Environmental
Financial Advisory Board
EFAB
Robert Lenna
Chair
John Wise
Executive Director
Members
Hon. Pete Domenici
Terry Agriss
George Brewster
George Butcher
Pete Butkus
Michael Curley
Michael Deane
Linda Descano
Michael Finnegan
Evan Henry
Anne Pendergrass Hill
Martin Kamarck
Stephen Mahfood
Langdon Marsh
John McCarthy
Vernice Miller-Travis
George Raftelis
Arthur Ray
Andrew Sawyers
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Mary Ellen Whitworth
Joseph Young
Environmental State Revolving Funds:
Developing a Model To Expand the Scope of
the SRF
FINAL REPORT
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
December 2000
Printed on Recycled Paper
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Environmental State Revolving Funds: Developing a Model
To Expand the Scope of the State Revolving Funds
Introduction
The federal Water Quality Act of 1987 made provision for the establishment of state
revolving loan programs, with the purpose of providing financial assistance for municipal sewage
and certain other water pollution control programs. The intention was to supplant the traditional
matching grant program with a revolving loan program, thus moving the United States towards a
system of sustainable finance. In the 1996 amendments of the federal Safe Drinking Water Act,
an additional revolving loan program was established to finance various drinking water projects.
As these programs have been developed, project priority has generally been driven by the need for
compliance with state or federally mandated standards. These programs are capitalized with
annual appropriations; EPA provides "capitalization grants" to each state to create and sustain a
State Revolving Fund(SRF).
The loans disbursed from the SRF are limited to specified eligible investments only.
Projects that may be defined as ineligible according to federal rules may be worthy environmental
projects from a state's perspective. Nonetheless, because of the limited federal definition of
"eligible" uses, the benefits of participation in these loan programs are denied to such projects.
Although these revolving loan programs were not originally intended to fund every clean water
need, examples of projects ineligible for program participation, but of significant environmental
benefit, can be found throughout the United States.
Environmental quality involves complex and inter-related issues of water, air and land. In
many instances, providing financing for a specific project, such as awastewater treatment plant,
may provide only narrowly defined or focused relief for a water quality problem covering a larger
geographic area. Issues of population, economic development, land use, geology, etc., vary
widely from state to state and region to region, affecting where and how financial resources can
provide the highest benefit.
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Significant environmental benefits could be achieved in many states by evolving
authorizing the evolution of the current State Revolving Fund (SRF) to a comprehensive
environmental SRF (ESRF). An ESRF could undertake a much broader range of environmental
financing, not necessarily infrastructure or facility based, but which substantially benefits water
quality. Possible projects could include solid waste projects, brownfields and landfill remediation,
removal of leaking underground storage tanks and site restoration, and a wider range of non-point
source projects, just to name a few.
Discussion
Several states have programs that could be considered ESRFs, due to the evolution over
time of the types of projects financed. The Ohio Water Development Authority (the "Authority)
serves as a very good example for an ESRF structure. The Authority has other programs
unrelated to issuance of its Water Quality Bonds. Its Community Assistance Program provides
financing to governmental agencies undertaking wastewater and water supply projects at extended
terms and below market rates to alleviate undue hardship for qualifying borrowers. In 1991, the
Authority developed the Solid Waste Financing Program to provide financing for governmental
agencies to implement solid waste management plans. Eligible projects include materials recovery
and composting facilities, transfer stations, landfills and incinerators.
In 1994, the Ohio General Assembly enacted legislation to establish a Voluntary Action
Program to encourage and facilitate the remediation of property contaminated by petroleum or
hazardous substances. The Authority has the power to make loans to finance "voluntary actions",
which includes measures that may be taken to identify and address potential sources of such
property contamination. In 1995, the Authority established an Economic Development Loan
Program for the purpose of making loans to governmental agencies for water and wastewater
improvement projects recommended and requested by the Ohio Department of Development
based upon expected economic development benefits.
In addition, the Authority is authorized to engage in research and development with
respect to wastewater, water management facilities, solid waste facilities, and energy resource
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development facilities, and has established a grant program for qualifying R&D projects meeting
certain guidelines. Grants are subject to available funds and recommendation by the director of a
department of state government which is responsible for applicable oversight. Priority is given to
projects that have statewide environmental and/or natural resource applications.
