Create State Revolving Funds to Finance Rural Water and Waste Disposal

The Department of Agriculture assists rural communities through a program that provides loans, loan guarantees, and grants for water and waste-disposal projects. It also offers grants for solid-waste management, emergency community water assistance, and technical assistance. For fiscal year 2010, $551 million was appropriated for the program to fund its grants and cover the cost of its loans and loan guarantees. (The cost of loans is defined under the Federal Credit Reform Act of 1990 as the present value of interest rate subsidies and expected defaults.)

The program's funds generally are allocated to each state on the basis of its rural population and the number of rural families with income below the poverty level. The Department of Agriculture distributes the funds allocated to each state on the basis of competitive proposals from eligible state and local agencies, recognized Native American tribes, and nonprofit organizations. The terms of assistance generally depend on the median household income in a grant recipient's area. Thus, the interest rates on direct loans for water and waste-disposal projects range from 60 percent to 100 percent of the market yields on municipal bonds covering similar numbers of years. Areas that are particularly needy may apply for grants or for combinations of grants and loans.

This option would reduce federal spending by providing an initial infusion of capital for state revolving funds devoted to rural water and waste disposal and then ending federal assistance. The revolving funds would be modeled on those established under amendments to the Clean Water Act in 1987 and under amendments to the Safe Drinking Water Act in 1996. The federal savings would depend on the amount and timing of the contributions to the revolving funds. Specifically, under this option, the federal government would provide $550 million annually for five years and then end assistance beginning in 2017. The option would save $54 million over five years and about $2 billion through 2021. (The details of the option are illustrative; the same basic approach could be implemented with different capitalization amounts or periods, yielding different savings.) The capitalization of the state revolving funds would not by itself allow states to offer the same amount of assistance currently provided by the federal grants and loans, but the Congress could allow the revolving funds to use their capital as collateral to leverage private-sector financing.

The rationale for this option is that the federal government should not bear indefinite responsibility for local development; programs that benefit communities, whether urban or rural, should be funded by state or local governments. The rationale for the specific approach in this option is that it is reasonable to provide funding for a few years to capitalize revolving funds before they become self-sustaining.

One argument against this option is that states might change their aid formulas (substituting loans for grants or high-interest loans for low-interest loans) to avoid depleting the funds and to recoup the costs of leveraged financing. That action could price the aid out of reach of needier communities.