Environmental Quality

Drinking Water

Rule R309-700: Financial Assistance: State Drinking Water State Revolving Fund (SRF) Loan Program

Effective Date: 05/22/2023

Admin. Code Reference: R309-700

Rule Type: Current Rule

R309. Environmental Quality, Drinking Water.

R309-700. Financial Assistance: State Drinking Water State Revolving Fund (SRF) Loan Program.

R309-700-1. Purpose.

This rule establishes criteria for financial assistance to public drinking water systems in accordance with Title 73, Chapter 10c, Water Development Coordinating Council using funds made available by the Legislature from time to time for this purpose.

R309-700-2. Statutory Authority.

The authority for the Department of Environmental Quality acting through the Drinking Water Board to issue loans to political subdivisions to finance all or part of drinking water project costs and to enter into credit enhancement agreements, interest buy-down agreements, and Hardship Grants is provided in Title 73, Chapter 10c, Water Development Coordinating Council.

R309-700-3. Definitions and Eligibility.

Subsection 73-10c-4(2)(1) limits eligibility for financial assistance under this section to political subdivisions.

Definitions for terms used in this rule are given in Rule R309-110. Definitions for terms specific to this rule are as follows:

"Asset Management Plan" A written plan developed by a water system to implement asset management or an asset management program within the system. The asset management plan describes the five core asset management components at Subsection R309-800-5(3) and provides an outline the water system can use to make appropriate improvements.

"Asset Management Program" The practice of managing infrastructure assets to maximize the efficiency and life expectancy of operating these assets while delivering the desired service levels.

"Board" means the Drinking Water Board.

"Credit Enhancement Agreement" means any agreement entered into between the Board, on behalf of the State, and an eligible water system to provide methods and assistance to eligible water systems to improve the security for and marketability of drinking water project obligations.

"Disadvantaged Communities" are defined as those communities located in an area which has a median adjusted gross income less than or equal to 80% of the State's median adjusted gross income, as determined by the Utah State Tax Commission from federal individual income tax returns excluding zero exemption returns, or where the estimated annual cost, including loan repayment costs, of drinking water service for the average residential user exceeds 1.75% of the median adjusted gross income. If, in the judgment of the Board, the State Tax Commission data is insufficient the Board may accept other measurements of the water users' income including local income surveys or questionnaires when there is a significant difference between the number of service connections for a system and the number of tax filing for a given zip code or city.

"Drinking Water Project" means any work or facility that is necessary or desirable to provide water for human consumption and other domestic uses. Its scope includes collection, treatment, storage, and distribution facilities; and also includes studies, planning, education activities, and design work that will promote protecting the public from waterborne health risks.

"Drinking Water Project Obligation" means any bond, note, or other obligation issued to finance all or part of the cost of acquiring, constructing, expanding, upgrading, or improving a drinking water project, including preliminary planning studies, surveys, engineering or architectural fees, and preparation of plans and specifications.

"Eligible Water System" means any community drinking water system owned by a political subdivision of the State.

"Emergency" means an unexpected, serious occurrence or situation requiring urgent or immediate action resulting from the failure of equipment or other infrastructure, or contamination of the water supply, threatening the health or safety of the public or water users.

"Financial Assistance" means a project loan, credit enhancement agreement, interest buy-down agreement, or technical assistance.

"Interest" means an assessment applied to loan recipients. The assessment shall be calculated as a percentage of principal.

"Interest Buy-Down Agreement" means any agreement entered into between the Board, on behalf of the State, and an eligible water system, to reduce the cost of financing incurred by an eligible water system on bonds issued by the subdivision for project costs.

"Project Costs" include the cost of acquiring and constructing any project including, without limitation: the cost of acquisition and construction of any facility or any modification, improvement, or extension of such facility; any cost incident to the acquisition of any necessary project, easement or right of way, engineering or architectural fees, legal fees, fiscal agents' and financial advisors' fees; any cost incurred for any preliminary planning to determine the economic and engineering feasibility of a proposed project; costs of economic investigations and studies, surveys, preparation of designs, plans, working drawings, specifications and the inspection and supervision of the construction of any facility; interest accruing on loans made under this program during acquisition and construction of the project; costs for studies, planning, education activities, and design work that will promote protecting the public from waterborne health risks; and any other cost incurred by the Board or the Department of Environmental Quality, in connection with the issuance of obligation to evidence any loan made to it under the law.

