Outline-for-Legal-Challenge-to-2020-WIFIA-FCRA-Criteria-Post-Loper-Bright-ChatGPT-05042025

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Like everybody else, I’ve been trying to understand the impact of AI and LLM models on, well…everything. So sometimes I experiment by asking the models about an arcane topic I know about in detail — like the WIFIA FCRA Criteria.

This morning in a ‘discussion’ with the free version of ChatGPT, the model admitted (after some clarifying back-and-forth) that the Criteria were not consistent with FCRA law, but that under Chevron deference, OMB had some scope for interpretation.

I saw last year that Chevron deference was overturned by Loper Bright and thought at the time that this might be relevant to the Criteria issue. But I then concluded that such ‘deference’ could never have extended to an outright misreading and misapplication of unambiguous technical law. Rather, it seemed to me that Chevron deference was intended for areas where at least some judgement call was involved — broadly stated statutes, regulations, refinement of eligibility standards, etc.

So, although Loper Bright seemed a very useful support of the general principle (e.g., bureaucrats can’t do whatever they want by claiming sole expert authority in some technical area), it didn’t seem to change the basis of a legal challenge to the Criteria — because ‘deference’ wasn’t the issue but outright ‘wrongness’. And if no stakeholders had brought a ‘wrongness’ suit against OMB, I assumed that was because they didn’t think it would work, regardless of underlying merits, as a practical solution (i.e., too long, too costly, too much confrontation with a powerful oversight agency, etc.). So, I left it at that.

Yet here was ChatGPT suggesting that OMB could have used the Chevron defense. Well maybe. I’m sure the folks at OMB expected ‘deference’ on all FCRA questions, not as a legal shield, but as a result of their imperious authority on matters of profound mystery, over which they likely expected no possible challenge. But it made me think.

I then asked ChatGPT about whether Loper Bright would have an impact, and of course the model agreed that it would and outlined the arguments. It then offered to draft a legal challenge to the Criteria — okay, why not? The PDF is posted above. I’m not a lawyer and don’t offer legal advice, so although the outline looks plausible, I don’t know whether it has any merit.

As noted above, I’m guessing Loper Bright probably hasn’t changed much with respect to the practical value of a legal challenge to the Criteria. But you know what has changed — a lot — since the time of Chevron overturn? The whole federal landscape.

When DOGE is blithely chain sawing long-established programs, federal agencies are laying off thousands of long-serving civil servants, and the Administration is challenging long-respected precedents on a daily basis, daring to question some OMB bureaucrats in court about their obvious overreach doesn’t look exactly radical. Maybe WIFIA and CWIFP stakeholders should think about it?

To be honest, I didn’t expect there to be any mention of WIFIA, CWIFP or even SRFs in the 2026 budget request summary published today. Federal financing and funding for water infrastructure has solid bipartisan support and is obviously completely non-ideological. Funding for the loan programs is miniscule in the scale of the federal budget and even annual SRF grants don’t amount to much. Given the magnitude of their battles ahead, why were these even on the Administration’s radar screen?

The proposed numbers would do some serious damage. SRF funding is almost completely cut, leaving a relatively small amount for transitioning. CWIFP funding for 2026 is eliminated. WIFIA funding is left flat from 2025, which would be a positive sign were it not for the summary’s indication that the EPA program is expected to take up the capacity lost at the SRFs and CWIFP.

Of course, a lot will change by the time Congress is done with the budget, so I don’t think the numbers themselves need to be taken too seriously. But their explanatory text is another matter. That text includes strong statements that hint at longer-term policy directions for federal finance. But also, confusion about what federal finance is meant to do.

To provide some context, I’ll briefly outline something that I’ve been developing for a while and will be writing a lot about in future. I hadn’t expected that it would be relevant until the ongoing federal upheaval started to settle down. But here we are – if relevant policy directions and/or confusion are emerging from the apparent chaos, they need to be addressed in the context of clear policy objectives. So, what are they? What should they be?

