CHICAGO — After an eight-year lull in state revolving fund borrowing, Illinois is poised to return to the market next year to fund low-cost loans to municipalities under a $1 billion Clean Water Initiative launched by Gov. Pat Quinn.
Quinn is touting the expanded state revolving fund program — from $300 million to $1 billion — as both an affordable means to overhaul the state’s aging clean water and wastewater infrastructure and as an economic boost that will create 28,500 jobs.
“Illinois is defined geographically and historically by waterways,” Quinn said. “Our Clean Water Initiative will put thousands of Illinoisans back to work, protect and improve our drinking water, and preserve this precious, irreplaceable resource for future generations.”
The Illinois Finance Authority will manage the financing with the Illinois Environmental Protection Agency continuing to administer the loan program. The IFA last issued SRF bonds in a $130 million issue in 2004. Its predecessor agency, the Illinois Development Finance Authority, launched the first borrowing to fund SRF loans in 2002 with a $150 million sale.
Quinn will promote the initiative Friday in an address to local municipalities meeting at the Illinois Municipal League’s annual conference in Chicago.
Although there’s no shortage of applicants, education is needed because many municipalities did not consider the state revolving fund as an option given the state’s limited capacity in the past, according to IFA executive director Christopher Meister. Officials said more than 350 local governments have voiced an interest in the program to upgrade aging water mains and treatment facilities.
The IFA over the summer conducted a request for proposals process for underwriters interested in participating on SRF bond sales. State officials are in the process of reviewing the proposals that were due by Sept. 28. “We are hoping to issue after the first of the year,” Meister said.
The SRF is funded with federal grants, a one-time infusion in federal stimulus program funds, a federally required state match, plus the principal and interest from loan repayments. The cash-strapped state does not anticipate putting any new tax dollars toward loans with equity provided by the existing loan portfolio.
The RFP asks underwriters to “discuss how IFA can structure this issue to meet state matching requirements through the proposed financing and support ongoing administrative and compliance costs for the life of the bonds for IFA and IEPA.”
Meister said demand for funding and the winding down of stimulus funds that had been available over the last few years drove the timing of the program’s expansion. The structure of future deals will be set with the help from selected underwriters.
“Due to the changing market and regulatory environment, the leveraging program is currently undergoing restructuring,” the RFP said.
The state revolving fund was established in 1989 and has provided more than $3.7 billion in loans. In 2012, the SRF programs received 447 pre-applications with total project costs totaling nearly $2.3 billion. “The high demands underline the immediate need to fully leverage the programs in order to maintain and improve the state’s water and wastewater infrastructure,” the RFP says.
The the IFA anticipates selecting up to five senior managers with the capital capacity to take down up to $500 million of bonds and up to eight co-managers with capacity to take down up to $100 million. Team sizes will vary according to the transaction, according to the RFP.
The state’s previous SRF deals carried triple-A ratings from Fitch Ratings and Moody’s Investors Service primarily because of its use of a hybrid structure that permits the use of excess cash-flow reserve fund structure as well as reserves to provide coverage on debt service.
The biggest borrower of the revolving fund at the time of the 2004 deal was the triple-A Metropolitan Water Reclamation District of Greater Chicago.
A recent report published by the Center for American Progress called for billions in more bond financing annually for the nation’s drinking and wastewater systems.
The most recent Environmental Protection Agency estimates, made in 2009 and 2010, projected that U.S. water infrastructure would require $635 billion of investment over 20 years, just under $32 billion annually, an estimate the center’s report said was way too low. The federal stimulus allocated $4 billion to the clean water state revolving fund.