What Are State Revolving Funds and Why Should Watershed Leaders Care?

With the recent passing of the Bipartisan Infrastructure Law, the next few years offer an unprecedented opportunity to dramatically advance investments in nature-based solutions. This chance to advance watershed conservation and protection will easily come and go unless we get the word out about the opportunities to take advantage of this funding – particularly, State Revolving Funds, which are set to receive an additional $44 Billion.

In fact, State Revolving Funds have the potential to be the largest impact investor on the planet for nature-based solutions!

You are far from alone if you have not heard about State Revolving Funds, or SRFs. The State Revolving Fund programs were created by the United States Environmental Protection Agency (EPA) to further the goals of the Clean Water Act by providing a sustainable funding mechanism for improving water quality and public health.

Most who are familiar with these programs consider SRFs synonymous with drinking and wastewater utility loans. However, the purpose of SRFs is actually much broader and allows for a huge variety of water quality projects, such as those more commonly funded with nonpoint source (§319) funds and stormwater (§402) funds.

The gap between EPA program goals and where funds are allocated is primarily due to state-level policy. Each state is responsible for its own SRF program, and individual state policies in many states have narrowed down the scope of eligible borrowers and priority projects to drive community investment in gray water infrastructure.

This doesn’t mean that nonpoint source projects aren’t eligible, but it does suggest that there are significant barriers to overcome if we are going to see substantial increases in program allocations to water quality projects that address nonpoint source pollution. While the challenges are many and still being assessed, what is blatantly clear is the necessity to engage watershed leaders in SRF decision making at the local and state level.

Beyond this, it will be up to watershed leaders to take initiative to engage with current decision makers and clarify the value of nonpoint source projects to water quality and public health.

An Untapped Opportunity for Nonpoint Source Projects

Looking back on my previous experience as a local watershed coordinator in Kentucky, I wish I had better understood the connection – both actual and possible – between SRFs and the watershed plan I was working to implement at the time. I now realize that SRFs were the financial mechanism used to fund the gray infrastructure wastewater projects identified in the watershed plan, which included the elimination of multiple treatment plants.

I also now realize that there was a missed opportunity to develop a more comprehensive SRF project by including a nonpoint source or green infrastructure watershed plan solution on top of the gray infrastructure. In addition to the benefits of addressing more than one water quality issue, based on Kentucky’s SRF ranking criteria, a project with a green infrastructure component also ranks higher, thus making it more likely to be selected for funding.

My lack of understanding underscores the disconnect between watershed planning, which leans towards focusing on nonpoint (unregulated) pollution, and infrastructure planning, which focuses on point source (regulated) pollution.

Now as a watershed coordinator for the Mississippi River Basin, I am intensely focused on how to go about including nonpoint source practices into SRF applications. In having conversations with those working on all sides of water, I see how widespread and deep this disconnect between management of point source and nonpoint source pollution really is.

Watershed leaders are uniquely positioned to be catalysts in deconstructing water management silos. This is because watershed leaders understand that nature-based solutions offer a holistic approach to addressing today’s most pressing environmental challenges and have the local expertise necessary to develop and implement water quality projects. Watershed leaders are also inherently driven by collaboration and have a keen ability to identify shared objectives and craft strategies that are mutually beneficial to those involved.

A first step is becoming informed enough about SRFs and how they could help achieve watershed planning goals.

A Primer on State Revolving Funds

SRFs are financial programs that provide low-cost financing for water quality projects that improve water quality, public health, and environmental protection. The primary goal of SRFs is to provide accessible and affordable funding options for communities, ensuring the development and maintenance of essential water systems.

There are two SRF programs: Drinking Water and Clean Water.

The Drinking Water SRF is probably of less interest to professionals doing nonpoint source work. It provides financial assistance to ensure safe and clean drinking water for communities. Eligible projects include those that build and improve drinking water systems.

Of more interest is the Clean Water SRF, which provides financial assistance to reduce pollution in bodies of water. Eligible projects include those that build and improve wastewater systems, stormwater systems, decentralized systems – such as septic – as well a wide variety watershed and nonpoint source projects.

