Overview

What is Accelerated Loan Commitment?

To date, many State Revolving Fund (SRF)

programs have taken a “Funds on Hand”

approach to lending. This means that each

funding cycle is based on the funds actually

available or on hand at the time project funding

is considered. The funds on hand consist of

the current year grant award, state match, and

any net leveraging funds produced, plus

interest earnings and loan repayments net of

any bond principal or interest payments.

The commitment of only those funds that are

available has been a prudent approach in

ensuring that an SRF does not make

commitments beyond what it can deliver.

However, given that the decision process for

selecting projects can take up to a year or more

and project disbursements can stretch for up to

another 2 to 5 years, SRFs are finding that

current lending practices can result in long lag

times from the time money becomes available

for commitment and the actual disbursement

of funds.

istent with the

practices used by private sector lenders, such

as banks.) Drinking Water SRFs (DWSRF)

may also look to an accelerated lending

approach to avoid the situation faced by some

Clean Water SRFs.

This paper discusses the use of accelerated

lending and presents the use of this approach

by two states, California and Oregon.

Accelerated lending is the commitment of

funds to projects based on the expected

availability of funds and the demand for those

funds (i.e. cash disbursements) over time. To

be conservative, accelerated lending relies on

some financial cushion in the projections to

ensure that the SRF does not become over

committed due to unforseen changes in

anticipated cash flows.

Tables 1 and 2 present simplified examples of

the cash flow differences between the two

approaches to SRF lending in making a

funding decision for a $20 million loan. Table

1 shows that when using a “Funds on Hand”

approach, where the state waits until the fund

has a balance sufficient to cover the entire

loan, 5 quarters will pass before the funds are

available to make a $20 million commitment.

