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EPA’s New Strategy to Finance Water Infrastructure

As we have previously discussed, America’s drinking and wastewater systems are underfunded and stretching existing water dollars further will be critical to overcoming the mounting costs. In a letter to state governors, EPA pitched its new strategy to finance more water infrastructure projects.

How it works

EPA’s water financing program, WIFIA (or Water Infrastructure Finance and Innovation Act) provides selected projects with a loan for up to 49 percent of total project costs. Last year was the first round of loans, with 12 projects selected to apply for a total of $2.3 billion in WIFIA loans. Designed after the successful TIFIA transportation program, WIFIA offers borrowers low-cost financing and a comfortable repayment structure. Expecting low default rates, WIFIA can support a volume of loans far larger than is needed in appropriations, which only need to cover the cost to the government of extending credit—the subsidy cost. With Congress increasing the appropriated credit subsidy for WIFIA from $20 to $50 million, EPA can provide up to $6.1 billion in loans in fiscal year 2018 (FY2018).

Hoosier Model?

Of the 12 selected projects in 2017, the vast majority were for individual developments (such as a new wastewater treatment facility), but one of the selected projects stands apart. The Indiana Finance Authority submitted an application that took their uncommitted State Revolving Fund (SRF) balance of $453 million, and bundled it as a single project applying for a WIFIA loan. When the 49 percent WIFIA loan is finalized—amounting to $436 million—Indiana’s SRF will be able to issue upwards of $890 million to dozens of new projects. (See the figure below for an explanation of how SRFs function.)

With WIFIA equipped with even more lending capacity for 2018, EPA held up Indiana’s SRF application as a model for other states to copy in a recent letter to governors. As Indiana’s WIFIA application described, “working to structure WIFIA into the Indiana SRF Loan Program will serve as an important pilot opportunity to demonstrate nationally that WIFIA funding and ongoing SRF funding are complementary and additive concepts, and do not have to be considered as competing funding vehicles.”

Previously, some SRFs have been able to leverage the bond market to virtually double their upfront lending capacity. Indiana and EPA are now demonstrating that WIFIA can serve as an additional leveraging opportunity for SRFs, regardless of if the SRF is already leveraged on the bond market. Should other states successfully follow Indiana’s lead by receiving WIFIA for their SRFs, the WIFIA program could dramatically change the landscape of water infrastructure in the United States.

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Importantly, though both the SRFs and WIFIA provide low-cost financing, the majority of loans must be repaid. For projects that require further assistance, SRFs have a variety of tools to further lower the financing costs, including offering zero or negative interest rates, principle forgiveness, direct grants, and flexible repayment periods of up to 30 years. By combining the capacity and flexibility of SRFs with the additional low-cost financing available through WIFIA, more funding can be available for much-needed water infrastructure projects.


Considerations for Policymakers

State Variance

Each state is granted broad authority in the design and operation of their drinking water and clean water SRFs. In addition to the baseline rules and regulations imposed by EPA, each state is able to establish their own regulatory and governance structure for their SRFs. This variance leaves no two SRFs identical. As of 2008, only 27 states had leveraged their Clean Water SRFs with bonds, and only 20 had done the same with their Drinking Water SRFs. Deciding to leverage an SRF with bonds can depend on the current and projected demand in a state. However, several states also explicitly prohibited their SRFs from issuing debt. As such, every state may not be able to immediately follow Indiana’s model and take advantage of WIFIA as a new leveraging opportunity to expand their SRFs. Further complicating this landscape, SRFs have a variety of cash flow and reserve structures that will dictate the dollar amount that can be used to establish the 51 percent of non-federal funding that is necessary for a WIFIA application. If this is an opportunity states are looking to pursue, it may require significant regulatory and structural changes to their SRF programs.

EPA’s Budget Directly Drives Infrastructure

In the midst of the political battle over EPA’s funding, WIFIA’s low impact on the federal budget compared to its potential loan volume makes it an attractive option for improving water infrastructure. But as Indiana’s WIFIA application demonstrates, federal support for both SRFs and WIFIA will be crucial to meeting the water infrastructure needs that are mounting across the country.

The federal government’s share of funding for water infrastructure has consistently declined since 1977. State and local governments have picked up the tab, spending $104 billion in 2014, while federal funding came in at $4 billion. Without additional funding, the bulk of spending on water infrastructure will remain at the state and local level. Moreover, proposed cuts to EPA’s overall budget could undermine the progress of SRFs and the WIFIA program.

The White House’s latest proposed budget for EPA included maintaining WIFIA at $20 million, but it also proposed cutting $2.8 billion (or 34 percent) of the agency’s current budget, including cutting 2,400 employees, a quarter of the current staff. While Congress largely rejected the president’s proposal and increased EPA’s funding from $8.1 to $8.9 billion, it is expected that the administration will continue to seek reductions to EPA’s budget, and directly decrease staffing levels. Yet broader cuts could impact EPA’s administrative capacity for loan processing, oversight, and regulatory enforcement. While the public’s need for new projects would remain regardless of enforcement levels, weakening EPA’s evaluation and administrative capability could obscure potential environmental or public health concerns.

Affordability Concerns Remain

Expanding the opportunities for low-cost financing will directly increase the number of water infrastructure improvements. Longer repayment periods with low interest helps spread out the cost of expensive upgrades. However, even at more affordable rates, both SRF and WIFIA provide loans that water systems and local governments must either raise taxes or increase user fees to repay. Increasingly, the affordability of water has become a major concern for low-income households. While water services have been historically underpriced compared to their true cost, water and wastewater rates have steadily risen by 136 percent since 2000. For 12 percent of Americans, water is already too expensive. Within the next 5 years that number could triple as rates continue to increase. When water bills become unmanageable for a low-income household, missed payments and a delinquent account can turn into disconnection or shut-off from the system. Shut-offs can jeopardize health and safety, and can have the same effect as an eviction.

As systems attempt to meet the $744 billion in both drinking and wastewater infrastructure investments that will be needed over the next 20 years, higher rates and increased taxes will inevitably fall on users or the general population. Currently, there is no national approach or widely adopted structure that ensures water remains affordable to all Americans. While EPA is creating a new opportunity to leverage SRFs with WIFIA, it directly underscores the urgent need for robust affordability solutions and a continued federal commitment to these critical programs.

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