# Presentation: 106760

## U.S. EPA State Revolving Fund: A Flexible Program to Attract Capital

***Briefing for:***
***Chinese Delegation***
***September 2003***

***U.S. EPA State Revolving Fund: ******A Flexible Program to Attract Capital***

## EPA and State Financial Partnership Has Evolved Over the Last 30 Years

- From 1972 to 1990, EPA provided assistance through project grants for wastewater treatment capital improvements
- More than $50 billion in direct grants to communities
- Significant benefit for improving water quality but it did not allow flexibility to address state priorities
- Since 1987, most of the federal government’s assistance has been in the form of capitalizing wastewater State Revolving Loan Funds
- EPA has provided about $20 billion in capitalization grants

## Foundation of the SRF Program

- Clean Water Act of 1987 authorized the SRF program
- Goal: provide a sustainable source of funding for water quality projects
- Move from Construction *Grants* program to SRF *Loan* program
- Expanded use of monies from municipal sewage systems to include nonpoint source and estuary activities

*The *_*revolving *_*nature of the SRFs means that funds will be available for the foreseeable future.*

## Features of the SRF Program

- Federally and state provided “seed money”
- State programs are allowed great flexibility
- State implemented and operated
- Public participation is encouraged
- Federal involvement is limited

## An SRF Functions As An Infrastructure Bank

***An SRF Functions As An Infrastructure Bank***

- Each state operates its own SRF that makes loans for wastewater treatment, nonpoint source, and estuary projects

## SRFs Can Provide Security for Bonds Issued in the Market

- One-half of the states issue bonds (leverage) to obtain additional funds for projects

## SRFs Provide Several Different Forms 

***of Financial Assistance***

- Loans
- Refinancing existing local debt
- Credit enhancements for local debt:
-  Purchase local debt
-  Bond insurance for local debt
-  Guarantee of local debt
-  Guarantee of debt for sub-state revolving loan funds
- Leveraging - Source of revenue or security for issuing bonds
- Cover costs to administer the SRF (up to 4% of federal funds)

## SRF Financial Terms Are Attractive

- Cover 100% of eligible cost – no local match
- Only capital-type projects are eligible
- Interest rates
- Range from 0 percent to market rate
- States set rates based on cost of capital, state law, or borrower’s ability to repay
- Loan repayment
- Up to 20-year term
- Begins up to 1 year after project start-up
- Wide flexibility in repayment sources
- All repayments of loan principal and interest return to the SRF to make future loans

- CWSRF Loan Volume:
-     Annual, typical  ......  $4 billion
-     Total 1988 - 2003 ... $42.4 billion

## Savings with SRF Loan Averages 21% 

**Market Rate***

**SRF Interest Rate**

- *Market rate is measured as the Bond Buyer 20-bond general obligation index.

**23%**

**26%**

**22%**

**21%**

**21%**

**24%**

**22%**

**22%**

**21%**

**20%**

**25%**

**23%**

**Savings with SRF Loan**

**21%**

***Savings with SRF Loan Averages 21% ***
***Over Market Rate Loan***

## The Flow of Funds From Many Sources  Results in a Larger Poolof Money for Projects

***The Flow of Funds From Many Sources  ******Results in a Larger Pool******of Money for Projects***

**Cumulative 1988-2002**

**$42.4 Billion**

**$19.5**

**$4.2**

**$11.8**

**$4.4**

**$3.4**

**Federal Capitalization Grants**

**State **
**Match**

**Net Leveraged Bonds**

**Net Loan Principal Repayments**

**Net**
**Earnings**

***Total is net of transfers with DWSRF and amount for administration.**

## Over Time, Non-Federal Sources Are More Important

- Annual

**Capitalization Grants**

**State Match**

**Net Leveraged Bonds**

**Net Earnings**

**Net Loan Principal**
**               ****Repayments**

## SRFs Fund 2 Times the Federal Capitalization

**$**

**Federal Capitalization Grants**

**$38.7**

**$19.5**

**SRF Assistance Provided**

**Billions of Dollars (Cumulative)**

## SRFs:  15 Years of Successful Experience in Water Quality Financing

- $39 billion in projects funded over 15 years (12,500 loans)
- $4.4 billion funded in 2002 (1,500 loans)
- Permanent source of infrastructure financing
- Loans fund significantly more projects than one-time grants
- Subsidy provided by low interest rates makes financing affordable
- State flexibility in directing funds to greatest environmental and public health priorities
- Continuous innovation by states
- Projects – agricultural cropland and animals, drinking water source protection, leaking underground storage tanks, wetlands, habitat protection, septic systems
- Sources of funding – leveraging bonds, use SRF with other federal, state, and non-governmental funds
- Funding mechanisms – partner with banks, local governments

## Federal controls on state programs
Clean Water Act, regulations, and program guidance
EPA conducts annual reviews of state programs
Noncompliance sanctions – withhold funds from states
State must have financial, managerial, and technical capability 
Restrictions on use of SRF funds (wastewater treatment, nonpoint source, estuaries)
Cash is transferred to state only as costs are incurred
SRF monies must be kept separate from other state funds
Payments of loan principal and interest must return to the SRF
Expeditious use of funds by states is required
State reporting, accounting, and auditing requirements
Annual Intended Use Plan, Annual Report, and Annual Fiscal and Compliance Audit
State controls on SRF and borrowers
State laws, regulations, and operating procedures follow federal requirements
State Attorney General’s opinion on operation of fund
Public participation – review of state Intended Use Plan and other state documents
Financial capability assessment of loan applicant before loan is made
Dedicated source of loan repayment by borrower is required
Review of project plans and specifications before construction begins
Ongoing monitoring of project construction and repayment capability of borrower
Project performance certification by borrower when construction is completed
Withhold other state aid to borrower in case of non-repayment of loan
Borrower controls
Accounting and auditing requirements
Desire to maintain credit rating for future borrowings

- Clean Water Act, regulations, and program guidance
- EPA conducts annual reviews of state programs
- Noncompliance sanctions – withhold funds from states
- State must have financial, managerial, and technical capability
- Restrictions on use of SRF funds (wastewater treatment, nonpoint source, estuaries)
- Cash is transferred to state only as costs are incurred
- SRF monies must be kept separate from other state funds
- Payments of loan principal and interest must return to the SRF
- Expeditious use of funds by states is required
- State reporting, accounting, and auditing requirements
- Annual Intended Use Plan, Annual Report, and Annual Fiscal and Compliance Audit
- State controls on SRF and borrowers
- State laws, regulations, and operating procedures follow federal requirements
- State Attorney General’s opinion on operation of fund
- Public participation – review of state Intended Use Plan and other state documents
- Financial capability assessment of loan applicant before loan is made
- Dedicated source of loan repayment by borrower is required
- Review of project plans and specifications before construction begins
- Ongoing monitoring of project construction and repayment capability of borrower
- Project performance certification by borrower when construction is completed
- Withhold other state aid to borrower in case of non-repayment of loan
- Borrower controls
- Accounting and auditing requirements
- Desire to maintain credit rating for future borrowings

***Governmental Controls Safeguard the Use ******and Fiscal Health of the SRFs***

## For More Information on

**For More Information on**
** ****the Clean Water State Revolving Fund:**
**www.epa.gov/owm/cwfinance/cwsrf**