Testimony of Rick Farrell

The Council of Infrastructure Financing Authorities
805 15th Street, N.W., Suite 500
Washington, DC 20005
Tel: (202) 371-9694·Fax: (202) 371-6601
Email: cifa@chambersinc.com
www.cifanet.org

Testimony of the Council of Infrastructure Financing Authorities
October 31, 2001

Written Statement
of
Rick Farrell
Executive Director, Council of Infrastructure Financing Authorities

Testimony of Rick Farrell
Executive Director, Council of Infrastructure Financing Authorities

Before the Subcommittee on Fisheries, Wildlife, and Water

Senate Committee on Environment and Public Works

U.S. Senate

My name is Rick Farrell and I am here today in my capacity as Executive Director of the Council of Infrastructure Financing Authorities.

CIFA is a national organization made up primarily of state and local officials engaged in the development and financing of water and wastewater pollution control projects and the operation of State Revolving Funds for infrastructure financing.The organization counts among its members 44 states, the District of Columbia and the Commonwealth of Puerto Rico.The people who represent the member entities of CIFA are some of the most respected finance officials in the country, and bring countless years of experience in the public and private sectors to bear in their day to day functions.

We appreciate the opportunity to share our views with the Subcommittee on the important issue of improving utilization of available water and wastewater infrastructure funding.With the ever-increasing projections of need for environmental infrastructure of all kinds it is clear that available resources must be utilized in ways that maximize their effect.

I note the particular focus on financial innovations.Our members have been in the forefront of creating and implementing financial structures that effectively stretch the available federal and state dollars while operating within the limits of statute, federal oversight, and fiscal responsibility.An important part of the CIFA mission is to foster such innovation and encourage the exchange of information concerning best practices in infrastructure financing among the States, and between the States, the national government, and the private sector.

I want to first address the context in which the effort to foster innovation and new approaches takes place.As Congress considers the policy and funding questions deriving from the enormous anticipated capital needs for wastewater and drinking water infrastructure, it is our strong view that the foundation for future progress must remain the State Revolving Fund programs.It is vital as well as sensible that the SRF partnership between the federal and state governments continue as the basic mechanism for water infrastructure assistance to local units of government throughout the country.

The State Revolving Loan Funds are arguably the most successful environmental programs ever.Since 1989, the Clean Water SRF has provided $33.6 billion in low interest loan funding for over 9,500 individual projects, while the Drinking Water SRF has provided $3.2 billion in assistance, both loans and grants, for over 1,500 projects in a little less than four years.

The proven track record argues strongly in favor of the SRFs as the premier mechanism for delivery of environmental infrastructure construction subsidies.With congressional support and cooperation of the Environmental Protection Agency the SRFs are positioned to facilitate the next wave of initiatives and activities to assure water quality, and will do so in a cost-effective, efficient, and creative manner.

Consistent with our strong support for the SRF model, we are opposed to the creation of independent grant programs operating outside of the state SRFs.The federal - state partnership and the successes it has created would be severely threatened by the onset of separately delivered grant programs, earmarking, and other alternate funding mechanisms.Separate grant programs not only complicate the funding process at the local level but often also serve to delay project initiation because the prospect of a grant diminishes the incentive to pursue other assistance such as a state revolving fund loan.These unintended consequences of delaying project initiation and creating unrealistic expectations are often exaggerated in the case of economically distressed communities where the needs are often most urgent.

Programmatically, it clearly makes most sense to provide all infrastructure construction subsidies, be they in the form of subsidized loans, grants, or grant equivalents such as principal forgiveness, through the SRF structure that is already established and has been successfully functioning in all the states since 1989.We should strive for fewer, not more programs to make accessing them easier for potential applicants.This saves overhead costs and reduces the confusion to communities trying to access a multitude of programs.Economically, it also makes most sense to provide infrastructure construction subsidies to local communities through the SRF programs since they can provide this assistance more efficiently than can independent grant programs.The goal should be to provide the subsidies necessary to get projects completed, not to provide grants to all.Using the SRFs to target subsidies—perhaps with grants as well as with loans—extends valuable infrastructure dollars, a key goal for us all.Efficiency gains achieved by the SRF programs translate into more infrastructure construction than can be achieved by comparable grant programs.The success story of the SRFs is clearly a model that should be built upon.

Indicative of the vitality of the SRF program to facilitate financial innovation is the capacity it affords to leverage the funds.Leveraging, in the SRF context, means that states have the ability to use the federal capital grants, as well as their matching share, as collateral to borrow in the public bond market for purposes of increasing the pool of available funds for project lending.This option allows the states to use the funds as security or a source of revenue for the payment of principal and interest on bonds, so long as the bond proceeds are deposited back into the SRF.Security for the bonds may be provided by any of the SRF assets including anticipated future revenues from loan repayments.The use of the assets of the SRF to generate new monies which can be used immediately to fund more projects underscores the true financial strength of the SRF model.