Table 2 shows that when an accelerated

approach is used, the loan commitment could

actually be made in the first quarter due to the

expected timing of cash disbursements for the

project and future cash inflows. In this

example, the project could be funded a full 4

quarters earlier with no adverse effect on the

SRF. Applying this concept to real life

The lag time in fund disbursement combined

with the steady stream of interest earnings and

loan repayments returning to the SRFs has

created a situation for many Clean Water SRFs

(CWSRF) of having relatively large cash

balances and/or undisbursed federal grant,

match, or bond funds. To more effectively

utilize these excess funds, SRFs have begun to

take a much closer look at the availability and

use of funds on a periodic basis to allow the

accelerated commitment of funds based on

projected cash flows rather than just funds on

hand. (This approach is cons

STATE ACTIVITY SRF UPDATE
Table 1 - Funds on Hand Lending

Quarter

Fund Balance -

Beginning of the

Quarter

Loan

Commitments

Loan

Disbursements

Cash

Inflows

Fund Balance - End

of the Quarter

1 $10,000,000 $1,000,000 $11,000,000

2 11,000,000 2,000,000 13,000,000

3 13,000,000 5,000,000 18,000,000

4 18,000,000 8,000,000 26,000,000

5 26,000,000 $20,000,000 2,000,000 2,000,000 26,000,000

6 26,000,000 3,000,000 1,000,000 24,000,000

7 24,000,000 7,000,000 4,000,000 21,000,000

8 21,000,000 4,000,000 2,000,000 19,000,000

9 19,000,000 3,000,000 3,000,000 19,000,000

10 19,000,000 1,000,000 2,000,000 20,000,000

Table 2 - Accelerated Lending

Quarter

Fund Balance -

Beginning of the

Quarter

Loan

Commitments

Loan

Disbursements

Cash

Inflows

Fund Balance - End

of the Quarter

1 $10,000,000 $20,000,000 $2,000,000 $1,000,000 $9,000,000

2 9,000,000 3,000,000 2,000,000 8,000,000

3 8,000,000 7,000,000 5,000,000 6,000,000

4 6,000,000 4,000,000 8,000,000 10,000,000

5 10,000,000 3,000,000 2,000,000 9,000,000

6 9,000,000 1,000,000 1,000,000 9,000,000

Quarter

Fund Balance -

Quarter

Loan

Commitments

Loan

Disbursements

Cash

Inflows

Fund Balance - End

of the Quarter

1 $10,000,000 $1,000,000 $11,000,000

2 11,000,000 2,000,000 13,000,000

3 13,000,000 5,000,000 18,000,000

4 18,000,000 8,000,000 26,000,000

5 26,000,000 $20,000,000 2,000,000 2,000,000 26,000,000

6 26,000,000 3,000,000 1,000,000 24,000,000

7 24,000,000 7,000,000 4,000,000 21,000,000

Quarter

Fund Balance -

Quarter

Loan

Commitments

Loan

Disbursements

Cash

Inflows

Fund Balance - End

of the Quarter

1 $10,000,000 $20,000,000 $2,000,000 $1,000,000 $9,000,000

2 9,000,000 3,000,000 2,000,000 8,000,000

3 8,000,000 7,000,000 5,000,000 6,000,000

4 6,000,000 4,000,000 8,000,000 10,000,000

5 10,000,000 3,000,000 2,000,000 9,000,000

6 9,000,000 1,000,000 1,000,000 9,000,000

2

SRF
situations can result in funding projects years

earlier than under a funds on hand approach,

because careful cash flow analysis can ensure

that the funds will be available to meet the

project disbursement needs when they are

requested. Initiating accelerated lending

requires detailed projections of cash inflows

and outflows. Data considered in making major

cash inflow projections include:

grant awards/cash draws (net of setasides for the DWSRF)

state match

interest earnings

loan principal repayments

bond proceeds

release of debt service reserves

other cash inflows (transferred funds,

fees deposited in loan fund)

Data considered in making major cash outflow

projections include:

disbursements for existing loan

commitments

interest expense

bond principal repayments

deposits to debt service reserves

other cash outflows (transferred funds,

administrative expenses in CWSRF)

Once the cash inflows and outflows are

identified over time, the net cash (and undrawn

grant funds) can be assessed relative to new

project commitments. Following this approach

an SRF can then evaluate its ability to commit

funds to additional projects on its priority list

until the projected resources are effectively

committed. The analysis of cash flows should

specifically exclude funds that will not be

available to fund projects.

Both California and Oregon have made the

decision to implement accelerated lending

systems using the overall approach described

above. Their specific experiences are described

in the ensuing sections.

California’s State Water Resources Control

Board (SWCRB) has taken steps to convert their

CWSRF to an accelerated lending system due to

concern over extremely large cash balances in

the CWSRF’s repayment accounts. The

SWCRB initially attempted to resolve the issue

of excess balances by authorizing the

commitment of funds up to 125 percent of

expected repayment monies for a period of five

years. This approach expedited the issuance of

loans, but failed to significantly decrease the

cash balance available for new loans. While the

State recognized that large cash balances

provided a benefit of interest earnings, they

were concerned that large cash balances might

be interpreted as a lack of demand for funds, a

situation that was not true.

To better understand and project their cash

balance position, California developed a cash

flow model. The model can evaluate different

federal capitalization levels and allows analysis

of three alternatives for maintaining minimal

cash balances, thereby ensuring available

project funding in the face of unforseen events

and/or changes. Figure 1 presents the first of

two basic

Figure 2 presents the projected cumulative























CALIFORNIA

projections from the state’s

modeling activity. The solid line presents the

projected cash balance in the program if

California continues to utilize a cash on hand

approach to lending. The dashed line shows

the reduction in the cash balance if cash flow

based lending is employed.

3

STATE ACTIVITY

UPDATE
C alifo rnia C W S R F C ash B alance P ro je ctio n

0

100

200

300

400

500

600

700

800

1999 2001 2003 2005 2007 2009

F iscal Year

M illio n s o f D o llars

C ash on Hand A pproach

C a sh F lo w L e nd ing A p p ro a ch

C alifornia C W SR F C um ulative Lending

Projection

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1999 2001 2003 2005 2007 2009

F iscal Year

M illio n s o f D o llars

C ash on Hand A pproach C a sh F lo w L e nd ing A p p ro a ch

Figure 1

Figure 2

4

SRF
lending activity under the two scenarios of

implementation. The $25 million target cash

balance that the Board accepted for

implementation was a substantial reduction

from the cash balance levels of $525 million as

of December 31, 1998 ($250 million in undrawn

capitalization grants and $275 million in

repayment accounts).

California projected that converting to an

accelerated approach would result in $140

million in additional loan commitments in the

State Fiscal Year 1999 and $210 million in

additional loan commitments over the

subsequent five years.

The fiscal impacts of the implementation of this

system are relatively minor, but worth noting.

