State revolving fund

The Clean Water State Revolving Fund (CWSRF), part of the US EPA’s Office of Wastewater Management (OWM), is recognized as the most successful federal water quality funding program in the nation's history. The CWSRF, which replaced the Construction Grants program, provides loan assistance for the construction of municipal wastewater facilities and implementation of nonpoint source pollution control and estuary protection projects . It was established in 1987 for the purpose of creating a sustainable, self-perpetuating loan assistance authority for water quality improvement projects. Since inception, cumulative assistance has surpassed $65 Billion, and is continuing to grow through interest earnings, principal repayments, leveraging, and sound financial management.

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Clean Water State Revolving Fund

History

In 1987, Congress established the Clean Water State Revolving Fund (CWSRF), a groundbreaking infrastructure financing program designed to help protect and restore water quality in our nation’s rivers, lakes, and estuaries. While the federal government, through EPA, already had a strong tradition of supporting water quality infrastructure through the Construction Grants program, the Clean Water Act Amendments of 1987, by authorizing the CWSRF, ushered in a new era of clean water financing.

Implemented through a collaborative effort between EPA and states, the CWSRF program consists of independent revolving loan funds in each of the 50 states and Puerto Rico. It empowers states to fund projects according to state level water quality priorities and helps communities by providing low cost financing for critically important projects. The 51 funds are capitalized in part by federal and state contributions. For every dollar contributed by the federal government, states contribute 20 cents. Since the first federal capitalization grants in 1988, the total federal appropriation to the 51 CWSRF programs has reached over $25 billion, with corresponding state contributions of $5.3 billion. Financial leveraging techniques conducted by state funds have snowballed federal and state contributions into $65 billion as of 2007. []

Revolving Structure

All 50 states, plus Puerto Rico operate a CWSRF. The 51 CWSRF

An SRF Functions Like an Infrastructure Bank

programs function like environmental infrastructure banks by distributing low interest rate loans for water quality projects. Loan repayments are recycled back into individual CWSRF programs. States can only use the funds to make loans, purchase local debt, or issue financial guaranties. They cannot make grants or otherwise dissipate the capital in their funds. Principal repayments plus interest earnings become available to finance new projects, allowing the funds to “revolve” over time. States can also increase their CWSRF financing capacity by issuing CWSRF backed revenue or general obligation bonds. To date, 27 states have leveraged their programs in this way, raising an additional $20.6 billion for important water quality projects.

Program Highlights

Fig. 2 SRF Funding Proportions

Since the inaugural CWSRF project was funded in 1988, the 51 state-run CWSRF programs have provided $65 billion in assistance for water quality projects through 20,711 loans. In 2008, the programs reached a new high for single-year financing, providing nearly $5.8 billion in assistance to loan recipients of all sizes, including farmers, homeowners, small businesses, nonprofit organizations, and major municipalities. While wastewater treatment projects have comprised 96 percent of all CWSRF funding to date, over $2.6 billion has gone to nonpoint source and estuary projects (see Figure 2). The number of assistance agreements for nonpoint source projects has grown significantly over the years, from only two projects in 1990 to 1,305 in 2007. The low cost and flexibility of CWSRF financing has helped the programs serve communities of all sizes. In 2007, two-thirds of all loans went to communities with populations below 3,500. In addition, over $1.1 billion in assistance targeted communities with fewer than 10,000 people (see Figure 3).

Fig. 3 Communities Served By CWSRF's

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Fig. 4 Cumulative Assistance

Sound financial management, continued federal support, and the unique revolving structure of CWSRF programs have enabled them to address the increasing demand for water infrastructure financing. The programs are projected to continue to grow over time, as interest earnings and repayments of loans increase (see Figure 4). Nationally, the CWSRF program provides a remarkable return on federal investment: over the last 20 years, the program has financed $2.31 in projects for every dollar the federal government has invested (see Figure 5).

A high demand for CWSRF funds nationwide can be attributed to high needs, low interest rates, flexible financing options, and the efforts of state and federal CWSRF staff. The rate of fund utilization has increased steadily since 1988, signaling increased demand for funds as well as efficient state operations. As of 2007, 97 percent of all available funds were committed to projects. To meet high levels of demand, 27 states have chosen to implement leveraging approaches by issuing revenue and general obligation bonds that are secured by CWSRF assets. Through leveraging, states have significantly increased their capacity to finance important water quality projects.

