THE SUSTAINABLE FINANCE MODEL IN THE U.S.
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THE SUSTAINABLE FINANCE MODEL IN THE U.S. THE NEW YORK STATE EXPERIENCE. NEW YORK STATE ENVIRONMENTAL FACILITIES CORPORATION. James T. Gebhardt, Chief Financial Officer [email protected] Tracey Hitchen Boyd, Assistant Director of Finance [email protected] Seth Coulter,

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James t gebhardt chief financial officer gebhardt nysefc

THE SUSTAINABLE FINANCE MODEL IN THE U.S.

THE NEW YORK STATE EXPERIENCE

NEW YORK STATE

ENVIRONMENTAL FACILITIES CORPORATION

James T. Gebhardt, Chief Financial Officer

[email protected]

Tracey Hitchen Boyd, Assistant Director of Finance

[email protected]

Seth Coulter,

Assistant Director of

Investments and Loan Administration

[email protected]


James t gebhardt chief financial officer gebhardt nysefc

Presentation Summary

  • Who We Are

  • SRF Overview

  • Critical Elements for Sustainable Finance

  • SRF Financial Assistance Models

  • The New York State SRF Model and Experience


James t gebhardt chief financial officer gebhardt nysefc

SRF Overview


James t gebhardt chief financial officer gebhardt nysefc

U.S. STATE REVOLVING FUNDS

  • The CWSRF was established by the 1987 Amendments to the federal Clean Water Act to help municipalities finance publicly-owned facilities that reduce or prevent water pollution. The CWSRF succeeded a federal grant program.

  • The DWSRF was created by the 1996 Amendments to the federal Safe Drinking Water Act, to provide financial incentives for municipalities and private entities for drinking water infrastructure improvements.

  • Federally authorized SRF’s are:

    • Capitalized with federal and state grants (State matching grant requirement is 20% of the federal grant).

    • Governed by Project Priority System & Annual Intended Use Plans.

    • Designed to provide below market rate loan and other forms of assistance

    • Designed to recycle capital into new loans as loans are repaid

  • Funding lines limit which projects are funded


James t gebhardt chief financial officer gebhardt nysefc

Source:: US EPA


James t gebhardt chief financial officer gebhardt nysefc

CLEAN WATER STATE REVOLVING FUND

ELIGIBLE PROJECTS

  • Treatment Works Projects (examples)

  • - New, expanded or rehabilitated plants

  • - Sludge treatment facilities

  • - Collection, trunk and interceptor sewers

  • - Combined sewer overflows

  • - Stormwater pollution abatement

  • Non-point Source Projects (examples)

  • - Capping and closure of solid waste landfills

  • - Remediation of contamination from underground storage tanks

  • - Water quality components of municipally owned brownfields

  • - Salt storage facilities

  • - Stormwater management facilities

  • Estuary Conservation and Management Plans and Projects


James t gebhardt chief financial officer gebhardt nysefc

Add 20% State Match

Federal EPA Grant

STATE

State DWSRF Program

Revolving Loan Fund (includes repayments, bond proceeds, interest, etc.

Repayments return to Fund for future assistance

Assistance to Public Water System: Treatment, Sources, Storage, Transmission


James t gebhardt chief financial officer gebhardt nysefc

DRINKING WATER STATE REVOLVING FUND

ELIGIBLE PROJECTS

  • Water Supply Projects (examples)

    • - Rehabilitation or development of new drinking water sources

    • to replace contaminated supplies

    • - Facilities upgrade to improve quality of supply

    • - Storage facilities upgrade

    • - Installation or replacement of transmission or distribution mains

    • - Promotion of viability through consolidation of water supply services

    • - Purchase of a portion of another system’s capacity

  • Watershed protection – Land Acquisition


Institutional framework managing institution s resources financial resources professional resources

CRITICAL ELEMENTS

FOR SUSTAINABLE FINANCE

Institutional Framework

Managing Institution (s)

Resources

Financial Resources

Professional Resources


James t gebhardt chief financial officer gebhardt nysefc

Managing

Institution(s)

Resources

Institutional

Framework


James t gebhardt chief financial officer gebhardt nysefc

Institutional Framework Supporting Public Financing

of Environmental Infrastructure

  • Legal Framework – Federal/State/Local Government Roles

  • Judicial System

  • Marketplace


James t gebhardt chief financial officer gebhardt nysefc

Legal Framework

  • Federal Government

    • Establishes National environmental policy through establishment of nationwide laws & regulations (Clean Water Act of 1972)

