r/EPA
United States
Environmental Protection
Agency
Office of Water
(4101)
EPA816-R-00-021
October 2000
Implementation of Transfers in the
Clean Water and Drinking Water
State Revolving Fund Programs
Report to Congress
Clean Water
State Revolving Fund
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Executive Summary
Many communities across the nation face the challenge of making impor-
tant investments in infrastructure to protect water quality and human health. The
Clean Water and Drinking Water State Revolving Fund (SRF) programs, autho-
rized by Congress in 1987 and 1996, respectively, have been important tools in
helping states address these needs. Through the Clean Water SRF (CWSRF)
program, states have provided more than $26 billion in assistance for publicly-
owned wastewater treatment work projects and a variety of projects addressing
non-point source pollution and pollution confronting estuaries on our coasts.
States have provided more than $2 billion in assistance to address important
projects needed to protect public health using the newer Drinking Water SRF
(DWSRF) program. States have also reserved more than $400 million from
DWSRF grants to conduct state activities that support protection of the sources
of drinking water and encourage enhanced water system management.
The 1996 Safe Drinking Water Act (SDWA) Amendments, which autho-
rized the DWSRF program, included a provision allowing states to transfer up to
33 percent of their DWSRF grant to their CWSRF program, or an equivalent
amount from their CWSRF program to their DWSRF program. The goal of the
provision was to give states flexibility to address the most critical demands in
either program at a given time. The provision allowed states to make transfers
through September 30, 2001 and required that EPA report on use of the provi-
sion within four years of passage of the SDWA Amendments.
EPA is recommending that Congress continue to authorize transfers
between the two SRF programs in order to give states flexibility to address
their most pressing water infrastructure needs. This can be accomplished
by removing the sunset date of September 30, 2001 from the provision.
Through April, 2000, five states had used the provision to transfer funds
from their CWSRF programs to their DWSRF programs. After determining that a
transfer would not impact their ability to fund important CWSRF projects, these
five states (New York, New Jersey, Colorado, Maryland and Montana) transferred
approximately $83 million of CWSRF funds to address DWSRF projects. Each
state appreciated the flexibility that transfers allowed them in addressing immedi-
ate drinking water demands for funding. Several other states have indicated an
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intent to transfer funds between the two programs prior to October, 2001. Other
states indicated that they were less likely to transfer funds due to a concern that
funds could not be returned to the donating SRF prior to the sunset date.
Allowing transfers to continue into the future will give states another tool in
addressing the great needs which exist in both the clean water and drinking
water arenas. States have demonstrated that transferring funds requires a
thorough decision-making process. Extending the ability to transfer into the
future will allow them to better manage their drinking water and clean water
projects in the short-term because they will be assured that transferred funds can
be returned to either program in the long-term.
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Table of Contents
Executive Summary i
Part I - Introduction and Background 1
Part II - Implementation of the Transfer Provision 9
Part III -Transfers in the SRF Programs 13
Part IV - Assessment and Recommendation 21
Appendix A - Congressional authorization of transfers
between the SRF programs 25
Appendix B - Cross-collateralization in the SRF programs 27
Appendix C - EPA implementing policy for transfers in the
SRF programs 29
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IV
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Part I
Introduction and Background
One of greatest challenges facing state and local leaders in the United
States is the need to ensure adequate infrastructure for the citizens of the com-
munities they serve. This infrastructure includes that needed for transportation,
drinking water and wastewater. Much of the infrastructure in this country has
been financed with the assistance of the federal government, with several federal
agencies responsible for various infrastructure financing programs. During the
mid-1900's, the wastewater needs in the country increased significantly as
populations grew and spread out from urban centers. During the 1970's and
1980's the Construction Grants program, authorized by Congress and the Clean
Water Act, provided grants to communities for the construction of publicly-owned
wastewater treatment projects. The EPA Construction Grants program awarded
$50 billion in funds between 1972 and 1990 which resulted in the construction of,
or improvements to, more than 10,000 wastewater facilities throughout the
country.
In the late 1980's Congress began to consider a new way of providing
assistance - one which would both encourage the recipients of assistance to
more fully participate in the financing of infrastructure and provide a long-term
source of funding that would not be dependent on federal contributions. In the
Clean Water Act (CWA) Amendments of 1987, Congress authorized the Clean
Water State Revolving Fund (CWSRF) program and changed the course of
financing for wastewater infrastructure. Unlike ERA'S construction grants, which
provided direct assistance to communities for the construction of wastewater
infrastructure, CWSRF grants are made to states. States use the grant funds to
establish revolving loan Funds and are responsible for selecting which projects
receive assistance - primarily in the form of loans, not grants. Repayments from
the loans that are made return to each state's revolving Fund to provide addi-
tional assistance. Since the first grants were awarded in 1988, EPA has made
available more than $17 billion in grants to states to capitalize their CWSRF
programs. Every state is required to contribute to the establishment of its state
revolving Fund by providing a match equal to 20 percent of the grant. These
Funds, which provide low-interest loans and other types of assistance to eligible
projects, have in turn provided more than $26 billion in assistance through June
1999.
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Building on the success of the CWSRF program, Congress authorized the
Drinking Water State Revolving Fund (DWSRF) program in the 1996 Amend-
ments to the Safe Drinking Water Act (SDWA). Although there are significant
differences between the two programs, Congress largely modeled the DWSRF
program on the CWSRF program. Congress also expressed its intent for the two
programs to work together by including a provision in the SDWA giving states the
flexibility to transfer funds between the two programs to address their needs and
priorities. States are allowed to transfer an amount equal to 33 percent of their
DWSRF capitalization grant to the CWSRF program, or an equivalent amount
from the CWSRF program to the DWSRF program. The SDWA included a
sunset provision that does not allow for transfers beyond the end of fiscal year
2001 (Appendix A).
This report, required by the SDWA, describes implementation of the
transfer provision in the CWSRF and DWSRF programs. An overview of the two
SRF programs and a description of the linkages between them follows below.
Part II discusses the policy that was developed to administer the transfer provi-
sion. Part III reviews the states that have transferred funds, including a discus-
sion of their decision-making process. Finally, Part IV provides an assessment of
the transfer provision and EPA recommendations for continuation of the provi-
sion.
Background
CWSRF Program
As noted above, the CWSRF program was initiated in 1988 and is widely
viewed as a government success story. Although the program was only autho-
rized to receive appropriations through 1994, appropriations have continued to
the present. The CWSRF fiscal year 2000 budget
included $1.35 billion for states - bringing the total
Examples of Projects Funded
by the CWSRF
pollution, including:
- septic systems
amount appropriated for the program to $17.0
billion. Appropriated funds are allotted among the
• wastewater treatment plants ^ates USin9 a formula included within the Clean
• combined sewer overflow projects water Act.
• projects to address non-point sources of
The CWSRF program provides financing for
traditional wastewater treatment projects, as well
- agricultural best management practices ag Q ^ n int source jects that have
- brownfield remediation . .. ..,. . . . ' „ . . „
estuary management projects been ldentlfied in state Comprehensive Conserva-
tion and Management Plans and Nonpomt Source
Management Plans. In recent years, state
CWSRF programs have increased their use of
funds for projects that address non-point sources of pollution. While the CWSRF
program has gone a long way in providing needed infrastructure and non-point
pollution assistance, the needs remain daunting. The 1996 Clean Water Needs
Survey identified a need of $140 billion over the subsequent 20 years for waste-
water treatment and other SRF eligible projects. The 1996 survey did not include
most types of non-point source pollution needs. The next survey, recently initi-
ated and scheduled for a November 2001 release, will include needs associated
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with several types of non-point source pollution. Additional studies of clean water
needs have been conducted, including the 2000 Water Infrastructure Network
(WIN) report Clean and Safe Water for the 21st Cenftvry which suggests that
needs may far exceed those identified
by EPA. The WIN report indicates
that $23 billion per year in capital
investments will be needed over the
next 20 years for building new, and
replacing old, wastewater facilities.
The CWSRF program pro-
vides loans to eligible recipients with
interest rates that range between
zero and market rate. Loan terms
are limited to 20 years. States can
also provide other types of assis-
tance including refinancing of exist-
ing debt, purchase of debt, guaran-
tees, and insurance. Many states
have increased the amount of fund-
ing available for projects through
issuance of bonds (i.e. leveraging).
The financial community has high
regard for SRF programs and has
assigned AAA ratings to most of the
SRF debt issued by state programs.
National CWSRF Program
Appropriated (1988-2000)
$17.0 billion
Required state match $3.4 billion
Information through June 30, 2000
Awarded grants $16.7 billion
Administration 4 percent
Information through June 30, 1999*
Cumulative Assistance $26.1 billion
Cumulative Agreements 8208
Assistance in SFY 1999 $3.4 billion
Agreements in SFY 1999 1281
m 0
CWSRF Assistance with
Federal/State Match contribution
$26.1B
$18.6B
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
I Federal Cap Grants
] State Match
•Assistance Provided
"Information from CWSRF National Information Management System, an annual collection
of data from states on a July-June state fiscal year (SFY) basis. States that are not on a
July-June fiscal year are asked to report based on a July-June year. FY2000 data will be
available in November 2000.
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Composition of CWSRF Funds
• Net
Earnings
D Net Loan
Repayments
• Net Leveraged
Bonds
D State
Match
• Capitalization
Grants
10%
o%
1991
1999
All repayments and investment
earnings must return to the Fund
to ensure that there is a long-term
source of funding for assistance.
The concept of the revolving
fund, while not new, has been
shown to be impressive. Funds
available in the program as of
June 30, 1999 include $15.4
billion in awarded capitalization
grants, $3.2 billion in state match,
and an additional $7.8 billion in
proceeds from bonds issued to
increase the amount of funding
available for projects. The federal
investment of $15.4 billion,
coupled with these other sources,
has resulted in more than $26.1
billion in assistance. The figure to
the left shows the composition of
CWSRF funds in 1991 and 1999.
Note the increasing influence of
repayments relative to the contribution of the federal government. These funds
are revolving, and the President's fiscal year 2001 budget request keeps EPA on
track to meet the Administration's goal to capitalize the CWSRF program to
revolve at a level of about $2 billion in financial assistance annually over the next
several decades while providing approximately $3 billion in total annual assis-
tance over the next several years.
DWSRF Program
The DWSRF program, established as part of the 1996 SDWA Amend-
ments and authorized through 2003, was designed to be used by states as a
flexible and comprehensive tool to provide funding for drinking water infrastruc-
ture and state and local activities needed to ensure the provision of safe drinking
water. Congress also included provisions designed to help solve the compliance
needs of small and financially distressed communities. The first state grant was
awarded in March 1997. Through fiscal year 2000, Congress had appropriated
$3.6 billion for the program, including $820 million for fiscal year 2000. EPA
estimates that, with the $9.6 billion in funding that has been authorized for the
program, states will be able to provide more than $500 million in annual assis-
tance to eligible projects through 2035.
Infrastructure funding assistance can be provided for eligible drinking
water projects that protect public health, ensure compliance with the SDWA, and
assist systems most in need on a per household basis according to state
affordability criteria. States are required to rank projects according to these three
criteria and offer funding to those that rank highest. States are required to pro-
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vide a minimum of 15 percent of
available funds to small systems that
serve fewer than 10,000 persons, to National DWSRF Program*
the extent such funds can be obligated A iated (1997.200o) $3.6 billion
for eligible projects of public water
systems. It is impressive to note that Required state match $716 million
most states have significantly ex-
ceeded this minimum requirement. Information through June 30, 2000
Awarded grants $2.7 billion
The types of assistance that
can be provided from the Fund are Set-Asides 17 percent
generally the same as that provided
for in the CWSRF program. However, Cumulative Assistance $2.3 billion
a significant difference is that each Cumulative Agreements 1192
state may use an amount equal to 30
percent of its capitalization grant to Assistance in SPY 2000 $1.0 billion
provide additional subsidies, generally
in the form of principal forgiveness, to Agreements in SPY 2000 555
systems that the state has identified
as disadvantaged, or likely to become
disadvantaged as a result of the
project, using state-determined affordability criteria. States can also extend loan
terms for these disadvantaged communities to up to 30 years, provided that the
loan term does not exceed the useful life of the facility.
Each state may also set aside up to 31 percent of its capitalization grant
to fund programs and activities that support the state's drinking water program,
enhance the management ability of water systems, and protect sources of drink-
ing water. States have generally been conservative in their use of set-asides due
to the need for funding infrastructure projects. Approximately 17 percent of the
grant funds that had been awarded through June 30, 2000 were reserved to
conduct set-aside activities.
States faced challenges in the first three years of implementation of the
DWSRF program. Over a short period of time, they had to obtain legislative
authority for the program, promulgate regulations, develop priority systems for
ranking projects and begin identifying projects for funding. Agencies responsible
for DWSRF programs that are unfamiliar with the CWSRF program, or financing
programs in general, have been especially challenged in implementation of their
programs. States have also found that many public water systems, particularly
those that are small, require a significant amount of time to prepare for construc-
tion of needed projects. However, notwithstanding the challenges, the progress
of the program is impressive. Almost 1200 loans have closed since the first loan
was made in April 1997. Translated into dollars, more than $2.3 billion has been
provided for important projects needed to ensure the continued provision of safe
drinking water.
information reflects data collected from states on a quarterly basis pending completion of
DWSRF National Information Management System. Additional program data through
state fiscal year (July-June) 2000 will be available in November 2000.
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The needs for the drinking water community are significant. The first
Drinking Water Infrastructure Needs Survey Report to Congress released in
January 1997 identified more than $138 billion (1995 dollars) in needs for the
years 1995 through 2015. The next survey is scheduled for release in February,
2001. The 2000 WIN Clean and Safe Water for the 21st Century report indicated
that $24 billion per year in capital investments will be needed over the next 20
years for building new, and replacing old, drinking water facilities.
DWSRF-CWSRF Linkages
Congress recognized that in some states the responsibilities for adminis-
tering the two SRF programs would be shared. While the responsibility for setting
priorities and carrying out oversight of the DWSRF program remains with the
agency with primary enforcement responsibility for the drinking water program,
the financial administration of the program can be shared with other state agen-
cies. In many states, the same agency that administers the CWSRF program
shares responsibility for the financial administration of the DWSRF program. For
example, in the State of New York, the Department of Health is responsible for
programmatic DWSRF areas and the Environmental Facilities Corporation
(NYSEFC), which also works with the CWSRF program, handles the financial
portion of the DWSRF program. The NYSEFC administers the program's loan
portfolio, monitors the Fund, and reviews the financial capacity of applicants.
The partnership has proven to be successful as the NYSEFC has leveraged
federal DWSRF capitalization grants to more than triple the amount of assistance
than would have otherwise been provided. Additional information about the New
York program is provided in Part III of this report.
For those states that leverage, a high credit rating from the financial
community ensures a lower and more affordable interest rate for borrowers.
Therefore, ensuring the strength of the portfolio of projects supporting the bond
issuance is a matter of critical importance. In order to allow states to capitalize
on the strength of either SRF program, Congress included language in the 1999
Appropriations Act indicating that states could "cross-collateralize" the two SRFs
to increase the security of bond issuances. Generally, state bond issues can be
used to support the other program with the proviso that revenues from the bonds
be allocated to the respective funds in the same portion as they were used for
security for the bonds. By taking advantage of the cross-collateralization provi-
sion, several states, including Colorado, New Jersey, Missouri, Maine, Arizona
and Minnesota, have been able to obtain higher bond ratings (and thus, lower
interest rates) for SRF financings. An additional discussion of the use of this
provision has been provided in Appendix B to this report.
The most important linkage is the provision in Section 302 of the 1996
SDWA Amendments that allows states to transfer funds between the two SRF
programs (Appendix A). Congress recognized that some states would want the
flexibility to operate their SRF programs in a manner that would allow one to
support the other to address their most pressing needs. The provision allows the
Governor of the state to transfer an amount equal to 33 percent of the DWSRF
grant to the CWSRF program or an equivalent amount from the CWSRF to the
DWSRF program. States were required to wait until one year after establishing
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their DWSRF Fund before making a transfer and can only make transfers prior to
fiscal year 2002 (i.e., prior to October 1, 2001). An additional restriction in the
SDWA disallows states from using transferred funds to provide the required 20
percent state match for either program. Through April 2000, five states (New
York, New Jersey, Maryland, Colorado and Montana) had made use of the
transfer provision to address demand in their drinking water programs. Their
experiences are addressed in Part III of this report.
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Part II
Implementation of the Transfer Provision
In consultation with states, EPA developed a policy to implement the
transfer provision that would give maximum flexibility to states to allow them to
best manage the needs facing both SRF programs. The policy was published in
the Federal Register on October 13, 2000 (65 FR 60940). The major require-
ments were also codified in the DWSRF program regulations published in the
Federal Register on August 7, 2000 (65 FR 48286). This section reviews the
requirements outlined in the statute and policy EPA developed to give states
guidance in making use of the provision. The complete policy can be found in
Appendix C.
Authorized Provisions
In accordance with the SDWA, funds can only be reserved and trans-
ferred prior to fiscal year 2002 (i.e., October 1, 2001). A State was required to
wait until one year had elapsed after it established its DWSRF Fund (i.e. one year
after award of the first DWSRF capitalization grant for Fund projects) before
making a transfer. For example, if a DWSRF Fund was established on October
31, 1997 with the award of a capitalization grant, the first day funds could be
transferred was November 1, 1998.
The amount of the DWSRF capitalization grant, including any portion
awarded for set-aside activities, determines the amount of funds that can be
reserved and transferred. The Governor of the State may reserve an amount
equal to 33 percent of the DWSRF capitalization grant and transfer the funds to
the CWSRF program. Alternatively, the Governor may reserve funds from the
CWSRF in an amount equal to no more than 33 percent of the DWSRF capitali-
zation grant and transfer those funds to the DWSRF program.
Policy
Types of Funds
Section 302 utilizes the DWSRF capitalization grant to calculate the
amount of funds that can be transferred, however, this does not limit states to
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transferring only those funds that are part of the capitalization grant. States may
transfer any monies that are in the Fund, including federal capitalization grant
dollars, state dollars, repayments, and investment earnings. In order to provide
states with maximum flexibility, states were also allowed to use fiscal year 1997
grants in determining the amount of funds that could be transferred, although
states were required to wait one year after establishing their DWSRF Fund before
making a transfer.
Reserving Authority to Transfer
States may elect to reserve the authority to transfer funds in one year, but
not actually transfer those funds until some later time (but prior to October 1,
2001). This gives states flexibility to better plan for the use of funds. Reserving
the authority to transfer funds does not mean that the state is holding cash in
reserve for future use. Rather, the authority serves as a "credit" for future trans-
fer. The amount of authority reserved can accumulate with each subsequent
DWSRF capitalization grant. For example, a state may reserve the authority to
transfer $33 associated with two successive $100 DWSRF capitalization grants.
In the third year the state could transfer $66 from its DWSRF program to the
CWSRF program. As noted in the previous section, any monies in the Fund
totaling $66 could be transferred.
Transferring on a Net Basis
A state may account for transfers on a net basis such that it can "loan"
funds to its sister program by transferring funds knowing that it can transfer an
equal amount of funds back into its program prior to October 1, 2001. The state
need only ensure that it has not exceeded the 33 percent ceiling on transfer of
funds. This provision was intended to allow states to address the highest priority
projects at any given time. For example, a state may need additional funds in the
DWSRF program because it lacks the financial resources to address an expen-
sive drinking water project. However, the state may be reluctant to transfer funds
from its CWSRF program because it will need those funds in the future to ad-
dress important non-point source pollution projects. In order to allow states to
address their most pressing needs, the policy allows for transfers on a net basis.
Requirements and Limitations
Calculation of State Match and Set-Asides
Because a transfer occurs after award of a capitalization grant, it does not
affect the calculation of state match, set-asides calculations in the DWSRF
program, or the administration (4 percent) or 604(b) calculations in the CWSRF
program. The state match requirement for both programs is 20 percent of the
capitalization grant. For example, if a state determines that it will transfer 33
percent of a $10 million grant from the DWSRF program to the CWSRF program,
the amount of the grant remaining for the DWSRF program would be $6.7 million.
However, the 20 percent match requirement for the DWSRF program would
remain $2 million, it would not decrease to $1.34 million. Similarly, the CWSRF
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program would not have to provide additional match for the $3.3 milion trans-
ferred into its program. Section 302 also stated that funds transferred under the
provision cannot be considered as the required state match for the capitalization
grant in either program. The transfer provision also cannot be used to acquire
state match or serve as a source of security or repayment for state match bonds.
Set-aside ceilings in the DWSRF program are calculated based on the
amount of the state's allotment or capitalization grant. Ceilings are not recalcu-
lated as a result of transferring funds. Thus, for the example above, the maxi-
mum amount of the grant that the state could reserve for set-asides (i.e., 31
percent) would not decrease to $2.1 million, but would remain $3.1 million.
Likewise the 4 percent ceiling on use of the CWSRF Fund for administra-
tion is based on the capitalization grants awarded. Therefore, the calculation
does not change as a result of a transfer. Using the same example, for the $3.3
million transferred into the CWSRF program, the state would not be able to use 4
percent of that amount, or $0.13 million, for administration of the program, be-
cause the ceiling is based on the capitalization grants for the CWSRF program
and does not include funds transferred into the program.
Project Funding for Small Systems in the DWSRF Program
The SDWA includes a provision requiring that states provide a minimum of 15
percent of available funds credited to the Fund to small systems serving fewer
than 10,000 persons, to the extent that funds can be obligated to eligible projects.
Funds transferred into the DWSRF Fund are considered to be part of the "avail-
able funds credited to the Fund" and as such are subject to the small systems
provision.
Transferring Federal Funds
There are specific requirements which are attached to the use of federal
funds in state SRF programs. If a state transfers federal funds and the associ-
ated state match, it can complicate the analysis of whether a state is complying
with these requirements. In the SRF programs, federal capitalization grant
dollars are deposited into the Fund where those dollars mix with state monies,
repayments, and investment earnings. Because many states do not identify the
source of money disbursed to a recipient (since every disbursement likely repre-
sents a mixture of funding), states must identify projects funded in an amount
equal to the capitalization grant and apply applicable requirements to those
projects. States must identify whether the transferred amount consists of federal
dollars to which these requirements will apply and maintain sufficient procedures
to ensure proper accounting for transferred dollars.
The policy included in Appendix C outlines the requirements that trans-
ferred funds are subject to if they are identified as federal dollars. These include
requirements relating to the period over which states may accept payments of
capitalization grant funds and obligate those funds (including state match).
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States must also ensure that identified projects meet the requirements of other
cross-cutting federal laws (e.g., Endangered Species Act, National Historic
Preservation Act, etc.) in the same manner as they apply to capitalization grant
funds in the SRF program. If a state transfers non-federal funds (i.e., principal
and interest repayments, investment earnings), it may be able to reduce the
number of requirements that apply to tranferred funds, and thus reduce the
burden on recipients of assistance.
Reporting
States are required to develop an annual Intended Use Plan (IUP) for
both SRF programs that describes how funds are to be used in the program for
that year. The IUP must be made available for public review and comment. If a
state chooses to transfer funds it must describe the type of funds that will be
reserved and/or transferred and identify how those funds will be used. The IUP
must disclose how and why decisions were made to transfer funds by, for ex-
ample, discussing the wastewater and drinking water needs in a effort to show
the public that the highest priority projects are being funded.
States are also required to produce reports describing how funds in the
program have been expended. The CWSRF program requires an Annual Report,
while the DWSRF program requires a Biennial Report. With respect to transfers,
these reports must identify the amount of funds transferred between the two
programs and describe how those funds were used. The state must also report
transfers in the financial statements of the SRF programs, with corresponding
footnotes identifying the type of funds transferred.
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Part III
Transfers in the SRF Programs
The Clean Water and Drinking Water Needs Surveys and related studies
show that the needs confronting both the drinking water and clean water commu-
nities are considerable. While the amount of funding provided through the SRF
programs is great, it cannot fund all of the documented needs. SRF program
managers must assess the total needs in the state and target limited resources
to those with the highest priority. As they make program decisions, state SRF
managers must also consider the relative demand for funding. This demand can
be affected by external factors (e.g., favorable interest rates in the private or
municipal lending sectors, grant programs) or internal factors (e.g., readiness of
projects targeted for SRF funding to proceed with construction). If the demand
for funding exceeds the availability of funds in the program, states can make
decisions that will increase the funds available for projects. For example, many
states have increased the amount of funds available for their programs by issuing
bonds secured by SRF funds (i.e. leveraging).
A state that makes the decision to increase the amount of available
funding by transferring funds from one program to the other must weigh the
relative needs in each program with the demand in each program and balance
the impacts that any transfer will have on both programs. As of May 2000, five
states - New York, New Jersey, Maryland, Colorado and Montana - had consid-
ered their needs and demand and made the decision to transfer funds. In each
state, funds were moved from the CWSRF program to the DWSRF program.
Four of the states chose to transfer non-federal funds, while one transferred
capitalization grant funds. This section will provide a discussion of the process
each state went through to arrive at the decision to transfer funds and the impact
of transferring monies on both SRF programs.
New York
The New York CWSRF and DWSRF programs are among the strongest in
the nation. The CWSRF program is administered by the New York State Environ-
mental Facilities Corporation (NYSEFC) in cooperation with the New York State
Department of Environmental Conservation (NYSDEC). The DWSRF program is
administered by the New York State Department of Health (NYSDOH) in coop-
eration with NYSEFC. As mentioned previously, NYSEFC is responsible for
financial management of the Fund for both programs. Both programs issue
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bonds to increase the amount of funding available for projects. As can be seen in
the table below, the amount of additional funds that have been made available by
leveraging is significant.
The needs in New York for drinking water projects are great. Given the
lack of a significant source of funding for drinking water projects and system
needs to meet current drinking water standards such as the Surface Water
Treatment Rule, the state found that there was a significant demand, particularly
for assistance to disadvantaged systems. The state's federal fiscal year 2000
DWSRF IUR issued in September 1999, identified more than $3 billion in
projects. In 1996, the Governor signed the Clean Air/Clean Water Environmental
Bond Act which authorized more than $365 million in bonds to assist public water
systems. This funding, combined with the funding made available through the
DWSRF program, represented the first serious provision of funding to assist
public water systems in the state. In order to address the particular needs of
disadvantaged communities, the state included an additional $90 million in funds
to be used as grants. Yet, even with the additional state funds and funds derived
by leveraging federal monies, the state found that it still could not meet the
demand for funding.
In the CWSRF program, the state is currently able to fund every eligible
project which is ready to be financed. Therefore, the state determined that it
would transfer an amount equal to 33 percent of its fiscal year 1997 through 2000
DWSRF grants from the CWSRF program to the DWSRF program - a total of
$66.2 million. The state has already transferred $49.98 million and will transfer
the remaining amount
sometime in late 2000.
Because the state will
leverage these funds, it
anticipates that a
significant number of
additional drinking water
projects will be funded
as a result of transfers.
The direct impact of the
transferred funds is that
it allows New York to
expand its fundable list
of DWSRF projects to
address a greater
number of high priority
projects. An additional
benefit is that it allows
the state to fund more
disadvantaged/hardship
community projects.
Should the CWSRF
program need additional
funds to finance high
New York
Infrastructure needs
Allotment (as % of
appropriation)
Grantee
Cooperating agency
Federal grants
DWSRF Set-asides
Net bonds issued*
Assistance agreements
Assistance dollars
Dollars transferred
thru April 2000
(% of total assistance $)
CWSRF
$15.9B
(1996-2016)
11.18%
NYSDEC
NYSEFC
(thru 6/30/99)
$1.6B
$3.5B
508
$4.0B
$49.98M
(1 .2%)
DWSRF
$10. 1B
(1995-2015)
6.33%
NYSDOH
NYSEFC
(thru 6/30/00)
$200.5M
$22.8M (1 1 .4%)
$396M
130
$465M
*Net bonds = Gross bonds - costs of issuance - debt service reserve
14
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priority drinking water projects, the state will return transferred funds by Septem-
ber 30, 2001 (the sunset date for transfers). If the authority to transfer continues
beyond the sunset date, New York will reevaluate the need to continue transfer-
ring based on an assessment of the relative needs of the DWSRF and CWSRF
programs. The state strongly supports extending the transfer provision beyond
fiscal year 2001.
New Jersey
Both of New Jersey's SRF programs are jointly administered by the New
Jersey Department of Environmental Protection (NJDEP) and the New Jersey
Environmental Infrastructure Trust (NJEIT). Both SRFs include leveraging,
secured by a portion of SRF funds, to increase the amount of funding available
for projects.
The demand for drinking water projects in New Jersey is significant. The
draft DWSRF federal fiscal year 2001 IUP project priority list identified 200
projects totaling $554 million. The Department found that the CWSRF financing
program is currently able to fund all eligible projects meeting program require-
ments and deadlines. Therefore, the NJDEP made the decision to pursue a
transfer of funds from the CWSRF program into the DWSRF program in the
amount of $9.2 million. A transfer of CWSRF non-federal funds to the DWSRF
account was completed in October 1999, allowing the state to fund one large
project. The amount transferred is equal to 14 percent of the state's fiscal year
1997-1999 DWSRF grants. An additional $11.7 million may be transferred during
the latter part of 2000,
which will bring the
transferred amount to
33 percent of the 1997-
1999 DWSRF grants.
The state will transfer
funds in the future as
long as it does not
jeopardize its ability to
fund clean water
projects that are ready
to proceed.
The state
supports extending the
transfer provision
beyond the fiscal year
2001 deadline because
it will enhance its ability
to meet drinking water
and clean water financ-
ing needs.
New Jersey
Infrastructure needs
Allotment as % of
appropriation
Grantee
Cooperating agency
Federal grants
DWSRF Set-asides
Net bonds issued
Assistance agreements
Assistance dollars
Dollars transferred thru
April 2000
(% of total assistance $)
CWSRF
$7.0B
(1996-2016)
4.14%
NJDEP
NJEIT
(thru 6/30/99)
$776. 8M
$546M
161
$1.1B
$9.2M
(0.8%)
DWSRF
$3.6B
(1995-2015)
2.44%
NJDEP
NJEIT
(thru 6/30/00)
$63.5M
$8.2M (12.9%)
$39M
21
$77.3M
15
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Maryland
The Maryland SRF programs are administered by the same office within
the Maryland Department of the Environment (MDE). In 1988, the State of
Maryland created the Water Quality Financing Administration (WQFA) within
MDE to encourage capital investment for water quality activities. The WQFA
oversees the CWSRF and DWSRF Funds and is authorized to issue debt to
increase the amount of funding available for projects. The CWSRF program has
leveraged funds to finance additional projects, however, the WQFA has deter-
mined that it will not leverage funds in the DWSRF program at this time.
Because the state has been able to fund all eligible projects that are
ready to proceed in the CWSRF program during the last two years, it determined
it was appropriate to transfer funds to the DWSRF program in order to finance
more drinking water projects. An additional factor in making the decision to
transfer was that the amount eligible for transfer was relatively small compared to
the availability of CWSRF funds. To date, the state has transferred $10.6 million,
an amount equal to 33 percent of its fiscal year 1997-1999 grants, which it has
targeted for 24 projects on the state's IUR The transferred funds will primarily be
used to make direct loans to small systems. If demand is sufficient, the state
may pledge the direct loans to future bond issues to increase the amount of
funding available for projects. Because the funds that were transferred consisted
of non-federal funds, the state was able to streamline the funding process for
many of the small systems receiving assistance because the funds were not
subject to the same
requirements which
apply to federal funds.
The state will make
a determination on the
need to transfer annually
based on demand in
both the CWSRF and
DWSRF programs. The
state supports extending
the flexibility to transfer
beyond the end of fiscal
year 2001.
Maryland
Infrastructure needs
Allotment as % of
appropriation
Grantee
Cooperating agency
Federal grants
DWSRF Set-asides
Net bonds issued
Assistance agreements
Assistance dollars
Dollars transferred thru
April 2000
(% of total assistance $)
CWSRF
$1.7B
(1996-2016)
2.45%
MDE
MDE/WQFA
(thru 6/30/99)
$344.6M
$178M
142
$377.8M
$10.6M
(2.8%)
DWSRF
$1.3B
(1995-2015)
1 .00%
MDE
MDE/WQFA
(thru 6/30/00)
$30.2M
$7.9M (26.4%)
no leveraging
14
$23.9M
16
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Colorado
The Colorado Water Resources and Power Development Authority
(CWRPDA) is responsible for the financial administration of both Colorado SRF
programs. Programmatic management of both programs is handled by the
Colorado Department of Public Health and Environment (CDPHE). Like the other
states discussed previously, Colorado has leveraged its SRF programs to
significantly increase the amount of funds available for projects and has funded
more than $260 million in projects through its CWSRF program.
Colorado made the determination that it had sufficient funding in the
short-term to fund those CWSRF projects that were ready to proceed to
construction. The state has more than $116 million in drinking water projects on
its fiscal year 1999 priority/fundable project list. Although the state is already
leveraging DWSRF capitalization grant funds to increase the number of drinking
water projects it can fund, by transferring funds from the CWSRF to the DWSRF
program, it will add to the pool of funds it uses for leveraging. Thus, the $8 million
in funds that the state transferred will be able to fund more than $20 million in
drinking water projects.
Because of restrictions in the statutes authorizing the SRF programs in
the state, Colorado can only transfer federal funds. The state calculated the
amount available for transfer from its fiscal year 1997 and 1998 DWSRF grants at
$8.7 million. The state determined that it would transfer $8.0 million of the $10.8
million fiscal year 1998 CWSRF grant. The transfer was completed in December
1999.
The transferred
monies were used to
fund three projects,
including a loan to the
town of Julesburg (pop.
1262), which was on a
compliance schedule
due to high nitrate levels.
If the transfer date is
extended, Colorado
would revise its statute
to allow non-federal
funds to be transferred
and would continue to
make transfers until
more CWSRF projects
move into construction
mode.
Colorado
Infrastructure needs
Allotment as % of
appropriation
Grantee
Cooperating agency
Federal grants
DWSRF Set-asides
Net bonds issued
Assistance agreements
Assistance dollars
Dollars transferred thru
April 2000
(% of total assistance $)
CWSRF
$0.65B
(1996-2016)
0.81 %
CWRPDA
CDPHE
(thru 6/30/99)
$134.1M
$226M
66
$263.4M
$8.0M
(3.03%)
DWSRF
$1.9B
(1995-2015)
1 .00%
CWRPDA
CDPHE
(thru 6/30/00)
$46.8M
$8.6M (18.4%)
$86M
23
$135.5M
17
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Montana
The Montana CWSRF and DWSRF programs are both managed by the
Montana Department of Environmental Quality (MDEQ). Financial management
of the Funds is conducted by the Montana Department of Natural Resources and
Conservation (MDNRC). Unlike the other states profiled in this report, the state
has never leveraged to increase the amount of funding for projects, choosing
instead to operate a direct loan program for both SRFs.
The state made a decision to transfer additional funds into the DWSRF
program due to the excessive demand for financing of drinking water infrastruc-
ture improvements throughout the state. Cash flow modeling for both programs
was performed by MDNRC to evaluate the short- and long-term impacts of
transferring on both SRF programs. No significant impacts were identified since
the state anticipates that it will return transferred funds to the CWSRF program to
fund wastewater projects if it finds that wastewater infrastructure needs are not
being met.
The state transferred $4.9 million from the CWSRF to the DWSRF pro-
gram in 1999, which represented the maximum 33 percent of the fiscal year 1997
DWSRF capitalization grant allowed for transfer. The state funded four additional
projects using transferred funds, including a $1.3 million loan for a project that
constructed a surface water treatment plant for a previously unfiltered system.
This loan is significant in that it made the project more affordable for the commu-
nity and allowed the system to expand the use of current resources for opera-
tions and maintenance and other improvement needs. The state also intends to
transfer amounts equal
to 33 percent of its fiscal
year 1998 and 1999
DWSRF grants, which
will bring an additional
$2.3 million and $2.4
million, respectively, into
the program for the
construction of additional
projects. Thus far the
state has transferred
non-federal funds, which
has afforded the state
more latitude in the use
of the funds to meet the
individual needs of
communities. The state
has only received sup-
portive comments with
respect to its decision to
transfer and strongly
supports continuing the
provision beyond fiscal
year 2001.
