EPAB
Richard Torkelson
Chair
Frieda K. Wallison
Vice Chair
Herbert Barrack
Executive Director
Mombers
Honorable Pete Domenld
Hooofwiw Beryl Anthony* «i »
HeneraM* Rottond Uwta
J. Jama* Birr
Joaeph Blair
Jack Bend
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Dr. Rteftvd Ftimfek, Jr.
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Robert Itabon, Jr.
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John McCarthy
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EFAB Advisory
PUBLIC SECTOR OPTIONS TO FINANCE
ENVIRONMENTAL FACILITIES
The views and opinions expressed in this advisory do not
represent those oflhg U.S. Environmental Protaclion Agancy.
nor are they intended to reflect consideration of other fiscal
issued whicn msy be overriding in terms of Administration.'.v
domestic policy. ' '-''
March 13,1992
Fruited on RMycwd
-------
Mr. William K. Reilly
Administrator /4/ln
U.S. Environmental Protection Agency "*na 1 J /Qno
Washington, DC 20460 J<:
Dear Mr. Reillyt .
I am pleased to transmit to yon this Advisory of the Environmental Financial
Advisory Board (the Board). This report describes problems that state and local
governments face as they attempt to keep pace with the levels of investment required to
meet national environmental goals. The report also presents alternative management
and funding approaches that the Agency may wish to consider as it works toward
facilitating greater investment at the state and local levels.
Hie Board examined changes to existing financial institutions and the
establishment of complementary institutions that could help ensure the nation's
environmental investment needs are met in ah efficient and timely manner. The Board
considered:
o Taking regular inventories of national environmental program costs;
o Improving the effectiveness of the SRF program;
o Evaluating the feasibility of trust funds as new mechanisms for directing
funding support to state environmental programs; and
o Examining dedicated fee systems as sources of funding for federal
and state environmental programs.
>
I want to thank George Raftelis, Chair of the Public Sector Workgroup for his
leadership in producing this Advisory. The Board is committed to helping EPA address
the issues raised in this Advisory and will gladly.provide supplementary material, if
requested. We appreciate the opportunity to assist the Agency in its work, and look
forward to continuing this dialogue in the future.
»
Respectfully submitted,
Richard Torkelson, Chair
Environmental Financial
Advisory Board
-------
CONTENTS
EXECUTIVE SUMMARY
i
I. INTRODUCTION I
A. PUTTING PUBLIC FINANCE PROBLEMS IN PERSPECTIVE 1
B. PURPOSE OF THIS ADVISORY 3
H. REGULAR INVENTORY OF ENVIRONMENTAL PROTECTION COSTS ... 4
A. STATEMENT OF THE ISSUE 4
B. POTENTIAL APPROACHES 4
m. IMPROVING THE STATE REVOLVING FUND (SRI) PROGRAM 7
A. STATEMENT OF THE ISSUE 7
B. POTENTIAL APPROACHES 8
IV. PUBLIC FINANCE OPTIONS FOR ENVIRONMENTAL PROTECTION ... 16
A. STATEMENT OF THE ISSUE 16
" B. POTENTIAL APPROACHES 17
V. DEDICATED FEE SYSTEMS AS A SOURCE OF FUNDING FOR FEDERAL
AND STATE ENVIRONMENTAL PROGRAMS 32
A. STATEMENT OF THE ISSUE 32
B. POTENTIAL APPROACHES TO TYPES OF FEES AND THEIR
DESIGN 33
C. POTENTIAL APPROACHES TO SYSTEM ADMINISTRATION . 38
NOTES 42
APPENDIX ';"..* A-l
Environmental Financial Advisory Board A-l
Workgroup Support Staff . A-5
Expert Consultants to the EFAB (from EPA) A-6
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EXECUTIVE SUMMARY
The Environmental Financial Advisory Board (the Board) was established in August 1989
to counsel EPA on ways to enhance investment in environmental facilities. The Public Sector
Workgroup was formed within the Board to explore public sector strategies that could enhance
total investment in environmental facilities.
BACKGROUND
The cost of maintaining a clean environment is growing rapidly. According to the Cost
of Clean report, annual public expenditures in drinking water, water quality, and solid waste
management must increase by over 17 percent between now and the end of the century just to
maintain current standards. State and local investment alone is expected to rise by almost a third
over the same period. Furthermore, state and local governments will be responsible for an
increasing share of total public expenditures their share will rise from 88.5 percent to almost
99 percent of total public expenditures required to maintain current standards between 1988 and
2000.
\
Some state and local governments may be unable to keep pace with these escalating
requirements. In particular, the Board identified three potential obstacles to the successful and
timely achievement of the nation's environmental goals:
The inability of some small and economically disadvantaged communities to
access publicly available capital or other funding sources at reasonable terms;
Limits on local governments' ability to debt-finance environmental projects; and
Limits on die effectiveness of government-sponsored financing mechanisms as an
alternative to municipal debt markets.
PUBLIC STRATEGIES FOR FINANCING ENVIRONMENTAL FACILITIES
The Board considered several options that could help state and local governments meet
the financing challenges they face. The first, which is independent of the others, calls for
consistent, timely accounting of the public costs of meeting national environmental mandates.
The second two options consider incremental adjustments to existing public finance institutions
and new public sector finance alternatives. The final option looks at potential revenue sources
that could be tapped to help finance environmental investments.
Regular Inventory of Environmental Protection Costs
The Board first considered the availability of current data on the public costs of meeting
.environmental mandates for wastewater, drinking water, and solid waste infrastructure. Cost
data for drinking water and solid waste initiatives are not collected in a comprehensive way or
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on a recurring basis, as they are for wastewater facilities. Such data would provide a valuable
tool to assess the financial impact of mandates, evaluate financing strategies, and measure
progress toward environmental goals. The Board therefore urges EPA to undertake a regular
comprehensive inventory of the public sector costs erf environmental protection.
Improving the Effectiveness of the SRF Program
The Board supports administrative and statutory improvements to the current SRF program
as a near-term priority. The Board examined four options EPA could recommend to Congress.
It could seek increased flexibility, allowing states to use some portion of their overall SRF assets
for program administration after 1994. Further modifications to the present rules include
examining whether the SRF should play a role in offering financial support for public-private
partnerships where funds would be used, for public-purpose environmental investments. The
Board also considered improving financial assistance to small communities under the Title VI
SRF program. Finally, the Board examined the option of funding the SRF program at fully
authorized levels for FY 1993-94 as well as appropriating the difference between the amounts
authorized'under Titles n and VI and those actually appropriated to date, or alternatively,
funding the SRF program at $2.0 billion per year for 1993 and 1994, or for 1993-98, following
the Administration's budget request for FY 93. The Board strongly endorses this recent and
timely action on the part of the Administration, and encourages consideration of maintaining this
level of funding through 1994 and the next reauthorization period. The Board encourages that
all of the above options be considered by EPA.
* ^
Public Finance Options for Environmental Protection
To the extent that further federal funds for capital financing become available, the Board
considered several public finance options for the delivery of that assistance. These options
include: directing the funding to the current SRF program; channelling funds into an SRF
program with expanded eligibilities; and using the funds to help capitalize a national trust fund
or, alternatively, individual state trust funds.
Continued Federal Funding of the SRF Programs
If further federal funding is made available, the Board supports directing such funds to
the current SRF programs, as they have served as a successful mechanism in providing
assistance for wastewater investments.
However, the Board generally does not support the creation of set-asides within the SRF
to target national priorities. Separate accounts that assign a particular funding priority to a
subset of programs can be rigid and unresponsive to state needs and priorities. In contrast, the
Board supports the establishment of set-asides based on the recipient group targeted and type of
assistance offered, such as set-asides for small system projects. In addition, the Board feels that
the cost impact of Title II equivalency requirements and cross-cutters should be evaluated in the
event that federal funds become available. It may be advisable to limit the scope of these
requirements if their costs outweigh the public benefit
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Expansion of the SRF Program
The wide variety and magnitude of public health and environmental needs for physical
facilities argue for additional flexibility in the SRF program for assisting multimedia eligibilities.
In response to this need, the Board endorses an expansion of eligibilities for the SRF program
contingent upon further federal funding. The Board urges that an evaluation of the impacts of
federal cross-cutting authorities be undertaken as part of this approach as well.
The Board is concerned that expansion not undermine the original financial objectives of
Title VI. Thus care must be taken not to compromise the fiscal integrity of the SRF. The most
compelling policy argument for expanded eligibilities centers on hardship situations where
communities cannot afford to proceed unless grants or principal subsidies, in some combination
with loan assistance, are available. The financial risk is that SRF grants could deplete the
corpus of the program and, at the same time, reduce hard-won acceptance of its credit functions.
The use of principal subsidies, however, such as those proposed in New York, would not deplete
the corpus of the SRF.
If hardship grants are authorized for expanded and current eligibilities of the SRF, the
Board urges that they be made from a financial set-aside created specifically for that purpose.
* The Board considered national and state environmental trusts, to serve both program and
capital assistance functions. An environmental trust as conceived here is neither a competitor
nor an alternative to the SRF program. On the contrary, a trust could serve a valuable capital
formation function in many states, not only to assist the SRF, but also other state financing
programs. The Board believes a properly designed trust could perform these functions with fee
revenues and certain other authorities independent of annual federal appropriations. Given the
uncertainty of future federal funding, a trust could play a particularly important complementary
role in building state capacity and financing multimedia environmental infrastructure.
The Board recognizes that state environmental trusts and fee systems have been established
by some states and shares the concern that federal actions not disrupt current state initiatives in
this regard. The federal role in expanding the use of state trusts should be one of active
encouragement through a number of incentives, but without penalty for nonparticipation.
Although the trust concept has several major concerns, the Board believes that the potential
inherent benefits warrant a cross-program evaluation by EPA and careful consideration by
federal and state policy makers. As part of the trust evaluation, the Board recommends that
EPA examine the state trust concept as an alternative to the national trust, supported by fee
revenues and federal incentives. The evaluation should stress the advantages and limitations of
linking the state trust with the S.RF and should include incentives and sources of revenue. The
evaluation should also consider modifying the SRF itself to accommodate the broader multimedia
functions of a state trust. The latter becomes particularly advantageous if eligibilities are
expanded for the SRFs.
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Dedicated Fee Systems as a Source of Funding for Federal and State Environmental
Programs
The Board urges the Administration to support and encourage the adoption and expansion
of state environmental fee systems and to investigate opportunities to establish national fee
systems. The latter activity must be carefully evaluated for potential duplication with disruptive
effects on state programs. Further, in many cases state environmental programs cannot, and
probably should not, be totally dependent for funding on fee-based revenues. The strength of
state programs is enhanced by their use of and access to a diversity of funding sources, including
federal appropriations.
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It INTRODUCTION
' Financing the restoration and protection of the environment presents a challenge that may
be increasingly difficult to meet. Total public investment (capital outlays as well as expenditures
to cover operating and maintenance costs) in drinking water, water quality, and solid waste
management totalled $22.78 billion in 1988.1 Annual investments will have to grow to $26.74
billion by 2000 - an increase of. 17.4 percent in constant dollars just to maintain current levels
of environmental quality. State and local investment will have to increase by 31 percent over
the same period, from $20.17 billion in 1988 to $26.42 billion a year by 2000. Compliance
with new regulations is expected to push state and local requirements even higher, to a total of
$29.02 billion by 2000.
If 1988 levels of investment are maintained, state and local governments may face a
financing gap of almost $9 billion per year by the end of the century. If costs are not reduced,
state and local investment in the environment will need to increase by 3.1 percent per year for
the next 12 years to meet expected levels of environmental quality. This is substantially faster
than the average expected rate of growth in US GNP over that period, which is forecast to equal
2.37 percent per year from 1990-2000.2 State and local demands for capital alone will need to
-rise from $4.7 billion per year in 1988 to $5.4 billion per year by 2000 to.maintain current
standards, an increase of $700 million per year.
A. PUTTING PUBLIC FINANCE PROBLEMS IN PERSPECTIVE
From a public finance perspective, it is questionable whether state and local ability to
borrow can keep, pace with the rising expenditures anticipated under current policy. In
particular, environmental investments may be increasingly delayed, as small and economically
disadvantaged communities often cannot get access to or afford the cost of capital. Delays may
also result from state limits on local indebtedness that can raise the cost of capital financing for
local governments. Examples of these problems are described below.
Small and Disadvantaged Communities
Small and economically disadvantaged communities frequently do not have established
credit ratings, making it difficult and costly for them to issue bonds for capital projects.3 Those
communities that can issue bonds pay high costs of capital because the fixed costs of issuance
impose a greater burden when spread over a smaller bond issue and may pay a higher yield
because of their credit risk. Communities without sufficient credit experience may be required
to secure bond insurance that raises the cost of capital further. Small size alone raises unit
capital costs because such communities cannot take advantage of economies of scale. Since most
environmental facilities serve towns with small populations, this problem is widespread. For
example, approximately 81 percent of the wastewater treatment plants in operation in 1988
handled less than 1 million gallons per day (typically adequate for populations of 5,000-
10,000).4 Almost 88 percent of the nation's community water systems serve fewer than 3,300
people, and most publicly owned landfills are small, accepting less than 30 tons of refuse per
day, the average amount generated by a community of up to 8,400.5
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State Limits on Local Indebtedness
Many local governments face restrictions on their levels of indebtedness. While these
restrictions are intended to protect the financial integrity of substate governments, they also
increase competition for credit capacity. This means that the rising demand for debt-financed
environmental investment will be competing for a growing share of a relatively fixed level of
total debt.
Restrictions on indebtedness limit the use of general obligation bonds. Indeed, this is the
case in many states that limit total outstanding general obligations of their local governments to
a fixed percentage of the value of real property m that locality. As a result, local governments
have tad to turn more to revenue bond financing, which has led to a general increase in user
fees to help pay for the associated debt service.6 If, over time, debt service exceeds the revenue
from user fees, a community's credit rating may suffer along with its ability to issue future debt.
User fees can support only a certain level of revenue bond debt An economically disadvantaged
community's ability to raise its fees to support further debt may be constrained once fees reach
beyond one percent of the median household income for each service. Increasing debt, beyond
this point will cause its debt coverage to fall, and hence its solvency will come into .question.7
In Boston, for example, the current average annual combined water and sewer bill is
about $337 per household. This is expected to rise substantially once the costs of the federally
mandated clean-up of Boston Harbor are added. By 1996, the average combined bill is expected
to equal $999, and by 2000 it is expected to grow to over $1,300 per year, per household.8 Not
surprisingly, a local action group is attempting to get rates rolled back to their 1988 levels.9
If this occurs, the municipality's debt coverage may be seriously reduced, damaging its credit
rating, limiting its market access, and consequently hampering its ability to meet future financing
requirements. While not all examples are equally dramatic, other cities also are fast approaching
the one percent threshold in each service.10
Existing Alternatives to the Municipal Debt Markets -
* >
The SRF program was introduced to replace the construction grants program in the
financing o/wastewater facilities, placing program responsibility on the state and hence closer
to actual needs. As loan repayments accumulate and revolve as new loans, SRFs are expected
to create sustainable, self-sufficient, and long-term sources of capital for local water quality
investments. Finally, SRFs were intended to leverage federal resources in order to ameliorate
more of the nation's water quality problems at a quicker pace.
