THE CLEAN AIR ACT OF 1990:
                       A Guide  To
         Public  Financing  Options
           The new Clean Air Act may be the most progressive
            and sensible environmental initiative ever enacted.
                        The new Clean Air Act
             can produce tremendous public health benefits.
  *      It also can be very expensive — but it doesn't have to be.

    Under the Clean Air Act of 1990, state and local governments are responsible
 for implementation and compliance activities. As EPA's partners, state and local
 air quality agencies must expand many existing regulatory programs and add
 new ones to implement fully and comply with the Clean Air Act.
    The benefits of the new Act are expected to be enormous — EPA esti-
 mates that 56 billion pounds of pollution will be removed from the air each
 year.  In human terms, these measures will significantly reduce lung disease,
 cancer, and other serious health problems. The impact on the environment
 will be equally significant— less acidic lakes, more abundant crops and forests,
 and enhanced visibility.
    Clearly, the costs of achieving such health and environmental benefits will
 be substantial. While the eventual cost is still unknown, air programs across the
 nation currently are assessing the costs of these new and expanded regulatory
 programs and compliance actions, and the share of the financial burden that
 will be borne by state and local governments.
    This guide examines opportunities both within the provisions of the Clean Air
 Act and within current air program financing arrangements for state and local author-
 ities to meet the funding requirements of the new Act. In the Act, Congress pro-
 vided authority to all state and local air agencies to charge emissions fees at lev-
 els sufficient- to cover their air permit programs. Even with this new authority,
 state and local governments will need to explore alternative funding mecha-
 nisms and other arrangements to cover program costs not associated with the
 permit program. The financing mechanisms described in this guide may provide
 additional funding for state and local air quality agencies and are intended to sup-
 plement, but not replace, existing general revenues or federal grant assistance.
   The Clean Air Act also  encourages several market-based programs, such as
an allowance trading program that enables utilities to buy and sell emission cred-
its and mobile source trading between fleets of vehicles. While these and other
innovative programs can reduce the overall cost of implementation to both the pub-
lic and private sectors, the focus of this guide is on public financing options to sup-
port implementation and compliance activities. By "working smart," state and local
governments can lower the costs and increase the results of implementing the Act.
   The financing
mechanisms in this
guide are intended
  to supplement,
  but not replace,
  existing general
revenues or federal
 grant assistance.

  The strength of
the state programs
   is enhanced
  by relying on a
   diversity of
 funding sources.
                   Historical Sources Of Funds
           — Federal Grants, Permit Fees, and General Revenues —
    Historically, state and local air agencies have relied on three sources of rev-
enues to support air programs — federal grants available under Section 105 of
the Clean Air Act, a variety of fees and charges, and state and local general rev-
enues. On average, federal grants have funded some 35 percent of state and
local programs. The percentage of fees, charges, and general revenues that
make up the remaining balance is as diverse as the hundreds of state and
local air agencies.

               Broadening Sources Of Funds And
                Financial Arrangements To Meet
                     Clean Air Act Challenges
    While the Clean Air Act's new air emissions 'permit fees (under Title V) are
expected fully to fund direct and indirect expenses associated with running these
• programs, these fees will not recover the costs of running many other air qual-
ity control activities, such as mobile and area source control. To finance these
and other air program responsibilities, state and local agencies may have to explore
a wide variety of approaches, including:
• New Revenue Sources, such as fees other than Title V emissions fees, taxes on pollut-
   ing activities or on inputs that cause air pollution, and fines and penalties.
• Regional Authorities and Special Districts that provide an efficient means of
   implementing air programs because of their ability to consolidate administrative require-
   ments, capture economies of scale, target problem areas, and raise revenues through
   special assessments or service charges.
 • New Institutional Approaches, such as revolving loan funds, trust and enterprise
   funds, and bond banks, which help publicly owned sources comply with Clean Air Act
   requirements at low cost, and which match revenues to their intended uses.
 • Public-Private Partnerships that may accomplish certain program elements at
   lower cost than can purely public alternatives, depending  on the characteristics of the
   partnership. Possible candidates include mobile source emissions inspection, emissions
   inventories, and ambient monitoring.

                 Matching Financing Sources To
                       Air  Program Activities
     The alternative revenue sources and institutional arrangements discussed
 in this guide demonstrate that there is an array of options for financing state and
 local regulatory programs and compliance activities. Individual revenue sources
 may be more appropriate for some uses than others. When selecting revenue
 mechanisms, program managers should consider the timing of revenues, total
 revenue potential, reliability of revenues over time, and fairness across those
 who pay and those who  either benefit or cause  air pollution.
                                                                                  THE CLEAN AIR ACT OF 1990

    Similarly, financial management mechanisms should be carefully matched
 with the uses of funds to be managed. Important considerations in structuring
 such arrangements include local characteristics such as conventions for bal-
 ancing intergovernmental powers, authority to raise revenues or manage funds
 on behalf of the public, budgeting and accounting conventions, and political
 willingness to delegate fiscal responsibility.
    Public financing is only one of the many challenges facing states and local
 governments as they address the requirements of the new Act. The mechanisms
 suggested here, while not the answer to all program needs, can provide the finan-
 cial foundation for new and expanded state and local programs.
    Under the Clean Air Act of 1990, state and local governments must establish'
 an array of new and expanded programs to protect the nation's air quality. To be
 sure, these programs will be costly, but the federal Environmental Protection
 Agency is also taking a more flexible approach to implementing these laws, and
 providing multiple options to clean the air. By "working smart," states and local
 governments can help achieve clean air in a cost-effective way. Critical to the suc-
 cess of the Clean Air Act is the development of adequate resources to implement
 the many new and expanded requirements of the law. This paper examines
 financing alternatives that can be used to support state and local implementa-
 tion activities. The financing mechanisms described in this guide may provide addi-
 tional funding for state and local air quality agencies and are intended to supplement,
 but not replace, existing general revenues or federal grant assistance.
    This guide is intended to assist state and local authorities as they explore
 alternative financing options for implementation of the requirements of the
 Clean Air Act. The sections below describe the requirements of the law and relat-
 ed state and local program requirements, and introduce a range of financing
 mechanisms and institutional approaches that state and local governments
 can draw upon in establishing new program activities.
                          Of The
               CLEAN AIR ACT OF  1990 —
    The Clean Air Act of 1990 will result in the single largest environmental
regulatory program initiated under a federal statute. The Act is comprised of 11
titles, covering a wide variety of air quality issues ranging from bringing nonat-
tainment areas into compliance with air quality standards to addressing the prob-
lems of acid rain and ozone depletion. The table located near the back of this
guide (page 20) presents the key provisions of the Clean Air Act by title.
   We must
have your help.
   The hey to
   clean air"
 is a working

