The Texas Water Development Board (the board) adopts amendments to 31 TAC §365.2 and §365.11 concerning Investment Rules without changes to the proposed text as published in the October 31, 2003 issue of the Texas Register (28 TexReg 9421) and will not be republished. The amendments are adopted for clarification of the rules to include provisions resulting from legislative action affecting the rules, and compliance with the Public Funds Investment Act (PFIA), Government Code, Chapter 2256.

The board amends §365.2 concerning Definitions of Terms. The amendment to §365.2(5) will delete the entire item. The development fund manager is not mentioned in the investment rules; therefore, no definition is needed. Section 365.2(9) is adopted to delete "Audit and Funds Management Director " and replace with "Chief Financial Officer". As a result of reorganization, effective September 1, 2003, the Investment Officer duties were transferred to the Chief Financial Officer.

Section 365.11 is adopted to delete "finance committee" and replace with "board". This amendment reflects concern from Texas Water Development Board members that the annual review, revision, and adoption of a list of qualified brokers should fall within the purview of the entire board and not the finance committee.

There were no comments received on the proposed amendments.

Subchapter A. GENERAL PROVISIONS

Subchapter A. GENERAL PROVISIONS

The Texas Water Development Board (board) adopts amendments to 31 TAC Chapter 375 concerning the Clean Water State Revolving Fund without changes to the proposed text as published in the October 31, 2003 issue of the Texas Register (28 TexReg 9422) and will not be republished. Amendments to §§375.17 and 375.52 and the creation of new §§375.19, 375.20, and 375.21 relate to the availability and use of Clean Water State Revolving Funds for projects that will provide service to disadvantaged communities.

The amendments to §375.17 adds required information to be included in the fiscal year 2005 intended use plan for projects which propose service to disadvantaged communities as defined in the new §375.19. New §375.19(a) is adopted to specify new authority for the board to provide low interest loans to political subdivisions that are either themselves disadvantaged, as later defined, or that will be providing wastewater service to areas outside the applicants' current service area that meet the definition of a disadvantaged community. New §375.19(b)(1) establishes that a disadvantaged community includes both the community that is currently disadvantaged or one that becomes disadvantaged as the result of a project. A community that achieves the income criteria meeting the definition of disadvantaged as the result of a project is deemed as much in need of subsidy as the community that is currently disadvantaged. New §375.19(b)(2) uses two criteria to define a disadvantaged community: adjusted median household income and household affordability factors. The adjusted median household income is a measure of the income levels of residents of the area. Similar income criteria are used in the Drinking Water State Revolving Fund (DWSRF) and the Economically Distressed Areas Program (EDAP), both of which are administered by the board, so that its use fosters consistency between board programs. Further, the board finds that the adjusted median household income is information that is readily available, is easily verified and is indicative of the current economic situation of the community. The 25% income threshold is a measure already used by the board to establish eligibility for the EDAP as required by Texas Water Code, §16.341(1).

Household affordability factors were used as the other criteria in new §375.19(b)(2) to define a disadvantaged community because the factors measure whether a project is affordable to the customers of the system. The household affordability factors indicate the capacity of the customers to support the cost of water and/or wastewater service, including debt service, through user charges. If the water or combined water and sewer bill exceeds a certain percentage of the adjusted median household income, then the project would not be affordable to the community without assistance from this program. The percentage of the average water or combined water and sewer bill to median household income, which is defined in new §375.19(b)(3), is a methodology used by other states in developing affordability guidelines as well as the federal government in determining affordability of projects. The 1.0% for water rates used in new §375.19(b)(2)(A) is the percentage used by the Environmental Protection Agency in its User Manual for the Municipality's Ability to Pay Computer Model. The 2.0% for water and sewer rates in new §375.19(b)(2)(B) was used because it was recognized that the additional cost of sewer services impacts the ability of customers to pay for a new project and this percentage was used by another state in developing its affordability guidelines. New §375.19(b)(4) defines combined household cost factor, which combines the average yearly water bill with the average yearly wastewater bill and divides the total by the average median household income.

