JAN 5 2007
A. James Homes, Chair
T&iyAgriss
Julie Belaga
John Kolaitd
ctetuytt JSiitcber
Donald Cornell
Mchaei Ctulty
Kacbel 0emlag
Pete ฃfaaten/ct
Ktity Dovnard
Mary Frauncoeur
Vincent Glmnty
Steve Grossman
Edith Matts
. Steve Mabfood
Langtlon Marsh
CtresffFlasoa
Chซsrie iUce
Xfelea Sahl
-Mntftvsw Sawyers
Jim /Smith
Sonia Toledo
Mm Tozzi
mttty Turner
Justin Wilson
John VUse
Stan Mettttorg
Designated
FedeKt/ Official
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Ave., N.W.
Washington, D.C. 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board (EFAB) has created a
workgroup on Non-Point Source to address issues concerning the local capacity to
finance projects and actions needed to implement watershed plans, including
Total Maximum Daily Loads (TMDLs), especially where Federal or State funding
is not available. The workgroup held a roundtable on a variety of issues on
March 9,2006 in Washington, D.C., funded by EPA's Office of the Chief
Financial Officers and the Office of Wetlands, Oceans 'and Watersheds. Enclosed
is EFAB's report summarizing the roundtable and providing recommendations for
enhancing sustainable watershed finance.
Commendably, EPA has taken a watershed approach to many of its
programs including planning, infrastructure and public education and information.
It has assisted thousands of watershed groups to develop plans and implement
projects. It has created programs such as the Targeted Watershed Grants program
to demonstrate important watershed-wide tools such as water quality trading. It
has made the watershed approach one of the pillars of its Sustainable Finance
initiative.
EFAB believes that it also makes sense to address financing issues on a
watershed basis, to take advantage of trading and other opportunities and to focus
on the most important priorities to achieve improved water quality, whether
through traditional infrastructure or improvements to address stormwater or other
nonpoint sources.
Most watersheds that have undertaken planning to meet water quality,
habitat, and other goals face daunting challenges' in financing both mfrastracture
and other projects and actions needed to achieve goals in a reasonable time frame.
Federal, State, and traditional local funds are usually adequate to cover only the
most urgent priorities and sometimes not even all of those. .
on "How Tฎ Fay" for Environmental Protection
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The report takes that view that, while there are no easy choices, there are a number of current and
developing innovative finance tools that may be used to help fill the gap that watersheds face.
' Some of the tools are well established, such water and sewer rate increases and special districts
for flood control and management of septic tanks and stormwater. Others are innovations such
as special purpose financing as in Maryland's Bay Restoration Fund and transfer of development
rights. Potential future tools include payments for and markets in ecosystem and other
intergenerational services.
Critical to the success of any whole watershed financing mechanism will be the choice of
the right collaborative governance approach to reach agreement across multiple jurisdictions and
among government, business, utility, nonprofit and citizen organizations on the best mix of
finance tools to implement the watershed plan or other needed projects. The report recommends
that EPA strongly encourage the use of collaborative approaches to achieving sustainable
watershed finance and educate potential participants in their use.
The recommendations contained in the report urge EPA to further knowledge and
development of whole watershed sustainable finance approaches. In particular, the report urges
EPA to assist in the development and dissemination of innovative finance mechanisms,
collaborative governance approaches, ecosystem services markets and appropriate watershed-
wide implementing entities. To demonstrate some of these recommendations, we recommend
that EPA assist in funding one or more demonstration projects that use a collaborative
governance approach to implement one or more innovative financing mechanisms.
We thank you for the opportunity to present these recommendations and look forward to
your response. We will be glad to answer questions or do further work as you may request.
Sincerely,
- ~ W -* *ซ(ซ* ปปfc"~~
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
cc; Ben Grumbles, Assistant Administrator for Water
Lyons .Gray, Chief Financial Officer
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Environmental Financial
Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
Sustainable Watershed Finance
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
January 2007
Printed on Recycled Paper
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EFAB Sustainable Watershed Finance Report
Executive Summary
The goal of clean water for every use, human and environmental, is a firm and long-standing
national priority. Substantial progress has been made through implementing the Clean Water
Act and other authorities, but much remains to be done. Over 40% of assessed waters do not
meet water quality standards. The causes include failing or inadequate wastewater and septic
systems, runoff from streets, parking lots, factories, lawns, farms, forests and emissions from
power plants and vehicles. Among the obstacles to clean water is the enormous cost of cleaning
up existing discharges, restoring damaged ecosystems and preventing current and future
pollution from reaching the nation's waters.
Federal and State grant and loan programs, especially the Clean Water and Safe Drinking Water
Revolving Funds and the various programs under the Farm Bill, coupled with state, local, and
private funding, have gone a long way toward achieving the goal and will play a considerable
part in making future progress. But there is a significant gap between the capacity of those
programs and the needs identified for both wastewater facilities construction and improvement
and actions needed to eliminate or prevent nonpoint sources (NFS) of pollution. It is unlikely
that federal or state funding will fill this gap in an acceptable timeframe, so it will be incumbent
on the residents, governments and businesses in each basin and watershed to finance a significant
portion of the costs of necessary actions, as they have to a considerable extent in the past.
The United States Environmental Protection Agency's (EPA) policies for sustainable
infrastructure finance include full cost pricing and a watershed approach. Many of the
challenges to meet water quality goals, including Total Maximum Daily Load (TMDL)
requirements, are best approached from a watershed perspective, so the analysis of finance needs
should incorporate that perspective.
To illuminate the challenging financing issues watershed managers and groups face in closing
the watershed finance gap, a roundtable on Sustainable Watershed Finance was co-hosted by the
Environmental Financial Advisory Board (EFAB) and the Office of Wetlands, Oceans, and
Watersheds (OWOW) in Washington, D.C. on March 9, 2006. The purpose of the roundtable
was to explore some of the key questions that will affect the success of innovative methods for
financing watershed protection and restoration.
Speakers and participants shared perspectives on a variety of issues related to increasing local
capacity to finance needed improvements.
1. Uses of State Revolving Funds and other Federal Programs
The presentations by EPA officials made several points clear:
Many Federal funding programs support watershed protection;
The Clean Water State Revolving Fund (SRF) Program and other Federal programs are
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already financing a wide variety of NFS solutions;
There is enormous flexibility in both Clean and Drinking Water SRF's to finance almost
any needed improvements, both point and non-point; but,
There is little likelihood that the SRF's will be capitalized at a high enough level for them
to finance more than the highest priority waste treatment and some non-point
infrastructure; and,
TMDL allocations under the Clean Water Act will be a strong driver for watersheds to
meet water quality requirements, making financing an increasingly critical need in the
coming years.
2. Principles for allocating the costs of watershed improvements among users and
beneficiaries
If there is interest at the local level in raising revenue to finance the costs of watershed
improvements, there are many complex challenges in fairly and equitably allocating these costs
among the various users and beneficiaries and across jurisdictions, but there are also some sound
principles under which watersheds could raise money through taxes, fees, or other charges in
ways that would be politically acceptable.
Among the principle sources of potential revenue, user fees are generally preferred, because they
are perceived as avoidable, fair, equitable, and efficient. User fees enjoy these advantages,
however, only where there are cost-effective means for excluding non-payers from using the
service. Tax options, including sales, income and ad valorem taxes, benefit assessments and
entrance fees all present their own difficulties.
Sustainable financing of watershed improvements should strive to be fair and equitable, produce
adequate funds, be politically acceptable, provide incentives for efficient fund use and for
efficient use of environmental services and avoid free riders.
