James T. Gebhardt, Chief Financial Officer gebhardt@nysefc.org Tracey Hitchen Boyd, Assistant Director of Finance boyd@n

1. 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 gebhardt@nysefc.org Tracey Hitchen Boyd, Assistant Director of Finance boyd@nysefc.org Seth Coulter, Assistant Director of Investments and Loan Administration coulter@nysefc.org

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

3. SRF Overview

4. 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

5. Source:: US EPA

6. 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

7. 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

8. 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

9. CRITICAL ELEMENTS FOR SUSTAINABLE FINANCE Institutional Framework Managing Institution (s) Resources Financial Resources Professional Resources

10. Managing Institution(s) Resources Institutional Framework

11. Institutional Framework Supporting Public Financing of Environmental Infrastructure • Legal Framework – Federal/State/Local Government Roles • Judicial System • Marketplace

12. 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)

13. 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

14. 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

15. 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

16. 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)

17. 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

18. 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

19. 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

20. Managing Institution(s) Resources Institutional Framework

21. 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

22. Managing Institution(s) Resources Institutional Framework

23. 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

24. 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

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

26. 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

27. PROFESSIONAL RESOURCES (continued) External Capacity Prerequisites • Investors - value - oriented • Government Officials – knowledge and support • Bankers - marketing • Users - willingness to pay

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

29. SRF Financial Assistance Models

30. 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

31. 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

32. 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

33. 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

34. Direct Loan Model Flow of Funds Federal Capitalization and State Matching Grants SRF Program Equity CWSRF And DWSRF Direct loans Loan Repayments

35. The New York State SRF Model and Experience

36. 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

37. 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

38. 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)

39. 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

40. 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

41. 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

42. TIMELINE

43. 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

44. 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

45. 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

46. 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

47. 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