Written by: Claudia Flores, Project Coordinator, Environmental Finance Center at the University of North Carolina at Chapel Hill

principal forgiveness

In 2018, the Environmental Finance Center (EFC) published findings from a study that assessed the metrics and criteria used to determine principal forgiveness eligibility in the state revolving funds (SRFs) in EPA Region 4. To complete a more comprehensive analysis, the EFC conducted interviews with program managers/directors and reviewed intended use plans in EPA Regions 9 and 10[1]. The methodology used in this study is the same used for Region 4.

Similar to Region 4, all drinking water SRFs in Regions 9 and 10 use median household income as a metric to determine principal forgiveness eligibility. After median household income, water rates are the most frequently used metric. Other common metrics amongst some states in both regions include population, rate of unemployment, and debt. Metrics used by at least one state are poverty level, designated colonia areas, project type, operation and maintenance expense, and consolidation. For clean water, the most frequently used metrics[2] are median household income, population, and unemployment rates.

Figure 1: Variables Used in Each State in EPA Region 9 (CA, NV, AZ, HI) and Region 10 (OR, ID, WA, AK) to Determine Principal Forgiveness for Drinking Water

For this study, “Principal Forgiveness Based on Economic Status” is defined as the state including or prioritizing disadvantaged or low-income communities in their criteria for determining principal forgiveness eligibility. The State of Oregon divides their applicants into categories based on project type—design and infrastructure construction, health and compliance, and disadvantaged. The state does not solely allocate principal forgiveness based on economic status. Principal forgiveness is allocated to the three categories based on need and no category is prioritized over the other.

Each state has the ability, with limitations, to determine the application process for the SRFs, which includes how to allocate principal forgiveness. Due to this versatility, some states in Region 9 and 10 offer alternative financial methods, such as lower interest rates, prior to offering principal forgiveness. Examples of states who use this method are Idaho and Oregon’s drinking water SRFs. In Idaho, 30 percent of their capitalization grant is designated for principal forgiveness. Half of the principal forgiveness funds are allocated to applicants with water rates greater than $100 per month, regardless of socio-economic status. Applicants that have a median household income greater than 1.5 percent are considered disadvantaged and can receive the remaining half of principal forgiveness funds. Idaho first recalculates the percent median household income of the disadvantaged applicants to include the anticipated debt. Then, the state will attempt to lower the applicants’ adjusted percent median household incomes to 1.5 percent or lower by offering extended loan terms or low interest rates. If this is not possible, principal forgiveness is offered.

Oregon’s methodology for the drinking water SRF has similarities to the one used by Idaho. However, Oregon does not base their principal forgiveness allocation solely on an applicant’s socio-economic status. For design/construction projects, all eligible projects receive principal forgiveness totaling to 10 percent of the awarded amount, not exceeding $100,000. Projects that violate health compliance regulations receive 20 percent of the awarded amount, not exceeding $150,000. Applicants with a median household income below the state average are given an affordability rate, which is calculated using local median household income and other fixed variables. The affordability rate is compared to the monthly residential water charge per Equivalent Dwelling Unit after project completion. If the residential water rates would exceed the affordability rate upon project completion, an interest rate of 1 percent is offered, and then, if necessary, principal forgiveness totaling to 50 percent of the awarded amount, not exceeding $250,000, is offered. Additionally, Oregon offers principal forgiveness of up to $15,000 for applicants to procure contractors to assist with project management and labor standards compliance. These amounts help to combat the perception that the federal requirements associated with the drinking water SRF are burdensome for a community.

Other states, like Nevada, have expanded principal forgiveness eligibility to include engineering reports and design in their drinking water SRF program. Expanding eligibility is a result of other federal and/or state programs not funding these types of activities. Despite adding new eligible projects, the state still prioritizes allocating funds to communities considered disadvantaged and/or communities with populations less than 10,000. Overall, when compared to Region 4, Region 10 has more variables used to assess how principal forgiveness is awarded. This difference might be due to the number of applications received or the socioeconomic status of the communities in each region.

After reviewing three of the ten regions, it is unclear whether the methodologies analyzed are representative of the way in which principal forgiveness is allocated in the rest of the country. However, the analysis we conducted revealed that some states do use similar methodologies to allocate funds. The chart below highlights these methods:

Figure 2: Scenarios of Methods Used to Determine Principal Forgiveness Eligibility | Region 4, 9, and 10

The table above describes the structure of some methods used to determine principal forgiveness eligibility in EPA Region 4 (FL, GA, AL, SC, NC, TN, KY), Region 9 (CA, NV, AZ, HI), and Region 10 (OR, ID, WA, AK). Examples of states that use the methods described are listed in the gray text boxes. States that have a tilde (~) before the state abbreviation indicates that the state does something similar to the description given.

Each SRF program has been thoughtfully crafted and altered over the years. The focus and needs of a state will determine the most appropriate and effective method to use. Therefore, no method is necessarily correct or incorrect. Every state must assess how each methodology will affect all applicants. For example, applicants who are close but do not quite meet the threshold for principal forgiveness are an important group to acknowledge when creating or choosing a methodology. In the chart above, scenario 4 is an example of a methodology that clearly tries to address this group because they would still receive favorable loans, despite not receiving principal forgiveness.

The EFC hopes to continue conducting SRF programs research in other regions and assist more states in redeveloping their principal forgiveness eligibility criteria and methods. The information collected in all regions will help the EFC create a guide for states on what to consider when undergoing the redeveloping process. For more information on addressing water and wastewater affordability challenges, please click the related resources.

[1] The U.S. territories in Region 9 were not included in this study. Guam, American Samoa, and the Northern Mariana Islands receive state revolving funds under the Construction Grants Program. Tribes in Region 9 and 10 that receive state revolving funds under the Drinking Water Infrastructure Grants Tribal Set-Aside and Clean Water Act Tribal Set Aside programs are ineligible to receive funds from any state revolving fund program.

[2] The Water Resources Reform and Development Act of 2014 required clean water state revolving funds to establish criteria for affordability that “shall be based on income and unemployment data, population trends, and other data determined relevant by the State.”

Special thanks to Stephen Lapp, Jon Unger, Tim Wendland, Sara Konrad, Carrie Bohan, Janet Cherry, and Donna McNeil for contributing to this post.