SRF Fund Management Handbook
ikth front
March 2018

Note to Reader
The SRF Fund Management Handbook was first released in April 2001 following the October
2000 memo on "Implementation of CWSRF Financial Indicators" that established a suite of
six indicators agreed to by a subgroup of the State/EPA Workgroup. In May 2013, a draft
paper "CWSRF Financial Risks: Program Objectives, Risk Analysis, and Useful Tools"
provided a sharpened focus on risks to the SRF program by assessing those risks in terms of
their potential impact on strategic objectives. A Government Accountability Office (GAO)
report on the SRF programs in August 2015 concluded that improved financial indicators
could strengthen EPA oversight. In response to GAO's recommendations, a new State/EPA
subgroup was established to develop additional financial indicators. These financial indicators,
along with key portions of the Financial Risks paper, were combined with the original SRF
Fund Management Handbook to create this revised handbook, an in-depth analysis of how to
measure the financial health of the SRF programs, spotlighting potential risks, and methods to
avoid those pitfalls.
The financial risks found in this paper are meant to be cautionary, and may be more
applicable to some programs over others or may not be applicable at all. From a national
perspective, these risks are laid out to assist programs in their strategic management to
mitigate or avoid any financial risks they might encounter.
This handbook, along with the "Overview of Clean Water State Revolving Fund Eligibilities,"
the "Drinking Water State Revolving Fund Eligibility Handbook," and the "Financing
Alternatives for Nontraditional Eligibilities in the Clean Water State Revolving Fund", are
technical documents intended as reference works to be used for successful implementation
of the SRF programs, and will be updated periodically as circumstances dictate. Our sincere
appreciation to all EPA and state staff that contributed to this Handbook.
CWSRF Branch
Water Infrastructure Division
Office of Wastewater Management
Office of Water
Drinking Water Protection Division
Office of Groundwater and Drinking
Office of Water
DWSRF Branch
Fund Management Handbook I

Purpose and Layout	3
Chapter I. SRF Financial Objectives	4
I. I Sufficient Staffing and Funding Capability to Administer the Program	4
1.2	Attain and Maintain a High Rate of Funds Utilization	6
1.3	Minimize Unliquidated Obligations by Ensuring Timely Disbursement of Funds	7
1.4	Effective Loan and Project Oversight	8
1.5	Sound Bond and Debt Management	8
1.6	Effective Management of Investments	9
1.7	Effective Use of Fee Revenues and Administrative Funds	9
1.8	Sound Accounting and Reporting Practices	10
1.9	Follow an SRF Strategic Business Plan	I I
Chapter 2. SRF Strategic Planning	12
2.1	Evaluate Program Objectives and Risks	12
2.2	Assess Environmental and Public Health Needs	I 3
2.3	Assess SRF Financing Needs	I 3
2.4	Set Short- and Long-Term Financing and Programmatic Goals	14
Chapter 3. Fund Management Topics	15
3.1	Setting Loan Terms	15
3.2	Fund Resource Utilization	20
3.3	Administrative Resources	26
3.4	Fees	28
3.5	Loan Portfolio Management	30
3.6	State Match Bonds	34
3.7	Leveraging	37
3.8	Returns On Fund Investments	43
3.9	Sustainable Funding Levels	45
Chapter 4. Analytical Tools, Techniques and Indicators	50
4.1	Trend Analysis	50
4.2	Cash Flow Modeling and Financial Planning	51
4.3	Role of Auditing/Accounting in Financial Management	52
4.4	Today's Dollars or Present Value (Constant Dollars)	52
4.5	Grant Equivalency	53
4.6	Investment Return	54
4.7	Loan Portfolio Analysis	55
4.8	Key Financial Indicators	55
Chapter 5. Fund Management Tools and Training	65
Chapter 6. Additional Resources	68
Fund Management Handbook 2

The purpose of this Handbook is to guide EPA and state SRF managers through the process of strategic
Fund management by putting the major financial topics concerning the SRF programs in a single place to
act as a valuable educational and reference tool for EPA and state SRF managers.
Chapter 1 outlines the primary financial objectives of the SRF program and the risks that could
prevent a state from achieving those objectives. Chapter 2 includes a short overview of the strategic
planning process in the SRF programs. Chapter 3 identifies nine key Fund management topics. While
this does not identify all Fund management issues, those included provide an overview of the major
Fund management discussions taking place at EPA and states. This chapter addresses each financial
management topic individually and how it relates to SRF financial objectives and programmatic and
financial risks. Many of the Fund management issues overlap, and the discussion for each issue seeks to
succinctly identify and examine the relationship between that issue and other related fund management
issues. Each issue is accompanied by one or more pertinent case studies of how a state has faced and
answered some of the Fund management questions.
Chapter 4 groups together a comprehensive set of analytical tools and techniques used in Fund
management. These include financial planning techniques and key SRF financial measures, along with a
matrix that relates the application of each measure to important financial management questions.
Chapter 5 includes a list of other Fund management tools and training opportunities, such as
checklists, workshops, and reports that complement this Handbook. Chapter 6 provides a list of
websites that are helpful for additional study.
This Handbook frequently turns to the importance of cash flow modeling in SRF Fund management.
Each of the topics in this Handbook requires a certain level of financial analysis to understand the
financial implications of these choices. Cash flow modeling is the principal technique for analyzing the
financial impact of decisions over time, given the financial complexity of SRFs; it is critical for effective
strategic financial planning in the SRF.
Models can range from simple to complex. They enable programs to model how changes in key
assumptions may impact Fund cash flows, assisting in the development of program policies. The large
size and complexity of SRF programs in each state underscores the need for every state to have a
custom financial model to analyze and track financial conditions and evaluate Fund management
options. There is more information on cash flow modeling throughout this Handbook, with special focus
on this topic in Sections 3.9 and 4.2.
Fund Management Handbook 3

While there are many differences between state SRF programs in terms of total dollars managed,
financial structure, environmental and public health priorities, and number of loan recipients, there are
overarching environmental, public health, and financial objectives that affect each program.
The SRF program has two primary goals:
•	To use SRF funds to achieve the greatest environmental and public health results by improving
water quality, and
•	To ensure that SRF funds are used efficiently and maintained in perpetuity.
There are a number of financial objectives that play a key role in programs achieving the goals described
above. SRF programs are constantly balancing their Fund management activities to mitigate the risks of
not meeting these objectives. For instance, setting a high interest rate may increase Fund earnings but
they may reduce the environmental benefits as fewer entities can afford to implement important
projects. This Fund management decision could result in low fund resource utilization ("pace"), resulting
in the program not achieving a key financial objective.
For each SRF program, the optimal approach will depend on state-specific factors such as the water
quality and public health priorities, demand for financial assistance, availability and financial benefit of
other assistance programs, state funding priorities, demographics and affordability, current market
conditions, and legislative support. The following pages highlight nine key SRF financial objectives,
although states may have additional financial and programmatic objectives.
Appropriate staffing is essential for successful administration of an SRF program. To be an effective SRF
program, each state must have reasonably sufficient staff to carry out the activities required. If the
objective of having sufficient well-informed staff is not met in the long term, we may see other
objectives of the programs not being met, potentially resulting in an overall decline in the success of the
SRF. From a Fund management perspective, a lack of qualified financial staff and management attention
can undermine the success of the program.
A 2017 survey of CWSRF programs found that staffing levels declined slightly from approximately 765
FTE (full-time equivalent) to 761 FTE between 2009 and 2016. At the same time, assistance provided
(both dollar value and number of agreements) increased by more than fifty percent (Figure 1). Program
requirements such as Davis-Bacon and American Iron and Steel have added to the challenges of
managing and overseeing SRF programs. In the midst of these changes, EPA and many state SRF
programs have had their budgets reduced, preventing them from filling open positions, receiving
adequate training, or simply having sufficient time to do all of the work required.
Fund Management Handbook 4

Figure I: Programs Have Grown Substantially While Staffing Levels
Have Remained Flat (2009-2016)
Assistance Agreements
Assistance Provided
Despite these pressures, EPA and state staff continue to
do an admirable job in managing their programs and
ensuring the continued growth and success of the SRF.
However, without ongoing support and training, the risks
of noncompliance with federal regulations and of not
meeting the other objectives of the program will increase.
For instance, insufficient staffing or inadequate training
may result in invoices not being comprehensively
reviewed, resulting in improper payments.1 Another
potential result is that there may be less time to cross-
train staff, which could result in delays or other problems
in the event of staff absences. There may also be fewer
opportunities to work on long-term projects that could
improve the program's effectiveness and reach in the
States and EPA have worked to manage some of these challenges by using contractor support,
developing Standard Operating Procedures (SOPs) to standardize processes, streamlining procedures,
and attending SRF training workshops. EPA has also been successful in promoting hiring by highlighting
staffing needs in Program Evaluation Reports (PERs), which are often read by high-level managers.
1 An improper payment is defined by the Improper Payments Elimination and Recovery Act of 2010 as any
payment "that should not have been made or that was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative, or other legally applicable requirements; and
includes any payment to an ineligible recipient, any payment of an ineligible good or service, any duplicate
payment, any payment for a good or service not received (except for such payments where authorized by law),
and any payment that does not account for credit for applicable discounts." (Pub. L. No. 111-204)
Potential Risks of Not Meeting
Sub-par or insufficient funds
Insufficient project and program
Low morale
Insufficient/poor training
Incorrect skill sets
Use of funds for ineligible
purposes due to lack of
Fund Management Handbook 5

Process Optimization Drills (POD) or LEAN exercises have helped some states improve staffing
organization and streamline activities.
A primary indicator of success in the SRF is the rate of fund utilization, or pace. A high rate of fund
utilization (Section 4.8.A) indicates that more funds are actively being used for projects. The rate of
funds utilization is an indicator of the demand for funds as well as the ability of the state to award those
funds to projects in a judicious manner. The rate of funds utilization is calculated as funds in executed
loans as a percent of funds available. At the end of fiscal year (FY) 2017, CWSRF programs had executed
loans accounting for 98 percent of all funds available nationally.2 The DWSRF had a funds utilization rate
of 96 percent nationally.
Low pace levels generally indicate that there is a lack of demand in a state. There can be a wide range of
factors, such as underinvestment in marketing and outreach, unappealing financing terms, or the
availability of significant grant funding in competing state programs. High pace levels do more than
indicate high program demand. Due to the revolving nature of the SRF, higher pace could increase the
returns to the program, resulting in more growth, and making more funds available to projects into the
future compared to a state with lower pace levels.
There is significant flexibility in the SRF programs, which
can help states maintain or increase demand for funding.
Co-funding with other programs and expanded marketing
to target audiences can attract new borrowers to the
program. Other SRFs have had success by streamlining
internal processes, taking on more of the burden from
applicants (e.g., by conducting much of the environmental
review), by expanding offerings into different loan types,
or offering planning and design funding.
States that maintain high levels of fund utilization
typically have the following qualities:

Potential Risks Preventing
Low pace levels
State does not strive for
Lack of outreach and
relationship management
Lack of pipeline of projects
Inflexible loan terms discourage
potential borrowers
No co-funding with other
Lack of technical assistance to
small and disadvantaged
State does not sufficiently
highlight SRF benefits compared
to other programs
They have significant knowledge of their
customer base and nurture their relationships
with large and repeat borrowers;
They visit/talk to communities (both current and
potential) customers frequently;
They are creative and open-minded, and willing
to seek a solution to a potential borrower's
financing challenges. This has led to the creation of programs such as linked-deposit or CWSRF
sponsorship structures;
They seek to root out any inefficiencies in the program to make it as user-friendly as possible;
They provide options to assist communities with the greatest difficulty in applying for a loan;
: Unless otherwise noted, fiscal years are from July 1 to June 30.
Fund Management Handbook 6

• They have productive relationships with other financing programs in the state.
Several of the Fund management techniques discussed in this report impact, and are affected by, pace
levels. For instance, fees can affect program pace, because non-program income can be used to fund
water quality efforts that could lead to additional CWSRF loans. Cash flow modeling can help give SRF
managers and prospective applicants greater clarity into the amount of funding that may be available in
the future, allowing them to adjust their planning efforts accordingly.
are able to revolve funds through their programs more
quickly will generally see faster growth, resulting in more
assistance provided over time. A state that does not award and disburse funds in a timely manner may
see reduced interest earnings and assistance provided, resulting in a smaller program compared to a
state that can maintain a faster pace.
States have used a variety of techniques to reduce unliquidated obligations. These include strategies
such as offering planning and design funding, adopting a year-round application process, establishing
deadlines for application milestones, and utilizing the advanced loan commitment option. Strategic
marketing and outreach efforts have helped states increase their borrower pool. In addition, financial
planning and cash flow modeling have helped states improve their insight into the funds that are
available for commitment and disbursement each year.
Together with meeting the objective of high fund
utilization rates, disbursements play a key role in SRF fund
management. At the end of FY 2017, disbursements as a
percent of executed loans was 87 percent in both the
CWSRF and the DWSRF (see Section 4.8.B for more
information on this metric). Due to a variety of factors, it
can sometimes take several years before the funds are
disbursed to projects. Depending on the state's cash
management approach, this can result in a build-up of
cash or high unliquidated obligations of federal funds.
States must commit and disburse all of their funds in a
timely manner: federal, state, repayments, and bond
funds (if leveraged).
Potential Risks Preventing
A lack of movement of federal and non-federal funds
leads to a lack of public health and environmental
improvements realized, and may conflict with the
message that the funds are in high demand. States that
Loan agreements signed long
before construction start
Borrower infrequently requests
State is not using First-ln, First-
Out (FIFO) for capitalization
grant draws
No pipeline of projects
State does not apply for grant in
first year
State neglects repayment monies
to clear out federal funds
Accounting practices do not
prioritize federal funds
Fund Management Handbook 7

The purpose of loan and project oversight is to ensure
that the approved items are being constructed and paid
for, that the SRF receives all repayments on time, and that
improper payments are prevented. States conduct
oversight through tools such as loan security mechanisms,
loan tracking systems, invoice review, construction
inspections, subrecipient monitoring, and subrecipient
audits. In addition, following up on deficiencies is an
essential element of program oversight. If states are
inadequately staffed, loan oversight activities are often
eliminated or trimmed, making the program more
vulnerable to problems.
Some states have revised their financial capability review procedures after an uptick in work-outs after
the 2008 financial crisis. They have sought to strengthen the review and adopt additional loan security
mechanisms. While many states review borrower audits annually, some go further by establishing
"watch lists" and tracking news stories to help anticipate and prevent potential repayment issues.

Potential Risks Preventing
Increased work-outs, defaults and
Improper payments
Inadequate loan security
Inadequate monitoring during
States that issue state match and leveraged bonds have
additional financial responsibilities. They must ensure that
they are not overleveraging and eroding their Fund, that
they will not run afoul of regulatory requirements, and
that they have a sound financial plan.
Sound bond and debt management requires careful cash
flow and financial planning, as well as careful
management of loan terms and program demand.
Leveraging too much or without a sound financial plan
could erode the value of the assets in the Fund, while
sound leveraging practices can result in more assistance
provided in the long term. States should carefully plan
their leveraging activities to ensure that they are not
negatively impacting their SRF. This is discussed in detail
in Sections 3.6 and 3.7. Sections 4.8.Q- 4.8.V provide
several metrics that can help evaluate leveraging efforts.
Potential Risks Preventing
without demand can limit
program growth or require
costly refundings
Lower bond ratings increasing
borrowing costs
Mismanagement of funds if
leveraged without appropriate
High demand states that do not
wish to leverage may not achieve
program goals
States have used efforts such as cash flow modeling to more precisely plan the sizing and timing of bond
issues, while also adopting other strategies described in this Handbook to help ensure the bonds funds
are disbursed quickly and efficiently.
Fund Management Handbook 8

SRFs generally have a substantial amount of cash that is
invested - even those states that carefully manage cash
flows to maximize project funding. The State Treasurer's
Office or the SRF investment manager typically manages
investments. In general, funds are invested along the
following priorities: (1) liquidity, (2) low risk, and (3)
returns. By focusing on short-term, liquid, and low risk
investments, returns on SRF funds are generally low.
However, there are opportunities to increase investment
returns while still ensuring adequate liquidity and
maintaining low risk investments by investing funds
according to cash flow needs. Increasing the return on
investment can help make additional funds available for
projects. More information on investments and returns
can be found in Sections 3.8, 4.6 and 4.8.M.
Higher investment earnings should not come at the
expense of funding high priority projects; states should
ensure they are still committing all available funds to projects. The nature of SRF projects is that funds
are disbursed over time as construction proceeds while simultaneously repayments are coming in. SRF
programs are able to fairly accurately predict these cash flows using modeling. By tracking investments
with these cash flows, a portion of the funds could be invested in longer-term securities that have higher
returns without negatively impacting funding of important water quality and public health projects. At
the same time, states also need to keep an eye on the risk profile of their investments, as even some of
the vehicles that were believed to be safe saw downgrades during the 2008 financial crisis. Several
states have been successful at working with state investment authorities to more closely match
investments to cash flow needs and increasing returns.

