James T. Gebhardt, Chief Financial [email protected]
Tracey Hitchen Boyd, Assistant Director of [email protected]
Seth Coulter,Assistant Director of
Investments and Loan [email protected]
22
1.1. Who We AreWho We Are
2.2. SRF OverviewSRF Overview
3.3. Critical Elements for Sustainable FinanceCritical Elements for Sustainable Finance
4.4. SRF Financial Assistance ModelsSRF Financial Assistance Models
5.5. The New York State SRF Model and ExperienceThe New York State SRF Model and Experience
33
• The CWSRF was established by the 1987 Amendments to the federal Clean Water Act to help municipalities finance publicly-owned facilities that reduce or prevent water pollution. The CWSRF succeeded a federal grant program.
• The DWSRF was created by the 1996 Amendments to the federal Safe Drinking Water Act, to provide financial incentives for municipalities and private entities for drinking water infrastructure improvements.
• Federally authorized SRF’s are:
• Capitalized with federal and state grants (State matching grant requirement is 20% of the federal grant).• Governed by Project Priority System & Annual Intended Use Plans.• Designed to provide below market rate loan and other forms of assistance• Designed to recycle capital into new loans as loans are repaid
• Funding lines limit which projects are funded
55Source:: US EPA
•Treatment Works Projects (examples)- New, expanded or rehabilitated plants- Sludge treatment facilities- Collection, trunk and interceptor sewers- Combined sewer overflows- Stormwater pollution abatement
•Non-point Source Projects (examples)- Capping and closure of solid waste landfills- Remediation of contamination from underground storage tanks- Water quality components of municipally owned brownfields- Salt storage facilities- Stormwater management facilities
•Estuary Conservation and Management Plans and Projects
77
Federal EPA Grant
STATEAdd 20%
State Match
Revolving Loan Fund (includes repayments, bond proceeds,
interest, etc.
Assistance to Public Water System: Treatment, Sources,
Storage, Transmission
Repayments return to Fund for future
assistance
• Water Supply Projects (examples)
- Rehabilitation or development of new drinking water sources to replace contaminated supplies
- Facilities upgrade to improve quality of supply
- Storage facilities upgrade
- Installation or replacement of transmission or distribution mains
- Promotion of viability through consolidation of water supply services
- Purchase of a portion of another system’s capacity
• Watershed protection – Land Acquisition
1.1. Institutional FrameworkInstitutional Framework
2.2. Managing Institution (s)Managing Institution (s)
3.3. ResourcesResources
• Financial ResourcesFinancial Resources• Professional ResourcesProfessional Resources
1010
• Legal Framework – Federal/State/Local Government Roles
• Judicial System
• Marketplace
• Federal Government
– Establishes National environmental policy through establishment of nationwide laws & regulations (Clean Water Act of 1972)
– Currently provides pass-through funding to States to partially capitalize Revolving Funds
– Federal Environmental Protection Agency (created in 1970) administers the distribution of federal funds and monitors compliance with program rules as established in federal law
– Federal Tax and Securities Laws and Regulations
– Regulatory Oversight (SEC, MSRB, IRS)
• State Government
– State designates agency to receive and administer Revolving Fund dollars
– Provides matching funds to help capitalize Revolving Funds
– Adopts state-level laws and regulations to articulate state-specific program rules and regulations within the Federal framework
– Enforces federal and state environmental laws
– Enabling statute provides bonding authority to EFC
– Bonds are exempt from State Income Taxes
• Local Government
– Point of delivery for essential water quality-related services
– Best equipped to identify the needs of the local population
– Formally the beneficiaries of the Federal Construction Grants Program
– Now eligible recipients of cheap capital through State Revolving Funds
• State Local Finance Law Governs issuance of debt
• Power to raise taxes
• High degree of transparency
