Step 3: Finance Strategies

NCRP Toolbox Navigation

NCRP Toolbox Main Cycle Step 1 Cycle Step 2 Cycle Step 3 Cycle Step 4 Cycle Step 5 Cycle Step 6
The thoughtful consideration of both up front and ongoing costs is essential for creating a viable financing strategy. Creating the financing strategy itself is a valuable part of the process and small communities need to plan for paying costs associated with the preliminary work to plan the overall financing strategy and pursue funds. It is typically necessary to fund these up-front costs prior to being approved for a larger overall funding package, although some funding programs may reimburse small communities for preliminary costs during the planning and design phase of a project.
Create Viable Financing Strategies

Financing has two main components: start-up funding and maintenance funding. Start-up funding consists of securing money up front to pay for studies, design, permitting and other preparatory costs as well as to pay for construction of improvements. This up-front money may come in the form of a grant, that does not need to be paid back, or in the form of a loan, that will typically have annual payments. Local agency or Tribal funds can also be used to pay for part or all of the upfront costs. Some funding programs require a local match of funds or in kind services and local contributions are often an essential part of a funding package.

Maintenance funding involves collecting enough money to pay back loans and to fund operations, maintenance, replacement, reserves, and other costs. It is important to consider both securing the money up front to completely fund the necessary work, and generating enough revenue over time to pay off any loan obligations and to cover replacement and other costs.

Toolbox Elements to Create Viable Financing Strategies

Toolbox Element Description
Funding Program Summaries
A one-stop information shop about funding programs suited to small community infrastructure projects.
Capital Recovery Tables Lookup tables to translate the portion of total project costs not paid by grant into annual debt service requirements met through a revenue mechanism.
Capital Improvement Financing Summaries Summary of strategy options for generating revenue to pay the annual debt service associated with capital improvement.
Cash Flow Considerations Assists entities in understanding the funds needed to move a project through planning, design, and construction.

The following sections provide more information about each toolbox element.

Funding Program Summaries

Funding Program Summaries

The funding program summaries present a general overview of many of the more common funding programs that are available to communities for financing infrastructure projects. This information can be used by local staff and officials to begin to identify possible loan and grant funding opportunities, and in many cases initiate the funding process. Funding programs are competitive and complex; therefore, local agencies may need professional expertise to help them through the overall process. Several State and Nonprofit agencies that may be able to assist with funding support are included in the additional resources below.

Learn more


Project Funding Resources

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.


Additional Resources

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

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 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:

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.

Capital Recovery Tables

Capital Recovery Factors (CRFs) are numbers which are multiplied by a loan amount in order to determine the annual amount required to pay off a loan. A CRF is calculated by considering the loan interest rate and the number of years needed to pay-off the loan plus the resulting interest. The equation to calculate the annual payment amount is shown below:

Annual Payment Amount = Capital Recovery Factor × Loan Amount

The annual payment amount represents the amount which would need to be collected through utility rates to ensure there is sufficient income in order to pay for the debt.

Capital Recovery Tables are a set of pre-calculated CRFs for specific interest rates and number of years for repayment. Capital recovery tables can be used to quickly find a CRF to calculate the annual repayment amount to pay-off a loan.

Learn more

Capital Recovery Calculation Methods

Annual Loan Repayment Calculation Example Using Look-up Tables

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

Years 2.50% 3% 3.50% 4% 4.50% 5% 6% Years
1 1.025 1.03 1.035 1.04 1.045 1.05 1.06 1
2 0.5188 0.5226 0.5264 0.5302 0.534 0.5378 0.5454 2
3 0.3501 0.3535 0.3569 0.3603 0.3638 0.3672 0.3741 3
4 0.2658 0.269 0.2723 0.2755 0.2787 0.282 0.2886 4
5 0.2152 0.2184 0.2215 0.2246 0.2278 0.231 0.2374 5
6 0.1816 0.1846 0.1877 0.1908 0.1939 0.197 0.2034 6
7 0.1575 0.1605 0.1635 0.1666 0.1697 0.1728 0.1791 7

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

Annual Payment Amount = $50,000 × 0.2246
= $11,230

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

Capital Recovery Factor using a Mathematical Equation

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:


  • 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

Additional Resources

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

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

Capital Improvement Finance Summaries

There are a number of ways that a water or wastewater provider, that is a local agency, can finance system improvements. In this summary, the following capital improvement financing methods are reviewed:

  • Enterprise Revenue Borrowing
  • Assessment or Special Tax Bonds
  • General Obligation Bonds

These three types of financing methods are described below and a table comparing the key features of each is included below. Much of the details for describing these methods has been excerpted from “Water and Wastewater Projects Financing with Tax-Exempt Bonds” by Stephen A. Spitz and Devin Brennan.

