&EPA
United States
Environmental Protection
Agency
Office of Water
(WH-546)
July 1990
Clean Water Financing
Update
NEW YORK LAUNCHES ITS SRF
$212 MILLION GRANT LARGEST EVER FOR EPA
By TERRY AGRISS and ROBERT HAMPSTON
New Yoijk State Environmental Facilities Corporation
New York State is running the biggest, most ambitious State Revolving Fund program in
the nation: a program that has come out a winner on Wall Street its first time out.
New York's SRF program roared off the launching pad when the US
Environmental Protection Agency gave us our first capitalization grant
of $212 million in March 1990. It was the largest single grant EPA
had ever awarded. The grant began a program we expect will issue
more than $4 billion in loans by the year 2000 to finance water pollu-
tion control facilities in our State.
EPA also approved New York's request to become the second State in
the nation, after Minnesota, to receive its capitalization grant on an
accelerated basis through aggressive leveraging. This will allow us to
use interest earnings to issue an additional $700 million in loans by
the year 2000, if EPA approves aggressive leveraging for each of our
successive grants.
Our first SRF bond issue, $166.5 million for the New York
City Municipal Water Finance Authority, impressed bond
rating agencies. Moody's Investors Services rated the
bonds "Aa," its second-highest rating. Standard and Poor's
Corporation rated the bonds "A," its third-highest rating.
Those ratings were higher than recent bond ratings of both New York State and the New
York City Municipal Water Finance Authority.
The tax-free SRF bonds were sold at a net interest cost of 7.5 percent, compared with the
approximately 7.8 percent rate the bonds were likely to have carried if they had been
issued directly by the New York City Water Authority. While we had only $166.5 million
in bonds to sell, we received orders for more than $1 billion in bonds.
New York, see page 2
Guest Analysis
Jhe Small Community Dilemma ,
Legislation Update
News From Washington
Calendar of Events
By Beth Ytell, Rural Community Assistance Corp.
page 9
page 11
page 12
page 15
July 1990
•"Printed on recycled paper
-------
New York, from page 1
Aggressive Leveraging: When
EPA's letter of credit cash draw
procedures would significantly
frustrate the State's program,
EPA allows an exception to these
rules and provides for a more
accelerated cash flow.
We estimate that the low interest rates and the State interest subsidy on the loan to New
York City will save city residents and businesses $34 million (present value) in debt
service charges over the life of the loan.
The New York State Department of Environmental Conservation (DEC) and the New
York State Environmental Facilities Corporation (EFC) jointly administer the New York
SRF program. DEC selects loan applicants based on public hearings and a rating system
that gives top priority to the most serious water pollution needs. EFC arranges financ-
ing.
We're now putting together a pool of communities to finance with our next SRF bond
issue, which is expected in mid-September. A third financing is scheduled for late No-
vember. Thereafter, we anticipate quarterly SRF financings. Interest in the program is
strong among municipalities.
What have we done to contribute to the success of the SRF? We produced an innovative
program to leverage Federal grants to ensure the most "bang for the buck". We invested
the Federal grants and the State match, then used each dollar of invested funds to back
up $3 in bonds. We then take the interest earned on the invested funds and use it to
subsidize the interest rate we charge municipalities, resulting in a one-third reduction in
the interest rate municipalities pay. We estimate a locality will save $250,000 in interest
payments for each $1 million it borrows from the SRF over the life of a loan.
ANNUAL DEBT SERVICE COMPARISON
20-Year SRF versus 20-Year Non-SRF Bond Issue
Annual
debt service
($000)
Unsubsidized
20-Year Loan
Analyzing the Results
(Example $10 Million Project)
Category
Final Maturity
TotalDebtService
Third Year Debt
SWVICd
SRF Loan
(Subsidized)
20 Year »
$16.4 Million
$1.1 Million
Non-SRF Loan
(Unsubsidized)
20 Year.
$18.7 Million
$1.2 Million
•Reflects Quarter phase-in of »w subsidized reserve fund.
"WNIo w0 hail only $166.5
minion In bonds to *eff, wo
received orders for more
than $1 billion. "
We've also set up safeguards to make the SRF bonds secure:
• Local governments give us municipal bonds to guarantee they'll repay loans.
• We can use the $1 set aside for every $3 we loan out to make up for any defaults.
• We can intercept State grants (other than school aid) to local governments that fail
to repay loans.
• We can use money freed up from debt service reserves, as loans are repaid, to
replace payments from borrowers in default.