Montana
Infrastructure needs
Allotment as % of
appropriation
Grantee
Cooperating agency
Federal grants
DWSRF Set-asides
Assistance agreements
Net bonds issued
Assistance dollars
Dollars transferred thru
April 2000
(% of total assistance $)
CWSRF
$0.3B
(1996-2016)
0.50%
MDEQ
MDNRC
(thru 6/30/99)
$63. 1M
47
no leveraging
$57.8M
$4.9M
(8.5%)
DWSRF
$0.7B
(1995-2015)
1 .00%
MDEQ
MDNRC
(thru 6/30/00)
$29.4M
$4.2M (14.4%)
21
no leveraging
$31 .9M
18
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Future Transfers
While only five states had made use of the transfer provision prior to the
spring of 2000, several others have indicated an interest in making use of the
provision within the next year.
Illinois wants to extend its DWSRF program to privately-owned community
water systems. However, the state issues tax exempt bonds for the program. To
fund privately-owned water systems using these state bond proceeds would be
complicated and restricted due to IRS rules controlling tax exempt bonds. There-
fore, as part of its fiscal year 2000 SRF grant applications, Illinois plans to trans-
fer state match funds from the DWSRF program to the CWSRF program and an
equal amount of fiscal year 2000 federal capitalization grant dollars from the
CWSRF program back into the DWSRF program. Because this is essentially a
net-zero transfer, the state could still choose to transfer dollars from one program
to another before the end of fiscal year 2001. If the provision is extended beyond
the end of fiscal year 2001, the state will likely continue to transfer DWSRF state
match dollars into the CWSRF program until such time that the repayment
stream for the DWSRF program becomes sufficiently large enough to permit
funding of all privately-owned public water systems using repayments.
Wisconsin plans to transfer non-federal funds from the CWSRF program
to the DWSRF program as an alternative to leveraging the DWSRF program. The
state leverages its state program that complements the CWSRF program and
can adjust its bond issues to make up for funds that are transferred to the
DWSRF program. While the state has not yet made a final determination on how
much it will transfer, it plans to transfer an amount equal to 33 percent of the
fiscal year 2000 and 2001 DWSRF grants, and may transfer an amount equal to
the fiscal year 1998 and 1999 grants as well.
Alabama plans to transfer approximately $13 million in non-federal funds
during fiscal years 2000 and 2001 from the CWSRF to the DWSRF program.
The amount is based on the maximum percentage allowed using fiscal year 1997
through 2000 DWSRF grants. The state has determined that the transfer will not
have an adverse effect on the CWSRF's ability to fund projects. The CWSRF
program has been able to fund all projects that have applied for loans, mainly
through leveraging to meet demand. While the state also leverages its DWSRF
grant funds to increase the amount available for funding, many of the projects
that are ranked high on the state's priority list require direct loans because they
are not of sufficient credit quality to be included in a bond pool. The funds that
are transferred into the DWSRF program will allow the state to provide assistance
to these high ranked projects and also access the projects with a stronger credit
quality further down on the priority list.
Missouri has indicated that it will transfer $10.5 million in non-federal
funds from its CWSRF program to the DWSRF program this year as part of its
application for fiscal year 2000 funds. This represents 20 percent of the state's
fiscal year 1997 through 2000 DWSRF grants. The state is transferring funds to
meet an excess in demand for DWSRF project assistance, however, the state
hopes to return the funds to the CWSRF program at some point in the future.
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20
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Part IV
Assessment and Recommendation
Thus far, the provision allowing transfers has proven to be most useful in
allowing states to address the needs facing public drinking water systems. More
than $83 million has been contributed to the DWSRF Funds of the five states that
have transferred to date. These funds will have a significant impact on helping
these states address demand for drinking water projects, yet only represent 1.4
percent of the assistance the five states have provided for clean water projects
since 1988. As with the provision that allows cross-collateralization for states
issuing bonds to support their programs (Appendix B), transfers have given these
states flexibility to use one SRF to support the other in meeting needs and
demand. Should the provision be continued beyond the fiscal year 2001 sunset
date, additional states may take advantage of the flexibility the provision allows
them in addressing their most pressing public health and water quality needs.
States that have not transferred were asked whether they had considered
using the transfer provision thus far in their SRF programs. Roughly one-half of
the 23 states responding had considered transfers. The most frequently cited
reason for not transferring was that demand for both programs within a state
exceeded the funding available for projects. When posed the question as to
whether they would consider transferring at some point in the future, roughly one-
half of the respondents indicated that the program would consider transfers in the
future. Other respondents indicated that they were not likely pursue transfers in
the future due to the great need for funding both programs or because the pro-
grams were in different agencies.
Obstacles
The policy developed by EPA to implement the transfer provision removed
some of the obstacles that states could have faced in making decisions to trans-
fer. For example, by allowing transfers on a net basis, EPA facilitated transfers
because states can move funds from one program to the other with the assur-
ance that an amount equal to those funds can be returned to the donor SRF at
some point prior to September 30, 2001. EPA also allowed states to transfer any
funds within their SRFs rather than just federal capitalization grant dollars. This
allowed States to relieve certain recipients from having to comply with the re-
quirements associated with the federal dollars in the SRF programs.
21
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One of the primary factors affecting the decision to transfer is where the
SRF programs are managed within the state. The five states discussed in this
report either had the SRF programs within the same agency or had one agency
that conducted financial management for both SRFs. When the same agencies
are involved in the decision-making process, it allows for better communication
and a more comprehensive look at needs and demands across the two pro-
grams. When the SRF programs are housed in entirely different agencies (e.g.,
Department of Health vs. Department of Environmental Quality), with different
management chains, it becomes more difficult to consider moving funds from one
program to the other.
Ensuring that adequate funds are available to administer SRF programs
has been an issue in several states, particularly those states that leverage funds
to increase the amount available for projects. Both SRF programs allow states to
use four percent of their capitalization grant for administration of the program.
However, if a state leverages, transfers funds or simply has a large balance of
funds available due to repayments, the amount of funding provided by an amount
equal to four percent of the grant may not be sufficient to maintain a large loan
portfolio. Many states have made the decision to impose fees on borrowers to
increase the amount of funds available for administration. One program indicated
that a factor it considered in deciding not to transfer was that a large influx of
funding would tax a small staff that is sufficiently challenged by maintaining the
loans provided within the existing framework.
Suggested Improvements
Colorado found the experience of transferring federal funds to be a chal-
lenge and is moving to make changes to state law that would allow the state to
transfer non-federal funds in the future. However, none of the five states that
have transferred funds to date had specific recommendations about how to
improve implementation of the provision. Their only recommendation, which was
echoed by states that did not elect to transfer, was that the provision be extended
beyond the fiscal year 2001 deadline.
Several states recommended that EPA allow a state that transfers funds
to use some amount to administer the loans that will be made from those funds.
This issue is difficult to address. The enacting legislation for the CWSRF pro-
gram allows a state to use a portion of their Fund to administer the program, but
clearly caps this use at an amount equal to four percent of the state's capitaliza-
tion grants. The DWSRF program enacting legislation does not allow states to
use a portion of the Fund for administration, but allows states to set aside four
percent of their allotment for that purpose. EPA believes that it has given states
sufficient flexibility to address administration funding needs by allowing them to
impose fees on borrowers for program administration.
22
-------
Some states recommended that EPA streamline requirements for public
notification so as to allow states to transfer funds at any time provided that they
not exceed a cumulative 33 percent of DWSRF capitalization grants. EPA be-
lieves that public notification is an important component of the SRF programs and
that decisions the state makes with respect to either program should be commu-
nicated to the public with an opportunity to comment.
Recommendation
Providing states with the long-term ability to transfer funds between their
SRF programs will add transfers to a toolbox that already includes leveraging and
cross-collateralization. Each of these tools give states the ability to address their
water infrastructure needs and demands. The states that have made use of the
transfer provision have found it to be of significant assistance in allowing them to
meet drinking water demands within their state. As critical drinking water needs
are met and states work to implement new requirements related to the Clean
Water Act, EPA anticipates that states will also look to transfer funds into the
CWSRF program if the amount of funding is not sufficient to meet demand.
While there may have been concerns that states would transfer DWSRF dollars
into CWSRF programs which were more mature, this has not been the case.
States have demonstrated that transferring funds requires a thorough decision-
making process. Extending the ability to transfer into the future will allow them to
better manage their drinking water and clean water projects in the short-term
because they will be assured that transferred funds can be returned to either
program in the long-term. Removing the time limitation from transferring funds
will also allow states to further reduce the risk of default when they sell bonds to
leverage their programs.
Therefore, EPA recommends that Congress continue to authorize
transfers between the two programs and remove the sunset date in the
provision to give states full flexibility to take advantage of the benefits transfers
can provide in helping them meet important water infrastructure needs.
23
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24
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Appendix A
Congressional authorization of
transfers between the SRF programs
Safe Drinking Water Act Amendments of 1996
SEC. 302. «NOTE: 42 USC 300J-12 note.» TRANSFER OF FUNDS.
(a) In General.--Notwithstanding any other provision of law, at any time after
the date 1 year after a State establishes a State loan fund pursuant to section
1452 of the Safe Drinking Water Act but prior to fiscal year 2002, a Governor of
the State may-
(1) reserve up to 33 percent of a capitalization grant made pursuant to
such section 1452 and add the funds reserved to any funds provided to
the State pursuant to section 601 of the Federal Water Pollution Control
Act(33U.S.C. 1381);
(2) reserve in any year a dollar amount up to the dollar amount that may
be reserved under paragraph (1) for that year from capitalization grants
made pursuant to section 601 of such Act (33 U.S.C. 1381) and add the
reserved funds to any funds provided to the State pursuant to section
1452 of the Safe Drinking Water Act.
