The Clean Water and Drinking Water State Revolving Funds (SRF) provide critical infrastructure funding for wastewater and water projects. These programs, managed by the Environmental Protection Agency (EPA), provide annual grants to all 50 states and Puerto Rico. The states are required to match the EPA funds with 20 percent funding which then creates a revolving loan pool for eligible projects. State matching funds can come from a variety of sources including appropriations, general obligation bonds, revenue bonds, or local contributions. As SRF loans are repaid, funds can be loaned to new projects.
SRF financing can be utilized in concert with other financing tools to complete a funding package for individual projects. The EPA has provided policy guidance on the possible utilization of non-federal and non-state match monies as match for other federal grants. States are able to customize the programs to meet the individual needs in their area, but some basic programmatic parameters include:
- Interest rates can range from zero percent to market rate.
- Maximum repayment period up to 20 years. Disadvantaged communities may qualify for an extended term up to 30 years.
- States may choose to offer loans, refinance or purchase local debt, guarantee or purchase insurance for local debt, forgive principal, provide negative interest loans, and/or provide grants.
- States may customize loan terms for small and disadvantaged communities through lower or no-interest loans.
- Loan repayment begins one year after project completion.
- Loan repayment sources on traditional construction projects include user charges or special assessments.
Clean Water SRF
The Clean Water SRF program was introduced as an Amendment to Title VI of the Clean Water Act in 1987 and replaced the federal Construction Grants program. According to the EPA, states can tailor the Clean Water SRF program to target resources to specific environmental needs including:
- Planning and design
- Contaminated runoff from urban and agricultural areas
- Wetlands restoration
- Groundwater protection
- Brownfields remediation
- Estuary management
- Wastewater treatment
- Sewer systems
The Clean Water SRF borrowers can include municipalities, businesses, non-profit organizations, and individuals.
Drinking Water SRF
The Drinking Water SRF program was established as part of the 1996 Safe Drinking Water Act Amendments with a goal of providing states with a financing mechanism for ensuring safe drinking water for the public. Both publicly and privately owned community water systems and nonprofit non-community water systems are eligible for funding under this program. Eligible projects include:
- Planning and design
- Installation and replacement of failing treatment facilities
- Eligible storage facilities and treatment and distribution systems
- Drinking water sources
- Source water protection
- Storage capacity costs
- Consolidation of water supplies
Application Protocol
States are required to develop annual Project Priority Lists and Intended Use Plans (IUPs) which identify projects that are eligible for SRF assistance. Potential applicants to the SRF programs must be identified in both the PPL and IUP prior to receipt of SRF funding. Typically, the states will solicit projects from potential applicants on an annual basis; however, it is essential to notify the state of any intent to apply for SRF financing early in the planning process.
Projects funded through the SRF programs usually require a consulting engineer and bond counsel. The state will work with the consulting engineer to ensure all state and federal regulations are followed throughout the project implementation. The state will work with bond counsel to ensure all legal and financial regulations are met.
Typically, states will require and provide approval of a Facility Plan, Plans and Specifications, and Construction. The SRF funds are disbursed on a reimbursement basis. This requires costs to be incurred prior to the release of SRF funds.
The SRF programs vary by state, as each state has the ability to design and implement the SRF programs based on local needs. Annual program implementation is also contingent upon the availability and disbursement of the state capitalization grants and is subject to variability. The following is a summary of state program guidelines in the five states within the current AE2S service area.
North Dakota
The North Dakota SRF programs are managed jointly by the ND Department of Health and the ND Public Finance Authority. The ND Department of Health prepares the required annual IUP for public review and comment in the fall of each year. In the spring of each year, a letter of interest is sent to all potential Drinking Water SRF loan recipients asking for information regarding new drinking water projects. Systems that respond are provided with a project ranking questionnaire. Eligible projects for which ranking questionnaires are returned, are then ranked and included on the comprehensive project priority list as part of the IUP development process. Following public review and comment, the IUP is finalized and subsequently included in the grant application to the EPA. Potential projects for the Clean Water SRF program are solicited annually in the December to January timeframe. The current interest rate for both programs is 3 percent with a maximum term of 20 years.
Montana
In Montana, these programs are administered by the Montana Department of Environmental Quality and Department of Natural Resources and Conservation. Montana’s Clean Water SRF program is entitled Water Pollution Control State Revolving Fund. Both programs require all entities to request that project(s) be added to the Priority List and Intended Use Plan. This annual process begins in June to identify projects which may need SRF funding in the upcoming year. A project remains on the list until it has been completed regardless of the funding source(s) used to finance the project. Loans will be offered on a first-come basis until demand exceeds available funds. Ultimately, ranking will be based on water quality and/or public health impacts. The current interest rate is 3.75 percent with a maximum term of 20 years. Disadvantaged communities may extend the term to 30 years.
Minnesota
The Minnesota Clean Water and Drinking Water Revolving Fund programs are administered by the Minnesota Public Facilities Authority (PFA), together with the Minnesota Pollution Control Agency and Minnesota Department of Health. The deadlines for submission to both programs’ 2012 Project Priority Lists were late spring 2011 for projects to be under construction before June 30, 2012. Projects on the Clean Water Revolving Fund 2011 list were automatically listed on the 2012 list unless the project has received funding, requested removal, or shown no progress in the past five years. The deadline for both programs’ 2011 Intended Use Plan was June 3, 2011.
Interest rates are determined by a market rate index (market scale) or the PFA’s bond market rate (Authority scale), whichever is higher, less a 1.50 percent discount approved by the PFA. Borrowers with a service area population under 2,500 may be entitled to additional discounts. Loans are amortized up to a maximum of 20 years or up to 30 years if the average annual residential cost would exceed 1.4 percent of median household income.
South Dakota
The Clean Water and Drinking Water SRF programs are managed by the SD Department of Environment and Natural Resources. The Department accepts applications four times per year for technical review, financial analysis, and consideration by the Board of Water and Natural Resources. Applications must be received on or before the first day of January, April, July, and October. The current interest rates and terms are 2.25 percent for up to 10 years or 3.0 percent for 11-20 years. Borrowers meeting the criteria of a disadvantaged community may be eligible for reduced interest rates and a term up to 30 years.
Wyoming
The Wyoming Department of Environmental Quality manages the Clean Water and Drinking Water SRF programs. The IUPs for both programs are updated in the spring of each year. Clean Water SRF loans carry an interest rate of 2.5 percent for up to 20 years. Drinking Water SRF loans carry the same term and interest rate; however, a 0.5 percent fee is collected at the loan closing.
Wyoming draws particular attention to ensuring “capacity development” of loan applicants which must be demonstrated before receiving a loan. Capacity development is a process where public water supplies examine their operations. Systems are assessed for their technical, financial and managerial capabilities. The purpose is to ensure public water supplies have, or work towards having, these capabilities to ensure ongoing successful operations. Sanitary surveys and worksheets provided by the Water Quality Division are used to complete the assessment.
Conclusion
The SRF programs offer advantageous, below market rate financing for water and wastewater projects; however, it does come with additional administrative requirements associated with SRF financing. Though these programs vary in design and schedule per state, the SRF program application process is several months in length. Applicants need to be in contact with the managing state agency very early in the project development stages to ensure a project is included in the PPL and IUP to qualify for funding consideration.
Contact AE2S Nexus for more information.