EPA Clean Water State Revolving Fund ACTIVITY Innovative use of Clean Water State Revolving UPDA TE Funds for Nonpoint Source Pollution States are successfully using linked deposit and pass-through loans to fund important nonpoint source pollution remediation projects Many states are successfully using the USEPA's Office of Water, Clean Water State Revolving Fund (CWSRF) loan program to fund important nonpoint source pollution remediation projects. Nonpoint source pollution is widely viewed as one of the most serious threats to our nation's water quality. State and local governments, local watershed and agricultural organizations, and many others are working to devise solutions that address nonpoint source pollution. The CWSRF program provides very attractive low-interest loans that spread project costs over a repayment period of up to 20 years. Today, CWSRF programs are funding projects that address agriculture runoff, leaking on-site septic systems, and urban nonpoint source pollution, including stormwater runoff and brownfield contamination. During the initial operating phase of CWSRF programs, states designed loan options and implemented administrative procedures that would best serve municipal wastewater system projects. However, when considering how the CWSRF program could be used to address nonpoint source pollution, a number of states recognized that they would need to go beyond the typical municipal borrower and provide loan assistance to farmers, homeowners, and nonprofit organizations. States also recognized that providing loans to small private borrowers could be challenging. The loans would fund a variety of small projects, there would be more of them to service and manage, and there would be a greater risk of loan defaults. States have taken different approaches to addressing these challenges. In some states, the CWSRF program has called upon internal expertise and the expertise of other state personnel to help manage loans to private borrowers. Other states have used creative lending approaches that pass loan risks and loan servicing responsibilities to financial institutions, local governments, or other state agencies. These lending methods include linked deposit loan programs with local financial institutions and pass-through loan programs with local government or state agencies. This activity update will highlight these loan structures with three case studies of successful state programs. ------- .Clean Water Slate Revolving Fund ACTIVITY UPDATE What is a linked deposit loan? Under a linked deposit loan approach, a state works with local private lending institutions to provide assistance for nonpoint source pollution control. The state agrees to accept a reduced rate of return on an investment (e.g., a certificate of deposit) and the lending institution agrees to provide a loan to a borrower at a similarly reduced interest rate. For example, if the typical earnings rate for a certificate of deposit (CD) is five percent, a state might agree to purchase a CD that earns two percent interest, and in exchange, the lending institution agrees to provide a loan to a borrower at an interest rate that is three percentage points lower than the market rate for the borrower. In this program, the CWSRF investment (deposit) is linked to a low-interest loan, thereby earning the description "linked deposit loan." Linked deposit loan programs provide benefits for CWSRF programs, local financial institutions, and borrowers. The linked-deposit approach benefits CWSRF programs because they support high priority nonpoint source projects and because they place risk and management responsibilities with local financial institutions. Financial institutions earn profits from the linked deposit agreements and add an additional service for their customers. Borrowers find linked deposit programs to be economical and comfortable; they save money with low- interest loans, and they are comfortable working with local financial institutions. Linked Deposit Loans CWSRF X Bank Farmer 1. CWSRF invests in reduced interest CD (below market rate) 2. Bank makes low-interest loan to farmer (below market rate) 3. Farmer repays loan to bank 4. CWSRF receives low-interest return on CD investment (investment is guaranteed regardless of loan repayment) Figure 1. Linked deposit program flow chart ------- ACTIVITY UPDATE What is a pass-through loan? In a pass-through loan, a CWSRF program makes a loan to another state or local government agency and that agency then lends the funds to private borrowers to address nonpoint source pollution. The town, county, or state agency reviews the project and the finances of each borrower. CWSRF loan funds are "passed-through" another government agency to private borrowers. Pass-through loan programs benefit CWSRF programs, pass-through partners (towns, counties, and state agencies), and borrowers. These programs benefit CWSRF programs because they support .Clean Water State Revolving Fund high-priority nonpoint source projects and because they place risk and management responsibilities with program partners. Towns, counties, and state agencies