Environmental Progress - Summer/Fall 2002

Environmental Progress : Summer/Fall 2002

First Leveraged Funds Boost IEPA Loan Programs

State program holds bond firms' highest rating

In June 2002, the Agency leveraged the state's Clean and Drinking Water loan programs for the first time, increasing available funds for wastewater loans by 25 percent and increasing available funds for water supply loans by 75 percent. Leveraging is a financing technique which uses currently available financial resources as security to generate additional funds to meet immediate financial demands. Under a leveraging approach, federal capitalization funds and program repayment streams are used to secure sizable bond sales, the proceeds of which are then added to the fund to be lent for loan program eligible activities.

More than $1.5 billion in loans already made

Illinois has had a revolving loan program since 1988 for wastewater, and developed a comparable program for drinking water facilities after the federal Safe Drinking Water Act was amended in 1996 to permit operation of such a fund. Both programs make low interest loans funded by a federal allotment and a 20 percent state match. The loans are offered at half the current market interest rate and are for a maximum term of 20 years. To date, more than 380 Clean Water Loans have been made for approximately $1,400,000,000. The newer drinking water loan program has made 132 loans for approximately $209,000,000. Neither program has incurred any payment defaults on the respective loans, and annually generate sizable principal and interest repayment funds that are then recycled back into the loan programs to fund additional construction projects at no additional cost to the state.

Old plants are nearing end of design lives

Despite the fact that combined repayment revenues and new capitalization has been providing almost $190,000,000 annually for operations of the popular loan programs, recent extraordinary demands for financial assistance from Illinois communities made leveraging a necessity in FY2002. Because so many municipal wastewater treatment plants were built at about the same time during the 1970s, a great many have now concurrently reached the end of their 20-year design lives and need expansion and rehabilitation in order to continue compliance with state and federal effluent and water quality standards.

On the public water supply side of the equation, Illinois communities face a staggering $200,000,000 construction bill to bring Illinois public water supplies into compliance with newly enacted federal limits on radium. As a result, neither loan program could keep pace with financial demands using normal program revenues.

In structuring its leveraged loan program bond sale, the Agency balanced the need for generating additional funds with the Illinois goal of being able to continue to offer loans at approximately 50 percent of the best commercial market rate. As a result, the Agency sold $150,000,000 revolving fund revenue bonds, intended to provide $75,000,000 to the programs for immediate loan awards and $75,000,000 as a reserve fund.

Bonds sold at a premium

The conservative structuring of the sale and excellent record of the Agency loan programs resulted in the bonds being rated "AAA" by Fitch Ratings, and "Aaa" by Moody's Investor Service, their highest quality ratings. In fact, the Agency's bonds were so well received on the market that they sold at a premium, generating an additional $9,000,000 in revenue over and above the face value of the bond sale.

The addition of the leverage funds has provided a welcome boost for the state's revolving loan programs, and is already generating many millions of dollars of critical new construction projects across Illinois.