We should all offer thanks for a new book by Environmental Law Institute visiting scholar Michael Curley, a former bond attorney, law professor, and all-around financial guru. His Finance Policy for Renewable Energy and a Sustainable Environment (CRC Press Taylor & Francis 2014), which discusses water infrastructure finance much more than energy actually, is a great primer on finance generally and environmental finance in particular. Moreover, he offers a single easy lesson to address, even solve, the so-called water infrastructure investment “gap” which, many argue, runs to several trillion dollars over X number of years for water and wastewater.
I first made the acquaintance of Michael Curley after reading is truly stunning article in ELI’s The Environmental Forum, “The Gold Mine” (March/April 2012) in which he single-handedly solves this investment gap by demonstrating how the $100-plus billion in federal and state dollars, with more than $40 billion in net asset, parked in the Clean Water Act State Revolving Funds, could be leveraged in the debt markets to meet most of our water and wastewater infrastructure needs with money left over for other environmental challenges.
The key is to utilize the principles of insurance and leverage and transform the CWSRF loan program into a guarantee program, with 30-year terms at minimal additional cost to the borrower. This could be done right now state by state. Again, there would still be money left for other needs if only Congress would broaden the authorized uses of these funds. Curley doesn’t even talk about the Safe Drinking water State Revolving Funds which offers potential, too.
The CWSRF funds are, essentially, under-performing assets which need to be leveraged, or energized, more effectively and efficiently for the good of the cause. In his new book, Curley elaborates on why this guarantee approach would work so well:
“Standard & Poor’s has studied the default histories of municipal bonds for almost a century. The default history on bonds issued to fund public wastewater projects is approximately 0.04 percent (2,500:1). In January 2011, S&P published a document requesting comment on, inter alia, a new total leverage ratio for anyone guarantying public wastewater project debt. S&P said that if the guarantor wanted to maintain its highest investment-grade credit rating (AAA), the maximum leverage ratio could be no higher than 75:1. With $40+ billion of net assets, at a 75:1 leverage ratio, the CWSRF has the potential to leverage $3 trillion.
Curley emphasizes that the 51 CWSRFs have the legal authority to issue guarantees under the Clean Water Act. “And, theoretically, their collective guarantees, up to a total of $3 trillion would be rated AAA.”
Even if you apply a 50 percent baloney factor to Curley’s leverage ratio, it still yields the princely sum of $1.5 trillion which would completely take care of the wastewater side of the infrastructure investment problem including the remediation of the very costly combined sewer overflows (CSOs).
Curley also provides a solid discussion on how to deal with low-income customers through various subsidies, cross-subsidies, community and government programs, all very common in the electric and gas utility sector but hardly common in the water arena. Poor people often become the excuse for not investing in infrastructure or raising water and wastewater rates. That excuse should no longer be allowed to stand. If you have poor people in your community or system, take care of them. But don’t allow the rate structure to suffer to the benefit of middle- and upper-class customers.
I have lived in Washington almost 13 years and have heard proposals for more funding for the SRFs, water trust funds, infrastructure investment banks, raising the cap on private activity bonds, and the like. Recently, Congress authorized a pilot WIFIA program akin to the TIFIA on the transportation side. All of these ideas are either stillborn or in the early, formative stages if at all. However, leveraging and guaranteeing CWSRFs by the various and sundry states is something that could be done now-today.
What are we waiting for?
A longer version of this article will appear in an upcoming issue of The Environmental Forum published by the Environmental Law Institute (www.eli.org).
The concept of leveraging the SRF funds needs to be taken more seriously by federal and state policy makers. Bravo to Michael Curley for pointing out this simple, yet widely overlooked option.