New §375.19(b)(5) and (6) define the term average yearly water and sewer bill, respectively, which are used in defining disadvantaged community. The average yearly water bill is calculated by applying the community's rate structure to the average number of gallons of water used in-house per year by the average occupied household. Identification of the rate on a per gallon basis accounts for the different usage rates between water systems thereby creating a common measure when analyzing the percentage of the water or combined water and sewer bill to the adjusted median household income. The number identified as the average gallons used in an individual residence for water and sewer in new §375.19(b)(5) and (6) is the estimated state-wide average of domestic water that enters a household and returns via the sewer system, based on data submitted by political subdivisions and compiled by the Texas Commission on Environmental Quality. New §375.19(b)(7) identifies the method by which median household income is to be identified. It uses the most recent census data and requires that it be adjusted to bring the median income to current income levels. The board recognizes that some utility providers supplement the rate revenue with other sources of revenue such as operation and maintenance taxes or surcharges which has the effect of offsetting an affordability determination made solely based on the utility rates. Therefore, the board also adopts new §375.19(b)(8) which allows an applicant to include in the affordability determination such other sources of revenue as may be used by the utility in providing service.

New §375.19(c) identifies the interest rates that will be charged for loans for projects that serve disadvantaged communities. New §375.19(c)(1) provides an interest rate determined by the percentage of the system's adjusted median household income to the state median household income. The initial 75% threshold is consistent with the eligibility threshold for the board's Economically Distressed Areas Program. Using the basic premise that the lower the median household income of the system, the less that the system can repay, a sliding scale of subsidies was created using two interest rates with greater subsidies going to systems with lower adjusted median household incomes. This approach mirrors the interest rate subsidies provided by the board through the Disadvantaged Community Program of the Drinking Water State Revolving Fund. Unlike the DWSRF, the Clean Water State Revolving Fund can only provide low interest loans and cannot provide any loan forgiveness. Consequently, the new rule offers loans with 1.0% interest rate for projects serving areas in which the adjusted median household income for the service area is between 75% and 70% of the median state household income and loans with a 0.0% interest rate, if the adjusted median household income for the service area is less than or equal to 70%.

New §375.19(d) provides that if the cost of the project exceeds the estimated cost as listed on the Intended Use Plan, then the additional cost will be funded through the Financial Assistance Account of the Texas Water Development Water Fund. Due to the limited availability of funds available for disadvantaged communities and the identification of projects through an intended use plan, funding unanticipated project costs would dissipate funds for applicants that had been notified of the availability of funds. Consequently, the adopted new rule provides that alternative financial assistance will be used for costs in excess of the estimated project cost identified in the intended use plan.

New §§375.20 and 375.21 set up alternative procedures for identifying projects that may be eligible for funds made available for disadvantaged communities. Due to the funding availability under the capitalization grant application process with the U. S. Environmental Protection Agency, the 2004 Project Priority List (PPL) has already been prepared and been the subject of the public hearing process pursuant to federal regulation. New §375.20 proposes using the PPL that has already been prepared for fiscal year 2004. New §375.21 proposes that projects that may be eligible to receive disadvantaged community funds be identified on the PPL starting in fiscal year 2005 and for all subsequent fiscal years.

New §375.20(a) proposes that the board identify the amount of funds that will be made available for projects that serve disadvantaged communities. An initial determination of the capacity of the Clean Water State Revolving Fund must be made as the first step in identifying projects that may be eligible to receive these funds. New §375.20(b) proposes the procedure for potentially eligible applicants to receive notification of the availability of funds. Once the board determines the amount of funds available, the executive administrator identifies only those projects already on the PPL starting in Category A, as adopted in new §375.20(b)(1). This new paragraph proposes that the executive administrator identify all the projects in Category A in priority order which, if funded, would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. New §375.20(b)(2) proposes that if the total estimated project costs for all projects in Category A does not exceed all the funds available for disadvantaged communities, then the executive administrator will identify the projects in Category B in priority order which if funded in conjunction with the funding of the projects in Category A would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. New §375.20(b)(3) proposes that if the total estimated project costs for all projects in Category A and B does not exceed all the funds available for disadvantaged communities, then the executive administrator will identify the projects in Category C in priority order which if funded in conjunction with the funding of the projects in Category A and B would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. The prioritization of projects in this manner is intended to provide the smallest communities with adequate capital to reach the critical capital mass necessary for a sustainable wastewater utility system. Only when the smallest communities (Category A covers potential applicants with existing populations of 3,000 or fewer) have had full access to these funds, then the executive administrator will determine the extent to which these funds may be available to communities with existing populations of 3,001 to 10,000 (Category B), then communities with 10,001 to 25,000 population (Category C). New §375.20(b)(3) makes these funds available only through Category C because utilities serving communities with populations greater than 25,000 have sufficient revenues and customer bases to sustain the necessary infrastructure for their systems by accessing the funds available through either the remaining portions of the Clean Water State Revolving Funds or other available capital markets.

