Now that some in Congress have shown that they take technical budget accounting matters at WIFIA extremely seriously, these diligent lawmakers should be very interested in directing the CBO to take a look at what appears to be a glaring error in Program scoring.
The Joint Committee on Taxation makes a major assumption about the projected impact of the WIFIA Program on federal revenues, which in turn makes a significant difference in CBO Cost Estimates. Here’s the relevant language from CBO’s June 28, 2018 scoring for S.2800:
JCT is assuming classic loan program ‘strict additionality’ here. Their expectation is that an infrastructure project that otherwise would not proceed will be able to do so only with a WIFIA loan. And since most water infrastructure is built by public-sector agencies and financed with tax-exempt debt, tax-exempt bonds are expected to be issued for the 51% of project capital cost that’s not covered by the WIFIA loan. Hence, a $49 million WIFIA loan will cause the additional issuance of $51 million of long-term tax-exempt bonds. Since in the absence of WIFIA, the project wouldn’t have proceeded and the bonds would not have been issued, the bonds’ tax revenue impact must be included in Program budget scoring.
JCT’s logic is completely correct. And at the Program’s outset, it was also completely reasonable for them to assume that the Program would develop along these lines, based on the general applicability of additionality objectives behind loan program policy and specifically on actual outcomes at TIFIA, the transportation loan program on which WIFIA was very closely modelled.
This is a case where “if some is good, more is better” might actually be true.
As frequently noted here, very long-term loans are a federal strength. Very long-lived infrastructure assets are often best financed with debt of a similar term, especially when cash flow for debt service is relatively certain (e.g. water rates, taxes) but not particularly abundant due to slow demographic and economic growth. Or say, when long-lasting effects of a major pandemic-related shutdown are expected. Like now.
But it’s never a good idea make the repayment of a financing too back-ended or exclude the discipline of the private-sector markets. A roughly 50/50 mix of shorter-term, faster amortizing market-sourced debt and a long-term federal loan with slower payoff combines a lot of positive elements in an optimal (or at least improved) financing of a long-lived asset.
And of course that’s how a 51%/49% muni bond/WIFIA loan combination works. Right now, an optimized muni/WIFIA financing for a highly rated public water agency could save almost 10% present value on debt service compared to bonds alone. Great — but that’s effectively limited by WIFIA’s current 35-year maximum post-construction term. For the right assets and credit quality, a federal loan could extend much longer with little increase in risk or FCRA cost. And the muni bond component could be pushed within its now-recovered market too. Extend the max WIFIA term to 55 years, and the PV benefit is almost 18%. It’s not for every asset, credit or fiscal condition, but since both lenders working together are fundamentally capable of providing this kind of financing, why not amend WIFIA’s max term and offer it?
Below is a summary of the numbers comparing the current 35-year max term with an equivalent 55-year extended case. Click on the picture to expand. For an even deeper look, the macro-less Excel models are here: 35-year and 55-year cases. A related analysis from late last year has some additional context: WIFIA Extended Term BCA.
Not surprisingly, since the extension makes intuitive sense, the idea is surfacing in the real-world, which is what prompted this post. The WIFIA Improvement Act (H.R.8217) was introduced a few days ago. The first part of this short bill proposes an extension of max term to 55 years for projects with a useful life at least that long — “as determined by the Secretary or the Administrator, as applicable”. And the usual rigorous credit review still applies. So no games. The project has to be the real deal life-wise and the borrower has to show they’re absolutely good for repaying 55-year post-construction money. As noted, it’s not for everybody. But since a lot of basic water infrastructure is extremely long-lived (that’s what needs replacing), and a lot of public water agencies are highly rated (AA- median per Fitch), there’s likely to be quite a large qualifying pool of potential borrowers. All of whom are certainly thinking about the challenges of a post-Covid-19 future. Like everyone else in the state & local public sector.
The second part of HR 8217 is a proposed modification of the FCRA treatment (or lack thereof) for projects that are nominally federally owned but otherwise demonstrably not federal in the things that really matter in FCRA — who borrows the cash and where the repayment comes from. Unlike the 55-year term part of the bill, this proposal applies to only a very small subset of water projects, mostly related to Bureau of Reclamation legacy assets.
Sounds uber-technical and uncontroversial, no? Unfortunately the modification is related to the recent unpleasantness about federal ownership criteria that got WIFIA punished in House Appropriations with a (hopefully soon-to-be-reconsidered) defunding. That’ll keep things interesting, but when the smoke clears at least there’ll be additional clarity on this issue. So notwithstanding the limited applicability to a few water projects, this proposed modification might surface some important things about WIFIA’s future direction — definitely a topic for another post or two.
Ideally, a federal infrastructure loan program should be more than a zero-sum transfer payment of some part of a loan’s cost from federal taxpayers to the borrower. If that’s the goal, it would be better (and more honestly) done as a grant. Instead, if the loan includes specific features that the federal government is more economically efficient at providing than the private debt market, then there’s a chance that overall efficiency is increased. In real world terms: fewer financial resources are used to achieve the same outcome (e.g. new infrastructure) and the cost to federal taxpayers is less than the national benefit. Maybe not much — but the right direction.
Of course, there aren’t many things where the federal government is actually more efficient at providing than the ultra-efficient private debt markets – assessing complex credit risk is definitely not one of them. But here are two that I think qualify:
Interest rate management – due to gigantic economies of scale the US Treasury can access in managing the national debt. The marginal cost of sharing a little bit of this management expertise in connection with a rate lock on an infrastructure loan during construction is probably very small – certainly much less than the cost of the usual transaction-specific bespoke arrangement.
Very long-term loans – notwithstanding current political fireworks, the US as a borrower (and as presumed repayor) is a forever thing. Or forever enough – even the Roman Empire took four centuries to fall. So the federal government can also be near-forever lender.
The reality of both of these features is much more nuanced, but it’s accurate to say that interest rate management and very long-term lending are strengths of the federal government. A loan program that can package and deliver these features efficiently to qualified borrowers (i.e. creditworthy and willing/able to go through the policy hoops) will, exactly like a private sector business with lower production costs, help move the invisible hand of an efficient economy in the right direction. And where are these features especially valuable? Financing infrastructure projects with long construction periods and long useful lives. As in basic water infrastructure. Which brings us to today’s poster program.
There is an issue at the WIFIA Loan Program. But not the one that Congress is focused on.
A Bond Buyer article about the latest water funding bill notes in passing that the WIFIA Loan Program “is designed to work with bonds and other funding sources.”
Since WIFIA limits its share of the project’s capital costs to 49% and requires an investment-grade rating, the borrower must find the 51% balance elsewhere and (given the rating) that’ll most likely include debt markets, including bonds.
WIFIA’s policy theory is that a selected project won’t happen soon (or at all) without a WIFIA loan. In that sense, WIFIA and bonds are designed to work together to unlock new infrastructure investment. CBO’s legislative scoring of the WIFIA Program reflects this expected outcome – it’s assumed that the 51% non-WIFIA part of project capitalization is financed with tax-exempt bonds that wouldn’t have been issued otherwise.
The reality over the past three years has been quite different. The vast majority of WIFIA borrowers are highly rated public water agencies. They’re almost universally financing projects that certainly will happen regardless of a Program loan. Without a WIFIA loan, these borrowers would simply issue 100% water revenue bonds in the usual way.
It would be more accurate to say that WIFIA “was designed to work with bonds but in fact mostly just replaces them”.