R309-700-4. Application and Project Initiation Procedures.

The following procedures must normally be followed to obtain financial assistance from the Board:

(1) It is the responsibility of the applicant to obtain the necessary financial, legal, and engineering counsel to prepare its application and an effective and appropriate financial assistance agreement.

(2) The applicant shall submit a completed application form, an engineering report listing the project alternatives considered and including a justification for the chosen alternative, a project financing plan that includes an evaluation of credit enhancement, interest buy-down and loan methods applicable to the project, and documents necessary to perform a financial capability assessment, when requested, and capacity assessment, if the Board determines such documentation will be beneficial for evaluating project feasibility. Comments from the local health department or the Department of Environmental Quality's resident district engineer may accompany the application. Comments from other interested parties such as an association of governments will also be accepted. Those costs incurred after the submission of a completed funding application form to the Board and before the execution of a financial assistance agreement and which meet the criteria for project costs are eligible for reimbursement from the proceeds of the financial assistance agreement.

(3) Division staff will evaluate the application and supporting documentation, calculate proposed terms of financial assistance, prepare a report for review by the Board, and present said report to the Board for its consideration.

(4) The Board may authorize financial assistance for the project on the basis of the staff's feasibility report and designate whether a loan, credit enhancement agreement, interest buy-down agreement, hardship grant or any combination thereof, is to be entered into, and approve the project schedule as described in Section R309-700-13. The Board shall authorize a hardship grant only if it determines that other financing alternatives are unavailable or unreasonably expensive to the applicant, as described in Section R309-700-5. If the applicant seeks financial assistance in the form of a loan of amounts in the security account established pursuant to Title 73, Chapter 10c, Water Security Council, which loan is intended to provide direct financing of projects costs, then the Board shall authorize such loan only if it determines that credit enhancement agreements, interest buy-down agreements and other financing alternatives are unavailable or unreasonably expensive to the applicant or that a loan represents the financing alternative most economically advantageous to the state and the applicant; provided, that for purposes of this subsection and for purposes of Subsection 73-10c-4(2), the term "loan" shall not include loans issued in connection with interest buy-down agreements as described in Subsection R309-700-10(2) or in connection with any other interest buy-down arrangement.

(5) Planning Grant - The applicant must submit an application provided by the Division and attach a scope of work, project schedule, cost estimates, and a draft contract for planning services.

(6) Planning Loan - The applicant requesting a Planning Loan must complete an application for a Planning Loan, prepare a plan of study, satisfactorily demonstrate procurement of planning services, and prepare a draft contract for planning services including financial evaluations and a schedule of work.

(7) Design Grant or Loan - The applicant requesting a Design Grant or Loan must have completed an engineering plan meeting program requirements.

(8) The applicant must demonstrate public support for the project. As a minimum, for a loan to be secured by a revenue bond, the Sponsor must mail notices to each water user in the Sponsor's service area informing them of a public hearing. In addition to the time and location of the public hearing the notice shall inform water users of the Sponsor's intent to issue a non-voted revenue bond to the Board, shall describe the face amount of the bond, the rate of interest, the repayment schedule and shall describe the impact of the project on the user including any increase in user rates, and impact and connection fees. The notice shall state that water users may respond to the Sponsor in writing or in the public hearing. The public hearing shall be held within ten days after the date of the notice. A copy of all written responses and a certified record of the public hearing shall be forwarded to the Division of Drinking Water.

(9) For financial assistance mechanisms when the applicant's bond is purchased by the Board, the project applicant's bond documentation, including an opinion from legal counsel experienced in bond matters that the drinking water project obligation is a valid and binding obligation of the applicant, as described in Subsection R309-700-13(3), must be submitted to the Board's bond counsel for preliminary approval and the applicant shall publish a Notice of Intent to issue bonds in a newspaper of general circulation pursuant to Section 11-14-21. For financial assistance mechanisms when the applicant's bond is not purchased by the Board, the applicant shall submit a true and correct copy of an opinion from legal counsel experienced in bond matters that the drinking water project obligation is a valid and binding obligation of the applicant.

(10) Hardship Grant - The Board or its designee executes a grant agreement setting forth the terms and conditions of the grant.

(11) As authorized in Subsection 19-4-106(2)(c) the Executive Secretary may review plans, specifications, and other data pertinent to proposed or expanded water supply systems to ensure proper design and construction, as specified in Section R309-500-4 General. Construction of a public drinking water project shall not begin until complete plans and specifications have been approved in writing by the Executive Secretary.

