In prior posts, I’ve been generally critical of OMB’s WIFIA FCRA criteria. In this one, I’ll focus on a specific point — that the published criteria failed to comply with the requirements of their Congressional directive. Not by a little or in a few details — the non-compliance is fundamental and pervasive.

The Wrong Question

The Congressional directive is relatively clear. Congress wanted to clarify the FCRA issue for federally involved projects with criteria that “…limit Federal participation in a project consistent with the requirements for the budgetary treatment provided for in section 504 of the Federal Credit Reform Act of 1990.” Since FCRA law is solely about loans, this is obviously talking about WIFIA loans to projects, and the limitations on Federal participation in a project with respect to those loans. For example, the most basic limiting criterion here is that the Federal participant can’t directly or indirectly guarantee the loan since FCRA is limited to non-federal borrowers. See? It’s not that hard.

Additional, more nuanced criteria can be developed along these lines with the principles outlined in the 1967 Budget Report, as the directive required. It’s straightforward if you’re asking the right question — FCRA law and the relevant principles in Chapter 5 of the 1967 Report are grounded in the calm rationality of the Enlightenment, not impenetrable Medieval theology or ancient pagan mysteries. I think correct criteria would look something like this: Six Criteria for Federally Involved Projects. Read Chapter 5 and you can try it yourself.

But OMB asked the wrong question. From the Background section of the Federal Register publication:

The question of whether or not to include a project or asset in the budget hinges on whether the project or asset in question is Federal or non-Federal in nature.

How to interpret this statement? What is the ‘project or asset’ here? The specific issue the criteria are meant to address is about budgeting for WIFIA loans — nothing else. The only ‘asset’ involved is a WIFIA loan which is indisputably a federal asset and unquestionably will be included in WIFIA’s federal budget. The question that requires clarification is which bucket of the federal budget the loan belongs in — FCRA or cash-based.

But apparently that wasn’t the question that OMB wanted to answer. The above statement only makes sense if their criteria are focused on classifying the federally involved project itself, not a WIFIA loan to it. Perhaps that classification is relevant for some reporting purposes (CBO scoring or economic impact data?) but if so, that’s a matter for the federal participant’s budgeting, not the WIFIA loan program. More importantly, that classification is not what the Congressional directive asked for, which is criteria to “limit Federal participation in a project”. They didn’t ask for a way to “limit WIFIA participation in a project that OMB determines to be a ‘Federal Project'”.

Still, OMB’s singular determination to classify Federal Projects instead of loans did require some connection to FCRA law, at least nominally, to appear to comply with the directive. That was accomplished with confusing subtlety by this free-floating assertion further on in the Background section:

Regardless of the identity of the borrower, however, requiring that a Federal project
or asset be recorded in the budget on a net present value basis would be inconsistent with 31 U.S.C. 1501

Since the ‘identity of the borrower’ doesn’t matter (yet), a WIFIA loan to a project can only be classified with respect to the use of loan proceeds, right? If OMB has deemed the project as ‘Federal’, those proceeds are also ‘Federal’ and therefore the loan’s borrower can now be identified — as a ‘Federal’ borrower! And FCRA treatment is statutorily only available for non-federal borrowers! See what was done there? OMB is conflating the project assets created with WIFIA loan proceeds with the financial asset that WIFIA creates by making a loan, thereby dragging WIFIA’s FCRA asset budgeting into OMB’s project’s classification.

This legerdemain neatly sidesteps FCRA law’s actual definition of an eligible loan as one to a “non-federal borrower under a contract that requires the repayment of such funds” (where the repayment obligation is integral to the borrower’s identity) and substitutes for it a novel definition of ‘borrower’ that is determined by where the loan proceeds are spent. However, the same word, ‘borrower’, can be used in the phrase ‘non-federal borrower’ and OMB’s project classification approach can apparently be connected to FCRA law. This would be impressive in a twisted way if intentional — but I suspect, per Occam’s Law, it was largely the result of a combination of wishful thinking and genuine confusion.