Various statutory restrictions on the uses and sources of funds in the program may act
to lessen its effectiveness. These restrictions include limits on administrative expenditures, the
application of federal cross-cutting authorities, and the exclusion of the private sector from
funding assistance.
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B. PURPOSE OF THIS ADVISORY
The Board believes it is both necessary and timely for EPA to develop positions on
promising public finance strategies to respond to these problems. 'More generally, the elevation
of environmental finance as an agency theme is an essential step to giving more recognition to
the ways and means of paying for pollution prevention, control, and abatement.11 As an
Agency priority, the development of environmental financing strategies would help:
Underscore the fact that national environmental objectives cannot be met without
adequate fiscal capacity to support state and local environmental programs;
Reinforce the validity and role of such strategies as a vital part of achieving
national objectives; . '
Focus on the approaching reauthorizations of key environmental laws as near-term
opportunities to bring finance issues to the forefront; and
Stress the importance of imagination, vision, and innovation in improving existing
financing mechanisms and in evaluating new ideas and approaches.
In serving these broad purposes, this Advisory proposes several strategies to help state
and local governments finance environmental facilities. These options include:
Institutionalizing the measurement of the public costs of environmental mandates
in water quality, water supply, and solid waste management;
Improving the effectiveness of the SRF program in achieving the nation's water
quality goals;
Exploring the feasibility of several new public financing institutional approaches
that would build state capacity and assist local governments; and
Examining fee systems as a means of financing environmental programs.
-------
H. REGULAR INVENTORY OF ENVIRONMENTAL PROTECTION COSTS
/
The biennial Needs Survey documents the capital cost of bringing all publicly owned
wastewater treatment works into compliance with the Clean Water Act, as well as the cost of
meeting the needs of the population 20 years hence. The report is required and defined by
sections 205(a) and 516(b) of the Clean Water Act. Cost estimates presented in previous surveys
served as a basis for authorization and allocation of funds to stales under the construction grants
program. The institutionalization of a similar survey in other environmental areas i.e.,
drinking waterand solid waste management (and the expansion of the current survey to measure
costs of nonpoint source pollution, stormwater runoff and other water quality areas not currently
measured) - would demonstrate to Congress the financial requirements of meeting a fuller range
of national environmental mandates. Such a measure would also provide information crucial to
states faced with rising costs of compliance in all three media. In particular, it would assist
states in budgeting and allocating capital, without prejudice for environmental media.
A, STATEMENT OF THE ISSUE
A regular inventory of the cost of national environmental mamHateg would help die
Administration and Congress understand the financing challenges faced by state and local
governments and provide a basis from which to measure progress in achieving environmental
goals. Such data would help policy makers select the most appropriate environmental goals and
establish the level of federal support to state and local efforts to achieve those goals. The
information also would help stale and local governments allocate limited funds to competing
environmental priorities. Yet, while the joint EPA/state biennial Needs Survey provides this
type of information for wastewater treatment plants, comparable estimates are not required by
statute and are unavailable in drinking water or solid waste programs.
B. POTENTIAL APPROACHES
Expansion of the Needs Survey
One potential approach to filling the cost-assessment gap would expand the joint
EPA/state biennial Needs Survey of municipal wastewater treatment facilities to include estimates
of related water quality needs such as stormwater runoff controls, nonpoint source programs,
and estuary management activities. In addition, EPA should consider the initiation of separate
but similar needs surveys for community water supply and municipal solid waste management
facilities. Special care would need to be taken by EPA and the states to fully define categories
of need in these two media, and active state participation in the collection and evaluation of such
data would be crucial to ensure that needs were accurately represented.
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Benefits and Concerns
The primacy benefit of using this approach is the improved accuracy that would result,
as states would individually collect data and submit estimates of need. Second, Congress would
be apprised of state and regional needs for each media.
However, institutionalizing the Needs Survey in other media raises the question as to
whether states actually have the raw data available for such an inventory. Definitions of need
in drinking water and solid waste currently have no statutory basis and states are only beginning
to measure the costs associated with these newer areas of concern in water quality. In the
absence of readily available data, therefore, another concern is the cost of establishing new data
collection initiatives and ensuring that they are roughly comparable across the SO states.
Institutionalizing the "Cost of Clean Report"
A second option would unimrifaa EPA's periodic report, Environmental Investments: The
Cost of a Clean Environment (the Cost of Clean Report).13 This report covers all three media
(as well as other environmental programs), and projects capital as well as operating and
maintenance costs over a 10-year period for three scenarios: maintaining current 'standards,
meeting new regulations, and achieving full implementation of current standards.13 Further,
it breaks down cost estimates into U.S. EPA, non-EPA federal, state, local, and private shares.'
Benefits and Concerns
The primary advantage of using. the Cost of. Clean Report is that it is an existing
measurement tool that estimates required capital and operating expenditures in the three media.
Another advantage is -its relatively low cost. Because Congress does not currently make
decisions regarding authorization or allocation of capital grants for municipal drinking water or
solid waste facilities, an institutionalized Cost of Clean Report may be a cost-effective way to
ensure that the basic information on environmental costs is available.
However, the Cost of Clean Report projections in wastewater are based on the Needs
Survey data. . For consistency, a similar approach would be required for the other media,
implying that the Cost of Clean approach might necessitate expansion of the Needs Survey
anyway. Thus, rather than representing an alternative option, a successful, annnaliml Cost of
Clean Report may only be possible in conjunction with the first option presented.
A second concern is that the information in the Cost of Clean Report is aggregated for
the nation as a whole, rather than state-by-state. Thus it is of limited use in helping states meet
their planning needs for capital investment, especially for projects requiring cross-media, risk-
based funding. In addition, the financial impact of federal regulations on individual states is
impossible to assess for federal policy purposes if this information is presented in an aggregate
form.
A final benefit of using either report is that undertaking a regular inventory of the public
costs of national environmental mandates in several media would help EPA and the. states
administer various geographic initiatives, including for example, the Great Lakes Initiative, the
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Gulf of Mexico Program, the Chesapeake Bay and Puget Sound Programs, and the Long Island
Sound Program.
However, as currently structured, neither report includes an assessment of the costs of
meeting environmental goals conditioned on pollution prevention measures being implemented.
There is growing evidence that pollution prevention can pay for itself by reducing the overall
waste stream and therefore the costs associated with meeting environmental standards. Inclusion
of this kind of cost assessment would provide an accurate estimate of needs and therefore help
states and the federal government increase the efficiency of their environmental investments.
In making decisions regarding the allocation of investment funds, an expanded report would
allow comparisons to be made on the return per dollar,, with and without pollution prevention
measures.
Despite several caveats in using either or both reports described above, the Board
recommends that the public capital costs of environmental mandates be estimated on a regular
basis, in the three media of water quality, drinking water, and solid waste management.
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m. IMPROVING THE STATE REVOLVING FUND (SRF) PROGRAM
State Revolving Funds have replaced the construction grants program in the financing of
publicly owned wastewater treatment works. The Board evaluated a series of changes to the
SRF program that could help reduce the cost of SRF financing, increase funds available to
localities, and strengthen the overall effectiveness of the SRF program.
A. STATEMENT OF THE ISSUE ,
The 1972 Federal Water Pollution Control Act created EPA's Construction Grants
Program, which provided federal grants to local governments for the construction of municipal
wastewater treatment facilities. Under this program, the federal government has provided over
$50 billion dollars over the last 20 years for the planning, design, and construction of sewerage
facilities nationwide. In 1981, the program was streamlined, and in 1987, the construction
grants program began a four-year phase out of new funds appropriation. Permanent revolving
financial institutions, or State Revolving Loan Funds (SRFs), were phased in with federal grant
money and state matching funds that will capitalize the funds until 1994.. The states finance
future wastewater treatment needs and other water quality management activities with loans from
these funds, the repayments of which will allow them to revolve their lending ability in
perpetuity.
To maintain current standards in water quality, total public expenditures on new capital
outlays must exceed $49 billion between 1988-2000.14 Compliance with new regulations will
increase total needs slightly, to $49.2 billion over the period, and achieving full implementation
increases total capital requirements to $82.2 billion. The authorized levels for capitalization and
implementation of the SRF program under the 1987 reauthorization of the Clean Water Act will
fall short of total required expenditures. Total federal funding under Titles H and VI from 1988
to 1994 will equal $12.43 billion, if appropriations in FY 1993-94 equal authorizations.15 The
state match of 20 percent will bring the tool to $14.92 billion for the period. These loans will
therefore have to "revolve11 several times before needs are met. Several states, however, are
providing more than the 20 percent match required, or "overmatching" their funds.16 In
addition some states have undertaken bond leveraging activities. Both of these actions will act
to increase the total amount of available funds. Overmatch funds alone, for example, would
add anther $1.07 billion in funds available and proceeds from leveraging would add as much as
$5.8 billion.17
Given the magnitude of the needs and the increasing importance of the SRFs in meeting
them, the Board considered several improvements that could be made in the program, to
facilitate state efforts in meeting the water quality challenges they face.
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B. POTENTIAL APPROACHES
The Board examined the merits of a number of changes, including:
Seeking flexibility in the 4-percent restriction on use of funds, to allow states to
use some portion of overall fund assets for program administration after 1994, as
several states could otherwise face temporary deficits in their budgets for
administration;
Allowing die SRF to support public-private partnerships for wastewater services;
Improving financial assistance to small communities under the Title VI SRF
program; and
Funding the SRF program at the authorized levels for FY 1993-94 and
appropriating the difference between those amounts authorized under Titles n and
VI, and those actually appropriated to date.
Seeking Flexibility in the 4-Percent Restriction on Use of Funds for Administrative
Currently, states are allowed to set aside up to 4 percent of their capitalization grant to
pay for SRF administration.18 However, when federal capitalization grants begin to decline in
1991 and end in 1994, federally provided funds for administration will similarly decline and end.
After 1994, states will have to appropriate funds from state budgets or charge administrative fees
to cover the costs of SRF administration, unless they had managed funds to cany them beyond
FY 1994. Many states, especially those facing budget deficits, may be unable to provide
appropriations. Administrative fees, however, could discourage demand for loans.
To help states avoid short-term deficits that may result, EPA could propose a statutory
amendment that would allow states to use some portion of their overall SRF fund assets for
program administration after 1994, phasing in th*s new allowance for administrative costs as
capitalization grants are winding down. This strategy would ensure a continuity in state funds
available to cover SRF administrative costs.
Since a minimum level of administration is necessary to service outstanding loans and
maintain the integrity of the fund, the opportunity to reduce administrative costs is limited,
Ordinarily, administrative costs associated with a more mature program would be expected to
decline along with loan origination after the federal capitalization grants end. For some SRF
programs, however, some costs associated with loan administration will not decline with the
drop in: loan origination for example, the fixed costs associated with administering the
portfolio of outstanding loans. In addition, some program managers may find it difficult to
reduce staff proportionately. In the years immediately following the cessation of capitalization
grants, therefore, overall administrative costs will be high relative to funds available for re-
lending. States that did not prepare adequately to cover their administrative expenses are at risk
for delayed compliance. These states would probably need to charge administrative fees.
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Several states already do this and should be able to cover their expenses. Some states, however,
may find they have to levy additional charges once their administrative allowance is reduced to
zero, and may still face short term deficits, as is demonstrated in the model outlined below.
The magnitude of the problem may be illustrated by modelling the accounts of eight SRF
programs.19 One method of raising funds for SRF administration is through loan origination
fees that, in effect, would add basis points to loan interest rates. The accounts of eight SRF
programs were examined to measure the adequacy of administrative funds if either a .5 percent
or a 1 percent administrative fee were added to all post-1990 loans.
The model uses states' anticipated administrative costs for each "year as the target.20
Appropriations were estimated to equal 78 percent of authorizations for FY 1993-94, following
the Administration's request for 1992 levels. Appropriations for FY 1990,1991, and 1992 were
set at actual levels received and fee percentages were added to interest rates charged for all post-
1990 loans.21 The model assumes loans are disbursed in total, debt service begins one year
after disbursement, and that a state's fee surpluses in any year would accrue interest at 8 percent
and be used to offset future deficits.22
*
Tables 1 and 2 demonstrate the deficits that each state may face.' Over time, as loan
repayments grow, these deficits will disappear and states will begin to accrue surpluses.
Table 1: Annual Administrative Net Deficit in
($ millions)
Connecticut
Georgia '
New Jersey
New Mexico
South
Dakota
Tennessee'
Texas
Virginia
1992
-0.77
1.03
-1.61
0.35
0.07
-0.£3
6.98
2.74
1993
-1.27
0.96
-3.88
0.31
-0.09
-0.52
7.32
3.09
1994
-1.42
0.63
-4.77
0.16
-0.22
-1.41
6.69
3.28
1995
-1.60
0.08
-5.27
-0.11
-0.29
-1.75.
5.03
3.25
Eight States Using a .5% Fee
1996
-1.36
-0.43
-5.09
-0.24
-0.24
-1.66
3.39
3.35
1997
-1.17
-0.46
-4.98
-0.22
-0.17
-1.59
1.72
3.61
1998
-0.95
-0.43
-4.93
-0.18
-0.17.
-1.57
0.026
3.91
1999
-0.76
-0.39
-4.92
-0.09
-0.17
-1.50
-1.56
4.27
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Table 2: Annual Administrative Net Deficit in Eight States Using a 1% Fee
($ millions)
Connecticut
Georgia
New Jersey
New Mexico
South
Dakota
Tennessee
Texas
Virginia
1992
-0.60
1.11
-1.44
0.37
-0.09
0.59
7.60
2.82
1993
-0.77
1.29
-3.51
0.41
0.00
-0.28
9.05
3.36
1994
-0.68
1.35,
-4.18
0.38
-0.13
-1.09
9.97
3.99
1995
-0.61
1.33
-4.45
0.27
-0.18
-1.32
10.23
4.61
1996
-0.13
1.44
-4.09
0.22
-0.07
-1.14
10.81
5.53
1997
0.14
1.63
-3.86
-0.20
0.06
-0.99
11.64
6.84
. 1998
0.90
1.93
-3.76
0.27
0.13
-0.96
12.77
8.30
1999
2.15
2.32
-3.74
0.53
0.22
-0.81
14.21
9.94
If this group even roughly represents the nation as a whole, then several states may find
they cannot cover their expected administrative costs with a .5 percent or even a 1 percent
fee.21
Benefits and Concerns
Lifting the restriction on "eligible uses of the SRF" would help prevent such short-term
deficits hi states that did not act to ensure they would have adequate funds to meet their
administrative costs. The primary concern is that some states will jeopardize the long-term
lending ability of their SRF to cover short-run administrative costs. In all likelihood, not all
states will be ill-prepared to cover administrative costs.34 Further, there is conflicting evidence
as to whether states are planning ahead to cover such costs.23 In the absence of compelling
evidence that administrative shortfalls will be significant and widespread, the Administrator may
want to request that Congress maintain some restriction yet allow a portion of fund assets to be
used for administrative purposes. This would provide SRF programs some leeway in covering
their costs yet protect the original goals of the SRF.
