EFAB Letter: Bay Restoration Fund Act


                       Environmental
              Financial Advisory  Board
EFAB
Vacant
Chair

A. Stanley Meiburg
Executive Director
Members

Hon. Pete Domenici
Terry Agriss
A. James Barnes
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Jennifer Hermandez
Stephen Mahfood
Langdon Marsh
John McCarthy
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
Innovative Financing Tools: Maryland Bay
             Restoration Fund Act
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.
                    December 2005

                  Printed on Recycled Paper

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ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
DEC - 5 2m
Honorable Stephen L. Johnson
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW.
Washington, D.C. 20460

Dear Administrator Johnson:

The Environmental Financial Advisory Board (EFAB) has formed a workgroup to
investigate and report on innovative finance mechanisms for environmental projects. In the
course of its work, the workgroup has reviewed and reported to the Board on the provisions of a
new statute in the State of Maryland called "The Bay Restoration Fund Act," certain provisions
of which constitute one of the most innovative pieces of environmental finance legislation since
the Congress amended the Clean Water Act in 1987 to create the Clean Water State Revolving
Funds.

The Board would like to commend this legislation to you and to appropriate officials in
the Office of Water, not for the purpose of altering any Agency policy, but rather for use in your
public pronouncements and other statements, wherever appropriate, to encourage other States
and other jurisdictions to review the provisions of this new law and to adopt similar legislation
tailored to their own needs.

Let us briefly summarize the relevant provisions of the Maryland law.

In its 2003 session, the Maryland General Assembly adopted a bill, which was signed by
Governor Robert B. Ehrlich, establishing a "The Bay Restoration Fund" (the Fund) and imposing
a "restoration fee" to capitalize the Fund. This is a very innovative piece of legislation for three
reasons. First, it envisions the securitization of the future income from the majority of the bay
restoration fees. Second, for the first time in our Nation's history, we believe, it imposes a
statewide fee on septic tanks at personal residences. And, third, it dedicates the income from the
fees on septic tanks to support specific non-point source pollution programs within the State.

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The Maryland law imposes the restoration fee, which is a flat fee of $2.50 per month, on
each home in the state served by a wastewater treatment plant or septic system1. However, the
law then divides up the proceeds of these fees into two separate funds. Revenues from those
using wastewater treatment facilities will be paid into a special fund managed by the Maryland
Water Quality Finance Administration (MWQFA) and can be used for grants, loans or to pay off
bonded indebtedness. It is the understanding of the General Assembly and Governor Ehrlich's
office that, in fact, for the first few years, until the revenue stream can be reliably predicted, the
MWQFA may well use the funds for grants or loans, but that once the revenue stream has
stabilized, the MWQFA will issue tax-exempt municipal bonds collateralized by the pledge of
the future revenue stream of this portion of the restoration fees (i.e., the fees collected from users
of waste treatment facilities).

The Governor's office estimates this portion of the restoration fee at $65 million per year.
The fiscal note accompanying the bill suggests that the securitization of these revenues will
support the issuance of over $700 million of bonds.

The proceeds of these bonds will be used as grants to 66 previously identified major
wastewater treatment facilities2 to upgrade their abilities to remove nitrates and phosphates from
wastewater to Enhanced Nutrient Removal levels3. There are provisions in the bill for including
other facilities as well.

The most innovative part of the legislation, however, arises from the same $30.00 per
year restoration fee on the users of septic tanks and sewage holding tanks. There are an
estimated 420,000 such users in Maryland. Thus, these facilities should generate some
$12.6 million of additional revenue.

The Maryland law specifically says that 60 percent of the proceeds of these restoration
fees shall be reserved by MWQFA for grants to owners of "failing septic systems." Priority
must be given to upgrading failing septic systems located in the Chesapeake and Atlantic Coastal
Bays Critical Area . The other 40 percent of the proceeds of this portion of the restoration fee
revenue stream will be paid into the Maryland Agricultural Water Quality Cost Share (MACS)
Program within the Maryland Department of Agriculture (MDA) to provide financial assistance
to farmers for cover crops. Under MACS, MDA provides grants to fanners to cover up to
87.5 percent of the cost to install best management practices (BMPs). Cover crops planted after
the fall harvest to absorb unused fertilizers is one of the BMPs currently eligible for cost-share
assistance.
Commercial and industrial users of wastewater treatment facilities will also pay the $2.50 per month for every
Equivalent Dwelling Unit1 (EDO) up to 3,000 EDUs, $1.25 per month for each EDTJ between 3,000 and 5.000,
where it is capped at a maximum of $120,000 per year per site.
Those with design flows in excess of 500,000 gallons per day.
* Three milligrams per liter of nitrogen and .3 milligrams per liter of phosphorus.
The Chesapeake ami Atlantic Coastal Bays Critical Area is defined as being within 100 yards of any tributary of
the Chesapeake Bay.

