ITEM 1:  CONVERSION OF STATE REVOLVING FUND (SRF) LOAN COMMITMENTS TO A SYSTEM BASED ON CASH FLOW

DISCUSSION:  The current system for determining the amount of SRF loan monies available
to applicants is based on the amount of funding the State Water Resources Control Board (SWRCB) expects to receive in the coming year. The SWRCB also approved Resolution
No. 97-001 allowing the commitment of loan funds for up to 125 percent of future repayment monies for a five year period beginning on January 23, 1997. The increase in the pool of projects approved by the SWRCB, but without loan contracts, has been successful in speeding up the issuance of loans. The speedup, however, has not been rapid enough to reduce the cash balance available for loan disbursements.

The large cash balance results from funds that have been committed to projects, but are not yet disbursed. Historically, it takes an average of 17 months from the time of the SWRCB loan commitment to issuance of the loan contract. It then takes an average of two years to disburse about 90 percent of the project loan amount. While a large cash balance increases the growth of the fund due to interest paid by the Pooled Money Investment Account on SRF cash that is higher than the SRF loan interest rate, these monies should be put to work as rapidly as possible to provide needed infrastructure financing to solve water quality problems.

In addition, the United State Environmental Protection Agency (USEPA) wants the states to obligate (signed loan contracts) SRF repayment funds within one year of receipt. This is the same requirement that is applied to the receipt of SRF Capitalization Grant payments. A copy of USEPA’s Memorandum is contained in Exhibit A. There is a growing concern by USEPA that states are carrying significant cash balances in their repayment accounts. Large SRF cash balances make it difficult to support federal legislation for additional capitalization grants. For example, on December 31, 1998, California’s SRF had the following cash status:

Undrawn Capitalization Grant Monies $249,891,217

Repayment Account Cash $275,320,005

Total $525,211,222

According to USEPA, this large cash potential is not being drawn down as rapidly as it should.

One viable solution to increasing the issuance of loans and to assure a minimum SRF cash balance is to administer the program using a cash flow system. Under the cash flow system, disbursements would be timed to closely follow SRF loan repayments and receipt of Capitalization Grants.

Another viable solution might be to streamline administration of the SRF Loan Program to move projects more rapidly to the loan disbursement stage. Streamlining the program, however, does not have the same assurance of getting funds disbursed quickly as does the cash flow system. Streamlining the SRF administration can be accomplished later to compliment the cash flow system.

A cash flow system will ensure that funding is always available to pay recipients and at the same time enable the SWRCB to accelerate its preliminary loan commitments. Under a cash flow system, loan commitments would be made, as necessary, to balance the cash accruing each year against the disbursements made to loan recipients. This method would reduce the cash on hand to an acceptable minimum balance. The concept of a cash flow system has been reviewed by the Division of Administrative Services and they agree that it complies with applicable accounting standards.

The Division of Clean Water Programs (DCWP) has developed a cash flow model that uses future loan repayments and loan disbursement schedules, and an estimate of the future level of federal capitalization grants to determine the amount of loans that can be issued each year, Conversion to a cash flow system will allow the SWRCB to issue at least $220 million in additional preliminary loan commitments in the next five years even if there are no federal appropriations after SFY 1999/2000. Exhibit B lists the major assumptions used in developing this cash flow system.

The advantage of the cash flow system is that SRF monies are turned around and reloaned on a much faster basis. This results in more projects being funded and additional water quality problems resolved. The disadvantage of using a cash flow system is that it increases the administrative burden on DCWP staff to obtain and monitor payment schedules from existing and prospective loan recipients. The system would require constant attention to assure that sufficient cash is always available to make loan payments. The system might also result in active DCWP management of cash flow for large loan recipients.

Exhibit C contains typical charts showing annual levels of additional loans that could be made available. The charts are based on various levels of minimum cash balances from $25 to $75 million assuming 1) Federal Capitalization Grants end after SFY 1999/00; 2) a minimum federal reauthorization based on receiving $66 million per year for the next five years; or 3) a maximum federal reauthorization based on receiving $165 million per year over the next five year period. The first chart shows the expected cash balance should the SWRCB decide to continue with the current procedure for making preliminary loan commitments.

The following tables summarize three alternative federal Capitalization Grant possibilities described above with three different levels of cash reserves varying from $25 million to $75 million. Holding a minimum cash reserve is necessary to assure that funding will always be available to handle unanticipated changes.

* First year commitment limited to a maximum of $200 million because of time and administrative impact involved in getting projects ready to go the SWRCB.