Potential Risks Preventing
Overinvestment in short-term
securities with low returns
Higher risk investments that may
have uncertain returns
Investments do not reflect cash
flow needs
Poor returns can impact
leveraging, funds available, and
available subsidies
Overinvestment in long-term
securities with penalty for early
withdrawal for cash flow needs
Fee revenues and administrative funds have specific
eligibility criteria. CWSRF fee revenues require separate
accounting for program and non-program income, and
the uses differ based on those qualities and on how the
fees are collected. In both the CWSRF and DWSRF, eligible
uses vary based on whether the funds are deposited
inside or outside the SRF program accounts. For DWSRF, if
the fees are kept outside the SRF loan account, they can
be used for any purpose under SDWA Section 1452: for
more infrastructure loans, for administration of the
DWSRF, or for any purpose eligible under the DWSRF set-

Potential Risks Preventing
Use of fees for ineligible purposes
Improper collection of fees
Improper accounting of program
and non-program income
Insufficient planning leading to
excessive fee balances
States generally utilize fee revenues to supplement administrative funds. Some states use their fees to
pay for programs that could draw more borrowers to the SRF or provide other water quality benefits.
Fund Management Handbook 9

For example, they may fund circuit riders to help smaller entities with utility management or their SRF
applications. They may also provide grants for water quality projects or SRF project planning and design.
To avoid excessive fee balances, some states have triggers whereby funds are moved to the loan fund if
the fee account balance reaches a certain level. More information on fees can be found in Section 3.4.
Financial reporting and audits are a key component of
catching potential waste, fraud, and abuse in the SRF.
CWSRF Regulations Section 35.3165(d) and DWSRF
Regulations Section 35.3570(b) state that audits are due
within 1 year after the end of the fiscal year, although
OMB requires Single Audits - which satisfy this
requirement - to be completed within 9 months. While
SRF programs do not routinely have audit findings, those
that occur are often related to inadequate internal
controls, such as:
•	Incorrect coding and data entry into the
accounting system;
•	Insufficient segregation of duties of accounting
•	Poor reconciliation of financial data, particularly
where two or more agencies implement the SRF;
•	Improper payments; and
•	Insufficient sub-recipient monitoring.
With over $165 billion in assets across the CWSRF and DWSRF, it is imperative that states have proper
internal controls to protect them from waste, fraud, and abuse. While statewide Single Audits satisfy the
requirement for an SRF audit, they may not show SRF-specific information and therefore may not have
the necessary information for a thorough analysis of the SRF. Most states will do a separate audit in
addition to the Single Audit.
For EPA, state financial statements and audit reports provide invaluable information for measuring
program performance. Many of the metrics at the end of this report utilize data from financial
statements. The Management's Discussion and Analysis and Notes provide important information on
program debt, investments, and other events which may not appear in the Annual Report or Intended
Use Plans. Additional information on audits can be found in Section 4.3.
Potential Risks Preventing
Lack of audit may prevent
improper internal controls or
fraudulent activities from being
Audit reports with uneven
quality or missing information
Inadequate response to audit
findings due to lack of staff,
expertise or other issues
Improper payments due to lack
of internal controls
Fund Management Handbook 10

Strategic planning by state SRF programs can help them
establish program priorities and develop a plan for
Potential Risks Preventing
achieving those priorities while meeting their financial
objectives. It is therefore a key component to effective
Program and Fund management.
• State does not address highest
priority water quality and public
health issues
States that do not engage in strategic planning may find
themselves a step behind, as they are not able to prepare
for or react quickly to changes in conditions. For instance,
these states may only fund those projects that come to
them and not pursue projects that they believe will have
the greatest impact on water quality. Or they may set
financial terms of assistance without taking into account
the short- and long-term impacts of these decisions.
States can benefit from strategic planning by:
• Poor decision-making regarding
leveraging, subsidies, loan terms
• Poor pace and demand
• Failure to anticipate or plan for
major risks (e.g., end of grants)
• Poor performance and planning
could result in loss of support
from stakeholders
• Funding more of the highest priority water quality
and public health challenges through specific
financing offerings and outreach efforts;
•	Effectively making decisions on financing terms and leveraging to ensure Fund perpetuity;
•	Experiencing sustained demand levels as the state uses a strategic approach to funding projects
and reaching out to high priority project types and borrowers;
•	Anticipating and preparing for major program risks, such as the end of capitalization grants; and
•	Sustaining a high level of performance, which helps maintain and gain support from local
entities and state and Federal decision-makers.
Chapter 2 provides additional direction on developing an SRF strategic plan.
Fund Management Handbook I I

The most effective SRF Fund Management approaches follow an SRF strategic plan. A state that has
identified its goals, needs and objectives is in the best position to identify what the optimal Fund
management approaches are, such as loan terms, leveraging
plans, and fees uses. This chapter provides a short outline of a
typical SRF strategic planning effort.
Program Objectives
Assess Environmental/Public Health
Assess SRF Financing Needs
SRF strategic planning starts with the establishment of program
objectives. The SRF financial management objectives described in
Chapter 1 are a starting point for states. States can also add
additional objectives as desired.
An evaluation of the risks that may prevent a state from meeting
its most important program objectives can help it evaluate
programmatic needs or identify changes that may need to be
made to ensure future success. For instance, a state with low
pace levels would use that as a starting point to identify unmet
environmental or public health needs and set programmatic and
financial goals. This state could also evaluate the option of using
fee revenues to fund planning and design grants, which could
help bring new borrowers into the program.
For the DWSRF programs, states should take a broad look at the
stressors on their utilities and take an annual look at the
resources available to the state through both the DWSRF loan
fund and set-aside accounts. A state should have strong
communication and links between its state Public Water System
program, infrastructure lending program, well head and source
water protection program, capacity development program, and
operator certification program. A robust discussion about the
best use of funds overall should precede the submission of a
capitalization grant application and set-aside works plans to
ensure resources are used strategically and to greatest public
health effect.
For DWSRF, SDWA Section 1452(g)(1)(B) mandates that the drinking water primacy agency be the state
entity determining assistance priorities for the DWSRF program, including priorities assigned to projects
and allocations of funds between the loan and set-aside funds. While this agency is the leader for
funding priorities, strategic planning exercises should include financial, programmatic, engineering, and
enforcement personnel.
Set Short- and Long-Term Financing
and Programmatic Goals
Fund Management Handbook 12

The pivotal activities of a water quality program are to identify the environmental and public health
needs of the state. The basic question is, "What activities or projects need to be undertaken to achieve
the program's environmental/public health objectives?" Examples include identifying and protecting
critical water resources, encouraging desirable uses of water resources, addressing the most serious
threats to public health, and ensuring compliance with the Clean Water and Safe Drinking Water Acts.
Publicly available resources such as 303(d) lists of impaired waters, Safe Drinking Water Information
System (SDWIS) data, state or regional water plans, and enforcement and compliance data, such as the
Drinking Water Enforcement Targeting Tool (ETT), can be used to identify water quality and public
health priorities. These assessments can be compared to funded projects using GIS mapping, for
example, to identify areas where the SRF could increase its positive impact on water quality and public
health. With this information, planning can be performed with respect to funding desired activities and
projects. For instance, marketing and outreach activities can be developed to reach the borrower and
project types that would most benefit water quality in the state, or fees can be used to fund grants or
other programs that could result in additional SRF loans. Another result could be that the SRF decides to
change its priority setting system to better reach high-priority needs and borrowers.
A goal for an effective SRF could be to draw high-priority projects and borrowers to the program rather
than waiting for projects to come in; this is called demand management. The next step in strategic
planning is therefore to identify financing needs within the context of achieving the identified
environmental and/or public health needs and SRF objectives. Evaluations of other financing options in
the state and how they are addressing water quality priorities can provide insight into where the SRF
could be beneficial. Using this information, states would consider what financing options and
approaches would help bring those high-priority projects to the SRF program. For instance, to reach
non-traditional projects that may not have a source of repayment, several states have implemented a
sponsorship loan option whereby traditional borrowers can sponsor these non-traditional CWSRF
projects in exchange for an interest rate discount. Marketing and outreach efforts would be targeted to
these high priority projects and borrowers.
Managing demand also includes understanding how many dollars are required and when those dollars
are required from the Fund. Projects take some time to get through the SRF application process, and
many large projects require multiple years of construction. As municipalities plan out their Capital
Improvement Programs (CIP) over time, SRF managers can work with them to assess when SRF funds are
necessary through the planning and construction cycle. Demand management techniques are further
described in Section 3.2.
The end result is to identify the demand for SRF funds over time and to adjust financing terms and
activities accordingly to best enable the program to meet funding needs. Leveraging through bond
issuance may be an opportunity where high levels of demand show that additional cash flows will be
needed. Conversely, where demand appears to be low, lower interest rates, longer loan terms, and
additional outreach may be called for.
Fund Management Handbook I 3

The balancing of environmental/public health and financing needs with financing resources provides a
foundation for establishing short- and long-term SRF financing goals. These can then be used to
establish what projects and financial assistance can reasonably be provided over the near and longer
terms. These goals also tie back to the program objectives identified in the first step of the strategic
planning process. Goals can be large and small. Example goals could include: convincing the largest two
cities in the state to seek SRF funding for the first time, increasing demand so leveraging is necessary
within five years, implementing a fee so additional staff can be hired, or increasing funding towards
water efficiency projects by twenty percent.
This process of setting goals ties to the Fund management concepts discussed in the next chapter of this
Handbook. For instance, loan terms and fees can help or hinder a state's ability to meet the goals it has
set for itself. Loan terms can change the types of projects funded, which impacts demand and can
change the composition of the loan portfolio. Cash flow modeling is therefore an integral part of this
goal-setting process: it allows the state to evaluate how the various goals and options impact the
program in the short and long term.
Time is a critical element when considering Fund management. SRF financial management is a process
that takes place over time and consists of a series of financial actions and decisions that have both
short- and long-term implications. Due to the time value of money and the environmental and public
health benefits of building projects sooner rather later, SRF assistance provided this year is not the same
as assistance provided next year. Similarly, financial actions taken this year may have little impact until
several years later. States should use at least a five year time horizon for financial planning. Many states
use 20- or 30-year time horizons because those are the typical terms on loans and bonds. The longer the
time horizon, the more uncertainty there is as conditions change, but it can provide a better idea of the
sensitivity of various assumptions on Fund growth. States should consider both the short- and long-term
implications of their Fund management decisions.
Fund Management Handbook 14

Effective SRF fund management is not the result of a single action or decision that results in a successful
program. It is a result of a strategic process of identifying program environmental, public health, and
financial goals. Program success depends on how a series of Fund management questions are identified,
answered, and revisited over time. In this chapter, several of these key questions are discussed. The
following list identifies those questions, with the appropriate subchapters.
3.1: Should loan terms be adjusted?
3.2: Are Fund resources being utilized effectively?
3.3: Does the Fund have sufficient administrative resources?
3.4: Should the state charge a fee and at what level?
3.5: Does the Fund have a sound loan portfolio?
3.6: What impact will borrowing for state match have on the Fund?
3.7: Should the Fund leverage/continue to leverage?
3.8: Does the Fund receive adequate returns on cash investments?
3.9: What is the sustainable funding level of the program?
The following pages discuss those nine key Fund management topics identified above. Each topic is tied
to the SRF objectives outlined in Chapter 1 of this report. In addition, selected measures and indicators
are noted, which can be calculated using formulas found in Chapter 4.
SRF Objectives	Ensure Timely Use of Federal and Non-Federal Funds
Attain and Maintain a High Rate of Funds Utilization
Sound Bond and Debt Management
Use of Fee Revenues and Administrative Funds
Follow an SRF Strategic Business Plan
Selected Indicators3 Ratio of Undisbursed Project Funds to Disbursements (4.8.C)
Sustainability/Retained Earnings (4.8.E)
Operating Net (4.8.F)
Total Net (4.8.G)
Unliquidated Obligations as a Percent of Grant Awards (4.8.H)
Loans Outstanding as a Percent of Total Assets (4.8.1)
Net Interest Margin (4.8.N)
In setting loan terms, states seek to balance the need to keep their programs appealing and low-cost
while maximizing the rate of return on their funds. Given that the purpose is to enable public health and
environmentally beneficial projects to proceed where cost and credit barriers exist, loan terms are
critical factors to the entire program. The SRF interest rate subsidy is typically the primary factor in an
3 Refer to Chapter 4 for formulas and descriptions of the indicators. Specific indicators are noted in parentheses.
Fund Management Handbook 15

entity's decision-making process. At the same time, interest earnings are the largest source of cash
inflows into the program. Leveraged programs must also ensure that they have sufficient funds to pay
debt service on their bonds. SRFs are continually faced with the question of what loan interest rates and
repayment terms to use to help them meet their financial objectives. However, they are also concerned
with meeting their programmatic objectives. To that end, many SRF programs set different interest rates
for different types of projects or borrowers.
Loan terms include interest rates, financing terms (e.g., 20 or 30 years), and the use of additional
subsidization. Each state has taken a different approach to setting loan terms. To be most effective, a
state will take a strategic approach to setting loan terms and weigh the needs of the borrower to those
of the state. The loan terms directly impact several factors, including:
•	The ability to make loans and market the program,
•	The fund utilization rate,
•	Composition of the loan portfolio,
•	Ability to leverage or borrow for state match, and
•	Long term sustainable funding levels.
Many states charge a "base" rate of approximately half of the market interest rate. They may then have
different loan terms for different types of projects, such as green infrastructure, nonpoint source, or
disadvantaged community projects. Discounted interest rates, financing terms, and additional
subsidization are tools that can help drive high-priority projects to the SRF.
States and EPA can use a variety of metrics to analyze how effectively they are setting loan terms. Loan
terms that make the program unappealing to borrowers can result in increasing Unliquidated
Obligations and Undisbursed Funds Ratio, while Loans Outstanding as a Percent of Total Assets may
decrease as loan volume drops. Metrics such as Operating Net, Total Net, and Sustainability/Retained
Earnings can be used to measure the growth of the Fund and program perpetuity. Net Interest Margin
would be used to determine whether the program's revenues are sufficient to cover its expenses. To get
an adequate picture, trend analysis and cash flow modeling should be used for any metric.
CWSRF regulations Section
35.3120 and DWSRF
Section 35.3525 require
that SRF loan interest rates
be between zero percent
and the market rate, as
determined by the states.
EPA does not define
market rate, although
many states use the 20-
year General Obligation
Bond Buyer Index.
Historically, SRF interest
rates have averaged
approximately half the
market rate (Figure 2).
Figure 2: CWSRF and DWSRF Weighted Average
Interest Rates are Approx. Half of Market Rate
rt 4
« 3
<0 0

States that leverage must ensure that their interest rates are sufficient to make debt service payments,
grow the program, and achieve all bond covenant requirements. Due to the substantial cash flows in the
programs, most leveraged states can achieve these objectives without charging higher interest rates
than direct loan states.
In many states, interest rates are set by state regulations. For instance, New Hampshire's Code of
Administrative Rules sets the interest rate for 20 year loans at 80 percent of the market rate minus one
percent. Such requirements can be somewhat limiting, but states may be successful in finding other
ways to add flexibility if needed.
States can use financial modeling to understand how different loan terms and project types may impact
the long-term growth of the Fund.
The length of time that a borrower has to repay an SRF loan also impacts the loan's affordability. A
longer repayment period will result in a lower annual debt service payment. For the SRF, this reduces
the amount of funds revolving to new loans each year. However, because the state is collecting interest
over a longer period of time, the total repayment amount will be greater.
CWSRF Amendments passed in 2014 authorize states to make loans for up to 30 years or the useful life
of the project, whichever is less, starting on October 1, 2014. Prior to that, CWSRF programs were
limited to loans of up to 20 years. The DWSRF program may provide loans up to 30 years or the
expected design life of the project for disadvantaged communities (as defined by the state).
SRF regulations require that principal and interest repayment must begin within one year of project
completion. States vary in when they begin repayments, with some starting during construction while
others wait until a year after project completion. States may also offer different repayment structures:
Level debt service: Periodic equal total
payments of principal and interest, resulting
in lower principal payments early and larger
principal payments later. Most SRF loans
have level debt service.
Level principal: Periodic equal payments of
principal over the loan amortization period,
while interest included in total payments
declines over time.
Gradual ramp-up: Periodic payment of
principal and interest increases overtime.
The resulting principal payment in early years
is lower than level debt service.
Balloon payment: Majority of principal is paid
at the end of the loan amortization period.
Interest (if charged) is paid on the
outstanding loan balance until the balloon
payment is made.
What is a bond purchase agreement
in the SRF?
Some states purchase a bond from their
communities rather than issue a loan.
They are able to do this under the
eligibility allowing states to refinance or
purchase local debt obligations.
Functionally they act in the same way as a
loan. Some states are required by law or
policy to purchase a local bond. In other
cases, a community may prefer to issue a
bond to the SRF. It can sometimes result
in higher costs due to the need for bond
Fund Management Handbook 17

