in New York’s program, if a borrower

fails to repay a Clean Water State

Revolving Fund (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, when the debt service reserve

and other reserve funds are depleted, the

second revolving fund can “invest” funds

to cure the deficiency. The investment is

made by the borrowing SRF selling a

bond to the investing SRF program.

The

bond must be a short-term investment so

that the lending SRF is repaid after the

borrowing SRF recovers from loan

defaults.

cross-investment structure provides

additional security to bond holders

and reduces the cost of borrowing to SRF

programs. As the newer program, the

DWSRF program will benefit from the

existing coverage levels, diversification

and credit quality of the CWSRF

program. These benefits are

accomplished even though the chances

of a cross-investment 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 New York’s short-term crossinvestment 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 cross-investment

is found in Section 603(d)(4) of the CWA

and Section 1452(f)(4) of the SDWA.

A

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.

nder a short-term cross-investment

structure a state may use available

funds from one SRF program to help

cure a default in the other. For example,

crosscollateralization short-term crossinvestment

Cross-collateralization was

authorized by the Departments of

Veteran Affairs and Housing and Urban

Development, and Independent

Agencies Appropriations Act of 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.

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
T

I

he New York Environmental

Facilities Corporation (NYEFC) has

amended its existing Master Trust

Agreement (MTA) and Master Financing

Indenture (MFI) to implement a common

financing approach for both CWSRF and

DWSRF loans. Under this approach

CWSRF and DWSRF loans will be

financed under a joint bond issue.

However, from an accounting standpoint

the programs will remain segregated.

Loans for each program will be recorded

on separate balance sheets. The CWSRF

and DWSRF will also have their own

separate reserve accounts to make up

for any borrower default in debt service.

n most cases, borrowers will be

financed under the MFI. However,

borrowers large enough to justify

separate financing, such as the New York

City Municipal Water Finance Authority

(NYW), and private companies that do

SRF

New York’s Combined Financing Program

not meet certain credit standards will

be financed under separate indentures

(See Exhibit 1).

he NYEFC common financing

program offers many economic

and programmatic advantages. Clean

Water and Drinking Water loans will be

pooled together into the same bond

issue, lowering issuance costs. For

example, New York will issue two series

of bonds (rather than four) to

accommodate different borrower

payment date requirements. The

DWSRF program will benefit from the

CWSRF AAA bond rating, allowing for

greater leveraging capacity. Finally,

although the programs will remain

legally separate and distinct, the newly

amended financing program allows for

a cross-investment from a “free-up” of

reserve dollars of one program to cure

a deficiency in the other program.

T

Clean Water Equity Account Drinking Water Equity Account

Private

Water

Company

Financing

Indenture

Deallocated Corpus Subaccount

Clean Water

Loans and

Debt Service

Reserve Funds

(DSRFs)

Drinking

Water

Loans and

DSRFs

Clean

Water

Loans and

DSRFs

Drinking

Water

Loans and

DSRFs

NYW Financing

Indenture

Deficiency

Reserve

Subaccount

Deficiency

Reserve

Subaccount

Deficiency

Reserve

Subaccount

Master Financing Indenture

Drinking

Water

Clean

Water

General Reserve

Exhibit 1

New York Master Trust Agreement



The NYEFC common

financing program

offers many

economic and

programmatic

advantages
Under the MFI, both CWSRF and

DWSRF projects are funded from

revenue bond proceeds. SRF capitalization

grants, state match and deallocated funds

are used to fund SRF reserves (Exhibit 2).

As construction progresses, funds are

released to the borrower and deposited

into individual Debt Service Reserve Funds

(DSRFs). DSRFs are funded in an amount

equal to either one-third or one-half of the

loan amount. The interest earnings on

these individual DSRFs are released into

the Debt Service Fund to subsidize loan

repayments or, if necessary, to cure any

shortfalls. As repayments on loans are

made, reserve funds are released from the

DSRF into the General Reserve Fund.

Released CWSRF and DWSRF funds are

kept in separate subaccounts. The General

Reserve Fund will be maintained at an

amount that is equal to any deficiency in

the borrowers’ individual DSRFs.

STATE ACTIVITY

UPDATE

Remaining funds are then released from

the General Reserve into the Deallocated

Corpus Subaccount. Funds can be moved

from this account into the Deficiency

Reserve Subaccount to cover deficiencies

under the MTA or be recycled into the

Unallocated Corpus Subaccount for any

authorized purpose of the SRF.

f reserve funds within a program are

unavailable to meet debt service

payments, funds from the other SRF will

be invested to cure the deficiency.

