United Statea
Environmental Protection
Agency
Office of Marine and
Estuarine Protection
Washington, D.C. 20460
Office of Policy
Planning and Evaluation
Washington, D.C. 20460
Office of Water
September 1988
503/8-88/001
<&EPA Financing Marine and
Estuarine Programs:
A Guide to Resources
by
Kenneth I. Rubin
APOGEE RESEARCH, INC.
4350 East West Highway, Suite 1124
Bethesda, MD20814
Mark Alderson,
Work Assignment Manager
U.S Environmental Protection Agency
Office of Marine and Estuarine Protection
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Executive Summary
Under the U.S. Environmental Protection Agency's (EPA)
National Estuary Program, state resource managers, town
planners, and local administrators jointly develop plans to
protect our coastal waters and preserve the living resources of
our estuaries. Based on past experience, these plans are
expected to call for a broad range of resource protection and
management activities, including the construction or
improvement of sewage treatment plants, implementation of
nonpoint source control programs, collection of data, and
restoration offish and shellfish habitat.
Implementing these technical plans to their fullest potential
requires significant financial resources. The National Estuary
Program provides funds only to develop recommendations,
not to actually implement activities or, for example, to
actually build a wastewater treatment plant. To move from
planning to action, therefore, resource managers must
understand and promote the myriad of financial mechanisms
available to support their cleanup programs.
This three-part document, Financing Marine and Estuarine
Programs: A Guide to Resources, will help estuarine and
marine managers understand the concepts and terminology
of public finance, and secure the funds needed to support
restoration and protection programs. The first part of the
report, the financial primer, introduces basic financing
concepts and explains the initiatives needed to begin financial
planning for long-term resource management activities. The
second part, the case studies, provides specific examples of
how some towns and cities have raised money to solve specific
water quality problems. Finally, the glossary serves as a quick
reference to the financial terminology that managers
unfamiliar with financial planning need to understand.
The primer focuses on the three fundamental components of
financial planning: (1) accessing revenues; (2) managing the
flow of funds; and (3) building institutions to oversee
financial planning and management. Sources of revenue-the
various taxes, fees, and assessments-are presented in terms of
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their advantages and disadvantages to fund estuary
programs. Next, the primer discusses typical ways to link
sources and uses of funds, and the institutions that preside
over these programs. Managers can use the information in
the primer to efficiently choose sources of revenue and ways
to manage financing programs.
The case studies demonstrate the use of financing tools,
financial management mechanisms, and management
institutions capable of raising revenue for a wide range of
projects. The 10 case studies discuss how various local, state,
and special-district governments successfully used the
financial mechanisms presented in the primer and other more
innovative mechanisms to finance resource protection and
other programs.
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TABLE OF CONTENTS
PART I. THE FINANCIAL PRIMER
I. Introduction and Overview 3
Matching Financial Techniques to
Restoration and Protection Activities 4
Accessing Revenues 4
Managing Revenues 7
Building Institutions 8
II. Tools to Access Revenues 9
Taxes 9
Income Taxes TO
Property and Sales Taxes 10
Commodity Taxes 11
Tax Surcharges 11
Fees 11
User Fees 12
Impact Fees 13
Intergovernmental Transfers 13
Debt as a Source of Capital 14
Types of Debt 15
Negotiated Versus Competitive
Bonds 16
Credit Ratings and Interest Rates 16
Impacts of the Tax Reform Act
of 1986 '. 17
Private Capital 18
Private Ownership or Operation 19
Other Forms of Public/Private
Partnerships 19
Tax Increment Financing 22
III. Financial Management Mechanisms 25
Appropriations 25
Capital Budgeting 26
Independent Mechanisms 27
Enterprise Funds 27
Revolving Loan Funds 28
Bond Banks 30
Revenue Dedication and Trust
Funds 30
in
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IV. Institutional Arrangements 33
Conventional Governments 33
Federal Government 34
State Government 35
Local Government 35
Special-Purpose Governments 36
PART II. THE CASE STUDIES
I. Introduction and Overview 39
II. Land Bank and Dedicated Revenues:
Nantucket Island, Massachusetts 43
Background 43
Administrative Setting 44
Program Characteristics 45
Applicability to Estuarine and Marine
Initiatives 45
III. Occupancy Tax: Dare County,
North Carolina 47
Background 47
Administrative Setting 48
Program Characteristics 49
Program Results 49
Applicability to Estuarine and Marine
Initiatives 49
Implementation Problems 50
IV. Tobacco Taxes: Washington State 53
Background 53
Program Characteristics 54
Program Results 55
Applicability to Estuarine and Marine
Initiatives • 55
V. Inland Waterways Trust Fund:
Nationwide 57
Background 57
Administrative Setting 58
Program Characteristics 58
Implementation Issues 59
Applicability to Estuarine and Marine
Initiatives 60
IV
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VI. Oyster Taxes: Maryland and Georgia 63
Background and Program Characteristics 63
Applicability and Estuarine Marine
Initiatives 65
VII. Tax Increment Financing District:
Orlando, Florida 67
Background 67
Administrative Setting 68
Program Characteristics 68
Applicability to Estuarine and Marine
Initiatives 71
VIII. Sport Fishing License: Chesapeake Bay,
Maryland 73
Background 73
Program Characteristics , 74
Applicability to Estuarine and Marine
Initiatives 75
IX. Stormwater Utility: Beilevue,
Washington 77
Background 77
Administrative Setting 78
Program Characteristics 78
Revenue Potential 79
Other Sources of Revenue 80
How Successful Has the Program Been? 80
Implementation Obstacles 80
Public Support 81
Roads and Highways 81
Applicability to Estuarine and Marine
Initiatives 82
X. Water and Sewer Trust Funds:
Corpus Christi, Texas 83
Background 83
Administrative Setting 84
Program Characteristics 84
Program Results 86
Applicability to Estuarine and Marine
Initiatives 86
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XI. Wastewater System Access Rights:
Houston, Texas 89
Background 89
Administrative Setting 90
Program Characteristics 90
Program Results 92
Applicability to Estuarine and Marine
Initiatives 92
PART III. GLOSSARY OF FINANCIAL TERMS
I. General Terminology 95
II. Forms of Debt Insurance 98
Short-Term Instruments 98
Long-Term Instruments 98
VI
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LIST OF TABLES AND FIGURES
TABLES
Table 1.
Table 2.
Table 3.
Table 4.
Table 5.
Table 6.
Table 7.
Tables.
Table 9.
Table 10.
Links Between Financial and
Technical Components:
Pollution Control
Links Between Technical and
Financial Components: Living
Resources, Monitoring, and
Institutional Management ..
Summary of Case Studies
Revenue-Generating Potential
From an Occupancy Tax in New
York City (in Millions of Dollars)
Revenue-Generating Potential of
an Additional Tax on Cigarettes
Sold in Maryland
6
40
50
56
Revenue-Generating Potential of
a Fuel Tax Based on All Fuel Pumped
for Marine Purposes in an Average
Year (Based on Fuel Prices of
$1/Gallon)
60
Fuel Expenditures of Commercial
and Recreational Boating Users for
Oregon Inlet, North Carolina (Based
on Fuel Prices of $1/Gallon)
Value Added by New Construction
and Major Rehabilitation to
Downtown Assessment Base (for
the Period 1986-1990)
Projected Tax Levy Scenarios for
Varying Development Rates
(Thousands of Dollars)
61
69
70
Projected Tax Levy Scenarios for
Most Probable Development,
Varying Millage Rates (Thousands
of Dollars)
70
VII
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Table 11.
Table 12.
Revenues from the Sale of Sport
Fishing Licenses, 1984-1986
Annual Revenues for a Community
of 50,000 Acres Under Five
Hypothetical Development
Scenarios and Three Hypothetical
Fee Schedules
74
79
FIGURES
Figure 1.
Flow of Funds: Water and Sewer
Trust Fund
85
VIII
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Part I. The Financial Primer
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Chapter I
The Financial Primer
Financing public programs would be easy if resources were
unlimited. But because they are not, and because decision
makers constantly face trade-offs among alternative
investments, the competitive edge in finance rests on
information and creativity. All program leaders, including
estuarine and marine managers, can compete successfully for
limited funds if they understand the basic principles of public
finance. Armed with the tools to raise revenues equitably and
efficiently, resource managers are more assured that well-
structured technical plans will be set in motion.
This primer will familiarize natural resources managers with
the concepts and jargon of public finance. The primer reviews
the basic components of public finance, provides examples
relevant to estuary protection, and discusses how techniques
are applied in the field. Together, the primer, the case
studies, and the glossary provide enough background so that
estuarine and marine managers, working with the finance
community, can create the financial plans needed to ensure
that cleanup programs are fully implemented.
Matching finance options to restoration and protection
activities is based on efficiency, equity, and institutional
feasibility.1 A finance option is well-matched to an activity if
1ln a democratic society, public expenditures, whose funding
is both limited and collectively owned, should ideally accord
with public needs, values, and priorities. Funding for estuary
cleanup, for example, must be judged more worthwhile than
the use of the same funds for some entirely different purpose,
such as education. This primer does not address the question
of purpose, such as education. This primer does not address
the question of allocation of public funds among competing
uses. Rather, it focuses on a variety of possible techniques for
financing estuary and marine programs, assuming that the
decision to fund such programs has already been made.
INTRODUCTION AND
OVERVIEW
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MATCHING FINANCIAL
TECHNIQUES TO
RESTORATION AND
PROTECTION
ACTIVITIES
Accessing Revenues
no other alternative would raise revenues at less cost; if the
recipients of program benefits also pay its costs; and if there
are no overriding legal, institutional, or practical impediments
standing in its way. If a restoration or protection activity
involves pollution control or contaminant removal, both
equity and efficiency are served if the polluter is assessed the
costs of these initiatives.
A program to control rural nonpoint source pollution, for
example, could be financed appropriately with acreage-based
fees that are handled with a dedicated fund and administered
by an agricultural drainage district composed of neighboring
counties. A public education program, on the other hand,
might be more equitably financed with general revenues
(because the benefits are more dispersed) controlled by local
or state legislatures. Restoring shellfish habitat could be
financed with the proceeds of shellfishing licenses, auctioned
to the highest bidder. These fees could be collected each year
by a state or county shellfish manager and held in interest-
bearing accounts until used.
The tools of public finance are designed to tap the principal
source of revenue: personal wealth. One of the most
important skills, therefore, is matching these tools to the
initiatives they must finance in efficient, equitable, and
creative ways. Tables 1 and 2 summarize the relationships
between the components of public finance and a selection of
technical programs frequently promoted in marine and
estuarine plans. Arranging the financing for these technical
initiatives requires consideration of three fundamental
components: choosing tools to access revenues; establishing
mechanisms to manage the flow of funds; and creating the
institutions for financial management.
There are an almost infinite number of ways to secure
revenues. The most common forms i'nclude taxes, user fees,
intergovernmental grants, and debt. Different kinds of taxes
are best suited to finance different types of activities, but a
good rule of thumb is that property and sales taxes finance
activities that benefit entire communities, whereas user fees
are appropriate to raise funds from select groups of bene-
ficiaries. Commodity taxes on cigarettes, liquor, or gasoline
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TABLE 1
UNKS BETWEEN FINANCIAL AND TECHNICAL COMPONENTS:
POLLUTION CONTROL
LEGEND Municipal
Fully Applicable M Point
Partly Applicable B Source
Inapplicable cn Control
FINANCIAL TOOLS
Intergovernment Aid
Property Taxes
Sales Taxes
Income Taxes
User Fees
Private Capital
Short-Term Debt
Long-Term Debt
Tax Credits
Impact Fees
Tax Increments
ALLOCATION MECHANISMS
General Fund Appropriation
Enterprise Fund
Revolving Fund
Bond Bank
MANAGEMENT INSTITUTIONS
Federal Agencies
State Agencies
Local Government
Basinwide Commission
Assessment Districts
Regional Authorities
B
B
B
cn
Hi
B
B
M
M
Hi
cn
B
m
M
m
B
B
m
cn
•i
••
Industrial
Point
Source
Control
cn
cn
B
cn
•I
•i
B
m
Hi
cn
cn
cn
cn
B
cn
cn
cn
B
cn
cn
a
Industrial
Pretreat-
ment
cn
cn
B
cn
Hi
Hi
B
Hi
Hi
cn
cn
cn
cn
B
cn
cn
r— |
B
cn
cn
cn
Urban
Nonpoint
Source
Control
B
Hi
B
cn
B
cn
B
Hi
cn
Hi
B
B
Hi
Hi
H
cn
B
Ml
cn
M
Hi
Rural
Nonpoint
Source
Control
B
Hi
B
1 — |
B
B
B
Hi
cn
Hi
Hi
B
Hi
Hi
B
cn
B
Hi
Hi
Hi
Control
of Land
Disposal
Facilities
cn
cn
B
cn
Hi
Hi
cn
cn
Hi
cn
cn
B
B
cn
B
cn
B
cn
cn
On Site
Septic
System
Control
B
B
cn
cn
B
cn
cn
cn
B
cn
cn
cn
cn
B
cn
i — i
cn
r~ i
H
B
Combined
OOUUOJT
^JUVVOI
Over-Flow
B
B
cn
Hi
B
B
Hi
cn
B
Hi
Hi
KJ
HH*J
B
PHBN
cn
Hi
Hi
Marine
Discharge
cn
•i
cn
cn
cn
cn
cn
cn
cn
cn
cn
cn
cn
Pollution
Spill
Response
cn
cn
B
cn
cn
cn
cn
cn
m
B
cn
cn
_
cn
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TABLE 2
LINKS BETWEEN TECHNICAL AND FINANCIAL COMPONENTS:
LIVING RESOURCES, MONITORING, AND INSTITUTIONAL MANAGEMENT
Uvinq Resources
LEGEND
Fully Applicable H
Partly Applicable H
Inapplicable | — |
FINANCIAL TOOLS
Intergovernment Aid
Property Taxes
Sales Taxes
Income Taxes
User Fees
Private Capital
Short-Term Debt
Long-Term Debt
Tax Credits
Impact Fees
Tax Increments
ALLOCATION MECHANISMS
General Fund Appropriation
Enterprise Fund
Revolving Fund
Bond Bank
Fisheries
Enhancement
B
•
en
B
m
en
B
B
en
B
n
m
m
m
ss
Habitat
Restoration
B
H
en
B
B
en
B
B
en
B
•
m
m
B
B
Sediment
Detox-
ification
B
•I
en
B
en
in
en
en
en
•
••
m
M
en
en
Monitoring & Data Control
Ambient
Monitoring
B
en
B
en
en
en
en
en
en
en
en
m
m
en
en
Data-Base
Management
B
en
B
en
en
en
en
en
en
en
en
m
M
en
en
Regulatory
Programs
B
en
en
en
m
en
en
en
en
B
B
m
en
en
en
Institutional Management
Public
Education
m
en
en
en
en
en
en
en
en
en
en
m
r~\
en
EZ3
Public
Partici-
pation
m
en
en
en
en
en
en
en
en
i — i
en
m
en
~u
, i
Inter-
governmental
Coordination
en
B
B
en
en
en
en
en
en
en
en
m
en
en
en
MANAGEMENT INSTITUTIONS
Federal Agencies
State Agencies
Local Government
Basinwide Commission
Assessment Districts
Regional Authorities
B
en
en
en
a
B
a
a
B
en
en
B
W
fcii
CD
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have generated considerable sums to support environmental
protection programs in several parts of the nation. User fees
charge the beneficiaries of a protection program their
proportionate share of the program's cost. Pollution fees do
the opposite-they charge polluters in direct proportion to
their discharges.
Debt financing-issuing municipal bonds-is an effective way
to raise large sums of capital to finance the construction of a
pollution control facility and pay for it with taxes or fees over
its useful life. Innovations in capital access have focused on
attracting private capital to joint public/private ventures.
New ways to capture the value created by public investments
also appear promising. A cleaner environment stimulates
regional growth, attracts additional investment, and supports
community well-being. A small down payment to restore the
beauty of a bay can yield long-term returns to help repay that
original investment.
Implementing a cleanup program successfully depends on the
availability of adequate funds at appropriate times. Although
some cleanup activities (for example, construction of a
stormwater control basin) require "lumps" of capital initially,
others require annual budgets to support ongoing activities.
In the latter case (maintaining a water quality monitoring
network, for example) financing must become an ongoing
activity. This method of raising funds requires some way to
accumulate and disburse funds as well as an institution to
preside over these activities.
The most common financial management mechanisms are
budget processes that collect general revenues and
appropriate funds to government programs on a regular
basis. Relying on legislatures for continuing support,
however, can jeopardize program continuity.
Instead, many managers have sought stability in more
permanent financial management mechanisms such as
enterprise funds, dedicated trust funds, bond banks, or
revolving loan funds. Enterprise funds and dedicated trust
funds "earmark" and control taxes or fees to finance a single,
self-supporting activity. State bond banks use the proceeds
from their own bonds to purchase less marketable, local
bonds at a savings to participating localities. Once
capitalized, revolving loan funds can lend money for local
cleanup projects at below-market rates. As the initial loans are
repaid, the fund is replenished, enabling new loans for
additional projects year after year.
Managing Revenues
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Building Institutions
Because estuarine cleanup efforts can involve many political
jurisdictions within a state, or even several states, the most
appropriate institutions to enact financial management plans
may be special-purpose districts. These public authorities take
many forms, but they are generally created to accomplish
unified goals, such as stormwater management, irrigation,
interstate pollution control, or regional water and sewer
services. Frequently, these authorities are empowered to levy
taxes, collect revenues, borrow against income, and manage
their resources. Such districts have been particularly successful
in addressing inter-jurisdictional problems in finance as well
as resource management.
Of course, no single matrix could possibly meet the needs of
all local situations. Yet the concepts of securing adequate
revenues, handling the flow of funds, and retaining public
support for continued financing are widely applicable.
Combining all three components in a financial plan provides
the catalyst often needed to move a technical study off the
shelf and into the hands of decision makers.
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Chapter II
Tools To Access Revenues
Financial tools establish a flow of funds from sources to uses.
Accessing capital, which involves choosing a source of revenue
and a way to tap it, generally alters current or future public
wealth in time or location. The following sections discuss the
basic characteristics of five tools to access capital: levying
taxes, collecting fees, securing intergovernmental transfers,
issuing municipal bonds, and attracting (or extracting) private
capital. The usefulness of each depends on the individual
investments, project costs and benefits, and explicit
acknowledgement of financial risks.
The two most conventional tools to raise revenues include the
levying of taxes and the assessment of fees. The third basic
tool—issuing public debt in the form of bonds—although also
common, is a variant on the first two. Bonds accumulate
revenues "up front" and promise the repayment of interest
and principal over a period of years, usually with tax receipts
or revenues from the collection of fees.
Intergovernmental grants are also variants on taxes or fees.
The grants redistribute revenues collected by one level of
government, the donor, to another, the recipient. Had the
donor not collected the taxes or fees in the first place, the
recipient government would have been able to do so.