Each of these approaches to repayment can be designed with unique variations. States may also
restructure existing loans for borrowers in distress. For instance, principal payments can be deferred for
several years until the borrower's financial status improves.
Figure 3: Comparison of Annual and Total Debt
Service Payments for $1,000,000 Loan
SRF programs, in an effort to mitigate the
effects of a 30-year loan, could charge
entities that are not disadvantaged a slightly
higher interest rate in exchange for a longer Loan Term Annual	Annual	Total
•	. ..	r i	. .	Interest Rate Payment Payment
loan maturity. One reason for doing so is to	'	'
increase the return on the loan, thereby	20 Years	2.2%	$62,343 $ 1,246,868
reducing the negative impact of the longer	30 Years	Z5%	$47,778 $1,433,329
maturity on program growth. A 30-year loan
will have a lower annual payment than a 20-year loan with the same principal. Increasing the interest
rate slightly on the 30-year loan can raise the return to the CWSRF while maintaining the benefit of
lower annual payments to the borrower compared to a 20-year loan term (Figure 3).
States have the ability to provide an additional subsidy to borrowers beyond the subsidy provided by the
below-market interest rate. The additional subsidy may be provided in three forms:
•	Principal forgiveness: A portion of the loan's principal is forgiven and must not be repaid;
•	Grant: A portion of project funding is provided as a grant; and
•	Negative interest: A negative interest rate can be charged, which reduces the total repayment
amount to something less than the original principal.
DWSRF regulations Section 35.3525(b) allow up to 30 percent of a state's capitalization grant to be used
for additional subsidization for disadvantaged communities. Since 2010, however, federal
appropriations have required different levels of additional subsidies.
At its inception, the CWSRF did not include provisions for additional subsidization. Starting in 2010,
appropriations bills included a requirement for additional subsidies for the CWSRF. The 2014 CWSRF
Amendments added language to the CWSRF statute permanently allowing states to use a portion of
their capitalization grant amount for additional subsidies, when the annual appropriation is greater than
$1 billion. However, annual appropriations language may change the required and allowable amounts.
States must make many decisions when weighing how to allocate the additional subsidy. While it can be
a useful tool for funding projects that may otherwise not qualify for financing, the additional subsidy
represents principal that will not revolve back into the program for future loans. In addition, states must
consider what projects will receive subsidies and how those projects will be selected. While some states
utilize affordability metrics to allocate subsidies, others target their subsidies towards high priority
water quality or public health projects. Financial modeling can help states make these decisions on how
best to allocate their additional subsidies.
SRF loans can also be viewed from the approach of grant equivalency. Financing a project at the market
rate has no subsidy and a grant equivalency of zero. A low-interest SRF loan will have a subsidy
compared to the market rate and a grant equivalence. A $1 million SRF loan at 1 percent is equivalent to
grant for 25 percent of the project ($250,000) and a market rate loan of 4 percent for the remainder of
Fund Management Handbook 18

the project. Grant equivalency is calculated as the reduction in present value cost of a financing option
compared to assistance at market rates. This is more extensively discussed in Section 4.5.
Oregon's CWSRF program has several different interest rates and terms for different project types.
Interest rates are set quarterly, based on the average Bond Buyer rates of the previous quarter. When a
loan agreement is signed, the interest rate is fixed for the life of the loan. From October I through
December 31, 2017, interest rates were as follows:
1.	Planning: 0.89% for up to 5 years.
2.	Small Communities & Communities below Statewide Median Household Income (MHI): Range from
0.89% to 1.48% for loans with maturities from 5 years to 30 years.
3.	All Other Borrowers: Range from 0.89% to 2.95% for loans with maturities from 5 years to 30 years.
4.	Sponsorship: Treatment facilities can sponsor nonpoint source projects in exchange for a reduced
interest rate. The interest rate on the combined loan is reduced so the annual cost is the same as the
treatment project alone, or I percent, whichever is higher.
From the borrower's perspective, the SRF is competing with other state and federal financing options as
well as the municipal bond market, bank loans, and other private financing. They will seek the financing
option that is most advantageous. In fact, surveys of communities in several states find that financing
terms and ease of use are foremost on their minds when they are considering financing projects.
EPA's FACT (Financing Alternatives Comparison Tool) program and FACT-Lite were developed to assist
entities in making their financing decisions. FACT enables entities to do a side-by-side comparison of the
total and annual costs of up to 15 financing options, including loan-grant combinations. FACT allows
users to incorporate the individualized costs that may occur with each financing source, such as any
perceived additional costs that result from the requirements that accompany SRF financing. The results
compare the financing costs of the options being considered on an annual basis as well as over the life
of the financing.
EPA's Financial Planning Model and state cash flow models can be used to model the potential impact of
different loan terms on the program. Figure 4 shows the potential impacts of changing interest rates on
a hypothetical state SRF program using broad assumptions. In this analysis, all factors including demand
remain the same while the interest rate is changed. The chart shows that when all else is equal, a lower
interest rate will decrease Fund disbursements over time because the interest earnings revolving back
to the Fund decline. There is further decline if the length of loans increases to 30 years. However, lower
rates and/or longer loan terms could potentially increase demand, which may ultimately increase
revolving levels. Total interest earnings are greater for 30 year loans compared to 20 year loans (at the
same interest rate), but the funds revolve more slowly due to the longer repayment term. This example
demonstrates the importance of using cash flow modeling when evaluating the potential impact of
changing loan terms in an SRF program.
Fund Management Handbook 19

In some cases, loan terms are
prescribed in state rules or
legislation (or a similar
mechanism). This limits some of
the state's flexibility to change
terms if demand increases or
decreases, but does not diminish
the importance of financial
planning to account for other
events or terms that are not
subject to state rules or legislation.
Over the years, some states have
worked to make the Rules (or
equivalent) as flexible as possible,
ore easily be adjusted if conditions
Loan terms are perhaps the greatest drivers of program growth in the SRF. They play an important role
in helping the state achieve financial objectives. Interest rates that are too high could dampen demand,
limiting program growth. Very low interest rates could result in high demand levels but also hamper
growth by severely limiting earnings on the loans. While maximizing additional subsidies may increase
demand, it reduces the funds revolving back into the program. Extending all loans to thirty years
reduces the annual repayment amount, slowing down how quickly funds revolve through the program,
although it can result in higher interest earnings over the entire term of the loan. Selecting loan terms
requires the SRF fund manager to find a compromise between funding projects at a meaningful subsidy
level and preserving capital to fund projects into the future. Cash flow modeling can assist SRF managers
in determining how it should establish its loan terms to best balance program growth and demand.

resources being used as efficiently as possible?" An SRF that is efficiently using its funds is consistently
putting all available dollars into projects and quickly re-loaning repayments to new projects. States that
are most effective at utilizing their fund resources maintain high demand levels through outreach and
attractive loan terms, while managing their internal processes so loan application approvals and
disbursement processing are efficient.
One of the metrics used to measure fund resource
utilization is Executed Loans as a Percentage of
Available Funds (also known as "pace"). Assistance
provided is equal to executed loans. Funds available
includes capitalization grants, state match, transfers,
interest earnings (loans and investments), loan
principal repayments, and net bond proceeds (minus
debt service reserves).
Many CWSRF and DWSRF programs have fund
utilization rates at or near 100 percent, indicating
that states are, on average, committing almost all
available funds to loans. Some states have rates
higher than 100 percent because they use an
advanced loan commitment approach, whereby they
make loan commitments in anticipation of future
availability of funds (described later in this section).
Pace levels have been increasing in the DWSRF in
recent years as states have focused on getting more
projects to sign loan agreements and start
construction in a timely manner (see text box).
Efficient use of fund resources also includes how
funds revolve through the program. A program may
have a high pace level, indicating that it commits
(almost) all available funds to loans, but it may still
have high cash balances because it commits funds prior to project planning and design, or the internal
loan processes could be slow. This may be demonstrated through measures such as high levels of
undisbursed funds, high unliquidated obligations, high/growing cash balances, declining net position,
and low/no internal capital formation.
The text box "Getting Projects to Construction" highlights several approaches states have taken to get
projects to disburse funds more quickly. Chapter 4 includes several metrics that can be used to analyze
these factors, such as Operating Net, Total Net, and Return on Net Position. Metrics and cash flows
should not only be measured at a moment in time, but their trends should be evaluated to determine
whether the state is effectively using funds over longer time periods.
Funds utilization does not only concern the use of federal and state match funds, but also repayments
and bond funds. As Section 3.7, Leveraging, explains, leveraged bonds are most appropriate when
existing capitalization and repayment funds are insufficient to satisfy the demand from high-quality
projects. The ongoing emphasis on expending federal funds as quickly as possible should not result in an
accumulation of repayments and earnings. Funds utilization measures should include all available funds.
Getting Projects to Construction
States have implemented many different
strategies to get projects to draw construction
funds more quickly after committing funds. A
partial list is below:
•	Rank projects only if planning and design
are complete.
•	Offer planning and design loans or grants
to assist project development.
•	Contract with third-party assistance
providers to work with small, rural
•	Station SRF staff throughout the state to
work with communities directly.
•	Accept applications and funding projects
year-round so they apply when ready.
•	Require that loan agreements be signed
within 6 or 12 months of priority ranking.
•	Base interest charges on undrawn funds.
•	Assign dedicated staff to work with small
and disadvantaged communities.
•	Minimize application requirements for
large municipalities/repeat customers.
Fund Management Handbook 21

The efficient use of SRF funds intersects all of the primary SRF financial objectives. An SRF that is
effectively managing its funds and efficiently using available resources, while keeping an eye towards
managing risks to the program, is in a position to achieve the financial objectives of the SRF.
Programs that efficiently use their available resources have several characteristics in common, including:
•	Cash flow planning: Effective utilization of SRF funds requires knowing how much money is
actually available now and in the near term. States that engage in cash flow modeling don't only
know what they have available to commit today, but they plan for the inflows and outflows of
funds in the near and long term, and can develop program strategies accordingly. More
information on this topic can be found in Section 3.9. Sustainable Funding Levels.
•	Sustained high demand levels: States that have high levels of demand are typically well-known
among their communities due to their outreach efforts. Additionally, they may have strong
relationships with their communities, particularly large and repeat borrowers. Several state
approaches to maintaining high demand levels are discussed below.
•	Efficient disbursement of funds: The efficient disbursement of funds is a key element of
effective funds utilization. This not just encompasses responding to disbursement requests
within a short period of time, but also ensuring that borrowers regularly come in for
disbursements. For instance, some states have clauses in loan agreements requiring monthly
disbursement requests. Knowledge of how funds are typically disbursed to projects is a key
element of effective cash flow planning.
•	Efficient internal processes: States that have efficient internal processes are always working to
streamline the application and loan disbursement processes as much as possible. One way in
which states have worked to streamline demand is by conducting a LEAN, Kaizen, or Program
Optimization Drill (POD) event. During these events staff analyzes each step in the SRF process
and identifies streamlining opportunities. An example of California's POD is highlighted in
Section 3.3, Administrative Resources.
Some certainty over near term demand levels can significantly facilitate financial planning and
management efforts. States have taken several approaches to try to make it easier for entities to
participate in the SRF and encourage repeat borrowing, thereby creating more confidence in demand
levels. Tactics states have used to manage demand include:
•	Incentive programs: Most states have instituted incentive programs to attract new or high
priority project or borrower types. A typical approach is to lower the cost of the loan by using
principal forgiveness and/or reduced interest-rate or interest-free loans. States have also
offered sponsorship, linked deposit, and pass-through programs to make the SRF more
accessible to nonpoint source, decentralized, and other nontraditional project types. These
programs help encourage participation in the SRF and help reach high-priority water quality
projects that may not otherwise qualify for financing.
•	Streamlined applications: SRF programs have worked several angles to streamlining application
processes, from developing templates, online applications, and internal process streamlining.
•	Frequent borrower programs: Regular borrowers of the SRF are generally well-versed in the
requirements of the program and may therefore benefit from streamlined processes.
Fund Management Handbook 22

•	Programmatic lending: The programmatic
lending approach allows the SRF to fund a
segment of an entity's Capital
Improvement Program (CIP) on a cash
flow basis. The entity prepares a number
of projects to be SRF-eligible, generally
well in excess of the funding that the SRF
has available for the entity. As any of the
projects are constructed, invoices are
submitted to the SRF, until all of the
available funds are expended. Using this
methodology, the state may fund only a
portion of a large number of projects,
compared to funding a small number of
projects in their entirety. A benefit of this
plan is that if any of the projects are
stalled, there are other projects already in
progress that can receive those funds,
ensuring that the SRF funds are expended
efficiently. The entity benefits because the
SRF is able to commit a stable amount of
funding on an annual basis. See
Minnesota example in the text box.
•	Advanced loan commitment: Many states
are able to commit funds in anticipation of
the future availability of funds. At the
same time that a program is making
disbursements to projects, it is receiving
repayments from other projects and
earning interest. As a result, a state can
commit funds in excess of what it has
available today, knowing that it will be
receiving repayments and interest earnings as those commitments translate to disbursements.
This approach requires careful financial planning but can help ensure that the state fully utilizes
all available funds. Some states are prohibited by law or regulation from committing funds that
are not immediately available. Refer to the North Carolina example on page 24.
•	Phased funding: Large projects that will take several years to construct can be broken down into
annual phases. Each phase accounts for the expected cash flows for the year. This eliminates the
need for the SRF to commit a very large sum of funds that will not be disbursed for several
years. It gives the SRF the knowledge that it can guarantee funding for a project over several
years, decreasing the uncertainty in the level of demand from year to year. Large projects, such
as pipe replacement throughout a community, are particularly conducive to this methodology.
Florida uses a phased funding approach for many of its projects: in the first year, the loan
agreement covers the amount of construction activity that is expected to occur in that year; in
the following year, the loan is amended to include that year's funding need, and so on. The state
commits each year's funding amount before it processes any new loans. This phased process
utilizes a single loan agreement and amortization schedule.
Fund Management Handbook 23
SPOTLIGHT: Minnesota Clean Water
State Revolving Fund Programmatic
Minnesota uses a programmatic lending
approach with its largest borrower, the
Metropolitan Council (Twin Cities).
The CWSRF uses cash flow modeling to
determine the funds it can make available to
Met Council over a 12-month period. A single
loan agreement is signed for that amount, with
multiple projects listed in the loan agreement.
The project totals exceed the loan amount.
Many of the projects are carried over from
previous years, when the CWSRF funded their
planning and design. Each project typically has
a 20-year useful life, so the SRF is able to use a
single amortization schedule for each loan.
Met Council provides detailed spreadsheets
with each monthly disbursement request that
track costs on a project level; invoices are
provided in PDF format.
In November 2015, the CWSRF signed a $70
million loan with Met Council, partially funding
over 50 projects. Minnesota believes that this
program adds stability to their SRF, while Met
Council can also plan for a stable amount of
funding each year.

•	Managing the project pipeline: At any point in time, SRFs generally have a number of projects in
the "pipeline." These are projects currently in the application phase or expected to apply for
financing within the next 1-3 years. Tracking the progress of these projects helps the state stay
ahead of potential delays and also forms a picture of future demand. The state can look ahead
at the projects in the pipeline and make decisions about outreach activities (e.g., if the pipeline
has few projects) or if leveraging may be needed (i.e., if the pipeline is large). Illinois maintains a
comprehensive project pipeline whereby staff follows up with projects on the priority list at
least every six months to obtain updates on progress and estimated construction start dates.
•	Co-Financing: SRF programs can work in partnership with other state and federal financing
programs to jointly fund projects. This can help bring projects to the SRF that may not otherwise
apply for financing. For example, a system or community may not be aware of the SRF or may
require grant funding to help make the project affordable. Funding projects with other programs
can help increase overall financing provided by the SRF and serve as a marketing tool. Several
states, including Arizona, use a "one-stop shop" approach where financing programs work
together to allocate funding to projects.
•	Marketing and outreach: Marketing and outreach are essential components of an SRF program
and help create demand for the program. Marketing activities can be tailored to the types of
projects that the state considers a high priority and can encompass a wide range of activities.
EPA offers a range of marketing tools and opportunities for SRF programs, including a step-by-
step guide to developing a marketing plan.
SPOTLIGHT: North Carolina Advanced Loan Commitment
North Carolina has implemented an advanced loan commitment model allowing it to commit funding to
more projects than it has in funds available at that time. After conducting an analysis of existing projects, it
was able to divide projects into three size categories: smaller than $1 million, $1-10 million, and greater
than $10 million. They were able to develop estimated outlay schedules at 6 month intervals for each
project category. For instance, projects under $1 million tended to disburse the first 65 percent of funds
within the first 6 months, and the remaining amount in the second six months.
The state used this information, as well as assumptions and data on projected project start dates to
establish estimated program outlays for all active projects.
On the revenue side, it uses repayment schedules for active and future projects and estimated interest
earnings to estimate the inflow of funds. In addition, it uses a range of values for future capitalization
grants. Utilizing this data, the state develops high and low revenue and outlay projections for every six
months. With a minimum fund balance of $50 million as a buffer, it is able to develop project commitment
levels taking into account future funds availability.
The advanced loan commitment strategy has allowed North Carolina to achieve a cumulative pace
(assistance provided as a percent of funds available) level of 101 percent in 2017 without leveraging.
Other states utilizing this approach include Oregon (a direct loan state) and Iowa (a leveraged state).
SRF statutes not only allow states to provide assistance to projects through loans and purchases of debt
obligations, but they also enable SRF programs to guarantee or purchase insurance for local obligations
where it would improve credit market access or reduce interest rates. While not utilized by any state
Fund Management Handbook 24

until New York in 2013, there is increasing interest in this assistance tool among states. A guarantee is a
commitment by the SRF that in the event there is a default on the local obligations, the SRF will make up
the shortfall. Bonds guaranteed by the SRF will receive that SRF program's credit rating; most SRFs have
a AAA rating. Because of the possibility that the SRF may have to pay debt service on the obligation, any
guaranteed projects must be SRF-eligible.
The SRF may benefit from a loan guarantee for several reasons, including:
•	It does not require outlays or pledge of SRF funds, except in the event of a significant default;
•	It can increase the amount of assistance provided without requiring an outlay of funds; and
•	It can improve water quality and public health by helping other projects be constructed at lower
The entity may benefit because:
•	The financial strength of the SRF providing the guarantee can reduce the cost to the beneficiary,
•	It can help a beneficiary establish market presence at lower cost, and
•	It can lower the project costs even if the SRF does not have capacity to award a traditional loan.
A loan guarantee does not require an outlay of funds unless there is a default. The SRF must ensure,
however, that it has sufficient equity available to make debt service payments on the guaranteed bonds
if necessary. For instance, New York includes the potential debt service payments on the bonds it has
guaranteed in its debt service coverage ratio calculations. Due to the fact that guarantees are a new use
of SRF resources, we are likely to see many variations and iterations as other states begin to utilize this
SPOTLIGHT: New York CWSRF Guarantee of Homeowner Energy Efficiency Loans
In 2013, New York's CWSRF, which is implemented by the New York State Environmental Facilities
Corporation (NYSEFC), provided a guarantee on $24 million in bonds issued by the New York State
Energy Research and Development Authority (NYSERDA). In 2009, NYSERDA created a $42.5 million
revolving loan fund to finance energy audits and energy efficiency updates and retrofits for residents, small
businesses, not-for-profits, and multi-family buildings. With over $30 million tied up in loans within three
years, NYSERDA sought to securitize its loan portfolio and sell it to investors, freeing up funds to
underwrite new loans. The bonds would be repaid from the repayments on the homeowners' loans.
Because the NYSERDA program was relatively new, rating agencies were initially unwilling to award a
strong credit rating and bond insurance was not an option after the 2008 credit crisis. The resulting high
interest rate would have limited NYSERDA's ability to provide low-cost loans to homeowners.
NYSERDA was also keen to establish a bond presence for its energy efficiency program.
A guaranty from the CWSRF program enabled NYSERDA to receive a AAA credit rating on its bonds.
New York's Section 319 Nonpoint Source Management Plan identifies atmospheric deposition from fossil
fuels as a significant source of water quality impairment. As a result, this arrangement was eligible for
CWSRF financing under Section 603(c)(2) of the Clean Water Act.
The guaranteed bonds are subordinate to NYSEFC's leveraged bonds. NYSERDA borrowers' repayments
are substantially higher than the debt service on the bonds, ensuring that it is unlikely that the guarantee
will have to be used if some homeowners default on their loans. In addition, an $8.5 million reserve
account was established to reimburse the NYSEFC if it becomes necessary to draw on the guarantee.
Fund Management Handbook 25

Programs that are not using all of their SRF available funds in a timely manner and maintaining a rate of
funds utilization risk building large cash balances. This could result in the state not maximizing the
potential benefits of the SRF on water quality and public health. In addition, having balances of
unutilized funds could lead to a loss of support for the SRF on a national level (through lower or no
capitalization grants) or state level (through loss of appropriated state match).
SPOTLIGHT: Iowa Cash Management
As a result of efforts to streamline their process, expand outreach, and implement creative funding
options for non-traditional projects, Iowa's CWSRF and DWSRF programs have seen substantial up-ticks
in demand. The state uses cash flow modeling and advanced loan commitment to maximize lending
capacity and plan for leveraging.
The state recognized that due to construction schedules, it did not need to have funds on hand for the
entire project at loan closing. Reviewing the historical patterns of expenditures, the state determined that
it disbursed on average $14 million per month in the CWSRF. It uses cash flow modeling to ensure it
never falls below 1.5 times monthly disbursements. Knowing that it takes months to prepare a bond
issuance, IFA projects its cash flow for six to nine months in advance. When projections show it will be
dropping below this limit, the state begins preparations to issue leveraged bonds. Iowa has issued
leveraged bonds of approximately $70 to 250 million across both programs every I to 2 years since 2009.
Because the state has an established bond team, it is able to issue bonds with 3 to 4 months' notice.
As of June 30, 2017, Iowa had $920,635,001 in total leveraged bonds outstanding in its CWSRF and
DWSRF. The state has issued almost $1.17 billion in leveraged bonds in both programs since 2009. Since
that time, it has averaged $219 million in assistance provided and $208 million in disbursements each year
in both programs.
SRF Objectives	Sufficient Staffing and Funding Capability to Administer the Program
Effective Loan and Project Oversight
Effective Use of Fee Revenues and Administrative Funds
Sound Accounting and Reporting
Follow an SRF Strategic Business Plan
Selected Indicators Executed Loans as a Percent of Funds Available (4.8.A)
Disbursements as a Percent of Executed Loans (4.8.B)
Ratio of Undisbursed Project Funds to Disbursements (4.8.C)
Federal Return on Investment (4.8.D)
Loans Outstanding as a Percent of Total Assets (4.8.J)
Delinquency Ratio (4.8.L)
"Does the program have sufficient administrative resources?" is a common question posed by SRFs. SRF
programs must ensure that if they are to manage the Fund in perpetuity, that they have the
administrative resources to do so.
Fund Management Handbook 26

Since the passage of amendments to the CWSRF in 2014 and the DWSRF in 2016, states have additional
resources to provide for operating their SRFs. States may also use program and non-program income
from fees for administration of the funds (Section 3.4). These fees are not part of the limit on
administrative costs set by the Federal Water Pollution Control Act and the Safe Drinking Water Act.

