WIFIA program — no longer a “pilot” — is set to grow.
On October 23, 2018, President Trump signed into law the America’s Water Infrastructure Act of 2018 (AWIA 2018). This bipartisan legislation, among other elements, reauthorized the Water Infrastructure Finance and Innovation Act (WIFIA). WIFIA, which established a federal water infrastructure bank administered by the US Environmental Protection Agency (EPA), is intended to ramp up federal funding for large-scale projects. Under the program, EPA can make low-interest, long-term loans and loan guarantees for a broad range of water projects. Eligible users include private, public, or mixed public-private entities, projects generally must be US$20 million or larger, and loans or guarantees can cover up to 49% of eligible costs. For a broader overview, please see Latham & Watkins’ WIFIA White Paper.
Although WIFIA was enacted in 2014, Congress did not fund the program until Fiscal Year (FY) 2017. In FY 2017, Congress appropriated funding sufficient to provide more than US$3 billion in loans or guarantees, and in FY 2018 expanded this to support more than US$5 billion in loans or guarantees. WIFIA uses a two-step selection process, beginning with the project proponents submitting letters of interest to EPA; from these, EPA selects a subset of projects to make a full application, with the expectation that projects making a full application ultimately will be approved. EPA closed its first loan in April 2018 and recently selected 39 projects to apply for FY 2018 funding. The program enjoys robust bipartisan support, and appears poised to continue to grow in coming years. While the reauthorizing legislation made only modest changes to WIFIA, water project developers considering using the program should note three key takeaways.
1. WIFIA Graduates from “Pilot” Status and Congress Authorizes Enough Spending for US$4.5 Billion Per Year or More in Loans Through FY 2021
First, AWIA 2018 removed the designation of WIFIA as a “pilot program” — signaling Congress’ intention to move the program to a more long-term footing. Congress authorized up to US$50 million for the program for each of FY 2020 and 2021, with up to US$5 million reserved for EPA’s administrative costs – a topline level consistent with the existing authorization for FY 2019.
Importantly, Congress does not need to appropriate the actual funds used for WIFIA loans. Rather, Congress appropriates only “credit subsidy costs” — essentially insurance against default on any loans or guarantees to be made using existing US Treasury funds. Because the projected default rate for water projects is low (around 1%), EPA can award US$100 in loans or guarantees for each dollar of credit subsidy costs Congress appropriates. The upshot is that, if Congress were to appropriate US$50 million for FY 2020 and 2021, with US$5 million reserved for administrative costs, this would still support approximately US$4.5 billion in loans or guarantees for each FY. Although AWIA 2018’s authorization levels are less than some WIFIA proponents had hoped, Congress appropriated funds for the program in excess of its authorized level for FY 2018 and could do so again in the future.
The WIFIA program has been oversubscribed for its first two years. In FY 2017, EPA received 43 letters of interest seeking US$6 billion in loans — as compared with appropriations sufficient to fund more than US$2 billion in loans or guarantees. In FY 2018, Congress appropriated funds sufficient for more than US$5 billion in loans or guarantees, and EPA received 62 letters of interest seeking US$9.1 billion in loans. If this robust demand continues and the program builds a track record of success, there is good reason to think Congress will maintain or increase funding levels going forward.
2. Expanding Access for State Revolving Funds
Apart from WIFIA, the main mechanisms for federal funding of water infrastructure in the US are the Clean Water and Drinking Water State Revolving Funds (SRFs). Under the SRF programs, Congress appropriates funds through EPA’s annual budget that are distributed to states as grants (with allocations among states based on a formula). These grants are used to capitalize state-administered revolving funds, which in turn support water infrastructure projects through low- and no-interest loans and grants. The SRFs focus primarily on smaller projects, with an average loan size of US$2 million to US$3 million.
Although the SRFs receive annual funding from Congress, they are also eligible to apply for loans or guarantees under WIFIA. Indeed, EPA is soon expected to close a loan to Indiana’s SRF with FY 2017 funding. Interest rates under WIFIA are higher than those for SRF loans, but some have advocated borrowing from WIFIA as a mechanism to expand SRF capacity. In response, Congress in AWIA 2018 made several changes to facilitate SRF access to WIFIA. The key changes are as follows:
- State infrastructure authorities are allowed to finance up to 100% of project costs using WIFIA, as compared to 49% for non-SRF projects.
- Upon receipt of an application from a state, EPA must within 180 days, either approve the application or provide detailed guidance and an explanation of any changes needed for approval.
- Projects funded through SRFs are not required to undertake additional environmental or engineering reviews (beyond those otherwise required) by virtue of WIFIA funding.
- If Congress appropriates at least US$50 million for WIFIA in any given FY, US$5 million of this can be used for credit subsidy costs to support loans or guarantees to SRF programs.
- However, no funding is to be made available for SRF borrowing from WIFIA in a given FY unless appropriations to each of the Clean Water SRF and the Drinking Water SRF themselves for that FY are equal to the FY 2018 appropriation for each SRF — or 105% of the previous FY’s appropriation to each SRF — whichever is greater. This measure is intended to ensure that WIFIA does not “cannibalize” direct funding for the SRFs.
This outcome represents a significant change from the bolder, and potentially more disruptive, reforms proposed in the “Securing Required Funding for Water Infrastructure Now Act” (SRF WIN Act). The SRF WIN Act, which was included in an earlier version of the Senate legislation that led to AWIA 2018 and discussed in Latham’s May 2018 Client Alert, would have created an entirely separate lending “window” for SRFs under WIFIA. Further, it would have allowed most SRFs to borrow at interest rates 20 to 50% below those applicable to the broader WIFIA program, resulting in a substantial reduction in the amount of loans the WIFIA program could support with a given level of appropriations. The provisions included in AWIA 2018 instead provide for a more modest increase in SRF access to WIFIA. Whether there will be significant demand for this new mechanism is uncertain, given that WIFIA loans require interest payments and many SRFs have not made use of other opportunities to expand.
3. Opening the Door to EPA Partnerships With the Army Corps, Bureau of Reclamation, and Other Federal Agencies
WIFIA also authorizes the Army Corps of Engineers (Corps) to administer a water infrastructure financing program, but EPA and the Corps have authority to support different types of projects. EPA can make loans or guarantees to projects related to water treatment, water supply and distribution, and reuse, among other types. The Corps is authorized to support projects relating to flood and storm protection, environmental restoration, and navigation improvements for inland and coastal harbors or waterways. But whereas Congress has appropriated funds for EPA to establish a WIFIA program, it has not done so for the Corps. The Corps currently does not have the capacity to administer the program, and stakeholders have questioned the wisdom of creating separate water infrastructure banks in different agencies.
In response to these concerns, AWIA 2018 amends WIFIA to authorize EPA to enter into agreements with other relevant federal agencies to provide assistance in administering and servicing loans or loan guarantees that such agencies are otherwise authorized to provide. This applies to any federal agency, but is intended in part to allow the Corps to stand up a WIFIA program with EPA’s assistance — provided Congress appropriates the necessary funds. In addition, AWIA 2018 specifically directs EPA and the US Department of Interior’s Bureau of Reclamation (Reclamation), within one year, to enter into an agreement of the type just described. Reclamation has authority under the Rural Water Supply Act of 2006 to provide federal loan guarantees to non-federal borrowers to finance rural water supply projects, extraordinary maintenance of Reclamation project facilities, and improvements to infrastructure directly related to a Reclamation project. Reclamation also has authority to make loans to certain small reclamation projects. The agencies have not yet made any public announcements about how they will implement this new authority and directive, and again, Congress would need to appropriate funds to support any future Reclamation loans or guarantees.