Using tools imaginatively is sometimes called "innovative
financing." The creative variants on taxes, fees, and debt
include the issuance of specially packaged municipal bonds,
impact fee systems and tax increment schedules to tap private
capital, and voluntary privatization arrangements in which
public/private partnerships are formed to raise revenues
jointly.
Taxes provide more than three-fourths of all government
revenues2, and have been used successfully by cities, counties,
TAXES
2Based on Bureau of Census data, Government Finances in
1984-1985.
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Income Taxes
Property and Sales Taxes
and states to fund projects that protect the coastal environ-
ment. There are three broad categories of tax bases: income,
property, and consumption (sales). Income taxes are particu-
larly well suited to finance broad-based, national programs
such as defense or social welfare.
They may be less well suited for environmental management
programs. The second two bases, property and consumption,
are better suited to fund projects whose benefits accrue
regionally, even though, in practice, there is sometimes little
connection between tax bases and target groups.
In general, taxes are calculated using different formulas, or
tax rates, on different bases. Tax rates are simply unit charges
per unit of base. There are two general types of rate
structures: (1) fixed rates for each unit of tax base (for
example, a gasoline tax of five cents per gallon), and (2) ad
valorem rates expressed as a percent of the value of the tax
base (such as property taxes of $1.20 for each $100 of assessed
property value). In addition, tax surcharges are often levied
temporarily to raise money for a particular task.
Because they generate revenue for broad-based public
programs, such as welfare and social security programs, the
primary economic value of income taxes is their ability to
distribute income from the wealthy to less wealthy recipients.
The federal government thus relies on this source for the
majority of its revenues. Income taxes are candidates for
funds to restore or protect estuarine and marine waters only
to the extent that legislatures choose to support such
programs from general revenues.
Of all levels of government, states show the heaviest
dependency on sales taxes. Property taxes are the most
popular form of local tax. A beach erosion control program,
for example, might be equitably financed with a tax on
property values assessed against all beachfront property
owners. Relatively low-rate real estate transfer taxes impose
manageable burdens on buyers and sellers, and raise
significant revenues for resource conservation programs in
many states. In a region whose economy is dominated by
seasonal tourism, sales taxes on lodging, meals, and
entertainment equitably generate revenues to finance public
facilities that must be sized to accommodate sudden but
temporary surges in population (see case study on Occupancy
10
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Tax: Dare County, North Carolina). Some wastewater
treatment plants in coastal communities derive both construc-
tion capital and operating support from so-called "use and
occupancy taxes."
But not all cleanup or prevention programs will have such
readily identifiable beneficiaries or service populations.
Moreover, states often limit local government authority to
collect sales or property taxes. In practice, matching
beneficiaries to tax bases may also pose problems. Despite all
these determents, property and sales taxes are viable methods
of raising revenue for projects to protect estuaries.
Traditionally, certain commodities have been singled out for
special taxation. Popular examples include taxes on gas,
cigarettes, and liquor. These commodity taxes provide much
narrower tax bases that can target beneficiaries of specific
products or services. The federal gasoline tax, for example,
finances highway improvements. Since 1981, a tax on diesel
fuel consumed by tugboats has helped finance the
maintenance dredging of the nation's system of inland
waterways (see case study on Inland Waterways Trust Fund:
Nationwide).
In other instances, the relationship between commodity tax
bases and target populations is tenuous. In Washington State,
for example, an eight cent per pack cigarette tax helps finance
the state's water quality protection plan (see case study on
Tobacco Taxes: Washington State). The New Hampshire
liquor tax finances a broad range of activities across that state.
A tax surcharge is an additional levy to an established tax rate.
Frequently, surcharges are levied on a temporary basis. They
help raise revenues for specific projects that may not have
been anticipated and that are not expected to recur with any
regular frequency. A tax surcharge on residential sewer bills,
for instance, might finance the replacement of stormwater
retention basins that were destroyed during a hurricane.
Fees for public services are intended to establish direct links
between the demand for services and the cost to provide
them. Fees are also used to help finance pollution control act-
ivities by charging polluters the costs their discharges impose
upon society. Well-structured fees, therefore, are the most
equitable means of (1) matching program costs and program
Commodity Taxes
Tax Surcharges
FEES
11
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User Fees
beneficiaries or (2) assessing the costs of cleanup on the
parties responsible for the original pollution.
The qualifier "well-structured" is important. Where fees
provide the primary sourceiof project cost recovery, failure
either to accurately approximate demand or to charge fully
for services can jeopardize the financial viability of a project.
Consider, for example, a local drainage project financed by
acreage-based fees levied on landowners who stand to
benefit from such a project. If fees are set too low, the project
may go forward, but will eventually become insolvent. If fees
are set too high, the project may not be approved by the
landowners, even though project benefits exceed the real, but
lower, project costs.
Unlike tax bases that may or may not be directly related to the
services they finance, fees can be assessed on much more
narrow bases. Typically, they a're calculated as a function of
use (user fees) or on the basis of proportional cost imposed on
the system (impact fees).
When properly calculated and assessed, fees can encourage
efficient public investment decisions by identifying the local
share of project costs to beneficiaries before they decide to
invest. Faced with the prospect of paying fees, users (or
beneficiaries) will demand only those projects that they judge
to be worth the cost. For example, residents faced with
additional sewer system fees to finance urban stormwater
control facilities would be likely to approve them only if they
judged the projected water quality benefits to be worth the
costs.
Appropriately structured fees also encourage efficient
pollution control strategies by explicitly identifying the cause
and effect of pollutants. Clearly, industry would be less likely
to discharge toxic wastes to an estuary if fees for sediment
detoxification were assessed on each gallon of waste
discharged.
Charging beneficiaries directly through user fees is the most
common way of recovering the costs of fee-based projects.
User fees are especially useful at the local level, because most
services are provided by local governments to easily identi-
fiable user groups. Examples include charges for water,
sewer, and solid waste disposal. In many coastal areas, septic
systems are a source of near coastal water pollution. One way
to control this source is inspecting tanks periodically, pumping
out septage, and replacing poorly operating drain fields. A
number of communities have financed such programs entirely
12
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with periodic fees collected from homeowners with septic
systems. Properly structured fees ensure a long-term source of
recurring capital that can finance day-to-day operations,
strengthen a locality's ability to issue low-cost bonds, and
contribute to retained capital for later investment in repairs
and rehabilitation.
Impact fees are similar to user fees in that they are intended
to recover the cost of services from individuals or groups
responsible for generating those costs. Typically, impact fees
transfer the costs of infrastructure services required by private
development directly to developers who, in turn, redistribute
some of these costs through home sales or commercial leases.
In California, for example, several wastewater treatment
plants have been financed with fees paid by developers on the
basis of demands for treatment that their communities are
expected to generate.
Unlike user fees, which recover costs over the life of a project,
impact fees are typically collected in one lump sum at the
beginning of a project. These fees are particularly attractive
to local governments because they relieve up-front financing
pressures on local budgets. Instead of paying for new
development out of general revenues prior to the growth of a
sufficient revenue base, impact fees secure equivalent
financing from the private sector (and ultimately from new
residents of a community). Impact fees have the additional
advantage of avoiding the political fallout often associated
with tax increases.
Not surprisingly, impact fees have been criticized by
developers both as an unjust imposition of local police powers
and because of their implications for equity-fees effectively
make new developers pay the same costs that were provided
to original residents as highly subsidized community
investments. Consequently, care must be exercised in
imposing impact fees to ensure that all legal commitments are
met and that fees do not exceed the cost of needed
improvements. On the whole, impact fees work best where
there is strong pressure from private development.
Transfers are fees or taxes collected by one level of
government and passed on to another. One interpretation of
intergovernmental transfers is that they redistribute revenue
or income geographically. Typically, these funds are provided
as grants for specific types of projects, not as general support
Impact Fees
INTERGOVERNMENTAL
TRANSFERS
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DEBT AS A SOURCE OF
CAPITAL
to be used as the receiving government sees fit.3 Hence, even
though intergovernmental transfers constitute a considerable
proportion of state and local revenues (20 percent and 35
percent, respectively), their utility for support of broad
governmental activities is limited.
The beneficiaries of transfers a re primarily local governments.
The Federal Office of Management and Budget publishes a
Catalog of Domestic Federal Assistance each year, listing the
federal grant programs active in each program area. Many
such programs are suited to finance estuarine and marine
restoration programs. In addition, most states have grant and
loan programs that would be applicable to marine or
estuarine pollution control, water quality monitoring,
hazardous waste site cleanup, nonpoint source control,
habitat restoration, and other activities.
Debt financing is a sound way to raise up-front capital and to
distribute the burden of repayment for a long-lived facility
across all individuals who benefit from it. Generally, these
projects require larger outlays than a locality may have
available at any given time. Much as individuals borrow to
finance their homes through bank-issued mortgages,
governments borrow funds from investors by issuing debt in
the form of bonds. It is important to note that a bond is not
an independent source of revenue. Because borrowed funds
must be repaid, the ultimate source of repayment, and thus
the bond revenue, is either taxes or user fees.
Bonds are best suited to finance capital facilities, such as
wastewater treatment plants or municipal waste resource
recovery plants. Bonds are also appropriate to finance
nonstructural investments if they generate sufficient revenues
to repay the debt or if the issuing entity is willing to back the
borrower with its general credit. Bonds are not suited to fund
ongoing, routine expenses such as water quality monitoring.
3One recent exception to this was the General Revenue
Sharing program that, until it lost its authority in 1986,
provided block grants to localities to be used at local
discretion.
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Types of Debt
Tax-exempt bonds may be categorized by term (or maturity)
and by source of funds for repayment of principal and
interest. The division by term includes short-term bonds,
which mature and are payable in one year or less from the
date of issue, and long-term bonds, which bear a maturity
greater than one year. There are two types of long-term
bonds: general obligation (G.O.) and revenue bonds. G.O.
bonds are backed by the full faith and credit of the issuing
entity. This means that the issuing local or state government
pledges to use all of its taxing and other revenue raising
powers to repay bond holders. A revenue bond, in contrast, is
backed strictly by the future stream of revenues expected to
be generated by the project that the bond finances.
Short-Term Debt. Short-term debt is often used to provide
interim funds for projects waiting to receive long-term
financing such as taxes or grants. The guarantee of
repayment typically is provided by a dedication of the
expected taxes or grants.
There are two general categories of short-term financing:
notes and tax-exempt commercial paper (TECP). Notes
include obligations issued in anticipation of grants (grant
anticipation notes, or GANs), bonds (BANs), or taxes (TANs).
TECP is a form of unsecured debt backed by a letter or line of
credit. Its popularity has grown rapidly since its inception in
1980. Compared to notes, TECP offers lower interest rates,
enhanced flexibility, and greater liquidity. However, these
benefits can be offset by higher issuance costs because TECP
requires a line or letter of credit as a guarantee.
Lonq-Term Bonds. Long-term bonds traditionally match the
term of financing with the longevity of the project. A
wastewater treatment plant, for example, might be expected
to perform adequately for 30 years without major
rehabilitation. In recognition of this long life, the community
would issue a 30-year bond. Long-term bonds fall into two
categories: term bonds, the entire principal of which matures
and is payable on the final maturity date; and serial bonds,
the principal of which is repaid in periodic installments over
the life of the issue. Long-term bonds can be issued as general
obligation or revenue bonds.
General obligation bonds. All other things equal, the general
obligation of a government entity is considered a stronger
guarantee of repayment than a dedicated stream of revenues.
Because this guarantee represents the most direct obligation
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Negotiated Versus
Competitive Bonds
Credit Ratings and Interest
Rates
of the issuer, the accumulated level of outstanding G.O. debt
is an important measure in developing credit ratings
(discussed subsequently) and can become a constraining
factor in the addition of new G.O. debt. Beyond a certain
level, existing taxing authority may be insufficient to
guarantee new bonds, a condition that reflects poorly on the
financial stability of a government. About 40 states require
voter approval of all local general obligation debt; thus even
if new debt is feasible for a debt-burdened government,
voters may disapprove it because of high interest rates or the
possibility of additional taxes. These constraints have
lowered the appeal of G.O. debt, giving rise to the growth of
revenue-backed issues.
Revenue bonds. Because revenue bonds have far fewer
constraints, they have replaced G.O. bonds as t.ie primary
form of municipal tax-exempt financing. In theory, because
this form of debt has its own guarantee (the project
revenues), its issuance should not decrease a locality's credit
rating. In practice, however, revenue debt represents an
indirect obligation of the issuing government. In addition,
because the lender has only the project revenues to depend
on for repayment, the value of the guarantee is not as great
as that of a similar G.O. bond. Therefore, relative to
comparable G.O. bonds, interest rates for revenue bonds are
generally higher.
Whatever the type of bond, underwriters or investment
bankers secure the rights to market it in one of two ways. In a
competitive bidding process, generally the lowest cost
underwriter is granted the rights to market the issuer's bond.
Competitive bonds may be preferable for smaller, more
conventional issues or those to be offered in a stable market.
Alternatively, with more complicated issues, one underwriter
negotiates directly with the issuer to establish the terms and
cost of marketing the bond. All things equal, competition will
generally lower the cost of issuing debt.
Community planners considering using bonds to finance
estuarine protection projects must evaluate credit ratings and
interest rates. Interest rates on municipal bonds are composed
of three components: (1) the cost of the use of money—a
factor determined outside the tax-exempt bond market; (2) a
premium reflecting current supply of and demand for similar
bonds; and (3) compensation for investor risk (of inflation and
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issuer default). The basic cost of the use of money is a
function of complex interactions of federal fiscal and
monetary policies. The final component, which is investment
ratings of risk, provides investors basic information on the
relative credit-worthiness of government entities. Together
with supply and demand, investment ratings help determine
the appropriate rate of interest payable within the range
established by fiscal and monetary policies.
Moody's Investors Service and Standard & Poor's are the two
principal organizations that regularly issue municipal bond
ratings for a fee. The most important rating factors for G.O.
bonds include the following: trends in growth, employment,
and income of the underlying population; organization and
management of the issuer; the issuer's recent financial
history; and the issuer's past performance in handling debt.
For revenue bonds, the above factors are considered, but the
financial prospectus of the planned project, particularly the
projected revenues, are afforded greater consideration. Some
communities, especially the small ones, may choose not to
have their bonds rated. This saves the cost of the fee even
though a rating can enhance marketability and reduce
interest costs.4
Managers investigating the benefits of using bonds to raise
revenue for cleanup activities should understand the
implications of the 1986 tax reform on the utility of bonds.
Tax reform in 1986 imposed stringent limits on the use of
proceeds from tax-exempt bonds, restricted the total volume
of tax- exempt debt available to each state thrbugh annual
"caps," required more detailed reporting and planning, and
imposed greater administrative and compliance burdens on
issuers of municipal bonds. Under the new provisions, only
"governmental" bonds are exempt from taxes. Governmental
bonds are those for which less than 10 percent of the proceeds
are used (directly or indirectly) for a trade or business, and less
than 10 percent of the payment of principal or interest is
made by a nongovernmental entity.
4 In a recent survey of bonds issued to finance water supply
improvements, for example, only 14 percent of the bonds
issued by towns with populations of 5,000 or less were rated.
In contrast, over 90 percent of the bonds issued by cities with
populations greater than 100,000 carried a rating. See
Kenneth I. Rubin and Michael Deitch, Financing Municipal
Water Supply Systems. U.S. Congressional Budget Office (May
1987).
Impacts of the Tax Reform
Act of 1986
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PRIVATE CAPITAL
So called "private-activity bonds" (private pollution control,
industrial development, student loan, mortgage revenue, and
non-profit organization bonds) are generally taxable except
in certain circumstances.
There are three classes of private-activity bonds: taxable; tax-
exempt, but subject to annual statewide volume limitations;
and tax-exempt, but not subject to volume limits. The volume
of new tax-exempt private-activity bonds issued by all
municipalities within a state is subject to a volume cap of the
greater of $75 per person or $250 million per state in 1987. By
1988 and thereafter, the cap drops to $50 per person or $150
million. Once the total volume of allowable private-activity
bonds has exceeded the state's cap, all new private-activity
bonds will be taxable.
Overall, tax reform has reduced the supply of tax-exempt
securities, but the impact on demand is unclear. Institutional
demand for tax-exempt bonds has already declined as a result
of tax reform. Balanced against this, however, is the increased
demand from individuals because other tax-sheltered
investments were also limited by tax reform in 1986. Despite
these limitations on the use of revenues from bonds, bonds
are effective mechanisms of raising capital up front.
Another method of financing projects to protect estuaries is
tapping the resources of private capital. Although local
government partnerships with private firms have received
increasing attention recently, financing public facilities with
private capital is not new. Public/private partnerships have
financed solid waste disposal and mass transit facilities for
many years. More recently, private participants have helped
finance facilities, such as roads, wastewater treatment plants,
and jails, once thought to be in the sole purview of the public
sector. On the whole, the ability to attract private capital is
limited primarily by local development pressure, the
economics of the facility to be financed, and the limitations of
the 1986 Tax Reform Act.
All forms of public/private partnerships offer viable ways to
finance estuarine and marine protection initiatives, but the
partnerships must meet certain conditions. Involuntary
private payments should be solicited in an equitable fashion
to avoid unnecessary litigation. For voluntary private
investments, the private partner must be assured a reasonable
return on investment. Returns can include actual cash
payments (e.g., sewer fees to operate a wastewater treatment
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plant), enhanced private operations (e.g., higher fisheries
yields due to cleaner water), or intangible factors (e.g.,
enhanced community acceptance or a stronger labor force).
Many of these "privatization" transactions, particularly those
in which a private partner owned a public facility, were
attractive largely because of the private tax benefits of
ownership initiated by 1981 tax reform legislation. Many
more privatized facilities would have been built had 1986 tax
reform not eliminated these same benefits. However,
because of these recent tax changes, the private interest in
financing and owning public facilities has diminished
considerably, if not disappeared entirely.
On the other hand, private operation of public facilities is
growing. There are two reasons for this. First, some private
operators can deliver quality services at less cost than their
public counterparts.5 Second, private operators often supply
well-trained personnel, who would otherwise be
unaffordable for many small, local governments. As a result,
private operators are frequently hired to solve persistent
water quality violations.
In such arrangements, the public partner finances and builds
the facility while the private partner operates and maintains it
for a fee. In 1986, about 100 municipal wastewater treatment
plants were operated privately. Private operation is
applicable in estuarine and marine programs wherever a
pollution control facility is not meeting its minimum discharge
limits.
Privatization need not encompass only the traditional forms
discussed above. In fact, some of the most innovative ways
estuarine managers can attract private capital involve taking
advantage of rapidly escalating real estate values to form new
types of public/private partnerships. This section discusses two
such arrangements: impact fees, which enlist private
financing involuntarily, and capacity credit systems, which
attract private capital voluntarily.
5Proponents claim that private operation can save 5 percent
to 15 percent over the cost of public operation.
