Step 3: Finance Strategies

One of the common barriers to system improvement is lack of funds. This tool provides information on what funding agencies are looking for in terms of project types and which stage or component of the project is funded. This will help to identify the correct funding agency for the current stage of your project.

The NCRP keeps an updated list of project funding opportunities.

The project type will determine the relevant funding programs. The following resources present methods for screening potential funding agencies based on their mission and the project type.

• Funding Program Agency/Project Type Matrix [pdf]:
  This table provides information on the stage or component of a project an agency will fund. The matrix can be used by looking up the stage of your project and/ or a component that needs funding and then reading across to the types of project.

California Financing Coordinating Committee (CFCC): A multi-agency group formed to facilitate and expedite the completion of various types of infrastructure projects by helping customers combine the resources of several agencies. The CFCC has several useful tools:

• A common inquiry form that can be used to query multiple funding agencies about their ability to fund a project is available on the CFCC website. From the home page, the CFCC Inquiry Form is available under Quick Links at the top right of the home page. Additionally a copy of the inquiry form and answers to other questions on the CFCC can be obtained by e-mailing ibank@ibank.ca.gov.

The California State Library, California Grants Portal: one destination to find all state grant and loan opportunities provided on a first-come or competitive basis. Visit grants.ca.gov to find funding opportunities for your community.

California Governor’s Office of Emergency Services Grants Management: The CalOES Division administers federal and state funds for criminal justice, emergency management, victim services, and homeland security. Disaster recovery and preparedness funding may be available from this source.

The State Water Board, Division of Financial Assistance (DFA), provides Funding Assistance Options with a tool entitled: “Help Me Find Funding” Options. There are four fields (funding type, applicant type, project phase, and project type) that when filled out provide you with DFA’s currently available funding source(s).

CoolCalifornia Funding Wizard helps project organizers locate grant funding and initiatives for projects which are concerned with sustainability.

Rural Community Assistance Corporation, Environmental Infrastructure Loans: RCAC offers loans to finance water and waste facility projects. RCAC’s loan program is unique — it provides the early funds small rural communities need to determine project feasibility and to pay pre-development costs prior to receiving state and federal funding. Website: http://www.rcac.org/home

Indian Health Service’s (IHS) Mission Statement is to raise the physical, mental, social and spiritual health of American Indians and Alaska natives (AI/AN) to the highest level. IHS can connect tribes with potential resources for to support project funding.

First Nations Development Institute Grantmaking: First Nations Development Institute provides financial and technical resources to Tribes and Native nonprofit organizations to support asset-based development efforts. This website has a link to current grant opportunities and resources for grant seekers. The site has a dedicated California Tribal Fund that was created to support California-based, California-Native-led nonprofits and Tribal programs in controlling and protecting their food systems, water, languages, traditional ecological knowledge, and land.

CalEPA California Native American Tribal Relations: Funding Opportunities: Several state agencies and departments that provide funding to Tribal governments for infrastructure projects are presented on this web page, including the State Water Board, CA Energy Commission, and the CA Office of Emergency Services.

California Climate Investments For Tribal Governments: This web site contains links to two dozen funding opportunities, including the Safe and Affordable Drinking Water Fund, which helps struggling water systems sustainably and affordably deliver safe drinking water.

US EPA Guidebook of Financial Tools: This book is a reference work examining a wide range of different tools for financing sustainable environmental systems. The book examines comprehensive financial tools, such as finance organizations and websites, public-private partnerships, and traditional means of raising revenue, borrowing capital, and enhancing credit. It also describes specialized financial tools geared towards specific geographic areas and project types.

The following tables contain CRFs for various loan durations (years) and interest rates (%). To determine the CRF for your situation, find the intersection between the interest rate and loan duration. The number at the intersection of these two parameters is the CRF for those parameters.

The following example shows step by step how to use the tables to calculate the annual loan repayment amount for your project. For this example, the method for finding the CRF for a 5-year, $50,000 loan at 4% interest rate loan is shown below. The intersection of 4% and 5 years yields the highlighted CRF – 0.2246.

