United States
Environmental Protection
Agency
Office of Wastewater Management
(4204)
Washington, DC 20460
EPA832-R-00-010
October 2000
  Potential Roles for Clean Water State Revolving Fund
            Programs in Smart Growth Initiatives

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 This pamphlet represents the beginning of a dialog in which Clean Water State Revolving
 Fund (CWSRF) managers are addressing the intersection of CWSRFpractices and
policies with development patterns.  The CWSRF is a widely available financing source
 used to fund municipal wastewater treatment projects as well as nonpoint source
pollution control and estuary protection projects. CWSRF funding decisions can affect
 development patterns, so states are interested in coordinating their management of
 CWSRF loans with emerging smart growth policies and initiatives. This coordination is
voluntary, and this document is offered as guidance for interested states.

Below are some options for states to use the CWSRF to support smart growth, which will
be addressed later in this document:

      Strengthen State and Federal Environmental Review Requirements
      Use the CWSRP for Nonpoint Source and Estuary Projects
      Use Integrated Priority Ranking
      Reduce Interest Rates
      Allow Alternative Repayment Structures
      Provide Additional Funds for Smart Growth Enhancements to Traditional
       Projects
      Provide Technical Assistance on Smart Growth to Proj ect Applicants
     Expand Applicant Eligibilities
     Comply with Statewide Smart Growth Initiatives
     Require Long-Term Comprehensive Growth Plans
     Require or Encourage Limits on Sewer Connections or Capacity for New Growth

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The Land-Water Connection
Many states are facing the issue of sprawl - a form
of development that tends to proceed in a leapfrog
fashion, consumes excessive green space, promotes
dependency on automobiles, and widens our urban
fringes. Each year, satellite photographs depict
further losses of green space as our urban areas
expand into the countryside at rates far faster than
population growth. Even without sophisticated
satellite imagery, most of us can readily see that
tree-lined neighborhoods, sidewalks and town
centers are giving way to high speed traffic patterns,
large lot residential developments, commercial
strips, and huge parking lots.

Numerous efforts around the country are underway to reconfigure development in a more "eco-
efficient" and "community-oriented" style, so  that open and green space is conserved, town
centers are more conducive to community life, and pedestrian and transit choices are more
available. This counterpoint to sprawl is sometimes called the "livability" movement.  Its
strategies are often referred to as "smart growth."

In addition to the aesthetic and quality of life concerns motivating the livability agenda, there are
compelling environmental  and fiscal reasons for controlling sprawl.  As our cities and suburbs
expand, so do our impervious  surfaces (streets, parking lots, driveways and rooftops). With more
pavement, rainfall is less able  to percolate into the ground. This raises the volume and velocity of
runoff that carries pollutants and sediments into our waterways. Our groundwater recharge zones
are diminished and our water tables  can be threatened.  Because of this land-water connection,
development decisions have a direct bearing on water quantity and quality.

Finally, there are fiscal reasons for pursuing a more compact development pattern and preserving
and upgrading existing infrastructure.  Local governments around the country are discovering that
scattered greenfield development has had a negative impact on municipal budgets as roads, utility
pipes, police and fire protection, and schools must be extended further outward.  In the 1999
report The Costs of Suburban  Sprawl and Urban Decay in Rhode Island prepared for the
coalition Grow Smart Rhode Island, H.C. Planning Consultants and Planimetries documented the
high cost of sprawl. The study concluded that if the State's current pattern of development

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 continues (sprawl and urban disinvestment), over the next twenty years the state could spend as
 much as $142 million more in operating public sewer infrastructure than if growth followed a
 more compact model.

                                                     Strategies for enabling smart growth
                                                     are layered and complex, spanning a
                                                     range as wide and varied as the roots of
                                                     sprawl itself.  Those root causes have
                                                     been variously listed as ineffective
                                                     zoning laws, population growth, the
                                                     decline of the inner city, road building
                                                     incentives under the Highway Trust
                                                     Fund, the availability of cars and cheap
                                                     gas, etc. A complex array of federal,
                                                     state, and local changes will be needed
                                                     if we are to reverse course and make
                                                     more efficient choices about
                                                     development.

