There is an issue at the WIFIA Loan Program. But not the one that Congress is focused on.
A Bond Buyer article about the latest water funding bill notes in passing that the WIFIA Loan Program “is designed to work with bonds and other funding sources.”
Since WIFIA limits its share of the project’s capital costs to 49% and requires an investment-grade rating, the borrower must find the 51% balance elsewhere and (given the rating) that’ll most likely include debt markets, including bonds.
WIFIA’s policy theory is that a selected project won’t happen soon (or at all) without a WIFIA loan. In that sense, WIFIA and bonds are designed to work together to unlock new infrastructure investment. CBO’s legislative scoring of the WIFIA Program reflects this expected outcome – it’s assumed that the 51% non-WIFIA part of project capitalization is financed with tax-exempt bonds that wouldn’t have been issued otherwise.
The reality over the past three years has been quite different. The vast majority of WIFIA borrowers are highly rated public water agencies. They’re almost universally financing projects that certainly will happen regardless of a Program loan. Without a WIFIA loan, these borrowers would simply issue 100% water revenue bonds in the usual way.
It would be more accurate to say that WIFIA “was designed to work with bonds but in fact mostly just replaces them”.
That’s a problem. Federal loan programs are not supposed to replace fully functioning and efficient private-sector markets. OMB Circular 129, which sets out the rules for loan programs, explicitly requires review of this:
5. The effects on private capital markets. The review should estimate the extent to which the program substitutes directly or indirectly for private lending, and analyze any elements of program design that encourage and supplement private lending activity, with the objective that private lending is displaced to the smallest degree possible by agency programs.
It’s strange that Congress, specifically the House Appropriations Committee, has taken an extreme interest in a minor and largely irrelevant issue (WIFIA’s federal-ownership budget scoring criteria) while ignoring a real one about market displacement. Of course, defunding the Program is one way to solve the private market displacement issue, so perhaps they aren’t ignoring it all — just camouflaging an unpopular solution behind a technical accounting issue? I don’t know — that level of politics is way outside my expertise. But on the surface — it all looks odd. Defunding an inexpensive, popular and successful infrastructure program in the middle of an economic crisis? Over a technical accounting issue? Really?
If WIFIA was actually an economically pointless subsidy program (like US ExIm) that unnecessarily distorted US municipal finance, shutting it down would be not be a loss in the long run, despite the usual near-term objections from the Program’s specific beneficiaries.
But that’s far from the case – WIFIA does work (albeit more subtly than expected) to improve US water infrastructure and it will work even more effectively as its specific off-market features can be including in project planning over time. Even for short-term purposes (e.g. Covid-19 economic recovery), WIFIA can be an efficient mechanism to directly assist state & local infrastructure agencies – not that different in theory from the Fed’s MLF.
The better path is to fully surface and assess the issue (something that OMB appears to require anyway) and look for substantive fixes. I think there are straightforward ways to do this. Most fundamentally, WIFIA doesn’t need to hold a portfolio of highly rated post-construction revenue bonds forever – sell them back to the market, one way or another, as soon as possible.
There might be other ‘win-win’ approaches. But ignoring the issue (or worse, obscuring it with something else) will definitely become a ‘lose-lose’ outcome both for financial markets and the US water sector. In the increasingly grim reality of state & local fiscal and infrastructure challenges, that won’t go unnoticed.