Learn more


If an agency or tribe does not have sufficient reserves to complete a project, an alternate financing source is needed and those that benefit from the improvements should contribute to paying for them. Even though a variety of funding sources could be pursued including grant funds, it is typical that some form of loan will need to be obtained to complete a project. A variety of financing methods can be set up to assure the lender that a loan will be repaid and act as loan security.

Three common financing methods are summarized in this tool so that small community representatives may familiarize themselves with available options. A review of each method is presented, including a comparison table containing information about terms, requirements, and necessary documentation.

Agencies wishing to consider financing options should consult a financing specialist to better understand the details of potential financing methods, attorneys needed, and the overall funding strategy. Other less common Financing Methods may be appropriate for special circumstances and local entity representatives should consult with funding professionals for other options. Regardless of which method is chosen, a strong, experienced financing team is essential for successful water and wastewater agency or Tribe debt financings.

Capital Improvement Finance Summaries

Overview - Law, Capital Expenditures, and Financing

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.

Enterprise Revenue Borrowing

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

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

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

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.

Financing Comparison Table

Loan Security Revenue Bond Certificates of Participation or Installment Sale Agreement Assessment Bonds Mello Roos Bonds General Obligation Bonds
Source of Repayment Water or Sewer Rates Water or Sewer Rates Benefit Assessments Special Tax Additional Ad Valorem Property Tax
Election Requirements With any general or special election None Mailed ballot with 45-day ballot period Typically with any general or special election With any general or special election
Who Votes Registered Voters Not required Property Owners Registered Voters (if uninhabited land owners) Registered Voters
Approval Requirements 2/3 of those voting Written protests do not exceed 50% Majority of Assessment amount 2/3 of those voting 2/3 of those voting
Reserve Requirement Typically less than 10% Typically less than 10% Typically less than 10% Typically less than 10% Not required
Term for Debt Less than 40 years Less than 40 years Less than 40 years Per ballot – indefinite Less than 40 years
Term for Maintenance Per ballot – indefinite Per ballot – indefinite Per ballot – indefinite Per ballot – indefinite Cannot be used for maintenance
Additional Documentation Rate Study Rate Study Engineers Report Rate and Method of Apportionment

Additional Resources

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.

Please report broken links to NCRP by e-mailing

Cash Flow Considerations

Cash flow is the management of all revenue and expenses that occur within the operation of a utility system. There are many aspects incorporated within a utility’s cash flow, including operations and maintenance, depreciations, reserves, and debt service. Understanding how to combine all of these types of cash flows in a big picture financial planning method is imperative in creating an efficient and sustainable utility service. The tools presented in this section are meant to provide an overview of the cash flow process for small utilities.


Learn more

Cash Flow Considerations

Element Overview

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.

Cash Flow Considerations Table

Phase 1: Preliminary review to consider issues, direction, and preliminary funding Agency reserves are often used in this phase to get the wheels rolling on a project. Costs in this phase are typically less than in the other project phases.
Phase 2: Planning to evaluate and select technical and funding alternatives If agency reserves are low, a funding source will likely need to be sought to cover expenses. If a long-term funding source that does not pay upfront for planning and design costs (but are reimbursable later) is obtained, a bridge loan* will be needed to cover cash flow. If counting on reimbursement later, check with the funding agency on any potential ineligible costs.
Phase 3: Permitting and design to secure permission to build and plans and specifications to bid At this point in the project the long-term funding source for construction should be identified. As with Phase 2 a bridge loan* may be needed until reimbursement can be obtained.
Phase 4: Construction to build planned improvements Typically, construction cannot start until a final funding agreement has been signed. The Public Contract code requires contractors to be paid within 30 days, so a bridge loan* may be needed to cover costs until the funding agency provides reimbursement.

* 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.

Example Diagram

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

Example Explanation

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.