Dispute over borrowing holds up environmental projects

BOSTON, Mass., Oct. 17, 2000 (Boston Herald)—With $380 million for local water and sewer projects on the line, Gov. Paul Cellucci and Treasurer Shannon O'Brien are feuding again, leaving environmental officials, who face a huge backlog of unfinished work, squirming in between.

The question is whether the state should jack up its borrowing capacity immediately or a year from now, to begin chipping away at a $1.5 billion project backlog. O'Brien, who supports an immediate increase, recently tried to force the issue, but was thwarted by the two Cellucci appointees to the three-member Water Pollution Abatement Trust board, who say the move, at least for now, is too risky financially.

"In light of the fact that the governor has announced we are heading toward a billion-dollar surplus, this is the cheapest financing that communities will be able to find to get these very important projects done," O'Brien said in a recent interview. "It goes hand in hand with the governor's housing initiative - you can't have affordable housing if you don't have sewerage. I think it was a common sense thing to do."

The administration and the treasury have long haggled over the best way to make money available to cities and towns to upgrade their waterworks, often to comply with federal pollution requirements. Administered by the trust, the wait list for zero-interest loans from the popular State Revolving Fund grows annually. In 2001, the trust expects to finance $275 million of the $1 billion in pending requests.

As the economy chugs along, both Cellucci and O'Brien have pushed to squeeze more money out of the revolving fund by increasing the state's borrowing capacity from 2-1 leveraging to a 3-1 system. That would mean that the state could borrow triple, rather than just double, the amount of any direct cash appropriation. Investors view 3-1 borrowing as more risky, and it accrues higher debt service costs.

The Legislature in the last budget went along with the 3-1 plans, coupled with a new directive that in 2002, cities and towns would begin paying 2 percent interest on the loans, which have been interest-free in recent years. The payments are intended to cover the $9.5 million a year in new debt service that would accompany 3-1 leveraging. Cellucci vetoed the 3-1 provision, saying it could be done administratively.

With a $345 million bond sale looming this week, O'Brien placed a motion before the board at its Oct. 6 meeting to move immediately to 3-1 leveraging, which O'Brien said would raise an additional $380 million between now and 2002, when interest payments kick in. But Administration and Finance Secretary Stephen Crosby, a member of the board, argued against the motion, saying that the trust can't afford to go to 3-1 without the revenues from the delayed 2-percent interest provision. Massachusetts is the only state that currently does not charge interest on loans financed through state borrowing.

The state currently pays about $40 million a year in interest on the bonds that support the revolving fund, said Scott Jordan, director of debt finance for A&F. Once cities and towns begin paying 2 percent interest, the trust should be able to do 3-1 leveraging and still "break even," he said. But if borrowing is increased early, "someone's got to pay the difference," he said. "Ten million doesn't sound like a lot, but over a 20-year bond deal, that's 200 million bucks."

Although the Department of Environmental Protection struggles daily with the project backlog and supports 3-1 leveraging, the third board member - Andrew Gottlieb, director of DEP's Division of Municipal Services - did not second O'Brien's motion. In a later interview, Gottlieb said DEP would have "preferred" that the interest rate be increased this year so the trust could switch to 3-1 leveraging. But Gottlieb repeated the administration's argument that the two pieces must be done in tandem.

"There are a significant number of projects out there waiting to be done," Gottlieb said. "Without the 2 percent interest rate being implemented in 2001 by the Legislature, we'll continue to see carryover of over-demand on the program that we'll be able to address more aggressively in 2002."

O'Brien warned that failing to switch to 3-1 now would result in money being "lost forever." Jordan dismissed that as "a little bit of rhetoric," but trust officials insisted on it. Trust Executive Director Luke Thompson said this week's $345 million bond sale requires $172 million in cash security to be leveraged at 2-1, but would only require $115 million if done at a 3-1 rate.

"If we do this deal - and we are - at 2-1 leveraging, we will be putting $57 million more into the reserve than if we did this deal under 3-1," Thompson said. "That $57 million is now lost forever to be able to leverage new loans. It has to go into this reserve for the next 20 years."

With the federal government considering ending its financial commitment to the program, the trust and the treasurer argue that the state should get the most out of the revolving fund while it can. The original federal program included a 1996 sunset clause, but the Congress has extended funding each year since then. Thompson said state officials don't expect grants beyond 2004. Massachusetts receives $70 million a year in federal funds, on top of $14 million in state money, he said.

"It's really questionable how much further into the future they will go," Thompson said. "I wouldn't be surprised at all to see the amount of funding going into this program begin to decline."

But Jordan at A&F expressed skepticism that the plug would be pulled on a program that's "loved" by the Congress, the president and the US Environmental Protection Agency. "That's a fear," Jordan said. "Is it a realistic fear? Probably not any more so than any other program."

Municipalities, meanwhile, are girding for a fight to repeal the 2 percent interest initiative. Massachusetts Municipal Association Director Geoffrey Beckwith said that while no other state offers zero-percent loans, neither does any other state have to contend with Proposition 21/2.

The 2 percent interest provision would add about $11,000 to the bottom line for every $1 million in project costs, Thompson said. In Newburyport, for example, the town would have to come up with an extra $102,300 for a $9.3 million drinking water project that's currently underway. Newburyport also has a $14 million sewer project in the works, which would require an additional $154,000 in interest.

"There is absolutely no excuse and no reason why the state should be engaging in this cost shift to try to shift the burden into local taxpayers," Beckwith said. "We had sort of a tread-water approach to the program this year, and we think it's time to swim forward and not sink next year."

More reports from the State House News Service

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