This is the third post in the FCRA Non-Federal Series

The Congressional directive does not mention the 2017 Report, How CBO Determines Whether to Classify an Activity as Governmental When Estimating Its Budgetary Effects, but according to the GAO Report (the subject of the next post in this series), OMB considered their FCRA loan criteria to be consistent with its views.  The CBO Report also appears to be one of two primary sources OMB used, the other being the Budget Commission’s 1967 Report.

The CBO Report is much shorter than the 1967 Report and has a specific focus on the practical issues that CBO encounters when scoring legislation that involves non-federal entities.  It describes how CBO decides whether to include ‘activities’ of non-federal entities in the budget score.  Federal program loans are not considered per se, but arguably they’re covered by CBO’s inclusion of the “cash flows related to those activities”.

Introductory Section

The introductory section of the report reiterates the ‘when in doubt, include it’ principle from the 1967 Report:

To make such determinations, CBO follows guidelines from the 1967 Report of the President’s Commission on Budget Concepts, which includes the following recommendation: “The federal budget should, as a general rule, be comprehensive of the full range of federal activities. Borderline entities and transactions should be included in the budget unless there are exceptionally persuasive reasons for exclusion.”

The report echoes another principle that the Budget Commission established as a primary reason for the separate treatment of federal credit within the budget, correctly measuring economic impact:

Although the federal budget is primarily a tool for tracking the government’s cash flows, it also serves as a measure of the scope of federal activities and their effects on the economy.  Treating the activities of some nonfederal entities as part of the federal budget, even if those transactions would not flow through the Treasury, helps to accomplish that objective.

Interestingly, CBO notes that its scoring and OMB budgetary treatment may differ, something also described in one of the report’s examples:

The Office of Management and Budget in the executive branch is responsible for recording cash flows related to enacted legislation in the federal budget.  Its budgetary treatment of activities may differ from the treatment CBO uses in its cost estimates.

General Observations About the Introductory Section:

• As discussed in the prior post in this series, ‘borderline’ ambiguity does not arise with federal program loans — they are indisputably included in the federal budget. The specific FCRA budget question is whether a program loan to a federally involved project should be given FCRA treatment or included in the general cash-based budget. For CBO scoring, it is easy to see that federal involvement in an infrastructure project can raise a different question – whether, regardless of the nominal form of ownership and the involvement of non-federal participants, cash flows related to the project’s activities beyond those pertaining directly to the federal participant should be considered federal.  The two questions both require an examination of the federal participant’s role in the project and its financing, but they are not necessarily related beyond that.

• To better reflect the economic impact of a federal action, CBO says its scoring will sometimes add the cash flows of non-federal entities.  But in some situations, perhaps subtraction of cash flows in and out of the Treasury will provide better information?  In fact, such subtraction is precisely what the federal budget’s separate FCRA section for federal credit programs was expected by the 1967 Budget Commission to do.  Since a program loan comes with a non-federal obligation to repay, including the large initial funding outflow and extended repayment inflows in a cash-based budget will distort the true picture of the loan’s economic impact.  FCRA basically nets the reversing cash flows on a present value basis and records the much smaller residual amount as the loan’s effective federal outflow or subsidy payment.  Both CBO scoring and FCRA budgeting are aiming to provide better information about federal actions, but it should be kept in mind that they work in an almost opposite way.  In effect, CBO scoring asks, ‘what non-federal cash flows should be included?’ while FCRA budgeting asks, ‘what federal outflows and non-federal inflows should be excluded?’.

• It’s not surprising that CBO scoring and OMB budgeting might differ in some situations.  In private-sector GAAP accounting, a company’s balance sheet will consolidate the non-recourse debt of a majority-owned project.  That arguably gives a truer picture of the scale of the company’s operations, but the company’s recourse liabilities (as disclosed in the financial notes) will be a much more important factor for credit rating agencies’ models.  I think CBO and OMB differences might be analogous – CBO is looking at a bigger picture and tends to consolidate activities, while OMB is focused on the budgetary cost of specific actions in a less consolidated context.

CBO’s Criteria for Identifying Governmental Activities

After the introductory section, the CBO Report states two fundamental criteria for consolidating the activities and related cash flows of a non-federal entity into a score:

1) The activity would require the exercise of the sovereign power of the federal government by or on behalf of a nonfederal entity; or

2) The activity would serve a specific governmental purpose; the entity would be directed, controlled, or owned by the government; or both of those conditions would be met.

