00-26353. Transfer and Cross-Collateralization of Clean Water State Revolving Funds and Drinking Water State Revolving Funds

AGENCY:

Environmental Protection Agency.

ACTION:

Policy statement.

SUMMARY:

Enactment of the Safe Drinking Water Act (SDWA) Amendments of 1996 and the Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act of Fiscal Year 1999, (Appropriations Act) provide flexibility to States for both their drinking water and wastewater needs. The SDWA Amendments established the Drinking Water State Revolving Fund (DWSRF) and also contain a provision authorizing States to transfer funds between the DWSRF and the Clean Water State Revolving Fund (CWSRF). Congress also created additional flexibility by authorizing a form of cross-collateralization in the Appropriations Act. With proper planning, priority setting, and public disclosure, these two provisions can assist the States in maximizing their infrastructure funding programs by increasing the availability of funds where they are most needed, enhancing bond ratings, and lowering borrowing costs without increasing risks.

Since there are similarities between the two SRF programs, the Environmental Protection Agency (EPA) intends to administer the two programs in a similar manner in regard to transfers and cross-collateralization. Requirements regarding transfer and cross-collateralization of funds are contained in EPA's Interim Final Rule, Drinking Water State Revolving Funds (see 65 FR 48286). This policy establishes EPA policy regarding the use of these two provisions in funding DWSRF and CWSRF projects. It identifies the process a State must undergo to gain EPA approval for incorporating transfers and/or cross-collateralization into its SRF program.

DATES:

This policy statement is effective October 13, 2000.

FOR FURTHER INFORMATION CONTACT:

For technical inquiries, contact Sheila Platt, State Revolving Fund Branch, Municipal Support Division, Office of Wastewater Management (MC-006 4204), U.S. Environmental Protection Agency, Ariel Rios Building, 1200 Pennsylvania Avenue, NW., Washington, DC 20460. The telephone number is [phone] and the e-mail address is [e-mail]. Copies of this document can be obtained from EPA's Office of Wastewater Management website at www.epa.gov/​owm/​finan.html.

SUPPLEMENTARY INFORMATION:

Background

Section 302 of the SDWA Amendments authorizes a State to transfer up to 33 percent of the amount of a fiscal year's DWSRF program capitalization grant to the CWSRF program or an equivalent amount from the CWSRF program to the DWSRF program. The Fiscal Year 1999 Appropriations Act (Public Law 105-276) authorizes cross-collateralization between the DWSRF and CWSRF programs.

EPA released a draft policy entitled “Transfer/Cross-collateralization Policy for the DWSRF and CWSRF” in June 1998 which specified the provisions that States must meet in order to gain EPA approval for incorporating transfers and cross-collateralization provisions into their programs. The draft policy has been used for the past two years for review and approval of State transfer and cross-collateralization proposals. The policy was developed with substantial review and comment from EPA Regional staff, national stakeholder organizations, and a State/EPA SRF Work Group comprised of State DWSRF managers, State CWSRF managers, and managers of State financial agencies. The only major comment received pertained to extending the September 30, 2001 sunset date for transfers. EPA will recommend to Congress that the sunset date for transfers be dropped. This policy statement includes the transfer and cross-collateralization requirements for both the DWSRF and the CWSRF programs.

Dated: October 5, 2000.

J. Charles Fox,

Assistant Administrator, Office of Water.

Transfer and Cross-Collateralization of Clean Water State Revolving Funds and Drinking Water State Revolving Funds

Table of Contents

I. Transfers

A. Statutory Authority

1. Authorized Time Period

2. Transfer Ceiling

B. Transfer Flexibility

1. Transfer Funds

2. Timely and Expeditious Use

3. Expiration of Authority to Reserve or Transfer

4. Transferring on Net Basis

C. State Match, Set-asides, Administrative Ceiling and 604(b) Calculation

1. State Match

2. DWSRF Set-asides

3. CWSRF Administrative Ceiling and 604(b) Calculation

D. Project Funding for Small Systems

E. Intended Use Plan and Operating Agreement

1. Intended Use Plan

2. Operating Agreement

F. Transferring Federal Funds and State Match Funds

1. Payment Schedule/Grant Amendments

2. Cash Draw Proportionality

3. Binding Commitments

4. Cross-cutting Federal Authorities

G. Transferring Other Funds

H. Reporting, Monitoring and Review

II. Cross-Collateralization

A. Authorization

B. Purpose

C. Legislative Authority

D. Operating Agreement and Intended Use Plan

E. Revenues from the Bonds

F. State Match

G. Operation of SRF Programs

I. Transfers

A. Statutory Authority

Section 302 of the Safe Drinking Water Act (SDWA) Amendments of 1996 offers States the flexibility to transfer funds from one SRF program to the other. The transfer provision reads as follows:

Sec. 302. Transfer of Funds.

