x>EPA
United States
Environmental Protection
Agency
Office of Water
(4504F) ;
EPA842-B-96-002
August 1996
BEYOND SRF:
A Workbook for Financing CCMP
Implementation
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TABLE OF CONTENTS
FORWARD
I. INTRODUCTION
H. TRADITIONAL MUNICIPAL DEBT FINANCING
HI. PRIVATE SECTOR FUNDING
15
IV. NON-CAPITAL FINANCING
21
V. REFERENCES
29
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FORWARD
"' ' '
The Oceans and Coastal Protection Division in the Office of Wetlands, Oceans and
Watersheds, Office of Water, of the U.S. Environmental Protection Agency, is engaged hi an
ongoing effort to provide resource managers with information, tools, and products they can use
to cany out their missions effectively.
this workbook introduces state, tribal, and local officials to potential approaches for
financing various aspects of coastal protection, especially those identified under the auspices of the
National Estuary Program (NEP). Because the NEP has a fairly well defined process, including
development and implementation of Comprehensive Conservation and Management Plans
(CCMPs), the workbook focuses explicitly on financing actions develpped under the NEP.
However, the concepts should apply equally well in evaluating sources of funding for all watershed
protection efforts, as well as other environmental or natural resource protection programs.
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I.
INTRODUCTION
Overview of the National Estuary Program
Section 320 of the Clean Water Act established the National Estuary Program (NEP) to
identify nationally significant estuaries threatened by pollution, development, or overuse and to
promote the preparation of comprehensive management plans to ensure their ecological integrity.
To achieve these goals, the Administrator of the U.S. Environmental Protection Agency (EPA)
convenes Management Conferences for each estuary in the NEP to provide a forum for consensus
building and problem solving among citizens, interested agencies, and user groups. Management
Conferences study environmental conditions and trends in their estuaries and their likely causes,
identify the most significant problems, and develop action-oriented Comprehensive Conservation
and Management Plans (CCMPs) to address high-priority problems. One of the most critical steps
in the CCMP process includes identifying alternative environmental and management strategies,
estimating the costs of these initiatives, and calculating how these expenditures are likely to be
funded (Figure 1-1). As they engage in this process, however, Management Conferences
increasingly find it necessary to grapple with detailed funding questions sooner rather than later
The barriers they have encountered in financing CCMP implementation range from gaps in
financial management structures to fear of voter rejection. For example:
The primary source of federal funding for water pollution prevention is the State
Revolving Loan Fund (SRF), which technically is available to fund implementation of any
action in approved CCMPs. However, many potential CCMP recommendations involve
activities such as education, public outreach, habitat restoration, or land-use management;
such activities, though eligible, are not well suited for funding through long-term loans.'
Moreover, they frequently cannot compete successfully against pressing needs for
conventional wastewater treatment projects.
Some of the solutions identified in CCMPs rely on non-construction activities such as land
acquisition, public education, or monitoring. These non-capital-intensive initiatives are
inherently more difficult to evaluate and finance because they do not typically provide
physical assets suitable for debt collateral. Further, non-capital programs often have
difficulty demonstrating a guaranteed stream of future revenues in the form of fees or
taxes.
Some of the municipalities and counties involved in the CCMP process are small, rural,
or economically depressed. Such entities may not have the expertise, size, or fiscai
strength to finance capital investments identified in the CCMP.
Proposed implementation strategies may consist of numerous small, interrelated initiatives.
The scale of these individual projects may not be sufficient to permit cost-effective
participation in traditional financial markets.
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Raising taxes or user fees to directly implement CCMP recommendations is not always
practical. Beyond general resistance to new tax burdens, voters are often reluctant to raise
local taxes for vague long-term benefits such as changes in water quality over a broad
geographic area.
Financial and political commitments to implement CCMPs are critical to success in the
NEP. But the price tag associated with implementation of CCMP action plans can be high and is
likely to get higher. For this reason, NEP Management Conferences need to develop realistic
financial plans in parallel with their management plans. They can ensure that these plans are viable
by considering such factors as political feasibility, equity, and the revenue potential and longevity
of proposed funding mechanisms. Another insurance is to bring "real world" financial and political
advice to CCMP development by including elected officials, representatives of state revenue,
administrative, and comptroller agencies, and local public and private finance experts. In addition
to providing technical expertise to the process, such members can serve as a nucleus of involved
and informed advocates for final funding recommendations. This can be critical, since financial
plans may recommend new or increased taxes and fees in addition to considering potential private
sources of funding.
This document outlines a framework for encouraging the participation of such experts, as
well as for identifying and evaluating general financing strategies for CCMPs. Its purpose is to:
describe key decision points in the public financing process, highlighting critical issues
likely to affect market access and the cost of borrowing funds, and identifying techniques
to mitigate potential impacts;
« identify approaches for obtaining private funding for CCMP-type environmental
infrastructure; and
describe approaches for implementing and funding growth management, conservation, and
restoration measures.
To facilitate application of this information, the document is designed as a workbook; each
chapter is followed by a series of worksheets presenting simplified decision trees and checklists to
summarize the text.
Overview of Financing Strategies to Implement CCMPs
Figure 1-2 highlights the principal financing decisions faced during development of CCMPs
or other watershed-based plans. One of the first decisions is to determine if an activity is suitable
for long-term financing, guided primarily by: (1) an assessment of a project's capital needs for
construction or acquisition, and (2) its likely economic life, which should be commensurate with
the maturity of municipal bonds (typically 10 to 30 years). Long-term debt financing is appropriate
for capital improvements that have a substantial useful life and for which a strong case can be made
that funding is available to repay the debt over time. Examples of CCMP projects for which
long-term borrowing may be appropriate include activities such as:
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building and operating sewage treatment facilities (both primary and secondary),
retrofitting outmoded combined sewer overflow facilities, and improving or upgrading
. on-site septic systems;
building and operating stormwater management systems;
installing nonpoint source pollution controls or equipment;
financing private industry facilities to reduce pollution and clean up contaminated sites-
and , '
building and operating boat pumpout facilities for vessel waste.
Chapter n^'Traditional Municipal Debt Financing," describes key issues surrounding the
sale of municipal bonds. It provides a "road map" of the major decision points associated with
securing municipal financing, identifies factors that should guide these decisions, and suggests
approaches for mitigating potential impediments.
Chapter ffl, "Private Sector Funding,." describes opportunities for funding CCMP-related
activities with private capital. Approaches to obtaining capital from private sources include
developer financing; privatization activities; voluntary industry investment; leasing; and directing
fines and penalties in negotiated settlements toward specific endowments.
A fourth general financing strategy for implementing CCMPs is to identify mechanisms
for implementing and financing non-capital activities. Chapter IV, "Non-Capital Financing "
discusses strategies for funding such activities as growth management measures, including offsets
set-asides, and transfer pf development rights; and conservation and restoration measures'
including donations and purchases pf land trusts, easements, and development rights.
Finally, CCMP implementation will likely need to draw on one or more of a variety of
other funding sources such as sales, property and special assessment taxes, user fees and various
grant mechanisms. These sources are referenced in this workbook, but because they have long
been the traditional financing tools of local government and are well documented elsewhere they
are not discussed in detail. Chapter V, "References," summarizes information cited throughout the
workbook, and provides a bibliography of additional sources and organizations relevant to CCMP
financing. .
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Figure 1-1
Phases of the National Estuary Program Process
Phase I
Issues Addressed
Monitoring
strategy
Impediments
to
implementation
».
Items requiring
further study
Evaluate
alternative
solutions
Planning
establishing organizational
structure
Phase II
' Characterization
identifying environmental
problems and causes
Phase in
CCMP Blueprint for
restoring and
protecting estuary
Phase IV
I
Implementation of CCMP
\
Various federal, state, local
initiatives and projects
Issues Addressed
Identify viable
solutions
Short-term
opportunities
for action
Cost of
initiatives
* i^
How will costs be
aiid financed?
Issue addressed in this\
.- -_f.f- - '
document T --:>
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Figure 1-2
CCMP Financing Decisions
Costs and strategy for environmental
restoration and protection
Is the initiative
a capital construction
project suitable for
municipal borrowing?
> Financed with state
revolving fund
Does project meet
threshold si7.e requirements?
> Are there techniques
which reduce impediments
to financing?
Special district
Bond bank
Bond pool
Should a general
obligation or revenue
bond be used?
Can the funding
be obtained directly
from private sector
capital construction
.'projects? -
Opportunities to obtain
funding or capital from
private sector
Developer financing
Privatization
Voluntary investment
Leasing
Fines and settlements
Can funding for
non-construction
projects be structured
to be self-funding?
Growth management
measures and land
acquisition
Land offsets,
set-asides and
transferable
. development rights
Land acquisition
and conservation
casements
Can the
proposals be
funded with
taxes or
grants?
funding sources
f for state and local
' -1 '" '
Taxes'
User fees
Grants
Topics not included in this document because they are well-understood, or better covered iri other
source documents
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n.
TRADITIONAL MUNICIPAL DEBT FINANCING
This chapter describes key decision points associated with debt financing, and in particular,
debt financing with state and local municipal bonds. It focuses on four strategic questions faced by
CCMP managers in evaluating the use of long-term municipal debt as a source of funding for
environmental initiatives (Figure II-l): .
Is the State Revolving Loan Fund (SRF) available for the activities contemplated in the
CCMP? The SRF was established under the 1987 Clean Water Act amendments to provide
low interest loans to localities for water pollution control projects.
If the SRF cannot be accessed, CCMP implementers may wish to look to traditional
municipal financing markets to fund capital projects. The substantial advantages of
municipal bonds, primarily the non-taxable interest to investors, mean that all else being
equal (i.e., duration of loan, credit-worthiness, etc.), municipal bonds have a lower
effective interest rate than if the funds were borrowed directly by corporations or
individuals to finance environmental projects.
Do capital requirements .meet me minimum threshold size for a cost-effective
underwriting? While some CCMP recommendations may call for substantial capital
projects (e.g., building sewage treatment facilities), others (e.g., stormwater treatment
structures, septic system improvements, and vessel pump-out requirements) may represent
much smaller total capital needs. Below a certain size, issuing long-term debt may not be
feasible or may require negotiating directly with lenders.
Can borrowing requirements be consolidated? Three typical methods of consolidating
financing requirements include:
. consolidating regional needs into multi-jurisdictional special districts;
using state bond banks; and
pooling bonds from multiple localities into a joint issue.
These approaches are particularly relevant when the second decision point indicates that-
the transaction costs may be excessive. They should also be considered routinely since they"
are effective at reducing both transaction and debt servicing costs.
Which of the two general types of municipal debt instruments should be used general
obligation bonds or revenue-type bonds? Selecting the appropriate type of municipal debt
will influence both costs and the approach to implementation.