The next two sub-sections briefly describe more about these criteria.  The first, the exercise of sovereign power, seems to be summed up here (emphasis added):

If legislation would authorize a non-federal entity to use the sovereign powers of the federal government, CBO considers the cash flows of activities related to that exercise to be federal.

The next, governmental purpose and control, is apparently applicable to a very broad scope of economic activity (emphasis added):

If a nonfederal entity would serve a [federal] governmental purpose or act on behalf of the government to satisfy a federal policy objective or achieve a regulatory outcome, CBO might consider the costs of those activities to be federal costs.

The balance of the report is taken up with descriptions of scoring examples and case studies in the context of these criteria.  None specifically involve major public infrastructure projects with federal participation, though one about power transmission systems and two about federal facilities are potentially indirectly relevant.

General Observations About CBO’s Criteria

• The two criteria seem to be very consistent with the 1967 Report’s fundamental external discipline principle, the foundation of both general federal budget inclusion and FCRA’s exception for a program loan’s reversing cash flows.   If the federal government is the primary cause or controller of an activity at a non-federal entity, then the cash flows related to that activity are not effectively subject to non-federal external discipline and should be included in federal budget metrics like CBO’s scoring.  This would also be the case when the activity in question a federal program loan – if the federal government is the primary source of the loan’s repayment or is compelling non-federal entities to repay it, then external discipline is lacking, FCRA budgetary treatment will not apply, and all the loan’s cash flows should be reflected in the federal budget.  In terms of principle applied to a hypothetical clear-cut case, CBO scoring and FCRA budgetary treatment would come to the same conclusion.

• But the scope of the descriptive language for the criteria is very broad.  A literal interpretation would produce some odd results.  Regarding federal sovereign power, CWSRFs and DWSRFs are obviously non-federal, state entities.  But they owe their existence to federal CWA legislation and their continued capitalization to legislated federal funding that comes with any number of strings attached.  Are the cash flows of SRF loans therefore ‘related to the exercise’ of federal power?  When an SRF issues a tax-exempt municipal bond to leverage its loan portfolio, should those bonds be considered federal debt [1]?  When SRF leverage comes from the SWIFIA program, should the program’s loan be ineligible for FCRA budgetary treatment [2]?

• A literal interpretation of the government purpose and control criteria has the same problem.  If a local water authority is constructing a CSO system in compliance with a federal consent decree, does that make it a ‘federal’ project?  If the authority issues municipal bonds to finance the project, are the bonds ‘federal’ because the authority was arguably ‘compelled’ to raise local taxes to repay them [3]?  If WIFIA makes a loan to the authority for the CSO project in the same circumstances, should the loan receive FCRA treatment [4]?

• To be fair, the CBO Report’s scoring examples (the bulk of the document) make it clear that CBO applies their two criteria in limited and realistic ways.  They don’t make odd decisions in reality. CBO’s pragmatic approach is the correct context in which to consider how the report’s criteria should be applied to the FCRA non-federal issue. The 1967 Report’s budget principles and specific criteria like those in the CBO Report need to be anchored in the real-world to be useful and efficient for policy implementation.

CBO’s Criteria in the Context of a Public Infrastructure Project Financing

The best way, I think, to provide a realistic anchor for the FCRA non-federal issue is to describe the basic elements of major public infrastructure project financings that are likely both (1) to apply to a federal loan program and (2) to have a federal participant, and then to see where and how CBO’s criteria might be applied.

The main distinguishing characteristic of a classic project financing is that the primary source of repayment for the project’s debt is not the project owners, but other creditworthy entities that purchase the project’s output under long-term contracts or (more typically for public infrastructure) the communities that benefit from the project’s existence and operations.  The latter agree to pay taxes or user fees that will cover the project’s operational costs and amortize the financing of the project’s construction costs.  Since the project’s debt is not fundamentally recourse to the project’s owners (who are also often its developers and managers), it’s usually called ‘non-recourse debt’ — but in fact the debt has a lot of recourse to project’s contractual counterparties, cash flows, and other security.

The relationship between the project’s beneficiaries and the non-recourse lenders, though usually mediated by the project’s owners or managers, is critical to the project’s success.  There are any numbers of factors related to the type of power and control that the CBO criteria describe.  The non-recourse lenders will require that the beneficiaries execute lengthy, long-term contractual obligations to pay for the project.  In addition to debt service, payments must cover detailed specifications for project maintenance and operations.  In turn, the beneficiaries require that the lenders provide cost-effective financing on acceptable terms that are consistent with their ability and willingness to pay for the project.  Most importantly, it is a very long-term relationship – each side will rely on the other to perform for decades.