Another challenge is finding fairness in determining who should pay, the beneficiaries of better
water quality, those whose activities cause degradation, those who can afford pay, or the general
public.
The provision of ecosystem services by watersheds, including clean and sufficient water, waste
absorption capacity, flood control and habitat for native plants and animals can be a basis for
determining the allocation of costs and burdens. Some are more fairly protected by broad based
government programs, while others can be the subject of market or other payments.
Future generations have an intense interest in how we manage watershed resources and ways
should be explored to create a forward market for intergenerational services that would have the
lowest life cycle costs. As a first step, a number of entities are exploring emerging markets for
ecosystem services to serve multiple, environmental, habitat and resource conservation needs. It
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is likely that interest in markets and other ways of paying for ecosystem services will increase
significantly in the next few years.
3. Collaborative Governance
The best chance of enacting new or increased charges, taxes or fees is where there is agreement
among the various groups of payers across multiple jurisdictions, sectors and interests. All to be
charged must be represented so they have a chance to negotiate the burdens that will fall on their
constituency. There are examples of collaborative governance approaches that show promise for
how agreements might be reached and implemented. The lessons learned can readily be
incorporated into collaborative approaches needed for sustainable watershed finance. Important
components of a collaborative governance approach are (1) a respected convener to bring people
together, (2) a neutral forum, such as a university center to provide expert assistance to te
convener and members of the collaborative team and (3) a sponsor, such as a governor, agency,
or alliance of organizations to call for and support the process.
Some of the practical political considerations that need to be addressed for any successful
process are:
Keep it simple and transparent;
Connect the actions needed and their costs to the beneficiaries and those responsible;
Share the financing costs among the broadest possible group of payers;
Incorporate clear lines of accountability;
Seek sources of revenue that are the most sustainable; and
Make sure any new financing mechanism is embraced by key advocacy groups.
4. Innovative Finance and Market Methods
There is a broad and growing variety of innovative finance or market tools that a collaborative
local team may choose among. They include:
Leveraging the funds available through innovative use of SRF's;
Special purpose financing like Maryland's Bay Restoration Fund;
Special district financing, such as septic tank management partnerships and ecosystem
service districts;
Water or wastewater rate increases, like New York City's financing for improving in its
reservoirs' watersheds, and the local utility financing of streamside planting to reduce
temperatures in the Tualatin river in Oregon.
Watershed assessments, allocated on the basis of relative benefits and contributions;
Tax base sharing;
Transfer of development rights, as in the Cuyahoga and Deschutes watersheds;
Tax increment financing, to help pay for land protection programs that benefit watershed
health and increase property values on properties within the watershed;
Integrated services financing, through long term bonds issued by a watershed based
utility to finance infrastructure and other services via the integrated design of a full range
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of environmental and other services needed by both present and future generations;
Market based programs, to put together consumers of agricultural and forest products or
ecosystem and restoration services with producers of those products and services; and
Supplemental environmental projects, where in lieu of fine or penalty for an
environmental violation a source could pay into a revolving fund or other mechanism.
See the list of Innovative Finance and Market Methods in Section 5 of the Discussion of Issues
for fuller descriptions of these tools.
5. Potential Implementing Entities
Once there is agreement on who will pay and what type of traditional or innovative finance
mechanism will be used, an entity to issue bonds, collect and distribute revenues, leverage other
sources of funds and accounting to all stakeholders must be designated or established. Potential
entities include water, wastewater or other public utilities, public authorities, redevelopment
districts, special service districts and multi-jurisdictional entities created by intergovernmental
agreements. Selection of the appropriate entity will depend on the functions that are to be
assigned to it. Some of these may be the responsibility of a decision-making, multi-jurisdictional
governance entity and others of an implementing entity.
Recommendations
Expand Knowledge and Foster Use of Collaborative Governance Approaches.
EPA should foster use of collaborative governance approaches for achieving
sustainable finance in all watersheds, using the many forums that EPA hosts or
participates in. EPA should disseminate success stories that demonstrate the use
of collaborative governance principles and techniques in achieving successful
financing outcomes.
Disseminate innovative finance tools. EPA should designate an environmental
finance center to maintain a directory of innovative finance and market
techniques. EPA and the environmental finance centers should disseminate
information about these successes and model techniques.
Encourage ecosystem services markets. EPA should partner with university
research centers and others to determine whether and to what extent ecosystem
service values can be used to make local taxing, fee or other revenue raising
systems more equitable, fair and acceptable to payers. EPA should work with the
Department of agriculture and other organizations which are exploring how to pay
for and make markets in ecosystem services to determine how loans and grants
from both agencies can be used to leverage payments for markets in these
services.
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Leverage existing finance tools. EPA should continue to review its existing
superb financing tools under the Clean and Safe Drinking Water Acts to
determine how they might be leveraged with local efforts to obtain additional
funds and markets to help close the funding gap.
Track sustainable finance implementing entities. EPA should, with the assistance
of the EFCs and EFAB, develop a compendium of the potential entities that
would be appropriate to implement whole watershed finance strategies agreed
upon.
Initiate demonstration projects. EPA should fund or otherwise assist several
watershed scale demonstration projects that incorporate sustainable finance
techniques, and that use collaborative governance approaches.
Background
Implementation of the Clean Water Act (CWA) has made tremendous progress since 1972 in
removing billions of tons of pollution, but the nation has a long way to go to meet the CWA's
goals. Forty percent of assessed rivers and streams, 45 percent of assessed lakes and 51% of
assessed estuary square miles do not meet basic water quality standards.
The U.S. Environmental Protection Agency (EPA) and other Federal agencies provide
substantial funding and financing. Safe Drinking Water Act (SDWA) and CWA capital grants
for state revolving loan programs (SRFs) are important sources for local drinking and wastewater
infrastructure. Other programs include the Farm Bill, Section 319 grants for nonpoint source
(NPS) pollution and smaller programs, such as targeted watershed grants. Despite this
commitment of Federal dollars and matching or complementary state contributions, the gap
between what funding is available and the overall need is huge and the cost of addressing
polluted runoff and achieving ecological watershed goals is daunting.
According to EPA, NPS pollution remains the nation's largest source of water quality problems
and the main reason that so many of our surveyed rivers, lakes, and estuaries are not clean
enough to meet basic uses such as fishing or swimming. Nevertheless, most of the funding for
water quality improvement has gone to address point sources, given the large capital
expenditures needed for treating sewage and industrial wastes. Since adoption of the Clean
Water Act, Congress has appropriated about $70 billion for investment in clean water
infrastructure. State and local governments has invested many billions of dollars more. Still, it
is estimated that, over the next two decades, the United States needs to spend hundreds of
billions of dollars to replace or improve existing wastewater infrastructure systems. While there
is no agreed estimate on the cost of addressing nonpoint sources, it is certain that many
additional billions will also be needed, and, in many watersheds, addressing NPS will be the
major cost of restoring water quality.
Total Maximum Daily Load (TMDL) allocations required for all water bodies not meeting water
5
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quality standards, will be an increasing driver for reducing pollution from both point and
nonpoint sources. Implementation plans devised to meet these allocations will highlight the
work remaining to be done to achieve the nation's water quality goals. These plans have led and
will lead to increasing public expectations that pollution sources be abated and that funding or
financing be provided where past actions, on-going prevention, redesign of systems causing
pollution and other avoidance and restoration activities fall short. It should be noted that there
are funding and financing issues related to the collection and analysis of data for the completion
of TMDL allocations. To the extent data is unavailable, it becomes harder to identify the precise
problem that needs financing to solve. Paying for data is traditionally the role of government,
permittees, responsible parties, universities and volunteers. A robust watershed financing
approach will need to include payments for collecting and analyzing data.