Financing from the State Revolving Loan Fund (SRF) Program
The SRF was established under the 1987 Clean Water Act amendments (Public Law 100-4)
to provide low interest loans to localities for water pollution control projects, and is administered
by states within guidelines set up by EPA. SRFs in each state were capitalized initially by a
combination of Federal grants and state matching funds with the intent of recycling money back
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into the SRF as the loans are repaid. In this way, the funds are designed to be self sufficient over
time.
The Clean Water Act and EPA guidance specifically allow use of the SRF for such
activities as land acquisition, habitat enhancement, sediment detoxification, monitoring and
enforcement, education, training, and technical assistance if they are identified in approved
CCMPs and listed on a state's intended use plan (IUP). In practice, however, unmet treatment
plant needs dominate available funds, even in states where SRF enabling legislation does not
restrict its use to facility construction. Despite these impediments, however, the SRF almost always
should be considered as part of CCMP financing strategies because of its below-market interest
rates and low transaction costs. (If the SRF is selected as a financing means, however, it is critical
that projects to be financed be added to the state's intended use plan and priority project list. This
is another example of how financing and management strategies must be developed in parallel.)
Primary information sources on SRF use and eligibility include:
" U.S. Environmental Protection Agency, 1988. Initial Guidance for State Revolving Funds.
Office of Municipal Pollution Control.
» U.S. Environmental Protection Agency, 1990. Funding of Expanded Uses Activities by
State Revolving Fund Programs: Examples and Program Recommendations. Office of
Water. EPA 430/09-90-006. . '
« U.S. Environmental Protection Agency, 1991. State Revolving Fund (SRF): Final Report
to Congress. EPAX 9103-0035.
U.S. General Accounting Office, 1992. Water Pollution State Revolving Funds Insufficient
to Meet Wastewater Treatment Needs: Report to the Chairman, Committee on Public
Works and Transportation, House of Representatives.
Additional references are provided hi Chapter 5.
Financing from Municipal Markets
Economic Thresholds for Issuing Bonds
When going to municipal markets for financing, it is important to consider the minimum
economic threshold size for issuing bonds. The threshold issue is particularly important in
financing CCMPs since their recommendations often include small-scale capital projects such as
those usual for nonpoint source pollution control. The transaction costs associated with issuing
bonds typically include:
fees to financial advisors, to underwriters who prepare and market the bonds, and to legal
advisors who issue opinions on the validity and tax exempt status of the bonds;
preparation of official statements and documentation;
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fees for obtaining a bond rating;
purchase of optional default insurance which may decrease interest costs and increase
rnarketability of the bonds; and
in the case of revenue bonds, development of financial and feasibility studies.
Figure E-2 presents a typical range of bond issuance costs as a function of the size of the
issue. When the issue is over approximately one million dollars, costs typically range between one
and two percent of the proceeds. Under a threshold of approximately one million dollars for the
total issue, issuing costs rise dramatically as a percentage of the total as fixed costs, particularly
those associated with the bond counsel and underwriters, begin to dominate the process.
Differences are just as dramatic between general obligation bonds and revenue bonds. In
the case of general obligation bonds, total issuing costs may reach 10 to 15 percent of the proceeds
where the size of the issue is only $100,000. For revenue bonds, the proportional cost rises even
more strikingly with smaller sizes because of required engineering and financial feasibility studies
which typically cost a minimum of $20,000.
Given these fixed costs, the minimum size recommended for a bond issue typically ranges
from one to five million dollars. While it,is technically feasible to issue bonds with a total issue size
of $100,000, the cost of issuing would be prohibitive. Because bond financing is such an attractive
option, however, a variety of techniques have been developed to expand its applicability even in
cases where either the costs or the size of the bond issue appear to preclude it. Typically, these
techniques involve consolidating or merging financing requirements with those of other programs-
such techniques have major potential to reduce transaction costs and interest costs and should be
at least considered for most financing applications.
Consolidating Capital Requirements
Consolidating capital requirements is a general approach that integrates the financing needs
of numerous localities to achieve economies of scale during the financing process. Typical
approaches for consolidating municipal debt include: ' ' ,
creating special multi-jurisdictional districts;
using state bond banks or similar state^financial agencies; and
pooling bonds from multiple localities in a joint issue.
The fundamental advantage of these methods is that they allow individual municipalities
more efficient access to capital. A particular advantage in CCMP financing is that these techniques
allow for numerous relatively small debt issues which individually would be well below the
minimum economic threshold were they to be issued separately. Pooling also offers approaches
that can be combined to provide even greater benefits; a special district, for example, could be
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created to issue multi-jurisdictional debt through a state bond bank. Consolidating debt is also a
logical approach to implementing CCMP actions where several municipalities must take similar
actions to address a particular problem.
Special Multi-Jurisdictional Districts
One method of consolidating capital requirements is to establish a special district,
commission, or authority to address a particular aspect of estuary protection. Region-wide
stormwater management districts are particularly relevant to CCMP financing since they integrate
multiple municipalities or counties into an administrative unit focused on one aspect of water
pollution. The special districts take on all functions associated with that issue, including research,
construction and financing, and operations. Once established, special districts have authority to
issue debt similar to that available to individual localities.
A key advantage of special districts is their capacity to promote a region-wide approach
by organizationally focusing relevant jurisdictions on a particular issue. Special districts can fund
a comprehensive set of capital improvements across a wide geographic area, and once established,
they also have the capability to pursue a range of capital projects, provided they relate to the
district's mandate. Special districts also offer potentially greater operating economies by spreading
administrative costs over a wider area, as well as sharing technical and management capability
more widely.
Among the disadvantages of establishing special districts are their considerable start-up
requirements. Enabling legislation is frequently required at the state level; as is voter and/or
legislative approval by participating localities. A further disadvantage is that bond ratings for the
special district usually will reflect the performance record of the weakest participating jurisdictions.
Finally, a new district cannot document long-term financial performance. This lack of a financial
performance record increases the perception of risk and necessitates higher effective interest rates.
Figure II-3 summarizes advantages and disadvantages of establishing special districts.
Overall, special districts can be complicated to set up and the short-term benefits limited.
Over the long term, however, such districts can result in both lower costs and a more strategic
regional approach to estuary/watershed protection. In weighing the establishment of special
districts, management conferences should consider carefully the evidence of public support and
likelihood of voter and legislative approval. It is critical to define a proposed district's mission,
operating characteristics, and projects, as well as to establish a sound financial and management
structure that will satisfy all the jurisdictions involved. Figure II-4 provides a checklist of factors
influencing the feasibility of special districts.
Establishment of a special district likely will require continuing efforts to convince the state
legislature and fiscal management agency of the benefits of estuary/watershed protection projects,
explain how they can be achieved by a special district, and assess likely political support for such
an effort.
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Bond Banks .-'.
Bond banks are a second mechanism to overcome the threshold issue and reduce the cost
of borrowing, particularly to small entities. Bond banks are established at a state-wide level to
purchase bonds from localities throughout the state. The bond bank, in turn, sells bonds to the
financial markets to cover the pooled debt. This concept is analogous to that of mutual funds, in
which investors buy a share of a larger portfolio. In this case, the bond bank's portfolio consists
exclusively of municipal bonds in the state. The fundamental advantage of a bond bank is that once
established, it represents the most efficient means of pooling capital requirements. Moreover,
transaction costs associated with bond bank issues are modest, since the major costs are incurred,'
and shared, by the portfolio of bonds held by the state bank. Bonds can be directly relevant to any
CCMP recommending financing of capital projects.
At present, bond banks are not available in all states. However, there are related programs
at the state level which, in some cases, could perform similar functions. Some state industrial
finance agencies, for example, have begun to issue capital financing for environmental projects.
Just as for special districts, bond banks require extensive initial start-up effort. This effort
is likely to be outside the capabilities of an NEP management conference, although in their CCMPs
conferences may identify the desirability of establishing such banks. It also is important to
determine the scope of authorization for existing bond banks or related state pooling mechanisms.
For example, bond banks routinely deal with municipal water and sewer projects, but may not have
a mandate to cover a program to upgrade on-site septic systems or to purchase critical habitat
areas. Use of state bond banks should be evaluated in light of the scope of projects they can cover.
It may be appropriate in some cases for CCMPs to support broadening project eligibility or bond
bank authority. Figure II-5 summarizes advantages and disadvantages of working with a state bond
bank. ,
^ If a state bond bank or similar state-wide bond issuing agency exists, it may be appropriate
to consider accessing its financial capability. Where such agencies do not exist or are not currently
authorized to issue bonds for CCMP-related projects, the state financial agencies or legislature will
need to act to establish such authority. An analysis of the benefits of such authority can also serve
to build support for other institutional and financial recommendations. Figure II-6 provides a
checklist of the factors that influence the feasibility of entering into arrangements with a state bond
bank for CCMP-related financing.
Bond Pooling and Joint Issues
A third capital financing strategy, summarized in Figure H-7, consists of pooling the bonds
from numerous municipalities into one consolidated bond issue. In this arrangement, several
localities agree to collectively .coordinate and undertake a bond issue. Also known as bundling or
joint issues, pooling can enhance marketability by combining not only multiple municipalities, but
also different types of projects (i.e., wastewater treatment and transportation projects). State
financing agencies can be potentially helpful in evaluating this approach, not only offering advice
and technical support, but also facilitating the pooling of municipal bond issues among jurisdictions
throughout the state.
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The pooling approach can be much less cumbersome administratively than the
establishment of a special financial district. It also may be the only feasible method for capital
financing, if the establishment of a special financial district is not possible and a state bond bank
is not available.
Pooling through a joint issue requires extensive coordination among all the participating
jurisdictions. Not only must they agree to pursue joint financing, including coordinating local bond
issue approvals, the projects to be financed must also share similar construction schedules, risks,
and operating durations.
The primary disadvantage of this method of financing is that the bond rating and
marketability of the bond issue is heavily influenced by the fiscal rating of the weakest participant
in the pool. This impediment can be overcome through the use of a joint powers agreement, which
is a legally binding arrangement under which the individual municipal participants in the bond issue
agree to jointly indemnify one another. Its disincentive, however, is that the fiscally stronger
localities undertake a greater financial risk through the indemnification arrangement. In addition,
pooling doesn't benefit from the economies of state-level funds handling, and imposes the full
range of financing costs.
Figure II-8 summarizes a checklist of factors influencing the feasibility of implementing
pooling arrangements for issuing bonds. The most critical step is to determine region-wide capital
requirements and assess whether the total capital requirements meet the minimum economic
threshold size for a bond issue. This assessment should identify potential partner localities, examine
their credit ratings, and evaluate likely voter and legislative support among the potential
participants. Results of this assessment will help determine the feasibility of a pooling arrangement.
Many of the legal and administrative issues associated with pooling are complicated and
call for specialized legal and financial advice. The success of any pooling arrangement is similar
to that of any successful bond issue and is highly dependent on the development of a strong
financial, operating, and management plan for proposed projects.