The role of the project’s owners and manager is of course also critical to its success.  But this is most intense during the initial planning, development, and construction phases of the project’s life.  For large-scale public infrastructure like roads and waterways, most of the value is realized by successful construction completion and subsequent O&M activities are relatively routine.

In this kind of classic project financing for major public infrastructure projects, the beneficiaries are local or regional communities that agree to pay taxes or user fees for the value they expect to receive.  Federal involvement is primarily at the initial development stages, with a possible continuing role in project ownership and management.  Non-recourse lenders can include federal infrastructure loan programs if the project meets threshold and transaction quality eligibility requirements [5].  The nature and interaction of these three parties will determine whether a program loan will be subject to external discipline for OMB’s FCRA budgetary treatment and consistent with CBO’s scoring criteria for non-federal activities.

• The most important point here for both FCRA classification and CBO scoring is that there are two distinct types of project cash flows related to different activities – those related to project development, construction, and management of the project, and those related to (and often legally segregated for) non-recourse debt repayment.  This distinction means that CBO scoring criteria should not be applied in an undivided way, as if all the project’s cash flows were necessarily related.  Rather, the scoring decision should be more nuanced (as it appears to be in the CBO Report’s real-world examples) and include or exclude non-federal project cash flows towards the aim of providing the most accurate picture of federal involvement.  Non-recourse debt service will usually be an infrastructure project’s largest post-completion cash flow — incorrectly including these amounts (which should not be distinguished between those for private-sector debt and for a program loan, if there is one) would be misleading with respect to the scale of federal involvement in the project.

• With this distinction in mind, CBO scoring criteria can first be applied at the project’s partnership or JV entity level, where the federal participant and non-federal participants will interact directly.  At this level, there will be many factors related to the project’s planning, design, development, authorizations, and construction in which the federal participant has a dominant or even exclusive role [6].  That may be the basis for including non-federal cash flows related to those activities in the CBO score.  But note that even if all the cash flows at this level are included, that does not necessarily mean that the cash flows related to the repayment of non-recourse debt should also be included.

• To determine whether non-recourse repayment cash flows should be included in CBO scoring, the relationship between their source, the project’s beneficiaries, and the federal participant should be separately considered.  This is also the most important focal point for OMB’s FCRA treatment classification.  Are the primary beneficiaries of the project non-federal entities? It’s a bit hard to imagine that they would be otherwise for a large-scale public infrastructure project — perhaps if the project exclusively serves a major military facility?  Most usually, the beneficiaries will be communities represented by a sub-national state, local or regional authority.

• After it is established that the source of repayment is non-federal, more nuanced questions can be asked.  Most importantly, is the federal participant compelling the beneficiaries in some way, unrelated to the enforcement of widely applicable federal laws, to repay project debt?   This may be indirect — if the federal participant requires some aspect of project design, scope, siting, construction, etc. that is not consistent with standard public infrastructure benefit-cost principles and makes rejection of the project by the ‘beneficiaries’ practically impossible, that might be a form of compulsion.  This too is hard enough to imagine on the project’s physical level, much less with respect to the federal participant’s policy objectives and the beneficiaries’ legal rights.  But the question, and others like it pertaining to any power and control dynamics that might exist between the federal participant and the project debt’s source of repayment, can be asked in the context of the CBO criteria.

• OMB should be asking similar questions about the federal participant’s relationship with the project’s source of repayment for FCRA loan budgeting, if the project has applied for a federal infrastructure loan. Of course, these appear to be included in some form in OMB’s current FCRA criteria for WIFIA. But I think a more explicit and precise approach is necessary to avoid over-inclusion and ambiguity. Looking at the CBO Report gives a sense of the pitfalls to be avoided — if CBO’s brief description of their criteria is too literally interpreted, the results are odd and misleading, but their more expansive examples show limited and realistic applications of the criteria. This kind of realism needs to be surfaced for the FCRA non-federal issue, whether for improved criteria or a statutory fix. Much more on this topic in future posts in this series.