At the same time, available funding through EPA for both point and nonpoint sources is in
decline. While the Farm Bill is likely to continue to pay for beneficial improvements to address
agricultural nonpoint sources, Federal and state programs for other nonpoint sources are unlikely
to make up the shortfalls. While a variety of measures have been successful in improving water
quality, the financing gap is a significant barrier to the continued work necessary to maintain and
improve our waterways.
These conclusions are reflected at a regional scale. In the draft report entitled A Strategy to
Restore and Protect the Great Lakes, the President's Great Lakes Regional Collaboration
(GLRC) identified over $20 billion in investments necessary to begin work on high priority
restoration opportunities in the next five years, with 85% of the funds dedicated to capital costs.
Green infrastructure capital costs, to address non-point sources and ecosystem restoration, were
identified at $1.75 billion and traditional infrastructure capital costs were identified at $18.25
billion. The Great Lakes Protection Fund has found that innovative financing methods will be
required to enable these investments to be made, even assuming that the Federal Government
will contribute as much as $11 billion of the total. The potential needs at the state and local level
total some $9 billion dollars.
Most efforts of watershed managers and groups have been expended on seeking outside grants,
loans and other forms of public and private assistance to pay for the substantial cots of projects
needed to achieve watershed health. These efforts are worthwhile and need to be pursued to the
fullest extent, in order to reduce the burden on local residents.
But even with every state, federal and private funding option employed, it is clear that those
responsible for meeting watershed health goals will need to finance a significant portion of the
cost of needed improvements on their own. With the general public largely resistant to increased
taxation, there is a need to develop innovative market and financing mechanisms that will
generate the funds to finance the actions necessary to improve water quality while maintaining
the necessary political support for this effort.
EPA has adopted as one of the four pillars of sustainable water quality infrastructure the idea of
full cost pricing, meaning that local resources will ultimately have to be depended upon to
finance needed water quality improvements, principally through fees and charges. While EPA's
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policy does not apply to nonpoint sources, the same logic would dictate that local resources need
to be mobilized to pay for or make the improvements required to meet TMDL's and other
watershed health goals.
EFAB Roundtable
To illuminate the challenging financing issues watershed managers and groups face, a roundtable
was co-hosted by the Environmental Financial Advisory Board (EFAB) and the Office of
Wetlands, Oceans, and Watersheds in Washington, D.C. on March 9, 2006. The purpose of the
roundtable was to explore some of the key questions that will affect the success of innovative
methods for financing watershed protection and restoration.
Among the questions posed to the participants of the Roundtable were:
What types of new fees and charges or new markets for avoiding polluting
activities are acceptable to the public?
How far can charges like water and sewer fees be raised to pay for more than
traditional/infrastructure investments ?
Can charges or markets be effectively and fairly linked to sources and benefits?
Summary of Roundtable
Charge
Diane Regas, Director of EPA's Office of Wetlands, Oceans, and Watersheds (OWOW), charged
the participants to think about how to move forward on implementing watershed plans and
commitments to achieve Clean Water Act and community water quality goals. Financial
mechanisms should be realistic and based on collaboration among stakeholders. What are
models of governance that maximize leveraging at the watershed level? What market-oriented
solutions lead to sustainable approaches? What goods and services can be built into markets to
achieve sustainable financing of watershed goals? How can one build capacity and sustainability
into watershed efforts? She urged participants to maintain the dialogue among all stakeholders;
everyone has an interest in doing this well.
OWOW considers three components essential to sustainable watershed funding: (a) hydrological
focus, (b) collaboration, and (c) a strategic or scientific approach using a geographic framework
for rational plans and mechanisms to assess progress and adjust actions.
Ms. Regas and James Hanlon, Director of the Office of Wastewater Management, pointed out
that the watershed approach is one of the four pillars of sustainable water infrastructure. Being
based on cooperation among all stakeholders, it allows efficiency and effectiveness not otherwise
available and affords opportunities to both provide critical water services and protect watersheds.
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Discussion of Issues
1. Uses of State Revolving Funds and other Federal Programs
The presentations by EPA officials made several points clear:
Many Federal funding programs support watershed protection;
The Clean Water SRF Program and other Federal programs are already financing
NPS efforts to a significant extent;
There is enormous flexibility in both Clean and Drinking Water Revolving Funds
to finance almost any needed improvements, both point and nonpoint; but,
There is little likelihood that the SRFs will be capitalized at a level for them to
finance more than the highest priority waste treatment and some nonpoint
infrastructure.
Georg Ames emphasized that a "community quilt" approach to watershed finance, patching
together a variety of national, state, local and private sources, is likely to be the most successful
way to make progress. This approach allows for the most efficiency in finance as well. Fore
example, where an SRF makes a loan to a municipality that has done a thorough analysis of
sources of pollution, it may be far cheaper to achieve needed load reductions by negotiating with
land owners to use best management practices upstream. The municipality could off-lend to
those owners, which will be more cost-effective than upgrading the facility. This kind of thing is
possible through the SRF, but has rarely been done to date.
The SRFs can be used to make investments that leverage additional financing from local sources.
For example, the Safe Drinking Water SRF is capable of providing start up funds for some
innovative watershed market and financing programs in watersheds, through the Source Water
Protection Program. Peter Shanaghan, Director, Office of Groundwater and Drinking Water,
pointed out that these can be applied to a variety of activities, including (a) loans to water
systems for land/conservation easements to protect drinking water sources, (b) implementing
voluntary, incentive-based source water protection measures, (c) development of own-source
water protection programs to build capacity to implement and oversee these programs.
He gave examples in Des Moines, Iowa, where a company that runs a drinking water utility
collaborates with agricultural users upstream on controls to lower levels of nitrates in water
bodies, and in Illinois, where a drinking water investor-owned utility had a project with the State
to trade upstream sediment control to allow discharge of solids downstream that reduces twice as
much discharges of solids.
Mr. Ames and Stephanie vonFeck of the Office of Wastewater Management stressed TMDL
allocations under the Clean Water Act will be a strong driver for watersheds to meet water
quality requirements, making financing an increasingly critical need in the coming years.
TMDLs are accompanied by implementation plans, which, while not technically required to be
implemented, provide a pathway toward meeting water quality standards and the other goals of
the Act. There is a compelling role for the use of financial or market incentives that produce
innovative, cost effective approaches to achieving these goals.
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2. Principles for allocating the costs of watershed improvements
The presentations of John Boland, Johns Hopkins University; and Josh Farley, Gund Institute for
Ecological Economics, are summarized extensively below both because they point out many of
the complex challenges in fairly and equitably allocating the costs of watershed improvements
among the various users and beneficiaries and across jurisdictions, but also because they suggest
some sound principles under which watersheds could raise money through taxes, fees or other
means that would be politically acceptable.
Mr. Boland pointed out that watershed-level programs are some of the most straightforward,
effective, and efficient means of accomplish ecosystem protection. But they present the most
complex and challenging means of raising funds needed for ecosystems protection. What is
good about watershed programs also makes them challenging to finance. Watersheds only rarely
match political boundaries; most regulatory and financial institutional arrangements are at the
wrong scale or in the wrong place. Watershed pollution sources are diffuse; responsibility for
them cannot easily be established. Free riders-nonpayers-cannot be excluded from the benefits.