(12) If a project is designated to be financed by the Board through a loan or an interest buy-down agreement as described in Subsection R309-700-10(2) to cover any part of project costs an escrow account supervised by the applicant and the Board will be established by the applicant to assure that loan funds are used only for qualified project costs. If financial assistance for the project is provided by the Board in the form of a credit enhancement or interest buy-down agreement as described in Subsection R309-700-10(1) all project funds will be maintained in a separate account and a quarterly report of project expenditures will be provided to the Board.

(13) If a revenue bond is to be used to secure a loan, a User Charge Ordinance must be submitted to the Board for review and approval to ensure adequate provisions for debt retirement and infrastructure operation and maintenance. If a general

obligation bond is to be used to secure a loan, a User Charge Ordinance must be submitted to the Board for review and approval to ensure the system will have adequate resources to provide acceptable service.

14 The applicant's contract with its engineer must be submitted to the Board for review to determine that there will be adequate engineering involvement, including project supervision and inspection, to successfully complete the project.

(15) A position fidelity bond may be required by the Board insuring the treasurer or other local staff handling the repayment funds and revenues produced by the applicant's system and payable to the State of Utah through the Drinking Water Board.

(16) The applicant's attorney must provide an opinion to the Board regarding legal incorporation of the applicant, valid legal title to easements and rights-of-way at the project site and throughout the system, and adequacy of bidding and contract documents.

(17) CREDIT ENHANCEMENT AGREEMENT AND INTEREST BUY-DOWN AGREEMENT ONLY - The Board executes the credit enhancement agreement or interest buy-down agreement setting forth the terms and conditions of the security or other forms of assistance provided by the agreement and notifies the applicant to sell the bonds, as described in Sections R309-700-9 and R309-700-10.

(18) CREDIT ENHANCEMENT AGREEMENT AND INTEREST BUY-DOWN AGREEMENT ONLY - The applicant sells the bonds and notifies the Board of the terms of sale. If a credit enhancement agreement is utilized, the bonds shall contain the legend required by Subsection 73-10c-6(3)(d). If an interest buy-down agreement is utilized, the bonds shall bear a legend which makes reference to the interest buy-down agreement and states that such agreement does not constitute a pledge of or charge against the general revenues, credit or taxing powers of the state and that the holder of any such bond may look only to the applicant and the funds and revenues pledged by the applicant for the payment of interest and principal on the bonds.

(19) The applicant opens bids for the project.

(20) LOAN ONLY - The Board approves purchase of the bonds and executes the loan contract, as described Subsection R309-700-4(24).

(21) LOAN ONLY - The loan closing is conducted.

(22) A preconstruction conference shall be held.

(23) The applicant issues a written notice to proceed to the contractor.

(24) The applicant must have adopted a Water Conservation Plan before executing the loan agreement.

R309-700-5. Implementing an Asset Management Program.

(1) Retail water suppliers seeking financial assistance through Utah's State Revolving Fund must commit to develop and implement an asset management program. An asset management program provides the following benefits to water systems:

(a) Prolonging asset life.

(b) Reducing overall costs for operations, maintenance, and capital expenditures.

(d) Meeting consumer demands with a focus on system sustainability.

(e) Meeting service expectations and regulatory requirements.

(f) Improving responses to emergencies.

(g) Improving the security and safety of assets.

(h) Budgeting focused on critical activities for sustained performance.

(i) Setting rates based on sound operational and financial planning.

(2) An effective asset management program includes detailed asset inventories, operation and maintenance tasks, and long-range financial planning. These items should be captured in an asset management plan, which can be tailored to fit individual water system size and complexity.

(3) The asset management plan shall address the following five core components.

(a) The current state of the utility's assets.

(i) Prepare an asset inventory.

(ii) Develop a system map.

(iii) Develop a method to assess and prioritize assets based on condition.

(iv) Assess remaining useful life of the asset.

(v) Determine asset value and replacement cost.

(b) The utility's required sustainable level of service.

(i) Analyze current customer demand and satisfaction.

(ii) Analyze anticipated customer demand and satisfaction.

(iii) Understand current regulatory requirements.

(iv) Communicate system performance goals with the public.

(v) Identify standard levels of service and track system performance.

(i) Conduct a failure analysis on all assets.

(ii) Determine probability of failure.