Capital Recovery Factors Interest Rate

All of the necessary information to calculate the annual repayment amount is available. Inserting the values into the equation above to yield:

Thus, the annual repayment amount for a 5-year, $50,000 loan at 4% interest is $11,230.

If your loan has an interest rate or duration which is not shown in the tables below, the CRF can be calculated using the following equation:

where:

• CRF = Capital Recovery Factor
• i = the decimal interest rate (% rate/100)
• n = number of years of the loan

For example, if the scenario above was for a 5 year loan at 4.25%, the CRF could be calculated using the above equation as follows:

The CRF calculated using this method is then used the first equation (Annual Payment Amount = Capital Recovery Factor (CRF) x Loan Amount) as before to calculate the annual loan repayment amount.

So if you were to borrow the same $50,000 for five years at an interest rate of 4.25%, the annual payment amount would be: 0.2262 X $50,000 = $11,310.35

Several online Capital Recovery calculators exist. Several are listed here for convenience:

• Capital Recovery Factor Equations Calculator by AJ Design Software
  https://www.ajdesigner.com/phpdiscountfactors/capital_recovery_equation.php
• Capital Recovery by vCalc
  https://www.vcalc.com/wiki/vCalc/Capital+Recovery
• Compounding formulas for discrete payments by The Engineering Toolbox
  https://www.engineeringtoolbox.com/discrete-payments-compounding-formulas-d_1234.html/
  

The external information for this toolbox element was not created by NCRP and is provided as an additional reference that may be useful for the user. Other additional information may also be available to the user from outside references. NCRP is not responsible for the content available from other entities.


Since external resources are not managed by NCRP, the links provided may become broken without notice. Please report broken links to NCRP by e-mailing
kgledhill@westcoastwatershed.com

Water and sewer rates as well as other taxes and charges are subject to the requirements of Proposition 218, which was passed by California voters in 1996. The Proposition amended California’s constitution by adding two articles that require voter approval prior to imposition or increase of general taxes, assessments, and some user fees. Metered rates for water consumption and sewer service charges are subject to this law.

Capital expenditures are funds used for the purchase, improvement, or maintenance of long-term assets that improve the efficiency or capacity of a water or wastewater system. Ongoing system maintenance, including repair and replacement, require regular small expenditures. Major system improvements and expansions, however, involve large expenditures over short periods of time.

Ongoing system maintenance expenditures can be readily included in an agency’s yearly budget; this type of financing is called “pay-as-you-go” financing and is likely to be covered through connection fees and service fees. Major system improvements, however, are likely to require more capital than a system has on hand, especially small systems on California’s North Coast. The more commonly used methods for financing major improvements are enterprise revenue borrowing, assessment or special tax bonds, and general obligation bonds. Each of the three common financing types is discussed in greater detail below.

The optimal financing strategy is unique to each system and it is strongly recommended that a well-credentialed, experienced financing team be consulted prior to deciding on a strategy to ensure successful debt financing.

A local government that operates a water or wastewater facility may designate all or a portion of the facility as an enterprise, or revenue producing improvement, (as defined in the Revenue Bond Law of 1941 – Government Code 54300).This allows it, with the approval of voters, to issue revenue bonds to finance capital improvements. The debt is secured by anticipated future revenues, with the interest rate determined by the expected time it will take to pay off.

General obligation bonds are secured by ad valorem property taxes if approved by a two-thirds vote of the electorate. General obligation bonds may only be issued to finance acquisition or improvement of real property. A benefit of general obligation bonds is that they usually have lower interest rates because they are secured by the pledge of an agency’s taxing authority.

Assessment bonds are paid from proceeds of assessments levied upon property that is specially benefited by the capital improvements being funded and they are secured by a lien on that property. This type of bond only requires a majority of affected property owners to submit ballots in favor (rather than the two-thirds required for general obligation bonds) and may be used to provide new or upgraded service. This type of funding ensures that those who benefit from the improvements are financing it, but a disadvantage is that rating agencies are reluctant to evaluate land-secured debt and so assessment bonds are usually not rated.