Municipal Bonds: General Obligation vs. Revenue
Two principal types of municipal bonds are discussed in this section:
general obligation bonds: backed by the "full faith and credit of the issuing agency and
repaid from general tax revenue and all other income to which the issuing agency is
entitled. General obligation bonds do not tie revenues directly to individual obligations;
revenue bonds: backed by a dedicated revenue stream from a specific project or system,
typically through user fees. A significant bond variation is the "double-barrel bond, "a
revenue bond with general obligation backing.
Because each bond type involves distinct costs and implementation activities, it is very
important to determine the most appropriate type of debt instrument relatively early in the CCMP
financing process.
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General Obligation Bonds
Because they are funded from general tax revenues, general obligation bonds are
frequently used to finance projects with widespread public benefits such as roads, schools, or new
municipal buildings. General obligation bonds may be appropriate for CCMP-related projects
where specific beneficiaries are difficult to identify and the projects cannot readily be separated
from ongoing government programs. Figure D-9 summarizes the applicability and advantages and
disadvantages of general obligation bond financing.
In contrast to revenue bonds, which require a specifically identified project with a revenue
stream (typically based on user fees) to support it, general obligation bonds are less likely to raise
opposition from specialized stakeholders who may oppose user fees. Since they are backed by all
the revenues collected by the issuing government entity, they also typically have a lower interest
rate. However, this advantage must be weighed against the fact that general taxpayers would be
taking on more debt.
Although the administrative burden associated with a general obligation bond issue is
moderate, it may still generate prohibitive costs for small issues. Costs include those for obtaining
legal opinions on the validity of the bond issue, credit ratings from major rating agencies and
independent advice on the mechanics of the issue. In addition, most states require that general
obligation bonds be placed on the ballot for approval. Voters increasingly have been reluctant to
approve bond issues, because of the associated increases in tax burden.
Figure 11-10 provides a checklist of factors influencing the feasibility of issuing general
obligation bonds. In general, this mechanism is primarily suitable for capital projects where the
term to maturity of the bonds is commensurate with the useful life of the projects. In evaluating
the ability of a municipality or other government entity to issue new debt, a primary consideration
is the overall debt structure and its relationship to key fiscal indicators. These include the existing
level of debt and the ratio of total debt service (including the new issue) compared to the total real
estate valuation and/or to the total personal income in the area of the issuing government.
Socio-economic indicators are also important in evaluating debt capacity. Indicators include
such factors as the rate of population growth, unemployment rate, business outlook for major local
industries, per capita income, capacity to absorb additional taxes, existence of legal debt
limitations, and current municipal bond ratings. Credit worthiness is also assessed based on
historical budget discipline, including ability to balance budgets and meet debt obligations
Indicators also include administrative capability of government agencies to effectively manage the
bond issue. This includes ability to coordinate the actual bond issue, manage the disbursement of
funds, and audit results. Likelihood of obtaining voter and/or legislator approval is key in any
decision to issue general obligation bonds, and the local electorate trends in approving bond issues
should be examined, as well as the overall level of support for estuary/watershed programs.
Independent financial advisors can help to assess the fiscal and financial criteria associated
with a potential bond issue, and can increase the marketability of the bonds by providing current
information on the state of financial markets and the prospects for obtaining favorable bond ratings.
It is also important to coordinate with local environmental groups and opinion leaders, such as
11, - '
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elected public officials and business leaders. The support of such groups can help to attract
potential underwriters of the bond issue.
Revenue Bond Financing
Revenue bonds are applicable to capital projects that generate a revenue stream (typically
through user fees) that can be dedicated to amortize the debt. Examples of estuary/watershed
protection projects for which revenue bond financing may be appropriate include traditional sewage
treatment plants and stormwater management utilities.
Figure E-ll summarizes some of the key advantages and disadvantages of revenue bond
financing. In comparison to general obligation bonds, revenue bonds are growing in popularity as
a means of financing municipal infrastructure because they do not contribute to an increase in the
direct tax burden. When they are funded from user fees by those who contribute to the
environmental problem, revenue bonds also feature the intrinsic appeal of having the "polluter"
pay for the cost of environmental remediation or protection. Moreover, they are less constrained
by legal factors such as debt limitations, even while they have less direct effect on a locality's fiscal
rating and its ability to incur additional debt. They still contribute to the total debt load on a
community, however, and this load is an important factor in establishing a fiscal rating and
ultimate ability to service debt. Because they require a predictable and fiscally-sound revenue
stream and a well-defined project, revenue bonds may be inappropriate for certain types of projects
contemplated in the CCMP.
Projects to be financed by revenue bonds must show a sound operating and management
plan. This is to ensure both that the projects are feasible, and that a qualified bond rating can be
obtained. Since a separate operating entity is required, the administrative requirements will be
more substantial than is the case for general obligation bonds. Revenue bonds also have a higher
effective cost of capital than general obligation bonds. This is because they typically have a
somewhat higher effective interest rate, as well as greater issuance costs to cover required financial
and engineering feasibility studies. Finally, although revenue bonds typically do not require the
voter approval process of general obligation bonds, they do require approval by elected officials.
Figure II-12 presents some of the key factors influencing the feasibility of revenue bond
financing. Fundamental to the feasibility of revenue bond financing is the availability of a viable
revenue stream. In the area of water quality, revenue bonds have been used mostly to finance
traditional sewage treatment plants, using sewer and water user fees as the revenue stream. An
evolving use for revenue bonds, however, is the funding of stormwater management and related
nonpoint source control projects through stormwater utility assessment fees. Other innovative
applications include using a portion of landfill tipping fees to fund capital projects for upgrading
municipal landfills, charging fees for vessel pump-out stations, or imposing permit fees for projects
to control construction erosion.
An effective financial justification for revenue bond proposals requires accurate assessment
of project capital costs, operating costs, and projected revenues. This generally is accomplished
by having an independent consultant perform financial and engineering feasibility studies.
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Although not typically a problem with CCMP-related issiiings, revenue bond proposals
must also show that they meet a number of IRS standards for tax exempt status. These include per
capita limits and assurance that funds not go to activities that are private sector functions. Local
legal requirements must also be evaluated. For example, some states have direct limitations on the
utilization of user fees. It will generally be critical to show that fees are reasonably related to the
service provided and based on an appropriate fee structure. While this is fairly straightforward in
the case of traditional sewage treatment plants (which typically base fees on water consumption
rates), establishment of a new stormwater management utility requires considerable administrative
effort and innovation. Stormwater management utilities usually base fee structures on such factors
as lot size and percentage of impervious area, for example, but environmental impacts associated
with state highways or major government facilities are other factors that could be considered in
. determining potential user fees and structures.
As with general obligation issuings, it is vital that projects be coordinated with potential
Underwriters, including legal and financial advisors. Bond sales require a legal opinion on the
validity of the issue, including its tax exempt status. Because of the many complications associated
with revenue bond projects, particularly innovative ones, issuing agencies should also employ an
independent financial advisor. Finally, a trustee such as a local or regional bank should be
accountable for monitoring the flow of funds associated with the project. The administrative
mechanism is usually some form of utility or authority, generally with oversight from a local or
regional government to ensure management'capability and accountability.
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Figure H-3
Consolidating Capital Requirements: Special
Multi-Jurisdiciiional Districts
Applicability
Q Situations where there is a broad region-wide consensus on the
importance of protecting the estuary or the resource
Advantages
Q Offers municipalities access to capital below the minimum economic
threshold for issuing bonds
Q Provides greater security to investor and offers cost of capital advantage
to issuer
Q Allows opportunity for establishment of a broader region-wide approach
for estuarine environmental problems
Q Consolidates funds to implement a comprehensive set of capital
improvements across a wide geographic area
Q Offers operating and administrative economies
Q Expands availability of technical and management capability
Disadvantages
Q Requires considerable political and administrative wherewithal to
initiate and involves extensive administrative requirements to set up and
operate
Q Requires state-level legislation or authorization to establish
Q Requires voter and/or legislative approval by participating
jurisdictions
Q Requires considerable political coordination among multiple
jurisdictions
Q Tends to reflect the fiscally weakest locality in the overall bond ratings
Q Suffers from lack of initial operating track record
-------
Figure n-4
Consolidating Financing Requirements: Special
Multi-Jurisdictional Districts Checklist
Key Feasibility Factors
Q Is there sufficient political support to establish a special district?
Q Voter approval
Q Legislative approval
Q Can a suitable administrative and operating structure for a special
district be established?
Q Can an effective set of projects and functions be identified for the
special district?
Q Do the pooled capital requirements meet the size threshold for a
. viable bond issue?
Q Can a sound financial plan for the operation of the district be
developed?
Q Do all of the involved localities meet acceptable fiscal criteria?
Facilitating Activities
Q Promote the importance of the special district in achieving
environmental goals to the state legislature and treasury agency.
Q Work with potential partner localities to develop the political will to
implement the concept
Q Conduct promotional and outreach programs to the public which
emphasize the benefits of achieving estuarine protection goals
-------
Figure n-5
Consolidating Financing Requirements: Bond Banks
Applicability
Q States with existing bond banks or showing inclination to establish
one
Advantages
Q Offers municipalities access to capital below the minimum economic
threshold for issuing bonds
Q Provides greater security to investor and offers cost of capital advantage
to issuer
Q Represents the most efficient means of pooling capital requirements
Disadvantages
Q Not available in all states
Q Requires legislative and extensive administrative effort on part of state to
establish one
Q Often requires new authority to deal in CCMP-related types of projects
-------
Figure n»6
Consolidating Financing Requirements: Bond
Banks Checklist
Key Feasibility Factors
Q Are appropriate state fiscal management or treasury agencies willing
to provide advice?
Q Does a bond bank or similar mechanism currently exist in the state?
Q Is the existing bond bank authorized to make environmental or CCMP-
related loans?
Q If a bond bank does not currently exist, is there interest or political will
to establish one?
Facilitating Activities
Q Work with the state fiscal management or treasury agencies to explore
the feasibility of using an existing bond bank or similar mechanism.
Q Investigate use of alternative funding mechanisms such as industrial
development banks to perform the functions of a bond bank
Q If existing mechanisms are not currently authorized to deal in
financing for environmental projects, consider building support in the
state legislature and state fiscal management or treasury agencies to
obtain the necessary authorization.
-------
Figure H-7
Consolidating Financing Requirements: Pooling
in
Applicability
Q Situations where several partner localities have capital requirements
similar time frames
Advantages
Q Offers municipalities access to capital below; the minimum economic
threshold for issuing bonds
Q Provides greater security to investor and offers cost of capital advantage
to issuer
Q Imposes fewer administrative burdens than the establishment of special
districts
Q If a state bond bank is not available, serves as the only feasible method of
pooling
Disadvantages
Q Requires extensive political and administrative coordination among the
participating jurisdictions
Q Requires similar time schedule and financing by partner localities
Q Bases bond ratings on the fiscally weakest locality
Q Requires that partners agree to joint indemnification in order to share the
risk of default by any of the partner members
-------
Figure n-8
Consolidating Financing Requirements:
Pooling Checklist
Key Feasibility Factors
Q .Are there multiple capital requirements within a state or region that do
not meet the size threshold for a viable bond issue and that can be
pooled?