Upon identification of the projects following the procedures set forth in new §375.20(b)(1) - (3) and §375.20(b)(4) would require the executive administrator to provide written notification to the applicant associated with each identified project of the availability of funds, invite the submission of an application, and notify the applicant of the deadline for the submission of an application. New §375.20(c) proposes that the only way for an eligible political subdivision to receive these funds is to respond to the invitation within three months of the date of notification. This deadline is proposed because the limited availability of the funds together with the federal funding cycle requires that the funding decisions be made within the fiscal year. If a particular applicant is not prepared to apply for these funds, then there are other applicants who should be given the opportunity to apply. This new subsection also would provide that the required response is the submission of an application for assistance, as defined in §375.2(6), together with the information that the applicant believes the board should consider in determining the eligibility of the project for these funds. Further, this new subsection requires the executive administrator provide written notification that an application has been received and may request additional information in order that the applicant is apprised of the applicable timelines and requirements. Finally, this new subsection would provide that an applicant must receive a commitment within three months of the submission of an application. As before, a deadline is proposed because the limited availability of the funds together with the federal funding cycle requires that the funding decisions be made within the fiscal year. If an application has not been completed or otherwise is not approvable by the board, then there are other applicants that should be given the opportunity to receive a commitment.

New §375.20(d) proposes that a political subdivision that receives notice of the availability of funds that does not submit an application or receive a commitment within the specified time lines will have its project re-ranked and moved to the bottom of the PPL in the category in which it was ranked. New §375.20(e) requires that, three months after the notice of available disadvantaged community funds has been sent, the executive administrator determine if the amount of funds requested by all the complete applications submitted to that point in time is less than the funds available for disadvantaged communities. If the amount requested in completed applications is less than the funds that are available for disadvantaged communities, then the executive administrator will return incomplete applications and change the priority project list to move the projects for which incomplete or no application has been submitted to the bottom of the list.

New §375.20(f) provides that upon the re-ranking of projects in new §375.20(e), the executive administrator identify the projects from the PPL according to the process identified in new §375.20(b) and which have not previously received a notice of availability funds. New §375.20(g) would require that the executive administrator provide to the political subdivision associated with the projects thus identified written notice of the availability of funds, an invitation to submit an application for assistance, and the deadline for the submission of the application. New §375.20(h) would provide that in order for the political subdivision to receive these funds, it must file an application according to board rules within three months of the date of notification and receive a loan commitment from the board within three months of the date of the submission of the application. New §375.20(i) is adopted to require that the executive administrator, three months after the second notice of availability of funds has been sent, determine if the applications submitted to that point in time, if approved by the board, would use all of the funds available for disadvantaged communities. Further, new §375.20(i) would provide that if there are any excess funds identified, the executive administrator will return incomplete applications and the excess funds may be made available for projects in disadvantaged communities in the application process of the next fiscal year.

New §375.20(j) proposes that any political subdivision receiving notice of the availability of funds can let the executive administrator know, in writing, that it does not intend to apply for these funds. Under this new subsection, the executive administrator can proceed immediately to identify the next project on the PPL that could apply for the funds and that has not previously received notice of funds availability. Further, this new subsection would provide that upon identifying the next project on the PPL, the executive administrator would provide the political subdivision associated with such project with written notice of the availability of funds, an invitation to submit an application for assistance, and the deadline for the submission of an application. New §375.20(k) would require these political subdivisions to submit an application within three months of receiving the notice and require that the applicant receive a commitment within three months of submitting the application.