– Bonds are exempt from Local income taxes
• Used by citizens and governmental bodies to interpret and
enforce environmental laws
• Also available to protect the contractual rights of investors
• Judicial decisions can influence priorities and practices of
lawmakers and SRF program administrators
• Public infrastructure finance has historically used publicly issued bonds to Public infrastructure finance has historically used publicly issued bonds to raise capitalraise capital
• Adds private capital to government revenues available for providing capital Adds private capital to government revenues available for providing capital for environmental infrastructurefor environmental infrastructure
• Borrowing by some American Cities dates back to the Seventeenth Century Borrowing by some American Cities dates back to the Seventeenth Century
• Well established marketplace comprised of:Well established marketplace comprised of:
– Individuals and institutions looking to invest capitalIndividuals and institutions looking to invest capital– Intermediaries (investment banks)Intermediaries (investment banks)– Ratings servicesRatings services– RegulatorsRegulators– Legal consultantsLegal consultants– Fiduciaries (bond trustees)Fiduciaries (bond trustees)
1717
• Secondary market provides investors with the ability Secondary market provides investors with the ability to buy and sell on an ongoing basis (liquidity)to buy and sell on an ongoing basis (liquidity)
• Essential to ensuring affordable capital and Essential to ensuring affordable capital and enforcing efficient market pricingenforcing efficient market pricing
• Issuer debt repayment supported by user fees or tax Issuer debt repayment supported by user fees or tax revenues, further supported by general obligation revenues, further supported by general obligation pledges to repay debtpledges to repay debt
• Public Ratings issued by independent rating services based on arms-length analysis of the debtors financial and economic condition and bond security pledge
• Annual Financial Reporting Requirements
• Bond Counsel Opinion that debt obligations are validly issued
• Disclosure documents which provide full critical disclosure to potential investors
• Competitive bidding requirements
1919
• Ongoing disclosure provides investors with updated Ongoing disclosure provides investors with updated informationinformation
• Freedom of Information Act provides recourse to Freedom of Information Act provides recourse to investors that believe critical information has been investors that believe critical information has been withheldwithheld
• Courts can act on citizen or bond trustee petition to force Courts can act on citizen or bond trustee petition to force debtor to honor debt obligationsdebtor to honor debt obligations
2020
• Administers the Funds as delegated by federal and state governmentAdministers the Funds as delegated by federal and state government• Interacts with StakeholdersInteracts with Stakeholders• Brand Name in Financial Markets Brand Name in Financial Markets • Provides feedback to Institutional FrameworkProvides feedback to Institutional Framework
• Examples:Examples:
– State Bond Banks: Maine, North DakotaState Bond Banks: Maine, North Dakota
– Dedicated Special Purpose State Agencies: New York, Virginia, Dedicated Special Purpose State Agencies: New York, Virginia, TexasTexas
– State Treasurer’s Office: Massachusetts, MichiganState Treasurer’s Office: Massachusetts, Michigan
2222
2323
• Foreign CapitalForeign Capital - Terms and Conditions Influenced by External - Terms and Conditions Influenced by External
Factors Factors- May Crowd Out Domestic CapitalMay Crowd Out Domestic Capital
• Domestic CapitalDomestic Capital
- Terms and Conditions Determined by Local Terms and Conditions Determined by Local FactorsFactors
- Avoids Exchange Rate RiskAvoids Exchange Rate Risk- Mobilizes Local Financial ResourcesMobilizes Local Financial Resources- Stimulates Local Capital DevelopmentStimulates Local Capital Development
2424
SRFs Rely on Domestic SRFs Rely on Domestic CapitalCapital
• Public capital provided by federal Public capital provided by federal capitalization grants and state capitalization grants and state matching contributionmatching contribution