States drawing their administrative funds from their
capitalization grants must also ensure that they are
using the first-in, first-out (FIFO) method for drawing
those funds. They should not be maintaining small
amounts of funds in grants because they are to be
used for administration; they should draw those
administrative funds from the oldest grants first. In
the CWSRF, states drawing administrative funds from
their capitalization grants must use the appropriate
proportionality ratio.
Because having adequate staffing is key to managing
a growing, well-functioning SRF program, many of the
indicators that would be considered are those that
relate to program pace levels, such as Executed Loans
as a Percent of Funds Available. In addition, a high
Delinquency Ratio could indicate that there is
insufficient staffing or expertise to conduct an
effective financial capability review.
The primary use of administrative funding is staff
salaries and benefits. Sufficient staffing is essential to
a successful SRF program. This topic is discussed in
more detail in Section 1.1. In some states, the
administrative funding available is insufficient and a
fee must be added to add additional resources. In
other programs, state hiring restrictions may hinder
the SRF's ability to hire. In some cases, EPA has been
able to help the state obtain additional staff by
pointing out deficiencies in the annual Program
Evaluation Report (PER), which are shared with top-level management at the state agency. In other
cases, a state has been able to use contracts to help manage the workload. A workload study can be a
valuable tool for determining whether there is sufficient staff to conduct essential activities and ensure
proper oversight.
Program organization and staffing are closely intertwined. Program organization refers to the staffing
structure as well as internal SRF processes - how does information and decision-making flow through
the program? States can undertake a Process Optimization Drill (POD), LEAN, Kaizen or other similar
approach to analyze internal processes. These exercises can help identify (a) areas that can be
streamlined or improved, (b) activities that require more or less staffing or different staff configurations,
(c) areas where technical assistance or other contracts may be beneficial, and (d) other areas for
What can Admin funds pay for?
Administrative funds can be used to pay
for "reasonable costs of administering the
SRF," including but not limited to:
SRF staff salary and benefits;
Equipment for SRF use, such as
computers, vehicles, software;
Consulting fees (financial, legal,
Cost of issuing debt;
Cost of servicing loans;
Support contracts with other State
programs or third-party providers;
SRF marketing and outreach
expenses; and
Technical assistance activities for
systems. In the CWSRF, there may
be a reasonable expectation that it
will result in a loan application.
Ineligible expenses include:
•	Fully funding staff that work part-
time in the SRF or shared equipment
(costs must be pro-rated),
•	Administering the construction
grants program, and
Administering permit programs.
Fund Management Handbook 27

improving the program so it achieves its strategic goals. Refer to the text box for a description of
California's POD.
SPOTLIGHT: California Process Optimization Drill
As part of a larger strategic management study, California's DWSRF participated in a 2-day Process
Optimization Drill (POD) event in 2014. The POD included creating a value stream map of each discrete
process in the work flow to identify the tasks performed, the time associated with each task, and the
number of hand-offs and approvals necessary before advancing to the next process. The POD focused on
3 problem areas: Priority Setting & Invitation Process, Loan Process, and Claims/Disbursements. A suite
of 22 efficiency opportunities were identified as a result of the POD. All staff that participated in any way
in these processes participated in the POD and contributed to the recommendations.
The POD results and recommendations were incorporated into the management study. The findings and
recommendations were used to inform the new loan process and organizational structure when the
program was moved from the Department of Health to the State Water Resources Control Board.
Insufficient administrative resources could prevent a state from achieving its goals and objectives, with
negative financial implications. States with inadequate staff may develop a backlog of applications or
disbursement requests, see a decline in demand due to a lack of outreach, or conduct insufficient
oversight of projects. At the extreme end, lack of staff may lead to accounting irregularities, fraud, and
3.4 FEES
SRF Objectives	Sufficient Staffing and Funding Capability to Administer the Program
Effective Use of Fee Revenues and Administrative Funds
Selected Indicators Executed Loans as a Percent of Funds Available (4.8.A)
Net Interest Margin (4.8.N)
Many SRF programs charge fees on loans. In most cases, fees are used by states to help pay for the
administration of the program. Depending on how the fees are assessed and where they are deposited,
fee income can also be used for various other purposes, including state match, eligible projects,
activities eligible under the DWSRF set-asides, and other water quality purposes.
Loan fees may be used to supplement the administrative funds allowable through the Clean Water Act
and Safe Drinking Water Act. Other potential uses of fees depend on whether they are considered
program income or non-program income and if they are deposited into or outside the Fund. The SRF
programs have specific regulations as to the potential uses of fee income collected. States should ensure
that they closely track the collection and deposit of fee income to ensure that they are only used for
eligible purposes.
Fund Management Handbook 28

A state may consider charging borrowers a fee when the needs are greater than the administrative
funds available through capitalization grants. Administrative fees usually take the form of an application
fee, a loan closing fee, a loan servicing fee, or a fee on the outstanding principal balance. Various fee
systems should be evaluated to project the revenue generated by each system or combination of
systems and its sufficiency for meeting administrative costs. Fees should also be evaluated with respect
to fairness across segments of borrowers.
For many states, the imposition of an administrative fee has been accompanied by an off-setting
reduction in the loan interest rate to avoid increasing the total loan cost for the borrower. This
reduction of interest earnings reduces the amount of funds available for future loans, affecting Fund
growth. Metrics such as Net Interest Margin can be used to analyze the impact of this practice. The cost
of administrative fees should be factored into subsequent analyses of SRF loan interest rates to ensure
that the fees are reasonable. Some states will also transfer funds from the fee account to the loan
account if fee account balances reach a certain level.
Fees can be used to help increase demand for the SRF, resulting in an increase in the measure Executed
Loans as a Percent of Funds Available and other pace-related indicators. Some states use their fees to
fund circuit riders or third-party assistance providers, which can help smaller entities obtain SRF loans.
Fees can also be used to fund programs such as planning grants or water audits, ultimately leading to
additional SRF loans. They can also fund other water quality improvements. SRF financial managers
should evaluate fee uses to determine whether they are benefiting the SRF, water quality, or public
health, and whether they serve programs that may otherwise not receive necessary financial assistance.
SPOTLIGHT: Georgia Water Audits
The 2010 Georgia Water Stewardship Act required that water systems serving over 3,300 people
conduct annual water audits. The Act took a phased approach, with larger systems having to submit the
audit in 2012 and smaller systems in 2013. The audits are posted online at the Georgia Environmental
Protection Division's (EPD) website.
In 2012, the Georgia Environmental Finance Authority (GEFA) conducted a series of three workshops
that trained over one hundred small water systems in conducting water loss audits, culminating in the
completion of the audit by the March 1, 2013 due date. Subsequently, GEFA provided technical assistance
for leak detection, finished water meter testing, and customer meter testing for small and large water
systems. Large systems were also offered technical assistance for pipe control assessments, pressure
management evaluations, and district metered area evaluations. In 2016, GEFA and EPD conducted a
Qualified Water Loss Auditor Training Program.
GEFA uses DWSRF set-aside funds to provide the workshops and small system technical assistance.
Technical assistance for large systems and the water loss auditor training program are paid for using
DWSRF fees. Work is conducted by contractors. GEFA expects that the free technical assistance will
result in additional SRF projects as systems seek financing to implement improvements identified through
the water loss audits.
Georgia's DWSRF charges a one-time I percent closing fee on all loans.
Fund Management Handbook 29

While fees can be an important piece in the puzzle of running an effective SRF program, depending on
how the fee is charged, it can also reduce interest earnings on the Fund. States should evaluate this
impact and be prepared to adjust its fee, if necessary, from time to time.
There are additional accounting and reporting requirements associated with fees. Programs should
ensure it is clear to EPA whether they are depositing their fees inside or outside their SRF fund, as that
impacts eligible uses of the fees. In addition, in the CWSRF, they will have to track program income and
non-program income to ensure fee revenues are utilized only for eligible purposes.
SRF Objectives	Effective Loan and Project Oversight
Follow an SRF Strategic Business Plan
Selected Indicators Loan Principal Repaid as a Percent of Loans Outstanding (4.8.K)
Delinquency Ratio (4.8.L)
The loan portfolio is the total of the loans that an SRF has under its management (in disbursement and
repayment). SRF financial managers analyze the loan portfolio on an ongoing basis to evaluate the
financial condition and ability of loan recipients to repay the loans. The capacity of borrowers to repay
loan principal and interest could have a major impact on the financial condition of the SRF and its ability
to meet financial and environmental/public health
The presence of weak segments or credits within the
loan portfolio is not an inherent flaw in the management
of the SRF. A program's objective may be to focus loan
support on financially weak borrowers to support
projects that achieve desired environmental or public
health results. A state may choose to set lower interest
rates or introduce other flexibilities in loan terms to
make participation possible for weaker credits. The
financial condition or strength of the loan portfolio must
be monitored to assess uncertainty over future loan
repayments and to establish loan loss reserves (or
prepare for losses) when appropriate. This assessment
can also inform cash flow modeling and projection
efforts. In addition, it can provide feedback on the
program's credit review process by determining if it is
adequate to categorize the financial capability of
borrowers and whether it properly identifies borrowers
that are of higher credit risk.
States and EPA can use metrics such as Delinquency Ratio and Loan Principal Repaid as a Percent of
Loans Outstanding to analyze loan portfolio management. These metrics will help illustrate whether the
creditworthiness review is sufficient to ensure repayment on the loans.
A simple test of the soundness of the
loan portfolio is to see if all scheduled
loan principal and interest payments
have been paid on time: Have there
been any defaults, late payments? Has
the state restructured any loans? What
was the cause of the default, late
payment or restructuring? Was it due
to a shortcoming in the financial
review or oversight by the SRF or due
to larger economic conditions that
could not have been foreseen?
Answering these questions may help
financial managers ascertain whether
there are weaknesses in the loan
portfolio and whether those
weaknesses are avoidable through
changes in review or oversight.
Fund Management Handbook 30

Loan portfolio management starts at the applicant credit review. The credit review aims to assess the
potential risk of each applicant to determine whether it qualifies for an SRF loan and what types of loan
security provisions may be required, such as reserve requirements and collateral. One of the primary
elements of the credit review process is an analysis of whether the applicant has the ability to construct
and operate the water project while maintaining affordable user rates. Most states undertake some
financial analysis or modeling to evaluate how operating revenues, operating costs, and debt service
costs will change over a 3 to 5 year period. In addition, they may consider local economic conditions to
evaluate how the ability of the borrower to operate the facility and collect adequate user fees may
change over time.
As states evaluate the creditworthiness of
applicants they must also make decisions on the
amount of risk they are willing to accept to fund
their highest-priority projects. These projects may
obtain additional subsidies and lower interest
rates to help make the loan more affordable, or
additional security provisions may be required.
DWSRF regulations require that a Technical and
Managerial review take place in addition to the
Financial Capacity review (also called a TMF
review). While not explicitly required by the
regulations, many CWSRF programs conduct a
similar review. This aspect of the review analyzes
whether the borrower has the technical and
managerial capacity to implement the
construction project and operate it effectively in
the long term.
Loan portfolio analysis requires an understanding
of the financial condition of each borrower. If
most of the borrowers have a bond rating, then
their bond ratings can be used to assess the
overall financial condition of the portfolio. For
example, the loans outstanding could be
categorized in the following way: 44 percent are A-rated or higher, 34 percent have B-ratings, and 32
percent are not rated. A portfolio that is heavily skewed towards unrated or low-rated credits may
warrant a closer review. The text box on page 32 shows an example of Maryland's loan portfolio. SRF
programs where borrowers do not require bond ratings can do a similar type of breakdown using the
results of financial capability reviews performed at the time of the loan application.
For SRF programs with loan portfolios that have a large proportion of financially weaker borrowers,
there may be offsetting factors that should be taken into consideration that increase the assurance of
repayment. Such factors include loan provisions that provide additional security for loan repayment
beyond revenue pledges, such as asset pledges, state aid intercepts, or a General Obligation pledge.
Nebraska's Assessing Wastewater
Infrastructure Needs (AWIN) program was
developed to estimate future conditions in
Nebraska communities. The information is
used to help minimize the financial burdens for
struggling communities by developing
sustainable projects. AWIN was developed as
SRF and other state staff became concerned
about the ability of small, shrinking
communities to effectively operate and
maintain facilities while maintaining affordable
user rates.
AWIN uses factors such as population change,
per capita income, average age of residents,
and infrastructure needs to develop a
"sustainability risk" score. Each community
receives a score and is categorized as low,
moderate, or high risk. This rating is
incorporated into the CWSRF funding
process, including the allocation of principal
Fund Management Handbook 31

SPOTLIGHT: Maryland Water Quality Financing Administration CWSRF Loan Portfolio
Evaluation Process
Maryland's CWSRF program closely tracks the credit quality of its loan portfolio. Many borrowers are
well-established communities with their own credit ratings. As environmental priorities have evolved, a
greater percentage of SRF borrowers have become smaller communities without a credit rating. As of
June 30, 2015, 63 of 90 outstanding borrowers did not have a credit rating. At the same time, larger
borrowers with credit ratings made up the majority of the assistance provided: 83 percent of outstanding
loan balances are in projects with credit quality of A or better.
Outstanding Balance and Borrower Credit Quality as of June 30, 2015
Rating	Outstanding Principal	% of	% of Loan
(Moody's)	Balance	Assistance	Agreements
No Rating
Total	$919,967,715	100%	100%
Borrowers without a credit rating require additional review of financial capability and are tracked on an
ongoing basis. Financial statements are collected annually for both the enterprise and general funds and
the information is entered into a financial analysis spreadsheet. The spreadsheet is used to calculate
standard industry ratios, including current ratio, debt service coverage, cash as a percent of current
liabilities, and total assets as a percent of total liabilities.
The ratios are compared to industry standards and to prior year's data. The results of the evaluation,
along with analysis of other economic and demographic information is used to identify potential weak
credits in the loan portfolio and update a watch list of borrowers with potential financial problems. This
information allows Maryland to actively oversee all aspects of its loan portfolio and to maintain a high
degree of confidence for loan repayment.
Some SRFs will take a subordinate position to a borrower's municipal bonds. The subordinated position
reduces the probability that the SRF would be made whole in the event of a default. However, there
may be mitigating factors, such as additional security features like a debt service reserve. For some
borrowers, the financial capability review and debt service coverage ratios may show that there are
substantial resources to pay both the senior and subordinated debt, and that an additional security
pledge may be unnecessary.
The composition of the loan portfolio is particularly important for leveraged SRFs. The three biggest
credit rating agencies, Fitch, Moody's, and Standard & Poor's, use credit quality characteristics of
borrowers as a major component of the SRF credit rating. Some states maintain a direct loan portfolio
and a leveraged loan portfolio, with the stronger credits included in the leveraged portfolio. This helps
ensure that weaker credits with a higher likelihood of default, late payment, or restructuring do not
impact the SRF bond rating.
Fund Management Handbook 32