However, any movement of dollars

between the CWSRF and DWSRF would be

recorded on the respective balance sheets

as a temporary investment and recorded

as an asset on one SRFs balance sheet and

as an asset with an offsetting liability on

the other SRFs balance sheet.

Investments will be repaid with the first

available SRF resources.

I

Unallocated Corpus

Subaccount

(Grant, Match,

Net Bond Proceeds

and De- allocated

Corpus Funds)

Loans to Borrowers

(by Subaccount) General Reserve

Fund

Corpus Releases

DSRF

Loan

DSRF DSRF DSRF Repayments

De-allocated

Corpus

Subaccount

Bond

Holders

Debt Service

Fund

Deficiency

Reserve

Subaccount

to cure shortfalls

DSRF interest

earnings for

debt service

t

to cure shortfalls

o cure shortfalls

each borrower

has own DSRF

Flow of Funds under New York’s MFI

Exhibit 2

New York’s Flow of Funds in the MFI

If reserve funds within

a program are

unavailable to meet

debt service

payments, funds from

the other SRF will be

invested to cure the

deficiency

> The order of accounts used to cure a

borrower default under the MFI is

shown in Exhibit 3. In the event of a

default, the first draw would be on the

individual SRF Debt Service Reserve Funds.

Once depleted, the next source of funds to

cover a default would be from the General

Reserve Subaccount for the applicable

CWSRF or DWSRF. The next account to be

drawn upon would be the General Reserve

Subaccount from the other SRF. This is

first instance where cross-investment will

take place. If needed, funds could be

drawn from the applicable CWSRF or

DWSRF moneys in the Deficiency Reserve

Subaccount. Finally, funds would be

borrowed as a cross-investment from the

Deficiency Reserve Subaccount of the other

SRF

Priority Use of Account Funds to Cure Deficiencies

SRF. The cross-investments would be

in the form of a short-term bond.

he order of accounts to cure a

default under the NYW Indenture

is similar. First, funds would be drawn

from the applicable CWSRF or DWSRF

NYW Reserve. Then funds would be

drawn from the applicable CWSRF or

DWSRF portion of the Deficiency

Reserve Subaccount. Finally, funds

would be borrowed from the other

SRFs portion of the Deficiency Reserve

Subaccount as a short-term crossinvestment.

T

Within the MFI

"Freed-up" CW or DW funds

in the General Reserve for

applicable CWSRF or DWSRF

"Freed-up" CW or DW funds

in the General Reserve for

the other SRF

"Freed-up" CW or DW funds

in the Deficiency Reserve

Subaccount for applicable

CWSRF or DWSRF

"Freed-up" CW or DW funds

in the Deficiency Reserve

Subaccount for other SRF

Within the NYW Indenture

NYW Reserve Fund for

applicable CW or DW

"Freed-up" CW or DW funds

in the Deficiency Reserve

Subaccount for the other

SRF

"Freed-up" CW or DW funds

in the Deficiency Reserve

Subaccount for applicable

CWSRF or DWSRF

SRF Reserve Fund for

individual borrowers

"Freed-up" CW or DW funds

in the General Reserve for

the other SRF

Exhibit 3

Priority Use of Account Funds to Cure Deficiencies


New York’s structure is designed to be

appealing to bond rating agencies

and investors. The State’s approach

enhances the security structure of New

York’s CWSRF and DWSRF leveraging

bonds while complying with federal

CWSRF and DWSRF program requirements.

The following are key features of New

York’s cross investment structure:

The CWSRF and DWSRF accounts

remain separate.

Only ‘freed-up“ dollars from reserve

funds will be used for short-term

cross-investments.

Cash draws will not be made for

cross-investment purposes.

Cross-investments will not be used

for state match.

The structure allows

cross-investment in either direction

between the State’s CWSRF and

DWSRF programs.









 short-term

STATE ACTIVITY

UPDATE

Summary of Key Features









Investments are temporary,

short-term bonds that will be

repaid with the first available SRF

resources.

Any investment between the

CWSRF and DWSRF will be

recorded on the SRF balance

sheets.

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 rossinvestment needs.

tates interested in further

information on short-term crossinvestment should contact their EPA

Regional Office SRF Coordinator. For

information on New York’s crossinvestment structure contact the state

representative below.

James Gebhardt

NYS Environmental Facilities

Corporation

50 Wold Road

Albany, NY 12205

Tel: (518) 457-0886

This report was prepared by

EPA Headquarters

short-term c

S

State Contact: