Breaking Down the State Revolving Fund – Recommendations and Changes

December 2nd, 2024 by Jessika Sherman

This blog is a follow-up to New Jersey Future’s November 2023 report Improving a Program That Works: Recommendations to the New Jersey Water Bank for Advancing Equity. Please see page 1 of the report for a list of acronyms.

Over the next 20 years, the United States must spend $625 billion to fix, maintain, and improve water infrastructure. According to the US Environmental Protection Agency, New Jersey alone will need to spend at least $12,252,800,000 on drinking water infrastructure and $19,352,000,000 on clean water infrastructure over the next 20 years to make all necessary improvements and repairs. The predominant sources of water infrastructure funding and financing for all 50 states are the Clean Water State Revolving Fund (CWSRF – wastewater treatment and stormwater management) and the Drinking Water State Revolving Fund (DWSRF – safe and reliable water supply). These State Revolving Funds (SRFs) are financial assistance programs that provide low-interest loans to support critical water infrastructure projects essential for protecting public health and the environment.

The New Jersey Water Bank (NJWB), a partnership of the New Jersey Department of Environmental Protection (NJDEP) and the New Jersey Infrastructure Bank (I-Bank), manages New Jersey’s State Revolving Funds. NJWB’s financial support to New Jersey wastewater and drinking water systems has generated significant savings through principal forgiveness (PF – grant-like funding) and low-interest loans. Disadvantaged communities (DACs) served by small and medium-sized systems face increased challenges in accessing SRF funding, particularly struggling to reach the initial application stage due to the high costs associated with planning and design. Larger water utilities tend to receive disproportionate awards, while smaller, fiscally distressed DACs lag behind, highlighting a significant equity concern. In Improving a Program that Works: Recommendations to the New Jersey Water Bank for Advancing Equity, released in November 2023, New Jersey Future (NJF) and the Environmental Policy Innovation Center (EPIC) primarily recommended policies to improve access to the SRFs for water systems serving DACs through a more robust method for identifying disadvantaged communities, maximizing pre-construction support, expanding principal forgiveness funds, and providing 0% interest loans.

Annually, the NJWB is required to develop Intended Use Plans (IUPs) for the DWSRF and CWSRF, laying out the policies, funding packages, and project priority ranking methodology for the corresponding state fiscal year. Over the last few years, NJF has reviewed New Jersey’s IUP policies and submitted comments concerning the amount of state and federal funding used to address the needs of water systems serving disadvantaged communities. NJDEP, which sets policy for the NJWB, has been open to feedback and working with stakeholders to improve the IUP policies.

Of the ten recommendations made in Improving a Program that Works, NJDEP has implemented the following:

NJWB has made progress in expanding set-aside activities for technical assistance and support for DACs, particularly for pre-construction needs. Project sponsors who meet the affordability criteria are eligible for the New Jersey Technical Assistance Program (NJTAP), a free technical assistance program for drinking water projects. Additional planning and design grants and principal forgiveness are also available.
Increased flat caps in all drinking water SRF categories that will result in more subsidies for small water systems, lead service line (LSL) projects, and DAC systems.
NJWB implemented a tiered funding structure to direct a greater share of financial assistance to DACs with the greatest financial need.
The most recent IUP clarified the I-Bank’s creditworthiness policy.

NJF is excited to see all the improvements that have been made and hopes to see the following changes made in the future:

As a key first step in refining its criteria for dispersing principal forgiveness, NJDEP implemented a two-tiered system based primarily on median household income (MHI).To maximize equity, NJDEP should adopt the model established by several other states (e.g., Wisconsin) that incorporates more tiers and indicators (e.g., family poverty, population trend). The combined effect directs a larger share of aid to the state’s neediest communities.
MHI is still the primary criterion for calculating an affordability score for water systems serving DACs in the Intended Use Plans. NJF and EPIC recommend utilizing the Department of Community Affairs’ Municipal Revitalization Index score, a multidimensional tool comprising ten factors in five broad categories. Alternatively, NJDEP could consider using a water affordability index, such as the one developed by Dan Van Abs (Professor of Practice for Water, Society, and the Environment at Rutgers University, School of Environmental and Biological Sciences) for Jersey Water Works, for distributing funds to those in greatest need.
NJDEP should significantly expand the use of 0% interest loans to advance critical, high-priority projects in the most distressed DACs. NJDEP only increased these loans for investor-owned systems in the most recent IUP.
Significantly increase the ranking points awarded in the Project Priority List for “gainsharing” initiatives that benefit both the water utility and the state, such as water affordability programs (which support appropriate rate setting while protecting low-income customers), asset management plans, and regionalization of water assets.
NJDEP should repurpose a modest portion of loan repayments to increase principal forgiveness to DACs. NJDEP could use this approach to develop a funding source for galvanized water service lines within DACs, which may not be eligible for federal Bipartisan Infrastructure Law funding. Galvanized service lines are required to be removed in NJ by 2031 since they can be a source of lead in drinking water.
Legislation to improve creditworthiness for severely distressed DACs.

The report also identified the need to address congressionally directed spending, or earmarks. Congress has diverted SRF funding to earmarked projects, and the concern is that earmarked projects circumvent the normal priority-setting process where projects determined to be of the highest priority score the most points. In addition, communities with median household incomes (MHI) above the state average, including some of New Jersey’s wealthiest areas, have received nearly half of the earmarked funds. Meanwhile, less than a third of these funds have gone to disadvantaged communities (DACs). Discussions with New Jersey’s congressional delegation are ongoing, but no definitive changes have been made to prevent federal water infrastructure funding from being derailed by earmarks. Governor Murphy, according to NJDEP, sent a letter to the New Jersey Congressional Delegation expressing concern over this issue.

As last year’s report title states, NJDEP’s CWSRF and DWSRF programs are generally effective and have provided significant funding to improve water systems since their inception; however, as New Jersey faces the daunting challenge of aging water infrastructure and its extreme costs, ensuring equitable access to funding is critical. DACs served by small- to medium-sized water systems face the most barriers to accessing the financial resources needed to repair and upgrade water systems. Though progress has been made, significant disparities remain. NJWB should continue to refine its program to target funding to New Jersey’s most distressed communities, most of which lack the resources to provide safe, reliable water services for the future. Without a greater commitment to both equity and funding, the gap between resource-constrained DACs and other water utilities will continue to grow, undermining efforts to build resilient, sustainable infrastructure across New Jersey.