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Aging infrastructure, new PFAS and lead-removal rules, climate change, and cyber threats are just some of the many reasons utilities must invest in their systems. Utilities must also consider how they can balance affordability with these substantial investments. Many large utilities have historically turned to the public bond markets as their primary source of capital funding, while smaller utilities have applied for State Revolving Loan Funds (SRF) or they’ve sought loans from banks. These traditional funding sources remain viable, but there many more sources of funding and financing to consider. These include the federal Water Infrastructure Finance and Innovation Act (WIFIA) loan program, Rural Development Loan and Grant Programs through the United States Department of Agriculture (USDA), various grant and principal forgiveness programs available through the Bipartisan Infrastructure Law, and interim financing tools that can be particularly useful when the timing of receipt of grant or loan monies is uncertain. There are many factors water utilities must consider when determining how to pay for needed investment in their infrastructure.
WIFIA is a loan program administered by the Environmental Protection Agency (EPA) that is accelerating investment in our nation’s water infrastructure by providing long-term, low-cost supplemental loans for eligible projects. The program allows eligible borrowers to finance water and wastewater projects at a subsidized interest rate, approximating the U.S. Treasury rate of a similar maturity as the loan. It also offers substantial flexibility that isn’t always available from other sources of capital. For example, WIFIA funds can be drawn as needed, the maturity date of the loan can be up to 35 years from the project’s substantial completion, and repayment can be deferred for up to five years after substantial completion. This structural flexibility allows you to create more even debt service over time, which can help you maximize your debt capacity. It also provides a wider range of options as you consider the timing and magnitude of rate increases needed to support new capital investment.
While a WIFIA loan is flexible in many ways, in other ways it is not, so it is important to understand its limitations. WIFIA is a supplemental loan, which means it will not fund an entire project; rather, a WIFIA loan will fund up to 49% of eligible project costs. The other 51% of the project must be funded from another source, such as an SRF loan or bond financing. There is a minimum project size of $20 million for larger communities and $5 million for communities with populations of 25,000 or less. Projects with WIFIA funding must also adhere to several federal compliance requirements, including the National Environmental Policy Act (NEPA), Davis-Bacon, American Iron and Steel, and Buy America, Build America. If your utility already uses federal funding or has SRF loans that meet these requirements, this may not be an issue for you, however, if your utility typically accesses capital from the public bond markets without these requirements, there may be some effort and expense involved in meeting these requirements. The decision to include WIFIA funding in a project also needs to be made early in the process, prior to procurement of the construction contract, as it impacts the rules and reporting requirements the contractor must follow. It is important to note that following these rules may increase the cost of the project, so that should be weighed against any cost savings on the interest rate or rate increase flexibility the utility would get with a WIFIA loan as compared with other funding tools.
The WIFIA program is competitive and requires the utility to first submit a Letter of Interest (LOI) along with a financial model demonstrating historical and projected debt service coverage. If the LOI is accepted, EPA will invite the utility to submit a formal application. The official estimate of the time needed to complete the application is 200 hours, though that will vary, as it requires input from both your finance and engineering teams, along with an understanding of the environmental benefits of the project. In some cases, EPA targets certain types of projects for WIFIA loans, such as those that directly meet regulatory requirements or those that enhance energy efficiency at a drinking water or wastewater facility, to name just a few.
Like any lender, EPA will consider the borrower’s creditworthiness to ensure the utility is positioned to repay the debt. Along with the financial model, the application requires a new or recent preliminary rating letter from a nationally recognized rating agency that must be at least investment grade. If your utility already has a public rating, the letter would be an update to the rating, taking the WIFIA debt into consideration. If your utility does not have a public rating, obtaining one can be done in a non-public process that is relatively straightforward. If your utility is on the lower end of the credit spectrum, a WIFIA loan can be particularly beneficial, because all WIFIA borrowers pay the same interest rate, based on the maturity of the loan and the Treasury rate on the closing date, whereas the public bond markets or a bank are likely to charge a higher interest rate if the borrower has a lower credit rating.
EPA’s WIFIA staff are constantly working to make the program as accessible as possible under their authorizing legislation. For example, earlier rounds of funding required two ratings, while now they only require one. The financial model requirements have been simplified over the years. Earlier rounds of funding had specific deadlines and funding cycles, while the program now allows utilities to submit LOIs and applications on a rolling basis. They have also developed a hybrid program called SWIFIA that makes WIFIA funding available directly to SRFs, which could be a viable path if the utility is pushing the capacity it can get from the SRF but isn’t well positioned to do a WIFIA loan on their own. Last, it is very easy to get more information about the program. EPA hosts periodic webinars, will meet directly with you, respond directly to email inquiries, and their website is full of helpful information, including the current form of the application and more detailed information about the various compliance requirements. See www.epa.gov/wifia for more information.