Here is where TIFIA, WIFIA and CWIFP have a serious problem. After you strip away all the special interest narratives, what exactly is the national purpose of federal infrastructure loan programs lending to investment-grade borrowers financing low-risk projects while debt markets are functioning normally? It could be reasonably said that there is none. In pre-2025 times, such an observation wouldn’t have mattered. Now, it might invite the DOGE chainsaw. So, a real-world, narrative-free objective, suited to the emerging political context and actual federal fiscal constraints, must be made explicit. For now, I’ll simply state what I think it should be:

The primary goal of federal infrastructure loan programs is to facilitate local funding for local infrastructure solely by utilizing intrinsic and unique federal financing strengths (relative to debt market alternatives) through loan feature design and efficient transaction implementation.

Much more on that to come in future posts and articles. Now, back to budget summary. I’ll comment on each paragraph, roughly line-by-line.

Clean and Drinking Water State Revolving Loan Funds: $2,460m Reduction

EPA’s State Revolving Fund (SRF) was designed decades ago to give money to States via formula allocation for seed money to set up their own water infrastructure loan programs without continued annual appropriations. When it comes to water infrastructure, the States should be responsible for funding their own water infrastructure projects. Contrary to that design, in practice, the program has been heavily earmarked by the Congress for projects that are ultimately not repaid into the program and bypass States’ interest and planning. In addition, the SRFs are largely duplicative of the EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) program and the Department of Agriculture’s (USDA) Water and Wastewater Loan and Grant program, and they received a massive investment in the Infrastructure Investment and Jobs Act (IIJA). The Budget proposes to return the SRFs to their intended structure of funds revolving at the State level and therefore provides the decreased funding level of $305 million total to allow States to adjust to alternative funding sources for their water infrastructure.

• I don’t know if the limited seed money intent was part of the original design or was later superseded by some sort of consensus. Not sure it matters because the administration is raising a valid question — is continued annual federal grant funding anything more than a transfer payment? Note this is relevant to the proposal to offer WIFIA sub-UST rates to SRFs to jump-start more optimal leveraging — that feature should be explicitly time-limited and contingent on measurable progress.

• States responsible for their own water infrastructure funding — that’s a major statement. ‘Should be’ without further explanation is the kind of normative language used for ‘self-evident’ objectives — as in a political philosophy. Also note consistency with the fundamental objective I briefly stated above — there is also a self-evident national interest in helping states raise their own funding, and federal financing can be part of that.

• Yes, the earmarking does suggest that annual grants are seen as ‘free money’ transfers which Congress can redirect away from the intended purpose, revolving fund capitalization. Why, because that purpose is not important and Congress is better at resource allocation? It’s a bad look. Perhaps the huge cut was proposed, not so much to really reduce SRF funding, but to clap back at Congress: “See, you didn’t think revolving fund capitalization was important and you could play earmarks with the money. Well, taxpayers aren’t going to fund your earmarks and the SRFs can do without. That okay with your constituents?”

• The next one is very important: SRF lending duplicative of WIFIA lending? Really? Of course, the answer is ‘absolutely not’, as I’ve written about frequently on this site. But the real concern is that the line suggests whoever wrote it doesn’t know much about SRFs, WIFIA or even basic project lending. How about thousands of $5m project loans being selected, executed and administered out of Washington? Does that sound efficient or like the optimal use of resources? Not exactly consistent with Project 2025 decentralization principles — or even common sense. To be fair, the policy objectives and outcomes of federal finance programs have been so shrouded with ridiculous narratives (as described above) that the new team’s simplistic misunderstanding is not surprising. Still, it’s a red flag. This kind of thing needs explicit clarification before it’s embedded in emerging policy mindsets.

• Who knows if $305m for ‘alternative funding sources’ is the right amount? But I agree with the implied principles: (1) states (and localities) need to fund their own infrastructure, but the federal government should help them find it — this was not a cold cut-off, and (2) alternatives that increase the capital efficiency of SRFs with prudent leverage would presumably be included. WIFIA sub-UST rate for underleveraged SRFs would be consistent with both principles. Btw, $300m of SWIFIA credit subsidy funding would support about $3bn of leveraged SRF loan volume, more than the cut. Just saying.