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Administrator, as you well know, the imposition of any type of charge on the people is
never politically popular. It took great courage for the State of Maryland to enact this law.
Moreover, the Board believes that this is truly one of the most innovative environmental finance
laws to have been enacted anywhere in the United States in well over a decade. We commend it
to you and your colleagues in the Office of Water to encourage other States to examine the
provisions of this Act and to adopt similar legislation in their own jurisdictions according to their
own needs.

In making this recommendation, we note that non-point-source pollution is a highly
intractable problem. Its causes are diffuse, as are the funding sources for its remedies. Public
awareness leading to behavioral change is a major tool in addressing this issue. The efforts of
you and your colleague to highlight this innovative statute may well inspire other areas to enact
other similar laws to address this issue.

Finally, since this statute also addresses the broader issue of sustainable watershed
financing, we would like to inform you that the Board will be hosting a roundtable on this issue
in March 2006 where, with the help of experts, we will examine a wide variety of financing tools
that will enable watershed managers and groups to leverage federal and state grants with locally
raised resources. Maryland's restoration fee will be highlighted at this gathering as a potential
source of local financial resources.

If the Board may be of any further assistance on this matter, please do not hesitate to
contact us.
Sincerely,
A. Stanley Meiburg
Executive Director
cc: Ben Grumbles, Assistant Administrator
Office of Water, MC 4104M

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.
I* \ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
I WASHINGTON, D.C. 20460

MAR 30 2006
Mr. A. Stanley Meiburg OFFICE OF
Executive Director WAT6R
Environmental Protection Agency
Environmental Financial Advisory Board
61 Forsyth Street, S.W.
Atlanta, GA 30301
Thank you for your letter to Administrator Johnson, concerning a new statute in
Maryland called the "The Bay Restoration Fund Act." The Administrator has asked me
to reply. Your letter recommends that the Environmental Protection Agency (EPA)
encourage "other States and other jurisdictions to review the provisions of this new law
and to adopt similar legislation tailored to their needs."

First, we appreciate very much the Environmental Financial Advisory Board
(EFAB) bringing this significant law to our attention. Over the years EFAB has earned a
well-deserved reputation for bringing promising new ideas of environmental finance to
the attention of EPA. The Bay Restoration Fund Act is no exception, and we will
certainly endeavor to encourage other states and jurisdictions to seriously consider
similar steps to securing a steady revenue stream to help pay for worthy environmental
projects. A key feature in our view is the linkage established between the source of the
funds, the so-called flush fee, and their use for wastewater-related projects.

I also want to bring to your attention our recent activities to inventory at the
national, state, and local levels innovations in the financing of water infrastructure. We
look forward to working closely with the EFAB committees involved with sustained
watershed financing and innovations in environmental finance.

Again, thank you for your letter and this important information. If you have any
questions, please contact George Ames at (202) 564-0661 or Jordan Dorfman at
(202) 564-0614, in the Office of Wastewater Management.
Sincerel
Benjamin HrGrumbles
Assistant Administrator
internet Acidrgss (URL) • h!tp://www.epa,gov
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$ £% \ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460

MAR 30 2006
Mr. A. Stanley Meiburg
WAT t R
Executive Director
Environmental Protection Agency
Environmental Financial Advisory Board
61 Forsyth Street, S.W.
Atlanta, GA 30301
Dear MpiMetrnrg:
Thank you for your letter to Administrator Johnson, concerning a new statute in
Maryland called the "The Bay Restoration Fund Act." The Administrator has asked me
to reply. Your letter recommends that the Environmental Protection Agency (EPA)
encourage '"other States and other jurisdictions to review the provisions of this new law
and to adopt similar legislation tailored to their needs."

Again, thank you for your letter and this important information. If you have any
questions, please contact George Ames at (202) 564-0661 or Jordan Dorfman at
(202) 564-0614, in the Office of Wastewater Management.
Sincerel
Benjamin H. Grumbles
Assistant Administrator
Internet Address (URL) • hltp://www. epa.gov
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