(a) In General.—Notwithstanding any other provision of law, at any time after the date 1 year after a State establishes a State loan fund pursuant to section 1452 of the Safe Drinking Water Act but prior to fiscal year 2002, a Governor of the State may—(1) reserve up to 33 percent of a capitalization grant made pursuant to such section 1452 and add the funds reserved to any funds provided to the State pursuant to section 601 of the Federal Water Pollution Control Act (33 U.S.C. 1381); and (2) reserve in any year a dollar amount up to the dollar amount that may be reserved under paragraph (1) for that year from capitalization grants made pursuant to section 601 of such Act (33 U.S.C. 1381) and add the reserved funds to any funds provided to the State pursuant to section 1452 of the Safe Drinking Water Act.

(b) REPORT.—Not later than 4 years after the date of enactment of this Act, the Administrator shall submit a report to Congress regarding the implementation of this section, together with the Administrator's recommendations, if any, for modifications or improvement.

(c) STATE MATCH.—Funds reserved pursuant to this section shall not be considered to be a State match of a capitalization grant required pursuant to section 1452 of the Safe Drinking Water Act or the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.).

Section 302 states that the governor of a State can reserve up to 33% of its DWSRF capitalization grant for transfer to its CWSRF or an equivalent amount from its CWSRF to its DWSRF. Therefore, a State has the flexibility to prioritize its funding where it has the greatest need.

Both the CWSRF and the DWSRF programs require that an Attorney General's opinion certifying that the SRF program is consistent with State law be submitted with each capitalization grant application. If a State receives a capitalization grant and later decides to transfer funds, the capitalization grant agreement must be amended and an Attorney General's opinion must be submitted certifying that State law permits the State to transfer funds. Transfers must be made by the Governor or by a State official acting pursuant to authorization from the Governor.

1. Authorized Time Period

Funds may be reserved and transferred only during a limited time period:

a. CWSRF or DWSRF funds may be transferred after one year has elapsed since a State establishes its DWSRF Fund (i.e., the date of the first DWSRF capitalization grant awarded to the State for projects), and may include an amount equal to the allowance associated with its fiscal year 1997 capitalization grant. For example, if a DWSRF Fund is established on October 31, 1997 with the award of a capitalization grant for project funds, the first day funds can be transferred is November 1, 1998.

b. Funds may only be transferred “prior to fiscal year 2002” (October 1, 2001).

2. Transfer Ceiling

The amount of the total DWSRF capitalization grant, including any portion awarded for set-aside activities, determines the amount of funds that can be reserved and transferred.

a. The Governor of a State may reserve an amount equal to 33% of the DWSRF capitalization grant and transfer the funds to the CWSRF.

b. The Governor may reserve funds from the CWSRF in an amount equal to no more than 33% of the DWSRF capitalization grant and transfer those funds to the DWSRF.

B. Transfer Flexibility

1. Transfer Funds

Based on section 302 of the SDWA, the DWSRF capitalization grant the State is basing the transfer amount on must have been awarded prior to the transfer of any funds. Section 302 does not limit the transfer of funds to Federal capitalization grant dollars. States may transfer Federal capitalization grant dollars, State match, investment earnings, or principal and interest repayments. When CWSRF Federal funds are transferred, the CWSRF capitalization grant must also have been awarded prior to the transfer of funds. As part of the transfer process, States must identify in both the CWSRF and DWSRF Intended Use Plans (IUPs) that funds will be transferred, the type of funds to be transferred (Federal capitalization grant dollars, State match, investment earnings, etc.), and the effect that transfers will have on the program's ability to fund projects. States may elect to reserve the authority to transfer funds in one year, but not actually transfer those funds until a later time, but no later than fiscal year 2001 (see Table #1).

2. Timely and Expeditious Use

Reserving the authority to transfer funds at a future date is not reserving the actual cash, but is a “credit” for future transfer. Funds must still be used for project or set-aside activities during the time period prior to when the actual transfer occurs. States may then transfer other moneys present in the respective SRF at the time of the transfer.

3. Expiration of Authority to Reserve or Transfer

Funds may not be reserved or transferred after September 30, 2001.