 While perniitfees
(under Title V) are
 expected to fund
  the full expense
associated with the
 stationary source
 permit program,
   they, will not
 recover the costs
 of running other
  activities, such
as mobile and area
  source control.
    Under the Act, state and local regulators are on the front-line of imple-
mentation. To implement the new Act, state or local governments, where autho-
rized, will need to adapt and enhance basic programmatic and regulatory
activities as follows:

  -f Prepare and implement State Implementation Plans (SIPs);

  -f Implement permit programs for stationary sources;

  + Create economic incentives programs, including emissions fees
    and marketable permits;

  + Improve monitoring of emissions from stationary sources;

  •f Create new inventories of ozone-causing emissions;

  + Enforce Stage II control programs at gasoline stations;  •

  -f Adjust inspection and maintenance programs for mobile sources to
    comply with the basic and enhanced provisions of the Act;

  •f Take the Clean Air Act into consideration in transportation planning,
    including the creation of new transportation control programs under the
    1991 Intermodal Surface Transportation Efficiency Act; and

  + Bring state and local public facilities (including stationary sources and
    state fleets)  into compliance.

    Implementation of these activities will increase the size, scope, and cost
 of state and local air programs over the next several years. The costs of these
' new or expanded programs, and the share of the financial burden that will be
 borne by state  and local governments, is currently being assessed by gov-
 ernments across the nation.
                                                           Meeting The
                                                 Financial  Needs  Of The
                                                 — CLEAN AIR ACT OF 1990 —

                                          Historically, states have relied on three sources of revenues to support air pro-
                                       gram activities —federal grants (and in particular ง105 funds), state permit fees,
                                       and general revenues. In the past, federal grants have comprised as much as 35
                                       percent of state and local program funding. A significant portion of state and
                                       local air program funding also has come from state general revenues. In Maryland,
                                       for example, general fund revenues accounted for 36 percent of the total expend-
                                       itures of the Air Management Administration in 1991 (total expenditures of $5.5
                                       million). Federal grants provided 35 percent of funding needs, with permittees
                                       accounting for 18 percent, and 11 percent coming from reimbursements and other
                                                                              THE CLEAN AIR ACT OF 1990

sources. As of 1990, at least 24 states and 25 local air authorities had air permit
programs that were supported at least in part with permit fees.
    Title V of the Clean Air Act requires that states impose emissions fees on sta-
tionary sources at levels sufficient to finance the Title V permit program. States
must charge at least $25 per ton per regulated pollutant unless they can prove
that a smaller charge will cover the full direct and indirect costs of the permit pro-
gram. This  program will greatly augment states' financial resources to admin-
ister pollution control programs by requiring sources of pollution to pay their share
of the costs of states' air pollution programs. While this helps, it will not meet all
of the new  program requirements outlined above because: (1) fee revenues
can be  used  only for the Title V permit program (which covers primarily sta-
tionary sources); and (2) fees are not likely to cover the full cost of the program,
especially in the interim period  before full implementation, since a number of states
are choosing to phase-in full cost recovery fees over several years.
    Even with increased permit fees, it is clear that states will need to do more
to meet the increased costs of the Clean Afr Act. Four categories of possible
actions are described here:

    r   •  New revenue  sources;

    If'"'  •  Regional authorities;

        •  New institutional approaches; and
    ;   •  Public-private partnerships.
    Financing mechanisms and institutional arrangements within these four
categories build on opportunities in the provisions of the Clean Air Act and in
current air programs so that state and local authorities can meet the funding require-
ments of the new Act. The following matrices summarize these options and
offer a framework for assessing the relevance'of options to particular funding
needs at the state and local levels.
    The first matrix lists the revenue options available to state and local air
pollution programs and assesses the applicability of each revenue option at both

                   Summary Of Revenue Options
Sources Of Revenue...
Federal Grants 	
State Loans and Credit

Capital Costs Program Costs
0 9
w •
ฉ 9
ฎ w
0 0
Capital Costs Program Costs
" 0
programs cannot,
  and probably
   should not,
    be totally
  dependent for
 funding on fee
 based revenues.,_
                        Fully Applicable   ^ Partially Applicable  (\) Not Applicable

the state and local level. It delineates between capital and programmatic costs
because a revenue source is often more appropriate for one or the other clas-
sification of cost. Applicability is assessed based on the timing of revenue col-
lection versus the timing of the costs being incurred and the availability of the
various revenue sources,  along with their relative reliability.
    The second matrix summarizes relevant fund management mechanisms,
identifying the revenue source with which they are commonly associated, the
level of government most likely to use the mechanism, and the level of government
benefiting from or receiving the funds.

           Summary Of Fund Management Mechanisms
Annual Appropriations ....
Revolving Funds
Bond Banks 	
Enterprise Funds . . .
Trust Funds

