TD746
.U541
X-/EPA
United States
Environmental Protection
Agency
Office of Water and Waste
Management
Washington, D.C. 20460
January 1981
c, /
1990
PRELIMINARY DRAFT
STRATEGY FOR MUNICIPAL
WASTEWATER TREATMEN1
OOOR81101
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PRELIMINARY DRAFT 1990 STRATEGY FOR
MUNICIPAL WASTEWATER TREATMENT
TASK I - FUNDING STRATEGY
OFFICE OF WATER AND WASTE MANAGEMENT
U.S. ENVIRONMENTAL PROTECTION AGENCY
"This paper presents a preliminary draft
strategy, proposed by EPA staff, for
improving the national municipal waste-
water treatment program. EPA is now
considering the positions offered here.
The document is intended for public
review and discussion to assist EPA
in developing its final 1990 Strategy."
January 16, 1981
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Fnvlronnvntnf Pm
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PREFACE
The proposals presented in the preliminary draft Funding Strategy
(Task 1 of the 1990 Strategy) are the result of both a major effort
within the U.S. Environmental Protection Agency and extensive participa-
tion on the part of the interested public through meetings and the
distribution of relevant issue and background papers prepared by EPA.
Some of the recommendations in the draft represent a compromise among
diverse positions of various constituents of the program. Further
refinement of those recommendations will continue through public
participation and ongoing agency policy review as the draft strategy
is put in final form.
In developing the draft Funding Strategy, recommendations were
based on an assumption of continued federal funding support. Given
current economic conditions and calls for budget constraints, Congress
and the Administration may determine that program funding should be
reduced. Substantial changes in funding levels would require
re-evaluation of some of the recommendations as well as reconsideration
of the timetable for achieving the Clean Water Act goals. In light of
continuing review of these issues, the draft Funding Strategy provides
an analysis of a wide range of funding options in addition to those
recommended.
Several of the recommendations in the preliminary draft Funding
Strategy will depend on Congressional action for their implementation;
others will require the amendment of existing regulations for their
accomplishment; and some can be accomplished simply by administrative
action by EPA or other federal agencies. In developing a final 1990
Strategy and an action plan for its imlementation, EPA will work
closely with Congressional staffs, other federal agencies and the widely
varying constituents of the Construction Grants Program to insure that
the future course charted for the program is a workable and effective
means to achieving the goals of the Clean Water Act.
The 1990 Task 1 Funding Strategy draft was prepared by an EPA Task
Force within the Office of Water and Waste Management. Assistance to
EPA staff in this effort was provided by Temple, Barker and Sloane, Inc.
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CONTENTS
I. INTRODUCTION 1
The 1990 Strategy Study 1
11. EXECUTIVE SUMMARY 3
Objectives 3
Assumptions 3
Current Funding Policies 3
Types of Projects Funded 4
Geographic Funding Patterns and Community Size 4
Major Funding Issues 4
Goal s 5
Policies 5
Recommendati ons 5
III. BACKGROUND ON THE CONSTRUCTION GRANTS PROGRAM 9
Historical Perspective on the Construction Grants
Program 9
Current Funding Policies 10
Types of Projects - Remaining Needs and Past and Future
Fundi ng 15
Geographic Patterns and Community Size - Remaining Needs
and Past Funding 25
Local Cost Impacts 33
IV. MAJOR FUNDING ISSUES 39
Effectiveness Issue 39
Equity Issue n
Efficiency Issue 42
Local Financial Capability Issue 43
Implementation Considerations 44
V. AVAILABLE OPTIONS 47
Eligibilities 47
Change in Federal Share 58
Change State Priority Systems 62
Responsibility for Priority System 63
Alter the Allotment Formula 67
Changes in Funding Mechanisms 71
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VI. ALTERNATIVE STRATEGIES BASED ON PREFERRED OPTIONS 77
Description of Strategy Elements 77
Evaluation of Strategic Alternatives 80
Secondary Opti ons 84
VII. SUMMARY AND PROPOSAL 91
GoalIs 91
Policies 92
Funding Policy Recommendations 94
Federal Share 101
State Priority System 101
CSO/Urban Run-off Strategy ! °2
Funding Implications of Inflation 102
Allotment System 103
Fundi ng Mechani sm ^3
Set-Aside Programs 104
VIII. ACTION PLAN.
105
Federal Funding Under Delegation 105
Federal Funding Under Water Quality Management Plans 105
Legislation Package '°5
Regulations 1°6
Guidance , l06
Long-Range Issues 1 °6
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CHAPTER I
INTRODUCTION
In spite of many successes, the construction grants program
currently faces a number of challenges, including the prospect of
an erosion of funding and political support. Moreover, funding
requirements greatly exceed expected appropriations; municipalities
complain about a lengthy and complex process; many completed projects
do not meet required standards; and widespread improvements in water
quality as a result of construction grant expenditures are difficult
to demonstrate. These problems, combined with the prospect of a
new decade with a changing political climate, have prompted EPA
to undertake a wide-ranging study of the construction grants
program.
THE 1990 STRATEGY STUDY
The study, referred to as the 1990 Construction Grants Strategy,
is a major review and reassessment of the municipal construction
grants program. The strategy examines what is to be accomplished
by 1990 and what steps (administrative, legislative, etc.) are
necessary to accomplish those goals. The study is divided into
five major task areas: funding, management, operations, compliance,
and planning. A strategy document for each area is being prepared
which identifies relevant problems and issues, enumerates and
evaluates options for dealing with those problems, and describes
EPA's tentative position on the preferred options in each topic area.
In developing the strategy papers, EPA Headquarters and
Regional staffs are drawing upon their vast experience with the
construction grants program. In addition, EPA is receiving extensive
input from interest groups, including environmental, rural, engineering,
municipalities, states, and labor interests. Analysis of the strategies
will continue within EPA and in the public review arena as part of the
public participation process. The public review will include two
three-day workshops in November, at which time participants repre-
senting interests such as those listed above will discuss particular
aspects of the overall strategy.
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CHAPTER II
EXECUTIVE SUMMARY
OBJECTIVES
The funding strategy paper is intended to serve as the basis for
discussions that will lead to the development of a comprehensive
funding strategy for 1990. Its major functions are to identify
problems, analyze issues, examine priorities, compare alternatives,
and discuss possible funding strategies for the next decade. The
funding portion of the overall strategy seeks to develop a plan that
will maximize progress toward the goals of the Clean Water Act.
Considerations include near-term priorities, long-term goals,
and funding mechanisms.
ASSUMPTIONS
The consideration and debate concerning possible construction
grants funding strategies require a few assumptions to provide a
context for the discussion. It has been assumed that Congressional
appropriation levels will be similar to historical levels. This
translates to a level of $4.0 billion per year (in 1980 dollars)
for the 1980-1990 period. Moreover, to provide additional definition
and discipline to the discussion, it is assumed that a time frame to
conclude the grant funding program as currently structured must be
established.
CURRENT FUNDING POLICIES
The construction grants program represents federal efforts to
improve the quality of the nation's waters through the construction
of publicly owned wastewater treatment plants. Under this program,
municipalities are eligible for 75 percent grants which meet, at a
minimum, secondary treatment standards. The program also awards
grants for conveyance systems and related needs, as well as for the
control of combined sewer overflows (CSO).
The funds are dispersed to states according to an allotment
formula. The states then rank eligible projects according to their
own priorities. States must reserve, or set aside, two percent of
their alloted funds for innovative or alternative treatment
technologies which are eligible for an 85 percent federal grant.
Rural states, in addition, must reserve four percent of their
allotment for use by communities under 3,500 population. The
program also recognizes the value of multiple-purpose projects
which combine wastewater treatment with the achievement of other
environmental goals, and funds these projects according to the
costs of the various project purposes.
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TYPES OF PROJECTS FUNDED
Since 1972, the program has awarded roughly 25.5 billion dollars
in grants, 7.5 billion of which was awarded in 1978 and 1979. Of the
7.5 billion, 53 percent funded treatment needs, almost 38 percent was
devoted to conveyance-related needs and the remainder was used for
control of CSO problems.
The latest survey of remaining needs conducted in 1980 indicates
that $119 billion worth of projects are yet to be funded. Roughly
29 percent of the total is for treatment projects with conveyance-
related and CSO projects accounting for 40 percent and 31 percent
respectively.
GEOGRAPHIC FUNDING PATTERNS AND COMMUNITY SIZE
The funds obligated to date correlate closely with regional
population levels and identified treatment system needs, two major
components of the federal allotment formula. Some disparity, however,
exists between the total number and size of grants awarded and size
of community. Communities under 5,000 population are especially
affected, receiving only 55% of the number of all grants awarded
even though they represent 80% of all communities nationally.
Also, they receive only 12% of the dollar value of all awards,
although containing 31% of national population.
MAJOR FUNDING ISSUES
Effectiveness Issue
Funding policies should be modified so that the construction
grants program can contribute more effectively to achieving the
goals of the Clean Water Act.
Equity Issue
There are some inequities in current funding policies which
impact small and large communities differently, and other inequities
which will arise if the program is modified.
Efficiency Issues
The current funding distribution system should be improved to
maximize efficiency in obligating funds to projects ready to proceed.
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Local Financial Capability Issue
Federal funding programs should be designed to ensure: (1) that
local communities are capable of funding required sewerage cost, and
(2) that local communities have the ability and incentive to operate
POTW's on a self-sustaining basis following the first round of EPA
grants.
GOALS
To reach, "wherever attainable", a water quality that "provides
for the protection of fish, shellfish, and wildlife" and "for
recreation in and on the water," by 1990.
To maximize the recycling and recovery of water and wastewater
components consistent with sound environmental practice, public health,
energy and economic constraints.
Publicly owned treatment works (POTWs) are to achieve "best
practicable waste treatment technology (BPWTT) by the date established
in their NPDES permits. Extensions beyond July 1, 1983 should be
allowed on a case-by-case basis, if consistent with State management
plan.
POLICIES
To provide federal financial assistance for planning, design,and
construction of POTW's.
To prohibit the discharge of toxic pollutants in toxic amounts.
To ensure the operation of POTW's in compliance with permit
conditions and to establish economically self-sustaining operations
which will not require additional federal funding.
To recognize, preserve and protect the primary responsibilities
and role of the States to prevent, reduce, and eliminate water
pollution.
RECOMMENDATIONS
Direct funds to States, who will be required to develop a funding
and management plan by 1982 showing how they will meet the water
quality goals of the Clean Water Act. In making this plan,
projects will be prioritized according to their anticipated
water quality impacts.
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For effluent limited receiving waters, expand the definition of
secondary treatment to include trickling filters where water quality
is not adversely affected.
For water-quality limited receiving waters, funding of projects
should be linked to the demonstration of attainable water quality
goals. Comprehensive before and after stream monitoring should be
done for all of these projects.
Fund collection systems for communities of 3,500 population or
less, or for larger communities where necessary for the integrity
of the treatment works in order to meet the enforceable require-
ments of the Act. FmHA should provide assistance for collector
systems for small communities in the form of an expanded loan
program. Similarly, interceptors should be funded when necessary
for the integrity of a treatment system being funded in order to
alleviate existing pollution problems.
t Reserve capacity should be funded according to current guidelines,
but when funded, a financial plan outlining long-term planning
to finance rehabilitation and expansion would be required. A
water conservation program should be encouraged to increase the
time before expansion is necessary.
Fund rehabilitation only for projects which will contribute
significantly to improving inflow/infiltration problems. Rehabili-
tation of aging infrastructure of older inner cities should be part
of Urban Strategy administered by the Department of Housing and
Urban Development (HUD).
Expand Step I planning eligibilities and modify conditions for
grantee eligibility.
Modify the existing multi-purpose funding policy to the 115 percent
option.
t No federal program is recommended for subsidizing low income
households. EPA should work closely with State and local
governments to explore possible State or local assistance options
for mitigating the impacts of cost increases upon low income
families.
Eliminate funding for second-round grants.
t Continue the recently passed option which allows States to
establish a lower federal share for all projects within the
State.
States should maintain control and responsibility for the
overall priority system and priority list. Through a water
quality management strategy States should orioritize projects to
be funded in order to meet water quality goals and complete
the municipal construction program. The State priority system
should be in conformance with the State management strategy.
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Retain the current allotment formula. The FY 82, 83 formula should
be based on the 1980 State population and 1980 State Needs Survey.
Adopt a two-tier appropriation to provide incentive of additional
funds to States ready to proceed.
Investigate with Congressional staff, the feasibility of establish-
ing a loan or loan guarantee program.
Maintain a one percent set-aside program for innovative projects
but eliminate any special account for alternative projects.
Modify the project eligibilities in the rural set-aside program.
Develop, refine, and implement a combined CSO/Stormwater Strategy.
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CHAPTER III
BACKGROUND ON THE CONSTRUCTION GRANTS PROGRAM
In order to consider possible funding strategies for the construction
grants program, it is necessary to understand the program's developments,
its accomplishments to date, and its current status. This chapter provides
a background on the construction grants program in the following sections:
Historical perspective of the construction grants program,
Current funding policies,
Types of projectsremaining needs and past and future
funding, and
Geographic patterns and community sizeremaining needs
and past funding.
HISTORICAL PERSPECTIVE ON THE
CONSTRUCTION GRANTS PROGRAM
The construction grants program receives its authority from the
Clean Water Act (P.L. 92-500, passed in 1972) and subsequent amendments.
The Act seeks to "restore and maintain the chemical, physical, and
biological integrity of the Nation's waters." This legislation is
the basis for most of EPA's water pollution control activities,
including effluent guideline limitations for industries, non-point
source programs for areawide activities and the funding of Regional
water quality management plans. In addition, the construction of
publicly owned treatment works (POTWs) to eliminate municipal
discharge of untreated or inadequately treated pollutants is a
major focus of effort under the Act.
The objective of the construction grants program is to encourage
nationwide construction of sewage treatment facilitiesa major
step toward the clean water goals of the Act. The following goals
for the grants program are specified by the Act:
Achieving nationwide secondary treatment by 1977-1978
(extension to 1983 possible),
Achieving best practicable wastewater treatment
technology (BPWTT) by 1983, and
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Achieving fishable and swimmable waters where possible.
The grants program provides the financial means by which these goals
can be accomplished. Simply stated, the construction grants program will
provide up to 75 percent of eligible project costs for conventional
treatment systems and 85 percent for systems employing innovative and
alternative wastewater treatment methods. The program therefore provides
both incentive and assistance to communities seeking to comply with water
quality standards.
As of June 30, 1980, $31.6 billion has been appropriated by Congress
under this program, of which $26 billion has been obligated by EPA in
over 19,000 grants to communities. Available funds since 1973 as well
as obligations and outlays are shown in Exhibit III.l. Approximately
2,100 plants representing a value of $2.6 billion have been completed.
