&EPA
United States
Environmental Protection
Agency
Office of Water
(4204)
EPA 832-B-01-003
April 2001
SRF Fund Management
Handbook
Clean Water
State Revolving Fund
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TABLE OF CONTENTS
Overview and Use of the Handbook ii
1.0 INTRODUCTION , 1-1
1.1 Principles Of Fund Management 1-1
1.2 Fund Management At Work: An Overview Of State Programs . 1-3
2.0 STRATEGIC FINANCIAL MANAGEMENT 2-1
2.1 Fund Management Objectives 2-1
2.2 Fund Management Time Horizon , 2-1
2.3 Assessing Environmental Needs 2-3
2.4 Assessing SRF Financing Needs 2-3
2.5 Setting Short & Long Term Financing Goals 2-4
State Case Study: Ohio Business Plan 2-5
3.0 SRF FUND MANAGEMENT ISSUES 3-1
Use of Cash Flow Modeling/Financial Planning for SRFs 3-1
3.1 Adjusting Loan Terms 3-2
State Case Study: Utah State Revolving Fund Financial Assistance Program .... 3-5
3.2 Returns on Fund Investments 3-7
State Case Study: New York's CWSRF Leveraging Program. 3-9
3.3 Fund Resource Utilization 3-11
State Case Study: Oregon's Accelerated CWSRF Loan Commitment 3-12
3.4 Loan Portfolio Management .3-14
State Case Study: Maryland Water Quality Financing Administration . 3-16
3.5 Availability of Funds 3-17
State Case Study: Massachusetts Fund Utilization Strategy 3-18
3.6 Administrative Resources 3-19
3.7 Leveraging 3-20
State Case Study: Tennessee Leveraging Decisions 3-22
3.8 Borrowing for State Match 3 - 24
3.9 Set-Asides and Capitalization Fund Transfers 3-25
State Case Study: Nevada DWSRF Use of Set-Aside Funds 3-26
3.10 Sustainable Funding Levels 3-28
State Case Study: Minnesota WPCRF Capacity Analysis 3-29
4.0 ANALYTICAL TOOLS AND TECHNIQUES 4-1
4.1 Cash Flow Modeling and Financial Planning and Projection 4-2
Sample Modeling Results 4-3
4.2 Role of Auditing/Accounting in Financial Management 4 - 8
4.3 Today's Dollars or Present Value (Constant Dollars) 4-10
4.4 Grant Equivalency 4-11
4.5 Investment Return . 4-12
4.6 Balance Sheet Analysis < 4-14
4.7 Loan Portfolio Analysis 4-16
4.8 Key Financial Measures 4-17
4.9 Financial Indicators 4-31
Appendix: Annotated Listing of EPA Guidance Related to Fiscal Fund Management . A - 1
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SRF Fund Management Handbook
Overview and Use of the Handbook
This handbook discusses a range of SRF fund management issues, with an emphasis on fas fiscal aspects
of fund management. Fiscal management of an SRF requires understanding and balancing day to day
financial decisions against the long term performance of the fund. The handbook provides relevant case
study examples of state SRF fund management experiences, and identifies useful tools and techniques for
evaluating SRF fund management considerations. The handbook can be used in many ways:
As a "how to" handbook for fiscally sound fund management by reading the entire document, or
As a resource document to select and focus on specific fund management issues discussed in the
handbook.
The handbook also can and should be used in conjunction with other SRF fund management tools
and resources such as EPA's SRF Financial Planning Model, program information generated by
the SRF National Information Management System, Leveraging and State Match Guides, SRF
annual reports, and SRF financial statements.
This document is available electronically at http ://www.epa. gov/owm/finan.htm
This handbook does not represent official policy determinations of the U.S. EPA with respect to the
operations of SRFs. The handbook is intended to present management concepts and general good
financial management practices to be considered by SRF fund managers.
April 2001
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1. Introduction
1.0 INTRODUCTION
The Clean Water State Revolving Fund (CWSRF)
program was created by the 1987 amendments of
the Clean Water Act. Prior to the creation of the
CWSRF, the Construction Grants program was
the primary federal funding source for wastewater
infrastructure. A key difference between the two
programs is the revolving nature of the CWSRF.
The available assets in the Construction Grants
program consisted of incoming federal grants and
varying amounts of state match. Once these assets
were distributed to communities, they left the
program. Aside from determining which
communities receive the grants, state management
of these assets was limited. In contrast, assets
used to provide SRF assistance are lent to
communities and ultimately return to the fund in
the form of interest payments and principal
repayments. States may also obtain additional
funds for their programs through leveraging.
Overall, states have a great deal of control over the
flow of SRF assets and day to day management
decisions can have significant impacts on the
fund.
Implementing the SRF has resulted in a critical
shift from grant management to fund
management, from managing a static program
that focuses on distributing grants to managing a
complex loan program with diverse and constantly
changing assets. The CWSRF is now reaching a
mature stage of development with substantial
principal and interest payments entering the fund.
Continued success of both the CWSRF and the
recently established Drinking Water SRF
(DWSRF) will require an emphasis on managing
the dynamic, revolving nature of an SRF.
This handbook is designed to highlight important
fiscal aspects of SRF fund management and to
provide examples and tools from state experiences
to assist with the ongoing management of SRFs.
The handbook is organized into three sections:
The chapter on strategic management provides
an overview of program assessment and goal
setting in an SRF. Following the strategic
management discussion is a set of chapters
devoted to fund management issues that
represent day to day program management topics
which have a fiscal impact on the fund. The final
section groups together a comprehensive set of
analytical tools and techniques to be used in fund
management. These include financial planning
and projection techniques, the use of EPA's
financial models and an overview of key SRF
financial measures. Throughout the handbook,
case studies of SRF programs have been included
to show effective fund management at work.
1.1 PRINCIPLES OF FUND
MANAGEMENT
The SRF program is specifically designed as an
environmental financing program aimed at
reducing clean water and drinking water project
costs. The primary form of assistance is below
market rate loans for water quality and drinking
water projects. The financial subsidy aspect of the
SRF program does not reduce the need for
effective fund management.. Fund management
in the SRF is unique due to the balance that must
be struck between environmental and financial
goals.
The seed capital of an SRF is a valuable financial
resource that should be utilized effectively.
Comprehensive fund management should
maximize an SRF's ability to meet current and
anticipated environmental financing needs
through judicious management of all program
resources. A basic approach to fund management
should include developing a plan (establishing
short & long term goals), program management,
and program evaluation. The process is
illustrated in Figure 1 below.
April 2001
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SRF Fund Management Handbook
Figure 1
SRF Fund Management
A Basic Model
Strategic Planning
Assess short and long-term environmental;
^ซ Assess short ancl longปtermifinaneial nlfeS^t?'*' >.ซ./vt*f"~* ""**"" X-i^I" " ''"<
Assess program assets and identify other environmental financing resources.
Balance environmental and financial needs to establish short and long-term
financing goals'ano^obllecttveSfw^ie'SrtF,/-"^ ' ',~,fJ "*"~$-v'ซฃ $
Program Management
Set policies and manage the SRF totjm|et,shor^and long-term environmental
financing goals and objectives. ^1/,*"" ,*..!'.'-,
Program Evaluation
Assess progress towards achieving environmental financing goals and
objectives.
Identify adjustments necessary to improve progress.
In strategic planning, program managers
essentially develop a long-term business plan for
their program. To accomplish this, they should set
out to determine what kinds of environmental and
financial needs the SRF must address. This
information should be used to establish short and
long term financing goals for the program. Once
the program's goals are established, the SRF
should be managed to meet these goals. Program
management encompasses the setting or adjusting
of policies and the day-to-day management of the
fund. Critical issues such as the level of interest
rate subsidy to offer, selection of projects to
receive assistance, timely commitment of new and
recycled funds to projects, investment of idle
funds, and decisions to issue debt must be
evaluated in a financially responsible manner to
ensure that funds are used effectively.
Collectively, the day-to-day decisions of SRF fund
managers make up the overall effectiveness with
which a fund is utilized. These decisions must be
made in light of the goals established during the
business planning process. Continuous program
evaluation or assessment provides a check on
whether or not current policies are helping to meet
the SRF's goals.
April 2001
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1. Introduction
1.2 FUND MANAGEMENT AT WORK: AN
OVERVIEW OF STATE PROGRAMS
Individually, the SRFs vary greatly in the size and
scope of their operations. Since the start of the
CWSRF program, federal and state capitalization
has accumulated steadily to $20 billion and total
cumulative available funding has grown to $34
billion (through June of 2000). The funds
available now exceeds 168% of the cumulative
seed capital due to leveraging, loan principal
repayment, and net interest earnings.
The financing approaches used in the SRF
program does impact the funds that are available
for projects and the financial management issues
that each program faces. Table 1 below identifies
the breakdown of the 51 CWSRF programs
according to two important dimensions, issuance
of leverage bonds and issuance of bonds for state
match.
The use of bonds or borrowing in the SRF
program has numerous impacts on a program over
time. The use of leverage bonds provides an
increase in available funds for projects over the
near term and may provide greater cumulative
financial assistance over the life of a program,
when adjusted for inflation. The use of bonds for
state match enables a state to comply with the
state match funding requirement, but reduces
available funding over time as interest earnings
that could have been used to fund new proj ects are
instead used to repay match bond principal and
interest.
Table 1
" '""" 0- ^W^^^S^l^aatt S&wtitit.P"- - ---" "?Vr
No SRF Borrowing
for Match
SRF Borrowing for
Match
Total
Direct Loan
Programs
25
(49%)
4
(8%)
29
(57%)
Leveraged
Programs
10
(20%)
12
(24%)
22
(43%)
Total
35
(69%)
16
(31%) "
51
(100%)
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SRF Fund Management Handbook
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April 2001
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2. Strategic Financial Management
2.0 STRATEGIC FINANCIAL MANAGEMENT
2.1 FUND MANAGEMENT OBJECTIVES
While there are many differences between SRF
programs in terms of total dollars managed,
financial structure, environmental priorities, and
number of loan recipients, there are common
objectives for the program that can serve to guide
all programs in the area of fund management.
The SRF program has several goals. The first is
that the capital contributed to the program is used
efficiently and maintained in perpetuity.
Ultimately, both the Clean Water and Drinking
Water SRF programs are expected to revolve and
this is reflected in EPA's goal of providing
environmental assistance far into the future.
Another goal is that states use SRF funds to
achieve the greatest environmental results.
Working within these goals, states have two
focused objectives in managing their SRF
programs. The first is to ensure that financial
assistance is provided to proj ects that will produce
the most desirable environmental and public
health benefits. The second objective is to achieve
sound financial performance while providing the
financial assistance.
All of these fund management objectives must be
balanced to achieve an SRF's desired results. For
example, loan interest rates shouldn't be set at
such a low rate that the long-term SRF purchasing
power is unnecessarily eroded by inflation and, at
the same time, the rates should not be set so high
that there is little financial benefit provided by an
SRF loan. A balance must be struck between
these extremes.
The balancing of objectives for an SRF program
can be thought of as trying to reach an optimal
solution to:
make the most money available, consistent
with demand for funds;
commit money quickly to meet project
needs;
offer attractive financial terms; and
maintain the purchasing power of the funds
being managed.
For each SRF program, the optimal solution will
depend on state specific factors such as the
demand for financial assistance, availability and
financial benefit of other assistance programs,
state funding priorities, current market conditions,
and legislative support.
All of these factors should be analyzed as part of
an overall SRF financial plan. Such a plan should
lay out the basic operating assumptions of the
program over time. What are the expected cash
inflows and outflows of the program, what
assistance can be provided, and how valuable is
the assistance to the borrowers?
2.2 FUND MANAGEMENT TIME
HORIZON
Time is a critical element when considering fund
management. SRF financial management is a
process that takes place over time and consists of
a series of financial actions and decisions that
have both short and long term implications. Due
to the time value of money and the environmental
benefits of building projects sooner rather than
later, SRF assistance provided this year is not the
same as assistance provided next year. Similarly,
financial actions taken this year may have little
impact until several years later. For these reasons,
fund management must be considered across the
dimension of time to balance what can be
accomplished in the present versus the future. The
time element is illustrated in Figure 2 below.
April 2001
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SRF Fund Management Handbook
The figure shows proj ect funding levels under two
scenarios and is similar to the results produced by
many SRF financial planning exercises. The
dashed line represents a direct loan program and
the solid line represents the same program with
leveraging beginning in 2000. Phase 1 on the
figure is the pre-leveraging period.
Phase 2 of the figure shows that leveraging will
immediately increase the available project funding
in 2000 when leveraging starts. Assuming that
leveraging continues, the funding level (in
inflation adjusted dollars) will remain higher for
the next 22 years. However, the funding level
under a direct loan program will rise relative to a
leveraging scenario (Phase 3). At some point in
the future, a direct loan program with otherwise
identical financial terms will always produce more
nominal annual funding than a leveraged program
(Phase 4).
In this example, the cumulative funding provided
over the period illustrated' is higher for the
leveraged program, demonstrating a leveraged
program's potential to provide greater assistance
overall. The challenge for fund managers in
considering leveraging is to determine the value
of funding projects and achieving environmental
results sooner in exchange for potentially reduced
longer-term funding.
When evaluating SRF programs in the context of
time and future events, there are many factors that
will affect the program that cannot be controlled
or accurately forecasted. The best that can be
done is to make reasonable assumptions about
what is likely to happen in the future and to apply
those assumptions to evaluate potential future
outcomes.
40
35
Figure 2
Annual Disbursements Adjusted to 2000 Dollars
30
2
TO
o
o
20
(0
ง 15
10
Phase 1
Phase 2
Phase 3
Leverage $850 million
Direct Loan $774 million
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Key assumptions are: leveraging initiated in 2000, loan rate of 3%, bond yield of 5.5%, 10%
debt service reserve, 2% bond issuance cost, and investment earnings of 4.5%. Leveraging
maintained at 50% of program equity. Discount rate of 3%.
April 2001
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2.Strategic Financial .Management
The following are some important factors that may
impact SRF programs. Changes in each could
have varying effects on the financial projection
results illustrated in Figure 2.
Interest rates and Federal Reserve policies
Short and long-term inflation rates, both
expected and actual
' Congressional actions
future appropriations
reauthorization of existing legislation
passage of new legislation
Available funding from other federal and
state drinking water and water quality
financing programs
Legislative actions and enforcement
National, regional, and local economic
conditions
Regional demographic shifts
Technology changes
Increased understanding of water quality
and drinking water needs
These factors, both individually and collectively,
will have impacts on SRF funding resources, loan
terms, demand for loan funds, and the long-term
financial position of an SRF. Of these factors,
general market interest rates and inflation rates
will have the most direct fiscal impact on the
program and must be accounted for in any
financial planning effort. Market interest rates
will drive the level of loan interest rates that the
program must offer to 'provide meaningful
subsidies to borrowers and will also directly affect
interest earnings of the SRF. Conversely, inflation
will erode the purchasing power of the SRF over
time. These two critical factors need to be
incorporated into long-term.financial planning in
terms of an appropriate discount rate or effective
real rate of interest.
The combination of financial and environmental
factors that have short and long-term implications
provides a complex framework for analyzing fund
management issues. To help organize the
discussion of these issues in this handbook, a
number of maj or fund management questions have
been identified. These questions are introduced
in Section 3.
2.3 ASSESSING
NEEDS
ENVIRONMENTAL
The pivotal activities of a water quality or
drinking water program are to identify and
understand the environmental and public health
needs of the program. The basic question to
answer is, "What activities or projects need to be
undertaken to achieve the program's
environmental/public health objectives?"
Examples include designing and constructing
wastewater and drinking water facilities,
identifying and protecting critical water resources,
encouraging desirable uses of water resources, and
discouraging undesirable uses of water resources.
The required information to assess
environmental/public health needs include
cataloging water resources in the state by location,
type, use, and current and desired water quality
objectives. Assessments of water resources are
typically performed with the aid of geographic
information systems (GIS). With this information,
planning can be performed with respect to funding
desired activities and projects.
2.4 ASSESSING
NEEDS
SRF FINANCING
For an SRF, the next step is to identify financing
needs within the context of achieving
environmental needs and goals. The project
priority setting process and resulting project
funding priority list provide a basis for identifying
SRF financing needs.
Through the process a state can identify which
projects have the highest priority, which projects
are actually slated for receiving funding, what
level of assistance is required, and when
financing needs will .actually be required.
Evaluating funding needs can be used to assess the
April 2001
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SRF Fund Nlanagement Handbook
demand for SRF funds.
While overall financing needs may exceed
available resources, the demand for SRF
assistance may not. Managing demand, through
activities that include marketing and technical
assistance, is important in running an efficient
SRF program. A fund manager must understand
how many dollars will be required and when those
dollars will be required from the fund. Such an
assessment must be conducted in conjunction with
assessments of other funding sources and the
ability of other financing programs to share in the
financing of desired activities and projects.
The end result is to identify the demand for SRF
funds. This demand for funds is then compared
to the availability of funds to determine the ability
of the SRF to meet funding needs. When SRF
funding demand greatly exceeds the availability
of funding resources, the SRF may want to
consider techniques for increasing funding
resources, such as altering loan terms or
leveraging (see discussion that follows).