• Private capital mobilized through the Private capital mobilized through the issuance of tax exempt bonds to issuance of tax exempt bonds to – Retail investors Retail investors – Investment management institutionsInvestment management institutions
• Administering Staff and Borrower StaffAdministering Staff and Borrower Staff– FinancialFinancial
• Investment Investment • CreditCredit• Structuring/ Terms negotiationStructuring/ Terms negotiation• Disbursement & Debt ServicingDisbursement & Debt Servicing
– LegalLegal• FinanceFinance• EnvironmentalEnvironmental
– AccountingAccounting– EngineeringEngineering
• TechnicalTechnical• Program PlanningProgram Planning
Financial Advisor - Assists in the bond sale. Including:• Verifies cash flows • Leads negotiations of bond sales to underwriting team (negotiated sales)• Investment of bond proceeds and debt service reserves
Underwriters - Sell bonds to investors at the best possible price (negotiated sale) Bond Counsel - Assists with meeting all legal requirements related to the bond sale and providing legal opinion for investors that the bonds are legally issued and binding on the SRF managing institutionUnderwriter’s Counsel - Represents underwriters and is responsible for full disclosure of all material issues to prospective investors in the disclosure documentBond Trustee - Takes all actions necessary to protect bondholder intercepts and seek enforcement of payment obligation to bondholders, if necessaryRating Agencies - Issues bond ratings which inform investors about credit strength including bond security provisions and ability/willingness of the SRF managing institution to make debt service payments over time
• Investors - value - oriented
• Government Officials – knowledge and support
• Bankers - marketing
• Users - willingness to pay
2828
• General Public
• Federal and State Government
• Borrowers (Local Governments and qualified private entities)
• Advocacy Groups (environmental, economic development)
• Investors
• Public Finance Practitioners
2929
Guarantee
Cash *
Reserve **
Direct Loan *
Low
Moderate
Moderate
High
Market Access to weak anduntested local governmentborrowers
Offers below market rate loanswith low administration over-head
Matches below market rate loanswith maximum investment returns
Offers loans at zero to marketrates; low administrative overhead
* Favored by states with small capital allocations and high incidence of small rural communities** Favored by states with large capital allocations
Model Capital Requirements Primary Benefits
3131
SRF Guarantee
Financial Market
Borrowers
Loan
Proceeds
at SRF
Bond
rates
Loan Repayments
Repayment in the event of borrower
default
Federal Capitalization and State Matching Grants
3232
Federal Capitalization and State Matching Grants
SRF Program Equity
CWSRF
and
DWSRF
Direct loansLoan
Repayments
SRF Bond Issue
Reimbursement
Loan Repayments
3333
Federal Capitalization and State Matching Grants
SRF Bond Proceeds
SRF Program Equity
Reserve Allocations
Borrower FinancingsRecycled Reserves
Bondholder Repayment
Bond debt service in the event of default
Borrower Repayments net of
interest subsidyInterest Rate Subsidy
3434
Federal Capitalization and State Matching Grants
SRF Program Equity
CWSRF
And
DWSRF
Direct loans
Loan Repayments
3535
• Created in 1970 by an act of the State Legislature as a public benefit corporation separate and apart from the State
• Governed by a board of directors that consists of three ex-officio members
State Commissioner of Environmental ConservationState Commissioner of HealthSecretary of State
and four private citizens, appointed by the Governor and confirmed by the State Senate
• Administer the Clean Water and Drinking Water State Revolving Funds (SRFs)
• Finance certain environmental programs on behalf of the State, including State contributions to the SRFs
• Finance through the issuance of bonds, water management, solid waste disposal, sewage treatment and pollution control projects on behalf of private sector entities
• Provide technical assistance to public and private sector entities on sewage treatment and collection, solid waster disposal, materials recycling, hazardous waste abatement and pollution control practices