It is important to note that P.L. 92-500 is not the first effort in
this area; during the 1956-1972 period, prior to the passage of 92-500,
P.L. 84-660 provided assistance to 13,764 projects in the amount of
$5.2 billion. Despite this effort, the 1980 Needs Survey reported a
remaining eligible need of $118.7 billion, exclusive of the cost of
stormwater controls.
CURRENT FUNDING POLICIES
The construction grants program operates under procedures and policies
covering a myriad of issues. In an effort to provide further background
on the program, the subsequent sections outline current policies covering
the following major topics:
Eligibility policy and the Needs Survey,
State priority lists,
The allotment formula,
t The rural set-aside,
The innovative and alternative set-aside, and
Multiple-purpose projects.
Eligibility Policy and the Needs Survey
The Agency currently funds 75 percent of most eligible project
costs and 85 percent of innovative and alternative projects.
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EXHIBIT 11 I.I PUBLIC LAW 92-500 AND SUBSEQUENT
AMENDMENTS: OBLIGATIONS AND OUTLAYS' (IN DOLLARS)
Fiscal Year Authority Allotments Obligated (Each FY) Outlays
1973a
1974
1975
1976b
5,000,000,000
6,000,000,000
7,000,000,000
0
2,000,000,000
3,000,000,000
4,000,000,000
9,000,000,000
1,532,048,571
1,444,443,360
3,616,168,130
4,813,639,424
0
158,861,688
874,158,134
2,563,497,940
1977C 1,480,000,000 1,430,000,000 6,663,832,006 2,710,444,759
1978 4,500,000,000 4,500,000,000 2,300,916,959 3,612,400,000
1980 5,000,000,000 3,400,000,000 1,765,000,000 3,274,100,000d
^Does not include reimbursable funds.
Contract authority.
blncludes transition quarter (July-September 1976).
^Includes $480 million under Public Works Employment Act.
"Includes reimbursable and old law projects.
Source: Clean Water Fact Sheet, July 1980.
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Wastewater treatment may encompass a number of facilities, but at the
present time, .federal grants will only fund certain types of activities.
Eligible needs are broken down into the following categories and are
enumerated every two years in the Needs Survey:
Category I--SECONDARY TREATMENT. This category includes- those
facilities that are required to provide "secondary treatment" or "best
practicable wastewater treatment technology" (BPWTT). Systems designed
to serve individual residences are also included in this category.
Also included in category I is the cost of treatment necessary to'raise
the treatment level of facilities from primary to secondary.
Category IIHIGHER THAN SECONDARY TREATMENT. This category
includes treatment facilities that must achieve treatment levels more
stringent than that afforded by secondary treatment. Requirements for
these treatment levels generally exist where water quality standards
require the removal of such pollutants as phosphorus, ammonia, nitrates,
or organic and other substances.
Category IIIACORRECTION OF INFILTRATION/INFLOW. Included in
this category are the costs of correcting sewer system infiltration/
inflow problems. Needs could also be reported for preliminary sewer
system analyses and for detailed sewer system evaluation surveys.
Category IIIB--MAJOR REHABILITATION OF SEWERS. Requirements for
the replacement and/or major rehabilitation of existing sewer systems
are reported in this category if the corrective actions are necessary to
the total integrity of the system. Major rehabilitation is considered to
be extensive repair of existing sewers beyond the scope of normal main-
tenance programs, where sewers are collapsing or structurally unsound.
Category IVANEW COLLECTOR SEWERS. This category includes the cost
of constructing new collector sewer systems and appurtenances designed to
correct violations caused by raw discharges, seepage to waters from septic
tanks and the like, and/or to comply with federal, State, or local actions.
Category IVB--NEW INTERCEPTOR SEWERS. Included in this category are
costs for new interceptor sewers and transmission pumping stations
necessary for the bulk transport of wastewaters.
Category VCONTROL OF COMBINED SEWER OVERFLOW. Facilities to prevent
and/or control periodic bypassing of untreated wastes from combined sewers
to achieve water quality objectives are included here; treatment and/or
control of storm waters in separate storm and drainage systems are not.
At present, facilities are funded by EPA based on cost-effectiveness
reserve capacity with a maximum 20-year reserve capacity, and advanced
wastewater treatment and advanced secondary treatment (AWT and AST)
projects require justification on a water quality basis.
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State Priority Lists
The Clean Water Act requires the development of an inventory of all
needed wastewater facilities by each State. The Act further requires
each State to develop a system for assigning a priority to wastewater
treatment projects and, in turn, to use this system for ranking all
such projects within the State. As originally envisioned, it was
expected that these requirements would result in the development of a
priority listing of all needed wastewater treatment facilities. Based
on this "priority listing" and the amount of funds allocated to a State
each year, an "imaginary funding line" was to be drawn below the last
project for which funds were available in a given year. This process
was to be repeated each year until all such wastewater treatment needs
were satisfied.
In fact, priority systems as actually developed are methodologies
for the selection of projects for funding; they are not strictly used to
determine the relative importance of a particular project on an
environmental basis. Reasons for this include the provisions that funds
not obligated will be subjected to reallotment, the fact that projects
must go through rigorous review and public participation activiti.es, and
the fact that a specific amount of funds must be directed to certain
types of projects or geographic areas. In addition, enforcement actions
against municipalities will move systems up on the priority list (this
is the philosophical underpinning of EPA's municipal enforcement strategy).
Even after the priorities have'been decided, in practice "bypass procedures"
are frequently used to fund ready-to-proceed projects, that may be lower
in priority, in order to use up allotted monies.
Section 126 of the Act provides that each State shall be solely
responsible for determining the priority to be given each category of
projects within the State. EPA participates in the development of the
priority systems, but not in the actual positioning of specific projects.
In the past EPA has had a more direct influence on the priority lists.
In the 1977 amendments, however, Congress reaffirmed the States'
responsibility in that area. At present EPA's influence on specific
projects exists only through "jawboning."
The Allotment Formula
The share of each year's Congressional appropriation for which
each State is eligible is described in the Clean Water Act itself
(Section 205). Though the specifics of the allotment formula have
changed over time, the basic factors remain the same. The state share
is based on the portion of national needs in certain categories applicable
to that State (based on the biannual Needs Survey), and the population
of the State. Moreover, each State must receive at a minimum 1/2 of 1
percent of the total funds allotted; and Guam, Virgin Islands, Samoa,
and the Trust Territories shall not receive in sum more than 1/3 of 1
percent of the total funds allotted.
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Funds allotted to States remain available for obligation to projects
for two years. After that period, the funds are reallotted to those
States that have obligated all their funds (the reallotment is on the
same relative basis as the original allotment).
Currently, a rather complex allotment formula is in force. The House
and Senate arrived at slightly different versions of the allotment formula
for FY78 and FY79, each giving different relative emphasis to various needs
categories (the Senate giving preference to categories I, II, IIIA, IVB,
and V; the House giving preference to categories I, II, and IVB) and
population (high priority in the Senate, low priority in the House). The
resulting compromise formula calculates the amounts a State would receive
under the Senate version and under the House version and then averages
that amount. The result is a slightly heavier emphasis on needs than on
population. The minimums for States and Territories remain in effect.
The Rural Set-Aside
Over 53 million Americans live in small, rural communities; of these
rural Americans, over 2.4 million lack adequate sewage disposal and
treatment facilities. Of 1978 total estimated national needs of $106
billion for sewage treatment facilities, it is estimated that $23 billion
(or 1/5) of these needs occur in communities of less than 10,000 population.
Yet while the pollution problem facing a small, rural community may be
pressing, the community's position on a State priority list may be so low
as to preclude for many years a solution through the use of a federal
construction grant. Moreover, rural communities often lack the financial
resources or expertise necessary to complete a sewage treatment project
on their own.
Beginning in FY79, rural States (i.e., States with at least 25 percent
of the population qualifying as rural) were required to set aside 4 percent
of their allotments for alternative and unconventional systems to be used
in communities with a population of 3,500 or less, or highly dispersed areas
of larger communities. At present there are 34 such States. In addition,
States not strictly defined as rural may request the Administrator to set
aside, in a similar manner, up to 4 percent of their allotted funds (two
States have done so to date). In addition, 205(g) monies are available
to be used in rural initiatives.
The Innovative and Alternative (I/A) Set-Aside
Section 201(g)(5) of the Clean Water Act of 1977 requires all facility
plans initiated after September 30, 1978, to consider innovative and
alternative technology for municipal wastewater treatment in order to meet
the national goals of (a) greater recycling and reuse of water, nutrients,
and natural resources; (b) increased energy recovery and conservation, reuse,
and recycling; (c) improved cost-effectiveness in meeting specific water
quality goals; and (d) improved toxics management. The Act also requires
EPA to set aside a percentage of the State allotment (2 percent in FY79
and FY80 and 3 percent in FY81) and to increase the federal share of grants
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for I/A processes from 75 percent to 85 percent. Moreover, the Act provides
for grants to pay 100 percent of the cost to modify or replace innovative
or alternative technologies that have failed. The Ihree-year I/A program
as presently mandated by Congress will expire on September 30, 1981.
Multiple-Purpose Projects
A multiple-purpose project in the construction grants program is one
that combines a wastewater treatment project meeting an NPDES permit with
another acceptable purpose, such as reclamation and reuse, energy
generation, urban drainage, recreation, or the disposal of municipal
and industrial waste.
The current funding policy of EPA for the design and construction of
multiple-purpose projects involves the use of the Alternative Justifiable
Expenditures (AJE) method for allocating the costs to the various project
purposes. The AJE method has been used since 1976, primarily in projects
involving combined sewer overflow and urban drainage problems.
The AJE method is based on the assumptions that achieving multiple
purposes simultaneously should be less costly than achieving them
separately, and that all purposes should share in the cost savings.
Thus, the funding for a project under this policy is less than it would
have been had the project been designed for the single purpose of
pollution control. It has been argued, therefore, that this method
discourages integrated facilities.
The current funding policy for projects combining water pollution
control with recreation is different from the policy for all other types
of multiple-purpose projects. The Agency funds such projects at the level
of the most cost-effective single-purpose pollution control project, which
means that no costs associated with the design and construction of
recreation elements are eligible. However, the grantee is not economically
penalized for undertaking this particular multiple-purpose approach, as
he would be for all others under the AJE method.
TYPES OF PROJECTSREMAINING NEEDS
AND PAST AND FUTURE FUNDING
In considering whether to change the grant program's emphasis on the
types of projects to be funded, it is important to understand what types
of projects have been funded in the past and what the relative needs are
among project categories for the future. Unfortunately, national statistics
on the types of projects funded in the past are scarce. Prior to January
1978, statistics were not maintained detailing which needs categories
were associated with each grant, or how much of each grant's funds went
to treatment plant construction versus other needs categories, e.g., new
interceptors. Data have been maintained since 1973, however, concerning
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aggregate grants awards, by State and Region and also by community size.
Accordingly, the profile presented below of funding under the construction
grants program is based primarily on future needs data when describing
the types of projects involved, and is based on historical needs data
when describing the geographic areas or sizes of communities affected.
As the time for publication of this paper approached, some preliminary
national figures from the 1980 Needs Survey became available. These
data have been included wherever possible. These numbers are preliminary,
however, and subject to further revision. The 1978 data used in the
Regional graphs reflect an earlier method of categorizing needs in
which the costs of raising treatment levels from primary to secondary
were included in Category II.
Remaining Needs
The 1980 Needs Survey estimated that a total of roughly $119
billion would be needed to complete the construction of all the eligible
sewage facilities in the country. If, in addition, needs for constructing
stormwater collection and treatment systems were included, another $112
billion would be required.
Figure III.l on the following page illustrates the relative funding
needs of the various types of projects. Of the $119 billion total, only
$28.8 billion is earmarked for constructing secondary treatment plants
(needs category I). Presumably, that amount would complete the national
program of achieving secondary treatment for the entire country. Another
$5.6 billion is designated for treatment facilities of more advanced
design (needs category II). Advanced secondary treatment and tertiary
(advanced wastewater) treatment are included in this category.
Three other needs categories range from $18.4 to about $37 billion.
The largest is needs category V, combined sewer overflows (CSOs), estimated
at approximately $37 billion. The correction of CSOs remedies the
problem of overloading treatment plants at times of peak stormwater
flow. Categories IVA and IVB, new collectors and new interceptors,
totaled approximately $18.4 and 20.8 billion respectively.
The final two needs categories are much smaller, due in part to the
limited eligibilities of projects in these categories. These are
infiltration and inflow (IIIA) and replacement and rehabilitation
(IIIB), estimated at $2.5 and 5.6 billion, respectively. Although these
estimates seem relatively small, this is due largely to the restrictive
definition applied to this needs category by EPA. For example, if
eligibilities were less restrictive for rehabilitation, the needs in
urban areas would be much larger.
Table III.l shows the dollar amount and percentage of needs reductions
and increases between the 1978 and 1980 surveys. The 1978 needs were
first adjusted to 1980 dollars in order to make a valid comparison.
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FIGURE III.I 1980 NATIONAL FUNDING NEEDS BY PROJECT CATEGORY
NEEDS CATEGORY
V. COMBINED SEWER
OVERFLOW
IVB. NEW INTERCEPTORS
IVA. NEW COLLECTORS
NIB. REHABILITATION
IMA. INFILTRATION/INFLOW
II. AST/AWT
I. SECONDARY
$100
-jjjjjjj^jjjj.^^^^^^^ $0
DOLLAR NEEDS
118.69 (Billions)
Source: 1980 Needs Survey, Cost Estimates for Construction of POTW Facilities, GICS Database.
17
-------
TABLE III.l 1978 VS. 1980 NEEDS1 (BILLIONS)
Category
I Secondary
II AST/ AWT
IIIA I/I
B Rehabilitation
IVA Collectors
B Interceptors
V CSO
TOTAL
1978 Needs
C78$)
26.1
9.5
2.4
4.9
19.0
18.5
25.7
106.1
1978 Needs
('80$)
32.1
11.1
3.0
6.0
23.4
22.7
30.1
128.4
1980 Needs
('80$)
28.84
5.64
2.50
5.97
18.40
20.84
36.5
118.69
Reduction/
Increase
(Percent)
-10
-49
-17
- 1
-21
- 8
+21
-7.6
1
The 1980 needs figures are preliminary and subject to further revision.
18
-------
Reduction in needs can generally be attributed to grant awards.
Particularly dramatic reductions, however, are the result of a combination
of factors. The sharply diminished needs for AST/AWT projects, for
example, is due in large measure to more stringent review processes.
