We know who lost.

In some fundamental ways, the recent defunding of the WIFIA Loan Program and the decision (so far) not to amend the Municipal Liquidity Facility are similar. Neither action appears to involve the merits of the cases or a cost-benefit analysis. Both instead rely (ostensibly) on principles — a technical accounting issue at WIFIA and a strict interpretation of a lender-of-last-role for the MLF. Both result in less federal lending to sub-national public-sector agencies — public water agencies in WIFIA’s case, state & local governments in the MLF. And both incur what appears to be a significant net cost to the public sector, including federal taxpayers. Pretty expensive principles, it would seem — cui bono, exactly?

Here is a quick estimate of the quantifiable costs and benefits of the decision to defund the WIFIA program for one year. As always, you can look at the Excel model here.

A $55 million appropriation for WIFIA FCRA cost was expected but then effectively rescinded by the House Appropriations Committee in connection with the program being late in publishing federal ownership criteria. The principle of connecting the two is a little obscure — punishment? Of whom — the public water sector? I don’t see any economic or even bureaucratic logic here. Yet on a party line vote it passed, presumably after due consideration for the national welfare. How does that look now?

For a Aa3/AA- issuer looking to finance a project with a 5-year construction phase and 35-year term financing, utilizing a 49% WIFIA loan share will save about 10% PV of the financing’s debt service cost, relative to 100% bonds. That level is as good as it’s ever been for WIFIA — all rates are super-low currently, but Treasuries are even lower than munis (click to enlarge).

Three-year debt isn’t very relevant to our focus on infrastructure finance. But it may be the simplest way to begin a constructive discussion about whether and/or how to amend the MLF from a lender-of-last-resort to a lender-of actual-loans. Starting with the impact of changing only the rate and leaving the current 3-year max term in place will keep things focused on a few important questions that may ultimately be relevant to federal infrastructure credit facilities.

Three possibilities outline the range: no change (i.e. penalty rates), lower it to about current tax-exempt bond yields for the borrower’s rating or offer a flat Treasury rate to all. Below are some rough estimates (Excel model here):

A $500 billion amended MLF is not as simple as it seems. Creating a series of smaller, more specialized lending facilities within the framework would be a lot more practical and effective, economically and politically. A sub-facility for refinancing municipal infrastructure assets is an example.

An amended MLF as lender-of-actual-loans sure looks compelling when the federal revenue impact is included. Just change two digits — term and rate — and it’s aux armes, right? Not quite. There are serious practical problems with the minimalist amended MLF outlined in a prior post. The purpose of that thought experiment was only to show that the FCRA cost of state & local loans is low, relative to the likely tax revenue loss of the alternative. Cool your jets citoyens — implementing a MLF as lender-of-actual-loans is a very different matter.

Policy, Economics — and Politics

Notwithstanding the intent of the CARES Act and the Fed’s mandate, federal credit programs that actually make direct loans are governed by OMB Circular 129. This guidance is pretty clear that credit programs aren’t supposed to replace functioning debt markets. Rather, they should be designed “with the objective that private lending is displaced to the smallest degree possible by agency programs”.

New article in Water Finance & Management. Very timely in light of a broader theme — the need to get creative about the interaction between the municipal bond market and federal credit programs. It shouldn’t ever have to be a zero-sum game — but especially not now, when state & local governments and infrastructure agencies need the best financing resources they can get.