Leveraging the SRF can dramatically increase the funds available for lending.Close to $9 billion has been added to the loan pool by the 24 states that have leveraged their funds. This compares with $18.3 billion in federal capital grants thus far.The successful leveraging occurring with the SRFs has allowed us to address serious problems much more quickly than anyone had anticipated by delivering substantially increased amounts of affordable capital sooner to meet critical infrastructure needs.There are examples of leveraging that demonstrate a multiplier effect of project funding levels at two to four times the original investment.

The Clean Water SRF program authorizing legislation establishes a state-operated program that utilizes federal capitalization grants and state matching funds to achieve the mutually desired water quality goals.After more than 10 years of successful program operation it is clearly the experience of CIFA member states that the more latitude and operating flexibility the states are allowed, the greater is our ability to accomplish the environmental and financial goals of the program.An example of the utility of flexibility is illustrated by the fact that among all the states and territories operating revolving funds no two are structured precisely alike, yet all share the same water quality objectives.While we recognize and acknowledge that the significant levels of federal dollars involved call for considerable accountability on the states’ part, we also assert that excessive oversight and ‘one-size-fits-all’ administrative control by the Environmental Protection Agency can have the effect of stifling our ability to innovate and create program structures that best accomplish our common goals.The SRF’s are successful because their underlying concept is based on program management and service delivery at the state and local level with broad accountability at the federal level.This model should be protected, allowed to flourish, and emulated in other program areas.

I believe a useful question for the Subcommittee to look at is why leveraging is not an option for more states and to examine the underlying issues and concerns of the states in this regard.While the ultimate decision with respect to leveraging is and must remain within the purview of the state governments, there are aspects of federal policy and EPA requirements which, if modified, would likely serve to facilitate expanded leveraging.Lessening the administrative restraints and requirements of the SRF programs would also serve to make the programs more efficient, while remaining accountable under the precepts of the authorizing legislation.Examples of these limitations include the ability to freely transfer funds between the Clean Water and Safe Drinking Water SRFs, required pre-approval for certain financing techniques, including simple leveraging, and the various conditions that must be satisfied by all recipients of funds made available directly from federal capitalization grants.

While mindful that the jurisdiction of the Committee does not extend to tax law, I feel it is important to point out that any comprehensive review of means available to maximize water infrastructure funding should include consideration of the arbitrage rebate rules as they affect the leveraged SRF programs.In this context, arbitrage is the difference between the interest rates at which tax-exempt bonds are issued and the rates at which the proceeds are invested.The states that operate leveraged SRF programs are compelled by the arbitrage rules to either limit the rate at which funds can be invested, or rebate to the treasury the net earnings on those portions of the SRF funds that are considered under these rules to be bond proceeds.

This greatly reduces the resources available to fulfill the funds’ purpose of providing below-market financial assistance to help communities meet federal standards for their water programs.CIFA estimates that in the absence of these restrictions, the affected states could earn an additional $100 - $200 million annually on their SRF capitalization funds which, when leveraged, would permit an additional $200 - $400 million annual investment in needed water projects.

The arbitrage rules, which were enacted before state revolving funds came into existence, were intended to prevent abusive arbitrage practices, including “over-issuance” of bond indebtedness beyond the amount to be spent for a particular project as well as early issuance before bond proceeds are actually needed.Such practices are not at issue in the case of SRFs, whose earnings, by law, must be retained in the revolving funds and can only be used for the fund’s purpose of financing water and wastewater facilities.Funds in an SRF, whether capitalization grants, loan repayments, or earnings on invested monies, can be expended only for eligible projects listed on the state’s current-year Intended Use Plan, and federal monies are made available only to the extent that verifiable project spending has or will occur.Prompt loaning out of bond proceeds and other available fund assets is ensured by the oversight and program audits required by the U.S. Environmental Protection Agency.These restrictions placed on SRFs by federal law assure that exemption from arbitrage rebate requirements will not lead to the abuses that inspired the arbitrage rules.

In conclusion, It is our position that any congressional initiatives targeting water and wastewater infrastructure funding, affecting current SRF operations, or expanding the mission of the SRFs, should be developed with the recognition that innovative methods of addressing water and wastewater needs are more likely to originate at the state, rather than the federal, level.The states are closer to the problems that need to be addressed, and the states are capable of tailoring their approach to best meet their unique needs.The best hope for discovering and realizing innovative financing approaches is to give the states wide latitude, within the constricts of appropriate accountability, in designing and implementing their locally tailored solutions.