benefit from pass-through programs because CWSRF funds support their nonpoint source priorities. Pass-through loans can offer two potential benefits to borrowers. First, pass-through loans are not provided by private lenders and, as a result, are likely to have lower interest rates. Second, local government agencies may have greater flexibility to provide loans to borrowers with relatively weak credit conditions if the borrower's nonpoint source project is a high priority for the state or local government agency. Pass-throu oans CWSRF I State/local Agency I Farmer 1. CWSRF provides a below market rate loan to a state/local agency 2. The state/local agency manages low-interest loans to farmers 3. Farmer repays loan to state/local agency 4. State/local agency repays loan to CWSRF Figure 2. Pass-through program flow chart ------- .Clean Water Slate Revolving Fund ACTIVITY UPDATE Who has benefited from these programs and what have they funded? CWSRF linked deposit and pass-through loan programs have supported borrowers implementing a variety of nonpoint source projects: • Homeowners have implemented stormwater runoff best management practices and repaired or replaced failing on-site septic systems. • Homeowner associations have addressed failing stormwater management facilities. • Farmers have addressed agricultural runoff with a wide variety of agricultural best management practices including the construction of manure storage facilities, the restoration of filter strips and grassed waterways, and the use of conservation tillage equipment. Ohio Case Study — Linked Deposit Loan Program Ohio has used a linked-deposit loan program since 1993 to fund projects that support county watershed management plans. This program has funded more than 300 projects, including the repair of onsite wastewater treatment systems and the implementation of best management practices for agriculture, forestry, stormwater, and land development. The CWSRF program developed this program with the help of county soil and water conservation districts and local banks. The CWSRF program implements its linked deposit loan program one county at a time. Each county's program is developed with two concurrent steps: the county soil and water conservation district develops a watershed management plan, and the CWSRF program and local financial institutions enter into agreements describing requirements and procedures for linked deposit loans. Watershed management plans describe a watershed, identify sources of pollution, suggest actions that would address those pollution sources, prioritize water quality problems, identify sources of funding, and establish an implementation schedule. The county soil and water district's draft plan is reviewed by Ohio EPA and by a formal public review process. If Ohio EPA approves a plan after this review, the CWSRF program and the soil and water conservation district sign a memorandum of understanding that describes how these two entities will coordinate their implementation of the management plan. ------- ACTIVITY UPDATE * .Clean Water State Revolving Fund At the same time that a watershed management plan is developed and reviewed, soil and conservation districts contact local banks to identify institutions that would like to participate in a linked deposit program. Interested banks enter into agreements with the CWSRF program that describe requirements and procedures for linked deposit loans. Any borrower with a project that helps to implement a watershed management plan is eligible for a linked deposit loan. Participating banks review borrowers' credit using their own credit standards. If a bank approves a linked deposit loan, the CWSRF program purchases a CD of equal value from the bank. The CWSRF program accepts a CD interest rate that is five percentage points lower than the rate of a U.S. Treasury Note or Bond with the same term. The borrower's loan interest rate is also reduced by five percentage points. The bank makes semiannual payments of principal and interest to repay the CWSRF for its investment in the CD, and it makes these payments even if the borrower defaults on the linked deposit loan. Massachusetts Case Study — Lending through Local Government Since 1995, Massachusetts' Community Septic Management Program has used pass- through loans with local municipalities to fund the repair and replacement of failing septic systems. The program has funded more than 3,000 projects across the state. The CWSRF has developed this program with the cooperation of local municipalities. Communities that participate in Massachusetts' Community Septic Management Program can borrow hundreds of thousands of dollars from the CWSRF program, but communities must first develop a septic management plan and procedures for a local betterment loan program (the community uses betterment assessments to secure the loans). Massachusetts provides grants of up to $20,000 to municipalities to support these planning activities and the administration of the program. Massachusetts law defines a betterment assessment as a charge imposed on real property that receives a benefit from a