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Notes

[1] JCT, the CBO’s tax section, estimates the tax revenue impact from legislation that might change the amount of the tax-exempt bonds issued in future. This includes estimates for WIFIA’s (supposed) effect of increasing bond issuance. The broader point is that including the bonds’ repayment cash flows in scoring isn’t being considered, even though JCT is presumably modelling them for the tax impact.

[2] Like WIFIA, the tax revenue impact of SRF leverage with tax-exempt bonds is explicitly included in CBO scoring. Again, plenty of focus on these cash flows.

[3] In theory, this is not just a CBO scoring issue — if the creditworthiness of tax-exempt debt is ‘substantively’ supported by the federal government, the tax-exempt status may be questionable. Forcing local taxpayers to repay a bond would have this effect. There will be more on this in a future post in this series.

[4] This is a real case: Decatur Priority Areas Sewer Assessment and Rehabilitation Program Consent Decree Packages. There is no publicly available information indicating that OMB ever questioned the FCRA treatment of the DeKalb CSO loan.

[5] In the four programs that generally limit loan size to 49% of project cost (TIFIA, WIFIA, SWIFIA and CWIFP), a program loan is not likely to be the sole source of non-recourse debt for a large infrastructure project. If CBO scoring includes the program loan to a federally involved project, presumably the private-sector debt will also be included.

[6] If the federal participant is the source of specific legislative authority to enable the project, that’s a major factor to consider with respect to initial project cash flows — equity investments by non-federal participants, for example. But once in place, that doesn’t mean that all of the project’s cash flows were enabled by the specific project legislation in any meaningful way. For the repayment of project’s non-recourse debt, the agreement by the non-federal beneficiaries to pay taxes, and by the non-recourse lenders to provide financing, are much more important with respect to non-federal external discipline and FCRA classification.

Yes, WIFIA’s FCRA budgeting issue with federally involved projects is important. Everyone recognizes that. Now, what about this one?

Here is more information. But don’t talk about it, okay?

• FCRA Re-Estimates and the Anti-Deficiency Act

• The Cost of WIFIA’s FYE 2022 Portfolio (TL/DR Version)

• Estimating the Cash Cost of WIFIA’s FYE 2022 Portfolio

• The Economic Cost of WIFIA’s Portfolio at FYE 2022

The WIFIA loan program is currently divided into three areas, (1) the ‘original’ and apparently successful WIFIA for state & local water agencies, (2) the currently small and only slightly differentiated SWIFIA section, and (3) the Corp’s new co-authorized program, CWIFP.

What is the reason for this division? Simply a bureaucratic matter within a unified statutory framework? Loan product branding for different potential borrowers? Echos of legislative history?

Perhaps all of those, and others like them besides. None are as important as the fundamental differences emerging between the divisions:

Irreconcilable Differences

Here’s a controversial idea: Regardless of its original groundbreaking role, State & Local WIFIA is now holding back the development of SWIFIA and CWIFP:

• State & Local WIFIA loans will inevitably compete head-on with the municipal bond market. But that market can’t beat WIFIA’s free interest rate options. This is why Congress is so parsimonious when it comes to WIFIA appropriations — a small fraction of what TIFIA and CIFIA get, despite the water program’s rapid growth and apparent success.

• Why don’t State & Local WIFIA stakeholders fight harder to expand the program? Because they’re also (and even more so) stakeholders in the municipal bond market. In theory, a better approach might be for them to promote synergies between the two sources of infrastructure financing, expanding and improving both. But in the real world of entrenched monopolies, long-established relationships and zero-sum solutions, their prioritization of one over the other is a rational choice.

• Because State & Local WIFIA was the original version and has a track record of delivering results, their stakeholders will naturally be more organized, focused and energized than those of the new, as-yet unutilized divisions. Any proposals that could upset their part of the WIFIA applecart will meet effective opposition. The SRF WIN Act’s ambitious plans in 2018? They might have posed a threat to State & Local WIFIA’s détente with muni bonds, in addition to the usual resistance of any group to a dilution of its influence. Despite broad-based (but less organized?) support, the Act got reduced to a consolation prize.

• It goes beyond appropriations. Loan programs can expand their capabilities not just with increased funding, but by loan product development as well. State & Local WIFIA has done a good job (perhaps too good) in enhancing and expanding the scope of their interest rate-lock products. But its stakeholders won’t back product development that isn’t important to state and local water utilities and agencies. 55-year loan term for long-lived projects? Not usually relevant to our projects. Improving OMB’s FCRA non-federal criteria? Not our problem. Sub-Treasury rates to incentivize small SRFs? Our highly rated borrowers are quite happy with their free interest rate options. And so on.