Source Of Revenue

Administered By:
• State
or Local

Manages Funds
On Behalf Of:
or Local

            New Revenue  Sources
    While the Title V permit fee program provides an important funding source
testates, it is only one source and its applicability is limited. In addition, it will take
a number of years for states to implement permit fee programs because, in most
cases, new state legislation is needed and because EPA must approve all per-
mit programs. Each state must submit a permit program to EPA for approval by
November 15, 1993. EPA then must approve or disapprove the program within
one year of its submittal. Within one year after a state has an approved program,
it must have collected applications from sources. All permits must be issued
within three years of program approval (by November 1997, at the latest). Some
states will implement a program and collect fees earlier, but other states may not
collect fees until the end of this implementation period. Some states are col-
lecting interim fees prior to full implementation to help cover the start-up costs asso-
ciated with establishing the new permit program, but these fees do not necessarily
exactly match the federally mandated permit fees; nor are they set to recover the
full cost of implementation.
    States will need to identify alternative funding mechanisms to cover new air
program costs not associated with the permit program and to fund the short-
term costs of implementing new permit programs before the fees are fully
                                       THE CLEAN AIR ACT OF 1990

implemented. Possible funding mechanisms include fees (other than the Title
V permittees), taxes, and fines and penalties.
    Not every financing mechanism will be appropriate for every state or local
program. Within each jurisdiction, political,-administrative, and legal charac-
teristics will influence the selection, design, and implementation of a financing
mechanism. The accompanying box lists eight key factors that can be used to
evaluate the merits of each mechanism in the context of the program it is
designed to finance, in general, no single financing mechanism will completely
satisfy all criteria. Equity considerations, for example, may be  qualified by
concerns over administrative costs, economic impacts, and incentive effects.
Taken together, however, these criteria form the basis for selecting an appro-
priate financing mechanism for a specific program activity.

[; •'   .             •   -    . "•'Criteria-Fpr'   ..  ,'-. •     '    •  '•  -• .    :
;>:             Evaluating: Financing Mechanisms         '  '...:
   • Equity reflects the fairness of the
     distribution of the funding burden
     among individuals. Equity in clean
     air programs can be approached
     from two directions — those who:
     create or contribute to environmen-
     tal problems should bear the fund-
     ing burden (the "polluter" pays) or
     those who benefit from program  .
     activities should bear the funding
     burden (the "beneficiary" pays),

   H Legislative acceptability
     reflects the political attractiveness
     of a financing mechanism.There
     are unique legislative predisposi-
     tions in each state that often influ-
     ence the choice of  a financing
     mechanism.       .'  '   :.       :

   m Public acceptability reflects
  ."/  the willingness of those subject to
     a fee or tax to pay,  or the willing-
     ness of the public to make a partic-
     ular sector pay.

   & Flexibility reflects the ability to
     use revenues from  alternative
   .  financing mechanisms as needed
     for a variety of program activities. '
 B Revenue potential
   is measured by the amount
   of money that can be raised  ,
   with a particular financing
   mechanism, and whether
 .  a mechanism provides a  ..'.-"
   one-time or continuing    ;
   source ,of revenues.

 ซ Feasibility relates to the .
   legal authority to impose a fee
   or tax as well as to factors
   that affect the workability of a
   financing mechanism

 m Administration require"
   ments relate to the/effort   • '.'•
   needed to implement an alter-
•   native financing mechanism,
   including start-up costs and
   on-going collection and man-
   agement of funds.  • •:•'  .  '

 ซ Impacts relate to whether a
   financing mechanism creates
..  incentives for desirable (or  .
   possibly undesirable) behav-
   ior, and whether it places an
   undue financial burden, on   .
 .  industry or .general taxpayers.
"working smart,"
 state and local
governments can
  help achieve
   clean air in
 a cost-effective
      Source: Discussion Paper on Alternative Financing Mechanisms for State Water Programs.
         Prepared by Apogee Research, Inc., for EPA's Office of Water, November 1989.

       P''r  2 '  •	^     :':V Fees	;
      A fee is generally a charge for a particular activity or service.
        Fees for public services are intended to establish a direct
               link between the demand for services and
                      the cost of providing them.
    Many of the activities conducted by states as part of their air quality pro-
grams could be supported by a "fee for service." For example, fees may be charged
for issuing permits, inspecting facilities, discharging or disposing of materials,
monitoring, and sampling, or for the incremental burden (or "impact") placed
on public services by new development. This could include fees imposed on
non-Title V sources, such as small boilers and area sources. Examples of new
fees for mobile sources include additional vehicle inspection fees, registration
fees, and new vehicle fees.
    In Maryland, for example, the Air Management Administration (AMA) has
imposed an Asbestos Contractors' License fee of $75-$450 (depending on
the number of employees engaged in asbestos projects). The fee is charged
to businesses, contractors, and public entities who engage in an asbestos
project. Other fees funding the AMA's budget include permit-to-construct fees,
fees for new emission-generating facilities operating in a non attainment area,
and permit-to-operate fees. Oregon has instituted an emission-based motor vehi-
cle fee of $2 for  pre-1980 cars and $1 for newer cars levied at the time of reg-
istration. The estimated $3.5 million in annual revenues will go to a special
Department of Transportation fund to be used for alternative transportation
projects to  mitigate motor vehicle air pollution.
    New York is considering a broad array of new or increased fees to finance
both stationary and mobile source requirements, including an emissions fee of
$250 per emission point for non-title V sources (e.g., small boilers), increased
inspection and registration fees, a new vehicle fee, and fees on "excess" vehi-
cle miles travelled (VMT).  In addition to raising  revenues, several of these
options are intended to create incentives to reduce air pollution. For example,
the "excess" VMT fee might encourage drivers to be more efficient in using their
vehicles (e.g., by combining trips) or to shift to an alternative mode of transportation.
    Surcharges on existing mobile source fees could also provide support for
state and local air pollution programs. For example, Florida finances state and
local air programs through a $1 surcharge on auto license tags. If a county has
a local air pollution control program that the state has declared eligible for fund-
ing, it receives $0.75 of the surcharge from the automobiles registered within the
county. If the county does not have such a program, the entire amount is ded-
icated to the state's air pollution control program. As of March, 1992, over seven
Florida counties had programs which were partially supported by this license fee.
    In many cases, fees are set to recover the full cost of the service for which
they are being collected. Indeed, this is a requirement of the Title V permit fee
programs  by the time they are  fully implemented. One way to  ensure maxi-
                                         THE CLEAN AIR ACT OF 1990

