Posted by George Voris on 2/23/18 11:57 AM
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In the second post of Summit’s blog series on the White House’s new infrastructure plan, Summit Senior Consultant Sam Seong and Summit Senior Analyst George Voris preview how the plan will impact existing federal infrastructure financing programs. You can read the last post in the series here.
The White House Infrastructure Plan proposes several actions that affect existing federal credit programs. Federal credit programs are a cost-efficient way for the Federal Government to provide assistance to infrastructure projects. Each dollar appropriated as budget authority allows the Federal Government to provide a much larger amount of credit assistance than a grant of the same amount would, as the budget authority is needed only to cover the expected losses of the lending program. In addition, as many federal credit programs require that their funds be used in conjunction with non-Federal sources of financing, each dollar of appropriated budget authority ultimately results in an infrastructure investment that can be more than 100 times larger.
The infrastructure plan calls upon the Congress to commit $14 billion, expiring in ten years, in increased budget authority and appropriations for administrative expenses and technical assistance to four federal credit programs:
- The U.S. Department of Transportation’s (DOT) Transportation Infrastructure Finance and Innovation Act program (TIFIA);
- DOT’s Railroad Rehabilitation and Improvement Financing program (RRIF);
- The Environmental Protection Agency’s (EPA) Water Infrastructure Finance and Innovation Act program (WIFIA); and
- The United States Department of Agriculture’s (USDA) Rural Utilities Service (RUS) lending program.
This amount is a significant increase to the levels proposed in the 2018 President’s Budget. For example, the budget requested only $20 million in appropriations for the WIFIA program. The plan also proposes legislative changes for these programs related to broader eligibility requirements, larger loan limits, competitive terms compared to the bond market, and tax incentives to bolster infrastructure investment. Generally, the expanded eligibility requirements detailed below create overlap in terms of lending authority, but also may incentivize intra-agency coordination and resource sharing to advance infrastructure development.
Under the current statute, TIFIA can generally only lend to highway and transit capital projects. Under the proposal, the program would expand its eligibility requirements such that port, airport, and non-Federal waterways projects may receive TIFIA credit assistance. TIFIA had been experiencing decreasing levels of disbursements in recent years. These changes open completely new project types to be eligible under TIFIA, and have the potential of revitalizing demand for the program. However, as the revenue sources and borrowers for these credits can differ substantially from the types of projects that the TIFIA program has historically dealt with, the TIFIA program may need to reassess its credit policies to ensure that the government’s assets are sufficiently protected.
DOT’s RRIF program would also be amended to provide larger benefits to attract more borrowers. Under FCRA, credit programs must establish a capital reserve to cover the expected long-term cost to the Federal Government of issuing debt. For many credit programs, such as the TIFIA program, that capital reserve is funded through budget authority appropriated by the Congress, so the TIFIA program can lend to borrowers directly at Treasury rates. However, the RRIF program cannot currently use appropriations to fund that reserve for loans provided to short-line freight rail or passenger rail projects. Therefore, project sponsors who seek RRIF credit assistance must fund the reserve by paying a credit risk premium, increasing their cost of borrowing through the RRIF program. Providing budget authority to the RRIF program would substantially increase its benefits. In particular, this would allow for lower-rated credits, generally the projects that have fewer available sources of financing, to borrow from RRIF.
The plan proposes a number of changes to the program that change the statutory eligibilities and terms and conditions of the credits. Under the proposal, EPA would be able to finance non-Federal flood migration and navigation projects, which are currently eligible projects only under the United States Army Corps of Engineers’ (USACE) financing authority. The plan would also allow the WIFIA program to lend to Brownfield rehabilitation and Superfund site cleanup projects, and be used for post-substantial completion acquisition of water and wastewater systems. WIFIA would also be authorized to lend to “water systems” as opposed to “community water systems”. This change would give WIFIA the statutory authority to lend to projects that sell water to other water utilities.
The proposal would also change the structural requirements of the WIFIA loan, application requirements, and what are considered eligible project costs. First, the WIFIA statute will be changed to require only a single opinion letter from a rating agency on the project’s senior obligations, instead of two. The WIFIA statute currently requires the WIFIA loan to spring to parity with the project’s senior debt in the event of bankruptcy or bankruptcy-related event. Under the proposal, the WIFIA program would gain the ability to waive this requirement if the borrower is rated A or better, and the revenues pledged for repayment of the loan are not dependent on project revenue. The proposal recognizes that the EPA’s administrative capacity must be increased for increased budget authority to be translated into additional project funding. Under the proposal, the WIFIA program would receive more administrative resources to effectively administer the program, monitor its growing portfolio, and accelerate investment in the nation’s water and wastewater infrastructure.
Projects with existing senior debt on their books that prohibit issuance of parity debt could issue the WIFIA loan on a truly subordinate lien, increasing its senior debt service coverage and borrowing capacity. Requiring only one rating letter may expedite the loan closing process and decrease the pre-closing expenses borrowers face. However, for water and wastewater systems that are frequently obtaining rating letters, the marginal benefit of this change may not be significant.
The WIFIA program is already an attractive source of financing for several types of borrowers. This proposal expands that pool of borrowers and adds some additional flexibility to the terms, likely increasing demand. In the previous project selection round, EPA received 43 letters of interest, but only had sufficient budget authority to invite 12 of those projects to apply. Without additional budget authority and administrative appropriations, these changes may not increase investment in water infrastructure, as the WIFIA program is already oversubscribed.
While the CWSRF program is not a federal credit program, it is an important source of financing for the nation’s clean water projects. The Proposal suggests changes to the CWSRF statutory language to allow CWSRFs to provide financial assistance to both publicly owned and privately owned public-purpose infrastructure projects while expanding funding for those treatment works facilities. As a result, the number of eligible projects for CWSRF programs would increase. This change would increase demand for CWSRFs that are undersubscribed, but may cause funding issues in states where current CWSRF funding is insufficient to meet existing demand. This may increase demand for other sources of financing, such as the WIFIA program, private loans, and bond issuances.
The plan calls for an expansion of project types eligible to be financed with Private Activity Bonds (PABs) to increase private investment in public-purpose infrastructure.
State volume caps and transportation volume caps for PABs for public purpose infrastructure would be removed and the alternative minimum tax rate preference on PABs would be eliminated, which private investors often cite as a main deterrent for pursuing financing via PABs. This allows for another source of financing for private entities involved in infrastructure. Many of the changes proposed by the infrastructure plan make infrastructure financing more attractive for private entities. While the exact benefits of each program will be specific to the details of each project, if the funding levels are increased as proposed, this plan will likely decrease the cost of financing infrastructure in the nation.
In our next post, Summit will review initiatives outlined in the White House Infrastructure plan that would accelerate investment into the nation’s rural infrastructure and economy.