public improvement. Municipalities have traditionally imposed betterments to pay for improvements such as roads, sidewalks and sewer lines. In the Community Septic Management Program, however, betterment agreements allow individuals to receive community support (a betterment loan) for septic system improvements, and the agreements allow communities to ensure that the loans are repaid as part of a property tax bill. The community can place a municipal lien on property if a homeowner defaults on a betterment loan. ------- .Clean Water Slate Revolving Fund ACTIVITY UPDATE Septic management plans identify and prioritize areas with septic systems that require monitoring, maintaining, and upgrading. As part of the planning process, communities develop maintenance schedules for septic systems, and they develop databases that track the inspection, maintenance, and upgrade of these systems. The Massachusetts Department of Environmental Protection reviews all community septic management plans. Before a community can receive a CWSRF loan from the state, however, it also develops the framework for a local betterment loan program. Communities create administrative structures to manage the programs, devise a method for selecting priority projects, and work with their tax assessors to ensure that homeowners will repay their betterment loans as part of their local tax assessments. Communities that develop septic management plans and procedures for a local betterment loan program receive loans from the CWSRF program for 20 years at zero percent interest. Communities typically borrow $200,000 from this program. Homeowners typically receive twenty-year loans from communities at two to five percent interest. Communities can use interest accrued on betterment loans to support the administrative costs of the loan programs. Communities must begin to repay the CWSRF within one year after they have finished dispersing the proceeds of each CWSRF loan. Missouri Case Study — Lending through State Agencies Missouri's Nonpoint Source Animal Waste Treatment Facility Loan Program is a pass-through loan program that uses a state agency as a loan intermediary. Since 1995, the Missouri Agriculture and Small Business Development Authority (MASBDA) has borrowed $5 million from the CWSRF program, and MASBDA has used these funds to support the construction of 88 animal waste treatment systems for livestock and poultry producers. The agricultural operation of each borrower in this loan program produces fewer than 1,000 animal units — concentrated animal feeding operations are ineligible. Missouri's Nonpoint Source Animal Waste Treatment Facility Loan Program does not require a regional planning effort similar to the soil and water conservation plans required in Ohio' linked deposit program or the septic management plans required in Massachusetts' pass-through loan program. Engineers with Missouri's CWSRF program review each project application to ensure that CWSRF- financed structures and equipment support the goals of the program. ------- ACTIVITY UPDATE * .Clean Water State Revolving Fund Missouri's CWSRF program provides 10- year loans to MASBDA that have a 1.8 percent interest rate. Individual agricultural producers access these resources by submitting applications to MASBDA. MASBDA reviews the financial component of each application, assessing cash flows and establishing security requirements. Borrowers must provide a dedicated source of repayment and a first or second deed of trust on their property. Agricultural producers typically receive 10-year loans from MASBDA that have interest rates from 5.3-5.8 percent. However, MASBDA does not offer construction financing for animal waste treatment systems. Typically, agricultural producers use loans from the Nonpoint Source Animal Waste Treatment Facility Loan Program to pay off construction loans from a private lender. MASBDA uses the repayments from agricultural producers to repay its loan from the CWSRF. Case Study Contact Information More information on the programs outlined in this update can be found on the state program web sites or by contacting the programs themselves. Ohio Environmental Protection Agency Div. of Environmental & Financial Assistance Contact: Bob Monsarrat Phone: 614-644-3655 Web site: www.epa.state.oh.us/defa/linkdepo.html Massachusetts Department of Environmental Protection Massachusetts' Community Septic Management Program Contact: Joseph McNealy Phone:617-556-1068 Web site: www.state.ma.us/dep/brp Missouri Department of Agriculture Animal Waste Facility Loan Program Contact: Steve Townley Phone:573-751-1397 Web site: www.mda.state.mo.us/a2c.htm ------- ACTIVITY ••••••••••••• ' Slate Revolving Fund For more information about the Clean Water Revolving Fund, or for a program representative in your State, please contact: Clean Water State Revolving Fund Branch U.S. Environmental Protection Agency 1201 Constitution Avenue, NW (Mailcode 4204M) Washington, DC 20004 Phone: (202) 564-0752 Fax: (202) 501-2403 Internet: http://www.epa.gov/owm Clean Water State Revolving Fund Office of Water July 2002 EPA 832-F-02-004 ------- |