mum utilization of a financing mechanism such as the Title V permit fee is to ensure
that all of the activities related to the permit program are included in the costs
to be recovered through permit fees. For example, a comprehensive Title V per-
mit program would include not only the cost of issuing a permit, but also the indi-
rect costs of administering the program, such as monitoring emissions, inspect-
ing facilities, developing and maintaining new source inventories, and planning-
related activities, as well as indirect departmental overhead costs.
  .  A fee is often the most equitable means of matching program costs with those
parties responsible for or benefiting from program activities. Both legislatures
and the public are increasingly comfortable with charging "fees for service." Fees
can generate substantial revenues at relatively low rates where the base is
fairly  large. In addition, fees can be  designed to tap "new" sources of rev-
enues that do not overlap or compete with existing sources of program fund-
ing or general revenues. Finally, fees .can induce desirable changes in behav-
ior (such as reduced air emissions).
    Many state legislatures are reluctant to set fees high enough to recover pro-
gram costs. Historically, states and localities have charged only a nominal
amount for services, with the remaining costs financed with general revenues.
As a result, "fees" that are acceptable to the public today are relatively low. This
creates a dilemma for state programs that rely on fees to support their pro-
gram activities but that cannot raise fees to cover full cost without encounter-
ing public resistance. Another potential disadvantage of fees is that where
they fall on the same parties, materials, or activities as another assessment, there
may be competition from other programs that already rely on that source of funds
(e.g., many vehicle-related charges may compete with highway or transit pro-
grams). Finally, if fees are perceived as too  high, they could create incentives
to avoid payment through relocation, noncompliance, or other means.
        :!...    ..•'..•     .-.•'.-.•• Taxes  ;.. ..,;V:;'-;."   ;   -'..-.•:
      A tax is generally a charge against sales, income, or property.
        Taxes are typically used when program funding needs are
        large and when the benefits of an activity are widespread.
          Unlike fees, there may be less of a direct relationship
                 between the tax and the use of funds.
    Taxes are the primary source of general fund revenues. Sales and income
taxes comprise the majority of state general revenues, while property taxes
are the primary source of revenues for local governments (exclusive of revenue
sharing from the state). The mix of revenues from different taxes varies signif-
icantly from state to state,  reflecting  factors such as the level of manufacturing

     ...we need
  mow flexibility.
  The job is simply
 too big for any one
  sector or level of
or industrial activity, political predispositions, and historical preferences.
    Air programs have two options for using taxes to support their programs. They
can seek financial support from legislatures in the form of increased appropria-
tions from general revenues or seek dedication of specific tax revenues. As
states and localities face increasing demands on their general funds, environmental
programs are experiencing decreased appropriations even as new regulatory require-
ments are driving  program costs up. In the face of such competition, it may be
more constructive to look for new and dedicated taxes, rather than attempt to cap-
ture a greater share of general fund appropriations from year to year.
    For state or local air quality programs, taxes on sales or income provide some
opportunity for establishing a dedicated revenue source. A sales tax could be
levied on products or activities that contribute to air pollution, such as gasoline
or automobiles. An income tax or tax surcharge could be imposed ort those busi-
nesses whose industrial activities  contribute to air pollution. New York is con-
sidering an excise tax on automotive parts to help finance its mobile source pro-
gram. In California, the Sacramento Air Quality Management District is par-
tially funded by a local option sales and use tax on retail sales in the county, a
share of which is dedicated to the local air authority.  Other examples  include
severance taxes on coal and oil, tolls, a value-added tax (VAT) on certain man-
ufacturing processes, and property transfer taxes.
    Depending on the base, a tax can build directly on the principle that the pol-
luter or beneficiary pays. For example, a tax on products that contribute to
pollution problems (such as pesticides or gasoline) falls on "polluters," while
a tax on protected resources falls on "beneficiaries." Where the tax base is
broad (e.g., sales or income), a tax at even a low rate can generate substan-
tial revenues. Imposition and collection of taxes may be relatively straightfor-
ward — generally, the commodities on which a tax is levied have value and the
point of transaction (e.g., sales) can be clearly identified. Further, the mecha-
nisms of existing state agencies may be used to collect revenues. Finally,
taxes can be designed to avoid state-to-state and international competitiveness
concerns by targeting consumers as opposed to producers of products, thus
avoiding possible relocation by industry to avoid the tax.
                                            A major disadvantage to using taxes to fund state air programs is public and
                                         legislative opposition. In particular, many legislatures resist dedicating tax revenues
                                         to particular programs; instead, they may reserve their taxing, authority (and tax
                                         revenues) for the general purposes of the state, and insist that state air programs
                                         compete with other public programs for revenues. In today's tax cMmate, public
                                         resistance to new taxes is also high. Also, where a clear opportunity for dedicat-
                                         ed taxes exists (such as an automobile excise tax) there may be competition from
                                         other programs or from the state's  general fund for those revenues (e.g., in
                                         THE CLEAN AIR ACT OF 1990

Washington, an auto manufacturer's tax, which was initially proposed to support
cleanup of Puget Sound, was diverted by the legislature to the state's air pro-
gram). A further objection to taxes for specific program funding is that the relationship
between the tax base and target populations (polluters or beneficiaries) is some-
times tenuous. Some taxes may be difficult to justify beyond the fact that they
raise needed program funds. Finally, taxes may be regressive, imposing greater
costs on low income households relative to higher income households.
                    Fines and Penalties
        Fines and penalties are imposed primarily for violations
             of federal or state requirements or regulations.
    Whereas fees and taxes may be collected  on everyday activities, fines
and penalties are collected only on the exceptions  to normal operations. As such,
fines and penalties typically do not provide a steady stream of revenue. More
often, fines and penalties have been used to create positive incentives (e.g.;
improved compliance).
    Fines and penalties adhere closely to the principle of "polluter pays." As a
result, they enjoy both public and legislative acceptability. They also may be
an effective means of creating incentives for desired behavior, if violations
can be detected and the resulting fine is higher than the cost of the desired behav-
ior (such as installing a preventative measure). Finally, states may  exercise
considerable discretion in the use of revenues from fines and penalties.
    The feasibility of fines and penalties is dependent on the enforcement
authority's ability to detect potential violations. This may require extensive
inspection, monitoring, and enforcement activities. Without such enforcement
activities, the value of fines and penalties as a source of funds or as an incen-
tive is lost. Revenues from fines and penalties may be sporadic, and do not pro-
vide a steady and predictable stream of revenues for program  operations.
Finally, reliance on fines or penalties as the only source of funds for program
activities could create  perverse incentives for the  state agency to pursue
unnecessary enforcement actions.

