Financing Water and Landfill ProjectsState Revolving Fund Loan Program Offers Advantages
Upgrades of water treatment plants, replacement of water distribution mains, landfill closures, interceptor sewers, septage and wastewater treatment can all be big ticket items for a municipality. Drinking water projects, wastewater treatment plant upgrades and landfill closures can cost anywhere from a few thousand dollars on up into multi-millions of dollars, depending on the size and scope of the project. These larger projects are difficult to fund out of a municipality’s operating budget and generally will require some type of debt service. Fortunately, the federal and state governments have developed means to help finance these projects without issuing bonds—and at a cost that is lower than market rates.
Loans Not Bonds
The passage of the amendments to the federal Clean Water Act (CWA) in 1987 gave states the tools necessary to create new funding mechanisms. The most useful tool was the Clean Water State Revolving Fund (CWSRF) program, which was designed to create State Revolving Funds through a program of capitalization grants to states, which in turn provide a long-term source of state financing for construction of wastewater treatment facilities and implementation of other water quality management activities, including landfill closure.
A similar revolving loan program was established for drinking water projects in 1996 through an amendment to the Safe Drinking Water Act. This program, known as the Drinking Water State Revolving Fund (DWSRF), was established to fund projects to achieve and maintain compliance with the Safe Drinking Water Act and further public health protection.
In New Hampshire, the Department of Environmental Services (DES) implements both federal programs. The New Hampshire version of this program is called the State Revolving Loan Fund (SRF) and the Drinking Water State Revolving Funds (DWSRF). New Hampshire municipalities are eligible to borrow through these loan programs and when the loan is repaid, those funds plus interest can be used for other projects. The revolving nature of the fund provides an ongoing funding source that will last far into the future.
The SRF provides loans for a variety of wastewater projects, such as work on interceptor sewers, correction of excessive infiltration/inflow (I&I), purchase of computers and software directly related to process control, facility planning, development of operation and maintenance manuals, municipality utility relocation, purchase of safety equipment, septage treatment and much more. A full list of eligible projects is provided at the DES Web site at www.des.nh.gov/wwe/eligib_2.pdf.
The landfill closure portion of the loan program is designed for municipal unlined landfills. Eligible costs include pre-closure hydrogeological evaluations, pre-closure engineering investigation, construction design, closure construction and construction supervision. The funding of transfer, material handling, or recycling station construction, when completed in conjunction with a landfill closure, is also eligible for SRF loan monies.
Public water systems eligible for loan assistance are community water systems, both privately or publicly owned, and nonprofit non-community water systems. Loans can be used for rehabilitation or development of sources, installation or upgrading of treatment facilities, replacement of transmission and distribution pipes, upgrading of storage facilities and the consolidation of water systems.
The charge rate for the SRF loan is based upon the 11-GO Bond Index, published in the first week of October. This bond index is a weekly average, based upon estimates from underwriters of municipal securities, of the yields that would be offered to investors if an issuer were to bring 20-year tax-exempt general obligation (GO) bonds to market at par on any given day.
The New Hampshire SRF program further discounts the 11-GO Bond Index rate. This discount is applied based upon the term of the loan; New Hampshire offers five-year, 10-year, 15-year and 20-year options for repayment. The charge rate is a percentage of the 11-GO Bond Index. For example, a five-year term of loan is 25 percent of the 11-GO Bond Index, while a 20-year term is 80 percent of the 11-GO Bond Index. Table 1 shows the loan rates in effect now through September 2008.
Although the SRF provides an excellent market rate, municipalities are free to seek funding in the open market or from other sources. These sources can be used instead of the SRF loan or in conjunction with the SRF loan. One alternative available to cities and towns of 10,000 or smaller is the U.S. Department of Agriculture’s (USDA) Rural Development Authority loan and grant program. The USDA has funds for both water and waste related projects. More information can be obtained from the USDA Web site at www.usda.gov/rus/water/.
The New Hampshire Municipal Bond Bank (NHMBB) offers an additional alternative. Instead of seeking a bond directly, municipalities can work with the NHMBB, which seeks better rates by representing multiple municipalities. Visit the NHMBB Web site at www.nhmbb.org/ for more information.
SRF Loans vs. Traditional Bonds
The discount the SRF program offers on the average bond index is a deal that may be hard to beat, even when a municipality is competing in the open market directly to issue bonds. Also, while the overhead cost of a bond is 4.5 percent or more (when including bond preparation), the overhead cost of the loan program is low. The SRF program does not charge the municipality an up-front fee and will only charge an administrative fee of 1 percent, which is built into the already low interest rate. This saves municipalities the additional fees paid to underwriters.
Unlike a bond, the SRF loan will not provide the funds to the municipality upfront; the municipality must submit the construction expenses to DES and loan monies will be released as the expenses are incurred. This aspect of the loan requires cities and towns to consider their contractual arrangements with the construction firm if they wish to avoid having to front some of the costs.