Loans to individuals, nonprofit groups, and private businesses for nonpoint source and other
nontraditional projects add complexity to loan portfolio analysis. Such loans may be structured
differently from loans to traditional governments (note: in some states, state law only permits lending to
governmental entities). The source of revenue to repay the loan may be unique to the project and
borrower's circumstances. Collateral to secure the loan may play a larger role in the loan structure
because the borrower does not have broad taxing authority. Some states utilize conduit lending
arrangements with other state agencies or financing institutions to reduce the administrative burden
and protect the SRF. Other programs, such as sponsorship loans, reduce the burden on nonpoint source
project sponsors to find a repayment source.
Oregon's underwriting process for DWSRF loans uses different criteria for local governments, private
borrowers, and homeowners associations. For private borrowers, one component is an in-depth analysis
of the liquidity, solvency, and trends through an analysis of three years of financial statements and
supporting documentation. Security and collateral also differ for private borrowers compared to local
governments. Types of security include liens on real property, corporate or personal guarantees, and
mortgage liens.
More information on loan portfolio analysis can be found in Section 4.7.
A borrower's finances can change over the course of the twenty to thirty year repayment period of an
SRF loan, making subrecipient monitoring a key
element of SRF portfolio management.
Most states require that their borrowers submit
audited financial statements annually even if a
Single Audit is not required of them.4 States should
review these financial statements carefully and
follow up with the borrowers if they see
concerning information or trends, such as
indications that the borrower is not meeting debt
coverage requirements, declining revenue trends,
and expenses increasing in an unexpected way.
The notes to the financial statements can provide
valuable information regarding economic trends
and other potentially emerging financial issues.
Programs should follow up on the information in
the audits if they see anything that could impact
the ability of the borrower to repay the loan. Some
states, like Texas (see text box) go beyond the
audits to do comprehensive subrecipient monitoring to attempt to get ahead of potential problems. In
the same vein, California tracks local news stories of its borrowers to catch local events that may impact
the community's ability to repay their loan.
SPOTLIGHT: Texas Water
Development Board
The Texas Water Development Board, which
manages the SRFs and several other water
quality programs, has a team dedicated to loan
monitoring. They review annual financial
statements, including indicators, such as
coverage ratios, collection rates, and property
values. The state has developed an extensive
checklist to assist in this review and to ensure
that a comprehensive review of the financial
statements is conducted each time. Borrowers
may be placed on a watch list for additional
monitoring. The team meets monthly and
portfolio reports are completed on a regular
4 Under 2 CFR Part 200 subrecipients with loans in an amount equal to the capitalization grant are required to
undergo a Single Audit if they expended at least $750,000 (in 2015) in federal funds in a year.
Fund Management Handbook 33

States that do not engage in sufficient loan oversight and portfolio management may find that they see
more work-outs or delinquencies than may be expected. The lack of oversight may also result in more
projects with inadequate security mechanisms to protect the SRF in the event that the borrower is
having trouble making debt service payments. A state that does not track borrowers during repayment
may find itself surprised if payments are missed. These findings may especially impact leveraged SRFs, as
defaults could result in downgrades in their bond rating, raising the cost of borrowing.
From a strategic planning perspective, management and oversight of the loan portfolio will help the SRF
program determine whether it is reaching its highest priority project types or communities. Analyzing
the make-up of the loan portfolio, combined with outreach and marketing techniques, can help the SRF
use a targeted approach to securing borrowers and reach its highest priority projects.
SRF Objectives
Selected Indicators
Sound Bond and Debt Management
Ensure Timely Use of Federal and Non-Federal Funds
Sustainability as a Percent of Contributed Capital (4.8.E)
Operating Net (4.8.F)
Total Net (4.8.G)
Net Interest Margin (4.8.N)
Debt to Net Position (4.8.Q)
States must describe their source of state match in their capitalization grant application and deposit that
state match on or before the date on which it makes cash draws.5 States may obtain the 20 percent
state match through appropriation, local match, non-program income, or state match bonds. Most SRF
programs have used bonds at some time to obtain state match, generally because they were unable to
receive an appropriation, which is the preferred source. Figure 5 summarizes the use of the match
bonds in the CWSRF. The text box on page 35 outlines the four types of state match bonds.
When an SRF borrows for state match, interest earnings from the program may be used to repay
principal and interest on the match bonds. Loan principal must return back to the Fund and cannot be
used to retire state match bonds. Repayments on match bonds reduces the financial resources of the
SRF, as those interest earnings could have been used to fund new projects. As a result, borrowing for
state match does impact the
growth of the Fund.
However, due to the large
cash flows in the SRFs, the
financial impact of borrowing
for state match is limited -
and far outweighed by the
impact of not receiving the
capitalization grant. States
Figure 5: CWSRF Programs that Have Issued Debt for State
Match (FY 1988-2017)
Direct Loan Leveraged
Program Loan Program
Borrow for State
7 (14%)
17 (33%)
24 (47%)
Do Not Borrow for
State Match
15 (29%)
12 (24%)
27 (53%)
23 (45%)
28 (54%)
51 (100%)
5 While the CWSRF and DWSRF statutes require that state match be deposited prior to grant payment, in practice
EPA has sought for the funds to be available at the same time or prior to Federal cash draws.
Fund Management Handbook 34

and EPA can analyze the impact of state
match borrowing using metrics such as
Operating Net, and Total Net. Operating Net
and Total Net help illustrate Fund
perpetuity, and how match bond interest
expenses impact program growth.
Some states repay that debt over time,
while others retire their bonds immediately
on award of the capitalization grant -
sometimes within one day of bond issuance.
In simplistic terms, borrowing for state
match can be thought of as providing
"temporary" matching funds. At the time
the match funds are borrowed, the state has
the full 20 percent match available for
projects. Overtime, as interest earnings are
used to repay the match bonds, the interest
earnings that would have otherwise
remained with the SRF are lost to repay the
bonds. At the end of the bond repayment
period, there are no matching funds
remaining from the match bonds since they
have been repaid. The program is left with
the original grant amount, plus accumulated
net earnings after repaying the bonds.
States that retire match bonds immediately
upon award of the capitalization grant limit
the impact of borrowing because interest does
Types of State Match Bonds
Debt service paid by the state government
1.	General Obligation (GO) bonds. The state
government issues GO bonds and uses
general fund revenues to repay the debt. GO
bonds are backed by the state's full faith and
credit and taxing authority.
2.	GO bonds placed in the SRF. The state
deposits a GO bond in the SRF and pays
annual debt service to the SRF to retire the
bond. This is very uncommon.
Debt service paid by the SRF
3.	GO bonds repaid with SRF revenues. The
state issues GO bonds backed by the state's
full faith and credit, but bond debt service is
paid by the SRF using interest earnings.
4.	State match revenue bonds. The SRF issues
match bonds and uses interest earnings to
retire the bonds. This is the most common
Source: EPA. "State Match Options for the State
Revolving Fund Program." February 1997. EPA
not accrue on the bonds.
SRF Financial Analysts can use financial modeling to understand how borrowing for state match may
impact the program in the long term. A baseline scenario estimates near and long-term funding using
assumptions deemed appropriate by the state. Next, a scenario would be added where state match is
borrowed. The difference between the two scenarios is the cost of borrowing for state match.
Demonstrating the impact of borrowing for state match may be valuable for presenting the case to
request a match appropriation from the state legislature. An example of such an analysis is illustrated in
Figure 6. On the other hand, borrowing for state match would be preferable to forgoing capitalization
grants due to a lack of matching funds.
Fund Management Handbook 35

Figure 6: Comparison of Annual Project Disbursements
State Match Bonds
While state match bonds have a fiscal impact on the Fund (if they are paid back using interest earnings),
state SRF programs have sufficient assets today that the impact is reasonably small. The primary risks to
the SRF are whether the program has sufficient staff and resources to do the oversight and reporting
required of issuing bonds.
States must ensure that EPA has approved the structure for the match bond deposits and the flow of
funds, and that all future match bond issues follow the approved structure.
Montana has issued General Obligation bonds to meet its CWSRF state match requirements since it
received its first capitalization grant. The GO bonds are repaid with interest earnings on SRF loans and
are further secured by the full faith and credit of the state. In 2015, Montana issued a $24,365,000 GO
bond to provide state match for the federal FY 2014 and future capitalization grants. Montana charges a
0.25 percent fee on loans. Excess fee that is not required for program administration is swept and used
towards state match (subject to CWSRF regulations). State match contributions have totaled 49 percent
of capitalization grants (including ARRA) as of June 30, 2017. The state uses the excess match to help
satisfy the high level of demand for funding.
As of June 30, 2017, Montana had issued $67.2 million in state match bonds of which $27.8 million was
outstanding. The 2015 bond issue for $24,365,000 has bond ratings of Aal (Moody's), AA (Standard &
Poor's), AA+ (Fitch). Montana does not issue leveraged bonds.
Fund Management Handbook 36

SRF Objectives	Sufficient Staffing and Funding Capability to Administer the Program
Sound Bond and Debt Management
Attain and Maintain a High Rate of Funds Utilization ("Pace")
Ensure Timely Use of Federal and Non-Federal Funds
Effective Management of Investments
Follow an SRF Strategic Business Plan
Selected Indicators Executed Loans as a Percent of Funds Available (4.8A)
Disbursements as a Percent of Executed Loans (4.8.B)
Ratio of Undisbursed Funds to Disbursements (4.8.C)
Operating Net (4.8.F)
Total Net (4.8.G)
Net Interest Margin (4.8.N)
Return on Net Position (4.8.0)
Debt to Net Position (4.8.Q)
Debt to Performing Assets (4.8.R)
Debt Service Coverage Ratio (4.8.T)
Interest Coverage Ratio (4.8.U)
Leveraging through the issuance of bonds can be an effective tool for providing greater project
assistance than a direct loan program for near-term needs. Additional monies to provide assistance are
obtained through the issuance of bonds secured by assets of the program. Leveraging is a valuable
option for states with substantially more demand than they have funds available today. Effective use of
leveraging requires careful financial planning and management.
Leveraged programs have the responsibility of being sophisticated financial planners because it can
affect their access to the municipal bond market. Effective management of the SRF is also necessary to
ensure that leveraging levels match the demand for funding. SRF programs that leverage must work
towards a variety of SRF financial objectives, including sound debt management; ensuring high pace
levels so all funds, including bond funds, are utilized efficiently; and effective management of
Cash flow modeling, trend analysis, and analysis of financial metrics can help inform whether a state is
leveraging appropriately. Trends in indicators such as Executed Loans as a Percent of Funds Available,
Ratio of Undisbursed Project Funds to Disbursements, and Disbursements as a Percent of Executed
Loans, combined with cash flow modeling, can be used to analyze whether program demand and cash
flow needs exceed the availability of funds, making leveraging necessary to satisfy program needs. Net
Interest Margin, Return on Net Position, Operating Net, and Total Net are all indicators of the financial
growth of the SRF. Net interest margin helps inform whether the interest earnings are greater than
interest expenses on bonds, while return on net position, operating net, and total net help analyze
whether the SRF is growing and program earnings are greater than expenses. Debt to Net Position and
Debt to Performing Assets tells the financial analyst how leveraged a program is relative to its assets,
while Debt Service Coverage Ratio and Interest Coverage Ratio indicate whether the program will be
able to make debt service payments on leveraged bonds with available net earnings.
Fund Management Handbook 37

The text box below outlines the three key questions to ask before leveraging.
Three key issues must be carefully considered when asking whether a Fund should (continue to)
1.	Are Fund resources being used efficiently?
If no, the State should first ensure it is utilizing all Fund resources efficiently before leveraging
because there are existing resources that could be used to fund projects.
2.	Is there strong, sustained demand for funding and are all available resources being
fully utilized?
If all existing resources are fully utilized and the state reasonably anticipates that high demand
levels will continue, then there may be value in leveraging to fund more projects today.
3.	Is the state administratively capable of managing a leveraged program?
Leveraged programs must ensure they have the staff and expertise to effectively work with
financial advisors, bond counsel, rating agencies, auditors, and investors, and to have a clear
understanding of the financial issues and implications of leveraging decisions. In addition, they
must have the staff capacity to oversee the additional loan volume.
There are two types of leveraging used by SRF programs that issue bonds: reserve fund and cash flow (or
blended rate) leveraging. In the early years of the SRF, states primarily used the reserve fund option.
However, most states now employ cash flow leveraging.
The key difference between these methods is related to the debt service reserve set aside to secure the
bonds. In reserve fund leveraging, the reserve is "oversized" and often is 40 to 60 percent of the bonds
outstanding. These reserves provide enhanced security for the bonds and are invested to produce
sizeable interest earnings which help to pay off the bond debt service. The reserve was often funded by
the capitalization grant.
Cash flow leveraging uses a more traditional reserve fund of approximately 10 percent of the bonds
outstanding (and sometimes no reserve at all). This allows the use of smaller bond issues to fund an
equivalent amount of projects. States have found that an oversized reserve is no longer necessary for a
top bond rating due to the program's very high cash flows, perfect history of leveraged bond repayment,
solid history of loan repayment, and investors' many years of experience and comfort level with the SRF
program. The high cash flows help ensure that the coverage ratios on the debt are sufficiently high.
States can also leverage their programs using co-financing and guarantees. While these do not require
the issuance of bonds, they augment the funds available to the SRFs by utilizing other available
resources, enabling SRF programs to fund more projects than they otherwise would have the capacity to
fund. These financial tools are discussed in more detail in Section 3.2.
Fund Management Handbook 38

If two programs are the same in all aspects, except that one leverages and the other does not, then the
leveraged program should be able to provide more assistance sooner than the non-leveraged (direct
loan) program. Over time, however, the direct loan program may build program equity faster than the
leveraged program because the leveraged program uses earnings generated from loans and investments
to make debt service payments. At some point in time, the amount of annual assistance provided in the
non-leveraged program may exceed that of the leveraged program, though the cumulative assistance
provided by the leveraged program will remain greater. A number of factors will dictate when and if
annual assistance offered by direct loan programs will exceed that of leveraged loan programs, the most
important of which are:
•	Rate of inflation,
•	Loan interest rates,
•	Bond interest rates,
•	Rate of return on investments, and
•	Frequency and level of bond issuance activity.
Figure 7 illustrates this concept by comparing a leveraged program to an otherwise identical direct loan
program. As the graph demonstrates, even though the direct loan program will eventually provide more
annual assistance than the leveraged loan program (phase 4), the leveraged program still provides more
cumulative assistance. By providing greater assistance sooner than the direct loan program (phase 2),
the leveraged program is able to buy more "bricks and mortar" over time due to the erosive effect
inflation has on purchasing power.
Figure 7: Comparison of Annual Project Disbursements
| 160
1 140
1	120
^ 100
« 80
0	60
S to
1	20
= 0
Most states carefully calibrate leveraging so they don't diminish the perpetuity of their SRF. States
generally only leverage when the cash is needed and only in the amount needed. They seek to avoid
leveraging so much that they are expending such a large percentage of their operating funds on
repaying their bonds that they are not able to grow their programs. An important factor is the difference
Phase 1
Phase 2
Phase 3
Phase 4
Direct Loan
Cumulative Disbursements:
Leveraged: $5.5 billion
Direct Loan: $5.2 billion

between interest earnings on loans and investments and interest expenses on bonds. On average,
leveraged states have not charged higher interest rates than direct loan states. Therefore, they calibrate
their leveraging activity and resources to provide the additional assistance today without significantly
diminishing program growth.
Evaluating new or additional leveraging requires detailed financial modeling and financial planning. A
financial advisor and/or underwriter will assist the state in financial planning; however, the state should
ensure it has sufficient expertise on staff to independently evaluate and analyze the recommendations.
The process for evaluating leveraging should begin by establishing a reasonable baseline plan that
projects the financial future of the SRF using all of the relevant	———«
operating assumptions for the program without any new or
additional leveraging.
All SRF programs, but particularly states that leverage or
are considering leveraging, should conduct cash flow
modeling to evaluate their programs. To effectively plan
for leveraging, state Financial Managers should ask:
1.	How much funding is needed to satisfy demand (or how much funding is needed to finance the
projects the state would like to fund)?
2.	What is the shortfall - how much leveraging is required to obtain the needed cash?
3.	When will the funds be needed to satisfy cash flow requirements?
4.	What impact will leveraging have on the Fund in the near and long term?
The first step is an evaluation of the project pipeline and project funding patterns. Careful consideration
of the project list may show many projects may not proceed in the expected timelines. In addition,
projects may construct over several years and the
program may not require the cash for those projects
to be available up-front.6 Cash flow modeling that
incorporates assumptions on how funds are
disbursed to projects over time will help states
evaluate when cash is needed, and therefore when
leveraging may be necessary to satisfy cash flow
needs. States may also choose to consider whether
other options, such as increasing co-funding with
other financing programs or utilizing a loan
guarantee, may satisfy those cash needs in a way
that is preferable to the state.
IRS regulations under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) require that
SRFs must reasonably expect to spend 30 percent of bond proceeds within one year and 95 percent of
bond proceeds within three years. These regulations underscore the need to engage in financial
modeling prior to leveraging. Several states will disburse state funds first for projects and then
6 Some State SRF regulations require all project funds to be available at the time of loan closing while other states
are able to operate on a more real-time cash flow basis based on construction progress. This significantly impacts
cash flow needs, with the former states requiring significantly more cash on hand than the latter states.
Modeling Tools
State cash flow model
SRF Financial Planning

1.	How much money is needed to fund
2.	How much leveraging is required to
obtain the needed cash?
3.	When will the funds be needed to
satisfy cash flow requirements?
4.	What impact will leveraging have on
the Fund in the near and long term?
Fund Management Handbook 40

reimburse themselves with bond funds when they
are issued. Other states will issue short-term notes
to cover cash flow needs and retire those
periodically with larger long-term bond issues.
The steps on page 40 will help a state evaluate
leveraging needs in the short term. In the long
term, SRF programs will make assumptions about
factors such as demand, capitalization grants, loan
terms, and discount rates. Longer-term evaluations
will help the state determine whether its
leveraging plans are a net positive for the program.
A trend analysis will also help inform whether the
current conditions necessitating leveraging are the
result of program growth over time or a
momentary blip.
The fundamental trade-off to consider with
leveraging is the benefit of financing more projects
in the short-term versus potentially reduced annual
project funding in the longer term. The
environmental and public health benefits of
supporting projects sooner may favor leveraging.
When the time value of money is considered, there
may also be a net economic benefit from
leveraging by funding projects sooner rather than
later. A fundamental requirement is the adequacy
of demand for leveraged funds.
Leveraged states are responsible for ensuring they have the demand and internal resources (e.g.,
staffing, expertise) to manage a leveraged SRF program. Leveraging too much or without a sound
financial plan can erode the value of the assets in the Fund in the long term. Effective cash flow
management can help SRF programs leverage only when needed.
Failure to achieve TIPRA requirements would trigger mandatory special redemption provisions, which
would be costly for the SRF. To date, state SRFs have managed their leveraging activities to avoid this
action, but a state without a sound debt management strategy and adequate demand may miss these
deadlines or neglect to spend down their Federal or recycled funds in favor of spending bond funds.
A state without a strong debt management and project oversight strategy may also eventually see
reduced bond ratings. This could occur, for example, if it includes many borrowers in the pool with
subpar credit quality.
Another requirement of leveraging is having sufficient, adequate expertise on staff, which includes both
financial expertise and technical staff that can review the additional projects that would be funded.
Inadequate staffing could result in mismanagement of the funds, poor performance, high costs, or costly
SPOTLIGHT ON: Alabama Leveraging
Alabama began leveraging its CWSRF program
in 1990 and its DWSRF program in 1999. In
2006, the state asked EPA, with help of a
consultant, to evaluate whether it should
continue to leverage.
Using EPA's SRF Financial Planning Model and
financial ratios such as Operating Net and
Total Net, it was found that Alabama was
performing about average compared to other
leveraged states. However, due to the high
level of leveraging, there was little money left
to grow the Fund once interest expenses and
loan subsidies were factored in. The report
concluded that in the long run, if the state
kept leveraging as aggressively as it was, the
corpus of the Fund would be negatively
As a result of this study, Alabama was able to
demonstrate to decision-makers that it should
discontinue leveraging for the time being. By
reevaluating its leveraging process, Alabama
avoided many of the risks of over-leveraging
and poor bond management.
Fund Management Handbook 41

