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EPA WIFIA and/or OMB seem to have recognized at some point after the first resets in October 2020 that restrictions were required. Unrestricted resets would have meant borrowers constantly lowering the commitment rate until they hit the absolute low in an interest rate cycle during a 5- to 10-year construction phase, all while using short-term finance for actual construction draws. That pattern would have resulted in the maximum possible upward re-estimate and funding loss when the loan was finally drawn (i.e., the financing ‘option’ was exercised).

The first announcements of resets didn’t mention restrictions. But the July 2021 ‘fact sheet’ spelled out two — only one reset was available per loan, and only up to the point where 50% of project eligible costs were expended. Since the reset has no statutory basis, these were self-imposed, either by the program itself or OMB.

Okay — a good idea. The restrictions would lower the probability and extent of future funding losses. But a downward reset of any kind increases that probability. They must have known this, yet AFAIK credit subsidy estimates at re-execution, like the estimates at original commitment, did not include any apportionment for future funding losses.

In effect, EPA WIFIA and OMB seemed to recognize the probability of funding losses in WIFIA loan commitments based on predictable borrower behavior, but other than minor restrictions on the resets, they did nothing else about it.

Why? What could have been the mindset? I don’t want to be cynical, but I can only think something like this: “Yes, we know there’ll be funding losses, but the FCRA re-estimate process will cover them with permanent indefinite authority for mandatory appropriations, and it’ll all be buried in off-budget accounts. However, we don’t want to be too obvious about what’s going on, and unrestricted resets might prompt some awkward questions. So, we’ll scale them back a bit — the borrowers and their lobbyists will understand.” [1]

There may well be more innocent explanations, IDK. But ‘awkward questions’ should be asked.

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Notes

[PDF] A short note on the $699m SFPUC loan highlighted in the fact sheet. As usual for ‘narrative’ purposes, the $432m of ‘savings’ was on an undiscounted basis — the real NPV difference by lowering a 3.09% commitment to 1.45% was probably around $180m. Big enough, but SFPUC probably could have got about the same lower rate in the tax-exempt bond market at the time, though without the WIFIA loan’s optionality.

More importantly, the reset SFPUC loan probably wasn’t drawn until their short-term rates were higher than 1.45% — maybe 2023? By then, 20Y UST rates for funding the loan were well above 3.09% — meaning that the entire $180m of ‘savings’ to SFPUC ratepayers was a transfer payment via mandatory appropriations from federal taxpayers. Probably more, as most drawdowns may have occurred 2024-2025.

Note that if SFPUC had drawn the entire loan on the day of reset to 1.45%, taxpayers would not have borne any cost — UST buyers were offering that rate then. But not later — the borrower’s optionality for delayed draw (very handy when ST rates were low) was the cause of the funding losses. And what did that optionality accomplish, exactly, re US infrastructure renewal?

[1] Maybe this is the reason that water lobbyists never sought to make the reset statutory, something which is not otherwise easily explicable? It’s one thing for EPA and certain OMB officials to be in on the scheme, but quite another to get it through wider Congress, where even innocent questions might end up leading in the wrong direction. Better to keep a low profile and trust ‘our people’ to deliver, no? [Updated further thought: CBO would have to score such an amendment — they would definitely ask some awkward questions.]

Google-Gemini-on-EPA-WIFIA-Likely-20-pct-Realized-Loss-Rate-on-Disbursed-Loans_etc-02062026-InRecap

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A wide-ranging ‘discussion’ with Gemini. It started out with technical points about how to look at EPA WIFIA’s $2b loss (realized or unrealized — much more on that coming soon) but veered into broader issues of WIFIA reform. Interestingly, Gemini prompted some of this direction on its own and even sounded a bit polemic at times.

Usual caveats apply, particularly re the silicon ‘thinker’ confusing Fair Value discounting with FCRA budgeting.

Update: This more recent post, Apportioning Discretionary Funding for Expected WIFIA Portfolio Systemic Funding Losses, describes the principles and mechanics involved in the topic in greater detail.