The emphasis on small alternative treatment systems was likely responsible
for some of the pipe needs reduction, especially for collector sewers,
whose needs in towns under 5,000 population comprised 57 percent of all
collector needs according to the 1978 Needs Survey.
The only grant eligible category with a net increase in needs is
the control of combined sewer overflows. The main reasons for this are
increases in storage costs, the addition to the model of costs for
interceptors to connect with storage facilities, and the identification
of a slightly larger land area subject to CSO problems. While the $36.5
billion figure reflects costs needed to reach the recreational objectives
used in the 1978 Needs Survey, CSO correction costs could be reduced to
$24 billion if the goal is changed to meet the Fish and Wildlife standards.
Types of Projects Funded. 1978-1979
Two important questions in the analysis of the construction grants
program are which categories have been funded and at what levels. As
discussed previously, data concerned with funding by needs category were
not collected until 1978; therefore, it is not possible to examine pre-
1978 spending patterns. Post-1978 data, however, provide insight in
answering these two questions and are examined in the following sections.
Awards by Needs Category:
In calender years 1978 and 1979, approximately $7.5 billion was
spent for construction of treatment plants. Figure III.2 shows the
distribution of awards by needs category. As can be seen in the figure,
secondary treatment facilities alone account for 37 percent of the grant
money, and when coupled with advanced wastewater treatments, a full 53
percent of all awards are accounted for. In addition, new collectors
and interceptors represented over 1/3 of all awards.
Table III.2 depicts the 1978 needs and the 1978/79 awards for
treatment and pipe-related projects as well as for infiltration/inflow
and combined sewer overflows. The heavy emphasis relative to needs on
treatment projects is clear. This reflects the emphasis on the part of
POTWs to meet current regulatory requirements.
19
-------
FIGURE III.2 NATIONAL DISTRIBUTION
OF AWARDS DOLLARS BY PROJECT CATEGORY
INFILTRATION/
INFLOW 1.2%
REHABILITATION
2.1%
Source: GICS Database. Awards data were analyzed and refined by EPA
staff. Approximately 40 percent of awards required additional
analysis.
TABLE 111.2 1978-1979 DOLLAR AWARDS:
TREATMENT VERSUS PIPES
(percent of 1978 dollars by need category)
Treatment
Secondary
AST/AWT
Subtotal
Rep Iacement/
Rehab111 tat ion
Collectors
Interceptors
Subtotal
Other
Inf i Itration/Inflow
Combined Sewer
Overflows
Subtotal
Total
1978 Needs1
25%
9
34%
5%
18
18
41%
2%
24
26%
101%*
1978 and
1979 Awards2
37%
16
53%
2X
13
22
37X
1%
9
10%
100%
1978 Needs Survey, GICS Database; numbers adjusted to
reflect changes in definitions of categories I and II.
2GICS Database. Awards data were analyzed and refined by
EPA. Approximately 40 percent of awards required additional
analysis.
*Does not equal 100 percent due to rounding.
20
-------
Awards by Region:
While data on national-level distribution of awards by project category
are available, definitive material for Regional analysis is not so easily
identified. An initial approach to this analysis has been to use dollar
award data collected from the Regions since 1978. Due to data collection
and processing problems, however, the quality of some existing information
is in question. Therefore, a sample of verifiable data has been developed
to provide insight into this area. The sample was derived from all
grant awards that correctly identified the breakdown of grant awards into
individual needs categories. The resultant sample contained 41 percent
of the awards and amendments made for Step 3 and combined Step 2 and
Step 3 projects from 1978 to 1979. This 41 percent of the number of
awards represents 45 percent of all award dollars. For individual
Regions, however, the percentage of award dollars represented in the
sample ranges from 85 percent for Region VI to 4 percent for Region VII;
the percent of dollars represented in the sample for each Region is
illustrated by the shaded areas in Figure III.3. Due to this variation
in dollars represented by Region, it must be kept in mind that the smaller
the percent of dollars represented, the greater is the likelihood of
error in the displayed distribution as compared with the true Regional
distribution. However, the sample appears to be, with the exception of
Regions VII and IX, very representative, with over 40 percent of each
Region's award dollars represented.
Nationally, the sample's percent distribution of award dollars for
each project category is very similar to that shown in Table 11 I.I.
This fact adds credibility to the results derived from the sample.
Figure III.3 presents the award distribution by EPA Region and
project category for grants awarded since January 1, 1978. This
figure highlights the diversity of award patterns by EPA Regions.
Even for secondary treatment, which typically receives a large
commitment of award dollars, there is great variation by EPA
Region ranging from 19 to 62 percent of their respective awards.
Figure III.4 shows the sample award dollars distribution for the
seven project categories by EPA Regions. Project category V, CSOs,
shows an interesting aspect of Regional variation. While, as shown
in Figure III.3, the national average of award dollars for CSOs is
10 percent and the vast majority of CSO dollars has been spent in
Region V, the actual amount of this difference is apparent only upon
examination of Figure 111.4.
21
-------
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From Figure 111.4, it is clear that a full 93 percent of all CSO
dollars were spent in Region V. Other examples of this type of
variation can be seen through similar comparisons of these two
figures.
Innovative and Alternative Projects (I/A):
During the period October 1978 through June 1980, a total of 248
I/A technology projects were funded by EPA. The 248 projects totaled
over $27 million in I/A set-aside value (32 percent of the $84 million
FY79 set-aside available). Of the 248 projects funded, 31 included
innovative technology ($4 million) and 224 included alternative
technology ($23 million).
Rural Set-aside Projects:
As of September 30, 1980 (end of FY79), of the $77.1 million total
of the required individual State set-aside, $7.63 million of FY79 monies
could potentially have been lost to reallotment. Several States have
excellent records in utilizing the 4 percent set-aside while others
show little or no utilization of the set-aside.
Second Grants:
No definitive data are available to assess the current use of
second grants to fund additional capacity. For example, it is difficult
to differentiate between undesired second grants for additional capacity
and intentionally time-phased grants. An effort to determine the extent
of second grants was based on sample data of grantees who had secondary
treatment but still reported needs. In both these instances, between
85 and 90 percent of the cases were easily determined to be valid awards
and not second grants for additional capacity. More detailed analyses
of the remaining 10-15 percent were not carried out due to resource
constraints. Even using this upper bound, however, would result in a
very small dollar estimate of the extent of second grants.
Types of Fundable Projects, 1980:
There have been questions raised regarding whether the federal
government ought to give equal funding priority to projects that
involve treatment plants and those that involve pipe systems, such
as new collectors, new interceptors, and most replacement and
rehabilitation projects. There is some feeling that these "pipe"
projects ought to be given lower priority, or at least not be
allowed to dominate the construction grants funding. There are
two primary reasons given for this view: first, some feel that
these pipe projects are essentially local responsibilities,
especially when related to growth; and second, these projects
seem to be less directly affecting water quality because they
are merely collecting wastes, not treating them.
24
-------
The relative shares of the 1978 needs and the presently fundable
projects that represent pipe-related projects are shown below in
Table III.3. The categories representing treatment plant investments
account for only 1/3 of the total needs, but a little over 1/2 of the
projects ready to proceed. The pipes categories account for 41 percent
of both the 1978 needs and the present fundable projects.
TABLE 1 1 1. 3 1980 FUNDABLE PROJECTS:
TREATMENT VERSUS PIPES
(percent of 1978 dollars by need category)
1980 Fundable
1978 Needs1 Projects2
Treatment
I. Secondary
II. AST/ AWT
Subtotal
Pipes
II IB. Replacement/
Rehab i 1 itation
IVA. .Collectors
IVB. Interceptors
Subtotal
Other
IIIA. Infiltration/Inflow
V. Combined Sewer
Overflows
Subtotal
Total
1978 Needs Survey, GICS Database;
reflect changes in definitions of
GICS Database. Awards data were
EPA. Approximately 40 percent of
analysis.
*Does not equal 100 percent due to
25%
9
34%
5%
18
18
41*
2%
24
26%
37%
17
54%
13%
12
16
41%
2%
3
5%
101%* 100%
numbers adjusted to
categories I and II.
analyzed and refined by
awards required additional
rounding.
GEOGRAPHIC PATTERNS AND COMMUNITY SIZEREMAINING NEEDS AND PAST FUNDING
When examining and evaluating the performance of the present
construction grants program, it is useful to review where the needs
are and where the awards have been going. In this section, needs
and awards are examined by Region, by State, and by size of community.
25
-------
Needs and Obligations by Region
The needs as assessed by the 1978 Needs Survey show a very different
level of need among the Regions: Region VIII requires $2 billion, while
Region V requires $23 billion. In addition, as shown in Figure III.5,
the needs closely follow the population in the Regions. As would be
expected, the obligated funds (which follow the allotments that are
based on needs and population) also follow that same pattern.
FIGURE III.5 1978 NEEDS, FUND OBLIGATIONS,
AND POPULATION
$30
DOLLARS
(Billions)
$25
$20
$15
$10
$5
50
POPULATION
PROJECTED FOR
40THE YEAR 2000
(Millions)
30
20
10
II III
IV V VI
EPA REGIONS
VII VIM IX
Source: 1978 Needs Survey, GICS Database; Clean Water Fact Sheet,
June 30, 1980; 1979 Statistical Abstract of the United
Slates, Table 13.
The particular categories of need that represent the greater amounts
of funding requirements differ from Region to Region. For example, as
shown in Figure III.6, Regions II and IV have a significant need for
pipe-oriented projects (categories IIIB, IVA, IVB): 46 and 54 percent
of their total needs, respectively. Region V's biggest need is for CSOs,
accounting for 46 percent of its total needs. Secondary treatment, to
some the most important needs category, ranks highest in two Regions
(VII and IX) and is among the top three needs categories in five of
the ten Regions.
26
-------
FIGURE III.6 1978 NEEDS BY EPA REGIONS
$24
DOLLARS
(Billions) $22
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
0
OTHER
OTHER
IV A
I
III B
IV B
IV A
V
OTHER
OTHER
1MB
IV B
IV A
III B
IV B
IV A
OTHER
IV A
IV B
I SECONDARY
II AST/AWT
III A I/I
III B REPLACEMENT & REHABILITATION
IV A NEW COLLECTORS
IV B NEW INTERCEPTORS
V CSO
OTHER
OTHER
IV B
II
IV B
IVA
II
IVB
OTHER
IVA
II
III
IV V VI
EPA REGIONS
Source: 1978 Needs Survey, GICS Database.
VII
VIII
IX
Awards by State
When States are examined across EPA Regions, as shown in Figure III.7,
the concentration of total grant dollars among a relatively few States
is clear. Twenty States account for almost 80 percent of the grant
dollars. However, this closely tracks the population distribution by
State: the same 20 States represented 74 percent of the total
population in 1970. The remaining States also show a strong correlation
between grant dollars received and population size.
27
-------
FIGURE 111.7 DISTRIBUTION OF GRANT DOLLARS
60%
PERCENT
50%
40%
30%
20%
10%
0%
58%
53%
PERCENT OF TOTAL GRANT DOLLARS
RECEIVED BY STATES LISTED THROUGH
JUNE 30, 1980
PERCENT OF TOTAL 1970 POPULATION
LIVING IN STATES LISTED
First 10
States
New York
California
Illinois
Ohio
New Jersey.
Michigan
Pin ray Iv wii*
Florid*
Texas
Massachusetts
Second 10
States
Maryland
Indiana
Virginia
Missouri
Minna so ta
Wisconsin
Georgia
North Carolina
Connecticut
Washington
Third 10
States
Tennessee
Wast Virginia
Kentucky
Iowa
South Carolina
Louisiana
Puerto Rico
Oregon
Alabama
Oklahoma
Fourth 10
States
New Hampshire
Maine
Kansas
Colorado
Mississippi
Hawaii
Washington D.C.
Arkansas
Delaware
Arizona
Fifth 10
States
Rhode Island
Nebraska
Nevada
Alaska
Utah
Idaho
Vermont
New Mexico
Montana
South Dakota
Final 7
Areas
North Dakota
Wyoming
Pacific Islands
Guam
Virgin Islands
Samoa
North Marianna Islands
Source: Clean Water Fact Sheet.. June 30, 1980; 1970 Census of Population, Number of Inhabitants. Table 14.
Awards by Community Size
At the local level a different view of funding patterns is seen.
Figure III.8 shows the dollar value of grants by community size
for the 1972-1980 period. In total, 55 percent of the grants went to
communities with fewer than 5,000 inhabitants, while 13 percent went
to communities with more than 100,000 inhabitants. Conversely, only
12 percent of the dollars went to communities of fewer than 5,000, while
those with more than 100,000 people received 47 percent of the grant
monies.
28
-------
FIGURE III.8 GRANTS BY COMMUNITY SIZE (POPULATION)
NUMBER OF AWARDS
>100,000
< 5,000
$ VALUE OF AWARDS
> 100.000
-------
FIGURE III.9 DISTRIBUTION OF NUMBER OF GRANTS AND PLACES
BY COMMUNITY SIZE
PERCENT
70%
60%
50%
40%
30%
20%
10%
0%
80%
55%
<5
11%
12%
6.7%
PLACES
NO. OF
GRANTS
11%
100
5-10 10-25 25-50 50-100
COMMUNITY SIZE (Population in 1000'$)
Source: Clean Water Fact Sheet, June 30, 1980; 1970 Census of Population, Number of Inhabitants. Table 19.
FIGURE 111.10 DISTRIBUTION OF POPULATION AND AWARDS
DOLLARS BY COMMUNITY SIZE
50%
PERCENT
40%
30%
20%
10%
0%
31%
12%
CD
POPULATION
1970
DOLLAR VALUE
OF AWARDS
12%
14%
7% 7%
10% 10% g% 10%
C5 5-10 10-25 25-50 50-100
COMMUNITY SIZE (Population in 1000's)
47%
31%
>100
Source: Clean Water Fact Sheet, June 30, 1980; 1970 Census of Population, Number of Inhabitant*, Table 6.
30
-------
EPA enforcement policy concentrates on larger municipalities,
thus moving their projects up on the priority,
t Water quality impacts may be more important in these large
municipalities,
A conscious policy decision may have been made on this basis
by States,
Other sources of funding may be available to small communities.
Many small communities are able to avoid sewerage systems.
Standard Metropolitan Statistical Areas (SMSAs)
SMSAs represent the more heavily populated areas of the country.
It is useful to examine the needs of SMSAs as a way to focus on
needs in the more urban areas of the country.
Needs for SMSAs for 1978 were reported for most States, with the
exception of Vermont, Wyoming, and Alaska. In addition, no SMSA-related
needs were reported for Puerto Rico, Virgin Islands, American Samoa,
Guam, or the Pacific Territories.