(iii) Analyze risk and consequences of failure.

(iv) Prioritize system assets based on criticality to system operation.

(v) Develop specific response plans based on potential asset failure.

(d) Minimum infrastructure life cycle cost.

(i) Implement an appropriate maintenance schedule including costs for all assets.

(ii) Identify life cycle costs for all assets.

(iii) Develop a capital improvement plan and an operations and maintenance strategy.

(iv) Identify and compare the cost of rehabilitation versus replacement.

(v) Determine the related costs of responding to asset failure.

(e) Long-term budgeting strategy.

(i) Regularly review system budget.

(ii) Establish and fund a capital facilities account.

(iii) Implement a rate structure to ensure financial sustainability.

(iv) Explore asset renewal and replacement financing.

(v) Identify financial assistance options for major asset repair or replacement.

(vi) Prioritize financial resources based on asset condition and importance.

(4) All water systems subject to this rule shall complete the following:

(a) Prepare an asset management plan as described in this subsection.

(b) Systems governing body shall formally adopt the asset management plan.

(5) In addition to the requirements of this subsection, water systems applying for financial assistance under Utah's State Revolving Fund Financial Assistance Program must also submit their asset management plan to the Division of Drinking Water or request sufficient funds to create an asset management plan.

R309-700-6. Loan, Credit Enhancement, Interest Buy-Down, and Hardship Grant Consideration Policy.

(1) Board Priority Determination. To determine an applicant's priority for financial assistance, the Board shall consider the following.

(a) The applicant's ability to obtain funds for the drinking water project from other sources or to finance such project from its own resources.

(b) The applicant's ability to repay the loan or other project obligations.

(d) Whether the drinking water project:

(i) meets a critical local or state need;

(ii) is cost effective;

(iii) will protect against present or potential hazards;

(iv) is needed to comply with the minimum standards of the Federal Safe Drinking Water Act, 42 U.S.C. Section 300(f) et. seq. or similar or successor statute;

(v) is needed to comply with the minimum standards of the Utah Safe Drinking Water Act, Title 19, Chapter 4, or similar or successor statute; or

(vi) is needed due to an Emergency.

(e) The overall financial impact of the proposed project on the citizens of the community, including direct and overlapping indebtedness, tax levies, user charges, impact or connection fees, or special assessments, resulting from the proposed project, and anticipated operation and maintenance costs versus the median income of the community.

(f) Consistency with other funding source commitments which may have been obtained for the project.

(g) The point total from an evaluation of the criteria listed in Table 1.

(h) Other criteria that the Board may consider appropriate.

TABLE 1

NEED FOR PROJECT

1. PUBLIC HEALTH AND WELFARE, SELECT ONE

POINTS

A. There is evidence that waterborne illnesses have occurred

B. There are reports of illnesses which may be waterborne

C. No reports of waterborne illness, but high potential for such exists

D. No reports of possible waterborne illness and low potential for such exists

2. WATER QUALITY RECORD, SELECT ONE

A. Primary Maximum Contaminant Level (MCL) violation more than 6 times in preceding 12 months

B. In the past 12 months violated a primary MCL 4 to 6 times

C. In the past 12 months violated a primary MCL 2 to 3 times or exceeded the Secondary Drinking Water Standards by double

D. In the past 12 months violated MCL 1 time

E. Violation of the Secondary Drinking Water Standards

F. Does not meet all applicable MCL goals

G. Meets all MCLs and MCL goals

3. VERIFICATION OF POTENTIAL SHORTCOMINGS, SELECT ONE

A. Has had sanitary survey within the last year

B. Has had sanitary survey within the last five years

C. Has not had sanitary survey within last five years

4. GENERAL CONDITIONS OF EXISTING FACILITIES, SELECT ALL APPLICABLE THAT PROJECT WILL RESOLVE

A. The necessary water treatment facilities do not exist, not functioning, functioning but do not meet the requirements of the Utah Public Drinking Water Rules (UPDWR)

B. Sources are not developed or protected according to UPDWR

C. Source capacity is not adequate to meet current demands and system occasionally goes dry or suffers from low pressures