Effective ecosystem protection measures may also conflict with private property rights.
Mr. Boland stated that the objectives of a financing strategy include (s) sufficient resources to
carry out the program, (b) sustainability (current financing strategy should not jeopardize ability
to raise enough funds in the future), (c) efficiency (the financing strategy should promote
economic efficiency, (d) equity (equals are treated equally), (e) fairness (financing method
should be regarded as fair by most affected persons), (f) political acceptability (sufficient
political support at all levels to assure implementation), and (g) lack of perverse incentives
(should not encourage free riding and counterproductive action, inefficient uses of resources,
etc.).
Mr. Boland then reviewed several sources: taxes, user fees, and voluntary contributions of
money, property, and services. In general, people like user fees, which are perceived as
avoidable; fair, because they are tied to services rendered; equitable, because they fall only on
service receivers; and efficient, because properly configured they can provide an appropriate
incentive for use of the service.
User fees enjoy these advantages, however, only where the associated service is excludable, that
is, there are cost-effective means for excluding nonpayers from using the service. In the absence
of excludability, the user fee becomes a voluntary payment, inviting free riders and eliminating
many advantages (efficiency, equity, and fairness) of this funding source. This is a challenging
problem.
Another issue is distinguishing between sources and instruments. "Financing instrument" refers
to the means used to connect monetary sources (the ultimate payers) to sinks (project costs).
Financing instruments can reallocate costs and associated risks over space and time; for example,
borrowing reallocates costs over time, and broadly based taxes reallocate costs over space.
"Financing source" refers to the identity of the ultimate payers of the cost. Identification of
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financing source and the choice of a financing instrument are related decisions, but not identical.
Some tax and fee options:
Broadly based taxes (e.g., sales and income taxes) are inequitable for watershed
problems, because the financing source is different from the beneficiaries, raising
resistance and diminishing incentives for efficient use of funds.
Ad valorem taxes (e.g., special watershed taxing district) require benefit measures for
equity and fairness, but not all benefits accrue to locals, raising resistance and moderately
reducing incentives for efficient use of funds.
Benefit assessments require benefit measures and may correlate well with local benefits,
but not all benefits accrue to locals. The process of setting such an assessment is often
transparent and improves the incentive for efficiency.
Entrance fees/license fees for recreational services correlate well with benefits,
provided they are limited to recreational services. Funding of other benefits is
inequitable and may be seen as unfair and create pressure to skew improvements to
recreation services.
Voluntary options include:
Cash contributions and property contributions are usually not sufficient or sustainable as
a funding source and may be targeted, restricting the scope of improvements.
In-kind contributions are not sufficient as a funding source, but may build community
support helping sustainability; however, they have limited applicability.
In summary, sustainable financing of watershed improvements must:
Be fair and equitable (e.g., user fees and voluntary contributions)
Produce adequate funds (e.g., taxes)
Be politically acceptable (e.g. user fees and voluntary contributions)
Provide incentives for efficient funds use (sometimes user fees and voluntary
contributions)
Provide incentives for efficient use of environmental services (sometimes user fees)
Avoid free riders (taxes and sometimes user fees)
Josh Farley presented further insights on equitable financing of watershed projects. Approaches
include beneficiary pays, polluter pays, those who can afford pay, and government pays for
public goods, but fairness in these approaches is difficult to determine.
Environmental services often have a wide geographic distribution from local to global.
Determining who benefits according to receipts is very complicated. One example of
beneficiaries paying is the nine million paying customers of the New York City water utility,
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who are paying for watershed protection measures by upstream farmers and others. Another is
payments by the Costa Rican government of $70 a year per hectare to certain farmers to protect
upstream forests or to allow forests to regroup. In Colombia, the Colombia-Cauca irrigation
cooperative pays upstream landowners to preserve the watershed.
How much should beneficiaries pay? On the supply side, they should pay as much as they need
to continue supply of those services or the lower limit of upstream landowners' opportunity
costs. On the demand side, the most that beneficiaries are willing to pay is the upper limit of
what the benefits are worth to them. Nature provides services regardless of income; yet,
economists try to decide the value of ecosystem services only in terms of income. One could
base it on a democratic principle of one person, one vote, but most economists use a plutocratic
approach of one dollar, one vote.
The spatial distribution of impacts on watersheds is also broad: impacts may come from afar
(e.g., mercury and acid rain emissions) or locally or regionally (e.g., phosphorous and nitrogen
emissions or deforestation). Direct damage may be caused by such activities as channelization
of water bodies or direct point source emissions. It is difficult, therefore, to implement the
"polluter pays" solution. A first step might be to get rid of perverse subsidies-such as massive
subsidies for agricultural production and logging in national forests and on royalties on fossil
fuel extraction-but that is not going to happen very soon.
One example of the polluter pays model is "cap and trade": giving polluters permits to pollute,
which they can trade. On the supply side, price is determined by supply and, therefore, by
democratic processes. The equitability of "cap and trade" raises issues of the equity of revoking
property rights and/or privileges. It is easier to regulate waste absorption capacity, but it is also
harder to monitor.
Markets require excludability, and prices require feedback loops. Most ecosystem services,
however, are inherently non-excludable, making direct markets impossible, and have no
feedback loops, making pricing difficult.
Some ecosystems services (e.g., recreation; waste absorption, for which there are an abundance
of cap and trade emission schemes; and structural elements of ecosystems, such as water use
rights and tradable development permits) can be made excludable. It is easier to make unowned
waste absorption capacity excludable than to revoke/change existing property rights.
The less excludable a resource, the more transaction costs and free riding occur. The more
transaction costs, the greater is the efficiency of government intervention. Examples in which
natural resources have been made excludable are all cap and trade schemes (e.g., carbon dioxide
markets in Europe) and charging for use of a resource (e.g., flood control; clean water for non-
consumptive uses; recreation, although congestion can occur; and waste absorption capacity).
Mr. Farley summarized his points on excludability of resources as follows:
Excludable rival resources (rival resources are exhausted by use) include market goods
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(e.g., irrigation and drinking water, waste absorption capacity of forests and lands) and
constitute a natural area for non-governmental financing.
Non-excludable rival resources include open access regimes (tragedy of the commons),
such as waste absorption capacity (requires governmental regulations to create markets
by making the resource excludable).
Excludable non-rival resources include recreation and patented information, for example,
on pollution control technology (requires government financing).
Non-excludable non-rival resources include pure public goods, such as information, most
ecosystem services (flood control, clean water for non-consumptive uses) and require
government financing.
Mr. Boland and Mr. Farley also talked about delivering resource to future generations. The
challenge in business is to create a "forward market" for intergenerational services. In addition,
there are designs with zero cost, for example, facing a school to the south to capture solar heat.
Mr. Farley noted that intergenerational financing is difficult. How much will future generations
pay for long-term debts incurred today? In addition, all we know about what future generations
will want is what we want now. All we can do is rule out the worst and look at the best
possibilities. The only way future generations will pay is through debt financing, which is
perfectly reasonable, when benefits occur over multiple generations.
Hank Patton of World Steward responded that a powerful way to bring science to answer the
question of what future generations will want is to use life cycle assessment to assist in
determining the full costs of the things we want today and give bond trustees the ability to
determine that future generations would want those investments that have the lowest life cycle
costs.
1. Ecosystem Services Valuation
It was an assumption made in planning the workshop that ecosystem services valuation might
play a significant part in sustainable watershed finance, by helping to adjust fees, charges or
taxes to take account of the differing contributions to problems or benefits received by different
stakeholders in the watershed, especially landowners. While it appears that making these
adjustments is theoretically possible and perhaps could contribute to making needed increases in
revenues more palatable to stakeholders, the complexities and uncertainties involved at this stage
of development of the science make it challenging. Further research is needed.