• Loans– Short Term
• Up to 3 years for planning, design and early construction• Interest Free
– Long Term• Bond Financed
– Investment grade– Subsidized Interest of 50% or 33 1/3rd %
• Direct – Non-Investment grade– Hardship: Reduced rate to 0%
• Grants (DWSRF only)• Guarantees (under consideration)
As of 9/30/04
Clean Water SRF• New York Program established in 1989
• $2.5 billion in Capitalization Grants and• $491 million State Match Contributions• $8.45 billion in CWSRF Bonds• 692 loans• 1,235 projects financed
Drinking Water SRF (jointly administered by EFC and NYS Dept. of Health)
• New York Program established in 1997• $374 million in Federal Capitalization Grants and• $265 million State Match Contributions• $965 million in DWSRF Bonds• 163 loans, 122 grants• 452 projects financed
Consists of:
• Participation at local government conferences
• Distribution of Intended Use Plan (IUP) to local government officials and engineering, finance and legal professionals
• Program information, including project listing and loan applications available on the EFC’s website (www.nysefc.org)
• Community Assistance provided by dedicated staff throughout the project development and loan development process
Consists of:
• Application Reviews and Assistance• Loan Sizing• Financial Engineering• Credit Review• Financing Contract Development• Loan Closing and Investment Deployment • Disbursement of funds and Loan Servicing for 20-30 years
4242
BeginProject
Identify Need for &Scope of Project
Identify All FundingSources
Develop TechnicalPlanning Report
IUP ListingDevelop M/WBE-EEO Workplan
Apply to StateComptroller for SewerDistrict Approval 6 - 9Months Prior to Loan
Application **
BeginEnvironmental
Review
Apply to StateComptroller for Debt
Exclusion 1 - 2 MonthsPrior to CWSRF
Application **
DevelopProfessional Services
AgreementsIntermunicipalAgreements **
Bond Resolution
Submit Short-TermCWSRF Application
& ApplicableComponents
(See ApplicationChecklist)
Short-TermCWSRF Closing
Short-Term CWSRFProceeds Availablefor Planning, Design& Associated Costs
BeginDesign
DevelopPlans &
Specifications
Apply for PermitsAcquire Title for
Project Site
Short-TermCWSRF Proceeds
Available forConstruction Costs
Bid Project
AwardConstruction
ContractsIssue Notice To
Proceed
Submit Long-TermCWSRF
Application &Applicable
Components
Signed ProjectFinancing Agreement
&ApplicableDocuments
SubmitEngineer's
Certification ofProject
Completion
CompleteConstruction
Long-Term CWSRFClosing
Long-Term CWSRFProceeds Available
IUP Pooled CWSRFTarget Closings Dates
Winter PoolSummer Pool
PROJECT & FINANCING TIMELINE FOR A TYPICAL CWSRF PROJECT *
* The timeline for your project may look different from this example, depending on status of project progress and the type and timing of needed financings. Thistimeline is organized to show the relative sequence of the process for an ideal scenario.
IUP Pooled CWSRFApplication Deadlines
Winter PoolSummer Pool
** if applicable for your project
CWSRFRepayment
Begins
First Payment MadeWithin 1 Year of
Project CompletionOR Within 2 Years of
the First Financing
NYSEFC 09/13/02
Permits IssuedPlans &
SpecificationsApproved
SubmitCertification OfTitle To Project
Site
C-1
3
Six Factors Are Reviewed By EFC Staff:1. Repayment history of prior or outstanding debts2. Debt levels and fiscal management practices3. Financial health (financial results of past
three years)4. Strength of the local economy 5. Strength of local contract provisions such as:
- trust indentures- intermunicipal agreements- operating agreements
6. General Management Practices
• SRF loans are secured by legally ratified and binding borrower bond obligations
• SRF borrower’s loan obligations require that principal and interest payments equal borrower’s share of EFC bond debt service requirement
• SRF Debt Service Reserve Fund (DSRF) is funded at a level equal to at least one-third of the loan and maintained at that level, and must be used if the borrower fails to pay
• Reserve deficiencies are replenished from lien on free-up from other borrower reserves
