The Trump Administration’s proposed 2018 budget cuts to the US Department of Agriculture’s (USDA) rural water and wastewater grant program would likely result in a partial diversion of funds from the U.S. Environmental Protection Agency’s (EPA) State Revolving Fund (SRF) Programs, Fitch Ratings says. 

The recommended budget essentially calls the USDA program redundant and eliminates its nearly $500 million budget. Without any offsetting increases in SRF grant funding, SRF project funding, which is frequently used, would likely be strained.

SRF programs provide valuable financing options for municipalities’ water- and sewer-related infrastructure needs. They combine a pool of loan repayments with additional forms of credit enhancement, such as reserve funds, to protect bondholders from losses caused by the default of pool participants. 

The combined 2018 budget proposal for clean and drinking water SRFs is approximately $2.3 billion, which is similar to last year. Therefore, increases in funding needs, or similarly, funding reductions, could eventually lead to further leveraging of the SRF programs.

Fitch Ratings says it doesn’t expect any ratings impact in the near term, as the SRF programs rated by Fitch have substantial reserves and equity positions. However, ratings could be pressured over the long term if there are any substantial increases in program leverage to meet the demands from utilities historically served by the USDA.