(b) Report.-Not later than 4 years after the date of enactment of this Act, the
Administrator shall submit a report to the Congress regarding the implementation
of this section, together with the Administrator's recommendations, if any, for
modifications or improvement.
(c) State Match.-Funds reserved pursuant to this section shall not be consid-
ered to be a State match of a capitalization grant required pursuant to section
1452 of the Safe Drinking Water Act or the Federal Water Pollution Control Act
(33 U.S.C. 1251 etseq.).
25
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Explanatory Statement of the Committee on Conference
Title III - Miscellaneous Provisions
Transfer of Funds (Sec. 302)
The following represents an understanding between the House of Com-
mittee on Commerce and the House Committee on Transportation and Infrastruc-
ture. This understanding has no impact on the operation of law.
The House Commerce Committee, which has jurisdiction over the Safe
Drinking Water Act, and the House Transportation and Infrastructure Committee,
which has jurisdiction over the Federal Water Pollution Control Act, agree to
share jurisdiction over the free-standing provision in section 302 of the Safe
Drinking Water Act Amendments of 1996 involving transfer of revolving loan
funds. This provision allows for the transfer of funds, under specified terms and
conditions, between the Safe Drinking Water State Revolving Loan Fund which is
under the exclusive jurisdiction of the Commerce Committee and the Clean
Water State Revolving Fund which is under the exclusive jurisdiction of the
Transportation and Infrastructure Committee.
For matters directly amending section 302, the two Committees agree
that each should be given equal weight in bill referrals, conference appointments,
and other jurisdictional assignments. For instance, a bill to amend section 302 to
increase the percentage amount that may be transferred between the two revolv-
ing funds would be in the joint jurisdiction of the two Committees. Likewise, a
direct or indirect amendment to the provisions of section 302 would be in the
Committees' joint jurisdiction.
Enactment of this freestanding section does not give the Commerce
Committee any jurisdiction over the Federal Water Pollution Control Act, nor does
it give the Transportation and Infrastructure Committee any jurisdiction over the
Safe Drinking Water Act. Jurisdiction for changes that amend provisions of the
Federal Water Pollution Control Act or the Safe Drinking Water Act should be
determined without regard to section 302. Thus, for example, a bill to change or
impose conditions or limitations on the criteria applicable to a State for the receipt
or expenditure of revolving funds under the Safe Drinking Water Act or Federal
Water Pollution Control Act would be in the sole jurisdiction of the Committee on
Commerce or the Committee on Transportation and Infrastructure respectively.
26
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Appendix B
Cross-collateralization
in the SRF programs
Cross-collateralization allows funds from one State Revolving Fund (SRF)
program to be used to secure the other SRF program from revenue shortfalls.
Cross-collateralization has had a significant positive impact on the State Revolv-
ing Fund program. States and bond rating agencies report that the use of cross-
collateralization has resulted in the following benefits:
Stronger bond ratings for DWSRF bonds because they are supported by the
very strong cash flows of the CWSRF program.
Stronger bond ratings that translate into lower interest rates on DWSRF
bonds and cost savings to SRF borrowers. New DWSRF program access
to the bond market that would not be possible without the credit backing
provided by the CWSRF through cross-collateralization.
Stronger Bond Ratings for SRF Programs
Independent bond rating agencies all agree that cross-collateralization
provides critical security for the DWSRF program. In a 1999 research report,
"SRF Bonds Provide Safe Harbor,"1 Fitch IBCA indicates that even though the
average loan pool credit quality for the DWSRFs is weaker than that of existing
CWSRFs due to increased lending to small systems, cross-collateralizing the
new DWSRF program's assets with those of the mature CWSRF programs has
allowed states to compensate for this credit risk. Fitch IBCA's SRF specialist
elaborated on this position in a recent correspondence stating:
"Specifically, with regard to structures classified as cross-collateralized by
EPA, cross- collateralization was - in all cases - a major factor justifying or
supporting either upgrades, rating affirmations, or initial rating assign-
ments at the 'AA+' or'AAA' rating levels, Fitch IBCA's two highest. Most
notably, cross-collateralization was the major factor allowing Fitch IBCA to
upgrade Colorado DWSRF bonds to 'AAA' from 'AA' last year. These
upgrades or initial rating assignments were important in increasing the
SRF bond sector's median rating to 'AAA' from the 'AA' category. It is the
only sector of the U.S. municipal market to achieve this distinction on its
unenhanced debt."2
27
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Other major rating agencies (Standard & Poor's Corporation and Moody's
Investor Service, Inc.) provide similar findings in published reports regarding
cross-collateralization, noting that cross-collateralization is achieving its goals of
enhancing start-up drinking water pools and enabling them to achieve a similar
rating to their CWSRF counterparts.3'4
The higher bond ratings that result from cross-collateralization translate
into lower borrowing costs for DWSRF programs. The State of Colorado esti-
mates that cross-collateralization reduced the interest rate on their DWSRF
bonds by up to 1/2 percent - a very significant cost savings to the program. In
Arizona, the state notes that "the presence of cross-collateralization positively
contributed to our (Arizona's) ability to obtain a stand alone AA+ rating. In effect,
the diversification present in our (Arizona's) CWSRF portfolio implicitly benefits
the unknowns associated with lending to small water systems."5
Access to Leveraging Made Possible Through Cross-Collateralization
Some SRF programs view cross-collateralization as being critical to their
efforts to employ leveraging in the DWSRF program. In Minnesota only two of
the 72 DWSRF projects that are funded have what would be viewed as a strong
credit rating ('A' or better). The other 70 cities, needing approximately $60 million
in funding, are generally weak credits ('BBB,"Baa' and noninvestment grade
borrowers). These borrowers combined would be viewed as a very weak portfo-
lio of loans providing limited security for a leveraging program. Minnesota has
found that by incorporating cross-collateralization into its financial structure it was
able to obtain a 'AAA' rating on its DWSRF bonds.
Minnesota's leveraging has put them one and one-half years ahead of
schedule in financing projects. They were able to include an additional 43
projects in their program as a result of leveraging and have the flexibility to
provide greater amounts of funding in the future. Having the greater funding
capacity provided by employing leveraging has helped Minnesota's cities be-
cause they know that funding through the DWSRF program will be available for
them once they are finished with planning and are ready to fund a DWSRF
project.
1Fitch IBCA, "SRF Bonds Provide Safe Harbor," November 4, 1999
2Dickerson, Jason, Director, SRF Ratings Group, Correspondence, April 3, 2000
3Standard & Poor's, Standard & Poor's Credit Week Municipal, "Cross-Collateralization -
The New Credit Tool for SRFs, November 2, 1998
4Moody's Investors Service, Municipal Credit Research - State Revolving Funds Outlook,
December 1999
5 Swartz, Greg, Executive Director, Water Infrastructure Finance Authority of Arizona,
Correspondence, April 4, 2000
28
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Appendix C
EPA implementing policy for transfers
in the SRF programs
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30
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TRANSFER/CROSS-COLLATERALIZATION POLICY
FOR
DRINKING WATER STATE REVOLVING FUND and
CLEAN WATER STATE REVOLVING FUND
I. INTRODUCTION
Enactment of the Safe Drinking Water Act Amendments of 1996 (SDWA)
and the Department of Veterans Affairs and Housing and Urban Development,
and Independent Agencies Appropriation Act of Fiscal Year 1999, (Appropriations
Act) provide flexibility to States for both their drinking water and wastewater
needs. The SDWA 1996 Amendments established the Drinking Water State
Revolving Fund (DWSRF) and also contain a provision authorizing States to
transfer funds between the DWSRF and the Clean Water State Revolving fund
(CWSRF). Congress also created additional flexibility by authorizing a form of
cross-collateralization in the Appropriations Act. With proper planning, priority
setting, and public disclosure these two provisions can assist the States in maxi-
mizing their infrastructure funding programs by increasing the availability of funds
where they are most needed, enhancing bond ratings, and lowering borrowing
costs without increasing risks.
Since there are similarities between the two SRF programs, the Environ-
mental Protection Agency (EPA) intends to administer the two programs in a
similar manner in regard to transfers and cross-collateralization. This policy
statement establishes EPA policy regarding the use of these two provisions in
funding DWSRF and CWSRF projects. It identifies the process a State must
undergo to gain EPA approval for incorporating transfers and/or cross-
collateralization into its SRF program.
Based on the 1997 Drinking Water Needs Survey and the 1998 Clean
Water Needs Survey, the combined needs for wastewater and drinking water
infrastructure financing have been assessed at $278 billion. EPA encourages
States to use these two funding enhancements to finance projects on a priority
basis.
II Transfers
A. Statutory Authority
Section 302 of the Safe Drinking Water Act (SDWA) Amendments of 1996
offers States the flexibility to transfer funds from one SRF program to the other.
The transfer provision reads as follows:
Sec. 302. Transfer of Funds.
