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STATE ACTIVITY
UPDATE
Accelerated Loan Commitment2006
in the SRF Program
EPA
816
N-
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003E
Overview
To date, many State Revolving Fund (SRF)
programs have taken a "Funds on Hand"
approach to lending. This means that each
funding cycle is based on the funds actually
available or on hand at the time project funding
is considered. The funds on hand consist of
the current year grant award, state match, and
any net leveraging funds produced, plus
interest earnings and loan repayments net of
any bond principal or interest payments.
The commitment of only those funds that are
available has been a prudent approach in
ensuring that an SRF does not make
commitments beyond what it can deliver.
However, given that the decision process for
selecting projects can take up to a year or more
and project disbursements can stretch for up to
another 2 to 5 years, SRFs are finding that
current lending practices can result in long lag
times from the time money becomes available
for commitment and the actual disbursement
of funds.
The lag time in fund disbursement combined
with the steady stream of interest earnings and
loan repayments returning to the SRFs has
created a situation for many Clean Water SRFs
(CWSRF) of having relatively large cash
balances and/or undisbursed federal grant,
match, or bond funds. To more effectively
utilize these excess funds, SRFs have begun to
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Table 1 - Funds on Hand Lending
Quarter
1
2
3
4
5
6
7
8
9
10
Fund Balance -
Beginning oft lie
Quarter
510,000,000
1 1,000,000
13,000,000
18,000,000
26,000,000
26,000,000
24,000,000
21,000,000
19,000,000
19.000,000
Loan
Commitments
520,000,000
Loan
Disbursements
2.000,000
3,000,000
7,000,000
4,000,000
3,000,000
1.000,000
Cash
Inflows
$1,000,000
2,000,000
5,000,000
8,000.000
2,000,000
1,000,000
4,000,000
2,000,000
3,000,000
2,000,000
Fund Balance -End
of the Quarter
$11,000,000
13,000,000
18,000,000
26,000,000
26,000,000
24,000,000
21 ,000,000
19,000,000
19,000,000
20.000,000
Table 2 - Accelerated Lending
Quarter
1
2
3
4
5
6
Fund Balance -
Beginning of the
Quarter
510,000,000
9,000,000
8,000,000
6,000,000
10,000,000
9,000,000
Loan
Commitments
520,000,000
Loan
Disbursements
52.000,000
3,000,000
7,000,000
4,000,000
3,000,000
1,000,000
Cash
Inflows
$1,000,000
2,000,000
5,000,000
8,000,000
2,000,000
1,000,000
Fund Balance -End
of the Quarter
59,000,000
8,000,000
6,000,000
10.000,000
9,000,000
9,000,000
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STATE ACTIVITY
UF>D/\TE
situations can result in funding projects years
earlier than under a funds on hand approach,
because careful cash flow analysis can ensure
that the funds will be available to meet the
project disbursement needs when they are
requested. Initiating accelerated lending
requires detailed projections of cash inflows
and outflows. Data considered in making major
cash inflow projections include:
• grant awards/cash draws (net of set-
asides for the DWSRF)
• state match
• interest earnings
• loan principal repayments
• bond proceeds
• release of debt service reserves
other cash inflows (transferred funds,
fees deposited in loan fund)
Data considered in making major cash outflow
projections include:
• disbursements for existing loan
commitments
• interest expense
• bond principal repayments
• deposits to debt service reserves
• other cash outflows (transferred funds,
administrative expenses in CWSRF)
Once the cash inflows and outflows are
identified over time, the net cash (and undrawn
grant funds) can be assessed relative to new
project commitments. Following this approach
an SRF can then evaluate its ability to commit
funds to additional projects on its priority list
until the projected resources are effectively
committed. The analysis of cash flows should
specifically exclude funds that will not be
available to fund projects.
Both California and Oregon have made the
decision to implement accelerated lending
systems using the overall approach described
above. Their specific experiences are described
in the ensuing sections.
CALIFORNIA
California's State Water Resources Control
Board (S WCRB) has taken steps to convert their
CWSRF to an accelerated lending system due to
concern over extremely large cash balances in
the CWSRF's repayment accounts. The
SWCRB initially attempted to resolve the issue
of excess balances by authorizing the
commitment of funds up to 125 percent of
expected repayment monies for a period of five
years. This approach expedited the issuance of
loans, but failed to significantly decrease the
cash balance available for new loans. While the
State recognized that large cash balances
provided a benefit of interest earnings, they
were concerned that large cash balances might
be interpreted as a lack of demand for funds, a
situation that was not true.
To better understand and project their cash
balance position, California developed a cash
flow model. The model can evaluate different
federal capitalization levels and allows analysis
of three alternatives for maintaining minimal
cash balances, thereby ensuring available
project funding in the face of unforseen events
and/or changes. Figure 1 presents the first of
two basic projections from the state's
modeling activity. The solid line presents the
projected cash balance in the program if
California continues to utilize a cash on hand
approach to lending. The dashed line shows
the reduction in the cash balance if cash flow
based lending is employed.
