How $2.1b of Taxpayer Resources Could Have Been Used for Sub-UST SWIFIA Loans

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As discussed in a recent post, WIFIA’s $2.1b funding loss was in essence the result of executing $10b of loan commitments to highly rated water systems at interest rates that turned out to be on average about 1.25% below Treasury’s funding rates at disbursement. In effect, these were ‘sub-UST’ loans, the funding cost of which was conveniently hidden in off-budget mandatory spending. If the 1.25% discount was simply offered up front in exchange for immediate disbursement, the $2.1b cost would have been the same, but it would have been apportioned by OMB from discretionary funding — that is, glaringly on-budget. Presumably, Congress would have had some questions about the intended policy outcome from that level of spending. Pointless transfer payments to Silicon Valley water ratepayers mightn’t have played too well.

Congress wasn’t shy about asking questions (or listening to lobbyists) about sub-UST loans in the past. In the 2018 SRF-WIN bill, sub-UST WIFIA loans to smaller SRFs were proposed as part of legislation establishing SWIFIA. The idea got shot down by water lobbyists who claimed that sub-UST lending to SRFs was far too expensive, compared to ‘nearly free’ lending at full Treasury rates (supposedly) to their highly rated water systems members. Whether the lobbyists ever acknowledge it or not, the criticism hasn’t aged well — In Retrospect, An Ironic Criticism of the SRF-WIN Act.

I continue to think that sub-UST SWIFIA loans to SRFs are a good idea, with potentially significant policy outcomes, especially as a way to encourage prudent leverage at SRFs that currently don’t utilize their federal & state grant capital optimally. Here’s a long-form WFM article outlining the idea: Revisiting WIFIA Sub-UST Interest Rates for SRFs. More quantitative details in the context of federal deficits in this post: Fiscal Constraints and WIFIA Leverage for SRFs.

What if the $2.1b of taxpayer resources that WIFIA wasted on pointless transfer payments buried in off-budget mandatory spending had instead been used as credit subsidy for $10b of sub-UST SWIFIA loans, with clear policy objectives and assessable outcomes, all on-budget and correctly apportioned?

The above chart outlines how it could have worked:

  • Real Resources: To make a $10b loan, you need $10b of real resources. $7.9b can come from the Treasury market at current rates — about 5%. To make a sub-UST loan, $2.1b in credit subsidy from taxpayers is also required — but this time, it’s upfront, on-budget, and has a clear policy objective.
  • Federal Allocation: With the $2.1b in credit subsidy, SWIFIA can offer sub-UST loans at 3.75% to SRFs that meet certain criteria — sub-optimal leverage, constrained loan capacity, particular regional need, and so on. There’s plenty of policy scope and outcomes can be objective, e.g., first-time use of leverage, significant increase in lending, etc. Note that almost all of the $2.1b will be used for the funding subsidy — credit risk at state-supported SRFs is trivial. Also, under current SWIFIA law, the SRFs can draw the full loan commitments immediately, and can be required to do so to qualify for a sub-UST loan, obviating funding loss risk.
  • Sub-UST SRF Leverage: Assuming that qualified SRFs with collective grant capital of $10b are incentivized to take on prudent 50/50 leverage with $10b of sub-UST SWIFIA loans, total capitalization is now $20b.
  • Additional SRF Loan Capacity: The additional capitalization can provide about $10b of additional loan capacity, depending on the terms (e.g., amount of no-interest loans offered, etc.). SRFs in general are almost always constrained in lending capacity with big waiting lists, a situation not made better by recent cuts and continuing earmarking.
  • Real Policy Outcomes: This is the most important part. In contrast to WIFIA’s large highly rated water systems using Program loans as ‘free’ interest rate options, small project borrowers really need state-sponsored financing. There will be true and measurable additionality in terms of projects enabled and accelerated. Allocation will be efficient relative to WIFIA attempting to increase small loans for ‘narrative’ purposes — the state programs are ‘on the ground’ and will have their own equity capital at risk. They’ll monitor outcomes anyway — as part of the sub-UST loan deal, they can be asked to provide data and conclusions for assessments of outcomes from a federal taxpayer perspective. No guarantee of success, of course — but at least no more fake ‘narrative’ outcomes for well-connected water systems camouflaging huge off-budget games at the expense of federal taxpayers.

WIFIA reform is coming. The above illustration is only one example of what can be achieved with the level of Program funding that’s currently being expended anyway.