    • Currently provides pass-through funding to States to partially capitalize Revolving Funds

    • Federal Environmental Protection Agency (created in 1970) administers the distribution of federal funds and monitors compliance with program rules as established in federal law

    • Federal Tax and Securities Laws and Regulations

    • Regulatory Oversight (SEC, MSRB, IRS)


James t gebhardt chief financial officer gebhardt nysefc

Legal Framework (continued)

  • State Government

    • State designates agency to receive and administer Revolving Fund dollars

    • Provides matching funds to help capitalize Revolving Funds

    • Adopts state-level laws and regulations to articulate state-specific program rules and regulations within the Federal framework

    • Enforces federal and state environmental laws

    • Enabling statute provides bonding authority to EFC

    • Bonds are exempt from State Income Taxes


James t gebhardt chief financial officer gebhardt nysefc

Legal Framework (continued)

  • Local Government

    • Point of delivery for essential water quality-related services

    • Best equipped to identify the needs of the local population

    • Formally the beneficiaries of the Federal Construction Grants Program

    • Now eligible recipients of cheap capital through State Revolving Funds

      • State Local Finance Law Governs issuance of debt

      • Power to raise taxes

      • High degree of transparency

    • Bonds are exempt from Local income taxes


James t gebhardt chief financial officer gebhardt nysefc

Judicial System

  • Used by citizens and governmental bodies to interpret and

    enforce environmental laws

  • Also available to protect the contractual rights of investors

  • Judicial decisions can influence priorities and practices of

    lawmakers and SRF program administrators


James t gebhardt chief financial officer gebhardt nysefc

Marketplace

  • Public infrastructure finance has historically used publicly issued bonds to raise capital

  • Adds private capital to government revenues available for providing capital for environmental infrastructure

  • Borrowing by some American Cities dates back to the Seventeenth Century

  • Well established marketplace comprised of:

    • Individuals and institutions looking to invest capital

    • Intermediaries (investment banks)

    • Ratings services

    • Regulators

    • Legal consultants

    • Fiduciaries (bond trustees)


James t gebhardt chief financial officer gebhardt nysefc

Marketplace (continued)

  • Secondary market provides investors with the ability to buy and sell on an ongoing basis (liquidity)

    • Essential to ensuring affordable capital and enforcing efficient market pricing

  • Issuer debt repayment supported by user fees or tax revenues, further supported by general obligation pledges to repay debt


  • James t gebhardt chief financial officer gebhardt nysefc

    Transparency

    • Public Ratings issued by independent rating services based on arms-length analysis of the debtors financial and economic condition and bond security pledge

    • Annual Financial Reporting Requirements

    • Bond Counsel Opinion that debt obligations are validly issued

    • Disclosure documents which provide full critical disclosure to potential investors

    • Competitive bidding requirements


    James t gebhardt chief financial officer gebhardt nysefc

    Transparency (continued)

    • Ongoing disclosure provides investors with updated information

    • Freedom of Information Act provides recourse to investors that believe critical information has been withheld

    • Courts can act on citizen or bond trustee petition to force debtor to honor debt obligations


    James t gebhardt chief financial officer gebhardt nysefc

    Managing

    Institution(s)

    Resources

    Institutional

    Framework


    James t gebhardt chief financial officer gebhardt nysefc

    MANAGING INSTITUTION(S)

    • Administers the Funds as delegated by federal and state government

    • Interacts with Stakeholders

    • Brand Name in Financial Markets

    • Provides feedback to Institutional Framework

    • Examples:

      • State Bond Banks: Maine, North Dakota

      • Dedicated Special Purpose State Agencies: New York, Virginia, Texas

      • State Treasurer’s Office: Massachusetts, Michigan


    James t gebhardt chief financial officer gebhardt nysefc

    Managing

    Institution(s)

    Resources

    Institutional

    Framework


    James t gebhardt chief financial officer gebhardt nysefc

    CAPITAL RESOURCES

    • Foreign Capital

      - Terms and Conditions Influenced by External Factors

      • May Crowd Out Domestic Capital

  • Domestic Capital

    • Terms and Conditions Determined by Local Factors

    • Avoids Exchange Rate Risk

    • Mobilizes Local Financial Resources

    • Stimulates Local Capital Development


  • Srfs rely on domestic capital

    SRFs Rely on Domestic Capital

    • Public capital provided by federal capitalization grants and state matching contribution

