ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
APR 3 0 2002
Honorable Christine Todd Whitman
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, D.C. 20460
Dear Administrator Whitman:
The Environmental Financial Advisory Board (EFAB) is pleased to provide you with its
report on a proposal to expand lending of the Clean Water State Revolving Fund (SRF) program
for projects designed to prevent or reduce pollution from non-point sources. The Board wishes
to clearly recognize the highly effective efforts of the Office of Water in opening up and
realizing the potential of the SRF program in the support of non-point source control. Great
progress has been made in this regard underscoring the flexibility of the revolving fund concept
to the efficient financing of many environmental and public health projects.
The proposal outlined in the attached report builds on that broad foundation of progress
already in place. The proposal envisions a cooperative arrangement between a Clean Water
State Revolving Fund and a municipality where the latter borrows from the SRF and in turn
passes the loan funds on, in a subsidiary lending arrangement, to a non-point source discharger
to finance implementation of best management practices (BMP). Essentially, this is a conduit
• lending structure which could be adaptable to many communities, but would seem to have most
application to municipalities faced with the prospects of stricter permit limitations, making the
determination that it would be more cost-effective to use SRF loan funds to finance BMPs. The
conduit lending arrangement would provide a means to fund these important non-point source
control measures where financing is frequently a critical problem. This type of cooperative
arrangement, imbedded in an implementation plan, could be directly targeted toward achieving
total maximum daily load goals for a watershed. The report recommends that the Office of
Water support and help facilitate a demonstration project with a SRF and municipality to
implement this strategy. To our knowledge, conduit lending through a municipal government has
not been undertaken with SRF loan funding; although it has worked using other governmental or
quasi-governmental entities and that model could be expanded.
When the Board discussed this report, it generated considerable comment and
suggestions from the members and expert witnesses. Other possibilities were suggested to
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improve the original concept. Areas of interest included expanded use of nonprofits, credit
enhancements, and the use of best management credits. Additionally, in a future report we
would like to profile innovative state programs, such as Ohio's Water Resource Restoration
Sponsor Program, as prototypes for reaching nontraditional SRF borrowers.
This report, then, is intended as the first product of an ongoing project. We earnestly
hope you will find it informative and helpful and will pursue the Board's recommended action.
The Board wishes to express its appreciation to Jim Smith who is the principal author of
the report. Jim is a nationally recognized authority on SRF lending and the development of new
ways of using the programs to more efficiently and effectively finance water quality
improvement projects. We also want to sincerely thank Rich Kuhlman, Kit Farber, and Jordon
Dorfman who provided valuable advice and insight to this project.
We would like to suggest meeting with you to review this and other EFAB projects to
discuss additional ways that we may be of assistance. In that regard, our goal is to increase the
impact of EFAB as a resource to EPA.
Sincerely,
Robert O. Lenna A. Stanley Meiburg
Chair, EFAB Executive Director, EFAB
Attachment
cc: Tracy Mehan, III, Assistant Administrator, OW
Ben Grumbles, Deputy Assistant Administrator, OW
Diane Regas, Deputy Assistant Administrator, OW
Thomas Gibson, Associate Administrator, OPEI
Linda Combs, Chief Financial Officer
Mike Ryan, Deputy Chief Financial Officer
Joe Dillon, Comptroller
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Environmental
Financial Advisory Board
EFAB
Robert Lenna
Chair
A. Stanley Meiburg
Executive Director
Members
Hon. Pete Domenici
Terry Agriss
George Brewster
George Butcher
Michael Curley
Michael Deane
Michael Finnegan
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Evan Henry
Anne Pehdergrass Hill
Mary Kelly
Stephen Mahfood
Langdon Marsh
John McCarthy
George Rafteli;
Arthur Ray
Andrew Sawyers
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Mary Ellen Whitworth
John Wise
Expanding Lending for
Non-Point Source Projects
FINAL
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.