The use of Leveraging in the CWSRF

27 CWSRF’s offer sub-market rate loans through leveraging. This means that these states augment their CWSRF capital by issuing municipal bonds. Typically, they loan the proceeds of the bonds while investing their capitalization funds (both state and federal). These investments serve two purposes. First, they are pledged to the bondholders as additional collateral, thus more than assuring a AAA bond rating. Second, the interest on the invested capital is used to pay subsidies to the CWSRF program’s local utility borrowers.

The use of Guaranties in the CWSRF

Section 603 (d)(3) authorizes CWSRF's to guaranty debt, the program's greatest source of funding potential. Guaranty powers increase the funding capacity of CWSRF's as well as decrease annual payments which utility ratepayers must pay for their wastewater projects. Guaranties work very much like municipal bond insurance.

Because the overwhelming number of users regularly pay their sewer bills, the finances of wastwater utilites are extremely stable and predictable. However, because many such utilities simply don't have the size or redundant systems that the international credit rating agencies demand for high level investment grade ratings, these municipal utilities often don't enjoy the higest credit ratings. As such, their bonds do not sell at the most favorable rates. To lower their rates, these utilities will often purchase municipal bond insurance. Municipal bond insurance is a form of financial guaranty.

In early 2008, there appears to be approximately $35 billion of 'net assets' in all 51 state programs combined. 'Net assets' in SRF parlance is defined as the sum of all of the federal capitalization grants, all of the state capitalization grants, and all of the interst earned on loans made by SRF's (net of what was paid to bondholders).

Thus, using the S&P capitalization ratio of 173.7:1, the capacity of the CWSRF would be at present over $6 trillion, about 29% higher than the entire Federal Budget for 2009.

Statutory Authority

Title VI, sections 212, 319, and 320 of the Clean Water Act(CWA) define the statutory authority of the CWSRF. The CWSRF is authorized to provide financial assistance for the construction of publicly-owned treatment works (212), the implementation of estuary management programs (319), and the development and execution of state’s comprehensive conservation management plans (320).

Project Eligibilities

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Section 212 Projects

Eligible projects under Section 212 of the CWA include the capital costs for the construction and maintenance of Publicly-Owned Treatment Works (POTWs).

• Wastewater collection and treatment
• Publicly owned municipal stormwater projects
• Water pipes, storage, and treatment systems
• Green infrastructure, such as green roofs, infiltration basins, curb cuts and landscaped swales, and wetland protection
• Water quality portions of municipal landfill projects
• Water Conservation and Reuse
• Energy Conservation and Efficiency

Eligible projects under Section 319 (nonpoint source projects) of The Act may include:

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Section 319 Projects

• Agricultural runoff
• Leaking on-site septic systems
• Stormwater runoff
• Brownfield contamination
• Atmospheric deposition
• Runoff from closed landfills
• Leaking underground storage tanks

Eligible projects under Section 320 (estuary management) of The Act allows the CWSRF to fund publicly and privately owned projects as long as the project is part of the state’s Comprehensive Conservation Management Plan (CCMP) and is sanctioned in the plan.:

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Section 320 Projects

• Planting trees and shrubs within the watershed (drainage basin)
• Purchasing equipment required for the CCMP
• Environmental clean-up
• Development and initial delivery of educational programs

Projects must have a direct benefit to the water quality of an estuary. This includes

• protection of public water supplies
• protection and propagation of a balanced, indigenous population of shellfish, fish, and wildlife
• actions that, in order to allow for recreational activities in and on water, require the control of point and nonpoint sources of pollution to supplement existing controls of pollution

In many cases, estuary level protection plans are combined with other elements of an overall project. Where the water quality portion of a project is clearly distinct from other portions of the project, only the water quality portion can be funded by the CWSRF.

Projects are selected based on an Intended Use Plan (IUP), which is produced by each State on an annual basis. The IUP contains a list of projects eligible to receive assistance in the state. This list also notes which projects will receive assistance in the coming year. The list is developed through a ranking system for all treatment works projects required by the CWA. (This list only contains treatment works projects. Nonpoint source and estuary projects do not need to be ranked, however they must be included on the IUP list of projects to be funded).

