A I™ P| A
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the
Water the
July 1998
This has not for by the U.S. and the and
in the do not of the Agency or any other in the
Government This report has been sent to the Office of Water.
Introduction
The Safe Drinking Act Amendments of 1996 the Safe Drinking Water Act (SDWA) to
provide for the establishment by State of a treatment revolving fund (a "State
fund"). In lo the ("SRFs") to the
Act, the SDWA the to
and as as The
introduction of this a number of legal, financial, and
practical for loan fond that do not exist in the Clean Water SRF.
The are (1) to the that as a
to and and (2) to the of
available and the approaches by loan to The
issues and alternatives described below have identified through discussions with various loan
fund to to privately and
can be as
* constitutional on and gifts or on lending of the credit to
a private entity.
• Tax to for
options.
• Credit and structuring related to the size, nature and financial status of the private and
nonprofit
. to SDWA and the
Guidelines "Final Guidelines").
o Dedicated source of revenues
o Prohibition on
o and
o
® Targeting of SRF to water users.
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on Private_Pgiat|ogg
A of that prohibit the or
and/or prohibit the State from lending its credit for the benefit of a private person or entity.
Two alternatives are utilized or considered by States to facilitate incorporation of the
water providers into loan fund programs. First, several States that these
restrictions have been overcome by administering the drinking water SRF through a separately
or agency by the this be by
the to private as the In
one the prohibition on the to not to of
for a It is a to a is
be a
Taxjsgies
Including loans to private providers in a SRF program can the tax exemption of
the SRF bonds unless the complies with the of the Internal Code relating to
"private bonds." If a SRF bond is deemed to be a bond, in
for the to be (a) a cap be to the and
(b) the will be to the tax ("AMT"). The of
to the AMT Is to an of by 15 to 25
It Is that the 1997 Activity
the treatment of bonds to finance municipally owned facilities under management
- an often of privatization. Prior to rules, municipal facilities under private
contracts than the five-year safe harbor were considered to be private activity
to tax-exempt Management with private can now be up
to 20 for publicly facilities without private use and allocation of
bond cap.
A any in (1) an the of 5% or $5
of the is to be for to any a or (li) 10%
or of the are in a or of a a
unit. In if the portion of the for a purpose
$15 million, the State must obtain volume cap for the
Accordingly, a State fund has the following for leveraging its to private and
nonprofit water
«
•
o The be to the AMT;
o State cap be allocated to the
o Advance would be prohibited;
o For any for the furnishing of water, the water must be available to the public
and water must be regulated by a agency or locality;
o At least 95% of the net bond must be used for are treated as capital
the tax
• are not
o No the of 5% or $5 be "lent" to
and
o Total use both and any use by a
cannot exceed 1 0% of the bond
o Any private use in excess of $15 million must obtain State volume
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In that the
be in to the to or sell the
in to make the to privately it would be to obtain
volume cap on each loan. At one loan fund administrator has by bond
that the amount of volume cap required for each borrower would exceed the amount of the borrower's
loan. If correct^ this would make It for the loans to privately owned borrowers to
be structured on a
any tax the
or on a to or to
a by or to or
Credjjjssues
Nature of Privately Owned Water Systems
In state surveyed, are some large privately owned water are regulated as to
by the and, in as Connecticut and Missouri a of the population is
by privately in the Is
(typically, less ten) and are also a (in of
privately that as few as 25
associations, and are not to rate
and in are a limited amount of
Funding of these small poses for loan funds in whether
meet the financial capability requirements of the SDWA, in that the loans are
secured, and in considering their inclusion in a pool of loans publicly offered bonds.
to capability are below. Although the volume is
In a. no on the the
to not
be The not to a
or a not to be to in the
and the risk The will be as
or by providing guarantees to One political benefit by fund
administrators of providing guarantees, rather than direct or is that it removes the
loan fund from involvement in any enforcement or foreclosure
of Security
are or at and do
not a can a and be
In a or
not at an are to rate and be
to a of revenues that their loans. &
has a matrix for water utilities that could be useful in the creditworthiness
of both of these of privately owned water A third group of privately owned
of small water that are not subject to rate regulation and that be characterized as
speculative or highly speculative credits. As is the with all privately owned systems,
or could file for in the that encounter
To are as by the SDWA, to
by
to an level of security or other controls, of
pledge recourse debt, or of credit.
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by to the
(1) a or
(2) a the of a "B"
as determined by the loan fund, (3) loan on a and (4)
loan to under a arrangement that the banks to
scrutinize the credit.
with the SPWA andjhe Final Guidelines
SDWA It a for a to a the "will a
of revenue (or, in the of a Is
for of the loan..." This is in the of the
to The guidelines of security,
Including: a pledge of accounts receivable, provision of credit enhancement, a of collateral,
and/or other types of security, as corporate or guarantees. The from the
of having a source of revenue Is important for privately owned
that do not have a for water
The that the an (No. 11) to this
the not the of
the for that are it
that "[t]he and to assure that a
of revenue," and that in addition, "States criteria to an applicant's
ability to repay the loan." Given the straightforward of the statute, it likely that the
of the alternative for private systems to the adequacy of security is an oversight.
Prohibition on
The that are not for the
Is to
are the In to the
of this are to to
eligible for SRF for a project if no costs are borrowed funds until
the has a binding commitment relating to the
Technical managerial and financial capability
The SDWA and Final as no shall be
to a not the and to
the SDWA. A not
or or
to and in
accounting, or other In addition, the is to a
to evaluate to be funded to that it has to receive funding.
Various State loan fund administrators indicated that determining the of technical,
and financial of privately owned water particularly will require a
that In the Clean SRF or with publicly To the
are and
of (a) and in and (b) the
(or for SDWA in the
and of small
An that will for loan funds in determining the financial and
credit worth! ness of small privately owned systems, is what type of financial are sufficient to
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a are (a) no (b)
but that an and (c) to
an audit. Some administrators that they will an audit in order to
a loan application. Other administrators, particularly those have prior
with to small privately owned systems, indicated a to evaluate the
borrowers on a if the borrower maintained records, if there are that would
an audit. In all the administrators that there would be a prospective
for a to an
The Is for that to
to The by the SDWA to be
to The
that "the its affordability into account when the level of subsidy a
community will receive, in order to the loan affordable."
Cross-culling
The are Federal and that by own to
and the the
as
the Act, and as the
Act of 1975 and Title VI Civil Act of 1964, and
and
In the that State loan funds comply with the Cross-cutting Authorities applies only
to an amount of assistance to the Federal grant ("equivalency projects""). Projects
with monies in an amount greater than the grant ("non-equivalency projects") are
not to the all and activities
by a are to
the Civil Act of 1964, 504 Act of
1973, and the Act of 1975. The has the for
by
To avoid application of the Cross-cutting to smaller State loan
_ are likely to fund their as non-equivalency projects. To address provisions of federal
anti-discrimination that apply to non-equivalency projects, use of covenants to comply
with annual should be sufficient.
In to the a
the to an
in lieu a is to the by the
the Policy
of Loan to Water
State loan fond administrators have an interest in that the benefit of the SRF
inures to the of the water system's For systems, the rate
should this outcome. for nonprofit and controlled by
the be to the customer. for
and be no to a
the be on to the
the for the SDWA and
for a to a owner the
of a SRF to its customers.
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