The DCWP proposes that the SWRCB adopt the use of a cash flow system for issuing loans beginning immediately. The DCWP has examined each of these alternatives and proposes that the SWRCB adopt Alternative B.1, which assumes a minimum five year federal SRF reauthorization of $66 million per year while keeping a $25 million minimum cash balance. The $25 million cash balance was selected because it amounts to about 10 percent of our annual expected expenditures, which is a standard percentage for retaining a reasonable reserve to address future unknowns. Alternative B.1. was selected because we believe it to be a conservative estimate of future federal funding. This alternative will maximize the loan issuance potential while leaving a sufficient cushion ($25 million) to handle unforeseen events. Regardless of the alternative chosen, the DCWP will continually monitor federal funding, and adjust SRF loan issuance to projected income and disbursement schedules..

In order to implement the staff recommendation, the SWRCB will need to raise the current cap of $10 million set for this fiscal year. Based on the additional funds made available under the recommended alternative, the DCWP proposes that the cap be raised to $25 million for SFY 1998/99 and 1999/2000.

POLICY ISSUE:  1.) Should the SWRCB approve the use of a cash flow system to issue loans; 2.) Should a minimum cash reserve of $25 million be maintained; and 3.) Should the SWRCB raise the cap on funding for SFY 1998/99 and 1999/00 to $25 million?

FISCAL IMPACT:  There is no significant fiscal impact to the program as a result of this proposal. There would be an administrative burden created by the need to obtain applicant cash draw schedules and to monitor these schedules closely. The DCWP estimates that the current staff year allocation for SRF administration is sufficient to handle the increased workload. The SRF will have a substantially lower cash balance than currently exists, which will lower the interest earned on that balance. As a result, the SRF will not grow as fast, but the money will be recycled faster resulting in construction of more infrastructure projects.

RWQCB IMPACT:  None

STAFF RECOMMENDATION:  That the SWRCB approve: 1.) the use of the cash flow system based on Alternative B.1. for awarding SRF loans; 2.) approve a minimum cash reserve level of $25 million; and 3.) raise the funding cap to $25 million.

[Attachments not available electronically but can be obtained by calling Mr. Eric Torguson at (916) 227-4449.]

WHEREAS:

1. The State Water Resources Control Board is delegated authority by the Operating Agreement to administer the SRF Loan Program.

2. Water pollution control efforts are best served by efficiently managing the use of monies in the SRF.

3. The United States Environmental Protection Agency (USEPA) has expressed concern over the buildup of large cash reserves in the states’ repayment funds.

4. As of December 31, 1998, the SRF Repayment Account had a cash balance of $275.2 million and undrawn federal Capitalization Grant and State Match monies totaled $249.9 million.

5. The USEPA has issued guidance directing the states to issue SRF loans from the Repayment Account within one year of receipt of funds.

6. The Division of Clean Water Programs has evaluated alternatives and concluded that implementation of a cash flow system based on a conservative estimate of future federal financing would achieve compliance with USEPA requirements and result in greater pollution control benefits as a consequence of recycling funds at a faster pace.

THEREFORE BE IT RESOLVED THAT:

The State Water Resources Control Board:

1.  Approves the implementation of a cash flow system based on conservative estimates of
     future federal funding (Alternative B.1.);

2.  Approves the maintenance of a minimum cash reserve of $25 million; and

3.  Approves raising the funding cap to $25 million for SFY 1998/99 and 1999/2000.

The undersigned, Administrative Assistant to the Board, does hereby certify that the foregoing is a full, true, and correct copy of a resolution duly and regularly adopted at a meeting of the State Water Resources Control Board held on May 20, 1999.

Maureen Marché
Administrative Assistant to the Board

1. The cash flow analysis assumes that a period of two years elapses between the State Water Resources Control Board (SWRCB) preliminary loan commitment and the award of the loan contract. Actual State Revolving Fund (SRF) data shows the period to be 17 months.

2. Cash outlays under future federal capitalization grants begin one year after the United States Environmental Protection Agency’s award of the grant. All cash from future capitalization grants is assumed to be disbursed in five years.

3. This analysis assumes that new loans are issued within one year of receipt of loan repayments.

4. Repayments on future capitalization grants begin six years after USEPA awards the capitalization grant. This is based on historic program data.

5. A period of four years is used between the receipt of repayments and full disbursement of the cash to new loan recipients. This is based on historic program data.

6. The minimum federal reauthorization would be for five years based on a national appropriation of $800 million annually. California’s share is assumed to be 7.24 percent, or
$66 million with the 20 percent state match.

7. The maximum federal reauthorization would be for five years based on a national appropriation of $2.0 billion annually. California’s share is assumed to be 7.24 percent, or
$165 million with the 20 percent state match.

8. If federal Capitalization Grants cease, the Federal Fiscal Year 2000 grant will be the last year the program is funded by Congress.

9. The SWRCB will have sufficient bond monies, or funds from other sources to provide the required 20 percent state match.

10. The interest rate used for future SRF loans is 2.0 percent. This is based on the average interest rate for all loans taking into account the local match program.