Some states have implemented integrated priority setting systems. These are project ranking systems that compare all projects, not only treatment works. They incorporate a number of factors, which are decided by the state. Though not required, these types of planning systems are strongly encouraged.

Financial Eligibilities

The CWSRF employs a variety of loan assistance mechanisms.

• Interest rates for a CWSRF loan must at or be below market rate. Average CWSRF loans are issued between 20%-40% below market rate.

• CWSRF loans offer extended term financing, typically 20 years, but can be extended for small or disadvantaged communities for up to 30 years.

• A CWSRF loan can be used to purchase or refinance local debt. Under the Extended Term Finance Policy, the purchase may have terms more than 20 years.

• Guaranties or insurance

• CWSRF programs may issue debt guaranteed by SRF funds.

• Similar revolving funds established by municipalities or intermunicipal agencies can receive loan guarantees.

• A CWSRF may provide assistance to any municipality, inter-municipal, interstate, or State agency (within the program’s jurisdiction) for the construction of publicly owned treatment works (as defined in section 212 of the CWA).

Economic Benefit of Clean Water Investment

Return on Federal Dollar

Over the past two decades, the CWSRF has financed $2.31 in infrastructure projects for every $1 invested by the federal government, providing a remarkable return on federal investment (See Figure 5).

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Fig. 5 Return on Federal Dollar

EPA has projected that over a twenty-year time horizon, the initial federal investment into the CWSRF can result in the construction of up to three to four times as many projects compared to programs that utilize a one-time federal grant, depending on the allocation of resources to the program.

Due to the income stream into the program from state match, loan repayments, interest earnings, investment earning, and bond proceeds from leveraging, the return on federal investment to the CWSRF will continue to increase exponentially over time. This feature of the program means that money invested into the CWSRF is used more efficiently and effectively than the funds may have been if they were invested into other sectors if the economy. As a result, investment into the CWSRF may have greater direct and indirect economic benefits than an equal amount of spending allocated elsewhere.

Increase Investment

Federally-subsidized CWSRF loans reduce the financial burden on states and localities while increasing net investment.

Meeting the standards necessary to protect the nation’s water resources can place a financial strain on states and localities. The subsidized portion of a CWSRF loan allows municipalities to attain healthy environmental standards without placing undue hardship on their citizens.

The availability of subsidized infrastructure loans allows states and local governments to use their own resources on other priorities, resulting in a net increase in spending.

Addressing Climate Change

Climate change threatens both water quality and water quantity. The CWSRF can assist water utilities and municipalities mitigate the effects of climate change as they relate to water quality by capitalizing costs related to planning and implementing new technologies.

Energy Conservation

Wastewater and stormwater treatment facilities consume energy to collect and distribute treated water. The CWSRF can fund capital costs needed to power these publicly owned treatment works (POTWs) and strongly encourages the implementation of energy efficient technology.

• Energy efficient pumps
• Clean energy technology (i.e. solar, wind, hydroelectric, geothermal, etc.)
• Purchase of energy audits that have a reasonable prospect of resulting in a capital project
• Pro-rata share of capital costs for offsite publicly owned clean energy facilities that provides power to a POTW

Carbon Sequestration

The CWSRF can finance carbon sequestration through a variety of methods, including urban heat-island reduction, energy saving achievement, and habitat preservation. Aquatic environments, green spaces, and geologic carbon storage are efficient carbon sinks that can be utilized with CWSRF loans.

• Wetlands restoration
• Land Conservation (purchase of easements and preserved green spaces)
• Tree plantings (reforestation, green roofs, tree boxes, parks, vegetated swales and median strips)
• CO2 scrubbers on power plants that provide energy to POTWs

Methane Capture

• Publicly owned equipment to capture methane emitted from anaerobic municipal wastewater treatment process and convert it into energy is eligible for CWSRF funding.
• Methane capture equipment can be privately owned if the project is located within a designated National Estuary.
• Publicly or privates owned equipment to capture methane emitted from manure containing ponds on animal feeding operations (AFOs), not regulated as contained animal feeding operations (CAFOs), and convert the methane to energy is eligible for CWSRF funding.
• This equipment can be located at CAFOs in designated National Estuaries.