April 2002
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EXPANDING LENDING FOR NON-POINT SOURCE PROJECTS
INTRODUCTION
Potential exists to greatly expand the application of the State Revolving Loan Fund
(SRF) to non-point source water quality problems using municipal treatment systems as the
borrowing conduit to reach the mainly private community of farmers, growers, developers and
home owners. In a cooperative arrangement between an SRF and a municipality, the latter
would borrow from the SRF and in turn pass the loan funds on, in a subsidiary lending
arrangement, to the non-point source discharger to finance implementation of best management
practices. Presumably, the state would lend to the municipality at a very favorable rate which in
turn could be passed on to the non-point source borrower possibly even more heavily subsidized
by the municipality.
While this conduit arrangement could be used in many circumstances, it will have more
application for communities situated on so called "quality limited" waters where trade offs
between point and non-point sources of discharge have the potential of alleviating regulatory
pressure on the community to further limit its treated sewage discharge, saving the municipality
millions of dollars in more advanced treatment facilities and operational costs. Cost savings are
the main incentive enticing a municipality into becoming a conduit lender. As for the state, the
incentives are several fold. First, it holds out the prospect of water quality benefits through
controlled non-point source discharges. Second, lending through the municipality effectively
insulates the SRF from credit exposure to the uncertain finances of many non-point source
borrowers. And, just as important in many states, it provides a means of surmounting state
constitutional and statutory limitations on lending state funds to private parties in as much as the
SRF loan is to the municipality, not the private non-point source discharger.
BACKGROUND
In the area of water pollution control two phenomena are increasingly in evidence. One
is the progressive implementation of the point source regulatory control strategy embodied in the
Clean Water Act of 1972 which mandates increasingly rigorous control of permitted point source
discharges in order to achieve or maintain ambient levels of quality in a specific water body.
Under this strategy, waters determined to be in violation of designated quality standards must be
subjected to pollution loading allocations that calculate the amount of pollution discharged from
permitted sources and develop reallocations of discharge limitations which, mathematically at
least, allow the specific water body to achieve the ambient standard. These calculations are
referred to as maximum daily loadings and in the last few years have become the focus of
multiple legal and administrative actions aimed either at enforcing the incremental regulatory
strategy of the Clean iWater Act, or disputing the efficacy of its application to certain waters.
Juxtaposed against this strategy of increased control of permitted point source discharges
is growing evidence that rapid urbanization and changes in land use practices throughout the
country are accelerating the level of pollution flowing into our streams, rivers and oceans from
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unregulated and mainly uncontrolled non-point sources, contributing, in many cases, levels of
pollution to certain waters that obviate the entire point source control strategy.
In other words, even in the presence of rigid control of point sources, the goal of
achieving and maintaining water quality standards may not be attainable as a result of
uncontrolled non-point discharges into the same waters. In such circumstances, under the
present federal regulatory regime, the only alternative is to clamp-down even more rigorously on
the permitted point source discharges which, because of the sheer quantity of discharge from
municipal treatment plants, especially those located in urban areas, means the application of
costly advanced treatment technologies to the municipal waste stream. Anticipation of the
expected cost of this threat to the municipal treatment works is one of the factors contributing to
recent efforts by the Association of Municipal Sewage Authorities, the National League of
Cities, and other municipal based interests to focus attention on the growing cost of municipal
compliance.
NON-POINT SOURCE LENDING
While the Clean Water Act is a point source control statute, the amendments in 1987,
creating the SRF loan program, provide that water pollution control problems attributable to
non-point sources can qualify for SRF assistance so long as they are identified and included in
the state's non-point source management plan authorized under Section 319 of the Act or the
National Estuary Program's Comprehensive Conservation and Management Plan referenced
under Section 320 of the statute. The Environmental Protection Agency (EPA) has been quite
latitudinal in its application of these provisions, providing eligibility to most projects that can be
associated with abatement of either ground or surface water pollution or those designed to
protect the water resource from deterioration. Examples include such things as manure storage
and composting facilities, no-till farm equipment and water conserving irrigation machinery,
wetlands restoration and protection, land mitigation banking, stream bank restoration, estuary
protections, restoration of submerged aquatic vegetation, control of storm water run-off in
unsewered areas, underground storage tank removal, failed septic systems and landfill.
improvements or closures.
