STATE ACTIVITY
 In practice, states

that provide CWSRF

   assistance by

 purchasing a local
  bond consider it
to be equivalent to a

  loan as defined in

the CWSRF program
                    Massachusetts'  Extended
                    Bond  Purchase  Program
    The Clean Water State Revolving Fund
    Program (CWSRF) provides states the
flexibility to use a variety of financial
assistance options including loans,
insurance and guarantees for local debt,
security for leveraging, guarantees for sub-
state revolving funds, and refinancing or
purchasing local debt. To date, states have
found that the low interest loans available
through the program are extremely
popular. Since program inception the
CWSRF has provided over 6,800 loans that
total over $22 billion.

    Some CWSRF programs enter into a
    loan agreement through the purchase
of a local bond. This approach is made
eligible under section 603(d)(2) of the Clean
Water Act (CWA) that allows states to buy
or refinance local debt obligations. In
practice, states that provide CWSRF
assistance by purchasing a local bond
consider it to be equivalent to a loan as
defined in the CWSRF program. The
interest rate on the bond may range from
0 percent to market rate and the term of
the bond may be up to twenty years. The
bond is viewed as the state's legal
instrument used to enter into an agreement
that is equivalent to a loan agreement.

    Recently, the Commonwealth of
    Massachusetts proposed that
purchasing a local bond as authorized
under section 603(d)(2) of the CWA is
fundamentally different from a loan
allowed under section 603(d)(l) in that
loans are limited to a 20 year repayment
term while bonds
the term of repayment. As a result, the
Commonwealth reasoned that they should
be allowed to extended the term for
repayment of a local bond to the lesser of
the useful life of the project or 30 years.

  In reviewing the Commonwealth's initial
  proposal EPA reaffirmed that, in
general, CWSRF loans that use a local
bond as the legal instrument for the
agreement may not extend CWSRF loan
repayments beyond 20 years. However,
the Agency did accept the subsequent
Massachusetts proposal to implement a
bond purchase program that extends
payments up to 30 years because the
Commonwealth has taken extraordinary
measures to both ensure that the funding
levels of the CWSRF would not be harmed
by the bond purchase program and to
provide substantial additional assistance
to local borrowers.

    To receive approval for this approach
    the Commonwealth committed to 1)
provide capital investment into the CWSRF
program that is in addition to the 20
percent state matching funds required
under the CWSRF program—the
Commonwealth will continue to make
deposits to provide a 50 percent subsidy
for annual loan repayments and  2) modify
its leveraging structure to ensure that the
purchasing power of the CWSRF would not
be diminished over the long-term due to
the 30 year term allowed for the bond
purchase program. This update describes
the Massachusetts extended bond
purchase program and the conditions
under which  the proposal was accepted.

                             Overview of Massachusetts' CWSRF Program
 Coupled with interest

  earnings from debt

service reserves funded

   by capitalization

grants, the cashflow of

 these subsidies equate

 to a minimum of a 50

percent subsidy on debt
   service payments.
   In Massachusetts, the CWSRF program
   is operated by the Water Pollution
Abatement Trust (Trust). Since its
inception the Trust has provided more
than $1 billion in assistance to local
governments. The Commonwealth's
CWSRF program uses reserve fund
leveraging but also offers a direct loan
program for very small projects and an
interim financing program for projects
in anticipation of permanent financing.
As part of the CWSRF program, the
Commonwealth provides annual debt
service subsidies to local governments
to reduce borrowing costs. The
"contract assistance" payments that are
provided by the Commonwealth are
credited against the debt service
payments that are  due from local
borrowers. Coupled with interest
earnings from debt service reserves
funded by capitalization grants, the
cash flow of these subsidies equate to a
minimum of a 50 percent subsidy on
debt service payments.

    Exhibit 1 displays the leverage bond
    repayment process in
Massachusetts' CWSRF program. The
local government repays a portion of
principal that reflects the level of
subsidies provided. The remainder of
the bond debt service is paid with
direct contract assistance from the
Commonwealth and interest earnings
from the debt service reserve fund.
The contract assistance payments are
appropriated annually, but are a general
obligation of the Commonwealth for
the life of the financing.
                          Bond Repayment Cash Flows
Local Government
yment of
a! Bond
at a

Commonwealth of

* Leveraged Bond
Reserve Fund
over Term
of Bond
Bond Trustee

                                                  Bond Debt Service
                                                            Bond Holders

                                                                   STATE ACTIVITY
 Extended Bond Purchase Program
    The Commonwealth of Massachusetts
    initiated its Extended Bond Purchase
Program as an additional CWSRF
assistance option. This program is
available to local government units that
are undertaking water pollution abatement
projects with useful lives beyond 20 years.