A second concern is the inherent tradeoff that would occur if some portion of fund assets
were allowed to be used for administrative purposes. The higher the expenditure on
administration, the fewer funds available for lending.
The Board therefore recommends that the restrictions on "eligible activities of the SRF"
with respect to the financing of SRF administration be lifted to allow states to use some portion
of their overall fund assets for program administration after 1994, phasing in this new allowance
for administrative costs as capitalization grants are winding down. Each state would have to be
examined in order to determine whether it can expect to run short of funds, and the magnitude
of its expected shortfall. Once the extent and duration of each state's expected deficit were
measured, the appropriate allowance would be determined.
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Allow the SRF to support Public-Private Partnerships for Wastewater Services
. The Board considered lifting the limitations on use of SRF monies to finance the publicly
owned portion of wastewater treatment facilities. Privatization of wastewater treatment plants
gained momentum in the 1980s due to incentives provided in the 1981 and 1982 Tax Reform
Acts. Eight wastewater treatment plants were privatized in the early 1980s, one of which has
since been sold back to the local public sewer authority.36 After the 1986 Tax Reform Act,
however, most of the earlier tax benefits were lost and no additional fully privatized wastewater
treatment facilities have been built in the United States since that time.
At issue is the merit of a federal policy that restricts local choices. In particular, why
should SRF funds be restricted to publicly owned treatment works if a locality, for whatever
reason, chooses to involve a private partner to improve Us delivery of wastewater treatment
services? Where private sector involvement can be shown to be beneficial, to the public purpose,
the removal of this restriction would widen financing opportunities to that sector, and could help
ensure timely investments in wastewater facilities.37
Benefits and Concerns
Allowing the SRF program to offer assistance in cases of private sector involvement
would expand the range of possible financing solutions available to municipalities considering
participation by private enterprise. Where such participation could be shown to be beneficial,
access to SRF funds could help encourage private sector participation.
In addition, allowing the SRF to support public-private partnerships could increase
interest in privatization of wastewater treatment plants. Clearly the benefits of further
privatization depend on the individual circumstances. In some cases private sector involvement
can reduce the costs of providing environmental services, simultaneously freeing public funds
for use in other areas, the private sector may also be able to achieve solutions where local
governments cannot, due to legal or political barriers.
. <
There are, however, concerns associated with allowing this use of funds. First, if an
SRF has borrowed to provide funds to the private sector, it may face restrictions under the 1986
Tax Reform Act since such loans will have been made out of the proceeds of private activity
bonds. The implications under current .tax law would therefore need evaluation.28 Second,
states may face political resistance to offering funds to the private sector ahead of municipalities,
even where the participation by private enterprise is warranted. Finally, loans to the private
sector may require adjustment of the SRF's lending terms, as the alternative financing
arrangements available to the private sector differ from those available to the public sector.
There was also concern on the part of some Board members that subsidies to promote
public-private partnerships would be more efficiently and effectively delivered -through tax
incentives instead of through the types of assistance available from the SRF. In addition, some
members questioned whether the private sector should receive any subsidy at all.
For the purposes of this Advisory, however, the issue discussed was one of the delivery
of a subsidy and the Board would urge that the SRF's role in this delivery be made a primary
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issue on the EFAB agenda. (The Board has also recommended that EPA evaluate increasing the
flexibility of giant policies to permit the privatization of giant-funded publicly-owned treatment
works. The reader is referred to EPAB's Private Sector Incentives Advisory).*9
Improving the Financial Assistance to Small Communities under the SRF Program
In a companion Advisory, Small Community Financing Strategies for Environmental
Facilities, the Board recommended three ways to improve the availability of Title VI SRF funds
to small and economically disadvantaged communities.30 These included;
* ,
Creating a small community set-aside under Tide VI SRFs to provide principal
discounts or principal subsidies on SRF loans or direct grants in the case of
demonstrated need;
Creating a new revolving fund exclusively for small communities covering
wastewater treatment, drinking water and solid waste management; and
Extending the SRF loan term beyond 20 years for small communities.
Some barriers to financing affect small communities under Title VI SRFs. In particular,
die Board found that small communities may not be able to compete successfully against their
larger counterparts for SRF funding, or may not be able to afford that funding where it is made
available to them. Small communities may not seek SRF loans because they lack the ability to
document needs or meet application requirements, and, finally, they may be unable to finance
the operating costs associated with an SRF financed wastewater facility. (For further discussion
of these options the Board refers the reader to the Small Community Advisory cited above.) The
Board recommends that these options be considered in concert with the other SRF options
discussed.
*
The Board recognizes that set-asides reduce state flexibility in dealing with small
communities and grants may deplete the corpus of the SRF itself. (Subsidized assistance other
than direct grants could avoid fund depletion, and are discussed in Section IV B, subsection
entitled Expansion of the SRF Program). The Board expressed the concern that such set-asides
be funded through additional federal appropriations.
Funding the SRF Program at Authorized Levels
A fourth option considered funding improvements in the SRF program. A continuation
of the capitalization program could help meet point and nonpoint source investment needs. Fully
authorized levels could be appropriated for FY 1993-94. Further funding could be made
available by appropriating an extra $1.43 billion, which is the difference between amounts
authorized under Tides K and VI from 1986 to 1992, and the amounts actually appropriated in
those years. This $1.43 billion, while not enough to close the gap between needs and resources,
would contribute toward that goal.
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The flutter capitalization could be distributed in several ways. It could be used to
increase the FY 1993-94 appropriation; it could be made available in FY 1995-96; or it could
be spread over the entire 1993-96 period.
A 50 state aggregate model SRF was developed to illustrate the difference further
capitalization could make in helping to close the funding gap. The model uses the total grant
program as its initial capitalization. In Case I, it assumes that capitalization equals actual
appropriations to the states for 1988-92. Appropriations for FY 1993-94 are estimated to equal
87.5 percent of authorizations, the same as the ratio of 1991 appropriations to authorizations.
In Case n, appropriations for 1993-94 are estimated to equal authorizations and the program is
further capitalized by the additional $1.43 billion. The model distributes these funds equally in
1995 and 1996.
*
In both cases the model assumes:
The full amount of the capitalization grant and state match (20 percent of the
capitalization amount) are disbursed each year, at 5 percent interest for a 20 year
period;
* Loan repayments are assumed to begin three years after disbursements, based on
the average construction time for wastewater treatment facilities; those funds are
available for re-lending One year after they are repaid (e.g., a 1988 loan begins
repayment in 1991, and that repayment can be re-loaned in 1992);
Administrative costs use 4 percent of each year's capitalization grant
appropriation, and 4 percent of all funds available for re-lending after 1994; and
' Bond proceeds from actual state leveraging activities in the 1988-91 period are
added to total funds available for lending in those years.31
Based on this model and assuming no additional capitalization, Table 3 shows the total
value of projects that will have been financed from the SRF program by 10 years, by the year
2000, and over the 20 year period.
Table 3. Case I: Financing Capacity of the SRF Program
Under Current Policy
(billions of 1991 dollars)
Projects Financed
over 1988-1998
Period
$21.85
Projects Financed
by the Year 2000
$24.73
Projects Financed
over 1988-2008
Period
, $40.61
Under current policy, by the year 2000, the combined SRF program in the 50 states will
have been able to fund over $24 billion worth of capital costs for point and nonpoint source
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water quality projects, or nearly half the estimated needs assuming maintenance of current
standards.37
Under the more aggressive capitalization assumptions, the gap can be reduced somewhat
Over 55 percent of needs could be met by the year 2000, assuming maintenance of current
standards. This result is summarized in Table 4:
Table 4. Case IL Financing Capacity of SREs Capitalized .
Through 1996
(billions of 1991 dollars)
Projects Financed
over 1988-1998
Period
$23.86
Projects Financed
by the Year 2000
$26.99
Projects Financed
over 1988-2008
Period
$44.32
The original $1.43 billion would be translated into a total increase in financing capacity
of $3.7 billion over the 20 year period.33 A significant gap still remains, however.
The Board notes that the Administration's recent FY 93 budget requests $2.0 billion for
the SRF program. This changes the funding outlook from that which prevailed at the time the
original discussions took place regarding SRF financing.
In order to measure the possible effect of capitalization of the current SRF program at
the $2.0 billion level for 1993 and 1994, a third scenario of the model was run. In addition,
the Board looked at the outcome of capitalizing the SRF program at $2.0 billion per year for the
years 1993-1998. The results of the third and fourth cases are highlighted in Tables 5 and 6.
Table 5. Case HI: Financing Capacity of SRFs Capitalized at $2.0
Billion per year for 1993-1994
(billions off 1991 dollars)
Projects Financed
over the 1988-1998
Period
, $24.96
Projects Financed
by the Year 2000
$28.28
Projects Financed
over the 1988-2008
Period
$46.43
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Table 6. Case IV: Financing Capacity of SRFs Capitalized at $2.0
Billion per year for 1993-1998
(billions of 1991 dollars)
Projects Financed Projects Financed Projects Financed
over the 1988-1998 by the Year 2000 over the 1988-2008
Period Period
$34.56 $38.44 $63.07
If capitalization for the current program equals $2.0 billion for the years 1993 and 1994,
58 percent of estimated needs can be financed, assuming maintenance of current
standards. If, however, this level of financing is continued through 1998, over 78 percent of
estimated needs can be financed, assuming maintenance of current standards.34 This represents
a 55 percent increase in the dollar value of projects that could be financed by the end of the
century, relative to that which could be financed under current policy (Table 3). If full
implementation is the goal, however, even in this case less than half the estimated needs could
be met by the year 2000.
Benefits and Concerns "
The primary benefit of any of these options is that it should allow a greater number of
eligible water quality projects to receive funding more quickly than would be possible under the
current program.
In some states, needs outweigh available funds,, even under the more aggressive
capitalization assumptions of Case n. Hence, appropriations at the authorization ceiling and
adding $1.43 billion in 1995 and 1996 are only partial solutions - funding gaps will remain.
Indeed, even the most generous financing scenario, that which provides $2.0 billion in
capitalization over the years 1993-1998 is insufficient to ensure investment to maintain current
standards much less meet full implementation needs.
To augment available funding resources, the Board urges that capitalization of the SRF
program be continued by appropriating at least, the fully authorized levels for 1993-94, and by
appropriating as wen an extra $1.43 billion, the difference between amounts authorized under
Titles n and VI from 1986 to 1992, and amounts actually appropriated in those years. The
Board also strongly endorses the Administration's recent FY 93 budget request for $2.0 billion
for the SRF program, and encourages consideration of maintaining this level of funding through
1994 and the next reauthorization period.
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IV. PUBLIC FINANCE OPTIONS FOR ENVIRONMENTAL PROTECTION
A. STATEMENT OF THE ISSUE
Public finance options for environmental infrastructure have three inherent dimensions:
the types of facilities or "needs" that are eligible for assistance; the delivery of the assistance;
and die level and timing of assistance. This section discusses several finance options for federal
and state governments in terms of eligibilities and delivery mechanisms. (As used here,
"eligibilities" refers to environmental facilities and services that may be funded from a subsidy
program.)
The Board believes that federal funding beyond the current authorization is the
fundamental issue to be considered in developing new. public finance options in water quality.
It is clear that needs now eligible for funding under the Clean Water Act far outstrip the present
authorization for the SRF programs. As noted in Section ffl, the Board strongly endorses the
appropriation of all funds authorized for the SRF program under the 1987 reauthorization of the
Clean Water Act. It also supports the Administration's recent FY 93 budget request for $2.0
billion for the SRF program, and encourages consideration of maintaining this level of funding
through 1994 and the next reauthorization period.
If no additional federal funds for capital financing become available, the Board
recommends that current eligibilities remain unchanged and that no new initiatives requiring
additional federal funds be mandated.
Under this scenario, EPA's efforts would be directed toward seeking further
improvements in the SRF program, such as those described in Section HI and in the EFAB
Advisory, Small Community Financing Strategies for Environmental Facilities. EPA should also
encourage states to continue investing-in their SRFs after the cessation of federal funding in
1994.
In anticipation of new federal investment capital, EPA should work toward selecting
options for its delivery and use. While the Board has investigated eligibility issues and options,
such as water supply and solid waste management programs, it also recognizes that many
legitimate claims can be made on any future federal funding. The Board thus considers it to be
outside its charter to make recommendations regarding die selection of such eligibilities and their
relative priority within overall national environmental goals.
It is evident from the deliberations of the Public Sector Workgroup and comments on
drafts of this Advisory that many informed opinions exist on public finance options. The main
point of departure is whether one views the SRF program as the principal vehicle for change,
or whether one considers other institutional approaches as better suited to act in this capacity.
This discussion by no means includes all options and is not meant to be an exhaustive analysis
of those presented. The intent is to describe the structure and function of several possible
delivery mechanisms and to highlight key benefits and concerns of each.
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The Advisory considers three potential approaches to the delivery of financial assistance,
touching upon the issue of eligibility for each approach. These options include:
Directing further funding to the current SRF programs;
Building on the success of the SRF program by expanding eligibilities to include
water supply and solid waste management programs; and
Considering several trust fund approaches that could complement the other
initiatives examined.
In sum, the Board believes 'that EPA should seek administrative and statutory
improvements in existing SRF programs, regardless of whether new federal investments are
made in financial assistance programs for environmental infrastructure. Since, however,'
continued funding for various capital needs has been under serious consideration by Congress
in the context of hearings on the reauthorization of the Clean Water Act, the Board also urges
EPA to evaluate these options for delivery mechanisms with the objective of developing and
recommending an administration position on them.
With respect to the first two approaches, it should be noted that the Board also reviewed
the issue of whether the application of Title n equivalency requirements and cross-cutting
authorities should be extended along with federal funding. Further, the public finance
approaches covered here are difficult to compare since they serve different purposes. Each
approach may be a better strategy for achieving a national priority, delivering a type of
assistance, or providing support for a certain eligibility. The following discussion clarifies the
.benefits and puiposes of the various strategies.
B. POTENTIAL APPROACHES
Continued Federal Funding of the SRF Programs
Description
i
This option would continue federal funding of the existing program beyond the end of
the current authorization in FY 1994. No other changes would be made in the types of
assistance or eligibilities of the program, although alternative approaches to lessen the cost
impact of Title n requirements and cross-cutting authorities should be considered.
* , *
An important alternative within this option is to direct some share of the federal
investment to either national priority areas or towards a particular recipient group. This goal
can be best achieved through the statutory distribution of funding into set-asides.
