Why states should issue bonds to leverage more funds for SRF programs

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WASHINGTON -- States could address a significant part of the nation’s unmet water infrastructure funding gap by issuing bonds to leverage additional funding for their state revolving fund programs and providing SRF-backed loan guarantees to communities, according to a report by the National Resources Defense Council.

The U.S. Environmental Protection Agency’s 2018 survey of water infrastructure needs over the next 20 years estimates the needed investment at about $743.6 billion, with $472.6 billion for drinking water and $271 billion for wastewater and stormwater.

One way to meet that need would be to boost federal spending, which Congress did in March when it approved a 2018 omnibus appropriations bill that increased funding to the two SRFs by a total of $600 million.

EPA water infrastructure spending now totals about $3 billion, according to the nonpartisan Congressional Research Service.

NRDC estimates that annual federal water infrastructure spending must reach $6 billion.

Congress could close some of that shortfall in the fiscal 2019 budget, which is moving through the House and Senate appropriations committees.

The NRDC report also said states could do more even without additional federal funding.

Twenty-two states have not issued any bonds to boost the amount of money available in their clean water state revolving fund or drinking water state revolving fund, the report found.

State are required to provide a 20% match to their federal grants to their SRFs, but can also issue bonds backed by the capitalization of the SRFs.

New York and Massachusetts are leaders in issuing these bonds.

New York has added $9.35 billion and Massachusetts has added $4.69 billion to their clean water state revolving fund through bonds.

New York has added another $1.85 billion and Massachusetts has added $1.2 billion to their drinking water state revolving funds also through bonds.

California has issued $906 million in bonds for its state clean water revolving fund since 2016, according to S&P Global Ratings.

The two SRFs in every state and Puerto Rico are described by EPA as similar to infrastructure banks by providing low interest loans to eligible recipients for water infrastructure projects. As money is paid back into each of the state’s two revolving loan funds, the state makes new loans to other recipients. These recycled repayments of loan principal and interest earnings allow the state to “revolve” the money over time, according to EPA.

The 22 states identified by NRDC for failing to use bonds to boost the amount of money in their SRFs are: Alaska, Delaware, Georgia, Hawaii, Idaho, Louisiana, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.

In only one case involving the state of New York, has any state used the generally high credit ratings for their SRFs to provide loan guarantees to communities or public utilities to help finance local projects, the report said. SRFs generally enjoy high credit ratings even in states where state governments have encountered financial difficultly.

Tim Tung of S&P Global Ratings said SRFs “generally rate very favorably.”

In Kentucky and Illinois -- two states that have experienced budget problems -- the SRFs have triple-A S&P ratings.

The high ratings come as Kentucky's general fund is rated A-plus with a negative outlook by S&P and Illinois' general fund is rated triple-B minus with stable outlook.

“The revolving fund programs in those states benefit from our highest rating level and that’s because of the structure they use to issue those bonds and the security that’s been provided,” Tung said. “It’s important to note that those ratings and the credit quality of the pool is independent of the states’ general fund ratings. That’s why there’s quite a bit of separation between those rating levels.”

Moody’s Investors Service said “the majority” of the SRFs it rates carry an Aaa rating.

Rob Moore, the primary author of the NRDC report, emphasized that states can take action to boost their water infrastructure investments under existing federal law.

By not fully utilizing bonding or offering loan guarantees through their SRFs, states are denying local governments and public water utilities a way to “leverage more money more cheaply than they currently can,” Moore said.

“There’s a shiny unused tool in the toolbox that’s not available to them. And the states need to make it available to them. It’s a commonly used instrument in almost every other infrastructure sector but it’s one that going completely unutilized in the water infrastructure sector.”

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