D. Significant areas within distribution system have inadequate fire protection

E. Existing storage tanks leak excessively or are structurally flawed

F. Pipe leak repair rate is greater than 4 leaks per 100 connections per year

G. Existing facilities are generally sound and meeting existing needs

5. ABILITY TO MEET FUTURE DEMANDS, SELECT ONE

A. Facilities have inadequate capacity and cannot reliably meet current demands

B. Facilities will become inadequate within the next three years

C. Facilities will become inadequate within the next five to ten years

6. OVERALL URGENCY, SELECT ONE

A. System is generally out of water. There is no fire protection or water for flushing toilets

B. System delivers water which cannot be rendered safe by boiling

C. System delivers water which can be rendered safe by boiling

D. System is occasionally out of water

E. Situation should be corrected, but is not urgent

TOTAL POSSIBLE POINTS FOR NEED FOR PROJECT

100

(2) Drinking Water Board Financial Assistance Determination. The amount and type of financial assistance offered will be based on the following considerations.

(a) An evaluation based upon the criteria in Table 2 of the applicant's financial condition, the project's impact on the community, and the applicant's commitment to operating a responsible water system.

The interest rate to be charged by the Board for its financial assistance will be computed using the number of points assigned to the project from Table 2 to reduce, in a manner determined by Board resolution from time to time, the most recent Revenue Bond Index RBI as published by the Bond Buyer's Guide. The interest rate so calculated will be assigned to the financial assistance.

For hardship grant consideration, exclusive of planning and design grants or loans described in Sections 309-700-6 through R309-700-8, the estimated annual cost of drinking water service for the average residential user should exceed 1.75% of the median adjusted gross household income from the most recent available State Tax Commission records or the local median adjusted gross income (MAGI) is less than or equal to 80% of the State's median adjusted gross income. When considering funding for planning and design grants and loans described in Sections 309-700-6 through R309-700-8, the Board will consider whether or not the applicant's local MAGI meets the criteria for hardship grant funding. If, in the judgment of the Board, the State Tax Commission data is insufficient, the Board may accept other measurements of the water users' income, including a local income survey or questionnaire when there is a significant difference between the number of service connections for a system and the number of tax filings for a given zip code or city. The Board will also consider the applicant's level of contribution to the project.

TABLE 2

FINANCIAL CONSIDERATIONS

1. COST EFFECTIVENESS RATIO, SELECT ONE

POINTS

Project Cost per benefitting connection

A. $0 to $500

B. $501 to $1,500

C. $1,501 to $2,000

D. $2,001 to $3,000

E. $3,001 to $5,000

F. $5,001 to $10,000

G. Over $10,000

2. CURRENT LOCAL MEDIAN ADJUSTED GROSS INCOME (MAGI), SELECT ONE

A. Less than 70% of State Median AGI

B. 71 to 80% of State Median AGI

C. 81 to 95% of State Median AGI

D. 96 to 110% of State Median AGI

E. 111 to 130% of State Median AGI

F. 131 to 150% of State Median AGI

G. Greater than 150% of State Median AGI

3. APPLICANT'S COMMITMENT TO PROJECT

PROJECT FUNDING CONTRIBUTED BY APPLICANT, SELECT ONE

A. Greater than 25% of project funds

B. 15 to 25% of project funds

C. 10 to 15% of project funds

D. 5 to 10% of project funds

E. 2 to 5% of project funds

F. Less than 2% of project funds

4. WATER BILL, INCLUDING TAXES, AFTER PROJECT IS BUILT RELATIVE TO LOCAL MEDIAN ADJUSTED GROSS INCOME, SELECT ONE

A. Greater than 2.50% of local median MAGI

B. 2.01 to 2.50% of local median MAGI

C. 1.51 to 2.00% of local median MAGI

D. 1.01 to 1.50% of local median MAGI

E. 0 to 1.00% of local median MAGI

5. SPECIAL INCENTIVES, SELECT ALL THAT APPLY:

The Applicant has the following:

A. A replacement fund receiving annual deposits of about 5% of the system's annual drinking water (DW) budget and fund has already accumulated a minimum of 10% of said annual DW budget in this reserve fund.

B. In addition to item 5.A., accumulated an amount equal to at least 20% of its annual DW budget in its replacement fund.

C. Created or enhanced, or will create or enhance, a regionalization plan.

D. Implemented a rate structure encouraging conservation.

TOTAL POSSIBLE POINTS FOR FINANCIAL NEED

100

(b) Optimizing return on the security account while still allowing the project to proceed.

(d) Cost effectiveness evaluation of financing alternatives.

(e) Availability of funds in the security account.

(f) Environmental need.

(g) Other criteria the Board may consider appropriate.