Private Ownership or
Operation
Other Forms of Public/
Private Partnerships
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Impact Fees. Impact fees are charges to developers for public
construction of facilities to serve their development site. They
assess the cost of added infrastructure only upon the new
development that requires expanded services. Fees are
usually set by a fixed schedule or by a formula based on
proportional demands (the number of dwelling units in a
residential development, for example). Rarely are fees
negotiable or contested by developers. Impact fees offer a
high degree of flexibility because revenues can be reserved in
a developer's own municipal account for capital expansion at
a future date.
Impact fees have financed capital facilities most successfully in
rapidly growing areas. Hence, they are well suited to finance
pollution control facilities in many coastal regions because of
the intense development pressure in beachfront communities.
Similar systems also could be devised to finance operating
programs such as water quality monitoring.
Municipal sewer departments are the largest current users of
impact fees. One recent national survey found that 190 cities
with populations above 15,000 used impact fees to finance
wastewater treatment plants.6 In Orange County, Florida, for
example, a new sewage treatment impact fee was assessed
against developers when the EPA enjoined the county from
dumping sewage into a local estuary and local growth had
depleted existing sewage treatment capacity.
Numerous issues have arisen as impact fees have grown in
popularity. Equity is perhaps the most significant one. Major
developments tend to become targets for exactions, while
smaller projects often escape assessment, even though a large
number of smaller projects can place greater demands on
infrastructure than a single major project. Home buyers
usually end up paying for services because most impact fees
are simply passed along in housing prices.
Impact fees also have long-term implications for future
development patterns. As congestion increases in a heavily
developed region and developers are forced to pay for
needed infrastructure services, development opportunities
may be created in surrounding communities that have the
capacity to absorb new development and do not assess impact
fees. Although these regional shifts can help balance growth,
they can also lead to suburban sprawl and development of
rural lands.
6James E. Frank, et al., Community Experience with Sewer
Impact Fees: A National Study, Policy Sciences Program,
Florida State University (1985).
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Capacity Credits. Selling capacity credits to private developers
is a relatively new way to finance pollution control projects.
Like impact fees, only new users demanding services pay for
new services. But, unlike impact fees, users pay voluntarily.
Only a few programs currently exist, but capacity credits
appear to offer many advantages over other public/private
partnerships. Capacity credits are best suited to finance
capital facilities such as wastewater treatment plants, solid
waste management facilities, or stormwater control facilities.
Typically, a municipality faced with demand for new or
expanded wastewater treatment capacity conditions the
provision of this service on the prior collection of sufficient
capacity credits from the private development community.
Individual developers buy (or reserve for future use) a certain
amount of capacity in a prospective wastewater treatment
plant. When enough advance capacity is sold, the project
moves forward (see case study on Wastewater System Access
Rights: Houston, Texas). The exact amount needed before a
project may proceed depends on the goals of the
municipality. Some may require full prepurchase and others
may supplement capacity credits with local financing, which
may or may not be sold later. Often, earlier purchasers buy
capacity at lower unit costs than latecomers.
In Upper IVIerion Township, Pennsylvania, for example, the
city faced demands for new treatment capacity imposed by
population growth. The city fashioned a capacity credit
program (called The Sewer Access Rights Program) that would
allow for incremental expansion of existing facilities based on
growth in the sale of credits to private developers. The town
charges a one-time fee of $3,200 per "Equivalent Dwelling
Unit" (200 gallons per day). Fees will increase annually to
account for increases in construction costs. Nonparticipants
have no guarantee of sewage treatment capacity for their
development. The initial offering was for 1.8 million gallons a
day (mgd) (which is equivalent to 9000 dwelling units), with
additional expansion upon demand to 5.5 mgd. Because the
program is so new, no results can be reported at this time.
However, the city fully expects to sell out its initial offering.
Capacity credit systems impose the costs of expansion on the
population causing the new demand, while minimizing cost
increases for existing populations. They also serve as tools for
practical regional planning. The purchase of capacity credits
signals increased demand for new capacity; otherwise,
facilities' built-in extra capacity may lie idle for years and
impose high costs on the current population. The purchase of
capacity credits also signals where new capacity will be
needed.
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TAX INCREMENT
FINANCING
Despite the advantages, capacity credits have drawbacks as
well. First, they appear most suited to finance capital facilities
in growing regions. In stagnant or declining areas facing
rehabilitation, capacity credits are less applicable. Second, the
system of capacity credits could be made more efficient, but
perhaps more administratively complex, if credits could be
resold. Under the right conditions, capacity credits can help
estuary programs build up capital to construct pollution
control facilities and justify controls on local growth.
Many of the strategies discussed earlier for securing revenue
from the private sector work best in high growth areas. Tax
increment financing (TIP), on the other hand, can redirect
private investment capital to depressed areas, boosting
economic activities and increasing employment. Typically, a
local government issues a bond to finance a public works
project in a depressed area. This development attracts private
investment in businesses and services to support the expected
growth. As land values increase, real estate tax revenues also
increase. These new revenues are dedicated to repay the local
bond issue.
In order to be eligible for TIP in most states, the local govern-
ment must demonstrate that redevelopment in a specified
area is necessary, prepare a redevelopment plan, and submit
that plan at a public hearing. In addition, the plan must con-
form to the requirements specified in the Tax Reform Act of
1986 in order for the municipality to be eligible for tax-
exempt financing. The City of Orlando, Florida, for example,
created a Community Redevelopment Trust Fund in 1982 to
carry out the redevelopment of run-down areas of the city.
The city structured a series of revenue bonds to finance
housing, transportation, and other investments. These bonds
are not a general obligation of the agency or the City of
Orlando; they are secured by an irrevocable lien on the
increment in property tax revenues paid into the Trust Fund
and interest earned by the Trust Fund. Because
redevelopment increased real estate values, tax increment
revenues contributed to the Trust Fund climbed from
$940,000 in 1984 to $2.27 million in FY 1986 (for more detail,
see case study on Tax Increment Financing District: Orlando,
Florida).
Tax increment financing could be applied to estuarine or
coastal initiatives if the restoration of communities bordering
these resources would cause an increase in property values or
if development were tied to specific cleanup programs. In
either case, land values would be expected to increase, the
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rate of increase determining the, total financing possible.
Urban stormwater control, for example, would both help
improve local water quality and boost local real estate values.
Such a facility could be financed with a TIP district revenue
bond. A disadvantage of tax increment financing is that,
given its dependence on development not yet in place,
revenues are viewed by the capital markets as somewhat
uncertain. This uncertainty can increase the cost of revenue
bond financing.
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Chapter III
Financial Management Mechanisms
Financial management mechanisms link sources of funds to
uses. Like pumps and valves in a system of water pipes,
financial management methods direct the flow of taxes, fees,
and other funds to programs, hastening some and slowing
others. Managers of estuarine or marine programs that rely
on state or local legislatures for support should understand
the broad financial management mechanisms used at the
legislative level.
There are three techniques for coordinating the distribution
of money: appropriations, capital budgeting, and
independent mechanisms. The political process, which
periodically appropriates general revenue to government
programs, is perhaps the most common financial
management tool at the legislative level. Capital budgeting
is another broad financial management technique that
allocates funds to construction projects on the basis of
selected criteria.
Managers of estuarine and marine programs that are
financed independently of other, broader, governmental
programs should examine other types of financial manage-
ment mechanisms designed to channel specific sources of
revenue to particular cleanup initiatives. These independent
mechanisms could include dedicated funds, enterprise or
revolving funds, bond banks, and pooled financing. These
independent financial methods are intended to efficiently
manage project- or program-specific resources. Often, special
public or public/private institutions must be created to
monitor and control financial management activities (see
Chapter IV).
Legislatures use the appropriations process to make the
fundamental decisions that allocate public resources to
programs or projects. The federal government, for example,
appropriates funds annually for each administrative agency
according to previously authorized budget ceilings. In some
APPROPRIATIONS
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CAPITAL BUDGETING
programs, particularly the direct investment programs in
water resources development projects, the U.S. Congress
appropriates funds on a project-by-project basis. States
appropriate their operating budgets in similar ways. Local
governments may or may not be as structured within periodic
appropriations processes. Where they are not, funds are
generally allocated to programs directly through the budget
process.
The most obvious drawback of relying on annual appropri-
ations to finance multiyear projects, such as many estuarine or
marine cleanup initiatives, is the year-to-year funding
uncertainties as new priorities arise. In 1986, for example,
there were $60 billion of approved, but unfinished, federal
projects to manage water resources waiting for appropri-
ations. At the state level, where popular issues are more
readily addressed legislatively, it is not difficult to imagine
that several years into a cleanup program, a new state
legislature and administration might prefer to fund its own
favorite projects rather than pursue the policies of past law
makers.
Capital budgets are financial plans that account for the
construction and upkeep of the physical facilities owned by
public entities. Although the federal government does not
use one, most state and local governments have some
semblance of a capital budget.7 Almost all capital budgets
have four basic components:
• Selecting the scope of services for which the state or
local government is responsible;
• Identifying assets through a physical inventory, an
assessment of condition, and an evaluation of
performance;
• Integrating the data with estimates of costs to operate
and maintain existing facilities and build new ones; and
7Over 80 percent of state governments (42 of the 50), 90
percent of large cities (populations greater than 250,000), and
more than half of all other cities and counties use some form
of capital budget to allocate funds to projects. See American
Public Works Association, Public Works Management: Trends
and Developments, 1981.
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• Drafting a summary plan for distribution to (and con-
currence by) all government public works agencies and
interested nongovernment groups.
The object in capital budgeting is to assemble all available
sources of funds and allocate them to the highest priority
investments in capital expansion and major rehabilitation.
This allocation process requires a recognition of the level and
certainty of funds coming into the budget (from dedicated
taxes, fees, grants, and appropriations); a way to set priorities
for candidate projects (by using information on inventory,
demand, and physical condition); and a way to evaluate the
effectiveness of funded projects (by using information on
performance and efficiency). Each year, projects can be
recommended to the appropriate decision-making body for
funding on the basis of a systematic, substantiated plan.
A capital budget is an appropriate financial management
mechanism to help set investment priorities for a large
number of capital facilities in an estuarine or marine region.
For example, in Puget Sound, Washington, nearly one-third of
the 106 municipal treatment plants will require replacement
or upgrading to comply with discharge standards and
improve the water quality of the Sound. These investments
are scheduled to be made through the early 1990s. In order to
create its priority list of projects for funding over this period,
the state has, in effect, created a capital budget to plan for
inflow and allocation of funds to individual projects.
INDEPENDENT
MECHANISMS
En te rp rise Fu n ds
Enterprise funds help manage the finances of government
activities that are largely self-supported through user fees.
Income from fees and outlays for capital as well as operation
and maintenance are accounted for separately from the
general fund of a state or local government. Some enterprise
funds operate without assistance from the parent municipal
government or intergovernmental grants, whereas others
receive periodic infusions of capital from general revenues or
grants-in-aid. Common city enterprise funds include water
and sewer services, electric and gas utilities, airports, parking
lots, and local transit (see case study on Water and Sewer Trust
Funds: Corpus Christi, Texas).
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Revolving Loan Funds
The biggest advantage of operating a program through an
enterprise fund is that revenues can be predicted with
reasonable certainty. Separate enterprise funds make it more
difficult for legislatures to interrupt the flow of funds from
dedicated revenues to their uses. Moreover, if costs can be
projected accurately, then the difference between revenues
and costs suggests the need to adjust user fees in advance of
the eventual outlay. A projected shortfall, for example, warns
policy makers that rates should be increased accordingly.
Revolving loan funds (RLFs), which are generally operated by
states, provide long-term, low-interest loans to localities for
major capital investments. In addition, they may provide
other forms of financial assistance such as credit enhancement
or, to a limited extent, grants. The popularity of RLFs at the
state level has increased rapidly over the last few years and in
1987, the 16 operational state RLFs provided loans for virtually
every type of public works facility. In addition, the Clean
Water Act amendments in 1987 provided $8.4 billion in
federal seed capital for state wastewater treatment RLFs, an
action likely to result in the creation of such funds in all 50
states.8
In a state revolving fund, a state institution receives an initial
infusion of capital, typically appropriations from general
revenue, federal grants, or the proceeds from a bond issue.
The fund managers act as loan officers for all future
operations. Local user fees (such as sewer charges in the case
of wastewater treatment plants) are set to cover operation
and maintenance costs and repay the loan. Interest rates vary
by state from no interest to a near-market rate. Over time, as
repayments accumulate, the RLF makes additional loans using
those repayments; hence, the fund "revolves."
Managers must recognize the various ways individual RLFs are
capitalize.d and operated. The following list summarizes the
characteristics of the 16 operating state RLFs as of 1987:
• Financial and technical operations are typically
conducted in separate state offices. Older funds tend
to have better working relationships between the
technical and financial operations.
8In order to participate, states must provide a 20 percent
match, making the totai anticipated capitalization $10.1
billion.
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• Although capitalization varies from state to state, half
the states started out with an appropriation from
general revenues and half the states granted
borrowing authority to their.RLFs.
• Only one state (Washington) operates its fund on a pay-
as-you-go basis. Dedicated water, sewer, and solid
waste revenues plus revenue from a real estate transfer
tax are that fund's only sources of capital.
• Some RLFs are designed to be self-sustaining, whereas
other funds must receive periodic infusions of capital to
maintain a healthy balance.
• Most fund lending is not targeted to fiscal capacity or
any other criteria. Instead, it is done on a first-come,
first-served basis.
• Most RLFs have the flexibility to adjust loan terms to
suit localities' ability to repay.
• Many funds finance wastewater treatment facilities
plus other projects, including water supply, solid waste
management, water resources development projects,
highways, streets, and bridges.
• Loan defaults are surprisingly rare. Most RLFs rely on
preventive screening procedures to minimize defaults.
The benefits of RLFs include targeted investments to specific
project types (which are identified in enabling legislation) and
the security of a long-term source of capital with few effects
from political volatility. In addition, because the primary form
of assistance is loans, RLFs encourage the use of more efficient
management techniques.
The principal drawback of RLFs is their start-up cost. Because
this type of fund must have capital to begin lending, the state
must first authorize or otherwise secure some form of seed
capital. Possible sources include bond proceeds, a diversion of
existing grants or loans, dedicated taxes, and
intergovernmental grants. In addition, RLFs do not guarantee
equitable distribution of funds. Localities still have to finance
their share of construction costs if loans are made for less than
the total cost of the facility. This situation could result in the
wealthiest communities deriving most of the benefits of RLF
financing.
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Bond Banks
Revenue Dedication and
Trust Funds
Bond banks are another type of independent financing
technique that town planners can use to raise revenue for
projects to preserve coastal resources. State bond banks
purchase local bonds that would otherwise bear very high
interest costs and reissue the pooled, local debt as a single
state bond at a lower interest rate. Bond banks improve
borrowers' access to the financial markets by lowering local
costs of capital and assuming some of the risk of local default.
Bond banks have either a debt service reserve or a moral
obligation from the state to cover local defaults. These
guarantees effectively diminish the risk to bondholders and
lower interest rates. In general, bond banks are most useful in
states with a strong bond rating and a relatively high number
of small, rural communities that seek debt capital
infrequently.9
Bond bank financial management would be ideal to finance
an estuarine restoration program that con.prises many small
pollution control facilities within a single state. Of course, not
all states have bond banks and it would be unlikely for a state
to initiate one just to meet the needs of an estuary cleanup
program.10
Revenue dedication and trust funds are the final types of
independent or creative financing that are often appropriate
to the needs of estuary programs. All levels of government
earmark revenues. Earmarking dedicates revenue from a
specific,tax (or other stream of revenues) to the financing of a
particular government function. The most widely earmarked
taxes are on gasoline, vehicle registrations, general sales,
9See "Bond Banks: Pooled Offering Help the Small and
Sometimes the Weak." Credit Markets, April 16, 1984.
10 Since 1969, when Vermont opened the first bond bank, at
least seven other states have followed suit: Alaska, Arkansas,
Indiana, Maine, New Hampshire, Nevada, and North Dakota;
Puerto Rico also initiated a bond bank. The Maine bank now
has over $200 million in outstanding debt issued on behalf of
almost 400 localities. It goes to market twice a year, generally
with issues averaging $15 million.
30
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tobacco, and alcohol.11 Typically, a trust fund is set up within
the government budget in order to handle the dedicated
income and outlays (see case study on Land Bank and
Dedicated Revenues: Nantucket Island, Massachusetts). In
1984, 21 percent of state tax revenue was tied to specific
purposes. This amount is not significantly different from the
23 percent of state tax revenues earmarked in 1979, but a
large decline from the 50 percent plus that was earmarked in
the mid-1950s.
There are two ways that states earmark revenues for handling
in trust funds: constitutionally or legislatively. Most
constitutionally earmarked funds require no legislative
appropriation to release trust fund deposits. Deposits accrue
to the trust fund automatically and are generally available for
only the purpose named in the constitution. In other states,
the legislatures dedicate receipts and designate trust funds to
manage them. Current appropriations may or may not be
required to release these statutorily earmarked funds. The
advantage of statutory earmarking is that legislatures have
more flexibility to collect funds and make annual
appropriations. On the other hand, constitutional dedication,
though more difficult to enact, secures funds with less threat
of political interference. Some states permit transfers of
surplus earmarked funds to unrelated purposes regardless of
the technique under which they were dedicated.
11 For additional information, see Steven D. Gold, et al.,
Earmarking State Taxes, a draft report of the National Council
on State Legislatures (1987).
31
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Chapter IV
Institutional Arrangements
Because projects to clean up estuaries can involve numerous
political jurisdictions within a state, or even several states,
managers of our coastal resources must be aware of the types
of governments and institutions that control and distribute
revenue. The 82,000 individual governments in the United
States provide the framework within which capital for invest-
ment is secured and managed. Consequently, the character-
istics of these governments and their components are often
the critical variables in the creation and implementation of a
financing plan.
Many governments are readily recognized and include the
standard government units such as federal agencies, state
agencies, and governing boards of local governments
(municipalities, counties, and townships). These conventional
governments typically have many responsibilities and a broad
authority to tax, borrow, or charge fees. The less traditional
regional authorities and special districts generally are
designed to administer fiscal programs within a multi-
jurisdictional region or apply capital access tools either on
behalf of a limited group of beneficiaries or for limited
purposes, such as for agricultural best management practices.
Although the responsibilities of conventional governments
and their ability to raise revenues vary considerably, all have
two qualities in common. They operate, directly or indirectly,
a wide variety of services, and they have the ability to
authorize an equally wide variety of mechanisms to recover
the cost of those services. But despite this flexibility, conven-
tional governments tend to rely most heavily on only a few
sources to recover costs.
CONVENTIONAL
GOVERNMENTS
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Federal Government
The federal government devotes three-quarters of its
revenues to two program areas: (1) national defense and
international relations, and (2) social security. Because of the
broad-based societal benefits these programs generate, the
mechanisms for cost recovery are equally broad in scope.
