The Wifia Program’s one-page benefit summary makes the point that a Wifia loan can include a ‘customized repayment schedule’. That may not sound like much of a benefit to highly-rated public water systems with efficient access to the tax-exempt bond market (the vast majority of Wifia borrowers) since they can structure bond series with almost infinite flexibility.

But what the Program is really getting at is something that’s actually quite valuable: non-pro-rata amortization (the Program informally calls it ‘sculpting’) that allows the 51% bond tranche of a Wifia financing to amortize first and faster. This does two things. First, it means that over its term the average Wifia share of the financing is higher than the initial statutory 49% — closer to about 60%. Second, sculpting allows more utilization of a Wifia loan’s sweet spot, the US Treasury curve’s generally less positive slope (relative to munis, especially after 10 years) and specifically flat-forward rate beyond the 30-year market.

Here’s a one-page summary of a refinement to the basic leveraged impact story (outlined in prior post). The idea is that the impact investment tranche in a large infrastructure financing would specifically support development of social programs associated with the project (e.g. workforce training or affordability reserves) and receive a return contingent on the programs’ success or lack thereof. More subtly, once fully developed the programs would be explicitly eligible to be included in the capitalized cost of the project for long-term federal infrastructure loan financing (e.g. Wifia). In effect, the development impact loan would be a kind of construction financing taken out by subsidized term financing and amortized over, well, a really long time. So popular social programs can help sell the boring-but-necessary project and it all gets paid for in the long-term capital budget. The impact investor is critical to help ensure that the programs really work (which is their stated mission) but also to amplify the buzz (which they’re also really good at).

I’ve analyzed a series of Environmental Impact Bonds (DC Water, Atlanta, FRB etc.) and, to be brutally honest, the common characteristic they all share is ‘ineffectiveness’. Despite gushing PR, they’re all too expensive, too small, and too idiosyncratic to accomplish anything other than buzz itself. An expensive and misleading form of advertising or virtue signalling.

But they’re not necessarily ‘pointless’. What I also see is that some components of the deals might, if incorporated in more efficient structures, might actually be useful while losing nothing of their virtue. In fact, their virtuous quality can cast a helpful, consensus-building glow on the efficient parts (which tend to be pretty boring). Example is below (click for PDF), adapted from a presentation I did in the summer:

A recent article in The Atlantic, The Toxic Bubble of Technical Debt Threatening America, describes a fundamental concept that ought to be central in infrastructure policy discussion:

A kind of toxic debt is embedded in much of the infrastructure that America built during the 20th century. For decades, corporate executives, as well as city, county, state, and federal officials, not to mention voters, have decided against doing the routine maintenance and deeper upgrades to ensure that electrical systems, roads, bridges, dams, and other infrastructure can function properly under a range of conditions. Kicking the can down the road like this is often seen as the profit-maximizing or politically expedient option. But it’s really borrowing against the future, without putting that debt on the books.

I wrote about the same thing in a 2017 Governing op-ed, Deferred Public Spending: The Credit Card from Hell:

When infrastructure maintenance is deferred or a pension contribution is skipped, critics of imprudent public spending are quick to label it as “kicking the can down the road.” But that doesn’t really capture the essence of the practice. It’s a form of borrowing. More cash is available in the current period, but a future obligation in the same amount, plus accrued costs, is created. Just like a loan.