    • Private capital mobilized through the issuance of tax exempt bonds to

      • Retail investors

      • Investment management institutions


    James t gebhardt chief financial officer gebhardt nysefc

    PROFESSIONAL RESOURCES

    • Administering Staff and Borrower Staff

      • Financial

        • Investment

        • Credit

        • Structuring/ Terms negotiation

        • Disbursement & Debt Servicing

      • Legal

        • Finance

        • Environmental

      • Accounting

      • Engineering

        • Technical

        • Program Planning


    James t gebhardt chief financial officer gebhardt nysefc

    PROFESSIONAL RESOURCES (contd.)

    SRF FINANCE TEAM

    • Financial Advisor - Assists in the bond sale. Including:

      • Verifies cash flows

      • Leads negotiations of bond sales to underwriting team (negotiated

      • sales)

      • Investment of bond proceeds and debt service reserves

    • Underwriters - Sell bonds to investors at the best possible price (negotiated sale) Bond Counsel - Assists with meeting all legal requirements related to the bond sale and providing legal opinion for investors that the bonds are legally issued and binding on the SRF managing institution

    • Underwriter’s Counsel - Represents underwriters and is responsible for full disclosure of all material issues to prospective investors in the disclosure document

    • Bond Trustee - Takes all actions necessary to protect bondholder intercepts and seek enforcement of payment obligation to bondholders, if necessary

    • Rating Agencies - Issues bond ratings which inform investors about credit strength including bond security provisions and ability/willingness of the SRF managing institution to make debt service payments over time


    James t gebhardt chief financial officer gebhardt nysefc

    PROFESSIONAL RESOURCES (continued)

    External Capacity Prerequisites

    • Investors - value - oriented

    • Government Officials – knowledge and support

    • Bankers - marketing

    • Users - willingness to pay


    James t gebhardt chief financial officer gebhardt nysefc

    SRF STAKEHOLDERS

    • General Public

    • Federal and State Government

    • Borrowers (Local Governments and qualified private entities)

    • Advocacy Groups (environmental, economic development)

    • Investors

    • Public Finance Practitioners


    James t gebhardt chief financial officer gebhardt nysefc

    SRF Financial Assistance Models


    James t gebhardt chief financial officer gebhardt nysefc

    AVAILABLE SRF

    FINANCIAL ASSISTANCE MODELS

    ModelCapital RequirementsPrimary Benefits

    Guarantee

    Cash *

    Reserve **

    Direct Loan*

    Low

    Moderate

    Moderate

    High

    Market Access to weak and

    untested local government

    borrowers

    Offers below market rate loans

    with low administration over-

    head

    Matches below market rate loans

    with maximum investment returns

    Offers loans at zero to market

    rates; low administrative overhead

    * Favored by states with small capital allocations and high incidence of small rural communities

