A full-on polemic. It’s time for this pointless issue to disappear.

I didn’t post anything here for the last sixteen months for two reasons. First, I was somewhat occupied with another, unrelated project.

But second, far more importantly, it was obvious at the outset that 2024 was going to be an unusually ‘interesting’ year. There seemed little chance that significant or even minor improvements to federal infrastructure loan programs would get much traction in the swirling gyre. Since that’s my main goal here, there didn’t appear to be much point in further description of possible changes that might or might not be feasible, or even relevant, depending on the overall outcome.

To be clear, I love the analytical aspects of loan programs, as the nature of this site reflects. But there seems little value – to me anyway – in a purely academic exercise on the subject. The point of the analyses is to prompt and guide realizable change in a political context. When the basic parameters of that context appear generally fixed and somewhat clear, practical policy refinements that work within those parameters can be supported by detailed analyses, something I had been calmly doing for a while.

But when the political context’s main parameters are obviously changing in some radical way, the priority must be to understand the change and what it might lead to. That’s what I was trying to do for the last sixteen months. It was (and continues to be) a steep learning curve. I’m no expert in current politics or political science, yet at least some knowledge in those areas suddenly seemed highly relevant even to my very narrow focus on federal infrastructure loan programs. More than once, I thought “Damn, I wish I’d paid more attention at university”.

Gradually, I felt I understood the political context well enough to see the dynamics at play, at least as far as they’re relevant to loan program policy. The election last November crystallized the fact of change. But the months since the Inauguration have shown that the scale of change is not far short of revolutionary. This is not a grinding realignment of tectonic plates with occasional tremors. A full-on earthquake is happening. And it’s not at all clear when the earthquake will end or what the landscape will look like at that point, much less what the nature of new or rebuilt structures will be. Only that things won’t be the same.

This is a belated update of The Economic Cost of WIFIA’s Portfolio at FYE 2022. The discussion and the methodology outlined in that post and prior ones on the topic remain the same, so I’ll just sketch out the basic numbers for FYE 2023.

WIFIA executed 19 loan commitments over the fiscal year, totaling about $2.6 billion in volume. The comparable numbers for FY 22 were 29 commitments with $3.8 billion in new volume. That significant drop doubtless reflects many factors unrelated to the program itself, not the least of which is the likely delay of infrastructure project development due to uncertain economic conditions.

The average execution interest rate for the new loans was about 4%, so the weighted average interest rate (WAIR) of the overall $18.6 billion portfolio at FYE 23 increased to about 2.15%, up from about 1.86% at FYE 22.

There seems to be a rough negative correlation between loan closings and the UST 20Y rate, as you’d expect since larger applicants can vary the timing of execution to some extent. The timing of closings for small commitments didn’t seem as sensitive to this — also as you’d expect, since small borrowers have fewer financing alternatives, and the timing of loan closing will primarily reflect project construction draws.

As before, there’s no hard data on drawn vs. undrawn loan commitments. Given the persistent inversion of the yield curve, the drawdown rate could have been much higher than when the yield is normal and it’s advantageous to use the WIFIA commitment as an option for permanent financing.

Now for the dismal part. Like all other fixed-income portfolios based on UST rates, WIFIA’s FYE 23 portfolio is underwater. Since the program is the quintessence of a hold-to-maturity lender, the mark-to-market is perhaps not really relevant. But as described in prior posts, the potential interest rate re-estimate losses do reflect an economic cost to taxpayers which is unlikely to be mitigated by above-market loans forming a significant part of the portfolio over time [1].

Reflecting uncertainty about the drawdown percentage at this point, I did the future loss sensitivity analysis with a wide range of drawdown numbers. Correspondingly, actual losses for the fully drawn portfolio could range from about $1 billion to nearly $3.5 billion if interest rates stay around 4%.

Overall, the main story stays the same — WIFIA’s portfolio has interest rate re-estimate costs which far exceed Congressional appropriations. But no one seems to care — yet. If and when this becomes an issue, the first line of defense will be to shift the narrative to the portfolio’s 10-year cash cost (better) and then include the tax revenue savings from the displacement of muni bonds (even better). But the real and sustainable defense is to improve WIFIA’s and other infrastructure loan programs’ capabilities to provide financial benefits to borrowers which don’t rely on off-budget interest rate options. They’ll get there one way or another.