2.5 SETTING SHORT & LONG-TERM
FINANCING GOALS
The balancing of environmental and financing
needs with financing resources provides a
foundation for establishing short and long-term
SRF financing goals. This can then be used to
establish what projects and financial assistance
can reasonably be provided over the near and
longer terms. Such goals should become an
integral part of an SRF strategic plan.
The Ohio CWSRF conducted a strategic planning
exercise to determine the funding needs and
resources of the CWSRF. The following case
study describes their efforts.
April 2001
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2. Strategic Financial .Management
Case Study of Ohio Water Pollution Control Loan Fund's (WPCLF)
Assessment of Fund Management Options
Vital Statistics as of June 30, 2000
First Loan Issued in October 1989
Leveraging Initiated in 1996
Extensive Borrowing for State Match
Average Loan Interest Rate: 4.0%
Federal Capitalization Grants:
Total Funds Available:
Total Assistance Provided:
Number of Loans:
$920 million
$1.8 billion
$1.6 billion
738
In March, 1997 the Ohio WPCLF initiated a strategic planning process to develop a long-term business plan to use as the
"blueprint" to shape and direct the WPCLF through the year 2001. The purpose of the plan was to describe how the resources
of the WPCLF would be directed beginning in 1998. The development of the plan was divided into three major steps:
1. Assessing environmental needs and priorities;
2. . Evaluating funds available for assistance; and
3. Combining steps 1 and 2 into a business plan.
This case study focuses on the evaluation of funds portion of the planning process, and draws on a WPCLF funding
analysis report. The WPCLF's Report on Fund Management Options begins with the fund objectives of:
Providing financing for priority wastewater and NFS projects; and
Maintaining the fund in perpetuity.
To begin evaluating approaches for achieving the objectives, various fund management options were considered. These
options included combinations of altering loan interest rates and repayment periods, undertaking different leveraging
approaches, and altering capitalization scenarios. The most suitable options were retained and analyzed in detail.
The options analysis consisted of financial modeling of the program through the year 2051 to project all program sources
and uses of funds using the different assumptions associated with each option. For each option analyzed, annual and
cumulative funding capacity was projected in nominal and inflation adjusted terms. Inflation adjustments were based on
the average annual change in the consumer price index from 1952-1995, which was calculated to be 4.12 percent.
For purposes of the analysis, the WPCLF utilized a target funding level of $200 million per year, which is slightly more
than the average funding level achieved by the program in the previous five years. The funding levels achieved with each
option were then compared to the target funding level in nominal and inflation adjusted terms. Total cumulative funding
capacity achieved by each option was also calculated and presented for comparison purposes.
The results of the analysis showed that a combination of fund management steps will be required to meet the funding target.
Leveraging will be an integral part of meeting funding needs, but must be used carefully to minimize the loss of annual
funding capacity over time. Increasing loan interest rates and augmenting capitalization provided the greatest impact on
the WPCLF's overall capacity.
The conclusion reached in the report is that the WPCLF has the capacity for meeting a significant amount of Ohio's present
and future financing needs for water pollution control and water resource improvement projects. However, four essential
factors need to be managed to do this:
1. The amount and timing of fund leveraging;
2. The costs of bond issuance;
3. The interest rates charged borrowers; and
4. Future strategic fund capitalization.
A public advisory group meeting was held to review the findings. Comments received from individuals supported funding
immediate needs through leveraging with a possible trade-off in long-term capacity, increasing loan interest rates to increase
capacity, and requesting additional state capitalization. A shorter 20 to 30 year time horizon was recommended for future
fund planning.
For additional information contact:
Ohio Water Development Authority
88 East Broad Street
April 2001
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SRIF Fund Management Handbook
Columbus, OH 43215
April 2001
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2. Strategic Financial Management
<
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3. SRF Fund Management Questions
3.0 SRF FUND MANAGEMENT ISSUES
Effective SRF fund management is not the result
of a single action or decision that results in a
successful program. Instead, program success
depends on how a series of fund management
questions are identified, answered, and revisited
overtime. Important questions include:
Should loan terms be adjusted?
Does the fund receive adequate returns on
cash and reserve fund investments?
Are fund resources being utilized
effectively?
Does the fund have a sound loan portfolio?
Is sufficient project assistance being made
available?
Does the fund have sufficient administrative
resources?
Should the fund leverage/continue to
leverage?
What impact will borrowing for state match
have on the fund?
What impact will set-asides or capitalization
transfers have on the program?
What is the sustainable funding level from
the program?
This handbook is designed to take a three pronged
approach to discussing fund management issues.
First, the handbook addresses each of these fund
management issues individually. Second,
recognizing there is considerable overlap in the
issues, the conclusion of each individual issue
discussion identifies the relationship between the
current fund management issue and other related
fund management issues. Third, as each issue is
addressed, the discussion is accompanied by
pertinent case studies of how states have faced and
answered these fund management issues.
Analytical tools and techniques that are referred
to in the discussion are identified in italics and are
explained in more detail with illustrative examples
at the end of the handbook.
Use of Cash Flow Modeling/Finaneial\
Planning for SRFs
Each of the fond management topics require a certain I
level of financial analysis to understand the financial
implications of any particular SRF financial policy I
iholee, Cashflowmodetingifinancial planning is tlie I
principal technique for analyzing the financial impact I
of decisions over time, given, the financial complexity I
Of revolving loan funds. This type of financial [
analysis consists of systematically identifying all cash I
flows associated with an SRF over time, including I
capitalization, loan disbursements and repayments,!
earnings on investments, and bond issuance and|
repayment.
Computerized .cash flow modeling tools have been |
developed by underwriters, financial advisors, EPA,
and infernally by states to support SRF financial I
management activities. These types of tools use!
historical financial activity of an SRF, anticipated I
near-term financial activity, as well as the longer-term I
projected future financial activity. Changes in key!
assumptions requiredto make financial projections are
used to identify the impact of potential policy choices. I
Cash flow analyses should also consider the impactof I
time and the cost of money by evaluating financial I
scenarios in terms of today's dollars, or present I
value/constantdollars^(dollafs stated m terms of equal \
purchasing power).
Many of the analyses presented in this handbook are I
based on results from EPA's new SRF Financial
Planning Model This model allows program level)
analysis of CW and DW SRFs, capturing the most!
important financial assumptions that impact the!
financial condition of SRFs. The model is an Excel f
based tool available from the SRF branch at EPA|
headquarters,
In the discussion that follQws, modeling tips and
comments are provided in text boxes like this one for I
April 2001
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SRF Fund Management Handbook
the EPA SRF Financial Planning Model
Cor iparison of SRF and Market Interest Rates
9 1991 1993 1995 1997 1999
Year
The discussion of tools and techniques provides
a comprehensive list of key financial measures
that have been applied to SRF programs, along
with a matrix that relates the application of each
measure to the financial management questions.
An underlying requirement of any discussion of
fund management is the availability of reliable
financial information, confirmed through the audit
process, to provide the basis for financial analysis
of a fund. The use of independent audits of
program funds provides assurance to SRF
management that policy decisions are based on
reliable financial information.
3.1 ADJUSTING LOAN TERMS
There are a number of situations that may cause
SRF management to consider whether loan
interest rates and other loan terms should be
adjusted. These include overall changes inmarket
interest rates, low demand for program assistance,
complicated interest rate formulas, and/or a desire
to stretch SRF funds further. Regardless of the
reason for reviewing loan terms, all SRFs are
continually faced with the question of what loan
interest rates and repayment terms to use for their
loans.
Figure 3 presents a comparison between average
CWSRF interest rates and comparable market
rates over the past ten years. After an initial start-
up phase, the CWSRF rates are a relatively
uniform proportion of market rates. The constant
change in average CWSRF rates suggests that
interest rate review and revision is an ongoing
process.
Given that the purpose of SRF programs is to
reduce the costs of environmentally beneficial
projects, the interest rate charged and repayment
terms for loans are critical factors to the entire
program. The loan interest rate and repayment
terms establish the subsidy or benefit provided by
the program to borrowers. At the same time, loan
interest earnings and principal repayment are the
main source (after capitalization and leveraging)
of cash inflows for the program, allowing it to
maintain its capital base and revolve into the
future.
Loan interest rates may be set anywhere between
zero percent and market rates (the DWSRF does
have a provision allowing negative interest rates
for hardship loans), as determined by the states.
As loan interest rates are reduced below market
rates a benefit is provided to the borrower in terms
April 2001
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3. SRF Fund Management Questions
Figure 4
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9.
8.
7
6.
5.
4,
3-1
2
1.
0
g Direct Loan
rj Leveraged
<1% 1 to 2 to 2.5 to 3 to 3.5 to 4 to
2% 2.5% 3% 3.5% 4% 5%
Loan Yield Rates
of reduced borrowing cost. The greater the
For the borrower, delaying loan principal
repayments has a similar effect to reducing
interest rates. As principal repayment is delayed,
more financial benefit is provided to the borrower.
However, principal repayment terms also have a
direct impact on an SRF. Delayed principal
repayment translates into a direct delay in the
recycling of those funds. The desire to maximize
SRF earnings and principal repayment must be
balanced with the desire to provide greater
assistance to borrowers, in the form of lower
interest rates and preferential repayment terms.
Loan principal repayment can be structured to
shift principal repayment into the future, as long
as some level of principal repayment begins
within one year of project completion. The
following principal repayment structures generally
represent the spectrum from less to more shifting
of principal into the future.
level principal periodic equal payments
of principal over the loan amortization
period, while interest included in total
payments declines over time.
loan interest rate reduction, the greater the
benefit. The reduction of loan interest rates
does have a negative consequence on the fund
of reducing future loan interest earnings for the
fund.
In 2000, CWSRF loan interest rates ranged
from a low .of zero percent to a high of 4.3
percent, with a median of 2.7 percent. Figure
4 provides a categorization of CWSRF interest
rates for each of the 51 programs in 2000,
broken out for direct loan and leveraged
programs. The most common interest rates are
in the 2.5 to 4.0-percent range. The leveraged
programs tend to have higher loan interest
rates, to help support the interest expense on
the bonds.
level debt service periodic equal total
payments of principal and interest, results
in lower principal payments early and larger
payments later, like a home mortgage.
gradual ramp-up - periodic payment of
principal and interest increases over time,
the resulting principal payment in early
years is even lower than level debt service.
balloon payment - maj ority of principal is
paid at the end of the loan amortization
period, interest (if charged) is paid on the
outstanding loan balance until the balloon
payment is made.
Each of these general approaches to principal
repayment can be designed with unique variations;
however, the exact impact for the borrower and
SRF will depend on the specific structure of the
loan. Naturally, longer loan repayment periods
delay the repayment of principal resulting in
potential financial benefit for the borrower and
reduced fund recycling for the SRF.
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SRF Fund Management Handbook
The Massachusetts CWSRF recently initiated an
extended bond purchase program that allows
borrowers to refinance bonds with a term of
greater than 20 years. This allows the borrower
to reduce debt service payments by extending
principal repayment. This is allowed in the
CWSRF program because the term of refinanced
debt is not limited at 20 years. Additionally, the
state plans to reduce the SRF debt service reserves
associated with these bond purchases to ensure
that the overall financial ability of the SRF is not
significantly affected.
Reviewing loan terms requires a balanced analysis
of the effect on borrowers and the SRF. The
results of each analysis can be reconciled to reach
a final answer on appropriate loan terms.
April 2001
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3. SRF Fund Management: Questions
SRF Planning Model Tip
Select Loan Repayment under the!
Projections tab.
Select "Enter Loan Portfolio "
Enter the terms (interestrate,, maturity,, and I
amortization type) that you wantto analyze)
for your program,
Enter up to 7 different combinations of loan |
terms.
3.1.1 Loan Terms from the Borrower's
Perspective
A potential SRF borrower will look to the SRF as
one of several financing options for proceeding
with a project. The highest cost option for a
potential borrower is financing the project on their
own by borrowing funds at the current market
interest rates that the borrower faces (market rates
vary for different borrowers based on their credit
condition). The SRF program should provide
lower cost alternatives to borrowing at market
rates.
An evaluation of appropriate SRF loan terms
(interest rates, repayment, and loan fees) requires
an understanding of what the other financing
options are for potential borrowers. Questions
include:
What is the cost of borrowing at market
rates for a borrower?
What other sources of funding exist?
How available is the funding?
What are the financing terms?
Understanding the range of options will help to
gauge the financing role the SRF should play in
the state and the appropriate interest rates or
subsidy levels that the SRF program should
provide.
Comparing current and potential SRF loan terms
to a borrower's market rates and other programs
requires a common basis of comparison. For
different programs that involve borrowing funds
over similar time periods, it may be sufficient to
compare interest rates directly to other rates. Such
comparisons take the form of differences in basis
points (hundredths of a percentage point) or
interest rates as a percent of market rates. Thus
an SRF loan with a five percent interest rate when
compared to a six percent market rate would be
100 basis points below market or 83 percent of
market rates.
When financing options differ substantially in
terms of the time period of financing, varying
interest rates over the life of a loan, construction
period interest, balloon payments, loan fees, or the
form of assistance provided (e.g., grants versus
loans), a more rigorous approach is required to
compare the options. A useful technique for
comparing financing approaches is to calculate a
grant equivalency of each option.
Financing a project using traditional borrowing at
market rates would have no subsidy and would
have a grant equivalency of zero percent. A two
percent SRF loan for 20 years when market
interest rates are six percent would be equivalent
to a 30 percent grant. Grant equivalency is
calculated as the reduction in present value cost
of a financing option compared to assistance at
market rates. This technique will allow analysis
of a wide range of assistance programs in
comparison to current and potential SRF loan
rates to determine the appropriate interest rates for
an SRF program. Section 4.4 provides additional
information and example calculations of grant
equivalency.
As alternative loan terms are being considered,
it may be useful to calculate hypothetical loan
amortization schedules (projected principal,
interest, loan fees, total payment, and loan
balance for each payment period) to help
understand the magnitude of different changes in
loan terms. This type of analysis can provide a
realistic context for the differences between
April 2001
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SRF Fund Management Handbook
potential loan terms for the same loan amounts.
Case Study of the Utah State Revolving Fund
Financial Assistance Program
Vital Statistics as of June 30,2000
Federal Capitalization Grants: $102 million
Appropriated State Match: $20 million
Total Funds Available: $154 million
Total Assistance Provided: $126 million
First Loan Issued in 1989
Direct Loan Program
Number of Loans:
Loan Interest Rate:
40
0-5%
Since 1983, Utah has operated a state administered grant and loan program for wastewater projects to supplement
the Construction Grants Program, initially, and now the State Revolving Fund Program. The focus of their
program is matchingthe level of financial assistance provided with the financial need of each borrower. Financial
need is based primarily on estimated annual residential sewer user charges as a percentage of median adjusted
gross household income (MAGHI). Estimated user charges are based on projected O&M costs, plus existing
debt service, plus the resulting debt service from the proposed loan (potentially combined with a grant). The
MAGHI is determined from the most recently available State Tax Commission records.
When potential borrowers have projected costs that exceed 1.4 percent of MAGHI, they will be considered for
a hardship grant to bring their cost below 1.4 percent of MAGHI. To be considered for a loan, the user charges
cannot exceed 1.4 percent of MAGHI. The interest rate recommendation for the loan portion of assistance can
fall between zero percent and market rates to ultimately achieve a cost burden on the residential users that falls
in the 1.1 percent to 1.4 percent range relative to MAGHI. (The staff has developed a cost of service spreadsheet
model to evaluate the potential cost burden under alternative scenarios.)
Other factors that the staff considers when evaluating assistance terms include:
comparing project costs relative to MAGHI to other recently completed projects in the state;
optimizing the return on the security account while allowing the project to proceed;
local political and economic conditions;
cost-effectiveness of financing alternatives;
availability of funds; and
environmental need.
The results of the staff evaluation of the specific criteria and other factors are presented as recommendations
to their Board for consideration.
For additional information contact: Utah Department of Environmental Quality
April 2001
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3. SRF Fund Management Questions
288 North 1460 West
Salt Lake City, UT 84114
To the extent that borrowers consider or perceive
the federal requirements that accompany SRF
funding as increasing project costs, this higher
cost- should be factored into the analysis. For
example, when comparing financing options for
a project, the SRF funded approach may increase
project costs by some percentage to account for
the cost to comply with Federal requirements.
The bottom line comparison can then be made in
terms of grant equivalency or another basis of
comparison.
3.1.2 Loan Terms from the SRF
Perspective
The interest rates charged on loans and other
terms will have a direct financial impact on an
SRF over the entire life of each loan. During each
loan amortization period, loan
interest, principal repayment, and
fees will be received by the SRF
according to the loan terms. This
stream of payments over time
should be analyzed as part of any
review of current or potential
loan interest rates. A. financial
plan should be prepared that
incorporates basic capitalization
and loan assistance information
into projections that estimate
year-by-year inflows and
outflows of funds. The major
inflows for direct loan programs
will be capitalization, loan
interest and principal repayments,
and investment earnings while
the major outflows will be new
loan disbursements and
administrative costs.
financial plan. Increases in interest rates will
increase interest earnings from loans and produce
more funds for future loans. Decreases ininterest
rates on new loans will decrease interest earnings
and reduce the amount of funds available for
future loans.
Leveraged programs and programs with match
bonds add to the complexity of financial planning
by adding bond fund cash inflows and bond
interest and principal repayments as cash
outflows. However, the fundamental concept that
changes in loan terms will impact the overall
financial resources of an SRF and future project
funding from an SRF remains the same.