Figure 111.11 shows the SMSA needs by project type for 1978.
Of the $72.5 billion in need, only 14 percent was associated with
secondary treatment. However, secondary and advanced wastewater
treatment represented 35 percent of the total SMSA need. CSOs
were also a significant need, accounting for 21 percent of the need.
Approximately 1/3 of the Farmers Home Administration's grant and
loan funds over the last five years has been awarded for wastewater
projects--a total of over $3.5 billion. In addition, the Housing
and Urban Development Department's Entitlement and Small Cities
Program also has awarded approximately $3.6 billion in both FY79
and FY80. Most of these funds, however, are awarded to metropolitan
areas. In addition, a significant portion of these funds is awarded
to drinking water projects.
31
-------
FIGURE 111.11 SMSA FUNDING NEEDS BY PROJECT CATEGORY
NEEDS CATEGORY
V. COMBINED SEWER
OVERFLOW
IVB. NEW INTERCEPTORS
IVA. NEW COLLECTORS
IIIB. REHABILITATION
IMA. INFILTRATION/INFLOW
II. AST/AWT
I. SECONDARY
DOLLAR NEEDS
(Billions)
$4.8
$14
.9
530
$20
$10
Sourot: 1978 NMd* Survey, GICS Ditibatt.
32
-------
Geographic Patterns:
Figure III.12 shows the SMSA needs by category and EPA Region.
Clearly, Regions II and V have the most significant needs. Secondary
treatment is the largest needs category for only three Regions (IV, VII,
IX) while CSOs are a significant need, representing the largest or second
largest needs category for six Regions.
Comparison with National Needs:
Figure III.13 shows a comparison of SMSA and national needs by EPA
Region. In all cases, more than 50 percent of the people in the Regions
live in SMSAs. In Regions II and IX this figure approaches 90 percent.
Moreover, for most regions, except Region VIII, SMSA needs represent
over 1/2 of the total needs in the Regions. SMSAs in Regions II and IX
account for over 80 percent each of the total needs in each Region.
Figure III.13 also points out the general correlation between SMSA
population and SMSA needs.
LOCAL COST IMPACTS
Although wastewater treatment expenditures have historically comprised
a small portion of municipal budgets and family incomes, there is concern
that construction and O&M costs required for compliance will prove to be
burdensome.
In recent years, sewerage costs have increased rapidly. During the
1967 to 1977 period, direct expenditures for sewage increased at an annual
growth rate of 15.2 percent, to become more than 5 percent of all local
governments' budgets (excluding school districts). Estimates of the
local share of sewerage suggest that the 1980 costs are in the $4-5 billion
range, exclusive of debt service. Debt service costs would add approximately
$1.2 billion additional costs.
Projections of future sewerage costs vary widely, but they are in
agreement that significant increases in sewerage costs will be forthcoming.
A conservative estimate has been developed using a projection model with
a data base from Census Bureau reports of local sewerage expenditures.
This model, which assumes a constant level of federal spending throughout
the 1980s points to the following real (constant dollar) increases by 1990.
t An 88 percent increase in total sewerage costs,
A 68 percent increase in per capita costs, and
A 150 percent increase in the State and local share of total
sewerage costs.
33
-------
FIGURE III.12 1978 SMSA NEEDS BY EPA REGION
DOLLARS
(Billions)
$2 U
cso
NEW INTERCEPTORS
NEW COLLECTORS
REHABILITATION
INFILTRATION /INFLOW
AST/AWT
SECONDARY TREATMENT
III IV V VI
EPA REGIONS
VII VIII
Source: 1978 Needs Survey, GICS Database.
34
-------
FIGURE 111.13 PERCENT OF TOTAL REGIONAL NEED ATTRIBUTABLE TO SMSA
IVJIML. rMCCU- 1UU%
PORTION OF POPULA-80%
TIOIM WITHIN SMSA
PORTION OF NEEDS
ATTRIBUTABLE TO _ %
SMSAs
40%
20%
0%
"
y
58%
/
^
V
V
co«
s
^ y
S&K
;.:
,-i.-
/
^S%
>
75%
.
s
66%
S^
x
J
/
'
49%
J- ':
'
A
t ""
. . '.
.,. ; .*
., ..:^a
S.
\
\
\
-
I II 111 IV V VI VII VIII IX X
EPA REGIONS
Source: 1978 Needs Survey, GICS Database; 1979 Statistical Abstract of the United States,
Tables 11 and 19.
35
-------
These numbers do not include possible increases in future interest
payments on debt. Since the model indicates that there will be strong
pressures for increased local borrowing, the expected expenditure increases
will probably be even higher than those cited here. If 8 percent inflation
is added to the cost estimates, the 1990 costs will be approximately 21/2
times higher than the above.
Many Regions, States, and localities can expect increases much
higher than the national average. The model forecasts, for example,
that real per capita costs will increase 100 percent or more by 1990 in
Regions I and X, and that community-level fiscal impacts are sketchy,
but preliminary evidence suggests that small communities and older urban
areas are likely to be especially prone to financial capability problems.
As Figure III.14 indicates, small communities are subject to high
treatment cost impacts for a number of reasons. In many instances,
increased per capita costs occur because of diseconomies of small scale
plant size, or because of costs of providing sewerage for a dispersed
population. Also, small cities, on the average, have a lower per
capita income and pay higher costs for borrowing money. In some
cases, the lack of independent technical and financial management
skills may result in the construction of inappropriate systems which
they cannot easily afford. An analysis of approved user charge systems
from Region V indicates that more than 25 percent of small communities
had annual per household costs (based on 100,000 gallons) over $200,
while less than 5 percent of communities above 10,000 had charges this
high.
A second problem area involves financially distressed, older urban
centers whose sewer systems may be in need of substantial rehabilitation
and who may have substantial CSO and urban stormwater needs. A study by
the Urban Institute of 28 large cities found the highest per capita
needs in cities least able to afford them in terms of fiscal capacity.
In addition, they noted an actual decline in constant dollar
maintenance spending for some large cities because of financial
pressures. A striking example is New York City, with $72 billion
of categories I-V needs, all of which went unmet during the 1976
to 1978 period. According to the 1978 Needs Survey:
This situation is not unique to New York, but is a common
occurrence in financially troubled cities, which have
little prospect of financing the local share of more
than a small percentage of their wastewater treatment
and conveyance needs. The national total of needs in
the 10 most financially distressed large cities is
about $15 billion.
As a reflection of this concern with large city costs, EPA has
begun an effort to collect financial "community profiles" for the
SMSAs with the greatest wastewater treatment needs.
36
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For communities of all sizes, increased costs of wastewater
treatment are occurring at a time when intergovernmental aid to local
communities has leveled off or decreased. This indicates that the cost
increases will be borne locally, and that wastewater treatment will face
stiff competition for scarce local resources.
There is also a concern that the impact of new or increased sewerage
rates will present a burden to low-income households within a community.
The program currently focuses on costs relative to median household
income as a measure of ability to pay, but this approach does not
identify burdens on very low-income segments within a community.
For low-income households, much of the family budget is already
consumed by non-discretionary expenses, and some form of assistance
may be required in response to higher costs. Analysis of many State
programs which currently provide assistance to low-income households
for high utility (heating) costs can provide some insight into the
advantages and disadvantages of various assistance approaches.
38
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CHAPTER IV
MAJOR FUNDING ISSUES
EFFECTIVENESS ISSUE
Issue
Funding policies sliou±d be modified so that the construction grants
program can contribute more effectively to achieving the goals of the
Clean Water Act.
Discussion
One of the primary objectives of the Act is the achievement of
fishable/swimmable waters wherever attainable by July 1, 1983. In funding
treatment works to meet this goal, the construction grants program has
obligated more than $25 billion, with construction completed for more than
2100 projects valued at $2.6 billion. Final construction costs of projects
currently in Step 1 or Step 2 of the grants pipeline are estimated at more
than $30 billion. This contruction has resulted in improved water quality
in many areas of the country.
Compared with the $119 billion of reported needs, however, construction
completions are less than 3 percent of the reported dollar needs for treatment
facilities, and future funding is not expected to be adequate to meet all
needs. Because of limited funding, categories of projects currently grant
eligible must be evaluated carefully in terms of their contribution to
achieving goals of the Act, and priorities must be established.
The categories most directly related to fishable/swimmable goal are
the treatment plant categories I and II of the Needs Survey. Other
categories, such as new collectors, major sewer rehabilitation, and
correction of I/I are less directly related to the goal of improved
stream quality. In some cases, however, collectors may be an integral
part of a treatment system or necessary to prevent groundwater contamination.
Major sewer rehabilitation and correction of I/I may have substantial
indirect impacts on treatment as they may be needed to maintain or improve
treatment system performance.
Priorities among projects may be established by eliminating or reducing
funding for certain categories, or by restricting eligibilities within
categories. One additional approach is to prioritize individual projects
based on direct water quality impacts. Highest priority would be given
those projects, regardless of category, which are necessary for the
achievement of fishable/swimmable waters, and which by themselves, or
in concert with other controllable pollution sources, are sufficient
to achieve fishable/swimmable waters.
39
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Prioritization of projects will also be affected by application of
the attainability criteria associated with the fishable/swimmable goal.
Revised guidelines are under review for making determinations of
environmental, technological, and economic attainability as associated
with particular water quality standards. In many cases, projects
listed as current needs may prove to be unattainable. (See the 1990
Planning Strategy for an extended discussion of this issue.)
In addition to the primary water quality goals, CWA objectives also
include: (1) the reclaiming and reuse of wastewater; (2) improved energy
recovery and conservation; (3) improved cost-effectiveness in meeting
specific water quality goals; and (4) encouragement of integrated
facilities for sewage treatment and treatment or disposal of other waters.
The primary EPA programs that are directed specifically to meet
these goals are the Innovative and Alternative (I/A) technology program
and the funding of multiple-purpose projects. As noted in Chapter III,
the current funding policy for multiple-purpose projects generally
results in a grant eligible cost which is less than the single-purpose
pollution control cost. For more progress toward CWA goals, alternatives
should be considered which provide greater encouragement to such projects.
The I/A program has made some progress, but has had only a limited
national impact. Major issues include:
long standing conventional approach to municipal water
pollution control in the United States,
brief initial authorization period for program,
t mismatch between demand and distribution of State I/A
set-aside funds,
the administrative and technical complexity of I/A program, and
inadequate incentives to develop I/A projects.
The I/A program is discussed in detail as part of the 1990 Operations
Strategy.
A final effectiveness issue concerns the ability of treatment
facilities funded under the program to achieve compliance with permit
requirements. This has been identified as a major problem, and measures
to be undertaken to reach greater compliance are discussed in the 1990
Compliance Strategy.
40
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EQUITY ISSUE
Issue
There are some inequities in current funding policies which impact
small and large communities differently. Other inequities may arise
if the program is modified.
Discussion
Rural Communities
While the construction grants program has historically awarded
grants to states roughly in proportion to identified eligible needs
and population levels, the number and dollar value of grants given
to small communities does not reflect either the relatively large
number of such places, or their share of the national population
(Figures III.8, III.9, and III.10).
The rural set-aside program was established to ensure that awards
better reflect rural needs. Early estimates of funds obligated under
this program, however, indicated that $55.5 million of the $85.8 million
total could potentially be lost to reallotment. While preliminary
figures as of 10/1/80 show that only about $7.5 million will actually
be subject to reallotment, the year-end obligation crunch may indicate
that some problems remain.
One reason that small town projects may receive less than adequate
funding is that their Step 1 grants are made from the general pool of
funds according to state priority lists and not from the 4 percent
set-aside. Because funds available to states are limited, the priority
lists may favor major stream pollution areas to the neglect of rural
communities with an interest in protecting groundwater quality.
Small towns are also often required to construct more expensive
advanced treatment systems, due to their location on smaller streams
which are classified by states for higher water quality levels than
downstream costs. In addition, many small communities have not
constructed less expensive alternative systems because of lack of
understanding of alternative technology benefits by local public
officials or consulting engineers.
Inner Cities
Many larger cities have older inner city areas which will have
disproportionately high needs for sewer rehabilitation in the future
since sewer maintenance is a very low priority at present. In
addition, many older cities have combined sewer overflow problems,
which nationally total more than $37.8 billion in needs. Technolo-
gical complexity and local unwillingness to proceed have meant that
41
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a smaller proportion of ultimately necessary projects in large urban
areas have been funded. Also, the urban share of the total state
allotment has often been inadequate, when compared to their tremendously
high needs, and has resulted in the slow progress of many projects.
In the end, some urban areas will face higher costs for major
rehabilitation because of the age of the system and because they
have deferred maintenance costs, which are not grant eligible.
Program Modifications
Certain new inequities are likely to occur if the current federal
share or eligibilities are changed.
Reducing the federal share disadvantages late starters if the
delayed initiation is due to special circumstances beyond the local
grantee's control. In this sense, reduced federal assistance may
impact localities unfairly.
Reducing or eliminating certain eligibilities will also impact
certain types of grantees more than others. For example, eliminating
collectors may particularly affect small or rural communities.
Elimination of eligibility for rehabilitation disproportionately
affects older urban areas. Further, some eligible needs are concentrated
in particular regions of the country. For instance, more than 50% of
CSO needs fall in five states.
Changed federal share or eligibilities also impacts states
differently depending upon the individual State's past priorities
in reducing needs. For example, some states may have concentrated
funding on treatment plant projects, anticipating future funding of
pipe needs. If federal funding for pipe needs is reduced or eliminated,
States that have concentrated on reducing high priority treatment needs
first will be disadvantaged compared to States which have funded pipe
needs first.
EFFICIENCY ISSUE
Issue:
The current funding distribution system should be improved to
maximize efficiency in obligating funds to projects ready to proceed.
Discussion
Because there is often a mismatch between States with unobligated
funds and states with projects ready to proceed, efficient obligation
of funds is limited. Some States, in a given year, have funding shortages
while others feel pressure at year's end to fund any project ready to
proceed to avoid reallotment of funds. The current allotment system is
42
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designed to reflect long-term needs and population and is not responsive
to short-term fluctuations in readiness to proceed. Although not the
primary problem, the current allotment system has contributed to the
program's difficulty in obligating appropriated funds in a timely
fashion, which, in turn, has affected the appropriations levels voted
by Congress.
Further, the role of the allotment system is to reflect program
priorities in distributing funds to states with priority needs. To
operate efficiently, an allotment formula ,iust be based on priorities
established through eligibilities, federal shares, or priority systems.