R309-700-7. Planning Grant.

(1) The Drinking Water Board may make loans or grants from the security account to political subdivisions for planning for drinking water projects.

(2) Qualifying for a Planning Grant will be based on the criteria listed in Subsection R309-700-6(2)(a).

(3) The applicant must demonstrate that all funds necessary to complete project planning will be available before commencing the planning effort. The Planning Grant will be deposited with these other funds into a supervised escrow account when the grant agreement between the applicant and the Board is executed or the Board may choose to provide the funds in incremental disbursements as the applicant incurs expenses on the project.

(4) Failure by the recipient of a Planning Grant to implement the findings of the plan may prejudice any future applications for drinking water project funding.

(5) The recipient of a Planning Grant must first receive written approval for any cost increases or changes to the scope of work.

(6) The Planning Grant recipient must provide a copy of the planning project results to the Division. The planning effort shall conform to rules under Title R309.

R309-700-8. Planning Loan.

(1) A Planning Loan is made to a political subdivision with the intent to provide interim financial assistance for project planning until the long-term project financing can be secured. The Planning Loan must be repaid to the Board unless the payment obligation is waived by the Board.

(2) The applicant must demonstrate that all funds necessary to complete project planning will be available before commencing the planning effort. The Planning Loan will be deposited with these other funds into a supervised escrow account when the loan agreement between the applicant and the Board is executed or the Board may choose to provide the funds in incremental disbursements as the applicant incurs expenses on the project.

(3) The recipient of a Planning Loan must first receive written approval from the Division Director for any cost increases or changes to the scope of work.

(4) Copies of all prepared documents required by the planning loan shall be submitted to the Division.

R309-700-9. Design Grant or Loan.

(1) For purposes of Section R309-700-9, project design means preparing engineering plans and specifications, construction contracts, and associated work.

(2) A Design Grant or Loan is made to a political subdivision with the intent to provide interim financial assistance for the completion of the project design until the long-term project financing can be secured. The Design Loan must be repaid to the Board unless the payment obligation is waived by the Board as authorized by Subsection 73-10c-4(3)(b).

(3) The applicant must demonstrate that all funds necessary to complete the project design will be available before commencing the design effort. The Design Grant or Loan will be deposited with these other funds into a supervised escrow account when the grant or loan agreement between the applicant and the Board is executed.

(4) The recipient of a Design Grant or Loan must first receive written approval from the Board before incurring any cost increases or changes to the scope of work.

R309-700-10. Credit Enhancement Agreements.

The Board will determine whether a project may receive all or part of a loan, credit enhancement agreement or interest buy-down agreement subject to the criteria in Section R309-700-6. To provide security for project obligations the Board may agree to purchase project obligations of applicants or make loans to the applicants to prevent defaults in payments on project obligations. The Board may also consider making loans to the applicants to pay the cost of obtaining letters of credit from various financial institutions, municipal bond insurance, or other forms of insurance or security for project obligations. In addition, the Board may consider other methods and assistance to applicants to properly enhance the marketability of or security for project obligations.

R309-700-11. Interest Buy-Down Agreements.

Interest buy-down agreements may consist of:

(1) A financing agreement between the Board and applicant whereby a specified sum is loaned or granted to the applicant to be placed in a trust account. The trust account shall be used exclusively to reduce the cost of financing for the project.

(2) A financing agreement between the Board and the applicant whereby the proceeds of bonds purchased by the Board is combined with proceeds from publicly issued bonds to finance the project. The rate of interest on bonds purchased by the Board may carry an interest rate lower than the interest rate on the publicly issued bonds, which when blended together will provide a reduced annual debt service for the project.

(3) Any other legal method of financing which reduces the annual payment amount on locally issued bonds. After credit enhancement agreements have been evaluated by the Board and it is determined that this method is not feasible or additional assistance is required, interest buy-down agreements and loans may be considered. Once the level of financial assistance required to make the project financially feasible is determined, a cost-effective evaluation of interest buy-down options and loans must be completed. The financing alternative chosen should be the one most economically advantageous for the state and the applicant.

R309-700-12. Loans.

The Board may make loans to finance all or part of a drinking water project only after credit enhancement agreements and interest buy-down agreements have been evaluated and found either unavailable or unreasonably expensive. The financing alternative chosen should be the one most economically advantageous for the state and its political subdivisions. A loan origination fee is a fee assessed to the loan recipient as a percentage of the principal balance of the loan. This fee will not be charged to any disadvantaged community receiving a loan subsidy as part Drinking Water State Revolving Fund financial assistance.