Unstable Disequilibrium

Well, the federal government is filled with sub-optimal programmatic outcomes. Why should the trajectory of the WIFIA program be any different? It’s easy to imagine that State & Local WIFIA will soon plateau into a kind of captive US ExIm Bank for minor transfer payments to a sub-sector of water infrastructure, exactly to the extent allowed by the municipal bond market. SWIFIA and CWIFP will remain as its stunted and ineffective satellites, kept around for political convenience and to prevent other federal loan programs occupying the space, but not given the funding or loan capabilities to succeed.

Perhaps. But I don’t think so. Even for federal programs, a more-or-less permanent sub-optimal outcome requires the absence of destabilizing factors. There are at least two of these in the background:

• Most fundamentally, the growing needs of the sectors that SWIFIA and CWIFP serve. A few more years of failing infrastructure, economic difficulty and a changing climate can quickly become a perfect storm. Obviously unmet needs will coalesce and energize the sectors’ stakeholders to demand that their existing loan programs be given the required funding and capabilities, and they’ll be prepared to take on State & Local WIFIA’s stakeholders to get them. Now add in regional and political overtones (a ‘Cross of Muni Bonds’ speech?) and the issue goes beyond the technicalities of federal loan programs. I think some movement in this direction has already started.

• Most explosively, State & Local WIFIA’s exposure to huge funding losses. I’ve written about this frequently in other posts, so I won’t go into the details. The important point here is that State & Local WIFIA’s success is not real. Its $16 billion portfolio of executed loan commitments will almost certainly cost far more than the program’s Congressional appropriations to date, and taxpayers are the hook for the difference. If this unexpected cost becomes another Solyndra-type issue (and I think it will), then State & Local WIFIA’s influence will be significantly diminished, and SWIFIA and CWIFP stakeholders will be motivated to distance their programs from the mess. I don’t know how this type of destabilizing event will end, but a reversion to the status quo ante is not likely.

An Unnecessary Intra-Sectoral Conflict

There’s no need for all this. The current and potential problems with WIFIA’s divisions highlight the inadequacy of a purely sectoral approach to federal infrastructure loan programs. They’ll each have their own stakeholders that are quite rationally concerned with their own sector, without regard to the bigger picture. Worse, if a ‘sector’ is defined too broadly, there’ll be competing stakeholders within a single loan program. Without a non-sectoral authority to sort out the issues and develop equitable solutions, the strongest stakeholder in the program will prioritize its own interest, to the detriment of the others, as I think we’re seeing at WIFIA.

For now, SWIFIA and CWIFP stakeholders have no choice but to focus on their respective sectors. Paradoxically, however, one way to advance their causes may be to support a more unified approach to federal infrastructure loan programs. Cross-sectoral loan program stakeholders will naturally have an interest in SWIFIA and CWIFP growth and development. But perhaps in this case, given the relatively extreme degree of sub-optimality caused by sectoral differences, they’ll also begin to recognize their potential central importance.

In a prior post, I explained why adding a limited interest rate buydown provision to WIFIA’s statute would make sense for the Corps’ new loan program, CWIFP.  The limited buydown provision allows an infrastructure loan program to lower (within limits) a loan’s execution interest rate to what it would have been on the day the loan application was accepted.  It’s a potentially significant benefit for projects that have a long development phase during a time of volatile interest rates.  CIFIA (the primary focus of several earlier posts on this topic) has this provision, as does TIFIA, but WIFIA currently does not.

Adding the limited buydown to WIFIA might also make sense for another major stakeholder of the loan program – state revolving funds, or SRFs.  Obviously, WIFIA loans to SRFs are quite different than those to large infrastructure projects.  SRFs have a few special ‘SWIFIA’ provisions within WIFIA which are designed facilitate lending to the funds, and a dedicated (albeit small) amount of credit subsidy.  But the more fundamental difference is about policy objectives – while a WIFIA loan to a large infrastructure project is intended to accelerate its development and completion, the purpose of a WIFIA loan to an SRF is to encourage the fund to leverage its loan portfolio, effectively increasing the impact of its state and federal grants.

