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

-------

-------
                                              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

-------
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.

-------
                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

-------
                                   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

-------
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

-------
                                   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

-------
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

-------
                                  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

-------
Part I. The Financial Primer

-------

-------
                                                                       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

-------
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

-------
                   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

-------
                            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

-------
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

-------
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.

-------
                                                                       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.

-------
                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

-------
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

-------
                      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

-------
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
                                                                                       13

-------
   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.
14

-------
                                                            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
                                                                                        15

-------
           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
16

-------
 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
                                                                                       17

-------
         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
18

-------
 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
                                                                                        19

-------
                                   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).
20

-------
 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.
                                                                                         21

-------
          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
22

-------
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.
                                                                                       23

-------

-------
                                                                 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
                                                                               25

-------
     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.
26

-------
    • 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).
                                                                                        27

-------
       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.
28

-------
    • 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.
                                                                                          29

-------
                  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

-------
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

-------

-------
                                                                    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
                                                                                  33

-------
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.

-------
                                                            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

-------
        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

-------
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

-------

-------
Part II. The Case Studies

-------

-------
                                                                        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

-------
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

-------
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.
                                                                                        41

-------

-------
                                                                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

-------
         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

-------
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

-------
                                   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
46

-------
                                                                  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

-------
        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

-------
                                                           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

-------
        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

-------
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

-------

-------
                                                                   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

-------
                  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

-------
                                                            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

-------
                                   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

-------
                                                                  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

-------
        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

-------
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

-------
        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

-------
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

-------

-------
                                                                   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

-------
                                  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

-------
                                                           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

-------

-------
                                                                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

-------
      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

-------
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

-------
                                    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

-------
                                                          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
                                                                                    71

-------

-------
                                                                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

-------
                  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

-------
 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

-------

-------
                                                                   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

-------
         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

-------
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

-------
   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

-------
                                                            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

-------
       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

-------
                                                                    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

-------
                          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

-------
                                          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

-------
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

-------

-------
                                                                 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
                                                                              89

-------
         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.
90

-------
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.
                                                                                         91

-------
      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).
92

-------
FOR ADDITIONAL INFORMATION, CONTACT:

John Baldwin
Fiscal Administrator
Public Works Department, P.O. Box 1562
Room 2417 Annex
Houston, Texas 77251
(713)247-1418
                                                                                     93

-------

-------
Part III. Glossary of Financial Terms

-------

-------
                              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
                                                                                   95

-------
                                    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.
96

-------
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.
                                                                                       97

-------
          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.
98

-------
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.
                                                                                         99

-------
                                  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.
100

-------
 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.
                                                                                       101

-------

-------