Study Examines Cities’ Use of SRF Program

The State Revolving Loan Fund helped fund a substantial percentage of water projects between 2000 and 2004...

The State Revolving Loan Fund helped fund a substantial percentage of water projects between 2000 and 2004, but water utilities often pass up the program because of associated red tape and a preference for local funding options.

In a recent study conducted by the Mayors Water Council (MWC), based on a survey of the nation’s principal cities conducted in early 2005, only 38 percent of responding cities had used the SRF to help fund water projects during the period.

City size was an important factor in decisions to use, and success in obtaining, SRF loans for water projects, the study found. Compared with cities of 100,000 population or greater, cities under 50,000 are nearly 2.4 times more likely to receive loans, while medium size cities (50,000 to 100,000 population) are two times more likely to be successful.

The study found that cities generally prefer to use municipal bonds - revenue and general obligation. Many cities perceive bonds as a more cost-efficient approach due to better finance terms and the greater certainty in timing. Many other cities prefer the “Pay as you Go” method, using cash they have set aside for projects.

Of course, bonds and cash are more attractive for those cities with healthy bond ratings and robust user fees/charges - the kind of proactive utility that plans for reinvestment in water infrastructure.

Red tape, burdensome paperwork and SRF loan conditions and strings were identified by 15 percent of the survey cities as the critical reason why they did not turn to the SRF program for water projects. Another 11 percent indicated that they applied for an SRF loan but were either rejected or did not receive a response to their application; or didn’t apply because they felt their project didn’t qualified.

A small percentage of survey cities (5 percent) said they prefer to seek grants over the use of SRF loans. Another 10 percent said they did not investigate the use of the SRF loan program for water projects; or that they did not need to use the SRF.

Several studies on water infrastructure over the past few years have identified a gap between projected need and available funding that ranges from $500 billion to $1 trillion. Despite recent growth in municipal expenditures in the water arena, there has been no substantial progress in closing the water infrastructure investment “Needs Gap,” according to the study’s author, Richard F. Anderson, Ph.D., senior advisor to the Mayors Water Council.

“The SRF is one financing tool available to local government, and while it is a necessary tool it is by no means sufficient to satisfy the water infrastructure investment Needs Gap,” Anderson wrote. “The United States Conference of Mayors has consistently supported Congressional and Administration efforts to recapitalize the SRF loan programs. Yet the SRF loan program and the historical and on-going commitment of major municipal funds to rehabilitate an aging water and wastewater infrastructure may only help cities ‘run-in-place’ rather than satisfy growing investment needs.”

Anderson urges Congress and the Administration to take a closer look at how current tax policy limits cities from accessing capital markets using private activity bonds for public-purpose water and wastewater infrastructure. He suggests that modifying the tax code to enable cities to access more private capital would enhance environmental policy goals, increase public health protection, and boost local economies.

The report, Major Capital Investment in Water and Wastewater Infrastructure: City Practices and Attitudes Concerning the State Revolving Fund Loan Program, is available for download at www.usmayors.org/USCM/urbanwater/SRFReport_080106.pdf.

James Laughlin, Editor

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