Mr. Farley said that, if something is non-excludable like ecosystem services, it might be possible
to put a vlaue on those benefits and create some kind of mechanism to pay for them that is fair
and equitable. The elements of ecosystem structure that create those services are rival and
excludable, which allows the possibility for creating those mechanisms. Many of the benefits are
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easy to measure. For example, if one deforests a watershed, new infrastructure costs (e.g., storm
water management) will be phenomenal. It is easy to estimate a huge tax to create that storm
water control. Ecosystems tend to provide many services cost-effectively, there is no constant
flow of new money going in.
A number of entities are exploring emerging markets for ecosystem services to serve multiple
environmental, habitat and resource conservation needs. These include universities, private
businesses, nonprofit organizations, and governmental agencies, here and abroad, including the
U.S. Department of Agriculture. The U.S. Forest Service, within that Department, has been
especially active in looking for opportunities for private forest landowners to be paid for
conservation activities that benefit watersheds while providing income in addition to sustainable
tree harvesting. Forest Trends, a non-profit organization, publishes extensively on the issues and
opportunities for markets in ecosystem services. Projects in Colombia, Costa Rica and
elsewhere have brought together municipal water suppliers, businesses that rely on clean water
and forest landowners, who receive payments to protect their forests rather than exploiting them
in ways that damage water quality or availability. In New York, farmers, forest landowners and
municipalities in the upstate watersheds of the City of New York's reservoirs are receiving
payments, investments, and assurances, mostly paid for by the users of the City's water supply
system, in order to protect the water quality of the streams flowing into the reservoirs.
It seems likely that interest in markets and other ways of paying for ecosystem services will
increase significantly in the next few years. EPA, with its long experience in encouraging
trading for water quality improvements and in measuring water quality values through its
monitoring and TMDL programs, is well positioned to participate in both the development and
implementation of these markets. The flexibility afforded by the SRFs and the farm programs
provides an enormous opportunity for the Federal government to leverage markets in ecosystem
services, providing avenues for more efficient and effective means of producing water quality
(with significant air quality, habitat and soils benefits), at a great savings to taxpayers and rate
payers, compared to the costs of providing these services through engineered solutions.
2. Collaborative Governance
One of the hardest aspects about local financing is the difficulty of reaching agreement among
the various groups of payers. Transparency and accountability are very important. There needs
to be a sense that the money to be raised is needed and will be efficiently used to address the
highest priorities. Adding to the challenge is the need to achieve agreement across multiple
jurisdictions, sectors, and interests.
The best chance of enacting new or increased charges, taxes or fees is where democracy works
best, that is: all to be charged are represented, have a chance to negotiate the burdens that will
fall on their constituency, have a say in how, when and where any new charges will be
implemented, and will not be surprised by any changes after they have agreed.
Achieving agreement on these issues is hard to do in our fractionated world, but there are some
examples of collaborative governance approaches that show promise for how agreements might
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be reached and implemented to assess new or increased charges to pay the financing costs of
watershed an related community improvements.
Greg Wolf, National Policy Consensus Center, talked about how collaborative governance
attempts to solve problems at regional and community levels, such as a watershed, by multiple
governmental bodies (Federal, state, county, city, district, etc.) And non-governmental entities
and citizens. A collaborative governance network consists of a sponsor (leader, agency,
community group, business, etc.); a convener (e.g., governor, legislator, mayor, civic leader,
etc.); and a neutral forum (e.g. university, civic organization, etc.). Through collaborative
governance, sponsors identify and raise an issue or opportunity and assess which sectors should
participate. Leaders convene all stakeholders, who adopt the collaborative governance system as
a working framework for action. Conveners and participants frame or reframe the issue for
further deliberation. The neutral forum designs and conducts a quality process for participants to
negotiate their interests and integrate resources. A written agreement among all parties
establishes accountability and spells out individual and collective actions.
This process is based on transparency and accountability, equity and inclusiveness, effectiveness
and efficiency, responsiveness, forum neutrality, and consensus processes. Not following these
principles could derail the process later. At the regional level, this system creates and determines
the objectives, policies, and kinds of investments needed to solve the problem across
jurisdictional and other lines. At the community level, public, private, nonprofit, and citizen
groups leverage resources and implement the agreed actions as community-based projects.
Mr. Wolf described the example of the Lower Columbia Solutions Group, which was sponsored
by the governors of Oregon and Washington and the Director of the Council on Environmental
Quality for collaborative decision making on sustainable dredge material disposal in the lower
Columbia River area, a source of contention between environmental and industry groups in the
two states. A collaborative team was organized using a respected state legislator as the
convener. The effort led to high-level regional agreements that produced a charter and
collaborative governance system to address the issue. Individual teams reached agreements on
specific alternative disposal solutions.
Jeff Edelstein, a Maine facilitator, described the Casco Bay/Sayco Bay Interlocal Stormwater
Working Group, listing the factors for success of the group, including taking a problem based
approach, using a respected convener, providing neutral facilitation, process management,
research and technical expertise, involving all appropriate parties, avoiding excess formality and
obtaining adequate seed funding for the process.
Panelist and participants emphasized that collaborative approaches must be used to solve the
conundrum of having to raise local revenues for needed and often well accepted projects and
actions, through means, like taxes, fees and assessments that are generally politically unpopular.
Successful adoption and implementation of new financing measures are more likely with
consensus-based agreements that are worked out by all affected interests and jurisdictions and
implemented fairly and equitably.
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Charles Evans, Special Assistant to the Secretary in the Maryland Department of Natural
Resources provided a useful list of some of the practical political considerations that must be
satisfied for adoption of innovative financing at the state level and will have resonance at the
local level as well:
Keep it simple;
Connect the actions needed and their costs to the beneficiaries and those responsible;
Share the financing costs among the broadest possible group of payers;
Seek sources of revenue that are the most sustainable; and,
Make sure the new financing mechanism is embraced by the environmental and other key
advocacy groups that have the ability to defeat proposed financing measures.
5. Innovative Finance and Market Methods
A collaborative governance team or other entity or group that can make politically achievable
recommendations for raising money to finance watershed improvements or for making markets
in watershed services, has a broad variety of innovative finance or market tools to choose among.
And the listing is growing longer. Following are brief descriptions of some of the more
interesting ones that were discussed at the Roundtable or uncovered by subsequent research.
Leveraging the funds available through innovative use of SRFs
Stephanie vonFeck listed some innovative financing ideas, including:
A Watershed Revolving Fund (EFABs proposal for an Environmental Revolving Fund
could find application in the watershed context);
Conduit lending (municipal borrowers from SRF lend to individuals or nonprofits to
undertake projects);
Sponsorship (user fees for NFS);
Matching SRF loans with other Federal programs (e.g., Clean Water Act 319 nonpoint
source funding and various Farm bill programs);
State financial management (e.g., very creative arbitrage rebate rules in New York);
many other innovations are "bubbling up" from the states, particularly in Ohio;
Portfolio financing (funding in stages, phases, and segments); and
Septic tank management partnerships
Special purpose financing: Maryland's Bay Restoration Fund
Dan Nees, Maryland Environmental Finance Center; Bob Summers, Director for Water
Management Administration in the Maryland DNR, and Charlie Evans described development of
Maryland's "flush fee" as an innovative approach to funding the State's Chesapeake Bay
Restoration Fund. A 2000 agreement among the states of Pennsylvania, Maryland, Virginia and
the District of Columbia and later included New York, Delaware, and West Virginia was the
original impetus; each state had agreed to cap load allocations for nitrogen and phosphorus at
certain levels. In Maryland, however, it had not been possible to get a line item in the State's
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budget for wastewater treatment plants, so an alternate source of funding was needed.
