Proposed Down Payment for Financing the Texas Water Plan

Texas Representative Allan Ritter (R-Netherland) recently introduced HB 4 and HB 11 to finance the Texas Water Plan through a one-time $2 billion capitalization of a dedicated revolving fund.  The legislation will also address the fund’s management and operation.  This post discusses two key aspects of revolving funds that will shape how far the Texas Water Development Board (“TWDB”) can stretch the $2 billion capitalization to meet Texas’s financing needs:

  • interest rate subsidy
  • ability to remarket the revolving fund’s initial loans to the capital market

I use a stylized model of a revolving fund to show the impact of these considerations.

Financing Needs of Texas Water Plan

The 2012 Texas Water Plan concludes that the capital cost of projects to meet Texas’s water needs through 2060 totals $231 billion (2008 dollars):

  • Water treatment and distribution: $88.9 billion
  • Wastewater treatment and collection: $81.7 billion
  • Flood control: $7.5 billion
  • Water Management Strategies of 2012 State Water Plan: $53.1 billion

The state financing needs relate to the water management strategies, or 23% of total investment.    Water providers offer to fund about half the capital costs to develop 9 million acre per year of water supplies.  They request total state funding of $26.9 billion (2008$) for the following purposes:

  • Over $20 billion for construction and land acquisition
  • $3.3 billion for project permitting, planning and design
  • $3.1 billion for excess storage capacity
  • $440 million for projects in rural and economically distressed areas

The timing of the majority of state financing needs ($15.4 billion, 2008 dollars) occurs before 2020 (see chart)

Funding Needs TX Water Plan

Note: Water for Texas 2012 Water Plan, Chapter 9 (Financing Needs), p. 217

Revolving Fund Operations and Financing Capacity

Revolving funds use an initial capitalization to finance defined projects and use the repayment of loans to finance more projects.  So, in the case of Representative Ritter’s bill, the TWDB would start with $2 billion to finance projects under the fund’s loan terms.   As projects repay loans, the revolving fund would have more money to fund more projects.

The timing and amount of funding from a revolving fund depends on operational factors and funding strategy.  Operational factors involve timing of capital needs of selected projects.  Funding strategy involves the interest rate subsidy in the fund’s loan program and whether the fund remarkets program debt.

Interest Rate SubsidyAs discussed in last week’s post on project evaluation, a market interest rate for a project equals the yield on 10-Year Treasury Notes plus a project risk premium.  For a model of long-term financing, I recommend not using current market conditions where real interest rates are negative, but instead a long-term perspective about the real interest rate and expected inflation.  From this perspective, the market interest equals 4.5% plus a risk premium.  In the example below, I assume a risk premium of 1.5%.  Therefore, the market interest is 6%–the interest rate used by the Texas Water Development Board in their preparation of the financing needs of the 2012 Texas Water Plan.

The interest rate subsidy has an impact on the amount financed by the revolving fund.  The fund would start with the $2 billion that I assume would be fully committed within 3 years.  The annual repayment depends on the interest subsidy (see table below).  Charging a below market interest rate of 2.5%, for example, generates an annual repayment of $109 million that TWDB would use to finance new projects.  Cutting the interest rate subsidy from 3.5% to 1.5% can increase annual repayment (and thereby annual funding of more projects) from $109 million to $135 million.

Interest Rate

Interest Subsidy

Annual Repayment (millions)










Note: calculation assumes 25 year loan term

Remarket Program Debt.  If the TWDB bases future financings only on repayments from the first $2 billion of loans, the funding of new projects would drop significantly after 2016 (see above table).  Assuming that the projects were credit-worthy, the TWDB could remarket program debt.  The market value of debt depends on the interest subsidy (see table below).  By remarketing program debt, the TWDB can fund an extra $1 billion to $2 billion of projects by 2017.

Interest Rate

Interest Subsidy

Market Value of Program Debt (billion)










Note: The net proceeds from the capital market transaction will be less than gross proceeds by the amount to fund debt service reserves and pay issuance costs.  The model below assumes that reserves and issuance cost equal 10% of gross proceeds.

Funding Profiles

The remarketing of debt will increase the capacity of a revolving fund to finance the Texas Water Plan (see chart).  By 2020, a revolving fund relying solely on loan repayments for future capital to fund more projects (“pay as you go financing”) will fund $2.8 billion.  A revolving fund that remarkets the initial $2 billion program debt can fund $4.0 billion.

Note: Example assumes that program interest rate is 4.5%, providing a 1.5% interest subsidy

Comparing the funding capacity of the revolving fund to financial needs of the Texas Water Plan must recognize that the above chart is in dollars while the TWDB measures capital needs in 2008 dollars.  As discussed in the first post in the series on Project Evaluation, the cost of projects financed in the future will exceed cost estimates prepared years in advance of project construction.  The chart below states the funding profiles in 2008 dollars.  The remarketing of program debt funds capital spending through 2020 of $3.2 billion (2008 dollars).  Relying on “pay as you go” funding of new projects only funds $2.4 billion (2008 dollars) through 2020.

Real CAPEX Funding

Note: Adjustments for cost escalation from 2008 to 2012 based on change in Bureau of Reclamation Construct Cost Indices and by the long-term annual rate of increase (3.7%) thereafter.

Assuming the remarketing of initial program debt, the $2 billion initial capitalization will finance $3.2 billion (2008 dollars) of the $15.7 billion (2008 dollars) of the Texas Water Plan through 2020.  A full analysis must include the other funding sources available that would further capitialize the revolving fund.


Capitalization of a revolving fund can jump-start funding of the Texas Water Plan.  The TWDB can leverage a $2 billion capitalization significantly if the fund can remarket the program debt.  The power will be in the specifics of the program.

  • What will be size of interest rate subsidies?
  • Will eligibility requirements yield funded projects sufficiently credit-worthy to support the remarketing of program debt?

The questions are easily stated.  The specifics of the legislation governing the fund’s management and operations, including the degree to which project risks are properly assessed and managed will detrmine the outcome.

The implementation policies used by the Texas Water Development Board will matter as well.  The board’s policies on project selection and interest rates will bear on the marketability of program debt.  The revolving fund would in effect market a “pool of loans.”  The TWDB will enter the world of project risk management and pricing.


This entry was posted in HB 4 and HB 11, Revolving Loan Fund, Texas Water Plan on by .

About Rodney T. Smith

Rodney T. Smith, Ph.D., President of Stratecon Inc.—an economics and strategic planning consulting firm—advises public and private sector water users on the acquisition, sale and leasing of water rights and water supplies in the western U.S. He is routinely involved in economic valuation of water rights, water investments, and negotiation of water acquisition and transportation agreements and has served as an expert witness in the economic valuation of groundwater resources, disputes over the economic interpretation of water contracts, economics of water conservation and water use practices, and the socio-economic impacts of land fallowing. For more information, see