Financial planning to assess interest rate impacts
should begin with a common baseline that
Annual Disbursements Adjusted to 2000 Dollars
30
a
20
15
in
I 10
Increase Rates to 4%
,- -. Maintain Rates at 3%
Changes in interest rates on new
loans will directly affect the
Key assumptions: Direct loan program, initial loan rate of 3%, loan rate
increased to 4% for loans made beginning in 2000, investment earnings
of 4.5%, discount rate of 3%.
April 2001
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SRF Fund Management Handbook
identifies funding levels over time using current
program assumptions. Changes to interest rates
or other assumptions can then be compared to this
baseline to identify the magnitude and direction
of each potential change. This type of analysis is
presented in Figure 5 for an interest rate change
in a program.
In this example, a program is currently charging
an average loan interest rate of three percent. The
dashed line presents the year by year funding
(adjusted to 2000 dollars using a three percent
discount rate) that this program can provide. The
solid line presents a phased increase in loan
interest rates to four percent. The impact of a rate
change is not seen right away as all existing loans
still yield three percent, but over time the return
from new loans at four percent begins to
dramatically increase project funding levels. By
the year 2020, the funding level could be
increased from $22 million per year to $27 million
per year with a one percent change in loan rates.
As the chart indicates the difference in funding
levels will continue to increase over time.
Selecting an appropriate loan interest rate requires
a judgement call to reach the right compromise
between funding projects today at a meaningful
subsidy level and preserving capital to fund
projects into the future. No one answer is right for
all states. Each SRF fund manager is responsible
for determining what is appropriate for their state.
3.1.3 The Issue "Adjusting Loan
Terms" Directly Relates to:
Ability to make loans and market the
program
Fund utilization
Composition of the loan portfolio
Ability to leverage or borrow for match
Long term sustainable funding levels
Figure 5
April 2001
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3. SRF Fund Management Questions
3.2 RETURNS ON FUND INVESTMENTS
After loan interest rates and other loan terms, the
next most important area of SRF earnings comes
from the interest earnings on cash and investments
held by the SRF. Frequently, this area of the
program is controlled by state investment policies
and decisions are under the control of the State
Treasurer's office. Cash investment and
management is one of many financial functions
that a Treasurer's office must perform and
frequently SRF funds are invested along with
other state funds in this manner. When bonds are
held by the program, reserve investment
requirements are specified in the bond indenture.
However, periodic review of investment earnings
should be a part of ongoing SRF financial
management to ensure that investment earnings
meet expectations and are being properly credited
to the SRF.
Figure 6 shows the distribution of investment
returns for CWSRF programs in 2000 (returns are
estimated based on average cash and investment
balances held for 2000). The figure shows that
many of the programs had investment yields in the
four to six percent range. About an equal number
had slightly higher or lower yields. At the lower
end of the scale, six programs had yields below
three percent. The figure does not show a
significant difference between investment yield
for direct loan programs as compared to
leveraged programs.
The yields presented are based on estimates to
provide a basis of yield comparisons. A more
precise calculation of investment yield is
required to assess this aspect of fund
management in more depth. Specific analysis
requires detailed data on investments and their
returns.
SRF programs that issue tax-exempt bonds to
leverage their program and/or raise state match
are subject to a complex set of arbitrage
earnings restrictions and rebate requirements.
u.
a:
ฃ
o
0)
These rules, defined in section 148 of the Internal
Revenue Code, are designed to prevent issuers of
tax-exempt bonds from retaining any interest
earnings that exceed the interest cost of the bonds
(i.e., arbitrage earnings). Arbitrage restrictions
add an additional dimension to investment
earnings for programs using tax-exempt bonds.
SRF Planning Model Tip
Investment earnings are controlled in thel
Use of Funds section of Projection!
Assumptions.
Set anticipated interest earning rates on|
short-term investments and reserves.
Generally, interest rates on longer-terml
reserve investments will be higher thanf
short-term investments.
3.2.1 Evaluation of Investment Yield
Investment earnings should be monitored on a
routine basis, typically monthly. The information
required to review investment earnings usually
takes the form of monthly investment reports.
Such reports should provide basic transactional
information on the investment accounts and
periodic posting of interest earnings and gains and
losses on investments.
Figure 6
CWSRF Investment Returns
W
I
0)
o
12
10
8.
6.
4
2.
0
S Direct Loan
D Leveraged
<2% 2 to 3 to 4 to 5 to >6%
3% 4% 5% 6%
2000 Yield
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SRF Fund Management Handbook
Using the information supplied in each report, a
simple investment yield calculation should be
computed for each major investment account
group, categorized by the length of investment
maturity, and collectively for all fund investments.
This will provide an indication of the average
return over the period for each account group and
in total. The results can then be compared to
typical market rates for similar investments as
reported in financial publications.
When significant deviations are found between
actual investment returns and market rates for
comparable investments, the differences should
be investigated. Low investment returns for a
particular type of investment could indicate:
*
investment earnings not being properly
posted to an SRF account;
excessive trading losses on investments;
investment in inappropriate investment
vehicles; or
time lapses on investment deposits (un-
invested funds).
While higher than expected investment returns are
immediately appealing, such instances should also
be evaluated because they may indicate:
a lack of understanding of the investment
group;
inappropriate (e.g., high risk) investments
that could cause problems in the future;
misstated financial information; or
higher than expected cash balances due to
project delays.
Any potential investment problems usually can be
corrected quickly. However, they must first be
identified as problems by conducting routine
investment reviews. Corrective action steps can
then be taken to correct the situation.
Ideally, the investment portion of an SRF should
provide a rate of return that is comparable to
similar low risk investments in the market place,
such as, investments in U.S. government bonds
and bank issued certificates of deposit.
April 2001
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3. SRF Fund Management Questions
Case Study of the New York State Clean Water SRF
Vital Statistics as of June 30,2000
Federal Capitalization Grants: $1,671 million
Funds Available for Loans $5,104 million
Total Assistance Provided: $4,550 million
First Loan Issued in 1990
Average Loan Interest Rate: 2.4%
Leveraged and Direct Loan Program
Appropriated Match Provided
Total Number of Loans: 641
Leveraged: 322
Direct Short Term: 23 8
Direct Long Term: 81
The New York State Clean Water SRF offers leveraged and direct loans at below market rates. Both types of
loans are offered to strike a balance among the need (a) to maximize the delivery of program benefits, (b) to
protect the credit quality of the leveraged loan portfolio, and (c) to maximize benefits to disadvantaged
communities. (New York also offers a short term zero interest rate planning, design, and/or initial construction
loan that can be rolled into these long term loans.)
Initially, program resources were "leveraged" at a ratio of 3:1. For every $150 in loans, New York State would
commit $50 from federal capitalization and state match funds to borrower (debt) reserve accounts. Earnings on
borrower reserve accounts are applied as an offset to each borrower's loan interest cost. Three times leveraging
corresponds to approximately a one-third interest rate subsidy. In June of 1992, the leveraging ratio was reduced
to 2:1 for the purpose of increasing the subsidy provided to borrowers (from approximately one-third to one-half).
The reduction in the leveraging ratio to increase the borrower subsidy was accomplished by an amendment to
the New York State statute governing the CWSRF. The amendment is scheduled to sunset on September 30,
2003. New York has not made a commitment to permanently reduce the leveraging ratio to two times. Such
a decision would depend on anticipated future federal grants and a decision by the State of New York that offering
greater financial subsidies to high scoring projects on the Intended Use Plan will yield greater environmental
results than maximizing the number of projects that receive funding, but with lower financial subsidies.
Bond Financing and Investment of Federal Capitalization and State Match Funds Deposited in Leveraged
Borrower Reserve Accounts
Leveraged loans are funded from the proceeds of CWSRF bonds. Because the New York City Municipal Water
Finance Authority (NYW) is the dominant leveraged loan borrower, CWSRF bond financing activity is undertaken
under two separate indentures; one that serves NYW and one which serves all other local governments. Operating
out of two indentures allows New York to isolate the NYW credit and maximize the program credit rating. NYW
financings are marketed on the basis of Aal/AA+/AA+ ratings and the pool financing indenture is marketed to
investors on the basis of Aaa/AAA/AAA ratings. With this structure, participating local governments benefit
from the New York Environmental Facilities Corporation's (EFC) ability to borrow on the basis of the
Aaa/AAA/AAA ratings while being assured that any deterioration in NYW's credit would have no detrimental
impact on program borrowing costs. This arrangement also works to the benefit of NYW as it allows New York
State to respond specifically to the funding timetable of NYW.
Capitalization dollars deposited in borrower reserve accounts are invested in U.S. Treasuries (State and Local
Government Series (SLGS) or long dated repurchase agreements which are collateralized with U.S. Treasuries
or U.S. government guaranteed securities. Collateralized repurchase agreements have been entered into with
domestic and foreign banks, broker dealers, and insurance companies each meeting certain statutory rating
requirements. NYS currently requires funds deposited under these repurchase agreements to be collateralized
110% with U.S. Treasuries or 113% with U.S. government guaranteed securities. NYS must have a perfected
April 2001
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SRF Fund Management Handbook
security interest in the collateral and it must be marked to market weekly with any shortfall cured within one
business day. Agreement providers must pay interest one day in advance of the SRF bond payment date.
Agreements are bid on the basis of market interest rates.
The objective of the program is to secure a market bid that will enable the program to deliver interest subsidy
payments that accounts for a percentage of the borrower's annual interest cost that at least matches the corpus
allocation percentage. Since the inception of the program, NYS has succeeded in meeting this objective.
Arbitrage and Reserve Model Leveraging: Capturing Equivalent Refunding Savings for the Benefit of
CWSRF Borrowers
New York uses the interest earnings on reserve funds to provide subsidy benefits to borrowers. In accordance
with Section 148(f) of the Internal Service Code and Section 1.148-5(c) of U.S. Treasury Regulations, arbitrage
rebate and yield reduction payments, respectively, are made to the U.S. Treasury on certain reserve fund
investment (other than tax-exempt bonds) earnings in excess of the bond arbitrage yield to the U.S. Treasury.
Bond debt service can be reduced by refunding bonds in a lower interest rate environment. When doing an
advance refunding (where bonds are refunded by more than 90 days in advance of the first call date), it is
necessary to issue refunding bonds in an amount that exceeds the amount of bonds to be refunded. This is.
necessary to generate the bond proceeds needed to fund an investment escrow that will produce the future
cashflow requirements needed to pay the debt service of the refunded bonds. For state SRFs that rely on the
reserve model, the net SRF subsidy benefit to SRF borrowers is diminished by the necessary increase in bonds
outstanding and the requirement that earnings exceeding the arbitrage rate on the new bonds (the refunding bonds)
be returned to the U.S. Treasury. This decrease can only be offset by increasing the allocation of SRF equity
to borrower reserve accounts, which would restore the loan to borrower reserve ratio and preserves the interest
rate subsidy. New York has found this option to be untenable as it would require that previously financed SRF
projects be relisted on the IUP and compete with new projects for funding.
In September 1997, New York initiated an advance refunding of SRF bonds issued for the purpose of funding
SRF projects for NY W. Because federal tax law and regulations would restrict the borrower reserve fund earnings
to the new, lower arbitrage yield of the refunding bonds, New York undertook a partial refunding. The partial
refunding was done without the benefit of an SRF reserve as part of the bondholder security pledge. In effect,
the unrefunded bonds retained the SRF reserve pursuant to the outstanding bond indenture (the "Senior Bonds")
and the refunding bonds were issued on a subordinate basis (the "Subordinate Bonds"). In accord with federal
tax regulations, New York (a) refunded only those pre-1993 bonds for which debt service could not be covered
by SRF debt service reserve fund earnings and (b) refunded post-1993 bonds as defined by the difference between
the outstanding bond balance and outstanding reserve fund balance. The arrangement resulted in the SRF
borrower receiving the equivalent of an interest free loan for their post-1993 unrefunded bonds and a market
rate loan for the balance as set by the interest rate of the refunding bonds. Although New York would have
preferred a traditional refunding, yield restrictions limited the refunding options available to them that would
produce a meaningful present value savings. i
The development of this Senior/Subordinate Refunding approach has enabled New York's reserve fund leveraging j
program to achieve meaningful present value savings on behalf of local borrowers. Unfortunately, New York!
found this refunding approach to be suboptimal in that it only maximizes PV savings for the bonds that are j
refunded. Absent, tax law and tax regulatory constraints, a traditional high to low refunding of all callable bonds,
would offer much greater savings to SRF borrowers. So long as its SRF reserve fund investments are subject
to rebate and yield reduction payments, New York has found that a traditional high to low refunding can not
consistently compete with the senior/subordinate refunding approach.
April 2001
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3. SRF Fund Management Questions
For additional information contact:
Environmental Facilities Corporation
50 Wolf Road, Room 502
Albany, NY 12205-2603
April 2001
3-13
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SRF Fund.
3.2.2 The Issue "Returns on Fund
Investments" Directly Relates to:
Total funds available for loans
Ability to leverage or borrow for match
Long-term sustainable funding levels
3.3 FUND RESOURCE UTILIZATION
Regardless of the level of capitalization or the
availability of additional capital through
leveraging or other sources, each SRF has a pool
of financial resources at its disposal. An
important question to ask is, "Are those resources
being used as efficiently as possible?"
This question is best examined by analyzing the
SRF balance sheet assets to see how SRF
resources are being utilized. SRF assets consist
of five main components:
Cash and Short-Term Investments,
including loan repayments
Debt Service Reserve Investments
Loans Outstanding
Undrawn Federal Grants, less amounts
designated for set-asides (may show up in
financials as a footnote)
Undrawn State Match Amounts
The sum of these asset components comprise the
total assets or financial resources of an SRF.- All
of these assets except debt service reserves
make up the total assets available for loans.
Therefore, a simple measure of the efficiency
with which funds are utilized is a calculation of
loan commitments as a percent of available
assets (total assets less debt service reserves).
In the most efficiently managed SRF, this
measure approaches 100 percent, which means
almost all available assets are being committed
as loans. From a practical standpoint, loan
commitments must be less than available assets
to account for the need to maintain cash
balances that accommodate the tune lag from
receiving loan repayments, interest earnings,
TJ
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CO
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o
new capital, or bond proceeds and actually
disbursing the funds. Converting available assets
to loans will also take time for programs as they
go through their start-up phase. However, it is
reasonable to expect that over time most SRF
available assets should be committed as loans and
this measure will approach 100 percent. Due to
the timing of loan commitments and
disbursements, most programs will not actually
reach the 100 percent level.
Figure 7 presents the national average of
cumulative CWSRF loan commitments as a
percentage of cumulative available funds over
time. The graph shows steady progress in
increasing the use of available funds. In 2000, the
average for the program had reached 89 percent,
which was up from 86 percent in 1999. This trend
is expected to continue as loan commitments
continue to catch up to the available funds.
Individual CWSRF programs have naturally
performed above and below the national average
of cumulative loan commitments as a percentage
of available funds. Some programs have even
exceeded 100 percent, indicating that they are
making loan commitments in anticipation of
future availability of funds (e.g., repayments and
interest earnings).
Figure 7
Cumulative CWSRF Loans as a % of Available
Funds
100 .
o
1988 1990 1992 1994 1996 1998 2000
April 2001
3-14
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!ff,^
case btuay or tne uregon s Accelerated Loan commii:ment
in the Clean Water SRF
Vital Statistics as of June 30, 2000
Federal Capitalization Grants: $191 million
Total Funds Available: $301 million
Total Assistance Provided: $327 million
Match Provided from State Appropriations
and GO bonds outside SRF
First Loan Issued in 1991
Direct Loan Program
Number of Loans: 129
Average Loan Interest Rate: 3.8%
Oregon's Clean Water SRF is a direct loan program that is taking an innovative approach to making loan
commitments. Initially, like all CWSRFs, Oregon only made loan commitments for funds that were actually on
hand. However, with delays in project start-up and long disbursement schedules, Oregon's Department of
Environmental Quality (DEQ) found itself with long lag times from the time when funds were initially available
to actual project disbursements. This resulted in relatively large cash balances and undrawn grant amounts.
To reduce the lag time in fund utilization, Oregon is now committing more project assistance than it has funds
immediately available because of its experience in projecting program cash flows and project disbursements.
By examining the inflows and outflows of CWSRF funds, DEQ discovered that the program could commit to
loans in anticipation of future cash inflows as long as it closely monitored the fund's projected cash balance.
The table below presents a simplified illustration of this approach.
Quarter
1
2
3
4
5
6
Cash and Grants
Available - Beginning
of the Quarter
$10,000,000
9,000,000
8,000,000
6,000,000
10,000,000
9,000,000
Loan
Commitments
$20,000,000
Loan
Disbursements
$2,000,000
3,000,000
7,000,000
4,000,000
3,000,000
1,000,000
Cash In-
flows
$1,000,000
2,000,000
5,000,000
8,000,000
2,000,000
1,000,000.
Cash and Grants
Available - End of
the Quarter
$9,000,000
8,000,000
6,000,000
10,000,000
9,000,000
9,000,000
In this illustration, if the program waited until the full $20,000,000 was "available" the loan commitment could
not be made until the end of the fourth period when funds available would exceed the $20,000,000 project amount.