Key to the Ohio program's success is the flexibility to fund the various programs the state
deems important. Because the Authority's initial funding was a grant from the State many years
ago, few restrictions are placed on how it can be employed. This is very different from how the
current-day federal clean water and drinking water programs are structured, with numerous
restrictions on the eligible uses, particularly with respect to financing. For example, Ohio makes
surpluses from one program available to another. This flexibility not only enables programs to be
developed quickly to address various needs but also enhances financing flexibility by allowing the
surplus from one program to secure that of another.
The Ohio Water Development Authority model as a tempkte for the concept of an ESRF
could be expanded moderately or greatly as desired. Eligible projects could include wastewater,
nonpoint sources, landfill and land protection, stormwater, wetlands and habitat protection, and
interrelated projects within specific watersheds, all as an overall approach to improving water
quality. Expansion to projects dealing with underground storage tanks, landfill closures,
brownfields, agricultural waste and animal feed lots could be easily considered. Specific air
quality issues, as they relate to water quality, could be addressed through emission control
financing and development of alternative energy sources as opposed to burning fossil fuels.
The benefits of this approach would be significant. Most states have fully developed SRF
procedures, which could be readily expanded to encompass additional projects qualifying for
financing. Expansion of an existing program, instead of developing additional stand-alone
programs, would provide administrative efficiencies, resulting in less administrative costs for
states and borrowers. The increased pace of project funding would provide environmental
benefits sooner. Administration could be structured to facilitate improved access for borrowers.
Analysis and funding of an increased scope of eligible projects would provide greater awareness
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of broad environmental issues. Finally, greater flexibility would allow states to address specific
environmental problems more effectively.
Challenges
Consideration of an ESRF model poses certain issues that must be discussed and
addressed at various levels. States that have expanded the types of projects financed and
financing tools utilized have already addressed many of these issues, which undoubtedly include
public policy, managerial, administrative and technical capability, financial and funding capacity,
and legislative and legal issues.
Public Policy Issues
Is it sound policy, fromboth the federal and state perspectives, to allow states the option
of evolving their SRF programs into an ESRF? Would an ESRF be more efficient and effective
financing mechanism to deliver financial assistance in meeting environmental needs? Would an
ESRF be more equitable on a state-by-state basis in allowing state flexibility to address its water
quality issues?
Management and Administration Issues
By its nature, an ESRF could be more complex, and management of the programs could
be more involved. Consideration must be given to the challenge of dealing with new issues such
as land acquisition, conservation easements, and possible projects which cross state lines or EPA
regional boundaries, to mention a few. Some states may lack experience in dealing with
grassroots or community based groups, or private businesses and thus may not reach out to
include those participants. A broader range of projects could mean a larger administrative burden
in staff time, range of knowledge and technical expertise, and expenses. Some states may need to
devote more resources to the development of partnerships with other organizations and state
agencies in order to move toward an ESRF model.
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A significant issue would be development of applicable models to evaluate and prioritize a
broader base of environmental projects. It may be necessary to obtain relevant technical data,
such as environmental and health reports, in formats which vary from those currently available or
that are unavailable. It would be necessary to develop innovative approaches to methods of
ranking a wider range of eligible projects, some of which may not be compliance-driven, and
resulting priority lists.
Funding Capacity/Financial Issues
Although development and use of the ESRF would be at an individual state's discretion,
the adequacy of present funding levels is a consideration in the further development of the ESRF
concept. Some states presently fully utilize all available federal monies and state match, and have
additional demand, based on the present eligible uses. Recent studies (see below) indicate that
there is still a significant gap in funding capacity to meet present infrastructure improvement
needs.
The program administration effects of smaller projects and private borrowers, as well as
projects that are not compliance-driven, have already been referenced. Such projects might also
impact program solvency or present other risks. It may be necessary to develop innovative
financing mechanisms, such as SRF "block loans" or "block grants" to interrelated projects.