Notwithstanding the above, many state SRFs are restrained from lending directly to non-
point source borrowers. Mainly these are private, non governmental borrowers in states were
constitutional or statutory provisions prohibit the state from providing direct financial assistance
to private parties such as farmers, growers, businesses and homeowners. Still other states have
self imposed limitations on the SRF from lending to other than point source discharges. Federal
regulations, OMB policy and constraints imposed by Federal tax law on the use of funds from
tax-exempt bond proceeds can also make it difficult for a state to lend directly to a private party.
Although, it should be noted that SRFs can issue taxable debt not subject to most of these same
constraints.
Perhaps more daunting for SRF managers are the different credit considerations that
enter into the area of private lending. Basically, it is an area of commercial lending without the
assurances of either a revenue stream from user fees or a source of taxes to pledge for
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repayment. Many state loan programs have been reluctant to take on the potential credit
exposure inherent in commercial banking. Those SRFs that finance non-point control measures
often structure conduit lending arrangements through state or local governmental entities or
commercial banking establishments which serve to insulate them from direct credit exposure.
(see Council of Infrastructure Financing Authorities' Monograph No. 10 on "Credit
Considerations for Reaching Nonpoint Source SRF Borrowers")
The SRFs, with EPA support and encouragement, have structured an impressive array of
intermediary options designed to provide subsidized loans to private parties for non-point source
projects. For example, SRFs in some states loan to other state agencies or authorities which in
turn relend to individual property owners; to nongovernmental organizations (NGOs) that relend
to individuals; directly to individuals; and to commercial banks that make loans to private
parties, including individuals.
This latter approach, termed "linked deposit" involving a commercial banking entity, is
probably the most comparable to the proposed municipal conduit lending arrangement. An SRF
deposits funds in a commercial bank in exchange for a certificate of deposit at a significantly
reduced rate which it would otherwise pay. The bank makes loans from the deposited funds to~
private parties for non- point source projects. The loans are at below market rates with the
spread going to the bank. The bank performs the credit analysis, services the loan, and assumes
the credit risk.
THE MUNICIPAL CONDUIT
What the Environmental Financial Advisory Board (EFAB) suggests here is not a
strategy to further subsidize municipal treatment costs, but rather a means by which
municipalities can access low cost financing of non-point source controls through the State
Revolving Loan Fund, thus deferring, in certain areas, the time when advanced treatment
technologies need to be employed. Comparable with linked deposit programs where commercial
banks are making loans from deposited SRF proceeds, the municipality would serve as a conduit,
borrowing from the SRF, and, in turn, lending the proceeds of the loan to a non-point source
project. The attraction for the municipality in facilitating this arrangement is two-fold.
First, and most obviously, it allows the city, with the application of certain well selected
non-point source controls, to claim an off-set to pollution loadings, relieving it at least in the
immediate future, from needing to implement more stringent controls on its own discharges. It
may be appropriate that non-point source control projects selected by the municipality for loan
assistance receive advance approval by the state permit issuing authority.
Secondly, this could be accomplished with minimal cost to the municipal treatment
authority. Assuming the SRF cooperates in making the funds available at an attractive rate
(including zero interest) they would be working with essentially free money. In contrast to a
linked deposit program where the spread between the cost of the SRF deposit and the interest
charged on the loan goes to the commercial bank, no spread is necessary with municipal conduit
lending, although the municipality may wish to generate sufficient funds to pay their
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administrative costs. The same subsidy from the SRF loan to the municipality can be passed
along to the borrower at more favorable terms than those provided by a linked deposit program.
A small loan origination fee or nominal interest might be charged to the borrower to
cover the cost of administering and servicing the loan and developing the loan package. The
largest consideration from the city would be exposure to uncertain credits from the non-point
source borrowers and possible manpower resource costs in putting the loans together. Because
non-point source projects can be difficult to implement, especially where multiple parties are
involved, the physical design of the project and development of the loan package could be
manpower intensive. On the other hand, the overall cost savings to the municipality of
identifying and implementing environmentally strategic non-point source projects with potential
to defer or eliminate the need to install additional major advanced treatment, could be
tremendous.
