There’s much common sense in this column in Politico today. It’s right to say there’s no magic bullet for infrastructure investment. It takes real resources from someone, somewhere to cover the real cost of real assets. Any other view is just a fantasy. That’s the essence – and the dilemma – of funding. You can’t simply create it with talk.

I also completely agree with his point that expanding and improving federal infrastructure loan programs like TIFIA, RRIF and (as he should have included) WIFIA should be one of Washington’s highest priorities. The power of these programs is vastly underutilized, especially with respect to innovative flexible financing to help state and local governments deal with revenue volatility and uncertainty. The nature of loan programs also works well with the federal government’s own budget issues – both political and substantive. A small credit subsidy can support a big volume of relatively low-risk loans, a category that includes most essential public infrastructure. So Congress and the Administration can deliver loan programs with “yuge” volume numbers and potential benefit for state and local governments without doing too much damage to the federal deficit. I’m guessing that this alone will lead to a radical expansion of loan programs when all the other options are proved to be too expensive or controversial. Maybe Rahm is just getting ahead of a parade he sees must come eventually? Not at all surprising for such a political insider – and, as such, actually encouraging.

But he seems to be missing something: Financing (debt from the private sector or loan programs like TIFIA) needs to be repaid from funding (taxes or user fees from someone, somewhere). Although they’re both measured in terms of money, financing and funding are not at all the same. Financing doesn’t actually “pay” for anything. It just shifts the timing of eventual payment, which must be funded. Yes, a low or subsidized interest rate helps lower the eventual funding need a bit, but even if rates are zero, principal repayment is required. So you’re back to the original problem: Where will the funding commitment come from? You could fairly restate Rahm’s sentence at the end of the first paragraph as: “Any plan for financing infrastructure that does not include funding is fairy dust.”

Is Rahm confused about the difference between financing and funding? Blinded by the fairy dust in dreams of gigantic loan programs? Maybe, but I think that’s unlikely for an ex-investment banker and crafty politician. Certainly a subsidized interest rate would help junk-rated Chicago more than most US local governments, but surely he knows that the city would have to find funding to repay a loan from an expanded TIFIA or WIFIA….

…or does it? Perhaps the column’s transition from strong words about funding’s harsh reality to
advocating a politically-realistic expansion of federal loan programs (with some obligatory local chest-thumping in between) is more subtle and artful than it looks.

In a sense, financing always has one intrinsically committed source of in-built funding: default. If you don’t repay a loan, the lenders have in fact paid for whatever was financed, however unintentionally. In the private sector, the lenders naturally then take the asset they paid for and sell it to recoup. But when the lender is the federal government, and the asset is Chicago public infrastructure – well, things are different. Perhaps the loan will be “restructured” with a much longer term and payment holidays. Or forgiven outright. Either way, federal taxpayers who thought they were providing financing will now be the source of real funding, something they would not have agreed to otherwise (but I’m sure Chicago taxpayers and infrastructure users will appreciate).

Rahm’s complaint about RRIF’s “onerous credit rules” is quite telling. A federal financing program without real credit standards indeed becomes a funding option for a borrower with less-than-stellar credit and pie-in-the-sky income projections. If a financed project succeeds and there’s plenty of user fees, or if tax revenue is growing in a revitalized and booming city, the loan gets repaid from abundant local funding. If not (which is more likely), then hardball negotiation begins in a political context. With some nerve, political influence at the federal level and little to lose in terms of reputation (e.g. you’re already junk-rated), chances are I think very good that the erstwhile financing will – without the bother of much political debate — become funding.

Rahm describes the RRIF program as a “massive bait-and-switch” due to program credit standards and perhaps from a borrower’s viewpoint that’s correct if they were expecting something other than financing. But a “massive bait-and-switch” is exactly what federal loan programs without high credit standards and other lender protections will become for federal taxpayers. A bit of sardonic humor?