In the last several years, additional funding has become available for specific purposes such as lead service line replacement and PFAS treatment. Much of this funding became available through the Bipartisan Infrastructure Law, which committed $50 billion to water, wastewater, and stormwater projects, including:
Recognizing that applying for this funding can be complicated and take time, EPA offers free assistance (Water Technical Assistance) to help utilities and local governments identify their water challenges, develop plans, build capacity, and develop their application materials to access infrastructure funding.
The USDA also offers a variety of financing programs for local governments in rural areas across the country. Rural areas and towns with populations of 10,000 or less may be eligible for long-term, low-interest loans to support their systems. Depending on available funding, grants may also be combined with a loan to help borrowers keep costs reasonable.
Per the USDA, funds may be used for a wide range of purposes including:
In addition, borrowers may be able to pay for legal or engineering fees, the acquisition of land or water rights, or permits and costs related to start-up operations and maintenance. Additionally, the loan proceeds may be used to fund interest incurred during construction.
The USDA Rural Development Loan Program is allowed to issue loans with a final maturity of up to 40 years. The actual maturity of each loan is based on the useful life of the facilities that are being financed with the loan. Loans for USDA are fixed rate loans. The final rate is based on the final maturity date, project need, and the median household income in the area to be serviced.
Depending on the terms and conditions of the financing program, borrowers may need to leverage interim financing in advance of finalizing a long-term loan. Interim financing can take a wide range of forms.
One of the most efficient and cost-effective approaches to interim financing is a loan between different funds or an interfund loan. The ability to leverage an interfund loan will depend on several key factors. First, every state and locality has different statutory requirements and internal policies. It is essential to understand any restrictions that may limit the ability to quickly leverage this option. The key factor is access to a fund that has sufficient liquidity that can loan the funds for the required term. An interfund loan has limited costs and significant flexibility compared to the options outlined below.
A Bond Anticipation Note (BAN) is a short-term debt instrument issued by a government or municipality to finance immediate capital projects. BANs are typically used to cover expenses such as construction costs, equipment purchases, or other capital expenditures.
BANs are sold in the public markets to an underwriting firm. A BAN generally has a fixed rate with interest paid at maturity. The maturity of the BAN would coincide with the completion of construction and issuance of other long-term financing. When a BAN is issued, the borrower receives 100% of the proceeds to fund the construction of the project.
The terms of the interim financing are set at closing of the BAN. There is limited flexibility to adjust the terms and there are significant costs associated with obtaining a BAN as well as documentation requirements.
A line of credit or draw program is a financial arrangement in which a borrower establishes a credit facility with a financial institution or lender to access funds as needed. This credit facility allows the utility to borrow money up to a predetermined limit. Because this type of credit facility allows for borrowing on an as-needed basis, it can help minimize the overall interest costs of the facility. Additionally, the documentation requirements are moderate, the timeline for execution can be expedited, and upfront issuance costs often limited. While some USDA programs may require use of interim financing, these types of short-term facilities can minimize interest costs during construction for many types of long-term financing structures, especially when construction schedules and/or receipt of funding from longer-term debt is uncertain.
In February 2024, the Office of Management and Budget (OMB) launched the Federal Program Inventory (FPI), which is a comprehensive, searchable tool with critical information about federal programs that provide grants, loans, or direct payments to organizations such as public utilities. It can be searched and filtered in several useful ways. In some cases, principal forgiveness may be available in the event the utility meets certain affordability metrics.
Federal money often comes with compliance requirements, but there are recent indications that recipients may see relief in that area in the coming years. It was announced on April 4, 2024, that the OMB Guidance for Federal Financial Assistance is being revised to reduce the burden on grant recipients and streamline the requirements between various federal funding programs. This is the most substantial revision to the Uniform Grants Guidance since it went into effect 10 years ago. The hope is that it will make it easier for communities to access critical funding and focus on implementing their missions rather than on administrative compliance work often associated with federal funding. The implementation guidance is available at M-24-11-Revisions-to-2-CFR.pdf.
In today’s economic environment, utility leaders must demonstrate to their customers that they have explored every available option to help minimize the impact that investing in infrastructure has on households. The federal government is making unprecedented investments in water and offers many funding options. It’s up to utilities to be aware of the wide variety that’s available and secure the one that best meets your needs.