July 1990
-------
New York has mounted an aggressive campaign lo inform local governments about the
SRF program In order to explain the SRF, officials of the Department of Environmental
Conservation and the Environmental Facilities Corporation have appeared at nearly
every conference held this year by Statewide groups of municipal officials
We've also held nine regional meetings around the State to explain the SRF to local
officials We bring representatives from our consultants and underwaters to the ses-
sions After giving a general presentation at the meetings, our team breaks into small
groups to speak with individual local officials, explaining how the SRF can help them
Armed with a portable computer and pnnter, we feed in data about local officials'
specific municipal wastewater treatment projects We then estimate the cost of the
project to each municipality, comparing an SRF loan to the cost of direct borrowing by
the locality The numbers produce convincing evidence of the benefits of a SRF loan
In addition, we've mailed local officials regular progress reports about the SRF We've
explained that the success of our bond issue for New York City makes it more likely that
bonds issued for other localities will get a good reception on Wall Street And, of course,
we've been in steady touch with local government officials through individual letters and
phone calls We've done our best to promptly answer every question raised about the
SRF
We've also worked with the media The'Govemor, who signed legislation in 1989
creating the New York SRF, has issued three news releases announcing milestones in the
program Thanks to those releases and work on our part to inform the media, stones
about the SRF have been earned in The Bond Buyer, The New York Times, The New
York Public Finance Newsletter, The Capital Market Reports wire service, Waste Tech
News, and other publications TV and radio stations have also earned stones about the
program
The three favorable articles published in The Bond Buyer were particularly important,
because the daily newspaper is considered the "Bible" of the bond industry
An article we wrote for the New York State Association of Counties news magazine
received wide circulation among municipal officials, who are the mam target of our
marketing campaign
All of these efforts, fueled by the hard work and dedication of the staffs of the Depart-
ment of Environmental Conservation and the Environmental Facilities Corporation, are
responsible for the early success of the SRF in New York.
We hope to build on our achievements, always mindful that the SRF program is a public
service — a program that will play a key role in cleaning up and keeping clean the pre-
cious water resources we, our children, and our children's children will always depend
on Q
(Terry Agnss is President of the New York State Environmental Facilities Corporation Robert Hampston
is Acting Director of the Division of Construction Management of the New York State Department of Envi-
ronmental Conservation )
"...we produced an innovative
program to leverage Federal
grants to ensure the most
•bang for the buck.' We
Invest the Federal grants and
the State match, and then
use each dollar of invested
funds to back up $3 In
bonds."
"The numbers produce
convincing evidence of the
benefits of an SRF loan."
A Note to Our Readers
For those who are familiar with tfie SRF Update, you have probably noticed that the name has changed. But that is not the only difference While the
old Uodate concentrated solely on the SRF Program, f/ig Clean Water Financing Update writ periodically provide information and brief analyses on capital
financing for all water-related environmental infrastructure Much of the focus will remain on the SRF Program, however, we will also cover a broader range
of issues such as small community environmental problems. Public-Private Partnerships, and funding of State water quality management programs
We intend to feature guest analyses on appropriate subjects Our readers are also invited to make suggestions or other contributions concerning their
experiences in financing water-related environmental infrastructure It's better to have you tell your story than to have us tell it for you To obtain previous
copies of the SRF Update or to contribute either a guest analysis or news article, call TomBurson, Planning and Analysis Division offAe Office of Municipal
Pollution Control, US EPA, (202)475-8679.
July 1990
-------
Standard & Poor's Announces Criteria for Rating SRFs
Weak Link: The least credit-
worthy participant in a pooled
financing program.
