The State Water Implementation Fund for Texas

Effective September 1, 2013, the Texas Legislature adopted rules governing the State Water Implementation Fund for Texas (SWIFT) pursuant to House Bill 4 (Ritter). Creation and funding of SWIFT requires constitutional amendment through Proposition 6, which will be submitted to Texas voters on November 5, 2013. If Proposition 6 passes, SWIFT would be managed by the new Texas Water Development Board (TWDB), which I described in an earlier post.

As stated in HB 4, the purpose of SWIFT is to ensure that meaningful and adequate financial assistance is available to provide an adequate water supply for the future of the state. SWIFT is designed as a water infrastructure bank that will offer low-cost capital financing or credit enhancements for the development of water projects that further the State Water Plan. That plan includes approximately 550 projects statewide, but does not identify any financing sources.

Funds for SWIFT are expected to derive from a one-time transfer of $2 billion from the Texas Economic Stabilization Fund, commonly known as the “Rainy Day Fund,” if approved by Texas voters through Proposition 6. The Legislature could appropriate other funds to SWIFT in the future, or could create a tax or fee dedicated for deposit to the fund. HB 4 also created the State Water Implementation Revenue Fund for Texas (SWIRFT), which can hold funds appropriated by the Legislature, transferred from SWIFT or derived from revenue bonds issued by the TWDB. Funds deposited to SWIFT would generally be distributed to other existing financial assistance programs administered by the TWDB.

SWIFT is authorized to provide project sponsors with financial assistance including:

  • Low-interest loans;
  • Longer repayment terms for loans than might be otherwise available;
  • Incremental repurchase terms for projects with state ownership interest; and
  • Deferral of loan payments, including deferral of principal and interest.

SWIFT is not authorized to make grants, meaning that project sponsors must contribute local or federal funds in order to quality for state financial assistance. Other limitations are that a project sponsor may not receive financial assistance if it has not submitted a water conservation plan in accordance with Texas Water Code section 11.1271, and a sponsor must agree to comply with federal and state laws concerning contracting with disadvantaged business enterprises and historically underutilized businesses.

Importantly, SWIFT is prohibited from providing any financial assistance to a project that is not listed in the State Water Plan. This bolsters the importance of that document, as it effectively creates a difference in the cost of capital for local citizens based on whether or not a project is in the State Water Plan. Unfortunately, it may disincentivize innovation by the private sector or local governmental officials for projects that are not part of the long-term planning efforts of the State Water Plan. It also means that local governments must obtain political support for their projects from other agencies in their planning region.

HB 4 established two priority systems for projects. First, each regional water planning group must prioritize projects within that region, considering the following criteria:

  • The decade in which the project will be needed;
  • Feasibility of the project, including availability of water rights and hydrologic and scientific practicability;
  • Viability of the project, including if it is a comprehensive solution with a measurable outcome;
  • Sustainability of the project, taking full project life into account; and
  • Cost-effectiveness of the project, including unit cost of water to be supplied by the project.

In addition, TWDB is required to establish priorities based on:

  • Whether a project will have a substantial effect, such as serving a large population, providing assistance to a diverse urban and rural population, providing regionalization, or meeting a high percentage of the water supply needs of water users to be served by the project;
  • Local financial contribution to the project;
  • Financial capacity of applicant to repay the financial assistance provided;
  • Ability to leverage state financing with local and federal financing;
  • Whether there is an emergency need for the project;
  • Effect on water conservation; and
  • Priority given to the project by the regional planning group.

If SWIFT receives voter approval, the TWDB will undertake a rulemaking process to establish specific criteria for project selection, including an opportunity for public comment. During the five-year period between adoption of editions of the State Water Plan, at least 10 percent of monies disbursed from SWIFT are to be used for projects benefitting rural water systems that serve 10,000 or fewer persons, or that involve agricultural water conservation. In addition, at least 20 percent of disbursements are to be used for projects promoting water conservation or reuse.

As stated by representatives of the TWDB in a meeting earlier today in Austin, although Texas faces a number of water supply challenges, the Legislature and the TWDB intend to meet those challenges and remove water as a potential barrier to economic growth in the state. SWIFT is seen as one key component of efforts to implement the State Water Plan and secure the state’s water future.

6 Comments on “The State Water Implementation Fund for Texas

  1. Please explain how this is different from authority granted by prop 2 in 2011 and if possible what projects have been already supported since 2011.

    • Proposition 2 (2011) authorized the Texas Water Development Board to issue up to $6 billion in general obligation bonds, with the proceeds deposited into the Texas Water Development Fund II. Those funds are used to provide loans to local government entities for water and wastewater projects that are consistent with the 2012 State Water Plan. In contrast, Proposition 6 would make a one-time transfer of $2 billion from the Texas Economic Stabilization Fund to a new fund called the State Water Implementation Fund for Texas. Thus, it would approve a transfer of existing funds in the state coffers rather than borrowing of funds through issuance of state bonds. I will try to post a list of projects funded by Proposition 2 soon.

    • Thank you for the reply. I am hearing the argument that the existing authority from Prop 2 is not resulting in projects and therefore why assign more funding. It would seem that the local gov’t borrower will see the same costs with the difference being that repayment under prop 2 goes to the State to pay “Wall Street ” and payments under prop 6 go to the State to revolve the funds.

    • Much of the success of using state funds for implementation of water projects, whether under Prop 6 or Prop 2, depends on the details of how those funds are applied to local projects, and how the water industry responds. Funds available under Prop 6 would allow the TWDB to offer financing for local projects on a more advantageous basis than under Prop 2, resulting in a potentially lower cost of capital. However, the actual use of financing under either propoosition depends on local agencies planning and implementing water projects. If local agencies do not develop projects, the state funds will not result in significant projects being accomplished.

      In my view, the key is how the TWDB will use the funds to leverage private investment in water infrastructure, so that the $2 billion in “seed money” can help close the $27 billion gap between needs identified in the State Water Plan and available financing. There are some signs that the TWDB is ready and willing to take steps to facilitate such leverage, but the state has a weak history of implementing public private partnerships and other means of using private capital for water infrastructure projects.

    • It appears that concern from rural residents is present from my unscientific sampling of rural folks. The law seems to be more ambiguous than desirable in providing clear prescriptive language that there will be funding support to conservation and rural areas. Sent from my iPad

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    • Yes, I think that is probably correct. That is common in most statewide bond issuances or other funding measures, across different states. A common assessment is that such funding mechanisms tend to provide more funding to large urban areas with greater political power. In my experience, there is often a proportionally higher distribution of funding to poorer rural communities as well, although there are so many small communities that not all receive funding. The areas that tend to get the least funding are medium-sized cities and suburbs.

      In the case of Prop 6, I think the best argument in favor is that state funding has the potential to create significant leverage for commitment of local and federal dollars, as well as private capital. The question is whether the TWDB will implement SWIFT in a manner that creates leverage, or whether the money will just be used in a more typical way to fund projects that would have been built with local funds without the state contribution. I do not yet have a firm sense of how the TWDB would implement SWIFT.

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