Water Conservation and Reuse

• Eligible water conservation and reuse projects include:
• Efficient plumbing fixture retrofits or replacement
• Grey water recycling in public buildings
• Efficient landscape irrigation equipment for public facilities
• Publicly owned stormwater treatment and reuse
• Publicly owned wastewater distribution lines to support effluent reuse/recycling uses, including piping the effluent to the property line of a privately owned effluent consumer as well as publicly owned equipment to reuse effluent
• Monitoring, including the installation of water meters
• Water quality trading for construction projects that generate water pollution control credits or capital projects that may be located offsite the POTW
• Replacing inefficient irrigation practices with efficient drip irrigation
• Publicly owned projects that reduce and reuse water are eligible for CWSRF funding.

• Privately owned projects located in designated National Estuaries that reduce or reuse water are eligible for CWSRF funding.

• Publicly or privately-owned projects that reduce agricultural water use are eligible for CWSRF funding

Green Infrastructure

The CWSRF can fund the “capital costs” of water quality improvement. Capital costs include traditional infrastructure expenditures (such as pipes, pumps and treatment plants), as well as unconventional infrastructure costs (like land conservation, tree plantings, equipment purchases, planning and design, environmental cleanups and even the development and initial delivery of environmental education programs). One of the few things the CWSRF cannot fund is the operation and maintenance costs of a project (i.e. mowing the grass in an urban park or paying operator salaries). Grey stormwater infrastructure, such as traditional pipes and pumps, continue to be eligible for CWSRF assistance.

Public Private Partnerships

Public Private Partnerships, or P3’s, are one investment technique by which municipalities can finance the upgrade, expansion, repair, or implementation of new technology for wastewater infrastructure. The CWSRF, because of its unique financing authorities, is authorized to oversee (in concert with the Assistant Administrator for Water), provide technical assistance, and guidance for municipalities that choose to investigate P3’s for the provision of their wastewater services.

A P3, as defined by the Environmental Financial Advisory Board, is a contractual, institutional, or other relationship between government and a private sector entity that results in sharing of duties, risks, and rewards of providing a service in which the government has an interest, recognizing that the government retains ultimate responsibility for insuring that social needs and objectives are met.

P3's are sought by state's and local governments as a way to reduce the financial burden of water pollution and infrastructure needs. It has been estimated that, of the costly capital improvements, upgrades, expansions, and new compliance requirements imposed on water and wastewater utilities, local governments bear 95% of the costs. Among local government expenditures, only education is higher. .

Further Reading

2004-2007 Annual Reports [http://www.epa.gov/owmitnet/cwfinance/cwsrf/ 2004-2007 CWSRF Annual Reports]

Clean Water State Revolving Fund CWSRF

Drinking Water State Revolving Fund[http://www.epa.gov/safewater/dwsrf/ DWSRF]

Environmental Financial Advisory Board (EFAB) Environmental Financial Advisory Board

Public Private PartnershipsKPMG whitepaper on P3’s for Water

EFAB P3 paper

51 CWSRF Programs

• Alabama Department of Environmental Management
• Alaska Department of Environmental Conservation
• Water Infrastructure Finance Authority of Arizona
• Arkansas Development Finance Authority
• California State Water Resources Control Board
• Connecticut
• Delaware Department of Environment and Natural Resources
• Florida Department of Environmental Protection
• Georiga Environmental Facilities Authority
• Hawaii Department of Health
• Idaho Department of Environmental Quality
• Illinois Water Pollution Control Loan Program
• Indiana Finance Authority
• Iowa Finance Authority
• Kansas Department of Health and Environment
• Kentucky Infrastructure Authority
• Louisiana Department of Environmental Quality
• Maine Municipal Bond Bank
• Maryland Department of the Environment
• Massachusetts Water Pollution Abatement Trust
• Michigan Clean Water Fund
• Michigan Municipal Bond Authority
• Minnesota Pollution Control Authority
• Mississippi Water Pollution Control Revolving Fund
• Missouri Water Protection Financial Assistance Center
• Montana Water Pollution Control State Revolving Fund
• Nebraska Department of Environmental Quality
• Nevada Department of Conservation and Natural Resources