Greater program efficiency can also be achieved by leveraging federal
funds to encourage States and localities to use more of their own financial
and administrative resources to meet program goals. Each federal dollar
spent currently funds $1.33 of total construction grants outlays. This
implies a federal commitment of $89.5 B to reduce the total $119 B needs.
The challenge is to achieve more results with a given federal expenditure
level, yet ensure local financial capability, including the long run ability
of the POTW to be economically self-sustaining.
LOCAL FINANCIAL CAPABILITY ISSUE
Issue
Federal funding programs should be designed to ensure: (1) that
local communities are capable of funding required sewerage costs, and
(2) that local communities have the ability and incentive to operate
POTWs on a self-sustaining basis following the first round of EPA
grants.
Discussion
As indicated in the section on local cost impacts, federally mandated
wastewater treatment costs are expected to increase substantially during a
period when many cities are anticipating that demands for current expendi-
tures will outstrip revenue growth. In addition, wastewater facility needs
facing some communities are very large relative to their ability to afford
capital expenditures. This is particularly true of many small communities
which have reached their borrowing limits and large, older cities with
special problems due to the age of their infrastructure. In the latter
case, fiscally strained communities may face difficult choices between
competing priorities for capital projects.
An additional area of concern is the impact of increased sewerage
costs on low income households within a community. If excessive costs
for low income persons are not able to be avoided, options should be
considered to ameliorate this burden.
-------
The federal concern in the cost area is reflected in many ways.
Excessive costs may be avoided by encouraging better planning, better
financial management., and application of economic attainability guidelines.
Long-range funding of all needs, and encouragement of local self-sufficiency,
should be addressed through consideration of alternative federal funding
mechanisms. Local economic self-sufficiency is also addressed in the
Financial Management portion of the 1990 Compliance Strategy.
Proposals to reduce the federal share of construction grants or to
eliminate categories of eligibilities will have negative impacts on
local financial capability. If the federal share is reduced substantially
for all categories, local communities, unless rescued by States, will face
higher capital costs and expanded debts. A reduced Federal share would
provide money for more projects, but more communities would find themselves
unable or unwilling to raise sufficient local funds. If federal share
reduction or eligibility elimination is directed at a few categories,
the overall impact would be lessened, but some communities are still
likely to face difficulty in meeting local funding requirements.
A reduced Federal share increases the financial burden on local
communities by:
Raising debt service costs, thereby affecting the capacity of revenues
to adequately cover 0, M, & R costs, since debt service normally has
Increasing the difficulties for States and localities to market
bond issues at acceptable rates due to increased borrowing; and
Causing the true local share to increase to more than 50 percent.
Although the Act currently provides 75 percent federal funding, in
practice, eligibility determinations made during project reviews
often result in a given project being awarded substantially less
than 75 percent. This being the case, lowering the federal share
to 50 percent will result in the actual State/local share exceeding
50 percent.
IMPLEMENTATION CONSIDERATIONS
Any construction grants program funding strategy selected for
implementation should be compatible with, and reinforce objectives of,
other water quality programs in order to focus on the goals of the
Clean Water Act as effectively as possible. Planning and enforcement
strategies, contained in other 1990 papers, should be tied directly
to the availability and distribution of grants. Both strategies should
key on projects meeting identified priority needs.
Implementation must also be consistent with management objectives.
Recommendations should be compatible with the current emphasis on
delegating project management and responsibility to the States.
44
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Consideration of program priorities or changes must take into account
the large number of projects in the grants pipeline in Steps 1 and 2.
Implementation of major changes without concern for pipeline impacts
could damage the ability of the program to fund construction in a timely
manner.
In order to successfully implement a preferred funding strategy,
managers in the construction grants program must have rapid access to
useful data in order to track and monitor program performance. In a major
step in this direction, EPA is implementing an integrated data base
management system (IDMS) to provide rapid interchange of information
in the permits, needs, grants and other important data files. The IDMS
is central to the implementation of the MMS, which is designed to increase
the rate of municipal compliance and the rate of municipal construction.
Information from IDMS can be used to make mid-course corrections in
program elements and to fine-tune the program for maximum water quality
impacts.
45
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CHAPTER V
AVAILABLE OPTIONS
The preceding two chapters provided information regarding the
current status of the program, and organized the information around
four major issues. In this chapter, options designed to deal with
program issues are described and analyzed.
The options are organized under five major headings:
Eligibilities
Federal Share
Priority Systems
Allotment Formula
Federal Funding Mechanism
Although these options are organized under five separate areas,
it is important to recognize that decisions made in any one area
have important implications for decisions made in other areas. For
example, if program priorities are to be established by eliminating
eligibility for one category of projects, the allotment formula should
perhaps also be changed to reflect this priority. In Chapter VI of
the paper, the relationships between the five areas are important to
the formulation of an overall coordinated strategy based upon options
chosen in each area.
In general, the primary links between the options and the four
issues of Chapter V are best illustrated in Table V.I. Because of
the interrelationships among options, the links are in fact more
complicated than this table suggests, but the table does provide a
useful map of the most direct and strongest linkages.
Some concerns raised in the issue section are not directly
addressed in the five major option areas. These concerns, such as
funding set-asides and multiple-purpose policy, will be dealt
with in Chapter VI.
ELIGIBILITIES
Under existing law, eligibilities are defined in terms of treat-
ment (Categories I and II), new sewers (Categories IV A and IV B),
the repair or rehabilitation of sewers (Categories III A and III B),
and control of combined sewer overflows (Category V). The estimated
costs of these eligibilities (or eligible cost) are reported as
"Needs." The Act assigns no particular priority to any of the
categories other than requiring that no less than 25 percent of
a State's allotment be obligated for sewer rehabilitation, new
sewers and control of combined sewer overflow (CSO) projects.
Because of funding limitations, however, program priorities need
to be established.
47
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TABLE V.I PRIMARY LINKS BETWEEN ISSUES AND OPTION AREAS
Issues
EFFECTIVENESS
(effectiveness of
projects funded in
meeting CWA goals)
EQUITY
(equitable distri-
bution of funds
between communities
and States)
EFFICIENCY
(ability to direct
funding to projects
ready to proceed)
LOCAL FISCAL
CAPABILITY
(ability of local
community to fund
and maintain
facilities)
Eligibilities
X
Op
Federal
Share
X
X
ion Areas
Priority
Systems
X
X
Allotment
Formula
X
X
i
Federal
Funding
Mechanism
X
X
48
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Setting Priorities Among Eligibilities
The current eligibilities make varying contributions to certain
clean water objectives. The following discussion, aided by Table V.2,
attempts to distinguish among the eligibility categories on the basis
of their contribution to several objectives. The apparent differences
suggest the basis for establishing priorities among eligibilities.
Secondary Treatment (Category I)
minimum of secondary treatment is required by the CWA.
preliminary studies indicate favorable impact on toxic
pollutant removal (POTW study)
t secondary treatment sometimes not necessary in order to
meet water quality standards or to achieve beneficial
uses, (e.g., small discharge into large river).
technological definition prevents use of less expensive,
"near secondary" treatment process, even where they are
adequate to meet water quality standards.
Advanced Treatment (Category II)
focuses funding on reaching levels of treatment critical to
meeting water quality objectives.
administrative reviews require adequate quality justification.
actual cost of required treatment is expected to decrease
with review of State standards and widespread application
of attainability criteria (see 1990 Planning Strategy).
Infiltration/Inflow (Category III A)
represents small portion of needs, but needed for cost-effective
sizing of plants.
t elimination of funding of I/I would lead to increased treatment
costs.
recent studies on completed projects show that actual I/I
reduction achieved has been substantially less than
predicted by sewer system evaluation surveys.
Rehabilitation (Category III B)
t represents small portion of needs, but cost estimate does
not account for potential major problems with older, inner
city infrastructure.
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broadening application of the category, however, would reward
communities with inadequate sewer maintenance programs.
New Collectors (Category IV A)
less critical to water quality except where on-site systems are
contaminating groundwater. In some cases may be integral part
of cost-effective treatment system.
particularly critical for small communities where they may
constitute major part of capital costs, but in many cases
decentralized alternative systems are more cost-effective.
may be used to promote growth rather than correcting
existing pollution problems.
current reviews under PRM 78-9 will lower costs, as would
limiting funding to collectors integral to system, but
estimate of dollars saved not available.
New Interceptors (Category IV B)
in most cases can be justified as integral part of treatment
system.
in some cases have been used to promote development in areas
that previously had low populations.
Combined Sewer Overflows (Category V)
t needs estimates based on modeling of costs necessary to reach
recreation water uses.
application of attainability criteria may result in reduced
needs. Fish and wildlife objective is $15 billion less
than recreation goal.
work progressing on coordinated strategy for evaluation of
CSO/Urban stormwater issues. (See Appendix)
question as to adequacy of standards criteria for high flow
conditions.
Reducing Eligible Costs
The primary reason for evaluating and prioritizing eligibilities
is to suggest ways of reducing projected federal costs to manageable
levels, while maximizing water quality impacts of federal dollars.
In the following sections, four approaches to revising eligibilities
are discussed:
elimination of eligibilities,
restrictions within categories,
51
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t revision of secondary treatment definition.
review of attainability for water quality limited stream
segments, and
water quality-based eligibilities.
A summary of the primary options is provided by Table V.3.
Elimination of Eligibilities:
The categories most frequently recommended for elimination are new
collectors, infiltration/inflow correction, and major sewer rehabili-
tation. These categories have the least direct impact on the treatment
goals of the Act. As we have noted, however, elimination of eligibility
for I/I may be reflected in increased costs for treatment, and
elimination of eligibility for rehabilitation may increase costs for
interceptors, as new pipe is substituted for rehabilitation. Also,
elimination of categorical funding for new collectors would limit
flexibility, as collectors may be critical for some public health
problems.
Restriction of Eligibilities within Categories:
A more flexible approach is to restrict eligibilities within
categories. Current administrative reviews of new collectors, AWT
projects, and interceptors closely limit funding in these areas.
Program Requirements Memorandum (PRM) 78-9, for example, limits
collection system eligibility to systems proven to be "necessary and
cost-effective," in addition to meeting the substantial human
habitation and two-thirds rule requirements. In order to be "necessary"
a collection system must be replacing existing systems which are
creating a public health problem, contaminating groundwater, or violating
point source discharge requirements of the Act. The collection system
must also be proven to be more cost-effective then decentralized or
on-lot systems. Thus, collectors are to be funded only if an integral
part of a treatment system necessary to meet enforceable requirements
or a groundwater contamination/public health problem.
Interceptor eligibility could similarly be limited to funding only
those interceptors which are a necessary part of a treatment system
being funded in order to meet existing pollution problems. Interceptors
would also be eligible where substituting for a treatment plan need by
conveying sewage from one locality to another in lieu of constructing
a treatment facility at the first location.
52
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Two other areas in which funding might be restricted are industrial
flow and reserve capacity. Eliminating eligibility for industrial flow
would remove the need for an industrial cost recovery (ICR) program and
encourage conservation and pretreatrnent of non-domestic wastewater.
Under an authorization bill (S-2725) signed into law in October, the
ICR program is repealed as of December 27, 1977. Any ICR grant
provision in a grant made since March 1, 1973 is to be removed. No
grant funds shall go to the industrial portion of a treatment works
after November 15, 1981 for a Step 3 grant, except where a Step 2 grant
was made before May 15, 1980. EPA is to make a report to Congress .on
the effect of these amendments by March 15, 1981.
One disadvantage of this approach is that it discourages mixed
treatment of industrial and domestic waste which can be a beneficial
approach in some cases. Also, under these amendments pretreatment
will be required, thus precluding flexible approaches suggested by
an integrated waste management strategy.
Reducing reserve capacity eligibility would concentrate federal
funding on the correction of backlog needs and allow funding of more
treatment works than would otherwise be possible. It would also
discourage oversizing of treatment works, and provide incentives for
measures to reduce wastewater flows. On the other hand, it would
substantially increase the state/local cost share and may decrease
the opportunities for municipal/economic self-sufficiency. Also,
reserve capacity can contribute to compliance: because of variations
in wastewater characteristics, more conservative design may be
warranted. One suggestion is to tie funding of reserve capacity
to a commitment to a water conservation plan and a financial management
system designed to ensure future self-sufficiency.
According to the 1978 Needs Survey, the backlog needs represent
the following portions of year 2000 needs.
1978 Backlog Backlog as %
Category Needs Needs of all needs
I 15.1 9.7 64%
II 20.5 10.6 52%
III A 2.4 2.4 100%
III B 4.9 4.9 100%
IV A 19.0 19.0 100%
IV B 18.5 6.7 36%
V 25.7 25.7 100%
Total 106.1 79.1 74%
Another option is to change the "two-thirds of flow" rule for
funding collectors, and limit funding to flow for 1972 populations
alone. This would lower federal costs for a category with less
critical water quality impacts, but for some small communities it
would have major cost impacts.
54
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One objective of the construction grants program is to ensure that
following a first-round grant, municipalities will become economically
self-sufficient with respect to future wastewater treatment costs.
Under the economic self-sufficiency concept, second-round grants would
not be eligible for funding. Second-round grants are defined as grants
for planning, design or construction with respect to expansion
(including the construction of a new plant), upgrading or replacement
for a POTW previously funded by 201 program. Second and subsequent
portions of a phased or segmented project will be be considered second-
round grants if specifically planned in original facility plan as
segmented portions of 20-year cost-effective treatment works. Limited
funding for corrective action for new plants out of compliance due to
design error or equipment failure could be eligible, but would be
followed up with an attempt to establish liability and recover costs.
Revision of Secondary Treatment Definition:
The cost of achieving secondary treatment currently represents
35 percent of 1980 Category I-IV Needs. Revising the current require-
ments for meeting secondary treatment offers the potential to impact
water quality by reducing federal and local treatment costs and
enabling more projects to receive grants. No data are available to
predict the precise size of the cost savings, but they would be
substantial, depending upon the particular revision proposed.
Proposals for revision of the secondary treatment definition would
apply to effluent limited stream segments where such treatment is now
required. Under all the of the following proposals, the revised
requirements would not permit degradation of water quality below that
required by the designated use of classification of the receiving water.
1. A process-based approach which would expand the current definition
to include specified treatment processes. While specification of a
process would be made on the basis of its ability to produce a
certain quality of effluent, the definition itself would be in
terms of the process and the technical procedures needed to make
the process effective. The model for this approach is the
existing specification of lagoons as secondary treatment. Current
discussion focuses on the additional specification of trickling
filters as a secondary treatment process.
2. An effluent based approach allowing lower removal rates and higher
effluent concentrations. Pollutant parameters would be raised from
30 mg/1 of OBD and SS to 40 mg/1, for example. Any treatment
system which could attain these levels would then qualify as
secondary treatment.
