v>EPA
                                                                 STATE ACTIVITY
                                                                 UPDATE
                                            AUG 0 4 2006
                     New York's  Short-Term
                     Cross-Investment Structure
 Under a short-term

  cross-investment

structure a state may

    invest funds

   from one SRF

 program to cure a

 default in the other
EPA
816
N-
00-
003B
A    number of states, including New
    York, Michigan, and Colorado, have
already issued bonds to leverage their
Drinking Water State Revolving Fund
(DWSRF) programs. Recent reports
indicate that up to fifteen states are
already leveraging or are planning to
leverage their DWSRF programs. In
designing their leveraged program
structures several states have explored
the use of pooled bond security
enhancements that are new to the State
Revolving Fund program: cross-
collateralization and short-term cross-
investment. These security
enhancements allow the resources of
one SRF to be used to secure the
repayment of leverage bonds of the
other program.

    Cross-collateralization was
    authorized by the Departments of
Veteran Affairs and Housing and Urban
Development, and Independent
Agencies Appropriations Act of 1999 (PL
105-276). Short-term cross-investment is
allowed under the "permitted
investment provisions" of the Clean
Water Act and the Safe Drinking Water
Act. To date, New Jersey has received
approval for a cross-col lateralization
structure and New York and Michigan
have received approval for short-term
cross-investment structures.

    Under a short-term cross-investment
    structure a state may use available
funds from one SRF program to help
cure a default in the other. For example,
in New York's program, if a borrower
fails to repay a Clean Water State
Revolving Fund (CWSRF) or DWSRF loan,
the first source to cover the default is the
individual program debt service reserve.
With a short-term cross-investment
structure, when the debt service reserve
and other reserve funds are depleted, the
second revolving fund can "invest" funds
to cure the deficiency. The investment is
made by the borrowing SRF selling a
bond to the investing SRF program. The
investment is permitted under Section
603(d)(6) of the CWA and Section
1452(f)(5) of the SDWA.  The authority
for borrowing funds for cross-investment
is found in Section 603(d)(4) of the CWA
and Section 1452(f)(4) of the SDWA. The
bond must be a short-term investment so
that the lending SRF is repaid after the
borrowing SRF recovers from loan
defaults.

A    cross-investment structure provides
    additional security to bond holders
and reduces the cost of borrowing to SRF
programs. As the newer program, the
DWSRF program will benefit from the
existing coverage levels, diversification
and credit quality of the CWSRF
program. These benefits are
accomplished even though the chances
of a cross-investment actually occurring
are remote due to the extraordinary level
of debt service reserves (often 50
percent of bond size) found in many
leveraged SRF programs. This report
describes New York's short-term cross-
investment structure.

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                            New York's Combined Financing Program
The NYEFC common

financing program

    offers many

   economic and

  programmatic

    advantages
    The New York Environmental
    Facilities Corporation (NYEFC) has
amended its existing Master Trust
Agreement (MTA) and Master Financing
Indenture (MF1) to implement a common
financing approach for both CWSRF and
DWSRF loans. Under this approach
CWSRF find DWSRF loans will be
financed under a joint bond issue.
However, from an accounting standpoint
the programs will remain segregated.
Loans for each program will be recorded
on separate balance sheets. The CWSRF
and DWSRF will also have their own
separate reserve accounts to make up
for any borrower default in debt service.

  In most cases, borrowers will be
  financed under the MF1.  However,
borrowers large enough to justify
separate financing, such as the New York
City Municipal Water Finance Authority
(NYW), and private companies that do
not meet certain credit standards will
be financed under separate indentures
(See Exhibit 1).

    The NYEFC common financing
    program offers many economic
and programmatic advantages. Clean
Water and Drinking Water loans will be
pooled together into the same bond
issue, lowering issuance costs. For
example, New York will issue two series
of bonds (rather than four) to
accommodate different borrower
payment date requirements. The
DWSRF program will benefit from the
CWSRF AAA bond rating, allowing for
greater leveraging capacity. Finally,
although the programs will remain
legally separate and distinct, the newly
amended financing program allows for
a cross-investment from a  "free-up" of
reserve dollars of one program to cure
a deficiency in the other program.
                                                            Exhibit 1
                                                Ned York Master Trust Agreement
                                        Clean Water Equity Account
                                            Master Financing Indenture
                                           Clean Water
                                            Loans and
                                           Debt Service
                                           Reserve Funds
                                             (DSRFs)
                          Drinking
                           Water
                          Loans and
                           DSRFs
                                               General Reserve
                                              dean
                                              Water
                         Drinking
                          Water
                                            Drinking Water Equity Account
                                            NYW Financing
                                             Indenture
    Clean
    Water
   Loans and
    DSRFs
Drinking
 Water
Loans and
 DSRFs
                                                              Deallocated Corpus Subaccount
                                                Deficiency
                                                 Reserve
                                                Subaccount
 Private
 Water
Company
Financing
Indenture

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                                                                       STATE  ACTIVITY
                                                                       UPDATE
 Flow of Funds under New York's MFl