    ** Favored by states with large capital allocations


    James t gebhardt chief financial officer gebhardt nysefc

    Guarantee Program Flow of Funds

    Financial Market

    Loan

    Proceeds

    at SRF

    Bond

    rates

    Repayment in the event of borrower default

    Loan Repayments

    Borrowers

    SRF Guarantee

    Federal Capitalization and State Matching Grants


    James t gebhardt chief financial officer gebhardt nysefc

    Cash Flow Model

    Flow of Funds

    Federal Capitalization and State Matching Grants

    SRF Program Equity

    SRF Bond Issue

    Reimbursement

    CWSRF

    and

    DWSRF

    Direct loans

    Loan

    Repayments

    Loan

    Repayments


    James t gebhardt chief financial officer gebhardt nysefc

    Reserve Fund Model

    Flow of Funds

    SRF Bond Proceeds

    Federal Capitalization and State Matching Grants

    SRF Program Equity

    Recycled Reserves

    Borrower Financings

    Reserve Allocations

    Borrower Repayments net of interest subsidy

    Interest Rate Subsidy

    Bond debt service in the event of default

    Bondholder Repayment


    James t gebhardt chief financial officer gebhardt nysefc

    Direct Loan Model Flow of Funds

    Federal Capitalization and State Matching Grants

    SRF Program Equity

    CWSRF

    And

    DWSRF

    Direct loans

    Loan Repayments


    James t gebhardt chief financial officer gebhardt nysefc

    The New York State

    SRF Model and Experience


    James t gebhardt chief financial officer gebhardt nysefc

    NEW YORK STATE ENVIRONMENTAL

    FACILITIES CORPORATION

    • Created in 1970 by an act of the State Legislature as a public benefit

    • corporation separate and apart from the State

    • Governed by a board of directors that consists of three

    • ex-officio members

    • State Commissioner of Environmental Conservation

    • State Commissioner of Health

    • Secretary of State

    • and four private citizens, appointed by the Governor and

    • confirmed by the State Senate


    James t gebhardt chief financial officer gebhardt nysefc

    POWERS OF THE CORPORATION

    • Administer the Clean Water and Drinking Water State

    • Revolving Funds (SRFs)

    • Finance certain environmental programs on behalf of the State,

    • including State contributions to the SRFs

    • Finance through the issuance of bonds, water management, solid

    • waste disposal, sewage treatment and pollution control projects

    • on behalf of private sector entities

    • Provide technical assistance to public and private sector entities on

    • sewage treatment and collection, solid waster disposal, materials

    • recycling, hazardous waste abatement and pollution control practices


    James t gebhardt chief financial officer gebhardt nysefc

    Types of SRF Financial Assistance

    • Loans

      • Short Term

        • Up to 3 years for planning, design and early construction

        • Interest Free

      • Long Term

        • Bond Financed

          • Investment grade

          • Subsidized Interest of 50% or 33 1/3rd %

        • Direct

          • Non-Investment grade

          • Hardship: Reduced rate to 0%

    • Grants (DWSRF only)

    • Guarantees (under consideration)


    James t gebhardt chief financial officer gebhardt nysefc

    NEW YORK STATE

    ACTIVITY SINCE PROGRAM INITIATION

    • As of 9/30/04

    • Clean Water SRF

      • New York Program established in 1989

        • $2.5 billion in Capitalization Grants and

        • $491 million State Match Contributions

        • $8.45 billion in CWSRF Bonds

        • 692 loans

        • 1,235 projects financed

    • Drinking Water SRF (jointly administered by EFC and NYS Dept. of Health)

      • New York Program established in 1997

        • $374 million in Federal Capitalization Grants and

        • $265 million State Match Contributions

        • $965 million in DWSRF Bonds

        • 163 loans, 122 grants

        • 452 projects financed


    James t gebhardt chief financial officer gebhardt nysefc

    NEW YORK SRF MARKETING

    AND OUTREACH

    • Consists of:

    • Participation at local government conferences

    • Distribution of Intended Use Plan (IUP) to local government

    • officials and engineering, finance and legal professionals

    • Program information, including project listing

    • and loan applications available on the EFC’s website

    • (www.nysefc.org)

    • Community Assistance provided by dedicated staff throughout

    • the project development and loan development process


    James t gebhardt chief financial officer gebhardt nysefc

    LOAN DEVELOPMENT

    TIMELINE (4 to 6 months)

    • Consists of:

    • Application Reviews and Assistance

    • Loan Sizing

    • Financial Engineering

    • Credit Review

    • Financing Contract Development

    • Loan Closing and Investment Deployment

    • Disbursement of funds and Loan Servicing for 20-30 years


    James t gebhardt chief financial officer gebhardt nysefc

    TIMELINE


    James t gebhardt chief financial officer gebhardt nysefc

    LOAN APPLICANT

    CREDIT REVIEW PROCESS

    Six Factors Are Reviewed By EFC Staff:

    1. Repayment history of prior or outstanding debts

    2. Debt levels and fiscal management practices

    3. Financial health (financial results of past

    three years)

