TATE
   REVOLVING
                  UND
    A Decade of Successful
     SRF Performance
        1987-1997
Council of Infrastructure Financing Authorities
 Environmental Financial Advisory Board

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                                                                        January, 1998

       This report on the progress of the State Revolving Loan Fund (SRF) program for Clean
Water project financing was prepared by the Council of Infrastructure Financing Authorities
(CIFA) in cooperation with U.S. EPA's Environmental Financial Advisory Board (EFAB). The
report profiles the development and performance of the SRF loan program over the past ten years,
chronicling its success as an effective mechanism for bringing low-cost financing to meet community
environmental infrastructure needs; a priority concern of both CIFA and EFAB.

       CIFA is a national, nonprofit organization of state and local authorities involved in the
provision of financing for public infrastructure development. Most CIFA members have the
capacity to access the municipal debt market to finance infrastructure projects with the issuance of
tax-exempt bonds, and most are involved in the management or administration of the SRF program
in their state or participate as active borrowers.  For this reason, the organization takes some
satisfaction hi providing this positive report on the progress of the SRF program in its first decade.

       EFAB operates under the Federal Advisory Committee Act (FACA) to provide advice and
analysis to EPA's Administrator on ways to meet the growing costs of environmental protection, as
well as the means to increase investment in environmental infrastructure through the leveraging of
public and private resources.  The operation and expansion of the state revolving loan fund
mechanism, especially its capacity to leverage through issuance of tax-exempt bonds, has been a
focus of the Advisory Committee and a subject of several of its advisories to the EPA Administrator.
EFAB's membership consists of prominent individuals from government and the private sector with
experience and expertise in the area of public and private finance.  A list of the membership can be
found at the back of this document.

       Information in this report is based on data collected and assembled by EPA from the 51 SRF
programs and can be found in EPA's electronic data-base, Clean  Water On Line. Analyses and
graphic design were provided by Nathan Nikotan and Tara Powers.
                                       The Council of Infrastructure Financing Authorities
                                       805 15th St., N.W., Suite 500
                                       Washington, DC 20005
                                       Tel: (202) 371-9694 * Fax: (202) 371-6601

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               STATE  REVOLVING FUND
                     Its Performance, Its Success
PUBLIC FINANCE SUCCESS STORY

      State Revolving Loan Funds (SRFs) arc a real success story, funding tens of billions of dollars
of environmental infrastructure projects  to  clean and  protect  the  nation's  waters.   Created by
amendments to the Clean Water Act in  1987, the SRF was envisioned  as a transitory financing
mechanism to carry the funding of municipal water quality from a project grant financed program to a
self-sufficient loan fund.   The Federal government would provide states with matching grants to
capitalize State  Revolving Funds. The SRFs would loan funds to localities, mostly at below market
rates, to build necessary wastewater treatment  systems.   The return flow of principal and interest
payments from the loans would increase to the point when eventually a self-sufficient loan fund could
be sustained.

      Now, with ten years of experience with the Clean Water SRF program, it is gratifying to
observe how well it has performed in meeting those expectations.  Data collected by EPA from the 50
State SRFs and  Puerto Rico tells the story. Collectively, these  SRFs constitute a loan pool of over $24
billion. As of the date of the survey (June 30, 1997), 82% of available funds had been loaned. Nearly
5,700 separate project loans have been made. Federal "seed money" in  the form of capital grants of
$13.2 billion to  the SRFs has been nearly doubled by the 20% state matching requirement, the proceeds
from leveraging the funds through bond issues, and the cumulative payment of principal and interest of
over S4.2 billion returning to the SRFs  for debt retirement  and re-lending.

LEVERAGING THE DOLLARS

      The most unique feature of the  SRF is the capacity of the States to leverage their loan  funds in
the  municipal bond  market.  More than one-half of the States now  leverage their  funds,  which
collectively accounts for $8.8  billion or 36% of the funds in the  lending  pool.  In addition, another
$2,9 billion, now in debt reserves securing leveraged bond issues, will incrementally flow back into the
loan funds as reserve requirements diminish with bond maturities.

      Now with the ability  to  cross-collateralize loans in  the Clean Water SRF with  the new
Drinking Water SRF as common security for a bond issue, several states are planning to issue bonds
in 1998 to further leverage their funds and increase the lending pool.

