What’s New with Clean Water State Revolving Funds?

This past November, President Biden signed the Infrastructure Investment and Jobs Act into law. This Bipartisan Infrastructure Law includes the single largest federal investment in water ever made and allocates $11.7 billion over five years to the Clean Water State Revolving Funds (CWSRF). “This means an increase of $1.69 billion or more per year, “which adds significant resources to the program,” said Michael Deane, Chief of the EPA Clean Water State Revolving Fund. More funding for the program, combined with greater emphasis on nonpoint source projects — including habitat, groundwater, and surface water protection and restoration — make the CWSRF an appealing source of funding for conservation in New England. 

Of particular importance is that 49% of this funding must go towards “additional subsidization,” or principal loan forgiveness — this portion functions like a grant to help states fund priority projects, especially within environmental justice communities. The increased Infrastructure Law investment, along with the focus on additional subsidization and the potential projects in New England, means it is the perfect time to start thinking about leveraging SRFs to fund conservation projects. Terisa Thomas, Director at Quantified Ventures, advanced key legislation for SRFs in Vermont. Thomas encourages the New England conservation community to utilize SRFs and “Step into this new generation of conservation finance, where there’s not enough free money to make it all happen today, and waiting until tomorrow is not an option.”

The CWSRF was established in 1987 to provide low interest loans and long-term financial assistance in support of water infrastructure needs. Since its inception, the CWSRF has allocated $145 billion towards water quality improvement projects. SRFs are funded with a federal capitalization grant, which is given to a state and then matched at 20% by state funds. The Bipartisan Infrastructure Law reduces state match down to 10% for financial years 2022-23, with the match returning to the normal rate after that. States lend out these funds as low-interest loans, with an interest rate ranging from 0% to the market rate, with an average rate of 1.2%. As loan recipients pay back the principal, states can make new loans to other recipients, creating a revolving source of funding for projects. Eligible recipients include municipalities, nonprofit organizations, citizen groups, and private entities. This Conservation Finance Network Toolkit explains how State Revolving Funds work and how they can be applied to conservation. 

To qualify for a CWSRF loan, projects must demonstrate a water quality benefit and meet at least one of the EPA’s 11 eligibility criteria and project categories, including habitat, groundwater, and surface water protection and restoration. Land acquisition and restoration can be funded through the CWSRF, typically as a Nonpoint Source (NPS) project as a means to protect water quality. Projects can take the form of conservation easements, leasing of land, fee simple purchases, and restoration activities such as pervious trails and tree planting. 

While nonpoint source pollution is the leading source of water quality impairment across the U.S., less than 4% of CWSRF funds (through 2020) have gone towards addressing nonpoint source needs. Michael Deane highlighted this disparity and emphasized that new funding from the Infrastructure Law poses an opportunity for states to explore more nonpoint source projects. Green infrastructure projects have at times been underappreciated as a water quality solution. Conservation NPS projects prevent water impairment at the source, reducing the need for traditional wastewater treatment. They also prevent development in sensitive areas, helping avoid associated storm water runoff and water quality degradation. 

As nonpoint source projects have a unique set of challenges and opportunities, this Best Practices Guide for NPS projects outlines everything an NPS project developer should consider. Understanding what makes an NPS project effective is key to figuring out if the CWSRF might be the right fit. First, determine what your state’s water quality priorities are. States will be most interested in projects that solve priority problems. Demonstrating multiple benefits can also make your project a stronger contender for funds. NPS projects often naturally have multiple benefits, as they protect habitats, conserve natural resources, and preserve land. Additional benefits of NPS projects include economic, public health, and social benefits that come from healthy watersheds and access to green space.  Projects that benefit underserved communities are also prioritized at the state level. Another feature that makes a project more attractive to state CWSRF programs is having layered financing where funds are coming from multiple sources. Layered financing shows support from other sources and validates project preparedness. 

While conservation groups may be averse to taking on debt or trying an unfamiliar financing approach, Terisa Thomas emphasized their many benefits for conservation projects. “The value of securing all financing upfront, a 0% or very low interest loan, and flexibility in terms of repayment… This enables the project versus losing the project or waiting a few years when the cost of the property significantly increases.”  This Conservation Finance Webinar on the Power of Debt highlights the value of debt for conservation projects, and this article tackles talking to your land trust board about debt financing. 

The EPA gives states discretion on how their CWSRF works so that they are able to target their priority water quality issues. As each state has a unique CWSRF strategy, some are further along in the NPS project realm or have special financing to support NPS projects. States utilize Intended Use Plans (IUPs) to identify priority projects each year. It is important to find out your state’s water quality priorities and goals so your NPS projects align with them. Working with your state CWSRF representative can also help determine whether changes can be made to state CWSRF regulations to accommodate the growth of NPS projects. The importance of reaching out to your state’s SRF contact early on in the process cannot be overstated. Find your state’s CWSRF allotments, contacts, and websites from the EPA.

In addition to coordinating with state CWSRF representatives, partnerships at the local level are an essential part of NPS projects. Establishing a relationship with your municipality and local wastewater utilities is important to help them understand green infrastructure and the value of conserving land to protect water quality. Partnering with other land trusts can build capacity to understand how the SRF works and collaborate on projects. Working with other entities can also lead to potential repayment streams and creative solutions. 

An example of CWSRF advancement of NPS projects comes from Vermont. State restrictions on nonpoint source funding were a barrier to addressing nutrient loading issues in Lake Champlain, which was a top priority for water quality in Vermont. Terisa Thomas played a key role in passing Act 185 in May 2018 — which expanded eligibility of CWSRF projects to include natural resources protection projects such as conservation easements, wetland restoration, and tree planting. Act 185 also enabled direct loans to private entities for natural infrastructure projects. “There are only a few states that do this and it’s a huge barrier to finance these projects if you have to go through municipalities,” said Thomas, “this allowed our State Revolving Funds to work directly with conservation groups to develop financing tools that are of value.” 

As NPS conservation projects are often smaller than other gray infrastructure projects funded by the CWSRF, administrative challenges can exist. Financing several small NPS projects requires more relative effort than larger, traditional projects. Exploring more conservation projects also requires exploration of new partnerships and financing options by state CWSRF programs. In states with strong NPS partnerships and projects, dedicated staff play an important role. 

The need for a repayment stream has resulted in some creative solutions for conservation focused projects. Some examples include Homeowner Association fees, recreation fees, and equipment rentals. The Yurok Tribe in California acquired over 22,000 acres from the CWSRF. They came up with a very creative repayment plan — carbon credits from sustainable harvesting practices and timber sale revenues. The Massachusetts CWSRF Community Septic Management Program applies property tax bills to repayment. Applicants must prove the validity of a repayment plan in order to secure a loan, so this should be a priority issue to discuss when considering applying. Michael Deane remarked that, “Some conservation or watershed focus projects don’t have an obvious repayment stream, and while there’s some exciting things going on with land trusts and conservation groups to generate revenues to pay off loans, the ability to provide loan principal forgiveness through the CWSRF program’s additional subsidization can provide more flexibility for states to structure affordable assistance and get some momentum going.” Creative repayment streams and additional subsidization can help NPS projects thrive. 

New England as a region is in a favorable position to capitalize on this opportunity. Regional Conservation Partnerships (RCPs) can share knowledge and creative solutions. As the conversation around SRFs circulates around New England, several webinars have shared regional and national knowledge of the CWSRF. In the words of Terisa Thomas, “This is the prime time for municipalities and conservation organizations to develop new partnerships with state SRF representatives and express interest in participation.” The CWSRF is a powerful financial tool that has the potential to kickstart conservation projects across New England.

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