Cutting through the confusion, it turns out that OMB’s criteria are not in fact based on FCRA law but — something else. That’s the first failure to comply with the Congressional directive.

Down the Rabbit Hole with OMB.

The directive has another hurdle for OMB’s project classification approach to clear — using the 1967 Report’s principles and recommendations. Fortunately for the approach, it’s easy to find one if you only read Chapter 3, ‘Coverage of the Budget’, which is largely about inclusion in ambiguous situations. The Report’s authors admit that this area is a rabbit hole. And OMB enthusiastically jumps right in — a perfect context to keep things vague and mysterious. The sole principle cited for the criteria from the 1967 Report basically says, ‘when in doubt about an activity with some federal involvement, include the whole thing’. How handy for the classification of a complex, multi-party project with a federal participant and practically guaranteed to get the desired result — an entirely Federal Project!

Still, the rabbit hole is not all fun and games. It’s inherently difficult to develop clear criteria in such a context and, after all, that’s what Congress asked for. I imagine it could be done with some creative effort, but the inadequacy of the result for an intrinsically unrelated FCRA issue might be obvious and, in any case explicit criteria for Federal project classification would take away large parts of OMB’s ‘eye of the beholder’ option — where’s the fun in that?

Well, in the rabbit hole all challenges of logic or even the meaning of words can be overcome! Perhaps the Congressional directive should have added this source:

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘Criteria’ are ‘questions’ and vice versa, ok? The Red Queen can therefore decide that the requirements of the Congressional directive are fully satisfied.

In the Real World

Of course, back in the real world, all of this is nonsense. Questions, which OMB is entitled to ask anytime, are not criteria. They don’t clarify the FCRA issue for the applicant, who is left guessing as to what the result will be when OMB applies its own undisclosed criteria. Congress specifically asked for criteria to be published in the Federal Register — a public document meant to inform the relevant stakeholders. That’s the second, and perhaps most obvious even to a casual observer, failure of OMB to comply with the directive.

More substantively, if OMB had read (or didn’t willfully ignore) Chapter 5 of the 1967 Report, unambiguously titled ‘Federal Credit Programs’, they’d have seen the principles of what later became FCRA law outlined in great detail and with clarity. There are no rabbit holes there. The primary principle outlined is that federal loans require special budgeting treatment due to a substantive obligation for repayment from non-federal sources – something that is echoed in FCRA law’s definition of a FCRA loan. An exercise in ‘Federal project classification’ doesn’t belong here — but budgeting for WIFIA loans, the explicit topic of the directive, clearly does.

OMB failed to utilize the obviously relevant principles of the 1967 Report in their criteria. That’s the third area of non-compliance with the requirements of the Congressional directive.

Footnote Diktats

Finally, the criteria’s two footnotes should be mentioned briefly. This is where OMB’s desire to classify projects as ‘Federal’ and thereby render them (using OMB’s own special logic) ineligible for WIFIA loans is most unambiguously expressed. For projects with Army Corps or Bureau of Land Management involvement, OMB skips the weak sauce of ‘criteria’ and cuts to the chase with diktats. They’re all Federal! WIFIA loans to such projects are never eligible for FCRA treatment! Don’t even think about applying!

I have to think that after trudging through all the tortuous language of the rest of publication, they enjoyed writing these clear statements of reference-free bureaucratic power. However, the footnote diktats are of a piece with the rest of the work — not based on statute, relevant principles, or the requirements and purpose of the Congressional directive. Nothing — just more free-floating assertions. Compliance failure number four? Yes, if going far beyond the scope and intention of the directive counts.

Junk the Lot

I was more optimistic about OMB’s criteria when I started the FCRA Non-Federal Series late last year. I thought that they would probably require some important clarifications and refinements but had to be at least roughly compliant with the Congressional directive to be published. I assumed OMB would defend their work on that basis. That’s why I thought it worth exploring alternatives to the heavy lift of actually amending the WIFIA statute.

