We know who lost.

In some fundamental ways, the recent defunding of the WIFIA Loan Program and the decision (so far) not to amend the Municipal Liquidity Facility are similar. Neither action appears to involve the merits of the cases or a cost-benefit analysis. Both instead rely (ostensibly) on principles — a technical accounting issue at WIFIA and a strict interpretation of a lender-of-last-role for the MLF. Both result in less federal lending to sub-national public-sector agencies — public water agencies in WIFIA’s case, state & local governments in the MLF. And both incur what appears to be a significant net cost to the public sector, including federal taxpayers. Pretty expensive principles, it would seem — cui bono, exactly?

Here is a quick estimate of the quantifiable costs and benefits of the decision to defund the WIFIA program for one year. As always, you can look at the Excel model here.

A $55 million appropriation for WIFIA FCRA cost was expected but then effectively rescinded by the House Appropriations Committee in connection with the program being late in publishing federal ownership criteria. The principle of connecting the two is a little obscure — punishment? Of whom — the public water sector? I don’t see any economic or even bureaucratic logic here. Yet on a party line vote it passed, presumably after due consideration for the national welfare. How does that look now?

• The $55 million appropriation would have supported about $7.3 billion of WIFIA loans at a conservative average FCRA cost of 0.75%. That in turn would have been the 49% share of about $15 billion of project cost. Using the historical average WIFIA loan benefit of 7.6% of project cost, the present value of total cost savings from lower debt service would have been about $1.1 billion. That’s lost. It’s hard to see any benefit to public water agencies in not having the WIFIA loans available. So the net cost to the sector is the full $1.1 billion.

• Federal taxpayers also bear an indirect cost. Assuming that the WIFIA loans would have replaced tax-exempt debt in 75% of the transactions, taxpayers will now face higher projected tax expenditures. Using JCT methodology in a CBO 10-year scoring, that’s about $246 million of decreased federal revenues. But the House Committee’s defunding did save $55 million of appropriations, so federal taxpayers can feel slightly better — the net cost is only $191 million.

• Another economic participant impacted in the defunding is the private-sector debt market. This market will now place the $7.3 billion that WIFIA will not. Assuming that most of the debt is in the form of highly rated water revenue bonds or similar straightforward placements, competitive fees are likely only around 0.30%, or $22 million. The volume is small enough not to incur any special costs for intermediaries or pricing change for market investors, so a $22 million gain from additional fees is the net change.

The net total is a $1.3 billion cost to the stakeholders involved — two big losers, one minor winner. This likely represents a true loss of potential national wealth because on the margin a WIFIA loan is slightly more efficient for financing long-lived infrastructure than muni bonds — a mix of the two is better than muni bonds alone. Note that the marginal aspect here is important. A huge amount of federal lending would influence many variables and incur other types of costs in terms of market disruption and misallocation, so these numbers don’t scale linearly at all. But $7.3 billion more or less in the context of the water sector and the private-sector debt markets is a clearly a marginal analysis. The billion-dollar scale of this estimate of WIFIA’s defunding cost is likely accurate.

Which brings us back to the question. What was the basis of the decision to defund the WIFIA program and incur a net national $1.3 billion opportunity cost? We know who lost — the US water sector and federal taxpayers. Who benefitted?