To monitor the fund's cash balance and to predict the fund's ability to commit to new projects, Oregon created
an Excel based cash balance model to track the inflows and outflows of cash in the fund. With the spreadsheet,
DEQ can predict the amount pf new loans that the fund can originate and the effects the proposed disbursements
would have on the fundVeash balance.
Program data quantifying all major projected cash inflows and outflows are entered into the spreadsheet on a
quarterly basis. The current cash balance of the fund and the grants available to the fund are entered as the starting
point for funds available. Then future inflows and outflows are added. The major cash flows consist of projected:
grant payments;
state match;
loan principal and interest repayments;
administrative expenses;
April 2001
3-15
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disbursements for existing loan commitments; and
investment earnings.
These cash flows are used to project future cash balances and the ability to commit to additional loans on a
quarterly basis. Because the intent of the spreadsheet is to monitor the fund's future cash balance, only future
activities of the fund need to be included for the spreadsheet to operate.
Once the anticipated financial activity has been included in the spreadsheet, the impact of committing to additional
projects on the fund's cash balance can be evaluated based on the projected project schedules and disbursement
schedules submitted by the borrower. This becomes one factor before loan commitments are made. This does
not supplant either the calculation of funds available that determines the total amount of loans that will be
committed each year, or the priority system that determines the order in which projects will be funded.
The cash balance projection spreadsheet does use a conservative estimate for potential investment interest and
a rapid escalation of administrative expenses to build in a cushion against any unforeseen changes in the projected
ability to commit funds. As the state gains more experience in projecting cash flows and committing funds in
anticipation of funds becoming available, they will be better able to judge the need for conservative assumptions.
The use of accelerated loan origination has allowed Oregon to commit to $37.7 million more in projects through
fiscal year 1999 than they would have using the traditional funds on hand approach to loan origination. By
completing the loan agreements earlier, projects are able to meet schedules rather than be delayed until the funds
are available. The bottom line is thatthe program cash is used more efficiently. Additional benefits include being
able to more accurately project the loan funds that will be available in future years. With this information, long-
term forecasts are prepared for project management and administration. In addition, the state has been able to
commit to four different short-term loans, providing construction period financing for projects that will receive
USDA Rural Development funding. These projects, totally over $15 million, have kept the cash in use for
communities while other projects, higher on the priority list, are getting ready for construction.
After several years of "leveraging" future cash inflows, the low point on the cash flow model has moved from
being several years out to being only 18 months ahead of us. While the nature of project schedules and the
conservative assumptions will probably keep moving the mark out further, the program should be close to drawing
down all available federal funds and using the cash on hand by that time (maintaining an appropriate cash reserve).
Other calculations are used to be sure that funds remain available for the highest priority projects when they are
ready to constructratherthanjustgoingtoaproject whose disbursement projections fit the cash flow gaps. More
short-term construction period loans will probably not be added unless unusual construction schedules create
significant periods of time that cash is idle. The cash flow model is most useful in modeling disbursements before
a loan is signed to be sure that the cash will be on hand when needed.
A prudent reserve amount will be maintained to allow for project schedule changes, and loan increases on on-
going projects. In addition, allowing for the accumulation of cash to fund large, high priority projects will create
on-going cash balances.
Oregon's cash balance computer model has become a useful tool in the direct loan program, maximizing the use
of cash for the benefit of the communities and, essentially, "leveraging" our own cash flow. While it does not
give the total picture, it provides an important piece in using the CWSRF to make the greatest impact possible
on water quality problems in Oregon. i
For additional information contact:
Oregon Department of Environmental Quality
811 S.W. Sixth Avenue
Portland, OR 97204-1390
April 2001
3-16
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!^
3.3.1 Assessing the Use of SRF Funds
The ability of an SRF to convert available assets
to loans is a use of funds issue. An evaluation of
the use of fund resources should begin with an
identification of available assets or resources
beginning at the start of the program and
continuing out into the future. This pool of
available assets can be compared against the use
of the assets to make loans. From the start of the
program, the increase in loan funds outstanding
as a proportion of available assets should be
climbing. If the program is lagging behind in
converting available assets to loans, then the
program may want to develop a plan for
increasing loan commitments and accelerating
loan disbursements over the near-term.
SRF Planning Model Tip
Fund utilization rates t are critical to I
modeling SRF Programs and are controlled |
under the Use of Funds tab.
Fund use is controlled relative to the|
availability of funds to make new loans.
Constraints may be imposed to ensure j
minimum cash balances are maintained.
The model can perform trial and error I
calculation to solve for your fund utilization
goals check "Optimize Cash Balance" to [
use this method.
For SRFs that are lagging in using available assets
as loans (slow program pace), the anticipated
increase in fund utilization should be reflected in
subsequent intended use plans to identify how
available assets, which include loan repayments
and interest earnings, will be utilized in the
coming year. The utilization of funds and
commitments to new projects should account for
a program's need to maintain reasonable working
capital in the program and to account for large
scale projects that will require disbursements over
a relatively long time frame (i.e., three or. more
years). Programs that are experiencing low xisag6
rates of available assets (z'.e., maintaining excess
cash balances and undrawn grant/match amounts)
should move aggressively to ensure that funds are
put to their intended use over the near-term.
3.3.2 The Issue "Fund Resource
Utilization" Directly Relates to:
Loan terms
Availability of funds for investment
. Use of funds produced by leveraging
Ability to leverage or borrow for match
Long-term sustainable funding levels
3.4 LOAN PORTFOLIO MANAGEMENT
The purpose of an SRF is to make below market
interest rate loans to projects that can achieve
desired environmental and public health results.
The ability of the loan recipients to repay loan
principal and interest could have a major impact
on the financial condition of the SRF. The
financial ability of potential SRF borrowers
should be assessed as part of the loan application
review to determine loan affordability, ability to
repay the loan, and loan security provisions that
may be required such as reserve requirements and
collateral.
The question, "Does the fund have a sound loan
pbrtfolio?" refers to the financial condition and
ability of the loan recipients to repay the loans on
an ongoing basis. A simple test of the soundness
of the loan portfolio is to see if all scheduled loan
principal and interest payments have been paid on
time. Have there been any late payments or the
need to restructure payments? If all payments are
not being paid currently, this may be a sign of
problems with the loan portfolio. Such difficulties
should be investigated to determine the magnitude
of the problem and identify any overall
weaknesses in the loan portfolio.
The presence of weak segments or credits within
the loan portfolio is not an inherent flaw in the
management of an SRF. An integral part of a
program may be to loan funds to financially weak
borrowers to support proj ects that achieve desired
environmental results. However, the financial
condition or strength of the loan portfolio must be
monitored to assess uncertainty over future loan
repayments and to establish loan loss reserves (or
prepare for losses) when appropriate.
April 2001
3-17
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gjFtFfund Manjagement Han^gok
3.4.1 Loan Portfolio Analysis
Loanportfolio analysis requires an under standing
of the financial condition of each borrower. If
most of the borrowers have a bond rating, then
their bond ratings could be used to assess the
financial condition of the portfolio. For example,
the loans outstanding could be categorized by
bond rating such as 44 percent of the loans are A
rated or higher, 34 percent are investment grade
with B ratings, and 32 percent are not rated. A
similar type of breakdown could be provided
using the results of financial capability reviews
performed by the SRF on the borrowers during the
loan application process. The results of each
review can be categorized into strong, medium,
and weak financial condition. As with bond
ratings, these categories can be used to break
down the composition of the loan portfolio.
For SRF programs with loan portfolios that have
a large proportion of financially weaker
borrowers, there may be off-setting factors that
should be taken into consideration that increase
the assurance of repayment. Such factors include
loan provisions that provide additional security for
loan repayment beyond pledges of the revenues
from user charges, such as, pledging the full faith
and credit of the community, asset pledges, and
state aid intercept. Additional pledges provide
greater assurance of repayment and should be
taken into consideration when evaluating the
condition of an SRF loan portfolio.
Loans to individuals, non profit groups, and
private businesses for nonpoint source and
drinking water projects add complexity to loan
portfolio analysis. Frequently, such loans are
structured differently from loans to traditional
governments. The source of revenue to repay the
loan may be unique to the project and borrower's
circumstances. Collateral to secure the loan may
play a larger role in the loan structure because the
borrower does not have broad taxing authority.
Nonetheless, loan portfolio analysis should
attempt to evaluate the credit risk of these loans
using techniques such as those outlined in Credit
Considerations for Reaching Nonpoint Source
SRF Borrowers. GIF A. April 1999.
Loan portfolios should also be evaluated with
respect to loan terms that may strain the ability of
borrowers to make repayments in the future.
Examples are loans that have increasing interest
rates/payments in the later years and loans with
balloon repayments. In both cases, a borrower
may be able to meet current obligations, but be
unable to make higher payments later in the loan
term. Assessments of loan portfolios should
consider these factors when reviewing the overall
ability of the borrowers to make all loan principal
and interest payments.
The end result of assessing the financial condition
of the SRF loan portfolio can serve a number of
purposes. The first is to evaluate the likelihood
that all outstanding loans will be repaid on time.
If there is risk or uncertainty over repayment from
a segment of the loan portfolio, this knowledge
should be applied to financial planning by
factoring in potential default rates on certain
loans. It may also be desirable to establish
accounting loan loss reserves to recognize the loss
potential in financial statements.
Assessing the loan portfolio can also be used to
provide feedback on a program's credit
review/financial capability analysis process by
determining if the process is adequate to
categorize the financial condition of the
borrowers. Secondly, any defaults and/or late
payments can be linked back to the assessment of
financial capability to ensure that borrowers that
ultimately experience repayment difficulty were
properly identified as higher credit risk.
3.4.2 The Issue "Loan Portfolio
Management'" Directly Relates to:
Loan terms
Fund utilization
Ability to leverage or borrow for match
Long-term sustainable funding levels
April 2001
3-18
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case study of Maryland Water Quality Financing Administration (WQFA)
Loan Portfolio Evaluation Process
Vital Statistics as of June 30,2000
Federal Capitalization Grants: $367 million
Appropriated Match: $ 69 million
Leveraging Initiated: 1990
First Loan Issued: 1990
Total Funds Available: $687 million
Total Assistance Provided: $533 million
Number of Loans: 160
Average Loan Interest Rate: 2.5%
As one of the first SRF programs to begin using a blended rate approach to leveraging, the credit quality of WQFA's loan
portfolio was extremely important. Many of the early borrowers were well established communities that had debt issuance
experience and had corresponding ratings on their debt from bond rating agencies. This situation provided a straightforward
means of tracking the financial condition of the WQFA borrowers by tracking the bond ratings of these same entities for
independently issued debt. This level of analysis is conducted annually to produce summary tables characterizing the
financial condition of the loan portfolio.
The table below provides the summary as of June 30, 1997.
Rating
Aaa/AAA
Aa/AA
A/A
Baa/BBB
Not Rated
Total
Loan Volume
$33,050723
$116,135,010
$70,595,147
$9,926,209
$9,202,497
$238,909,586
Percent of Total
14%
49%
30%
. 4%
4%
100%
The table shows a very strong portfolio with 92% of the loans with borrowers having a A rating or higher. However, the
category of borrowers listed as "Not Rated" required additional review since no rating information is available on these
borrowers on an ongoing basis. (The not rated borrowers do go through an initial credit reviewprior to loan commitment.)
To track "not rated" borrowers on an ongoing basis, Maryland developed a systematic approach for collecting and analyzing
financial and other data on each of these borrowers. Financial statements are collected annually for both the enterprise
and general funds and the information is entered (using a standard approach) into a financial analysis spreadsheet.
The spreadsheet is used to calculate standard industry ratios, including:
current ratio
cash/current liabilities
total assets/total liabilities
net debt/(fixed assets + working capital)
O&M expenses/total operating revenues ;
fund balance (retained earnings)/revenues
interest and debt service coverage; and
debt service safety margin . '
I The ratios are compared to industry standards'developed by Moody's and also compared to prior year's data for trend
| analysis. The results of the evaluation along with analysis of other economic and demographic information is used to
I identify potential weak credits in the loan portfolio and update a watch list of borrowers with potential financial problems.
This information allows Maryland to actively oversee all aspects of their loan portfolio and to maintain a high degree
of confidence for loan repayment. This oversight and evaluation process will become increasingly important in the program
| as a larger share of the loan volume for the CWSRF and DWSRF goes to unrated borrowers.
For additional information contact:
Maryland Water Quality Financing Administration
2500 Broening Highway
Baltimore, MD 21224
April 2001
3-19
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SRF Fund Management Handbook
3.5 AVAILABILITY OF FUNDS
States may be asked if their SRF programs are
providing sufficient levels of project assistance to
the right mix of borrowers. The question may
arise because there is not enough SRF funding
available for'all of the eligible projects that wish
to receive assistance. Excess demand for the SRF
will manifest itself in several ways. The first is
the general interest level in the program for
traditional and other types of projects. Indicators
include high numbers of inquiries about the
program, requests for program information, strong
attendance at SRF public meetings, and large
numbers of assistance applications. A second
indication is a low dropout rate for applicants
approved for assistance. The proj ects that receive
assistance commitments usually proceed with the
project to avoid losing the funding. A third
measure of demand is the diversity of potential
applicants interested in the program. Is there
strong interest in the program across community
sizes and financial capability?
SRF Planning Model Tip
Enter modeling assumptions for your state.
Go to See Results - Single Graph.
Viewresultsfor fund resources to assess how |
well your program is using available funds,
Adjust fund utilization assumptions to see I
how demand must change to meet yourj
supply of funds.
Collectively, high demand for the program can be
attributed to many factors, including: strong
enforcement, favorable SRF loan terms, lack of
alternative programs, or general economic
conditions. The causes of the high demand may
help direct the appropriate response to make more
SRF funds available.
3.5.1 Factors to Consider When There
Is Excess Demand for Funds
The consideration of making more funds available
would lead to three of the other fund management
questions:
Should loan terms be adjusted?
Are available resources being used
effectively?
Should the fund leverage/continue to
leverage?
Responses to each of these questions could make
more funds available by increasing loan interest
rates, increasing the utilization of existing
resources, or providing additional funds through
leveraging. Any action must be considered in the
short and long term. Changes in interest terms
and improved fund utilization will take time to
translate into increased funding levels. An
increase in interest rates may also have a negative
impact on loan demand making it more difficult
to utilize all funds. Leveraging decisions could
have a much more immediate effect on funds
available for projects.
In addition to expanding the reach of the current
SRF, the level of demand may warrant an appeal
by the SRF and its constituents to request
additional state contributions or the development
of other state programs to complement the SRF.
3.5.2 The Issue "Availability of Funds"
Directly Relates to:
Loan terms
Investment results
ซ Need for leveraging
Impact of borrowing for match
Long term sustainable funding
April 2001
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3. SRF Fund ManaffementjQuestipns^
Case Study of Massachusetts State Revolving Fund (MASRF)
Fund Utilization Strategy
Vital Statistics as of June 30, 2000
Federal Capitalization Grants: $643 million
Match from GO Bonds outside the SRF
Leveraging Initiated: 1993
First Loan Issued: October 1991
Total Funds Available: $1.8 billion
Total Assistance Provided: $1.9 billion
Number of Loans: 787
Average Loan Interest Rate: 0%
For the past several years Massachusetts has been working to implement its Watershed Initiative, a comprehensive
watershed approach to water quality protection] The Watershed Initiative divides the Commonwealth into 27
separate watersheds and assigns "basin teams" to manage water quality issues within the watersheds. The
underlying concept of the watershed approach is to look at overall water quality within each watershed and allow
experts familiar with the watershed to participate in developing water quality strategies.
In an effort to support the watershed initiative and achieve the highest level of water quality for the
Commonwealth, the Department of Environmental Protection (DEP) began rethinking their MASRF utilization
strategy in the spring of 1996. Like many states, the bulk of the MASRF funds had traditionally gone to large
wastewater treatment and collection projects. DEP began developing a strategy that would allocate a certain
amount of funding forNPS and other non-traditional projects. Initially DEP was leaning towards allocating five
percent of funds to NFS projects in the first year and increasing it thereafter.
Further analysis of their fund utilization strategy led DEP to decide that the type of project, whether it was a new
treatment plant or funding the repair of septic systems, was somewhat irrelevant since the real goal of the SRF
is to protect and improve overall water quality. This thinking led DEP to conclude that financing NFS projects
to a fixed level of five percent made little sense since DEP estimated that NFS's were responsible for 80 percent
of water pollution.
Subsequently, DEP revised its project category allocation approach for financing water quality projects. In
October of 1997 the Commonwealth promulgated regulations that leveled the funding playing field between
traditional and non-traditional projects. Funding criteria in the new regulations gives priority to the most desirable
projects to fund within each watershed. Further no applicant can receive more than 33 percent of available funding
in any one year. Under the new regulations, watershed teams review and rank projects within their watershed.
Regional DEP staff (there are four regions in Massachusetts) then review and rank the projects within their region.
As a final ranking step, DEP headquarters takes the regional rankings and compiles a final Project Priority List
(PPL). The end result is a PPL that ensures the most desirable water quality projects receive funding, "regardless
of project category." The MASRF trend of utilizing funds to achieve the greatest water quality benefit is reflected
in their funding levels. Before the new funding regulations were in place, the MASRF obligated $1.7 million
in NFS loans (through 1997), mostly to communities to assist with the repair of failing septic systems. This
funding level increased dramatically in 1998, to $39 million, the first year the watershed-based ranking criteria
and regulations were employed. Once the watershed assessment period ends, it is expected that the NFS funding
level will be 50 to 60 percent of all SRF funding.
