At the Finance & Contract Administration and BABA Workshop recently hosted by WWEMA in Indianapolis, attendees received a market outlook from Doug Baldessari, a specialist in bond financing. The key takeaway from Doug’s presentation was that funding provided through the Infrastructure Investment and Jobs Act (IIJA) will cease after this year. This is going to create a drop in the number of utilities projects as the original five-year timeline for funding comes to an end.
Despite this Doug highlighted a variety of other funding options available to utilities, which vary by state and include bonds, grants, and cash. He discussed several bond financing options, including State Revolving Funds (SRF), Water Infrastructure Finance and Innovation Act (WIFIA) financing, and State and Tribal Assistance Grants, which can impact SRF funding. Smaller utilities may be less affected by reductions in federal funding because SRF programs and other grants can help address the financial challenges associated with lower operating budgets.
Essentially, the current funding outlook will see a decrease in grants. Consequently, rates may increase to cover this lack of funding. Depending on the utility’s bond rating, some bond insurance may also be required. However, these costs balance themselves out as projects funded through are generally not subject to Build America Buy America (BABA) requirements. Bond rates are currently attractive, with rates of return around 4%. However, it is challenging to acquire a good bond rating, and a favorable rating is important for successful bond sales. Doug highlighted that smaller utilities may find this more challenging. Some factors that could impact the market include, including expectations for Federal Reserve rate cuts, uncertainty around tariffs and the global economy, and ongoing global conflicts.
Smaller utilities do have the advantage of accessing rural development bonds, which Doug encouraged them to take full advantage of. These bonds can offer extended terms of up to 40 years and help fund projects with limited customer bases. While additional engineering costs may be associated with these programs, rural development bonds can also help refinance outstanding debt to make operations easier. Doug also highlighted affordability concerns, which should be considered as infrastructure ages and construction costs go up, which will also lead to rates increasing.
Doug concluded that the near-term outlook for utility funding will become more challenging as IIJA funding comes to an end after FY2026. SRF program funding is expected to decline along with the availability of forgivable loans and subsidized interest rates. As a result, utilities should be prepared to utilize a wide range of funding sources to meet their infrastructure needs.