the term of repayment. As a result, the

Commonwealth reasoned that they should

be allowed to extended the term for

repayment of a local bond to the lesser of

the useful life of the project or 30 years.

n reviewing the Commonwealth’s initial

proposal EPA reaffirmed that, in

general, CWSRF loans that use a local

bond as the legal instrument for the

agreement may not extend CWSRF loan

repayments beyond 20 years. However,

the Agency did accept the subsequent

Massachusetts proposal to implement a

bond purchase program that extends

payments up to 30 years because the

Commonwealth has taken extraordinary

measures to both ensure that the funding

levels of the CWSRF would not be harmed

by the bond purchase program and to

provide substantial additional assistance

to local borrowers.

o receive approval for this approach

the Commonwealth committed to 1)

provide capital investment into the CWSRF

program that is in addition to the 20

percent state matching funds required

under the CWSRF program the

Commonwealth will continue to make

deposits to provide a 50 percent subsidy

for annual loan repayments and 2) modify

its leveraging structure to ensure that the

purchasing power of the CWSRF would not

be diminished over the long-term due to

the 30 year term allowed for the bond

purchase program. This update describes

the Massachusetts extended bond

purchase program and the conditions

under which the proposal was accepted.

I

T

n

T

R

he Clean Water State Revolving Fund

Program (CWSRF) provides states the

flexibility to use a variety of financial

assistance options including loans,

insurance and guarantees for local debt,

security for leveraging, guarantees for substate revolving funds, and refinancing or

purchasing local debt. To date, states have

found that the low interest loans available

through the program are extremely

popular. Since program inception the

CWSRF has provided over 6,800 loans that

total over $22 billion.

ome CWSRF programs enter into a

loan agreement through the purchase

of a local bond. This approach is made

eligible under section 603(d)(2) of the Clean

Water Act (CWA) that allows states to buy

or refinance local debt obligations. In

practice, states that provide CWSRF

assistance by purchasing a local bond

consider it to be equivalent to a loan as

defined in the CWSRF program. The

interest rate on the bond may range from

0 percent to market rate and the term of

the bond may be up to twenty years. The

bond is viewed as the state’s legal

instrument used to enter into an agreement

that is equivalent to a loan agreement.

ecently, the Commonwealth of

Massachusetts proposed that

purchasing a local bond as authorized

under section 603(d)(2) of the CWA is

fundamentally different from a loan

allowed under section 603(d)(1) in that

loans are limited to a 20 year repayment

term while bonds are not given a limit on

s

STATE ACTIVITY SRF UPDATE

In practice, states

that provide CWSRF

assistance by

purchasing a local

bond consider it

to be equivalent to a

loan as defined in

the CWSRF program
SRF

Coupled with interest

earnings from debt

service reserves funded

by capitalization

grants, the cash flow of

these subsidies equate

to a minimum of a 50

percent subsidy on debt

service payments.

Overview of Massachusetts’ CWSRF Program

funded by capitalization grants, the

cash flow of these subsidies equate to a

minimum of a 50 percent subsidy on

debt service payments.

Exhibit 1 displays the leverage bond

repayment process in

Massachusetts’ CWSRF program. The

local government repays a portion of

principal that reflects the level of

subsidies provided. The remainder of

the bond debt service is paid with

direct contract assistance from the

Commonwealth and interest earnings

from the debt service reserve fund.

The contract assistance payments are

appropriated annually, but are a general

obligation of the Commonwealth for

the life of the financing.

I

n Massachusetts, the CWSRF program

is operated by the Water Pollution

Abatement Trust (Trust). Since its

inception the Trust has provided more

than $1 billion in assistance to local

governments. The Commonwealth’s

CWSRF program uses reserve fund

leveraging but also offers a direct loan

program for very small projects and an

interim financing program for projects

in anticipation of permanent financing.

As part of the CWSRF program, the

Commonwealth provides annual debt

service subsidies to local governments

to reduce borrowing costs. The

“contract assistance” payments that are

provided by the Commonwealth are

credited against the debt service

payments that are due from local

borrowers. Coupled with interest

earnings from debt service reserves



Exhibit 1

Bond Repayment Cash Flows

Bond Trustee

Bond Holders

Commonwealth of

Massachusetts

Local Government Leveraged Bond

Reserve Fund

Repayment of

Local Bond

at a

Subsidized

Level

Earnings

over Term

of Bond

Contract

Assistance

Provided

Annually

Repayment of

Local Bond

at a

Subsidized

Level
T

P

he Commonwealth of Massachusetts

initiated its Extended Bond Purchase

Program as an additional CWSRF

assistance option. This program is

available to local government units that

are undertaking water pollution abatement

projects with useful lives beyond 20 years.

