Summary of Spring CIFA Conference

ASDWA representatives attended the April 2-3 Conference of the Council of Infrastructure Financing Authorities (CIFA) in Washington, D.C. and filed the following report:

Nancy Stoner’s Remarks:

Acting Assistant Administrator for Water, Nancy Stoner, highlighted the overall value of the SRFs in addressing water and wastewater infrastructure needs as well as being essential for a vibrant National economy.  She highlighted the relatively high levels of unliquidated obligations in the SRF accounts (to be discussed in more detail later in the conference).  She suggested that states should do all they can to quickly apply for capitalization grants (when available) as well as to lay the groundwork with potential borrowers for smooth and expeditious use of funds.  She mentioned some overarching themes that will be incorporated in the Office of Water’s initiatives, going forward, including focusing on community sustainability; encouraging green projects, where feasible; and considering competing infrastructure priorities in communities through an integrated approach to municipal stormwater and wastewater management.

ASCE Report on Investment in Water Infrastructure: 

Brian Pallasch of the American Society of Civil Engineers summarized that organization’s most recent report on the Nation’s investment in water and wastewater infrastructure noting that the overall grade for the sector was “D-Minus.”  He stressed that this grade was not a reflection on the outstanding work of states, municipalities, and others to fund and build infrastructure, but rather, was a reflection of the fact that we’re collectively not keeping up with the magnitude of the need and, in fact, falling further and further behind. The costs of failing to act are, in the long run, more expensive than stepping up to the plate now.  Solutions to the problem are obviously not easy and involve a sustained commitment to addressing the problem at all levels – Federal, state, and local. (Please go to www.infrastructurereportcard.org for detailed information about the report.)

The National Economic Outlook:

Alec Phillips of Goldman Sacks and Co. provided an overview of economic mega-trends for the audience to consider, including the following:

• The economy is currently outperforming expectations for this point in time and jobs are being created, but at a rather modest pace.
• Overall, the Gross Domestic Product is expected to stay in the 2-2½% range for the foreseeable future.
• Rising gas prices can be expected to serve as a drag on the economy. Various state and Federal policy/regulatory requirements are likewise a drag on the economy.
• One of the factors accounting for a still somewhat anemic economy is the continuing surplus in housing stock.
• The Consumer Price Index can be expected to rise only slightly (i.e., in the 1.5-2.0% range) over the next few years .
• The Fed’s prime lending rate will likely be stable through 2015.
• The National debt will continue to grow over the next few years, but less quickly than it has recently.
• There is great political uncertainty (in both the future direction of Congress and the Presidency) with respect to fiscal policy and tax policy — and thus, there are likely  changes in the wind that cannot now be projected.

Municipal Markets Update: 

George Friedlander of Citigroup shared his overall perspective that state and local bond markets are collectively not keeping up with the need.  The reasons for this shortfall are  several and include fiscal conservatism among state and local officials; tight budgets on the part of potential borrowers which impedes their willingness to take on more debt; overall weak economic growth; and an inclination on the part of elected officials to “kick the can down the road” and not make tough decisions now.  He predicted that most – but not all — state and local bond issuers will continue to keep their current credit ratings.  Of particular concern, from his perspective, was the prospect for any legislation that would retroactively alter the tax exempt status of state and municipal bonds.

Integrated Approach to Municipal Stormwater and Wastewater Management:

A panel comprised of representatives of EPA-OWM, the Assn. of Clean Water Administrators, the National Assn. of Clean Water Agencies, the Delaware Department of Natural Resources & Environmental Control, and the D.C. Water and Sewer Authority shared their perspectives on EPA’s recent initiative to allow municipalities to propose phasing and prioritization of their wastewater/stormwater infrastructure needs.  All lauded the initiative as representing a common sense approach to the very real problem facing municipalities in which they simply can’t afford to address all needed infrastructure at the same time.  The consensus of the panel was that the “devil’s in the details” and it will be important for municipalities to work closely with states and EPA in putting together project proposals under the new approach.  EPA stressed that the underlying statutory and regulatory requirements still ultimately still need to be met.

Capitol Hill Outlook:

Elizabeth Fox, minority staff for the Senate Environment & Public Works Committee, John Pawlow (majority staff, and Ryan Seiger (minority staff) for the House Transportation & Infrastructure Committee all concurred that Congressional attention, at the moment, is solely focused on reauthorization debates for the Surface Transportation bill.  Fox explained that there is bipartisan dismay at the cuts to the CWSRF and DWSRF and that there is also bipartisan interest in issues related to infrastructure funding.  The big question is how to fund infrastructure needs while being fiscally responsible.  Fox said that although she is not writing an infrastructure or “WIFIA” type bill right now, she is interested in hearing from interested parties about thoughts and suggestions for what such a measure could look like.  (She was referring the AWWA/WEF proposal for a Water Infrastructure Finance & Innovation Authority [WIFIA].)

Pawlow explained that, at present in the House, any infrastructure funding legislation is facing a significant uphill climb.  He acknowledged the need for additional tools for communities to meet their infrastructure funding challenges.  He noted that the original Transportation Infrastructure Financing and Innovations Act (TIFIA) has been reasonably successful in meeting the needs of “mega” projects and has been used as the model for the creation of a similar water infrastructure funding mechanism (WIFIA).  Pawlow did express concern about the potential for future “defunding” of the SRFs and turning more toward WIFIA financing as the sole solution.  He expressed preference for a hybridized approach that would let the SRFs use WIFIA as a funding source for additional projects and also aggregate smaller projects to achieve the $20 million cost floor.  Pawlow expressed concern about SRF “bleed off”, noting that, if the SRFs were to use WIFIA to fund projects, then the loan repayment would goes back to the Treasury rather than to help the SRF revolve.  He  encouraged state water and wastewater programs to come and talk about options that would not involve “robbing Peter to pay Paul.”