Liquidity: The ability to convert
assets into cash
Coverage: The ratio of pledged
revenues available annually to
pay debt service, as compared to
the annual debt service require-
ment
Standard & Poor's (S&P), one of the major municipal bond ratings agencies, has formu-
lated new criteria for its use in rating revenue bonds issued to capitalize State Revolving
Funds States can issue debt for SRFs to be secured by either a general obligation (G O)
pledge from the State or a pledge of loan repayments from local government borrowers
S&P has developed separate rating criteria for SRF bonds backed by loan repayments
State G O bonds issued for SRFs will be rated the same as the State's outstanding G O
debt
According to a report in its publication CreduWeek. S&P's method for rating SRFs
concentrates on "a general approach emphasizing the margin of safety for bondholders
m the event of a delay or default m payment by less creditworthy program borrowers"
Since SRFs receive "external credit support" m the form of Federal capitalization grants
and State contributions, the rating will not be based solely on the rating of the least
creditworthy participant Rather than concentrating on the "weak link", S&P will also
focus on two basic aspects providing credit strength additional liquidity and coverage
An SRF can use its capitalization grant and State match to maintain a debt service
reserve fund "much higher than those of typical debt service reserves funded solely
from bond proceeds It is this supplementary reserve that could provide additional
credit protection for bondholders, resulting in a higher rating for SRF bonds In
general, the larger the reserve, the greater protection for bondholders"
If an SRF does not want to tie up all of its grant money in additional reserves, it could
loan out all available money to program recipients, resulting m a larger flow of loan
repayments into the fund This increase in revenues will provide additional coverage
and greater credit protection for bondholders However, this approach assumes that
there are at least 20 borrowers, with no single borrower accounting for more than 10
percent of the debt service Otherwise, "the pool rating will closely reflect the ratings of
the weak link borrowers . unless it can be demonstrated that debt service will continue
to be paid even in the event of complete and continuing default by weaker credits"
If there are more than 20 borrowers, in order to attain a rating higher than that of the
weakest borrowers, SRFs must demonstrate liquidity or excess coverage that provides an
adequate cushion "even in the event of an interruption of payments from borrowers over
a period of time Liquidity and/or coverage requirements will be increased as credit
quality of borrowers declines" The rating on the SRF will be based on two basic factors
the rating of individual borrowers and the level of additional liquidity or coverage "An
important determination of liquidity requirements will be the size and diversity of the
pools The requirements for the larger, more diverse pools generally will be lower
For the purpose of determining liquidity requirements, pools with over 100 borrowers
will be considered large enough to have even less stnngent standards apply "
If there is a smaller number of borrowers (20-100), a penalty will be applied to reflect
"the added nsk inherent to smaller programs where the behavior of individual borrow-
ers has a more amplified effect" If one or a few borrowers are dominant, S&P will
calculate the additional liquidity needed if there is an interruption in payment from
these borrowers "It may happen that the required reserve level is so high as to be
prohibitive for the SRF Therefore, the pool rating would not be any higher than the
rating of the dominant borrowers"
Other considerations mentioned in the report are
• The continuing nature of SRFs poses a "challenge" for evaluating credit quality
because additional bond issues and the relending of payments may "change the
credit composition of the underlying borrowers"
• The EPA capitalization grant program will end in 1994, reducing the amount of
cushion available for future financings "Therefore it is essential for S&P to look
beyond the initial bond issues and borrowers for a given program"
July 1990
-------
S&P will require that all new borrowers be evaluated pnor to loan approval to
maintain the rating of the revolving fund "Without outside sources of capitali-
zation in the future, ihere may be reduced flexibility to lend to less creditworthy
borrowers and to subsidize interest rates for stronger borrowers"
The report concluded that "in light of the nature of SRFs — to provide financing for
Federal- or State-mandated wastewater projects to entities lacking access to the public
markets, in many cases — balancing the goals of the programs while providing protec-
tion for the bondholders will be a challenge " O
(This review is published solely for the purpose of acquainting our readers with the factors that Standard
&• Poor's considers in rating SRF debt We are not representing or endorsing Standard &> Poor's Before
making decisions or for more information, we caution readers to contact your financial advisor, bond
counsel, or call Mai Fallen at Standard 6- Poor's Corporation at (212) 208-1841)
Reserve Fund: The fund that
can be used to pay debt service
if the sources of the pledged
revenues do not generate
sufficient funds to satisfy the
debt service requirements
P3s Prove Popular
Once considered an option with limited suitability for financing municipal water quality
facilities, Public-Private Partnership arrangements, also known as P3s, are now becom-
ing more accepted Government officials are recognizing P3s as cost-efficient and
creative means to provide affordable water treatment for the public
With the passage of the 1987 Clean Water Act Amendments and the 1986 Safe Drinking
Water Act Amendments, States and local communities are facing significantly increased
responsibilities for complying with Federal objectives and requirements However, the
wastewater treatment construction grants program is being phased out In its place is
the State Revolving Fund program, for which Federal funding will end after Fiscal Year
1994
To satisfy the growing need for environmental infrastructure facilities and to meet the
new Federal requirements, local and State governments are supplementing and, in many
cases, replacing traditional public finance strategies with alternative
techniques involving vanous degrees of pnvate sector involvement
According to Don Rugh, a financial analyst with EPA's Office of Water,
"If States and municipalities are to meet current and future needs for
capital investment m treatment facilities, new and creative public and
pnvate financing mechanisms must be developed EPA is committed
to assisting States and municipalities examine workable alternative fi-
nancing arrangements We will get far more mileage out of our efforts
by blending of these new mechanisms with existing financing ap-
proaches "
The Office of Municipal Pollution Control (OMPC), in coordination
with other EPA offices, is developing a P3 initiative to increase the in-
volvement of the pnvate sector in the capital funding of wastewater
treatment facilities According to Rugh, "This increased involvement
can be best accomplished by project-level contractual relationships
between the public and pnvate sectors Both panics must be commit-
ted to providing an environmental public service " He noted that
partnership activities may include providing services, financing, design,
construction, outright ownership, and operation and maintenance of a
facility "A P3 arrangement may include a few or all of these activities"
Responsibilities and risks are negotiated between the pnvate party and the municipality
Most of these arrangements have one attribute in common a need to retain public
sector responsibility P3f see pgge
Public-Private Partnerships
(P3s): A contractual relation-
ship between the public and
private sector to provide public
services, including financing,
design, construction, outright
ownership, and operation and
mamtainance of a facility
The range ofP3 arrangements can include
(1) contract services (the least private involvement),
(2) turnkey facility (design and construction by the
pnvate sector, financing by the municipality),
(3) developer financing (the developer provides the
financing instead of the municipality),
(4) total privatization (the public decides the need for
the public service and the pnvate party provides fi-
nancing, design, construction, operation and main-
tenance, and possible ownership);
(5) cooperative (the wastewatertreatment facility is
owned, financed, and operated by the users of the
public services);
(6) a merchant facility (privately initiated the private
party makes the decision to provide public services
at no cost to the municipality)
July 1990
-------
P3, from page 5
"EPA Is committed to
assisting States and munici-
palities examine and set In
motion workable alternative
financing arrangements."
