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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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slide1

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]

slide2

Presentation Summary

  • Who We Are
  • SRF Overview
  • Critical Elements for Sustainable Finance
  • SRF Financial Assistance Models
  • The New York State SRF Model and Experience
slide4

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
slide6

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
slide7

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

slide8

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

slide10

Managing

Institution(s)

Resources

Institutional

Framework

slide11

Institutional Framework Supporting Public Financing

of Environmental Infrastructure

  • Legal Framework – Federal/State/Local Government Roles
  • Judicial System
  • Marketplace
slide12

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)
slide13

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
slide14

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
slide15

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

slide16

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)
slide17

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
slide18

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
slide19

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
slide20

Managing

Institution(s)

Resources

Institutional

Framework

slide21

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
slide22

Managing

Institution(s)

Resources

Institutional

Framework

slide23

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
slide25

PROFESSIONAL RESOURCES

  • Administering Staff and Borrower Staff
    • Financial
      • Investment
      • Credit
      • Structuring/ Terms negotiation
      • Disbursement & Debt Servicing
    • Legal
      • Finance
      • Environmental
    • Accounting
    • Engineering
      • Technical
      • Program Planning
slide26

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
slide27

PROFESSIONAL RESOURCES (continued)

External Capacity Prerequisites

  • Investors - value - oriented
  • Government Officials – knowledge and support
  • Bankers - marketing
  • Users - willingness to pay
slide28

SRF STAKEHOLDERS

  • General Public
  • Federal and State Government
  • Borrowers (Local Governments and qualified private entities)
  • Advocacy Groups (environmental, economic development)
  • Investors
  • Public Finance Practitioners
slide30

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

slide31

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

slide32

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

slide33

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

slide34

Direct Loan Model Flow of Funds

Federal Capitalization and State Matching Grants

SRF Program Equity

CWSRF

And

DWSRF

Direct loans

Loan Repayments

slide35

The New York State

SRF Model and Experience

slide36

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
slide37

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
slide38

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)
slide39

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
slide40

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
slide41

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
slide43

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

slide44

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
slide45

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
slide46

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
slide47

NYS SRF Bond Ratings

  • Provided by each of the major rating agencies:
  • Moody’s Aaa
  • Standard & Poor’s AAA
  • Fitch AAA
  • Ratings based on oversized reserves, flow of funds arrangement, pledge of local government bonds and NYS SRF credit criteria and management
slide51

Financing and Administrative Fees

Fees Paid at Closing

Direct Expenses 1.00%

Program Administration 1.10% (DW only)

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

Annual Fees

DW Administration .11%

CW Annual Administration .25%

slide52

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
slide53

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
slide54

Conclusion

Institutional Framework

Time Constrained Resources

Price Distortion

Political Inducement

slide56

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

slide57

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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