New §375.20(l) would provide that applicants not receiving a commitment within three months would have their projects moved to the bottom of the PPL. This new subsection also would provide that any funds available for disadvantaged communities and not used for such projects would be made available for disadvantaged communities in the next fiscal year. In this manner, the adopted rules would provide reasonable opportunity for projects on the PPL to receive funding in priority order as expeditiously as possible.

New §375.21 proposes that projects that may be eligible to receive disadvantaged community funds be identified as potentially disadvantaged community projects on the PPL starting in fiscal year 2005 and for all subsequent fiscal years. New §375.21(a) proposes that the board annually identify the amount of funds that will be made available for projects that serve disadvantaged communities. An annual determination of the capacity of the Clean Water State Revolving Fund must be made as the first step in identification projects that may be eligible to receive these funds. New §375.21(b) proposes that once the board determines the amount of funds, the executive administrator identify the projects on the PPL starting in Category A that have submitted information indicating the community meets the definition of disadvantaged. This new §375.21(b) proposes that the executive administrator identify all the projects which are shown as serving disadvantaged communities in Category A in priority order which, if funded, would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. New §375.21(b)(2) proposes that if the total estimated project costs for all projects in Category A shown as serving a disadvantaged community does not exceed all the funds available for disadvantaged communities, then the executive administrator will identify the projects shown as serving disadvantaged communities in Category B in priority order which if funded in conjunction with the funding of the projects in Category A would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. New §375.21(b)(3) proposes that if the total estimated project costs for all projects shown as serving disadvantaged communities in Category A and B does not exceed all the funds available for disadvantaged communities, then the executive administrator will identify the projects shown as serving disadvantaged communities in Category C in priority order which if funded in conjunction with the funding of the projects in Category A and B would not exceed the total amount of funds determined by the board to be available for projects serving disadvantaged communities. The prioritization of projects in this manner is intended to provide the smallest communities with adequate capital to reach the critical capital mass necessary for a sustainable wastewater utility system. Only when the smallest disadvantaged communities (Category A covers potential applicants with existing populations of 3,000 or fewer) have had full access to these funds then the executive administrator will determine the extent to which these funds may be available to communities with existing populations of 3,001 to 10,000 (Category B), then communities with 10,001 to 25,000 population (Category C). New §375.21(b) makes these funds available only through Category C because utilities serving communities with populations greater than 25,000 have a sufficient revenues and customer bases to sustain the necessary infrastructure for their systems by accessing the funds available through either the remaining portions of the Clean Water State Revolving Fund or other available capital markets.

Upon identification of the projects following the procedures set forth in new §§375.21(b)(1) - (3) and §375.21(b)(4) would require the executive administrator to provide written notification to the applicant associated with each identified project of the availability of funds, invite the submission of an application, and notify the applicant of the deadline for the submission of an application. New §375.21(c) proposes that the only way for an eligible political subdivision to receive these funds is to respond to the invitation within three months of the date of notification. This deadline is proposed because the limited availability of the funds together with the federal funding cycle requires that the funding decisions be made within the fiscal year. If a particular applicant is not prepared to apply for these funds, then there are other applicants that should be given the opportunity to apply. This new §375.21(c) also would provide that the required response is the submission of an application for assistance, as defined in §375.2(6), together with the information that the applicant believes the board should consider in determining the eligibility of the project for these funds. Further, this new §375.21(c) would require the executive administrator to provide written notification that an application has been received and may request additional information in order that the applicant is apprised of the applicable timelines and requirements. Finally, this new §375.21(c) would provide that an applicant must receive a commitment within three months of the submission of an application. As before, a deadline is proposed because the limited availability of the funds together with the federal funding cycle requires that the funding decisions be made within the fiscal year. If an application has not been completed or otherwise is not approvable by the board, then there are other applicants that should be given the opportunity to receive a commitment.