I don’t see it that way anymore. The current criteria are irredeemably flawed, probably influenced by some hidden bureaucratic agenda, and entirely non-compliant with the directive. The current lot should simply be junked completely — rescinded, perhaps by another Congressional directive or re-instruction. Or more realistically, since Congress will be involved either way, get ready to battle it out with an amendment that, as law, will presumably supersede OMB’s nonsense. HR 8127 is soon to be re-introduced and will again contain FCRA amendment language for WIFIA.

Doing nothing and simply living with the current criteria is not an option, even though relatively few infrastructure projects have direct federal involvement. There’ll be plenty of other FCRA-type budgeting and oversight issues that need correct and workable interpretations going forward as federal infrastructure loan programs develop — as they must. OMB’s current criteria for this issue set a harmful precedent for that critical process. They’ve got to go.

Imagine an infrastructure project for large-scale water management, like flood control or dam rehabilitation.  The optimal scale of the project for both national and regional benefit is about $1 billion.  For various reasons, a Federal Agency will be involved in overall project construction and management.  But the Agency can only allocate $600 million to the specific project.

A Regional Water Authority recognizes the importance of the project for the communities within their jurisdiction.  The Authority agrees to provide the $400 million balance so the project can be completed at the optimal scale, which is especially important for regional benefits.

The Authority can’t write a lump-sum check for the $400 million, and in any case, they want a long-term contractual agreement with the project that specifies all their rights and obligations in detail.  They will make periodic payments under this contract to cover their share of O&M and (most importantly here) provide cash flow for servicing $400 million of long-term debt to fund the construction cost balance.  All these arrangements are of course Project Finance 101.

The Authority will fund the contractual payments by a combination of general and special taxes, water rates, and other revenues from the regional communities that will benefit from the project.  This source of funding has a high level of creditworthiness, which gives the Authority several financing options.

First, they consider issuing tax-exempt bonds.  Bond credit rating will be based primarily on the Authority’s ability to make contractual payments from regional taxes.  An investment-grade rating is confidently expected.  However, bond tax counsel points out that due to the Federal Agency’s involvement in the project, they’ll need to confirm that the federal government is not providing a direct or indirect guarantee of bond debt service, per IRC Section 149 (b).  After an analysis of the economic substance of the transaction, especially with respect to the regionally based source of repayment, tax counsel signs off on an unqualified opinion that tax-exempt status is justified.

Next, the Authority looks at the WIFIA loan program.  The project is clearly statutorily eligible, and although the Treasury-based interest rate is not too different than tax-exempt bond yields, WIFIA loans offer various interest rate management and term features that are especially useful for large-scale, long-lived projects.  A WIFIA loan is, however, limited to 49% of “project” cost, which in this case means 49% of $400 million, or $196 million, since that represents the Authority share of the full project.  Fortunately, tax-exempt bonds and WIFIA loans are easy to combine and effectively complementary, so the Authority settles on a two-tranche financing plan for their share, $204 million of bonds and a $196 million WIFIA loan.

All good?  Not quite – the Authority’s application to the WIFIA program checks all the boxes with respect statutory eligibility, creditworthiness and other risk factors, public benefit and policy importance, and environmental reviews.  But there’s a problem – just as federal involvement in the project raised questions for the tax-exempt bonds, it requires special consideration for WIFIA’s FCRA budgeting of the loan. Without FCRA treatment, the loan would absorb far too much of the program’s budget and can’t proceed.

FCRA treatment is only available for a federal loan to a ‘non-federal borrower’. In one sense, the overall project is the ‘borrower’ because that’s where money will be spent, which prompts another question — is the overall project is federal or non-federal? But in another sense, the non-federal Authority is the ‘borrower’ because it is substantially obligated to repay the loan through contractual payments, which are ultimately sourced from non-federal communities. Which characterization of ‘borrower’ should prevail?

OMB’s Current Criteria

OMB’s 2020 FCRA criteria for federally involved projects appear to be directed towards the first characterization. The criteria, which are in fact a series of questions, apparently seek to determine if the overall project is a ‘federal project’, though the principles behind the determination are undisclosed. The only principle stated explicitly is that if there’s any ambiguity, the project is presumed to be federal. Well, isn’t that convenient?