Q Can the tuning of the bond issues be coordinated?
Q Are the projects of a similar category of risk?
Q Can an effective set of projects and functions be identified?
Q Are there potential partners with corresponding capital requirements?
Q Are potential partners willing and able to participate?
Q Is voter and legislative approval likely?
Q Do the potential partner localities meet appropriate fiscal criteria?
Q Will joint liability present a problem?
Q Will the fiscally weakest participant significantly affect marketability?
Q Can a joint powers agreement be arranged to share risk through joint
indemnification?
Facilitating Activities
Q Use the resources of the state fiscal management agency to coordinate
action - often, similar arrangements have been established to finance
school districts, highways, etc.
Q Seek specialized technical advice since a pooled bond issue is legally and
financially more complicated than a normal municipal bond issue
Q Bond counsel
Q Independent bond financial advisor
Q Work closely with potential partner localities to develop the political will
to implement the concept
Q Develop strong financial, operating, and management plans for the
entire range of projects to be funded
-------
Figure H-9
Municipal Bonds: General Obligation
Applicability
Q Projects with widespread public benefits
O Projects where specific beneficiaries or those causing the impact are difficult or
too general to identify
Advantages
Q Makes use of traditional financial mechanism
Q Raises little opposition from specialized stakeholders
Q Provides vehicle for projects where benefits are diffuse and cannot be tied to
specific fees
Q Generally results in somewhat lower interest costs than revenue bonds
Disadvantages
Q Requires voter approval in most states
Q Often inspires legislative opposition
Q Is sometimes limited by statutory debt limitations
Q Requires viable credit rating of government entity
Q Increases tax burden to public
Q Competes with other municipal infrastructure needs for available debt capacity
Q Is difficult for smaller municipalities to market
Adds administrative burden
Q Requires cultivation of political support for bond issue
Imposes potentially high administrative costs for small issues
Q Prior problems with repayment and reinvestment history and relationship with
financial markets will impact ability to finance even well-justified projects
-------
Figure 11-10
Municipal Bonds: General Obligation Checklist
Key Feasibility Factors
Q Are funds to be used for a capital project?
Q Bond term must match useful life of project
Q What is the overall debt structure of the municipality?
Q Existing level of debt
Q Ratio of debt to real estate value
Q Ratio of debt to personal income
Q Ratio of debt service to general revenues
Q What are the socio-economic indicators?
Q Population growth Q Property values
Q Unemployment Q Economic base
Q Personal income
Q Are there legal debt limitations that would have to be changed?
Q What is the current bond rating?
Q What is the record of fiscal management?
Q Balanced budgets last 3-5 years
Q Good faith based on past record^
Q Successful income management, such as high tax collection rate
Q What is the likelihood of voter/legislative approval?
Q History in approving bond issues
Q Political support for estuarine programs
Q What is the administrative capability?
Q Is there a minimum economic threshold size of bond issue?
Facilitating Activities
Q Build public support for estuary programs
Q Identify benefits and publicize
Q Build broad community support
Q Obtain support of key opinion leaders
Q Publicize successes
>
Q Coordinate with underwriters
Q Investment banks
Q Municipal bond department of commercial banks
Q Independent financial advisor
Q Legal advisor on validity of issue
-------
Figure n-11
Municipal Bonds: Revenue Bonds
Applicability
Q Projects, usually applicable for capital projects, that generate a dedicated
stream to amortize debt
revenue
Q Attractive for sewage treatment plants and stormwater management utilities
Advantages
Q Avoids contributing to a direct tax burden
Q Often does not require direct voter approval
Q Raises less political opposition than general obligation bonds
Q When funded from user fees, matches revenues to beneficiary or entity
causing the impact
Q Lessen effect on a municipality's fiscal rating and its ability to incur additional
debt
Q Imposes fewer legal constraints from debt limitations, etc.
Q Appears to be increasing in popularity over general obligation bonds
Disadvantages '
Q Requires a fiscally viable revenue stream, a well-defined project, and sound
management capability
Q Imposes increased fees on certain groups of stakeholders
Q Often limits use of funds to specific purposes directly related to the fees charged
Q Requires legislative approval in some cases
. - i
Q Often has higher interest rates than general obligation bonds and
thus overall higher costs
-------
Figure H-12
Municipal Bond Checklist: Revenue Bonds
Key Feasibility Factors
Q What are the potential revenue streams?
Q Sewer and water user fees
Q Stormwater management utility fees
Q Tipping fees from municipal landfills
Q Other specialized fees
Q Is the project financially feasible?
Q Project capital cost estimates
Q Operating cost estimates
Q Projected revenues
Q What are the legal requirements?
Q Enabling legislation
Q Authority to establish fees
Q What are the institutional requirements?
Q Management capability
Q Administrative/organizational-entity
Facilitating Activities
Q Develop viable financial plan, based on an appropriate fee structure
Q Consider appropriate fees from other government agencies
Q Develop effective operating and management plan
Q Build public support
Q Coordinate project with underwriters, legal advisor, financial advisor,
and trustee
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ffl.
PRIVATE SECTOR FUNDING
At least some of the capital required to implement at least some CCMP initiatives may be
obtainable either directly or indirectly from private sources. This approach is particularly effective
in funding initiatives that are below the minimum threshold size for a viable municipal debt
offering, as well as for those for which funds are simply not available through traditional financing
mechanisms. Using private capital has a number of other advantages, moreover: it does not
encumber the tax base of local and regional governments or constrain future borrowing; it links
some of the contributors to estuary or watershed pollution with the costs of mitigating these
impacts; and it has the potential to create commercial opportunities for the private sector.
, Figure,m-l presents a strategic framework for considering the decision points associated
with evaluating private capital for CCMP-related activities. The principal approaches for private
financing include: ,
developer financing: obtaining up-front capital from firms undertaking land development
to finance estuary/watershed protection projects. This approach can be implemented using
impact fees, capacity credits, and negotiated exactions.
_r ' °
» privatization: packaging projects so that private firms can undertake the investment as a
commercial venture on a fee-for-service basis.
industry-sponsored initiatives: enlisting voluntary, private-sector investments or initiatives.
leasing: acquiring and/or using services, equipment, or property under terms that
constitute operating costs rather than capital expenses.
fines and negotiated settlements: directing restitution payments, penalties, or other funds
into environmental endowments. ,
The following sections discuss the advantages and disadvantages of each of these options
and include a checklist of factors to consider when evaluating these sources of funds.
Developer Financing
Developer financing consists of securing funds to finance either mitigation or
environmental protection activities from firms undertaking land development, and is generally
structured around three mechanisms: impact fees; capacity credits; and negotiated exactions.
Impact fees are an assessment on real estate development activity to fund additional public
infrastructure capacity. Intended to compensate for additional demands placed on existing services
by new development, they are most applicable to capital improvements directly related to needs
such as traditional wastewater treatment, abatement of combined sewer overflows, and stormwater
management. Typically, a fee (usually on the order of a few thousand dollars for each residential
unit) is charged to the developer; the sum of accumulated impact fees provides a capital fund which
15
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may be used to finance any number of projects, although they are most commonly used to expand
municipal infrastructure, such as sewage treatment and stormwater management facilities.
Capacity credits are essentially prepaid impact fees. They permit developers to protect the
viability of future development projects by "reserving" an increment of capacity in a new or
expanded facility. Although technically voluntary, developers often choose to pay them in order
to ensure their ability to undertake development in the future.
Negotiated exactions, a type of impact fee, are assessments established on a case-by-case
basis. They are most appropriate for large development projects, particularly commercial or
industrial ventures. In certain situations, they can produce funding in excess of $1 million.
Negotiated exactions are considerably more complex to administer than impact fees, but they
ultimately provide more flexibility.
Figure ffl-2 summarizes the applicability and advantages and disadvantages of developer
financing. The approach is most feasible for regions experiencing strong growth and where there
is significant public concern over development. Fees can produce substantial capital funds, while
avoiding the need to issue public debt. In addition, fees can be administered through existing
management units such as municipalities, counties, or sewage districts. These factors tend to make
developer financing more acceptable than the typical tax increases or user fee increases used to
support traditional municipal bond financing of capital projects.
The concept of impact fees associated with new development has been well established in
many jurisdictions throughout the United States. Legal challenges can generally be avoided by
demonstrating that fees are reasonably tied to the impacts associated with the new development
activity. Such demonstration requires a moderate level of administrative effort and associated costs
in an implementing agency. .Figure ni-3 provides a checklist of key factors influencing the
feasibility and facilitating the implementation of developer financing.
As noted earlier, developer fees tend to be most effective where new real estate
development is occurring and a relationship is perceived between projected development and the
quality of the estuary or watershed. The acceptability of developer fees thus depends to a degree
on concern about environmental and economic impacts of new development and awareness of
potential mitigation that can be achieved.
Privatization
Privatization refers to the use of private firms to build and operate facilities, such as
wastewater treatment plants, or to provide services, such as environmental inspections. Capital for
financing the necessary investment is provided by the private firm, which then operates the project
as a commercial venture. Privatization of environmental projects has chiefly been applied to
traditional wastewater treatment plants and solid waste facilities. There was a greater incentive for
privatization before the Tax Reform Act of 1986, since the tax laws in place prior to that time
tended to lower the effective cost of capital for private development. Currently, however, both
traditional general obligation and revenue debt with tax-exempt status have a lower capital cost
than private financing. ,
16
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There are several related types of private-public partnerships, including contract services
. and turnkey projects. These do not address the'issue of raising capital, however, since under these
arrangements the capital for constructing the facility is provided by a public entity. From the
standpoint of raising private capital, full privatization of a project is the relevant arrangement.
Figure m-4 summarizes the applicability and advantages and disadvantages of privatization
as a means to raise capital, A wide range of projects can be considered for privatization, as long
as they can be organized to stand alone and there is an adequate revenue stream to support them.
Privatization allows access to private capital without encumbering public debt capacity or requiring
voter approval. Public acceptability can be high as long as effective contracting arrangements and
performance monitoring are in place to protect the public interest. In many instances, privatization
offers significant operating efficiencies or provides special expertise not readily available to local
governments. ,
Factors that support privatization, however, are similar to those that promote public
financing. Sewage treatment plant or septic tank maintenance programs, for example, are typically
supported by user fees, which encourage financing with traditional municipal bonds.'privatization
also requires well-defined, stand-alone projects, and thus may not work in situations where it is
difficult to separate a project from general government environmental functions. Further, the tax
advantages of municipal bonds typically give the public sector a cost advantage over the private
sector in the initial financing of the capital costs. This advantage may or may not be sufficiently
offset by lower operating costs. In addition, regulatory or other incentives are often necessary to
support or ensure the need for the activities under consideration for privatization. Finally effective
privatization requires considerable administrative effort to structure viable operating agreements,
monitor contractor performance, and resolve conflicts over deficiencies.
