Correspondence among

Importance: High It looks like DEQ is mulling over changes to state law to allow for the financing of service lines with DWRF monies. Did you want me to respond? | think with a change in state law we can make the loans, but we would not be able to leverage them in future tax- exempt pools as they would be considered private activity; much like the SWQIF loans for footing drain disconnects. It is worth noting, we have not leveraged the drinking water program since 2007 and have approximately $50 million annual program resources for each of the next five years. Thanks John

If this happened, who is next? Seems like we need to come with real world response about why this is crazy and really bad for the whole state Sent from my iPhone Begin forwarded message:

I think they would have concerns as to where it would stop; the slippery slope argument. The program tenants are based on sound business practice and are looked to as a program strength. If the path of principal forgiveness is opened up, they would view that as negative which would certainly impact the outlook, but maybe not the overall rating in the near term.

What would the rating agencies say about forgiveness?

Below is the response from DEQ: Here’s information that you can share with Amy Hovey, staffer for Congressman Dan Kildee, regarding how Michigan has used principal forgiveness in the Revolving Loan Programs. EPA has talked with Congressman Kildee on this issue at least twice. Principal forgiveness came around with the American Recovery & Reinvestment Act (ARRA). All of Flint’s drinking water loans were prior to ARRA. In May 2009, Flint submitted a project plan that comprised various projects the city wanted to pursue. Flint had 2 projects on the project priority list to receive funding in 2010 thru 2013. Initially the projects did not rank high enough to receive funding. When funding became available for Flint, the city declined to move forward with the projects. Some principal forgiveness was offered as part of the funding. Annually EPA requires the state to describe how principal forgiveness will be used (Intended Use Plan) and then report at the end of the fiscal year (Annual Report) how the funds were allocated. EPA audits the data during their annual visit. In Michigan, we have used principal forgiveness to assist disadvantaged communities and for projects that are water or energy efficient (i.e. green) consistent with EPA guidance. There is no provision to randomly provide principal forgiveness to a project or use it to refinance a prior loan, The purpose of the funds are to revolve in perpetuity (as stated in federal statute) so that communities can continue to receive financial assistance. Michigan has never completely forgiven an entire loan as it would greatly reduce the capacity of the fund to offer assistance to future projects. 1 xxxEND_PAGE:treasury01_b31_4719_5108_368 For a succinct statement I would suggest: There is no provision or program capacity to provide principal forgiveness outside the scope mandated by the EPA for disadvantaged communities (populations less than 10,000) or green infrastructure projects. The purpose of the funds are to revolve in perpetuity (as stated in federal statute) which allows communities to receive financial assistance in the future. Further, DWRF loans are pledged as security to various bond issues which provide the up-front capital to fund projects. Without a dollar-for-dollar replacement of revenue due to the loss of principal, the bonds could default.

Thanks

Okay, | will get with Ed and Randy to have something in the next couple of days. | will get with DEQ as well if that does not cause issues; they are the department that actually receives the federal funding and is responsible for program compliance.

This will probably come up again so we should get a statement together with all the reasons, both rules and credit issues

Nothing ready made, we would have to craft something. DEQ may be able to provide specific guidance from the EPA. | would suggest starting with the following: The DWRF is a pooled loan program whereby loans to local units are pledged to the repayment of a larger pooled bond issues. The pooled bond issues rely on the repayment from the local units for debt service. Absent a dollar-for-dollar replacement of the local loan revenue, the pooled bond issues would default. Further, the program is required to maintain all funds received in perpetuity as it is truly a revolving fund.

Do we have a succinct statement on why we cant forgive Flint DWRF?

Do we have a succinct statement on why we cant forgive Flint DWRF?