James T. Gebhardt, Chief Financial Officergebhardt@nysefc.org

Tracey Hitchen Boyd, Assistant Director of Financeboyd@nysefc.org

Seth Coulter,Assistant Director of

Investments and Loan Administrationcoulter@nysefc.org

22

1.1. Who We AreWho We Are

2.2. SRF OverviewSRF Overview

3.3. Critical Elements for Sustainable FinanceCritical Elements for Sustainable Finance

4.4. SRF Financial Assistance ModelsSRF Financial Assistance Models

5.5. The New York State SRF Model and ExperienceThe New York State SRF Model and Experience

33

• 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

55Source:: US EPA

•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

77

Federal EPA Grant

STATEAdd 20%

State Match

Revolving Loan Fund (includes repayments, bond proceeds,

interest, etc.

Assistance to Public Water System: Treatment, Sources,

Storage, Transmission

Repayments return to Fund for future

assistance

• 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

1.1. Institutional FrameworkInstitutional Framework

2.2. Managing Institution (s)Managing Institution (s)

3.3. ResourcesResources

• Financial ResourcesFinancial Resources• Professional ResourcesProfessional Resources

1010

• Legal Framework – Federal/State/Local Government Roles

• Judicial System

• Marketplace

• 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)

• 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

• 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

• 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

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

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

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

• Well established marketplace comprised of:Well established marketplace comprised of:

– Individuals and institutions looking to invest capitalIndividuals and institutions looking to invest capital– Intermediaries (investment banks)Intermediaries (investment banks)– Ratings servicesRatings services– RegulatorsRegulators– Legal consultantsLegal consultants– Fiduciaries (bond trustees)Fiduciaries (bond trustees)

1717

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

• Essential to ensuring affordable capital and Essential to ensuring affordable capital and enforcing efficient market pricingenforcing efficient market pricing

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

• 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

1919

• Ongoing disclosure provides investors with updated Ongoing disclosure provides investors with updated informationinformation

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

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

2020

• Administers the Funds as delegated by federal and state governmentAdministers the Funds as delegated by federal and state government• Interacts with StakeholdersInteracts with Stakeholders• Brand Name in Financial Markets Brand Name in Financial Markets • Provides feedback to Institutional FrameworkProvides feedback to Institutional Framework

• Examples:Examples:

– State Bond Banks: Maine, North DakotaState Bond Banks: Maine, North Dakota

– Dedicated Special Purpose State Agencies: New York, Virginia, Dedicated Special Purpose State Agencies: New York, Virginia, TexasTexas

– State Treasurer’s Office: Massachusetts, MichiganState Treasurer’s Office: Massachusetts, Michigan

2222

2323

• Foreign CapitalForeign Capital - Terms and Conditions Influenced by External - Terms and Conditions Influenced by External

Factors Factors- May Crowd Out Domestic CapitalMay Crowd Out Domestic Capital

• Domestic CapitalDomestic Capital

- Terms and Conditions Determined by Local Terms and Conditions Determined by Local FactorsFactors

- Avoids Exchange Rate RiskAvoids Exchange Rate Risk- Mobilizes Local Financial ResourcesMobilizes Local Financial Resources- Stimulates Local Capital DevelopmentStimulates Local Capital Development

2424

SRFs Rely on Domestic SRFs Rely on Domestic CapitalCapital

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

• Private capital mobilized through the Private capital mobilized through the issuance of tax exempt bonds to issuance of tax exempt bonds to – Retail investors Retail investors – Investment management institutionsInvestment management institutions

• Administering Staff and Borrower StaffAdministering Staff and Borrower Staff– FinancialFinancial

• Investment Investment • CreditCredit• Structuring/ Terms negotiationStructuring/ Terms negotiation• Disbursement & Debt ServicingDisbursement & Debt Servicing

– LegalLegal• FinanceFinance• EnvironmentalEnvironmental

– AccountingAccounting– EngineeringEngineering

• TechnicalTechnical• Program PlanningProgram Planning

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 institutionUnderwriter’s Counsel - Represents underwriters and is responsible for full disclosure of all material issues to prospective investors in the disclosure documentBond Trustee - Takes all actions necessary to protect bondholder intercepts and seek enforcement of payment obligation to bondholders, if necessaryRating 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

• Investors - value - oriented

• Government Officials – knowledge and support

• Bankers - marketing

• Users - willingness to pay

2828

• General Public

• Federal and State Government

• Borrowers (Local Governments and qualified private entities)

• Advocacy Groups (environmental, economic development)

• Investors

• Public Finance Practitioners

2929

Guarantee

Cash *

Reserve **

Direct Loan *

Low

Moderate

Moderate

High

Market Access to weak anduntested local governmentborrowers

Offers below market rate loanswith low administration over-head

Matches below market rate loanswith maximum investment returns

Offers loans at zero to marketrates; low administrative overhead

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

Model Capital Requirements Primary Benefits

3131

SRF Guarantee

Financial Market

Borrowers

Loan

Proceeds

at SRF

Bond

rates

Loan Repayments

Repayment in the event of borrower

default

Federal Capitalization and State Matching Grants

3232

Federal Capitalization and State Matching Grants

SRF Program Equity

CWSRF

and

DWSRF

Direct loansLoan

Repayments

SRF Bond Issue

Reimbursement

Loan Repayments

3333

Federal Capitalization and State Matching Grants

SRF Bond Proceeds

SRF Program Equity

Reserve Allocations

Borrower FinancingsRecycled Reserves

Bondholder Repayment

Bond debt service in the event of default

Borrower Repayments net of

interest subsidyInterest Rate Subsidy

3434

Federal Capitalization and State Matching Grants

SRF Program Equity

CWSRF

And

DWSRF

Direct loans

Loan Repayments

3535

• 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 ConservationState Commissioner of HealthSecretary of State

and four private citizens, appointed by the Governor and confirmed by the State Senate