(a) In General.—Notwithstanding any other provision of law, at any time
after the date 1 year after a State establishes a State loan fund pursuant
to section 1452 of the Safe Drinking Water Act but prior to fiscal year
2002, a Governor of the State may-
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(1) reserve up to 33 percent of a capitalization grant made pursu-
ant to such section 1452 and add the funds reserved to any funds
provided to the State pursuant to section 601 of the Federal Water
Pollution Control Act (33 U.S.C. 1381); and
(2) reserve in any year a dollar amount up to the dollar amount
that may be reserved under paragraph (1) for that year from
capitalization grants made pursuant to section 601 of such Act (33
U.S.C. 1381) and add the reserved funds to any funds provided to
the State pursuant to section 1452 of the Safe Drinking Water Act.
(b) REPORT.—Not later than 4 years after the date of enactment of this
Act, the Administrator shall submit a report to Congress regarding the
implementation of this section, together with the Administrator's recom-
mendations, if any, for modifications or improvement.
(c) STATE MATCH.—Funds reserved pursuant to this section shall not be
considered to be a State match of a capitalization grant required pursuant
to section 1452 of the Safe Drinking Water Act or the Federal Water
Pollution Control Act (33 U.S.C. 1251 etsea).
Section 302 states that the governor of a State can reserve up to 33% of
its DWSRF capitalization grant for transfer to its CWSRF or an equivalent amount
from its CWSRF to its DWSRF. Therefore, a State has the flexibility to prioritize
its funding where it has the greatest need.
Both the CWSRF and the DWSRF programs require that an Attorney
General's opinion certifying that the SRF program is consistent with State law be
submitted with each capitalization grant application. If a State receives a capitali-
zation grant and later decides to transfer funds, the capitalization grant agree-
ment must be amended and an Attorney General's opinion must be submitted
certifying that State law permits the State to transfer funds. Transfers must be
made by the Governor or by a State official acting pursuant to authorization from
the Governor.
1. Authorized Time Period
Funds may be reserved and transferred only during a limited time period:
a. CWSRF or DWSRF funds may be transferred after one year has
elapsed since a State establishes its DWSRF Fund (i.e., the date of the first
DWSRF capitalization grant awarded to the State for projects), and may include
an amount equal to the allowance associated with its fiscal year 1997 capitaliza-
tion grant. For example, if a DWSRF Fund is established on October 31, 1997
with the award of a capitalization grant for project funds, the first day funds can
be transferred is November 1, 1998.
b. Funds may only be transferred "prior to fiscal year 2002" (October 1,
2001).
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2. Transfer Ceiling
The amount of the total DWSRF capitalization grant, including any portion
awarded for set-aside activities, determines the amount of funds that can be
reserved and transferred.
a. The Governor of a State may reserve an amount equal to 33% of the
DWSRF capitalization grant and transfer the funds to the CWSRF.
b. The Governor may reserve funds from the CWSRF in an amount equal
to no more than 33% of the DWSRF capitalization grant and transfer those funds
to the DWSRF.
B. Transfer Flexibility
1. Transfer Funds
Based on section 302 of the SDWA, the DWSRF capitalization grant the
State is basing the transfer amount on must have been awarded prior to the
transfer of any funds. Section 302 does not limit the transfer of funds to Federal
capitalization grant dollars. States may transfer Federal capitalization grant
dollars, State match, investment earnings, or principal and interest repayments.
When CWSRF Federal funds are transferred, the CWSRF capitalization grant
must also have been awarded prior to the transfer of funds. As part of the trans-
fer process, States must identify in both the CWSRF and DWSRF Intended Use
Plans (ILJPs) that funds will be transferred, the type of funds to be transferred
(Federal capitalization grant dollars, State match, investment earnings, etc.), and
the effect that transfers will have on the program's ability to fund projects. States
may elect to reserve the authority to transfer funds in one year, but not actually
transfer those funds until a later time, but no later than fiscal year 2001 (See
Table #1).
2. Timely and Expeditious Use
Reserving the authority to transfer funds at a future date is not reserving
the actual cash, but is a "credit" for future transfer. Funds must still be used for
project or set-aside activities during the time period prior to when the actual
transfer occurs. States may then transfer other moneys present in the respective
SRF at the time of the transfer.
3. Expiration of Authority to Reserve or Transfer
Funds may not be reserved or transferred after September 30, 2001.
4. Transferring on Net Basis
Moneys may be transferred between the SRF programs on a net basis
provided that the 33% ceiling is maintained. Once money has been transferred,
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even if the donor SRF reaches the 33% limit, it may still be transferred back to
the donor SRF from the receiving SRF by a subsequent transfer. Table #2 shows
the effect of multiple capitalization grants of $100 each and transfers between the
SRF programs.
Another example is a situation where State law does not allow State
funds to be used to fund private water systems in the State's DWSRF program.
In this case, the State may designate that it will transfer State match funds from
the DWSRF to the CWSRF and Federal funds, equal to the State match amount,
from the CWSRF to the DWSRF. Since the dollar amounts of these transfers are
equal, there is no effect on the amount available to transfer. Table #3 illustrates
this example.
C. State Match, Set-asides, Administrative Ceiling and 604(b)
Calculation
Transfers do not impact the State match calculation in the capitalization
grants, the set-asides calculations in the DWSRF, or the 4% administration and
604(b) calculations in the CWSRF.
1. State Match
In both SRF programs, the State match requirement is 20% of the capi-
talization grant. Transfers do not affect the calculation of those required amounts
in either program. Section 302 of the SDWA stipulates that funds transferred
under this provision cannot be considered the required State match for the
capitalization grant in either SRF program. The transfer provision cannot be used
to acquire State match. Transferred funds cannot be used for the purposes of
securing or repaying State match bonds.
2. DWSRF Set-asides
Since set-aside ceilings in the DWSRF are calculated based on the
allotment or the capitalization grant, the ceilings are not recalculated as a result
of transferring funds.
3. CWSRF Administrative Ceiling and 604(b) Calculation
The 4% administrative ceiling is not calculated using transferred amounts.
The calculation of the 4% is based upon the initial capitalization grant. The
604(b) funds are calculated on the allotment.
The following example illustrates the fact that a transfer will have no
impact on State match, the DWSRF set-asides, the CWSRF administrative
ceiling, and the CWSRF 604(b) calculation. The CWSRF capitalization grant is
$10,000,000 and the State match is $2,000,000. The DWSRF capitalization
grant is $10,000,000 and the State match is $2,000,000. The State has deter-
mined it will use 31% of the capitalization grant for set-aside activities. The State
also decided to transfer $3,000,000 from the CWSRF to the DWSRF for addi-
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tional SDWA project activities. After the transfer, the State match for each SRF
program ($2,000,000) remains unchanged because the CWSRF and DWSRF
State match is based upon the initial capitalization grants. The DWSRF set-aside
calculation does not change ($3,100,000) because the set-asides are based
upon the initial capitalization grant amount and/or the allotment. The CWSRF 4%
administrative ceiling remains at $400,000 and 604(b) is still calculated at
$100,000.
D. Project Funding for Small Systems
Transfers into or out of the DWSRF Fund could impact loan assistance for
small systems that serve fewer than 10,000 persons. The SDWA requires that a
State use a minimum of 15 percent of all dollars credited to the Fund to provide
loan assistance to small public water systems to the extent such funds can be
obligated for eligible projects of public water systems. Accordingly, 15 percent of
all dollars transferred into the DWSRF Fund must also be used in accordance
with the small systems provision of the SDWA.
E. Intended Use Plan and Operating Agreement
1. Intended Use Plan
States must develop an annual IUP for each SRF program for public
review and comment that includes a description of the funds to be reserved and/
or transferred and how those funds will be used. The ILJPs must disclose how
and why the decisions to transfer funds were made. EPA encourages States to
include a discussion of wastewater and drinking water needs to show the public
that the highest priorities are being funded. The IUP must provide sufficient
information regarding transfers for the public to understand:
a. the total amount of authority being reserved for future transfer including
the authority from previous years;
b. the total amount and type of funds being transferred during the term of
the IUP;
c. the impact on the current year's Fund and set-asides; and
d. the long-term impact on the Fund.
Both CWSRF and DWSRF lUPs must be amended if a mid-year transfer
is to occur that has not had prior disclosure to the public. For example, the State
received its DWSRF capitalization grant in June 1998 and subsequently decides
to transfer funds to its CWSRF. Because the current year lUPs did not contain
information concerning transfers, the lUPs must be amended (and capitalization
grants if transferring federal dollars) and distributed for public review and com-
ment in accordance with the State procedures established for amending lUPs.
2. Operating Agreement
When a State initially decides to include the ability to transfer in its pro-
gram, the Operating Agreement must be amended to include the method the
State will use to transfer funds.
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F. Transferring Federal Funds and State Match Funds
Because transfers can complicate the analysis of whether a State is
complying with the proper payment schedule, binding commitments, and cross-
cutting Federal authorities, the State must identify whether the transferred
amount consists of dollars on which these requirements will apply or other dol-
lars. The State must maintain sufficient procedures to ensure proper accounting
for transferred dollars.
1. Payment Schedule/Grant Amendments
If a State decides to transfer Federal funds subsequent to establishing a
payment schedule, a revised payment schedule will be necessary. Changes to
the payment schedule will be effected through an amendment to the grant agree-
ment.