Clean Water State Revolving Fund (CWSRF) managers are beginning to address the intersection
of CWSRF practices and policies with development patterns. States are  interested in coordinating
their management of CWSRF loans with emerging smart growth policies and initiatives.  This is
strictly a choice for states.  No federal statutory authority exists or is being considered to require
states to adopt CWSRF practices and policies that favor smart growth. This document offers
ideas for those states interested in exercising their own discretion.

The first question CWSRF managers should consider is whether the CWSRF has contributed to
sprawl.  CWSRF managers might wish to consider:
       Q
       Q
       Q
Have CWSRF funds provided wastewater treatment capacity for future growth -
without adequately accounting for the effects of projected growth?

Have the project environmental assessments accounted for the environmental
costs posed by new development?

Has CWSRF-funded wastewater treatment capacity made it more economically
attractive for developers to build in areas that might be better left as open or
green space?

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If answers to the above questions provide cause for concern, CWSRF managers should consider
what role, if any, their programs could play in preventing sprawl or, conversely, in supporting
smart growth initiatives.  Each state's political climate, growth management strategy, and
CWSRF regulations and practices will figure prominently in determining feasible options. Below
is a discussion of the potential roles that a state CWSRF program might choose to play to
encourage smart growth.

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 Options for States to Use the CWSRF to Support Smart Growth

 To date, CWSRFs have assumed varying-degrees of
 involvement in smart growth strategies. At a minimum, the
 CWSRF must ensure that projects receiving funding meet the
 environmental review requirements of the Clean Water Act
 (CWA). At the other end of the spectrum, programs have
 assumed a prominent role in the growth management process.
 This has been accomplished in various ways, including
 ensuring that projects comply with state smart growth
 requirements (e.g., with respect to location, sizing, project type
 and purpose) before providing CWSRF funding. Some
 CWSRF program managers may require fund recipients to
 adopt growth management  strategies in specific project areas.
 Below is a listing of options that states might consider in using
 the CWSRF to support smart growth.

 Strengthen State and Federal Environmental Review Requirements

 At a minimum, the CWSRF must meet the environmental review requirements of the Clean
 Water Act (CWA). Section 35.3140 of the Code of Federal Regulations, Title 40, mandates that
 states "conduct reviews of the potential environmental impacts of all Section 212 construction
 projects receiving assistance from the CWSRF, including nonpoint source pollution control
 (Section 319) and estuary protection (Section 320) projects that are also Section 212 projects."
 Each state has developed a formal environmental review process that contains specific
 environmental review requirements for projects. States may wish to review these processes to
 check for opportunities to be more consistent with smart growth goals and policies.

 Although many of the issues addressed in the review are the same from state to state (e.g.,
 secondary impacts), environmental reviews vary widely. The New York CWSRF's state'
 environmental review requirements are captured in the State Environmental Quality Review Act
 (SEQR), which requires all  state and local government agencies to consider environmental
 impacts equally with social  and economic factors during discretionary decision-making. This
 review begins at the local level, incorporates public review and is generally more comprehensive
 in its inclusion of social, economic, and environmental factors. Under New York's  SEQR,
projects seeking funds must do an analysis of development, including impacts of secondary
growth.  For the complete text of New York's SEQR, goto:
http://www.dec.state.ny.us/website/dcs/EP_SEQR/

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         CWSRF Eligible Projects
   Conservation easements attach restrictions on the
    future use of land.  They are used in many situa-
    tions, including those where land owners want to
    retain ownership for their personal use, but are
    open to granting rights to others in exchange for
    some sort of consideration (e.g., a fee or tax
    reduction). These rights often allow for the under-
    taking of  environmentally beneficial activities
    such as  streambank  stabilization and habitat
    restoration.

