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EPA Announces Guidance on State Revolving Funds for Sewage Treatment

[EPA press release - February 2, 1988]

The U.S. Environmental Protection Agency today issued initial guidance to states on setting up State Revolving Funds for sewage-treatment-plant construction and other water-pollution-control activities. The revolving-fund program was created by the 1987 Amendments to the Clean Water Act as part of the transition from the federal construction-grants program to a state-operated loan program. Under the new program, states and localities will be primarily responsible for financing, constructing and managing municipal wastewater facilities.

State Revolving Fund (SRF) officials will make loans to local governments for specific water-pollution-control purposes. Loan repayments, including interest, are used to make new loans for the same purposes. In this way, money is recycled to finance more projects than could be financed through federal grants alone.

Congress has provided for capitalization grants to states for the development of SRF programs. "We are eager to have the states use these grants to set up their revolving loan funds as quickly as possible," said Lawrence J. Jensen, EPA's Assistant Administrator for Water.

States may structure their particular SRF programs to meet their specific needs and constraints. A number of variations of funding programs are possible within the basic framework. The federal capitalization grant (seed money) and state matching funds provide the initial money for the SRF. If the fund administrators choose, they may borrow funds in the bond market to supplement this initial funding.

Since 1972, EPA has awarded $44.6 billion under the sewage-treatment construction-grants program. The 1987 Clean Water Act Amendments authorize an additional $18 billion, total, for the construction-grants program through 1990 and the SRF program through 1994. Of this amount, $9.6 billion is authorized for continuation of construction grants, and at least $8.4 billion is for use as capitalization grants to set up the SRFs. The states also have the option of switching over $4.8 billion from the construction-grant funds to the SRFs. All federal money in the SRF program must be matched by at least 20-percent state funding. The construction-grants program continues to have a match requirement, usually with local governments providing 45 percent of the funding.

"These state revolving funds will help local governments reduce the cost of raising capital to finance sewage-treatment-construction projects," Jensen explained. "The funds will allow local governments to borrow money in the bond market at a lower cost than possible on their own. The federal 'seed money' in the funds can extend state and local dollars and finance more projects than either state or local sources could on their own. Also, repayments to the revolving funds will allow for a stable source of financing for sewage projects over the long term. In addition, the 1987 Amendments stipulate that state loan rates to local governments cannot exceed market rates. Loans must be repaid within 20 years."

The SRF also can be used for loan guarantees to reduce the interest charge and overall cost of private loans to local communities; for bond insurance to improve credit-market access or to reduce costs of bonds to local communities; and for refinancing existing obligations if the debt was incurred and construction initiated before March 7, 1985. Federal money in the SRF must first be used by states to meet the Clean Water Act June 1988 deadline for sewage-treatment plants to meet their permit requirements for adequate water treatment. Once this requirement is met, funds may be used for certain other projects in the Clean Water Act, including non-point-source pollution (diffuse sources of water pollution such as farm-field runoff) and estuary-management programs.

The notice of availability of the SRF guidance is published in today's Federal Register.