Short-term interest free loans for planning, design and construction, or for technical assistance to
disadvantaged communities are possible. Pooling funding sources and exploration of partnerships
among state and federal agencies should be considered as well. Several states, such as Missouri,
have developed interagency commissions to review communities' water and wastewater needs, in
order to obtain maximum utilization of all sources of available funding.
The issues surrounding loans to private companies and individuals are significant.
Expanding to an ESRF model and broadening the scope of possible borrowers could involve a
significant increase of eligible private borrowers, as was the case with the inception of the
Drinking Water program, for which private water companies are eligible participants. Although
eligible, private companies maybe all but excluded from the program due to lack of an allocation
under the respective state's private activity volume cap. Solutions range from increasing the
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formula for computation of each state's volume cap, to the exclusion of public purpose projects
undertaken by an ESRF.
Legislative/Legal Issues
Finally, some states could face legislative hurdles. From a practical standpoint, the
simplest and most timely approach to the development of an ESRF model would be to base it
upon existing federal legislation. At the state level, some states are constitutionally constrained
from lending to private entities. Although a number of states have found innovative ways to make
funds available in such instances, others may need legislation to authorize loans and grants to
private, non-profit, or individual borrowers. In addition, some states may be tempted, during any
legislative process to mirror the scope of abroadened federal program, to add restrictive criteria
in order to avoid funding certain projects which are sensitive in that state.
Crucial to the development of a model environmental SRF is an analysis of the
"willingness to proceed" at both state and federal levels. As is the case in the development of
many other programs, most administrative, management and technical issues may be overcome
through a process of analysis and definition of the problem, and providing additional resources.
If, however, the participants do not want to move forward, there will be no meaningful resolution
of easily resolved management issues.
From a state's perspective, the state must be willing to fund a broadened range of projects
and to accept the resulting administrative and technical burden. Some states might need to enact
or modify legislation, in order to fund certain types of borrowers. Additional state match could be
required should funding capacity be increased.
EPA's Role
From the federal perspective, EPA flexibility is crucial to the development of an ESRF
model, as it demonstrates the willingness at a federal level. Although many SRF's are good
examples of successful collaborative efforts of state and federal governments, personnel, and
financial resources, there continue to be conflicting viewpoints on oversight and management of
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these programs. States have developed various leveraging structures and subsidy levels to tailor
SRF programs to meet their specific needs. Recently, many states have addressed issues of cross
collateralization and transferabiHty of funds. Although attempts to customize programs are
sometimes met with resistance at a federal level, the fact that some states have received approval
to finance projects relating to leaking underground storage tanks and brownfields remediation
provides a ray of optimism.
Other issues that relate to the willingness to proceed at a federal level are:
EPA acknowledgment of the ability of Clean Water and Drinking Water Revo Iving
Funds to finance certain non-point source projects, such as solid waste, to cross-
collateralize and transfer between funds, and to finance land protection;
Federal willingness to address issues relating to private activity volume caps and other
related tax issues;
• EPA acceptance of diverse financing and bond leveraging techniques, and
development of incentives to encourage broader funding approaches, such as longer
loan terms, removal of administrative burdens, less restrictive set-asides and more state
flexibility;
Willingness to develop potential alternatives to the present population-based
allocations and to the innovative approaches to development of priority lists;
Ability to enter into partnerships with other federal agencies which may provide
monies for like projects;
Overall willingness of EPA to increase flexibility and improve cross-regional
cooperation.
Findings
The Environmental Financial Advisory Board (EFAB) has periodically considered the
ESRF concept since 1995. In the process, the Board has prepared several outlines and draft
papers and the two related documents mentioned below. Based upon this earlier work and this
report, the Board offers the following findings:
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The EPA's Office of Water has undertaken three major interrelated water quality initiatives
in the last two years, each of which would benefit from the existence of an ESRF. The Clean
Water Action Plan calls for the development of watershed restoration strategies that take a
comprehensive view of water quality problems in a given watershed and specify measures to deal
with them. An ESRF would be well positioned to help finance implementation of these measures.
Importantly, it would encourage programmatic actions that pay for themselves or that have other
reliable sources of funding support.
