In a prior post, I explained why adding a limited interest rate buydown provision to WIFIA’s statute would make sense for the Corps’ new loan program, CWIFP. The limited buydown provision allows an infrastructure loan program to lower (within limits) a loan’s execution interest rate to what it would have been on the day the loan application was accepted. It’s a potentially significant benefit for projects that have a long development phase during a time of volatile interest rates. CIFIA (the primary focus of several earlier posts on this topic) has this provision, as does TIFIA, but WIFIA currently does not.
Adding the limited buydown to WIFIA might also make sense for another major stakeholder of the loan program – state revolving funds, or SRFs. Obviously, WIFIA loans to SRFs are quite different than those to large infrastructure projects. SRFs have a few special ‘SWIFIA’ provisions within WIFIA which are designed facilitate lending to the funds, and a dedicated (albeit small) amount of credit subsidy. But the more fundamental difference is about policy objectives – while a WIFIA loan to a large infrastructure project is intended to accelerate its development and completion, the purpose of a WIFIA loan to an SRF is to encourage the fund to leverage its loan portfolio, effectively increasing the impact of its state and federal grants.
Encouraging Leverage at SRFs
Although all the classic reasons for leveraging a loan portfolio would seem to apply, most SRFs do not utilize much, if any, external leverage [1]. There doesn’t seem to be a fundamental reason for this, though a lack of administrative resources might be a common factor [2]. SRFs in more densely populated states receive a larger share of federal grants (per the CWA’s population-based allocation) than those in rural states and can accumulate a capital base that supports the staffing and transactional economies of scale required to issue and manage tax-exempt bonds. In theory, since a WIFIA loan is in effect a single-lender private placement with an interest rate roughly comparable to a tax-exempt bond, it should be an easier starting point for smaller SRFs considering leverage. In practice, however, the only WIFIA loans to SRFs to date have been for two large funds that already issue bonds.
Perhaps in acknowledgement that policy objectives for SRF leverage weren’t being realized under current law, the SRF WIN Act of 2018 attempted to make WIFIA loans more attractive to smaller SRFs. The Act included significant SRF-specific funding and various features, including sub-Treasury interest rates for smaller SRFs. Despite broad-based support, there was serious opposition from major WIFIA stakeholders for whom the program was already working well enough. I don’t know why these stakeholders perceived the expansion of a successful loan program’s capabilities as a zero-sum game. Doubtless the story is complex. In any case, the opposition largely prevailed, and the Act was whittled down to the minor provisions enacted in SWIFIA.
Focusing on the First Step
In this context, the limited buydown might be seen as the type of feature that might have been included in the SRF WIN Act, though with a more subtle effect and a lower-key profile. As with many things in life, the first step for an SRF to leverage its portfolio is probably the hardest. At WIFIA, the process involves three steps over the course of at least two years – a letter of interest, an application, and loan execution. Under current law, only the most difficult and costly part, an executed loan, has any certain value. With a limited buydown feature, however, an accepted application itself has some potential value by setting an interest rate (albeit within limits and subject to the program’s agreement) for future leverage. That’s valuable to help the SRF’s planning and decision-making processes with more specific numbers, and perhaps also to visualize how the leverage would work in more concrete terms. If Treasury rates start rising, the application’s potential value becomes intrinsic and measurable – and perhaps significant. If not, and the SRF decides to discontinue the process for whatever reason, there are no penalties for withdrawing an application. The sunk cost at that point is limited to the application fee of $100k and relatively minor staff resources.
In effect, the limited buydown makes a successful WIFIA application a small but realizable goal that will potentially improve an SRF’s future leverage if the fund decides to go forward, but not cost very much if it does not. In turn, this makes the decision to take the first step — sending in an essentially costless letter of interest — more attractive because it has a potentially valuable near-term result that does not require a commitment to full loan execution. Yes, of course — the policy objective here is for more WIFIA loans to be executed and more SRF leverage to be in place. SRF WIN’s sub-Treasury rate on executed loans was a more direct approach to that. But the objective is also served by providing an incentive to get SRFs to start the process of considering leverage in the first place. I think adding the limited buydown provision to WIFIA can help accomplish that.
Limiting the Limited Buydown
It would be straightforward to simply cut and paste CIFIA’s limited buydown language and include it in the WIFIA statute. This has the advantage of utilizing a recently enacted precedent (CIFIA law was part of IIJA 2021) which in turn was based on the limited buydown language in WIFIA’s own precursor model, TIFIA. The cut and paste approach will likely work for CWIFP, which like CIFIA is intended for large, long-development infrastructure projects.
But for SRF policy objectives, it would probably make sense to add some limitations on eligibility for the provision. Large SRFs that are already leveraged with bonds or have the capital and staff resources to pursue a full WIFIA loan execution whenever they choose will naturally want to use the limited buydown as a potential enhancement for leverage they were going to do anyway. However, that’s obviously not consistent with the policy objective of encouraging smaller SRFs with limited resources to consider leverage that they might not have done otherwise. An SRF limited buydown provision should be designed with focus and clear additionality, in the same spirit as WIFIA’s provisions for small communities.
SRF WIN limited the availability of sub-Treasury execution interest rates to states that received less than 2% of federal SRF funding for the year. That’s definitely correlated to more rural states with smaller SRFs and could probably work as a rough filter for limited buydown eligibility. Other mechanisms could focus more directly on an SRF’s recent experience in leveraging or related current capabilities to exclude the ones that don’t need further inducement. There’s plenty of data available for a fine-tuned approach here and to characterize limited buydown eligibility as a data-driven technical refinement.
_____________________________________________________________________________________________
Notes
[1] A 2018 NRDC report, Go Back to The Well: States and the Federal Government Are Neglecting a Key Funding Source for Water Infrastructure, outlines the numbers on page 6: “Of the 28 states that have used bonding, just 12 are responsible for nearly 75 percent of the bond revenues generated…Only New York, Massachusetts, Ohio, and Indiana have regularly leveraged their SRFs through the sale of bonds…”
[2] A 2022 report from Duke University and EPIC, Uncommitted State Revolving Funds notes that a lack of administrative resources is an important reason why many SRFs have relatively high levels of uncommitted funds. If that’s the case for a SRF’s core loan-making function, then it’s likely even more true for leverage.