Corps WIFIA Program (CWIFP): $7m Reduction (Implied Elimination)

The Corps WIFIA program provides direct loans and loan guarantees for non-Federal dam safety projects. The Budget eliminates this program because there is no demonstrated need in the private market for Federal financial assistance for these types of projects. In addition, the program is duplicative of other programs, such as FEMA’s National Dam Safety Program and the EPA’s WIFIA Program. In addition, this program is arguably outside of the Corps’ mission, which is to provide engineering expertise for military construction and civil works projects—not serve as a creditor to private entities.

• Ugh, the FCRA Criteria again. CWIFP wasn’t intended to be limited to dam safety projects – it was meant to support non-federal cost shares in Corps & BOL projects, but the FCRA Criteria wrecked eligibility for that.

• There’s as much or more need for federal financing of this type of infrastructure as there is for WIFIA’s loans – like to AAA Silicon Valley Water agency. It’s the same case of utilizing federal finance to facilitate local funding. Which is exactly what cost sharing does, except that it also reduces federal outlays.

• Again, not ‘duplicative’ of WIFIA. CWIFP is a statutory extension of WIFIA for a type of specialized finance (cost shares). EPA WIFIA is effectively specialized in municipal water agencies. CWIFP just extends WIFIA’s proven success and efficiencies to another sector of water infrastructure, usually involving projects with an even greater degree of national-scale interest. Also, note the glaring inconsistency of saying that there’s no need for CWIFP loan capacity in the just-prior sentence, and then saying two other federal finance programs ‘duplicate’ that loan capacity? Well, which is it?

• CWIFP is no more outside USACE’s mission than WIFIA is outside EPA’s mission, or TIFIA is outside of DOT’s mission. In ideal world, I do think that federal infrastructure finance should be centralized, perhaps at Treasury. But as it is, location at sectoral agencies is relatively efficient.

• All this focus in a short budget summary for $7m?? The only two reductions that small are for a radical woke education program and an obsolete grant series. Both cuts were clearly intended to make a bigger point. What’s the bigger point of cutting CWIFP? None, except…well see below.

• Here’s an ugly thought. Axios reported that “many proposed cuts were identified by Elon Musk’s DOGE”. Quite possibly lower-level DOGE boys ended up talking to the same bureaucrats at OMB who are pursuing a private agenda against CWIFP and who were behind the FCRA Criteria. The boys likely asked them to name candidates for cuts. So, this dismal Criteria crew used the opportunity to go in for the kill by describing CWIFP only in terms of government waste, which they knew would resonate with the DOGE boys. It didn’t matter that their criticisms were misleading and inconsistent because they knew that their audience would be uninformed on the details. Exactly the same dishonest word salad strategy I saw in the Criteria. The story sounds plausible, no? But let me stress it’s just speculation at this point.

A full-on polemic. It’s time for this pointless issue to disappear.

I hope this is the last thing I ever write about it. Investigating the Criteria has given me a deeper understanding of FCRA, which is obviously very useful for loan program policy design and advocacy going forward. It was definitely worth the effort. But Criteria themselves are just pathetic.

I didn’t post anything here for the last sixteen months for two reasons. First, I was somewhat occupied with another, unrelated project.

But second, far more importantly, it was obvious at the outset that 2024 was going to be an unusually ‘interesting’ year. There seemed little chance that significant or even minor improvements to federal infrastructure loan programs would get much traction in the swirling gyre. Since that’s my main goal here, there didn’t appear to be much point in further description of possible changes that might or might not be feasible, or even relevant, depending on the overall outcome.

To be clear, I love the analytical aspects of loan programs, as the nature of this site reflects. But there seems little value – to me anyway – in a purely academic exercise on the subject. The point of the analyses is to prompt and guide realizable change in a political context. When the basic parameters of that context appear generally fixed and somewhat clear, practical policy refinements that work within those parameters can be supported by detailed analyses, something I had been calmly doing for a while.