Funding had to come directly and indirectly from those who contributed to the problem and
those who loved and benefitted from the Bay. An innovative and complicated "flush fee" system
was developed in which Maryland households are charged $2.50/month on sewer bills and each
commercial and industrial user pays an equivalent dwelling unit charge based on wastewater
flow. Users of septic systems, holding tanks, or other on-site sewage disposal systems pay
$30/year, of which part covered planting of cover crops and upgrades to failing septic systems,
providing direct benefits to rural areas. Funded in this way, the Bay Restoration Fund will allow
Maryland to achieve more than one-third of the necessary additional nutrient reductions by
upgrading wastewater treatment plans with enhanced nutrient removal and on-site sewage
disposal systems within 1,000 feet of tidal areas and planting cover crops on agricultural land.
A key element in eventual acceptance of the flush fee was the large percentage of citizens willing
to pay for perceived services and benefits. Political acceptability was also gained because the
tax was simple, connected directly to benefits, involved a broad base for collection, and was
embraced by the environmental community, which communicated the viability of the program to
the public.
The Maryland flush fee is unique because it was based on a cooperative, multi-state scientific
evaluation of the water quality benefit and nutrient reduction requirements for the Bay. The
enabling legislation received broad, bi-partisan support; all nutrient-rich wastewater generators
are paying the fee, including homeowners; and it included for the first time a fee paid by owners
of on-site sewage disposal systems. A key byproduct of the process was collaborated created
among all State agencies to get the Governor's approval.
The other states who signed the 2000 agreement are not setting up similar fees, because it
appeared politically impossible. These state view Maryland's "flush fee" as a tax they are
reluctant to impose and are focusing on existing programs to reach their agreed goals.
Special district financing. On a watershed level, septic tank management partnerships can be
created to establish a special district that takes over maintenance of decentralized on-site systems
so they fail at a lower rate. James White, Executive Director, Cuyahoga River Remedial Action
Plan, proposed that the Great Lakes and other nationally supported watershed strategies call for
mandatory or highly incentivized, sequential formation of watershed-based stewardship
organizations (e.g., watershed conservancy districts) with authority and capabilities to raise
funds. This mechanism would provide equitable regional benefits on a watershed basis and a
non-regulatory structure. There would be an incentive-based sliding scale for Federal/local
matching ratios to increase the motivation to create a local conservancy district. Fund-raising
authority would be based on a standard drainage unit for single-family households and multiples
thereof. He termed it the "pizza equivalency", that is, households would pay the equivalent of a
pizza for the family every quarter. This could raise as much as $20 billion in 20 years.
Similarly, Geoffrey Heal of Columbia University and others have proposed to create ecosystem
service districts to improve the efficient provision of watershed services necessary for human
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welfare, financed by government programs or local taxes.
A more complex, but perhaps more equitable means of raising money for watershed financing
might be a watershed assessment on all beneficiaries and pollution sources, allocated on the basis
of relative benefits and contributions. The assessment might be increased if there were clear
evidence of runoff or excess volume of water use attributable to the property or increases in
property value from benefits of upstream improvements. It might be decreased by the value of
allocable ecosystem services or by improvements made from restoration projects and best
management practices. The assessment could be allocated via the property tax or a universal
water fee.
Water fees for watershed protection. Several speakers indicated that water fees were among
the most logical sources of new financing for watershed improvements. New York City's
landmark agreement to preserve the ability of the watersheds of its Catskill mountain reservoirs
in order to protect their water quality and avoid multibillion dollar filtration costs was financed
by a rate increase on the nine million users of the City's water system. The increased revenue
paid for improvements in public infrastructure, acquisition of land from willing sellers, and
implementing best practices by farmers and working forest landowners.
Mr. Shanaghan pointed out that if watersheds include drinking water utilities, the utilities will
become strong advocates for watershed protection. Karl Morgenstern described how the Eugene
Water and Electric Board (EWEB) increased water rates to leverage partner contributions and
grant funding for specific projects to address the contributions of agricultural and forest
activities, especially pesticides, and septic systems to water quality degradation in the watershed.
In the Tualatin River watershed in the Willamette Basin, the Oregon Department of
Environmental Quality made water quality trading a part of the local water quality agency, Clean
Water Services'watershed-based NPDES permit to meet temperature standards through paying
upstream owners for stream bank vegetation restoration and other measures that will reduce river
temperatures. The fees for sewage treatment were used for watershed improvements that were
more cost effective than other treatment options.
Tax base sharing. Some form of tax base sharing among neighboring municipalities
responsible for improving water quality of shared watersheds may encourage collaborative
planning and coordinated action. Tax base sharing has the potential to reduce the fiscal burden
that each municipality must pay for water quality protection, while creating a regional funding
stream that may be more effective in addressing watershed issues. Noted examples of tax base
sharing include the Twin Cities region in Minnesota and Hackensack Meadows District in New
Jersey.
Transfer of Development Rights (TDR). A method of exchange between landowners in
designated areas for development rights and development restrictions, TDR programs create a
market for environmental protection by restricting development in "receiving areas" and
requiring that development rights be purchased from "sending areas". Used often to guide
growth away from sensitive environmental or aesthetic resources, TDRs are in wide use
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throughout the United States. Adaptability to the local context is one of the greatest strengths of
a TDK program. In Deschutes County, Oregon, a Transfer of Development Credits program was
established with the goal of reducing the number of septic systems in the sending area and
transferring potential development to a Neighborhood Planning Area. After generating enough
credits, a planned subdivision has been constructed. The program is noted as a success for
preventing groundwater pollution, and consequent pollution of the Deschutes River. Other
ecosystem benefits include protection of wildlife habitat, lower threat of wildfire and air quality
improvements.
Tax Increment Financing (TIF). Often used in Urban Renewal Areas, TIP funds are captured
from increasing property tax values in a specific area and often used to finance public
investment. TIF funds have been used for brownfield remediation projects, sometimes with
significant water quality benefits. TIF has also been used to capture the value created on nearby
properties by the public acquisition of open space for water protection and other ecological
purposes. TIF might be used to help pay for land protection programs that benefit watershed
health and increase property values on properties within the watershed.
Integrated services financing. Hank Patton described a new concept for regional or watershed
based financing that would rely on issuing long term bonds through a watershed based utility to
finance infrastructure and other services via the integrated design of a full range of
environmental and other services needed by both present and future generations. Investments
contracted for by the utility using the bond proceeds would be measured by life cycle assessment
based standards adopted by the state to assure that the services are fully sustainable over the long
term. Teams of bidders would compete to come up with an integrated set of services that best fit
the standards and the particular needs of the watershed or region. Debt service and profit for the
winning team would come from fees paid by the recipients of the services provided. Experts and
government officials in several states are actively looking at the concept.