• The New York State SRF statute permits EFC to intercept any state aid payments appropriated by the legislature to the borrower
State aid is approximately $2.5 billion
• EFC may take legal action in the New York State court system
• U.S. Treasuries, U.S. Government Guaranteed Securities or Government Sponsored Enterprises such as Fannie Mae and Freddie Mac
• Municipal Securities rated Aa/AA or better
• Collateralized Investment Agreements
• Forward Purchase Agreements
4747
• Provided by each of the major rating agencies:
Moody’s Aaa Standard & Poor’s AAA Fitch AAA
• Ratings based on oversized reserves, flow of funds arrangement, pledge of local government bonds and NYS SRF credit criteria and management
4848
MFI Loan Principal Balances by Moody's Rating as of 10/1/04
Ba (1), $1,735,000, 0.1%
Baa (64), $350,937,568, 17%
A (75), $488,143,035, 24%
NR (160), $671,880,898, 33% Aa (28), $364,857,487, 18%
Aaa (3), $170,552,354, 8%
4949
MFI Loan Principal Balances by Pledge as of 10/1/04
State (3), $36,955,000, 2%
General Obligation (311),
$1,595,812,020, 78%
Revenue (17), $415,339,322,
20%
5050
MFI Loan Principal Balances by Type as of 10/1/04
Authorities (17), $415,339,322, 20%
Cities (43), $238,783,610, 12%
Counties (22), $619,043,007, 30%
State (3), $36,955,000, 2%
Towns (133), $568,903,478, 28%
Villages (113), $169,081,925, 8%
Fees Paid at ClosingDirect Expenses 1.00%
Program Administration 1.10% (DW only)State Issuance Charge (sliding scale (.14 - .70%)
Annual FeesDW Administration .11%CW Annual Administration .25%
Trustee
• Receive and apply the proceeds of bond issues in accordance with the Indenture provisions• Invest funds in accordance with EFC instructions• Account for and distribute loan proceeds in accordance with requisitions from loan recipients• Preserve and service any collateral or security interest• Allocate funds for debt service
Registrar
• Act as EFC’s agent in maintenance and record keeping associated with the registration and transfer of registered bonds• Issue and authenticate new bonds in the event of transfer or exchange• Maintain bondholder accounts with continuous proof of principal outstanding
5353
Paying Agent
• Pay principal and interest when due• Service bondholder claims for non-payment
Loan Servicing Agent
• Receive Loan Recipients’ debt service payments and deposit to appropriate account for payment to bondholders• Receive other administrative fees charged to Loan Recipients and deposit to appropriate accounts and invest funds at the direction of EFC• Notify EFC of Loan Recipient defaults
5454
Price Distortion
Political Inducement
Time Constrained Resources
Institutional Framework
5555
Drinking Water Equity Account
NYW Financing Indentures
Total : $3,168,731,000 (Senior) Bonds
DSRF (Senior) $1,614,097,128
MFI Total : $1,941,435,000 (Senior) Bonds
De-Allocated Corpus Sub-Account
DeficiencyReserve
Sub-Account
Deficiency ReserveSub-Account
MFI & Non-MFISubordinatedEFC Bonds
$595,680,000Bonds
$4,351,500DSRF
Clean Water Equity Account
As of: Sept. 30, 2004
General Reserve
DSRF (Senior) $900,550,285
Clean Water Loans and DSRFs
Clean WaterSub-Account
DrinkingWater
Sub-Account
Drinking WaterEquity Account
Master Financing Indenture
Clean WaterEquity Account
Drinking WaterLoans and DSRFs
GENERAL RESERVE ACCOUNT
Interfund borrowing allowable under the permitted investment provisions of the Acts
5858
* Simplified for graphic presentation purposes
** Recipient Repayments are made up of independent repayments from the MFI and NYCMWFA as described in this section.
New York State Environmental Facilities CorporationSRF Program Flow of Funds*
Sources and Uses of SRF Funds
Federal Capitalization GrantsClean Water and Drinking
Water
State Matching FundsClean Water and Drinking
Water
NYSEFC MFI Bonds or
NYSEFC NYCMWFA Bonds
Un-allocated Corpus SubaccountDe-allocated Reserve AccountDeficiency Reserve Account
New and Recycled Federal & State Moneys
Direct Financing Agreements
Reserve Allocations
Leveraged Financing
Agreements**
NYSEFC MFI or NYCMWFA Bondholders
Recipient Repayments Net of Subsidy
Interest Subsidy
Recycled Direct Recipient Payments
Recycled Allocated Reserves
State Revolving Funds
Contingent Cash Flows
Master Trust Agreement