^{Source: InRecap analysis, EPA website, WH Budget Technical Appendices}

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The Economic Cost of an Average WIFIA Loan, Expected and Actual

The economic cost [1] of an average EPA WIFIA loan at time of loan drawdown 2018-2025 appears to be straightforward.

The Expected case was about 1% of loan principal amount from taxpayers to cover projected credit losses. The other 99% was assumed to be repaid, with UST interest, by the borrower. Given the characteristics of WIFIA’s mainly Aa3/AA- borrowers, this was conservative.

The Expected case, however, was also based on assumptions about the cost of funding the loan commitment when it was finally drawn, many years later. Since interest rate movements are unpredictable, an estimate of the funding loss or gain on an individual loan was not considered possible. But since over time interest rates are cyclical and revert to mean, eventually individual loan funding losses and gains would balance out. On a portfolio basis, therefore, the WIFIA Program would be costless with respect to funding the loan commitments. Critically, this conclusion relies on the assumption that WIFIA borrowers will draw on loan commitments in a way that was generally correlated to the project construction schedule, and completely uncorrelated to UST rates, relative to the loan commitment’s rate and the borrower’s financing alternatives.

The Actual results over the period, of course, were significantly different. There was no reason to revise credit loss assumptions, and that cost remained at 1%. But the net funding losses covered by taxpayers (i.e., WIFIA loan rate lower than UST funding cost at drawdown) on drawn loans were not zero or minor, but about $2b, or 9% of the $22b loan commitment portfolio at FYE25 [2].

This is not mysterious. Obviously, Aa3/AA- borrowers with significant resources and tax-exempt financing alternatives (both short and long term) will be proactively choosing the least-cost option to finance their project at every point. Decisions will be highly correlated with UST rates. Construction advances will be covered with short-term financing when short-term rates are below the WIFIA loan commitment rate. Drawdown of the WIFIA loan as permanent financing will only occur if its cost is roughly equal to or less than near-UST tax-exempt bond financing — otherwise, the commitment will be cancelled or the rate reset. Funding gains will be rare and minor; funding losses will be frequent and occasionally significant, especially when commitment rates are reset at low points in the rate cycle, as many were in 2020-2021.

The Expected case contains assumptions about the funding cost of WIFIA loans to taxpayers that might have appeared reasonable at the outset of the Program. But now there are Actual results which appear to conclusively invalidate those assumptions. Apart from the $2b funding loss itself, there is the consistent Aa3/AA- water agency profile of the borrowers, the fact that those borrowers did use ST financing for construction advances as opposed to drawing on a WIFIA loan commitment, the opportune timing of interest rate resets and the pressure brought to bear on the Program to offer them, and the overall correlation of WIFIA loan applications with conditions in the tax-exempt bond market. All of this forms a coherent data set on which expectations of future borrower behavior and funding losses may be based.

Incentives to Continue Using Original Expected Case

In light of Actual results, there is no justification for using the original Expected case going forward. Even if the precise funding loss for an individual loan cannot be predicted, the fact that funding losses are more likely than funding gains from WIFIA’s predominant borrower class is sufficient to predict that on a portfolio basis there is a near-certainty of net funding loss.

Regardless of justifications, however, there are incentives. When a WIFIA loan commitment is executed, the credit subsidy estimate for the specific loan is apportioned by OMB from the Program’s discretionary appropriations. Using the Expected case, only the cost of expected credit loss is considered, about 1% of loan amount. This approach minimizes the use of Congressionally approved discretionary funding and supports a ‘narrative’ that the Program is amazingly cost-effective.

Years later, when the loan commitment is drawn, the full cost of the loan to taxpayers is calculated. The credit subsidy amount is ‘re-estimated’ to account for changes from the original estimate, very often including that the loan is funded at a loss. However, this loss will come in the form of a ‘positive interest rate re-estimate’ that automatically receives ‘permanent indefinite authority’ to incur mandatory appropriations [3]. Congress is not involved and the spending itself is buried in technical budget accounts, far away from public notice and the narrative sphere. Hidden, in effect.

Anti-Deficiency Act Violations, Coercive Deficiency

I’ve noted in previous posts that spending triggered by the mechanical operation of FCRA interest rate re-estimates cannot be in violation of the Anti-Deficiency Act, regardless of facts and circumstances, because FCRA law is black-and-white and the ADA simply excludes such actions.

