(a) The state of Tennessee is authorized to make repayable grants to any municipality to assist the municipality in the construction of sewage treatment works. Such loans shall be made from the proceeds of bonds or notes issued by the authority for the purpose of making such loans. The authority shall establish the repayment schedule for the repayment of the repayable grant, and the repayable grant agreement shall be between the state, acting through the authority and the department, and the municipality. At the time of approval of the repayable grant agreement, the annual repayment schedule applicable to all approved repayable grants to a municipality under this part, when combined with annual repayment schedules applicable to approved loans to the municipality under part 5 of this chapter, shall not exceed two hundred percent (200%) of the unobligated amount of annual state-shared taxes paid to the municipality as shown by the latest completed audit for the state's fiscal year; provided, that the authority may impose more strict requirements if, in its judgment, deemed necessary or advisable. Nothing contained herein shall require a uniform test for all repayable grants, it being the intent of the general assembly that the authority exercise discretion based on the facts and circumstances of each repayable grant. In exercising its discretion, the authority shall take into consideration the general financial condition of the municipality receiving the repayable grant and the ability of the system, for which such repayable grant is to be made, to generate user fees sufficient to pay the costs of operation, maintenance and debt service of the system, including depreciation in accordance with generally accepted accounting principles. For purposes of determining compliance with this subsection (a), the annual repayment schedule for each repayable grant or loan shall be, in cases prior to the funding of such repayable grants or loans or where such repayable grants or loans have been financed on an interim basis other than by bonds, an estimated annual repayment schedule showing debt service requirements under the repayable grant or loan agreements as if the bonds to be issued to fund such repayable grants or loans will bear interest at a rate per annum and mature in such manner as the authority shall establish at the time of approval of each such repayable grant or loan and, in cases where bonds have been issued to fund such repayable grant or loan, the actual debt service requirements on such bonds.

(b) Only municipalities receiving state-shared taxes shall be eligible to participate in the program under this part; provided, that one (1) or more municipalities receiving state-shared taxes may enter into a contract pursuant to this part and loan the proceeds of such sewage treatment works loan to a municipality not receiving state-shared taxes.