Kansas Public Water Supply Loan Fund

History

The PWSLF was established by the 1994 Legislature through SB 611. Statutory authority for the PWSLF may be found at KSA 65-163d through 65-163u. The PWSLF is a revolving loan fund program that provides financial assistance in the form of loans to Kansas municipalities at below market interest rates for the construction of public water supply system infrastructure. Expenditures from the PWSLF are for projects that comply with the federal Safe Drinking Water Act.

In 1996, the Safe Drinking Water Act (SDWA), by U.S. Congressional action, established the Drinking Water State Revolving Fund (DWSRF) to assist public water supply systems in financing the costs of infrastructure needed to achieve or maintain compliance with SDWA requirements and to protect public health. This measure authorized the U.S. Environmental Protection Agency (EPA) to award capitalization grants to the states.

How the Kansas Public Water Supply Loan Fund Works

The PWSLF is made possible by receipt of capitalization grants from the EPA. Kansas must provide 20 percent matching funds to receive the capitalization grant. The PWSLF provides matching funds by issuing state match revenue bonds and by a one-time $5.0 million allocation in accordance with SB 487 passed by the 1998 Legislature. The state-matched bonds are repaid with the interest portion of the municipalities’ loan repayments and other interest earnings of the PWSLF.

The PWSLF is operated as a reserve account leverage program. In a reserve account leverage program, the capitalization grant is deposited in a reserve account and pledged as security for repayment of state-issued revenue bonds. Proceeds from the revenue bonds are loaned to the municipalities. The reserve account is invested and the interest earnings are combined with the loan repayments from municipalities to buy down the loan’s interest rate. Municipalities are charged interest rates determined by the repayment period:

• For loans with a repayment period of up to 20 years, the interest rate is equal to 60 percent of the previous three months’ average of the Bond Buyers 20 Bond Index;
• For loans with a repayment period between 20 and 30 years, the rate equals 70 percent of the previous three months’ average of the Bond Buyers 20 Bond Index; and
• For loans with a repayment period between 30 and 40 years, the rate equals 80 percent of the previous three months’ average of the Bond Buyers 20 Bond Index.

Funding to implement and administer the PWSLF is available from the federal capitalization grant and from a service fee built into the loan interest rate. No funding from the State General Fund is needed for the program. The PWSLF resides in the State Treasury and moneys are credited to the Fund from the following sources:

• Funding received from the federal government;
• Funding appropriated by the Legislature;
• Proceeds derived from the sale of bonds issued in accordance to the PWSLF statutes;
• Funding received from repayments of loans as well as the interest paid;
• Interest attributable to investment of moneys in the PWSLF; and
• Funding received from any public or private entity for the purposes of the PWSLF.

Administration of the PWSLF

The Secretary of Health and Environment (Secretary) is charged with administering the PWSLF and developing a priority system for projects. According to statute, those permitted to have access to the PWSLF are:

• Municipalities (political or taxing subdivisions that are authorized by law to construct, operate, and maintain a public water supply system);
• Water districts; and
• Two or more political or taxing subdivisions that jointly construct, operate, or maintain a public water supply system.

The law requires the Secretary to exclude from the priority list any municipality project that has not adopted and implemented conservation plans and practices. Also excluded are any projects related to the diversion or transportation of water acquired through a water transfer.

Specific authority to issue and sell revenue bonds or to enter into an agreement with the Kansas Development Finance Authority (KDFA) to issue revenue bonds for the purpose of making loans for public water supply development and improvement is granted to the Secretary.

The PWSLF is audited annually by a certified public accounting firm in accordance with auditing standards generally accepted in the country and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General. The most recent report shows an unqualified opinion.

Priority System for Projects

The Kansas Department of Health and Environment (KDHE) has developed a Project Priority System to rank all projects submitted for funding. The system establishes priority rating criteria that are used to numerically rank projects for potential funding assistance from the PWSLF. All projects are placed on a yearly Project Priority List (PPL) which are listed in order of project ranking. A funding line is set to accommodate the highest ranked project in correlation to the available funds. Beginning in 2022, KDHE began generating three PPLs due to changes in federal law. The three PPLs include Lead Service Line (LSL), which only lists lead service line replacement and inventory projects; Emerging Contaminant (EC), which only lists projects that address emerging contaminants; and Base Program (BP), which lists all other eligible projects.

Projects will be funded according to ranking on the 2024 PPLs and the readiness of the project to proceed. The 2024 Intended Use Plan uses the PPLs to inform decisions regarding which projects will be financed through the PWSLF and estimates anticipated available funds for the program. The Infrastructure Investment and Jobs Act of 2021added three additional capitalization grants (General Supplemental, Lead Service Line Replacements, and Emerging Contaminants) available for federal fiscal years 2022 through 2026. KDHE applied for two of these grants (General Supplemental and Emerging Contaminants) on May 10, 2023. KDHE will apply for the third grant (Lead Service Line Replacements) once a sufficient amount of project costs are in the LSL PPL.

The SDWA requires priority to be given to projects that address the most serious risks to human health, that are necessary to assure compliance with the requirements of the SDWA, and to assist public water supplies most in need, on a per household basis according to state affordability criteria.

In addition, state law requires KDHE to make available at least 20 percent of the total money in the PWSLF to public water supply systems serving less than 5,000 people. The SDWA requires KDHE to make available at least 15 percent of the total money in the PWSLF to public water supply systems serving less than 10,000 people. Systems that serve less than 10,000 represent 32 percent of the estimated available loan funds in the 2024 PPL.

KDHE considers several factors, in addition to readiness, in determining the priority of each project. The factors include:

• Water quality issues, including compliance with maximum contaminant levels, treatment techniques, aesthetic factors, and unregulated contaminants;
• Consolidation of systems;
• Improvements to reliability;
• State median and applicant household income levels;
• Special categories which include expansions and improvements to potential future quality standards; and
• Other considerations that KDHE may include when the above factors do not cover the previously outlined criteria but are worthy of consideration.

2024 Priority List

The 2024 PPLs list all eligible and current projects that have been submitted for loan fund consideration. The funding lines for the PPLs are set to an amount closest to the available funds, which KDHE has estimated to be approximately $440.0 million in aggregate. The BC PPL will have a funding line that includes all projects with a priority rank of 12 and above. The EC PPL will have a funding line that includes all projects with a priority rank of 23 and above. The LCL PPL will not have a funding line because KDHE can fund all projects on the LCL PPL.

Financial Status of the PWSLF

In November 2010, the KDFA created a Master Financing Indenture (MFI) that allows the PWSLF and the Kansas Water Pollution Control Revolving Fund (KDHE’s Clean Water Act State Revolving Loan Fund) to access the municipal bond market as a single entity. According to KDHE, this indenture greatly enhances the PWSLF’s ability to provide loans. The MFI issued bonds in November 2010 and May 2011, and both issues were rated AAA. The Master Bond Resolution, which preceded the MFI, will continue to exist as long as bonds issued under it are still outstanding, but no new bonds can be issued from it.

As of May 31, 2023, KDHE had 401 loan agreements or offers in place for a total of $1.2 billion. KDHE will direct loan the non-set-aside portion of any remaining and future capitalization grants rather than use it to leverage bonds through a reserve leveraging structure. For the 2024 PPLs, KDHE anticipates $440.0 million of available PWSLF that can be committed to loans. This represents available cap grant funds, recycled funds, and bond proceeds in excess of existing loan commitments. KDHE does not typically commit specific types of funds for specific loans at loan execution; instead, the source of funds used for disbursements will be determined at the time of each disbursement request.

by Luke Drury
Senior Fiscal Analyst
785-296-7250