Vol. 6 No. 2 Fall 1998
A Newsletter About New Jersey's Water Quality Programs

New Jersey Receives First Federal Approval of Drinking Water Funding Process

The EPA action means that the Trust will be able to use the loan security procedures built into its long-established Clean Water Financing Program to protect the security of loans made under the Drinking Water Financing Program, which will make its first loans later this year.

"This action has real significance for New Jersey ratepayers and taxpayers," said Dirk C. Hofman, P.E., executive director of the Trust. "It means that our combined clean water and drinking water bonds will receive the same AAA rating as our Clean Water bonds have received since 1995."

"With all three bond credit rating agencies giving the Trust their highest rating, we will continue to be able to sell our bonds at the lowest available market rates. That means lower interest payments for the water projects financed by the Trust, and lower costs to the ratepayers and taxpayers who ultimately pay for those projects," Hofman said. Hofman noted that the Trust is one of only two infrastructure financing agencies in the county to regularly have its uninsured bonds rated AAA by all three major agencies.

The process approved by EPA, known as crosscollateralization, will allow the Trust to use loan repayments from borrowers in both programs to guarantee payment on its combined Clean Water and Drinking Water bond series.

It is the least expensive financing available anywhere for eligible borrowers, who include local and county governments, local and regional sewer and utility authorities, and certain privately owned water purveyors. The savings generated by the lower interest rate and other cost-saving features of the program typically save the borrower 30 percent of the overall cost of the project.

In order to assure the coveted "triple AAA" rating by the three bond credit rating agencies, the Trust and DEP devised a three-tiered system of security for repayment of its bonds. The primary level calls for repayment of both the Trust and DEP loan to a single Loan Servicer bank, which immediately transfers to the Trust's bond trustee the funds required for repayment to bondholders.

A second level of security is created when the Loan Servicer transfers all the remaining funds, including those destined to repay the DEP loan, to a Master Program Trustee. The Master Program Trustee holds those funds for up to a year, during which time they are available to make up any deficiency created by the failure of a borrower to meet its obligations. At the end of a year, those funds are returned to the department.

A third, separate, level of security is provided by a separate Debt Service Reserve Fund, which is capitalized by the state for each series of Trust bonds.