The Board discussed these two types of set-asides in its deliberations of public finance
options for environmental protection. The first type is one that is defined by the eligibility being
targeted; funds are set aside to provide financing for that particular eligibility, such as national
priority areas. The type of assistance is no different from that normally available, and no
17
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particular group is targeted for the funds. Set-asides of this type can be designed to reserve a
specific amount of funds or a range of funds to finance a particular program area.
The second type of set-aside is defined by the group being targeted and the type of
assistance available; funds are set aside to provide a special type of assistance to a designated
recipient group. This type of set-aside could target small communities, for example, and be set
up within the SRF.
Instead of set-asides, federal funding could be used as an incentive to encourage more
state attention to that purpose for which a set-aside was considered, whether it be a national
priority area or a particular recipient group. Inducements such as grants (with or without a.
matching funds requirement) could be made available on a program or project basis.
Benefits and Concerns
Continued federal investment in the state revolving funds beyond 1994 would represent
a recognition and affirmation of a program that works. Use of these existing state mechanisms
would be a fast and effective way of getting assistance to important environmental priorities not
included in the wastewater construction grants program. Most notable of these are nonpoint
source control programs and practices.
Set-Asides
Nonpoint source and combined sewer overflow programs are eligible without legislative
change. If Congressional intent is to direct state attention to certain national priorities, and if
the cost of the needs they represent exceeds any reasonable expectation of additional federal
funds, then a set-aside of the first type, established within the instrumentality of the SRF itself,
is a readily available approach to achieving that goal.
From an operational standpoint, however, mandated set-asides of the first type, (those
defined by the program area targeted), established within the SRF, may be too rigid to
accommodate the needs and priorities of a given state. State programs generally do not require
or benefit from mandated set-asides, of this type. The states .are capable of determining their
water quality, priorities and, in the Board's view, should be able to largely direct the use of
funding in accordance with existing federal requirements.
On the other hand, set-asides that target the recipient group provide SRFs flexibility in
allocating funds to water quality priorities, yet reserve funds for a recipient group that might
otherwise be overlooked. ,
A concern with set-asides is the build-up of unobligated funds over time. This occurs
if no eligible projects are ready for financing. Such build-ups can be avoided by designing the
set-aside to incorporate a time limit feature, whereby if funds are not used within a particular
time frame, unobligated funds revert back to the general SRF fund to be used elsewhere. Each
year, a new set-aside would be created, with the same "use or lose" feature.
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The Board noted that incentives, as an alternative to. set-asides, can avoid the rigidity
problem because incentives are voluntary. For example, a supplemental federal appropriation
could be established for EPA to make giants or enter into cooperative agreements in support of
activities that address a national interest. States presumably would have the choice of whether
to take advantage of die incentive. This approach probably makes more sense than set-asides
that target particular programs to receive funding, unless state nonparticipation becomes, in
effect, a penalty because the incentives are drawn from funds that otherwise would have been
part of the SRF capitalization grant.
Federal Requirements ' '
A concern that emerges with continued federal, funding of the SRF program is the
applicability of Title n equivalency requirements and cross-cutting authorities. Both sets of
requirements now apply to the use of federal capitalization grants made to the SRFs. Based on
comments received from the Office of Water hi the development of this Advisory, the Board
understands and has been informed by the EPA that these requirements will no longer affect SRF
financial assistance once federal funding ceases. The only exceptions involve Civil Rights and
National Environmental Policy Act requirements which will stay in place.35 If federal funding
continues, however, Congress may retain the same equivalency and cross-cutting requirements.
Enough evidence exists to suggest that these federal requirements significantly increase
project costs. In particular the Davis-Bacon Wage Act may increase project costs enough to
delay start-ups.36 The Board believes that the increases in cost cited as resulting from these
authorities is enough to warrant an inquiry into this issue in order to determine whether, if
further federal funding is made available, some adjustment should be made to the applicability
of these authorities in the case of financial assistance provided by the SRF.37 The Board also
expressed concern' that the increased project costs generated by compliance with these
requirements may outweigh their public benefits. The Board therefore strongly supports a cost
evaluation of both Title n equivalency requirements and federal cross-cutters.
Cost increases vary across states depending on how closely state statutes mirror federal
regulations. For some states the Davis-Bacon Act and various cross-cutters may act to decrease
the subsidy and attractiveness of SRF loans. Where the municipal debt markets are a viable
option for a local government this is not a problem, but for communities that cannot afford to
borrow at market rates, the statutory imposition of the Act and other cross-cutters may
effectively block the one alternative financing mechanism available to them.
The Davis-Bacon Wage Act requires that wages for those working on federally funded
projects be set at the going rate for that region, as determined by the U.S. Department of Labor.
The region is generally defined as the state, but can be smaller. Despite the fact that wages can
vary greatly within a state, these wage levels are applied uniformly to all projects in the state
whether in metropolitan or rural areas. In cases where one wage rate has been set for the state,
there can be a significant difference between the Davis-Bacon wage rate and the local wage
rate.38
In Arizona, for example, where few statutes mirror federal regulations governing the use
of federal funds, the impact of the Davis-Bacon Act can be significant. Since the Davis-Bacon
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wages are based on the going rates in Phoenix and Tucson, the greatest impact is to the rural
areas, where wages are generally much lower. The state's SRF coordinators estimate that the
Davis-Bacon Act raises project costs by as much as 20-25 percent in mral communities, and 5
percent in the metropolitan areas (outside of Phoenix and Tucson).39 The consequence of
higher costs is an effective reduction in the subsidy offered by the SRF loan. The SRF
coordinators in Arizona and Utah felt that communities would not take the SRF loan unless
interest rates were at least 2 percentage points lower than market rates.
While the increase in SRF costs attributable to statutory authorities has never been
systematically measured, if the estimates are correct, the financial consequences could be
significant. Consider, for example, a $1 million project that a community plans to debt-finance
at 7 percent with a 20-year maturity. Debt service would cost $94,393 per year. If, instead,
the community borrows from the SRF and cross-cutters raise costs by 20 percent, the town
would, need to borrow $1.2 million at the SRF rate and maturity. If Arizona's SRF loans carry
an interest rate of 4 percent, annual debt service on the $1.2 million loan would be $88,298,
effectively reducing the SRF subsidy from 3 points to 0.8 percentage points ($88,298 is the debt
service on a $1 million loan at 6.2 percent interest). If the cross-cutters add 25 percent to the
project cost, the effective subsidy is only 0.3 of a percentage point. Thus, in this example, what
was designed as a 3-point subsidy actually provides a subsidy of less than 1 percent. For some
communities, such a small differential may be outweighed by the administrative ease of market
transactions relative to SRF loans. Table 7 summarizes these results:
Table 7: Characteristics of Financing $1 Million in a Publicly Owned
Treatment Works under Municipal Debt Market and SRF Loans, Conditioned
by Cross-Cutting Authorities
Municipal debt market
financing
SRF financing with cross-
cutters mat impose a 20%
cost premium
SRF financing with cross-
cutters that impose a 25%
cost premium
Amount
Financed
$1 million
$1.2 million
Nominal
Interest
Rate
7%
4%
Annual Effective
Payment Interest Rate
on $1 million
Invested
$1.25 million 4%
$94,393
$88,298
$91,977
7.0%
6.2%
6.7%
While the Department of Labor's assessed Davis-Bacon wage can be adjusted to local
economic levels, the administrative process is cumbersome and lengthy. For example, Utah
received a revised wage scale three years after the Department of Labor undertook another wage
survey within the state. Local governments may not have the resources to challenge the Act on
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their own, and if their respective state does not intervene on their behalf, delay or
noncompliance may be an easier solution.
Measuring the costs directly would clearly quantify, the actual effects of the Title n
equivalency requirements and cross-cutting requirements on project costs. If costs or delays (or
both) are found to be significant, dropping or moderating some or all of these authorities may
be appropriate if federal funding is continued beyond 1994.
In sum, the Board recognizes that the decision with respect to federal funding will
ultimately be a political one, whether attention is focussed on appropriating the full amount
authorized'under the 1987 Clean Water Act or on a consideration of maintaining the
Administration's requested level of funding for FY 93 through the next reauthorization period.
The Board generally does not support the use of statutory set-asides targeting particular
programs as separate accounts within the SRF. The Board, however, supports set-asides to aid
small community projects, where the community's limited financial capability is often the
primary issue blocking compliance.
However, as'was discussed in the Board's Advisory, Small Community Financing
Strategies for Environmental Facilities, SRFs were not intended to serve as small community
assistance programs or to give special priority to their needs; thus the Board recommended in
that Advisory that the Administrator consider supporting a set-aside or separate program for
small communities and that the agency should actively encourage SRFs to give more attention
to small community needs.40 The Board also supports that an evaluation of the impacts of the
Tide n equivalency requirements and federal cross-cutters be undertaken.if further federal
funding is made available.
Expansion of the SRF Program
i "
Description
A second institutional initiative would use the SRF as the primary vehicle for the delivery
of financial assistance to an expanded set of eligibilities, including water supply and solid waste
management programs. Expansion of eligibilities would be continent upon continued federal
funding beyond the current authorization period. The Public Sector Workgroup's attention was
focused on the merits of expansion and not on the criteria for eligibility; thus, the inclusion of
water supply and solid waste management programs in the discussion served as example
eligibilities only and do not reflect a recommendation as such. Once selected, the expansion of
the SRF program could be gradual through a phase-in of the new eligibilities.
Benefits and Concerns
The'primary benefit of SRF expansion is that it establishes, in each state that so chooses,
a multimedia environmental financing authority capable of directing assistance to the most
critical state environmental priorities. For a number of years many states have been developing
financial assistance programs of their own. In some cases the SRF programs were created
within an existing state financing authority. Expansion of the SRF programs seems a natural and
. "i
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beneficial consequence of a trend that has seen states and localities shoulder the fiscal burden
of compliance with federal environmental mandates.
A fundamental concern is that the nature of the need for financing in drinking water and
solid waste management may make the SRF, as currently structured, an inappropriate vehicle
through which to supply such financing. The communities that would stand to benefit most from
an expansion of the SRF are economically disadvantage*! and may not be able to afford SRF
loans; the expansion of eligibilities for SRF assistance may thus require a concomitant expansion
in the* type of SRF assistance available, where such new assistance would include grants,
principal discounts, or principal subsidies, for economically disadvantaged communities. New
York, for example, is considering the use of negative interest rates for economically
disadvantaged communities seeking SRF assistance. In contrast to an outright grant, this
program would allow principal to remain available to the SRF for other financing once the loan
recipient's needs were accommodated.
The New York program would calculate the difference between what a community could
afford to pay annually and the real annual cost. The SRF would then allocate, to an interest
bearing account, that amount necessary to generate sufficient interest to equal the difference
between the real annual cost of the loan and the amount the community could afford to pay.
Upon project completion, the SRF would bill the community for the affordable cost of the
project, and use the interest accumulated to pay the balance of debt service due in that-year.
As previously discussed, the Board feels that the second type of set-aside (that defined
by the recipient group targeted and type of assistance made available) would be the most
appropriate way to provide grants or principal subsidies for such communities.
Water Supply
Currently, water supply investments are locally financed. Under certain conditions,
however, local governments may be unable to continue to finance their programs through
revenue bond issues.. This occurs when local governments try to issue debt above the level that
their user base can support. If communities are unable to raise rates, they may be constrained
from taking on further debt. .This problem arises more frequently in small and economically
disadvantaged communities. For any level of required investment, economically disadvantaged
communities will reach this threshold at a lower level of investment per capita than will affluent
communities. Where these communities are also small, the problem is exacerbated. Higher unit
costs and a smaller base over which to spread fixed capital costs may result in higher user rates
to achieve a given standard in water supply than would be the case in larger systems. Such
communities also may have difficulty in imposing full-cost pricing as costs continue to escalate,
and falling behind in rate increases may hamper bond issuance.41 According to Standard &
Poors, the "lack of timely rate increases can weaken overall credit quality as debt service
coverage and liquidity declines."42 These communities may require extra assistance. in
financing their water supply investments.
The primary need for assistance in financing in water supply thus comes from small and
economically disadvantaged communities. While regionalizing small communities' water supply
facilities may help reduce rate pressure in some cases, other economically disadvantaged
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communities may not be able to regionalize. Thus, the provision of an alternative financing
mechanism for water supply, such as grants, may provide the only financing option to certain
communities.
Solid Waste Management
Capital investment requirements in solid waste management also are rising. Low-cost
options for solid waste disposal are diminishing, due both to a stricter regulatory environment
and to the limited capacity of landfill sites. This results in an increased need for capital and a
need for new landfill and incineration sites.43 While most, analysts agree that difficulties in
siting new facilities axe a major barrier to investment in solid waste management, the high cost
of capital also delays investment in economically disadvantaged communities.44 Where
economically disadvantaged communities are also small, regionalizing the wastesheds for local
facilities could, in some cases, lower the cost of capital by taking advantage of economies of
. scale. This would lower unit costs and hence lower user rates, improving the chances of
manageable revenue bond financing. Economically disadvantaged communities in general,
however, may need an alternative financing mechanism to relieve rate pressure and ensure that
national solid waste management goals are met without undue delay.
General obligation debt financing appears to be constrained primarily in economically
distressed communities that are also small. One recent study, for example, estimated the
cumulative effect of increasing solid waste regulations on municipalities of different sizes. The
study found that the additional regulations increased the difficulty with which small
municipalities could issue general obligation bonds to finance compliance activity, even where
this type of indebtedness had not reached the limits defined in state statutes.45 In particular,
the study estimated that under new regulations, 18 percent of communities with populations of
less that 2,500 would face increased difficulty in raising funds to finance investment in solid
waste facilities. This impact fell to three percent for municipalities with populations between
2,500 and 10,000, and to one percent of less for larger communities.46'
Revenue bond financing may be constrained hi most economically disadvantaged
communities. The average household spends only about 0.32 percent of its annual income on
solid waste management, less than for sewer costs or drinking water. Thus, communities would
normally be expected to have considerable room to raise user rates. However, from the
perspective of the householder's ability to pay, the relevant issue is the ratio of the user rates
for all three environmental services to median income. On average, this equals,! .30 percent.47
In economically disadvantaged communities the ratio would be higher, as household income can
fall significantly below the median. In addition, such towns could possibly face constraints in
their ability, to issue revenue bonds for solid waste facilities. Such communities may not be able
to afford SRF loans; a grant mechanism may be more appropriate to help alleviate these
financing constraints. , *
Expansion of the type of assistance available along with an expansion of eligibilities may
allow the SRF to more successfully meet the needs of communities requiring financial assistance
to reach their water supply and solid waste management investment goals. This expansion in
type of assistance available could be established through a set-aside for "hardship" grants,
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although the impact of such grants on the integrity of the fund corpus would have to be closely
examined.
* *
Second, in the drafting of any new statutory requirements governing expanded use of
additional federal funds particular attention should be given to crafting streamlined requirements
that reflect the federal interest without impeding state implementation. Using the SRF program
as the vehicle through which to implement change would require the application of cross-cutting
requirements to these expanded eligibilities. Their application to the new eligibilities could be
a complex and time-consuming activity. The Board feels that an evaluation of the impacts of
these authorities is warranted under this policy approach as well.