P3s should not be considered a cure-all for infrastructure requirements. However,
added Rugh, "P3s are an additional tool which can be part of an effective remedy to a
community's financing needs. Depending on the circumstances, instituting a P3 ar-
rangement may be a long and arduous process, requiring experts from the engineering,
financial, and legal communities. The municipality must take an educated approach
based on a clear understanding of Public-Private Partnerships. The P3 agreement should
be negotiated in such a manner as to ensure that the interests of all parties are furthered."
For more information about OMPCs P3 activities, contact Don Rugh at (202) 245-4153.
The Problem With State Drinking Water Program Capacity
Primacy: The formal delegation
to the States of responsibilities
for managing and operating-State
Public Water Supply systems.
The following analysis is reprinted from the Drinking Water Mobilization Coordinator's
Handbook
EPA relies on the States to run the Public Water Supply (PWS) program, and the 1986
Safe Drinking Water Act (SDWA) Amendments substantially expand State-level regula-
tory power and responsibilities. All State primacy agencies must adopt and enforce all
new or revised regulations by their effective date (usually 18 months after EPA promul-
gates the regulation). In order to obtain or retain primacy, States must continually
demonstrate that their PWS program is adequately funded and meets various require-
ments.
As new requirements come online, however. State programs will have difficulty expand-
ing to incorporate the increased tasks associated with oversight and enforcement of PWS
systems. States are already short of the funds and personnel needed to run the current
program and will face increased costs of greater than 100 percent. States currently
expend about $95 million per year on drinking water programs. Of that amount, States
contribute two-thirds and Federal grants constitute the remainder.
A study conducted by the Association of State Drinking Water Administrators and EPA
concludes that, in the absence of significantly increased funding, major elements of
public health protection under the SDWA will be compromised. The analysis indicates
that States need an additional $34 million per year just to implement the current re-
quirements. In addition, implementation of the 1986 amendments will cost States an
State Shortfall of Funds Necessary to Implement
the Public Water Supply Program (PWS)
Currant Ftdaral
Contribution
132 Million
(11*)
Currtnt PWS
Program Shortfall
$34 Million
(12%)
Funding lor
Currant and
N*w
Rflquiram tnts
Funding loi
Currant PWS
Program
•for ihe n»w requirements, an additional S180
million in ona-tlm* costs also is necessary.
New Requirements Shortfall
1152 Million
(55%)
Total- $211 Million
par ytar
Stale
Contribution
Total- S129 Million
per year
T
50
100
~r
150
T
200
(Dollars in Millions)
T"
250
300
July 1990
-------
estimated $180 million in "one-time costs" through 1992 and lead to an increase in
annual costs of $150 million thereafter
Dramatic increases in Federal funding are unlikely, therefore, States are faced with
increasing their budgets and/or they must cut back on current program activities in
order to address the new requirements Critical program elements such as public
participation and education, staff training and development, special studies, inspections,
and sanitary surveys are often cited as activities most likely to be limited when resources
are scarce
The current and future Federal/State limitations on PWS program resources indicate that
efforts to ensure program implementation must extend beyond EPA and the States As a
result, EPA and the States must effectively mobilize relevant groups and organizations in
providing the necessary supplemental support to small water systems
For more information, contact Jamie Bourne, US EPA Office of Drinking Water, at
(202) 382-5557 Q
'7n the absence of signifi-
cantly Increased funding,
major elements of public
health protection under the
Safe Drinking Water Act will
be compromised."