Federal revenues are derived primarily from three taxes:
individual income (41 percent), social security (31 percent),
and corporate net income (8 percent).12
The federal government is the primary public investor in
natural resource protection programs. Although only 6
percent of its annual budget ($52 billion) goes to natural
resource protection programs including estuarine, marine,
and near coastal management, this amount represents 86
percent of total government expenditures for that purpose.
In addition, the federal government accepts financial
responsibility for many projects whose benefits are regional in
nature. The federal government chooses to invest in many of
these projects because benefits exceed, or "spill over," state
or local boundaries. The interstate highway system, the air
traffic control system, and some water resource projects are
just a few exam pies.
In addition to EPA's National Estuary Program, which funds
programs to preserve the water and resources of estuaries
threatened by overuse and development, a number of other
federal programs can assist in the restoration and protection
of estuarine and marine waters. For instance, the U.S. Soil
Conservation Service and EPA help finance rural nonpoint
source control projects. The Farmers Home Administration
operates a program of loans and grants for water and sewer
improvements to communities with fewer than 10,000
inhabitants. In addition, the Department of Housing and
Urban Development provides community development block
grants that can be used largely at the discretion of the grant
recipient. The Economic Development Administration
administers similar grants that have financed sewer and
stormwater control investments. Coastal Zone Management
Act funds also may be available for estuary protection plans.
12 Special fees or charges generate 13 percent of federal
income, but are derived from a wide variety of sources
including postage, natural resources, and housing.
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State Government
Like the federal government, state governments also hold
responsibility for projects with broad-based benefits.
Generally, however, these benefits are confined within state
boundaries. States derive revenues primarily from five
sources: general sales taxes (24 percent), federal grants
(21 percent), individual income taxes (16 percent), user fees
and other charges (14 percent), and insurance trust revenues
(16 percent). State governments spend these funds on a
variety of purposes including education, social services,
transportation, and public safety. In 1985, all states combined
spent nearly $7 billion (2 percent of total state spending) for
natural resource protection programs.
States also support local governments. In 1984, for example,
states transferred some $116 billion in loans and grants to
local governments. Of that amount, nearly 66 percent was for
education, 12 percent was for welfare programs, 10 percent
was general support for all local operating programs, 4
percent was for public health, and the rest was for
transportation, natural resources, public safety, housing, and
miscellaneous uses.
In addition to appropriations, there are many state programs
that can be used to help finance estuarine and coastal
resource protection programs. Property tax incentives or
compensation for conservation easements help preserve open
space in coastal regions of Connecticut, Delaware, Maine,
New Hampshire, North Carolina, Rhode Island, Virginia,
Oregon, New York, Maryland, Georgia, New Jersey, and South
Carolina. Nongame income tax checkoffs in 32 states raised
$9.4 million in 1985 for many conservation purposes including
habitat restoration, wetlands inventories, and natural areas
acquisition. Some states also dedicate revenues from stamp
sales, severance taxes, and real estate transfer taxes to the
acquisition of critical coastal land areas.
Local governments play a particularly important role in
providing water and sewer services as well as other environ-
mental control programs (such as drainage, stormwater
control, flood protection, and beach restoration). The source-
to-use link is the clearest and best justified at the local level of
government. This link is demonstrated by the local govern-
ment's reliance on user charges for revenues. For their
operating revenues, local governments depend on
intergovernmental transfers (34 percent), property taxes (25
Local Government
35
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SPECIAL-PURPOSE
GOVERNMENTS
(percent), a wide variety of user-charges (20 percent), and
general sales taxes (5 percent). Local governments' primary
responsibilities are education, health, welfare, and highways,
but significant local expenditures also provide for police and
fire protection, jails, and environmental projects. Thus,
although localities tend to collect funds from more sources
than other levels of government, these funds are often
secured for specific, targeted purposes.
In 1984, for instance, localities spent about $12 billion to build
and operate wastewater treatment plants and another $14
billion for drinking water supply facilities. Although $2.4
billion of the wastewater treatment expenditure was federal
grants passed through to localities, most of the water supply
expenditure originated from local revenues. In contrast, local
governments spent less than $2 billion in 1984 for natural
resource protection programs.
Special-purpose governments appear to be well matched to
the institutional needs of most estuary and near coastal clean-
up programs. Often, the natural resources to be protected are
not covered by existing institutional boundaries. Interstate or
inter-jurisdictional coordination is frequently necessary. In
addition, many of the revenue-raising mechanisms that link
users to payments are readily administered by special-purpose
units created to manage such flows. For these reasons,
managers looking for ways to raise revenue for implementing
estuary protection programs should consider creating a
special-purpose government.
There are 43,000 special-purpose governments in the United
States today. Most of them are districts, compacts, com-
missions, or other authorities organized to manage the
provision of a single service. Aside from school districts, the
most common of these governments include irrigation
districts, stormwater management districts, interstate water
management commissions, regional port authorities, turnpike
commissions, and water and sewer management districts.
Typically, these entities have limited powers to raise and
manage money to finance the operation, construction, and
upkeep of the physical plants over which they preside. Many
areawide districts have the authority to levy ad valorem taxes;
other special-purpose governments have the authority to
issue their own bonds. Some governments have both powers.
36
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Since the early 1970s, special-purpqse governments (exclusive
of school districts) have proliferated. In 1972, for example,
24,000 special-purpose units existed; by 1980, the total
exceeded 28,000. The fiscal limitations imposed by state and
local debt limits have been one of the chief reasons for this
rapid growth. Wearing their debt limits or fearing that
another issue might jeopardize their credit ratings, states and
cities have resorted to creating separate institutions that are
not subject to debt ceilings and that do not impair traditional
governments' credit. These special-purpose units often issue
revenue bonds rather than general obligation bonds because
these units lack the financial guarantees of their associated
municipal or state governments. Moreover, they often
administer revenue- or utility-based programs.
Whatever the type of government, estuary managers must
learn to work effectively with the financial institutions and
tools available to fund pollution control projects. The case
studies in the next section complement the concepts
presented in the primer. These examples demonstrate how
local and state resource managers have used the tools of
public finance to support their programs. Some case studies
document innovative combinations of revenues, manage-
ment, and institutions, whereas others document straight-
forward programs. All cases should stimulate creative
financial thinking to help protect our national coastal
resources.
37
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Part II. The Case Studies
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Chapter I
Case Studies
These case studies complement the primer's discussion of
financing tools, financial management mechanisms, and
management institutions appropriate to support estuary
cleanup projects. The case studies demonstrate the use of the
various financing tools: hotel, tobacco, and boat fuel taxes;
sport fishing, real estate transfer, users, and developers' fees;
and water and sewer funds. Table 3 summarizes the 10 case
studies in which resource managers raised money for specific
programs, each involving different needs.
Each case study includes a section that evaluates the
applicability of the particular financing technique to
estuarine and marine resource restoration and protection
programs. With few alterations, most case-study techniques
are appropriate to finance many of these programs. It is
important to match capital financing programs that raise
lump sums in advance to capital projects with similar needs.
Financing programs that raise recurring revenues are well
suited to fund operating or maintenance programs with
yearly budgets. All financing techniques also have limitations,
which are appropriately noted.
Managers should note that none of the cases rely on
intergovernmental grants. Instead, most either convert a
future stream of benefits into current capital or reserve a
portion of current revenues to finance programs on a pay-as-
you-go basis. In Bellevue, Washington, for example,
landowners pay acreage-based fees, which in turn, support
bonds to finance stormwater control facilities. In Houston,
developers buy rights to future wastewater treatment
capacity, enabling their projects to proceed while sufficient
current capital is raised to build treatment plants without
financial strain on the city government. The seasonal
demands placed on coastal resources by tourism in Dare
County, North Carolina, are used to raise capital for local
protection programs through a tax on hotels, motels, and
rental units.
INTRODUCTION AND
OVERVIEW
39
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I
TABLES. SUMMARY OF CASE STUDIES
LOCATION
Nantucket,
MA
Dare County,
NC
State of
Washington
Nationwide
State of
Georgia
Orlando,
FL
Chesapeake
Bay, MD
Bellevue,
WA
Corpus
Christ!, 7X
FINANCING TOOL
2% Real Estate
Transfer Tax
3% Occupancy Tax
Hotels, Motels,
Rental Units
Tobacco Taxes
Fuel Tax-Barges
Using Inland
Waterways
Oyster Harvest
Lease Bids
Tax Increment
Financing
Sport Fishing
License Fees
Acreage Based
Fees
Impact Fees
RECENT
YEAR
REVENUES USE OF FUNDS
$5.6
Million
$1
Million
$40
Million
$58.5
Million
$5,500
$2.27
Million
$1.1
Million
$3.4
Million
Controls
$659,651
Purchase Shoreline
Property for
Conservation &
Access
Capital Projects
Water Quality
Initiatives
Grants & Loans
Operation,
Maintenance
& Rehabilitation of
Inland Navigation
Oyster Bed
Management
Redevelopment of
Downtown Areas, i.e.,
Water and Sewage
Native Fish
Management Program
Surface Runoff &
Stormwater Drainage
Water Supply and
Wastewater Treatment
FINANCIAL
MANAGEMENT
MECHANISM
Dedicated Fund
(Land Bank)
Dedicated Account
In the General
Fund
Revolving
Loan Fund
Inland Waterways
Trust Fund
Private Sector
Dedicated Trust
Fund
Dedicated Fund
Dedicated Fund
Dedicated Trust
Funds
FINANCIAL
MANAGEMENT
INSTITUTION
Local
Government
County
Government
State
Government
Federal
Government
State
Government
City Government
State
Government
City
Government
City
Government
PROGRAM POTENTIAL
APPLICABILITY OBSTACLES
Capital &
Operating
Capital &
Operating
Capital
Capital &
Operating
Operating
Capital
Operating
Capital &
Operating
Capital
Issue of Double Taxation
New Institutions Needed
Interest Group Pressure
(Realtors)
May Need State Approval
Difficult to Enforce
Interest Group Pressure
(Realtors)
Political Acceptance Process
Development of Loan and
Grant Criteria
Interest Group Pressure
(Tobacco Lobby)
Could Shift Commodities to
Other Transportation Modes
Interest Group Pressure
(Shippers)
Potential Regional Economic
Disparities
Institutional Constraints
Disparities
Revenues Unpredictable
Dependent on Economic Growth
Tax Reform Restrictions
Elasticity Issues-Fishermen
May Fish Elsewhere
Public Support
New Institution Needed
Initial Rate Setting
Most Appropriate in High
Growth Areas
Houston, TX
Capital Recovery
Charges
$11
Million
Facilities
Wastewater Treatment Dedicated Funds City
Facilities Government
Raises Equity Taxes
Capital Most Appropriate in High
Growth Areas
Developing Fee Structure
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The case studies provide a number of examples that will allow
managers to choose the financing tools most appropriate to
their specific need. A 2 percent real estate transfer tax, for
instance, raises $5.6 million a year to conserve and protect the
coastline of Nantucket Island. A sport licensing program that
raises $1.1 million a year supports native fish management
programs in Maryland. In Corpus Christi, Texas, developers
pay over half a million dollars a year in fees that are managed
in four dedicated trust funds to build water and wastewater
treatment plants.
In five of the case studies, revenues are managed by local
governments, two by state governments, and two by special-
district governments. The federal government administers
the Inland Waterways Trust Fund, which assesses a small fuel
tax on tug boat operators. The tax is dedicated to a special
fund within the U.S. budget to assure that needed repairs and
capital improvements are made nationwide. Similar
programs, administered by local agencies, would be
applicable to fund shore or harbor maintenance in any coastal
region.
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Chapter II
Land Bank and Dedicated Revenues:
Nantucket Island, Massachusetts
In response to extreme development pressure, residents of
Nantucket Island, Massachusetts, created a Land Bank in 1983
to acquire up to 15 percent of the island's shores and moors by
1990. The Bank also actively manages these resources to
ensure public access to recreational areas. The Bank is funded
predominantly by a transfer fee of 2 percent of the price of all
property sold in Nantucket County. In 1986, these transfer
fees generated $98,000 a week, or $5.1 million for the year, in
revenue for the Land Bank Fund. Financing the acquisition of
critical lands, or any other protection program, with revenue
derived from real estate transfer taxes is ideally suited to
coastal counties.
Nantucket is a 50-square-mile island located 22 miles off the
southeastern shore of Massachusetts. The island supports a
year-round population of 6000 residents. In summer,
however, the island is flooded with off-islanders returning to
summer homes or vacationers enjoying a visit. Roughly half a
million visitors yearly come to Nantucket to enjoy its 70 miles
of beaches and unique open moorlands. Not surprisingly,
tourism and construction are the two principal industries on
the island.
Roughly one-third of the island has been preserved by private
land trusts such as the Nantucket Conservation Foundation,
Trustees of Reservations, Massachusetts Audubon, and the
Nantucket Ornithological Association. Nevertheless, the
island has experienced intense development pressures, with
about 300 homes built and 500 lots subdivided per year.
As more homes are built each year, islanders have become
increasingly concerned about the diminishing open lands and
beaches as well as reduced public access to these areas. Of the
70 miles of shorefront on Nantucket, only 1.5 miles are
publicly owned. Traditionally, islanders have allowed public
access to privately owned beaches.
BACKGROUND
43
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ADMINISTRATIVE
SETTING
But, as more and more shorefront property is bought by off-
islanders and non-Massachusetts residents, long-time
residents fear that this tradition will disappear. The
Nantucket Land Bank was instituted to ensure public access to
beaches and open spaces on the island in the face of this
development pressure.
The Land Bank program is the first of its kind in the nation.
The initial concept to create the Bank began with a growth
management conference to educate the public on this
innovative institution. The proceedings from the conference,
"Goals and Objectives for Balanced Growth," contained the
island's first written policy on growth management. A year-
long consensus-building effort culminated in the 1983
endorsement of a Land Bank at a Nantucket town meeting by
an overwhelming margin of 446 to 1. The Nantucket Island
Land Bank was formally established by Chapter 669 of the
Acts of 1983 of the Commonwealth of Massachusetts.
The Land Bank is governed by a five-member commission,
elected by popular vote to five-year staggered terms of office.
Members of the commission, who serve without
compensation, must be legal residents of Nantucket County.
Commissioners make decisions governing Bank affairs and the
uses of Bank monies. They are empowered to do the
following:
• Purchase and acquire simple fee interests in any land in
Nantucket County;
• Accept gifts of any such lands or funds to further the
purpose of the Bank;
• Take such interests in lands by eminent domain
pursuant to Chapter 79 of the general laws (only after a
vote in which four commissioners favor such action and
only after authorization from a two-thirds vote of an
annual town meeting and provided that reasonable
effort is made to negotiate the acquisition of the land
prior to the taking);
• Incur debt pledging the full faith and credit of the town
of Nantucket; and
• Hire staff and professionals necessary to carry out Bank
business.
44
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Decisions of the commission require majority vote. Business
can be conducted only with at least three members present.
The commission meets twice a month and additional special
meetings can be called on an as-needed basis.
The Land Bank imposes a fee of 2 percent of the purchase
price of any property sold in Nantucket County upon
transference of ownership. Certain types of land transfers are
exempt from the transfer fee. Transfers to the U.S.
government and to charities, foreclosures, and up to $100,000
of property for first-time land owners are exempt from the 2
percent transfer fee.
New land owners are responsible for paying the fee. Deeds
cannot be filed without a stamp-from the Land Bank
confirming that the transfer fee has been paid. Revenues
from this fee are deposited into the Land Bank Fund to pay for
the acquisition of public rights to the shores and moors of the
island. The Land Bank also may receive appropriations by vote
of the county commissioners of Nantucket County or of a
Nantucket town meeting; voluntary contributions; or pro-
ceeds from disposal of any property or interests. Further, the
Bank is empowered to issue bonds and dedicate revenues
from the Land Bank Fund toward repayment of debt incurred.
A recent bond issue of $11.05 million by the bank was insured
by the Municipal Bond Insurance Association, earning an AAA
rating (the highest rating available) by both Moody's and
Standard and Poor's.
The Land Bank is relatively inexpensive to run because the
commissioners serve without compensation. In 1986, operat-
ing expenditures totaled $90,253, or less than 2 percent of the
income received from transfer fees. Land Bank expenses
include salaries and wages for two full-time staff and a part-
time advisor; and fees for legal services, appraisals, surveying,
printing, auditing, taxes, property maintenance, travel, and
general office expenditures (supplies, postage, telephone,
etc.).
The Land Bank of Nantucket has met with widely acclaimed
success since its inception in 1983. As of 1986, it has raised
total revenues of close to $11 million and has acquired 761
acres of land in Nantucket. The source of funds for the Land
Bank seems particularly appropriate for open space preser-
vation because real estate development is the root cause of
PROGRAM
CHARACTERISTICS
APPLICABILITY TO
ESTUARINEAND
MARINE INITIATIVES
45
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declining open spaces. Further, transfer taxes have a built-in
inflation adjustment—revenues increase as the price of
property increases.
Despite its success, the Land Bank has also met with some
opposition. The biggest argument against the transfer fee
stems from the notion of double taxation. Those who oppose
the Land Bank see the fee as a double tax paid initially by the
developer who buys the land (a cost that is often passed on to
the buyer) and then again by the consumer at the time of
purchase. Thus, homeowners pay the fee twice. Some say this
double payment, in turn, exacerbates the rising housing costs
on the island.
Despite this opposition, the Land Bank has been extremely
successful in fulfilling the needs of Nantucket County. The
Bank appears to be suitable for a wide range of land and
estuary management, provided (1) the locality has a sufficient
real estate base to fund the program and (2) state legislation
does not prohibit or restrict this type of fee. Although the use
of land transfer fees is appropriate in the case of land
management, other types of fees may prove more
appropriate for different localities and different program
objectives. Overall, land banks can be a very useful tool to
help finance estuary and land management programs.
FOR ADDITIONAL INFORMATION, CONTACT:
Nantucket Land Bank Commission
Town & Country Building
Broad Street
Nantucket, Massachusetts 02554
(617) 228-6800 ext. 211
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Chapter III
Occupancy Tax:
Dare County, North Carolina
Dare County, North Carolina, is a rural coastal county that
experiences tourism demands in the summer that strain its
infrastructure. To remedy this situation and minimize impacts
on permanent residents, the County raised $1.6 million in a
year and a half by levying a 3 percent occupancy tax on all
hotels, motels, and rental houses. The County has used the
receipts from the occupancy tax to begin planning for a new
wastewater treatment plant. Occupancy taxes link recre-
ational users of coastal environments to programs that
improve users' enjoyment of area resources. These taxes,
therefore, appear widely applicable for financing marine and
estuarine protection and restoration programs in similar
regions.
Dare County is located in the northern coastal region of North
Carolina known as the Outer Banks. Miles of pristine coastline
and secluded coves, as well as some of the best sportfishing in
the world, have made the Outer Banks one of the most
popular summer vacation spots in the mid-Atlantic. These
attributes draw over 2 million visitors to the area each year.