    In one of the more creative SRF projects, The
    Nature Conservancy (TNC) received a SRF loan
    from the California State Water Resources Control
    Board to purchase more than 12,000  acres of
    ranchland known as the Howard Ranch.  The land
    is home to valuable, fragile vernal pools. TNC
    will place conservation easements on the land, and
    then resell much of it to a ranching company to
    assist with repaying the SRF loan.

   Land acquisition is another method of managing
    growth and reducing nonpoint source pollution. In
    a now famous example, the city of New York set
    aside $260 million for land acquisition and conser-
    vation easements in  areas needed to protect its
    Delaware/Catskill water supply.  Of this total
    amount, $27 million has been granted in the form
    of low interest loans from the New York CWSRF.

   Development  best  management practices  are
    another method of managing the effects of growth
    and reducing nonpoint source pollution. The Ohio
    Water Pollution Control Loan Fund provided over
    $1.1 million in loans to a housing development
    company in West Jefferson, Ohio.  The loans
    financed a wide variety of structural and non-
    structural best management practices that protect
    Big Darby Creek watershed, one of the highest
    quality warm-water  aquatic ecosystems in the
    Nation.
Use the CWSRF for Nonpoint
Source and Estuary Projects

Nonpoint source and estuary projects can
accomplish significant objectives for
smart growth. They can be used to
conserve land in sensitive areas or
facilitate reuse of already developed land.
Both of these types of projects are eligible
for CWSRF funds. Nonpoint source
projects must be consistent with the
state's nonpoint source management plan
under Section 319 of the Clean Water
Act. Estuary projects must be consistent
with Section 320 which authorizes the
National Estuary Program. A detailed
explanation of these expanded uses of the
CWSRF and actual projects funded by
states can be found in EPA's The Clean
Water State Revolving Fund: How to
Fund Nonpoint Source and Estuary
Enhancement Projects (EPA 909-K-97-
001). The accompanying sidebar
contains a list of SRF-eligible projects
that overlap with the themes and
objectives of smart growth.

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 Brownfields remediation is the restoration or recla-
 mation of abandoned, idled, or under-used industrial
 and commercial  facilities where expansion or
 redevelopment is complicated by real or perceived
 environmental contamination.   Remediation of
 existing developed land helps to slow the develop-
 ment of greenfields and is therefore a powerful
 smart growth strategy that can be funded with the
 CWSRF. The Ohio CWSRF provided a loan for the
 cleanup of contaminated groundwater and soils in a
 20-acre industrial site in Cleveland to prepare the
 area for commercial reuse.

 Installation or upgrade of onsite wastewater sys-
 tems. Maintaining a reliance on onsite (individual
 or cluster) systems can, in certain circumstances,
 help control undesirable development by eliminat-
 ing the need for sewers that could otherwise expose
 environmentally sensitive and fringe areas to devel-
 opment.  The CWSRF  may choose to fund onsite
 system upgrades or installations as nonpoint source
 or estuary projects. Since 1995, the Maine CWSRF
 has also been making loan funds available to owners
 of single-family residences for the repair and up-
 grade of septic systems.  Under the program, the
 Maine Municipal BondBank (MMBB) lends money
 to the Maine State Housing Authority (MSHA).
 The MSHA then makes 1% loans to homeowners
 that carry maximum repayment terms of 20 years.
 Any repayments received by the MSHA are remit-
 ted to the MMBB and returned to the CWSRF. The
 State has provided funding in amount equal to $ 1.5
 million out of $2 million committed to the program.
 However, the decision about funding onsite systems
 must take into account a variety of factors such as
 soil conditions, development repercussions, and the
 likelihood of appropriate maintenance practices. If.
 allowed mdiscriminately, onsite systems can accom-
modate and sustain a lower density development
that may ultimately consume  more land and re-
 sources than higher density options.
 Use Integrated Priority Ranking

