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
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