ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Chair, Vacant
Members
Terry Agriss
A. James Barnes
Julie Belaga
John Bo/and
George Butcher
Donald Correll
Michael Curler
Rachel Denting
Pete Domcnici
Kelly Downard
Mary Francoeur
Vincent Glrardy
Steve Grossman
Jennifer Hernandez
Steve Mantood
Langdon Harsh
John McCarthy
Cherle Rice
Helen San/
Andrew Sanyers
Jim Smith
Qreg Swart*
Son la Toledo
Jim Tozzl
Billy Turner
Justin Wilson
John Wise
Stan fteiburg
designated Federal Official
May 30, 2006
Honorable Stephen L. Johnson
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue NW.
Washington, DC 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board is pleased to submit the enclosed
report, "Establishment of a New State Revolving Fund Loan Guaranty Program" for
the Agency's consideration and use. To date, the Board has not identified an area in
which a significant benefit would be realized from the establishment of a new loan
guaranty program.
The Board's deliberations focused on the potential benefits of creating a new
guaranty program, as contrasted with what can be achieved under existing legislation.
In evaluating the potential incremental benefit of a new loan guaranty program, the
Board's primary consideration was whether a new program would stimulate or
accelerate environmental activity. A secondary consideration was whether a new
program would increase the amount of private money involved in supporting
environmental programs. In general, the benefits that could be achieved through the
creation of new loan guaranty program could also be achieved using the existing loan
guaranty programs.
However, two areas may warrant further study. First, consideration might be
given as to whether existing loan guaranty authority for environmental programs could
be more effectively leveraged. Second, additional consideration might be given as to
whether a new loan guaranty program targeted at small, unrated borrowers could
accelerate environmental activity in that sector.
The Board appreciates the continuing opportunity to provide financial advisory
assistance to the Agency on issues of national importance.
Sincerely,
A. Stanley Meiburg
Executive Director
Enclosure
cc: Ben Grumbles, Assistant Administrator for Water
Lyons Gray, Chief Financial Officer
Providing Advice on "How To Pay" for Environmental Protection
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Environmental
Financial Advisory Board
EFAB
Vacant
Chair
A. Stanley Meiburg
Executive Director
Members
Hon. Pete Domenici
Terry Agriss
A. James Barnes
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Jennifer Hermandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
Establishing a New State Revolving Loan
Fund Guaranty Program
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
May 2006
Printed on Recycled Paper
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EFAB Report on Establishing a New
SRF Loan Guaranty
Question
Should the Board recommend that EPA support the establishment of a new loan guaranty
program?
Methodology
Our deliberations have focused on the potential benefits of creating a new guaranty
program, as contrasted with what can be achieved under existing legislation - e.g., by
using the loan guaranty authority available to State Revolving Funds (SRFs) or by using
the authorization for the Rural Utilities Service (RUS) to guaranty loans made by banks
and other eligible lenders. In evaluating the potential incremental benefit of a new loan
guaranty program, the Board's primary consideration was whether a new program would
stimulate or accelerate environmental activity. A secondary consideration was whether a
new program would increase the amount of private money involved in supporting
environmental programs.
Recommendation
To date, the Board has not identified an area in which a significant benefit would be
realized from the establishment of a new loan guaranty program. However, two areas
may warrant further study. First, consideration might be given as to whether existing
loan guaranty authority for environmental programs could be more effectively leveraged.
Second, additional consideration might be given as to whether a new loan guaranty
program targeted at small, unrated borrowers could accelerate environmental activity in
that sector.
Discussion
In general, the benefits that could be achieved through the creation of a new loan
guaranty program could also be achieved using the existing loan guaranty programs.
However, as currently structured, the existing SRF and RUS mechanisms for providing
loan guaranties are unused or underutilized. To create a more effective loan guaranty
program (either by improving the existing programs or by creating a new program), it
would be critical to modify those attributes of the existing programs that have limited
loan demand.
Specific considerations regarding the potential utility of a loan guaranty program include:
• For most rated borrowers (which includes many water and sewer systems), there
is a well developed and highly competitive private market that provides credit
enhancement in the form of municipal bond insurance. Therefore, for such
borrowers, absent some sort of additional subsidy, the potential benefit of a new
Loan Guaranty for SRFs
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or existing loan guaranty program is limited to eliminating or reducing the cost of
obtaining credit enhancement.
If the requirements for obtaining a loan guaranty add significantly to the
borrower's cost or administrative burden (e.g., the federal cross-cutting
requirements applicable to SRF loans and guaranties), the benefit of obtaining a
loan guaranty would be outweighed by the additional burden of obtaining the
guaranty and there would be little, if any, demand.