55
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3. A water-quality based approach which makes secondary effluent
limitations relative to ambient water quality and use objectives
of a given reach. Under this approach, secondary treatment would
be defined as the minimum necessary to avoid degradation of
receiving water uses. A lower limit of primary treatment might
be established.
4. An approach which blends technology and water quality standards.
Under this approach a variety of treatment technologies is
linked to attainable effluent quality which would support given
water usages. With site-specific knowledge of the receiving
stream, States ould match an attainable usage with appropriate
technology. In effect, there would be a number of "minimum
technologies" keyed to a variety of water quality conditions
and desired stream uses.
Although revising secondary treatment regulations might more
efficiently focus funding on water quality impacts, the following
factors should also be considered:
The current definition of secondary treatment in terms of
effluent limitations is a clear, generally accepted and
absolute prescription of minimum treatment levels.
Any redefinition at this point might be disruptive to
projects now in planning and design.
It would be inequitable for those municipalities that
have already achieved initial compliance, and it may
set back ongoing compliance actions.
Preliminary studies indicate that secondary treatment
is effective in removing toxics. Therefore, perhaps
secondary treatment requirements should not be modified
until toxics are incorporated into water quality standards.
Of the four options presented above, option 1, involving expansion
of the secondary treatment definition to include specific processes,
would produce the least disruption in the current grants pipeline.
Review of Attainability (Water-Quality Limited Stream Segments):
A major new initiative in standards is the review of attainable
uses for water quality limited segments (which require some form of
advanced treatment to meet their water quality and beneficial use goals),
A policy is being developed for downgrading water quality standards
when environmental, technological, or economic factors preclude use
attainment. (This issue is discussed in detail in the 1990 Planning
Strategy.) The impact of this initiative on dollar needs is uncertain,
but needs for CSO correction and advanced treatment should be reduced
somewhat.
56
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A related approach from the funding perspective is to fund projects
in water quality limited segments only when attainability of beneficial
uses and related water quality criteria can be demonstrated. Thus,
attainability reviews would have two primary objectives: (1) to allow
stream reclassification if preferred uses are unattainable, and (2) to
focus funding for advanced treatment on projects which will have
substantial water quality impacts.
Water-Quality Based Eligibilities:
Current eligibilities established in the Clean Water Act range
widely in their contribution to statutory clean water objectives.
Further, the eligibilities are not "treatment system" or "water
quality problem" oriented. Some are related to types of construction
such as "secondary treatment," "new collectors", or "interceptors,"
while others are related to correction of pipe problems or combined
sewer overflows. A treatment system designed to treat a specific
water quality problem will normally involve components involving two
or more eligible categories. This may create problems if different
eligibility categories are given widely different priorities.
As an alternative approach, eligibilities could be redefined in
terms of water quality objectives. Given an eligible objective,
treatment works construction necessary for meeting the objective would
be eligible regardless of current category. This approach would provide
considerable flexibility to localities in determining the most cost-
effective mix of construction types needed to achieve the water quality
goal.
Some proponents of this approach have argued for including
eligibility for nonpoint source controls when such controls appear to
be part of the cost-effective solution to water quality problems.
In order to ensure a primary focus on point sources, NPS funding could
be limited to some fraction, such as 5 percent, of 201 funds. One
suggestion is to defer any funding of NPS controls pending completion
and evaluation of a number of studies currently underway designed to
determine the effectiveness of various NPS control techniques.
The problems involved in implementing an entirely new set of
eligibilities would be substantial. Since current eligibilities are
defined by statute, a change in the law would be required, followed by
new regulations. Further, unless projects currently in the pipeline
are exempted , a change in eligibilities would require substantial
re-evaluation of all existing grants. The primary argument against
a comprehensive redefinition of eligibilities, however, is that such
a step is unnecessary given State control of priority systems. Under
existing priority systems, States may evaluate projects in terms of
water quality impacts regardless of eligibility category.
57
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CHANGE IN FEDERAL SHARE
Lowering the federal share is an option which serves two major
purposes depending upon how it is applied.
A uniform drop in the federal share for all categories could be
used to lower program costs and to spread the currently available
federal monies among a greater number of projects. It would also
have a leveraging effect, stimulating more State and local funding
for each grant dollar spent.
Lowering the federal share for only some categories may be done
to establish priorities among categories. For example, to reflect
national priorities, treatment categories could be funded at 75
percent while collection could be funded at 50 percent. This approach
would also have some leveraging impacts.
A third alternative is to allow States discretion in adopting a
50 percent federal share, provided that the State provides an additional
25 percent share. This adds considerable flexibility to the program,
as fast moving States could allocate federal money to more projects
while slow moving States could continue to use the 75 percent share.
Table V.4 indicates program costs by category for a 75 percent
and a 50 percent federal share. Program costs for a mixed 75/50
program can be calculated by adding across categories using the
relevant federal share.
Table V.5 summarizes the implications of lowering the federal
share for four different scenarios (including the current 75 percent
share). Descriptive paragraphs on column headings follow.
t Establishes Priorities Among Eligibilities -- By their nature,
some scenarios, in which the federal share is higher on some
eligiblities than others, tend to implicitly prioritize the
eligibilities.
Allows Federal Funds to Impact More Projects -- This criterion
assumes that total federal program costs remain constant,
allowing the lower share to be spread among more projects.
It also assumes that a State has sufficient projects ready
to absorb the money.
Leveraging Potential -- This column shows the option's
relative potential for stimulating States and localities
to use more of their own financial resources to meet
program goals. It assumes the States or localities will
make up the difference in funding created by the lowered
federal share, and that there are priority projects ready
to be funded with the smaller share.
58
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TABLE V.4 DIFFERENT FEDERAL SHARE COST SCENARIOS BY CATEGORY
CATEGORY
(Billions - 80 Dollars)
II
I IIIA IIIB IVA IVB V Total
TOTAL 28.84 5.64 2.50 5.97 18.40 20.84 3.65 118.69
1978
NEEDS
75%
FEDERAL 21.63 4.23 1.88 4.48 13.80 15.63 27.38 89.02
SHARE
50%
FEDERAL 14.42 2.82 1.25 2.99 9.20 10.42 18.25 59.35
SHARE
59
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Promotes Proper Sizing of Treatment Works -- To the extent that
the State and local governments are funding a larger proportion
of the total bill, there is more of an incentive to keep costs
down by not funding excess reserve capacity.
t Avoids Priority List Disruption -- Any change in the federal
share will probably change State needs, and possibly priorities,
as they are currently defined. Furthermore, lowering the federal
share may force the deferral, for cost considerations, of projects
having high water quality benefits and may provide an incentive
to proceed with projects that are desirable in terms of State
and local priorities at the expense of those having higher
environmental benefits.
Maintains Federal Commitment Proposals reducing federal share
are likely to amplify State and local uncertainty about the
strength and duration of the federal commitment.
Avoids Unobligated Funds -- Lowering the federal share may
increase available funding for fast moving States, but it
aggravates the problem of obligating the allotted funds in
slow-moving States.
Avoids Locational Effects -- Reducing the federal share for
certain eligibilities will impact certain types of grantees
more than others. For example, reducing the federal share
for collection may particularly affect small or rural
communities. Further, some eligible needs are concentrated
in particular regions of the country. Fifty percent of total
CSO needs fall in five States.
Avoids Equity Issues -- The proposal to lower the federal share
raises a question of equity in its treatment of applicants yet
to receive a step 3 grant. Late starters are disadvantaged
even if the delayed initiation is beyond the local grantee's
control. Another equity question hinges on an individual
State's past priorities in reducing needs. If federal
funding is reduced for pipe needs, for example, States that
have concentrated on reducing high priority treatment needs
first will be disadvantaged compared to States which funded
pipe needs first.
t Avoids Increased Pressure on Local Financial Capability (LFC) --
This criterion assumes that either the State or the locality
picks up the difference when the federal share is reduced.
Allows Flexibility -- The optional 50 percent share would
provide fast-moving States an opportunity to build more
projects without aggravating reallotment problems in slow-
moving States.
61
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CHANGE STATE PRIORITY SYSTEMS
Under current law and regulations, States are given primary responsi-
bility for establishing a priority system and preparing an annual project
priority list which ranks projects in preferred order of funding. The
construction grants regulations regarding the project rating system
require the inclusion of some general criteria and specifically exclude
other criteria. Additional criteria, however, may be included at the
State's option and the State has the authority to determine the relative
influence of the rating criteria. The State also has sole authority to
determine the priority for each eligibility category. Regional EPA
Administrators must review and approve State priority systems for
"procedural completeness," ensuring that each is designed to comply
with enforceable requirements of the Act.
Establishment of the annual project priority list is the responsi-
bility of the States, and EPA is not involved in the ranking of individual
projects. If the Regional Administrator determines that a project or
specific portion thereof will not result in compliance with the
enforceable requirements of the Act, the State is obligated to remove
it from the priority list.
Under the current approach to priority systems, each State's system
reflects localized concerns, and a great variation among priority systems
results. While this approach provides the benefits of flexibility and
decentralized control, it also means that in some cases national priorities
are not being reflected in projects being constructed.
One basic approach to deal with this issue is to establish uniform
national criteria for priority systems. Although States would still be
responsible for ranking individual projects and constructing project
priority lists, more specific, uniform criteria would guide the ranking
process. This approach to establishing program priorities is more
flexible than options which consider the elimination of needs categories.
It recognizes variations among States in terms of the categorical mix
of remaining needs, and provides for within-State prioritization rather
than wholesale eliminating of categories.
Two basic sets of options need to be considered in the application
of this approach. The first set involves the responsibility for, and
degree of, specificity of the priority system criteria. The second set
of options deals with the type of criteria which should be included.
62
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RESPONSIBILITY FOR PRIORITY SYSTEM
Criteria for a priority system may be established by detailed
statutory guidance, or by administrative action under a more general
grant of statutory authority. Similarly, responsibility for establishing
a priority system or systems may be placed on Congress, EPA or the States.
In combination, these choices suggest five options.
Primary
Responsibility How Specified
1. Congress Detailed Statutory System
2. EPA General Statutory Guidance
3. EPA Detailed Statutory System
4. State General Statutory Guidance
5. State Detailed Statutory System
Option 4 represents the existing situation with States having primary
responsiblity under the general grant of Section 216 of the CWA. Option 4
is also the approach most consistent with the current management objective
of delegating increasing control and responsibility to the States. Options
1, 3, and 5 while providing Congress the opportunity to make a clear
statement of national policy, provide little flexibility for those
closest to the program to respond to the complexities involved. Option 2
provides an opportunity for both flexibility and national program direction,
but may produce a degree of uniformity not compatible with the goal of
delegating to the States the responsibility for program management.
Priority System Criteria
A priority system reflecting uniform national criteria would involve
the mandatory inclusion of one or more criteria as part of the system.
If more than one criterion is included, weighting of the components
would be specified.
Existing regulations provide for wide variation but require the
inclusion of the following criteria: (1) the severity of the pollution
problem; (2) the existing population affected; and (3) the need for
preservation of high quality waters.
Other criteria which might be desirable would include:
1. categories of projects,
2. enforceable requirements, and
3. water quality impacts, particularly beneficial uses achieved.
63
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Categories of Projects:
In the analysis of eligibility options, a table (V.2) was developed
indicating the relative impacts of project types on the goals of the Clean
Water Act. Ranking projects by prioritizing eligible categories is an
approach which provides more flexibility than the elimination or restric-
tion of categories. One disadvantage to this approach is that many
projects involve components reflecting different categories (e.g.,
secondary treatment plus collectors) which may have very different
rankings.
Enforceable Requirements:
EPA recently adopted a National Municipal Policy and Strategy (NMPS)
for improving the effectiveness of municipal compliance and accelerating
the construction of facilities required to achieve initial compliance.
A stated goal of the NMPS is "coordinating with States to develop State
Project Priority Lists which assure that grant funding is allocated
to projects necessary to meet the enforceable requirements of the Act
before funding is allocated to other projects, to the extent authorized
by law."
An outgrowth of NMPS, the Municipal Management System (MMS), is a
guide for regional/state personnel in setting priorities for managing
grant schedules and municipal permits. The focus of MMS is on those
projects within the 106 SMSAs which have treatment needs exceeding
$50 million each and which are in the fundable portion of the State
priority lists. The MMS further provides that within the context of
the NMPS priorities, "emphasis should be placed on major grantees
within the top 106 SMSAs."
EPA intends to use the State priority system as one of the key
mechanisms to implement the NMPS. State priority lists are screened
to determine whether they contain projects that do not meet enforceable
requirements of the Act and have a higher ranking than the unfunded
projects pending enforcement actions described above. If so, EPA
conducts a review of the State priority system to ascertain what changes
might be made in the system to elevate the ranking of the significant
polluters. Basically the system must give preference to projects that
will meet enforceable requirements over the construction of other
projects. EPA then requests the State to modify its prjority system
accordingly.
The MMS guidance makes it clear that the basis for approval (or
disapproval) of a State priority system and pending extension requests
could be the nature of the State response to requests for modification
of their priority system. Moreover, a noncomplying POTW without an
active grant this is not in the fundable range and is causing signifi-
cant water quality or public health problems will be referred for
judicial action rf the project is not moved into the funding range.
64
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The NMPS represents an ambitious attempt to establish national
priorities through the State priority systems without statutory
changes. The emphasis is placed squarely on major grantees in the
106 SMSAs. (This priority should give clear direction and focus to
efforts underway to accelerate Step 1 facility planning.)
Water Quality/Beneficial Uses:
Prior to the 1972 Act, effective implementation of pollution control
was hampered by EPA's difficulty in identifying specific sources of
pollution and by State water quality standards based on insufficient
information relating them to beneficial uses or cost of implementation.
Following the 1972 Act, EPA's principal focus has been on the develop-
ment and enforcement of technology-based effluent limitations instead
of water quality standards. In light of several years additional
experience with the program, perhaps it is now useful to reassess the
potential of basing funding priorities on water quality standards and
attainable beneficial uses. Because of competition for resources,
money spent for water pollution control should have maximum possible
impact on water quality.
An alternative for establishing priorities would be initially
funding only those projects which result in the achievement of
fishable/swimmable waters. Other projects would be delayed, although
an exception could be made for very large discharges whose planned
facilities to meet enforceable requirements of the Act will take many
years to construct.
Another alternative is to adopt a ranking adapted to newly defined,
water quality-based priorities. Such a system might provide three classes
of priority, such as the following list ordered from highest to lowest
priority, or it might include an expanded set of objectives such as those
listed below:
Projects which are necessary for achievement of beneficial
uses and which, by themselves or in concert with other
controllable sources, are sufficient to achieve those
uses. Also included would be projects protecting public
health and the quality of Outstanding National Resource
waters.