New §375.21(d) proposes that a political subdivision that receives notice of the availability of funds that does not submit an application or receive a commitment within the specified time lines will have its project re-ranked and moved to the bottom of the PPL in the category in which it was ranked. New §375.21(e) requires that, three months after the notice of available disadvantaged community funds has been sent, the executive administrator determine if the amount of funds requested by all the complete applications submitted to that point in time is less than the funds available for disadvantaged communities. If the amount requested in completed applications is less than the funds that are available for disadvantaged communities, then the executive administrator will return incomplete applications and change the priority project list to move the projects for which incomplete or no application has been submitted to the bottom of the list.

New §375.21(f) provides that upon the re-ranking of projects in new §375.21(e), the executive administrator identify the projects from the PPL according to the process identified in new §375.21(b) and which have not previously received a notice of availability funds. New §375.21(g) would require that the executive administrator provide to the political subdivision associated with the projects thus identified with written notice of the availability of funds, an invitation to submit an application for assistance, and the deadline for the submission of the application. New §375.21(h) would provide that in order for the political subdivision to receive these funds, it must file an application according to board rules within three months of the date of notification and receive a loan commitment from the board within three months of the date of the submission of the application. New §375.21(i) is adopted to require that the executive administrator, three months after the second notice of availability of funds has been sent, to determine if the applications submitted to that point in time, if approved by the board, would use all of the funds available for disadvantaged communities. Further, this new subsection would provide that if there are excess any funds identified, the executive administrator will return incomplete applications and the excess funds may be made available for projects in disadvantaged communities in the application process of the next fiscal year.

New §375.21(j) proposes that any political subdivision receiving notice of the availability of funds can let the executive administrator know, in writing, that it does not intend to apply for the funds. Under this new subsection, the executive administrator can proceed immediately to identify the next project on the PPL that could apply for the funds and that has not previously received notice of funds availability. Further, this subsection would provide that upon identifying the next project on the PPL, the executive administrator would provide the political subdivision associated with such project with written notice of the availability of funds, an invitation to submit an application for assistance, and the deadline for the submission of an application. New §375.21(k) would require these political subdivisions to submit an application within three months of receiving the notice and require that the applicant receive a commitment within three months of submitting the application. New §375.21(l) would provide that applicants not receiving a commitment within three months would have their projects moved to the bottom of the PPL. This new subsection also would provide that any funds available for disadvantaged communities and not used for such projects would be made available for disadvantaged communities in the next fiscal year. In this manner, the adopted rules would provide reasonable opportunity for projects on the PPL to receive funding in priority order as expeditiously as possible.

Amendments to §375.52 will revise the rule to provide the methodology for setting interest rates for all loans under the chapter and include the method for determining the interest rates charged for loans with a debt service schedule in excess of twenty years and when the annual debt service payments are not level through the term of the bonds.

The amendments to §375.52 will include new subsection (a) to insert definitions for terms commonly used in the section. The term "average life" is included as a necessary component of the methodology used to calculate the loan interest rate to be set by the executive administrator in this section. The average life is defined as the number that results from dividing the sum of the payment periods of all maturities of a loan by the principal amount of the loan. The term "borrower" is used to refer to eligible applicants that have received a commitment for financial assistance from the Clean Water State Revolving Fund (CWSRF). The term "Delphis" is defined as the Delphis Hanover Corporation Range of Yield Curve Scales in order to identify the source of information that the board will use to identify the market cost of funds to a borrower. The board will use the Delphis because it is a standard recognized in the financial services industry for determining the market cost of funds. The term "loan interest rate" is used to identify the rate of interest that the board will charge a borrower for a loan from the CWSRF. Since financial assistance is provided by the purchase of a series of bonds or a loan agreement that identifies specific amounts to be repaid on specific dates, loan interest rate is defined as the series of interest rates that the board will charge for each bond in the borrower's bond series or for each principal payment in the loan agreement. The term "market rate" is defined since the loan interest rate will be determined in relation to the borrower's cost to acquire funds on the open market, which is determined by reference to the Delphis. The term "payment period" is included as a necessary component in determining the average life. It is the number that is determined by multiplying the maturity principal amount of each bond in the series or each maturity in the loan agreement by the standard period for such loan. The term "standard period" is defined because it is a necessary component in the calculation of average life. It is the number of days between the delivery of funds from the board to the borrower and the maturity date of a principal payment, calculated on the basis of a 360-day year composed of twelve 30-day periods, divided by 360.