                                                     Regional Authorities

                                                A regional authority is an independent agency created
                                                   through an intergovernmental agreement among
                                                          participating local jurisdictions.
                                                      The authority generally is governed by a
                                                 board of directors comprised, of representatives from
                                                           the participating governments.
                                           In some states, implementation of air programs may be better managed at
                                       a sub-state level. At the same time, the county or local level of  government
                                       may be too small to capture the geographic aspects of air emissions and dis:
                                       persion of pollution. In response,  some states have allowed for the creation of
                                       regional authorities to deal with the problem. Regional authorities may offer a
                                       cost-effective means of implementing program requirements.
                                           Several states  have long-standing  regional air pollution control authori-
                                       ties. In Oregon, state law expressly allows cities and counties to form region-
                                       al air pollution control authorities by adopting local ordinances. If the state
                                       Environmental Quality  Commission determines that the boundaries of the
                                       authority are reasonable and the proposed financing is sufficient, the state
                                       delegates its air permitting activities to the regional entity. There is currently one
                                       such regional authority in Oregon, which is financed through a combination of
                                       state and federal grants, permit fees, local funding, and enterprise activities.
                                       Because the local authorities are ultimately responsible for their own financing,
                                       the cost of air permit implementation to the state may be reduced.
                                           Special districts offer another means of forming a sub-state or regional
                                       entity that encompasses several  local jurisdictions. Special districts are limit-
                                       ed-purpose local governments created as separate entities, often with substantial
                                       independence from general-purpose local governments (e.g., counties, munic-
                                       ipalities,  and townships). A special district can be  created by state law to pro-
                                       vide environmental program services. Characteristics of special district gov-
                                       ernments differ widely among the states, with varying degrees of administra-
                                       tion and fiscal autonomy provided for by state legislative provisions. Special dis-
                                       trict governments are known by a variety of titles,  including districts, authori-
                                       ties, commissions, and boards. Options for sources of revenue include special
                                       fees or taxes, special assessments, and tax increment financing. Of the spe-
                                       cial districts in the United States, 43 percent have the power to impose district-
                                       wide property taxes, 24 percent impose service charges, and 14 percent have
                                       the power to impose special assessments.
                                           The state of California has created independent local air pollution control
                                       districts to implement air quality  programs. The principle sources of revenue
                                       for these districts are permit fees, automobile registration surcharges, and
                                       local special taxes. For example, the Sacramento Air Quality Management
                                       District, which has  been in existence since 1975,  finances its $8 million bud-
                                       get through a combination of local sales  taxes, county automobile registra-
                                       tion fees, permit fees, and federal and state grants.
                                                                               THE CLEAN AIR ACT OF 1990


    Regional authorities can consolidate administrative and other activities in
a single agency, eliminating duplication of effort among local agencies. Due to
economies of scale, a regional authority often can perform required air pollu-
tion monitoring and permitting activities more cost-effectively than individual
local agencies. Since the regional authority sometimes is financed by contri-
butions from the local governments involved, it can reduce the burden on the
state budget and increase the chances that the costs of air pollution control will
be shared equitably among local governments. Regional air pollution districts
allow states to target air pollution efforts to a particular area, implementing
more stringent regulations and monitoring only where necessary, thus direct-
ing funds where the needs are greatest.
    State governments may be concerned about loss of state control over
regional air programs that have been entirely delegated. Since the regional author-
ities are smaller, the state program may be able to achieve greater economies
of scale. If the regional authority is financed by local funds, it may be vulnera-
ble to local budget problems, intergovernmental financial disputes, or region-
al economic downturns. Local  politics may hinder regulation of economically
important industries and cause uneven implementation across regions, even
where conditions are similar. Regional authorities also may encourage.a nar-
rower focus on the problems of a particular area, while decreasing focus on wider,
interstate air pollution concerns.
                New Institutional
    In addition to implementing new administrative programs to ensure pri-
vate compliance with the Clean Air Act, state and local entities will have to
bring their own facilities into compliance with the Act. This will mean that
increased investment at the state and local level will be required to ensure
compliance of publicly-owned stationary sources of air pollution as well as
mobile sources, such as state or local fleets.
    There are several institutional initiatives states can develop to facilitate
public capital investments. These include:
   "'--ป  Revolving loan funds;

       ป  Trust and enterprise funds; and

   Jsss.,,,1,  Bond 'banks.   /•.  '; -.-..-," -•.../.   ...••.
   ...significant ^
opportunities exist
  for all levels of
 government and
 the private sector
  to improve the
   efficiency of
   finance and
  to boost levels
  of investment
 needed to  ensure	
that environmental
  goals are met.
   These institutional approaches offer several advantages to states. Trusts
and enterprise funds can ensure that revenues from specific sources (such as

                                        a fee or special tax) are.dedicated to their intended uses. Dedication through
                                        a trust or fund also may enhance public acceptability of a new fee or tax,
                                        because it reinforces the link between the revenue and its intended  use.
                                        Revolving loan funds and bond banks may lower the cost of raising capital, there-
                                        by making it easier for states and local governments to finance needed capi-
                                        tal investments in air pollution control measures.

                                                         Revolving Loan Funds

                                                         Revolving loan funds provide loans to
                                                      local governments for capital investments.
                                                   The repayment of these loans over time allows the
                                                    fund to revolve its lending ability in perpetuity.
                                           The State Revolving Loan Fund (SRF) program established to replace the
                                        construction grants program in wastewater treatment could provide a model for
                                        the development of an air quality loan institution. The revolving loan fund (RLF)
                                        concept could be applied to air programs to help local governments meet the
                                        anticipated need for capital investment to bring public facilities, such as munic-
                                        ipal incinerators or public transit systems, into compliance with the Clean Air
                                        Act. A revolving loan fund could be capitalized with a grant from the federal  gov-
                                        ernment or with state bond proceeds.
                                           Revolving loan funds can be designed to provide assistance based on
                                        environmental needs and/or financial need. The current SRF program bases loan
                                        applications on the former, but several states also take into account a community's
                                        ability to pay. Interest rates can be fixed or flexible. For example, very poor com-
                                        munities could be offered loan terms at a lower or zero rate of interest. Revolving
                                        loan funds could even provide grants.
                                           The primary advantage of a revolving loan fund is that it is a self-sufficient
                                        source of capital for capital investments. SRFs also are flexible in that they
                                        can be structured to offer subsidies where heeded.
                                            Creating a revolving loan fund requires a sizeable investment of capital. With
                                        federal grant funds diminishing and state bonds increasingly extended, it may
                                        be difficult to capitalize a revolving loan fund for a new program area such as
                                        air pollution control. Several problems could arise if revolving loan funds are not
                                        administered or designed carefully. The most obvious concern is the potential
                                        for depletion of the fund corpus, either because interest rates are set too low,
                                        or because default rates are too high. A second concern is whether particular
                                        states have sufficient demand for such an institution. Without a sufficient vol-
                                        ume of lending activity, a revolving loan fund may not provide a cost-effective
                                        means of financing public investments.