Encouraging Leverage at SRFs

Although all the classic reasons for leveraging a loan portfolio would seem to apply, most SRFs do not utilize much, if any, external leverage [1].  There doesn’t seem to be a fundamental reason for this, though a lack of administrative resources might be a common factor [2].  SRFs in more densely populated states receive a larger share of federal grants (per the CWA’s population-based allocation) than those in rural states and can accumulate a capital base that supports the staffing and transactional economies of scale required to issue and manage tax-exempt bonds.  In theory, since a WIFIA loan is in effect a single-lender private placement with an interest rate roughly comparable to a tax-exempt bond, it should be an easier starting point for smaller SRFs considering leverage.  In practice, however, the only WIFIA loans to SRFs to date have been for two large funds that already issue bonds.

Perhaps in acknowledgement that policy objectives for SRF leverage weren’t being realized under current law, the SRF WIN Act of 2018 attempted to make WIFIA loans more attractive to smaller SRFs. The Act included significant SRF-specific funding and various features, including sub-Treasury interest rates for smaller SRFs.  Despite broad-based support, there was serious opposition from major WIFIA stakeholders for whom the program was already working well enough.  I don’t know why these stakeholders perceived the expansion of a successful loan program’s capabilities as a zero-sum game. Doubtless the story is complex.  In any case, the opposition largely prevailed, and the Act was whittled down to the minor provisions enacted in SWIFIA.

Focusing on the First Step

In this context, the limited buydown might be seen as the type of feature that might have been included in the SRF WIN Act, though with a more subtle effect and a lower-key profile.  As with many things in life, the first step for an SRF to leverage its portfolio is probably the hardest.  At WIFIA, the process involves three steps over the course of at least two years – a letter of interest, an application, and loan execution.  Under current law, only the most difficult and costly part, an executed loan, has any certain value.  With a limited buydown feature, however, an accepted application itself has some potential value by setting an interest rate (albeit within limits and subject to the program’s agreement) for future leverage.  That’s valuable to help the SRF’s planning and decision-making processes with more specific numbers, and perhaps also to visualize how the leverage would work in more concrete terms.  If Treasury rates start rising, the application’s potential value becomes intrinsic and measurable – and perhaps significant.  If not, and the SRF decides to discontinue the process for whatever reason, there are no penalties for withdrawing an application.  The sunk cost at that point is limited to the application fee of $100k and relatively minor staff resources.

In effect, the limited buydown makes a successful WIFIA application a small but realizable goal that will potentially improve an SRF’s future leverage if the fund decides to go forward, but not cost very much if it does not. In turn, this makes the decision to take the first step — sending in an essentially costless letter of interest — more attractive because it has a potentially valuable near-term result that does not require a commitment to full loan execution. Yes, of course — the policy objective here is for more WIFIA loans to be executed and more SRF leverage to be in place. SRF WIN’s sub-Treasury rate on executed loans was a more direct approach to that. But the objective is also served by providing an incentive to get SRFs to start the process of considering leverage in the first place. I think adding the limited buydown provision to WIFIA can help accomplish that.

Limiting the Limited Buydown

It would be straightforward to simply cut and paste CIFIA’s limited buydown language and include it in the WIFIA statute. This has the advantage of utilizing a recently enacted precedent (CIFIA law was part of IIJA 2021) which in turn was based on the limited buydown language in WIFIA’s own precursor model, TIFIA. The cut and paste approach will likely work for CWIFP, which like CIFIA is intended for large, long-development infrastructure projects.

But for SRF policy objectives, it would probably make sense to add some limitations on eligibility for the provision. Large SRFs that are already leveraged with bonds or have the capital and staff resources to pursue a full WIFIA loan execution whenever they choose will naturally want to use the limited buydown as a potential enhancement for leverage they were going to do anyway. However, that’s obviously not consistent with the policy objective of encouraging smaller SRFs with limited resources to consider leverage that they might not have done otherwise. An SRF limited buydown provision should be designed with focus and clear additionality, in the same spirit as WIFIA’s provisions for small communities.

SRF WIN limited the availability of sub-Treasury execution interest rates to states that received less than 2% of federal SRF funding for the year. That’s definitely correlated to more rural states with smaller SRFs and could probably work as a rough filter for limited buydown eligibility. Other mechanisms could focus more directly on an SRF’s recent experience in leveraging or related current capabilities to exclude the ones that don’t need further inducement. There’s plenty of data available for a fine-tuned approach here and to characterize limited buydown eligibility as a data-driven technical refinement.