Third, if the objective of additional federal funding is to focus more on national priorities
by restricting and concentrating the use of federal funds, then expansion of the SRF programs
tends to be counter-productive. The achievement of national targeting through state programs
probably requires the creation of dedicated set-asides that could be administered within or
outside the SRF instrumentality. As state-controlled and managed enterprises, the SRFs may
not be the best vehicle for set-asides dedicated to specific funding of national priorities. Use of
the SRF undercuts state priorities in administering the program and may raise issues affecting
the practicality and cost of borrowing by local communities. In the Board's view, expansion
should result in more, not less, flexibility for the SRFs.
A final concern is whether a new federal subsidy program for facilities heretofore paid
for by local governments or private entities would trigger a queuing phenomenon, whereby
communities, required to build faculties to attain or maintain compliance, would delay until
assistance became available. If grants or principal subsidies are reserved strictly for hardship
cases, however, this should not be a problem.
The Board supports expanded authority governing eligibilities of the SRF program if
federal funding continues, bearing in mind that alternatives to loan assistance may need to be
built into any expanded eligibilities program through a set-aside targeting economically
disadvantaged communities. The Board urges that any federal, requirements regarding new
eligibilities be kept to a minimum, leaving the determination of. funding priorities to. state
discretion within broad federal guidelines.
Environmental Trust funds: A Complement to Other Public Finance Approaches
An approach that could complement existing institutions includes the development of a
national or state trust funds as mechanisms to help in the delivery of federal (or other)
assistance. The definition of a trust, as used here, is a permanent, self-funding account of public
funds used for predetermined purposes. Its funds may come from any sources used to pay for
public programs, but a base level of funding should come from one or more dedicated sources.
As dedicated accounts, trusts are well-suited to perform functions closely related to the source
of their funds, such as fees for permit issuances that are used to support the permit program and
related activities. Trust assistance may take many forms, including grants, loans, credit
enhancement, and even include technical assistance.
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The Board does not view trust funds as set-asides. A set-aside reserves some share of
funds where those funds usually come from annual appropriations. Thus, set-asides are typically
neither permanent nor self-sustaining and they usually operate as part of, or to support, other
program elements, as was the case with the set-asides of the wastewater construction grants
program.
The Board feels it would further the debate over public finance strategies to present the
outlines of various "straw options" for several approaches to environmental trust funds. The
following discussion is for illustrative purposes only and does not represent an endorsement of
the trust concept by the Board at this tune.
National Trusts
Description
. A national environmental trust would require federal legislation to charter it, provide for
its administration, define its scope of activities and sources of revenues, and provide other
authorities as may be necessary regarding its financing operations. The national trust would
serve two broad functions, providing:
Financial assistance to ytate environmental programs and regional environmental
planning and regulatory commissions; and
* Additional capital to state and local infrastructure financing agencies.
Program Assistance .
The trust's charter would authorize financial assistance to state environmental programs
and regional commissions for research, training,, and public education and demonstration
purposes, and would authorize categorical grants for certain special projects. The scope of the
trust's activities would extend to public purpose environmental services and facilities in all
media.
The national trust would have broad authority in setting terms and conditions governing
its assistance. Trust grants would be exempt from the cross-cutting requirements discussed in
Section m. Aid to state programs would attempt to find a workable compromise, if necessary,
in emphasizing EPA priorities such as pollution prevention, small community needs, geographic
initiatives, public-private partnerships, staff training, multimedia planning, and enforcement.
Special projects would include financial hardship assistance to communities unable to pay for
the capital costs of environmental facilities required for compliance. Assistance would be
awarded and administered through the appropriate state environmental agency.
As discussed earlier, the greatest need for subsidized financing in water supply and solid
waste management arises primarily in economically disadvantaged and small communities. Such
communities, unable to afford financing through the municipal debt markets, may also be unable
to afford even subsidized loans. These communities would benefit greatly from grant financing.
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Capital Assistance
The trust's charter would improve the liquidity of state environmental infrastructure
financing authorities and eligible local governments. "Liquidity" is defined here as the
availability of sufficient capital, as needed, at an affordable cost to. local governments.
The trust concept may play a significant role in facilitating capital formation in the 1990s and
help bridge the financing gap.41 The trust would improve liquidity for the financing of
multimedia environmental infrastructure by:
Having the statutory authority to issue environmental infrastructure revenue bonds
exempt from federal taxation, which would lower the cost of financing;49
Making loans to state environmental infrastructure financing programs; '
t » .
Purchasing debt instruments, including short-term notes, and pooling issues;56
Providing guarantees -or issuing letters of credit .backing debt instruments; and
Acting as a secondary market by purchasing state loan portfolios.
Thus, in performing these activities, the national trust would perform a role similar to
that of the Fannie Mae in the housing industry. Its charter, however, would stipulate that the
trust was not a government-sponsored enterprise and that its borrowing was not guaranteed or
insured by the federal government.
Trust Revenues
Unlike the approaches for the delivery of federal assistance discussed above, a trust
requires financing through a dedicated continuous source of revenues, such as a fee. While fee
systems are discussed separately, a brief review of the role of fees with respect to the trust
concept is presented here, as trusts are dependent on such systems.
The most appropriate source of revenue for a national trust would be environmental fees
and charges. These could be as broad based as fees on corporate production or sales, or as
specific as effluent fees on permits issued under the National Pollutant Discharge Elimination
System. Other options include water fees and solid waste disposal fees. Small or economically
disadvantaged communities (with systems serving populations under 25,000, for example), could
be exempt or pay reduced national fees. Operationally, states could collect the fees, deduct a
share specified under law, and deposit the balance in the national trust. The trustees would
make annual and multiyear funding decisions based on proposals from the EPA and state
environmental programs. EPA has already given some consideration to fee systems, although
not in the context discussed here.11
The fees collected would be used for programmatic assistance and for special projects.
Fee revenues, however, would probably be insufficient as a source of capital financing beyond
their possible use for hardship construction grants. The liquidity functions listed above that
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serve to make additional capital available at attractive rates would require the authority to issue
tax-exempt bonds.
Administration
A .national trust might be set up under the aegis of the EPA but run by an independent
Board of Trustees including state and local representatives appointed by the President, the
Congress, and chaired by the EPA Administrator.52
Benefits and Concerns
The most significant benefit of a national environmental trust is that it is a permanent
source of financial assistance supporting state environmental programs. As a self-funding
mechanism, the trust would function independently of annual federal appropriations. The
financial independence of the trust is an especially attractive feature in contrast to other
approaches, such as categorical grant programs, that depend on continued direct federal funding.
If funding is phased out, the utility of a trust takes on added value.
A second benefit, is that the trust could be administered by representatives from all levels
of government assuring that no one priority or point of view would dominate decision making.
Third, a national trust is a natural vehicle for promoting national environmental priorities.
Alternatively, enabling legislation chartering the trust could require coordination with state
priorities. For example, the trust might be chartered to support multimedia state activities
involved with EPA's geographic initiatives. The trust's funding decisions in this regard would
give particular weight to state proposals. Thus, the trust could serve as an important mechanism
for blending and balancing national priorities with those of the individual states.
The liquidity functions would provide a significant alternative source of lower-cost capital
for state multimedia infrastructure financing programs, helping to narrow the financing gap now
opening between needs and resources. In contrast to other public finance options, the trust's
capital financing operations would not be run as a subsidy program; nor would it have to rely
on the national fees dedicated to program assistance. This self-sufficiency would be
accomplished primarily with the authority to sell tax-exempt bonds, the sale of securitized
portfolios, and assessment of participation fees. Additionally, by directly supporting the several
state bond banks or by serving as a national bond bank itself in assisting needy communities, the
trust could play a unique and worthwhile role.
One potential beneficiary of the trust's capital assistance could be those SRF programs
that are making deeply subsidized loans without a commitment of further state financing for their
programs.5? According to a recent EPA report on the status of the SRF program, SRFs would
need to ensure that the interest rate on their loans matched the rate of inflation, to avoid
diminishing the amount of lendable SRF funds over time. In order to maintain; the fund in real
terms, such states would need to make a concomitant financial commitment to further capitalize
their SRF program. The report notes that only 15 SRFs plan to provide further capitalization
beyond 1994, yet more than this number offer loans below the inflation rate, which has averaged
about 4.5 percent per year since 1982. Thus some SRFs may find their fund balance
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diminishing after 1994, when federal capitalization ends.54 These SRFs may therefore benefit
from the availability of an alternative source of capital assistance.
Several key concerns arise with the national trust concept. With any national approach
based largely on fees there will be cross-subsidization among states. Some states will receive
more than their contribution in fees. While a national trust would provide considerable
assistance to most state programs, it is clear that some states would do better if they had similar
fee systems of their own. Second, a national trust based on national fees could disrupt state
attempts to establish alternative financing mechanisms.
Also, the liquidity functions raise a concern with redundancy. In some states the
municipal debt markets and existing state financing programs may be sufficient to meet
increasing capital spending requirements for environmental infrastructure. Well-established.
markets currently serve the borrowing needs of state and local governments (although certain
provisions of the 1986 Tax Reform Act had the effect of decreasing demand for tax-exempt
bonds, thus increasing yields paid by some issuers.)39 Secondary markets for loan portfolios
have long existed and all states have at least a SRF program. A national trust functioning as
described here could be perceived as a competitor with the municipal capital markets and may
seem to be of little use to some state financing programs.
Whether this potential "crowding out" effect would occur depends on the validity of the
premise that the volume of public borrowing for environmental infrastructure must increase
dramatically in the coming decade. If that occurs, a trust would likely serve as another useful
mechanism providing the additional capital required to meet needs, and the trust itself would
borrow significantly in the capital markets.
A related concern is the possibility that the trust liquidity function would interfere with
or duplicate the SRF programs, some of which now borrow on their own. This issue requires
further examination beyond the scope of this Advisory. However, it is likely that states with
strong infrastructure financing programs probably will not benefit greatly from a national trust.
.Those states that do not have multimedia financing programs may stand to gain considerably
from the trust's capital operations. '
A final concern is the effect the trust's sale of tax-exempt bonds would have on the
national deficit. While some tax expenditure will result, where the trust issues tax-exempt debt
on behalf of other public borrowers, however, there should be no net revenue loss to the
Treasury. .
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Stats Environmental Trusts
Description
Instead of creating one national trust, federal legislation would offer incentives to states
to establish their own environmental trusts. Federal authorizing legislation could specify a range
of incentives, including: ' .
A state share in annual revenues from national environmental fees (if such fees
were used);
Federal matching funds;
Federal grants and loans;
The removal of various impediments from the trusts' sale of tax-exempt bonds;56
and
Various forms of technical assistance.
Functionally, the state trusts would operate in a similar fashion as the national trust
discussed above. Depending upon legal and political circumstances in each of the states, the
liquidity functions would probably vary considerably. Two basic approaches are considered
here: placing die trust within the instrumentality of the SRF or setting it up as a separate, stand-
alone entity.
Within the SRF. The SRF programs are themselves a form of trust fund in the sense that
federal and state deposits must be used for certain purposes hi perpetuity and all loans made by
the fund must be repaid to it. They are intended to be permanent and eventually self-sufficient
institutions. Strictly speaking, however, SRFs are not trusts. Once federal and state
contributions to the SRF cease, SRFs can only remain financially self-sufficient as long as the
interest charged on new loans does not fall below prevailing rates of inflation or the cost of
borrowing. If new loans do not meet these conditions, the SRFs. may "deplete their corpus.
Trusts are financed by a revenue source external to their activities and can remain solvent even
if they disburse no funds at all, or disburse them as grants.
"V
In this approach a trust account would be created within the instrumentality of the SRF.
The trust would perform the several functions described above for a national trust. Because
these functions are multimedia in scope and would involve grants, the trust's operations may
need to be segregated from those of the SRF. The capital assistance functions of the trust
could support the SRF as well as other state financing programs involved with drinking water
and solid waste management.
A related alternative to a separate trust within the SRF is the modification of the SRF
itself to accommodate the functions of the trust. This could build on, and reinforce, the
expansion of SRF eligibilities as discussed above. .
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Separate Entity. Alternatively, the state could establish the trust as a separate entity with
its own administrative infrastructure and resources. Its multimedia mode of operation, which
would probably require interaction with a large number of state and local organizations, may be
more suited to an independent status, particularly if SRF eligibilities are not expanded.
Similarly, the capital assistance functions, extending to all public-purpose environmental
infrastructure, could be administered more easily if run independently of other financing
programs operating under different restrictions.
Benefits and Concents
The general benefits of a state trust correspond with those cited for a national trust. The
trust is a practical mechanism for allocating funding for a wide variety of purposes most likely
involving several state programs and many local agencies. The net benefits of a state trust
would depend, to a large extent, on the capabilities of existing programs. Some states have
advanced environmental and financing programs that may make a.trust redundant. With other
states, the trust might be a valuable tool for building program capacity and expanding
infrastructure financing options for state agencies and local governments. This variation among
the states argues for an approach that provides for considerable latitude in design and
implementation. .
*
The public financing approaches developed in this chapter were based on the assumption
of further federal funding. One advantage of state trusts is that they, like a national trust, could
be established without federal funds. Alternatively, if funding continues and the SRF programs
are expanded in terms of eligibilities, modification of the SRF to accommodate trust functions
also provides a viable option. Thus, state trusts are a sound option in either case. However,
depending on the nature of the trust's authority and operation, adding trust functions to the SRF
might prove time consuming, legally complex, and controversial with traditional constituencies.
In short, the Board recognizes that the trust concept at either the national or state level
is bound to be controversial. But, it cuts across existing program responsibilities and functions.
As a self-funding mechanism, it is independent of annual appropriations, yet requires the levy
and collection of taxes and fees which may reduce tax revenues to the U.S. Treasury
Department. , " -
t * "
A national environmental trust or state trusts independent of annual appropriations, could
play a particularly important role in building state capacity and financing environmental
infrastructure. The Board believes that the concept has sufficient inherent merit to warrant a
careful consideration by federal and state policy makers.
The Board, therefore, recommends that EPA conduct a cross-program evaluation of the
trust concept and potential revenue sources for it. The evaluation should emphasize ways a trust
could support and enhance the SRF programs as they currently function, and with expanded
eligibilities. The Board further endorses the use of environmental fees as the principal source
of revenue for a national or state trusts. Any proposal, however, to implement a national fee
system by itself, or in support of national or- state .trusts, should be carefully evaluated for
potentially duplicative or disruptive effects on existing state fee systems.
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As part of the trust study, the Board recommends that EPA evaluate the state trust
concept as well as the national trust concept. The evaluation should stress the advantages and
limitations of linking the trust to the SRF and should carefully examine incentives and sources
of revenue. The investigation of potential sources of revenue should include taxes and fees that
tap the private sector, as well as the public. The Board further recommends that EPA actively
support, through technical assistance and cooperative agreements, any current state efforts to
create environmental trusts or trust-like mechanisms as a public finance strategy for meeting
environmental needs.