       ;.;     Trust and Enterprise 'Funds  .    •

            Financial management mechanisms link sources
        of funds with their intended uses, and also can be used
          to increase the value of resources between the time
                   they are collected and disbursed.
    Three mechanisms are summarized here. Trust funds  are created by states
to receive revenues generated by a specific tax or other funding mechanism
and disburse funds for the purposes to which the revenues are dedicated. A
variation on this concept is an environmental endowment, which can be created
to promote state air quality goals. In general, an endowment is an independent,
incorporated legal entity that directs funds toward a variety of research and pro-
gram activities. Endowments may receive revenues from a number of sources,
including dedicated taxes, fines  or legal settlements, or voluntary contribu-
tions. Enterprise funds are used to manage the finances  of government activ-
ities that are largely self-supported through user fees or another specified rev-
enue source. An enterprise fund is really no more than an accounting mecha-
nism to separate the financing of a particular activity from the general fund. As
a result, income and outlays can be segregated from the general government
budget. For instance, state and  local air programs may wish to establish enter-
prise funds to segregate the income and expenditures associated with the
Title V permit fee program to guarantee that the use of these funds is for Title
V-related activities.
    The major advantage of funds, and the primary reason for using them, is to
ensure that revenues from specified sources are used only for their intended
purposes. Funds also help insulate program activities from the vagaries of the
appropriations process. Funds help preserve program revenues by prevent-
ing them from reverting to the general fund at the end of the budget period. Finally,
where interest on fund balances accrues directly to the fund, revenues can
grow through good financial management.
    Funds place an additional administrative burden on the state, and may
only be cost-effective where program revenues are substantial. There may be
legislative opposition to the use of funds because of the loss of control over dis-
bursements of state revenues. Finally, where fund balances may be subject to
interfund transfers to meet other funding needs of the state, they may provide
only limited security for program revenues. In Connecticut, the legislature
recently transferred $4 million from the Auto Emissions Fund and $6 million
from the Leaking Underground Storage Tank Fund to cover increased expen-
ditures for a low-income energy assistance program.

                                                                Bond Banks
                                                     Bond banks assist local governments, and
                                           especially small communities, in gaining access to the municipal
                                               debt markets and in lowering the cost of debt financing.
                                           Currently, at least 13 states have bond banks. 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. 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. A bond bank can help lower the cost of
                                       capital for local communities and can be of special assistance to small or eco-
                                       nomically disadvantaged commuriities. It will either sell bonds in the bond
                                       market and use the proceeds to purchase bonds from local communities, or it
                                       may purchase local issues, pool them, and sell the debt as one large bond
                                       issue. Proceeds from the pooled bond sale are loans to the participating local
                                       communities, which repay the loan from facility revenues or from other local rev-
                                       enue sources. The costs of capital are lowered because pooling lowers the asso-
                                       ciated risk of default, similar to the way insurance policies operate.
                                           The primary advantage of a bond bank is that it helps communities gain access
                                       to otherwise inaccessible municipal debt markets. It also lowers the cost of
                                       debt financing for communities.
                                           Unlike a revolving loan fund, a bond bank must constantly go back to the
                                      . bond market for new capital because loan repayments from local governments
                                       are used to pay debt service on previous bond issues. Thus a bond bank's
                                       ability to assist local governments will fluctuate with the general level of bond
                                       activity. In addition, because bond banks rely on the sale of bonds backed
                                       solely by loan  repayments, they cannot offer the interest rate subsidies of
                                       revolving loan funds.

       Public-private partnerships can be defined as private sector
       involvement in historically public sector activities, ranging
      from performing contract labor for a public agency to private
          ownership and operation of a public purpose facility.
    Through public-private partnerships  in the performance of Clean Air Act
 mandated activities, state and local governments may be able to reduce the pub-
 lic capita] and operating costs involved in the implementation of the Clean Air
 Act, thereby reducing the need for state funds. The Act requires state and local
 governments to undertake numerous activities, including,  but not limited to,
 inspection, inventory, and monitoring of air quality and emissions. In  addition,
 states will be required to bring their own emission sources into compliance with
 the Clean Air Act requirements. Depending on each state's situation, it may be
 cost-effective for state and local governments to consider employing private sec-
 tor resources, in lieu of state resources, for some or all of the required activities.
    Public-private partnership arrangements fall into two broad categories: cap-
 ital and operating.; and operating only. Capital arrangements involve some form
 of private ownership and operation of a public facility. By permitting private own-
 ership, capital costs can be shifted to the private sector, eliminating the need to
 acquire public capital and relieving the burden on public debt capacity. In addi-
 tion, cost savings can be achieved because private capital construction costs are
. often  lower than public construction costs, in part because the private design, pro-
 curement, and decision-making processes are often faster than the public con-
 struction processes, and in part for the same reasons listed below for operating
 costs. Private operating costs often can be lower because: (1) a private company
 may be more responsive to competitive pressure; (2) a private company may expe-
 rience lower labor costs; and (3) a private company can achieve economies of
 scale by operating multiple facilities, even in multiple states. As an example, in
 other environmental programs such as solid waste removal and wastewater
 treatment, the private sector often has been 15 to 20 percent more cost-efficient
 than its public counterpart in  both capital and operating costs.
    One area where public-private partnerships already have been applied in
 a number of states is vehicle emissions inspection. Stricter vehicle emissions inspec-
 tion requirements in the Act will involve capital expenditures for new inspection
 equipment and facilities. If the final EPA regulations require the more  intensive
 l/M-240 emissions test, many states may have to invest in new equipment and
 facilities. For example, New  Jersey estimates that its 30 state-run inspection
 facilities will need to expand from 3-4 inspection lanes per facility to 10  lanes per
 facility. The state currently is exploring the option of having a private company
 build, own, and operate the new facilities. New York also is considering centralizing
 its emissions inspection  program by contracting out to private, non-repair auto
 maintenance companies. Such arrangements have already been successfully
 applied to emissions inspection programs in many states. For example, inspec-
 tion facilities in Maryland were sited, built, and operated by a private company
 after  a competitive bidding process. Here, part of the fee paid to the operator
 can find creative
 ways to leverage
available resources
    to achieve
  quality goals.

