Funds for capital outlay expenditures for police and fire protection, essential health services, and water and sewerage systems required to serve the expanded population in the impact area may be provided to any city, county, or district rendering, in whole or in part, any of the services described in Section 12950, upon their application under either or both of the following options to be exercised by the local governing bodies:

1. (a) A loan by the State to the local agency for all or any part of such expenditures; such loans to be entirely repaid within 30 years at a rate of interest one-quarter of 1 percent higher than the interest cost to the State for long-term loans at the time of the loan.
2. (b) Direct state expenditures to meet all or any part of such needs. Direct state expenditures shall be for temporary facilities which shall be dismantled upon completion of the water project construction.