cure a default in the other. In the event

that a borrower fails to repay a CWSRF

or DWSRF loan, the first source to

cover the default is the individual

program debt service reserve. With a

short-term cross-investment structure,

as the debt service reserve is depleted,

the second revolving fund can “invest”

funds to cure the deficiency. The

investment is made by the borrower

SRF selling a bond to the investing SRF

program.

The bond must be a shortterm investment so that the lending

SRF is repaid after the borrowing SRF

recovers from loan defaults.

he benefit of the cross-investment

is that it provides additional

security to bond holders which helps to

improve the bond ratings given to

leveraging bonds and reduce the cost

of borrowing to the SRF program.

These benefits are accomplished even

though the chances of a crossinvestment actually occurring are

remote due to the extraordinary level

of debt service reserves (often 50

percent of bond size) found in many

leveraged SRF programs. This report

describes the Michigan short-term

cross-investment structure.

The investment is permitted

under Section 603(d)(6) of the CWA and

Section 1452(f)(5) of the SDWA. The

authority for borrowing funds for crossinvestment is found in Section 603(d)(4)

of the CWA and Section 1452(f)(4) of

the SDWA.

T

Anumber of states, including New

York, Michigan, and Colorado, have

already issued bonds to leverage their

Drinking Water State Revolving Fund

(DWSRF) programs. Recent reports

indicate that up to fifteen states are

already leveraging or are planning to

leverage their DWSRF programs. In

designing their leveraged program

structures several states have explored

the use of pooled bond security

enhancements that are new to the State

Revolving Fund program:

and

. These security

enhancements allow the resources of

one SRF to be used to secure the

repayment of leverage bonds of the

other program.

ross-collateralization was

authorized by the Departments of

Veteran Affairs and Housing and Urban

Development, and Independent

Agencies Appropriations Act, 1999 (PL

105-276). Short-term cross-investment is

allowed under the “permitted

investment provisions” of the Clean

Water Act and the Safe Drinking Water

Act. To date, New Jersey has received

approval for a cross-collateralization

structure and New York and Michigan

have received approval for short-term

cross-investment structures.

nder a short-term cross-investment

structure, a state may use available

funds from one SRF program to help

crosscollateralization short-term crossinvestment

C

U

STATE ACTIVITY SRF UPDATE

Under a short-term

cross investment

structure a state may

invest funds

from one SRF

program to cure a

default in the other
Michigan’s CWSRF and DWSRF are

managed jointly by the Michigan

Department of Environmental Quality

and the Michigan Municipal Bond

Authority. The State has used reserve

fund leveraging in the CWSRF since

1992. In order to finance DWSRF

loans, Michigan amended its existing

master indenture to establish a

combined revolving fund financing

program while continuing to separately

account for all funds associated with

the CWSRF and the DWSRF. The first

DWSRF bonds funded $53.2 million in

loans to 23 separate government

borrowers for 24 different projects.

SRF

Michigan’s first

DWSRF bonds funded

$53.2 million in loans

to 23 separate

government borrowers

for 24 different

Projects

=

Exhibit 1 displays Michigan’s master

indenture flow of funds. The

indenture shows that as principal on

bonds are repaid moneys from the

Reserve Fund are released for other

uses. It is possible to release funds and

reduce the size of the reserve because

as the outstanding bond principal is

reduced, the released funds are no

longer required to provide security or

to generate interest to subsidize the

repayment of the bonds. Moneys from

the Revenue Fund are also released

once it is determined that they are not

required for debt service payments.

Revenue Fund

Debt Service Fund

Loan Fund

EPA

Capitalization

Grants

Any

Authorized

SRF Purpose

of the Fund

Borrowers

Reserve Fund

State Match

Revenue Bonds

Cost of Issuance

Fund

Released

Account Moneys

Exhibit 1

Michigan’s Master Indenture

Pooled Project Bonds Flow of Funds



Overview of Michigan’s Cross-Investment Structure
Once the funds are released from the

Reserve Fund, Michigan’s SRF

management reviews the CWSRF and

DWSRF to determine whether the released

funds are required to cure any fund

deficiency resulting from defaults on SRF

loan repayment. If the funds are not

needed to cure a default, they are then

made available for any authorized SRF

purpose (i.e., new loans). Exhibit 2

displays the priority order in which the

released funds may be applied. The Exhibit

shows that the released funds are first

used to cure defaults within the Fund of

origin before they are made available for

cross investment in the other SRF

Released funds are first

used to cure defaults

within the Fund of

origin before they are

made available for

cross-investment in the

other SRF fund

STATE ACTIVITY

UPDATE

Use of Released Moneys for Cross-Investment

CWSRF Loan

Repayments &

Investment Income

DWSRF Loan

Repayments &

Investment Income

DWSRF Pooled Project

Bonds Released Account

Moneys

DWSRF Pooled Project

Bonds Revenue Fund

DWSRF Pooled Project

Bonds Debt Service Fund

DWSRF Pooled Project

Bonds Reserve Fund

Any Authorized SRF Purpose

of the Fund

CWSRF Pooled Project

Bonds Released Account

Moneys

CWSRF Pooled Project

Bonds Revenue Fund

CWSRF Pooled Project

Bonds Debt Service Fund

CWSRF Pooled Project

Bonds Reserve Fund

Any Authorized SRF Purpose

of the Fund

Available in the following

order:

a. Debt Service Fund for

CWSRF Project Bonds

b. Reserve Fund for CWSRF

Project Bonds

c. Debt Service Fund for CWSRF

Refunding Bonds

d. Reserve Fund for CWSRF

Refunding Bonds

e. Debt Service Fund DWSRF

Project Bonds

f. Reserve Fund for DWSRF

Bonds

Available in the following

order:

a. Debt Service Fund for

DWSRF Project Bonds

b. Reserve Fund for DWSRF

Project Bonds

c. Debt Service Fund for CWSRF

Project or Refunding Bonds

d. Reserve Fund for CWSRF

Project or Refunding Bonds

CWSRF Loan

Repayments &

Investment Income

DWSRF Loan

Repayments &

Investment Income

DWSRF Pooled Project

Bonds Released Account

Moneys

DWSRF Pooled Project

Bonds Revenue Fund

DWSRF Pooled Project

Bonds Debt Service Fund

DWSRF Pooled Project

Bonds Reserve Fund

Any Authorized SRF Purpose

of the Fund

CWSRF Pooled Project

Bonds Released Account

Moneys

CWSRF Pooled Project

Bonds Revenue Fund

CWSRF Pooled Project

Bonds Debt Service Fund

CWSRF Pooled Project

Bonds Reserve Fund

Any Authorized SRF Purpose

of the Fund

Available in the following

order:

a. Debt Service Fund for

CWSRF Project Bonds

b. Reserve Fund for CWSRF

Project Bonds

c. Debt Service Fund for CWSRF

Refunding Bonds

d. Reserve Fund for CWSRF

Refunding Bonds

e. Debt Service Fund DWSRF

Project Bonds

f. Reserve Fund for DWSRF

Bonds

Available in the following

order:

a. Debt Service Fund for

DWSRF Project Bonds

b. Reserve Fund for DWSRF

Project Bonds

c. Debt Service Fund for CWSRF

Project or Refunding Bonds

d. Reserve Fund for CWSRF

Project or Refunding Bonds

Released moneys are supplied by both

SRF programs and are accounted for

separately. If a cross-investment is

required to cure a default the investment

will be accounted for as a short-term,

temporary investment of one SRF in the

other and will be evidenced by a

subordinate repayment bond. The crossinvestment will be repaid with the first

moneys available to the borrowing fund,

i.e., after payment of debt service on

outstanding bonds.

Exhibit 2

Priority Use of Released Account Moneys

Michigan’s structure is designed to be

appealing to bond rating agencies

and investors. The State’s approach

enhances the security structure of

Michigan’s CWSRF and DWSRF leveraging

bonds while complying with federal

CWSRF and DWSRF program requirements.

The following are key features of

Michigan’s short-term cross-investment

structure:

The CWSRF and DWSRF accounts

remain separate.

Only moneys released from

reserves or revenue accounts may

be used for short-term crossinvestments.

Cash draws can not be made for

cross-investment purposes.

Cross-investments cannot be used

for state match

The structure allows short-term

cross-investments in either

direction between the State’s

CWSRF and DWSRF programs.

Short-term cross-investments are

made after the borrowing program

has depleted all other sources of

security in that fund.













SRF

STATE ACTIVITY

UPDATE











Investments are temporary, shortterm bonds that will be repaid with

the first available SRF resources.

Any investments between the

CWSRF and DWSRF will be recorded

on the SRF balance sheets and

evidenced by a subordinated

Repayment Bond

If all funds are viable, the released

moneys will immediately be made

available to commit to eligible SRF

projects.

The state’s approach is detailed in

the operating agreements for the

DWSRF and CWSRF between the

region and the state.

Funds will not be held in one SRF

in anticipation of potential future

cross-investment needs.

tates interested in further information

on short-term cross investment should

contact their EPA Regional Office SRF

Coordinator. For information on

Michigan’s program contact the state

representatives below.

State Contacts:

FinancialJanet Hunter-Moore

(517) 373-1728

ProgramThomas L. Kamppinen

(517) 373-2161

This update was prepared by

EPA Headquarters

S



Summary of Key Features