The Official Statement for the City of Hampton’s recently issued Environmental Impact Bond (EIB) describes a transaction that isn’t quite as ‘impactful’ as the press releases suggest. In fact, the sole basis on which the $11 million of Series 2020A Bonds are designated as an EIB is the City’s intention to review some specific social and environmental outcomes on three small stormwater projects. The intention is very explicitly not a promise:

A more accurate description of the 2020As would be “Environmental Intention Bonds”. Still, good intentions matter. For the City to go to the extra effort of considering social and economic outcomes, summarizing all that in a lengthy appendix to the OS and stating very publicly that they intend to check it again with third parties as the projects are completed is definitely going in the right direction. But is there some way to turn good intentions into at least a little actual impact to this type of minimalist EIB?

In the same way that water infrastructure isn’t built simply to be financed, WIFIA doesn’t exist simply to make loans. Both the loan program and the infrastructure it finances belong in the context of their ultimate purpose – better water resources for communities. That often involves physical water infrastructure, but not always. WIFIA’s mission should — and can — extend beyond the project itself.

As often noted here, WIFIA loan proceeds must be spent on the infrastructure project, but WIFIA loan benefits can be allocated to other non-infrastructure purposes. In practice, the lower debt service requirements of a WIFIA financing usually end up keeping water rates lower than they would have been otherwise.

Lower water rates are great, of course. But once the non-infrastructure allocation principle is established (and even effectively acknowledged by WIFIA itself), the question arises: What other non-infrastructure purposes within a public water system’s scope of responsibility could WIFIA loan benefits go towards? Water equity initiatives? Specific environmental enhancements? Workforce training? COVID-19 recovery efforts? Like many state & local public agency in these interesting times, public water systems have a big ought-to-do list. WIFIA loan benefits should be seen as part of the solution.

It won’t be easy to get things done in a divided and polarized government. Yet the economic effects of the Covid-19 pandemic are likely to continue — or even intensify — throughout 2021. On top, of course, of everything else.

Infrastructure loan programs aren’t perfect for many wish lists, but they might be one of the few federal policy tools that can expect bipartisan support. The WIFIA Loan Program is a model, both in how it is working now and how it should be expanded. Here’s a recent article in this month’s Water World Magazine that sketches out three specific and realistic actions that will make the program (even) more useful in 2021.

Low-cost federal loans to investment-grade state & local governments and infrastructure agencies are a powerful tool that works well on many levels, including for federal taxpayers. But the potential impact on the municipal bond market needs to be carefully — and explicitly — considered.

The classic role of a federal loan program is to be a lender in situations where borrowers don’t have many cost-effective alternatives, either because their credit isn’t yet good enough (student loans) or there’s something wrong in the capital markets (ARRA loan programs). In those cases, pretty much the whole cost-benefit story is about the impact of the program on two stakeholders – the borrowers and federal taxpayers.

But when a federal program makes loans to investment-grade state & local governments and infrastructure agencies, another stakeholder has to be included in the mix – the municipal bond market. A federal loan that by definition is intended to be advantageous to state & local public-sector borrowers will almost inevitably displace a municipal bond issue that the market would have loved to buy, an outcome that’s clearly disadvantageous to investors and market intermediaries.

New article in Water Finance & Management Magazine.

WIFIA’s recent interest rate resets on loan commitments made a few years ago show that the Program’s real mission includes improving not just physical infrastructure but public water systems’ fiscal condition as well. Very timely in light of the need for post-Covid-19 recovery. The US EPA should explicitly embrace this aspect of WIFIA’s mission. And the proponents of an expanded Fed MLF should take a close look at how a federal loan program for state & local governments and infrastructure agencies can actually work.