Privatization appears to be a potentially effective approach chiefly for small-scale capital
projects that can be tied to a revenue stream for a private operator. An example would be
procuring vehicles and equipment for septic system maintenance. In this instance, a private
operator provides the necessary capital items, the revenue streams to finance the investment are
provided by commercial and residential owners of septic systems, and incentives in the form of
requirements to maintain septic systems facilitate private investment by ensuring a need for the
services.
Figure ffl-5 presents a checklist of the key factors influencing the feasibility of privatization
programs. Primary requirements include adequate revenue streams and the ability to package the.
project as a stand-alone operation. It is also important to determine whether privatization offers
increased efficiency or effectiveness, such as increased availability of special expertise, breadth
of experience, and greater flexibility in personnel utilization. In addition, while a privatized project
may have a greater cost of capital, operating economies may be able to offset these greater capital
costs.
The local government must be able to effectively oversee an operating agreement; the
presence of regulatory requirements or other incentives for the desired environmental activities
should also be evaluated. A final factor is the availability and interest of firms to undertake the
privatized project.
17
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Industry-Sponsored Initiatives
Another source of private capital may be available in the form of voluntary, industry-
sponsored initiatives. Increasingly, private firms are voluntarily financing environmental projects.
This approach, however, depends on the availability of one or more "hallmark" firms who are able
and willing to make the necessary investment in meaningful projects. Moreover, potential revenues
or benefits from this approach may not be predictable or consistent.
Examples of such an approach include:
" a major pesticide or fertilizer firm funding investment directed toward mitigating
agricultural run-off;
a major regional firm establishing an environmental fund or donating equipment for
environmental enhancement or mitigation;
» a locally prominent developer constructing stormwater control basins or performing
wetlands mitigation beyond mandatory requirements; and
local utility companies undertaking various nonpoint source control improvements.
Figure ffl-6 summarizes the advantages and disadvantages of voluntary industry initiatives,
and Figure Ift-7 summarizes the key factors influencing the feasibility of this approach. A
particular advantage of industry-sponsored initiatives is that they do not encumber the tax base and
thus tend to have high public acceptability. However, care must be taken to ensure that a public
mandate does not convey an unjust benefit to a private party. The feasibility of this funding tactic
depends on the availability of interested parties who perceive a stake in such a program and who
have the necessary financial resources to undertake individual projects that contribute to the
environmental goals for the estuary or watershed.
Opportunities for firms to publicize their achievements can encourage voluntary donations
of capital. For example, donated equipment or facilities could identify the provider, special plaques
or citations could commemorate a donation, and local public officials could participate in
dedication ceremonies. Candidate firms include those who have a stake in potential regulation or
who are otherwise interested in environmental protection. While it is critical to ensure that projects
are consistent with CCMP or watershed goals, industry-sponsored initiatives can be particularly
attractive for small-scale projects where the capital requirements are below the threshold for
cost-effective municipal debt financing.
Leasing
Leasing is another potentially attractive method of obtaining capital equipment, facilities,
or property. Figure ffl-8 summarizes the applicability and advantages and disadvantages of leasing.
Although probably less attractive for large-scale efforts because the private cost of capital would
typically be higher than the cost of capital obtained through municipal bond offerings, leasing may
work well for small-scale capital purchases of equipment or in overcoming a funding shortfall.
18
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Examples of such arrangements include leasing oil spill containment equipment, or vehicles and
equipment used for nonpoint source abatement or wetlands restoration. In addition some
communities have begun adapting the use of lease-purchase arrangements to finance land
acquisition.
Mechanisms for concluding leasing arrangements are generally available through standard
local government procurements. While leasing does not circumvent the need for revenues to cover
the carrying cost of the leased item, it does potentially allow a capital item to be procured in a
more timely fashion. Leasing is most applicable to standardized pieces of equipment
Non-standard items will require a relatively complex procurement process.
Figure m-9 summarizes key factors influencing the feasibility of leasing. The attractiveness
of leasing is related to: 1) whether there is an urgent need for equipment or services; 2) whether
vendors are available to supply the required equipment; and 3) whether future operating budgets
will be able to support the lease payments. Competitive bids are the best way to evaluate the
financial terms of potential lease arrangements. Assessments of the financial reasonableness of the
lease include comparisons of the annual lease fee with the equivalent annual cost of buying
equipment and should be based on estimates of useful life, residual value, and cost of capital using
discounted cash flow techniques.
Fines and Negotiated Settlements
Occasionally, sufficient funds become available through fines, negotiated settlements or
jury awards to fund significant capital improvement programs. Although these are essentially
unpredictable sources, it can be useful to establish a process for securing, using, and perhaps
sustaining these funds when appropriate occasions arise. For example, an existing entity such as
an environmental trust, can be designated as the recipient for various punitive or restitution
payments flowing to the state or local governments. Some federal statutes, such as the Oil Pollution
Act and CERCLA, provide that penalties for damages to natural resources be shared with state or
local trustees to implement restoration activities.
An example of this concept in operation is the Massachusetts Environmental Trust (MET)
MET was established by the state legislature with two million dollars in seed money from federal
fines levied against several polluters of Boston'Harbor, including the Commonwealth itself- it also
derives funds from settlements of environmental lawsuits initiated either by the state or by private
citizen environmental organizations. Although established as an instrumentality of the state the
MET operates with independent financial and policy-making status. In addition, the MET is not
subject to the legislative appropriation process and receives no annual or special appropriations
Instead, it is authorized to receive additional fines and penalties, as well as gifts and grants from
other sources, and to manage these funds.to meet the specific requirements of each settlement
This flexibility ensures that the MET can play an ongoing role.
Where such opportunities present themselves, the results can be particularly attractive
Major cases may produce substantial revenue, and public acceptability is high based on the
"polluter pays" principle. Moreover, projects funded through these means offer a vehicle to turn
19
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penalties and fines to positive purposes. Figure HI-10 summarizes.considerations in assessing the
establishment of environmental endowments.
The primary disadvantages of this source of funding are its uncertainty and vulnerability
to competition for other uses. In many cases, moreover, funds from fines or similar payments go
to the general treasury rather than to address the injuries for which penalties were exacted. Where
this is so, new legislative authority may be required, both to create an organizational entity to
receive the funds and to authorize "diversion" of payments from the general treasury to the
endowment. Finally, it is important to recognize that litigation procedures likely will extend a
significant length of time before any funds are actually available. Figure m-11 presents a checklist
of factors influencing the feasibility of this funding source and benefits of establishing an
endowment program, which typically would include:
» an appropriate legal entity with established administrative procedures for using funds,
including clearly defined objectives, project eligibility and selection criteria, and fund
recipient eligibility;
necessary legislation to establish such an endowment, including an assessment of the
specific legal procedures in the state for distributing funds from penalties or litigation;
continuing liaison with litigating agencies to track appropriate cases and promote the
endowment as a potential settlement participant; and
a list of priority projects or funding needs to which proceeds can be immediately applied.
If the endowment is developed wholly or partly to help in implementing CCMP
recommendations, that goal should be clearly defined as one of its primary objectives. Although
privately-contributed capital may be viable only in limited circumstances, its availability can be an
important element hi funding estuary and watershed protection programs.
20
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O
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Can greater promotional
efforts increase
acceptability?
*
Is there a pending
enforcement action that may
result in a significant fine or
negotiated settlement?
a lund lor estuarine restoration or
protection?
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nable to establishing
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financing requirement below
the effective threshold size
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illingnessof firms to
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needed capitalinvestment?
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identified to support private
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Can needed investment
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Figure m-2
Private Sector Funding: Developer Financing
Applicability
Q Useful for projects that can be identified with a particular real estate
development proposal (i.e., sewage treatment facilities, stormwater
control) or user charges
Q More acceptable as means to address environmental impacts of new
development as opposed to existing development
Q Viable in areas experiencing strong growth in real estate development
Advantages
Q Produces substantial funds for capital development, even with moderate
fees .
Q Provides capital without affecting existing debt capacity
Q Generally enjoys greater public acceptability than across-the-board tax
increases
Q Implements an established concept that can be administered by existing
municipality, county, or sewage district
Q Builds on public anti-growth sentiment "
Q Ties cost of environmental protection to those causing the impacts
Disadvantages
Q Only addresses environmental impacts related to new real estate
development
Q Is tied to strong public concern over growth
Q Is likely to evoke opposition from real estate development interests
Q Subject to legal challenges if program is not established equitably
Q Requires a moderate level of administrative capability to establish
viable program s
Q Must match fees reasonably to needed improvements
-------
Figure m-3
Private Sector Funding: Developer
Financing Checklist
Key Feasibility Factors
Q Can estuarine environmental problems be significantly tied to new
real estate development?
P Sewage treatment capacity
Q Combined sewer overflows
Q Stormwater management
Q Nonpoint source impacts
Q Is significant growth occurring hi the region?
O Residential
Q Commercial , ,
Q Industrial
Q Is there significant public anti-growth sentiment?
Q Public comment at hearings/council meetings
Q Difficulty in obtaining approval for development projects
Q Does a governmental entity exist with a moderate level of
administrative capability to implement program?
Q Municipality "
Q County
Q Special sewage treatment/stormwater management district
Q Do local governments have legal authority to establish development
fees? - . r
Q State enabUng legislation
Q Amenability of local elected officials
Facilitating Activities^ " ~~ "
P Educate public on linkage between development and the estuarine
problems being addressed
Q Leverage public concern over growth
Q Highlight potential environmental benefits which can increase real
estate value
-------
Figure m-4
Private Sector Funding: Privatization
Applicability
Q Projects which can be well defined and separated from general
government functions (Le., sewage treatment plants, septic system
maintenance programs)
Advantages
Q Provides flexible revenue potential depending on scale of project
Q Provides means of obtaining capital without encumbering government
dept capacity
Q Enjoys public acceptability in general as long as public interest is
adequately protected
Q Can tap special expertise not readily available in local governments
Q Offers the potential to operate a specific project more efficiently
Disadvantages
Q Requires adequate revenue stream to support the private investment
Q Requires a well-defined "stand-alone" project
Q Requires substantial administrative effort to structure a viable operating
agreement
Q Requires continual monitoring of private contractor performance to
ensure that project goals are being met
Q Imposes higher costs on capital raised by a private firm versus municipal
debt
Q May result in some loss of control by government over operation of the
project
Q May make conflict resolution in the event of substandard performance
difficult to achieve
Q May convey control of a potentially valuable public resource to private
parties
-------
Figure DI-5
Private Sector Funding: Privatization Checklist
Key Feasibility Factors
Q Can revenue streams be identified to support a profitable private
investment?