For additional information contact:
Massachusetts Department of Environmental
Protection
1 Winter Street
Boston, MA 02108
April 2001
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SRF Fund Management Handbook
April 2001
3-22
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3. SRF Fund Management Questions
3.6 ADMINISTRATIVE RESOURCES
"Does the fund have sufficient administrative
resources?" is a common question posed to SRFs
to determine if a fund can not only revolve
financially in perpetuity, but that it has the
administrative resources to provide for operating
the program in perpetuity. The use of SRF funds
for administrative costs is capped at four percent
of the capitalization grant amount, which means
that at some point each SRF will require outside
sources of SRF administrative funding.
Determining the administrative resource
requirements of an SRF is a long-term budgeting
exercise. The historical and projected
administrative costs of the program must first be
calculated to understand the funding requirement
over time. The funding requirement on a
sustainable basis should be calculated as an
average annual administrative cost m today's
dollars.
Currently available administrative resources
should be matched year-to-year with estimated
administrative costs. This will provide an
indication of how long currently available
resources will be sufficient to pay these costs. The
short-fall between available funds and projected
costs is the amount of additional administrative
funding that will be required. Opportunities to
reduce operating costs, while not diminishing the
effectiveness of the program, should be considered
along with any review of projected administrative
costs.
Sources of additional funding include ongoing
state program funding or fees generated as part of
the SRF program as a cost to the borrowers. The
political appeal of either approach may dictate the
direction that administrative funding will follow.
Meeting administrative funding needs with SR^F
generated reyenue requires charging an
administrative fee to borrowers. The fee should
be set to meet the administrative funding need of
the SRF over the near-term and the estimated
average annual cost over the long-term.
Administrative fees usually take the form of an
application fee, a loan closing fee as a percent of
the loan amount (points), and/or a loan servicing
fee charged as a percentage of the debt service
payment or principal balance outstanding on the
loan. Various fee systems should be evaluated to
project the revenue generated by each system or
combination of systems and its sufficiency for
meeting administrative costs. Systems to generate
fees should also be evaluated with respect to
fairness across segments of borrowers.
SRF Planning Model Tip
A separate section allows the user to model j
alternative fee scenarios.
Fees work in combination withl
administrative set-aside amounts and user|
entered funding requirements.
Immediate feedback iง available on the
ability of fee levels to meet anticipated j
costs.
For a number of states, the imposition of an
administrative fee has been accompanied by an
off-setting reduction in the loan interest rate to
avoid increasing the total loan cost for the
borrower. This reduction of interest earnings
reduces the amount of funds available for future
loans, affecting fund growth. The cost of
administrative fees should be factored into
subsequent analyses of SRF loan interest rates to
ensure that the fees are reasonable.
3.6.1 The Issue "Administrative
Resources" Directly Relates to:
Administrative fee portion of loan terms and
total cost to the borrower
Ability to manage leveraging or borrowing
for match
Achieving sustainable funding levels
April 2001
3-23
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SRF Fund Management Handbook
3.7 LEVERAGING
Leveraging can be an effective tool to provide
greater project assistance than a direct loan
program for near-term needs. Additional monies
to provide assistance are obtained through the
issuance of bonds secured by the assets of the
program.
In general terms, there are two types of leveraging
used by SRF programs, reserve-fund and cash-
flow leveraging. The key differences between
these methods are related to the debt service
reserves set aside to secure the bonds. In reserve
fund leveraging, the reserve is "oversized" and
often is 40 to 60 percent of the bonds outstanding.
These reserves provide enhanced security for the
bonds and are invested to produce sizeable interest
earnings which help to pay off the bond debt
service. Cash flow leveraging uses a more
traditional reserve fund of approximately 10
percent of the bonds outstanding. This allows the
use of smaller bond issues to fund an equivalent
amount of projects. The net result of each
leveraging approach produces similar levels of
funding and subsidy for the SRF borrowers.
If two programs are the same in all aspects, except
that one leverages and the other does not, then the
leveraged program should be able to provide more
assistance sooner than the non-leveraged program.
Over time, the non-leveraged or direct-loan
program will build program equity faster than the
leveraged program. In the leveraged program,
earnings generated from loan and investment
interest are applied to debt service payments and
may not build as much equity over time. At some
point in time, the amount of annual assistance
provided under the non-leveraged program will
exceed that of the leveraged program. How many
years this takes is based on a number of factors,
the most important of which are:
rate of inflation
loan interest rates
bond interest rates
rate of return on investments
Figure 8 illustrates this concept by comparing a
leveraged program to an otherwise identical
direct-loan program. As the graph demonstrates,
even though a direct-loan program will eventually
provide more annual assistance than a leveraged
program (phase 4), the leveraged program still
provides more cumulative assistance. By
providing greater assistance sooner than the direct-
loan program (phase 2), the leveraged program is
able to buy more "bricks and mortar" over time
due to the erosive effect inflation has on the
purchasing power of the fund. A detailed
discussion of Figure 8 is provided in the next
section.
The question of whether a fund should leverage
or continue to leverage should carefully consider
two of the fund management issues discussed in
earlier chapters. The first question is "Are the
fund resources being used efficiently?" If the
answer is no, the SRF has existing fund resources
that could be used to fund projects. The existing
resources should be fully utilized before
leveraging or additional leveraging is undertaken.
The second question is "Is sufficient project
assistance being made available?" If the answer
to this question is no, then there may be sufficient
demand for leveraging, provided that all existing
resources are being fully utilized. In other words,
the first two criteria for a program to leverage or
continue to leverage are:
strong sustained demand for additional loans
from the program
efficient utilization of existing financial
resources
For SRFs that are in this situation and are
administratively capable of managing leveraging,
new or continued leveraging should be pursued.
April 2001
3-24
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3. SRF Fund[.Managjameiit Questing
3.7.1 Using Financial Planning to
Evaluate Leveraging
Evaluating new or additional leveraging requires
detailedfinancialplanning with the assistance of
a financial advisor and/or underwriter. This
process should begin by establishing a reasonable
baseline plan. The plan should project the
financial future of the SRF using all of the relevant
operating assumptions for the program, but
Figure 8
Annual Disbursements Adjusted to 2000 Dollars
Leverage $850 million
Direct Loan $774 million
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Key assumptions are: leveraging initiated in 2000, loan rate of 3%, bond yield of
5.5%, 10% debt service reserve, 2% bond issuance cost, and investment earnings
of 4.5%. Leveraging maintained at 50% of program equity. Discount rate of 3%.
scenario. The scenarios should be compared to the
baseline to assess the desirability of leveraging
and the preferred scenario. The comparison
between the baseline and leveraging should be
comparable where possible. For example, the
interest rate on new loans should be the same in
the baseline as in a leveraging scenario.
The fundamental trade-off to consider with
leveraging is the benefit of
financing projects over
the short-term versus potentially .
reduced annual
project funding in the longer-term.
The environmental benefit alone of
supporting projects sooner rather
than later may favor leveraging.
When the time value of money is
considered, there may also be a net
economic benefit from leveraging
by funding projects sooner rather
than later. Therefore, a
fundamental requirement to
consider leveraging is adequacy of
demand for the leveraged funds.
Analyzing leveraging scenarios
should include the calculation and
assessment of key financial
measures that demonstrate the
financial viability of leveraging
proposals. Common measures
include debt service coverage, net
interest margin, and debt to equity.
without any new or additional leveraging. This
will provide a basis for comparing each leveraging
scenario. Key parameters to understand are total
project funding that can be achieved over the next
three years, average project funding over the next
twenty years, and average proj ect funding in years
twenty-one to thirty, all in today's dollars. These
parameters will establish a baseline for evaluating
the near-term, medium-term, and long-term
impacts of leveraging.
The next step is to add one or more leveraging
scenarios to the financial projections. The same
three parameters should be tabulated for each
e c t i o n
SRF Planning Model Tip
Leveraging parameters are set!
on a single leveraging pagej
under Proj
Assumptions,
First select the level of leveraging you want!
to achieve relative to grant dollars or total j
program capital,
Then set key assumption on bond yield, |
term, size of debt service reserve, andj
issuance expense.
The earning rate for the reserves is set under j
Use of Funds.
April 2001
3-25
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SRF Fund Management Handbook
Case Study of State of Tennessee Clean Water
State Revolving Fund's Assessment of the Need for Leveraging
Vital Statistics as of June 30,2000
Federal Capitalization Grants: $279 million
Appropriated Match: $ 59 million
First Loan Issued: January 1989
Total Funds Available: $464 million
Total Assistance Provided: $440 million
Number of Loans: 124
Tennessee, as a financially conservative state, strongly considered the federal language that the intent
of the CWSRF is to provide funding in perpetuity for wastewater facility construction. At the inception
of the CWSRF, many discussions were held regarding the viability of leveraging. It was determined
that leveraging as a concept was viable and could greatly increase project funding over the near term;
however, neither the need (demand) for leveraging nor the administrative coordination to leverage was
resolved. Consequently, the State decided to not leverage and as a result all repayment of principal and
interest is returned to the fund and revolved into new loans.
Tennessee received its first CWSRF capitalization grant on March 30,1988. The first three loans were
awarded on January 30,1989. In 1993, the State's Department of Finance and Administration conducted
a study to consider leveraging the CWSRF. The study focused on:
demand for CWSRF funding;
authorizing legislation;
CWSRF operating procedures;
program administration; and
activity nationally and in other southeastern states.
[n addition, they evaluated the flow of funds required for leveraging and, while they identified the
potential benefits of leveraging, they identified three critical concerns. The first concern was that the
Federal laws governing the use of tax-exempt bond proceeds would necessitate a relatively rapid
disbursement of funds for projects. Historically, the State's experience with disbursements for these!
types of projects had been slower; hence, creating a risk relative to rebate requirements. The second!
concern was that the relatively low interest payments from borrowers may not be sufficient to repay the!
leverage debt and that supplemental state appropriations may be required to sustain the CWSRF. The!
third concern was that leveraging may adversely affect the State's bond ratings for general obligation!
and revenue bonds. !
April 2001
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3. SRF Fund Management Questions
Given these concerns and an overall assessment that leveraging was not required to meet demand, the
state decided to not pursue leveraging at that time. However, they did institute the use of a cash flow I
tracking spreadsheet to assess on an ongoing basis the availability of funds and ability to commit to new|
loans. Based on this analysis, the State continues to believe that they have sufficient funding resources!
to not require leveraging.
The spreadsheet tracks actual and projected:
capitalization grants;
state match;
loan principal and interest;
interest on investments; and
administrative expenses.
The flow of funds in each category are used to record past available loan dollars, loan awards, and cash
balances and to project future loan awards based on using 90 percent of available funds in each year.
This analysis shows that annual loan awards will climb in nominal dollars from $40 million currently
to over $100 million in the next 20 years ($55 million per year in 1998 dollars using a three percent
inflation rate).
So far, a project has not been denied access to the CWSRF because of the lack of available funds. This
does not imply that the CWSRF has met all the wastewater project needs in Tennessee. It is important
to recognize the multiple funding options available for these projects, the driving forces behind project
initiation, and the expediency in which funds are required. During the past few years Tennessee has
limited the maximum loan amount to one recipient within a fiscal year to 10 million dollars. Again,
conservatism translates in Tennessee that the intent of the program is to primarily assist financially
distressed systems rather than merely subsidize large cities which have more opportunities to alternative
financing with lower bond interest rates.
For additional information contact:
Tennessee Department of Environmental Conservation
Division of Community Assistance
401 Church Street
Nashville, TN 37243
April 2001
3-27'
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SRF Fund Management Handbook
3.7.3 The "Leveraging"
Directly Relates to:
Issue
Figure 10
Loan terms
Investment earnings
Fund utilization
Loan portfolio management
Ability to increase available
assistance
Adequacy of administrative
resources
Long-term funding and sustainable
funding levels
3.8
BORROWING
MATCH
FOR STATE
Annual Disbursements Adjusted to 2000 Dollars
With limited state financial resources,
most SRFs at one time or another are
faced with the question of what impact
borrowing for state match will have on the
program. The most preferable approach for
receiving match is through a state appropriation
or other mechanism that does not require
repayment by the SRF. However, in certain cases
or at certain times this form of match may not be
available. This leads to consideration of SRF
borrowing for the state match.
When an SRF borrows for state match, interest
earnings from the program are used to repay
principal and interest on the match bonds. This
reduces the financial resources of the SRF
because interest earnings that could have been
used to fund new projects are used to pay bond
interest and principal. The loss of project funding
is compounded by the additional loss of interest
that would have been earned on the loans that
could have been made from the funds. Figure 10
illustrates the impact of borrowing for state match
for a single $5 million grant. Continued
borrowing for match for multiple grants will
increase the financial impact illustrated.
Evaluating the net impact of borrowing for state
match requites financial planning analysis over
the life of the bond issue(s). As with the analysis
Key assumptions are: Loan rate of 3%, bond yield of 5.5%, 10% debt
service reserve, 2% bond issuance cost, and investment earnings of
4.5%. Discount rate of 3%.
for leveraging, a baseline scenario should first be
developed that estimates near, medium, and long-
term funding. A scenario in which state match is
borrowed can then be applied to the financial
projection to calculate comparable results. The
difference between the two scenarios is the cost
of borrowing for state match. Understanding the
magnitude of the impact from borrowing for state
match is valuable information for presenting the
case to request direct match contribution from the
legislature.
SRF Planning Model Tip
Match contribution levels and sources are I
set under the Match Data tab.
The first entry just sets match as a I
percentage of grants regardless of the source |
of the match.
Remaining entries allow specification of J
borrowed match assumptions.
Borrowing for match has similar modeling)
control parameter as leveraging.
nHHBBI
In simplistic terms, borrowing for state match can
be thought of as providing "temporary" matching
April 2001
3-28
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3. SRF Fund Management Questions
funds. At the time the match funds are
borrowed, the state has the full 20 percent
match available for projects. Over time, as
interest earnings are used to repay the match
bonds, the interest earnings that would have
otherwise remained with the SRF are lost to the
SRF to repay the bonds. At the end of the bond
repayment period, there are no matching funds
remaining from the match bonds since they have
been repaid. The program is left with the
original grant amount that was being matched,
plus accumulated net earnings after repaying the
bonds.
3.8.1 The "Borrowing for State
Match" Issue Directly Relates
to:
Loan terms
Investment earnings
Future ability to provide needed assistance
Use of leveraging
Long-term funding and sustainable funding
levels
3.9
SET-ASIDES AND CAPITALIZATION
FUND TRANSFERS
One of the most significant factors affecting the
financial resources of an SRF is the level of
capitalization. Steps that can be taken to increase
the capitalization of an SRF will have immediate
positive impacts on the availability of funds.
Increases in capitalization beyond new federal
grant awards can take the form of additional state
contributions or transfers from the state's other
SRF program (subject to transfer, rules).
Reductions in capitalization, primarily caused by
the use of set-asides or transfers out of the SRF,
have an opposite impact on SRF funding by
immediately reducing available funding resources
by the dollar amount of the set-aside or transfer.
Cashflow modeling and financial planning will
be required to evaluate the effect of changes in
capitalization levels. The analysis should begin
with reasonable baseline capitalization levels
Figure 11
Lipact of Borrowing State Mitch
Appropriated IVfeteh
Borrowed IVfetch
Oapitali2ation
Fund - Initial Value
Interest Earning
Fund-Value in 20
Years
Appropriated
Mitch
$100 Grant
$20 Mitch
Bond
Impact is loss of full amount of Mrtch plus interest cost In Ihis example $30
before increases or decreases to those levels. This
baseline can then be used to compare the relative
impact of using funds for set-asides, transfers, or
anticipated other capitalization impacts. The
appropriate point of comparison will be the
resulting impact on annual funding levels
immediately and over the long term.
SRF Planning Model Tip
Grants data allows the entry of various j
future grant funding scenarios.
Options are available to specify use of J
grants for set-asides.
Transfers may be specified separately from]
the initial grant data.
H^HHB^H
The results of analyses of capitalization levels
should be used to frame the policy discussion of
using funds for set-asides, transferring funds
between programs, and making the case for
increasing state capitalization.
3.9.1 The Issue "Set-Asides and
Capitalization Fund Transfers"
Directly Relates to:
Availability of funds
April 2001
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SRF Fund Management Handbook
Ability to leverage or borrow for match
Long-term sustainable funding levels
Case Study of the Nevada Drinking Water State Revolving Fund
Use of Set-Aside Funds
Vital Statistics as of June 30,2000:
Federal Capitalization Grants:
State Match:
$27.1 million
$5.4 million
Total Funds Available:
First Loan Issued:
$27.0 million
Spring of 1999
As the Nevada Bureau of Health Protection Services (BHPS) began planning for the implementation
of a DWSRF, it evaluated many aspects of the new program including the potential use of set-aside funds. \
Key issues considered included determining which set-asides to use and what funding level to plan for. j
By working with the Nevada Division of Environmental Protection, who has the authority to administer!
wellhead protection and underground injection programs, the BHPS was able to develop an estimate!
for set-aside funding.
The proposed budget for set-asides was incorporated into work plans and a draft Intended Use Plan, which
were then presented at four workshops to solicit public review and comment The initial dollar amounts
presented in the IUP consisted of educated guesses that were later refined based on responses to a
comprehensive request for proposals (RFP) to support many of the set-aside activities. The revised work
plans and budget were submitted to EPA for review and ultimately received approval.