Mello-Roos Bonds have aspects of both assessment and general obligation bonds. They were established under California’s Mello-Roos Community Facilities Act of 1982 and allow public entities such as water and wastewater agencies to establish a Community Facilities District (CFD). Through the CFD, the agency can levy a special tax on the land within the CFD and use the proceeds to finance capital improvements, some new services, or to repay bonds issued for those purposes based on a tax formula. As with general obligation bonds, two-thirds of voters must approve the format of the CFD, and as with assessment bonds, Mello-Roos bonds are usually unrated.

California’s Proposition 218 was passed by the voters in November 1996. This constitutional amendment significantly affected the ability of local government to raise funds. The requirements are complex and local entity representatives are encouraged to contact an attorney specializing in the interpretation of the requirements. The following links provide general information on Proposition 218 as overall guidance.

• League of California Cities Proposition 218 Implementation Guide
• Proposition 218 for Special Districts, California Special District Association
• Water and Wastewater Projects, Financing with Tax-Exempt Bonds, Orrick
• An Introduction to California Mello-Roos Community Facilities Districts, Orrick

Please report broken links to NCRP by e-mailing
kgledhill@westcoastwatershed.com

Cash flow should be based on considering all needs of the system based on the overall long term broad view of the utility management cycle. Reviewing the material provided in this element will help to familiarize small utilities with the process of cash flow. The Cash Flow Considerations Table identifies which elements of the Utility Management Cycle to address during each phase of a project. The Cash Flow Considerations Example shows typical project cash flows to help with a conceptual understanding of the process. Should further assistance in financial planning be required, the utility could seek guidance from outside resources or consultants.

^* Bridge Loans are designed for two purposes: One is to provide temporary financing for a utility until permanent financing is secured. A second is to cover time gaps during construction between when contractor payment is due and funding agency reimbursement is provided. Due to the short-term nature of bridge loans, they typically have higher interest rates than conventional loans. Bridge loans will typically be made for the largest amount that must be paid out of pocket, which ensures that the costs will be adequately covered throughout the phase of the project. Bridge loan funds are typically disbursed quickly and received within a month of being requested.

Click on the thumbnail for a higher resolution version.
*For further explanation of this chart, see the following section.

The diagram above shows a typical cash flow for a funded water or wastewater project. The graphic also shows agency cash on hand, or reserves, as well as cumulative debt. In the example, the cumulative debt is assumed to increase only with the percentage of project cost which is funded through loans (% Cost Loan). The project funding that occurs through grants does not affect the cumulative debt (% Cost Grant). Typical characteristics of each project phase are described below:

Phase 1: Preliminary review to consider issues, direction and preliminary funding. A utility must spend existing funds in order to identify the needs of the water system and the programs available to fund the project. This process typically takes several months to complete. This step is typically non-refundable.

Phase 2: Planning to evaluate and select technical and funding alternatives. Costs are typically eligible for reimbursement through long-term grant or loan programs; however, agencies should check with potential funders for more information. A bridge loan may be needed if the cash on hand (reserves) are not accessible or if the final funding source does not reimburse planning and design costs until the construction phase. The example above assumes a bridge loan is needed, and reimbursement of costs is obtained within a month.

Phase 3: Permitting and design to secure permission to build and plans and specifications to bid. The final design and permitting for the project takes place, and bids come in from contractors. Similar to Phase 2, this process generally requires a bridge loan, although many funding agencies are now providing direct reimbursement.

Phase 4: Construction to build planned improvements. In this phase, costs are reimbursed through the final grant or loan funding source, which can take as long as 3 months from the time costs are submitted to the funding agency. The example assumed a 2 month reimbursement period and the bridge loan covers costs in the same month and is shown as a line on the graph. The bridge loan amount needed is equal to the two highest consecutive payments, which in the example is $280,000.