In the lending arrangement, the municipality would, in effect, serve as the conduit to the
private sector (non-point source) borrower. Borrowing directly from the SRF, the municipality
would secure the loan with either a pledge of tax or user fee based revenues, thus insulating the
SRF from serious credit exposure. As the direct borrower, the municipality would be _
responsible for loan repayment to the SRF and any associated reporting requirements including
those of disclosure in the event that bond proceeds are involved in the loan. Consequently, the
state lender would not be especially concerned with the financials of the ultimate borrower but
would in all likelihood want to be assured that the project or projects selected for funding met
certain environmental criteria determined capable of accomplishing quantifiable water quality
results.
To our knowledge, this particular arrangement for reaching the non-point source through
a municipal conduit loan has not yet been employed, but would seem to have attractive potential
for some communities faced with prospects of increasing costs for control of non-point source
discharges. Indeed, there is nothing we are aware of in the Title VI provisions of the Clean
Water Act that would effectively prohibit a state loan fund from designating funds, probably
through an advance lending pledge device, that could be drawn on by a municipality to
incrementally loan to non-profit sources, thus alleviating some of the administrative work
associated with approval of each individual loan by the SRF.
ISSUES
Several issues were raised in the development of this report.
• Can municipalities lend to private parties, particularly in States where SRFs are
prohibited from doing the same thing? The extent of this as an issue will need
further investigation, but in those states where such lending is not prohibited,
EFAB believes that municipal conduit lending for non-point source projects holds
considerable promise as a significant cost-cutting option to achieve water quality
goals within a watershed.
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• Can municipalities lend to private parties outside of their immediate political
jurisdiction? Again, this is a state by state consideration and legal authorities
vary. EFAB is aware of the use of the SRFs as a source of capital to state
governments, quasi-governmental organizations, NGOs, and commercial banks
for relending to private parties for non-point source projects. It is not aware of
any SRP lending to municipalities for the purpose of relending to private parties
outside of their political jurisdictions. The municipality might enlist the
participation of the county or even a multi-county jurisdiction, if so limited. On
this issue, the absence of comprehensive state by state survey information should
not deter further evaluation of the merits of municipal conduit lending as an
option.
• Would municipal employees have the requisite skills to perform credit analyses
of prospective borrowers? While the answer to this involves a case-by-case
determination, it seems likely that a municipality interested enough to serve as
conduit and assume the risk of loan repayments to the SRF would ensure that it
had available to it the necessary skills for the evaluation of loan applications.
Technical assistance from outside sources, including SRF assistance and
mentoring, provide other resources to the municipality. Other agencies with
experience in credit analysis might prove helpful such as the Department of
Agriculture's Rural Utility Service.
RECOMMENDATION
The Environmental Financial Advisory Board recommends that the Office of Water
support the demonstration of municipal conduit lending for non-point source projects with one or
more SRFs and selected municipalities. At the same time, these demonstrations will shed more
light on the above issues and provide the empirical information to properly evaluate the concept
and possibly other variations.
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\ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
XJSJZ ? WASHINGTON, D.C. 20460
*
MAY 3 1 ?002
OFFICE OF
WATER
Mr. A. Stanley Meiburg
Executive Director, EFAB
Environmental Protection Agency - Region IV
61 Forsyth Street, S.W.
Atlanta, GA 30303-8960
Dear Mr. Meimirg:
^
Thank you for your letter of April 30, 2002, to Administrator Christine Todd Whitman,
transmitting the Environmental Financial Advisory Board's (EFAB) recent proposal to expand lending of
the Clean Water State Revolving Fund (CWSRF) program.