4. Transferring on Net Basis

Moneys may be transferred between the SRF programs on a net basis provided that the 33% ceiling is maintained. Once money has been transferred, even if the donor SRF reaches the 33% limit, it may still be transferred back to the donor SRF from the receiving SRF by a subsequent transfer. Table #2 shows the effect of multiple capitalization grants of $100 each and transfers between the SRF programs.

Another example is a situation where State law does not allow State funds to be used to fund private water systems in the State's DWSRF program. In this case, the State may designate that it will transfer State match funds from the DWSRF to the CWSRF and Federal funds, equal to the State match amount, from the CWSRF to the DWSRF. Since the dollar amounts of these transfers are equal, there is no effect on the amount available to transfer. Table #3 illustrates this example.

C. State Match, Set-asides, Administrative Ceiling and 604(b) Calculation

Transfers do not impact the State match calculation in the capitalization grants, the set-asides calculations in the DWSRF, or the 4% administration and 604(b) calculations in the CWSRF.

1. State Match

In both SRF programs, the State match requirement is 20% of the capitalization grant. Transfers do not affect the calculation of those required amounts in either program. Section 302 of the SDWA stipulates that funds transferred under this provision cannot be considered the required State match for the capitalization grant in either SRF program. The transfer provision cannot be used to acquire State match. Transferred funds cannot be used for the purposes of securing or repaying State match bonds.

2. DWSRF Set-asides

Since set-aside ceilings in the DWSRF are calculated based on the allotment or the capitalization grant, the ceilings are not recalculated as a result of transferring funds.

3. CWSRF Administrative Ceiling and 604(b) Calculation

The 4% administrative ceiling is not calculated using transferred amounts. The calculation of the 4% is based upon the initial capitalization grant. The 604(b) funds are calculated on the allotment.

The following example illustrates the fact that a transfer will have no impact on State match, the DWSRF set-asides, the CWSRF administrative ceiling, and the CWSRF 604(b) calculation. The CWSRF capitalization grant is $10,000,000 and the State match is $2,000,000. The DWSRF capitalization grant is $10,000,000 and the State match is $2,000,000. The State has determined it will use 31% of the capitalization grant for set-aside activities. The State also decided to transfer $3,000,000 from the CWSRF to the DWSRF for additional SDWA project activities. After the transfer, the State match for each SRF program ($2,000,000) remains unchanged because the CWSRF and DWSRF State match is based upon the initial capitalization grants. The DWSRF set-aside calculation does not change ($3,100,000) because the set-asides are based upon the initial capitalization grant amount and/or the allotment. The CWSRF 4% administrative ceiling remains at $400,000 and 604(b) is still calculated at $100,000.

D. Project Funding for Small Systems

Transfers into or out of the DWSRF Fund could impact loan assistance for small systems that serve fewer than 10,000 persons. The SDWA requires that a State use a minimum of 15 percent of all dollars credited to the Fund to provide loan assistance to small public water systems to the extent such funds can be obligated for eligible projects of public water systems. Accordingly, 15 percent of all dollars transferred into the DWSRF Fund must also be used in accordance with the small systems provision of the SDWA.

E. Intended Use Plan and Operating Agreement

1. Intended Use Plan

States must develop an annual IUP for each SRF program for public review and comment that includes a description of the funds to be reserved and/or transferred and how those funds will be used. The IUPs must disclose how and why the decisions to transfer funds were made. EPA encourages States to include a discussion of wastewater and drinking water needs to show the public that the highest priorities are being funded. The IUP must provide sufficient information regarding transfers for the public to understand:

a. The total amount of authority being reserved for future transfer including the authority from previous years;

b. The total amount and type of funds being transferred during the term of the IUP;

c. The impact on the current year's Fund and set-asides; and

d. The long-term impact on the Fund.

Both CWSRF and DWSRF IUPs must be amended if a mid-year transfer is to occur that has not had prior disclosure to the public. For example, the State received its DWSRF capitalization grant in June 1998 and subsequently decides to transfer funds to its CWSRF. Because the current year IUPs did not contain information concerning transfers, the IUPs must be amended (and capitalization grants if transferring federal dollars) and distributed for public review and comment in accordance with the State procedures established for amending IUPs.

2. Operating Agreement

When a State initially decides to include the ability to transfer in its program, the Operating Agreement must be amended to include the method the State will use to transfer funds.

F. Transferring Federal Funds and State Match Funds

Because transfers can complicate the analysis of whether a State is complying with the proper payment schedule, binding commitments, and cross-cutting Federal authorities, the State must identify whether the transferred amount consists of dollars on which these requirements will apply or other dollars. The State must maintain sufficient procedures to ensure proper accounting for transferred dollars.

