State revolving funds: a model for financing drinking water programs?

• Author: Levine, Steve

State revolving funds for wastewater treatment facilities exhibit a variety of creative financing structures. Will SRFs become the preferred alternative for financing drinking water programs as well?

State revolving funds (SRFs) created in 1987 to finance local wastewater treatment projects, now are widely accepted as the model for infrastructure financing programs, a preferred alternative to the traditional system of direct federal grants. Not only have these revolving funds been used successfully for wastewater financing, but Congress is now contemplating expanding the use of SRF programs to drinking water programs and possibly beyond.

This article updates the status of state revolving fund programs and discusses issues being debated in early summer 1994 that will affect the future of these programs.

1987 Set the Stage for SRFs

It has been seven years since Congress enacted amendments to the Clean Water Act which have had an enormous impact on wastewater funding. The new laws mandated a transition to a significantly different structure under which states and localities finance wastewater treatment projects. Previously, the federal government made direct grants to localities for specific projects. These grants covered a significant percentage of costs, primarily for plant construction. After Title VI of the Clean Water Act was established in 1987, construction grants were phased out. Instead, annual capitalization grants now are provided to each state to establish a fund to make loans to local governmental units for wastewater facility financing.

In general, by establishing a bona fide state revolving fund, a state commits to use federal capitalization grants, along with required matching funds from

the state, to generate loans to localities. The interest rates on the loans are subsidized, which provides a strong inducement for localities to participate in the program rather than finance the projects on their own. As the localities repay the loans, new loans are generated, creating a revolving or self-sustaining structure.

States' Financing Structures

States have responded to these new regulations with a variety of creative financing structures to meet the stringent and costly environmental mandates for wastewater treatment. Many states have introduced leveraging structures in which bonds are issued to increase the amount of loans that can be generated from the federal grants and state matching funds. Virtually all leveraged programs fit...