Finding the right financing tools becomes crucial as local governments aim to balance budgets while also meeting increasing water and wastewater demands. Water and wastewater projects are large-scale undertakings, often requiring significant investments relative to a municipality’s annual capital improvement budget. They require attention to environmental sustainability, public health and safety, and infrastructure modernization. Their success is vital, not only in service to ratepayers, but in ensuring state and federal regulatory compliance.

Here, we compare two financing tools often used to support water and wastewater projects: United States Department of Agriculture (USDA) Rural Development Loans and State Revolving Fund (SRF) Loans. Below is a comparison table, followed by notes on both loan types as well as some best practices for determining which option makes the most sense for your community.

Comparison Table: USDA Rural Development Loans vs. SRF Loans

Feature/Aspect USDA  Rural Development Loans SRF Loans
Focus Area Rural communities Both urban and rural areas
Eligibility Criteria Populations < 20,000 Broad range of communities
Projects Supported Essential community facilities Water and wastewater systems
Interest Rates Low or zero interest rates Subsidized rates
Repayment Terms Up to 40 years 20-and 30-year options
Administering Agency USDA State agencies
Fiscal Year Start October 1 Varies by state
Application Process  Longer, specific forms required Typically, shorter
Interim Financing Needed Yes, to be supplied by issuer to cover construction period Varies; Planning and design loans available
Grants & Loan Forgiveness More likely to offer grants Less likely; some loan forgiveness, depending on eligibility
Planning Design Loans Not available; may be eligible for grants Available at 0% interest for 3 years

More about USDA Rural Development Loans

USDA Rural Development Loans aim to support infrastructure projects in small towns and rural communities with populations of less than 20,000. That said, smaller communities with populations of 5,500 or less are given priority. What most sets the USDA program apart is its extended repayment terms. While typical bond issues in capital markets might last up to 30 years, USDA allows for amortization over 40 years.

USDA loans are not just open to municipalities but also to counties, federally recognized tribes, and community-based not-for-profits that align with the USDA’s goals for rural development and community service enhancements.

Initiating a USDA loan begins by contacting your local USDA Rural Development office. Be prepared to provide detailed and specialized engineering reports, as USDA requirements may require different formats in contrast to SRF loans. Importantly, interim financing is required for the construction phase and must be secured before bidding begins on the project. Once the project is substantially complete, USDA refinances the bridge loan into a single loan package.

More about SRF Loans

A key feature is the revolving nature of the funds. Another highlight is the SRF program can offer planning and design loans at 0% interest for 3 years, even if the entity doesn’t proceed with an SRF loan for long-term financing.

The eligibility criteria and application processes for SRF loans can differ from state to state, but they typically share several common elements. Generally, applicants need to show they are responsible for public drinking water or wastewater services. Eligibility often also depends on factors like environmental regulation compliance and the project’s financial need.

The process usually commences with contacting the state’s environmental or water quality agency, followed by submitting a comprehensive project proposal. The proposal should include the scope of the project, budget, and anticipated timeline, along with financial data to evaluate your ability to repay the loan. State agencies then prioritize projects based on public health benefits, environmental impact, compliance with regulations, and readiness for construction.

Once a loan is approved, legal and financial agreements are completed, often involving bond attorneys to ensure proper authority for loan issuance. After the loan closing, the municipality is responsible for repayments according to the terms agreed upon in the loan document.

Best practices for financing municipal water

Several best practices apply to planning for either financing type:

  • Evaluate all options: Apart from USDA and SRF loans, consider bonds, local bank loans, etc.
  • Explore grants and loan forgiveness: USDA can offer generous grants to make large projects affordable for small and rural communities. SRF sometimes offers loan forgiveness.
  • Consider loan term impact on ratepayers: Longer repayment terms can lower the annual payment and minimize or smooth rate increases.
  • Consider conducting a rate analysis: Especially if your last analysis was several years ago, your financing strategy will likely benefit from an up-to-date review.
  • Be aware of timing: Application processes can have long lead times. Additionally, if you are seeking grants, it is advisable to start as early as possible as some of these may be very competitive.

Finally, be sure to involve professionals early. Including bond attorneys and municipal advisors in the early stages can help your community optimize financing to its specific needs.

Learn more about how UMB Financial Services, Inc. municipal advisors can assist to help find a quality path forward during these complex conditions. Contact us to connect with a municipal advisory team member.


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