This popularity has resulted in large increases to Dare
County's permanent population as the commercial,
residential, and industrial sectors have expanded to meet the
increasing demands of tourism. Although tourism is by far the
largest industry, the commercial fishing industry also
contributes to Dare County's economy.
Dare County comprises five towns: Nags Head, Kill Devil Hills,
Southern Snores, Kitty Hawk, and Manteo (the county seat).
Nags Head, the largest of the towns, is the only incorporated
township with its own government. The County's population
has more than doubled since 1970 and now stands at 22,000.
During the peak summer months of June, July, and August,
however, the population swells by a factor of 10 to over
200,000. This enormous inflow of temporary residents plus
the rapid growth of permanent residents has placed excessive
BACKGROUND
47
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ADMINISTRATIVE
SETTING
demands on Dare County's ability to provide the necessary
public services. By 1985, the County faced large capital needs
such as a new wastewater treatment plant, a new water
supply plant, a new school, and a new jail. The occupancy tax
was levied to raise money to address these issues.
Dare County, like most county governments, relies primarily
on property taxes for most of its income. Although the
County's total property value in 1985 was $1.2 billion,
representing an increase of 55 percent since 1983, because of
the low ad valorem tax rate of 39 cents per $100 of assessed
value, the County netted only $7 million from property taxes.
This revenue is inadequate to support the billions of dollars of
capital needs the County faces in the coming decade.
To raise money, the County considered general obligation
bonds as an alternative to occupancy taxes. Under North
Carolina law, a municipal government, with approval of the
state's Local Government Commission, can issue bonds as long
as they do not exceed a debt ceiling of 8 percent of the total
property valuation. In 1985, Dare County's total annual debt
was $7,000, representing a ratio of debt to total property
value of only 0.58. Although this is well below the allowable
debt limit, the County decided not to burden its permanent
population with the excessive financial burden caused mainly
by nonresidents. As a result, alternative sources of revenue
were explored. The County considered a real estate transfer
tax, a meals tax, and an occupancy tax.
Because North Carolina is not a home-rule state, in which the
municipal government receives all its taxing powers and
authorities from the state constitution, Dare County needs
state legislation to enact a new tax. The County originally
proposed a meals tax, a 3 percent occupancy tax, and a 3
percent real estate transfer tax. However, the restaurant
lobby successfully eliminated the meals tax from the proposed
legislation. The transfer tax faced similar opposition from the
real estate lobby, which successfully reduced the transfer tax
to 1 percent. The County was able to maintain the 3 percent
occupancy tax, and in April 1985, the state authorized Dare
County to levy the occupancy tax and the real estate transfer
tax.
48
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PROGRAM
CHARACTERISTICS
The occupancy tax applies to all motels, hotels, cottages, and
rental units, including time-share condominiums. The tax is
based on the total nightly, weekly, or monthly bill and only
applies to nonresidents. Proprietors are required to remit
taxes to the County at the end of every month. The law
applies strict penalties for owners who are delinquent or who
fail to pay the tax at all.
Although tax collections go into the County's general fund,
the proceeds can only be used for capital purposes including a
broad range of services from school buildings to public fishing
wharfs. Of the total collection, 3 percent covers administrative
costs, the County retains one-third, and the remainder is
allocated, based on property value assessments, among the
five towns. To assure that the occupancy tax is properly
administered, the County created a position in its tax office;
the person in this position will ensure that the tax payments
are collected promptly, deposited into the County's treasury,
and disbursed efficiently among the five towns.
The County collected $1.6 million between January 1986
(when the occupancy tax .went into effect) and April 1987.
This funding has allowed the County to begin planning for
the construction of a much-needed wastewater treatment
plant.
An occupancy tax appears broadly applicable to finance both
capital and operating estuary programs. This tax provides an
equitable way to translate the recreation benefits associated
with clean estuarine or marine waters into cash flows needed
to sustain pristine conditions. While other financing pro-
grams based on land values or local development charge
residents for environmental protection, an occupancy tax
spreads the cost of cleanup over tourists and nonpermanent
residents who also benefit from improvements. As the
estuary or marine environment improves and tourism grows,
revenues increase as well, providing a long-term source of
beneficiary financing.
In many areas, an occupancy tax has the potential to raise a
great deal of revenue. In 1986, for example, the New York
City Office of Visitor Information estimated that visitors spent
PROGRAM RESULTS
APPLICABILITY TO
ESTUARINE AND
MARINE INITIATIVES
49
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IMPLEMENTATION
PROBLEMS
approximately $1.5 billion on lodging in the city. These
expenditures could serve as an effective tax base to support a
substantial cleanup effort in New York Harbor or Long Island
Sound.
Table 4 illustrates the revenue potential of various tax rates
and expenditure bases (lodging demands). A relatively
modest 1 percent tax could raise $15 million a year; a 5 per-
cent tax could raise as much as $75 million per year. If a
broader region were included, lodging tax receipts would
increase substantially. It should be noted that these estimates
are made without regard for the effects of taxes on demand.
Table 4. Revenue-Generating Potential From an
Occupancy Tax in New York City
(in millions of dollars).
Tax Rate
Total Tax Base (millions)
1,500 1,750 2,000
1%
2%
3%
4%
5%
15
30
45
60
75
17.5
35.0
52.5
70.0
87.5
20
40
60
80
100
Before implementing occupancy taxes, care must be exercised
to set rates that balance government and private revenue
needs. High tax rates will inevitably generate dissatisfaction
among local businesses. Too high a rate could shift the
demand for lodging to neighboring jurisdictions without
occupancy taxes. As with any new mechanism to raise
revenues, it is important to educate the public about the
benefits they will receive.
Despite advantages of occupancy taxes, institutional
constraints may make a county or local occupancy tax difficult
to implement. Most states require local governments to
obtain approval from state legislatures or local citizens
through referendum. As the Dare County example illustrates,
heavy opposition to this type of tax by interest groups and
businesses could hinder passage of the legislation.
50
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Another potential problem with occupancy taxes is the
difficulty of enforcing them. Proper enforcement requires an
inventory of all hotels, motels, and rental units, as well as
knowledge of the occupancy rate for each month and each
establishment's rate structure. Regardless of these problems,
managers of estuary programs and coastal resources should
consider occupancy taxes in many areas with high tourism
rates.
FOR ADDITIONAL INFORMATION, CONTACT:
Eve Trowe
County Information Officer
Dare County, North Carolina
(919)441-1345
Dianna Fullmer
Occupancy Tax Administrator
County of Dare
P.O. BoxlOOO
Manteo, North Carolina 27954
(919)473-2143
51
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Chapter IV
Tobacco Taxes:
Washington State
The State of Washington raises $40 million a year to finance
water pollution control facilities and cleanup activities by
levying a combination of tobacco and sales taxes. In 1986, the
Washington legislature passed the Centennial Clean Water
Act, which established an eight cent per pack tax on
cigarettes, a 16.75 percent sales tax on tobacco products sold
at the wholesale level, and a sales tax on water pollution
control equipment. The law dedicates half these revenues to
the control of wastewater discharged directly into marine
waters. The other half is applied to various water quality
initiatives such as groundwater protection. Although tobacco
taxes are entirely unrelated to the technical programs they
would finance, the concept of commodity taxes appears to
have wide applicability to the finance of marine and estuarine
protection programs. Because such new taxes are never easy
to institute, this program has the greatest likelihood of
success at the state level.
Washington State has grown rapidly during the last decade,
particularly in the cities bordering Puget Sound such as
Bellevue, Tacoma, and Seattle. This rapid development in all
sectors of the economy has greatly stressed the state's marine
and estuarine environments. Parts of Puget Sound, for
example, have been degraded as a result of urban runoff and
the direct discharge of untreated wastewater into marine
waters.
In 1985, the Washington legislature enacted several statutes
aimed at correcting the state's water quality problems. These
laws focused on enhancing wastewater treatment capabili-
ties, establishing groundwater management areas, and pro-
moting local groundwater protection programs. Most
importantly, the statutes established the Puget Sound Water
Quality Authority (PSWQA). This Authority was directed to
prepare and implement a management plan for restoration
and continued protection of Puget Sound. The PSWQA was
also given the power to create shellfish protection districts.
BACKGROUND
53
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PROGRAM
CHARACTERISTICS
Although these actions set in motion the mechanisms to
effectively deal with the state's water quality problems, the
House and Senate could not agree on how to finance the
needed facilities, such as wastewater treatment plants. One
financing measure under serious consideration was giving
bonding authority to the PSWQA. However, the state legis-
lature could not decide on the exact terms of such a measure.
Under pressure from local and county governments, as well as
the U.S. Environmental Protection Agency, the state
legislature passed the Centennial Clean Water Act.
The Centennial Clean Water Act (SSB 4519 - Chapter 3 law of
1986) is designed to provide financial assistance to local
governments for the planning, design, acquisition, construc-
tion, and improvement of facilities to control water pollution.
To finance these activities, the Act established the cigarette,
tobacco, and sales taxes described earlier.
The revenues received from these taxes are deposited in a
dedicated Water Quality Account maintained by the state
treasury. A state study determined that at least $40 million a
year is needed to adequately address Washington's water
quality needs until fiscal year 1989. Thereafter, $45 million
would be required. If revenue from the tobacco and sales
taxes falls short of these goals, the state has pledged to
contribute the difference from general revenues.
The Water Quality Account is administered as a revolving-loan
fund (with some grants allowable), with the following
allocation to project purposes:
• 50 percent for pollution control facilities that discharge
directly into marine waters;
• 20 percent for sole source aquifer protection;
• 10 percent for protection of freshwater lakes and rivers;
• 10 percent for control of nonpoint pollution activities;
Use of remaining funds is determined by the State
Department of Ecology for projects not otherwise covered.
The Department of Ecology is the primary agency involved in
distributing the funds. The criteria for distributing grants and
loans, as well as the guidelines for project selection and for
application of such funds by local governments, will be
developed in the next six to eight months through public
hearings.
54
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PROGRAM RESULTS
Between April 1986 when the taxes went into effect and
February 1987, the Department of Revenue collected slightly
over $32 million. Projections for the remainder of 1987, and
1988 and 1989 are approximately $36 million per year. This
projection suggests that $4 million per year will be required
from general revenues.
No loans or grants have been made yet. Expenditures so far
have been limited to two government studies. The Office of
Financial Management spent $150,000 to develop a plan for
state financial assistance, and the Department of Ecology
spent $250,000 to develop an assessment of water quality
needs in the state. The study reports, published in January of
1987, will form the basis for deciding the appropriate level of
state assistance. They will also aid in the long-term planning
for how to meet the state's increasing water quality needs
over the next 15 to 20 years. In the future, all proceeds,
except a 3 percent allowance for administration, will be spent
locally on activities or facilities to control water pollution.
In 1987, the Washington state legislature appropriated
approximately $81 million for the Water Quality Account. The
majority of this fund, $75 million, is dedicated to local grants.
Although cigarette or tobacco taxes are not directly related to
users or beneficiaries of estuaries, these taxes can generate
tremendous amounts of revenue which then can be dedicated
to almost any program, at the discretion of legislatures or
local governing bodies. In fact, all 50 states tax either
cigarette or alcohol sales and dedicate revenues to a variety of
activities including education, transportation, welfare, and
local grants-in- aid. In 1984, the total state tax revenues from
cigarette sales was $4.3 billion dollars.
In 1984, for example, Maryland raised $66 million from taxes
on tobacco products. Based on 1984 cigarette safes, an
additional tax of five cents per pack would yield $26.5 million
a year, whereas an extra 15 cents per pack would generate
annual revenues of $79.5 million (see Table 5). These
revenues could be dedicated to cleaning up Chesapeake Bay;
however, using some of the added revenues for other high-
priority state initiatives could make such taxes more politically
feasible. It should be noted that these revenue projections
assume that increased prices (due to taxes) have no effect on
sales. In practice, sales of cigarettes would fall off as prices
increase.
APPLICABILITY TO
ESTUARINEAND
MARINE INITIATIVES
55
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Table 5. Revenue-Generating Potential of an Additional
Tax on Cigarettes Sold in Maryland.
Tax Base
Annual Sales
in Million of
Cigarette
Packs (1984)
429
477
530
583
641
05
$21,450,000
$23,850,000
$26,500,000
$29,150,000
$32,050,000
Tax
Cents Per Pack
10
$42,900,000
$47,700,000
$53,000,000
$58,300,000
$64,100,000
15
$64,350,000
$71,550,000
$79,500,000
$87,450,000
$96,150,000
Source: Apogee Research, from state tobacco tax data
presented in Advisory Commission on Intergovernmental
Relations, Measuring State Fiscal Capacity: Alternative
Methods and Their Uses (September 1986).
In addition to tobacco and sales taxes, other commodity taxes
that more closely link users to the programs they finance are
potential.sources of revenue. A tax on plumbing equipment,
for example, was recently proposed in the U.S. Senate, with
revenues dedicated to financing improvements in the public
water supply. This bill is designed to raise $500 million a year.
A similar tax could be designated to finance estuary cleanup
and protection initiatives. For example, a statewide tax on
fishing equipment, boat sales or leases, or fish landed could
be used as seed money for state-revolving funds dedicated to
estuary and marine cleanup and protection.
FOR ADDITIONAL INFORMATION CONTACT:
Bonnie Austin
House Office of the Budget
Second Floor
House Office Building
MS AS33
Olympia, Washington 98504
(206)786-7107
Nancy Stevenson
House Ways and Means Committee
MS AS33
Olympia, Washington 98504
(206)786-7136
56
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Chapter V
Inland Waterways Trust Fund:
Nationwide
The federal Inland Waterways Trust Fund was established in
1980 to manage revenues for construction, rehabilitation, and
repair of navigation systems on the inland and coastal
waterways. The Trust Fund is financed by receipts from a
waterways fuel tax. The fuel tax was initiated in 1980 at four
cents per gallon, and will increase incrementally so that after
1995, towboats operating on most of the nation's waterways
will be paying a 20-cents per gallon tax on fuel.
As of 1987, the Trust Fund had a balance of $300 million.
Although money has been accumulating in the Trust Fund
since 1981, the balance will be obligated for the first time next
year. Outlays from the Trust Fund are based on specific
appropriations for eight authorized and one anticipated
project, totaling $1.2 billion over the next five to ten years. In
1986, an 11-member User's Board made up of representatives
of the barge and shipping industry was created to
recommend future appropriations from the Trust Fund. The
inland waterways fuel tax charges part of the cost of
providing waterborne commerce to those who benefit from
the service. Similarly, a tax on fuel pumped atestuarine and
coastal marinas could help finance the cleanup of those
waters.
The U.S. Army Corps of Engineers (the Corps) began
construction and maintenance of the nation's inland
waterway system in the 1800s. The Corps' original role in the
inland waterway system stemmed from the need to link
major, established eastern population centers with the
growing agricultural and industrial regions in the Midwest.
As economic activity moved westward, inland waterways
played a pivotal role in encouraging and serving this new
growth.
Today, this system consists of over 21,000 miles of waterways
supported by 225 locks and dams. In 1985 the nation's
waterways transported 534 million tons of cargo representing
BACKGROUND
57
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ADMINISTRATIVE
SETTING
PROGRAM
CHARACTERISTICS
about 13 percent of all intercity freight traffic, most of it
consisting of barges carrying bulk goods with low values per
ton: coal, petroleum products, grains, sand and gravel, and
chemicals.
Traditionally, the Corps has maintained the inland waterways
in support of waterborne transportation. Although federal
dollars once financed all the construction and maintenance of
the nation's inland waters, by the mid 1970s it was clear that
federal appropriations could not keep pace with the financial
requirements needed to maintain the aging inland waterway
system. Nearly 40 percent of all locks operated for commercial
purposes are at least 50 years old. The antiquated equipment
has resulted in rising operation and maintenance costs, which
in turn, has put pressure on funding major rehabilitation
projects. Another result is excess delays and processing times
to the barge and shipping industry.
To make the inland waterways more efficient and raise funds
for needed repairs, Congress implemented a new user charge.
The Inland Waterways Revenue Act of 1978 (P.L. 95-502)
instituted fuel taxes to support federal inland navigation
programs for the first time in over a century. The original fuel
tax of four cents per gallon in 1980 increased by two-cent
increments in 1982, 1984, and 1986. The Water Resources
Development Act of 1986 (WRDA) increased the tax incre-
mentally so that by 1995, commercial carriers using the inland
waterways will pay 20 cents per gallon. The Inland Trust Fund
receives all fuel tax receipts. The tax is dedicated to covering
half of all system-wide operation, maintenance, and major
rehabilitation of the inland waterways. The Trust Fund is
managed by the Treasury Department (in the general fund of
the United States). Outlays from the fund are decided by
congressional appropriations, based on economic reports
prepared by the Corps, with advice from the User's Board.
Receipts were overestimated for the early years of the
program, due in large part to optimistic shipping projections,
unforeseen economic downturns, and unexpected compe-
tition from the newly deregulated freight rail and trucking
industries. During the first year the tax was initiated (1981),
only $25 million in fuel taxes was collected. Even with the
two-cent increase in 1984, only $54 million was received.
Although full cost recovery was never anticipated, receipts
covered less than 10 percent of the total cost to sustain inland
navigation. With fuel tax increases to 20 cents a gallon by
1995, the fund is projected to reach $600 million by 2002.
58
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Although the revenues from^the fund have been
accumulating since 1980, it was not until the WRDA that
expenditures from the fund were appropriated. The Act
appropriated $1.2 billion from the Trust Fund for eight
authorized projects and one anticipated project.
Although a fuel tax does link beneficiaries of a program to its
costs, and can be a tremendous revenue source, there are
several issues involved in implementing such a tax. Four issues
figured prominently during the debates over implementing a
new fuel tax: what will users get in return; how much freight
will shift to other modes of transportation; how will the
shipping industry be affected; and how will receipts from the
tax be allocated. Implementation of the inland waterway fuel
tax was helped along because waterway users demanded
construction of new facilities in return. This give-and-take
between public and private interests, and the public
education that must accompany such negotiation, are critical
to the success of implementing a new tax.
Analysts predicted that competing rail and truck transport
would gain significant traffic if a waterway fuel tax was
imposed. Since the advent of the tax, it has been difficult to
separate internodal shifts because of price competition from
the general downturn in traffic due to other economic forces.
Concerns were also raised that the barge industry, which was
already facing economic pressures from excess capacity, could
ill afford to shoulder the added cost burden of new fuel taxes.
Indeed, whether due to fuel taxes or overall economic trends,
the barge industry was consolidated and contracted
somewhat since the mid-1970s. Ability to pay taxes, given the
economic position of the water transportation industry, is a
valid concern.
Finally, how the money should be allocated once it is collected
can be one of the most controversial aspects of implementing
a fuel tax. Should allocations from the Trust Fund be
distributed evenly or should allocations be based on some
level of performance? The WRDA created the User's Board to
deal with such issues.