The calculation and apportionment of the original credit subsidy estimate, however, is a different matter. This process occurs in connection with the execution of a WIFIA loan commitment, and that commitment very much requires the allocation of future federal resources, for which funding must be provided. The estimate at time of commitment is meant to include all predictable costs of the loan, and those costs must be covered by an apportionment of the program’s available discretionary funding. EPA WIFIA is not an ‘entitlement’ program — mandatory appropriations are available only in the specific case that a good-faith estimate of a loan’s funding cost turned out to be inadequate upon re-estimate, not for predictable funding losses. Continuing to base estimates on demonstrably wrong assumptions, especially when there’s an obvious incentive to do so, is effectively to create a ‘coercive deficiency’, a straightforward violation of the ADA.

The Principles and Mechanics of Correct Funding Loss Estimates

In all important ways, an estimate of future loan funding loss at loan commitment execution is the same as an estimate for the loan’s future credit loss, a completely routine process.

As with a credit loss estimate, each borrower’s characteristics, and the likely consequences of those characteristics, need to be considered. A large Aa3/AA- water agency with extensive financial resources and sophisticated advisors is more likely than not to draw a WIFIA loan commitment only when it is materially ‘in-the-money’ relative to the then-current UST curve. The likelihood of a smaller, less highly rated agency doing so will be less. A strapped rural co-op or a Baa3/BBB- project financing can be expected to draw the commitment regardless of changing rates because they have no alternatives.

Analogous to credit ratings, borrowers can be roughly categorized with respect to the probability of incurring WIFIA loan funding loss and historical data from the category analyzed. EPA WIFIA now has such data, obviously not as extensive as for credit loss but sufficient for initial estimates. My guess is that most of the $2b of program funding loss 2018-2025 came from the largest, most highly rated borrowers — the correlation of loss with characteristics is probably strong, perhaps even statistically significant in a formal regression analysis.

The mechanics of quantifying estimates of loan funding loss are, I think, equally straightforward. OMB’s Credit Subsidy Calculator (CSC) is not mysterious — it is just a standard model for discounting projected cash flows that incorporates zero-coupon UST curves. When the loan commitment is executed, the loan’s interest rate per program policy must reflect then-current UST rates (either the yield at WAL or the CSC’s ‘single effective rate’ for projected cash flows). But the estimate for apportionment can assume the ‘disbursement scenario’ with a higher UST curve that reflects the borrower’s likely behavior (e.g., will on average draw only when UST curve is 15% higher than at commitment). The projected funding loss will appear as the amount by which the PV of the loan’s debt service is lower due to the higher discount rate, and the apportionment estimate for a funding loss reserve can be based on that.

When drawdown occurs and the cost of the loan is finalized, FCRA interest rate re-estimate mechanics will work as before. If rates are exactly as anticipated under the disbursement scenario, no re-estimate is needed. If rates are lower, some or all of the funding loss reserve will be returned to the program’s general budget authority. If rates are higher, permanent indefinite authority will provide mandatory appropriations to increase the funding loss reserve to the required amount. The only difference from current practice is that the predictable part of funding loss is funded by the program’s discretionary appropriations. To the extent that for a specific loan in a specific year most of the funding loss or gain will be unpredictable, all the re-estimate procedures work as intended. Over time, if the funding loss reserve estimates are correct, the program’s portfolio will tend to balance — mandatory spending will be offset by program gains, and discretionary funding will reflect the true cost of WIFIA loans for taxpayers.

No Excuse for Delay

I don’t see any excuse for EPA WIFIA or OMB to delay the inclusion of near-certain funding losses into apportionment for credit subsidy estimates. The process is analogous to apportioning for expected credit losses, and the mechanics to quantify the funding loss reserve are simple discounting adjustments that can be based on the program’s current data set. The estimates change nothing from the borrower’s perspective (they get the same then-current UST rate at commitment) and if somewhat rough initially, the re-estimate process will in any case provide the final cost numbers. The taxpayer will pay the same regardless — the only difference is an adjustment between mandatory and discretionary spending to improve budget accuracy and demonstrate compliance with the ADA. The estimates and methodology can be continuously improved — but the practice should be started without delay.

