On Monday, December 19, the Environmental Protection Agency (EPA) issued an interim final rule on credit assistance for water infrastructure projects that will become immediately effective. The rule allows EPA to begin implementing the new Water Infrastructure Finance and Innovation Act (WIFIA) program.
National Need = $660 Billion
In the rule, the EPA estimates the national funding need for capital improvements for such facilities totals approximately $660 billion over the next 20 years. The vast majority of that need, 90% or $591 billion, is for repair, rehabilitation, and replacement of existing infrastructure.
Lower-rated Investment-grade Municipal Borrowers Benefit Most From WIFIA
In many cases, meeting these needs will require significant increases in capital investment. Water infrastructure capital projects are typically funded with pay-as-you-go or debt financed through the municipal bond market. In 2008, the U.S. Conference of Mayors estimated that local governments invested $93 billion in their water systems, of which 40% went to capital investments, with the remainder for operations and maintenance. In 2014, municipal bond issuance for water and sewer projects totaled $31.9 billion according to the Securities Industry and Financial Markets Association (SIFMA). Total municipal bond issuance in 2014 was $314.9 billion, of which $282.8 billion was tax-exempt. From 2003 through 2012, tax-exempt financing for water and sewer facilities totaled $258 billion. While a summary of bond ratings for water and sewer debt is not available, a 2014 analysis of outstanding municipal market debt shows that 19 percent of issues were rated BBB or below, or were unrated. As such, the potential market for lower-rated investment-grade municipal borrowers, which could benefit most from WIFIA, is significant.
SRF, CW, DW, CWSRF, & DWSRF
As suggested by the estimated size of national water infrastructure needs, currently available funding sources are not sufficient. State Revolving Fund (SRF) programs under the Clean Water (CW) Act and Safe Drinking Water (DW) Act are designed to primarily provide a benefit to smaller projects, typically under $100 million, in communities that often have limited access to funding. There is a large segment of need associated with projects that the SRFs cannot fund due to project size or ownership. The average CWSRF (Clean Water State Revolving Fund) wastewater treatment project is $3.5 million, while the average DWSRF project is $2.4 million. According to the most recent data, states issued only 180 CWSRF (Clean Water State Revolving Fund) loans over $50 million, and 35 of those were over $100 million, out of over 14,000 loans issued since 2004. Since 2009, states issued only 20 DWSRF loans over $50 million, and ten of those were over $100 million, out of over 6,700 loans. Private wastewater treatment facilities are not eligible for most CWSRF financing.
Funding, Not There Yet, But on the Horizon
WIFIA authorizes EPA to provide direct loans and loan guarantees to eligible water infrastructure projects. WIFIA authorizes annual amounts to be appropriated for the cost of loans or loan guarantees in FY2015 through FY2019. However, to date, no annual appropriations have been provided for the cost of loans or loan guarantees under WIFIA. EPA will not know the amount of budget authority that will be available until it is appropriated. EPA is required to set aside at least 15% of its appropriated budget authority for projects that serve communities of no more than 25,000 individuals. (Note: We remain under a Continuing Resolution (CR) that funds federal government agencies at last year’s (FY 2016) level. The CR is through April 28, 2017. In the FY 2017 Interior and Environment Appropriations bill Congress included $45 million to subsidize gross obligations for principal amount of WIFIA direct loans, including capital interest not to exceed $5.487 billion.)