Nevada's decisions concerning the set-asides resulted in the following use of funds:
Administration Full four percent ($502,352) was set aside.
State Program Management The State is eligible for a $509,758 set-aside, based on the 1:1 state
expenditure credit; plus appropriated funds. Nevada is also providing an additional $100,000 for the
1:1 match to utilize an additional $ 100,000 set-aside. In total, $709,75 8 was made available for this State
Program Management set-aside, used as follows:
Public Water System Supervision Program $146,000
Technical Assistance and Education $201,338
Underground Injection Control Program $227,618
Develop and Implement Capacity Development Strategy $43,262
Operator Certification $91,540
Total $709,758
April 2001
3-30
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3. SRF Fund Managarcientjguestiong
The State has an additional $650,000 of available state funds that could be applied to this set-aside to
further increase the funding of these activities with state and federal money. However, any unused
amounts will revert to the state general fund.
Technical.Assistance for Small Water Systems - Full two percent ($251,176) was set aside.
Local Assistance and Other State Programs - This set-aside allows up to 15 percent of the grant!
amount to support several programs, with no more than 10 percent used on any one activity. Nevada;
allocated almost 12 percent ($1,465,147) of the grant to these programs. The full 10 percent amount;
or $1,255,880 was allocated to the source water assessment program (which would not be available in;
future years). Smaller additional amounts were allocated to capacity development and wellhead:
protection. No funds were allocated to source water protection loans. !
In total, Nevada is setting aside $2.8 million of their $12.6 million capitalization grant. The remaining!
grant amount of $9.8 million coupled with the 20 percent state match amount of $2.5 million will result
in a revolving fund balance available for loans of $12.3 million. This is 81 percent of the total funds!
available from the 1997 allotment plus match. !
In addition to planning for set-aside activity as it applies to the current grant, Nevada also extended its!
set-aside budgeting exercise to include annual and quarterly set-aside budgeting through the year 2003 .|
For additional information contact:
Nevada State Health Division
Drinking Water State Revolving Fund
1179 Fairview Drive
Carson City, NV 89701
April 2001
3-31
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SRF Fund Management Handbook
3.10 SUSTAINABLE FUNDING LEVELS
A valuable benchmark for an SRF is the
sustainable funding level that the program can
achieve. This information is frequently expressed
as an average dollar amount of funding that the
program can provide each year. Usingfinancial
planning, fund managers can estimate what the
sustainable funding level will be over time based
on current and anticipated operating assumptions.
Funding levels are usually expressed in today's
dollars to account for inflation.
The sustainable funding for a program is
frequently used in conjunction with promoting the
program and appealing for additional investment
in the program. It can also be used as a point of
reference to identify how additional funding for
the program or other program changes will impact
annual funding levels. For example, an additional
state contribution of $X million now will increase
average annual funding from the program by $Y
million through the life of the program.
An. important aspect of evaluating sustainable
funding levels is to reconcile funding levels with
the current demand or need for funds. The goal
should be to develop an approach for achieving
sustainable funding levels that match the demand
for funds. Funding strategies should attempt to
overcome funding shortfalls and at the same time
avoid creating excess funds beyond the current
demand for funds. Cash flow modeling is a
valuable tool for evaluating potential sustainable
funding levels that can be achieved and then
comparing funding levels to funding need.
3.10.1 The Issue "Sustainable Funding
Levels" Directly Relates to:
Loan terms
Investment earnings
Availability of funds
Loan portfolio management
Availability of administrative resources
Ability to leverage or borrow for match
Use of set-asides and transfers
April 2001
3-32
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3. SRF Fund Management Questions
Case Study of the Minnesota Clean Water SRF Capacity Analysis
Vital Statistics as of June 30,2000
Federal Capitalization Grants: $291 million
Total Funds Available: $849 million
Total Assistance Provided: $823 million
Match Provided from GO bonds outside SRF
First Loan Issued in 1989
Leveraging Initiated in 1990
Number of Loans: 665
Loan Interest Rate: 1 -4%
Minnesota's Clean Water SRF is a leveraged program where most of the capitalization grant funds from
1989 through 1994 were put into a debt service reserve. Beginning in 1995 when Minnesota's nonpoint
source loan programs were initiated, the majority of capitalization grant funds were used to make direct
loans for nonpoint source projects. (Due to the nature of the nonpoint source projects, they cannot be
.funded from bond proceeds.) From 1995 through 1998, 60 percent of capitalization grant funds went
to the nonpoint source programs.
To keep up with the loan demand from point source projects, the Public Facilities Authority (PFA) issued
five series of bonds from 1995 through 1998 that raised $283 million in net proceeds for new projects,
while adding only $27.5 million to the debt service reserve. This rate of leveraging is not sustainable
over the long-term based on the PFA's analysis of the Fund's future lending capacity. In 1997, the PFA
initiated discussions with the Minnesota Pollution Control Agency (MPCA) and the Minnesota
Department of Agriculture (MDA), the agencies that administer the nonpoint source SRF programs,
regarding overall point and nonpoint source needs and how to manage the Fund to best address those
needs.
The PFA's capacity analysis looks at the annual lending level for point source projects that the Fund
could sustain in perpetuity, based on the assumption that capitalization grants would continue at declining
levels through 2003 and then end. The PFA uses the capacity analysis to guide policy decisions by
examining annual lending levels and their impact on future lending capacity.
The model tested annual lending capacity based on two variables: the loan subsidy level and the
percentage of capitalization grants provided for nonpoint source programs. The table below summarizes
the results of the capacity analysis at two different subsidy levels, 1.5 percent and 2.0 percent below
market rate. (The actual weighted average interest rate on all loans to date is between these two levels.)
Percent of
Capitalization Grants
Used For
NPS Programs
0%
25%
50%
f f
t - f ss tt w.v.y'", ^
Rate Spread = 2% below
market
$53
$47
$43
ling Capacity (m mtHio
Rate. Spread = 1 .5%
market
$65
$58
$52
n&F \
below
April 2001
3-33
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SRF Fund Management Handbook
100%
$33
$40
If the 1995-98 nonpoint source funding level of 60% of capitalization grants were to continue, the annual
lending level for point source projects would be less than $50 million. The PFA has determined this
is not an acceptable level, given that the annual point source loan demand is in excess of $200 million, j
Based on this analysis, a decision was made that the MFC A and MD A would submit separate legislative 1
requests for state funding for their nonpoint source programs, to be provided as SRF overmatch. Through I
future rule revisions, the PFA will also consider reducing the interest rate subsidy for point source
proj ects. Another possible step would be to reduce or eliminate the interest free period provided for point |
source projects. Currently interest does not begin to accrue for most projects for 12-18 months afterf
the loan is made.
I
In the near future, the PFA intends to continue to leverage the Fund to finance as many point sources
projects as financially feasible. With municipal contracting costs inflating nationally at twice the overall \
inflation rate (and beginning to approach double digits in Minnesota) and borrowing costs below five j
percent, it is prudent to finance as much as possible as soon as projects are ready to go.
For additional information contact:
Minnesota Public Facilities Authority
500 Metro Square
121 7th Place East
Saint Paul, MN 55101
April 2001
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4. Analytic Tools and Techniques
4.0 ANALYTICAL TOOLS AND TECHNIQUES
This section of the handbook provides a discussion of the analytical tools and techniques that were identified
earlier in italics and are commonly used in support of SRF fund management. The tools and techniques
consist of:
Cash Flow Modeling and Financial Planning/Projection
Role of Auditing/Accounting in Financial Management
Today's Dollars or Present Value (Constant Dollars)
Grant Equivalency
Investment Return
Balance Sheet Analysis
8 Loan Portfolio Analysis
Key Financial Measures
Financial Indicators
April 2001
4-1
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jSRF Fund Management Handbook
4.1 CASH FLOW MODELING AND FINANCIAL PLANNING AND PROJECTION
Definition:
Illustrative Usage:
Prospective or projected financial activity of an SRF require key assumptions about
capitalization, the use of funds, investments, loan interest rates and repayment terms,
use of debt, and retained earnings. Typically presented as year by year financial
projections over a reasonable time horizon of up to 3 0 years. It may consist of short-
term or long-term planning. Cash flow modeling/financial planning is an ongoing
process that requires periodic updating to reflect actual program operations and
current market conditions.
The SRF financial plan projects average annual project funding of $42 million
over the next 20 years in today's (2000) dollars. The SRF financial plan
projects average annual equity growth in excess of the rate of inflation,
indicating that the SRF will be able to continue to increase funding levels in
today's dollars in perpetuity.
Calculation Approach:
Calculation Method:
Example:
SRF financial projections require year by year calculation of the inflows and
outflows of funds. The accounting financial statement model (income
statement, statement of cash flows, and balance sheet) provides a common
structure for making financial projections. The primary inflows of funds are
federal and state capital, bond proceeds, interest income from loans and
investments, and loan principal repayment. The primary outflows of funds are
loan disbursements, administrative expense, interest expense, bond issuance
cost, and principal repayment on bonds.
Requires year-by-year construction of fund inflows and outflows (actual data
to the present and estimated results in the future). Critical assumptions beyond
capitalization and debt issuance are future interest earnings on loans and
investments, interest expense on bonds, use of debt service reserves, and
commitment of available funds for loans. For each year of a financial plan,
a key calculation is the estimation of funds available for projects and the use
of those funds for new projects. The results of the calculation of each year's
new loan disbursements will affect all future period cash flows (i.e., interest
earnings on loans and investments and future loan principal repayment). The
calculations proceed from year to year as new funds become available for
projects and are then committed to new projects. This iterative process
continues through the relevant financial planning period.
Illustrative financial modeling results from the new EPA SRF Financial
Planning Model are presented on the following pages.
April 2001
4-2
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4. Analytic Toots and Techniques
Home Screen of the SRF Financial Planning Model
i^f . ManageSjnaos
4. JS ""-ซฃ- * S- f~- tฃ '***** iS** V^-' > 1 1 *ST ~* CMMMM^tSW^ti
if,jjH*SRf Being.Anatyzed^fซfonat dean Water Sfif xSt-1
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FjxsjgctgPfmntag Ptoc^Fflvpt)0,xIsL,;
April 2001
4-3
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SRFFund ManagementHandbook
Sample Output from the SRF Financial Planning Model
Annual Disbursements Adjusted to 2000 Dollars
35
30,
52
CO
=5 2S
20.
o
(0
g 15
10.
5 .
Phase 1
Phase 2
Leverage $850 million
Direct Loan $774 million
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Annual Disbursements Adjusted to 2000 Dollars
Increase Rates to 4%
. Maintain Rates at 3%
April 2001
4-4
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April 2001
4-5
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SRF Fund Management Handbook
April 2001
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April 2001
4-7
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SRF Fund Management Handbook
4.2 ROLE OF AUDITING/ACCOUNTING IN FINANCIAL MANAGEMENT
To effectively monitor the financial side of the SRF program, SRF managers must have timely and reliable
financial information available that thoroughly covers the essential areas of their program. Meaningful
financial information is necessary to conduct financial analyses, track the progress of achieving financial
goals and objectives, and develop future financial management decisions that will ultimately affect an SRF
program. Through adherence to standard accounting guidelines and the conducting of annual independent
audits, the SRF program has a way to monitor the financial information needed to manage this program.
The importance and usefulness of governmental accounting and financial reporting has been previously
noted in the statement of goals provided by the National Council of Governmental Accounting (NCGA)
in their Concepts Statement Number 1: -
/ - provide financial information useful for making economic, political, and social decisions,
and demonstrating accountability and stewardship; and
2 - provide information useful for evaluating managerial and organizational performance.
To have effective financial control, management should utilize information obtained from the normal
accounting and auditing process which is also an integral part of the above goals. It is essential that quality
and objectivity be a part of the audit phase so that the final audit results will be credible and timely. By
having reliable financial information, management can make improved financial decisions that will affect
the entire SRF program as a whole.
Another major point of consideration is what type of fund to use for accounting purposes. The two major
fund types are (1) proprietary fund or (2) special revenue fund. A proprietary fund treats the SRF financial
activity like a business or commercial activity to show profit and loss and the accumulation and use of
capital. A special revenue fund, however, is established to account for the proceeds of a specific revenue
source. It treats an SRF like a checkbook with an emphasis on the current period inflows and outflows of
funds. The special revenue fund is useful for tracking current financial activity, but quickly loses track of
the longer-term financial position of an SRF as a separate entity.
To have sound SRF financial management, it is necessary for the SRF to be regarded as a stand alone entity
that is designed to exist in perpetuity. Therefore, the proprietary fund is the preferred approach for an SRF.
When a state maintains an SRF as a special revenue fund, financial statements should still be prepared and
the overall financial structure of the SRF should still be thought of as a proprietary fund. This is similar
to treating the SRF like a bank or some other lending institution, which are the types of financial entities
that the SRF most closely resembles.
Financial reporting for proprietary funds consists of preparing three financial statements along with
supporting notes to the financial statements for the current period of activity, which is usually one year.
These statements are:
Statement of Revenues, Expenses, and Change in Retained Earnings This statement is like an
income statement and shows the current period revenues (from interest earnings on loans and
investments) minus expenses (e.g., interest expense, bond issuance costs, and administrative expense).
The annual excess/(deficit) of revenues over expenses are added to the accumulated retained
earnings/fund balance reported on the balance sheet and increase the total equity or capital available
April 2001
4-8
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4. Analytic Tools and Techniques
to the program. For governmental purposes, retained earnings may also be referred to as "fund
balance," which is the accumulated net earnings of the program.
Statement of Cash Flows - This statement shows the additions and subtractions from cash for the
current period. The statement begins with the change in retained earnings or fund balance for the
current period, reconciles accounts receivable and payable, and then identifies the major sources and
uses of cash. Major cash inflows consist of such items as ACH cash draws, loan principal repayment,
bond proceeds, and withdrawals from debt service reserves. Major cash outflows consist of such items
as loan disbursements, bond principal repayments, and deposits to debt service reserves. The net result
is the current period change in cash, which is added to the accumulated cash balance on the balance
sheet.
Balance Sheet - This statement shows the SRF's ending balances for a specific period of time.
Financial resources (assets) are equal to obligations (liabilities) plus equity (Assets = Liabilities +
Equity). The primary components of an SRF Balance sheet consist of:
Assets
Cash and cash equivalents
Debt service reserves (if debt has been issued)
Loans outstanding
Undrawn federal grants (may be identified in a footnote only)
Liabilities
State match bonds outstanding
Leverage bonds outstanding
Federal contributions
State contributions
Retained earnings or fund balance
This structure for financial reporting using the proprietary fund reporting model provides a simplified
approach for understanding how the financial activity of an SRF could be reported like a business. Annual
independent audits should provide additional assurance that the financial information is fairly presented
and for decision making. The Environmental Protection Agency Clean Water State Revolving Fund Audit
Guide, June 1998, provides additional information about auditing standards while outlining key issues to
be considered in SRF programs.
From a financial management standpoint, audited financial statements following the proprietary fund
reporting model, summarize financial activity to date in a useful format and can also provide a structure
for projecting future financial activity using cash flow modeling techniques. Cash flow modeling seeks
to quantify financial activity that has already taken place and projects future financial activity using
reasonable assumptions about how a program will be managed in the future. The projected financial activity
can be characterized as the potential financial impact of decisions on a program's revenues/expenses, cash
flows, and its resulting balance sheet.
April 2001
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SRJFFund Management Handbook^
4.3 TODAY'S DOLLARS OR PRESENT VALUE (CONSTANT DOLLARS)
Definition:
Illustrative Usage:
Dollars received today have a different monetary value than dollars received in the
future or the past. This is due to two factors, inflation and the time preference of
money or risk associated with receiving money now versus at another point in time.
In order to perform valid analyses, a dollar received in the past or future must be
adjusted to reflect its value in today' s dollars. This adjustment is commonly referred
to as calculating the present value of past or future dollars.
A payment received today of $100 is worth $100 or has a present value of
$ 100. If the cost of capital or borrowing rate is 8 percent per year, a payment
of $100 received one year from now has a present value of $92.59 and a
payment received a year ago has a present value of $ 108.
Calculation Approach:
Calculation Method:
Example 1:
Example 2:
Today's dollars or present value is calculated by first identifying the dollar
amount of each payment and the date when the payment will be made. The
payment amount is then discounted over the time period from the date of the
payment to the present using the cost of capital or borrowing rate for the entity
receiving the payment. (The use of the borrowing rate as the discount rate is
an appropriate simplification of a complex financial topic.) Multiple future
and/or past payments can each be discounted to their present value and added
together to compute the total present value of a series of payments or cash
flows received in the past or the future.
Present Value = Pmt,/(l-Hi)nl +Pmt2/(l+i)n2 + Pmt3/(l+i)n3 +
Pmt, = future or past value of the first identified payment
i = periodic discount rate or cost of capital, usually current borrowing
interest rate
n = number of compounding periods from the present at interest rate i (time
periods must be consistent with periodic interest rate). Positive values
of n represent future periods and negative values represent past periods
Payment of $ 1,000 in 2 years
Current borrowing rate of 6.5% per year
Present Value = $1,000/(1+0.065)2 = $1,000/1.1342 = $881.66
Payments of $1,000 in 2 years and $500 received 3 years ago
Current borrowing rate of 5% per year
Present Value = $1,000/(1+0.05)2 + $500/(1+0.05)'3
= $907.03+$578.81 =$1,485.84
April 2001
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4.4 GRANT EQUIVALENCY
Definition:
Illustrative Usage:
The equivalent value of SRF or other subsidized financial assistance as if it is
received as a direct grant. The grant equivalency is the benefit received by a
borrower resulting from financing project costs at a below-market interest rate.