R309-700-13. Project Authorization (Reference R309-700-4(4)).

A project may be "Authorized" for a loan, credit enhancement agreement, interest buy-down agreement, or hardship grant in writing by the Board following submission and favorable review of an application form, engineering report, financial capability assessment, staff feasibility report, and capacity assessment, if the Board determines the assessment will be beneficial for evaluating project feasibility. The engineering report shall include a cost effectiveness analysis of feasible project alternatives capable of meeting State and Federal drinking water requirements. It shall include consideration of monetary costs including the present worth or equivalent annual value of all capital costs, operation, maintenance, and replacement costs. The alternative selected must be the most economical means of meeting applicable State and Federal drinking water requirements over the useful life of the facility while recognizing environmental and other nonmonetary considerations. If it is anticipated that a project will be a candidate for financial assistance from the Board, Division staff should be contacted, and the plan of study for the engineering report should be approved before the planning is initiated.

Once the application form and other related documents have been reviewed and assessments made, the staff will prepare a project feasibility report for the Board's consideration in Authorizing a project. The project feasibility report will include a detailed evaluation of the project with regard to the Board's funding priority criteria and will contain recommendations for the type of financial assistance which may be extended such as a loan, credit enhancement agreement, interest buy-down agreement, or hardship grant.

Project Authorization is not a contractual commitment and is conditioned upon the availability of funds at the time of loan closing or signing of the credit enhancement, interest buy-down, or grant agreement and upon adherence to the project schedule approved at that time. If the project is not proceeding according to the project schedule the Board may withdraw the project Authorization so that projects which are ready to proceed can obtain necessary funding. Extensions to the project schedule may be considered by the Board, but any extension requested must be fully justified.

R309-700-14. Financial Evaluations.

(1) The Board considers it a proper function to assist and give direction to project applicants in obtaining funding from such State, Federal or private financing sources as may be available to achieve the most effective utilization of resources in meeting the needs of the State. This may also include joint financing arrangements with several funding agencies to complete a total project.

(2) Hardship Grants will be evidenced by a grant agreement.

(3) In providing any form of financial assistance in the form of a loan, the Board may purchase bonds of the applicant only if the bonds are accompanied by a legal opinion of recognized municipal bond counsel that the bonds are legal and binding under applicable Utah law including, if applicable, the Utah Municipal Bond Act. For bonds of $150,000 or less the Board will not require this opinion.

(a) In providing any form of financial assistance in the form of a loan, the Board may purchase either taxable or non-taxable bonds; provided that it shall be the general preference of the Board to purchase bonds issued by the applicant only if the bonds are tax exempt and are accompanied by a legal opinion of recognized municipal bond counsel that interest on the bonds is exempt from federal income taxation. Such an opinion must be obtained by the applicant in the following situations:

(i) Bonds which are issued to finance a project which will also be financed in part at any time by the proceeds of other bonds which are exempt from federal income taxation.

(ii) Bonds which are not subject to the arbitrage rebate of Section 148 of the Internal Revenue Code of 1986, or successor provision of similar intent, including, without limitation, bonds covered by the "small governmental units" exemption contained in Section 148(f)(4)(c) of the Internal Revenue Code of 1986, or any successor provision of similar intent, and bonds which are not subject to arbitrage rebate because the gross proceeds from the loan will be completely expended within six months after the issuance of such bonds.

(b) In any other situations, the Board may purchase taxable bonds if it determines, after evaluating all relevant circumstances including the applicant's ability to pay, that the purchase of the taxable bonds is in the best interests of the State and applicant.

(c) If more than 25% of the project is to serve industry, bond counsel must evaluate the loan to ensure the tax-exempt status of the loan fund.

(d) Revenue bonds purchased by the Board shall be secured by a pledge of water system revenues, and it is the general policy of the Board that the pledge of water revenues for the payment of debt service, including principal, interest, and applicable fees on a particular revenue bond be on a parity with the pledge of those water revenues as security for the debt service payments on all other bonds or other forms of indebtedness which are secured by the water revenues.