1. Payment Schedule/Grant Amendments

If a State decides to transfer Federal funds subsequent to establishing a payment schedule, a revised payment schedule will be necessary. Changes to the payment schedule will be effected through an amendment to the grant agreement.

2. Cash Draw Proportionality

Transfers of Federal capitalization dollars or State match dollars will impact cash draw proportionality. Please refer to the “Guide to Using EPA's Automated Clearing House for the Drinking Water State Revolving Fund Program” (EPA-832-B98-003) published in September 1998 for details concerning recalculating proportionality.

3. Binding Commitments

When Federal funds or State match funds are transferred from one SRF program's Fund into the other SRF program's Fund, the State must enter into binding commitments in the receiving SRF program for the transferred amount within one year after receipt of payment or, if payment has already been taken, within one year of the transfer date, in addition to the binding commitments required for its capitalization grant and State match. If funds are transferred from the CWSRF to the set-aside account in the DWSRF, the binding commitment requirement on the amount transferred will not apply. The donor SRF program will not be required to enter into binding commitments on the transferred funds.

4. Cross-cutting Federal Authorities

Cross-cutting Federal authorities apply to transferred Federal funds in the same manner as they apply to the capitalization grant funds in the receiving SRF program.

G. Transferring Other Funds

Since transfers do not relieve the State from complying with those requirements that apply to the amount of the capitalization grant, the State should consider transferring principal and interest repayments and investment earnings rather than transferring Federal and State match funds. Grant amendments, binding commitment requirements and cross-cutters, except for civil rights, do not apply to transferred funds consisting of repayments of principal and interest, and investment earnings. Also, cash draw proportionality will not be impacted by transfers of repayment funds and investment earnings. Please refer to the “Guide to Using EPA's Automated Clearing House for the Drinking Water State Revolving Fund Program.”

H. Reporting, Monitoring and Review

A State must report transfers in the DWSRF Biennial Report and in the CWSRF Annual Report. The reports must identify the amount of funds transferred from one SRF program to the other and how those funds were used. Since the State must be able to track all transfers, a schedule of actual transfers must be included in the reports which can be reconciled with the schedule of expected transfers in the IUP. A State must also explain reasons that funds were not transferred in accordance with the plan described in the IUP, including the impact on the SRF programs.

The State must also report transfers in the financial statements of the SRF programs with corresponding footnotes explaining the type of funds transferred (Federal dollars, State match, principal and interest repayments, or investment earnings).

II. Cross-Collateralization

A. Authorization

The Departments of Veteran Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act of Fiscal Year 1999 (Public Law 105-276) authorizes cross-collateralization between the DWSRF and the CWSRF programs. The language included in the law in regard to cross-collateralization is as follows:

* * * Provided, That, consistent with section 1452(g) of the Safe Drinking Water Act (42 U.S.C. 300j-12(g)), section 302 of the Safe Drinking Water Act Amendments of 1996 (Public Law 104-182) and the accompanying joint explanatory statement of the committee on conference (H. Rept. No. 104-741 to accompany S. 1316, the Safe Drinking Water Act Amendments of 1996), and notwithstanding any other provision of law, beginning in fiscal year 1999 and thereafter, States may combine the assets of State Revolving Funds (SRFs) established under section 1452 of the Safe Drinking Water Act, as amended, and title VI of the Federal Water Pollution Control Act, as amended, as security for bond issues to enhance the lending capacity of one or both SRFs, but not to acquire the State match for either program, provided that revenues from the bonds are allocated to the purposes of the Safe Drinking Water Act and the Federal Water Pollution Control Act in the same portion as the funds are used as security for the bonds * * *

B. Purpose

The drinking water and wastewater community has advocated cross-collateralization to increase the financing flexibility of the CWSRF and the DWSRF. For States which issue bonds, the added security provided by the strength of the CWSRF will enhance the funding capacity in the DWSRF by achieving better bond ratings. Funds from one SRF program can be used to secure the other SRF program against a default.

C. Legislative Authority

The CWSRF and the DWSRF programs require that an Attorney General's opinion certifying that the SRF program is consistent with State law be submitted with each capitalization grant application. If a State receives a capitalization grant and later decides to cross-collateralize, the capitalization grant agreement must be amended and an Attorney General's opinion must be submitted certifying that State law permits the State to cross-collateralize.