Calculation Approach:
With current borrowing rates at 6.5 percent, a three percent loan has a grant
equivalency of 26 percent.
Grant equivalency is calculated by computing the present value cost (see
present value discussion) of each financing option using the current market
cost of borrowing as the discount rate. The percentage difference between the
present value of each option is then calculated which is the grant equivalent
amount.
Calculation Method:
Example:
Reference Table:
Grant Equivalency = 100 x (PV of Option A - PV of Option B)/PV of
Option A
Project cost of $ 1,000,000
Financing Option A - Borrowing at Current Market Rates
Current borrowing rate of 6.5%
Annual level debt service over 20 years is $90,756
Present value cost @ 6.5% is $ 1,000,000
Financing Option B - Borrowing from an SRF
SRF loan rate of 3%
Annual level debt service over 20 years is $67,216
Present value cost @ 6.5% is $740,617
Grant Equivalency = 100 x ($l,000,000-$740,617)/$ 1,000,000 =25.9%
The table below presents grant equivalency percentages for various loan
interest rates and market rates.
'
Market Rates
7%
6%
5%
4%
redencyV
tfvlGe for 2
5%
15%
8%
0%
NA
atoes for Oiffe-rahi Loan ^ml-ftliarfcst Interest Muleฎ --
talari wH&fthnuai FayrsailtsBf PrijiBpiLsirtd-lriMJ'e^t)
3%
29%
23%
16%
9%
SRF Loan
2%
35%
30%
24%
17%
Interest Rates
1%
41%
36%
31%
25%
0%
47%
43%
38%
"32%
-2%
57%
54%
50%
45%
April 2001
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SR.JFJjJnd Management Hanjdbpolk
4.5 INVESTMENT RETURN
Definition:
Investment return is the total return received on an investment over a finite period
of time. The calculation must account for all earnings, gains, losses, and expenses
that are directly attributable to the investment. Investment returns must account
for new investments and withdrawals from accounts that are independent of
investment returns.
Illustrative Usage:
Calculation Approach:
The total investment return from the guaranteed investment contract is 4.9
percent per year.
Investment return is the net change in the value of an investment from the start
of a period to the end of a period, accounting for all financial activity
attributable to the investment. The investment return is expressed as a
percentage of the investment value at the start of the period.
Calculation Method: Investment Return = 100 x (EV-BV+E-X)/BV
Example 1:
Example 2:
EV = ending value of .the investment or group of investments that
corresponds directly to the investment(s) at the start of the period (z. e.,
proper adjustments for deposits and withdrawals)
B V = beginning value of the investment or group of investments at the start
of the period
E = all earnings properly allocated to an investment(s) that are not
reinvested (not included in EV)
X = all expenses properly allocated to an investment(s) that are not
deducted directly from the investment(s) (not included in EV)
Investment of $ 1,000 at the start of the year
Investment is worth $990 at the end of the year
Interest earned from the investment for the year, but not reinvested, is $79
Investment advisory fees allocated to the investment, but not deducted from
the investment, for the year is $24
Annual Investment Return = 100 x ($990-$l,000+$79-$24)/$ 1,000
= 100 x $457$ 1,000
= 4.5%
Investment A of $1,000 at the start of the year
Investment A is worth $1,075 at the end of the year
Interest earned from Investment A for the year, but not reinvested, is $42
Investment advisory fees allocated to Investment A, but not deducted from
the investment, for the year is $14
Investment B of $2,000 at the start of the year
Investment B is worth $1,920 at the end of the year
Interest earned from Investment B for the year, but not reinvested, is $84
April 2001
4-12
-------
4. Analytic; Tools and Techniques
Investment advisory fees allocated to Investment A, but not deducted from
the investment, for the year is $ 12
Annual Investment Return = 100 x (T$1.075-$1.0QQ+$42-$14VK$1.920-$2.QOO+$84-$12Vl
$1,000+$2,000
= 100 xf$103-$8V
$3,000
= 3.2%
April 2001
4-13
-------
SRF Fund Management Handbook
4.6 BALANCE SHEET ANALYSIS
Definition:
Illustrative Usage:
Use of an SRF's balance sheet to calculate the use of financial resources, claims
on the resources, and sources of capital. Ratio calculations that compare balance
sheet items are an integral part of any meaningful balance sheet analysis.
Calculation Approach:
Calculation Method:
Typical measures:
An SRF has 80 percent of its assets in use as loans outstanding. An SRF has
a debt to equity ratio of 62 percent.
A balance sheet represents the year end (or end of period) snapshot of the
balances of both the financial resources of an SRF (assets) and the source of
those resources (liabilities and equity). All balance sheet analyses are based
on same period percentage comparisons of relevant balance sheet items. Year
by year trends in balance sheet ratios can provide useful insight into fund
management.
Balance Sheet Ratio = 100 x (Balance Sheet Item I/Balance Sheet Item 2)
Cash as a Percent of Total Assets - proportion of available and currently
unused assets
Debt Service Reserve as a Percent of Total Assets - proportion of assets
dedicated as reserves for bonds and unavailable to make loans
Loans as a Percent of Total Assets - proportion of assets that are outstanding
loans from the SRF
Debt as a Percent of Total Equity - indicates degree of leveraging
Debt Service Reserve as a Percent of Debt - measure of leveraging structure
and security behind SRF leverage bonds
EPA Contribution as a Percent of Total Equity - proportion of capital from
EPA
State Contribution as a Percent of Total Equity - proportion of capital from
state
Retained Earnings as a Percent of Total Equity - proportion of capital
generated or lost through net earnings or losses
April 2001
4-14
-------
4. Analytic Tools and Techniques
Example:
SRF Balance Sheet as of June 30. 2000 fthousands^
Assets Cash and Investments $500
Debt Service Reserve 1,000
Loans Outstanding 5.800
Total Assets $7,300
Liabilities Accounts Payable $250
Debt Outstanding 2.700
Total Liabilities $2,950
Equity EPA Contribution $3,000
State Contribution 600
Retained Earnings 750
Total Equity $4,350
Total Liabilities and Equity $7,3 00
Cash as a Percent of Total Assets = 100 x (500/7,300) = 6.9%
Debt Service Reserve as a Percent of Total Assets = 100 x (1,000/7,300) = 13.7%
Loans as a Percent of Total Assets = 100 x (5,800/7,300) = 79.5%
Debt as a Percent of Total Equity = 100 x (2,700/4,350) = 62.1%
Debt Service Reserve as a Percent of Debt = 100 x (1,000/2,700) = 37.0%
EPA Contribution as a Percent of Total Equity = 100 x (3,000/4,350) = 69.0%
State Contribution as a Percent of Total Equity = 100 x (600/4,350) = 13.8%
Retained Earnings as a Percent of Total Equity = 100 x (750/4,350) = 17.2%
April 2001
4-15
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j5RF_Fund__Mjanag(Bmjent_Handboojk^
4.7 LOAN PORTFOLIO ANALYSIS
Definition:
Loan portfolio analysis consists of segmenting an SRF's loan portfolio by the credit
quality of the borrowers. Such analysis is used to evaluate the credit quality of a
loan portfolio and, hence, the financial risk an SRF faces for loan repayment.
Illustrative Usage:
Calculation Approach:
Calculation Method:
Example:
Over 65 percent of the outstanding loans have been made to communities with
above average or higher credit ratings.
Each loan recipient must be categorized by credit condition or financial
capability. The dollar amount of loans outstanding are then grouped by the
available categories to calculate the proportion of loan dollars in each category.
Bond ratings provide a convenient set of categories to measure credit
condition. However, many SRF loan recipients may be unrated. SRFs that
perform financial capability analyses on loan applicants may be able to
categorize loan recipients into ranges of financial capability from strongest
to weakest. Other SRFs may want to rank loan recipient financial capability
based on secondary sources of financial and socio-economic data on their loan
recipients, such as, debt per capita, median household income, and
unemployment rates.
Percentage breakdown of the loan portfolio by appropriate measures of
financial capability.
Total SRF loans outstanding of $5,800
Financial Capability
Strong
Above Average
Average
Below Average
Weak
Total
Loan Amount
$1,500
2,300
1,400
600
Q
$5,800
Percent of Total
25.9%
39.7
24.1
10.3
0.0
100.0%
Over 65 percent of the loan portfolio is rated above average or higher and
almost 90 percent is average or above, indicating a financially strong loan
portfolio.
April 2001
4-16
-------
4.8 KEY FINANCIAL MEASURES
The following measures can be used to evaluate various aspects of SRF programs. The measures are based
on commonly used financial analysis techniques used to assess the financial performance of self supporting
entities. The application and use of these measures is most appropriate for evaluating the current status
and year-to-year trends of individual SRF programs. It also may be useful to assess certain measures in
conjunction with other measures to obtain a more complete picture of an SRF. Care must be taken when
attempting to compare measures across SRF programs due to the unique aspects of many program structures.
Table 2 cross references the potential application of the financial measures to the fund management issues
discussed earlier.
This introduction to financial measures is followed by an example set of SRF financial statements. The
sets of equations that are included with each measure below refer to these statements. The first equation
in each set uses references for individual line items on the statements, while the second equation uses the
numbers that correlate to each reference. Where years are not specified, the most recent year is used.
Utilizing the C WSRF NIMS data, a number of these measures were calculated for reference purposes. Table
3 at the end of this section presents upper quartile, median, and lower quartile values. This data is based
on NIMS data for all 51 CWSRF programs and then segmented into programs that use bonds in their
program and those that don't. These values are intended to provide a gauge for the typical values that may
be found in SRF programs.
Measures that Apply to All SRF Programs
Binding Commitments as a Percent of Federal Contributions -
This measure shows the percentage of SRF funds committed to projects as a percentage of federal
capitalization grants. It is calculated by dividing cumulative binding commitments by cumulative
federal capitalization grant awards. Cumulative binding commitments is the total amount of money
that has been committed as loans. Binding commitments may or may not be closed loans, depending
upon a state's definition of a binding commitment. Cumulative federal capitalization grant awards
is the total amount of federal capitalization grant funds that have been awarded.
= (cumulative binding commitments / federal grant contributions) * 100
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f see financial statements on pages 4-27 to 4-30 for reference numbers.
At a minimum, this value should equal or exceed 120 percent to satisfy the statutory requirements
(within one year). However, with commitment of repayments and leveraging, this measure will exceed
120 percent and continue to grow into the future. Year-to-year increases in this measure will indicate
continued growth in the projects funded relative to the initial federal seed capital.
April 2001
4-17
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SRF Fund Management Handbook
Undisbursed Binding Commitment Liability -
Measures the ability of the fund to meet major off-balance sheet potential liability. This is calculated
by dividing cumulative undisbursed binding commitments by total current assets (including undrawn
federal grant and state match amounts).
= (cumulative undisbursed binding commitments / ta^^urrentjissets) * 100
= ((S2 - S3) / (B1 + B4 + B5)) * 100
When this measure is 100 percent, it indicates that the fund has outstanding commitments that exactly
equal currently available resources. Values below 100 percent indicate that all currently available
resources are not committed to new loans. Values over 100 percent will indicate that the program
is making loan commitments in advance of the receipt of funds, particularly repayments and new bond
issuance.
Project Completion Ratio (Dollars)
Reflects the proportion of project funding resulting in project completions. It is equal to the
cumulative dollar amount of completed projects divided by the cumulative dollar amount of projects
funded.
_= (completed projects / projects^funded) * JOO
ifil ^*-- ' -'
A relatively high percentage for this measure will indicate an effective pace of having proj ects proceed
to completion. Over time this measure should continue to rise at an ever slower rate as it approaches
100 percent. A declining trend hi this measure over several years could indicate a slowing of project
start-up and/or construction progress.
April 2001
4-18
-------
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1 . Should loan terms be
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S
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S
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S
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S
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S
S
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S
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S
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8. What impact will
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have on the fund?
S
S
S
S
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S
S
S
S
S
S
S
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SRF Fund Management Handbook
Project Completion Ratio (Number of Projects) -
Reflects the proportion of project completions in relation to the total number of projects funded. It is equal
to the cumulative number of completed projects divided by the cumulative number of projects funded.
= (completedprojects /projects funded) * 100
= (S10/S9)*100 ^ ,,^' /
(47 / $9)
j
A relatively high percentage for this measure will indicate an effective pace of having projects
proceed to completion. Over time this measure should continue to rise at an ever slower rate as it
approaches 100 percent. A declining trend in this measure over several years could indicate a
slowing of project start-up and/or construction progress.
Loans as a Percent of Total Available Assets
Measures the proportion of available fund resources utilized as loans. This is determined by dividing
total loans receivable by total assets less debt service reserves.
= (total loans receivable / (total assets - debt service requirements) * 100
S ---------------------------------- ' ---- ........... ------------ >.-.._.-,-, ....... ,-,_,. ............ , ----------- ..................... -JS&XSl?;" ..... >-' r-vyr-r,,.-,:.,-
As a program with a sole purpose of providing financial assistance, SRF programs should be utilizing
a substantial portion of their financial assets to make loans. This measure will indicate the degree
to which available assets are being converted into loans. A high percentage, approaching 100
percent, should indicate that virtually all available resources are being converted into loans. A
relatively low percentage or a downward trend could indicate underutilization of fund resources.
April 2001
4-20
-------
4.^AnalyticTools[andI
Loan Principal Repaid as a Percent of Loans Outstanding -
Shows the rate at which loan principal is being repaid and, thus, being made available to revolve.
The measure reflects the average maturity of loan principal outstanding. This value is determined
by dividing the amount of current year principal that has been repaid on loans by the average loans
outstanding.
A mature loan portfolio with 20 year loans that are repaid in level payments will have loan principal
repayment of nine to ten percent of the outstanding loan balance every year. Programs that offer
level debt service payments will have a lower percentage of principal repayment initially (less than
five percent), but that percentage will rise over time to greater than 8 percent. The length of maturity
of the loans will also directly affect this measure, with shorter loan maturities increasing the
percentage of principal repaid each year. For mature programs, a rate that approaches eight to ten
percent will be typical (reflecting average repayment across a diverse loan portfolio) and higher
percentages will indicate a more rapidly revolving fund.
Delinquincv Ratio
Identifies potential risk and liquidity problems that could be caused by delinquincies in the loan
portfolio. It is equal to the dollar amount of loans that are delinquint by more than 30 days divided
by total loans receivable.
= (delinquent loans / average loans receivable) * 100
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April 2001
4-21
-------
SRF Fund Management Handbook
Loan Yield -
This measure calculates the rate of return on the loan portfolio from interest. It is useful for assessing
total returns, as well as the reasonableness of loan interest earnings. It is calculated by dividing loan
interest earnings for a year by average loans outstanding.
= (loan interest earnings /average ^ |Q^s gutstandmg) * 100
' -== (12 / ((B3be9innln90(year
Interest earnings from loans is a primary source of revenue for SRF programs anil this measure will
present the average interest earnings yield from loans. The interest rate charged by SRPs is at the
discretion of the state, within allowable boundaries. Individual loan yield values must be evaluated
in the context of individual program objectives and market/alternative rates for borrowers. May
wish to include administrative fees in the calculation of total loan yield.
Reported Loan Rates -
Weighted average loan rates reported by the state. Use these amounts to assess the reasonableness
of the Loan Yield.
S5
= 3,0%
Interest Rate Spread (Estimated Subsidy) -
The difference between the interest rate charged on SRF loans and market rates. The market rate
should be a comparable cost of borrowing for communities such as the Bond Buyer 20 Year GO
bond index.
= (interest rate charged on SRF^ loans - market rates)
= S7 - S5
3.0 ซ kasC"
The interest rate spread indicates the amount of subsidy being offered by the program. A larger
interest rate spread indicates a greater benefit being given to the borrower and a lower return for
the SRF.
April 2001
4-22
-------
4.Analytic: Tools'.and Techniques
Investment Yield
This measure calculates the rate of return on investments. It is useful for assessing total returns and
the reasonableness of investment earnings. It is calculated by dividing investment interest revenue
by average investment assets.
Investment yields should approach current short term interest rates for low risk investments, such
as U.S. treasury bills and money market funds. Low investment yields may indicate inappropriate
investments or interest earnings not being properly credited to the SRF. Ideally investment yields
should be calculated and evaluated by type of investment.
Net Interest Margin
Indicates the net positive or net negative interest return relative to total average assets. It is equal
to the yearly total interest revenue minus total interest expense for an SRF, divided by total assets
over the year.
assets) * 100
This measure indicates the net earning potential of an SRF. A positive value indicates a program
that has positive earnings from its basic operations. The size of net interest margin will directly
impact the earnings and growth of an SRF.
April 2001
4-23
-------
SRF Fund Management Handbook
Return on Equity -
Measures the overall net return on contributed capital plus retained earnings. It is the excess (deficit)
of total revenues minus total expenses or change in fund balance/retained earnings, divided by
average equity.