SCORE—Four For Free
Tips for promoting adequate user charges and information on financial management and
compliance for water and wastewater treatment systems are included in four brief and
easy-to-read publications They are available free from EPA Regional small-community
outreach coordinators The matenals were prepared by the Office of Municipal Pollution
Control's Small Community Outreach and Education (SCORE) Program
"The publications stress the importance of sound fi-
nancial planning and management as the keystone of
a self-sufficient facility," said Richard Kuhlman,
manager of the SCORE program "Each one high-
lights a different concern"
SCORE is an information and technical assistance
program that helps small communities build and
maintain self-sufficient wastewater facilities that
comply with the Clean Water Act (CWA) The pro-
gram is a cooperative effort of Federal, State, and
sub-State agencies, educational institutions, and
public-interest and professional advocacy groups
The need for adequate user charges is stressed m the
brochure "A Water and Wastewater Manager's
Guide for Staying Financially Healthy", which also
briefly overviews utility budgets Advice on how to
win citizen support for adequate user charges
through a lively public education campaign is the
theme of another brochure, "Building Support for
Increasing User Fees"
The publication "Touching All the Bases" guides
the local official and wastewater manager through
the financial management of wastewater systems
from project planning through construction This
foldout is an excerpt of the more detailed EPA
guidebook by the same name
"It's Your Choice" summarizes an EPA handbook by the same name It outlines the
responsibilities of small community officials in achieving and maintaining the wastewater
treatment standards of the CWA The pamphlet emphasizes how choices in technology,
financing, and personnel can lead to compliance Q
The publications can be ordered without charge from the Regional SCORE
coordinators:
Region Office Location
Region 1 Boston
Region 2 New York City
-New Jersey
-New York State
-Puerto Rico and
the Virgin Islands
Region 3 Philadelphia
Region 4 Atlanta
Region 5 Chicago
Region 6 Dallas
Region 7 Kansas City
Region 8 Denver
Region 9 San Francisco
Region 10 Seattle
Contact
Mark Malone
Ponce Tidwell
Andrea Coats
Yolanda Guest
Bob Runowski
Roger DeShane
Al Krause
Gene Wossum
Kelly Beard
Harold Thompson
Elizabeth Borowiec
Bryan Yim
For further information about SCORE, contact
(202)382-7370.
Phone Number
(617)565-3492
(212)264-5670
(212)264-8349
(212)264-5255
(215)597-6526
(404)347-3633
(312)886-0246
(214)655-7130
(913)551-7217
(303)293-1560
(415)974-8266
(206)442-8575
Randy Revetta at
July 1990
-------
Guest, from page 9
EPA, as a regulatory agency, is charged with making certain that communities, regardless of size, cost, location,
or any other factors, comply with the Federal Clean Water and Safe Drinking Water Acts At the same time, EPA
is phasing out the wastewater construction grant program Furthermore, it has never provided financial
assistance for improvements to dnnking water systems Still, small communities must achieve and maintain
compliance
State Environmental Agencies are now in the position of developing financing programs to fund the improve-
ments that the communities must make to achieve and maintain compliance Some States have established fi-
nancing authorities outside their respective environmental and regulatory agencies, while others have elected to
set up "in-house" programs While most of the financing will be in the form of low-interest loans, several States
have established programs to make grants to low income communities Meanwhile, the State environmental
regulatory agencies continue to be responsible for enforcement The objective is to protect the water quality in
communities, regardless of size, cost, location, or any other factors
The Financial Community has a commitment to obtain a return on investments in environmental infrastruc-
ture projects They'll issue bonds, package financing, and assume the nsk for communities that have the assets
These institutions are wary of making investments in financially distressed communities Many rural commu-
nities can't qualify for pnvate financing
Associations Representing Large Water and Wastewater Utilities favor the end of all subsidized financing
of utilities They maintain that better decisions will be made by the entire industry if each confronts the same basic
funding issues In their opinion, the continued operation of small systems eliminates the economies of scale
savings that a Regional utility can provide
Local Officials Representing Small Financially Distressed Communities typically are willing to tackle their
problems, but may not have the resources or personnel it takes Many times, they don't know where to go for
help or how to set pnonties and begin solving them Yet, they are required to achieve and maintain compliance
Investor-Owned Systems and Small Non-Profit Utilities generally don't have the capital reserves to meet the
rising costs associated with achieving and maintaining compliance It is difficult to charge user rates sufficient
to offset those costs Moreover, these pnvate systems are not eligible for public financing These systems must
meet the same environmental requirements as publicly-owned systems
Customers of Water and Wastewater Utilities often don't perceive the need for increasing user charges to pay
for what they can't see This translates into not planning for the future or not understanding the problems at hand