IMPLEMENTATION
ISSUES
59
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APPLICABILITY TO
ESTUARINE AND
MARINE INITIATIVES
Creating a trust fund to manage fuel tax receipts from the sale
of marine fuel is an appropriate way to finance marine and
estuarine protection projects. A fuel tax assessed at all coastal
and estuarine marinas not only represents a recurring source
of substantial revenue, but also links users of such waters to
the maintenance of that water's quality. Such a fuel tax could
apply to both commercial vessels and recreational boaters.
Table 6 indicates the level of annual revenue that could be
raised given reasonable tax rates and marine fuel
consumption nationwide. It should be noted that pertinent
elasticities of demand are not known and therefore not
included in the revenue estimates shown.
TableS. Revenue-Generating Potential of a Fuel Tax Based
on All Fuel Pumped for Marine Purposes in an
Average Year (based on fuel prices of $1/gallon).
Gallons
Pumped
(inBillions)a
1.00
1.25
1.75
2.00
.01
$10,000,000
$12,500,000
$17,500,000
$20,000,000
Tax (cents/gallon)
.04 .08
$40,000,000
$50,000,000
$70,000,000
$80,000,000
$80,000,000
$100,000,000
$140,000,000
$160,000,000
.12
$120,000,000
$150,000,000
$180,000,000
$240,000,000
a|n 1985, one billion gallons of fuel were pumped for marine
purposes.
Marine fuel taxes could be implemented on a regional level.
The fuel tax in Oregon Inlet, North Carolina, for example,
illustrates the revenue potential of a single area. The area of
Oregon Inlet located at the mouth of Pamlico and Albermarle
Sounds, North Carolina, is served by two major marinas. Table
7 illustrates the revenue-generating potential of various fuel
tax alternatives applied to commercial and recreational users.
60
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Tab\e7. Fuei Expenditures of Commercial and Recreational
Boating Users for Oregon Inlet, North Carolina
(based on fuel prices of $1/gallon).
(Cents Per Gallon)
Expenditure Category
Recreational
Charterboat/Headboat
Commercial Fishing
Total
Gallons
Pumped .01
2,643,000 $26,400
366,000 $ 3,600
577,000 $ 5,700
Fuel Tax
.03
$79,300
$10,900
$ 7,300
.06
$158,600
$21,900
$ 34,600
TOTAL
3,586,000 $35,700 $97,500 $215,100
Source: Army Corps of Engineers Wilmington District,
Financial Analysis of Oregon Inlet, 1985.
A 1 percent tax per gallon on all gas expenditures for vessels
could net an estimated total of $35,000 a year whereas a 6
percenttax could yield an estimated $215,000.
As good a source of revenue as the fuel tax is, the overall
economic effects of new taxes must be considered, not just
the taxes' ability to raise revenue. States are protective of
their commercial fishing industries, especially on the east
coast where coastal boundaries are close. Under a statewide
tax scenario, some states might choose to exempt commercial
vessels in order to reduce the risk of losing moorage to a
neighboring state. Indirect state receipts from declining sales
in related sectors would also drop. In Oregon Inlet, for
example, if commercial fishing vessels were exempt from the
fuel tax, direct tax revenue would decline by up to 20 percent.
FOR ADDITIONAL INFORMATION, CONTACT:
Russ Brodie
Apogee Research
4350 East West Highway
Suite 1124
Bethesda, Maryland 20814
(301)652-8444
61
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Chapter VI
Oyster Taxes:
Maryland and Georgia
Coastal states are becoming increasingly aware of the need to
manage and preserve their valuable coastal resources.
Pollution and extensive shellfishing, for example, have
depleted shellfish beds and decreased harvestable areas,
demonstrating the need for better management of these
resources. Both Maryland and Georgia have shellfish
management programs to maintain oyster harvesting areas.
Although the general goals of the programs are similar, the
financial mechanisms that fund them differ. The State of
Maryland raises revenues for the Oyster Propagation Program
by placing a tax on harvested bushels of oysters. In contrast,
Georgia provides oyster management through its Shellfish
Program in which the state leases commercial harvesting
areas, based on a bid procedure and funds allocated from the
state legislature. Although both programs have been
successful in providing oyster management programs, this
case study discusses primarily the more unique program in
Georgia. Similar types of severance or renewal taxes on living
resources would be applicable for any coastal area with the
proper shellfish or fish resources.
Since 1983, Georgia has successfully managed its shellfish
population through a lease bid program. Unlike most coastal
states, Georgia has no open shellfishing areas. The general
public must harvest in designated public grounds. Public
harvests cannot exceed the daily legal limit of two bushels per
person (or six bushels per boat), and the harvester must pick
oysters only with hand-held implements.
Commercial harvesters must obtain a lease for state-owned
resources from the Georgia Department of Natural Resources,
Coastal Resources Division. Leases are awarded on the basis of
bids for a specific parcel of land. Any person desiring to lease
a state-owned oyster bed must submit an application indicat-
ing on a National Oceanic and Atmospheric Administration
BACKGROUND AND
PROGRAM
CHARACTERISTICS
63
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chart the area to be leased, the names of adjacent landowners
as designated in the county tax records, plans for working the
beds, and any other information the department may require.
If based on such factors as pollution conditions and shellfish
base, the state determines an area is suitable for leasing, the
state will offer the area in a competitive bidding process. A
"good faith" fee of $50 is required from the shellfishing
applicant and is returned if the applicant is unsuccessful at
securing a lease. If the applicant is successful, the fee is
applied to the amount the applicant owes to the department
as per the terms of the lease.
The bidding procedure requires that each bidder submit a
shellfish resource management plan. Management plans are
judged on the basis of various criteria including provision of
culch material (habitat substrate), transplantation of oysters
from unapproved growing areas, and shell deposition. The
winning bid is chosen according to the most advantageous
combination of lease payments and the strength of the
management plan. Lease terms last up to a maximum of 15
years. It should be stressed that this program is not designed
to generate revenue for the shellfish program, but to ensure
the proper management and use of Georgia's publicly owned
shellfish beds. In fact, bids that did not generate much
revenue but proposed exceptional management programs
have been chosen over more lucrative bids that proposed
weaker management programs. In effect, the program
substitutes private expenditures for public ones, because
significant public management costs would be necessary
without private management plans.
The leasing and oversight of shellfish beds is administered by
the Shellfish Program which is part of the Coastal Resources
Division of the Department of Natural Resources. The
Shellfish Program, funded by approximately $100,000 of state
appropriations, oversees programs for clams and other
shellfish as well as oysters. The cost of administering the
leasing program falls within this budget.
The leasing program itself generated $5,700 in 1986 and
$5,500 in 1987. Although this is a small amount, the true
benefits of the program are nonmonetary. They include the
rebuilding of Georgia's once prosperous commercial shellfish
industry as well as the provision for and sound management
of Georgia's valuable oyster resources.
64
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APPLICABILITY TO
ESTUARINEAND
MARINE INITIATIVES
In general, the Georgia Department of Natural Resources has
found the lease program to be a successful way to ensure
oyster management. Further, the program accomplishes this
goal with minimal state oversight. Only occasionally will a
lessee neglect to fulfill a part of the management contract.
These incidents generally have been cleared up with warning
letters. This type of combined revenue/management program
could be useful to manage natural resources, such as fish and
shellfish, in other areas with appropriate resource bases and
commercial harvesting demand.
In contrast to Georgia's program, the State of Maryland raises
money to fund the Oyster Propagation Program by actually
taxing commercial harvesters on the number of bushels taken
from the beds. The tax is 45 cents per bushel of oysters that
remain in state, and an additional 15 cents per bushel on
oysters leaving the state. In 1986, Maryland raised $600,000,
and expected revenues for 1987 are $800,000. The state uses
these revenues to provide culch, seed oysters, and a proper
habitat in order to ensure continued quality and abundance
of oyster beds.
Ultimately in both programs, commercial harvesters bear the
financial burden of their activities. But while Maryland
directly administers its program, Georgia transfers manage-
ment responsibility to the harvesters. Consequently, the
Maryland program may have greater flexibility to estuary
management in that revenues from the oyster tax could be
diverted to other uses. Georgia's program is restricted to the
management of living resources of commercial value. The
Georgia bid/lease idea could be adapted as a revenue-
generating program by eliminating the management criteria
and evaluating bids strictly on a dollar basis. These revenues
could then finance a state-run oyster management program
or any other aspect of estuary management.
FOR ADDITIONAL INFORMATION, CONTACT:
Dr. Stuart Stevens
Leader, The Shellfish Program
Georgia Department of Natural Resources
1200 Glynn Avenue
Brunswick, Georgia 31523-9990
(912)264-7218
65
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Chapter VII
Tax Increment Financing District:
Orlando, Florida
The City of Orlando, Florida, created a Community
Redevelopment Trust Fund in 1982 to carry out the
redevelopment of declining areas in downtown Orlando.
Revenue bonds totaling some $19 million were issued to
finance the public investments necessary for this project. The
incremental increase in property tax revenues expected from
redevelopment was pledged to service the debt incurred.
Similar tax increment financing techniques might be effective
ways to fund urban or rural drainage and stormwater runoff
projects adjacent to estuarine or marine waters.
The City of Orlando is part of the three-county Orlando
Metropolitan Statistical Area (MSA) consisting of Orange,
Osceola, and Seminole Counties. The city itself accounted for
143,000, or 17 percent of the MSA population in 1985. Prior
to 1967, the MSA economy was based upon agriculture and
citrus products, tourism, light manufacturing, and industries
related to the space program at the nearby Kennedy Space
Center.
More recently, however, Orlando has grown considerably as a
result of Disney World, high-tech industry expansion, and
increased manufacturing. In the period from 1970 to 1985,
the MSA population increased by 90 percent to nearly
862,000. A significant portion of this increase was in the
prime working group, aged 25-44 years. By 1990, this age
group alone is expected to expand by 47.5 percent and the
total MSA population will be more than one million.
But the majority of this growth has been in the outer areas;
the center of the city, defined as a 569-acre area, remained
underdeveloped. In 1982, the city aggressively sought to
improve this area through the application of Tax Increment
Financing (TIP). That is, the development was to be funded by
the increase in property tax revenues resulting from higher
assessed values due to the development.
BACKGROUND
67
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ADMINISTRATIVE
SETTING
PROGRAM
CHARACTERISTICS
There are two agencies with responsibility for the economic
health of downtown Orlando: the Orlando Downtown
Development District and the Orlando Community
Redevelopment Agency. The first authority has jurisdiction
over approximately 1,000 acres in the heart of downtown
Orlando and is governed by a five-member board appointed
by the mayor for three-year terms. The board has ad valorem
taxing powers. The second agency, the Orlando Community
Redevelopment Agency, was created in 1980 by the City
Council when the existence of a blighted area suitable for
redevelopment was identified within the larger Downtown
Development District. The City Council is responsible for the
Redevelopment Agency and its program of economic
regeneration.
In 1982, the Council adopted a Redevelopment Plan that
outlined a set of programs to be undertaken over an initial 10-
year timeframe. The plan included upgrading of the aging
infrastructure system (water, sewer, etc.), improvement of
traffic circulation, creation of additional economic opportuni-
ties, additions to the parking system, development of
housing, and enhancement of pedestrian areas. Simultane-
ously, the Council established the Community Redevelopment
Trust Fund to manage revenues for redevelopment projects.
The Redevelopment Agency floated several revenue bond
issues to finance the investments planned for the area. These
bonds are not a general obligation of the agency or of the
City of Orlando; they are secured by an irrevocable lien on the
increment in property tax revenues and on interest earned by
the Trust Fund holding those receipts.
For each property within their jurisdiction and within the
redevelopment area, the authorities pay annually into the
Trust Fund 95 percent of the difference between ad valorem
tax revenues actually received and the ad valorem tax
revenues that would have been received under the current
millage rate had assessments remained at January 1, 1981,
levels; i.e., 95 percent of the increase in property tax revenues
of each taxing authority. January 1, 1981, was chosen as a
perpetual base of reference. Millage rates are a taxation
expressed in mills (1/10 cent) per dollar.
68
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The aggregate assessed valuation of taxaole real property in
the Redevelopment Area as of January 1, 1981, (the "frozen
tax base") was about $136 million. By September 1984, the
final area valuation was in excess of $237 million; by January
1985, assessed value of property in the Redevelopment Area
had grown to over $363 million. Based on this increase in
value, the tax increment revenues contributed to the Trust
Fund were $940,000 in 1984, climbing to $2.3 million in fiscal
year(FY) 1986.
Significant building activity has continued in downtown
Orlando with construction of new buildings and renovation
of many existing structures. Based on this growth, projections
for future years indicate annual payments to the Trust Fund of
$2.9 million in FY 1987, growing steadily to $6 million in FY
1990.
Actual achievement of the projected increments in tax
revenue depend, of course, on the millage rates adopted by
the participating taxing authorities and the realization of
anticipated increases in property tax values due to
development and redevelopment in the area. To estimate tax
levies, projects were segregated into three categories on the
basis of their estimated likelihood of occurring (Most
Probable, Probable, and Uncertain Probability). Estimates
were then made of the potential additional value added to
the original tax base (See Table 8).
Tables. Value Added by New Construction and Major
Rehabilitation to Downtown Assessment Base (for
the Period 1986-1990)
Probability of
Occurrence
New
Construc-
tion
Major
Renova-
tion
Total
Most Probable
$144,305,416 $15,509,100 $159,814,516
Probable 141,771,119 1,785,000 143,556,119
Uncertain Probability 16,817,250 170,000 16,987,250
Total
$302,893,785 $17,464,100 $320,357,885
On the basis of these estimates, total tax levies for a given
period can be generated and sensitivity analyses can be
performed. In the case of Orlando, total levies were relatively
insensitive to changes in the development rate (see Table 9),
but, as they would be for any region, revenues were sensitive
to changes in the property tax rates, or millage rates (see
Table 10).
69
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Table 9. Projected Tax Levy Scenarios for Varying
Development Rates (Thousands of Dollars).
Fiscal
Year
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
Cumulative Value
Most
of Tax Levy
Probable Probable
$1,061 $
2,390
3,003
3,620
3,997
5,014
1,061
2,390
3,000
3,657
4,473
6,224
bv Probability
Uncertain
Probability
$1,061
2,390
3,003
3,658
4,483
6,320
Total
$19,084
$20,807
$20,914
Table 10. Projected Tax Levy Scenarios for Most Probable
Development, Varying Millage Rates (Thousands
of Dollars).
Tax Levy
Fiscal
Year
Base
Millage
Rate + 5 Percent
-5 Percent
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
$ 1,061
2,390
3,003
3,620
3,997
5,014
$ 1,114
2,509
3,153
3,801
4,197
5,265
$ 1,008
2,270
2,852
3,439
3,797
4,763
Total
$19,084 $20,038
$18,130
70
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APPLICABILITY TO
ESTUAR1NEAND
MARINE INITIATIVES
Tax increment financing has been used by other jurisdictions
for many needs. Davenport, iowa, for example, used its TIP
District to finance a major highway interchange in an area
slated for development. Clearly, tax increment financing is
appropriate for areas in which substantial new development
is fairly certain to occur in the wake of other public
investments. Cleaner estuarine or near coastal environments,
for example, could boost neighboring property values and
create a tax increment to support continued environmental
protection programs.
The disadvantage of tax increment financing is that, given its
dependence on development that has not yet occurred,
revenues are relatively uncontrollable and uncertain.
Supplementary revenue sources may be necessary, in some
cases, if increases in ad valorem tax revenues are inaccurately
projected.
The advantage of tax increment financing, of course, is the
relative "painlessness" of the exactions-payment is not added
to regular taxes, as is the case in special assessment districts,
but diverted or earmarked from ad valorem taxes that would
have been paid in any case.
FOR ADDITIONAL INFORMATION, CONTACT:
Robert R. Garner, Comptroller
City of Orlando
400 South Orange Avenue
Orlando, Florida 32801
(305) 849-2200
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Chapter V1H
Sport Fishing License:
Chesapeake Bay, Maryland
In response to deteriorating water quality in Chesapeake Bay,
the State of Maryland began a five-point program to improve
the Bay's water quality conditions and manage its abundant
natural resources. As part of this program, the state instituted
the Chesapeake Bay Sport Fishing License plan in January
1985. In so doing, Maryland became the first east coast state
to initiate tidal water licensing of anglers. Fees collected from
sport fishing licenses are credited to the Fisheries Research
and Development Fund and will be used to propagate and
conserve native fish stocks. In 1986, this program raised $1.1
million. The ultimate goal of the program is to improve sport
fishing experiences and to aid research concerning tidal
fishery resources. Fees on sport fishing licenses could
generate considerable revenues for estuarine and marine
management, depending on the strength of the regional
sport fishing industry.
Chesapeake Bay is one of the most precious estuarine
resources in North America. The value of the Bay can be
measured in terms of its environmental, recreational,
economic, and cultural resources. The Bay, for example, is a
rich source of shellfish, crabs, and finfish, and provides
numerous recreational opportunities for boaters and
campers. It is also home to two major shipping ports.
By the mid-1970s, signs of stress on the Bay and its resources
were brought to the attention of state and federal authorities
by concerned citizens. The U.S. Environmental Protection
Agency (EPA) undertook a seven-year study to determine the
factors contributing to the decline in conditions in the bay.
The EPA study found that conditions were deteriorating
because of both point and nonpoint sources of pollution.
In an effort to reverse the long-term decline in water quality
in Chesapeake Bay, the federal government, Maryland,
Virginia, Pennsylvania, and the District of Columbia entered
into the Chesapeake Bay Agreement. This agreement called
for the preparation and implementation of coordinated plans
BACKGROUND
73
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PROGRAM
CHARACTERISTICS
to improve and protect the Bay. The result of this effort was
the Chesapeake Bay Restoration and Protection Plan, which
established basic goals and objectives for improving the water
quality of the Bay. Each state then developed its own set of
initiatives for cleaning up and managing the Bay and its
resources. The Sport Fishing License Program is part of
Maryland's effort to maintain the Chesapeake's valuable
natural resources.
No one is allowed to fish in the Chesapeake Bay or its
tributaries up to the tidal boundaries without first obtaining a
Chesapeake Bay Sport Fishing License.2 The basic license is
$5.00, effective January 1 through December 31 of each
calendar year. In addition to the basic license, special licenses
must be obtained for charter boats or for use in conjunction
with freshwater licenses. Table 11 outlines the different types
of licenses, the number of licenses sold, the cost per license,
and the total revenue generated for the first two years of the
program.
Table 11. Revenues from the Sale of Sport Fishing Licenses,
1984-1986.
1984-1985
License Type
Bay Sport Lie.
w/Freshwater Lie.
Decal
3 day
6-Man Charter Boat
7-Man Charter Boat
Number
Sold
40,116
66,150
25,556
3,377
214
102
Cost($$)
5.00
2.50
25.00
2.00
200.00
240.00
Revenue($$)
200,580
165,375
638,900
6,754
42,800
24,480
Total Revenue
1985-1986
$1,078,889
Bay Sport Lie. 64,521 5.00 217,222
w/Freshwater Lie. 86,889 2.50 322,605
Decal 33,429 25.00 835,725
3 day 7,490 2.00 14,980
6-Man Charter Boat 242 200.00 48,400
7-Man Charter Boat 103 240.00 24,720
Total Revenue $1,144,273
Source: Maryland Tidewater Administration, unpublished data.