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V. DEDICATED FEE SYSTEMS AS A SOURCE OF FUNDING FOR FEDERAL AND
STATE ENVIRONMENTAL PROGRAMS
A. STATEMENT OF THE ISSUE
Even with additional capitalization of die SRF program, states may still face funding
. shortfalls in their water quality programs. In addition, there is currently no self-sustaining
source of capital available for drinking water and solid waste management programs. Thus new
public funding sources must be considered. Dedicated fee systems, for example, can help raise
the capital needed to finance investments in these media. Fee systems, however, while able to
contribute toward capital costs, axe primarily a good source of funds for program administration
and operation. Since such costs are .rising concurrently with the need for environmental
investments in capital projects, the Board believes an evaluation of fee systems is warranted.
Dedicated fee systems to support state environmental programs are becoming increasingly
significant as sources of funding. According to a 1989 study by the National Governors'
Association (NGA), 44 states used some form of alternative financing to help fund their
environmental programs.57 The NGA counted 431 active alternative financing mechanism
programs operating between September 1988 and May 1989. Alternative financing programs
are defined as any financing method other than federal grants and state appropriations from the
general fund. Programs cited in the report include fees, taxes, bonds, and revolving loan funds.
The term "fees" in this .discussion refers to both fees and taxes used to help pay for
environmental programs. Conceptually, a fee is linked directly to a service or benefit provided,
while taxes may or may not have such a linkage. Fees could be used to support any of the
public finance options described in Section IV, although historically appropriations have been
the source of funding for the SRF program and would also be for the Clean Water Fund.
Several issues associated with fee systems include fee design and the media targeted, the
level and location of system administration, and, in the case of state fee programs, the role of
the federal government. The Board believes it both timely and appropriate to 'examine fee
systems designed to meet both programmatic and capital needs.
The first issue to be considered hi assessing all fee systems is that of fee design and
administration. On equity grounds, the fee should be structured to match the benefit received
from the service to the cost charged for that service. Alternatively, where fees are actually
taxes, policy makers may want to structure the tax to reflect the contribution to pollution made
* by the taxed entity. In practice, however, this kind of close matching of fee and benefit (or tax
and contribution to pollution), is sometimes difficult There may be no data to provide the basis
for such an accounting, as.in the case of industrial solid waste management It may be
impossible to accurately measure the contribution to pollution - an industrial effluent fee,'for
example, would most likely be based on permitted levels, because actual levels are not metered.
Different classes of users may have different kinds of impact on the environment If all are
taxed, it may be difficult to design tax rates that reflect the respective impact of each. A water
use fee levied on users of publicly-supplied water and on self-suppliers of water is one such
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example. As a result, a compromise may have to be reached in order to make implementation
of a fee system possible.
A second issue is the level and location of administrative control of the fee system. As
a general guideline, the control over collection and disbursements should be as close to the use
of the revenues as possible. Where more than one agency or program uses the revenues, some
central authority is usually necessary to make funding decisions. A national fee system could
probably be administered by EPA or Treasury.58 Alternatively, a national fee system could be
administered by the states; an effluent discharge fee, for example, might be collected by the
states as discharge permits are reissued and deposited in the national trust, net of administrative
expenses.
1 A national system might well return to a state an amount equivalent to that collected from
it, with the state allocating the revenues based on its own priorities. This "hold harmless"
approach begs the question of having a national system in the first place, unless the system has
the discretion to redistribute revenues among the states based on some preference given to
national priorities and state needs. This function, of course, is the principal underlying
justification for a national system. (It should also be noted that state fee programs are often
redistributive in nature, with revenues going to support state or local assistance programs.)
The third issue involves the role that should be played by the federal government with
respect to state fee programs. That role can be passive limited, for example, to the provision
of technical assistance .or active, whereby the federal government actively encourages the
creation of state fee programs.
B. POTENTIAL APPROACHES TO TYPES OF FEES AND THEIR DESIGN
There are a host of fee systems that may be used to help pay for environmental
infrastructure and environmental programs. Several examples include:
, Water supply fees;
*
Wastewater effluent or permit charges; and
Solid waste taxes.
Other types of fees that could be charged would be more loosely related to the
beneficiary-pays principle. Corporate revenues can be taxed, for example, and used for
environmental purposes. In evaluating options that could be used to finance the Superfund
program, the Atlantic Richfield Company suggested the imposition of a gross corporate receipts
tax. This would tax the gross receipts in excess of $50 million in selected industries, or could
be spread across all industry. The proposal entailed a dedicated tax of less than $4 per $10,000
on corporate receipts in excess of $50 million per year on all businesses riling a U.S. corporate
income form 1120. This deductible excise tax would be levied on line l(c) of form 1120. The
company estimated that, depending on the rate used, the program could collect $500 million per
year.59
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Hie Board examined the revenue capacity of the three example fees listed above, in order
to assess their potential as public finance approaches to help pay program and capital costs in
the three environmental media. It should be noted that while the examples discussed below use
estimates for the United States as a whole, they are not meant to imply that these fee systems
are appropriate only at the national level. Indeed, many states have successfully-adopted fee
systems for environmental programs. .
Water Supply Fee
Description
An administratively simple water user fee could be levied on residential, agricultural, and
industrial users, entailing a fixed charge per 1,000 gallons used. Several issues, however, must
be resolved before such a fee could be implemented, first, for unmetered users, water use
would have to be approximated. The current system used by cities to estimate annual usage by
unmetered users could be used for fee assessment purposes. However, imposing a fee on self-
suppliers of water is more problematic. Such a fee would be difficult to collect at the household
level, as measurement would be all but impossible without installation of meters at every
wellhead. Self-suppliers of water can affect the water table and hence the costs of public system
withdrawals in adjacent areas that draw from the same aquifer; therefore, an argument could be
made for charging these users some lower rate. In 1985 approximately 17 percent of the U.S.
households supplied their own water through private wells.60 Assuming that this percentage
has not changed significantly, a $0.03 fee per 1,000 gallons levied on self-suppliers could raise
$345 million from 1993-2000.61
Even excluding self-suppliers, the revenue potential from a water use fee is large. Using
recorded withdrawals of publicly supplied water, a 5-cent fee per 1,000 gallons withdrawn has
been estimated to yield revenues of $6.3 billion for the period 1993-2000. Increasing the fee
to 10 cents per 1,000 gallons would yield $12.5 billion for the period. At 20 cents per 1,000
gallons, revenues would equal $25.1 billion over the same period.
This analysis assumes no reduction in water use. While such an assumption appears valid
for residential users, the imposition of a fee would probably lead to a drop in demand by
industrial users, who are more sensitive to price changes than individual households.62 This
group represents about 16 percent of total demand for water. Even if that demand fell by 50
percent in response to the fee, revenues overall would only fall slightly, to $5.8 billion, $11.5
billion, and $23.1 billion, respectively.
Translating this fee into an impact on households shows that it results in a relatively small
user burden. At the highest fee rate, average household water bills would increase by $20.25
to $26,98 per household per year.63 This rise represents an increase of 15-20 percent in the
nation's average household water bill and increases rates as a percentage of median household
income from 0.46 percent to between 0.53 and 0.56 percent.64
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Benefits and Concerns
The benefits of water use charges include large revenue potential, moderate impact on
households due to the breadth of the charge, and relative ease of collection. Economically
disadvantaged households can be excluded or charged less for water use and the charge can be
added as a line item to water bilk.
One concern with water use fees is their design, especially determining "fair" rates for
self-suppliers. While industrial self-suppliers could, in theory, be monitored, households that
draw their own water would be difficult to charge.
Wastewater Charges
Description
A fee on wastewater could take several forms. Ideally, the amount and/or toxicity of
wastewater generated could be monitored and a fee levied per gallon, per unit of controlled
pollutant, or some combination of the two. In practice, die fee could be based on permitted
limits rather man on actual discharges. Data on permitted levels of effluent discharge is
available under the National Pollutant Discharge Elimination System (NPDES) established under
the Clean Water Act. (All point source dischargers must secure a NPDES permit before they
can discharge to U.S. waterways. These permits are reissued every five years.) The permits
also show the estimated effluent content discharged, and its total volume. A fee could thus be
levied at the time of issuance or reissuance on the effluent limits as specified in the permit, or
made a function of the permit's estimate of actual discharge levels and content.45 To help
enforce payments by industry, NPDES permit issuance could be made contingent upon payment
of the fee. Alternatively, a fee could be charged for the permitting program itself. Fees of this
type are included in the Senate bill for reauthorization of the Clean Water Act (S. 1081). In this
case, industries subject to the NPDES permitting program would be required to pay an annual
fee to the state, where total revenues would cover not less than 60 per centum of the
development and administration of the permitting program.
An administratively simpler alternative would be to levy fees on the same basis that
household wastewater rates are charged, using water use as a proxy for wastewater discharge
volume. This would restrict the fee to a percentage of volume generated, however, and not
reflect effluent concentration.
Revenue from effluent charges could, be substantial. Using recorded releases of
wastewater from publicly owned treatment facilities as an estimate of total volume, while
underestimating true volume (because it excludes commercial facility discharges), gives some
idea of the revenues possible.66 A fee of S cents per 1,000 gallons discharged would yield $5.3
billion over the seven year period 1993-2000. Increasing it to 10 cents would yield $10.6
billion, and a charge of 20 cents per 1,000 gallons discharged would raise $21.3 billion over the
period.
These estimates also assume no reduction in water use. 'In this example as well,
approximately 16 percent of the volume discharged was industrial. Even if that demand fell by
/
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50 percent in response to the fee, revenues would fall only slightly, to $4.9 billion, $9.8 billion,
and $19.6 billion, respectively.
This fee would result in a relatively small user obligation for households, increasing
household wastewater bills by $20.25 to $26.98 per year, on average, at the highest fee rate.67
The levy would increase wastewater rates, as a percentage of median household income, from
0.52 percent to between 0.59 and 0.61 percent.68
*t
Benefits and Concerns
The benefits of effluent fees are similar to those of water use charges. The main concern
in charging industrial effluent fees is in fee design. If the fee is a flat rate per 1,000 gallons,
industry win have the incentive to concentrate its pollutants. If the fee design incorporates a
charge per pollutant, effluent may be diluted. It is possible to combine both concepts in an
effluent charge; indeed, states such as New Jersey have very sophisticated designs, but mis may
result in complex administrative processes.
Solid Waste Taxes
Description
^^^^ » ^
Unlike a water supply fee or a wastewater charge, solid waste taxes do not fall into the
category of user fees, unless the tax is restricted to feedstock taxes on inputs to production.
Levies on waste generation tax the polluter and not the beneficiary of the service.
Two main types of tax can be levied on solid waste waste-end taxes, and front-end (or
feedstock) taxes. The practicality of a solid waste end tax is limited there is no documentation
for solid waste collected and disposed of on behalf of industry. Municipal collection of waste
could charge a garbage fee, however, on a per bin basis. Some U.S. cities already use this
method of tax collection. In order to provide a revenue source at the state level, charges could
be levied on the disposal site operator.* Alternatively, the tax could be collected from
manufacturers who would pass it on at point of sale, as is the case with many state litter taxes.
Annual municipal solid waste generation is difficult to measure accurately definitions
of what constitutes municipal solid waste vary across states and within states. According to the
EPA/Franklin Model, 158. million 4ons of municipal solid waste were generated hi 1986; the
volume will rise to 193 million tons per year by 2000.69 Actual amounts of solid waste being
delivered to incinerators and landfills may be higher, however, as several categories of waste
are not included in the model's definition of municipal solid waste. Even so, the model suggests
that average per capita generation of such waste equalled 3.6 pounds per person per day in 1986
and will rise to 3.9 pounds per person per day by 2000. If a tax of $1 per ton were levied on
disposal operators, as much as $1.47 billion could be raised from 1993-2000, assuming no
change in behavior. A $5-per-ton tax would raise $7.4 billion over the period.
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Benefits and Concerns
Thebenefitsof a solid waste fee include large revenues and moderate impact. Assessing
a solid waste tax on industry, however, may be administratively impossible as there is no
documentation required in commercial solid waste management transactions. In addition, if a
tax could be imposed (such as a Surcharge on the tipping fee at the point of'disposal), it could
result in midnight dumping of solid waste if industry sees its waste disposal bills increase too
much.
Combined Revalue Potential
If fees and taxes are levied on drinking water, wastewater, and solid waste streams, the
potential revenues from 1993-2000 are huge and the impacts moderate. Using the lowest rates
considered for water supply, wastewater discharge, and solid waste management as a "low
projection" and the highest rates considered as a "high projection," Table 8 illustrates the
possible revenue streams.
Table 8: Annual Revalue Streams Available, 1993-2000 ($ billions)
Low Projection High Projection
Water supply fee
(public supply only)
With reduction $5.77 $23.08
Without reduction $6.27 $25.09
Wastewater charge
With reduction $4.89 $19.56
Without reduction $5.30 $21.30
Solid waste tax $1.47 $7.35
Total $12.13-$13.04 $49.99 - $53.74
Benefits and Concerns
The Board recognizes that the imposition of fees and charges could cause too great a
financial burden on some households in economically disadvantaged communities. Small
communities, or individual households with incomes below some level, could be exempted from
paying these charges. Thus, policy makers may not want to rely completely on user fees.
Tapping corporate revenues (or profits), as discussed earlier, could help alleviate the share of
the fee burden placed on localities and households.
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C. POTENTIAL APPROACHES TO SYSTEM ADMINISTRATION .
The following approaches to system administration are presented as options for
consideration and do not reflect recommendations by the Board.
National Fee Syston '
Description , .
As described earlier, environmental fees might be assessed against:
Dischargers using issuance of permits as the vehicle,
Consumers using surcharges on service bills,
The unit of government providing an environmental service, or
Industry, as environmental surcharges on various activities.
Examples of national fees or taxes already in operation include the motor fuel tax and the
emissions fee program established under the 1990 Clean Air Act.70
The motor fuel tax is essentially two taxes a $0.14 tax per gallon of gas and a $0.20
charge per gallon of diesel fuel. Many states have expressed the option to attach riders to these
federal charges. The taxes are dedicated to the Highway Trust Fund, a user-supported federal
trust fund intended to finance the Interstate Highway System and other roads authorized by
Congress. The gas tax is collected from the refineries directly, a system that is considered
efficient since the total number of collection points is relatively small. The diesel fuel tax is
collected at the wholesaler level. (Diesel fuel is used for other products besides fuel for motor
vehicles.71 In order to limit the assessment of the tax to that portion used in motor vehicles,
collection must take place after it leaves the refinery, hence collection at the wholesaler level.)
When the tax is reflected at the pump, the consumer is reimbursing the refineries and
wholesalers who have already paid this tax.
The tax is collected by the US Treasury, and funds are then credited to the Highway Trust
Fund. Although the fund is "on-budget", it is structured to hinder any attempt by Congress to
use revenues for other than designated purposes. Such diversion of-funds has been successfully
prevented until recently. Total annual revenues raised equal approximately $12 billion.