 CWSRF's are required to establish and
 use priority ranking systems which
 prioritize eligible treatment works
 projects based on public health and
 environmental considerations. States
 may wish to consider assigning a portion
 of the points in the ranking system to
 treatment works  projects that embody
 smart growth principles or which
 support the state's smart growth goals.
 In addition, since the universe of smart
 growth projects and loan applicants
 (farmers, conservation groups, citizen
 groups, landowners, etc.) is wide, not all
 smart growth projects will fall under a
 state's approved  Nonpoint Source
 Management Plan (Section 319) or a
 management plan associated with the
 National Estuary Program (Section 320).
 Certain "non-traditional" projects may
 not have water quality protection as their
 primary purpose  but will yield important
 water quality benefits nevertheless.

 A salt storage shed, a new landfill, a bird
 sanctuary, or the  purchase of leaf
 removal equipment would all be
 examples of non-traditional projects
 because their water quality benefits
 would be secondary to their main
purpose. CWSRF programs considering
 funding projects with a primary purpose
other than water quality will need to
develop an integrated priority ranking
system, as described in EPA's The
Clean  Water State Revolving Fund

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Massachusetts is one of a growing number of
states making loans for the upgrade of onsite
systems. To date the MASRF has lent more than
$30 million to individual communities  for this
purpose. Additionally, the MASRF makes grant
funds (from a non-SRF source) available to com-
munities receiving loans to assist them in imple-
menting onsite management programs.

Wetlands (reconstruction. Wetlands construction
projects have a strong growth management com-
ponents as they serve to both preserve land and
create natural habitats.  If the land is not already
owned by the project applicant, wetland construc-
tion projects are  often accompanied by a land
acquisition/ conservation easement component. In
order to protect Puget Sound, the  Washington
CWSRF is using funds to purchase and reconstruct
a degraded wetland area and to construct a sedi-
ment trap/pond facility in the city of Des Moines.
This project is allowing the city to meet  three
goals simultaneously: flood protection, wetlands
preservation and stormwater management.
                                                 I
                                                    Funding Framework (EPA. 832-B-96-
                                                    005).  States can identify their high
                                                    priority projects using an integrated
                                                    priority ranking system, using available
                                                    data with the state's priority system to
                                                    rank and select projects for funding.  The
                                                    State of New York uses its ranking
                                                    system to favor environmentally
                                                    significant projects over economic
                                                    development type projects, first granting
                                                    loans for projects that alleviate an
                                                    existing water quality problem before
considering future growth type projects.  Ranking systems can be tweaked in a number of ways to
award additional points for projects that are consistent with smart growth objectives.  For more
information on the integrated priority ranking system, see http://www.epa.gov/owm/finan.htm.

Reduce Interest Rates

CWSRFs can provide lower interest rates (down to zero percent) to projects that go beyond basic
requirements in assessing and addressing their impacts on growth. For example, the CWSRF
may choose to provide an interest rate subsidy for:
  Ul      Project applicants voluntarily establishing conservation easements or purchasing
          land for preservation.

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       Q      Municipalities who agree to adopt master plans as well as zoning and sub-
               division regulations that require developments to be designed, constructed, and
               managed using "smart growth" concepts.

Allow Alternative Repayment Structures

Some smart growth projects may have a difficult time in establishing a revenue stream.
Repayment structures can be altered to allow for more lenient payments in the early years (e.g.,
balloon payments). Types of alternative structures include principal-only or interest-only
payments, as well as graduated principal payments.