Figure 2 presents the projected cumulative
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Figure 1
I California CW SRF Cash Balance Projection I
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1999 2001 2003 2005 2007 2009
Cash on Hand Approach
Cash Flow Lending Approach
Figure 2
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2000
1800
1600
1400
1200
1000
800
600
400
200
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California CWSRF Cumulative Lending
Projection
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999 2001 2003 2005 2007 2009
Fiscal Year
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STATE ACTIVITY
UPDATE
lending activity under the two scenarios of
implementation. The $25 million target cash
balance that the Board accepted for
implementation was a substantial reduction
from the cash balance levels of $525 million as
of December 31,1998 ($250 million in undrawn
capitalization grants and $275 million in
repayment accounts).
California projected that converting to an
accelerated approach would result in $140
million in additional loan commitments in the
State Fiscal Year 1999 and $210 million in
additional loan commitments over the
subsequent five years.
The fiscal impacts of the implementation of this
system are relatively minor, but worth noting.
The system imposes an additional
administrative burden for the staff to obtain and
monitor payment schedules from present and
future loan recipients. Additionally, the
CWSRF will grow at a slower rate, due to a
lower cash balance earning market interest
rates. However, on balance California felt that
its most important priorities were to accelerate
current loan commitments and demonstrate
effective fund utilization by maintaining a
significantly lower level of funds on hand.
OREGON
Oregon's Clean Water SRF is a direct loan
program that initially only made loan
commitments for funds that were actually on
hand. However, with delays in project start-up
and long disbursement schedules, Oregon's
Department of Environmental Quality (DEQ)
found that there were long delays from the time
when funds were initially available to the point
at which project disbursements occurred. This
resulted in relatively large cash balances and
undrawn grant amounts.
To reduce the lag time in fund utilization,
Oregon made the decision to commit more
project assistance than it has funds immediately
available. By examining the inflows and
outflows of CWSRF funds, DEQ discovered
that the program could commit to loans in
anticipation of future cash inflows as long as it
closely monitored the fund's projected cash
balance. To monitor the fund's cash balance
and to predict the fund's ability to commit to
new projects, Oregon created an Excel based
cash balance model to track the inflows and
outflows of cash in the fund on a quarterly basis.
With the spreadsheet, DEQ can predict the
amount of new loans that the fund can originate
and the effects proposed disbursements would
have on the fund's cash balance.
Once the anticipated financial activity has been
included in the spreadsheet, the state can
evaluate the impact of committing to additional
projects on the fund's cash balance based on
projected project disbursement schedules
submitted by potential borrowers. This becomes
one factor the state considers before making a
loan commitment. However, this analysis does
not supplant either the calculation of funds
available, which determines the total amount of
loans that will be committed each year, or the
priority system which determines the order in
which projects are considered for funding.
Other calculations are used to ensure that funds
remain available for the highest priority projects
when they are ready to construct rather than just
going to a project whose disbursement
projections fit the cash flow gaps. The state will,
on a limited basis, allow for short-term
construction period loans when unusual
construction schedules create significant periods
of time that cash is idle. The cash flow model is
most useful in modeling disbursements before a
loan is signed to be sure that the cash will be on
hand when needed.
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U.S. EPA Hicci:- - -
Mai! C<:Vv-' -:
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STATE ACTIVITY
The cash balance projection spreadsheet uses a
conservative estimate for potential investment
interest and a rapid escalation of administrative
expenses to build a cushion against any
unforeseen changes in the projected ability to
commit funds. As the state gains more
experience in projecting cash flows and
committing funds in anticipation of funds
becoming available, they will be better able to
judge the need for conservative assumptions.
A prudent reserve amount is maintained by the
State to allow for changes to project schedules,
and increases in loan amounts to meet
contingency costs for on-going projects. In
addition, the state allows for the accumulation
of cash to fund large, high priority projects
which has the effect of creating continuing cash
balances.
Figure 3 illustrates the impact that Oregon's
accelerated lending program has had. The
figure presents the cumulative commitment of
funds as a percentage of cumulative funds
Figure 3
Cumulative Assistance Provided
Comparison Based on Ml MS Data
available (on hand) for Oregon and all CWSRF
programs based on National Information
Management System (NIMS) data through
1999.
Through fiscal year 1999, the use of accelerated
loan origination has allowed Oregon to commit
to $38 million more in projects than they would
have committed using the traditional funds on
hand approach to loan origination. By
completing the loan agreements earlier, projects
can meet schedules rather than postpone
construction until the funds are available.
Program cash is used more efficiently and the
state is able to more accurately project the loan
funds that will be available in future years. With
this information, long-term forecasts are
prepared for project management and
administration. In addition, changing its
approach has allowed the state to commit to
short-term loans that provide construction
period financing for projects that will receive
USDA Rural Development funding. Several
projects funded with these short-term loans,
totaling over $15 million
have kept CWSRF funds in
use for communities while
i other higher priority
projects are getting ready
for construction.
1995 1996
I Oregon
1997 1998 1999
- - - -Average
The accelerated lending
approach has become a
useful tool for the state's
direct loan program,
maximizing the use of cash
for the benefit of the
communities and,
essentially, "leveraging"
their own cash flow. The
approach provides an
important piece in using the
CWSRF to make the
greatest impact possible on
water quality programs in
Oregon.
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