State revolving loan funds (SRFs) are loan programs that are capitalized by federal grants, state appropriations and dedicated revenues. States use the funds to provide a range of financial assistance to local governments, including loans, grants and credit enhancement. SRFs are used to finance facilities for wastewater treatment. They are authorized for highways, bridges, tunnels and have been proposed for safe drinking water facilities.

Interest in and reliance on state revolving loan funds increased significantly since 1987 when amendments to the Clean Water Act replaced the Environmental Protection Agency's Construction Grant Program with a State Water Pollution Control Revolving Fund Program. The Intermodal Surface Transportation Efficiency Act of 1991 permitted states to establish a revolving loan program to support the development of public or private toll facilities and Congress considered the establishment of a revolving loan fund program for safe drinking water facilities in 1994.

The Government Finance Officers Association (GFOA) supports the establishment and use of state revolving loan fund programs because they are flexible financing tools that assist local governments in paying for public capital facilities and are adaptable to varying state and local government needs. Additionally, SRFs complement other federal financial infrastructure assistance programs.

With the growing popularity of revolving loan funds, GFOA has undertaken a review of these programs to determine if they are performing effectively and meeting the needs of local governments. Accordingly, GFOA makes the following recommendations to federal and state officials on ways such programs can be improved or structured differently to increase their usefulness for local governments.

Recommendations to the Federal Government

The following recommendations concerning state revolving loan funds are directed to the federal government:

• reauthorize the existing State Water Pollution Control Revolving Loan Fund and ensure sufficient overall federal funding levels to address the widening gap between needs and available resources for infrastructure facilities,
• permit revolving loan fund programs to be expanded for such purposes as safe drinking water and to include financing for other appropriate types of infrastructure facilities,
• encourage cooperation among programs that have similar objectives such as financial assistance to hardship communities for water or sewer projects,
• design any new revolving loan fund programs so that states and their beneficiary communities have the necessary flexibility to structure each state's program to meet the particular needs of that state and its communities,
• exempt state revolving loan funds from the arbitrage rebate restrictions so that the funds can retain and lend interest earned on the funds,
• eliminate overly restrictive statutory and regulatory requirements such as limitations on administrative costs and loan maturities,
• evaluate program performance by emphasizing outputs and impacts,
• eliminate requirements for state certifications such as those addressing the economic viability of projects and compliance with other federal requirements,
• limit the applicability of cross-cutting requirements and unrelated programmatic requirements on revolving loan funds,
• encourage states to develop specific policies for financing projects in small communities,
• encourage states to establish objective standards for determining economic hardship and develop specific policies for addressing such hardship,
• recognize the needs of larger jurisdictions and ensure that such jurisdictions have adequate opportunities to participate in state revolving loan funds,
• recognize the impact of administrative costs on all levels of government,
• provide a role for local officials in designing project prioritization systems and selecting projects, and
• assist states and localities by providing cost-estimating models, technical assistance and training.

Recommendations to State Governments

The following recommendations concerning state revolving loan funds are directed to state governments:

• work with local officials to design the most appropriate revolving loan fund structures for the state, taking into account the needs of different classes of users as well as overall state requirements,
• provide additional state resources to revolving loan funds and develop specific policies to assist particular classes of users,
• provide a process for local government officials to work with state officials to set SRF program priorities and to select projects,
• limit unrelated programmatic requirements on revolving loan funds,
• address the needs of economically distressed communities, especially where revolving loan funds are leveraged, by providing subsidized interest rates, grants and credit assistance but continue to maintain some level of local contribution to projects, and
• perform outreach activities and provide assistance to local governments, especially those without adequate financial and technical expertise.

To keep pace with our nation's infrastructure needs, multiple strategies are called for to stimulate new infrastructure investment opportunities, including state revolving loan funds. To improve this financing tool, GFOA urges federal, state and local government officials to work together to ensure that revolving loan funds are sufficiently flexible and appropriately funded.

• Publication date: June 1995