Nonpoint source projects have been eligible for funding through the Clean Water SRF for decades. However, only about 4% of state allocations have gone to these types of projects.

Within the annual plans of each state, most identify goals of increasing nonpoint source projects. For some states this interest has been followed by significant policy and programming changes. However, many states have still made little or no changes that aid an increase in nonpoint source projects.

The call to action for watershed leaders is to help close the gap between a state’s interest in increasing nonpoint source projects and subsequent actions that make it so. While there are a lot of pathways states could go down to help increase their percentage of allocations going to nonpoint source projects, meaningful success requires knowledge and engagement from local watershed leaders.

There are five key features that are useful for watershed professionals to know about SRF.

SRF Offers Subsidized “Low-Interest” Loans

Each year, the federal government provides SRF capitalization grants to each state. These grants are subsequently utilized by states to offset or bridge the gap between the market interest rate and the lower interest rate offered to borrowers. Borrowers are incentivized to use SRFs because interest rates are much lower than the market rate, leading to a significantly reduced total payback amount.

SRF Can Offer “Free Money” to Certain Projects

To further the accessibility of obtaining a loan, states provide an additional subsidy, called an “add sub,” to borrowers. Add subs can be in the form of a grant, loan forgiveness, or a further reduced loan rate. States typically distribute add sub to disadvantaged communities, as defined by each state’s affordability criteria.

However, states are allowed to distribute add subs to other priorities that address environmental or public health goals. This means that states have the option to provide what is essentially “free” money to watershed and nonpoint source water quality projects.

Thinking about paying for a nonpoint source project with a loan may seem like a huge barrier in a world that almost solely relies on grants. Indeed, the policies states set around add sub could support an easier transition of nonpoint source projects into the SRF, and lifting barriers like this will be one piece of the larger puzzle.

SRF Goes Round and Round

Operating on a revolving basis means that, as loans are repaid by the borrowing communities, the funds become available for new loans to other communities, creating a self-sustaining financial mechanism. With State Revolving Funds providing a stable funding option, watershed planners can start thinking long-term, as opposed to today’s more common 2 to 4 year grant cycles.

States have different requirements around SRF  

Each state administers its own SRF programs, typically through the state’s environmental or water quality agency. Management at the state level allows states significant autonomy to tailor their programs to the specific needs and priorities of the state’s communities.

Getting to know your state’s SRF requirements is an essential initial step. Watershed leaders, who have critical knowledge of local and statewide water quality issues, could also help influence the priorities set by SRF decision makers to make these funds more accessible to watershed projects.

States can create innovative funding options

States can add additional uses of funds to their SRF programs beyond the traditional loan structure. A Sponsorship Program is one successful option developed in a few states, such as Ohio and Iowa.

Sponsorship programs pair a graywater project with a nonpoint source water quality project. The nonpoint source project is funded by the loan borrower, who is incentivized with a reduced loan rate, resulting in the same or a lower total repayment amount.

Sponsored projects prioritize nonpoint source reductions through green infrastructure and land conservation. These projects also direct funds to borrowers not typically eligible, such as land trusts and community organizations.

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So, if SRF has piqued your interest, where can you go from here?

Government agencies and NGOs have developed several resources that review the opportunities to fund nonpoint source practices.

The River Network’s State Revolving Fund Advocacy Toolkit and EPA’s CWSRF Best Practices Guide for Financing Nonpoint Source Solutions are two good options to start with.

To learn more about how the CWSRF works in your state, you’ll need to review information provided by your state agency.

And stay tuned for future blog posts that will get more specific about the opportunities for watershed projects to capitalize on SRF!

Have more questions or are you seeking technical support? Quantified Ventures’ Watershed Coordinator Team is funded to help. Contact the Watershed Coordinator in your region or reach us at info@quantifiedventures.com.

Header image: A constructed wetland is one form of a nature-based solution for nonpoint source pollution. NRCS/SWCS photo by Lynn Betts