A second federal fee is based on the permit program instituted under the 1990
reauthorization of the Clean Air Act Under Title I, Section 502, the Act requires that an
emissions permit program be set up by the relevant air pollution control agencies (often the
state). It also requires that fees of not less that $25 per ton of each regulated pollutant be
collected from all sources subject to the program up to a limit of 4,000 tons per year of that
regulated pollutant. The monies are to be .used exclusively for the administration of the
permitting program.
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The design of a national environmental fee system to finance the types of options
discussed in Section IV will involve two primary administrative issues. The first is the level of
fee program administration; the second concerns the redistribution of funds among states.
The fee system, including disbursements, could be administered by EPA. If, however,
fee revenues were dedicated to national or state trusts, the trustees would be responsible for
system administration. Alternatively, state agencies now responsible for regulatory
environmental programs might be delegated administrative authority to implement a national fee
system and be compensated for that activity. At the same time, the state agency would be
permitted to levy additional fees for its own purposes. Regardless of fee design and media
targeted, the key question with any national system will be ease of fee assessment, collection,
and monitoring. .
A variation to a centralized system of national fees is federally, mandated authorizations
whereby states are authorized to establish their own fee systems contingent on meeting certain
minimum federal criteria. If a state railed to establish a fee system after a given interval, a
federal system would take effect This essentially is the approach taken in S.1081 (now under
consideration by the U.S. Senate) as, part of the Clean Water Act reauthorization.72 A more
passive option could provide a system of federal cash incentives in the form of a guaranteed
federal match .to states whose fee system satisfies national criteria.
Benefits and Concerns
The chief utility and benefit of a national system is its capability to direct revenues
toward the support of national or state environmental programs with the concomitant reduction
in state reliance on general funds. Dedicated fees diversify available funding sources for
environmental programs and help reduce that proportion of funds that is dependant on an annual
appropriations process. The public and private payees into the system benefit through improved
professional management of programs and in the case of subsidies, from potential eligibility for
financial assistance. A second benefit is the ability of a national fee system to redistribute
revenues among the states, should such redistribution be established as a national goal.
The primary concern with a national fee system is the risk that its design and
implementation will disrupt state fee initiatives. Care must be taken to ensure that this does not
occur. One way to help mitigate this risk is to use a default system as described above, which
leaves the design and implementation to the states.
State Fee Systems
Description
There are many examples of operating state fee systems that fund environmental
programs. Ideally, fee systems should reflect the importance of full-cost pricing not only to pay
for pollution prevention and control facilities at the local level, but also to support the
administrative infrastructure required for state program implementation. Several examples of
current state programs are discussed below to demonstrate the variety of designs that exist
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Most states levy some form of environmental fees or taxes to cover program costs and
help finance capital investments. For example, Arizona's state water tax is imposed as a
surcharge on local user fees; Washington uses its cigarette tax to fund environmental programs;
and the New Jersey NPDES permitting fee program finances permit administration.
There are actually two taxes that appear on local water bills in Arizona. The first is a
state sales tax of 5.5 percent on the "sale" of water used. The funds are not dedicated, but
rather deposited in the state's general fund. The second fee is referred to as the "Drano" tax
and equals 0.65 percent of the bill. The tax was introduced in.October 1990 for the express
purpose of financing the state Department of Water Resources. As a line item on local water
bills, the tax is repaid by water utilities on a monthly basis as receipts are collected. Revenues
collected in the first eight months of FY1991 were $830,679. Receipts for 1991 as a whole will
reach an estimated $1.1 million.73
The New Jersey Pollutant Discharge Elimination System (NJPDES) charges permit fees
on industrial dischargers to state waterways. The fees are designed on a sliding scale for each
permittee. They are a function of both the quantity of contaminants discharged and the relative
environmental risks associated with the discharge. High-volume, high-risk dischargers therefore
face a higher fee than low-volume, low-risk dischargers. Total fees collected in 1987-88
equalled over $16 million. The total dropped to $11.2 million in 1989 as a result of permit
terminations, rate recalculations, and probably pollution reduction. The Department of
Environmental Protection has statutory authority to issue Civil Administrative Penalties to
facilities for failure to pay their permit fees. The revenues are dedicated to covering the cost
of processing, monitoring and administering the permit program. Revenues must not exceed
these estimated costs.
The state of Washington levies taxes on cigarettes, tobacco, and water pollution control
equipment to finance ground water protection projects and water pollution control programs.
The fee is $0.08 per packet of cigarettes and 16.75 percent on tobacco products.
All revenues are dedicated to the state Centennial Clean Water Fund, which provides
grants to municipalities for environmental projects. Half the fund proceeds are dedicated to
control discharges into marine waters. The other half is used for various water quality projects,
including nonpoint source programs and aquifer protection. In 1990, estimated revenues were
$45 million.
Benefits and Concerns
Properly structured and administered fee systems can be a reliable source of significant
funding for environmental programs.74 Further, fee systems can serve as dependable,
significant supplements to annual appropriations and other undedicated sources of funds, which
are subject to forces unrelated to the needs of environmental programs. In addition, fee systems
can serve as an efficient means of directing funding to priority needs involving capital financing,
and providing debt service payments for environmental projects financed by revenue bonds.
One concern with national and state fee systems is their potential to displace other sources
of funding.75 As fee systems become major sources of revenue for state programs, a
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perception may grow among state policy makers that there is a concomitant decline in need and
justification for additional direct appropriations that historically have supported such programs.
Hie Board concludes that environmental fees should play a much broader role with
respect to assisting state programs. National or state fees should be viewed as a potentially
significant source of additional, supplementary revenue to help states-meet the increasing capital
and management costs of environmental programs.
The Board further recognizes that state environmental programs cannot, and probably
should not, be totally dependent for funding on fee-based revenues. The strength of state
programs is enhanced by relying on a diversity of funding sources, including federal
appropriations. Thus, the Board does not suggest that fees be adopted as a means of eliminating
or reducing other existing sources of funding support, while at the same time recommending that
the federal government actively support and encourage the adoption and expansion of state
environmental fee systems.
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NOTES
1. Calculated at operating costs plus new capital outlays. Figures exclude non-EPA federal
expenditures. Alan Carlin, with the assistance of the Environmental Law Institute,
Environmental Investments: The Cost of a Clean Environment, prepared for the US EPA,
Office of Policy, Planning, and Evaluation (December 1990), Tables 4-1 A, 4-2A, 5-1 A,
and 5-2A. All figures are given in 1986 dollars.
2. The average expected real rale of growth in US GNP from 1990 to 2000 equals 2.37
percent per year. Figure calculated from yearly forecasts as cited in Congressional
Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 1992,
Table H-2, Comparison of CBO, Administration, and "Blue Chip" Economic Projections,
Calendar Years 1990-2000 (March 1991).
3. For further -discussion of small communities, the reader is referred to the EFAB
Advisory, Small Community Financing Strategies for Environmental Facilities (August
9, 1991).
4. US EPA, 1988 Needs Survey Report to Congress: Assessment of Publicly-Owned
Wastewater Treatment Facilities in the United States (February 1989), Table C-3.
Average populations served by a 1 MGD facility calculated from Table C-4.
5. Wade Milter Associates, Inc., The Nation's Public Works: Report on Water Supply,
prepared for the National Council on Public Works Improvement (May 1987). Also, US
Congress, Office of Technology Assessment, Facing America's Trash, What Next for
Municipal Solid Waste? (October 1989). Average community size generating 30 tons per
day calculated from estimates on 75-76. Ratio of municipal solid waste to all waste
generated and sent to landfills for one community in Florida (3.9/8.5 Ibs per capita per
day), used against national estimates for average municipal generation per capita (3.75
IDS. per person per day), between 1986-2000. -
6. While it is true that some states exclude general obligation bonds from state caps where
the proceeds are used for environmental projects, overall there is still a trend toward the
use of revenue bonds for such projects.
7. Government Finance Research Center and Peat Marwick, Mitchell & Co., Financial
Capability Guidebook (Draft), Financial Management Assistance Program, 41-45. The
threshold for wastewater charges ranges from 1-1.5 percent for income levels up to
$17,000. The same thresholds are applied to drinking water charges as well in: Policy,
Planning & Evaluation, Inc., The Municipal Sector Study, Impacts of Environmental
Regulations on Municipalities, prepared for US EPA, Office of Policy, Planning, and
Evaluation (September 1988). If solid waste fees are charged a similar threshold might
apply. In addition, it should be noted that other factors also affect credit worthiness, and
hence a municipality's ability to raise capital. These include its rates relative to
neighboring communities and how rate setting is managed within the community. In the
latter case, for example, a town's rating is less likely to be damaged if rates are
increased incrementally over several years, rather than abruptly in any one year.
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8. These figures are given in nominal terms and therefore include the effects of inflation.
In teal terms, rates will still increase over 10 percent per annum until the end of the
century.
9. The organization behind the movement is the Massachusetts' Citizens for Limited
Taxation.
10. Malachy Fallen and Joan Pickett, "The Price of Clean Safe Water", Standard & Poor's
Credit Week (July 30, 1990), and personal communication with William Chew, Senior
Vice President, Municipal Finance Department, Standard & Poor's Rating Group.
11. See for example the EFAB Advisory, Incentives for Environmental Investment: Changing
Behavior and Building Capital (August 9, 1991).
12. US EPA, Office of Policy, Planning, and Evaluation, Environmental Investments
(December 1990).
13 . The costs of existing regulations are "those associated with regulations and programs that
were substantially in place by 1987 and have achieved substantially full compliance with
standards or attainment of goals." The costs of new regulations are "those estimated to
result from new or recently implemented regulations and programs (i.e. those not
substantially in place by 1987) and regulations currently under development or proposed
by EPA." The costs of full implementation are those costs "that would arise from full
compliance with those existing laws, regulations, and programs for which the attainment
passed but for which there was substantially less than full attainment by
1987. They include costs of bringing all cities into attainment with ...the costs to satisfy
the nation's municipal wastewater treatment needs to bring about fishable/swimmable
water quality". US EPA, Office of Policy, Planning, and Evaluation, Environmental
Investments, 1-5.
14. This figure is calculated from US EPA, Office of Policy, Planning, and Evaluation,
Environmental Investments, Table 4-1A: Water Pollution Control Capital Costs. The
figure equals total state, local, and federal (EPA only), capital spending requirements for
point and nonpoint source projects, to maintain current levels of environmental quality,
for the years 1988*2000 inclusive. Figure is in 1986 dollars.
15. Appropriations to the SRF equaled $2.304 billion in 1988; $1.95 billion in 1989; $1.99
billion in 1990; $2.10 billion in 1991; and $2.289 billion hi 1992. Personal
communication with US EPA, Office of Water.
16. Figures taken from Table C-l, US SPA, Office of Wastewater Enforcement and
Compliance (formerly Office of Municipal Pollution Control), State Revolving Fund
(SRF) Final Report to Congress (October 1991). Sixteen states will provide overmatch
funds at some time between 1988 and 1999.
17. Figures taken from Table 4.2, for years 1988-1994, US EPA, Office of Wastewater
Enforcement and Compliance, State Revolving Fund (SRF) Final Report.
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18. "Money in the SRF may be used for the reasonable costs of administering the SRF,
provided that the amount does not exceed 4 percent of all grant awards received by the
SRF. Expenses of the SRF in excess of the amount permitted under this section must
be paid for from sources outside the SRF.. .. Reasonable administrative costs include
all reasonable costs incurred for management of the SRF program and for management
of projects receiving financial assistance from the SRF. Reasonable costs unique to the
SRF, such as costs of servicing loans and issuing debt, SRF program start-up costs,
financial management, and legal consulting fees, and reimbursement costs for support
services from other State agencies are also available. . . . Unallowable administrative
costs include the costs of administering the construction grants program under section
205(g), permit programs under sections 402 and 404 and Statewide wastewater
management planning programs under section 208(b)(4).... Expenses incurred issuing.
bonds guaranteed by the SRF, including the costs of insuring the issue, may be absorbed
by the proceeds of the bonds and need not be charged against the 4 percent administrative
costs ceiling. The net proceeds of those issues must be deposited in the Fund" (55
Federal Register 10180).
19. Most of die data for this model was taken from the US EPA, Office of Municipal
Pollution Control, State Revolving Fund (SRF) Interim Report to Congress (April 1991).
Numbers were added, and/or updated by personal contact with SRF administrators in the
states involved.
20. Expected administrative costs in 1995 were assumed constant through 1999 based on the
assumption that there is not necessarily a direct relationship between administrative costs
and the level of lending.
21. In 1990 states received approximately 85 percent of their authorization levels, and in
1991 appropriations equaled 82 percent of authorization levels. In 1992 states actually
received 127% of authorizations; $2.29 billion instead of $1.80 billion.
22. In fact, debt service typically does not begin until construction has ended, which can be
three years. Constructing the model so that debt service (and hence fee payment) begins
one year after loan disbursement shows that even if states could require debt service to
begin right away, not enough money can be raised quickly enough to avoid a short term
deficit.
23. During the 1992-1999 period, three of the eight states in this example overmatched or
intend to overmatch their contribution to their SRF program. Connecticut significantly
overmatches its funds over the entire period. New Mexico plans to contribute between
$0.3 and $1.4 million per year during the years1992-94 in an overmatch account and
Virginia will contribute an extra $2.8 million in 1992. Because SRF restrictions
regarding the use of funds do not apply to overmatch funds, these three states, and hi
particular Connecticut, may be able to reduce or avoid short-term deficits as discussed
in the text In the nation as a whole, 16 states contributed or intend to contribute
overmatch funds at some point during the 1988-2000 period. In many cases, however,
the state's overmatching activity is limited to intermittent years. The two states with
significant overmatch activities are Connecticut and Wisconsin. Thus, while in the
*. *
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sample overmatch activity may reduce or eliminate the deficit for these three states,
overmatching tends to be the exception rather than the rule for the nation as a whole.
24. In a recent report on the status of the SRF program, 16 states reported that they expected
to face an overall administrative deficit over the 1989-94 period. US EPA, Office of
Wastewater Enforcement and Compliance, State Revolving Fund (SRF) Final Report.
After 1994 however, it is possible that a greater number of states will experience
shortfalls as the administrative allowance will have been reduced to zero.
25. The same study reports that many states have not developed financing plans to address
administrative costs after 1994. US EPA, Office of Wastewater Enforcement and
Compliance, State Revolving Fund (SRF) Final Report, 1-5. According to the Office of
Water- however, 30 states already have fee programs of one kind or another, so some
anticipation of future supplementary funding requirements has been made.
26. EFAB Background Paper, Current Private Involvement in the Provision of Environmental
Services: A Literature Review, (January 30, 1991). Only seven privatization .contracts
were ever signed one of the agreements included the construction of two plants.
27. This financing would be restricted to projects serving the public purpose.
28. For a greater discussion of the effects of the 1986 Tax Reform Act on environmental
financing, the reader is referred to the EFAB Advisory, Incentives for Environmental
Investment.