    Under this program, project costs for
    eligible projects will be financed or
refinanced with proceeds of bonds (local
government obligations) issued by
participating local governments and
purchased by the Trust. The local
government bonds will be either general
obligations of the borrowing local
government or special obligations secured
by specified pledged revenues.

    Principal and interest payments on the
    local government obligation bonds
purchased by the Trust must commence
within one year after completion of the
applicable project.  The bonds must be
fully amortized within a period that does
not extend beyond 30 years from the
project completion date or the useful life
of the project—whichever is shorter. Local
obligation bonds must otherwise conform
to the same requirements imposed on
loans made under section 603(d)(l) of the
CWA and the CWSRF regulations. Contract
assistance made by the Commonwealth
may not be credited toward the state
match. When financing a project on an
extended basis, the Trust will adjust its
financial parameters to compensate for the
longer repayment period. Specifically, the
Trust will reduce its reserve fund level to
40 percent for an extended bond financing
compared to 50 percent under the Trust's
Leveraged Loan Program. Projects with
amortization schedules between 20 and 30
years may employ proportionally sized
reserves to maintain the recycling level.
     Decreasing the reserve fund level
     will offset the reduction in funding
due to the longer amortization period of
bonds beyond 20 years.  In addition, all
financing under the Extended Bond
Purchase Program will continue to
receive the benefit of contract assistance
payments from the Commonwealth.

    To date the Commonwealth has
    committed to $538 million in
subsidies for existing loans.  In the case
of the Leveraged Loan Program, contract
assistance payments are credited to
borrowers in full, upon receipt, in
semiannual payments over the maximum
20 year term of each loan. However, in
the case of the Extended Bond Purchase
Program, contract assistance payments
will also be provided by the
Commonwealth over a 20 year period,
but will be credited to local bond issuers
over a maximum of 30 years, consistent
with the terms of the financing
employed. Under this program, a
portion of these assistance payments
are credited to the local issuer upon
receipt and a portion is held by the Bond
Trustee in a subsidy account within the
CWSRF. This retained amount, together
with all investment earnings, is credited
to local issuers over the term of the local
bonds in excess of 20 years.

    The Commonwealth is authorized to
    offer the Extended Bond Purchase
Program under the following conditions:
1) there is significant contract assistance
provided, 2) the Commonwealth
modifies its leveraging structure to
offset the loss in recycled CWSRF
funding, and 3) the program requires the
purchase of a local bond as defined
under section 603(d)(2) of the CWA.
 The Extended Bond
Purchase Program is
  available to local
 government units
      that are
 undertaking water

pollution abatement

 projects with useful

    lives beyond
    twenty years.

                                                 STATE ACTIVITY
Summary of Key Features

      Massachusetts' Extended Bond
      Purchase Program is a unique
program that gained approval because the
Commonwealth is 1) taking measures to
offset the loss to the CWSRF funding levels
that would result from extending
amortization schedules from 20 to 30
years and 2) providing substantial contract
assistance subsidies to reduce the cost to
local borrowers.  The bond purchase
program illustrates the flexibility that
states are given to coordinate their CWSRF
programs with unique state financing
approaches. In approving the
Massachusetts program, EPA recognizes
that, given the numerous differences found
in leveraged and direct loan programs, it
would be inappropriate to apply policy
without consideration for special
conditions that exist in CWSRF programs.
When possible the Agency will allow
flexibility in financial structure so long as
the sought after arrangements are
consistent with federal law and regulations
and it can be documented that the funding
levels will be maintained for the program
over time.

      Massachusetts' Extended Bond
      Purchase Program has the following

•     The extended term provided for the
      repayment of local bonds will be
      the useful life of the underlying
      asset or 30 years, whichever is

•     Local borrowers will establish a
      dedicated source of revenue for
      bond repayments.
•     All local bond principal and
      interest will be repaid to the

•     Local bond interest rates will be
      set between 0 percent and the
      market rate.

•     Massachusetts will adjust its
      leveraging structure by reducing
      the reserve levels for extended
      financing so that historic
      recycling patterns in the CWSRF
      will not be impeded.

•     Contract assistance will be
      provided to the borrowers that
      issue 30 year bonds.  Borrowers
      are eligible for assistance that is
      equivalent to a 50 percent grant.

•     The Commonwealth will not
      offer this program to private

    This update was prepared by EPA
    Headquarters.  States interested in
further information on the using an
Extended Bond Purchase Program
should contact their EPA Regional Office
SRF Coordinator.
                                                                  April 1999