• 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

• 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)

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

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

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

4242

BeginProject

Identify Need for &Scope of Project

Identify All FundingSources

Develop TechnicalPlanning Report

IUP ListingDevelop M/WBE-EEO Workplan

Apply to StateComptroller for SewerDistrict Approval 6 - 9Months Prior to Loan

Application **

BeginEnvironmental

Review

Apply to StateComptroller for Debt

Exclusion 1 - 2 MonthsPrior to CWSRF

Application **

DevelopProfessional Services

AgreementsIntermunicipalAgreements **

Bond Resolution

Submit Short-TermCWSRF Application

& ApplicableComponents

(See ApplicationChecklist)

Short-TermCWSRF Closing

Short-Term CWSRFProceeds Availablefor Planning, Design& Associated Costs

BeginDesign

DevelopPlans &

Specifications

Apply for PermitsAcquire Title for

Project Site

Short-TermCWSRF Proceeds

Available forConstruction Costs

Bid Project

AwardConstruction

ContractsIssue Notice To

Proceed

Submit Long-TermCWSRF

Application &Applicable

Components

Signed ProjectFinancing Agreement

&ApplicableDocuments

SubmitEngineer's

Certification ofProject

Completion

CompleteConstruction

Long-Term CWSRFClosing

Long-Term CWSRFProceeds Available

IUP Pooled CWSRFTarget Closings Dates

Winter PoolSummer Pool

PROJECT & FINANCING TIMELINE FOR A TYPICAL CWSRF PROJECT *

* The timeline for your project may look different from this example, depending on status of project progress and the type and timing of needed financings. Thistimeline is organized to show the relative sequence of the process for an ideal scenario.

IUP Pooled CWSRFApplication Deadlines

Winter PoolSummer Pool

** if applicable for your project

CWSRFRepayment

Begins

First Payment MadeWithin 1 Year of

Project CompletionOR Within 2 Years of

the First Financing

NYSEFC 09/13/02

Permits IssuedPlans &

SpecificationsApproved

SubmitCertification OfTitle To Project

Site

C-1

3

Six Factors Are Reviewed By EFC Staff:1. Repayment history of prior or outstanding debts2. Debt levels and fiscal management practices3. 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

• 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

• 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

• 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

4747

• 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

4848

MFI Loan Principal Balances by Moody's Rating as of 10/1/04

Ba (1), $1,735,000, 0.1%

Baa (64), $350,937,568, 17%

A (75), $488,143,035, 24%

NR (160), $671,880,898, 33% Aa (28), $364,857,487, 18%

Aaa (3), $170,552,354, 8%

4949

MFI Loan Principal Balances by Pledge as of 10/1/04

State (3), $36,955,000, 2%

General Obligation (311),

$1,595,812,020, 78%

Revenue (17), $415,339,322,

20%

5050

MFI Loan Principal Balances by Type as of 10/1/04

Authorities (17), $415,339,322, 20%

Cities (43), $238,783,610, 12%

Counties (22), $619,043,007, 30%

State (3), $36,955,000, 2%

Towns (133), $568,903,478, 28%

Villages (113), $169,081,925, 8%

Fees Paid at ClosingDirect Expenses 1.00%

Program Administration 1.10% (DW only)State Issuance Charge (sliding scale (.14 - .70%)

Annual FeesDW Administration .11%CW Annual Administration .25%

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

5353

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

5454

Price Distortion

Political Inducement

Time Constrained Resources

Institutional Framework

5555

Drinking 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

De-Allocated Corpus Sub-Account

DeficiencyReserve

Sub-Account

Deficiency ReserveSub-Account

MFI & Non-MFISubordinatedEFC Bonds

$595,680,000Bonds

$4,351,500DSRF

Clean Water Equity Account

As of: Sept. 30, 2004

General Reserve

DSRF (Senior) $900,550,285

Clean Water Loans and DSRFs

Clean WaterSub-Account

DrinkingWater

Sub-Account

Drinking WaterEquity Account

Master Financing Indenture

Clean WaterEquity Account

Drinking WaterLoans and DSRFs

GENERAL RESERVE ACCOUNT

Interfund borrowing allowable under the permitted investment provisions of the Acts

5858

* Simplified for graphic presentation purposes

** Recipient Repayments are made up of independent repayments from the MFI and NYCMWFA as described in this section.

New York State Environmental Facilities CorporationSRF Program Flow of Funds*

Sources and Uses of SRF Funds

Federal Capitalization GrantsClean Water and Drinking

Water

State Matching FundsClean Water and Drinking

Water

NYSEFC MFI Bonds or

NYSEFC NYCMWFA Bonds

Un-allocated Corpus SubaccountDe-allocated Reserve AccountDeficiency Reserve Account

New and Recycled Federal & State Moneys

Direct Financing Agreements

Reserve Allocations

Leveraged Financing

Agreements**

NYSEFC MFI or NYCMWFA Bondholders

Recipient Repayments Net of Subsidy

Interest Subsidy

Recycled Direct Recipient Payments

Recycled Allocated Reserves

State Revolving Funds

Contingent Cash Flows

Master Trust Agreement