Q User fees
Q General tax revenues
P Can a viable stand-alone project be defined?
Q Operations to be performed
Q Facility and equipment investment
Q 'Quality performance standards
Q Can privatization result in increased efficiency or effectiveness?
Q Special expertise
Q Greater breadth of experience - .
Q Greater personnel flexibility
Q Are there operating economies that can offset higher private capital
costs /
T
Q Does government have the administrative capability to effectively oversee
an operating agreement? - *
Q Are competitive firms available to perform the service?
Q Are there regulatory incentives in place that impose a need for the service?
Facilitating Activities
Q Define an operating agreement that protects public interests
Q Services
Q Equipment/facilities investment
Q Quality standards
Q Contract term
Q Termination
Q Renegotiation
Q Fee setting
Q Ensure monitoring and oversight
Q Compliance with agreement
Q Defaults and remedies
Q Citizen complaints
Q Build in incentives, regulatory or otherwise, that ensure need for the
services being considered for privatization
-------
Figure ffl-6
Private Sector Funding:
Industry-Sponsored Initiatives
Applicability
Q Projects that can be identified with the public interest of a' major
stakeholder (i.e., fertilizer company agricultural best management
practices, major industry in a region undertaking environmental
improvement program)
Q Small projects below the threshold for cost effective municipal debt
financing
Advantages
Q Enjoys high public acceptability
Q Does not encumber tax base
Q Taps increasing interest of private firms in promoting an environmentally
conscious image
Q May create additional benefits in terms of building an "environmentally
conscious" bandwagon effect
Q Generally experiences few legal impediments, although care must be
taken to ensure that a public mandate does not unjustly convey a
particular benefit to a private party.
Disadvantages
Q May require considerable effort to identify prospective sponsors and
promote the concept
Q Requires the existence of one or more "hallmark" firm(s) that perceive
advantages in making the necessary investment
Q Makes it difficult to anticipate revenues
Q Requires on-going efforts to ensure that the sponsored projects make
meaningful contributions to the environmental quality of the estuary
Q May raise issues of favoritism or special treatment when developer
receives permits
-------
Figure ffl-7
Private Sector Funding:
Industry-Sponsored Initiatives Checklist
Key Feasibility Factors
Q Are there potential stakeholders who can identify their private interest
with estuarine environmental projects?
Q Promote an environmentally responsible public image
Q Pre-empt a potentially adverse regulatory action
O Do potential stakeholders have the necessary financial resources?
Q Financial strength
Q Expenditures on public image
Q V Are Acre needs mat can be met by projects undertaken by individual firms?
U Stormwater control trenches and basins
Q Wetland restoration
Q Agricultural run-off filter strips
Q Donations of equipment
Q Waterfront "housekeeping"
Q Can potential stakeholders be identified?
Q Pesticide/fertilizer manufacturers/distributors
Q Petroleum and chemical companies
1-1 Local public utilities ,
Major real estate developers
Timber/mining companies
Major agricultural firms
Regional trade associations of potential.stakeholders
Other pre-dominant employer in a region
Q
Q
Q
Q
Q
Q
Facilitating Activities
Q Undertake specific efforts to identify potential sponsors
Q Compile list of potential candidates
Q Make direct approaches to candidate firms
Q Develop inventory of priority projects
Q Have range of projects matched to potential resources of sponsors
a Tie projects to specific environmental quality objectives
Q Conduct extensive promotional efforts
Q Public environmental benefits
Q Private interest image benefits to potential sponsors
Q Availability of individuals who can "sell" concept
Q Organize ongoing cooperative efforts to publicize the achievements and promote
the efforts sponsored by firms
Q Identify specific donations with sponsor
Q Special plaques or citations
Q Ribbon-cutting ceremonies with local public officials
-------
Figure HI-8
Private Sector Funding:. Leasing
Applicability
Q Theoretically applicable for acquiring a wide variety of equipment,
facilities, services and property
*
Q Generally more applicable to small-scale capital acquisition. Large
projects may have prohibitive capital cost disadvantages
Advantages
Q Typically does not detract from debt capacity of municipal entity
Q Generally enjoys public acceptability if proper contracting procedures
are observed
Q Helps meet medium term capital requirements when funds are not
available out of current operating budget
Q Can generally be implemented using existing agency procurement
regulations
Disadvantages
Q Typically imposes higher capital costs than for municipal debt
Q Applies most often to standardized pieces of equipment
Q Requires a relatively complex procurement procedure for non-standard
items
Q Depends on availability of appropriate firms
-------
Figure m-9
Private Sector Funding: Leasing Checklist
Key Feasibility Factors
Q Are there small-scale needs?
Q Funds not available from current operating budget
Q Needed within short time frame
Q Can capital costs be established on an annual basis?
Q Are total capital requirements below the minimum threshold for
issuing municipal debt?
Q Are vendors available?
Q Can operating budgets support lease payments in future years?
Facilitating Activities
Q Obtain competitive bids from multiple vendors
Q Analyze reasonableness of annual lease rate versus benefits of
owning
-------
Figure ffl-10
Private Sector Funding: Fines or Negotiated Settlements
Applicability
Q Applicable to endow a wide range of environmental programs from
"opportunistic" sources of funding
Advantages
Q Can result in significant revenue potential from major lawsuits
Q Once established, trust organizations tend to attract funds from penalties
Q Enjoys high public acceptability based on the polluter pays principal
P Rests on well-established legal authority in environmental law in several
major programs. OPA and CERCLA require, by regulation, that
penalties be used for resource rehabilitation
Q Frequently encourages negotiated settlements
Disadvantages
Q Creates uncertain source and availability of funds
Q Requires extensive liaison with litigating agency and legislative bodies
(Q Subject to intense competition from other programs
Q Frequently requires legislation to establish targeted allocation of funds
-------
Private Sector Funding: Fines or Negotiated
Settlements Checklist
Key Feasibility Factors
I i , '
Q Is there a pending enforcement action that may result in a significant
fine or negotiated settlement?
Q NOAA
Q State Environmental Agencies
Q Citizen suits
Q Can fines and settlements be used for environmental restoration?
Q Arei legislative/litigant decision makers amenable to establishing a
iund specific to estuarine restoration/protection or CCMP
implementation?
Facilitating Activities
Q Conduct continuing efforts to track on-going litigation so that
opportunities may be quickly identified
Q Develop a program to utilize such funding opportunities when they
arise J
Q Priority list of fundable projects
Q Agency to administer endowment
Q If necessary, assist in developing enabling legislation for endowment
Q Coordinate with legislature and litigating agency to establish program
u Litigating agency
Q State legislature
Q Other parties potentially interested in adding funding, i.e., estates
tax check-offs, etc. -
Q Establish institutional arrangements for administering funds
Q Objectives of fund
Q Qualifying projects
.Q Authorized government agencies to utilize funds
Q Criteria for selecting projects
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IV.
NON-CAPITAL FINANCING
CCMPs frequently address critical habitat and nonpoint source problems stemming from
the impacts of development and other human activities in coastal areas, recommending such
solutions as increased public outreach and education and technical assistance to promote and
implement best management practices (BMPs), manage growth and development, and protect
habitat. These types of activities, though critical for protecting an estuary or watershed, are rarely
amenable for financing under the approaches discussed in Chapters H and m. Because the impacts
of human activities are often the overarching issue, this chapter focuses on strategies for financing:
growth management measures, including transfer of development rights, offsets, and
set-asides; and
conservation and restoration through donations and purchases of land trusts, easements,
and development rights.
Geographic information systems (CIS) can be extremely useful tools for developing
recommendations in these areas because of their ability to help identify and track ecologically
important parcels of land, holdings of undeveloped land, and trends in development. ^Such
information can be used hi conjunction with buildout analyses to determine the feasibility and
potential effectiveness of conservation or restoration recommendations hi the CCMP.
The flowchart in Figure TV-1 summarizes key issues in considering various growth
management measures and conservation strategies. While many of the approaches will work in any
situation, their effectiveness will vary significantly. Mechanisms to finance these types of CCMP
recommendations are compared in detail based on the key variables of cost, administrative
capabilities, and local growth rates. These discussions include both a summary of the advantages
and disadvantages and a checklist of factors relevant to each approach.
Growth Management Measures
Growth management can take three basic approaches: transfer of development rights
(TDRs); development fees and/or incentives; and zoning. This section focuses on TDRs and
practices to guide development, specifically offsets and set-asides. Although zoning is a basic
element of planning and growth management, it is not discussed here as a separate alternative
because of its technical and regulatory complexity, locally site-specific nature, and indirect
relationship to specific financing issues. However, it remains an important factor as either a source
of or a solution to problems in the estuary or watershed, and should be carefully considered during
CCMP development.
i
In general, growth management measures are complex and require significant local
administrative effort. Though the capital and start-up costs are typically much lower than
regulatory or land acquisition alternatives, they also show fewer immediate results. Further, they
are most effective in areas facing significant development pressures, and thus serve best to prevent
pollution or habitat degradation rather to restore an impaired resource. When conditions are
21
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appropriate, however, growth management measures can be among the most effective and
long-lasting approaches to protecting and preserving an estuary or watershed.
One of the biggest challenges in implementing growth management programs is in
identifying the areas to be restored or protected. This identification essentially adds new
dimensions to zoningsuch as habitat value, uniqueness, and the interaction and interdependency
between habitats and living resourcesand calls for expertise or additional skills that local
governments may not possess. Local land trusts, natural heritage groups, and similar conservancy
programs are often very willing to provide technical and financial assistance. The Conservation
Fund1, for example, offers natural resources assessment, viewshed analysis, and greenway
planning on request to landowners and public agencies through its Land Advisory Services. In
many cases, these lands of groups have developed inventories of critical local habitats and
projections of where and when future development will occur. This kind of information can be
essential for identifying areas hi need of protection, for recognizing opportunities as they arise, and
for establishing a technical basis for zoning decisions. It is also information suitable for entering
in GIS or other natural resource databases; such systems can improve many communities'ability
to guide their own development.
Transfer of Develppment Rights
Property owners typically hold a bundle of rights with their property, some absolute, some
conditional. Examples of property rights include rights to farm a piece of land, to use it for other
purposes, or to prevent trespassers from entering. A development right is the right to develop a
property subject to the land-use restrictions placed on it by appropriate authorities. Establishing
a system to transfer these development rights provides a market-based alternative to direct
acquisition.