                                          is dedicated to state oversight and data collection, so that the cost to the state
                                          of operating the program is limited. North Carolina has recently added emissions
                                          testing to the annual  inspection program operated by private gas stations.
                                          States will need to consider the tradeoffs between centralized and decentralized
                                          programs in their consideration of privatization options.
                                             When capital facilities are not involved or when private ownership arrange-
                                          ments are not the best option,  operational savings still  can  be captured by
                                          contracting out certain activities to the  private sector, e.g., monitoring and
                                          inventory activities called for in the Act. The Wisconsin Bureau of Air Management
                                          is beginning a pilot program to contract out to private companies certain per-
                                          mitting and information and education activities required by the Clean Air Act.
                                          This pilot program resembles an existing state program using a private labo-
                                          ratory to monitor permitted wastewater discharges, and is another example
                                          of a public-private partnership in environmental compliance activities.
                                              Public-private partnerships already have been successfully  applied to
                                          public facilities and services in the areas of wastewater treatment and  solid waste
                                          management. To reduce the cost of bringing government-owned facilities into
                                          compliance, state and local governments may also want to take a similar
                                          approach for those public facilities subject to Clean Air Act requirements. For
                                          example, selling a municipal incinerator to a private company might allow a munic-
                                          ipal government to avoid the capital cost of emissions controls needed to bring
                                          the facility into compliance with Clean Air Act requirements.
                                             Under any public-private partnership arrangement, it is important to recognize
                                          that the ultimate responsibility for the provision of public services remains with
                                          state and local government officials. As such, there are a number of consider-
                                          ations that should be examined before undertaking any form of public-private
                                          partnership. Two of the more important issues to explore are the cost-effec-
                                          tiveness of the arrangement and the potential impacts on public employees.
                                             Since cost savings is often one of the first reasons to consider a public-private
                                          partnership, there must be a careful accounting of all costs associated with the pro-
                                          posed operation. A full accounting of costs should include both short-term and long-
                                          term needs, pricing factors, and the distribution of economic risks. The full cost of
                                          providing comparable services under public or private arrangements can then
                                          be compared to determine whether a public-private partnership is cost-effective.
                                             Public officials must also consider the potential impact on public employ-
                                          ees. There are steps that can be taken to mitigate the potential impacts on
                                          public employees, including agreements by the private sector to hire public employ-
                                          ees and honor existing labor agreements, early retirement options, and education
                                          and retraining programs.
                                             Private sector efficiency may lead to cost savings in both construction and
                                         operation of facilities. State officials surveyed in 1991 cited higher quality ser-
                                         vices, the provision of services that would otherwise be unavailable; and short-
                                         er implementation time as primary advantages of public-private partnerships.
                                         The shorter implementation time might be a significant advantage for states required
                                                                                   THE CLEAN AIR ACT OF 1990

to meet the deadlines set out in the Act for state program implementation.
Private investment in needed capital facilities also will reduce the amount of pub-
lic capital investment needed and reduce the impact on public budgets.
    Statutory or regulatory changes may be needed in order to arrange public-
 private partnerships, which might delay implementation of the activity in ques-
 tion. Cost savings and other benefits of private sector involvement may not
 always outweigh other financial and administrative costs associated with a par-
ticular public-private arrangement. Governments also may be concerned about
 the potential loss of government control in a partnership. Finally, some govern-
 ments may face significant political opposition from government workers who fear
 the transition to private sector employment, or from hostile public opinion.

                Sources  Of Information
    The information presented here provides a starting point for state and local
 governments to explore possible financing mechanisms for implementing the
 requirements of the Clean Air Act.

            We welcome your comments and suggestions  on  •;.'//...'...' .'••
               how EPA can provide additional assistance.             , '
 l                         Please contact:              • :  '         ;:

 "•--'      The Environmental Financial Advisory' Board;  .-• •   •,:
               c/o: U.S. EPA, Office of Administration and
                       Resources Management
           H3304, 401 M Street, S.W., Washington, D.C. 20460     ;      -:
         . -   •'.-...    . Phone: (202) 260-1020     ;.•-•••-•-•        ;
                "     Fax:(202)260-0710  ...;.;--;.;        \^[

 ^           '  For questions concerning[implementation.^ .     .....  .  !•
           the.Glean Air Act and other guidance, Please contact:..   .  ;;:

 ' ~       • '" The Clean Air Act Advisory Committee .';':.     : •:
 *-       :.•'••'..  c/o: U.S. EPA, Office of Air and Radiation               i
 ^      ANR-443,401 MStreet,:S.Vy;.;vyashington;:b:C. 20460;;: \; '."',••-^
         •   -        "Phone: (202) 260-7400-     ' ' ;    '.   ':'•'.,  :"
           :,     ,,'-.. Fa?1 (202) 260-5155.    ; • "• _ V^".:'..'. ."'V..,'' ^

        For additional  information see the back cover for a listing of federal,  ; ^
  .  state, and local air program.organizations and the inside back cover for  . ••-
 '"  a bibliography of relevant sources on financing air programs.  :•:'.:.
  "The key
to lower cost
 clean air is
 a working





