WASTEWATER LOANS REPLACE GRANTS

By JAMES B. PARK
Illinois Environmental Protection Agency

The federal construction grants program will soon fade into history as the last of the federal 55 percent grants are released in FY1990. The program provided assistance to wastewater facilities for more than 30 years, with 30 percent grants in the 1950s to as much as 85 percent in the early 1980s.

The State has also provided funding for wastewater projects over the years. Last year Governor James R. Thompson signed a $300 million expansion of the Build Illinois program to provide assistance to 226 communities required to comply with the federal Clean Water Act. Since 1970 over $4 billion in federal and State funds have been committed to cleaning up the waters of the State.

Even though grant funds for the immediate compliance problems were approved, there was no federal or State funding for future wastewater needs. Specific dollar amounts from the $300 million expansion were earmarked for only those 226 projects, with no discretionary funds to satisfy other identified needs.

Concerns over compliance maintenance and the need to replace aging infrastructure led the General Assembly to join with the Governor in the creation of the Water Pollution Control Revolving Fund to provide low interest loans to communities for wastewater projects in the years ahead. Funding for such a program was created when Congress phased out federal grant assistance and used the final round of federal money to capitalize revolving loan programs to be managed by the states. By providing a 20 percent match, states can receive, over the next six fiscal years, federal grants to capitalize their loan programs.

Illinois is authorized to receive $350 million for its 20 percent match of $70 million (also funded from the expanded Build Illinois program). These funds will be administered by the Illinois Environmental Protection Agency as low interest loans to local governments for wastewater construction projects such as treatment plant expansion, sewer replacement and repair, system expansion and other wastewater construction projects. Communities have up to 20 years from the initiation of operation to repay the loan.

Throughout the development of the loan program, the Agency has sought input from those who would be most directly impacted. An Advisory Committee was formed to review the basic structure of the program and comment on the comprehensive rules needed for administration. This committee was made up of associations and other groups, including the Illinois Municipal League, that represent the interests of communities in the State. The intent has been to develop a program that provides a simple means for low interest financing of wastewater projects within the constraints of U.S. EPA regulations required to obtain federal capitalization funds.

The rules directing this program were finalized on May 1, 1989. They provide detailed guidance on application procedures, loan agreements, priorities and other aspects of the process. The interest rate charged for loans is, of course, a significant element of these rules. It is important for the interest rate to be low enough to attract communities but adequate to cover inflation, administrative costs and possible defaults.

A two-tier interest rate has been approved to address the variety of project needs that currently exist. The base rate is set at 50 percent of the market rate for high quality 20-year general obligation bonds utilizing data from the Bond Buyer index. One-half of this annualized market rate yields a loan interest for FY1989 of less than 4 percent (3.955 percent).

In order to address any compliance issues not adequately funded in the State or federal grant programs, a lower interest rate of 2.50 percent has also been provided on a one time basis. Loan applicants who believe they have a project which is needed to satisfy State or federal regulations must notify the Agency in writing by October 28, 1989.

The IEPA plans to administer the program in a less complex manner, keeping in mind that this is a loan which will be repaid, unlike a grant. This will mean less "red-tape" compared to the grants program.

July 1989 / Illinois Municipal Review / Page 21

The proposed rules for operating the loan program require communities to submit pre-applications to the IEPA on an annual basis by March 31, in order to be eligible for a loan the following fiscal year. The timing of the development of priority lists for financial assistance for FY1989 and FY1990 necessitated one application deadline of March 31, 1989 for both fiscal years. Projects that submitted pre-applications by the deadline are potentially eligible for financial assistance from funds available for both fiscal years.

Project selection for loan assistance depends on both the priority position of the individual project and its readiness to proceed. Loan agreements will not be entered into until projects are ready to award construction contracts. This is to ensure the loan funds will be reserved only for the high priority projects that meet the schedule contained in their pre-application. It also encourages projects to proceed expeditiously and provides more projects on the list with an opportunity for loan assistance within a given fiscal year.

High priority projects which have indicated they will be under construction by September 30, 1989 will have the first opportunity for available loan assistance. This, in actuality, means the projects must have completed all other application requirements and advertised for bids by July 15, 1989. Failure to complete applications and advertise bids by July 15 will be assumed by the Agency to be evidence that construction will not be initiated by September 30. If any of the high priority projects fail to meet this schedule, they will be bypassed to other projects on the priority list which have completed all application requirements and are immediately ready to advertise for bids.

As part of the grant application process, the IEPA held a public hearing in April to discuss the program's Intended Use Plan (IUP) and project priority list of 517 projects which applied for loans in FY1989/1990. Thirty-one projects were identified for funding in FY1989 and each of these projects was notified in writing of the availability of loan assistance and of the bypass procedures.

In order to receive the federal funds, the IEPA applied to the U.S. EPA and was recently awarded a $50 million capitalization grant for the FY1989 funds. The required 20 percent State match of $10 million has been authorized and will be available to provide payments to loan projects as costs are incurred.

The capitalization grant application process for FY1990 will be very similar to the FY1989 application. A public hearing scheduled for July 14, 1989 will focus on the proposed projects scheduled to receive loans in FY1990 using the same priority list developed for FY1989. The hearing will be part of the IEPA's annual program plan hearings.

The exact listing of projects is dependent upon which projects meet the July 15 deadline and the level of the federal appropriation. Although Illinois' share would be approximately $50 million under full authorization, the President's budget would only provide about $33 million for FY1990.

For more information on the wastewater loans contact the Grants Administration Section, Division of Water Pollution Control, Illinois Environmental Protection Agency, 2200 Churchill Road, P.O. Box 19276, Springfield, IL 62794-9276, (217) 782-2027. •

Page 22 / Illinois Municipal Review / July 1989