The SRF and DWSRF also have additional requirements that must be met, including (but not limited to):
- All construction must meet DES specifications as outlined in its administrative rules. •
- Municipalities must submit an application and design for review. •
- Only eligible costs can be included. •
- Minority- and women-owned businesses must be solicited for construction projects with a goal that 6.39 percent of the work is completed by a women-owned business firm and 2.55 percent be completed by a minority-owned business firm. •
- An environmental assessment must be prepared by the DES and made available for public comment.
Given the discounts on the bond rate, it appears that SRF loans would be a better deal. In fact, the U.S. Environmental Protection Agency (EPA) estimates that on average a CWSRF funded project would cost 20 percent less than a project funded at the market rate. (See CWSRF chart.) Despite this discount, some government entities in New Hampshire choose not to use the SRF and instead seek financing through other methods because they feel the program is too cumbersome and comes with too many strings attached. However, they soon discover that the design review requirements, as well as the majority of other requirements, are still required by DES for the project—no matter who finances it. It is also important to note that most of the additional requirements are an essential component of the state’s State Aid Grant (SAG) for wastewater projects and State Aid Grant Plus (SAG Plus) for septage treatment projects and landfill closure grant programs (see page 14 for grant program information).
Nationwide, the Clean Water State Revolving Fund programs provided more than $4.5 billion annually in recent years to fund water quality protection projects for wastewater treatment, nonpoint source pollution control and watershed and estuary management. Similarly, the federal Drinking Water State Revolving Fund has provided over $11 billion dollars in assistance. The New Hampshire versions of these federal programs have been an important tool for public administrators to supply safe drinking water, treat wastewater and protect watersheds from unlined landfills.
Ray Gordon is Septage Coordinator for the Wastewater Engineering Bureau of the New Hampshire Department of Environmental Services.
In addition to the revolving loan program, the Department of Environmental Services offers grant programs to further assist municipalities with drinking water, wastewater and unlined landfill closure projects. Below is a summary of the related grant programs.
Unlined Municipal Landfill and Incinerator Closure Grant Program
This program reimburses municipalities 20 percent of eligible capital costs associated with the closure of unlined solid waste landfills closed after July 1, 1984, and certain municipally-owned solid waste incinerators constructed prior to July 1, 1998. These costs include hydrogeological and engineering investigation and design; construction of closure elements in accordance with plans and specifications approved by DES; and construction supervision. Eligible costs do not include land acquisition, administrative, legal and financial costs or costs for post-closure monitoring and maintenance. The annual priority for funding established by law is highest for those projects that are ready for construction or have completed construction, and the priority decreases for projects that are in the earlier stages of the closure process. In Fiscal Year 2006, over $2 million was paid out to New Hampshire municipalities; since 1997, the total amount awarded to municipalities has exceeded $24 million.
State Aid Grant Program (SAG) for Wastewater Projects
This program provides for financial assistance in the form of a 20 percent grant—or if the community’s sewer user fee is 20 percent higher than the state average user fee, a 30 percent grant—for the planning, design and construction of certain sewage disposal facilities by municipalities. This program, which helped build 92 municipal treatment facilities in New Hampshire, began modestly in the early 1960s and was expanded in 1972 with federal Water Pollution Control Act funds. Since its inception, the program has granted over $874 million to New Hampshire municipalities to accomplish what has been termed “one of the most successful public works efforts in this country." The resulting improvements to our state’s and nation’s water quality have been dramatic. The program continues to disburse, on average, $13.6 million annually to communities.
State Aid Grant Plus Program (SAG Plus) for Septage Treatment Projects
This program provides for financial assistance of up to a 50 percent grant for the planning, design and construction of certain septage disposal facilities by municipalities. The base 20 percent, or if the community’s sewer user fee is 20 percent higher than the state average user fee, 30 percent, comes from the SAG program (page 14). The additional grants are at a rate of 10 percent for the host community, and 2 percent for each additional community with which the host community has entered an inter-municipal agreement for septage receiving. Additional communities can be added up to the maximum allowed grant of 50 percent of eligible costs. This new grant program is helping to develop regional septage capacity throughout New Hampshire.
Water System Interconnection and Groundwater Investigation (SIGI) Grants
The SIGI program reimburses 25 percent of the cost for planning design and construction of facilities to interconnect two or more existing public water systems to address problems with quantity or quality of drinking water. The program also reimburses 25 percent of the cost of investigating detectable concentrations of man-made contamination, excluding MTBE, in existing wells. Costs incurred since July 2003 are eligible. The deadline for applications is in July. This is followed by a priority list hearing for eligible projects in August. The priority list for the current 2008 fiscal year includes nine interconnection projects and one groundwater investigation.
Editor’s Note: It is important to note that all municipal long-term debt must be approved in accordance with the Municipal Finance Act, RSA Chapter 33.