Current §375.52(a) is adopted to be subsection §375.52(b). Subsection §375.52(b)(1)(A) is adopted to include the term loan agreements because loan agreements are an available option to which this subsection should apply. Otherwise no other amendments are proposed to this subsection. Current §375.52(b) is restructured as §375.52(c) and completely replaced with new language to clarify the current procedure implemented by the board as well as to include additional methodologies to be used by the executive administrator for a loan for which the annual debt service schedule is not level. The first sentence currently provides that the loan interest rate is set at exactly 70 basis points below the fixed rate index rates. As a practical matter, a uniform rate exactly 70 basis points below the fixed rate index rates may result in annual debt service payments from the borrower becoming not substantially level, which could impair the ability of the board to meet its debt service obligations. Therefore, it is necessary to recognize that the executive administrator is authorized to make adjustments to the loan interest rate to insure a level debt service. To aid in the organization of this section, the statement about the reduction in interest rates is moved to new §375.52(c)(2). Also, the rule is amended to refer to market rate rather than fixed rate index scale, as is currently used, because it is believed that market rate improves the clarity of the rule. A sentence is added to §375.52(c) to summarize the process pursuant to which loan interest rates will be determined in the succeeding subsections.

New §375.52(c)(1) is included to clearly delineate the existing method of identifying the market rate for the various categories of borrowers but otherwise is not intended as a substantive change. New §375.52(c)(2) is intended to delineate, without substantive change, that the purpose of the program is to provide interest rate reductions for each of two classes of borrowers and the circumstances that create each class. A provision is added in this subsection to make explicit the current practice of the board that regardless of the amount of the reduction from the market rate, the loan interest rate cannot be less than zero. This restriction is necessary in order to minimize the board's program costs.

New §375.52(c)(3) identifies two methodologies for setting the loan interest rate. New §375.52(c)(3)(A) assumes that this method will be applied unless the borrower requests otherwise. Under this new subparagraph, the method for determining the interest rate as currently applied by the board is identified. This new subparagraph now accommodates the need of the board to insure level annual debt service payments even if doing so requires that the interest rate subsidy to be modestly adjusted from the full subsidy anticipated for the borrower. Under this process, the executive administrator determines the average life, as defined, and applies the subsidy to the market rate for the maturity for the year before the year in which the average bond life is reached. If the resulting debt service schedule is level to the satisfaction of the executive administrator, the loan interest rate will have been determined. However, if the resulting debt service schedule is not level to the satisfaction of the executive administrator, this subparagraph then specifically authorizes the executive administrator to adjust the interest rate in any of the maturities in order to insure that the bond repayment schedule is level. This amendment, as well as the amendments in §375.52(c)(3)(B) acknowledges the authority of the executive administrator to determine whether the borrower's proposed debt service schedule is level. The financial services industry recognizes that annual debt service payments need not be exactly equal in order to be considered level. If the annual debt service schedule is not level, the cash flow necessary for the board to repay its obligations under the program may be impaired. Additionally, an un-level debt service structure may cause the amount of the subsidy that would be provided from the CWSRF to increase and potentially compromise the integrity of the fund. However, the degree to which the debt service payments may not be equal yet still remain sufficiently level for the purposes of funds management is a matter of judgement that should reside in the executive administrator. Therefore, in these amendments the determination of whether the debt service payment schedule is level is explicitly assigned to the executive administrator.

New §375.52(c)(3)(B) identifies the method for determining an interest rate for a borrower that requests principal maturity schedule that does not have level annual debt service payments. This new subparagraph provides that the executive administrator determines the amount of the subsidy that the borrower would have had from a level debt service structure following the procedure identified in §375.52(c)(3)(A) and using the interest rate reduction identified in §375.52(c)(2). The executive administrator then determines the loan interest rate for the debt service schedule requested by the borrower in the manner that as closely as possible provides the same amount of subsidy that would have been provided had the debt service payments been level.

Amendments are adopted to re-letter current subsections (c) and (d) accordingly and to change subsection references contained therein.

There were no comments received on the proposed amendments and new sections.