£EPA
Office of Water (4101)
STATE ACTIVITY
UPDATE
EPA816-N-00-003B
January 2000
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
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-collateralization
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 (MFI) to implement a common
financing approach for both CWSRF and
DWSRF loans. Under this approach
CWSRF and 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 MFI. 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 7
New 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
Clean
Water
Drinking
Water
Drinking Water Equity Account
NYW Financing
Indenture
Clean
Water
Loans and
DSRFs
Drinking
Water
Loans and
DSRFs
Deallocated Corpus Subaccount
Private
Water
Company
Financing
Indenture
1
Deficiency
Reserve
Subaccount
1
Deficiency
Reserve
Subaccount
i
Deficiency
Reserve
Subaccount
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STATE ACTIVITY
UPDATE
Flow of Funds under New York's MFI
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 payments, funds from
available SRF resources.
If reserve funds within
a program are
unavailable to meet
debt service
Exhibit 2
New York's Flow of Funds in the MFI
DSRF interest
earnings for
debt service
the other SRF will be
invested to cure the
deficiency
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Priority Use of Account Funds 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 place. 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.
Exhibit 3
Priority Use of Account Funds to Cure Deficiencies
Within the MFI
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 I
"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
"Freed-up" CW or DW funds
in the Deficiency Reserve
Subaccount for other SRF
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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