STATE REVOLVING FUND MISCONCEPTIONS

Water Protection Program fact sheet
03/2014
Division of Environmental Quality Director: Leanne Tippett Mosby
PUB2263

If your community has ever discussed making upgrades to its wastewater or drinking water facilities, you probably have heard about funding programs like the U.S. Department of Agriculture -Rural Development Program, Community Development Block Grant Program offered by the Missouri Department of Economic Development and State Revolving Fund Programs offered by the Missouri Department of Natural Resources.

The days of 100 percent construction grants are long gone and the reality is that all communities will have to borrow money for water and wastewater infrastructure at some point. As stated above, there are several choices out there. However, we believe the State Revolving Fund provides the most interest savings.

Many communities miss out on excellent savings opportunities, simply because of lack of good information or misconceptions associated with SRF funding programs. This ultimately leads to unnecessary spending on a tight budget and extra money out of taxpayer’s pockets. Can you think of ways to efficiently maximize your community’s budget for other important local initiatives rather than paying it out in interest?

Missouri’s State Revolving Fund Program Common Misconceptions
If the community doesn’t go through the State Revolving Fund Program, also known as the SRF Program, they won’t have to pay state wage rates. This is false. All communities and other political subdivisions must pay state wage rates. This includes water districts, sewer districts, cities, counties and essentially any other political subdivision that is going to build something by contract. City employees through a force account may undertake construction activities at their normal rate of pay if the project is not bid.

SRF interest savings are offset by having to pay state wage rates. There are two exceptions to paying state wage rates, a force account as discussed above and lease purchases. The difference in wage scale between the state wage rate and the nonstate wage rate is not as significant as some believe. Wage rates are based on the average wage currently being paid in a particular county. The community will probably still be paying close to that rate. The savings in labor cost are often an increase in profit to the contractor instead of savings to the community.

A. For example, a $450,000 lease purchased project at 5.6 percent interest for 20 years will have an interest cost of $309,375. A community that sells $450,000 of bonds on the open market for 5.1 percent interest for 20 years will have an interest cost of $278,320. An SRF project with a 5.1 percent interest rate for 20 years will have a subsidized interest rate of approximately two percent and an interest cost of $110,782.

B. The savings are much more dramatic if the loan is large. A $2.5 million lease purchased project at 5.6 percent interest for 20 years will have an interest cost of $1,718,748. A community that sells $2.5 million of bonds on the open market for 5.1 percent interest for 20 years will have an interest cost of $1,546,218. An SRF project with a 5.1 interest rate for 20 years will have a subsidized interest rate of approximately two percent and an interest cost of $615,456.

We don’t think we can pass a bond issue to do this project, but we think the citizens won’t notice that they are still paying for this project if we lease purchase without a vote. If the citizenry won’t vote to pay less for a government-subsidized loan, then why would they support a lease purchased project for a significantly higher cost over the projected loan period? Most communities will support a bond issue if they know what it is for and the savings that can be realized over the loan period by going with a subsidized loan.

Extending the loan period will make a market rate bond as low as the SRF for the monthly user charge. The longer the term of the loan, the lower the monthly payment, which could result in a user rate comparable to the SRF user rate. However, users will be paying for more years. The longer term often lasts beyond the useful life of the system improvements. If debt repayment per month is very low, it may be because a large balloon payment will be necessary at the end of the loan period. The loan will have to be refinanced, maybe never paid off, or rates will have to be raised substantially to cover the balloon payment.

It takes too long to meet all of the environmental requirements of the SRF. It does require extra time for the community’s engineer to request clearances from public agencies. If there is not an environmental problem, the clearances should not add more than six weeks of time to the project. Early problem identification saves considerable time and money over after the fact resolution or litigation. The SRF program generally requires a Finding of No Significant Impact after a public meeting, with a 30 day public notice period to inform the public of the project’s chosen alternatives and their costs. This is an important opportunity to get comments from the public on issues that the city government may not be aware of, at a time when it can still be incorporated into the project. A Categorical Exclusion may be issued in lieu of a Finding of No Significant Impact for rehabilitation or replacement of existing facilities on existing sites, thereby reducing the timeframe significantly.

The review of the facility design and construction permit will go through the department faster if it is not an SRF project. The Missouri Department of Natural Resources is required to review all wastewater projects within 180 days. The central office, regardless of funding source, reviews all wastewater and drinking water projects. The wastewater construction permit will require a 30-day public notice if it is for a treatment works regardless of the funding source. It normally takes from nine to 18 months to get a project through the SRF and ready to bid.

The department may have grants to assist small communities with financing the development of facility plans as well as plans and specifications.

The department provides funding to municipalities and public water or sewer systems for engineering services through the department’s Drinking Water and Clean Water State Revolving Fund.  This funding is made available to help community systems obtain engineering report services as a first step toward implementing changes for the system.  www.dnr.mo.gov/env/wpp/pdwb/eng-report-svcs.htm

Easement acquisition is typically the single most time consuming component of a project and historically has been responsible for slowing projects regardless of the funding source.

The extra review that is required of the SRF increases the project costs. The “extra” review is to ensure the most cost effective and environmentally sound project is built. The review also ensures adequate competition so the lowest bid price is obtained. More than 30 years of experience in the funding of construction projects at the department has shown that the greater the opportunity for competition and the less restrictive the specifications, the lower the bids. The extra review by the state is a free value engineering service that assures the consultant has additional help in finding the best and most cost effective design. Large projects often pay thousands of dollars to have another engineering firm look over the shoulder of their consultant. The department provides this service to all projects.

The department dictates the user charges. The department reviews user charges to ensure that the budget is adequate to pay the debt and cover all operation and maintenance, including replacement. The department does not set the rate nor prescribe the methodology. However, the department does require a replacement account for replacing equipment that is at least 10 percent of the average annual debt. This is in lieu of a bond reserve, which is normally required when selling bonds.

The department requires a methodology, a formula for how the rates are calculated. After a methodology is approved the recipient can use it every year to calculate the necessary rates. A good methodology will allow the recipient to make adjustments for the annual budget and flow volumes in order to calculate rates for the upcoming year.

The department requires proportional rates for water and sewer projects. The department requires proportional rates for wastewater projects. It is fair to all customers since it costs the same to treat a gallon of water regardless of who contributes that gallon of water. In addition, many communities with existing treatment plants received a U.S. Environmental Protection Agency Construction Grant at one time. This grant requires a proportional rate as a grant condition. This contractual requirement runs for the life of any part of the facilities constructed under the grant.

Water projects do not require proportional rates. The regulations do require a rate based on actual use. Water meter readings provide the actual use. We strongly encourage, but don’t require, communities to collect fees based on a proportional rate system. A proportional rate system is fair and easy to calculate. Actual use means no free water. Both sewer and water projects can have a rate structure that subsidizes low-income users. This just means that the rate to the rest of the users must cover that subsidy.

The department gets involved with the user charge and won’t allow cities or water districts to continue to charge contract users according to the contract. The department does not require a community to change a contract rate.

The department requires that the community put all of the debt in a minimum charge. The department does not have any requirement for where the debt is included in the user rate calculation. Many communities divide the debt between the base minimum bill and the volume charge. Alternatively, the debt could all be on the base minimum or all on the volume charge.