As you know, we are greatly interested in seeing that States utilize the unique flexibility of
CWSRF funding as allowed by Congress in its 1987 amendments to the Clean Water Act. We have
issued policy memoranda which clarify that nonpoint source (NFS) and estuary projects may be funded
with CWSRF even if the facilities are privately owned. We are always interested in expanding the range
of borrowers who may be eligible to receive CWSRF funds; so it is with great interest that we read of
EFAB's proposal for conduit lending to municipalities.
As you note in your report, Expanding Lending for Non-point Source Projects, the CWSRF
program already supports the intermediary option called "linked deposit" whereby a commercial bank
uses CWSRF funds to relend to private parties. The Ohio Environmental Protection Agency has been a
prominent leader in this regard. Other States already have programs in which local governments borrow
funds from the CWSRF and then loan to individuals.
Minnesota's Agricultural Best Management Practices loan program was recently profiled in the
enclosed fact sheet. Minnesota's Agricultural Best Management Practices loan program is unique among
CWSRF programs because of the many partners involved in its operation. The Minnesota Department of
Agriculture manages the program. Counties receive loans from the CWSRF and use these funds for
agricultural loan programs at a local level. Soil and water conservation districts assist farmers with
needs assessment and with project planning and design. In return for a percentage of the loan interest
payments, local lending institutions (banks and farm credit institutions) review loan applications and
Internet Address (URL) • http://www.epa.gov
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guarantee repayment of each loan. Counties repay the CWSRF using repayments from their local-level
agricultural loans. Minnesota's CWSRF program has funded more than 1,961 agricultural projects for
more than $32.2 million.
Since 1995, Massachusetts has used pass-through loans with local municipalities to fund the .
repair of septic systems. This CWSRF program provides communities with zero percent loans;
homeowners then receive two to five percent loans. In a forthcoming CWSRF Activity Update, we are
featuring the "pass through" loans of the Massachusetts Department of Environmental Protection.
We agree with EFAB that conduit lending arrangements could significantly expand the ways in
which we provide financing for water quality improvements. Of particular interest is increased CWSRF
lending for the implementation of integrated priority systems and total maximum daily loads for water
bodies. To advance this idea further, we will share your paper with our regional CWSRF coordinators
who serve as our link to States. In addition, George Ames, Chief, State Revolving Fund Branch, Holly
Stallworth, an economist in the SRF Branch, and Dov Weitman, Chief, Nonpoint Source Control Branch
would like to meet with EFAB and the Environmental Finance Team to discuss ways of advancing
conduit lending arrangements in State programs. This meeting could also be used to address the three
questions at the end of your paper.
We appreciate your work on expanding financing for nonpoint source borrowers. If you have
any further questions, please feel free to contact George Ames (202-564-0661) or Richard Kuhlman,
Director, Municipal Support Division (202-564-0696).
Sincerely,
G. Tracy Mehan, m
Assistant Administrator
Enclosure
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Funding Agricultural Best Management Practices
with the Clean Water State Revolving Fund
Nonpoint Source Pollution from Agriculture
The United States has more than 330 million acres of
agricultural land that produce an abundant supply of
low-cost, nutritious food and other products. American
agriculture is noted worldwide for its high productivity,
quality, and efficiency in delivering goods to the
consumer. However, when improperly managed,
agricultural activities can affect water quality.
The most recent National Water Quality Inventory
reports that agricultural nonpoint source pollution is the
leading source of water quality impacts to surveyed rivers
and lakes, the fifth largest source of impairments to
surveyed estuaries, and also a major contributor to
ground water contamination and wetlands degradation.
Agricultural activities that cause nonpoint source
pollution include confined animal facilities, grazing,
plowing, pesticide spraying, irrigation, fertilizing,
planting, and harvesting. The major pollutants that result
from these activities are sediment, nutrients, pathogens,
pesticides, and salts. Agricultural activities also can
damage habitat and stream channels. Agricultural
impacts on surface water and ground water can be
minimized by properly managing activities that cause
nonpoint source pollution.