In effect, OMB’s current criteria appear to be trying to determine whether the overall project is a ‘federal project’.  But even with a clearer statement of principles, not only is that approach inherently ambiguous, FCRA law and its underlying principles are narrowly focused only on specific substantive borrowers and the source of repayment.  I don’t see any basis for an overall characterization of some activity as ‘federal’ to disqualify every part of it for FCRA treatment, which is what OMB seemed to be aiming at. I get the prudential caution, but their approach doesn’t seem consistent with either current FCRA law or the 1967 Budget Report.

A Better Approach

There’s no question that FCRA criteria are required for a federal program loan to a project with federal involvement, just as tax counsel must carefully consider the tax-exemption of bonds issued by such a project.

But I think a sounder & more efficient approach would narrowly focus the criteria on a ‘non-federal interest’ in a project that has significant federal involvement. As the above illustration suggests, a WIFIA loan to a non-federal interest in the project might qualify for FCRA if the obligation and source of repayment were demonstrably non-federal, and the proceeds of the loan were roughly in line with the benefits the non-federal borrower expected to receive. That narrower approach is more consistent with FCRA’s sole threshold qualification of a “non-federal borrower under a contract that requires the repayment of such funds” and reflects the 1967 Report’s ‘market discipline’ requirement, too.

Maybe the issue just needs better, generally agreed definitions? I think simply defining ‘non-federal interest’ vs. ‘federal interest’ for federally involved projects in the context of FCRA law would result in more constructive discussions & efficient solutions for all the stakeholders.

SVB’s collapse probably marks the beginning of an extended roller coaster ride for interest rates. Much more on that topic in connection with federal infrastructure loan programs in future posts.

For now, some quick numbers on the value of three enhancements to CWIFP loans for dam finance — a 75-year term, 10-year deferral and a limited buydown — when long-term rates are rising.

Assume that yields on long-term Treasuries rise (1) by 25 basis points between the date a CWIFP loan application is accepted and loan execution, and then (2) by 1.00% between loan execution and project completion. In the context of recent (and likely future) rate volatility, those assumptions are by no means unrealistic or extreme in the time frames of program transaction processing and infrastructure construction periods. Probably on the conservative side, actually.

At project completion, the NPV value of a fixed-rate financing executed when rates were lower can be estimated relative to then-current rates. We look at four alternatives — naturally they all look good in a rising rate environment, but the point here is their difference.

• Baseline Tax-exempt 30-year bond: A tax-exempt muni bond will have close to a Treasury yield and that market is highly correlated to the Treasury curve in the long end. But it’ll need to be issued at construction commencement to lock in the rate by funding an escrow [1]. Assuming a 5-year construction period, the effective term is about 25 years. Obviously, no debt service deferrals, but there’s a long interest-only period. The NPV value is about 14% — that is, at construction completion the bond will trade at 86% of face principal. Bad news for the bondholders, but a benefit to the project.

• Current WIFIA: Because of the rate lock, the project gets the full post-completion statutory 35-year term. The standard 5-year debt service deferral effectively extends the weighted average life of that tenor. The NPV is about 18%, materially better than a bond alternative. Of course, a WIFIA loan will have other costs and benefits relative to a bond, but here we’re only looking at the impact of rising rates [2].

• Amended 55-year Term WIFIA: As proposed in HR 8127, an amended WIFIA would offer a 55-year loan term for long-lived assets. With the same 5-year deferral, the NPV benefit is about 23% — significantly better than the bond and even current WIFIA.

• CWIFP Dam Finance Enhancements: As outlined in previous posts, for dam projects a 75-year term is justified. A proportional 10-year deferral ought to be added to that, especially due to the slow & low revenue profile of such projects. Those two enhancements add up to about a 27% NPV benefit. A Limited Buydown (which really should be offered for all WIFIA loans but we’re just looking at CWIFP dams for now) increases that to 34% — more than double the bond alternative and significantly better than current and proposed WIFIA. That’s the point of this illustration — dam projects are hard enough in an uncertain environment. Since CWIFP enhancements for their financing could help with the interest rate aspects of that uncertainty, special consideration is warranted.

