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Congressional Testimony
October 31, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2070 words
COMMITTEE:
SENATE ENVIRONMENT AND PUBLIC WORKS
SUBCOMMITTEE: FISHERIES, WILDLIFE AND WATER
HEADLINE: WATER PURIFICATION PROGRAMS
TESTIMONY-BY: RICK FARRELL, EXECUTIVE DIRECTOR,
AFFILIATION: COUNCIL OF INFRASTRUCTURE FINANCING
AUTHORITIES
BODY: October 31, 2001
Written
Statement of Rick Farrell Executive Director, Council of Infrastructure
Financing Authorities
Before the Subcommittee on Fisheries, Wildlife,
and Water
Senate Committee on Environment and Public Works U.S. Senate
My name is Rick Farrell and I am here today in my capacity as Executive
Director of the Council of Infrastructure Financing Authorities. CIFA is a
national organization made up primarily of state and local officials engaged in
the development and financing of water and wastewater pollution control projects
and the operation of
State Revolving Funds for infrastructure
financing. The organization counts among its members 44 states, the District of
Columbia and the Commonwealth of Puerto Rico. The people who represent the
member entities of CIFA are some of the most respected finance officials in the
country, and bring countless years of experience in the public and private
sectors to bear in their day to day functions.
We appreciate the
opportunity to share our views with the Subcommittee on the important issue of
improving utilization of available water and wastewater infrastructure funding.
With the ever-increasing projections of need for environmental infrastructure of
all kinds it is clear that available resources must be utilized in ways that
maximize their effect. I note the particular focus on financial innovations. Our
members have been in the forefront of creating and implementing financial
structures that effectively stretch the available federal and state dollars
while operating within the limits of statute, federal oversight, and fiscal
responsibility. An important part of the CIFA mission is to foster such
innovation and encourage the exchange of information concerning best practices
in infrastructure financing among the States, and between the States, the
national government, and the private sector.
I want to first address the
context in which the effort to foster innovation and new approaches takes place.
As Congress considers the policy and funding questions deriving from the
enormous anticipated capital needs for wastewater and drinking
water
infrastructure, it is our strong view that the foundation for future
progress must remain the
State Revolving Fund programs. It is
vital as well as sensible that the SRF partnership between the federal and state
governments continue as the basic mechanism for
water
infrastructure assistance to local units of government throughout the
country.
The State Revolving Loan Funds are arguably the most successful
environmental programs ever. Since 1989, the Clean Water SRF has provided
$
33.6 billion in low interest loan funding for over 9,500
individual projects, while the Drinking Water SRF has provided
$
3.2 billion in assistance, both loans and grants, for over
1,500 projects in a little less than four years.
The proven track record
argues strongly in favor of the SRFs as the premier mechanism for delivery of
environmental infrastructure construction subsidies. With congressional support
and cooperation of the Environmental Protection Agency the SRFs are positioned
to facilitate the next wave of initiatives and activities to assure water
quality, and will do so in a cost- effective, efficient, and creative manner.
Consistent with our strong support for the SRF model, we are opposed to
the creation of independent grant programs operating outside of the state SRFs.
The federal - state partnership and the successes it has created would be
severely threatened by the onset of separately delivered grant programs,
earmarking, and other alternate funding mechanisms. Separate grant programs not
only complicate the funding process at the local level but often also serve to
delay project initiation because the prospect of a grant diminishes the
incentive to pursue other assistance such as a
state revolving
fund loan. These unintended consequences of delaying project initiation
and creating unrealistic expectations are often exaggerated in the case of
economically distressed communities where the needs are often most urgent.
Programmatically, it clearly makes most sense to provide all
infrastructure construction subsidies, be they in the form of subsidized loans,
grants, or grant equivalents such as principal forgiveness, through the SRF
structure that is already established and has been successfully functioning in
all the states since 1989.We should strive for fewer, not more programs to make
accessing them easier for potential applicants. This saves overhead costs and
reduces the confusion to communities trying to access a multitude of programs.
Economically, it also makes most sense to provide infrastructure construction
subsidies to local communities through the SRF programs since they can provide
this assistance more efficiently than can independent grant programs. The goal
should be to provide the subsidies necessary to get projects completed, not to
provide grants to all. Using the SRFs to target subsidies -perhaps with grants
as well as with loans-extends valuable infrastructure dollars, a key goal for us
all. Efficiency gains achieved by the SRF programs translate into more
infrastructure construction than can be achieved by comparable grant programs.
The success story of the SRFs is clearly a model that should be built upon.
Indicative of the vitality of the SRF program to facilitate financial
innovation is the capacity it affords to leverage the funds. Leveraging, in the
SRF context, means that states have the ability to use the federal capital
grants, as well as their matching share, as collateral to borrow in the public
bond market for purposes of increasing the pool of available funds for project
lending. This option allows the states to use the funds as security or a source
of revenue for the payment of principal and interest on bonds, so long as the
bond proceeds are deposited back into the SRF. Security for the bonds may be
provided by any of the SRF assets including anticipated future revenues from
loan repayments. The use of the assets of the SRF to generate new monies which
can be used immediately to fund more projects underscores the true financial
strength of the SRF model.