2 Exceptions include senior citizens, holders of Virginia Chesa-
peake Bay fishing licenses, commercial fishers, and children
under sixteen, all of whom are exempt from the license
requirement.
74
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The program is overseen by the Tidewater Administration of
Maryland's Department of Natural Resources. Licenses are
issued from this department's Licensing and Consumer
Services, County Clerks of the Circuit Court, and licensed
agents. Those caught fishing without a license are penalized.
The enforcement officer generally issues a warning for first
offenses. Fines ranging from $25.00 to $50.00 are assessed for
subsequent offenses. In 1985-86 the license fees generated
roughly $1.1 million. In contrast, the cost to run the program
was nominal. Thus, as a means of generating revenue for the
Fisheries Research and Development Fund, the Sport Fishing
Lkense.plan has been very successful.
Public acceptance has generally not been a problem except in
the case of some anglers who resist paying fees for activities
that have been free all their lives. However, because license
fees will be used directly to improve fish populations, protect
and restore necessary habitat for spawning and growth of
sportfish species, and increase access to tidal waters, it
appears appropriate that fishermen bear the burden of these
costs.
Fees for Sport Fishing Licenses are applicable to fund
estuarine and marine management in all areas where both
the resources and sport fishing bases exist. The Maryland
program is particularly appropriate because the burden is
borne by those who are receiving the benefits. In the past,
east coast states have been hesitant to require licenses of
tidewater anglers because such licenses can shift demand to
neighboring states without such fees. However, when 1986
and 1985 are compared, there is no evidence that this shift has
occurred in Chesapeake Bay.
The use of license fees to generate revenue for estuarine and
marine management could be extended to other recreational
activities, such as boating, that also use an estuary's resources.
Revenues from such licensing fees could be used as seed
money for state-revolving loan funds with the proceeds
dedicated specifically to estuary management.
FOR FURTHER INFORMATION. CONTACT:
Mr. Howard King
Maryland Department of Natural Resources
Tide Water Administration
Tawes State Office Building
Annapolis, Maryland 21401
(301)974-3765
APPLICABILITY TO
ESTUARINE AND
MARINE INITIATIVES
75
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Chapter IX
Stormwater Utility:
Bellevue, Washington
The City of Bellevue, Washington, established an independent
government entity-a stormwater utility-to design, construct,
maintain, and operate a drainage system to control storm and
surface water runoff, urban flooding, and nonpoint source
pollution to nearby lakes which, in turn, discharge into Puget
Sound. Although it took seven years to build public consensus
and begin operations, the utility now operates a series of
channels and runoff detention basins; these drainage systems
are financed by acreage fees paid by landowners. Using the
revenue from these fees, the utility was able to issue $10
million in revenue bonds to build its original stormwater
control facilities. The secure, recurring revenues from
acreage-based fees, coupled with the management of these
funds through an independent utility, appear to be widely
applicable to financing programs to control urban nonpoint
source pollution in other estuaries and near coastal waters.
Bellevue, Washington, is a fast-growing suburb east of
Seattle, located on the inland waterways tributary to Puget
Sound. The area's prime location has transformed this once-
sleepy suburb into a booming metropolis characterized by
commercial, residential, and industrial development. The City
of Bellevue covers 25 square miles with a population of about
82,000. Population has grown by nearly 80 percent since
1970.
Disruption to the natural drainage pattern of the Bellevue
area first received attention in the late 1960s. As develop-
ment increased and vacant land was replaced with impervious
buildings, parking lots, and roads, more rainfall flowed over
the surface and less percolated into the ground. This runoff
carried surface pollutants into nearby streams. Heavy rainfall
and excessive runoff also caused accelerated erosion and
flooding throughout the city. Inadequate drainage caused
debris to wash into the estuaries around Puget Sound;
residual debris restricted in-stream flows during periods of
low flow and reduced the local salmon population.
BACKGROUND
77
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ADMINISTRATIVE
SETTING
PROGRAM
CHARACTERISTICS
After seven years of planning, the Bellevue Storm & Surface
Water Utility was created in 1974 to address these problems.
The legal authority to create such a utility was derived from a
1964 state law that allowed independent stormwater utilities.
These special government entities are empowered to collect
fees from landowners and borrow against them to finance the
construction and operation of control facilities. The entities
do not compete for funds with other traditional government
services such as education and police protection. In Bellevue's
case, the utility is a completely separate entity of city
government, legally the same as a sewer or water utility in its
organization, responsibilities, and financing, and is
accountable to an independent Rates Commission and the
Bellevue City Council. The Bellevue Storm and Surface Water
Utility maintains a staff of thirty-five, and operates on an
annual budget of nearly $4 million.
The Bellevue Stormwater Utility is the financial management
institution responsible for setting and collecting fees. The
utility sets fees on the basis of the type and intensity of
development for each parcel of land within its jurisdiction.
These parameters approximate the disturbance to the natural
percolation of rainwater and the resulting increase in
stormwater runoff. The utility5 developed runoff coefficients
based on land area for each of the following five classes:
• Undeveloped - lands not covered by impervious surfaces
and free of disturbances to the local hydrology (the flow
of water on the surface of the land).
• Light Development - characteristics similar to unde-
veloped land with less than 35 percent of the land area
covered by impervious surfaces.
• Moderate Development - areas with 35-50 percent im-
pervious coverage, where development has had an impact
on the local hydrology.
• Heavy Development - properties of fairly intensive
development with 50-70 percent of the land covered by
impervious surfaces.
• Very Heavy Development - properties that have greater
than 70 percent impervious coverage, typified by the
Central Business District. This category also includes the
majority of the roads and highways.
78
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To initiate operations, the utility staff used aerial photos and
property line maps to determine runoff coefficients and
parcel sizes for all the properties in Bellevue. The coefficients
are multiplied by the property size to determine the final
service charge. For example, owners of undeveloped property
less than 2,000 square feet pay a total charge of $.08 per
month, whereas a moderate development with approxi-
mately an acre of land (40,000 square feet) would pay $3.28 a
month. A heavy development of 98,000 - 100,000 square feet
would pay $15.60 per month. In 1987, the average household
bill was about $6.00 per month.
If a developer provides some type of runoff control system
such as on-site detention basins, development classification is
reduced. Because all new development in the city is required
to provide such detention systems, there are few new
customers in the high rate classifications.
The total annual revenue that could be expected under this or
a similar plan depends on the unit rates and total acreage for
each level of development. Table 12 illustrates the sensitivity
of annual receipts from a 50,000-acre community given
different levels of development and fee structures. If 80
percent of the land is undeveloped (the first development
scenario) and fees are modest (the base fee schedule), about
$1.3 million would be generated each year. On the other
hand, if most of the land is heavily developed (the last
development scenario) and fees are more than doubled (the
third fee schedule), revenues could increase by a factor of 5 to
$7.4 million a year. At the same time, the cost for runoff
control on underdeveloped lands would probably be less than
the cost for more developed lands.
Table 12. Annual Revenues for a Community of 50,000 Acres
Under Five Hypothetical Development Scenarios
and Three Hypothetical Fee Schedules.
Percent of Total Land Area
Undeveloped Medium Heavy
Fee Schedule Millions
of Dollars/Acre/Year
by Development Density
Base x Base x
Base3 . 1.5 2.25
Scenario 1
Scenario 2
Scenarios
Scenario 4
Scenarios
80
50
25
25
10
10
25
50
25
10
10
25
25
50
80
1.3
1.9
2.2
2.6
3.3
2.0
2.9
3.2
3.9
4.9
3.0
4.3
4.9
5.8
7.4
a $1.60 per acre per month for undeveloped land, $3.28 per acre per month
for moderately developed land, and $6.24 per acre per month for heavily
developed (and.
Revenue Potential
79
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Other Sources of Revenue
HOW SUCCESSFUL HAS
THE PROGRAM BEEN?
IMPLEMENTATION
OBSTACLES
Although rates charged on property within the utility's
boundaries provide the majority of revenues, the utility also
has authority to raise money in other ways. For example, any
new development must purchase a drainage permit. The fees
from these permits support enforcement and inspection of
new water control facilities. Developers also pay fees for
expansion, depending on the type and size of the project. A
"latecomer provision" charges new developers a "buy-in" fee
for the use of facilities already in place. In lieu of a cash fee,
the latecomer provision allows new developers to install a
drainage system consistent with the city's drainage
management plan. This provision allows the utility to expand
at no additional cost'to itself. A portion of each year's fees
finances the operation of the utility. The remainder is either
reserved for emergencies or dedicated to repay revenue
bonds issued to finance capital'facilities.
After nearly 11 years in operation, the program has been
deemed a great success not only by the utility's standards, but
more importantly, by the residents of the city. In fact, many
other cities have used the Bellevue Utility as a planning
model. Revenues from rates have grown from $568,200 in
1979 to $3.4 million in 1985. As of 1985, the utility had 25,000
accounts that have helped finance nearly $16 million in capital
improvements. Including developer contributions under the
latecomer provision, capital improvements are estimated to
range between $32 and $40 million.
Storm and surface water runoff have been greatly reduced
resulting in declining flood damages, as well as a general
improvement in water quality. Fish kills are no longer as
prevalent as they were in the mid-1970s and the salmon
fishery has rebounded. The flooding of downtown Bellevue is
no longer a common occurrence, as it was before the
drainage system was implemented. In addition, complaints of
basement floodings to city government have declined from 18
in 1980 to none in 1986.
The two most serious problems that Bellevue encountered
during the seven years that it took to begin the utility's
operation were enlisting community support and working out
arrangements with the state on how much it should pay
because of highway development.
80
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Public Support
Gaining public support is a difficult task because the concept
of a stormwater utility is often misunderstood by the public.
In the words of Pam Bissonette (Assistant City Manager), "the
public thinks we are taxing rain." Compared to other types of
public works, the benefits of a drainage system are relatively
obscure. For example, prevention of damages (from flooding,
erosion, pollution) is much more difficult to understand, and
hence, value, than an unencumbered trip to work on a new
highway or the convenience of turning on the faucet and
drinking clean water.
Another important aspect of public support is acceptance of
the rates charged by the utility. If initial rates are set too high,
public opposition could eliminate the program. On the other
hand, if rates are set too low, insufficient revenues could
delay full implementation. To keep rates low, for example,
Bellevue used fees only to finance operations and
administration and to repay long-term bonds. The large
amount of capital needed to implement the program was
amortized overtime and financed by issuing revenue bonds.
This source of capital kept the initial rates very low-about
$.80 per month for the average household. The rates were
kept at this level for three years, a time period that allowed
the public to become used to the idea of paying a new utility
charge for drainage. Even with such low rates, the utility
received about 200 complaints in response to its first set of
bills.
The status of road and highway properties was the second
major consideration in designing a rate structure. Because
roads and highways are major sources of runoff, Bellevue
treated them as billable property. Roads and highways also
benefit from drainage systems that alleviate highway
flooding. In the past, the city's Department of Public Works
has paid over $800,000 per year and the State Department of
Transportation has paid yearly bills of $233,000. These
revenue streams constituted a third of the utility's annual
income. However as a result of rate increases in 1985, and the
emergence of several other drainage utilities throughout
Washington, the state challenged all utilities' rights to charge
the state. Although the court upheld the right of the utility to
bill the state, a compromise was reached requiring the state to
pay for only 30 percent of their normal monthly charges.
Roads and Highways
81
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APPLICABILITY TO
ESTUARINE AND
MARINE INITIATIVES
Creating a utility that can collect user fees appears to be an
attractive way to finance estuarine and marine management
programs: The creation of a utility appears most useful for
programs operated within specific boundaries, such as urban
stormwater control, agricultural drainage, or areawide or
municipal wastewater treatment. Utilities supported by user
fees raise a steady stream of revenue that is not affected by
the uncertainties of traditional local budget processes. Fees
can be adjusted in a variety of ways, to account for erratic
revenue needs or differences in residents' ability to pay. On
the other hand, the creation of utilities can require substantial
institutional effort.
Fees can also be a source of local opposition, especially if they
affect low income groups disproportionately. In the case of
Bellevue, a resolution was adopted that, depending on their
particular situation, reimbursed senior citizens and residents
below a certain income level up to 70 percent of their
drainage bills.
FOR ADDITIONAL INFORMATION, CONTACT:
Pam Bissonette
Assistant City Manager
City of Bellevue
11511 Main Street
P.O.90012
Bellevue, Washington 98009-9012
(206)455-6810
Damon Diessner
Director
Bellevue Storm & Surface Water Utility
11511 Main Street
P.O. Box90012
Bellevue, Washington 98009-9012
(206)451-4476
82
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Chapter X
Water and Sewer Trust Funds:
Corpus Christi, Texas
Prior to 1982, Corpus Christi, Texas, financed new water and
sewer lines on an ad hoc basis-sometimes the city installed
new lines, sometimes developers installed the lines at their
own expense. There was no systematic method to ensure that
each developer was responsible for his fair share of the costs.
To better manage investment in water and sewer infra-
structure, the city created four trust funds, two each in water
and sewer, with specified fees allocated to each. The trusts
receive specified portions of the capital impact fees paid by
developers and use these funds to reimburse developers and
the city for construction of necessary water and sewer lines.
Managing impact fee revenues through dedicated city,
county, and state trust funds is a viable way to finance the
capital facilities-wastewater treatment plants, stormwater
control structures, and the like-needed to support the
cleanup goals of estuarine and marine waters. Trust funds, in
general, also are useful mechanisms to manage recurring
expenditures such as water quality monitoring programs.
The City of Corpus Christi has a long history of operating
various enterprise funds to account for activities that provide
services on a fee basis. These funds are financially self-
sufficient and include water, gas, wastewater, and transit
services, the airport, emergency medical services, and a public
golf center. In 1982, the city set up special trust accounts
within the water and wastewater enterprise funds to ensure
proper funding and construction of water and sewer lines
necessary for new development.
Prior to the establishment of the water and sewer trusts, there
was no established policy regarding who (the city or develop-
ers) underwrote the cost of constructing lines to service new
developments. Regardless of how they were financed ini-
tially, subsequent developments could tie into these lines
without reimbursing the builders. Although the city usually
installed and paid for the largest mains, the lack of a
consistent policy led to inequities in the financing of the
BACKGROUND
83
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II
ADMINISTRATIVE
SETTING
PROGRAM
CHARACTERISTICS
infrastructure with later developments paying less than their
fair share.
As a result of disaffection with this ad hoc system, the city
began reimbursing developers when they oversized mains or
decreased sewer depth to accommodate anticipated future
developments. Nonetheless, this system was not considered
truly satisfactory and, in 1981, the city created a commission
to work out a more equitable policy for financing
construction of new water and sewer lines.
The commission, composed of city staff, consulting engineers,
land developers, home'builders, and a few private citizens,
proposed the ordinances that now effectively govern the
water and sewer trust funds. The Water Ordinance was
approved and became effective in June 1982 and the Sanitary
Sewer Ordinance in December 1982.
Four trust funds were established by the 1982 ordinances, one
each for major and supporting water lines, and major and
supporting sewer lines. The establishment of these trusts has
produced more equitable sharing of the costs of new water
and sewer lines. The funds from these trusts are available to
pay the city for water and sewer line construction and to
reimburse developers for construction beyond the public
works for which they are directly responsible.
These trusts provide a closer link between those who benefit
from the new lines and those who pay for them. All
developers pay into the trusts whether they are the first or the
last to develop property in an area; all developers who
construct water and/or sewer lines that will be used by
subsequent developments are reimbursed for the costs they
incur on behalf of other developers. Furthermore, residents
of established areas underwrite water and sewer
infrastructure costs only to the extent that there are funds left
over from the operations and maintenance portions of the
respective enterprise funds.
The Platting Ordinance of the City of Corpus Christ! defines
the fees to be paid into the four trusts for construction of
water and sewer lines; current fee levels were specified in the
1984 ordinance. There are three types of fees: lot/acreage,
surcharge, and pro rata see Figure 1). First, each developer is
assessed a fixed fee per lot or per acre, whichever is greater,
84
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FIGURE 1
FLOW OF FUNDS:
WATER AND SEWER TRUST FUND
CORPUS CIIRISTI, TEXAS
REVENUES
TRUSTS
LOT/ACREAGE FEES
1
Pea per lot or
Acreage
' r
Trusts for major
(large diameter)
lines
75%
SURCHARGES
Fee per lot
25%
PRORATA FEES
Pea per foot of line
fronting property
i
Trust* for support
(•mailer diameter]
line*
USES
Cllj and Developer
construction of
frlda, main/trunk
lines
Cltj and Developer
conalrucllon/overalzlng
of distribution/
collection lines
00
wi
-------
PROGRAM RESULTS
APPLICABILITY TO
ESTUARINEAND
MARINE INITIATIVES
for water and sewer. Second, developers are assessed a
sanitary sewer surcharge per lot for all types of construction
and a water surcharge for single family or duplex residential
construction. Finally, developers tapping into distribution
and/or collection lines that have been constructed by other
developers must pay into the appropriate trust funds a pro
rata charge per foot of line fronting their property.
To account for inflation, fee levels are indexed to the August
construction index published in Engineering News Record.
Lot/acreage and pro rata fees are paid prior to the deeding of
the final plat, and unit surcharges are paid at the same time as
tap fees. In 1984, the combined lot/acreage and surcharge
fees amounted to $425 per lot or $900 per acre plus an
additional $200 per lot for single family and duplex
construction. For all other construction, the 1984 combined
lot/acreage and surcharge fees were $400 per lot or $1,200
per acre plus $100 per lot.
As of July 31, 1986, the combined balance of the four trust
funds was $653,142. Collected receipts for the year totalled
$659,651, whereas only $599,314 was paid out in the form of
reimbursements to developers and transfers to other funds.
Although water and sewer public works have not been made
into independent utilities in Corpus Christ!, the separation of
their funding from other city expenses has resulted in user-
based financial support. The trusts were an extension of user-
based financing to developers of new properties, and appear
to be functioning as envisioned.
The trust funds established in Corpus Christ! could be
replicated in other cities. The fees collected, though not titled
as such, are similar to impact fees and special district
assessments and are used in much the same way; that is, they
are used to build infrastructure in support of new
development. Corpus Christ!, however, is not geographically
restricted in the use of the trust fund revenues. Thus, the city
has more flexibility in allocating funds than would be allowed
in assessment or special improvement districts created for
similar financing where all funds collected must be reinvested
in the same geographically defined district. The flexibility of
trust funds similar to those in Corpus Christ! might therefore
86
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be administratively advantageous to a city in which
development is occurring in several nonadjacent areas
simultaneously and in which there are no independent water
and sewer utilities.
FOR ADDITIONAL INFORMATION. CONTACT:
Victor Medina
Director of Engineering Services
City of Corpus Christ!
