My testimony today will mainly address Title VI of the Clean Water Act, authorizing the State Revolving Loan financing program. This has been a singularly successful program that has fulfilled the vision of this Committee and the Congress in creating the loan fund mechanism over a decade ago. In that time the SRF has created a loan pool of more than $30 billion providing low-cost lending to build municipal treatment and water pollution abatement projects throughout the nation. This year, as last year, it is expected the program will provide more than $3 billion in loans for these critical environmental projects. Moreover, the loans provide substantial cost-savings to the borrowers. With SRF interest rates averaging two and one half to three percent below market, we estimate, over its duration, the cumulative subsidy the program has provided borrowers is around $8 billion.
In terms of federal investment, the SRF program has proven to be a tremendous bargain. The federal contribution, thus far, in funding for capital grants to the States has been around $15 billion, about one half of the total amount of the SRF. State contributions, loan repayments, other interest earnings and leveraged funds account for another $15 billion. A very good return on the initial federal investment, and one that will continue to grow as the fund matures.
As the Committee looks at provisions to amend and reauthorize Title VI of the Clean Water Act our advice is cautionary. Clearly, after nearly twelve years of experience with the SRF there are small modifications that will make the program more efficient. A new SRF has been created to finance safe drinking water needs and the inter-relationship of these two funds could be more successfully joined by some small changes in the statute. Also, growing recognition of new priorities for nonpoint source projects, as well as the economic hardship project costs can impose on some communities, suggest the need for some deeper subsidy for certain types of borrowers. Some changes are needed in the administrative provisions of the fund to match it to the realities of this thriving loan program. We will offer some suggestions for such modifications. But overall, we ask the Committee to move cautiously toward adopting any provisions that would dramatically overhaul or alter the way water quality projects are financed. Like the ancient admonition to physicians, Afirst do no harm.@
Proposals before this Committee to set up a new program of grant funding for certain categories of projects could have major repercussions for the future operation of the SRFs and the future quality of the nation's waters. Put plainly, communities that anticipate receiving federal grants to build water pollution projects are not likely to be interested in loans, no matter how attractive the terms. And even though the proposal in S. 914 limits availability of these grants to certain categories of projects, I submit that politically maintaining that categorical limitation would be next to impossible. Soon every project would be grant eligible and communities would defer needed projects until grant dollars became available. Additionally, Congress should be careful not to set up financial assistance programs that create dual and overlapping administrative structures at either the state or federal level. The re-initiation of a construction grant program would do just that.
CIFA recognizes that in order to address certain types of pollution problems it may be necessary to provide deeper subsidies to the borrower. We support provisions comparable to those contained in Senator Voinovich's bill, allowing States the discretion to provide principal write-downs or extended repayment periods for hardship borrowers. Such loan subsides, similar to those allowable with the Drinking Water SRF, should be limited to no more than 20% of the capital grant in any one year, with the proviso that states may bank the set-aside for use in future years, as need may dictate. The subsidy should be in the form of principal forgiveness and not limited in the amount available to any one borrower. The criteria, instead, should be environmental and economic justification.
There are a number of other provisions in Senator Voinovich's bill that CIFA supports. First, we support the de-coupling of allowable administrative costs from the annual amount of the capital grant. The amount of the capital grant to the State is no longer a measure of the administrative burden of the program. The large and increasingly sophisticated loan portfolios the States now manage require more administration. The size of the fund, not the amount of the grant, should dictate the allowable administrative cost. Moreover, new types of lending for nonpoint source and other borrowers can be very manpower intensive. We support the provision that would connect the administrative fee to the total value of the fund, allowing one half of one percent of the fund or $400,000 annually, whichever is greater, as well as any fees collected in association with the lending, to be used by the States to administer the SRF.
We also support the proposed level of authorization of $3 billion annually. CIFA believes that future demand for Clean Water SRF loan funding will exceed the $2 billion annualized goal EPA has identified as sufficient for federal capitalization. This goal for sustained SRF financing, which was arrived at by EPA without consultation with the States, appears woefully deficient when compared to the level of funding, estimated as high as $300 billion, needed to meet public clean water requirements over the next twenty years.
CIFA also supports elimination of all cross-cutters and duplicate federal requirements that increase the cost of the projects and slow down the loan process, especially since these requirements are particularly burdensome to small communities and potential nonpoint source borrowers. While recognizing that the application of Davis Bacon wage standards may increase project costs in some states, CIFA defers to the will of the Congress with regard to reapplication of these requirements to first round projects financed with federal grant dollars. CIFA, however, strongly objects to the application of those requirements, or other general grant conditions, to second round loans from the SRF.
We support the expansion of eligibilities for SRF lending to include lands essential for the treatment works. We believe that protection of riparian areas, water supply areas and purposes of mitigating environmental damages or habitat loss are already eligible for SRF lending, but have no objection to their being made explicit in the law. We would also support the inclusion of conservation management and water conservation measures as eligible SRF purposes.
Further, we support, at the States' discretion, the extension of the SRF to secure critical lands for other public purposes such as park, recreation and habitat protection. The SRF, with its capability of providing zero-interest lending, is capable of accomplishing the same purposes as the Administration's proposed Better America Tax Credit Bonds, which are so far untried in the municipal financing market and may not, in fact, provide the same level of no-cost financing that the SRFs can and often do provide the borrower.
Finally, in any amendments to the SRF, it is absolutely essential the Congress extend the current provision giving States the discretion to transfer a portion of the capital grant from one SRF to the other. This authority, which was provided in the 1996 Amendments to the Safe Drinking Water Act, expires next year. Faced with this deadline, States are increasingly uneasy about executing such transfers, even though efficient management of the two funds should encourage such interdependency in order to shift funding toward current demands in either program area. In addition, statutory provisions making it clear that transfer of the proportionate share of the administrative fund allowance is also permissible would be helpful to a number of state SRF programs.
In conclusion, the SRF has proven to be an effective and efficient means of providing federal and state subsidies to finance municipal environmental treatment needs. The Congress should be very circumspect about making major changes that will affect or impact on the SRF program, or to impose provisions that will create rigidity in the operation of the individual state loan programs. The genius of the SRF program, in many ways, has been the flexibility that the Congress provided the States in the 1987 amendments. In reality, no two state programs are identical in their structure or their management, and this flexibility is what has allowed each state to fashion the program to meet their own set of needs and their own managerial and administrative structure.
We appreciate the opportunity to testify before this Committee and offer to work with the members and staff to make statutory adjustments that will improve the efficiency of the SRF program.