Projects necessary to meet secondary treatment requirements
or other enforceable requirements of the Act, but not included
in the above category.
Projects which are unnecessary to meet fishable/swimmable
waters, secondary treatment requirements or other enforceable
requirements of the Act, but which include all Needs Survey
eligibilities not accounted for in the above categories.
65
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The objective of this approach is to focus limited funds on projects
that will show direct water quality improvement benefits. While agreement
with this objective is widespread, debate has centered on the feasibility
of the undertaking.
First and foremost, there is concern that current monitoring systems
are incapable of providing information Adequate for establishing a priority
system on this basis. This priority system taxes the limited ability of
analysts to define and measure "water quality" and beneficial uses, and to
measure accurately the impact of effluent limitations on water quality.
For example, a recent report on EPA monitoring of ambient water quality
indicates that the current data base on point and nonpoint sources is
inadequate for national analyses and for documenting before and after
treatment effectiveness.
Improved monitoring, including before and after construction
evaluations, would be an imperative for a water quality based system.
The Water Quality Based Management Plan:
In order to focus funding on projects with water quality impacts,
EPA could require states to develop strategies or management proposals by
1982 showing how they plan to meet program goals in the coming decade.
Water quality problems and BPWTT requirements will be matched to proposed
and existing grants in a long-range management plan. Under delegation,
EPA would exercise oversight concerning each State's success in
establishing and implementing this plan. This plan could be required
in conjunction with required priority system elements or in lieu of EPA
attention to priority system management. Further development of these
concepts can be found in the planning and management strategies.
66
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ALTER THE ALLOTMENT FORMULA
The allotment formula in distributing the annual appropriations
among the States serves as a vital function in the funding strategy.
If distribution is not closely related to priority needs, then no
dependable or functional relationship exists between a State's share
of the allotment and its share of priority needs.
Figure V.I shows the relationship of the allotment formula to
major elements of a needs based strategy.
The current formula has been criticized because of two recurring
problems: (1) high unobligated balances in some States that persist
late into the allotment period, and (2) the occasional use of allotments
to fund low priority projects in avoiding reallotment. The formula
itself has been a factor in, but not the cause of, the problem. In
general, high unobligated balances have not occurred because some
States receive a disproportionate share of funding. For the most
part these same States with chronic surpluses have high remaining
needs. Instead, the issue is one of the program management and
project readiness to proceed in these States. The question then"
is whether it is practical to include readiness to proceed in the
formula.
The funding of low priority projects is due in part to use of
these projects as a sponge to soak up surplus funds that otherwise
would be realloted. The question then is whether an extension
of the allotment period would offset this tendency.
Thus, it is far from certain that changes in the current formula
would correct these problems. Changes may be desirable, however,
to place stronger emphasis on priorities.
Three major variables logically deserve consideration in devising
a new formula:
1. Needs (costs of eligibilities)
- Total Needs
- Subsets of priority needs
- SMSA needs
2. Population
- Total state
- Requiring service
3. Readiness to proceed
- Proposed near term obligations
- Recent past obligation performance
67
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FIGURE V.I POSITION AND FUNCTION OF ALLOTMENT
FORMULA IN A NEEDS BASED STRATEGY
PROGRAM OBJECTIVES
DEFINITION OF ELIGIBILITIES
PRIORITIZATION OF ELIGIBILITIES
I
1
PRIORITY CRITERIA
BASED ON OBJECTIVES
NEEDS SURVEY
COST INVENTORY
OF ELIGIBLE
NEEDS
ALLOTMENT
FORMULA
EMPHASIZES
PRIORITY NEEDS
OTHER VARIABLES
1
STATE PRIORITY
SYSTEM RATING
OF PROJECTS
ANNUAL APPROPRIATION
c:
o
STATE
ALLOTMENT
STATE PRIORITY
LIST RANKING
OF PROJECTS
OBLIGATIONS
i
OUTLAYS
FUNDABLE PROJECTS
68
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Table V.6 pits these variables against several evaluation criteria.
Each variable is considered as if it were the sole factor in an allotment
formula. Obviously the "best" formula for a needs-based strategy is to
allot funds based solely on priority needs. Population has several
appealing features (predictability, ready availability) but needs costs
estimates are already heavily influenced by population levels. Readiness
to proceed measured by projected obligations could be a powerful tool
to link the near term demand for funding to priority needs in determining
state shares. In practice, however, developing estimates of readiness
to proceed each year would probably be resource intensive, difficult to
verify, open to question and subject to padding. Past performance in
obligating funds is at best a poor substitute for projected obligations
as an estimate of rediness to proceed.
Additional Considerations
1. Weighing variables in a formula permits the inclusion of more
variables than priority needs. Weights can also serve to generate or
modify locational effects.
2. Floors and ceilings applied to changes in state percentages can
control the degree of change as the formula is put into effect and
subsequently updated. Large, rapid changes in State allotments would
be extremely disruptive to the State planning process.
3. Set-asides can be used not only to distribute funds based on
priorities but to direct the use of funds as well. They tend, however,
to be inflexible in comparison with the use of priority systems for the
same purpose.
4. A fixed allotment period is essential to effective management
of obligations and outlays. Whether extension of the allotment period
would lessen the obligation of funds for low priority projects is
problemmatic. There is no real evidence that extension would stimulate
or divert obligations to high priority projects. It may, in fact,
encourage further delay in slow-moving states and, in effect, merely
postpone the year-end crunch to obligate funds. Relief from reallotment
of some funds might be used as an incentive to secure commitments to
fixed construction schedules for key projects.
5. Incentive and borrowing systems may provide a means of
balancing State allotments and readiness to proceed without changing
the allotment formula itself. The borrowing pool approach would
permit States in need of more funds to borrow in the next fiscal year
from the unobligated balances of other States at the end of the
current year. Borrowing States repay their loans at the beginning
of the next fiscal year following the year of the loan.
An alternative approach which provides an incentive for fast
moving States is the two-tier system. This approach sets aside
part of the annual appropriation as a "second-tier" of funds which
will be divided up among those States which achieve the goal
69
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established for obligation rates. For example, States that obligate
90 percent of their 1981 allotments by March 31, 1982 would receive
incentive funds from the second-tier of the appropriations. A number
of variations of this approach have been suggested, but all focus
on providing bonus funds to those States demonstrating an ability
to proceed rapidly.
CHANGES IN FUNDING MECHANISMS
Many of the proposed refinements of the construction grants program
necessitate a review of the current funding delivery systems. A lowered
federal share may require some additional form of assistance to help
ensure local financial capability. Also, specific objectives such as
leveraging the impact of the federal grant dollars, can be furthered
through alternative funding mechanisms. Finally, it is appropriate
during this comprehensive review of the construction grants program
to examine changes proposed by interested groups and individuals.
This section discusses several options for changing the present
funding approach. The characteristics of several possible changes
in funding mechanisms are in Table V.7.
Assistance Through Existing State Programs
One possible funding conduit is existing State programs on a specific
program basis. For example, funds could be provided to a State to supple-
ment or start its own construction grants program. Another possibility
is to provide start-up funds for a State financial intermediation program
(for example bond banks). Many varied State programs provide assistance
to local communities. Several points are noteworthy:
Thirty States provide construction grants ranging from 5-20
percent of the construction costs, generally financed through
State general obligation funds.
Some States use variable participation based upon need.
0 New York subsidizes O&M costs based on compliance.
t A few States provide grants to subsidize debt service.
t Some States provide guarantees of local debt.
Several State programs operate as financial intermediaries
through:
- State Bond Banks
- State general obligation bonds issued to support municipal
loan program.
- State revenue bonds repaid with local sewer revenues.
71
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Block Grants
EPA is considering a variation on the block grant concept as an
alternative funding conduit between the Federal government and the
States. Block grants differ from the present system of project specific
awards to allow greater discretion by the States in disbursing their
allotted funds. As this recommendation is envisioned, it is important
to note that it is far from a true block grant. The States would
allocate allotted funds under specific roles, regulations and
guidelines promulgated by EPA. In this "aspect, the modified block
grant is an extension of the delegation concept currently being
implemented.
The basic rationale behind block grants is to increase the economy
and efficiency of a complex program by providing financial assistance
in a single, broad functional area in contrast with multiple separate,
but related categories. In the past, funding by strictly defined
categories .has proven inflexible with respect to special problems
and circumstances by some States and local grantees. It would be
expected that giving the States greater discretion would increase-
program flexibility in a positive manner. However, this increased
flexibility may run counter to uniform, national program goals.
Further, it is not guaranteed that the block grant is a panacea
for excessive federal regulation or inflexible categorical priorities.
It is very possible that, as block grant funds filter down through
the intergovernmental system, substantive strings will be added,
restricting recepient flexibility in tailoring federal funds to
local priority needs.
From EPA's standpoint, the modified block grant offers several
potential advantages and disadvantages.
§ EPA's role would be reduced to that of "regulator." Rather
than overseeing each step of the grants process, EPA would
concentrate on results.
Administrative and policy decentralization would occur as
States, and to lesser extent, localities would be encouraged
to identify and prioritize their needs, develop plans and
programs to meet them, allocate funds accordingly, and
account for the results. Since the grant administration
would be shifted to the States, EPA's administrative load
would be reduced dramatically. EPA would make 50 grants
instead of over 10,000.
73
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Although one of the reasons for this approach is to increase the
efficiency of the construction grants program, the degree to
which this will occur is unclear. While EPA's administrative
reviews would be eliminated, the States would be required to
carry on much the same review and program control functions.
The capability of individual States to administer such a
program varies widely.
Existing block grant programs have traditionally presented
formidable problems for tracking funding and monitoring the
program's effectiveness and results.
Since the States would have greater responsibility for meeting
water pollution problems, the maintenance of national priorities
and program goals might be less assured. In the past, some
States' program goals have been much closer to national program
goals than others. The failure to achieve an effective balance
between the priorities of the States and those of the Federal
government or EPA may compromise the effectiveness of any block
grant program.
Line Item Appropriations for Large, High-Cost Projects
Under the line item approach, separate appropriation requests are
made for major projects meeting requisite needs and eligible cost
threshold.
t Line item appropriations would sharply distinguish the large
number of relatively lower-cost projects and a much smaller
number of very large and expensive projects.
Under present program procedures, funding of the large projects
will likely divert funding from the smaller projects, disrupting
a State's project development process.
Debate, delay and political tradeoffs generated in the appropriations
process limit any assurance that line item appropriations will
be made at all, much less on a timely basis.
Loan Guarantees
The present loan guarantee program (Section 213, P.L. 94-588) has
never been used and probably never will be. To quality for a loan
guarantee, the applicant must receive a loan from the Federal Financial
Bank (FFB). The FFB's interest rates are based upon rates of U.S.
Treasury bonds of comarable maturities which have historically been
1-2 percent higher than the interest rates in the municipal bond market.
Obviously, there is no incentive for municipal borrowers to use the
program.
74
-------
This approach could be revised by changing the present federal
guarantee program to apply to State and local bonds, thus
improving their security and marketability and lowering
interest rates.
t Possibly the best leveraging potential per federal dollar spent.
Guarantees could be tied to compliance.
Requires additional federal administrative resources to administer
loan guarantee programs.
Could be targeted by need.
No impact on federal budget at implementation. Future outlays
are uncertain.
Could be used to influence State programs and/or policies, but
excessive federal requirements may discourage some States from
participating.
Federal Loan Programs
The federal government could provide a loan as a last resort for
local government borrowers unable to sell bonds for POTW construction
at reasonable rates of interest in the open market. This could be done
as a supplement to the eixsting grants program or as a long range
replacement for it.
Targets assistance to areas of need, including small communities
ineligible for or unable to get FmHA assistance.
Requires additional federal financial and administrative
resources to administer.
May discourage long run self-sufficiency for POTWs.
Mini-Grants for Compliance
Some plant-related deficiencies which lead to noncompliance may
require additional construction to achieve compliance. EPA could
provide a limited-scope construction grant which focuses on the
compliance problems of an existing POTW. This mini-grant could be
exempt from many normal grant requirements since it would not change
the scope or purpose of the original project.
Ties funding directly to existing problems of noncompliance.
t May be highly cost-effective in terms of water quality impact
per dollar expended.
Does not directly encourage the concept of local self-sufficiency.
75
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Interest Rate Subsidies
Another method for leveraging State and local spending while aiding
local financial capability is through interest rate subsidies. The
borrower pays the market interest rate minus the subsidy which is made
up by the federal government.
Assistance can be provided directly by subsidizing the borrower of
the funds - in this case, the local government unit financing an
individual project.
Alternatively, the State, acting as a financial intermediary,
might borrow in the market, receive an interest subsidy, and
then provide low interest loans to municipalities.
Annual payment of subsidies can be linked to continuing
compliance with permit specifications.
One important feature of the interest rate subsidy is that
(unlike a federal government loan guarantee) the government
does not intercede directly into the marketplace, thereby
minimizing any disruptive interference. However, indirect
pressure on the financial markets can result if the subsidy
is raised by increasing government debt in the Treasury or
municipal markets as opposed to raising general revenues.
The potential for leveraging is very high. Assuming a 2 percent
subsidy on interest rate, an increase in State and/or local
spending by 5 billion dollars causes total federal program
costs to rise by just a hundred million dollars annually
over the life of the loan.
76
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CHAPTER VI
ALTERNATIVE STRATEGIES BASED ON PREFERRED OPTIONS
DESCRIPTION OF STRATEGY ELEMENTS
In order to develop a long range plan, the large number of possible
options must be reduced to choices involving a manageable number of
strategic alternatives. These strategic alternatives consist of packages
of preferred options in combinations expected to have the greatest
positive impacts on program goals. The approach here is to develop some
core strategic models, which are then fleshed out with preferred options
to produce ten strategic alternatives.
Core Strategic Models
The 1990 Funding Strategy will be the result of key decisions in
five basic areas:
Eligibilities
Federal share
Priority systems
Allotment formula
Alternative federal funding mechanisms.
While many specific options exist in each area, there are two or
three basic choices which set key directions. These basic choices are
indicated in Table VI.1.
Choices in the five areas are not independent, but are strongly
interrelated. For example, a substantial reduction in the federal share
for construction grants is likely to increase the need for other federal
assistance mechanisms.
Following the basic choices outlined in Table VI.1, and a limited
number of assumptions, strategic alternatives can be reduced to ten core
models. A decision tree illustrating the logic involved in reaching the
ten models is shown in Table VI.2. The assumptions used to guide the
reduction process included the following:
Some priority setting is required
The allotment system should reflect the priorities
established
Fewer changes are better than many changes to accomplish
the same objective
t Where the federal share is lowered across the board some
other form of federal assistance is necessary.