     Under the MFI, both CWSRF and
     DWSRF projects are funded from
revenue bond proceeds. SRF capitalization
grants, state match and deallocated funds
are used to fund SRF reserves (Exhibit 2).
As construction progresses, funds are
released to the borrower and  deposited
into individual Debt Service Reserve Funds
(DSRFs). DSRFs are funded in  an amount
equal to either one-third or one-half of the
loan  amount. The interest earnings on
these individual DSRFs are released into
the Debt Service Fund to subsidize loan
repayments or, if necessary, to cure any
shortfalls.  As repayments on  loans are
made, reserve funds are released from the
DSRF into the General Reserve Fund.
Released CWSRF and DWSRF funds are
kept in separate subaccounts. The General
Reserve Fund will be maintained at an
amount that is equal to any deficiency in
the borrowers' individual DSRFs.
Remaining funds are then released from
the General Reserve into the Deallocated
Corpus Subaccount. Funds can be moved
from this account into the Deficiency
Reserve Subaccount to cover deficiencies
under the MTA or be recycled into the
Unallocated Corpus Subaccount for any
authorized purpose of the SRF.

   If reserve funds within a program are
   unavailable to meet debt service
payments, funds from the other SRF will
be invested to cure the deficiency.
However, any movement of dollars
between the CWSRF and DWSRF would be
recorded on the respective balance sheets
as a temporary investment and recorded
as an asset on one SRFs balance sheet and
as an asset with an offsetting liability on
the other SRFs balance sheet.
Investments will be repaid with the first
available SRF resources.
                                Exhibit 2
                    New York's Flow of Funds in the MFl
                                         DSRF interest
                                         earnings for
                                         debt service
If reserve funds within

    a program are

 unavailable to meet

     debt service

payments, funds from

 the other SRF will be

 invested to cure the

      deficiency

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 Priority Use of Account Fluids to Cure Deficiencies
     The order of accounts used to cure a
     borrower default under the MFI is
shown in Exhibit 3. In the event of a
default, the first draw would be on the
individual SRF Debt Service  Reserve Funds.
Once depleted, the next source of funds to
cover a default would be from the General
Reserve Subaccount for the  applicable
CWSRF or DWSRF. The next account to be
drawn upon would be the General Reserve
Subaccount from the  other SRF.  This is
first instance where cross-investment will
take place1.  If needed, funds could be
drawn from the applicable CWSRF or
DWSRF moneys in the Deficiency Reserve
Subaccount. Finally, funds would be
borrowed as a cross-investment from the
Deficiency Reserve Subaccount of the other
         SRF.  The cross-investments would be
         in the form of a short-term bond.

             The order of accounts to cure a
             default under the NYW Indenture
         is similar.  First, funds would be drawn
         from the applicable CWSRF or DWSRF
         NYW Reserve.  Then funds would be
         drawn from the applicable CWSRF or
         DWSRF portion of the Deficiency
         Reserve Subaccount. Finally, funds
         would be borrowed from the other
         SRFs portion of the  Deficiency Reserve
         Subaccount as a short-term cross-
         investment.
                            1      Exhibits
             Priority Use oft Account Funds to Cure Deficiencies

                   Within the I^H                 Within the NYW Indenture
                 SRF Reserve Fund for
                 individual borrowers
               "Freed-up" CW or DW funds
                in the General Reserve for
               applicable CWSRF or DWSRF

               'Freed-up' CW or DW funds |
                in the General Reserve for
                    the other SRF
               "Freed-up" CW or DW funds
                in the Deficiency Reserve
                Subaccount for applicable
                  CWSRF or DWSRF
I
*

•Freed-up" CW or DW funds k
in the Deficiency Reserve 1
Subaccount for other SRF 1
              NYW Reserve Fund for
              applicable CW or DW
             "Freed-up" CW or DW funds |
             in the Deficiency Reserve
             Subaccount for applicable
                CWSRF or DWSRF
             "Freed-up" CW or DW funds |
             in the Deficiency Reserve
             Subaccount for the other
                    SRF

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                                                                   STATE ACTIVITY
                                                                   UPDATE
  Summary of Key Features

     New York's structure is designed to be  |
     appealing to bond rating agencies    |
and investors.  The State's approach       '
enhances the security structure of New
York's CWSRF and DWSRF leveraging
bonds while complying with federal       ;
CWSRF and DWSRF program requirements.
The following are key features of New
York's cross investment structure:

.     The CWSRF and DWSRF accounts
      remain separate.

•     Only 'freed-up" dollars from reserve
      funds will be used for short-term
      cross-investments.

•     Cash draws will not be made for
      cross-investment purposes.

•     Cross-investments will not be used
      for state match.

•     The structure allows short-term
      cross-investment in either direction
      between the State's CWSRF and
      DWSRF programs.
•     Investments are temporary,
      short-term bonds that will be
      repaid with the first available SRF
      resources.

•     Any investment between the
      CWSRF and DWSRF will be
      recorded on the SRF balance
      sheets.

•     The State's approach is detailed
      in the operating agreements for
      the DWSRF and CWSRF between
      the Region and the State.

•     Funds will not be held in one SRF
      in anticipation of potential
      future short-term cross-
      investment needs.

    States interested in further
    information on short-term cross-
investment should contact their EPA
Regional Office SRF Coordinator. For
information on New York's cross-
investment structure contact the state
representative below.

State Contact:
James Gebhardt
NYS Environmental Facilities
Corporation
50 Wold Road
Albany, NY 12205
Tel: (518) 457-0886
                                               This report was prepared by
                                                   EPA Headquarters

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