<:> There would be no demand for SRF loan guaranties for projects that had
not otherwise already met the cross-cutting requirements. There are two
potential situations in which the opportunity to provide loan guaranties for
projects that have already met the cross-cutting requirements could occur:
* First, to extend the loan amortization period for projects that have
already been qualified to receive federal assistance in order to
obtain an SRF interest subsidy. The loan guaranty can be used to
further lower debt service by extending the amortization period
beyond the period authorized for subsidized SRF loans (20 years
except for hardship loans and for Clean Water State Revolving
Fund loans in Massachusetts and New York). The loan guaranty
would not be offered under Sections 603(d) (1) and 1452 of the
Clean Water Act and Section 1452 of the Safe Drinking Water Act,
under which loans are statutorily limited to 20-year repayment
terms. Rather, implementation would require state programs to
operate in conjunction with Section 603(d) (2) and Section 1452 of
the respective Acts, which allow for the purchase of municipal
debt obligations without any express term limitation.
* Second, to guaranty loans for projects which have already met the
cross-cutting requirements but for which the amount of SRF
assistance has been capped due to a state-imposed limit on the
dollar amount of the subsidized borrower loan for any project. In
such states, the existing SRF guaranty authority may be
significantly underutilized at the present time. To the extent that
an entire project has met the cross-cutting requirements, the SRF
could easily provide additional assistance for the project in the
form of an "AAA" loan guaranty. However, any additional/novel
SRF tools should not be made available to states in which there are
back-logs for SRF assistance, but where the state has not yet
leveraged its SRF program.
<£> In the context of the RUS authorization to provide loan guaranties in the
amount of $75 million annually, there has been little demand because
under federal tax law, the use of such a "federal" loan guaranty would
disqualify the guarantied debt from being issued on a tax-exempt basis.
Loan Guaranty for SRFs
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Thus the benefit of a loan guaranty would be offset by the increased
borrowing cost. The RUS program is targeted at very small borrowers and
at borrowers who do not otherwise have market access; and the RUS
program is exempt from at least some of the cross-cutting requirements
(e.g., Davis-Bacon) that apply to SRF loan guaranties.
Another consideration regarding an additional loan guaranty program is the
confusion, particularly to smaller borrowers, caused by a proliferation of different
programs. The creation of another program might be more confusing than helpful
to many communities. This issue could be addressed by linking any new loan
guaranty authority to an existing program.
Loan Guaranty for SRFs
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OCT 1 6 rw
Mr. A. Stanley Meiburg
Executive Director
Environmental Financial Advisory Board
U.S. EPA, Region IV
61 Forsythe Street, SW
Atlanta, GA 30303
Dear M
OFFICE OF
WATER
Thank you for your letter to Administrator Stephen L. Johnson dated May 30,2006, in
which you transmit on behalf of the Environmental Financial Advisory Board (EFAB), the report
entitled Establishment of a New State Revolving Fund Loan Guaranty Program. I appreciate the
opportunity to review and examine any input from EFAB. The EFAB has proven since its
creation in 1989 that its contributions to EPA's efforts to meet the growing environmental
financial needs of the 21st century are always valuable and much needed.
The purpose of the report was to answer the question, "Should the Board recommend that
EPA support the establishment of a new loan guaranty program?" Because it determines that a
new program would not provide significant additional environmental activity or financial
benefits to borrowers, the Board recommends the EPA not support such a program. However,
the Board ventures that existing loan guaranty authorities in the SRF and USDA Rural Utility
Service programs could be more effectively utilized and that a new separate program targeted to
small unrated borrowers could accelerate activity in that specific sector. The credit support
provisions of the SRF programs, such as loan guaranties, are an important element of their
strength and further advice from the Board on facilitating more robust use of them would be
helpful to EPA and would be welcome.
Thank you again for providing this valuable input. I encourage you to continue
examining innovative methods for closing the nation's water infrastructure funding gap, and look
forward to hearing recommendations in the future. If you have any questions or wish to speak
further about this issue, please contact James A. Hanlon, Director, Office of Wastewater
Management, at (202) 564-0748.
Sincerel
BeTijamin H. Grumbles
Assistant Administrator
cc: A. James Barnes
Internet Address (URL) • http://wwwepa.gov
Recycled/Recyclable • Printed with Vegetable CM Based Inks on 100% Postconsumer, Process Chlorine Free Recycled Paper
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