= ((total revenues - total expenses) / average total ejguilyjL* 100
= ((19 - 114) / ((B14be3inningofyear + B14etldofyear) / 2)) * 100
((13.6 - 2.0) t {{m,$ + 393.7) / 2})* 1 00 * &
~\
This measure shows the overall return that is being earned on the equity of an SRF . A positive return
on equity will indicate thatthe fund is earning apositive return and growing as aresult of the positive
earnings.
Internal Capital Formation -
Measures the rate of growth of internally generated equity. It is determined by dividing current
period change in fund balance/retained earnings by prior period total fund balance/ retained earnings.
= (current change in fund balance/retained earnings / total fund balance/retained earnings)
* 100
= (115 / B14beainntngofyear)i* 100
mr*^w^f^wwiwmTป^^TT^Ty^w^i^^rr^rT'wgjปi;^^
(1 1 v.6 / 327.8} * 100 - 3.5%
This measure focuses on the return being generated by the SRF from internal net earnings. A
positive value means that the SRF is generating capital from ongoing operations, thus expanding
its capital base to make future loans.
April 2001
4-24
-------
4.Analytic Tools; and
Measures That Apply to Programs That Use Debt
Debt to Equity -
Expresses the degree to which the fund is leveraged and the amount of financial risk associated with
leveraging. It is calculated as total outstanding debt divided by total equity.
This is a common measure used to evaluate the financial structure of an entity. The higher the value
the more a program is leveraged, which simultaneously increases the near term funds available for
projects and the financial risk of the SRF.
Debt to Performing Assets -
Measures the amount of performing assets derived from borrowed funds. It is calculated by dividing
total outstanding debt by total assets that are earning interest (i,e., loans and investments). Total
outstanding debt is the combination of current year leveraged bond proceeds minus the state and
leveraged bond principal repayments, in addition to this value from the prior year. Total assets that
are earning interest include: cash, investments, loans receivable, and the debt service reserve fund.
This measure identifies the proportion of available funds that were generated from bonds. Highly
leveraged programs will have a relatively large proportion of performing assets generated from
borrowing.
April 2001
4-25
-------
SRF Fund Management Handbook
Debt Service Reserve Fund as Percent of Bonds Outstanding -
Identifies the level of security provided by the Debt Service Reserve Fund to meet current debt
service requirements. It is determined by dividing the cumulative end of period Debt Service
Reserve Fund balance by end of period outstanding debt.
= (cumulative debt service reserve fund balance / outstanding debt) * 100
_ _ -- --- -- - --- -
A reserve fund leveraging structure will result in a relatively high percentage for this measure. Cash
flow leveraged programs will have approximately 10 percent of the debt outstanding in reserves.
Debt Service Coverage fFixed Charge Coverage Ratio) -
Reflects the SRF's ability to meet both interest and principal payments on outstanding debt with
available net earnings. It is equal to loan principal repayments plus revenues minus expenses
(excluding interest expense), divided by total interest expense plus debt maturities paid in the last
year. Total revenues include investment interest plus interest on loans. Expenses include
administrative and bond issuance costs. Interest expense is interest paid on bonds issued by the SRF.
Debt maturities paid in the last year consist of the bond principal repayment for leveraged and match
bonds.
= ((loan principal repayments + revenues - expenses) / (total interest expense + debt
maturities)
t- (115 + 14 + C4) /04
Typical coverage ratios exceed 1.2 as an appropriate degree of financial safety.
April 2001
4-26
-------
4. Analytic Tools and Techniques
Interest Coverage Ratio -
Identifies the SRF's ability to cover at least interest expense with available net earnings. It is equal
to total revenues minus non-interest expenses, divided by total interest expense. Total revenues
include investment interest plus interest on loans. Expenses include administrative and bond
issuance costs. Interest expense is interest paid on bonds issued by the SRF.
((revenues - expenses) / total interest expense)
"%
Typical coverage ratios exceed 1.2 as an appropriate degree of financial safety.
Debt Rating -
Indicates the relative financial risk associated with an SRF Program's bonds. It is a measure of the
most recent ratings for debt issued by the SRF, if any. This is provided by debt rating agencies such
as Moody's or Standard & Poor's.
April 2001
4-27
-------
SRF Fund Management Handbook
4. Analytic Tools and Techniques
Example Financial Statements
B 1
B 2
B 3
B 4
B 5
& 6
B 7
Balance Sheet
Year Ended June 30, 2000
($ millions)
Assets
Cash and Equivalents
Debt Service Reserve
Loans Receivable
Undrawn ACH (may only be a footnote)
Accounts Receivable
Other Assets
Total Assets
2000
248.9
149.8
541.2
51.2
991.1
1999
159.8
143.9
493.9
23.3
820.9
Liabilities
B 8 . Accounts Payable
B $ Bonds Outstanding
B 10 Total Liabilities
1.5
592.9
594.4
493.0
493.0
B11
'012
B13
B14
B15
Equity
Federal Contribution
State Contribution
Retained Earnings
Total Equity
Total Liabilities and Equity
289.6
57.9
49.2
241.9
48.4
37.6
April 2001
4-28
-------
4. Analytic Tools and Techniques
If
12
i
.'*
IS
1 6
J7
18
1 10' '
J 11
1,12
113
1 14
'I 18
1 17
Statement of Revenue, Expenses, and Changes in Retained Earnings
Year Ended June 30, 2000
($ millions)
Interest Revenue
Cash and Investments
Loans Receivable
Total Interest Revenue
Interest Expense - Bonds
Net Interest Revenue
Other Revenue
Administrative Fee
Other
Total Other Revenue
Net Revenue
Other Expense
Administrative Costs
Bond Issuance Cost
Bad Debts Expense
Other
Total Other Expense
Net Income (change in retained earnings)
Retained Earnings - Beginning of Year
Retained Earnings - End of Year
2000
19.0
18.8
37.8
25.7
12.1
1.2
0.3
1.1
0.7
0.2
2.0
11.6
^=' ,!-!ii:a
37.6
$ 49.2
1999
16.7
16.8
33.5
22.2
11.3
0.9
0.1
1.0
0.8
0.3
2.1
10.2
27.4
$ 37.6
April 2001
4-29
-------
Reference
C*
C2
"
C3
C4
05
06
c?
C8
CS
,
010
on
' 012
cis
~ C14
Statement of Cash Flows
Year Ended June 30, 2000
($ millions)
Cash Flow from Operating Income
Net Income
Adjustment to reconcile net income to net cash
from operating activities
Net cash provided by operating activities
- Cash Flows from Noncapital Financing Activities
Cash Flows from Capital and Related Financing
Activities
Loan Disbursements
Loan Principal Repayments
Bond Proceeds
"- Bond Principal Repayments
ACH Cash Draws
State Match Deposits
Net Cash provided by capital and related
financing activity
Cash Flows from Investing Activities
Net (increase) decrease in debt service reserve
Net Cash provided by investing activities
Net Increase (Decrease) in Cash and Equivalents
^ Cash and Equivalents - Beginning of Year
Cash and Equivalents - End of Year
2000
$ 11.6
1.5
13.1
(68.9)
21.6
202.6 .
(102.7)
19.8
9.5
81.9
(5.9)
(5.9)
89.1
159.8
$(11.8)
1999
$ 10.2
(1.0)
9.2
--
(78.5)
19.3
238.6
(112.6)
17.4
7.6
91.8
(6.1)
(6.1)
94.9
64.9
$ (12.2)
C1&
Increases to ACH
47.7
38.1
April 2001
4-30
-------
4. Analytic Tools and
Reference
S3
S4,
$5
S6
S?
Supplemental Data Sheet
Year ended June 30, 2000
($ millions)
$10
Binding Commitments
Cumulative Binding Commitments
Cumulative Project Disbursement
Cumulative Project Completions
Reported Average Loan Rate
Debt Rating
Bond Buyer 20 Year GO Bond Index
Loan Delinquencies Over 30 days
Cumulative Assistance Agreements
Cumulative Project Completions
2000
56.0
701.5
625.3
517.6
3.0%
AA
5.9%
0%
59
47
1999
103.4
645.5
556.4
459.4
3.1%
AA
6.1%
0%
46
38
April 2001
4-31
-------
SRF Fund Management Handbook
4.9 CWSRF Financial Indicators
Like the measures included in Section 4.8, the following suite of indicators can be useful in assessing various
aspects of the SRF program. The suite of financial indicators in this section were developed through the
State/EPA Workgroup. They are currently used by EPA to report to Congress under the Government
Performance and Results Act (GPRA) on the performance of the national CWSRF program. For GPRA
they are only calculated on a national, aggregate level. See Table 3 for a summary of calculated financial
indicators.
The indicators were developed as a complete suite in order to provide a balanced approach to understanding
SRF performance. They reflect the different financial objectives of the SRF and provide broad indicators
of how the SRF is meeting them. The overall CWSRF goal these indicators intend to address is: To balance
the sometimes conflicting objectives of funding over time the largest dollar amount of the most
environmentally beneficial eligible projects as timely as possible, yet at the same time providing a
meaningful financial subsidy to borrowers while, maintaining the fund's contributed capital into
perpetuity.
The indicators are:
federal return on investment
percentage of executed loans to funds available
percentage of funds disbursed to executed loans
estimated additional SRF loans made due to leveraging
perpetuity (retained earnings or sustainability of fund)
estimated subsidy (subjective indicator only)
Each of these indicators are discussed below along with the formula required to compute the indicator.
The specific data assumptions required for each formula are presented at the conclusion of this section along
with calculated values for CWSRF programs.
Return on Federal Investment
This indicator is designed to show how many dollars of assistance were disbursed to eligible
borrowers for each federal dollar spent. It is computed by dividing cumulative CWSRF assistance
disbursed by cumulative federal outlays (including those for administrative expenses).
= cumulative CWSRF assistance disbursed / cumulative federal outlays
When comparing the results of this indicator among the state CWSRF programs care needs to be
taken in drawing conclusions. A CWSRF program with a higher value is not necessarily better run
than a CWSRF program with a lower value. This is because there are several good reasons why
significant differences exist among the state CWSRF programs. For example, CWSRFs that issue
bonds (leveraging) tend to have higher returns on federal investment than CWSRFs that do not issue
bonds. This is because CWSRFs that leverage have more loanable funds available relative to the
amount of federal funding than those that do not leverage.
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Other factors that can affect this indicator include the type of loans made, types of projects funded,
and the timing of when loan funds are disbursed. For instance, if state A issues loans for shorter
periods of time than state B then state A will have a higher federal return on investment than state
B, all other factors being equal. This is because the shorter-term loans will get repaid sooner, which
makes more money available for additional loans.
Percentage of Executed Loans to Funds Available for Loans
This indicator measures the cumulative dollar amount of executed loan agreements relative to the
cumulative dollar amount of funds available for loans. It is one indicator of how quickly funds are
made available to finance CWSRF eligible projects.
= (cumulative executed loan agreements / cumulative funds available for loans) * 100
The methodology used to compute funds available for loans takes into account the varying CWSRF
financial structures in place, so that only funds truly available for loans are counted as being
available, thus permitting valid comparisons between the various CWSRFs.
Percentage of CWSRF Loan Disbursement to Executed Loans -
This indicator attempts to measure the speed at which projects are proceeding toward completion.
It does this by comparing the cumulative dollar amount of CWSRF loan disbursements to the
cumulative dollar amount of executed loan agreements, and expressing this as a percentage. A key
assumption underlying this methodology is that there is a strong correlation between the amount
of loan disbursements and the amount of construction progress. While this assumption generally
appears to bear out actual experience, there are two notable exceptions - - refinancing and
disbursement of loans at the time they are executed.
= (cumulative CWSRF loan disbursements / cumulative executed loan agreements) * 100
Estimated Additional CWSRF Loans Made Due to Leveraging -
This indicator tries to estimate the dollar amount of additional projects that have been funded due
to leveraging (i.e., projects that otherwise might not have been funded, had leveraged bonds not
been issued). This is done by comparing the cumulative amount of CWSRF executed loans to the
cumulative amount of funds available after subtracting out the net funds provided by issuing bonds.
The difference by which the cumulative amount of CWSRF executed loans exceeds the cumulative
amount of funds available, after subtracting out the net funds provided by issuing bonds, represents
the estimated dollar amount of additional projects that have been funded as a result of leveraging.
This indicator only applies to states that have issued leveraged bonds.
= cumulative SRF Assistance - Cumulative SRF Funds Available w/o Leveraged Bonds
One critical assumption underlying this methodology is that states are only able to enter into loan
agreements to the extent that they have loanable funds available within the current year. It is
important to note that there are states that have adopted a cash flow approach to making loans that
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SRFJFund Management^Handbopk
allows them to enter into loan agreements in excess of loanable funds available in the current year.
There are two major reasons they are able to do this. The first is that there is a lag between when
loan agreements are signed and when funds need to be disbursed. Thus, the signing of a loan
agreement does not represent cash immediately going out the door. Second, states that have adopted
a cash flow approach do not limit themselves to funds available in the current year. They also take
into consideration funds that are expected to become available in future years.
Perpetuity of Fund -
This indicator seeks to gauge how well CWSRFs are maintaining their invested or contributed
capital, without making adjustments for loss of purchasing power due to inflation. For purposes
of this indicator only, contributed capital is defined as the federal capitalization grant less the four
percent allowed to cover CWSRF administrative expenses, plus the required 20 percent state match
whether borrowed or unborrowed.
= (Interest revenues from Loans and Investments - Bond Interest Expenses and State Match Bonds
Principal Repayments)
For those states that do not borrow for state match, if the amount of retained earnings of a CWSRP
is greater than or equal to zero, then the CWSRF is deemed to be maintaining its contributed capital,
and therefore, the perpetuity of the fund. If a state borrows for the required state match, then a
CWSRF will be deemed to be maintaining its contributed or invested capital if the amount of
retained earnings after subtracting out cumulative match bonds repaid equals or exceeds zero. This
approach puts states that borrow for state match and those that do not on an equal footing by
requiring that fund equity (assets minus liabilities) be equal to 96 percent of the federal capitalization
grant plus the 20-percent state match.
Estimated Subsidy Provided -
This indicator provides a narrative, rather than quantitative description, of the subsidy provided by
the various CWSRF programs. A quantitative indicator was not developed because of the difficulty
in estimating what value or values should be used to establish a market interest rate proxy or proxies,
and also to compute the true effective interest rate charged to borrowers.
However, because information about the subsidy being provided to borrowers is vital to
understanding the structure and operation of a state's CWSRF program, EPA will request a brief
narrative from States about the amount of subsidy being provided to borrowers. This narrative would
include the folio whig elements:
the estimated market interest rate or rates used, and how they are determined;
the estimated range of effective interest rates charged to borrowers, taking into account fees
charged and other loan conditions and requirements; and
the estimated average effective interest rate charged on loans.
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Data Assumptions Used to Compute CWSRF Financial Indicators
Net Federal Capitalization Grants -Total Federal Capitalization Grants - 4% Administrative Set-
Aside (Total Federal Capitalization Grants * 0.04)
Net Funds from Bonds = Net Leveraged Bonds Issued - Debt Service Reserve - Funds Used to
Refund Bonds
Earnings from Operations = Interest on Loans + Investment Interest - Net Bond Interest Expense
Net Bond Interest Expense=Total Bond Interest Expense - Capitalized Bond Interest Expense Paid
Cumulative Funds Available=Net Federal Capitalization Grants + Total State Match+Net Funds
From Bonds + Earnings From Operations -Leverage Bonds Repaid - Match Bonds Repaid + Loan
Principal Repaid + Net Transfers
Federal Return on Investment = Cumulative SRF Assistance Disbursed/Cumulative Federal ACH
Draws
Cumulative SRF Funds Available Without Leveraged Bonds = Cumulative SRF Funds Available -
Net Funds Provided By Bonds
Additional SRF Closed Loans Due to Leveraged Bonds = Cumulative SRF Assistance Provided -
Cumulative SRF Funds Available Without Leveraged Bonds
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gRj? .FundManagement
Table 3
CWSRF FINANCIAL INDICATORS FOR REPORTING YEAR 2000
BASED ON NIMS DATA THROUGH 6/30/2000
STATE AND NATIONAL SUMMARY
Non-Leveraged
State
Unweighted State
Average: Non-
Leveraged States
Unweighted State
Average:
Leveraged States
National
Weighted
Federal
Return on
Investment
1.25
1.94
1.78
SRF Executed
Loans as a % of
Funds
89%
88%
90%
SRF Loan
Disbursements as a
% of Executed
78%
80%
83%
Additional CWSRF
Executed Loans Due
to Leveraged Bonds
N/A
N/A
$6.8 Billion
Retained Earnings
Less State Match Bond
Principal Repayments
N/A
N/A
$2.8 Billion
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APPENDIX
Annotated Listing of EPA Guidance Related to Fiscal Fund Management
Guide to Using EPA's Automated Clearing House for the Drinking Water State Revolving Fund
Program, September 1998
The Clean Water State Revolving Fund Funding Framework, October 1996
The Clean Water State Revolving Fund - Financing America's Environmental Infrastructure
A Report of Progress, January 1995
The Clean Water State Revolving Fund - Practical Approaches to Improving Pace, September 1997
State Match Options for the State Revolving Fund Program, February 1997
Report on Leveraging in the State Revolving Fund Program, July 1995
EPA Clean Water State Revolving Fund Audit Guide, June 1998
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