A Water Infrastructure Financing Innovation Act and Other Financing Tools

High-quality drinking water and wastewater systems are essential to public health, business and quality of life in the United States.? The American Water Works Association (AWWA), Water Environment Federation (WEF) and others have documented that our water and wastewater infrastructure is aging. Therefore, many communities must begin to increase their levels of investment in the repair and rehabilitation of water infrastructure in order to protect public health and safety and to maintain environmental standards.

In addition, having a reliable water supply and a means of treating wastewater before returning it to the environment? are necessary to economic development. Rehabilitating and replacing that very infrastructure produces jobs. The U.S. Department of Commerce has estimated that every dollar spent on water infrastructure generates $2.62 in the private economy. For every job added to the water workforce, about 3.68 jobs are added nationally.

In February 2012, AWWA released its latest report on drinking water infrastructure needs, ?Buried No Longer: Confronting America?s Water Infrastructure Challenge.? This report reveals that the country will need to spend $1 trillion over the next 25 years to maintain our current level of water service. This figure does not account for above-ground infrastructure or improvements to water treatment necessary to meet new standards. Nor does it include wastewater infrastructure needs, which have been shown to be as large as drinking water needs.

Financing Water Infrastructure

AWWA and WEF have long believed that Americans are best served by water and wastewater systems that are self-sustaining through rates and other local charges. However, we recognize that at present, some communities need assistance due to hardships or special economic circumstances. In addition, the need to replace or upgrade existing infrastructure may require access to a large amount of capital in a relatively short time frame, placing great stress on local rates and charges.

Although 95 percent of spending on water and wastewater has been from local sources, the federal government can play an important role by lowering the cost of capital for water and wastewater investments. Almost 70 percent of American communities use bonds to finance local infrastructure. They pay billions of dollars in interest costs each year. Lowering the cost of borrowing for water and wastewater infrastructure is an important way to leverage local funding and help America rebuild and rehabilitate our aging water infrastructure.

The Water Infrastructure Finance Innovation Act

Congressman Bob Gibbs, chair of the House Subcommittee on Water Resources and Environment, is actively addressing water infrastructure finance issues. He held a hearing on Feb. 28 to look at innovative finance tools and is now preparing to introduce a Water Infrastructure Finance and Innovation Act (WIFIA). The act would create a finance mechanism modeled after the successful Transportation Infrastructure Finance and Innovations Authority (commonly called TIFIA) and provide access to lower-cost capital for investments in water infrastructure. This mechanism would have no or little long-term effect on the federal budget deficit. As in TIFIA, WIFIA would, under the Federal Credit Reform Act, only require appropriated funding sufficient to cover the subsidy cost, or risk, of loans. Fitch Ratings, a top credit rating agency, calculates that the historical default rate on water bonds is 0.04 percent. Indeed, water service providers are among the most fiscally responsible borrowers in the United States.? Moreover, those states that leverage their SRF programs all have AAA or AA bond ratings and no history of defaults, placing them among the strongest credits in the country.

WIFIA would access funds from the U.S. Treasury at Treasury rates and use those funds to support loans and other credit mechanisms for water projects at or near Treasury rates. Although interest fluctuates, such rates are currently better than municipal bond rates. The benefit to local communities of lower interest rates is significant. Lowering the cost of borrowing by 2.5 percent on a 30-year loan reduces the lifetime project cost by almost 26 percent, the same result as a 26-percent grant. WIFIA loans would be repaid to the Authority, and then to the Treasury, with interest. Consequently, WIFIA would involve minimal risks and minimal long-term costs to the federal government because it would involve loans that are repaid.

The Water Infrastructure Finance Innovations Act would create a mechanism to:

  • Offer loans, loan guarantees and other credit support for large water infrastructure projects and those with national or regional importance. These projects often find it difficult or impossible to access loans from the existing SRF program, due in part to inadequate capitalization of the SRFs.
  • Reduce the cost of leveraging for SRF programs by lending to them directly. A federal water infrastructure finance authority could lend to those SRFs wishing to leverage their capitalization grants at the lowest possible interest rates. This would allow SRFs to make more loans and would increase their ability to offer special assistance to hardship communities if they chose to do so. Currently, 31 states leverage their SRF programs on the bond markets.

America faces the need to begin a significant and sustained increase in its investment in water and wastewater infrastructure, or risk deteriorating services. The tenets outlined in this paper provide a path towards truly sustainable water infrastructure for all Americans.

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