The Maine CWSRF is considering a proposal to implement a "patient loan" program.  The
purpose of the proposal is to assist Maine cities and towns that wish to encourage development in
residential growth areas by offering low interest, "patient" loans for financing sewer extensions to
serve these growth areas. CWSRF funding would allow a community to extend sewer services to
undeveloped growth areas as designated in local comprehensive plans and thereby attract
development to that area. These designated growth areas to be sewered will be high density (3
residences per acre). Patient loans would provide low-interest rate loans covering the cost of the
extensions to eligible areas with a graduated or "patient" payback provision that keeps payments
low at the start of the project. The State anticipates making $3 million available for the program.
Provide Additional Funds for Smart Growth Enhancements to Traditional Projects

As part of a larger traditional project, such as a treatment works project, additional funds could be
provided for enhancements or "add-ons" to traditional projects. As an example, a municipality
applying for a treatment works upgrade loan might, as part of the same loan package, purchase
stream corridor conservation easements within the municipality's boundaries. Similarly, a
wetlands restoration might be combined with a loan for a wastewater treatment plant.  Providing
additional funds for these enhancements could go a long way toward promoting smarter designs
for new or upgraded wastewater treatment.

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Provide Technical Assistance on Smart Growth to Project Applicants

States can provide technical assistance to applicants on the principles of smart growth as part of
the application process.  Areas of technical assistance can range from comprehensive planning on
a community or county level down to utilizing smart growth principles on an individual project
basis.  Technical assistance may be particularly attractive to applicants with limited planning
resources. If the state's CWSRF agency lacks the capacity to provide technical assistance, it may
be possible to refer applicants to other offices within the state that can assist - perhaps the state
planning office or a smart growth office.

Expand Applicant Eligibilities

Loan recipients for nonpoint source control and estuarine protection projects are not limited to
public entities.  Alternatively, CWSRFs could consider linked deposit programs like those in
Ohio or Minnesota.  This mechanism allows CWSRF funds to be used for loans to individuals
In a linked deposit program, CWSRF funds equal to the required project funds are placed in a
Certificate of Deposit with a private bank at an interest rate somewhat lower than the market rate
at the time. The bank, in turn, is able to loan the funds to individuals (usually farmers) proposing
projects that are consistent with area watershed management plans. The loan recipient repays the
loan to the bank, and the bank repays the CWSRF.

Currently, 22 states have made nonpoint source loans to recipients such as municipalities,
community groups, conservation districts, nonprofit organizations, and private individuals and
companies.

Comply with Statewide Smart Growth Initiatives

The state of Maryland is the first to have a statewide smart growth policy that directs
development to community-designated growth areas. Since 1997, the Neighborhood
Conservation and Smart Growth Initiative directs the expenditure of specific  types of State
funding to geographic areas of Maryland that have been locally designated as growth areas.  State
law requires local governments to identify "Priority Funding Areas" (PFA's) that are essentially
designated growth areas for future development. These designated growth areas are incorporated
into 20-year county land use plans.

The Maryland CWSRF funds sewer projects only within PFAs.  CWSRF staff review projects
and county land use for compliance.  If the project is not within a designated  growth area, the
project will not receive funding, unless an exception is granted.  A similar requirement holds for
water projects funded through the State's Drinking Water SRF program. Any project outside the
growth area will need to qualify as an exception. Exceptions are granted where a project is

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necessary to protect public health/safety or where a denial of a project funded with federal funds
would be inconsistent with federal law.  At the time of pre-application, the CWSRF program staff
review all projects for consistency with PFA requirements. This involves correlating projects
with designated growth area maps in the county land use plans. To date, the CWSRF has funded
both expansion and upgrade projects and has not had to deny any high ranking project on the
basis of smart growth deficiency.

For more information on Maryland's Smart Growth Initiative, go to:
h11p://www.mde.state.md.us/environment/sm_grwth/ For CWSRF-specific information on
Maryland's Smart Growth Initiative, go to:
http://www.mde.state.md.us/envirornnen1/sm_gnvth/wmasm.html

Require Long-Term Comprehensive Growth Plans

Comprehensive long-term planning is one of the most effective growth management/sprawl
control tools available to municipalities. Recognizing this, some  states are requiring individual
communities and counties to develop long-term comprehensive growth management plans.  In
the absence of such a statewide requirement, CWSRFs can consider requiring applicants to
develop such a plan before it can receive funding from the program.