29. EFAB Advisory, Private Sector (Final) Advisory (November 1991).
30. EFAB Advisory j Small Community Financing Strategies for Environmental Facilities
(August 9, 1991). :
31. The four additions to funds available for lending by this "50-state SRF" equaled $67
million in 1988; $215.7 million in 1989; $625.98 million in 1990; and $923.76 million
in 1991. These figures represent the aggregation of ten states' leveraging efforts:
Alabama, Colorado, Connecticut, Iowa, Maryland, Minnesota, Missouri, New Jersey,
New York, and Texas.
32. Total estimated needs over the 1988-2000 year period were cited as $49 billion, assuming
maintenance of current standards. The reader is referred to section HI, A.
33. Without the extra funding projects worth $40.61 billion could be financed over the 20
year period. Under Case n, this total rises to $44.32 billion, an increase in funding
capacity of $3.71 billion.
34. Overmatch funds were excluded from the model in all four cases. Sixteen.states have
contributed or intend to contribute overmatch funds sometime during the 1988-1999
period. Over the 1988-1994 period, this activity will add a total of $1.07 billion in
capitalization to the SRF program. Between 1995-1999, another $286 million will be
added from the overmatch efforts of six states. This additional $1.35 billion, spread over
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a 12 year period, would add incrementally to the total financing capacity of the SRF
program. Overmatch activity for most states tends to be episodic in nature. Overmatch
figures taken from US EPA Office of Wastewater Enforcement and Compliance, State
Revolving Fund (SRF) Final Report, Tables 4-2 and C-l. In addition, the period selected
to represent case IV (Table 6), is based on the reauthorization period proposed in the
senate bill for reauthorizadon of the Clean Water Act, S. 1081.
35. Personal communication with the Office of Wastewater Enforcement and Compliance,
Office of Water, US EPA.
36. This evidence was made available through direct contact with the Bill Sharer from the
Arizona SRF, for example, and is mentioned as an issue in US EPA, Office of
Wastewater Enforcement and Compliance, State Revolving Fund (SRF) Final Report, 1-7.
37. The actual measurement of the costs resulting from these authorities, could be made a
part of state efforts to estimate the costs of compliance with environmental mandates, as
discussed in Section n above.
38. Personal communication with Jean Green, Enforcement Branch, Wage and Hour
Division, U.S. Department of Labor.
39. Personal communication with Bill Shafer, Arizona SRF program.
*
40. EFAB Advisory, Small Community Financing Strategies.
41. The fiscal affairs of small systems often are subsumed into the overall local government
making full-cost pricing difficult to implement; larger systems are often managed by
quasi-autonomous authorities whose bonding capability is separate from the local
government.
42. Fallen and Pickett, "The Price of Clean Safe Water".
43. Solid waste facilities are typically debt financed. Office of Technology Assessment,
Facing America's Trash. See also, Policy Planning and Evaluation, Inc., The Municipal
Sector Study and R. W. Beck and Associates, The Nation's Public Works: Report on
Solid Waste, prepared for the National Council on Public Works Improvement (May
1987).
44. Office of Technology Assessment, Facing America's Trash. Estimates made in 1988
suggested over 80 percent of all operating landfill sites would close by 2008. As much
as one third will close in the next three years. Closures are not being matched by new
openings: EPA estimated in 1988 that only 10 of existing landfills were less than five'
years old, while the life of a landfill often exceeds 20 years. Siting a new facility
(whether incinerator or landfill), can take 5-8 years or more; thus those states with less
than this time left in current landfill capacity face a suing constraint. This is a
significant number eight states have less than five years remaining capacity, and another
15 have between five and ten years remaining capacity. In addition, plans to site
incineration facilities are often dropped long after financing has been secured. A 1987
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survey by Kidder, Peabody & Co. concluded that the capacity of incineration facility
plans that had been canceled exceeded the capacity actually coming on stream (see R. W.
McCoy, R. J. Sweetnam, and M. A. Liker, Resource Recovery as of December 31,
1987, Kidder, Peabody Equity Research Industry Comment (New York: Kidder,
Peabody, & Co., 1988).
45. For a more complete discussion of the model used see Policy, Planning & Evaluation,
Inc., The Municipal Sector Study.
46. The study recognizes that very small communities are mote likely to obtain a bank loan
than float a bond and therefore measures this impact for that particular group.
47. - The 1.30 percent is the sum of the average rates as a percentage of income in the three
individual media: .46 percent in drinking water; .52 percent in wastewater, and .32
percent in solid waste.
48. US EPA, Office of Policy, Planning, and Evaluation, Environmental Investments.
49. The reader is referred to EFAB Advisory, Incentives for Environmental Investment.
50. This idea is based on a paper by Michael Curley. The Board gratefully acknowledges
the contribution of Michael Curley to this Advisory and to that of the Small Communities
Workgroup.
51. The reader is referred to US EPA, Office of Policy, Planning and Evaluation, Economic
Incentives, Options for Environmental Protection (March 1991).
52. The Board did not examine legislative options for establishing national fees to support
an environmental trust. One approach is to include in the trust's authorizing legislation
the amendments to the relevant environmental statutes providing for national fees.
53. ft would not help such programs avoid the problem, however, it would only help them
after-the-fact.
54. US EPA, Office of Wastewater Enforcement and Compliance, State'Revolving Fund
(SRF) Final Report, 6-4 - 6-6.
55. Anthony Commission on Public Finance, Preserving the Federal-State-Local Partnership:
The Role of Tax-Exempt Financing (October 1989).
56. These could include the implementation of some of the suggestions put forward in the
Anthony Commission Report on Public Finance, The Environmental Infrastructure Act
of 1991 (S. 90), Representative Anthony's 1991 tax simplification proposals (H.R. 710),
or the Environmental Infrastructure Financing Act of 1991 (H.R. 2172). These include,
for example, ^classifying environmental bonds as tax-exempt "infrastructure bonds",
defined as any state or local bond from which 95 percent of the proceeds are used to
provide sewerage, solid waste, water supply, certain hazardous waste disposal, and other
pollution-control facilities. For further discussion of the options discussed in these
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proposals the reader is referred to the EFAB Advisory, Incentives for Environmental
Investment.
57. National Governors' Association, Funding Environmental Programs: An Examination of
Alternatives (1989).
58. In the case of a national trust fund supported by fees the fee system could be
administered by the trustees.
59. Atlantic Richfield Company (ARCO), Funding Aspects of CERCLA Reauthorization,
Executive Summary (March 9, 1984). Also see, 'Management Analysis Center, Inc.,
Superjund Financing - Analysis of CERCLA Taxes and Alternative Revenue Approaches,
prepared for Atlantic Richfield Company (ARCO) (March 6, 1984).
60. Wayne B. Solley, Charles F. Merk, and Robert Pierce, Estimated Use of Water in the
United States 1985, U.S. Geological Survey Circular 1004, US GPO 1988, Table 3.
61. 1985 figure for self-supply taken from Solley, Merk, and Pierce, Estimated Use of
Water, Table 3. Water use is assumed to grow at 1.5 percent per annum.
62. Agricultural use could also potentially drop in response to the tax.
63. Based on drinking water withdrawals averaging 105 to 140 per person per day, and an
average household size .of 2.64 persons.
64. Water rates calculated from Ernst & Young, 1990 National Water and Wastewater Rate
Survey (January 1990), Exhibit 1. Median income figure is based on 1989 median total
household income of $28,906, Ed Walnack, Income Division, Bureau of Census,
Department of Census. Figure from US Bureau of Census, Current Population Report,
Series P-60, #168 (September 1990).
65. In practice it would need to be based on both. A straight volume fee could give rise to
highly concentrated discharges, and a contents only fee would give rise to dilution. Only
a fee that captured both would make the discharger pay for the pollution released. This
would be administratively more complex than a straight volume fee, however.
66. Numbers taken from Solley, Merk, and Pierce, Estimated Use of Water, Table 22. The
1985 wastewater releases are total public releases, in millions of gallons per day.
Wastewater releases were assumed to grow at 1.5 percent compound annual rate. Figures
for Puerto Rico and the Virgin Islands were excluded.
67. Using average drinking water withdrawals of 105 to 140 gallons per person per day as
a proxy for wastewater discharge and an average household size of 2.64 persons.
68. Wastewater rates calculated from Ernst & Young, 1990 National Water and Wastewater
Rate Survey, Exhibit 2. Median income figure is based on 1989 median total household
income of $28,906, Ed Walnack, Income Division, Bureau of Census, Department of
Census. Figure from US Bureau of Census, Current Population Report.
Page 48
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69. Office of Technology Assessment, Facing America's Trash, 73, 76.
70. For a full discussion of the fee program under the Clean Air Act, the Board refers the
reader to Title I, Section 502 of the Act.
71. It may be a component in home heating oil, for example.
72. See S. 1081, Section 21 (q)(5).
73. Personal contact with Rosa Hill, Phoenix Water Department, and Georganna Myers,
Arizona Department of Revenue.
74. See National Governors' Association, Funding Environmental Programs.
75. Ibid, 31-32. .
Page 49
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APPENDIX
Environmental Financial Advisory Board
(EFAB)
EFAB Chair
Richard Toikelson
Deputy Commissioner for Administration
New York State Department of
Environmental Conservation
Albany, NY
EFAB Vice Chair
Frieda K. Wallison
Partner
Jones, Day, Reavis & Pogue
Washington, DC
EFAB Executive Director
Herbert Barrack
Assistant Regional Administrator
Region II, U.S. Environmental Protection
Agency
New York, NY
Public Sector Financing Options
Workgroup
George A. Raftelis (Workgroup Leader)
Partner
Ernst & Young
Charlotte, NC
William H. Chew
Senior Vice President
Municipal Finance Department
Standard & Poor's Corporation
New York, NY
Roger D. Feldman, P.C.
Partner
McDermott, Will & Emery
Washington, DC
Shockley D. Gardner, Jr.
Executive Director
Virginia Resources Authority
Richmond, VA
Robert F. Mabon, Jr.
Morgan Stanley and Company, Inc.
New York, NY
Martin L. Mosby, Jr.
Managing Director
Public Financial Management, Inc.
Memphis, IN
Roberta H. Savage
Executive Director
Association of State & Interstate Water
Pollution Control Administrators
Washington, DC
Douglas P. Wheeler
Secretary for Resources
Sacramento, CA
Page A-1
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Economic Incentives Workffrnun <
Frieda K. Wallison (Workgroup Leader)
Partner
Jones, Day, Reavis & Pogue
Washington, DC
Honorable Beryl F. Anthony, Jr.
U.S. Representative
State of Arkansas
«
Dr. William Fox
Associate Director
Center for Business & Economic Research
University of Tennessee
Knoxville, TN
John Gunybu
Commissioner
Minnesota Department of Finance
St. Paul, MN
Heather L. Ruth
President
Public Securities Association
New York, NY
Richard Torkelson
Deputy Commissioner for Administration
New York State Department of
Environmental Conservation
Albany, NY
PageA-2
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Private Sector Incentives Workgroup
Warren W. Tyler (Workgroup Leader)
Vice President
State Savings Bank
Columbus, OH
J. James Ban-
Vice President and Treasurer
American Water Works Company, Inc.
Voorhees, NJ
Philip Beachem
Executive Vice President
New Jersey Alliance for Action, Inc.
Edison, NJ
Joseph D. Blair
Executive Director
Massachusetts Industrial Finance Agency
Boston, MA
Honorable Pete V. Domenici
U.S. Senator
State of New Mexico
David W. Gilbert
Vice President
Enviiotech Operating Services
Birmingham, AL
Harvey Goldman
Executive Vice President and Chief
Financial Officer
Air and Water Technologies Corporation
Soraerville, NJ
W. Jack Hargett
Vice President Government Relations
The Parsons Corporation
Washington, DC
Honorable Holland W. Lewis
Mayor of Mount Vernon
Mount Vernon, IL
Steven Liebennan
Assistant .Director for General
Management
Office of Management and Budget
Washington, DC
Page A-3
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Small Community Financing Strategies Wnrlcernun
Elizabeth Ytell (Workgroup Leader)
Director, Water-Wastewater Division
Rural Community Assistance Corporation
Sacramento, CA
Jack Bond
City Administrator/Deputy Mayor
for Operations
Washington, DC
Thomas Christensen
(Retired Supervisor)
Charter Township of Ironwood
Ironwood, MI
Dr. Richard Fenwick, Jr.
Vice President, Corporate Economist
CoBank National Bank for Cooperatives
National Credit Services Division
Denver, CO
William B. James, C.F.A.
Managing Director
Public Finance Department
Prudential Securities Incorporated
New York, NY
John C. "Mac" McCarthy
State Director
U.S. Department of Agriculture
Farmers Home Administration
Alexandria, LA
Honorable Anne Meagher Northup
Kentucky State Legislator
Louisville, KY
Page A-4
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Workgroup Support Staff
Environmental Protection Agency
David P. Ryan
Comptroller
John I. Sandy
Director, Resource Management Division
David Osterman
Chief, Resource Planning and
Analysis Branch
Helen Beggun
Chief, Giants Administration Branch
Region n
Alice Jenik
Chief, Policy and Program
Integration Branch
Region n
BenAbruzzo
Analyst
George Ames
Senior Analyst
Leonard Bechtel
Analyst
Margaret Binney
Analyst
Ellen Fahey
Analyst
Vera Hannigan
Senior Analyst
Joanne Lynch
Analyst
Timothy McProuty
Senior Analyst
Eugene Pontillo
Senior Analyst
Kim Thomas
Secretary
AnnM. Watt
Analyst
Apogee Research, Inc.
Dr. Kenneth Rubin
President
Ann Carey
Vice President
Dr. Susan Jakubiak
Senior Economist
Matthew Hardison
Vice President
Barbara Richard
Senior Financial Analyst
Lisa Akeson
Senior Economist
Amy Doll
Policy Analyst
PageA-5
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Expert Consultants to the EFAB (from EPA)
Stephen Allbee
Chief, Municipal Assistance Branch
Office of Wastewater Enforcement
and Compliance
Marian Cody
Analyst
Grants Administration Branch
Office of Administration and
Resources Management
Ann Cole
Small Community Coordinator
Office of Regional Operations and
State/Local Relations
Michael Deane
Environmental Protection Specialist
Office of Wastewater Enforcement
and Compliance
Ellen Haffa
Analyst
Grants Administration Branch
Office of Administration and
Resources Management
James Home
Special Assistant
Office of Wastewater Enforcement and
Compliance '
A. W. Marks
Senior Advisor
Enforcement and Program Implementation
Division
Office of Ground Water and
Drinking Water
Kitty Miller
Environmental Protection Specialist
Office of Water
Donald Rugh
Analyst
Office of Wastewater Enforcement and
Compliance
Peter Shanaghan
Mobilization Manager
Office of Ground Water and
Drinking Water
Ronald Slotkin
Analyst
Office of Research and Development-
Brett Snyder
.Economist
Economic Analysis and Research Branch
Office of Policy, Planning, and Evaluation
Page A-6.
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