Water lobbyists’ 2018 letter opposing sub-UST rates for SRFS
As discussed in this LR WFM article, the sub-UST rates proposed in the 2018 SRF-WIN bill might have been effective in encouraging smaller SRFs to start leveraging their portfolios of small project loans. Prudent leverage can expand their lending capacity and reduce reliance on annual federal grant capital for new loans.
But the proposal was shot down by the water lobbyists representing large municipal systems. A central argument — maybe the key one — was that sub-UST rates are ‘costly’ in terms of WIFIA’s credit subsidy loan ratios. Compared to what? Possible positive outcomes for both small SRFs and federal taxpayers as local resources are utilized more efficiently? No, nothing so banal. The lobbyists compared the cost only to the ‘magical’ ratios that lending to their membership appeared to offer. 100-1! Nearly free!
Except the ‘magic’ was based on bad budgeting. The value of WIFIA loans to Aa3/AA- water systems with excellent tax-exempt financing alternatives was primarily in the loans’ embedded interest rate call options, the uncapped cost of which would eventually surface when the loans were funded. Since this near-certain cost was not considered by EPA WIFIA or OMB in the apportionment of the loans’ credit subsidy, (perhaps, though not necessarily, in the conscious expectation that FCRA authority to incur off-budget mandatory appropriations would cover it) these very attractive options looked ‘free’.
Actual WIFIA outcomes FY18-FY25 show that the embedded options are far from ‘free’ for federal taxpayers. The $2.1b in mandatory appropriations over the period were due to rising UST rates and the consequent ‘exercise’ of the call options through loan drawdown. Since it is extremely unlikely that WIFIA will realize $2.1b in gains when UST rates are falling because highly rated borrowers will not draw ‘out-of-the-money’ loan commitments, the $2.1b of cost can be considered permanent for the FY18-FY25 portfolio.
‘Permanent’ as in a $2.1b transfer payment from federal taxpayers to the water ratepayers of those communities lucky enough to have a large, highly rated water system with sophisticated financial staff and smart advisors. Like AAA-rated Silicon Valley Clean Water, which has secured multiple WIFIA loans. Perhaps these ratepayers didn’t exactly need a federal subsidy, but I’m sure they appreciated it.
One wonders what $2.1b transferred to small SRFs through sub-UST SWIFIA loans to encourage and facilitate more efficient utilization of their capital might have accomplished by now?