2. Cash Draw Proportionality
Transfers of Federal capitalization dollars or State match dollars will
impact cash draw proportionality. Please refer to the "Guide to Using EPA's
Automated Clearing House for the Drinking Water State Revolving Fund Pro-
gram" (EPA-832-B98-003) published in September 1998 for details concerning
recalculating proportionality.
3. Binding Commitments
When Federal funds or State match funds are transferred from one SRF
program's Fund into the other SRF program's Fund, the State must enter into
binding commitments in the receiving SRF program for the transferred amount
within one year after receipt of payment or, if payment has already been taken,
within one year of the transfer date, in addition to the binding commitments
required for its capitalization grant and State match. If funds are transferred from
the CWSRF to the set-aside account in the DWSRF, the binding commitment
requirement on the amount transferred will not apply. The donor SRF program
will not be required to enter into binding commitments on the transferred funds.
4. Cross-cutting Federal Authorities
Cross-cutting Federal authorities apply to transferred Federal funds in the
same manner as they apply to the capitalization grant funds in the receiving SRF
program.
G. Transferring Other Funds
Since transfers do not relieve the State from complying with those re-
quirements that apply to the amount of the capitalization grant, the State should
consider transferring principal and interest repayments and investment earnings
rather than transferring Federal and State match funds. Grant amendments,
binding commitment requirements and cross-cutters, except for civil rights, do not
apply to transferred funds consisting of repayments of principal and interest, and
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investment earnings. Also, cash draw proportionality will not be impacted by
transfers of repayment funds and investment earnings. Please refer to the
"Guide to Using EPA's Automated Clearing House for the Drinking Water State
Revolving Fund Program."
H. Reporting, Monitoring and Review
A State must report transfers in the DWSRF Biennial Report and in the
CWSRF
Annual Report. The reports must identify the amount of funds transferred from
one SRF program to the other and how those funds were used. Since the State
must be able to track all transfers, a schedule of actual transfers must be in-
cluded in the reports which can be reconciled with the schedule of expected
transfers in the I UP. A State must also explain reasons that funds were not
transferred in accordance with the plan described in the IUP, including the impact
on the SRF programs.
The State must also report transfers in the financial statements of the
SRF programs with corresponding footnotes explaining the type of funds trans-
ferred (Federal dollars, State match, principal and interest repayments, or invest-
ment earnings).
III. Cross-Collateralization
A. Authorization
The Departments of Veteran Affairs and Housing and Urban Develop-
ment, and Independent Agencies Appropriations Act of Fiscal Year 1999 (Public
Law 105-276) authorizes cross-collateralization between the DWSRF and the
CWSRF programs. The language included in the law in regard to cross-
collateralization is as follows:
... Provided, That, consistent with section 1452(g) of the Safe Drinking
Water Act (42 U.S.C. 300j-12(g)), section 302 of the Safe Drinking Water Act
Amendments of 1996 (Public Law 104-182) and the accompanying joint explana-
tory statement of the committee on conference (H. Rept. No. 104-741 to accom-
pany S. 1316, the Safe Drinking Water Act Amendments of 1996), and notwith-
standing any other provision of law, beginning in fiscal year 1999 and thereafter,
States may combine the assets of State Revolving Funds (SRFs) established
under section 1452 of the Safe Drinking Water Act, as amended, and title VI of
the Federal Water Pollution Control Act, as amended, as security for bond issues
to enhance the lending capacity of one or both SRFs, but not to acquire the State
match for either program, provided that revenues from the bonds are allocated to
the purposes of the Safe Drinking Water Act and the Federal Water Pollution
Control Act in the same portion as the funds are used as security for the bonds..
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B. Purpose
The drinking water and wastewater community has advocated cross-
collateralization to increase the financing flexibility of the CWSRF and the
DWSRF. For States which issue bonds, the added security provided by the
strength of the CWSRF will enhance the funding capacity in the DWSRF by
achieving better bond ratings. Funds from one SRF program can be used to
secure the other SRF program against a default.
C. Legislative Authority
The CWSRF and the DWSRF programs require that an Attorney
General's opinion certifying that the SRF program is consistent with State law be
submitted with each capitalization grant application. If a State receives a capitali-
zation grant and later decides to cross-collateralize, the capitalization grant
agreement must be amended and an Attorney General's opinion must be submit-
ted certifying that State law permits the State to cross-collateralize.
D. Operating Agreement and Intended Use Plan
When a State initially decides to include cross-collateralization in its
program, the Operating Agreement must be amended to detail how cross-
collateralization will be implemented. The State must annually include in the IUP
for each SRF program a description of how cross-collateralization will be used,
and provide the ILJPs to the public for review and comment prior to submitting
them to the Region as part of the capitalization grant applications. The ILJPs
must, at a minimum, describe:
a. the type of moneys which will be used as security;
b. how moneys will be used in the event of a default;
c. whether or not moneys used for a default in the other program will be
repaid; and, if it will not be repaid, what will be the cumulative impact on the
Funds.
E. Revenues from the Bonds
The proceeds generated by the issuance of bonds must be allocated to
the purposes of the DWSRF and the CWSRF in the same proportion as the
assets from the two Funds that are used as security for the bonds. States must
demonstrate that at the time of bond issuance, the proportionality requirements
have been or will be met. If a default should occur, and Fund assets from one
SRF program are used for debt service in the other SRF program, the security
would no longer need to be proportional.
Proportionality may be achieved at different levels of security. A State
may achieve proportionality at the debt service reserve level. If the debt service
reserve is the primary security and consists of 35% DWSRF funds and 65%
CWSRF funds, the bond proceeds must be allocated 35% to DWSRF purposes
and 65% to CWSRF purposes.
A State may also achieve proportionality by requiring that loan repay-
ments on loans made from the CWSRF are pledged, as the primary security,
only to the CWSRF bonds (or portion of a joint bond issue) and loan repayments
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on loans made from the DWSRF are pledged, as the primary security, only to the
DWSRF bonds (or portion of a joint bond issue). If principal forgiveness is used
as a subsidy for disadvantaged communities funded with bond proceeds in the
DWSRF program, this option may not be used since the security would be dis-
proportionate to the security provided by the CWSRF program.
The above are only two examples which can be used to maintain the
proportionality of the security for bonds. There may be other options the State
will want to explore and submit for EPA approval.
F. State Match
States may not combine the assets of the SRF programs as security for
bond issues to acquire State match for either program. States may not use the
assets of one SRF program to secure match bonds of the other SRF program.
G. Operation of SRF Programs
States may use, in combination, the assets of the SRF programs as
security for bond issues. However, the CWSRF and DWSRF must each continue
to be operated separately. States must maintain records so that, for each SRF
program, separate financial statements can be compiled and separate financial
audits can be conducted. The debt service reserve and interest earned thereon
for the DWSRF program and the CWSRF program must each be accounted for
separately. Repayments on loans in the CWSRF program must be paid to the
CWSRF and repayments on loans made in the DWSRF program must be paid to
the DWSRF.
Cross-collateralization does not effect the calculation of set-asides, the
4% administrative ceiling and binding commitments. Payments and cash draw
proportionality may be affected if there are defaults. The CWSRF Annual Report
and the DWSRF Biennial Report must describe the use of assets of the SRF
programs as security for bond issues and any use of moneys from one SRF
program by the other as a result of cross-collateralization.
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Table #1
Reserving the Right (Banking) to Transfer in Future Years
Year
DWSRF
Capitalization
Grant
Amount Reserved
for Transfer
Banked Transfer
Ceiling
Amount
Transferred
1997
1998
1999
2000
2001
2002
$100
$100
$100
$100
$100
$100
$33
$33
$33
$33
$33
$001
$33
$66
$99
$132
$165
$001
$00
$00
$00
$00
$165
$001
Total $600 $165
1 No funds may be reserved or transferred after fiscal year 2001.
$165
Table #2
Transferring on a Net Basis
In this example, the DWSRF capitalization grant in each year is $100. Therefore, the
transfer ceiling is $33 for the first year, increasing to $66 in the second year and $99 in the
third year, etc.
Transaction
Year Description
1997 CG Award
1998 CG Award
1998 Transfer
1999 CG Award
1999 Transfer
1999 Transfer
2000 CG Award
2000 Transfer
2001 CG Award
2001 Transfer
2002 CG Award
Transferred Transferred
Banked from from
Transfer CWSRF- DWSRF-
Ceiling DWSRF CWSRF
$33
$66
$66 $20
$99
$99 -- $86
$99 $90
$132
$132 -- $50
$165
$165 $191
$0
DW
CW Funds Funds
Available Available
for for
Transfer1 Transfer1
$332 $332
$66 $66
$46 $86
$79 $119
$165 $33
$75 $123
$108 $156
$158 $106
$191 $139
$0 $330
$0 $0
1The maximum either SRF can transfer as the result of banking and previous transfers.
transfers cannot occur until one year after the DWSRF has been established.
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Table #3
Year
1997
1998
1998
Transaction
Description
CG Award
CG Award
Transfer
Banked
Transfer
Ceiling
$33
$66
$66
Transferred
from
CWSRF-
DWSRF
-
-
$40
(Federal)
Transferred
from
DWSRF-
CWSRF
-
-
$40 (State)
CW
Funds
Available
for
Transfer1
$33
$66
$66
DW
Funds
Available
for
Transfer1
$33
$66
$66
1The maximum either SRF can transfer as the result of banking and previous transfers.
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