Technical Assistance Providers hold the view that most low income communities can't afford to repay loans
and some will have difficulty financing improvements even if subsidies are available Compliance can be the
incentive for communities to make improvements to their systems
Each of these perspectives is compelling in its own nght However, the reality is that decisions about how to solve
these problems cannot be made in a vacuum The government agencies, organizations, and the investment
community will have to work with these communities and their users to amve at solutions that are achievable
Compromises will have to be made by all the parties involved Q
Ms Ytell is Director of the Water/Wostewater Division of the Rural Community Assistance Corp (RCAQ, a non-profit
organization located in Sacramento, California. Its mission is to build the capacity of low income rural communities to
improve, construct, maintain and operate water and wastewater facilities Ms Ytell was recently appointed to EPA's
environmental financing advisory board
10 July 1990
-------
Legislation Update
A Summary of New and Proposed Legislation From the
101st Congress
By GEOFF COOPER, Attorney Advisor
Office of Municipal Pollution Control, US EPA
Congress is considering a number of legislative measures "infrastructure bonds", including bonds issued for sewage
designed to assist communities in financing water quality treatment, water supply systems, solid and hazardous
projects. Several of these bills are targeted specifically to waste disposal facilities, and facilities required to achieve
small communities, which face difficult pollution control compliance with EPA regulations (e g, a mass transit
financing problems because they cannot rely on econo- system that must comply with Clean Air Act require-
mies of scale to the same extent as big cities can. ments), and ease certain restrictions on those bonds Ar-
j bitrage rebate requirements would be relaxed on these
The Senate Environment and Public Works Committee D0n(js and they would not be included in a State's "private
has drafted a bill that would provide assistance to locah- activity" volume cap. The legislation is also designed to en-
ties, either as grants or loans, for a host of environmental courage private investment by extending the accelerated
infrastructure projects. The Small Community Environ- depreciation provisions (seven years) to all environmental
mental Infrastructure Assistance Act (S. 2184) is a infrastructure facilities
consolidation of provisions in fourbills previously consid-
ered by the Committee. Title 1 of the bill is modeled Senator Moymhan has proposed the creation of a National
closely after Title 6 of the Clean Water Act It would Infrastructure Corporation The Corporation's accounts
establish State revolving funds authorized to provide long- would be capitalized by the interest on Federal transpor-
term loans and grants to small communities for water tation trust funds and would provide loans for 33 percent
supply, wastewater treatment, and solid waste projects of the costs of a wide range of infrastructure needs
and activities
The Domenici bill, in particular, has enjoyed the support
Title 2 of the bill directs the US Army Corps of Engineers of State and local governments and the public finance
to provide assistance to particularly needy communities community However, because of Federal budget con-
for environmental infrastructure. Title 3 incorporates stramts and the impact these two bills could have on
legislation to promote private sector participation in envi- Federal revenues, their passage in this session is uncertain
ronmental infrastructure project refinancing It would
permit communities to acquire private financing for con- Congressional consideration of all environmental bills
struction or rehabilitation of treatment works and other may be sidetracked for the time being by action on the
environmental facilities by offenng a security interest in Clean Air Act. There are significant differences between
the revenues of the treatment works beyond those needed Ac House and Senate versions of this extremely complex
to pay operation, maintenance and replacement costs, legislation (the House bill, H R. 1630, runs to 700 pages)
Communities that exercise this option would not be re- Considerable staff work must be completed before a con-
quired to repay grants awarded by the Environmental Pro- ference on the bills can be scheduled Most observers
tection Agency for construction of the treatment works. expect that final passage of the reauthorized Clean Air Act
will not take place until the late summer, after which Con-
The Environmental Infrastructure Act (S. 700), which gress ^ay lurn jts attention to other pressing pollution
was introduced by Senators Domenici and Boren, is de- control matters
signed to help States and local governments with these
expenses. The Environmental Infrastructure Act would For more information, contact Geoff Cooper, US EPA
amend the Tax Code by creating a new category of Office of Municipal Pollution Control, (202) 382-2287 Q
July 1990 11
-------
News From Washington
EPA Publishes SRF Regulations
The State Revolving Fund Program Implementation Regu-
lations were published in the Federal Register on March 19,
1990 (55 FR 10176) Comments on this interim final rule,
which became effective upon its publication, were accepted
until May 18, 1990
The interim final rule implements the State water pollution