Leveraging the SRF can dramatically increase
the funds available for lending. Close to $
9 billion has been
added to the loan pool by the 24 states that have leveraged their funds. This
compares with $
18.3 billion in federal capital grants thus far.
The successful leveraging occurring with the SRFs has allowed us to address
serious problems much more quickly than anyone had anticipated by delivering
substantially increased amounts of affordable capital sooner to meet critical
infrastructure needs.There are examples of leveraging that demonstrate a
multiplier effect of project funding levels at two to four times the original
investment.
The Clean Water SRF program authorizing legislation
establishes a state-operated program that utilizes federal capitalization grants
and state matching funds to achieve the mutually desired water quality
goals.After more than 10 years of successful program operation it is clearly the
experience of CIFA member states that the more latitude and operating
flexibility the states are allowed, the greater is our ability to accomplish the
environmental and financial goals of the program.An example of the utility of
flexibility is illustrated by the fact that among all the states and territories
operating revolving funds no two are structured precisely alike, yet all share
the same water quality objectives.While we recognize and acknowledge that the
significant levels of federal dollars involved call for considerable
accountability on the states' part, we also assert that excessive oversight and
'one-size-fits-all' administrative control by the Environmental Protection
Agency can have the effect of stifling our ability to innovate and create
program structures that best accomplish our common goals.The SRF's are
successful because their underlying concept is based on program management and
service delivery at the state and local level with broad accountability at the
federal level.This model should be protected, allowed to flourish, and emulated
in other program areas.
I believe a useful question for the Subcommittee
to look at is why leveraging is not an option for more states and to examine the
underlying issues and concerns of the states in this regard.While the ultimate
decision with respect to leveraging is and must remain within the purview of the
state governments, there are aspects of federal policy and EPA requirements
which, if modified, would likely serve to facilitate expanded
leveraging.Lessening the administrative restraints and requirements of the SRF
programs would also serve to make the programs more efficient, while remaining
accountable under the precepts of the authorizing legislation.Examples of these
limitations include the ability to freely transfer funds between the Clean Water
and Safe Drinking Water SRFs, required pre- approval for certain financing
techniques, including simple leveraging, and the various conditions that must be
satisfied by all recipients of funds made available directly from federal
capitalization grants.
While mindful that the jurisdiction of the
Committee does not extend to tax law, I feel it is important to point out that
any comprehensive review of means available to maximize
water
infrastructure funding should include consideration of the arbitrage
rebate rules as they affect the leveraged SRF programs.In this context,
arbitrage is the difference between the interest rates at which tax-exempt bonds
are issued and the rates at which the proceeds are invested.The states that
operate leveraged SRF programs are compelled by the arbitrage rules to either
limit the rate at which funds can be invested, or rebate to the treasury the net
earnings on those portions of the SRF funds that are considered under these
rules to be bond proceeds.
This greatly reduces the resources available
to fulfill the funds' purpose of providing below-market financial assistance to
help communities meet federal standards for their water programs.CIFA estimates
that in the absence of these restrictions, the affected states could earn an
additional $
100 - $
200 million annually on
their SRF capitalization funds which, when leveraged, would permit an additional
$
200 - $
400 million annual investment in
needed water projects.
The arbitrage rules, which were enacted before
state revolving funds came into existence, were intended to
prevent abusive arbitrage practices, including "over-issuance" of bond
indebtedness beyond the amount to be spent for a particular project as well as
early issuance before bond proceeds are actually needed.Such practices are not
at issue in the case of SRFs, whose earnings, by law, must be retained in the
revolving funds and can only be used for the fund's purpose of financing water
and wastewater facilities.Funds in an SRF, whether capitalization grants, loan
repayments, or earnings on invested monies, can be expended only for eligible
projects listed on the state's current-year Intended Use Plan, and federal
monies are made available only to the extent that verifiable project spending
has or will occur.Prompt loaning out of bond proceeds and other available fund
assets is ensured by the oversight and program audits required by the U.S.
Environmental Protection Agency.These restrictions placed on SRFs by federal law
assure that exemption from arbitrage rebate requirements will not lead to the
abuses that inspired the arbitrage rules.
In conclusion, It is our
position that any congressional initiatives targeting water and wastewater
infrastructure funding, affecting current SRF operations, or expanding the
mission of the SRFs, should be developed with the recognition that innovative
methods of addressing water and wastewater needs are more likely to originate at
the state, rather than the federal, level.The states are closer to the problems
that need to be addressed, and the states are capable of tailoring their
approach to best meet their unique needs.The best hope for discovering and
realizing innovative financing approaches is to give the states wide latitude,
within the constricts of appropriate accountability, in designing and
implementing their locally tailored solutions.
LOAD-DATE: October 31, 2001