Finally, states that have high demand but do not wish to leverage risk not being able to achieve their
program goals. These states may not be maximizing their potential benefit to water quality or public
health, which can have long-term consequences for state residents.
SPOTLIGHT ON: Massachusetts Green Bonds
Massachusetts is one of several SRF programs, including Connecticut, New York, and Iowa, to issue SRF
"green" bonds in recent years. Massachusetts issued $207 million in green bonds on April 13, 2017. The
tax-exempt bonds have a final maturity in 2047 and received AAA/Aaa/AAA ratings from Standard &
Poor's, Moody's, and Fitch Ratings. They have a true interest cost of 3.4 percent. The "green" designation
is a voluntary designation to denote that the proceeds will be used for environmentally beneficial
The Massachusetts Clean Water Trust (formerly the Massachusetts Water Pollution Abatement Trust)
operates the CWSRF and DWSRF programs in conjunction with the Massachusetts Department of
Environmental Protection. The CWSRF has leveraged almost each year since 1993 and the DWSRF since
2000. The Trust chose to market the bonds as green bonds as a tool to broaden their investor base and
to have more of an opportunity to tell the story of the SRF and the projects being funded, helping to
differentiate the bonds from the rest of the municipal market.
Massachusetts followed the four voluntary Green Bond Principles in writing its Official Statement:
•	Use of Proceeds: A description of each of the projects that will receive bond proceeds.
•	Project Evaluation and Selection Process: Document describes SRF process, such as priority
setting and engineering review.
•	Management of Proceeds.
•	Post-Issuance Reporting: Reporting on use of proceeds in the SRF Annual Reports.
The bonds marketed differently than non-green bonds. The Trust uses radio and online advertising, as
well as emails, to reach individuals in Massachusetts that may be interested in purchasing bonds. In
addition to working with the bond syndicate to sell the bonds through traditional means, the Trust works
with a retail brokerage firm to reach individual investors.
The Trust finds that the Green Bond designation resulted in new interest from retail investors as well as
other investors that have typically not shown interest in their bonds. These investors show greater
interest in the specific projects being funded than the Trust saw in its previous bond issues.
The Trust has found that the process for selling green bonds was not substantially more difficult than
conventional municipal bonds, and it better enabled them to tell the story of the SRF and differentiate the
bonds from the rest of the municipal market.
Fund Management Handbook 42

SRF Objectives	Effective Management of Investments
Selected Indicators	Investment Yield (4.8.M)
After loan interest rates and other loan terms, the next most important area of SRF earnings comes from
interest earnings on cash and investments held by the SRF. A 2011 survey by EPA's Environmental
Financial Advisory Board found that in 60 percent of states, the investment authority lay with the state
Treasurer or Investment Board. The SRF Administrators are responsible for fund management in the
remaining 40 percent of states, though their investment policies often incorporate state statutory
language governing investment policies and procedures.7 SRF funds are typically invested in
conservative investments such as U.S. Treasuries, money market funds, commercial paper with the
highest ratings, and in-
state municipals. Funds
are typically maintained
in short-term
investments, so they are
easily accessed if needed.
Some states have been
successful at investing
funds according to their
cash flow needs, with a
mix of short and longer-
term maturities, which
can earn a higher rate of
Yields on investment
returns naturally move with market rates. Since 2008, SRF investment yields have been low due to the
low-interest market rate environment. As Figure 8 shows, this environment is reflected in SRF
investment returns. Returns earned by leveraged states appear to generally have been higher than
those earned by direct loan states between FY 2013 and 2017.
States that leverage and issue state match bonds have additional complexity relating to arbitrage.
Arbitrage primarily impacts states that utilize the reserve fund leveraging model. Still, earnings on bond-
funded loan accounts are limited to the yield on the bonds. Arbitrage is the difference between the
interest rates on bond proceeds and the interest rates at which the proceeds are invested. Section 148
of the Internal Revenue Code requires that arbitrage earnings on tax-exempt bonds be rebated back to
the government.
SRF Financial Managers can involve themselves in investment decisions even where the authority lies
with a state Treasurer or Investment Board. In some cases, they may be maintaining funds only in short-
term investments because of a lack of comprehensive understanding of program cash flows. By working
closely with investment managers, SRF managers may be able to create portfolios with a mix of short
7 EPA Environmental Financial Advisory Board, "SRF Investment Function: Current Status and Prospects for
Enhancing SRF Sustainability." January 2011.
§ 14
M 12
£ io
Figure 8: CWSRF Average Investment Returns
(FY 2013-2017)
¦ Leveraged
~ Direct Loan
I . . .
<1% 1 to 2% 2 to 3% 3 to 4% 4 to 5% >5%
2013-2017 Average Yield
Fund Management Handbook 43

and long-term maturities that better reflect program cash flows. Because investments with higher
maturities generally earn a higher rate of return, this can increase overall investment yields, resulting in
more funds available for loans in the long term.
Investment yields should be monitored on a routine basis, typically monthly. The information required
can usually be obtained from monthly investment reports. Such reports should provide basic
transactional information on the investment accounts and periodic posting of interest earning and gains
and losses on investments. SRF Financial Managers can review the information supplied in each report
to calculate the investment yield for each major investment account group and collectively for all fund
investments. This will provide an indication of the average return over the period of each account group
and in total. The results can be compared to typical market rates for similar investments as reported in
financial publications (e.g., Morningstar). More information on calculating investment yields can be
found in Section 4.6.
When significant deviations are found between actual investment returns and market rates for
comparable investments, the differences should be investigated. Low returns for a particular type of
investment could indicate (but may not be limited to):
•	Investment earnings are not being properly posted to an SRF account,
•	There are excessive trading losses on investments,
•	Investments are made in inappropriate investment vehicles, or
•	Time lapses on investment deposits (uninvested funds).
While higher than expected returns are appealing, such instances should also be evaluated because they
may indicate (but may not be limited to):
•	A lack of understanding of the investment group,
•	Inappropriate (e.g., high risk) investments that could cause problems in the future,
•	Misstated financial information, or
•	Higher than expected cash balances due to project delays.
Any potential investment problems can usually be corrected quickly. However, they must first be
identified as problems by conducting routine investment reviews.
Higher investment earnings can result in more funds available for loans. However, these earnings should
not come at the expense of funding projects - states should still strive to maximize funding of high
priority projects each year. A careful view of the risk of the investment vehicles is necessary, as even
some of the vehicles that were believed to be safe saw downgrades during the 2008 financial crisis. An
excess of high-risk investments could result in losses, which would diminish lending ability over time.
States must therefore carefully balance the desire to improve earnings with a need to maintain low risk.
While states typically invest in short-term, liquid securities, adding longer term securities to the mix will
help increase earnings on the Fund. In doing so, states should manage those investments to match cash
flow needs. Over-investing in long-term securities could result in penalties if funds must be withdrawn
early to meet cash flow needs. A program with a comprehensive investment policy would describe how
it invests its funds and manages risk.
Fund Management Handbook 44

SPOTLIGHT: New York Clean Water and Drinking Water State Revolving Fund
The New York Environmental Facilities Corporation (EFC) implements the Clean Water SRF, and is the
financial manager for the Drinking Water SRF. EFC is responsible for investments of SRF funds not
actively in loans. The EFC invests SRF funds in a combination of short-term securities with maturities of
less than one year and long-term securities. Investments remain in conservative vehicles, as they believe it
adds a level of certainty of the interest rate subsidy that the program will be able to provide to
borrowers. As of September 30, 2017, 51.2 percent of equity investments were in short-term investment
vehicles, including Taxable Money Market Funds. The remaining 48.8 percent was held in municipal bond
funds with a weighted average maturity of I 1.51 years (NYSEFC, "Annual Information Statement",
October 1,2017).
Overall, permitted investments include U.S. Treasury, agency or government-sponsored entity GSE
obligations, direct obligations of the State of New York, federally or state-secured or guaranteed bank
deposits, money market funds, and other highly-rated investments. Investment agreements or repurchase
agreements must be collateralized by securities (obligations of, or guaranteed by, the U.S Government or
the State of New York and any FDIC coverage) with a fair value of not less than 102% of the amount on
The EFC's investment strategy is set by an Investment Committee comprised of the President and CEO,
Chief Financial Officer, Controller, General Counsel, and the Assistant Director of Investments.
Sufficient Staffing and Funding Capability to Administer the Program
Attain and Maintain a High Rate of Funds Utilization ("Pace")
Ensure Timely Use of Federal and Non-Federal Funds
Sound Bond and Debt Management
Follow a CWSRF Strategic Business Plan
Executed Loans as a Percent of Funds Available (4.8.A)
Disbursements as a Percent of Executed Loans (4.8.B)
Ratio of Undisbursed Project Funds to Disbursements (4.8.C)
Sustainability as a Percent of Contributed Capital (4.8.E)
Loans Outstanding as a Percent of Total Available Assets (4.8.J)
Net Interest Margin (4.8.N)
Return on Net Position (4.8.0)
Operating Net (4.8.F)
Total Net (4.8.G)
Debt to Net Position (4.8.Q)
Debt to Performing Assets (4.8.R)
A valuable benchmark for an SRF is the sustainable funding level that the program can achieve - that is,
the amount of funding that the SRF can provide each year. The establishment of funding levels is more
than simply the sum of capitalization grant, state match, repayments, transfers, and bonds (if issued).
Other factors, such as interest rates, loan terms, investment earnings, portfolio make-up, set-asides
(DWSRF), and administrative funding all impact a program's funding levels.
SRF Objectives
Selected Indicators
Fund Management Handbook 45

Maintaining an SRF program where funding levels are sustainable will help the program achieve several
financial objectives. SRF regulations require that Fund balances must be available in perpetuity (CWSRF
Regulations Section 35.3115 and DWSRF Regulations Section 35.3500). Certain new policies, such as 30-
year financing and principal forgiveness requirements may initially cause a decline in these levels, but
states should manage these options to limit the negative impacts. Using financial planning, SRF
managers can estimate what the sustainable funding levels will be over time based on current and
anticipated assumptions, such as demand, loan terms, capitalization levels, and leveraging.
The majority of the indicators and metrics identified in Chapter 4 will help inform whether a state is
setting sustainable funding levels and operating its program in perpetuity. To be most effective, these
metrics should be evaluated over time utilizing a trend analysis. Cash flow modeling is also a key factor
in helping the state determine whether it is making the right decisions today to protect the long-term
health and perpetuity of the SRF.
Each year, states make decisions on how much funding they can provide to projects. The goal should be
to develop an approach for achieving sustainable funding levels that match the demand for funds.
Achieving this balance requires cash flow modeling. Cash flow modeling helps inform states of the fund
impacts of their decisions: set the interest rate too low and demand may be high but sustainability low,
but set the interest rate too high and demand and sustainability may be low. A good time to do this
exercise is at the beginning of the SRF funding cycle, as the state establishes financing policies, updates
its strategic plan, and begins receiving pre-applications.
Revolving funds are dynamic and require the active balancing of cash infli
outflows. By using cash flow models to maximize lending, states can
optimize public health and environmental protection. Cash flow models
are essential tools for effective SRF fund management to establish
sustainable funding levels and to ensure cash balances remain at a
reasonable level. Cash flow modeling will help states improve planning
efforts, predict the availability of funds, develop better funding lists,
evaluate loan terms, and assess leveraging needs. While many states
utilize financial advisors for cash flow modeling, models that can be
operated by SRF staff can help the state better evaluate financial options
and assist in decision-making. Cash flow models can be complex or
reasonably simple, and effective cash flow models can be built using Micr
Excel or similarly widely-available software.
There are several components to a sound cash flow model, including, but not limited to:
•	A pipeline of projects: Includes all the projects that are ready to proceed or are currently
developing an SRF application for funding in the next 1-3 years. Illinois keeps a comprehensive
project pipeline whereby staff regularly contacts project sponsors to discuss when they plan to
proceed to construction. Using historic disbursement patterns by project size, Illinois is able to
model how quickly they will disburse funds to those projects and when they will receive
•	Capitalization grant assumptions: Many states take a conservative approach to planning for
capitalization grants.
ows and
Cash flow modeling
helps states answer
a key question:
What is our
lending capacity
in any given year?
Fund Management Handbook 46

•	Disbursement and repayment assumptions: Over time, a state may identify trends in the pace of
disbursements across different project types or sizes. It also informs repayments on loans. These
average disbursement trends and repayment projections, in combination with the project
pipeline, can give the state a picture of cash flowing into and out of the program.
•	Fungibility: Any CWSRF or DWSRF source (except set-asides) can be used to pay for any eligible
expense. For instance, principal forgiveness loans can be paid from any CWSRF or DWSRF loan
funds and project financing is not tied to specific capitalization grants or other funding sources.
The principles of fungibility; first-in, first-out; and equivalency greatly simplify cash flow
•	Other assumptions: States will be required to develop assumptions for interest rates, loan
terms, future loan volume (outside the pipeline), bond rates, administrative funds, and more.
•	Discount rate: The discount rate is used to calculate the present value of future cash flows,
therefore taking the effects of inflation into account in longer-term models (see Section 4.4 for
more information on discount rates).
Using a cash flow model, states can run scenarios to answer questions about future SRF lending. For
example, they can consider how their capacity would change without capitalization grants, with changes
in interest rates, or with increased leveraging. Using these scenarios, states can evaluate how their
decisions may impact the financial conditions and cash balances of their program in the short and long
term, and the impact that they have on sustainable funding levels. A state can identify what cash
balance levels it is comfortable with (e.g., 6 months of average disbursements) and determine the
corresponding lending and leveraging capacity.
States that do not engage in cash flow planning may put their programs at risk. Without cash flow
modeling, states cannot establish a long-term sustainable funding level. This could lead to over-
commitment of funds, which could reduce the funds available for projects in the long term, or it could
lead to under-commitment, resulting in unspent federal, recycled, or bond funds and high cash
balances. Modeling is also necessary to analyze the potential impacts of different loan terms, subsidies,
portfolio structures, and capitalization grant levels. Leveraged states must use cash flow planning to
determine when and how much to leverage, and to ensure leveraging does not negatively impact asset
growth in the long term.
Planning is also necessary in order to manage program demand. Demand management includes
decisions on outreach and where and how to draw funding lines. It can also include working closely with
large borrowers to ensure a stable source of demand over a number of years, which can help a program
maintain sustainable funding levels.
Strategic planning and sustainable funding levels go hand-in-hand. Without a strategic planning effort, it
is difficult to identify priorities and manage contingencies, therefore making it difficult to maintain a
sustainable funding level in the long term. Without such planning efforts, a state may only fund projects
that come to them for funding rather than pursuing projects that could have the greatest impact on
water quality or public health, or they may charge an interest rate so low that it impedes the growth of
the program.
Fund Management Handbook 47

SPOTLIGHT: Illinois FOCUS Cash Flow Model
Illinois developed the FOCUS (Financial Oversight and Cash-Flow Utilization in the SRF) model to
evaluate 30 year cash flows. The model uses data from their SRF Loan and Grants Tracking System
(LGTS) to obtain real-time repayments and disbursements on existing projects. Illinois also closely tracks
projects developing SRF applications. Using the expected construction start dates provided by applicants
(and updated throughout the year by SRF staff) as well as historic disbursement patterns, they are able to
estimate outlays and repayments for projects expected to go to construction within the next one to
three years. Finally, the State uses estimated loan volumes for up to thirty (30) years. FOCUS also tracks
fee income and uses. The model enables Illinois to make assumptions on annual loan terms, discount
rates, bond rates, capitalization grants, and DWSRF set-aside uses.
Implemented in 2014, Illinois has been using FOCUS to estimate annual loan commitments and plan for
leveraging. A very high demand state, Illinois is keen on funding as many projects as possible within its
leveraged bond issuance capabilities. Using FOCUS, the state is able to more precisely estimate the funds
available for loans and anticipate when leveraged bond cash flows will be needed. The model also allows
them to adopt an advanced loan commitment model. The model includes financial indicators and charts
which enables them to obtain a quick overview of the Fund's health and allow for easier presentation to
management. It also facilitates discussions with the program's financial advisors as they discuss leveraging
SPOTLIGHT: Minnesota Capacity Model
Minnesota uses a capacity model to determine the fundable range on its project priority list and
determine the long-term lending capacity of its program under various scenarios. Minnesota uses the
financial model to determine the sustainable lending capacity each year, and establishes a fundable range in
its Intended Use Plan that is 2 to 3 times that amount. This is based on historical experience that fewer
than half of the projects in the fundable range actually sign a loan agreement by the end of the fiscal year.
For placement on the IUP, the entity must have all the planning work completed, but loans are not signed
until the project is bid and ready to start construction.
Minnesota considers four primary scenarios in its modeling effort:
•	Baseline lending capacity without new capitalization grants;
•	Sustainable capacity with conservative assumptions of future grants;
•	Expected lending volume for the upcoming year
•	Lending at the high end of the possible volume for the upcoming year
For each scenario, the state considers the lending amount for the current year and the long-term annual
capacity. Therefore, Minnesota knows what the impact would be if more projects proceed to
construction than expected. In addition, they are able to use this modeling to show the state legislature
what the impact of the 20% matching funds have on lending capacity.
The establishment of a long-term sustainable funding level also helps potential borrowers plan ahead. The
cash flow model gives Minnesota's CWSRF the ability to utilize a programmatic lending approach with its
largest borrower, Met Council (Twin Cities) (as explained further in Section 3.2) because it can forecast
the sustainable lending capacity long-term.
Fund Management Handbook 48