_____________________________________________________________________________________________

Notes

[1] For simplicity, the analysis doesn’t include the negative arbitrage cost of escrow funding. That’s usually about 2% on an NPV basis when the yield curve is normally sloped.

[2] It’s worth noting that if rates fall after execution, the WIFIA loan might have some flexibility relative to a bond financing — the program is willing to reset the rate downward if the loan commitment is undrawn.

In late February, the WIFIA program closed its 100^th loan, a $74 million financing for Santa Clara Valley Water District.  This is the first part of a master agreement for future WIFIA loans totaling about $2 billion for the rehabilitation and construction of two reservoir dam projects.  Since dam finance has been a topic here recently in connection with the new CWIFP program, this loan is worth a closer look to see how three possible CWIFP enhancements – a 75-year term, a 10-year deferral and the Limited Buydown – would be useful in a real-world situation.

As usual for large water public agencies, there’s a lot of public information about the decision making process.  On December 13 last year, the SCVWD Board met to consider a final resolution to go forward with this WIFIA loan, in the course of which its potential benefits and costs were reviewed and discussed.

Here’s a link to the video of the meeting — SCVWD Board of Directors Meeting December 13, 2022.  The main WIFIA presentation starts at 0:45:10 and finishes at 0:55:03.  Discussion among the boardmembers goes to about 1:43:00 at which point the resolution to proceed is passed.  WIFIA slide deck pdf here.

Possible Enhancements Could Be Included in Future SCVWD WIFIA Loans

Although much of the WIFIA presentation was in the context of the overall $2 billion WIFIA financing plan for two dams, SCVWD’s specific resolution and subsequent loan closing was limited to a $74 million loan for planning and design costs for one dam project.  As many as nine additional WIFIA loans, closing between 2023-2032, are contemplated, but not committed, for the projects.  This time frame means that possible enhancements to WIFIA program loans may be directly relevant to SCVWD’s dam program.  Active legislative efforts, primarily connected to CWIFP implementation but specifically amending WIFIA law, are continuing.  Last year The Water Infrastructure Finance and Innovation Act Amendments of 2022 (HR 8127) was introduced in the 117^th Congress and is expected to be reintroduced soon.  This bill already includes an amendment to extend WIFIA’s maximum term to 55 years.  In addition, the Twenty-First Century Dams Act (HR 4375), also expected to be reintroduced, proposes an increase in WIFIA funding – amendments for enhancement (at least for dam projects) could be included in the same section.  Obviously, nothing is certain in this political environment, but enacting minor, technical-seeming amendments to enhance the capabilities of a popular and successful water infrastructure loan program probably has a decent chance, if anything does.  Thinking about how the enhancements might be useful to SCVWD is therefore not an academic exercise.

Apart from the financing, it’s clear from the board discussion that real-world plans for the dam projects are also far from finalized.  The dam project for which the $74 million WIFIA loan was sought, primarily a seismic retrofit of the Anderson Dam, seems to be more or less greenlighted towards construction.  But the other dam project, the Pacheco Reservoir Expansion, is still at an early (and apparently contentious) stage.  The fluidity of the situation highlights the value of a WIFIA loan’s overall flexibility, as was pointed out several times in the discussion.

There’s another aspect of this, specific to the enhancements – to the extent that possible WIFIA loan enhancements influence the final design or other real-world aspects of the infrastructure, that would demonstrate that WIFIA’s fundamental policy objective (US water infrastructure improvement, not just subsidization) is achievable.  For example, might a 75-year loan term focus attention on, and possibly enable, a plan for the Pacheco Dam that addresses very long-term sustainability, resilience and inter-generational issues?  If the enhancements are enacted while SCVWD’s situation is still fluid, their impact will be interesting to see from a policy perspective.

