BOARD01387

• Board Meeting Date: 11/19/2001
• Description: CF Section - Policy Review - Policy #7 - Annual Construction Fund and the Severance Tax Trust Fund Perpetual Base Account Lending Rate Determination
• Board Meetings - Doc Type: Memo

When applicants first solicit information abotit our loan program during the year, one of
their first questions is always "What is the interest rate?" Staff's response is to tell them
what the interest rate was the previous November, however, we must speculate on what
the interest rate will be for the coming November. Staff's proposal is to establish the
interest rate at the May Board meeting each year and make it applicable for the State's
fiscal year, July 1 through June 30. Th~ interest rate calculation would also be
determined based on the previous 6 month aVerage for the 30 year "A" rated municipal
bond rather than the previous 12 month avefage. The interest rate would therefore be
based on more current information.

2.

'i.

.

3. Finally, the Board established the Agricultur~1 Rate last year at 3.5%. The rate was not
tied to any of the other rates but rather fixed by a discretionary Board decision. Staff
proposes that the Agricultural Lending Rate I'le established as 60% of the Baseline Rate.
This would link the Agricultural Rate to t~e other borrower's rates and still provide
agricultural water users the most favorable 10* terms.

CWCB Construction Fund and Severance Tax Trust Fund Loan Interest Rates

5.5%
5.0%
4.0%
3.5%

2002
ProDosed Rate Strueture
6.0%
5.5%
5.0%
4.5%
3.75%
3.25%

e

2002
Current Rate Structure
6.0%

Borrower (2001 Rate)
Commercial (6.5%)
Baseline Rate
Municipal High Income (6.0%)
Municipal Middle Income (5.5%)
Municipal Low Income (4.5%)
Agricultural (3.5%)

Given the historic volume of loans in each category and Construction Fund and Severance Tax
revenues, the Fund would continue to maintain an ~verall rate of return greater than the target
growth rate for the Fund. i

For purposes of comparison, the following table presents the interest rates for other water project
lending agencies.

Al!encv
Water and Power Authority
Rural Development

Department of Local Affairs

ComDarable Proieet Interest Rates
Direct I\oan Revolving Funds 4.0%
Market ~ate 5.0%
Intennetliate Rate 4,75%
Povert~ Rate 4.5%
Energy Mineral Impact 5.0%
(domestic water systems)

Methods of rate determination varies greatly by th~ agencies. Rural Development uses a very
complicated procedure using bond rate averages, tht life of the facility, household income, and
specific proj ect circumstances. Water and Power! Authority sets their direct loan rates on a
general consensus of their Board. The Department 9f Local Affairs interest rate is set by statute.

.e

Recommendation
Staff recommends the Board consider for approval the proposed changes to Financial Policy #7 as
shown in the attached policy statements.