                                   Require or Encourage Limits on Sewer
                                   Connections or Capacity for New Growth

                                   CWSRF programs could require or encourage
                                   municipalities to adopt some form of "access
                                   management" for sewer lines to serve new development
                                   areas.  These requirements can be applied broadly or on a
                                   case-by-case basis.

                                   The Ohio CWSRF negotiated the adoption of a smart
                                   growth city ordinance with the city of Broadview
                                   Heights. The city had applied for a CWSRF loan for the
                                   construction of an interceptor sewer and plant upgrades in
                                   order to eliminate a local  package treatment plant.
                                   CWSRF staff became concerned upon discovering that
                                   sensitive riparian stream corridors could now be
                                   developed through connection to the sewer. In order to
                                   protect these valuable resources, the CWSRF successfully
                                   convinced Broadview Heights to pass a city ordinance
                                   that would not allow new developments that eliminated
10

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riparian stream corridors to connect to the interceptor.  The CWSRF loan terms were attractive
enough that the city found it in their best interest to pass the ordinance rather than seek funding
elsewhere.

The state of Massachusetts actively limits the use of SRF funds to support new growth.
Collection system projects are eligible only if 75% of the flows existed as of April 1995. Thus,
no more than 25% of the capacity of a project may be for new growth.  Both capacity limits and
access management can play a role in each state's CWSRF decisions.
     Peter Essick/Aurora
                                                                                      11

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       This document is the result of a Work Group formed under the auspices of
       the State/EPA SRF Work Group, a committee of state SRF program
       managers and EPA representatives who collectively address issues
       pertaining to the CWSRF and DWSRF. In response to a solicitation from
       EPA Headquarters in the fall of 1999, a "sub-workgroup" was formed to
       address issues of CWSRF management and smart growth. The group held
       monthly teleconferences to generate policy options and management
       protocols that might allow SRF managers to better integrate their
       programs with their states' smart growth objectives. This report is the  -
       collective result of those teleconferences.

Members of CWSRF Smart Growth Sub-Work Group:
       John Del Vecchio, Maine State Planning Office
       Jay Manning, Rhode Island Department of Environmental Management
       Larry Fitch, Vermont Department of Environmental Conservation
       Robert Davis, New York State Environmental Facilities  Corporation
       Bobby Blowe, North Carolina Department of Environment, Health & Natural Resources
       Bob Monsarrat, Ohio Environmental Protection Agency
       Paul Cartwright, Montana Department of Environmental Quality
       Rosemary Monahan, EPA Region 1
       Don Niehus, EPA Region 3
       Conny Chandler, EPA Region 4
       Dan Steinborn, EPA Region 10
       Holly Stallworth, EPA Headquarters
       Angela Cracchiolo, EPA Headquarters
12

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Useful On-line Resources:

      The Clean Water State Revolving Fund
       http://www.epa.gov/owm/finan.htm

      Clinton-Gore Administration's Livable Communities Initiative
       http ://www.livablecornmunities. gov/

      EPA Region 1 - Smart Growth Strategies
       http://www.epa.gov/region01/ra/sprawl/index.html

      EPA Region 5  Antidotes to Sprawl
       http://www.epa.gov/region5/sprawl/index.html

      Department of Energy Center of Excellence for Sustainable Development - Land Use
       Planning
       http://www.sustainable.doe.gov/landuse/luintro.shtml

      Smart Growth Network
       http ://www. smartgrowth.org/index2 .html

      Brookings Institute Center on Urban and Metropolitan Policy
       http://www.brookings.org/es/urban/urban.htni

      Sierra Club - Sprawl Solutions
       http://www.sierraclub.org/sprawl/

      Planning Commissioners Journal - Sprawl Guide
       http ://www.plannersweb. com/sprawl/home .html

      Sprawl Watch Clearinghouse
       http://www.sprawlwatch.org/
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