    4. Strength of the local economy

    5. Strength of local contract provisions such as:

    - trust indentures

    - intermunicipal agreements

    - operating agreements

    6. General Management Practices


    James t gebhardt chief financial officer gebhardt nysefc

    SECURITY PROVIDED

    TO EFC BONDHOLDERS

    • SRF loans are secured by legally ratified and

    • binding borrower bond obligations

    • SRF borrower’s loan obligations require that

    • principal and interest payments equal borrower’s share

    • of EFC bond debt service requirement

    • SRF Debt Service Reserve Fund (DSRF) is funded

    • at a level equal to at least one-third of the loan and

    • maintained at that level, and must be used if the

    • borrower fails to pay

    • Reserve deficiencies are replenished from lien on

    • free-up from other borrower reserves


    James t gebhardt chief financial officer gebhardt nysefc

    REMEDIES IN THE EVENT

    OF BORROWER DEFAULT

    • The New York State SRF statute permits EFC to

    • intercept any state aid payments appropriated by

    • the legislature to the borrower

    • State aid is approximately $2.5 billion

    • EFC may take legal action in the New York State

    • court system


    James t gebhardt chief financial officer gebhardt nysefc

    ALLOWABLE RESERVE FUND

    INVESTMENTS

    • U.S. Treasuries, U.S. Government Guaranteed Securities

    • or Government Sponsored Enterprises such as Fannie

    • Mae and Freddie Mac

    • Municipal Securities rated Aa/AA or better

    • Collateralized Investment Agreements

    • Forward Purchase Agreements


    James t gebhardt chief financial officer gebhardt nysefc

    NYS SRF Bond Ratings

    • Provided by each of the major rating agencies:

    • Moody’s Aaa

    • Standard & Poor’sAAA

    • FitchAAA

    • Ratings based on oversized reserves, flow of funds arrangement, pledge of local government bonds and NYS SRF credit criteria and management


    James t gebhardt chief financial officer gebhardt nysefc

    Financing and Administrative Fees

    Fees Paid at Closing

    Direct Expenses1.00%

    Program Administration1.10% (DW only)

    State Issuance Charge(sliding scale (.14 - .70%)

    Annual Fees

    DW Administration.11%

    CW Annual Administration.25%


    James t gebhardt chief financial officer gebhardt nysefc

    ROLE OF THE SRF TRUSTEE

    • Trustee

    • Receive and apply the proceeds of bond issues in accordance with the Indenture provisions

    • Invest funds in accordance with EFC instructions

    • Account for and distribute loan proceeds in accordance with requisitions from loan recipients

    • Preserve and service any collateral or security interest

    • Allocate funds for debt service

    • Registrar

    • Act as EFC’s agent in maintenance and record keeping associated with the registration and transfer of registered bonds

    • Issue and authenticate new bonds in the event of transfer or exchange

    • Maintain bondholder accounts with continuous proof of principal outstanding


    James t gebhardt chief financial officer gebhardt nysefc

    ROLE OF THE SRF TRUSTEE (continued)

    • Paying Agent

    • Pay principal and interest when due

    • Service bondholder claims for non-payment

    • Loan Servicing Agent

    • Receive Loan Recipients’ debt service payments and deposit to appropriate account for payment to bondholders

    • Receive other administrative fees charged to Loan Recipients and deposit to appropriate accounts and invest funds at the direction of EFC

    • Notify EFC of Loan Recipient defaults


    James t gebhardt chief financial officer gebhardt nysefc

    Conclusion

    Institutional Framework

    Time Constrained Resources

    Price Distortion

    Political Inducement


    James t gebhardt chief financial officer gebhardt nysefc

    Appendix


    James t gebhardt chief financial officer gebhardt nysefc

    New York State

    Environmental Facilities Corporation

    SRF Flow of Funds

    As of: Sept. 30, 2004

    Master Trust Agreement

    Drinking Water Equity Account

    Clean Water Equity Account

    • NYW

    • Financing

    • Indentures

    • Total : $3,168,731,000 (Senior)

    • Bonds

    • DSRF (Senior)

    • $1,614,097,128

    MFI

    Total : $1,941,435,000 (Senior)

    Bonds

    DSRF (Senior)

    $900,550,285

    MFI & Non-MFI

    Subordinated

    EFC Bonds

    $595,680,000

    Bonds

    $4,351,500

    DSRF

    General

    Reserve

    De-Allocated Corpus Sub-Account

    Deficiency

    Reserve

    Sub-Account

    Deficiency Reserve

    Sub-Account


    James t gebhardt chief financial officer gebhardt nysefc

    New York State

    Environmental Facilities Corporation

    SRF Flow of Funds (Combined Program Basis)

    Master Trust Agreement

    Clean Water

    Equity Account

    Drinking Water

    Equity Account

    Clean Water

    Loans and DSRFs

    Master Financing Indenture

    Drinking Water

    Loans and DSRFs

    GENERAL RESERVE

    ACCOUNT

    Clean Water

    Sub-Account

    Drinking

    Water

    Sub-Account

    Interfund borrowing allowable under the permitted investment provisions of the Acts


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