Figure 9: SRF Program Objectives vs. SRF Fund Management
The following table shows how the SRF fund management topics discussed in Chapter 3 intersect with the SRF program objectives laid out in
Chapter 1. Effective management of program funds is essential to the effective operations of an SRF program.
Fund Management Issues (Chapter 3)

3.1 Setting
loan terms
3.2 Fund
3.4 Fees
3.5 Loan
3.6 State
3.8 Returns on
3.9 Sustainable
funding levels
1.1 Sufficient staffing



1.2 Timely use of funds


1.3 High rate of funds


1.4 Effective oversight



1.5 Sound debt


1.6 Use of fee revenues
and administrative funds


1.7 Effective management
of investments


1.8 Sound accounting and


1.9 Strategic business plan


Fund Management Handbook 49

This chapter provides a discussion of the analytical tools and techniques that were identified earlier in
this Handbook and are commonly used in support of SRF fund management.
Trend analysis is a key element of effective SRF fund management and oversight. Many of the indicators
and metrics discussed in this report look at a moment in time. By considering trends over a five or ten
year period, financial managers and analysts can consider how the picture has changed over time. This
can give a view as to whether various policies have been effective, how the addition of certain
requirements impact loan demand, and what changes may be necessary to preserve the Fund in
Both NIMS (National Information Management Systems) data and other financial measures should be
used in the trend analysis. Any of the measures described in this chapter can be used for trend analysis
using information from financial statements. At least one EPA Regional Office maintains tracking
spreadsheets with key financial data from its states (gleaned from audit reports) to track trends over
Figure 10 illustrates a possible analysis of a state's lending. The chart compares assistance provided to
funds disbursed as a percent of funds available. This state has regularly committed more than 100% of
funds available (using advanced loan commitment). A large difference between commitments and
disbursements would indicate that project commitments may be made too early in the project process
or that borrowers are not regularly submitting disbursement requests. This state appears to have
reduced the difference between commitments and disbursements from the high point in 2010-2011.
Figure 10: Assistance Provided vs. Disbursed in a State CWSRF
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
¦Assistance Provided as a Percent of Funds Available ~ Funds Disbursed as a Percent of Funds Available
Fund Management Handbook 50

Cash flow modeling helps financial analysts look ahead into the future. Trend analysis can play a
beneficial role here, as well. For instance, a state with high demand considering a significant amount of
leveraging long-term could look at indicators such as Total Net and Operating Net going forward to
analyze what impact their decisions have on Fund perpetuity.
An example of an analysis utilizing financial statements is trends in Net Interest Margin. Net Interest
Margin indicates whether the program has positive or negative earnings from its basic operations, and is
calculated using interest revenues, interest expenses, and total assets. High net interest margin
indicates the program is growing because interest revenues exceed expenses. Figure 11 shows the
trends in Net Interest Margin in a leveraged state. This chart shows that the Net Interest Margin has
remained positive and remained approximately level over time. A strong decline in this metric could
indicate that changes in operating practices may be necessary, such as decreasing leveraging activity or
increasing interest earnings.
Figure I I: Trends in Net Interest Margin in a State SRF
2010 2011	2012 2013	2014 2015	2016 2017
Effective SRF financial management and oversight requires a certain level of cash flow modeling. The
complexity and size of SRF programs speaks to the need for states to engage in comprehensive cash flow
modeling. Projecting the financial activity of an SRF requires key assumptions about capitalization, the
use of funds, investments, loan interest rates and repayment terms, use of debt, and retained earnings.
Typically presented as year-by-year financial projections over a time horizon of 10 or more years, cash
flow modeling assists states both in short- and long-term planning. For example, it can help identify loan
capacity for the next year, but also demonstrate the long-term impacts of extending loan terms. Cash
flow modeling and financial planning is an ongoing process that requires periodic updating to reflect
actual program operations and current market conditions.
SRF financial projections require year-by-year (or sometimes month by month) calculation of the inflows
and outflows of funds. The primary inflows of funds are federal and state capital, bond proceeds,
interest income from loans and investments, fees, and loan principal repayment. The primary outflows
are loan disbursements, administrative expenses, interest expense, bond issuance cost, and principal
repayment on bonds. SRF financial analysts will have to make critical assumptions about each of these
factors in the development of cash flow models. It is beneficial to conduct a sensitivity analysis to
Fund Management Handbook 51

understand how great the impact of certain changes in the assumptions would be on program cash
EPA's Financial Planning Model was developed to aid in this effort. The Planning Model is updated
annually with NIMS data and distributed at the fall Council of Infrastructure Financing Authorities (CIFA)
conference. Many states have implemented their own cash flow or capacity models adapted for their
own program's specific structure and needs.
Refer to Section 3.9 for more information on the role of cash flow modeling in SRF Fund management.
To effectively monitor the financial side of the SRF
program, managers must have timely and reliable
financial information available that thoroughly covers
the essential areas of their program. Annual audits are
required by CWSRF and DWSRF regulations. An SRF
financial audit is conducted to provide an opinion on
whether the financial statements are stated in
accordance with accounting principles generally
accepted in the United States, and that they are
presented fairly, in all material respects. An audit
opinion - other than an unqualified or unmodified
opinion - needs to be addressed as well as any audit
SRF programs are considered "Enterprise Funds" by the
Governmental Accounting Standards Board (GASB). Enterprise funds are established to account for
operations that are financed and operated in a manner similar to private business enterprise. GASB
Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis -for State
and Local Governments establishes financial reporting standards for state and local governments,
including SRF programs.
SRF programs use the accrual basis of accounting whereby revenue is recognized when it is earned and
expenses are recognized when the liability is incurred.
Audits are not just important to ensure that an SRF is accurately reporting its financial position, but it
can also be an important Fund management tool. Many of the ratios calculated later in this Chapter use
data from audited financial statements. A best practice is to track key financial metrics, such as Net
Position, from the financial statements from year to year to identify trends.

Important SRF Audit Resources
Title 2 Part 200 Subpart F, Cost
Principles, Audit, and
Administrative Requirements for
Federal Awards
EPA Audit Guide for Clean Water
And Drinking Water State
Revolving Fund Programs
(September 2002)
SRF SOP, "Compliance with Audit
Definition Dollars received today have a different monetary value than dollars received in the
future or the past due to two factors: inflation and the time preference of money or
risk associated with receiving money now versus at another point in time. In order to
perform valid analyses, a dollar received in the past or future must be adjusted to
Fund Management Handbook 52

reflect its value in today's dollars. This adjustment is commonly referred to as
calculating the present value of past or future dollars.
Calculation Today's dollars or present value is calculated by first identifying the dollar amount of
each payment and the date when the payment will be made. The payment amount is
then discounted over the time period from the date of the payment to the present
using the cost of capital or borrowing rate for the entity receiving the payment (also
referred to as the discount rate). Multiple future and/or past payments can each be
discounted to their present value and added together to compute the total present
value of a series of payments or cash flows received in the past or future.
Present value (PV) = PMTi/(l+i)nl + PMT2/(l+i)n2 + PMT3/(l+i)n3 +....
PMTi = future or past value of the first identified payment
i = periodic discount rate or cost of capital, usually current borrowing interest rate
n = number of compounding periods from the present at interest rate i (time periods
must be consistent with the periodic interest rate). Positive values of n represent
future periods and negative values represent past period.
Illustrative Payment of $1,000 in 2 years. Current borrowing rate of 4.5% per year.
Usage	Present value (PV) = $l,000/(l+0.045)2 = $1,000/1.0920 = $915.73
Illustrative Payment of $1,000 in 2 years and $500 received 3 years ago. Current borrowing rate
Usage	of 4% per year.
Present value (PV) = $l,000/(l+0.04)2 + $500/(l+0.04)"3 = $924.56 + $562.43 =
Definition The equivalent value of SRF or other subsidized financial assistance as if it is received as
a direct grant. The grant equivalency is the benefit received by a borrower resulting
from financing project costs at a below-market interest rate. In other words, an SRF
loan at a below-market interest rate can be considered equal to a partial grant and
partial market-rate loan. Note: this is not related to the equivalency concept that applies
to Federal requirements, whereby certain Federal requirements only apply in the amount
equal to the Federal capitalization grant.
Calculation Grant equivalency is calculated by computing the present value cost (see 4.4) of each
financing option using the current market cost of borrowing as the discount rate. The
percentage difference between the present value (PV) of each option is the grant
equivalent amount.
Grant equivalency = 100 * (PV of Option A - PV of Option B)/PV of Option A
Illustrative Project cost of $1,000,000
Usage	Option A: Financing at Current Market Rates
Market rate: 4%
Annual level debt service over 20 years: $73,582
Present value cost at 4% is $1,000,000
Fund Management Handbook 53

Option B: Borrowing from an SRF
SRF rate: 2%
Annual level debt service over 20 years: $61,157
Present value cost at 4% is $831,140
Calculation of PV: (61,157/(l+4%)1 + 61,157/(l+4%)2 +...61,157/(l+4%)20
Grant equivalency = (($1,000,000-$$831,140)/$1,000,000) * 100 = 16.9%
Figure 12: Grant Equivalence Reference Table

SRF Rate

Definition	The total return received on an investment over a finite period of time. The
calculation must account for all earnings, gains, losses and expenses that are
directly attributable to the investment. Investment returns must account for new
investments and withdrawals from accounts that are independent of investment
Calculation Investment return is the net change in the value of an investment from the start of
a period to the end of a period, accounting for all financial activity attributable to
the investment. The investment return is expressed as a percentage of the
investment value at the start of the period.
Investment Return = 100*(EV-BV+E-X)/BV
EV = ending value of the investment or group of investments that corresponds
directly to the investment(s) at the start of the period (i.e., proper adjustments for
deposits and withdrawals)
BV = beginning value of the investment or group of investments at the start of the
E = all earnings properly allocated to an investment(s) that are not reinvested (not
included in EV)
X = all expenses properly allocated to an investment(s) that are not deducted
directly from the investment(s) (not included in EV)
Illustrative Investment of $1,000 at the start of the year.
Usage	Investment is worth $990 at the end of the year.
Interest earned from the investment for the year, but not reinvested, is $79.
Investment advisory fees allocated to the investment, but not deducted from the
investment, for the year is $24.
Annual Investment Return
100445 =
Fund Management Handbook 54

Definition	Loan portfolio analysis consists of segmenting an SRF's loan portfolio by the credit
quality of the borrowers. Such analysis is used to evaluate the credit quality of a
loan portfolio and, therefore, the financial risk an SRF faces for loan repayment.
Calculation Each loan recipient must be categorized by credit condition or financial capability.
The dollar amount of loans outstanding are then grouped by the available
categories to calculate the proportion of loan dollars in each category. Bond ratings
provide a convenient set of categories to measure credit condition. However, many
SRF loan recipients may be unrated. SRFs can categorize loan recipients into ranges
of financial capability from strongest to weakest based on their financial capability
Illustrative Total SRF loans outstanding of $5,800
Usage	Financial Capability	Loan Amount
Percent of Total
Above Average
Below Average
Total	$5,800	100.0%
Over 65 percent of the loan portfolio is rated above average or higher, and almost
90 percent is average or above, indicating a financially strong loan portfolio.
NIMS reports include various indicators and metrics that help tell a story about an SRF's financial
performance. They do not tell the whole story, however, and EPA and states can gain a deeper
understanding of an SRF's performance by delving into additional ratios and metrics using financial
statements and other resources. As explained in Section 4.1, these measures and indicators should be
reviewed over time to identify positive or negative trends in performance.
Figure 13 arrays each of the metrics against a sampling of specific fund management questions. The
table indicates how these metrics can be used to answer specific questions about the management of a
state SRF program. The questions are only a sample of the types of issues that these metrics can help
analyze. Those metrics that apply only to leveraged states are indicated in the table and in the text.
NIMS reports include both annual and cumulative data. Due to year-to-year variations in program cash
flows, cumulative figures are typically more informative, and are therefore generally utilized in the
analysis. The other financial measures identified in this section are based on commonly used financial
analysis techniques used to assess the financial performance of self-supporting entities.
Whenever possible, benchmark data is provided. Where national data is provided as a benchmark, it
should be noted that that includes both leveraged and direct loan states, so the numbers may not
always line up perfectly. As a result, it is a good practice to compare the state with other similar states.
However, all SRF programs are structured differently, so care must be taken when comparing SRF
programs to each other or national data.
Fund Management Handbook 55

Figure 13: Fund Management Questions and Potential Metrics

All States
Leveraged States
Executed Loans as a Percent of
Funds Available
Disbursements as a Percent of
Executed Loans
Ratio of Undisbursed Loan Funds to
Federal Return on Investment
Sustainability as a Percent of
Contributed Capital
Unliquidated Obligations as a % of
Grant Award
Undisbursed Loan Assistance
Loans Outstanding as a % of Total
Loan Principal Repaid as a % of
Loans Outstanding
Delinquency Ratio
Investment Yield
Net Interest Margin
Return on Net Position
Current Ratio
Operating Net
Total Net
Debt to Net Position
Debt to Performing Assets
DSR as a % of Bonds Outstanding
Debt Service Coverage
Interest Coverage Ratio
Debt Rating
Set-Aside Spending Rate
1 Is the Fund growing over time?



2 Should loan terms be adjusted?






Does the fund receive
3 adequate return on




^ Are fund resources being
utilized effectively?



g Does the fund have a sound
loan portfolio?


g Is sufficient project assistance
being made available?



^ Does the fund have sufficient
administrative resources?



g Should the fund
leverage/continue to leverage?



What impact will borrowing
9 for state match have on the



What impact will set-asides or
10 capitalization grant transfers
have on the program?




1 | What is the sustainable funding
level of the program?





Fund Management Handbook | 56

This indicator is commonly referred to as "pace" and it measures how well the
state is putting its available funds into loans. In NIMS, "CWSRF/DWSRF
Assistance" and "Executed Loans" are the same. Assistance includes loans, pass-
through and linked-deposit loans, refinancing, guarantees, and sub-state
revolving funds.
Cumulative Assistance
Cumulative Funds Available for Pro jects
Illustrative Usage States should target pace levels near or above 100 percent. States that are
lagging in this measure, or have declining pace levels, may need to review loan
policies and procedures, and outreach techniques. Nationally, pace was 98
percent for the CWSRF and 96 percent for the DWSRF in 2017 (cumulative).
States with pace levels greater than 100 percent are generally practicing
advanced loan commitment. Pace does not measure how quickly funds are
disbursed once the loan agreement has been signed.
Definition	This measure provides some insight on how quickly states are disbursing funds
to projects.
_ . .	Cumulative Project Assitance Disbursed „
Calculation		——-—:	—	*100
Cumulative Assistance Provided
Source	NIMS
Illustrative Usage When loans are signed, it is important that those funds are disbursed in an
expeditious manner. If loan agreements are signed while a project is still in the
planning phase, it may take several months or even years before construction
starts and the majority of loan funds are disbursed. Where funds are disbursed
more quickly, repayments start sooner and the funds revolve more quickly in
the program. Pace only measures how funds are put into loans, but not how
they are expended. Nationally, this figure was 87 percent for both the CWSRF
and the DWSRF in 2017 (cumulative).
This measure provides some insight on how efficiently SRF funds are revolving
by examining a program's disbursement rate over time and comparing it to cash
on hand.
Undisbursed Project Funds	-inn
* i. U U
3-Year Average Annual Disbursements
NIMS. Undisbursed Project Funds = Total Funds Available - Total Disbursements
3-Year Average Annual Disbursements = Sum of past 3 years of annual
disbursements, divided by 3.
Fund Management Handbook 57

Illustrative Usage
SRF programs must balance cash inflows and outflows. This ratio measures how
efficiently a program is able to disburse funds. A high figure could indicate that
the state has significant cash on hand and may not be revolving funds through
the program quickly. A low figure could indicate that the state is efficiently
disbursing available funds.
Illustrative Usage
The federal return on investment indicates reflects how successful SRF
programs have been at turning capitalization grants into loans that revolve and
earn interest.
Cumulative Project Assitance Disbursede
Cumulative Outlays
* 100
As funds revolve through the SRF, every dollar in federal capitalization can be
turned into more than one dollar in loans. Repayments are reloaned to new
projects and bonds are issued with the backing of existing assets to allow for
even more projects to be constructed, resulting in a program that with proper
management will continue to grow in perpetuity. The Federal Return on
Investment is an indicator of how well the program is operating from the
perspective of each federal dollar invested. Nationally, the Federal Return on
Investment was 272 percent for the CWSRF and 187.1 percent for the DWSRF in
2017 (cumulative), indicating that $1 of federal funds invested in the program
has resulted in $2.72 or $1.87 in projects in the CWSRF and DWSRF,
Sustainability is an indicator of perpetuity, and may be referred to as "retained
earnings." It reflects the earnings of the program as a function of new funds
coming in.
Loan Interest +Investment Interest -Interest on Bonds-Match Bond Principal Repaid
Federal Contributions Ad j.for Transfers+State Contributions-Total Cumulative Subsidy
* 100
Illustrative Usage
Negative sustainability indicates that funds being used for interest on bonds and
state match repayments exceed the interest earnings on the funds. Additional
subsidies required since 2009 also put pressure on the earnings of the program.
States with consistently negative sustainability may not be growing. The
indicator does not reflect the eroding effect of inflation, which can exacerbate
the impact.
States that do not leverage or issue state match bonds will generally not have
negative sustainability.
Fund Management Handbook 58