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Title I
Carbon Monoxide
(1995 & 2000)
Particulate Matter
(1995 & 2002)
Title II
Mobile Sources
Reformulated Gasoline
(beg, In 1995)
Oxygenated Fuels
(beg, Nov. 1992)
Fleet Program
CA Pilot Program
(Model Yrs.
1996 & 1999)
Tier I Tailpipe Std.
Tier II determination
Title III
Air Toxics
Major Sources
Area Sources
Great Lakes and
Coastal Waters
"- (1995)
Industry Provisions
(Nov. 1993-2003)
Accidental Releases
Title IV

Sulfur Dioxide
(1995 & 2000)
New Utility Units
(by 2000)
Nitrogen Oxide
(1995 & 2000)
Emissions Monitoring
(1995 & 2000)

Key Provisions of the
• Technological control requirements
for major and minor sources;
• Emission offset requirements at
new/modified sources;
• Enhanced motor vehicle inspection
and maintenance;
• Stage II controls
(systems to capture evaporative
emissions at service stations);
• Automatic contingency measures;
• Transportation control programs;
• Clean fuels/advanced controls; and
• Mandatory sanctions.
• Reformulated gasoline in 9 ozone
nonattainment areas;
• Oxygenated fuels in 41 carbon
monoxide nonattainment areas;
• Clean fuel fleet programs in
25 ozone or carbon monoxide
nonattainment areas;
• Tailpipe emission standards;
• Clean fueled vehicle programs
and standards; and
• Fuel requirements and standards.
• Technological requirements
and health-based standards
(if necessary) for major sources;
• Reduction requirements
at area sources;
• Great Lakes and
coastal waters monitoring;
• Industry specific provisions
and standards;
• Development of plans to prevent,
detect, and respond to accidental
releases of toxic air pollutants; and
• New source performance standards
for solid waste incinerators.
• S02 reductions required at affected

and banking allowed;
• New utility units must obtain
allowance for emissions;
• Required NOx controls at
program; and
• Continuous emissions monitoring
required at sources affected under
the SOa and NOx programs.

Clean Air Act
Title V

Title VI
Production Phase-Outs
Recovery and Recycling
(1992 & 1994)
Motor Vehicle
Air Conditioners .
Nonessential Product Ban
( 1 992 & 1994)
Warning Labels
(mid 1993-2015)
Safe Alternatives
Title VII
Title VIII

Title IX
Clean Air
Titles X
and XI

of 1990
• Permits are required for sources
subject to acid rain control require-
ments, major sources, other sources
subject to new source performance
standards or hazardous air pollutant
standards, other sources required to
have a permit by Title I, and any other
stationary source in a category desig-
nated by EPA; and
• Collection of an annual or
equivalent fee sufficient to cover
all reasonable (direct and indirect)
costs required to develop and
administer the permit program.
The amount collected shall not be
less than $25 per ton of each regulat-
ed pollutant, or an amount sufficient
to recover full program costs.
• Production of CFCs, 3 halons, carbon
tetrachloride, methyl chloroform, and
HCFCs to be phased out;
• Trading of production and
consumption allowances;
• Standards regarding use and
disposal of Class 1 substances
during service, repair, or disposal
of appliances and industrial
process refrigeration; .
• Standards for safe disposal of
class 1 and II substances; and
• Regulations for the servicing of
motor vehicle air conditioners.
• Assess administrative penalties
up to $200,000;
• Criminal violations upgraded to
felonies; and
• Citizen suits against polluters.
• Federal grant stipulations;
• Regulate outer continental
shelf emissions;
• Visibility programs; and
• International border area plans.

• EPA research programs;
• Environmental health research; and
• Acid rain assessment program.
• Disadvantaged
• business concerns; and
• Clean air employment
transition assistance.


    .      Bibliography Of Relevant Sources ~   •. •  .
              On Financing Air Programs

• ABB Environmental, Inc. for U.S. Environmental Protection Agency.
  Summary of State and Local Operating Permit Programs. Chapel
  Hill, North Carolina: September, 1990. '   .  '."           .

• Cordes, Joseph. State Environmental Taxes and Fees:  An
  Overview. Washington, D.C.: Department of Economics, George ;
  Washington University,  1991 (presented at National Tax Association
  Conference on State Taxation.of Business)'.    .

• Eisenlohr, Gainor,  Overview of Current Work on Alternative Sources
  of Funding for Environmental Programs. Washington, D.C.: U.S.
  Environmental Protection Agency, Office of Policy, Planning and
  Evaluation, Office of Management Systems and Evaluation, Program
  Evaluation Division, July 20, 1984.

• Porter, Douglas R., et al. Special Districts: A Useful Technique for
  Financing Infrastructure. Washington, D.C.: Urban Land Institute,
  1987.                           ..

• Shields, Evelyn.  Funding Environmental Programs: An Examination
  of Alternatives. Washington, D.C.: National Governors'Association,
  1989.                       "•'"..                 '"I":

• U.S. Environmental Protection Agency, Office of Air and Radiation,
  Office of Program Management Operations. Air Resources Study.
  Washington, D.C.,  September 1988.

• U.S. Environmental Protection Agency, Office of Administration and
  Resources Management.  Agency Task Force on Fees:  Interim
  Report. Washington, D.C., 1986.

• U.S. Environmental Protection Agency, Office of Administration and
  Resources Management.  Paying for Progress: Perspectives on
  Financing Environmental Protection. Washington, D.C., Fall 1990.

• U.S. Environmental Protection Agency, Office of Administration and
  Resources Management.  Public-Private Partnerships for
  Environmental Facilities: A Self-Help Guide for Local Governments.
  Washington, D.C., May 1990. .

• U.S. Environmental Protection Agency, Office of Policy,  Planning
  and Evaluation, Office of Management Systems and Evaluation,
  Program Evaluation Division. State Use of Alternative Financing
  Mechanisms in Environmental Programs. Washington, D.C., 1988.

• U.S. Environmental Protection Agency, Task Force on Permit and
  Emission Fees. State and Local Air Pollution Permit Fees — Briefing.
  Washington, D.C., November 23, 1987.              '    .  .

• U.S. Environmental Protection Agency, Office of Air and Radiation,
  Outreach and Economic Incentives Staff.  Task Force Report on
  State and Local Permit Fees. Washington, D.C., Novembers, 1987.