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LOAN RECIPIENTS

       Demographically,  the  loans are serving a broad spectrum  of the  population.   Thus far,
communities of over 100,000 have received 43% of loan funds.  Mid-sized communities in the 10,000
to 100,000 range account for  35% of the loans,  and  22%  of the loan dollars have gone to small
communities of under 10,000 in population. Conversely, of the 5,680 loans made thus far, 58% were
made to communities under 10,000 in population.

SUBSIDIZED BORROWING

       Uniformly, these loans  are providing below market rates for municipal borrowers.  Loan rates
range from zero interest to a few hundred basis points below market, but most SRF lending is at 2.5%
to 3.5% below the average revenue bond index.  For example, in 1996 the average revenue bond yield
was 6.01%; the mean average SRF loan rate was  3%.

       What does this loan rate subsidy mean in savings to the borrowers?  Using the spread between
the average revenue bond issue and the weighted average SRF lending rate for each year since 1989,
and assuming that each loan is structured for 20 years, an estimated  net savings to borrowers of $6.2
billion (in current dollars) can be calculated.

THE REVOLVING FEATURE

       With many of the earlier loan funded projects completed and starting to bring in operating
revenues,  loan repayments together with interest are rapidly growing;  increasing from a  mere $225
million in 1992 to nearly SI.2  billion  in 1997. Recently,  EPA and the Clinton Administration made a
commitment to continue providing federal capital grants to the Clean Water SRF to the point where the
corpus will be large enough to sustain borrowing  levels of S2 billion a year from return of principal
and interest back to the fund.

       The success of the Clean Water SRF as an infrastructure funding  mechanism has spawned
replication, A new State Revolving Loan Fund was created in 1996 to assist communities in financing
projects needed for compliance with the Safe Drinking Water Act. The State Infrastructure Banks for
road and  transportation system  funding also  give States the capacity to create revolving loan fund
financing mechanisms. Adaptability of the revolving loan concept is also being considered for clean
up  and development  of  "Brownfield"  sites,  and to provide loan subsidies for financing  physical
improvements for public schools.

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       What follows are several charts and graphs visually displaying the successful performance of
the Clean Water State Revolving Loan Fund. All SRF-related data comes from EPA's Survey of State
SRFs for the year ending June 30, 1997, and is contained in the Agency's Clean Water On-line data-
base.
Annual U. S. Clean Water SRF Funds
(In Millions)
^ -"''-'- '.::' " '.'


Years

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
TOTAL

Federal
Capitalization
Grants
195.5
846.1
1,031.4
1,587.2
1,843.0
1,510.9
1,720.3
2,321.4
849.1
1,292.0
$13,196.9

State
Contributions

36.6
196.7
257.7
400.7
344.1
322.0
345.2
363.5
244.4
194.6
$ 2,705.7

Net
Leveraged
Bonds 1
0.0
107.0
344.8
999.9
1,111.0
946.9
1,539.0
1,137.7
1,496.5
1,097.0
$ 8,779.9
Loan
Principal
& Interest
Payments
0.0
2.0
13.1
98.7
225.1
419.8
624.2
774.1
929.4
1,179.8
$ 4,266.3
 1 Exclusive of debt service reserves.

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Cumulative SRF Funds by Category
         (as a percentage of total SRF funds)
    Net Leveraged
       Bonds
        30%
       State
    Contributions
        9%
 Loan Principal
   & Interest
   Payments
    15%

   Federal
Capitalization
   Grants
    46%

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         SRF Assistance as a Percent of SRF Funds
                              Available
   90%
   80%
   70%
   60%
   50%
   40%
   30%
   20%
   10%
    0%
         1988  1989  1990  1991  1992  1993  1994  1995  1996  1997
     As a percentage of funds available, only 5% of SRF capital was lent in 1988, the first full year
of the program.  By 1991 this percentage of lending climbed sharply to 72% and continued the upward
trend, reaching 82% in 1997.
                         Annual Growth in Lending
   1,100
   1,000
     900
     800
     700
     600
     500
     400
     300
     200
     100
           1988  1989  1990  1991   1992   1993  1994  1995  1996  1997
     Growth in lending has also been steadily rising, climbing from 101 loans in  1989 to nearly
1,000 in both 1996 and 1997.

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               SRF Assistance  by Community Size
                       Less Than 3,500
                             9%
   00,000 and
    Above
     43%
                                                                  3,500 to 9,999
                                                                      13%
                                                             10,000 to 99,999
                                                                  35%
                                  $ 20 Billion
      The graph above identifies the amount of SRF assistance as a function of the size of targeted
populations, indicating that large metropolitan areas are the predominant users of SRF loan funding,
followed closely by communities from 10 to 100 thousand in population.  22% of SRF funding, thus
far, has gone to communities under 10,000, However,  as a percentage of total loans made, smaller
sized communities (under 10,000) account for 58% of the lending.

