I came across the acronym ‘POSIWID’ in an article today, and out of curiosity looked it up. The below from Wikipedia, my emphasis — re my recent posts, why does it sound so familiar?

The purpose of a system is what it does (POSIWID) is a heuristic in systems thinking coined by the British management consultant Stafford Beer, who stated that there is “no point in claiming that the purpose of a system is to do what it constantly fails to do”. It is widely used by systems theorists and is generally invoked to counter the notion that the purpose of a system can be read from the intentions of those who design, operate or promote it. When a system’s side effects or unintended consequences reveal that its behaviour is poorly understood, then the POSIWID perspective can balance political understandings of system behaviour with a more straightforwardly descriptive view.

So, analogously, the purpose of a federal infrastructure loan program is what it does? Not what federal policymakers and administrators intended it to do, or spin it as having done? And the loan program’s side effects (um, I don’t know, like massive mandatory appropriations?) might reveal that its actual role, as a specialty component of a competitive capital market, is poorly understood by said policymakers and administrators?

Well, perhaps it’s time to consider balancing current ‘political understandings’ with straightforward descriptions and spin-free policy ideas. Just saying.

There’s a ton of technical analysis and details behind this case, but the short story is straightforward:

The Background

• Under WIFIA’s current statutory framework, WIFIA loans and tax-exempt muni bonds are close substitutes.

• As a result, WIFIA borrowers (the vast majority of which are highly rated public water agencies that regularly issue in the tax-exempt bond market) utilize the Program’s interest rate management features as a type of arbitrage.

• The cost of this arbitrage to federal taxpayers is not funded by discretionary appropriations. Instead, it is reflected in an off-budget FCRA account as mandatory appropriations. In the WH FY26 Budget Technical Appendix, mandatory spending for FY24 and FY25 total about $1.6 billion. When amounts from FY22 and FY23 Technical Appendices are included, WIFIA’s total mandatory spending is over $2 billion — about 9% of the Program’s $22 billion portfolio. This amount is far above WIFIA’s discretionary funding — and likely to continue growing over the next 2-3 years.

The Narratives

• Anti-WIFIA Narrative: Another Solyndra. Shut it down or at least curtail the Program’s interest rate management features.

• Pro-WIFIA Counter-Narrative: Interest rate management features are critical for financing large, long-lived infrastructure projects. The use of such features for arbitrage can be minimized by differentiating WIFIA loans and tax-exempt bonds. The simplest and most effective way to differentiate the two is to enact the 55-year WIFIA loan term amendment recently re-introduced in Congress. This not only provides WIFIA with a path to reverse portfolio losses over time, but offers borrowers an important debt service management option for long-lived projects.

There are a number of other policy and political considerations for the 55-year loan term, as well as additional counter-narratives for the mandatory appropriations’ ‘sticker shock’. I’ll be posting about these in coming days.

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Yesterday, a Bond Buyer reporter asked me why public water agencies are concerned about WIFIA’s declining loan volume if their tax-exempt bond alternatives are better anyway. Fair question — after all, they’re the ones who aren’t choosing WIFIA loans, thereby causing said decline.

My answer, as quoted in the article, was “[t]he immediate concern is that WIFIA might get shut down altogether and they’ll lose one option, even if that option was only occasionally useful for a kind of rate arbitrage.”

What I didn’t add was “an arbitrage that’s potentially very expensive for federal taxpayers but the cost of which only shows up as an off-budget technical item years after the loan is executed.” That is, an arbitrage that requires a huge amount of Mandatory Appropriations.

‘Occasional usefulness’ for some stakeholders might not be a sufficient rationale to enact a federal loan program, but it’s probably good enough to keep one going (e.g., US ExIm), as long as the program doesn’t cause any noticeable (or newsworthy) trouble for prevailing political narratives.

Under a Harris or Biden 2.0 administration, it’s hard to imagine that WIFIA’s mandatory appropriations would even have been noticed, much less become an issue. But under Trump 2.0 and especially with Vought’s radicalized and apparently detail-oriented OMB, I wouldn’t be too sure.

Abstracts from the article’s text. My emphases:

The Water Infrastructure Finance and Innovation Act is a wellspring of funding administered by the Environmental Protection Agency that may be underutilized because it can’t compete with municipal bonds, which is a change from a few years ago.

“Atypical interest rate conditions from 2018-2021 made WIFIA loans attractive to water agencies who ordinarily would have done a revenue bond issue, and the loan program took about a 30% chunk out of the water and sewer market,” said John Ryan, principal at InRecap LLC.

“From 2022 through 2025 rates normalized and WIFIA loans became relatively less attractive. Annual volume declined to trivial market share.”

“WIFIA loans and bonds shouldn’t be competing — the loans should be re-designed to work together with bonds,” said Ryan.

In early November heavy hitters in the water and sewer sector sent a letter to EPA administrator Lee Zeldin, asking for an expansion to the WIFIA program. According to the Association of Metropolitan Water Agencies and the American Water Works Association, “EPA has closed just three loans since the beginning of 2025, compared with 18 loans in 2024 and 24 loans in 2023.”

Two weeks after the letter went out, the EPA announced that over $7 billion in WIFIA loans were available and five new projects were approved. “It’s a first step in getting WIFIA running again,” said Ryan. “It does show that the program is resilient and has support, the letter from the water advocacy groups was likely key in getting OMB to move on the approvals.”

Ryan notes that the approved projects have yet to close, are valued at about $700 million and the $7 billion figure doesn’t represent an increase. “That’s consistent with what I estimated for WIFIA 2025 volume as if the OMB pause and Trump 2 disruption hadn’t happened,” said Ryan. “Still an annual decline from 2024, though at a slower pace.”

Congress is looking for ways to juice up WIFIA as representatives from California, Washington and Kansas are sponsoring legislation that would “allow certain federal water infrastructure loans to have maturity dates of up to 55 years.”

The Trump administration’s practice of holding up infrastructure funding increases the desire amongst the water sector for having a reliable source of capital. “They’ll always want to have as many financing options as possible,” said Ryan. “The immediate concern is that WIFIA might get shut down altogether and they’ll lose one option, even if that option was only occasionally useful for a kind of rate arbitrage.”

Imagine a medium-sized, regional bank was able to achieve excellent growth for about four years by originating high-quality, low-risk loans. The bank’s owners would be quite happy with senior management, and they’d be looking forward to continued growth, even if the pace slowed a bit.

But then, unexpectedly, loan origination volume started to decline rapidly, culminating in a 60% drop in three years. And although the originated loans remained high in quality, the average size steadily dropped over the period, requiring more work per transaction and less net return for the capital invested.

At that point, the bank’s owner would be asking senior management hard questions, and not necessarily in polite language, either. As in: WTF happened? What changed? Are you sure you know why the bank was successful to begin with? What can you do to stop the decline?

Management better have good answers (not vague BS), or the next questions the owners might ask are: What’s the point of this bank? Why shouldn’t we just fire you all and liquidate this thing? And invest our resources in ventures where management understands what’s happening and the results are more predictable?

Well?