A low-interest loan program that supports California water projects has seen three times more requests for money than it has funds available, partly because of surging interest in water recycling.

The Clean Water State Revolving Fund exists to help local agencies pay for wastewater treatment plant upgrades, stormwater capture and wildlife habitat projects that improve water quality. Eighty percent of the money in the fund comes from federal appropriations via the U.S. Environmental Protection Agency, and the remainder from state appropriations.

A separate Drinking Water State Revolving Fund provides grants and loans for drinking water treatment and supply projects.

Until about 2012, there was relatively little demand on the clean water fund, and it usually ran a surplus. Then California’s long drought began, and demand for the money by water agencies began to ramp up.

“Over the last eight to 10 years or so, we had a lot of extra cash in the program,” said Christopher Stevens, a supervising engineer at the State Water Resources Control Board, which manages the fund. “Now, we’re writing more loans and more money is going out the door.”

In the 2015 to 2016 fiscal year, the water board completed $1.05 billion in loan agreements to local water and wastewater agencies using the fund. But there are additional applications for funding that total $3 billion.

That doesn’t mean projects won’t get funded, and Stevens was careful to explain the fund is not in a deficit situation.

Rather, the imbalance between available funds and applications for money simply means some projects must wait longer for funding.

The fund works by offering loans at about half the prime interest rate, or about 2 percent. That makes the program a very good deal for borrowers. As those loans are paid back over time, the repayments allow the fund to gradually grow and fund even more projects, hence the “revolving fund” name. Each year, it gets additional federal and state appropriations that also build the loan fund.

Stevens said that prior to 2012 the clean water fund rarely spent all of its available money. This was partly because the application process was cumbersome, discouraging many agencies from applying. So the water board streamlined its application process.

At the same time, it also increased the loan payback time from 20 years to 30 years, which made borrowing from the fund significantly cheaper. California was one of the first states to do so with its revolving fund, and many other states have since adopted the same measure.

“There is definitely more demand on the program, and that was something we did intentionally,” Stevens said. “It’s great to have cash in the bank, but that really wasn’t doing as much for water quality as could be done. It’s fair to say there are billions of dollars that we could use to finance additional projects.”

A lot of Californians don’t realize it, but they pay a monthly utility bill for sewage treatment in addition to their water bill. These ratepayer revenues are the largest source of money for new wastewater projects, said Bobbi Larsen, executive director of the California Association of Sanitation Agencies, a trade association that represents hundreds of wastewater treatment agencies.

But the Clean Water State Revolving Fund is the “single most significant” source of project funding outside of those ratepayer funds, she said.

“Since the early 1990s, the state revolving fund was very much maligned in California. It was viewed as highly bureaucratic, and getting funding took a long time,” Larsen said. “But I think the water board took that very much to heart, and they really tried to streamline things and take out unnecessary barriers. They decided to take a bit more of a customer-service approach in terms of helping people apply.”

In 2014, as the state was in the thick of the drought, the water board allocated $800 million from the fund specifically for projects that recycle treated sewage for potable use or landscape irrigation. And it offered funding for these projects at an interest rate of just 1 percent – half its usual loan rate.

This proved so popular that the program was extended in February, with another $160 million added for water recycling projects.

Jennifer Clary, water programs manager at the environmental group Clean Water Action, supports the fund’s new streamlined direction and said it’s good to see more projects getting funded.

But she said the water recycling projects it supports are not exactly “forward thinking.” Many are so-called “purple pipe” projects that deliver treated wastewater in dedicated pipelines for landscape irrigation. This is partly because the water board is still working to finalize regulations for direct potable reuse projects.

“Purple pipe projects used to water lawns are probably not the kind of cutting-edge projects that I really think of as drought-proofing,” Clary said.

Another concern is that stormwater reuse and habitat projects that improve water quality are rarely funded. That’s because such projects are more difficult to connect with tangible benefits for ratepayers, Clary said. This makes it difficult to use sewer rate revenues as local matching funds for a state loan, or to pay back a state loan.

The water board is not out of options to fund the $3 billion in additional demand for clean water loans. Earlier this year, the board voted to sell bonds on the open market to raise an additional $1.2 billion.

About $800 million of that bonding authority remains available to raise additional money for the fund in 2017 and 2018.

Beyond that, Stevens said the water board could authorize additional bonding authority, but that decision isn’t imminent yet.

The city of San Luis Obispo is one agency getting in line for a loan. The city needs to modernize and expand its sewage treatment plant to meet new treatment standards imposed by federal law, and to keep up with population growth.

The new project will expand and improve recycling capacity, said David Hix, San Luis Obispo’s wastewater division manager. The city hopes to secure a loan for as much as $90 million at 1 percent interest for the project.

Hix said the city is also interested in expanding its water recycling into a direct potable reuse system, once the state water board finalizes those regulations. This would allow highly treated wastewater to be plumbed directly into a water treatment plant – or even directly into the drinking water supply system.

“We really want to position this project for maximizing recycled water, whether it’s for irrigation or for potable reuse,” Hix said. “I definitely support the state selling more bonds or finding alternatives to keeping the revolving fund going, because I think they’re the best deal in town.”