But when the political context’s main parameters are obviously changing in some radical way, the priority must be to understand the change and what it might lead to. That’s what I was trying to do for the last sixteen months. It was (and continues to be) a steep learning curve. I’m no expert in current politics or political science, yet at least some knowledge in those areas suddenly seemed highly relevant even to my very narrow focus on federal infrastructure loan programs. More than once, I thought “Damn, I wish I’d paid more attention at university”.

Gradually, I felt I understood the political context well enough to see the dynamics at play, at least as far as they’re relevant to loan program policy. The election last November crystallized the fact of change. But the months since the Inauguration have shown that the scale of change is not far short of revolutionary. This is not a grinding realignment of tectonic plates with occasional tremors. A full-on earthquake is happening. And it’s not at all clear when the earthquake will end or what the landscape will look like at that point, much less what the nature of new or rebuilt structures will be. Only that things won’t be the same.

This is a belated update of The Economic Cost of WIFIA’s Portfolio at FYE 2022. The discussion and the methodology outlined in that post and prior ones on the topic remain the same, so I’ll just sketch out the basic numbers for FYE 2023.

WIFIA executed 19 loan commitments over the fiscal year, totaling about $2.6 billion in volume. The comparable numbers for FY 22 were 29 commitments with $3.8 billion in new volume. That significant drop doubtless reflects many factors unrelated to the program itself, not the least of which is the likely delay of infrastructure project development due to uncertain economic conditions.

The average execution interest rate for the new loans was about 4%, so the weighted average interest rate (WAIR) of the overall $18.6 billion portfolio at FYE 23 increased to about 2.15%, up from about 1.86% at FYE 22.

There seems to be a rough negative correlation between loan closings and the UST 20Y rate, as you’d expect since larger applicants can vary the timing of execution to some extent. The timing of closings for small commitments didn’t seem as sensitive to this — also as you’d expect, since small borrowers have fewer financing alternatives, and the timing of loan closing will primarily reflect project construction draws.

As before, there’s no hard data on drawn vs. undrawn loan commitments. Given the persistent inversion of the yield curve, the drawdown rate could have been much higher than when the yield is normal and it’s advantageous to use the WIFIA commitment as an option for permanent financing.

Now for the dismal part. Like all other fixed-income portfolios based on UST rates, WIFIA’s FYE 23 portfolio is underwater. Since the program is the quintessence of a hold-to-maturity lender, the mark-to-market is perhaps not really relevant. But as described in prior posts, the potential interest rate re-estimate losses do reflect an economic cost to taxpayers which is unlikely to be mitigated by above-market loans forming a significant part of the portfolio over time [1].

Reflecting uncertainty about the drawdown percentage at this point, I did the future loss sensitivity analysis with a wide range of drawdown numbers. Correspondingly, actual losses for the fully drawn portfolio could range from about $1 billion to nearly $3.5 billion if interest rates stay around 4%.

Overall, the main story stays the same — WIFIA’s portfolio has interest rate re-estimate costs which far exceed Congressional appropriations. But no one seems to care — yet. If and when this becomes an issue, the first line of defense will be to shift the narrative to the portfolio’s 10-year cash cost (better) and then include the tax revenue savings from the displacement of muni bonds (even better). But the real and sustainable defense is to improve WIFIA’s and other infrastructure loan programs’ capabilities to provide financial benefits to borrowers which don’t rely on off-budget interest rate options. They’ll get there one way or another.

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Notes

[1] I call it the ‘FCRA ratchet’ — the cost of below-UST market loans is off-budget through the mechanics of FCRA re-estimates (and hence not a portfolio management parameter), but above-UST market loans will probably be refinanced with tax-exempt debt because there are no pre-payment or make-whole penalties. Over time, the portfolio remains concentrated with low-yielding loans, regardless of interest rate cycles.