Clean Water State Revolving Fund Programs Can
Address Agricultural Nonpoint Source Pollution
Congress created the Clean Water State Revolving Fund
(CWSRF) program to provide reduced-rate loan funding
for water quality projects of all kinds, including
agricultural best management practices. All fifty states
and Puerto Rico manage CWSRF programs that are
similar to banks. Federal and State contributions have
established CWSRF programs, and states use these assets
to provide low or no-interest loans to important water
quality projects. As borrowers repay CWSRF loans,
states use the loan repayments to fund other important
water quality projects. CWSRF programs nationwide
have more than $34 billion in assets and fund $3-4 billion
in water quality projects each year.
Many states have used their CWSRF programs to fund
agricultural best management practices. States have
provided funding for a wide variety of projects, including
waste management systems, manure spreaders,
conservation tillage equipment, irrigation equipment,
filter strips and streambank stabilization. Delaware,
Minnesota, and West Virginia provide excellent
examples of how states have used their CWSRF programs
to address agricultural nonpoint source pollution.
State Examples: Delaware, Minnesota, West Virginia
Delaware's CWSRF program targets poultry and dairy
producers. Natural Resources Conservation Service staff
(Department of Agriculture) and local conservation
district planners assist agricultural producers with needs
assessments and with project planning and design. After
individual producers have designed best management
practices for their animal feeding operations, they can
receive low-interest loans from the CWSRF for project
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implementation. Borrowers guarantee repayment of the
loans with revenue streams from poultry integrators and
dairy cooperatives. Delaware has funded more than 341
agricultural projects for more than $2.89 million.
Minnesota's Agricultural Best Management Practices
loan program is unique among C WSRF programs because
of the many partners involved in its operation. The
Minnesota Department of Agriculture manages the
program. Counties receive loans from the CWSRF, and
the counties manage agricultural loan programs at a local
level. Soil and water conservation districts assist farmers
with needs assessment and with project planning and
design. In return for a percentage of the loan interest
payments, local lending institutions (banks and farm
credit institutions) review loan applications and guarantee
repayment of each loan. Counties repay the CWSRF
using repayments from their local-level agricultural loans.
Minnesota's CWSRF program has funded more than
1,961 agricultural projects for more than $32.2 million.
West Virginia's CWSRF program provides low-interest
loans that fanners use as the cost-share match for
Department of Agriculture grant programs such as the
Environmental Quality Incentives Program. Many
partners have contributed to the success of this program.
The West Virginia Department of Agriculture manages
the program. Soil and water conservation districts assist
farmers with needs assessment and with project planning
and design. In return for a percentage of the loan interest
payments, local banks review loan applications and
guarantee repayment of each loan. This program has
funded more than 174 agricultural best management
practices for more than $3.9 million.
Restriction: Concentrated Animal Feeding Operations
Concentrated Animal Feeding Operations (CAFOs) are
large animal feeding operations that are defined by
federal statute as point sources of pollution. Because
CAFOs are privately owned point sources of pollution,
they are ineligible for financial assistance targeted to
nonpoint sources of pollution. National Estuary
Programs, however, have wide leeway to fund priority
water quality projects with the CWSRF program. For
this reason, CAFO water quality projects that are located
within a National Estuary Program study area and are
included in a National Estuary Program management plan
are eligible for CWSRF assistance.
Challenges Ahead
EPA has been encouraging states to use their CWSRF
resources to finance the widest variety of water quality
projects while addressing high priority projects in
targeted watersheds. Those interested in cleaning up
polluted runoff resulting from agricultural nonpoint
sources should seek out their CWSRF programs, gain an
understanding of how their State program works, and
participate in the annual process that determines which
projects are funded.
For more information about the Clean Water State Revolving Fund, or for a program representative in your State,
please contact:
Clean Water State Revolving Fund Branch
U.S. Environmental Protection Agency
1201 Constitution Avenue, NW (Mailcode 4204M)
Washington, DC 20004
Phone: (202) 564-0752 Fax: (202) 501-2403
Internet: http://www.epa.gov/owm
Clean Water
State Revolving Fund
Office of Water
October 2001
EPA 832-F-01-006
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