control revolving fund capitalization grant program The
program, under which the Environmental Protection Agency
awards grants to States to capitalize funds that will provide
assistance for water pollution control purposes, was estab-
lished m the Water Quality Act of 1987 as a new title 6 to the
Clean Water Act ,
The Agency is now in the process of reviewing comments to
determine whether changes to the mtenm rule will be neces-
sary before proceeding to publish it as a final rule
For further information, contact Geoff Cooper at
(202) 382-2287
EPA Publishes Set 3 of SRF Qs and As
In May 1990, EPA's Office of Municipal Pollution Control
(OMPC) distributed Set 3 of its SRF Questions and An-
swers (Qs and As) documents States developed and imple-
mented their State Revolving Fund programs based upon the
SRF Initial Guidance released by the OMPC in January 1988
During the first phase of program implementation, the States
and Regions posed numerous questions to Headquarters
seeking clarification of the Guidance OMPC has responded
10 these inquiries through the publication of SRF Qs and As
documents, which are to be read in conjunction with the
Initial Guidance and the Interim Final SRF Regulations
Sets 1 and 2 of the Qs and As were published in November
1988 OMPC has announced that subsequent questions will
be addressed in memoranda to the Regions rather than in Qs
and As documents In the near future, OMPC will prepare
and distnbute a compendium of previously published Qs and
As with a key word index For a copy of the Qs and As
documents, contact Don Niehus at (202) 382-7366
Administration Requests NPS Funding
In its proposed budget for FY 1991, the Administration has
requested $15 million for implementation of the nonpoint
source (NPS) control program, which is authorized in the
1987 Amendments to the Clean Water Act (CWA) The
Administration's proposed 1991 budget request marks the
first time that an administration has asked for funds to be
appropriated for NPS programs
Under section 319 of the CWA, subsection (h) requires States
to implement management programs for "controlling pollu-
tion added from nonpoint sources within the State and
improving the quality of such waters" Subsection (i) empow-
ers EPA to make grants to States so they can carry out ground-
water protection activities that "will advance the State toward
implementation of a comprehensive nonpoint source pollu-
tion prevention program" Grants under section 319(0 may
be used to help fund research, planning, groundwater assess-
ments, demonstration programs, enforcement, technical
assistance, education, and training
In the FY 1990 Appropnation Bill, Congress included S40
million for the NPS program The Senate Conference Report
directed that " these funds be made available to States with
approved nonpoint source programs to begin implementa-
tion as soon as possible (T)he conferees direct EPA to
develop State-by-State planning targets for 1990 funding
based on mtenm catena which reflect nonpoint source
needs" The CWA had authorized $100 million for section
319 for FY 1990 The NPS program is coordinated by the
Office of Water Regulations and Standards For further infor-
mation, contact Dov Weitman at (202) 382-7085
New Pollution Control Program for
Small Businesses
Effective December 22, 1989, the Small Business Admini-
stration (SBA) began providing loan guarantees to eligible
companies for the planning, design, and installation of pollu-
tion control facilities The program, which is authonzed
under section 7(a)12 of the Small Business Act, provides
guarantees for loans of up to SI,000,000, less the amount
outstanding of any SBA 7(a) financing However, no direct
financing by SBA is authonzed
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July 3
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According to Karen V Brown, EPA Asbestos and Small
Business Ombudsman, "In considenng applications for a
guaranteed loan, SBA will review the Federal, State, or local
regulation that requires an expenditure of funds for environ-
mental remedy Small businesses may find the program
valuable in accessing capital when faced with specific com-
pliance requirements" Copies of any local, State, or Federal
environmental regulations that relate to the proposed facility
should be provided with the application
Eligible uses for funds under the program include "real or
personal property which is likely to help prevent, reduce,
abate or control noise, air or water pollution or contamina-
tion by removing, altering, disposing or storing pollutants,
contaminants, wastes or heat, and such real or personal
property which will be used for the collection, storage,
treatment, utilization, processing, or final disposal of solid or
liquid waste"
For more information on this new SBA Program, contact any
Regional, State, or local SBA Office or Karen Brown at
1-800-368-5888
On November 24, 1989, Congress passed the Fiscal Year
1990 Budget Reconciliation Act, which included provisions
designed toease the rebate requirement Issuers of "construc-
tion bonds" are now exempt from the rebate rule if they spend
at least 10 percent of the net proceeds by the end of six
months, 45 percent by the end of the first year, 75 percent in
18 months, 95 percent after two years, and 100 percent after
three years (The remaining five percent after the second year
is only for a "reasonable retamage", that is, amounts reasona-
bly required to ensure performance under construction
contracts already in existence)
According to the Council of Infrastructure Finance Authon-