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Notes

[1] A 2018 NRDC report, Go Back to The Well: States and the Federal Government Are Neglecting a Key Funding Source for Water Infrastructure, outlines the numbers on page 6: “Of the 28 states that have used bonding, just 12 are responsible for nearly 75 percent of the bond revenues generated…Only New York, Massachusetts, Ohio, and Indiana have regularly leveraged their SRFs through the sale of bonds…”

[2] A 2022 report from Duke University and EPIC, Uncommitted State Revolving Funds notes that a lack of administrative resources is an important reason why many SRFs have relatively high levels of uncommitted funds. If that’s the case for a SRF’s core loan-making function, then it’s likely even more true for leverage.

Federal loan programs for large-scale public infrastructure are focused on specific sectors.  And since the US doesn’t have a federal ‘Department of Infrastructure’, infrastructure loan programs are also situated in, and largely managed by, the non-financial federal agencies responsible for their sector.  Much of this makes sense in terms of specific policy objectives and for some aspects of program operational efficiency.

Infrastructure sectors have dedicated federal advocacy organizations and think tanks.  These are of course the primary source for proposing and developing loan programs designed for their respective sectors.  This natural arrangement has much to be said for it, too, especially with respect to energizing the sectoral stakeholders.

Common Elements Across Sectors

The current sectoral focus of federal infrastructure loan programs, however, should not be seen to reflect any fundamental uniqueness in their central activities. The programs have many common non-sectoral elements as well.  Most fundamentally, this is because they all make big, long-term secured loans to large creditworthy entities capable of building and operating large-scale projects. Four major programs also share the same basic statutory framework, defined originally for TIFIA and then more or less replicated for WIFIA and the Army Corps’ CWIFP, and more recently for CIFIA.  Their loans have similar financial features (fixed interest rate determination, prepayment flexibility, non-subordination, etc.) and are subject to the same FCRA budgetary treatment, OMB oversight and federal crosscutter requirements.  They are all funded by the US Treasury.

Program borrowers face common challenges in financing large-scale infrastructure projects, including:

• Long planning and construction periods during which interest rate risk on the project’s permanent long-term permanent financing must be hedged or otherwise managed.

• The need to source a significant amount of long-term debt and other capital, since program infrastructure loan amounts are statutorily limited to a maximum percentage of project cost — usually 49% for TIFIA, WIFIA and CWIFP, and 80% for CIFIA.  The balance of the project’s capitalization will need to come from other sources, primarily the tax-exempt bond market since most program borrowers are public-sector agencies or qualify for PABs. Other sources include SRFs, P3 equity investors and specialty lenders. The project’s lenders and investors will need to work with both the mandatory requirements and optional features of the federal program loan.

• Large-scale, long-lived projects are exposed to intrinsic, difficult-to-manage risks like climate change.  A project’s financing should be designed to help mitigate their impact whenever possible.

Large-scale projects have common stakeholders whose organizations range across infrastructure sectors – labor organizations, engineering & construction firms, state & local governments, legal and financial specialists, etc. In effect, these are common stakeholders of loan programs, too.

Common Issues and Opportunities

The extent of common elements across infrastructure loan programs, borrowers and stakeholders means that there are also many common issues and opportunities related to their loans.  Here’s an illustrative list, based on my own experience (links to relevant posts or articles), of various topics that appear to be relevant, to a greater or lesser extent, for large-scale federal infrastructure program loans: 

The chart below shows what I think to be each topic’s relative importance (reflected by color intensity) across four major loan programs:

A Unified Approach?

Some form of unified approach to solving issues or developing opportunities for infrastructure loan programs’ cross-sectoral capabilities would seem to be useful, for several reasons. The most obvious case is where one program has established a precedent or implemented a statutory refinement that would apply to the others. A less apparent but perhaps more significant reason arises from the fact that many issues and opportunities in program loans involve technical aspects of finance and debt markets. Sectoral agencies don’t have an in-depth level of relevant expertise here — it’s well outside their main mission. Yet all the programs make large loans to sophisticated borrowers who are simultaneously sourcing capital from major markets. A unified approach to the common financial aspects of program loans would benefit from classic scale economies and produce better results.

The most important reason for a unified approach to federal infrastructure loan programs, however, is more far-reaching than improving current implementation with precedents and expertise. The approach can provide a focal point for cross-sectoral stakeholders to view infrastructure loan programs outside of sectoral siloes, resulting in an additional — and more broadly-based — level of advocacy for expanding program capabilities.