Definition	Unliquidated obligations (ULO) are a measure of how quickly the state is
Illustrative Usage
drawing Federal funds.
Undrawn Federal Grant Funds
* 100
Total Grant Awards
Data on awarded and drawn Federal grant funds are found in COMPASS
ULOs are an important focus at EPA. High levels of ULOs indicate to outside
parties that the SRF funds may not be needed, which could result in lower or
complete elimination of appropriations. If there are open grants going back a
number of years, it can also indicate that the state is not using the First-ln, First-
Out (FIFO) method of cash draw, whereby funds are drawn from the oldest
grants first. EPA's goal is that all but two of the most current capitalization
grants be fully drawn and closed out.
This indicator measures whether the state is placing all currently available
resources in assistance agreements and is in compliance with the timely and
expeditious use requirement.
Cumulative Assistance-Cumulative Pro ject Assistance Disbursed
Total Current Assets
* 100
Illustrative Usage
Assistance and disbursement data is found in NIMS
Total Current Assets is found in the Statement of Net Position
When this measure is 100%, it indicates that the outstanding amount in loan
agreements exactly equal currently available (cash and other easily accessible)
resources. If the measure is below 100%, the state is not committing all
available resources to loans. If the measure is above 100%, the program is
making advanced loan commitments, whereby it signs loan agreements in
anticipation of the receipt of additional funds through repayments or bonds.
SRF programs should show a figure near or above 100%.
A state with a high percentage of undisbursed liabilities could have a ULO
problem or be building up a large amount of repayment funds. This could
indicate, for instance, that the state is committing funds too early in the project
design process, and that the funds are not being used efficiently.
Definition	The proportion of available fund resources that are in outstanding loans.
Loans Outstanding (Current and Noncurrent)
Illustrative Usage
Total Assets-Debt Service Reserve
All information can be found in the Statement of Net Position
The largest share of the Total Assets should be in Loans Outstanding (Current
and Noncurrent) as issuing loans is the primary purpose of the SRF. A high figure
indicates almost all available resources are being put into loans. A low or
Fund Management Handbook 59

declining figure indicates that the fund is being underutilized and that measures
should be taken to increase demand or speed up the application process, for
example. Nationally, this figure was 79% for the CWSRF and 70% for the DWSRF
at the end of FY 2017.
Illustrative Usage
Indicator of the rate at which funds are being repaid, and therefore, are
available to revolve into new loans.
Loan Principal Repaid
rLoans Oustanding (Beginning ofYear)+ Loans Outstanding (End of Year),
^	2	'
* 100
Loan Principal Repaid: Statement of Cash Flows
Loans Outstanding (Current and Noncurrent): Statement of Net Position
A mature loan portfolio with primarily 20 year loans that are repaid in level
payments each year will repayments of 9 to 10 percent of the outstanding loan
balance each year. Shorter loan maturities will increase the percentage of loan
principal repaid; this indicates that the program is revolving rapidly. On the
other hand, programs with more twenty to thirty year loans will have lower
percentages. Nationally, this figure was 7.6% for the CWSRF and 7.4% for the
DWSRF at the end of FY 2017.
Illustrative Usage
Loans are delinquent when they do not make their debt service payments on
time. Typically a payment that is 15 or 30 days beyond the due date is
considered delinquent. The timing is defined by the state.
Delinquent Loans
,Loans Receivable (Begining of Year)+Loans Receivable (End of Year).
V	9	/
* 100
Delinquent loans: Delinquent loan amounts should be included in the audit and
Annual Report
Loans Receivable (beginning and end of year): Statement of Net Position
Delinquent loans can cause problems in a portfolio, particularly if the program is
leveraged. Delinquent loans can pose financial risk and result in liquidity
problems, as cash is not coming in at the expected rate. Delinquencies are rare
in the SRF, but if the state has multiple delinquencies in a year, a review of the
financial capability review and loan oversight procedures may be necessary.
The rate of return on investments is an indicator of the reasonableness of
investment earnings. Together with loan interest earnings, investment earnings
are the main sources of income for the SRF and play an important role in
allowing the SRF to provide loan subsidies.
* 100
Investment Income
rCash & Equivalents+Debt Service Reserve (Beginning of Year and End of Year),
^	2	'
Fund Management Handbook 60

Illustrative Usage
Investment Income: Statement of Revenues, Expenses and Change in Net
Cash and Equivalents and Debt Service Reserve: Statement of Net Position
Very low investment yields may indicate that funds are not being invested in a
way that maximizes returns while ensuring funds are needed for cash flows. In
such cases, more active management can benefit the program. At the same
time, SRF funds should not be invested in high-risk investments. Investment
yields can be compared to other states and evaluated by the type of investment
to determine if they are appropriate.
Illustrative Usage
This measure is an indicator of the net earning potential of the SRF. The net
interest earnings of the SRF directly impacts the program's growth.
Interest Revenue-Interest Expense	A
,Total Assets (Beginning ofYear)+Total Assets (End of Year).
^	2	'
Interest revenues and expenses: Statement of Revenues, Expenses and Change
in Net Position. Includes interest from loans, investments and bonds
Total Assets (beginning and end of year): Statement of Net Position
A positive value indicates that the CWSRF has positive earnings from its basic
operations. High net interest margin indicates the program is growing more
quickly. A negative figure indicates that interest expenses on bonds are greater
than interest earnings, which can result in declining net position.
Nationally, this figure was 0.5% for the CWSRF and 0.9% for the DWSRF at the
end of FY 2017.
Illustrative Usage
The Return on Net Position is an indicator of the financial performance of the
Change in Net Position
Net Position (Beginning of Year)
Statement of Revenues, Expenses and Change in Net Position
A positive return on net position indicates that the SRF is growing and has
positive earnings. A negative return on net position indicates that the Fund is
being eroded because the program's expenses are greater than revenues, even
after Federal capitalization and state match are included. The largest
expenditures in the SRF are typically bond interest expense and additional
subsidy provided; reducing these expenses can help increase the return on net
This ratio is an indicator of whether the SRF has sufficient funds available in the
near term to cover short-term liabilities. It is a measure of the program's
Fund Management Handbook 61

Total Current Assets
Total Current Liabilities
Total Current Assets includes cash and equivalents, current loan receivables,
current investments, and other current receivables. Total Current Liabilities
includes current bonds payable, current interest payable and other current
Statement of Net Position
The current ratio represents the state's ability to cover its short term costs. If
this figure is below 1, it indicates that the program does not have sufficient
liquid funds available to cover its bills in the short term, indicating that it could
go into insolvency. Generally, a buffer is added to get a ratio of at least 1.5.
Definition	Operating Net is a measure of the growth of the fund from operating activities.
Illustrative Usage
Illustrative Usage
Loan Interest + Investment Interest — Match Bonds Repaid —
Bond Interest Expense + Interest Paid from Capitalized
Interest Account
Operating Net is the earnings of the Fund after match bond expenses are paid -
it is the growth of the Fund prior to the addition of capitalization grants, match,
and leveraged bonds. Programs with little or no Operating Net are not growing
financially, and may be losing value once inflation is factored in. High levels of
operating net indicate that the program is growing and could provide more
assistance into the future.
Illustrative Usage
Total Net augments the Operating Net by adding the loan principal revolving in
the program. It is a measure of perpetuity and internal growth of the program.
Operating Net + Loan Principal Repayments —
Leveraged Bond Principal Repaid
Total Net is an indicator of whether the SRF program is growing. If the Total Net
is substantially higher than Operating Net, it indicates that the program is
revolving quickly.
Definition	This measure is an indicator of how leveraged an SRF program is.
Bonds Outstanding (Current and Noncurrent)
rNet Position (Beginning of Year)+Net Position (End of Year),
^	2	'
Statement of Net Position
* 100
Fund Management Handbook 62

Illustrative Usage
A state that has a high percentage of debt to net position is more leveraged,
which means that it has more funds available for loans in the near term, but it
also has greater liabilities.
Illustrative Usage
This is a measurement of the amount of performing assets (assets earning
interest) that are derived from borrowed funds. This is an indicator of how
leveraged the state is.
Leveraged Bonds Outstanding
Cash+Investments+Loans Receivable+Debt Service Reserve Fund
Statement of Net Position
* 100
Highly leveraged programs will have a large proportion of their interest-
generating assets generated from borrowed funds.
Illustrative Usage
This is an indicator of the size of the debt service reserve fund.
Debt Service Reserve Fund
Leveraged Bonds Oustanding
Statement of Net Position
A reserve fund leveraged state will have a high percentage for this measure. A
cash flow leveraged program will have closer to 10 percent of outstanding debt
in reserves. An increasing number of states have no debt service reserve due to
high cash flows.
Illustrative Usage
The debt service coverage ratio is a measure of the program's ability to meet
interest and principal payments on bonds with available net earnings.
Change in Net Position+Bond Interest Expense+Loan Principal Repayments
Bond Interest Expense+Bond Principal Repayments
Change in Net Position and Bond Interest Expense: Statement of Revenues,
Expenses and Change in Net Position
Loan Principal Repayments and Bond Principal Repayments: Statement of Cash
Debt service coverage ratio indicates how much cash is available after expenses
are paid to cover debt service payments. A coverage ratio of 1.1 or 1.2 is typical.
A ratio below 1 indicates that there aren't sufficient cash flows to make debt
service payments.
The interest coverage ratio is a measure of the program's ability to meet
interest payments on bonds with available net earnings.
Fund Management Handbook 63

Change in Net Position+Bond Interest Expense
Bond Interest Expense
Illustrative Usage
Statement of Revenues, Expenses and Change in Net Position
The interest coverage ratio indicates how well the SRF is able to cover interest
on debt service payments. A coverage ratio of 1.2 or higher is typical.
Illustrative Usage
This is the rating assigned by the rating agencies - Standard & Poor's, Moody's
and Fitch - to assess the relative financial risk associated with the SRF bonds.
Bonds are rated on a scale of AAA (best/least risky) to C or D (most risky). AAA,
AA, A and BBB rated debt is considered "investment grade" bonds while bonds
rated below that are considered "below investment grade" or "junk" bonds. The
higher a bond is in the scale, the lower the interest on the bond.
The credit rating is itself a measure of risk. A bond with a rating of BB or lower is
considered high risk by rating agencies and investors, and the borrowing costs
will be higher for both the SRF program and its loan recipients. A state with a
low credit rating may reconsider its loan portfolio to consider whether it
includes too many risky borrowers.
Illustrative Usage
This is a measure of how efficiently states plan for and draw down awarded set-
aside funds. It calculates the cumulative DWSRF set-aside spending as a percent
of the cumulative net amount awarded for set-asides.
Cumulative Set-Aside Activity Dollars Expended/Committed
Cumulative Net Total Amount Awarded for Set-Asides
* 100
If the set-aside spending rate is high, it indicates efficient resource planning and
drawdowns. If this rate is low, it may indicate that the state reserved too much
in set-aside funding in the short-term. Nationally, this rate was 91.4 percent in
Fund Management Handbook 64

Besides this Handbook, the SRF has a slate of tools to assist in fund management and financial analysis.
However, these tools are only as effective as the ability of EPA and state staff to implement them. They
cannot replace the need for dedicated financial analysts at the state and Regional levels who can focus
on day-to-day and long-term fund management.
SRF TRAINING	EPA tries to reach each state and Region at least every two years for a 2-3
WORKSHOPS	day SRF workshop. The workshop topics range from beginner to more
advanced, and are an invaluable mechanism to bring staff from different
states together in a room for several days to discuss issues and share best
practices. More than two decades of experience have shown that the
workshops are the most effective way to educate staff about the program,
introduce issues and share best practices.
EPA SRF SOPs, which serve to supplement the Training Workshops and
create a step-by-step description of what EPA Regional staff should be doing
during different aspects of their annual cycle, including the Annual Review.
The SOPs are intended to be "living documents," which are periodically
updated as policies or requirements change. Additional SOPs are being
written each year.
ANNUAL REVIEWS The Annual Review is a central component of EPA's annual cycle. During the
Annual Review, EPA Regional staff conducts a programmatic and financial
review of state SRF programs. The purpose of the Annual Review is to
determine how the SRF is achieving the goals and objectives of the Clean
Water Act or Safe Drinking Water Act, to assess the state's performance of
activities identified in the Intended Use Plan and Annual Report and how the
state manages risk, to determine compliance with the EPA capitalization
grant agreement, to evaluate the financial status of the SRF based on the
long term goals of the Fund, and to assess strategic management of the
Fund. Regions use tools such as Annual Review checklists and Program
Evaluation Reports to document the findings from the review.
CHECKLISTS	Several checklists have been developed to assist in the oversight of the SRF.
Three checklists are used for the Annual Review: programmatic review,
project file review, and transaction testing. A checklist has also been
developed for the review of the Intended Use Plan. The checklists play a
critical role in ensuring that reviews are comprehensive and as uniform
across states and Regions as possible.
Fund Management Handbook 65

ANNUAL AUDITS Almost all states conduct independent audits of their SRF programs. The
audits review the financial statements and a program's internal controls. The
audits may be one of the first places where potential risk areas are identified
in a state.
Handbooks, guidance and memos complement SOPs and workshops because
they spell out the requirements of the SRF for specific topic areas. EPA
releases a USB drive each fall with all memos and guidance that have been
issued throughout the life of the program. This is a valuable resource for SRF
staff with questions about specific processes or requirements and provides a
comprehensive history of the program. It includes papers on innovative
topics and projects, such as the Eligibilities Overview, Nontraditional Project
Financing paper, and case studies on projects of interest.
Q&A'S	EPA has developed comprehensive Questions and Answer guides for both
the CWSRF and DWSRF programs. These Q&A's provide additional
clarification on the provisions in the CWSRF and DWSRF regulations. In
addition, EPA included Q&A's with the interpretive guidance for
amendments to the CWSRF made as a result of the Water Resources Reform
and Development Act. The Q&A documents are being updated at the time of
finalizing this Handbook.
STATE TRENDS Headquarters will continue to develop state trends based on data from the
National Information Management System. These trends can support
regional reviews of state programs by identifying potential programmatic
and financial issues. In addition, the trends can also help facilitate
conversations between the states and regions regarding the CWSRF
programs' general performance and future direction.
EPA Headquarters conducts annual reviews of the Regional Offices. The
Regional Reviews are intended to give Headquarters feedback on how
Regions are working with states and discuss any issues. In addition,
periodically, EPA Headquarters accompanies Regions on their site visits of
states. These trips provide invaluable information about weaknesses at both
the Regional and state levels, and also gives EPA an opportunity to learn
more about individual state programs.
EPA, through a contractor, has facilitated several state management reviews.
These are in-depth studies of a state's operations, with the objective of
identifying potential risk areas and system bottlenecks. These reviews assist
states in identifying their weaknesses and provide an implementation plan
for eliminating those weaknesses. The in-depth studies allow for more risk
areas to be identified than is often the case during a traditional Annual
EPA SRF, through a contractor, has facilitated the development of
computerized loan and grant tracking systems in a number of states. This
tool allows SRF staff to manage the financial and programmatic aspects of
their program and their cash flows.
Fund Management Handbook 66

EPA SRF, through a contractor, has facilitated the development of the FOCUS
(Financial Oversight and Cash-Flow Utilization in the SRF) model. This
Microsoft Excel-based model can be developed for individual SRF programs
to enable comprehensive cash flow planning. FOCUS can be integrated with
LGTS for real-time updates to cash flows.
EPA's SRF Financial Planning Model can assist states and Regions in financial
management and decision-making. It is an Excel-based tool that allows
programs to identify the potential impacts of decisions such as interest rates
charged, changes in demand, leveraging, and fee use. It assists in making
more informed financial decisions, which can help improve fund
management and mitigate risks.
FACT and FACT-Lite (a simplified version of FACT) are tools that help entities
compare the overall costs of SRF financing with other financing options. This
Access-based tool allows entities to plug in the various costs of construction
and financing for all of the potential funding options they are considering.
The output is an objective calculation of the annual and lifetime costs of
each of the financing options being considered. It can play a critical role in
marketing the SRF.
Fund Management Handbook 67

The following is a selection of online resources that can be used for additional study of the various topics
covered in this Handbook. With websites changing constantly, this list may be considered a starting
point, with new resources potentially becoming available overtime. For SRF-specific educational
resources, refer to the list in Chapter 5. Some websites require registration. Unless noted, all are free of
•	Investopedia - Dictionary,
•	Government Finance Officers Association (GFOA). GFOA publishes "Governmental Accounting,
Auditing, and Financial Reporting" (aka the "Blue Book"), which incorporates GASB standards. It also
publishes best practices, research reports, and training guides on topics such as debt management,
cash management, and investing,
•	Governmental Accounting Standards Board (GASB). GASB is the source of Generally Accepted
Accounting Principles (GAAP) used by state and municipal entities. GASB Pronouncements set the
standards for financial reporting. The Reference Library has fact sheets, plain-language articles, and
other resources,
•	California Debt and Investment Advisory Commission. CDIAC (part of the California State Treasurer's
Office) hosts seminars throughout the year on basics of debt issuance. Presentations as well as
recordings from past seminars are available,
o A 2015 Series on Municipal Debt Essentials has many presentations on issuing municipal
•	Electronic Municipal Market Access (EMMA) from the Municipal Securities Rulemaking Board
(MSRB). All bond Official Statements and continuing disclosure documents are posted and
•	University of North Carolina Environmental Finance Center, "Financial Health Checkup for Water
Utilities.": Presentation and Excel tool. The presentation also includes links to one-page fact sheets
on key utility financial ratios, what they mean, and desired benchmarks.
Fund Management Handbook 68

Leveraged SRF Rating Criteria (note: these are updated regularly, so check the websites for updates)
•	Fitch Ratings, "U.S. Public Finance State Revolving Fund and Municipal Finance Pool Program Rating
•	Moody's Investors Service, "Rating Methodology: U.S. State Revolving Fund Debt." PBM148698
•	Standard & Poor's, "U.S. Public Finance Long-Term Municipal Pools: Methodology and
Assumptions." US/web/guest/article/-
Water & Sewer Rating Criteria (note: these are updated regularly, so check the websites for updates)
•	Fitch Ratings, "U.S. Water and Sewer Revenue Bond Rating Criteria."
•	Moody's Investors Service, "Rating Methodology: US Municipal Revenue Debt." 1095545
•	Standard & Poor's, "U.S. Public Finance Waterworks, Sanitary Sewer, and Drainage Utility Systems:
Rating Methodology and Assumptions." US/web/guest/article/-/view/type/HTML/id/1857533
•	Kroll Bond Rating Agency, "U.S. Municipal Water and Sewer Revenue Bond Rating Methodology." report/1038
•	Governing,
•	The Wall Street Journal (fee),
•	Bloomberg News,
•	The Bond Buyer (fee),
Fund Management Handbook 69