Association for Public Policy Analysis & Management

Water infrastructure is a key element of a nation’s critical public infrastructure system. A reliable, convenient, and well-maintained water infrastructure system is critical to protect public health, support and sustain the nation’s economy, and improve quality of life.  Due to the aging drinking water infrastructure system, public officials at all levels of government are challenged to identify effective ways to pay for improvements to the current drinking water infrastructure systems. The US Environmental Protection Agency [EPA] (2013) pointed out a total capital improvement need of $384 billion for investing in public water infrastructure system over the next 20 years. In response to the declining financial resources for water infrastructure, a set of innovative finance tools have been introduced by the federal government to complement or replace the conventional grant-based funding mechanism. One type of innovative finance tool to finance local drinking water infrastructure is the Drinking Water State Revolving Fund (DWSRF) program. Under this program, each state is capitalized by the US EPA capitalization grants and a minimum 20 percent match of state funds, and provides low-cost loans to local communities to finance eligible water quality projects. Loan repayments from existing local borrowers are revolved and available for future lending.

State DWSRFs offer a flexible and sustained financial tool for supplementing traditional state and local drinking water infrastructure investment. Since their inception in 1997, the DWSRF program has entered into over 6,000 assistance agreements and offered over $16 billion in low-interest loans to public water systems (US EPA, 2010). Given such popularity and innovation in state capital finance and the widely expressed concern about the declining quality of American public water infrastructure systems, an empirical evaluation of the effectiveness and financial performance of the DWSRF program is both necessary and timely. However, despite decades of use, state DWSRFs are not well understood and under-researched. There is no study to empirically examine the role of the DWSRF program in financing local drinking water infrastructure investment. To fill this void, the primary purpose of this paper is to examine the extent to which the state DWSRF program increases local drinking water infrastructure investment and reduces local drinking water infrastructure financing needs. Using panel data consisting of the DWSRF program loans made by all 50 states from 1998-2012, the authors will build an econometric model to estimate the fiscal effects of state DWSRF loans on leveraging local drinking water infrastructure investment while controlling for a series of variables regarding the political, organizational, financial, and managerial factors in the setting and operation of state DWSRFs.

This research will contribute to the field of innovative infrastructure finance in several key ways: to expand our understanding of the role of DWSRFs in financing local drinking water infrastructure investment, to explore how institutional factors of state DWSRFs matter, and to offer policy suggestions for the design and administration of financially sound state DWSRFs.