The system imposes an additional

administrative burden for the staff to obtain and

monitor payment schedules from present and

future loan recipients. Additionally, the

CWSRF will grow at a slower rate, due to a

lower cash balance earning market interest

rates. However, on balance California felt that

its most important priorities were to accelerate

current loan commitments and demonstrate

effective fund utilization by maintaining a

significantly lower level of funds on hand.

Oregon’s Clean Water SRF is a direct loan

program that initially only made loan

commitments for funds that were actually on

hand. However, with delays in project start-up

and long disbursement schedules, Oregon’s

Department of Environmental Quality (DEQ)

found that there were long delays from the time

when funds were initially available to the point

at which project disbursements occurred. This

resulted in relatively large cash balances and

undrawn grant amounts.

To reduce the lag time in fund utilization,

Oregon made the decision to commit more

project assistance than it has funds immediately

available. By examining the inflows and

outflows of CWSRF funds, DEQ discovered

that the program could commit to loans in

anticipation of future cash inflows as long as it

closely monitored the fund’s projected cash

balance. To monitor the fund’s cash balance

and to predict the fund’s ability to commit to

new projects, Oregon created an Excel based

cash balance model to track the inflows and

outflows of cash in the fund on a quarterly basis.

With the spreadsheet, DEQ can predict the

amount of new loans that the fund can originate

and the effects proposed disbursements would

have on the fund’s cash balance.

will be on

hand when needed.

OREGON

Once the anticipated financial activity has been

included in the spreadsheet, the state can

evaluate the impact of committing to additional

projects on the fund’s cash balance based on

projected project disbursement schedules

submitted by potential borrowers. This becomes

one factor the state considers before making a

loan commitment. However, this analysis does

supplant either the calculation of funds

available, which determines the total amount of

loans that will be committed each year, or the

priority system which determines the order in

which projects are considered for funding.

Other calculations are used to ensure that funds

remain available for the highest priority projects

when they are ready to construct rather than just

going to a project whose disbursement

projections fit the cash flow gaps. The state will,

on a limited basis, allow for short-term

construction period loans when unusual

construction schedules create significant periods

of time that cash is idle. The cash flow model is

most useful in modeling disbursements before a

loan is signed to be sure that the cash

not

5

STATE ACTIVITY

UPDATE
The cash balance projection spreadsheet uses a

conservative estimate for potential investment

interest and a rapid escalation of administrative

expenses to build a cushion against any

unforeseen changes in the projected ability to

commit funds. As the state gains more

experience in projecting cash flows and

committing funds in anticipation of funds

becoming available, they will be better able to

judge the need for conservative assumptions.

A prudent reserve amount is maintained by the

State to allow for changes to project schedules,

and increases in loan amounts to meet

contingency costs for on-going projects. In

addition, the state allows for the accumulation

of cash to fund large, high priority projects

which has the effect of creating continuing cash

balances.

Figure 3 illustrates the impact that Oregon’s

accelerated lending program has had. The

figure presents the cumulative commitment of

funds as a percentage of cumulative funds

available (on hand)

programs based on National Information

Management System (NIMS) data through

1999.

Through fiscal year 1999, the use of accelerated

loan origination has allowed Oregon to commit

to $38 million more in projects than they would

have committed using the traditional funds on

hand approach to loan origination. By

completing the loan agreements earlier, projects

can meet schedules rather than postpone

construction until the funds are available.

Program cash is used more efficiently and the

state is able to more accurately project the loan

funds that will be available in future years. With

this information, long-term forecasts are

prepared for project management and

administration. In addition, changing its

approach has allowed the state to commit to

short-term loans that provide construction

period financing for projects that will receive

USDA Rural Development funding. Several

projects funded with these short-term loans,

for Oregon and all CWSRF

Cumulative Assistance Provided

Comparison Based on NIMS Data

40

50

60

70

80

90

100

110

120

130

1994 1995 1996 1997 1998 1999

Cumulative Assistance as % of

Cumulative Funds Available

Oregon Average

Figure 3

totaling over $15 million

have kept CWSRF funds in

use for communities while

other higher priority

projects are getting ready

for construction.

The accelerated lending

approach has become a

useful tool for the state’s

direct loan program,

maximizing the use of cash

for the benefit of the

communities and,

essentially, “leveraging”

their own cash flow. The

approach provides an

important piece in using the

CWSRF to make the

greatest impact possible on

water quality programs in

Oregon.

6

SRF

STATE ACTIVITY

UPDATE