From a practical perspective, EPA WIFIA has a huge carryover of discretionary funding, with another $65m added in FY2026 spending bill, for a total of about $300m. That’s far in excess of what’s required for any likely level of loan volume over the next few years. Apportioning some of that pile to a funding loss reserve at loan execution (or perhaps more likely, re-execution when the inevitable resets are done for recently closed loans) will not constrain the program in any way. To the extent that an investigation into ADA violations really would constrain the program, especially with respect to approval for non-statutory resets, I would think that WIFIA stakeholders would support improved estimates.

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Notes

[1] I discuss why ‘economic cost’ of WIFIA loans, as calculated using UST curves per OMB methodology, is the correct way to evaluate the utilization of taxpayer resources in the first subsection of this post — The Economic Cost of WIFIA’s Portfolio at FYE 2022

[2] It should be noted that according to the program’s press releases, only about $10b of the $22b portfolio has been disbursed as of mid-2025. It’s not clear if this means final drawdowns (90% per OMB rules) that trigger final interest rate re-estimates and mandatory spending, but assuming it does, the $2b in re-estimates may only have been incurred with $10b of loans — 20% of loan amount. On the other hand, there was a concentration of very low-rate loans executed or re-executed in the Covid Treasury dip 2020-2021, and more normal re-estimate losses will be a lower rate, perhaps even lower than the 9% overall to date. The program and OMB have the data — they should use it.

[3] I discuss some of the mechanics of mandatory spending in the second half of this recent post — Two Technical Clarifications – 55Y/35Y Difference, Mandatory Spending.

Google-Gemini-on-EPA-WIFIAs-Violation-of-Anti-Deficiency-Act-if-Predictable-Funding-Losses-are-Excluded-from-Loan-Commitment-Apportionment-InRecap-01302026

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A few years ago, I concluded that FCRA interest rate re-estimates couldn’t be the basis of a violation of the ADA, regardless of facts and circumstances. FCRA law is black & white on the mechanics and that provides an ADA exclusion.

But now, after seven years of operations and 140 loan commitments, as well as large mandatory spending numbers surfacing, is there a basis to question whether EPA WIFIA can continue to ignore predictable funding losses when making a loan commitment? Specifically, the apportionment of discretionary funding at loan commitment, years before WIFIA cost gets enmeshed in FCRA re-estimate machinery? Is an apportionment that doesn’t consider likely borrower behavior adequate? There isn’t any ADA legal exclusion for this type of action, which involve what should be a good-faith estimate of all the costs of the loan.

In fact, such questions would seem to fall squarely under the ADA — you know, the part of the Act intended to prevent program and oversight staff willfully minimizing discretionary appropriations to make a federal program look better. Exactly the situation that the ADA was intended to prevent, no?

Gemini ‘discussion’ above — usual caveats apply.

There’ll be more on this. As noted in recent posts, I’ve pretty much given up any hope of EPA WIFIA reform. Fine, I get that Washington works to serve rent-seeking special interests, not abstract ideas of the ‘common good’. If they want their crony loaner, they can keep their crony loaner. But EPA WIFIA has got to follow the rules like everybody else, especially when the rules involve the allocation of taxpayer resources.

This post is to clarify two technical points about topics frequently discussed here. I’m outlining these for the ‘avoidance of doubt’, as the lawyers say, in case some readers have questions.

1. The Difference in Value Between 35Y and 55Y WIFIA Loan Terms

In theory, a 55Y WIFIA loan should always be more valuable than a 35Y loan simply because more of the ‘flat forward’ part of the US Treasury is being incorporated into the loan commitment rate (or ‘Single Effective Rate’ as OMB zero-coupon methodology is called).

Source: InRecap analysis 010826

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But in reality, it is easy to understand why big Aa3/AA- water agencies wouldn’t care that much about it, regardless of the theoretical numbers. This is because they can — and do — see their financing as an actively managed component of the capital structure. Parts will be refinanced as soon as there’s the slightest benefit in doing so (e.g., advance refundings of tax-exempt bonds when that was still available) and in effect extended in the process of doing so. The overall liability side of the complex balance sheet constantly moves into the future with about the same maturity, matching the similarly evolving asset side. In this context, the primary value of a WIFIA loan is in the interest rate management features, which are in fact handy tools for active liability management over the next five or ten years, well within the standard planning horizon.

For them, a 55Y term will still cut some basis points off the initial commitment rate, but if the WIFIA loan is expected to be reset or refinanced at some point after the construction period, that might not be considered particularly relevant. Perhaps a 55Y loan term might spark some concern among less financially knowledgeable city councilors or folks like that, regardless of penalty-free cancellation. Like ‘why are we going to pay more interest?’ or ‘why are we entering into such an unusually long-term commitment — do we need a special vote?’ and so on. Not worth that hassle. And finally, big agencies wouldn’t want their bond underwriter to raise an eyebrow over their utilization of a WIFIA feature that not only highlights (another) limitation of that market but would also have broader applicability — “yes, WIFIA loans are OK as an occasionally useful option, but don’t go too far and give people ideas about federal infrastructure finance” or something similar. The agency’s relationship with the bond market is important and likely predates WIFIA by decades.

In contrast, a large regional project for permanent water management is likely to be done as a project financing. Project financings aren’t intended to be actively managed on the liability side. Project revenues are scheduled to amortize the asset’s initial (usually Baa/BBB-ish) long-term debt, it’s assumed that refinancing such an idiosyncratic deal might be difficult, and the planning horizon is closer to the asset’s useful life. The mindset is ‘one and done’ — “let’s get this flood control system built, finance it in the cheapest and most stable way possible, pray that nothing unexpected happens, and get back to our day lives”. In this context, the 55Y term is obviously valuable — cheaper and longer than any alternative. It’s no wonder that ‘western water’ congresspeople have push for it.

Other, less ‘actively managed’ infrastructure financing situations might also benefit. Some large SRFs do leverage in a big way, and they’ve happily done a few 35Y SWIFIA loans. But the majority of SRFs don’t leverage optimally, if at all. I’m told that this primarily reflects a staffing constraint. If that’s the case, a ‘one and done’ 55Y WIFIA loan commitment with slow amortization might help if the leverage was proposed as a sort of infrequently sought-for permanent addition to the capital structure, not as another ongoing managerial obligation. If there’s interest in this, a 55Y amendment could be easily modified to include SRFs SWIFIA loans, regardless of portfolio assets (the states themselves are long-lived enough, no?).

Similarly, lower rated rural water systems or, more realistically, a portfolio of loans to such systems, might simply require ‘project financing’ because the cash flows between assets and liabilities will need to be carefully matched. No illusion of refinancings, not much margin for error, and every penny will count. My impression is that these folks are trying to replace basic — and intrinsically — long-lived stuff (pipes, sewers, levees, etc.), so the 55Y term may often be a better match for useful life and intergenerational equity. The numbers and amort schedule benefits will speak for themselves.

Of course, there are more than a few hints of a ‘class divide’ going on here between those who don’t care about the 55Y and those that do. Much more on that substantive topic in future posts.

2. Mandatory Spending Only Reflects Positive Re-Estimates

I’ve been using ‘mandatory spending’ as shorthand for WIFIA’s re-estimate issue. The handle correctly conveys the relevant consequences of the operations of FCRA machinery, but precisely speaking, it’s only one side of the equation. I’ll sketch out the whole picture here for completeness, to the best of my understanding.

FCRA law just talks about re-estimates in general as a ‘change in program costs’:

504 (f) RE-ESTIMATES.–When the estimated cost for a group of direct loans or
loan guarantees for a given credit program made in a single fiscal year is
re-estimated in a subsequent year, the difference between the re-estimated
cost and the previous cost estimate shall be displayed as a distinct and
separately identified subaccount in the credit program account as a change in
program costs and a change in net interest. There is hereby provided
permanent indefinite authority for these re-estimates.

OMB Circular A-11 Part 5 On Federal Credit (pp, 547-631) splits the ‘change’ into either a ‘positive’ re-estimate (drawdown rate higher than commitment rate, higher cost) or a ‘negative re-estimate (vice-versa, lower cost) and spells out different treatment for each, as would seem to be allowed under 504 (f):

• A positive re-estimate “must be recorded against permanent indefinite budget authority available to the program account for this purpose.” So, the higher cost goes straight into the PIA account, which automatically incurs mandatory appropriations, which I think is generally turned into mandatory spending either simultaneously with funding the loan (the ‘spending’ is the top-up of an otherwise deficient Treasury account) or very shortly thereafter.

• A negative re-estimate, however, “will be recorded as offsetting receipts, which will offset the total budget authority and outlays of the agency and the budget subfunction of the program. However, at the discretion of the OMB representative with primary responsibility for the program, a special fund receipt account may instead be established.” In this case, the cost is less than expected — what do to with the ‘windfall’? From 504 (f), the lower cost must be recognized, but it is not specific as to how. I think OMB took a utilitarian approach, saying in effect, “dump the gains back into the general program budget, unless we decide some special treatment is necessary.”

All quite workable. But note there is a disconnect between the re-estimate gains and losses — they don’t cancel out. In theory, shouldn’t the program ‘pay back’ the losses before it can use the gains? That’d seem to be fairer to taxpayers and arguably provide a more useful budget metric. However, I can see how that might not be so simple. The losses are immediately realized, and the mandatory spending is sent to Treasury. If gains occur the next day (or the next minute), I assume you can’t ‘reverse’ the mandatory spending easily, if at all — the mighty PIA has been invoked, after all. Practically speaking, probably the best you can do is just keep the gains at the program and use them, as OMB prescribes. Notice that taxpayers won’t get any benefit at all if you can’t, whereas if the gains are generally usable, in theory fewer program discretionary appropriations will be required in future. Over time, things should more or less net out with respect to value, and of course detailed records are kept so a precise net position can be calculated if required.

We should keep in mind, notwithstanding the WIFIA case, that both the drafters of FCRA law and OMB rule makers likely assumed that interest rate re-estimates would always be a relatively minor item — most loans would be drawn quickly relative to interest rate changes, and the gains/losses would be quite minor relative to the big discretionary numbers involved with, say, risky student loans. Kind of a bookkeeping annoyance, certainly not worth a lot of complex policy. Or so perhaps it seemed at the time.

Here’s the important clarification: It is clear from the above that WIFIA’s mandatory spending numbers are only half the picture. It is logically possible that the program incurred $1.6b of re-estimate losses while racking up $1.6b of re-estimate gains, rendering this topic a non-issue. But of course, the program didn’t — and won’t. Ever.

First, there’s no evidence from the numbers I can see (mostly, WH Budget Technical Appendices) that some big lumps of negative re-estimates are appearing in the program’s “total budget authority”. The numbers below, FY24-FY26 include some bits and pieces, but generally the levels correspond to current discretionary funding or to carryover balances of unused discretionary funding. The carryover balances track almost exactly WIFIA’s actual loan volume 2018-2025. The big mandatory numbers that appear in FY24 and FY 25 do not carryover anything material, presumably since they’re spent the same year. Although WIFIA’s mandatory spending is only half the picture, there is no evidence that the other half is material — and so the shorthand description works.

Second, there’s a more fundamental reason that WIFIA only incurs positive re-estimates. Consider the question: In what planet would Aa3/AA- water agencies with excellent access to tax-exempt bonds ever drawdown a penalty-less loan commitment with an interest rate materially higher than their alternatives? None. Back in the real world, of course, these agencies will draw on in-the-money loan commitments all day long. The behavior is entirely predictable and (from their perspective) rational, but it was not anticipated by FCRA law nor the OMB rules. More on this topic in future posts, too.

But if you can’t quite tear yourself away from arcana yet, here’s the appendix to the 2021 WIFIA cost analysis that creates a model showing how ‘loan commitment drawdown optionality and correlation’ inevitably leads what we’re seeing at WIFIA now:

The-Economic-Cost-of-WIFIAs-Current-Loan-Portfolio-Part-1_-The-Potential-Cost-of-Interest-Rate-Re-estimates-2021-Appendix-A-1

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