The July 2000 publication of the Final Total Maximum Daily Load (TMDL) Rule requires
the preparation of implementation plans that contain "reasonable assurances" defining specific
management measures for meeting clean water goals. Reasonable assurances for nonpoint and
other [than point] sources include a test that among other things demonstrates that there is
adequate funding for the measures and that they will be implemented through reliable and
effective delivery mechanisms. Again, an ESRF would an exceptionally effective funding
mechanism to assure the success of TMDL implementation plans. The inherent flexibilities
offered by the ESRF concept allow and facilitate the customization of timely financial assistance
packages in watersheds to more efficiently meet water quality goals.
The Office of Water has launched a wide ranging analysis of the need to increase
investments in water infrastructure replacement, rehabilitation, and upgrades and increase
expenditures for operation and maintenance of existing systems. Preliminary results are
disturbing, suggesting that major deficits exist in both capital and O&M spending. The "Gap
Analysis" has suggested that a multi-dimensional financial and non financial approach will be
necessary to deal with the implications of the Gap. An ESRF would play an important role as it
would have the authorities to provide loans, credit enhancements, and grants to the capital
measures necessary to maintain current water quality and those measures required to meet new
goals.
The Board has prepared two previous documents for the Office of Water on the Clean
Water Action Plan and the Gap Analysis, each recommending further evaluation of the ESRF
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concept. EFAB believes that both initiatives and the TMDL rule make a strong collective
argument for advancing the ESRF concept.
The SRF programs have been evolving constantly since they were first established.
Future expansion of SRF eligibility seems likely to continue through administrative interpretations
and perhaps legislative change. The ESRF concept is a natural outgrowth of this evolution and is
an exciting concept that deserves fiirther evaluation and consideration
In the Board's view it would be preferable to guide these changes through a
comprehensive vision based on a broad-based consensus of the public policy and environmental
goals for SRF programs of the future.
The Board believes that an ESRF should be optional to the states, placing emphasis on
state flexibility to prioritize and fund environmental projects. An ESRF would be more complex to
administer than the current SRF programs, therefore, greater flexibility should be permitted states
in allocation of SRF funds to pay for administrative costs.
An ESRF program should build on the successful platform of the current SRF
programs, rather than create a new program or programs. The states have technical and
managerial knowledge in place, and could provide one-stop shopping to a variety of borrowers
seeking financing for eligible environmental projects.
Current federal tax kw issues, including arbitrage rebate, tax credit bonds, other tax
incentives, and allocation availability for private water companies have significant effects on the
efficiency and effectiveness of the SRF programs. Consideration of these effects, and possible
changes to the tax code, should be an integral part of further examination of the ESRF concept.
The Board believes that with the expansion of project eligibility comes a
concomitantly strong justification for a significant increase in federal funding to support the
ESRF program. After an appropriate time when full capitalization is achieved and/or when
sufficient funds revolve through lending activities, the ESRFs could stand as self-sustaining
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environmental banks. At the same time, the broad ESRF authorities also provide opportunities
for collaborative efforts that can access federal and state fimding from a variety of sources.
Based on these findings and the longstanding experience it has had with the SRF
programs, EFAB has voted to endorse the ESRF concept. The Board further believes the
ESRF concept warrants a careful evaluation by EPA.
Recommendation:
EFAB recommends that the EPA undertake a thorough examination of the ESRF
concept, giving special emphasis to the issues and findings in this report.
Clearly, many options are possible, and thus it would help inform and move the debate
forward if attention were given to crafting an ESRF model that garners the most support from
all or most stakeholders. In that spirit, EFAB suggests an ongoing consultation with
organizations possessing significant knowledge of many of these issues, such as the Council of
Infrastructure Financing Authorities, Association of Metropolitan Sewerage Agencies,
Association of Metropolitan Water Agencies, Association of State and Interstate Water
Pollution Control Administrators, Association of State Drinking Water Administrators,
Association of State and Territorial Solid Waste Management Officials, the Environmental
Council of the States, and other key environmental organizations.
EFAB is prepared to assist in anyway it can consistent with its charter. The Board, of
course, is available to discuss this report and its recommendation.
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