ties, "The 36-month exception is more realistic in providing
justifiable relief to a larger number of public purpose
projects"
To qualify for the new exception, at least 75 percent of the
net proceeds of an issue must be used for construction
(including reconstruction and rehabilitation) In addition,
the bond issue must be either a non-private activity bond or
a qualified 501(c)(3) bond The only case in which a pnvate
activity bond could qualify for the exception is if it is being
used to finance property to be owned by a governmental unit
or a 501(c)(3) non-profit organization
Congress Eases Arbitrage Rebate Provision
The Tax Reform Act of 1986 granted tax-exempt municipal
bond issuers only a six month "spend-down period" after
bond issuance dunng which they could invest the bond
proceeds in higher yielding securities without having to turn
their profits over to the U S Treasury The law was wntten
to discourage the issuance of bonds for the purpose of
making money from the spread between tax-free and taxable
rates This practice is known as arbitrage This provision
also was intended to prevent pooled issuers from taking ad-
vantage of current low rates by issuing bonds now, before the
funds are actually needed, in anticipation of future rate
increases After the six months, if the proceeds were not
spent for the governmental purpose for which the bonds
were issued, then the issuer was required to "rebate" all
profits back to the U S Treasury
When they are unable to spend they money dunng the six
month period, municipalities must undergo a complex and
expensive process of tracking their investment income and
profits This is often the case when bonds are issued for large
public projects Most wastewater treatment projects require
well over three years to construct In addition, there is a
strong relationship between the time it takes to construct a
project and us cost generally, the more a project costs, the
longer it takes to build A recent EPA analysis presented to
the Environmental Finance Advisory Board showed that
when this relationship is taken into consideration, the mean
time interval from construction start to initiation of operation
is 48 62 months
New Board to Give EPA Financial Advice
The Environmental Financial Advisory Board (EFAB) was
recently established as an affiliate to the National Advisory
Council For Environmental Technology Transfer, to provide
authoritative advice and position statements to the EPA
Administrator on environmental finance, legislation, and
taxation Particular regard will be given to issues of concern
to local governments and small communities
"The Board will recommend policies to increase public and
pnvate investment in environmental protection," said Don
Rugh, Financial Analyst in EPA's Office of Municipal Pollu-
tion Control "Workgroups have been formed within the
Board to identify barriers m the public and pnvate sectors, in
small communities and in environmental tax policy that
impede environmental infrastructure financing Recommen-
dations of the workgroups will be made to the full Board,"
added Rugh
Membership of the Board draws from all levels of govern-
ment, the finance and banking community, business and
industry, national organizations, and academia Q
July 1990
13
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STATUS OF SRF PROGRAMS
Slates with SRF
Programs on 7/1/90
States scheduled
by 10/1/90
'The FY1990 VA, HUD, and Independent Agencies Appropriation Act allows the District of
Columbia, Virgin Islands, and the Territories to receive their Title 6 allotments in the form
of construction grants.
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July 1990
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Calendar of Events
The following is a list of seminars, workshops, and conferences that will cover issues related to financing
environmental infrastructure. If you know of an event that should be listed in future issues, please call
Tom Burson, US EPA Office of Municipal Pollution Control, at (202)475-8679.
Event
Affordable Alternatives for Drinking
Water and Wastewater Systems
Nat'l Assn. of State Treasurers'
Conference on State and Local Debt
Interstate Conference on Water *
Policy (ICWP) 1990 Annual Meeting
American Society for Public Admin.
Conference "Environmental
Management: Challenges.
Opportunities, Strategies'*
Washington State Public Facilities
Finance Conference
Public-Private Partnerships
"Environmental Entrepreneurs:
Changing Directions in the 1990s"
Water Pollution Control Federation
1990 Annual Conference
EPA Region V Workshop
on Alternative Funding
Date
July 23-24
*
August 21-23
August 26-30
September 9-12
September 12-14
September 19
October 7-11
October 23-24
Location
Charleston, WV
Naples, FL
Atlantic City, Nj
Boston, MA
Wenatchee,WA
Harrisburg.PA
Washington, DC
Location not yet
determined
Contact
Don Rugh
(202)245-4153
Liz Ellis or
Bruce Gilander
(904)488-6776
Flammia Mangone
(202)466-7287
Joanne Dunne
(202)393-7878
Arthur Hamisch
(206)764-3646
Cathy Mastropieri
(215)597-4149
WPCF
(703)684-2415
Gene Wojcik
(312)886-0174
I 1
We are updating and expanding our current mailing list. If you or anyone you know would
like to receive future Issues of the Clean Water Financing Update, please contact:
Organization:
Address:
Tom Burson Name:
US EPA Title: _
Office of Municipal Pollution Control (WH-546)
401 M St., SW
Washington, DC 20460 _
(202) 475-8679 Telephone:
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July 1990
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