By Kelly McCutchen
As state government faces falling tax revenues, it is critical to identify core government functions, prioritize those services and reduce spending on other lower priority programs. The Georgia Environmental Facilities Authority (GEFA) is a perfect example of a program that was started with good intentions, but over the years has dramatically expanded beyond its core mission. Rightsizing this agency would stimulate the private sector and yield a one-time savings of as much as $500 million to plug the growing hole in the state budget.
GEFA was created by the Georgia General Assembly in 1986 as an off-shoot of the Environmental Facilities Program, created in 1983, which had been a part of the Georgia Development Authority. GEFA’s Finance Division Web site states “GEFA was established … to provide low cost loans to small towns and communities who had little or no access to the financial markets for their infrastructure needs.”
GEFA’s Web site goes on to state that “while both the state and federal programs were established with the goal of initially capitalizing a small pool of funds which, when repaid, could serve as a revolving pool of funds for future lending, GEFA now provides almost $300 million in annual funding for its programs.” These programs now far surpass the original intent of GEFA.
According to GEFA’s Comprehensive Annual Financial Report (CAFR) for the financial year ended June 30, 2008, the Authority obtained its capital from:
- the sale of guaranteed revenue bonds by the Authority,
- the sale of state general obligation bonds,
- federal capitalization grants under the state revolving loan program,
- repayment from existing loans,
- investment earnings, and
- state appropriations.
An examination of the funding sources revealed the following:
A.) The revenue bonds referenced above (1) were issued in fiscal year 1992 in an aggregate principal amount of $97,470,000 at an average interest rate of 6.30 percent. They were guaranteed by the State of Georgia. Those same bonds were refunded (refinanced) during fiscal year 1998 in the amount of $78,890,000 with an average interest rate of 4.55 percent. They have now been paid down to approximately $21 million, representing GEFA’s only long-term liability.
B.) The sale of general obligation bonds (2) sold at market rates provides GEFA with zero percent interest rate funding. GEFA does not have to pay interest back to the State for these funds.
C.) Federal capitalization grants (3) and state appropriations (6) are taxpayer money.
With the exception of the guaranteed revenue bonds, now paid down to approximately $21 million, GEFA does not have to pay interest on its funds (zero cost of capital), virtually all of which come from taxpayers. Taxpayers pay for this twice, the first time through taxes to fund GEFA, and again through water and sewer rates to repay the GEFA loans.
As of June 30, 2008, GEFA had total assets of almost $1.7 billion, total liabilities of $95,900,000 and total net assets, or net worth, of $1.6 billion. If compared to banks headquartered in Georgia, GEFA would be the third largest financial institution in the State ranked by total net assets or equity. With the exception of approximately $21 million in long-term debt mentioned above, all of GEFA’s funding is at zero percent interest.
GEFA has over $393 million in cash or cash equivalent investments, all invested with the Georgia Fund I, the State of Georgia’s investment pool. The rate paid on Georgia Fund I investments in June 2009 was 0.39 percent and the average for the first six months of the year was 0.64 percent.
As of June 30, 2008, GEFA had $1,259,768,888 in loans receivable. The loans (which are actually full faith and credit, property tax backed, intergovernmental contracts) are of a high quality with low default rates.
Rates on GEFA loans are generally priced at 1 percentage point below the rate on the general obligation bonds issued by the State to fund that year’s appropriation. As GEFA has grown, and larger loans have been made to governmental borrowers with substantially higher credit ratings, there appears to be no distinction between the rate charged to a AAA borrower, such as Cobb and Gwinnett counties, and lower or non-rated counties or city governments. Examples of this are evident in a June 16, 2009, press release from the Governor’s Office, which announced the approval of water, sewer and infrastructure projects throughout the State. Cobb and Gwinnett counties (both AAA rated) received loans for 20 years at 3 percent interest, the same rate given to much smaller non-rated communities such as the City of Camilla and the City of Hiawassee.
General Obligation Debt
Most water and sewer bond issues are in the form of revenue bonds, secured solely by the revenues of the system being financed. Generally, a debt service reserve fund is required.
Water and sewer systems are monopolies. They can raise revenue through rate increases, almost at any time and in any amount. Despite this fact, GEFA loans are secured by an intergovernmental agreement that obligates the full faith and credit of a county or city government to back the loan. This is done without a referendum, citizen input or a public hearing. If the local government defaults on the GEFA loan, GEFA has the right to force the borrower to impose a property tax levy or a rate increase in order to pay debt service.
Competition with the Private Sector
GEFA competes with the private sector throughout the State. GEFA pays no taxes and through its various funding sources, 94 percent of its lendable funds are at zero percent cost. Any financial institution could make money in that environment.
Commercial banks and investment banks employ many Georgians, pay taxes, support the communities in which they operate and would like to have these loans on their books or underwrite these bond issues, but they are at a complete disadvantage when competing with government-subsidized competitors.
Although there are federal restrictions on some of the funds, the “Georgia Fund” portion of GEFA’s high quality loan portfolio, currently totaling more than $541 million, could be monetized. Based on conservative assumptions, it is likely that securitizing these loans could produce between $325 million and $500 million in cash for the State. These funds could be used to supplement the state’s rainy day fund or targeted to a specific area such as construction of new water reservoirs.
Going forward, GEFA should return to its original purpose as a lender of last resort for small and economically challenged communities that are unable to find affordable loans in the private sector. Where possible, GEFA could more productively use their funds to make grants to these communities to supplement a commercial bank loan or a bond issue that would provide an average cost of funds or blended rate that would be comparable to or lower than the rates currently paid.
Building and maintaining water and sewer infrastructure is critical to Georgia’s future, especially with growth and the droughts experienced in recent years. However, it is not a good use of taxpayer funds to offer subsidized loans in competition with private Georgia lenders. Refocusing GEFA on its original mission will not only help Georgia balance its budget in a very difficult economy, but it will also provide an economic stimulus to local communities throughout the state as these loans are shifted to the private sector. GEFA would continue to offer federally funded water and sewer financing as well as assistance for communities who are unable to access private financing.
Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (August 4, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.