Transfer of development rights (TDK) offers a means to maintain certain areas in
agriculture or open space, while steering development to other areas with the existing or projected
infrastructure to handle it. When zoning designates protection and development areas, landowners
in protection areas may sell their development rights to developers or owners in development
areas, who may use these purchased rights to build at higher densities than are allowed under
existing zoning. Advantages of TDRs are that:
« landowners can be compensated for protecting important areas; development can go
forward in less sensitive places, protecting the local economy and tax base;
» development rights cost much less than outright purchase, thus extending the ability to
protect sensitive land; and
existing compatible uses can continue.
All organizations mentioned in this chapter are identified for information purposes only. There is no implicit or explicit
endorsement or support of these organizations by EPA intended through these references.
22
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The major advantages and disadvantages of TDRs are listed Jn Figure IV-2. Although most
directly useful for habitat protection, TDRs can also be important as part of overall strategies to
control nonpoint source pollution in rapidly growing regions.
Several conditions are critical for implementing TDRs successfully. First, there must be
property owners of sensitive land willing to forego development of their property in return for
payment; this provides the supply of TDRs. Second, there must be some means to create a demand
for TDRs, for example, by requiring purchase of TDRs by developers seeking increased densities.
Conditions such as these are most likely to exist where significant growth and development are
occurring. Finally, qualified staff must be available to run the program, particularly with respect
to identifying sensitive lands. Because TDR programs rely on expertise and information similar
to that required for zoning, local zoning offices will generally offer a good organizational location
as well as the needed skills. Figure JV-3 is a checklist of key factors influencing the feasibility of
TDRs.
Offsets and Set-Asides
Offsets and set-asides do not seek to limit development per se, but rather seek to avoid its
negative effects. Offsets balance but impacts of development in one area by preserving or restoring
another; since development often is sought in environmentally sensitive areas, such as shoreline
buffer zones, the challenge is to make sure that the offset sites represent the same environmental
quality as the developed sites.2 Set-asides, on the other hand, typically reserve, or set aside,
sensitive lands on a property for preservation or restoration, while; allowing development on other
parts of the property, usually more intensively than would otherwise be permitted. Both of these
approaches offer long-term opportunities for habitat protection, habitat restoration, and control of
nonpoint source pollution.
Although offsets and set-asides both offer significant advantages in flexibility, offsets tend
to be implemented through regulations, while set-asides are more often incorporated in incentive
packages. Depending on local administrative capabilities and resources, the packages can be broad
or narrow, general and guiding or detailed and specific. Local governments have the option of
calling on conservation groups or other experts for technical assistance in establishing programs;
such groups often can serve as "mitigation bankers" for a project, acquiring property to replace
lost wetlands and wildlife habitat and implementing recommendations for set-aside uses or for
handling development in or near sensitive lands. Other services can include help in undertaking
sustainable development projects that blend environmental and economic goals.
By their nature, offsets that include restoration tend to produce immediate positive impacts,
while set-asides show results over the long term: The advantages and disadvantages of offset or
set-aside programs are listed in Figure IV-4. Both of these approaches, however, require high land
values and significant growth conditions in order to provide sufficient incentive for developers to
For example, see "Offsets: The Baltimore City Critical-Area Management Program," Mary G. Dolan, The Prospects and
Problems of Economic Instruments as Complements to the Chesapeake Bay Critical-Area Program. The Chesapeake Bay
Critical Area Commission, Annapolis, MD, 1987.
. - - . 23 ' .' '
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set aside land or to undertake the expense of an offset. This applies particularly for set-asides
because a typical incentive for removing property from development is a tax break on the reserved
land. Unless land values are significant, this incentive may not be adequate. The checklist in Figure
FV-5 identifies other factors influencing the feasibility of implementing an offset or set-aside.
Conservation and Restoration Measures
The goal of land conservation is generally to gain permanent control of at least some uses
of sensitive land so as to protect the ecological importance of the property, either by restricting or
precluding development or by limiting its impacts. This goal can be accomplished by outright
acquisition of the land or by acquiring conservation easements or development rights, all of which
can be undertaken by public entities or by private, non-profit organizations such as privately
financed land trusts.
Either land or easements can be obtained by purchase or by donation. In some cases,
revolving funds have been established to provide immediate financing for priority land
conservation projects. Such funds allow a property to be purchased immediately, while the
purchasing organization gains time to raise funds to repay the loan. A slightly different approach
is for the organization which operates the revolving fund to offer the land for resale to another
conservation organization or to the private market after establishing easements or other protective
mechanisms on the property. Another benefit of revolving funds is that they can make loans below
market rates and even take losses on the purchase and sale of land if there is some source of
ongoing funding, such as development fees or donations. Development fees typically sustain funds
operated by government agencies, while donations sustain private non-profit groups.
Land Trusts
Land can be acquired by public agencies or by private non-profit organizations, most
commonly land or environmental trusts. Land trusts are private non-profit organizations that
acquire, monitor, and care for sensitive lands such as wetlands, woodlands, critical habitats,
well-managed farmlands, and even scenic areas. Protection of such areas is often a major goal of
CCMPs. Land trusts can also acquire easements and development rights, establish parks or other
public use areas, and engage in public outreach and education. Each land trust establishes mission,
goals, and policies to suit its individual situation, available funds, and other factors, as long as the
activities do not prevent it from qualifying as a 501(c)(3) non-profit organization. This designation
is key to many small, local trusts' ability to raise* funds. In addition to their non-profit status, local
trusts also bring a neighborhood base to fundraising that maximizes participation and donations
from the community and enhances the credibility of CCMP goals.
In addition to their ability to protect land permanently, the greatest advantage of land trusts
is their wide range of activities and philosophies, from limited acquisition to high visibility
outreach and maintenance. For example, they can accept all property donations, regardless of the
sensitivity of the land, and use the proceeds from the sale of non-sensitive land to acquire sites for
which conservation is a priority. They can also choose to accept only high priority land and avoid
the administrative demands of trying to sell land as well as acquire it. On the other hand, trusts are
responsible for permanent care of the land they acquire, and their effectiveness can be limited by
24
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the donations of land, cash, and volunteer time they receive. Donations, in turn, depend to a high
degree on tax incentives and the trust's status as a 501(c)(3) organization. Figure IV-6 itemizes
this and other advantages and disadvantages.
The checklist in Figure IV-7 presents factors influencing the feasibility of successful land
trust operations. These include an appreciation in the local community of the need to protect
sensitive lands, and the availability of assistance, both financial and administrative, in meeting the
responsibilities of land ownership or management. A number of organizations can provide
assistance to public agencies and nonprofit organizations in addressing these issues:
« The Trust for Public Land (TPL) acquires land, especially for recreation, scenic
preservation, historic preservation, etc. Typically, the land is turned over to a government
agency, but TPL also acquires land temporarily until a local government or organization
has sufficient funds for the purchase. TPL also assists in the establishment of trust funds
and other funding mechanisms and offers workshops in public finance and innovative land
acquisition techniques and strategies.
The Conservation Fund forms partnerships with individuals, businesses, public agencies,
foundations, land trusts, and other conservation organizations to advance land and water
conservation. In addition to making gifts to public conservation agencies of scenic areas,
wetlands, and waterfowl and wildlife habitat, the Conservation Fund also assists public
agencies by acquiring property and then donating the property to them after they have
raised sufficient funds. .
The Nature Conservancy acquires critical habitats and operates nature preserves. They also
provide technical assistance with conservation easements, management agreements,
purchases (from their own revolving fund), and management partnerships.
The Land Trust Alliance provides technical assistance and maintains a directory of land
trusts, acting as central clearinghouse of information and providing guidelines, standards,
and practices for operating land trusts. .
The American Farmland Trust, focusing primarily on sustaining farmland in productive
agricultural use, offers information and technical expertise :and operates a revolving fund
for short-term purchases.
Conservation Easements and Purchase of Development Rights
Conservation easements encompass development rights along with other types of
easements. As in TDRs, this approach is based on the concept that it is not necessary to transfer
ownership of a property, but only to restrict certain uses. Under a conservation easement, the right
to develop a site in accordance with its highest zoned use is given up, in whole or in part,' in return
for certain financial and tax benefits. This separation of rights from the property is legally binding
is recorded along with the title and deed records, and is conveyed along with ownership of the
land. Conservation easements are not intended to be tradeable, and thus enjoy much more
flexibility to define specific rights and conditions. This makes it easier to tailor easements to the
: 25 . ' ,
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distinctive needs of property owners, who define the restrictions they wish to observe. The
principle is similar to owning land hi a development subject to legally binding covenants against
subdividing property.
Figure IV-8 lists the major advantages and disadvantages of conservation easements.
Although easements can be structured for a given period of time, as is done in the U.S.
Department of Agriculture's Conservation Reserve Program, easements generally must give up
development rights permanently hi order to qualify for tax advantages. This is primarily because
it is difficult to value fixed-period easements, such as a 10-year moratorium on developing a
property.
Easement donors can take advantage of three different tax benefits. First, the value of the
easement (defined as the difference in value between the land with and without development rights)
can be deducted from a donor's income for federal and state income tax purposes. Second,
property values are assessed on the consequent lower value of the land, thus reducing the owner's
property taxes. Finally, the land is subject to lower estate taxes when the land passes on to the
donor's heirs, an advantage particularly relevant when farmland is at issue. These tax advantages
can be significant hi higher growth areas where development pressures create a high value for
development rights and render purchase of such rights too expensive to undertake. In lower growth
areas, on the other hand, the value of development rights may be low enough that the property
owner would prefer to be paid for the rights because the tax advantages are so small, and the costs
might be low enough that the agency or organization coujd more easily afford a purchase. The
concept provides such flexibility that it can be employed almost anywhere.
One of the greatest challenges hi this approach is gaining the serious consideration of
donors. Materials to assist hi outreach and education programs are available from organizations
such as the Land Trust Alliance, hi addition, as with most of the methods discussed in this section,
it is essential to identify lands that are likely to provide the most environmental value. This is
particularly crucial hi purchasing development rights, which are not tradeable and whose purchase
price is not likely to be recovered. Because donations create a monitoring responsibility, moreover,
it is also important to focus the resources on critical areas. CCMPs frequently provide this kind
of information, typically identifying critical areas and those needing special management. These
and other necessary conditions for a successful conservation easement program are shown in the
checklist hi Figure IV-9. General information on the purchase of development rights and obtaining
conservation easements can be obtained from the Land Trust Alliance and the American Farmland
Trust.
Summary of Non-Capital Financing Mechanisms
The appropriateness of non-capital projects for implementing specific CCMPs depends on
many factors and local conditions, of which the nature of the threats to the estuary or watershed
is only the first consideration. Other variables to be considered in selecting among these
approaches include the level of knowledge, expertise, and administrative capability of local
government; the local growth or development rate; the relative costs of alternatives, particularly
the tradeoffs between start-up or capital costs and ongoing administrative costs; expectations about
environmental improvements; and the urgency with which results are heeded. Figure IV-10
26
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summarizes potential funding sources for each non-capital approach, along with examples of
specific financing tools.