D. Operating Agreement and Intended Use Plan

When a State initially decides to include cross-collateralization in its program, the Operating Agreement must be amended to detail how cross-collateralization will be implemented. The State must annually include in the IUP for each SRF program a description of how cross-collateralization will be used, and provide the IUPs to the public for review and comment prior to submitting them to the Region as part of the capitalization grant applications. The IUPs must, at a minimum, describe:

a. the type of moneys which will be used as security;

b. how moneys will be used in the event of a default;

c. whether or not moneys used for a default in the other program will be repaid; and, if it will not be repaid, what will be the cumulative impact on the Funds.

E. Revenues From the Bonds

The proceeds generated by the issuance of bonds must be allocated to the purposes of the DWSRF and the CWSRF in the same proportion as the assets from the two Funds that are used as security for the bonds. States must demonstrate that at the time of bond issuance, the proportionality requirements have been or will be met. If a default should occur, and Fund assets from one SRF program are used for debt service in the other SRF program, the security would no longer need to be proportional.

Proportionality may be achieved at different levels of security. A State may achieve proportionality at the debt service reserve level. If the debt service reserve is the primary security and consists of 35% DWSRF funds and 65% CWSRF funds, the bond proceeds must be allocated 35% to DWSRF purposes and 65% to CWSRF purposes.

A State may also achieve proportionality by requiring that loan repayments on loans made from the CWSRF are pledged, as the primary security, only to the CWSRF bonds (or portion of a joint bond issue) and loan repayments on loans made from the DWSRF are pledged, as the primary security, only to the DWSRF bonds (or portion of a joint bond issue). If principal forgiveness is used as a subsidy for disadvantaged communities funded with bond proceeds in the DWSRF program, this option may not be used since the security would be disproportionate to the security provided by the CWSRF program.

The above are only two examples which can be used to maintain the proportionality of the security for bonds. There may be other options the State will want to explore and submit for EPA approval.

F. State Match

States may not combine the assets of the SRF programs as security for bond issues to acquire State match for either program. States may not use the assets of one SRF program to secure match bonds of the other SRF program.

G. Operation of SRF Programs

States may use, in combination, the assets of the SRF programs as security for bond issues. However, the CWSRF and DWSRF must each continue to be operated separately. States must maintain records so that, for each SRF program, separate financial statements can be compiled and separate financial audits can be conducted. The debt service reserve and interest earned thereon for the DWSRF program and the CWSRF program must each be accounted for separately. Repayments on loans in the CWSRF program must be paid to the CWSRF and repayments on loans made in the DWSRF program must be paid to the DWSRF.

Cross-collateralization does not effect the calculation of set-asides, the 4% administrative ceiling and binding commitments. Payments and cash draw proportionality may be affected if there are defaults. The CWSRF Annual Report and the DWSRF Biennial Report must describe the use of assets of the SRF programs as security for bond issues and any use of moneys from one SRF program by the other as a result of cross-collateralization.

Table 1.—Reserving the Right (Banking) to Transfer in Future Years

Year	DWSRF capitalization grant	Amount reserved for transfer	Banked transfer ceiling	Amount transferred
1997	$100	$33	$33	$00
1998	100	33	66	00
1999	100	33	99	00
2000	100	33	132	00
2001	100	33	165	165
2002	100	1 00	1 00	1 00
Total	600	165		165
1 No funds may be reserved or transferred after fiscal year 2001.

Table 2.—Transferring on a Net Basis

[In this example, the DWSRF capitalization grant in each year is $100. Therefore, the transfer ceiling is $33 for the first year, increasing to $66 in the second year and $99 in the third year, etc.]

Year	Transaction description	Banked transfer ceiling	Transferred from CWSRF-DWSRF	Transferred from DWSRF-CWSRF	CW funds available for transfer 1	DW funds available for transfer 1
1997	CG Award	$33			2 $33	2 $332
1998	CG Award	66			66	66
1998	Transfer	66	20		46	86
1999	CG Award	99			79	119
1999	Transfer	99		86	165	33
1999	Transfer	99	90		75	123
2000	CG Award	132			108	156
2000	Transfer	132		50	158	106
2001	CG Award	165			191	139
2001	Transfer	165	191		0	330
2002	CG Award	0			0	0
1 The maximum either SRF can transfer as the result of banking and previous transfers.
2 Transfers cannot occur until one year after the DWSRF has been established.

Table 3

Year	Transaction description	Banked transfer ceiling	Transferred from CWSRF-DWSRF (Federal)	Transferred from DWSRF-CWSRF (State)	CW Funds available for transfer 1	DW Funds available for transfer 1
1997	CG Award	$33			$33	$33
1998	CG Award	66			66	66
1998	Transfer	66	$40	$40	66	66
1 The maximum either SRF can transfer as the result of banking and previous transfers.