Debt Service Management

A primary theme in the WIFIA presentation was the loans’ usefulness in managing future debt service in the context of SCVWD’s cash flow.  In the longer term, this was about being able to customize a WIFIA loan’s amortization schedule and dovetail it with other financing by delayed principal payments.  In the front end, the full deferral of debt service (both interest and principal) allows a smoother ramp up of rate revenue.  As frequently discussed in prior posts, the ability to offer these features is a real federal government strength compared to private-sector debt markets, especially the tax-exempt public bond market.  WIFIA’s US Treasury-based pricing makes delayed amortization cost effective due to the ‘flat-forward’ Treasury curve beyond thirty years.  Interest accrued during the deferral is locked at the loan’s original rate.  And the loan or any amount of it can be prepaid without penalty.  The ‘flexibility’ of a WIFIA loan was often mentioned in the presentation and board discussion – I’d expand that description to include ‘optionality’ as well, a concept that includes potentially quantifiable value (e.g., in a refinancing situation) throughout the loan’s life.

The potential enhancements are simply that – a 75-year term, a 10-year deferral and the Limited Buydown improve the flexibility and optionality of WIFIA’s debt service management features without changing anything fundamental from the borrower’s perspective.  They will expand the program’s maximum statutory authority, but don’t prescribe what the borrower can choose, or the program is willing to approve.

Presumably SCVWD’s dam projects have useful lives when completed of at least 75 years.  As the WIFIA presenter noted, SCVWD’s credit rating for the WIFIA loan from Fitch was a near-perfect AA+.  If the enhancements were enacted, my guess is that WIFIA would approve future SCVWD loans utilizing all three to their fullest extent – risks to the federal taxpayer would remain very low and (as discussed above) program policy objectives would likely be benefitted.  Assuming that’s the case, we can consider how useful each enhancement might be in the context of SCVWD’s situation, as described in the WIFIA presentation and board discussion.

The below chart (page 9 of the pdf) summarizes the debt service requirements of about $2 billion of SCVWD’s planned WIFIA loans (blue bars) under current law. You can immediately see the back-end loading of delayed amortization. The 5-year deferral is a bit more subtle — without it, there would have been a sharper spike in debt service in 2028 than the one projected for 2033.

75-Year Term

SCVWD’s chart can be recreated to include an approximate model of the WIFIA loans using other information provided in the presentation. Assumptions can then be changed to reflect the enhancements. Here’s what a 75-year loan term would look like:

Unsurprisingly, there’s a big drop in level-payment debt service, more than $120 million annually, as the amortization period goes from 13 to 48 years. But this effect won’t start until 2055 — more than 30 years from now. Does it have practical value for SCVWD in terms of decisions that will be made in the next five years or so?

Depending on other SCVWD’s other capital plans and long-term projections, there might be a more or less direct application for the additional cash flow in the far future. But I think even outside that case, there’s always value in securing a very long-term amortization schedule for very long-lived assets like dams because it increases WIFIA loan optionality. Prepayments can always be made without penalty — SCVWD can opt to follow a 13-year amortization schedule or refinance the loans altogether if lower interest rates can be obtained. But a lot can happen in 30 years. If the need for additional financing for other projects arises, or projected revenues for some unforeseeable reason become significantly lower, $120 million of annual cash flow freed up by a 48-year amortization schedule on the WIFIA dam loans might become an important factor.

10-Year Deferral

If a 10-year deferral feature is included, WIFIA loan interest-only debt service simply starts in 2038 instead of 2033. The spike is still about the same — in fact, it’s very slightly higher due to capitalized interest. But now there’s an additional five years to ramp up rates or other revenue sources to pay it, something which may have relatively near-term value.

In any case, the same observations about increased optionality for the 75-year term apply to the 10-year deferral. Ramping up water rates is probably always a somewhat difficult and multi-factored process — having more time to accomplish it can only help. If things go better than expected, voluntary debt service payments are always an option.