Market based programs. Mr. Morgenstern described EWEBs market-based approach on
regional agricultural buyers and processors, where demand exceeds supply. It has established a
system that provides growers easy access to regional markets (increasing efficiency) and support
to transition to meet demands. It seeks to change behaviors through markets to reduce chemical
use and protect drinking water. He said they were developing four marketplaces: food, water,
restoration or ecological, and temperature (driven by TMDLs). For restoration, priority areas are
identified in the watershed and restoration early fully funded for growers in that area. For water
and temperature marketplaces, a grower who puts in a more efficient irrigation system can reap
benefits by trading their water right to someone else or by leasing it or, if they need more water,
by trading or paying for someone else or by leasing it or, if they need more water, by trading or
paying for someone else's water right. EWEB is looking at trading credits with farmers to
develop riparian habitat and lower temperature in exchange for their discharge.
In the longer term, transactions in these marketplaces could generate small fees that could help
pay for the financing of other watershed improvements.
Supplemental environmental projects. Federal, state and local governments have access to
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miscellaneous funds, which in some circumstances can be bleneded with other funds to help
finance or write down the cost of projects. An example is the supplemental environmental
project (SEP), a project or payment for an environmental improvement, in partial reduction of a
fine or penalty for an environmental violation. Instead of going into the Federal, state or
municipal treasury, the funds are kept in the community where the violation occurred. There is
an increasing interest in using SEPs to help solve a variety of problems, ranging from
environmental justice to renewable energy. While these are occasional sources, there are many
that relate to water quality and could become part of the community quilt of financing that
watersheds need to sew. At present, only between 6% and 15% of environmental violations lead
to SEPs.
6. Potential Implementing Entities
While the structure and powers of watershed implementing entities is crucial to the success of
watershed finance, there was not time for much discussion at the Roundtable. Potential entities
include public authorities, public utility or redevelopment districts, special service districts,
intergovernmental agreements, etc. There will be one or more mechanisms that can be adapted
to do the functions that might be agreed upon by the watershed jurisdictions and interests.
Among the functions any entity might have are the following:
Adopting and updating the watershed plan so that it meets Federal and state
requirements;
Prioritizing the projects, activities and other steps in the plan;
Identifying and obtaining all available Federal, state and private grants, loans and
other resources to meet the plan's objectives;
Leveraging or integrating government resources with other investments in the
watershed, for example transportation, housing, economic development, and other
infrastructure investments, and business, volunteer and government activities that
affect or can improve the watershed;
Identifying the gaps in resources available;
Agreeing on additional sources of revenues;
Collecting revenues, issuing financial obligations such as bonds, disbursing or
lending bond receipts, paying bond obligations, etc; and,
Accounting for and reporting to revenue payers, community at large, and
investors.
Some of these may be the responsibility of a decision making, cross jurisdictional governance
entity; others are more appropriate for an implementing entity and some, like integration of
investments, are responsibilities of both. The governance group could become the board of the
implementing entity or could stay separate. Watershed managers and groups attempting to create
a sustainable finance system would benefit from a detailed analysis of the pros and cons of the
different entities with respect to each of these functions.
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Recommendations
1. Expand Knowledge and Foster Use of Collaborative Governance Methods
While recognizing that partnerships must be formed at the watershed level, EPA should foster
use of collaborative governance approaches for achieving sustainable finance in all watershed in
the many forums that EPA hosts or participates in, such as the Watershed Academy, the
Environmental Finance Centers, and other outreach and training programs hosted by others.
These tested approaches are suitable for all financing needs in the watershed, including both
wastewater treatment, stormwater and other nonpoint sources. Knowledge sharing should build
on existing collaborative approaches being used successfully in many watersheds to build
agreements on problems, plans, priorities and projects, adding those elements crucial for success
in using local resources to finance projects or use markets to eliminate problems or substitute
good practices. Existing watershed groups should be encouraged to add parties and use robust
governance approaches to identify to create the financing and marketing techniques appropriate
to filling the funding gap. EPA should collect and disseminate success stories that demonstrate
the use of collaborative governance principles and techniques in achieving successful financing
outcomes. EPA and the Environmental Finance Centers should use outreach and training
programs to bring together parties with normally opposing viewpoints, such as watershed groups
and utilities and encourage them to work together on sustainable finance methods. EPA and its
sister Federal agencies should identify and support neutral forums at universities and elsewhere
that will design and conduct a quality collaborative governance processes for watersheds wishing
to use a collaborative governance approach.
2. Disseminate Innovative Finance Tools
EPA should designate an environmental finance center to maintain a directory of innovative
finance and market techniques that have been successfully employed in watersheds and other
contexts or which have been developed but not actually implemented because of local or other
factors. It should at a minimum include the list of tools from section 5 above. EPA and the
environmental finance centers should disseminate information about these successes and model
techniques through the Academy, a sustainable watershed finance summit, workshops, EFAB
Guidbook and tool box, websites, state-EPA agreements, publications and presentations.
3. Encourage Ecosystem Services Markets
EPA and other Federal agencies should partner with university research centers and NGOs
working on valuing and making markets in ecosystem services to determine whether and to what
extent ecosystem service values can be used to assist in sustainable watershed financing, for
example, by making local revenue raising systems more equitable, fair and acceptable to payers.
EPA should work with the Department of Agriculture and other organizations which are
W20W
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exploring how to pay for and make markets in ecosystem services to determine how loans and
grants from both agencies can be used to create payments for and markets in these services. EPA
should disseminate successful examples and promising approaches as suggested in
Recommendation 2.
4. Leverage Existing Finance Tools
EPA should continue to review its existing superb financing tools under the Clean and Safe
Drinking Water Acts to determine how they might be leverage with local efforts to obtain
additional funds and markets to help close the funding gap. Further, it should explore how
funding available through programs such as the Source Water Protection program and the
National Estuary Program can be used to assist the local collaborative efforts needed to develop
financing and marketing strategies. Agreements with other agencies, especially the Department
of Agriculture, should be expanded toward the same end.
5. Identify Sustainable Finance Implementing Entities
EPA should, with the assistance of the EFCs and EFAB, develop a compendium of the potential
entities that would be appropriate to implement the finance strategies agreed upon by the
watershed collaborative governance teams, including factors to evaluate in choosing one or the
other. Utilities that encompass one or more watersheds should be encouraged to develop
capacity to finance local projects to supplement loans and grants available from other sources.
6. Initiate Demonstration Projects
EPA should fund or otherwise assist several watershed scale demonstration projects that
incorporate sustainable finance techniques, such as those described in Innovative Finance and
Market Methods above, and that use collaborative methods such as those described in
Collaborative Governance, above. Some existing innovative grant programs, such as Section
319, Brownfields and Targeted Watershed Grants might be drawn on for this purpose.
While no single model will fit all situations, one or more of the projects might employ the
following model:
The grantee would use a collaborative governance approach (see
Recommendation #2) to work with existing watershed and other groups and with
regional and basin-wide interests to identify appropriate sponsors, conveners and
participants for a team approach to address the financing and implementation of
priority projects in the watershed. The team would include representatives from
existing watershed groups, utilities the finance sector, business, municipal
governments, nonprofit organizations (e.g., habitat restoration groups, land trusts),
state and federal agencies, and organizations from outside the watershed, as
appropriate.
The grantee would work with political leadership at the State, Federal and local
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levels to sponsor the process and appoint a local convener.
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The grantee would assist the convener to appoint members of the team and
to hold meetings to reach agreement on the priority projects to be
financed, the innovative finance tools to be used, the precise geographic
areas to be covered and the methods and implementing entities, public and
private to be employed.
The team would also develop agreements on how to leverage their own
and outside resources to create maximum benefit.
The project would employ financing information tools like Plan2Fund
and the Directory of Watershed Resources, developed by the EFC at Boise
State and modified for the particular geographic areas as part of the grant.