P.O. Box 9277
Corpus Christi, Texas 78469-9277
(512)880-3000
Debra Andrews
Director of Finance
City of Corpus Christi
P.O. Box9277
Corpus Christi, Texas 78469-9277
(512)880-3000
87
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Chapter XI
Wastewater System Access Rights:
Houston, Texas
In 1983, the City of Houston faced a shortfall in wastewater
treatment capacity, coupled with insufficient revenues from
sources such as EPA construction grants that historically
funded new capacity. In.contemplating the problem, the City
Council was faced with three alternatives: limit development,
increase the financial burden on established users of the
system, or find new sources of funds for expansion. While
rejecting the choice to restrict development, the Council was
reluctant to increase the level of revenue bonds issued and/or
to escalate sewer rates for existing customers. The City
Council felt that it was more equitable to place the primary
financial burden of new capacity on the new customers
creating the need for such expansion. Thus, the council opted
to create a new revenue source for capital funding-Capital
Recovery Charges (CRCs)-derived from fees levied against
new entrants into the system.
CRCs are one-time fees, similar to impact fees, collected from
either new users requesting access to the wastewater
treatment system or old users requiring increases in capacity.
In exchange for payment of the CRC, applicants are
guaranteed future access to a contracted amount of system
capacity that has been reserved for their use. Nearly $70
million has been contributed to the fund in the four fiscal
years following the program's inception in 1983. Capacity
credits can help achieve two goals often a part of estuarine
and coastal resource management programs: capital
formation to build pollution control facilities and justifiable
management of local growth.
The Houston sewer system has 372,400 active service
connections serving 1.9 million people. There are 49
wastewater treatment plants and three sludge treatment
facilities processing an average daily flow of approximately
250 million gallons.
BACKGROUND
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ADMINISTRATIVE
SETTING
PROGRAM
CHARACTERISTICS
The City of Houston's sanitary sewer financing system was
established in 1976 as a self-supporting enterprise fund paid
for primarily through sewer service charges. At that time, the
city initiated a major program of capital improvements and
enhancements to treatment plant capacity, wastewater
collection lines, lift stations, and sludge disposal facilities in
order to remedy a capacity shortfall. In spite of these efforts,
and primarily as a result of the construction boom of the late
1970s and early 1980s, demand outpaced the wastewater
treatment system's capacity. Because of this shortfall, land
development was subject to moratoria or severe restrictions in
large portions of the city. In addition, projected reductions of
federal funds were expected to severely restrict future
expansion.3
In May 1983, the City Council passed the Capital Recovery
Charges Ordinance mandating the collection of one-time
charges for either new connections or increased use through
existing connections. The council felt that the city stood to
benefit not only from the increased capital for expansion, but
also from the greater security provided to developers, because
the system would guarantee wastewater treatment capacity
to builders who paid the CRC fees. This guarantee would
ensure against future sewer moratoria.
Builders seeking a building permit must first submit to the
wasteload control staff of the Department of Public Works an
estimate of the daily wastewater discharge expected from the
completed project. If sufficient unreserved capacity is
available, the staff calculates the CRC for the projected
discharge; the applicant then pays the CRC and applies for the
building permit. Payment of the CRC does not guarantee the
applicant a building permit, but is only the first of several
steps the applicant must satisfy for building permits. The
wastewater system staff then reserves the necessary
wastewater treatment capacity for the future use of the
applicant's project; this capacity is subtracted from the
capacity available for future allocation, thus reducing1 the
unclaimed capacity available to later applicants.
3Between 1976 and 1986, almost half of the $800 million
expended on the sewer capital plan came from the U.S.
Environmental Protection Agency's Construction Grants
Program.
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The capacity reserved when the CRC is paid is specified in an
enforceable written contract between the city and the
developer. Furthermore, payment of the CRC does not
exempt the builder from paying connection fees, which are
paid at the time of hookup. If sufficient capacity is not
available, the building permit is denied and the builder must
defer his project until new capacity is built or capacity is
released by someone with unused access rights.
In addition to the regular capital recovery charges program,
the ordinance also provided for acceleration of capital
projects. In areas restricted to single-family residential
construction and in which there is a substantial demand for
capacity, the wastewater control staff can propose an
acceleration in construction of new capacity. The proposed
expansion is advertised and financial commitments or
subscriptions are solicited from property owners in the area.
These financial subscriptions are essentially CRCs committed
earlier than would normally be the case, possibly even prior to
specification of an applicant's proposed development. If the
subscriptions received are considered sufficient, the relevant
facility is moved forward on the capital improvement plan
timetable.
All capital recovery charges are maintained in a separate city
account and used solely to finance the construction of new
wastewater treatment capacity. CRCs are not available for
repairing or replacing existing facilities, nor for extending or
enlarging sewer mains unless this expansion is ancillary to the
operation of new capacity.
The amount of the CRC depends on the characteristics of the
proposed development and on the type of capacity required.
Charges depend on whether proposed developments are
completely new or whether they will serve portions of existing
subdivisions. When the ordinance was passed in 1983, the
basic unit charge used to calculate CRCs was $1.448 per gallon
per day; it is currently set at $ 1.606.
The capacity thus allocated is transferable to other parties
within the same service area, after payment of a transfer fee,
and with the express approval of the system's director.
Because such transfers are allowed, there is the potential for a
"gray market" in wastewater capacity within any one service
area: the price of transferred capacity is not controlled, nor is
transfer restricted to applicants on a waiting list.4
4ln contrast, in a similar program in Upper Merion,
Pennsylvania, no transfers are permitted and excess capacity
owned by one user can only be returned to the wastewater
authority.
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PROGRAM RESULTS
APPLICABILITY TO
ESTUARINEAND
MARINE INITIATIVES
Objections by real estate developers to the initial CRC
program have not abated but have increased with the recent
decline in Houston's economy. Developers view such charges
as troublesome additional costs burdening development and
profitability. Nonetheless, Houston planners have found that
CRCs have proved to be a viable tool for wastewater capacity
financing and, though a review may be called for, neither the
mayor nor the City Council has revoked support.
During the four fiscal years (FY) 1983-1986, close to $70
million in CRC charges was paid into the CRC fund. The fund
earned an additional $11 million in interest. These revenues
are associated with about 78 million gallons per day of
reserved capacity. Income to both accounts was highest in
1984-1985 and dropped substantially in FY 1986.
A CRC-based program similar to Houston's is suitable for
financing wastewater systems in any area in which
involuntary developer fees are acceptable and where
anticipated new development is expected to overburden the
existing wastewater (or water) treatment facilities. This
mechanism, however, is suited only to finance capital
facilities. Similar programs have already been established in
Escondido, California, and Upper Merion Township,
Pennsylvania.5
The Fiscal Administrator of the Houston Public Works
Department, John Baldwin, notes that one impact of the new
program has been a trend toward greater regionalization of
wastewater treatment services. Ultimately, the nearly 50
current distinct service areas in Houston will be consolidated
into fewer, medium-sized districts. Also, during the initial
years of the CRC program, there appears to have been an
easing in sewer restrictions. In October 1984, for example,
there were 24 totally restricted service areas; this number
declined to 15 a year later and to only eight by October 1986.
Nevertheless, the use of Capital Recovery Charges fees to
finance wastewater treatment systems is a viable method of
securing funds for many estuary programs.
sFor additional information, see Apogee Research, Inc.,
Financing Infrastructure , Innovations at the Local Level,
published by the National League of Cities, Washington, DC
(December 1987).
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FOR ADDITIONAL INFORMATION, CONTACT:
John Baldwin
Fiscal Administrator
Public Works Department, P.O. Box 1562
Room 2417 Annex
Houston, Texas 77251
(713)247-1418
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Part III. Glossary of Financial Terms
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Glossary of Financial Terms
Ad Valorem Tax.
property.
A tax based on the assessed value of
Arbitrage. The investment of low interest bond or note
proceeds at higher interest rates. Arbitrage earnings are fully
taxable with few exceptions.
Basis Point. One hundredth (1/100) of one percent in bond
yield or interest rate. The difference, for example, between
10 percent and 10.25 percent is 25 basis points.
Bond Bank. A state-chartered organization that purchases the
bonds of local governments and secures its own debt with the
pool of local bonds.
Capacity Credit. A reservation of future capacity in a public
facility purchased generally by private real estate developers
prior to the construction of that facility.
Capital Budget. A unified financial plan that accounts for
needs and spending levels for a group of current and
prospective capital facilities within a broader governmental
budget.
Conditional Sale Lease. A lease in which the lessee has the
option of applying lease payments to the purchase of a facility
for a reduced price. The lessee is owner for tax purposes. For
public lessees, it is also called a tax-exempt lease.
Coverage. The ratio of project revenues (net of operating and
maintenance costs) to debt service payable in a fiscal year.
Covenants. Specific provisions contained in all bond
resolutions and trust indentures to assure maintenance of
continued financial and operating performance.
Credit Risk. The risk of default.
GENERAL
TERMINOLOGY
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Credit Support. The guarantee of timely payment of principal
and interest provided by a third party (such as a bank or
insurance company) in exchange for a fee. Also called credit
enhancement.
Debt Limit. The statutory or constitutional limit on the
amount of debt a municipality may issue or have outstanding.
Also called a Debt Ceiling.
Debt Service. Periodic repayment of interest and/or principal
of an outstanding bond.
Discount. The amount, if any, by which the principal amount
of a bond exceeds its market price.
Earmarking. Statutory or constitutional dedication of
revenues to specific government projects or programs.
Enterprise Fund. A fund established to account for operations
(a) that are financed and operated in a manner similar to
private business enterprises—where the intent of the
governing body is that the costs (expenses, including
depreciation) of providing goods or services to the general
public on a continuing basis be financed or recovered
primarily through user charges, or (b) where the governing
body has decided that periodic determination of revenues
earned, expenses incurred, and/or net income is appropriate
for capital maintenance, public policy, management control,
accountability, or other purposes.
Impact Fee. A fee assessed against private developers in
compensation for the new capacity requirements their
projects impose upon public facilities.
Letter of Credit. A contractual obligation by a bank to pay
principal and interest in the event of an issuer default.
Liquidity Risk. The risk of a cash shortfall. Specifically, the risk
that cash will not be on hand to redeem bonds tendered by
bondholders.
Liquidity Support. A contractual obligation (by a bank or an
insurance company) to assure refinancing of bond or note
principal upon demand by a bondholder at maturity.
Market Risk. The risk to bondholders that changes in the
prevailing market interest rates will adversely affect the price
of the bonds they hold.
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Maturity. The date when the principal amount of a bond is
due and payable.
Official Statement. A document prepared by a financial
advisor or investment banker describing the legal and
financial terms of a bond offering and the pertinent financial,
economic, and engineering information about the issuer and
the project.
Par Value (or Principal). The face amount of a bond, usually in
$5,000 denominations.
Premium. The amount, if any, by which the price of a bond
exceeds the principal value.
Rating. A letter designation used by investment services to
represent the relative quality or creditworthiness of a bond
issue.
Rate Covenant. A trust indenture to maintain rates and
charges sufficient to pay all operating and maintenance
expenses, annual debt service and reserves, and to provide a
specific level of coverage.
Refinancing. The repayment of a debt with the proceeds of a
new debt instrument. Also called a Refunding.
Secondary Market. The trading market for outstanding
bonds.
Sinking Fund. A fund accumulated over a period of time for
retirement of debt.
Take or Pay Contract. A contract obligating a purchaser to
pay for a good or service whether or not he or she uses the
good or service.
Tax Increment Financing. The dedication of incremental
increases in real estate taxes to repay an original investment
in improved public facilities that created increased real estate
values.
Trust Indenture. The contract between bondholders and an
issuer securing the prepayment of debt. It sets forth how all
moneys of issuers will be applied to operating costs, debt
repayment, reserve funds, and construction funds. Also called
Bond Covenant.
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FORMS OF DEBT
INSURANCE
User Fee. Payments made by direct users of a facility (or
recipients of a publicly provided service) according to
individual level of use.
Yield. The net annual percentage of income from an
investment. The yield of a bond reflects interest rate, length
of time of maturity, and write-off of premium or discount.
Yield Curve. A graph that reflects the market yields on bonds
of various maturities from 1 to 40 years. Typically, the yield
curve slopes upward, showing progressively higher yields on
longer maturities.
Short-Term Instruments
Long-Term Instruments
Bond Anticipation Note (BAN). Notes issued by public
agencies to secure temporary (often partial) financing for
projects that will eventually be fully financed (and the BAN
repaid) through the sale of bonds.
Grant Anticipation Note (GAN). Notes issued by public
agencies to secure temporary financing for projects awaiting
the receipt of permanent funding through governmental
grants. The GAN is repaid from grant proceeds.
Note. A secured, written promise to repay a debt and interest
thereon at a specific date or maturity, usually short-term (less
than three years).
Tax Exempt Commercial Paper (TECP). An unsecured debt
obligation with a maturity of less than one year, the proceeds
of which are used to support current operations or to provide
interim financing of capital investments. TECP is usually
backed by a letter of credit..
Adjustable Rate Bond. A bond for which interest paid is
adjusted to reflect changes in market interest rates.
Bond. A written promise to repay a debt at a specific date or
maturity with periodic payments of interest (customarily every
six months).
Callable Bond. A bond subject to redemption prior to
maturity at the issuer's option.
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Compound Coupon Bond. A bond for which interest is not
paid on a regular basis but is deferred and compounded until
maturity.
Coupon Bond. A bond with coupons that are redeemable
usually on a semi-yearly basis for the interest due for that
period.
Deep Discount Bond. A bond that bears either no periodic
interest payments (in which case interest is paid in a lump-sum
when the bond matures) or interest at a rate well below the
prevailing market rate, which is priced for sale at a significant
discount of face value to produce a yield that approximates
the market rate.
Dedicated Tax Bond. A bond secured by the pledge "of the
revenues from a particular tax source.
Demand Bond. A bond that the holder may, at his or her
option, "put back" or "tender" to the issuer prior to maturity.
Also called a Put Bond or Tender Option Bond.
Double Barrelled Bond. A bond secured and payable from
both project or system revenues and taxes or general
revenues.
Drop Lock Bond. A floating rate put option bond. The
interest rate is tied to short-term indices, with a provision for
the interest rate to become fixed if certain predetermined
conditions are realized in the money market. If the interest
rate can be converted to a fixed rate at the option of the
issuer, the floating rate put option bond is called a Saddle
Bond.
Fixed-Rate Bond. A bond for which the interest rate paid is
fixed from the date of issue to final maturity.
Floating Rate Bond. A bond that bears an interest rate that
fluctuates, or "floats," on a periodic basis in relation to a
predetermined market rate. The floating rate feature shifts
the risk of changes in the interest rate from the lender to the
borrower. Overall, the shift of the interest rate risk allows the
issuer to finance at more favorable rates.
General Obligation Bond. A bond secured by the pledge of
the issuer's full faith, credit, and taxing power.
Industrial Development Bond (IDB). A bond secured by the
pledge of lease revenue from publicly owned industrial
facilities. Also called an Industrial Revenue Bond.
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Limited Tax Bond. A bond secured by a pledge of a tax or
category of taxes that are limited in rate or amount.
Mandatory Take Bond. A bond that the bondholder is
required to sell and the issuer is required to purchase upon
expiration of a letter of credit. The terms and conditions of
the bond automatically adjust, and the bonds are either
remarketed or retired.
Option Bond. A bond that permits the bondholder to tender
the issue at specified times to the issuer in return for payment
of the principal thereof. Typically a bank, pension fund, or
other entity will provide resources by agreement with the
issuer in the event that more bonds are tendered than the
issuer has funds to pay for.
Option Take Bond. A bond that the issuer can take back
before the expiration of the letter of credit by demanding
that it be surrendered for purchase. The interest rate is
initially fixed for the period that the letter of credit is
outstanding. Upon exercise of the take option, the terms and
conditions of the bond (interest rate and call features) change
based on preestablished criteria, and the bonds are
remarketed. If the take is not exercised, the terms and
conditions automatically adjust upon expiration of the letter
of credit, and the bondholder has the option to put, or is
required to surrender the bonds for purchase. Any purchased
bonds are then cancelled.
Original Issue Discount Bond. A bond, repayable only at
maturity, that bears a reduced interest rate and is sold at a
discount to provide a return to the investor. Also called
Capital Appreciation Bonds or Deep Discount Bonds.
Put Bond. A bond that contains provisions giving the
bondholder the option to tender (or "put") the bond to the
trustee for purchase at a specified price, within a specified
time period, and under specified conditions. The option is
intended to afford the bondholders protection against
market price fluctuations and other risks, and may be used to
give the bondholders an effective means of accelerating bond
payment, even in the absence of a default. Funds to pay for
the tendered bonds may be made available from draws on a
letter of credit.
Revenue Bond. A bond secured solely by the pledge of
project or system revenues, without recourse to any tax
support.
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Special Assessment Bond. A bond payable from the proceeds
of assessments imposed on properties that have benefited
from the construction of public improvements such as water,
sewer, transportation, and irrigation systems.
Serial Bond, A bond whose principal is repaid in periodic
installments over the life of the issue.
Special Service Area Bond. A bond secured by the pledge of
the revenues from a special service tax applied to a limited
geographic area.
Special Tax Bond. A bond secured by a special tax, such as a
gasoline tax.
Stepped Coupon Bonds. Coupon bonds, all of which in a
given issue and year will bear the same rate of interest,
although they mature serially. The rate of interest will
increase, in some cases as often as every year.
Term Bond. A bond with a single maturity date. Serial bonds
and term bonds are often combined in one issue.
Variable Rate Demand Bond. A bond bearing an interest rate
that floats based on a short-term interest rate index. The
bondholder has the right, upon notice, to "put," or demand
the bond be purchased by the issuer. The put is normally
backed by a letter of credit. A conversion option may be
offered under which the bond is converted to a fixed-rate
based on an index tied to the remaining term of the bond.
Variable Rate Demand Note (VRDN). A note that usually has a
maturity of two to three years. The interest rate is adjusted at
predetermined times based on a specific market index. Such
notes typically include a minimum interest rate to protect the
investor and a maximum to protect the issuer. In addition,
VRDNs include a "put" option that enables the investor to
tender the issue at "par" (the principal amount due at matur-
ity) prior to maturity. This action ensures the bond will be
marketable, even during times of declining market interest
rates.
Zero Coupon Bond (ZCB). A bond sold at a discount of par that
pays no interest until maturity, when the investor receives the
par amount. Changes in the purchase price dictate the effec-
tive rate of interest. The key attraction of ZCBs is that rein-
vestment risk is eliminated. A standard bond, for example,
pays coupons at specific rates that the investor must then rein-
vest, thereby assuming the risk of short-term fluctuations in
interest rates. A ZCB, however, effectively reinvests the cou-
pons at the original issue rate. The issuer can, therefore, sell
ZCBs at a lower interest rate and simultaneously reduce
management costs associated with coupon handling.
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