Two of the most important variables in selecting a course of action to implement CCMP
recommendations are the local rate of development and the administrative capability of the local
authority (i.e., the current availability of administrative resources). Although the impacts of these
variables on project and financing selection are difficult to quantify, Figure IV-11 depicts the
relative importance of each of these factors to the successful functioning of principal non-capital
activities. For instance, implementation of a successful TDR program requires both a high rate
of growth and high .level of administrative capability to handle the complexity of such a program
In contrast, land acquisition works well where there is a low growth rate, and it does not depend
on extensive administrative capability. Public outreach and education are not included in the graph
because they are more easily tailored to reflect the conditions and resources available.
'''
Choosing among the variety of alternatives available to promote habitat conservation and
nonpoint source pollution control frequently involves tradeoffs between the initial, or capital costs
and recurring costs. Figure IV-12 shows the relative initial and ongoing costs for various
approaches. A TDR program, for example, imposes relatively low start-up costs but its
administrative costs are substantial. Land acquisition, on the other end of the scale, has very large
capital costs up front, but is relatively inexpensive to maintain once the land has been acquired
Activities such as implementation of best management practices and public education and outreach
are flexible in this regard; substantial funds could be spent initially to develop materials and could
also be spent on an ongoing basis to maintain a high level of activity, but a high level of spending
is not typically a necessity.
Figure IV-13 compares the available approaches in relation to initial or start-up cost (to
government) and the speed with which results might be seen. Generally, the alternatives which are
focused on future development action have a long-term impact and relatively little immediately
visible success, but they also require relatively low start-up funds. The timing of impacts from
these alternatives is dependent on the growth rate.
27
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Figure IV-2
Growth Management Measures: Transfer of
Development Rights
Applicability
Q Useful for fostering habitat protection and nonpoint source pollution
control by reducing development of sensitive lands
Advantages
Q Offers incentive for voluntary land preservation
Q Provides reimbursement for the loss of development potential on a
property
Q Guides development into areas where it is desirable and can be
accommodated
Q Sets up conditions for long range/lasting impact
Q Utilizes a market mechanism, therefore low startup/capital cost to the
local government
Q Can be tied to existing zoning office and staff
Q Can be financed, in part, through development fees or real estate transfer
taxes
Q Implements a tried and proven technique
Disadvantages
Q Imposes administrative tasks and requires extensive administrative
resources
Q Requires technical expertise to designate receiving areas
Q Shows results slowly
Q Requires sufficient number of persons willing to forego development of
their property, although they will receive payment for it
-------
Figure IV-3
Growth Management Measures: Transfer of
Development Rights Checklist
Key Feasibility Factors
Q Is there a high level of administrative capability in local government?
P Zoning /planning staff
Q Permitting staff
P Is significant growth occurring?
P Housing
. P Industrial
P Population
P Changing land uses
Q Is local anti-growth sentiment evident, possibly including
Q Pressure for strict zoning
P Petitions to local elected officials
P Public support
P Does local government have adequate authority to implement
programs? . -
P State laws in place allow or do not prevent TDRs
P Local ordinances to establish system
P Does local government have the ability to obtain and maintain staff?
P Is political will evident to enforce diversion of development to
designated areas?
-------
Figure IV-4
Growth Management Measures: Offsets and Set-Asides
Applicability
Q Useful for habitat protection, habitat restoration, and nonpoint
source pollution control; works best in high growth areas with cooperation
among developers, government, and the public
Advantages
Q Applies to a wide range of situations, accommodating various levels of
administrative effort
- regulation
growth and development
Q Offers flexibility to be established as incentive or regulatory programs
Q Promotes preservation and/or restoration
Q Can be structured to fit the government funds available
Q Offers incentive for voluntary land preservation
Q Has jboth short-term, immediate impact and long-term impact
Q Can be tied to existing zoning office and staff
Q Can be financed, in part, through development fees or real
estate transfer taxes
Q Is particularly effective for creating or preserving buffer zones
Disadvantages
Q Requires an appropriate balance between regulation and incentive
Q Can be complex to administer, especially in determining incentive levels
and set-aside requirements
Q Does not show immediate results
Q Relies partly on tax situations to determine value of incentives
Q May reduce property tax collections as a result of reduced land values
of set-aside land, although development should more than offset such
reductions
Q May allow development of some sensitive land
-------
Figure IV-5
Growth Management Measures: Offsets and
Set-Asides Checklist
Key Feasibility Factors
Q Can local government accommodate moderate additional
administrative efforts?
Q Zoning or planning staff
Q Permitting staff
'Q
Are there development pressures in or near sensitive areas?
Q Is significant growth occurring?
Q Housing
Q Industrial
Q Population
Q Developed land
Q Does local population understand issues and desired outcomes?
Q Does local government have adequate authority to implement
programs?
Q State laws in place allow or do not prevent offsets
Q Local ordinances to establish system
Q State repognizes donations of easements for tax purposes
Q Does local government have ability to obtain and maintain staff?
-------
Figure IV-6
Conservation and Restoration Measures: Land Trusts
Applicability
Q Can be employed anywhere, but most useful for habitat protection or
watershed protection and in lower growth areas where land prices are
p«w» are
more accessible
Advantages
Q Protects land permanently
Q Provides tax incentives, such as deductability of donations from income
taxes and reduced or zero property taxes
Q Has many sources of assistance
Q Offers flexibility to be scaled to meet goals of the local community
U Offers faster process to acquire sensitive land as it comes on the market
U Can be part of a broader strategy beyond simple land acquisition
Q Can take advantage of loans provided by some national organizations
U Can make advance acquisitions for government agencies for properties to-
be purchased by the government pcruesro
Q Generally does not require any government action such as new laws or
ordinances
Disadvantages
Q Creates burden of managing land
Q Does not show immediate results because land purchases are limited bv
available funds y
Q Relies on donations and voluntary participation to a very high degree
Q Requires CIS-type system to identify and track ecologically important
properties for most effective implementation of strategic program
-------
Figure IV-7
Conservation and Restoration Measures: Land Trust
Checklist
Key Feasibility Factors
Q Does local population understand issues and desired outcomes?
Q Are local volunteers willing to set up and run a land trust?
Q One primary organizer and leader
Q Additional assistance in outreach and education regarding what
the land trust is and how it works
Q Fund-raising
Q Legal assistance for real estate transfers
Q Have sources of assistance been identified and contacted about
Q Legal aspects and requirements of organizing?
Q Outreach, education, and fund-raising ideas and/or materials?
O Is funding available to start up the organization?
Q Donations
Q Endowments
Q Government grant or loan from revolving fund
Q Loan from national conservation-organization
Q Are means available for identifying sensitive lands?
Q Local government
Q National organizations
Q Expert volunteers
Q Is there a means to track sensitive lands?
Q GIS system
Q Database of ownership
Q Do potential acquisitions help implement or complement CCMP
recommendations?
-------
' Figure IV-8
Conservation and Restoration Measures:
Conservation Easements and Purchase of Development
Rights
Applicability
Q Most useful for habitat protection or watershed protection. Purchase is
favored in lower growth areas, while donations may be favored in
higher growth areas and by higher prices, but can be employed
anywhere
Advantages
Q Allows the property owners to retain ownership of the land along with
the property rights they want to keep
Q Can protect land permanently or for set period of time "
Q Offers tax incentives such as deducibility of donations from federal
income taxes and reduced property taxes
Q Can be used to reduce estate taxes
Q Costs less than acquiring land outright *
Q Offers maximum flexibility ~ each easement can be drawn up to match
the specific aspects of the property, the property owner's wishes, and the
goals of the acquiring group
Q Has several sources of assistance for all aspects
Q Can be scaled to meet available funding and volunteer efforts
Q Can be carried out by government agency or private non-profit group
Q Provides mechanism to acquire properties for subsequent purchase by
public agencies
Disadvantages
Q Can be very expensive in high growth area
Q Creates burden of monitoring land to assure compliance with easements
Q Results accrue over a relatively long period of time because purchases
of development rights are limited by available funds
Q Relies on donations and voluntary participation to a high degree
Q Requires government action at state and local levels to provide tax
benefits
Q Restricts most tax benefits to permanent conservation easement
-------
Conservation and Restoration Measures:
Conservation Easements and Purchase of Development
Rights Checklist
Key Feasibility Factors
Q Does local population understand issues and desired outcomes?
Q Is the effort conducted through a public agency or a private
non-profit foundation?
Q Is legal assistance available for structuring the easements and
ensuring compliance with necessary tax laws, so that property
owners receive benefits?
Q Have sources of assistance been identified and contacted about
outreach, education, and fund-raising ideas and/or materials?
Q Is funding available to start up the program?
, Q Donations
Q Endowments
P Government grant or loan from revolving fund
Q Loan from national conservation organization
Q Is funding available for maintaining the program, monitoring the
easements, etc.? &
Q Are means available for identifying sensitive lands?
Q Local government
Q National organizations
Q Expert volunteers
Q Is local land trust interested in participating in these efforts?
Q Local volunteers are willing to assist in the program
Q Fund-raising
Q Is information available on critical areas?
Q Do possible acquisitions help to implement or complement CCMP
recommendations?
-------
Potential Funding Resources for Non-Capital CCMP
Recommendations
Approaches
Sources
Developers
Polluters
Beneficiaries/
Users
Property Owners
3
Government
General Fund
Contributions &
Volunteerism
3
3
3
. 3
3
3
3
Best management practices
/*
* Transferable (or tradeable) development rights
3
Examples of
Financing tools
Real estate
transfer fees;
development/
irmit fees
-
Property use
taxes; fertilizer
taxes
User fees
Property taxes;
real estate
transfer fees
General income
and sales taxes
Land donations
TDRs require some property owners to trade or sell their development rights
Key: = Funding source is fully applicable to or necessary for approach
3 = Funding source can provide partial funding or has limited applicability
-------
Figure IV-11
Requirements Under Various Approaches: Growth Rate
and Administrative Capability
Preferred local conditions for approaches to be successfully implemented
Fast
Growth
Development
and Growth
Rate
Slow
Growth
Limited
Development
Best
Management
Practices
Administrative
Capacity
Extensive
^Transferable (or tradeable) development rights
-------
Figure IV-12
Relative Capital and Administrative Costs
Under Various Approaches
\ . '
Costs incurred by local government in implementing CCMP
recommendations
Capital or
Initial Cost
Land
Trust
Conservation
Easements
Best
Management
Practices
Limited
Development
Administrative
or Annual Cost
$/year
^Transferable (or tradeable) development rights
-------
Capital or
Initial Cost
to Local
Government
Immediacy of Impact vs. Initial Cost
Under Various Approaches
$
Conservation
Easements
Limited
Development
Best
Management
Practices
Immediate
Delayed
Timing of Impact
transferable (ortradeable) development rights
-------
-------
V.
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