Limited Buydown

When describing the loan’s projected interest rate in the WIFIA presentation, the speaker was careful to note that it was only an estimate and wouldn’t be locked until loan execution. In the current economic and financial environment, interest rate volatility is (and likely will remain) a fact of life. Rates can rise or fall quite significantly and unexpectedly in a relatively short time. In SCVWD’s multi-year planning horizon for the dam projects, big changes in this central factor are almost a certainty.

A Limited Buydown feature — currently included in the TIFIA and CIFIA loan programs but not yet in WIFIA — could help mitigate this uncertainty in SCVWD’s WIFIA financings, at least to some extent. The feature simply allows the program to execute a loan at the Treasury-based rate prevailing on the date the loan application was accepted (usually many months or even years earlier) if that rate is lower than current, with a maximum 1.50% decrease. In effect, the Limited Buydown is an interest rate cap that shields the borrower from rate increases (up to 1.50%) in the period between an accepted application and loan execution (possible draft language for the provision here).

I am fairly certain that each loan under the Master Agreement between SCVWD and WIFIA will require some form of separate execution and its interest rate will be set on the day that happens. The rate for the $74 million loan was locked in the February closing but future loans — comprising the vast majority of the $2 billion program — are presumably still exposed to interest rate volatility.

If WIFIA had a Limited Buydown provision, an interesting question arises — does the Master Agreement constitute an ‘application’ for all the individual loans contemplated to be made under its terms? A WIFIA Master Agreement might be only a conditional agreement with respect to funding loans (per CIFIA law definition anyway), but it certainly represents a high degree of ‘acceptance’ by the program of all the loans contemplated thereunder. Legal interpretations at this level of detail are way above my pay grade, but I’d guess that if the WIFIA statute had had a Limited Buydown provision when the program accepted SCVWD’s application for the financing plan under a Master Agreement, or when the Master Agreement was executed, then a Limited Buydown adjustment would be available, as of that date, for all its individual loans [1].

Let’s assume that’s the case for a simple illustration. Also assume the Limited Buydown rate is the same as estimated in the WIFIA presentation — 3.68% [2] — and that US Treasury rates for future loans under the Master Agreement rise by 1.50% to 5.18% before execution.

Without a Limited Buydown cap, forecast debt service would increase by $50 million annually, as shown in the red bars below. That’s about a 40% increase in WIFIA debt service during the interest-only period, and an 18% increase in forecast debt service overall during the same time.

With the Limited Buydown provision, debt service could remain, subject to program approval [3], as originally forecast. The assumptions for this illustration make the potential monetary value obvious, but the more general point is that the Limited Buydown reduces uncertainty of forecasting financing cost of large capital programs, at least for the WIFIA component.

_____________________________________________________________________________________________

Notes

[1] Some sort of ‘reset’ or re-application of previously executed agreements might be required. Discussed here in the context of the CIFIA loan program — WIFIA Rate Lock Reset Precedents for CIFIA

[2] WIFIA rates are set by using the US Treasury yield applicable to the weighted average life (WAL) of the loan. On 12/2/22, the UST 20Y and UST 30Y yields were 3.79% and 3.56% respectively — presumably the presentation’s 3.68% rate is an interpolation corresponding to a loan life of about 25 years? That makes sense for the $74 million initial loan, but the WAL for the overall $2 billion financing is closer to 40 years, due to the deferral and long interest-only period. Still — even if the whole $2 billion were executed at 12/2/22 rates, the ‘flat forward’ convention for Treasury pricing would result in using the UST 30Y rate of 3.56%. That detail illustrates some of the value of the 75-year term — once WAL is close to 30 years (typical for long-lived infrastructure financing) there’s no extra cost in going much longer.

[3] The Limited Buydown permits, but does not require, the program to reduce the execution rate. That decision might depend on the availability of discretionary appropriation funding. Discussed here, also in the context of the CIFIA program — CIFIA’s Limited Buydown – Mind the Gap. To be really effective, WIFIA will need a much higher level of funding from Congress. Well — why not? Current funding (about $60 million per year) is almost trivial. The program has demonstrated remarkable success and is achieving its objectives — now how about some real funding?