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                             What the Loans Finance

      Of total wastewater treatment SRF  financing, S9.4 billion, or almost 50%, has been  for
secondary treatment, and $3,0 billion (16%)  went to advanced treatment. Other areas of .wastewater
project financing are new interceptor and collection sewers, $3.86 billion; combined sewer overflow,
$1.24  billion;  rehabilitation of sewer systems, $1.14 billion; correction of infiltration/inflow, $524
million; and slonn sewer overflow correction, $11.9 million.
  Annual U.S. Clean Water
                       Projects
SRF Assistance for Wastewater Treatment
by Category  (In Millions)
Year
1988
1989
1 990
1991
1992
1993
1994
1995
1996
1997
TOTAL
Total
Wastewater
Treatment
10.50
505.70
1,071.40
2,488.20
2,332.50
1,918.60
2,971.10
2,812.40
2,472.90
2,677.90
19,261.30
Secondary
Treatment
0.80
240.90
635.80
1,562.80
1,190.20
859.60
1,529.30
1,272.80
1,008.70
1,120.10
9,421.00
Advanced
Treatment
0.00
171.80
215.70
341.70
327.40
344.70
399.10
378.30
472.30
417.10
3,068.10
Other
9.70
93.00
220.10
583.70
814.90
714.30
1042.90
1161.30
991.80
1140.70
6772.20
      The above figures do not include non-point source project  funding,  which  has totaled S655
million.  The trend toward non-point source funding accelerated in 1995, and continues to climb in the
past two years with a total of 899 loans for non-point source projects over the  10 years of the program.
Even so, 33 slates reported no non-point source project funding, with most lending  concentrated in a
few states; namely Delaware, Minnesota, Massachusetts, Ohio, New York,  Wyoming, Washington,
New Hampshire, California and North Dakota.

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       $1,400
       $1,200
       $1,000
         $800
         $600
         $400
         $200
         $-
                    Loan Principal & Interest Payments
                                  (In Millions)
                 1988     1990     1992     1994     1996
      In 1997, loan repayments of principal and interest approached SI.2 billion. In 1998, with many
loan-financed projects completed  and beginning to generate revenues, return payments to the state

funds can be expected to accelerate. Cumulatively, since the beginning of the program, S4.2 billion in
principal and interest has returned to the funds for debt retirement and re-lending.

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                         SRF Interest Rate  Subsidies
Weighted Average Interest Rate for Clean Water SRF Assistance
(In Percentages)

National Average
Revenue Bond Average*
Highest
Lowest
1988
2.00
8.03
2.00
1989
3.70
7.51
5.10
1,80
1990
4.20
7.53
5,50
0,09
1991
3.70
7.11
5.90
0.00
1992
3.90
6.59
5.40
0.00
1993
3.20
5.82
5.00
0.00
1994
2.80
6.45
5.20
0.00
1995
3.10
6.20
5.10
0.00
1996
3.00
6.01
5.00
0.00
1997
2.90
5.78
4.60
0.00
 IJonit lluvcr Yearbook
State Revolving Funds
Historical Subsidies Values


Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
Total
Calculations
1 Assumes al


Loan Amounts
$ 513,193,108
$ 1,113,335,898
$ 2,643,719,902
$ 2,390,260,766
$ 1,876,548,157
$ 3,147,174,714
$ 2,884,934,495
$ 2,829,173,800
$ 2,803,300,000
$ 20,201,640,840
prepared by Bear, Stearns &
I loans are made on January
over 20 years. Future valued from loan
Average
Subsidized
Loan Rate
3.81%
3.33%
3.41%
2.69%
2.62%
3.55%
3.10%
3.01%
2.89%

Co., Inc.
1 and arc structured to
year to 1/1/98 at 5.0%.



s
$
$
$
$
$
$
$
$
$


Present Value
Subsidy 1
213,052,156
493,838,526
1,008, 703,201
927,956,687
594,220,267
845,754,050
792,576,997
722,551,590
663,673,138
6,262,326,612

produce level debt service


      The above chart illustrates the cumulative amount of loan subsidy provided to SRF borrowers
over the life of the program. Comparing average annual loan rates to the average annual revenue bond
index, a total savings to the SRF borrowers of over S6.2 billion in current dollars can be estimated.