nder this program, project costs for

eligible projects will be financed or

refinanced with proceeds of bonds (local

government obligations) issued by

participating local governments and

purchased by the Trust. The local

government bonds will be either general

obligations of the borrowing local

government or special obligations secured

by specified pledged revenues.

rincipal and interest payments on the

local government obligation bonds

purchased by the Trust must commence

within one year after completion of the

applicable project. The bonds must be

fully amortized within a period that does

not extend beyond 30 years from the

project completion date or the useful life

of the project . Local

obligation bonds must otherwise conform

to the same requirements imposed on

loans made under section 603(d)(1) of the

CWA and the CWSRF regulations. Contract

assistance made by the Commonwealth

may not be credited toward the state

match. When financing a project on an

extended basis, the Trust will adjust its

financial parameters to compensate for the

longer repayment period. Specifically, the

Trust will reduce its reserve fund level to

40 percent for an extended bond financing

compared to 50 percent under the Trust’s

Leveraged Loan Program. Projects with

amortization schedules between 20 and 30

years may employ proportionally sized

reserves to maintain the recycling level.

U

nwhichever is shorter

The Extended Bond

Purchase Program is

available to local

government units

that are

undertaking water

pollution abatement

projects with useful

lives beyond

twenty years.

STATE ACTIVITY

UPDATE

Extended Bond Purchase Program

D

T

T

ecreasing the reserve fund level

will offset the reduction in funding

due to the longer amortization period of

bonds beyond 20 years. In addition, all

financing under the Extended Bond

Purchase Program will continue to

receive the benefit of contract assistance

payments from the Commonwealth.

o date the Commonwealth has

committed to $538 million in

subsidies for existing loans. In the case

of the Leveraged Loan Program, contract

assistance payments are credited to

borrowers in full, upon receipt, in

semiannual payments over the maximum

20 year term of each loan. However, in

the case of the Extended Bond Purchase

Program, contract assistance payments

will also be provided by the

Commonwealth over a 20 year period,

but will be credited to local bond issuers

over a maximum of 30 years, consistent

with the terms of the financing

employed. Under this program, a

portion of these assistance payments

are credited to the local issuer upon

receipt and a portion is held by the Bond

Trustee in a subsidy account within the

CWSRF. This retained amount, together

with all investment earnings, is credited

to local issuers over the term of the local

bonds in excess of 20 years.

he Commonwealth is authorized to

offer the Extended Bond Purchase

Program under the following conditions:

1) there is significant contract assistance

provided, 2) the Commonwealth

modifies its leveraging structure to

offset the loss in recycled CWSRF

funding, and 3) the program requires the

purchase of a local bond as defined

under section 603(d)(2) of the CWA.

M

M

assachusetts’ Extended Bond

Purchase Program is a unique

program that gained approval because the

Commonwealth is 1) taking measures to

offset the loss to the CWSRF funding levels

that would result from extending

amortization schedules from 20 to 30

years and 2) providing substantial contract

assistance subsidies to reduce the cost to

local borrowers. The bond purchase

program illustrates the flexibility that

states are given to coordinate their CWSRF

programs with unique state financing

approaches. In approving the

Massachusetts program, EPA recognizes

that, given the numerous differences found

in leveraged and direct loan programs, it

would be inappropriate to apply policy

without consideration for special

conditions that exist in CWSRF programs.

When possible the Agency will allow

flexibility in financial structure so long as

the sought after arrangements are

consistent with federal law and regulations

and it can be documented that the funding

levels will be maintained for the program

over time.

assachusetts’ Extended Bond

Purchase Program has the following

features:

The extended term provided for the

repayment of local bonds will be

the useful life of the underlying

asset or 30 years, whichever is

shorter.

Local borrowers will establish a

dedicated source of revenue for

bond repayments.





SRF STATE ACTIVITY

UPDATE

Summary of Key Features





All local bond principal and

interest will be repaid to the

CWSRF.

Local bond interest rates will be

set between 0 percent and the

market rate.







Massachusetts will adjust its

leveraging structure by reducing

the reserve levels for extended

financing so that historic

recycling patterns in the CWSRF

will not be impeded.

Contract assistance will be

provided to the borrowers that

issue 30 year bonds. Borrowers

are eligible for assistance that is

equivalent to a 50 percent grant.

The Commonwealth will not

offer this program to private

entities.

his update was prepared by EPA

Headquarters. States interested in

further information on the using an

Extended Bond Purchase Program

should contact their EPA Regional Office

SRF Coordinator.

April 1999

T