With those tools and others, the grantee would identify all the possible
sources of existing funding and financing to accomplish projects identified
in watershed plans and the gap needing to be filled by innovative,
watershed based financing strategies.
The grantee and the collaborative team would attempt to reach agreement
on the most appropriate innovative finance tools to be employed to close
the gap (see the partial list in issue #5, above).
The team would stay in place for as long as needed to assist in
implementation of the agreement, make mid-course corrections, solve
implementation problems and oversee the evaluation of the project.
Reports at each stage and progress conferences with all the grantees and
others pursuing similar strategies would foster learning and develop best
practices.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
MAR 1 2007
OFFICE OF
WATER
Mr. A. Stanley Meiburg
National EPA Liaison
Centers for Disease Control and Prevention
1800 Clifton Road, N.E. - MS E-28
Atlanta, GA 30333
Dear Mr?Mgabtirg:
Thank you for your letter of January 5, 2007, to the Environmental Protection
Agency (EPA). Your letter included the Environmental Finance Advisory Board's
(EFAB) report, "Sustainable Watershed Finance," that summarized its Sustainable
Watershed Finance Roundtable held in March 2006. One of the central questions that the
Agency faces is how to finance watershed protection and restoration efforts. Your work
has brought together some of the best minds to help advance our thinking on innovative
watershed finance solutions.
Before turning to your recommendations to EPA included in the report, I want to
express EPA's continued commitment to developing innovative mechanisms to fund
watershed protection and restoration. EPA continues its investment in the Clean Water
and Drinking Water State Revolving Funds. In recent years, the Clean Water State
Revolving Fund (CWSRF) program has provided about four billion dollars annually to
fund water quality protection projects for wastewater treatment, non-point source
pollution control, and watershed management. The Office of the Chief Financial
Officer's (OCFO) Environmental Finance Program, the Environmental Finance Center
Network (EFC), and the Office of Wetlands, Oceans, and Watersheds' (OWOW)
Sustainable Finance Team have conducted finance workshops, developed funding
databases, and produced finance planning tools to build the capacity of State, Tribal, and
other watershed organizations to develop innovative finance mechanisms.
In 2007, several activities are planned that will disseminate watershed finance
tools to key stakeholders. EPA will sponsor "Paying for Sustainable Water
Infrastructure," an unprecedented meeting that will bring together stakeholders from all
levels of government and the private sector to explore creative methods to finance
sustainable water infrastructure. EPA, along with the University of Maryland
Environmental Finance Center, will conduct a national web cast on innovative finance
tools to educate State/Tribal and Local governments about available resources to reduce
Internet Address (URL) http://www.epa gov
Recycled/Recyclable Printed with Vegetable Oil Based Inks on 100% Postconsumer, Process Chlorine Free Recycled Paper
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stormwater runoff and implement other watershed protection and restoration measures.
EPA will aiso launch "Developing a Sustainable Fundraising Plan," an Internet-based
tool to teach watershed groups successful finance planning methods. Finally, EPA will
produce an on-line prioritization tool that will help public and private watershed
organizations decide what activities are in the greatest need of funding.
With regard to the specific recommendations contained in the EFAB report, my
responses follow.
ซ EFAB Recommendation #1: Expand Knowledge and Foster Use of Collaborative
Governance Approaches. EPA should foster the use of collaborative governance
approaches for achieving sustainable finance in all watersheds, using the many
forums that EPA hosts or participates in. EPA should disseminate success stories
that demonstrate the use of collaborative governance principles and techniques in
achieving successful financing outcomes.
EPA Response: Through its National Estuary Program, Targeted Watershed
Grants, and other programs, EPA has fostered collaborative governance as an
approach to environmental protection and restoration. The flexible and
collaborative nature of these programs has allowed them to develop many
innovative approaches to complex problems. EPA will promote cooperative
approaches to watershed finance at its forums, such as the upcoming Paying for
Sustainable Waters Infrastructure conference.
* EFAB Recommendation #2: Disseminate Innovative Finance tools. EPA should
designate an environmental finance center to maintain a directory of innovative
finance and market techniques, EPA and the environmental finance centers
should disseminate information about these successes and model techniques.
EPA Response: EPA agrees that providing a single repository of accessible
information on innovative watershed finance and market techniques makes sense.
EPA will explore this idea, including where such a repository of information
should be located. As you know, the OCFO Environmental Finance Program
already has a website with a compendium of environmental finance tools. This
website could be enhanced to include new collaborative watershed finance tools.
Recommendation #3: Encourage Ecosystem Services Markets. EPA should
partner with university research centers and others to determine whether and to
what extent ecosystem service values can be used to make local taxing, fee or
other revenue raising systems more equitable, fair and acceptable to payers. EPA
should work with the Department of Agriculture and other organizations which
are exploring how to pay for and make markets in ecosystem services to
determine how loans and grants from both agencies can be used to leverage
payments for markets in these services.
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EPA Response: EPA agrees that ecosystem markets should be explored as a
means to achieving cost-effective solutions to water pollution challenges. For
example, EPA's Clean Water State Revolving Loan Fund and National Estuary
Programs worked together to help the City of Port Townsend, Washington meet
its storm water management objectives by purchasing wetlands that protect a
natural storm water management system as well as a wildlife refuge. EPA will
explore partnering with universities and federal agencies to further advance
ecosystem services markets in the future.
Recommendation #4: Leverage Existing Finance Tools. EPA should continue to
review its existing superb financing tools under the Clean and Safe Drinking
Water Acts to determine how they might be leveraged with local efforts to obtain
additional funds and markets to help close the funding gap.
EPA Response: EPA will continue promoting innovative uses of its State
Revolving Loan Funds (SRFs) to extend fund resources to achieve the greatest
possible environmental results. New approaches to leveraging the SRFs will be
disseminated through conferences and other venues, as well as OWOW's finance
website. For example, EPA recognizes Clean Water SRF innovations that advance
EPA goals of performance and water quality protection through its annual
Performance and Innovation in the SRF Creating Environmental Success
(PISCES) Awards. The PISCES Awards acknowledge and promote innovative
projects that increase the sustainability of wastewater infrastructure across the
nation. Likewise, EPA's Drinking Water SRF provides awards for sustainable
public health protection. These awards recognize innovative uses of the fund that
have resulted in source water protection and system capacity building.
Recommendation #5: Track Sustainable Finance Implementing Entities. EPA
should, with the assistance of the EFC's and EFAB, develop a compendium of the
potential entities that would be appropriate to implement whole watershed finance
strategies agreed upon.
EPA Response: EPA will explore working with EFAB and the EFCs to develop a
compendium of entities which would be appropriate to implement watershed
finance strategies.
Recommendation #6: Initiate Demonstration Projects. EPA should fund or
otherwise assist several watershed-scale demonstration projects that incorporate
sustainable finance techniques, and that use collaborative governance approaches.
EPA Response: As it develops its workplans and grant RFPs in the future,
EPA will consider how the Agency can fund or otherwise support watershed-scale
demonstration projects that incorporate sustainable finance techniques and that
use collaborative governance approaches.
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I appreciate EFAB's Non-Point Source Financing Workgroup's efforts to foster
innovative watershed finance solutions. I welcome any additional thoughts about my
responses to your recommendations or EPA's role in fostering sustainable watershed
financing. If you have any questions, please contact me or have your staff call
Craig Hooks, Director, Office of Wetlands, Oceans and Watersheds, at (202) 566-1 146.
Sincerely,
I \',
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Benjamin H. Grumbles
Assistant Administrator
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