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Notes

[1] I call it the ‘FCRA ratchet’ — the cost of below-UST market loans is off-budget through the mechanics of FCRA re-estimates (and hence not a portfolio management parameter), but above-UST market loans will probably be refinanced with tax-exempt debt because there are no pre-payment or make-whole penalties. Over time, the portfolio remains concentrated with low-yielding loans, regardless of interest rate cycles.

In a recent post, Putting the FCRA Non-Federal Issue in Perspective, I described an escalatory approach to fixing the FCRA issue, the goal being to get OMB to agree to cooperate in revising the current Criteria before a full (and politically laborious) amendment was required.

It was pointed out to me that there’s a standard, low-key Congressional tool that might work very well in the early stages of that process — a non-binding “sense of” resolution. In effect, such a resolution would put OMB on notice that the precise technical shortcomings of the current Criteria (including the Background section’s FCRA word salad and smoking gun deletion) are now understood and will be further exposed if an amendment process is necessary. Yes, a public fight would be fun in a wonky way, but that’s not in anyone’s interest — everyone has better things to do, and they need to work together in future. By far the most efficient solution is for OMB, CBO and the WIFIA & CWIFP programs to quietly get together and fix the current Criteria, which I now don’t think would be difficult at all if there was a good faith intent to do it. Even the prospect of a Congressional resolution — however low-key and non-binding — might bring folks to the table with the correct attitude. If not, well, all the other escalatory options remain open.

As mentioned in many prior posts, I don’t have direct experience or expertise in the politics or mechanics of enacting legislation, and I’m sure the reality is far more complicated than it appears. But FWIW, here’s the first cut at what I think the language might look like, modeled on a current HR resolution that seems applicable, on the surface anyway.

FCRA-house-sense-of-resolution-draft-12212023-InRecap-1

PDF of the Document

The Water Resources & Environment subcommittee of the House T&I recently held a hearing on WRDA, Water Resources Development Acts: Status of Past Provisions and Future Needs. Almost all was devoted to specific projects that involve the USACE, which is WRDA’s primary purpose after all. But Rep. Napolitano’s opening remarks had a few things that could be relevant to CWIFP.

Most generally, about an expanded role for USACE in national water management infrastructure going forward (emphasis added):

Mr. Chairman, much of the country is now facing the same water supply challenges that we have long felt in the West. In my view that necessitates rethinking the role the Corps can play to help communities facing water insecurity, not to supplant state and local water efforts but to support them.

I thought the point about federal agencies not supplanting state & local efforts is completely consistent with how federal loan programs can work and has a very timely political aspect — more on that in future posts.

Specifically, OMB’s apparent propensity for arbitrary and artificial barriers was explicitly stated. Twice in fact:

If the Corps or the Office of Management and Budget is using arbitrary policy level factors to shut down the consideration of congressionally authorized water supply and water conservation developments and water resources projects, we should all be concerned.

If the Corps or OMB is using artificial barriers to exclude worthy projects with substantial state and local support from consideration, then Congress needs to revisit how authorized water supply and water conservation are ranked among the historic priorities and missions of the Corps.

Certainly directly relevant to the Corps’ FCRA travails. But I’m pretty sure that the comments refer to a wide range of issues with OMB, of which CWIFP’s FCRA issue might be a very minor one, if they thought of it at all. I’d note that Rep. Napolitano didn’t co-sponsor either HR 5664 or HR 2671.

But still, fixing the FCRA issue might be an especially good way to further the general push-back against OMB’s ‘arbitrary’ and ‘artificial’ restrictions on USACE water projects. Other issues probably have large subjective components about risk, compliance, interpretation of Congressional intent, etc. In contrast, OMB is simply and demonstrably wrong about the FCRA issue, which very much makes their FCRA Criteria an arbitrary and artificial barrier. Water stakeholders can win this one decisively, which perhaps is a good start.