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           ENVIRONMENTAL FINANCIAL ADVISORY BOARD MEMBERSHIP
Chair
Robert O. Lenna
Executive Director
Maine Municipal Bond Bank
Designated Federal Official
John C, Wise
Deputy Regional Administrator
U. S, EPA
Board Members

Honorable Pete V. Domenici
U. S, Senate

Langdon Marsh
Director
Oregon Department of Environmental Quality

Arthur W. Ray
Deputy Secretary
Maryland Dept. of the Environment

Mary Ellen Whitworth
Executive Director
Bayou Preservation Association

Michael Deanc
Vice President
Air & Water Technologies Corp.

George A, Raftelis
Raflelis Environmental Consultant Group, Inc.

George H. Butcher
Vice President
Goldman, Sachs & Co,

Michael Curley
Chairman
General Trade Assistance Corp.

Linda Descano
Vice President
Salomon Smith Barney

Sonia M. Toledo
Lehman Brothers

Heather Ruth
President
The Bond Market Association

John P. McCarthy
Program Director
Northeastern Rural Community Assistance
Program
Pete Butkus
Director, Community Investment
State of Washington

Shoekley "Hap" Gardner
Executive Director
Virginia Resources Authority

Stephen Mahfood
Director
Missouri Environmental Improvement and
Energy Resources Authority

Joseph L. Young
Forest County Potawatomi Tribal Attorney

Jim J. Tozzi
Multinational Business Services, Inc.

Elizabeth Ytell
Elizabeth Ytell Associates

Michael C. Finnegan
Managing Director
J.P. Morgan Securities

Evan Henry
Senior Vice President
Bank of America

Anne Pcndcrgrass-Hill, Esq.

Robin L. Wiessmann
Principal
Artemis Capital Group, Inc.

Peter M. Emerson
Senior Economist
Environmental Defense Fund

Decohn Ferris
Global Environmental Resources, Inc.

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            CIFA OFFICERS AND BOARD MEMBERS 1998

                              OFFICERS
President
 Vice President
Shocklcy D, Gardner, Jr.
VA Resources Authority
909 East Main St., #700
P.O. Box 1300
Richmond, VA  23218

Treasurer

Michael D. Wolff
WI Capital Fin. Dept.
101 E. Wilson 10 Fir. Box 7864
Madison, WI 53707-7864
 Robert O. Lenna
 ME Municipal Bond Bank
 45 University Dr, PO Box 2268
 Augusta, ME 04338
 Secretary

 Daniel L. Law
 CO Water Resources & Power
  Development Authority
 1580 Logan Street, Suite 620
 Denver, CO 80203
                       BOARD MEMBERS

Yvonne Addington
OR Econimc Development Dept.
775 Summer St., N.E.
Salem, OR 97310

Joe Freeman
OK Water Resources Board
3800 N. Classen Blvd.
Oklahoma City, OK 73118

Barbara Gottschalk
MA Water Resources Authority
100 First Ave., Treasury Dept.
Charlestown Navy Yard
Boston, MA 02129

Timothy Grogg
GA Environ. Facilities Authority
100 Peachtree  St., N.W., #2090
Atlanta, GA 30303-1911

Dirk Hofman
NJ Wastewater Treatment Trust
3131 Princeton Pike, BldgJ6, Ste. 201 PO
440
Trenton, NJ 08625

Janet Hunter  Moore
Ml Municipal  Bond Authority
DOT Treasury Bldg., 3rd Fir.
Lansing, MI 48922

Stephen Kraus
MD Dept. of Environment
2500 Broening Highway
Baltimore, MD 21224
Terry Kunlman
MN Public Facilities Authority
500 Metro Sq., 121 7th PI. East
St. Paul, MN 55101-2146

Paul Marchetti
PENNVEST
22 S. 3rd St., Keystone Bldg., 4 Fir.
Harrisburg, PA 17101

Anthony Simeone
RI Clean Water Finance Agency
235 Promenade St., #119
Providence, RI 02908-5767
Greg Swartz
AZ Water Infrastructure Finance Authority
3033 North Central Ave.
Phoenix, AZ 85012

Sonia Toledo
Lehman Brothers
Public Finance Department
3 World Financial Center, 20th Fir.
New York, NY 10285

Tom Tudor
ND Municipal Bond Bank
418 E. Broadway, #246
Bismarck, ND 58501
Executive Director
James N. Smith
CIFA
805 15th St., N.W., Suite 500
Washington, DC 20005

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