Last week, the White House released its proposed budget for Fiscal Year 2018. As expected, the proposal includes severe cuts to government agencies but also expands support for some programs related to critical infrastructure. As proposed, the budget would lead to a 31 percent reduction in funding for the U.S. Environmental Protection Agency (EPA), the reduction of EPA staff by 3,200 positions and the elimination of more than 50 EPA programs.
As proposed, the budget would lead to a 31 percent reduction in funding for the Environmental Protection Agency (EPA), the reduction of EPA staff by 3,200 positions and the elimination of more than 50 EPA programs. These proposed cuts are not certain to be implemented, however, as Democrats and Republicans from both the House and Senate have been critical of many of the proposed funding cuts and stressed that it is ultimately Congress’ responsibility for writing and approving the federal budget.
Critical infrastructure remained a budgetary priority as the proposed budget for the State Revolving Funds increased by $4 million to $2.3 billion and Water Infrastructure Finance and Innovation Act (WIFIA) funding was maintained at $20 million. The budget also includes a $1.5 billion allocation to the Department of Homeland Security to promote information sharing between response partners and improve responses to attacks on critical infrastructure.
President Trump has said that spending for a $1 trillion infrastructure plan would likely incorporate a combination of public and private capital.
President Donald Trump has vowed to follow through on a key campaign promise of infrastructure investment when he announced during a recent address to Congress that he would ask for approval of a $1 trillion infrastructure spending plan. But the president raised questions when his comments on increased infrastructure investment came just days after the White House had first outlined its FY18 budget, targeting reductions in federal discretionary spending to pay for a corresponding increase in defense spending.
While the president has been mostly nonspecific about an actual plan for the $1 trillion investment, he has said that any spending would incorporate a combination of public and private capital. While proposals issued last year by the Trump campaign sought to make private financing central to any new infrastructure plan, the president’s comments about a figure of $1 trillion may necessitate a new level of direct federal spending. This could potentially translate to additional funds for the SRF – which the Trump campaign called for tripling – and the Water Infrastructure Finance and Innovation Act (WIFIA).
For now, the White House’s proposed reduction in discretionary spending may contradict the president’s plan for a significant increase in infrastructure dollars.
AWWA urges water investment in budget
In a letter to the EPA’s Office of Management and Budget, the American Water Works Association (AWWA) is urging that water infrastructure needs be addressed in the federal budget for fiscal year 2018.
“Water infrastructure is vital to our nation’s well-being,” wrote Tracy Mehan, AWWA executive director of government affairs, in the Feb. 27 letter. “It protects public health and the environment, supports local and national economies, protects us from fires, creates jobs and brings us a higher quality of life.”
Specifically, AWWA recommended the budget:
- Fund WIFIA at $45 million, which is the amount authorized in the Water Resources Reform and Development Act of 2014;
- Fund the Drinking Water State Revolving Fund (DWSRF) at $1.8 billion;
- Maintain funding at the levels found in the Further Continuing and Security Assistance Appropriations Act of 2017 for research that assists EPA in preparing sound regulations related to drinking water; and
- Maintain funding at levels found in the Further Continuing and Security Assistance Appropriations Act of 2017 for EPA’s Office of Ground Water and Drinking Water within the Office of Water to support development of sound regulations related to drinking water.
Congress funded WIFIA for the first time in the 2017 budget, appropriating $20 million for the loan program. WIFIA lowers the cost of large water infrastructure projects by providing low-interest, long-term federal loans to communities. AWWA noted in its letter that based on estimates from the Senate Environment and Public Works Committee, funds appropriated through the WIFIA program could be leveraged at a ratio of 67:1. If the program were to receive the $45 million authorized for fiscal year 2018, it could cover over $3 billion in credit assistance.
Fitch: Proposed budget cuts may pressure state revolving funds
The Trump administration’s proposed 2018 budget cuts to the U.S. Department of Agriculture’s (USDA) rural water and wastewater grant program would likely result in a partial diversion of funds from the U.S. Environmental Protection Agency’s (EPA) State Revolving Fund (SRF) Programs, according to Fitch Ratings.
The recommended budget essentially calls the USDA program redundant and eliminates its nearly $500 million budget. Without any offsetting increases in SRF grant funding, SRF project funding, which is frequently used, would likely be strained.
SRF programs provide valuable financing options for municipalities’ water- and sewer-related infrastructure needs. SRFs combine a pool of loan repayments with additional forms of credit enhancement, such as reserve funds, to protect bondholders from losses caused by the default of pool participants.
The combined 2018 budget proposal for clean and drinking water SRFs is approximately $2.3 billion, which is similar to last year. Therefore, increases in funding needs, or similarly, funding reductions, could eventually lead to further leveraging of the SRF programs.
Fitch said it does not expect any ratings impact in the near term, as the SRF programs rated by the company have substantial reserves and equity positions. However, ratings could be pressured over the long term if there are any substantial increases in program leverage to meet the demands from utilities historically served by the USDA.
Most SRFs are rated ‘AAA’ by Fitch. Associated costs of financing are passed to SRF program borrowers, many of which may not have affordable access to the capital markets.
Fitch’s program asset strength ratio (PASR) is a measure to help market participants distinguish the relative financial strength of Fitch-rated SRFs. The PASR, an asset-to-liability ratio, is calculated by dividing the amount of aggregate pledged assets, including scheduled loan repayments, reserve funds, and account earnings, by aggregate outstanding debt service. The overall median PASR for the sector in 2016 was 1.9x, equivalent to 2015 and up slightly from 1.7x and 1.8x in 2013 and 2014, respectively. The high PASR levels reflect SRF’s robust enhancement.
Some information contained in this news was gathered from the Association of Metropolitan Water Agencies’ (AMWA) weekly Monday Morning Briefing.