Seiger looked at the long term expectations for the CWSRF.  He noted that the political landscape has changed and that no one should expect that CWSRF funding levels can easily or automatically be retained at the higher levels of prior years.  Seiger went on to caution the audience about the potential impacts of the Budget Control Act and sequester.  He said that, in reality, there is simply not as much money to go around.  He wondered how, under WIFIA, money would flow since there would not be a cap grant involved, but rather a direct transaction to/from the Treasury.  He was uncertain how state programs and infrastructure finance authorities would be affected.  Seiger also invited states to come and talk about the best path forward.

During the Q&A session, it became clear that state financing authorities are not fully supportive of a WIFIA-style financing approach to meet the escalating needs of water and wastewater systems.  One participant noted that the beauty of the SRFs has been their flexibility, adaptability, and innovation.  WIFIA, on the other hand, would mean a centralized Federal program in contrast with individually managed state programs that can be responsive and adapt to their own demographics and needs.  Congressional staff strongly recommended that states need to explain how SRF dollars are used and what benefits are derived.  States should be able to demonstrate meaningful uses and be advocates for their programs.

Fiscal Policy in a Changing Environment:

John Shure from the Center on Budget and Policy Priorities, spoke about the status of Federal fiscal actions and said that the “policy” could be summed up in four words:  “there is no agreement.”  He said that that an economic recovery is beginning to happen but that it is by no means robust.  States are still struggling and their small steps toward recovery could be stopped by politics.  He went on to describe the high stakes budget battle, explaining that the differences are so fundamental that there is little action likely to take place until after the post-election lame duck session.  He forecast three key issues as the centerpiece of the action:  1) whether or not to renew expiring Bush-era tax cuts; 2) how to prevent sequestration; and 3) what to do as we bump up against the debt ceiling (again) in January of 2013. According to Shure, sequestration is the greatest concern for states.  If it happens, states will be staggered by the loss of funding.  At present, the Federal government spends as much on state programs as it spends on defense.  The Feds support approximately 20% of all state budgets.  In closing, Shure opined that deficit reduction should occur – but not right now.  The nation needs more support for economic recover first.  Then, deficit reduction efforts should occur but they must be coupled with revenue enhancements.

Discussion on Uliquidated Obligations and the DWSRF Programs:

At present, there are approximately $960 million in unliquidated obligations (ULOs) for pre-FY 11 clean water funds and an estimated $1.3 billion in ULOs for pre-FY 11 drinking water funds.  Some in Congress interpret this situation as indicating that Federal funding is mor than sufficient and that reductions could help the current budget crisis.  Sheila Frace from EPA’s Office of Wastewater Management expressed concern over how Congress appears to view ULOs.  There is a lack of understanding that these programs were designed to keep as much money in the Federal Treasury as long as possible with drawdowns occurring only as needed.  Frace also reported that 70% of FY 11 funds have been obligated within 6 months.  The ongoing State-EPA workgroup that has been tackling this issue since last fall hopes to have a report to share in the next few weeks about some possible solutions/best practices.  Three states, Alabama, Indiana, and Minnesota, briefly described their varying “best practice” approaches to spending down their cap grants and avoiding high levels of ULOs.

• Alabama explained that, several years ago, they decided to not take any set-aside funds except for the 4% for SRF administration under their DWSRF program.  Instead, they use loan fees to support work in various program areas.  The state has also retained ARRA language that requires all projects to be under contract within one year or the loan will be taken back.  These actions have diminished their ULOs.  Indiana has restructured its CWSRF programmatic requirements based on the EPA PER (performance for environmental results) program.  They now establish funding ranges at the beginning of the state fiscal year.  Utilities have six months to meet all requirements and apply for funding or lose their “place in line.”

• Indiana has also added a “non use” fee – a 1% penalty on unused funds per month per project that is applied after the first 24 months of the loan.  They also offer planning and design loans to smaller communities and allow principal forgiveness applicants “leap frog” on their intended use plans to be able to meet the regulatory requirement for disadvantaged communities.  Finally, on an annual basis (tied to their fiscal year) they fund loans with cash on hand rather than waiting for the next cap grant award.  This helps to draw down the cap grant balances and reduce the number of ULOs.

• Minnesota manages both CWSRF and DWSRF within its Public Facilities Authority.  As is true for many other states, they are seeing more demand than available funds.  They get their state match from issuing state obligation bonds.  They request match money based on an estimate of likely Federal grant awards for the next two fiscal years.  This requires explaining to the legislature how the state match is used to build the state lending capacity and project funding availabilities.  As a result, they generally receive positive legislative support for their approach.  Minnesota’s intended use plans are based on the average lending capacity of the program for that year and an estimate of the percentage of projects ready to start construction.  By the time the cap grant arrives, projects are ready to go and the fund is drawn down quickly.  This approach gives some predictability for larger municipalities to know that the funds will be there when they’re ready to proceed.  As a result, they are willing to do the upfront design work to become “construction ready.”  Minnesota has established a separate state grant fund to support disadvantaged communities.

Audience discussion highlighted other state program efforts to help better manage SRF ULOs such as requiring adequate rate structures before making loan awards and the value of pre-award letters of commitment.  The audience also spent time discussing whether it would be possible for one state with more than adequate loan funds to make a loan to another state that has more projects ready to go than available funds to support the need.  The general consensus appeared that direct interstate program to program loans would not likely be deemed acceptable.  However, there may be some other possibilities that infrastructure and investment authorities may want to explore