer is the WIFIA project itself and the top layer is the WIFIA loan benefit value.  The layers in between are where the inspiration and innovation happen.