(4) The Board will consider the financial feasibility and cost effectiveness of the project in detail. The financial capability assessment must be completed as a basis for the review. The Board may require that a full capacity assessment be made for a given project. The Board will generally use these reports and assessments to determine whether a project will be Authorized to receive a loan, credit enhancement agreement, interest buy-down agreement, or hardship grant, as described in Sections R309-700-9 through R309-700-12. If a project is Authorized to receive a loan, the Board will establish the portion of the construction cost to be included in the loan and will set the terms for the loan. The Board will require the applicants to repay the loan as rapidly as is reasonably consistent with the financial capability of the applicant. It is the Board's intent to avoid repayment schedules which would exceed the design life of the project facilities.

(5) Normal engineering and investigation costs incurred by the Department of Environmental Quality or Board during preliminary project investigation and before Board Authorization will not become a charge to the applicant if the project is found infeasible, denied by the Board, or if the applicant withdraws the application before the Board's Authorization.

(6) The Board shall determine the date on which the scheduled payments of principal and interest will be made. In fixing this date, all possible contingencies shall be considered, and the Board may allow the system up to 18 months of actual use of the project facilities before the first repayment of principal is required.

(7) The applicant shall furnish the Board with acceptable evidence that the applicant is capable of paying its share of the construction costs during the construction period.

(8) LOANS AND INTEREST BUY-DOWN AGREEMENTS ONLY - The Board may require, as part of the loan or interest buy-down agreement, that any local funds which are to be used in financing the project be committed to construction prior to or concurrent with the committal of State funds.

(9) The Board will not forgive the applicant of any payment after the payment is due.

(10) The Board will require a debt service reserve account be established by the applicant at or before the loan is closed. Deposits to that account shall be made at least annually in the amount of one-tenth of the annual payment on any bonds purchased by the Board and shall continue until the total amount in the debt service reserve fund is equal to the annual payment. The debt service reserve account shall be continued until the bond is retired. Failure to maintain the reserve account will constitute a technical default on the any bonds and may result in penalties being assessed. Annual reports or statements will be required.

(11) The Board will require a capital facilities replacement reserve account be established at or before the loan is closed. Deposits to that account shall be made at least annually in the amount of 5% of the applicant's annual drinking water system budget, including depreciation, unless otherwise specified by the Board at the time of loan authorization, until the loan is repaid. This fund shall not serve as security for the payment of principal or interest on the loan. The applicant shall adopt such resolutions as necessary to limit the use of the fund to construct capital facilities for its water system and to notify the Board before making any disbursements from the fund so the Board can confirm that any expenditure is for an acceptable purpose. The applicant will not need the consent of the Board before making any expenditure from the fund. Failure to maintain the reserve account will constitute a technical default on any bonds and may result in penalties being assessed. Annual reports or statements will be required.

(12) If the Board is to purchase a revenue bond, the Board will require that the applicant's water rates be established such that sufficient net revenue will be raised to provide at least 125% or such other amount as the Board may determine of the total annual debt service.

R309-700-15. Committal of Funds and Approval of Agreements.

(1) The Executive Secretary, or designee, may execute the loan agreement, credit enhancement agreement, or interest buy-down agreement when the following are complete.

(i) All financial assistance authorization conditions, as outlined in the Authorization Letter sent to the recipient, have been met; including Division approval of all submitted legal documents and other items required by this rule.

(ii) The recipient has received written plan approval of the engineering plans and specifications for the authorized project from the Division of Drinking Water.

(2) If the approved scope of work has changed significantly since the Board's initial authorization, the Board shall review the modified project scope of work to determine if it meets the Board's requirements. If satisfied, the Board shall authorize the Executive Secretary, or designee, to proceed with executing the loan agreement, credit enhancement agreement or interest buy-down agreement.

R309-700-16. Construction.

The Division of Drinking Water staff may conduct inspections and will report to the applicant and applicant's engineer. Contract change orders must be properly negotiated with the contractor and approved in writing. All Change orders must be reviewed by staff to determine eligibility for reimbursement within the SRF program requirements and determine there are sufficient funds in the amount authorized by the Drinking Water Board to complete the project as authorized. The applicant shall notify the Executive Secretary when the project is near completion and request a final inspection. When the project is complete, but before facilities can be placed into service, the recipient must request an operating permit in accordance with current Division of Drinking Water rules.

KEY: financial assistance, loans, interest buy-downs, credit enhancements, hardship grants

Date of Last Change: May 22, 2023

Notice of Continuation: February 10, 2025

Authorizing, and Implemented or Interpreted Law: 19-4-104; 73-10c; 73-10g-5