77
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The Strategic Alternatives
The core model suggested by the decision tree may now be fleshed out
by linking the basic choices in each decision area to the preferred
options evaluated in Chapter V. The resulting strategic alternatives are
described in Table VI.3. These ten alternatives, plus the "no change"
option, comprise the set of alternatives to be evaluated.
The strategic alternatives provide basic policy direction but do not
encompass the entire range of decisions which must be made in conjunction
with a funding strategy. The basic alternatives may be modified,
however, to embrace a large number of secondary options, many of which
may be compatible with most of the ten alternatives. The secondary
options will be discussed following the evaluation of the ten
alternatives.
The ten strategic alternatives listed here are not meant to preclude
consideration of other alternatives and should not be viewed as the range
of options evaluated by EPA. Rather, this approach should be regarded as
a framework for evaluating and comparing strategies which forces the
evaluator to explicitly link the option areas into a coherent strategy.
The recommended strategy in Chapter VII closely approximates the
strategic alternative No. 4 in Table VI.3.
EVALUATION OF STRATEGIC ALTERNATIVES
The matrix provided in Table VI.4 compares the strategic alternatives
on the basis of descriptive and evaluative criteria. The evaluative
criteria are linked to the basic issues of effectiveness, efficiency,
equity, and implementation. Since options with a 50 percent federal
share are tied to a loan or loan guarantee program, the options should
not be distinguishable on the basis of local financial capability.
Effectiveness in Meeting Environmental Goals
1. Are Fishable/Swimmable Goals of CWA Promoted?
To what extent does the option effectively prioritize
projects directly promoting the fishable/swimmable
objective?
X
XX
XXX
Limited
Moderate
Great
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2. Are Secondary Treatment Goals of CWA Promoted?
To what extent does the option effectively prioritize
projects directly promoting the secondary treatment
objective?
X Limited
XX Moderate
XXX Great
Efficiency
3. Leveraging
Leveraging involves the use of limited federal government
resources to stimulate States and localities to use more of
their own resources for achievement of national program goals.
X
XX
XXX
Limited
Moderate
Great
4. Discourages Excess Reserve Capacity
This rating is based on the presumption that the larger the
State/local share the less likely a treatment works will be
oversized.
X
XX
XXX
Limited Discouragement
Moderate Discouragement
Great Discouragement
Implementation
5. Compatibility with EPA Enforcement Strategy
t This rating reflects the extent to which the current
enforcement strategy in the NMPS and MMS is consistent with
the proposed option. Enforcement emphasis is on minimum
secondary treatment and 106 SMSAs.
X : Limited to Moderate Compatibility
XX : Substantial Compatibility
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6. Does not Require Major New Information System
t This rating is based on the assumption that establishing
newly defined eligibilities will require substantial new
management information/tracking systems for EPA and the States.
7. Disruption of Current Priority Lists
If eligibilities are redefined or eliminated, or if the
federal share is reduced, some projects currently high on
State priority lists may be unable to proceed further. The
greater the degree of program change, the more disruption
of current priority lists. One "X" is awarded for each
program change proposed.
Equity
8. Equal Treatment of Applicants Raised as an Issue
If the federal share is decreased, or eligibilities changed or
eliminated, POTWs receiving reduced funding may raise the issue
of unfair treatment compared to POTWs previously funded.
X : Eligibility of share changed
XX : Both changed
SECONDARY OPTIONS
In conjunction with the basic funding strategy choices, there exists
a number of additional issues concerning the construction grants program
which have important implications for the funding strategy. Although we
are designating these issues as secondary to the basic strategic choices,
they impact program funding requirements and priorities. Therefore, the
options related to these issues must be considered carefully and evaluated
in terms of their compatibility with program objectives and the basic
funding strategy.
Since most of the secondary issues and options are discussed in
related 1990 issue papers, only a brief summary of the funding-related
aspects of each is presented here.
Multiple-Purpose Projects
The current funding policy on multiple-purpose projects involves
application of the Alternative Justifiable Expenditure (AJE) cost
allocation procedure. Under this policy, grant eligible cost are costs
limited to costs directly attributable to pollution control costs, plus
some portion of the shared costs. Non-pollution control costs of such
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projects are not eligible. Generally speaking, the grant eligible portion
of a multiple-purpose project will be less than that for a comparable
single-purpose pollution control project.
Even though EPA advocates the use of multiple-purpose projects, the
restrictive nature of the AJE funding policy does not appear to encourage
recycling, reclamation and energy recovery projects to the extent
envisioned by the Clean Water Act. During a major review of alternative
multiple-purpose funding strategies conducted during 1979, considerable
support was expressed for an alternative called "The 115 Percent Option."
This option uses the following eligibility formula for I/A projects:
115 percent of the ratio of (a) the present worth cost of the most
cost-effective single-purpose option, to (b) the present worth cost of
the multiple-purpose project, with a minimum eligibility of 115 percent
of the capital cost of the single-purpose alternative. Non-I/A projects
(CSO-urban drainage, co-landfills, wastewater treatment plus recreation)
are eligible at the cost of the single-purpose alternative.
This option offers a strong encouragement to the multiple-purpose
approach, and will fully fund some of these projects. It will divert
few funds away from the current needs categories except for the billion
dollars for CSO projects. It requires no legislation, nor does it rely
on the difficult measurement of water quality benefits.
A strong advantage of this option is that it is fully consistent
with policy on single-purpose I/A projects. The Clean Water Act
authorizes EPA to fund a single-purpose I/A project if its present worth
cost does not exceed that of the most cost-effective conventional
alternative by more than 15 percent. This policy option, by utilizing
the 115 percent factor, makes the funding of multiple-purpose I/A
projects closely parallel to the policy on single-purpose projects.
This option also has disadvantages. The principal one is that the
policy does not distinguish between desirable and less desirable
multiple-purpose projects. For example, the policy funds a reclamation
project which recycles nutrients to the land at the same level as one
which requires a high treatment level so as to provide industrial water
supply.
Low Income Households
Some low-income households may face difficulties in meeting the
increased cost of sewerage service resulting from the construction grants
program. Additonal assistance to these households (including the
elderly on fixed incomes, the urban and rural poor) will increase the
equity of the program. One key question is how to effectively deliver
additional assistance to those who need it. Some possible assistance
initiatives are (1) increased federal aid from EPA or other federal
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agencies; (2) federal, state or local assistance through tax credits or
deductions; and (3) aid through discriminating rate structures.
I/A Set-Aside Program
As described in Chapter III, a major concern for the I/A set-aside
program is the fact that, as of June 1980, only a small percentage of the
available funds had been used by the States, thus creating year-end
pressures to fund marginal projects. Some States have also made better
use of the program than others, exhausting their set-aside and still
leaving additional demands unmet. Various proposals related to the
funding strategy have been set forth in the 1990 operations strategy.
These are designed to make more effective use of the program by
eliminating those program requirements which give rise to the above
problems.
Under one option, a proposal to create a national I/A pool, grants
would be awarded on a first-come, first-served basis, with the maximum
amount of the pool not to exceed the sum of each State's present
set-aside. Another proposal would eliminate the set-aside for
alternative projects while continuing to fund such projects at
85 percent. A one percent innovative set-aside would be maintained.
Because concern centers on the grantee's uncertainty over continued
availability of funds under the present three-year authorization, one
suggestion is to extend the set-aside for five years, or make it a
permanent part of the grants program. This would stimulate a higher
level of interest on the part of program parti pants and would
demonstrate a stable, national commitment.
Additional incentives might also be offered by expanding the
coverage of the 85 percent grant to include the entire project, not
just the innovative or alternative part of it. Another approach
would widen the margin of the federal share between conventional
and I/A projects by either increasing the federal I/A share, or by
reducing the federal share for conventional systems.
Rural Set-Aside Program
As noted in Chapters III and IV, the rural set-aside program appears
to be underutilized. Possible solutions to this problem are considered
in detail in the 1990 operations strategy and those of particular
significance for the funding strategy are presented briefly below.
The first approach is to do nothing now. Because the program is so
new, many small community projects are still in Step 1 and thus are not
yet ready to use set-aside funds, which are reserved for Steps 2 and 3.
This option assumes that, as Step 1 projects move into subsequent steps,
available funds will be used within the allotment period.
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Other options include expanding set-aside eligibilities to include
Step 1 planning and expanding the definition of alternative systems to
include lagoons, oxidation ponds and other technologies papropriate to
small community needs and capabilities. Another possible way of
expanding program coverage is to raise the population ceiling for
eligible communities to over 3,500. In keeping with the rural aims of
the program, small communities in urbanized areas would be excluded.
States which do not now have a rural set-aside would be encouraged to
establish one. The 4 percent minimum set-aside level should be
maintained. There is some support for allowing individual States to
voluntarily increase the rural set-aside above the 4 percent level.
SMSA Strategy
Needs are largely concentrated in the nation's major urban areas.
The largest cities receive 4 percent of the grant awards, but 27 percent
of the dollar awards. Of the total 285 SMSAs, 106 have category I and
II needs exceeding $50 million. Together, the category I and II needs
for these 106 SMSAs are 61 percent of all I and II needs reported.
Further, more than half of the CSO needs fall in these same SMSAs. The
concentration of needs coupled with the poor financial condition of many
of the major cities leads to a special concern about SMSA needs. In
addition, many cities with large projects feel that States tend to
postpone such projects because of their great impacts on a State's
allocation.
The national municipal policy and strategy and the May 14 funding
strategy both suggest emphasizing the priority funding of large city
projects with basically two goals in mind: (1) to ensure the availability
of federal funds for SMSA projects as they become ready to proceed; and
(2) to ensure the local financial capability of the receiving SMSA. To
accomplish these goals, close coordination between funding, enforcement
and water quality planning is required. The incidence of CSO needs in
the SMSAs also points to a need for a coordinated CSO strategy.
EPA should work with the States to encourage placing SMSA projects
high on the State priority lists. If a question of the local financial
capability of the SMSA exists, other forms of federal assistance such as
loans, loan guarantees or interest rate subsidies should be considered.
Expanded Step 1 Eligibilities
Expanding planning activities eligible for Step 1 funds will help to
address a wide variety of issues related to the funding strategy.
Current facility planning does not always give sufficient emphasis to
environmental and management problems which is desirable, if not
required, in order to achieve a comprehensive, realistic plan.
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Therefore, Step 1 planning funds should be allowed to be utilized for:
Development of local management and financial plans to provide
for local self-sufficiency after first-round grants.
Water quality analysis necessary to ascertain "attainability"
and reevaluate water quality standards and waste load
allocations.
Nonpoint source planning where a relationship or possible
trade-offs exists with point source pollution and where nonpoint
source controls may be necessary to achieve fishable/swimmable
waters.
Compliance diagnostics
Third party management of grant projects
Integrated waste management planning.
The program should therefore encourage grantees to make maximum use
of the facility planning grant. Eligibility for specific project proposals
can be made by Regional Offices on a case-by-case basis. Because the
entire facility planning process requires only a small fraction of total
funds, the additional funding required is expected to be minimal. EPA is
currently moving to implement a new POM which details the types of planning
activities contemplated for eligibility. Eligible activities include,but
are not limited to planning or development of financial management systems,
training and technical assistance programs, small system and innovative
management systems, pre-treatment programs, and screening and evaluating
multiple-purpose options.
CSO and Urban Runoff
The distinction between runoff passing through storm sewers or
combined sewers may no longer be as valid as once supposed. We are
now beginning to understand the water quality effects and means of
control of separate stormsewer discharges, due to the efforts of the
National Urban Runoff Program. This research indicates that, at least
in some areas, funding CSO projects while neglecting stormwater runoff
may not result in the expected benefits. Another concern, in view of
high remaining needs in these categories, is to establish conditions
for deviations from standards where beneficial uses permit.
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During the next two years EPA will be developing and implementing
elements of a combined CSO/Urban Runoff Strategy. Elements of this work
include:
Completion of CSO Handbook
Completion of the National Urban Runoff/CSO Strategy
Establishment of conditions for deviations from standards for
stormwater events
0 Refined definition of CSO/Urban Runoff needs for the 1982 Needs
Survey
Coordination of point source and nonpoint source pollution
control as part of Stormwater Management Program in place by
1983.
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CHAPTER VII
SUMMARY AND PROPOSAL
GOALS
The Clean Mater Act of 1977 established time-based goals for cleaning
the nation's waters and identified a number of related environmental goals
such as the reuse and recycling of wastewater. The Act assigned a leading
role in meeting these goals to the construction grants program. The 1990
strategy strongly reaffirms the basic intent of the goals, but suggests
some modifications in terms of emphasis and timing.
Goal:
To reach, "wherever attainable", a water quality
that "provides for the protection of fish, shellfish,
and wildlife" and "for recreation in and on the water,"
by 1990.
The time-based water quality goals of the Act should be modified to
reflect the remaining needs and the limited availability of funding. The
goal of aquatic protection and recreation should be reached as quickly as
possible, with needed POTW construction completed by 1990. The feasibility
of this goal will be continually reevaluated in response to updated cost
estimates and anticipated funding levels. Projects to be funded should
be prioritized on the basis of water quality impacts.
In addition, greater emphasis should be placed on the "wherever
attainable" phrase and the definition of fishable/swimmable. EPA will
encourage and assist States to review designation of stream water uses
and to ensure appropriate criteria based upon improved scientific and
environmental considerations. Where environmental, technological or
economic constraints prevent attainment of a designated use, adjustments
should be made.
Goal:
To maximize the recycling and recovery of water
and wastewater components consistent with sound
environmental practice, public health, energy
and economic constraints.
The Act establishes as a goal the elimination of pollutant discharges,
(Sec. 101(a)(l)), but there is concern regarding the feasibility of this goal.
Technical and economic constraints preclude mandating recycling/reuse projects,
However, EPA should encourage such projects wherever feasible in order
to minimize pollutant discharges. In support of this, EPA must sustain
a strong innovative/alternative program and reconsider its current
funding policy for multiple-purpose projects.
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Goal:
Publicly owned treatment works (POTWs) are to achieve
"best practicable waste treatment technology" (BPWTT)
by the date established in their NPDES permits.
Extensions beyond July 1, 1983 should be allowed on
a case-by-case basis if consistent with State management
plan.
Since the CWA goal of 1983 for BPWTT will not be met, time extensions
for POTWs should be granted as established in NPDES permits with extensions
beyond 1983 determined on a case-by-case basis. Achievement of BPWTT should
proceed in accordance with the State plan for accomplishing water quality
goals. The total cost of reaching this goal is difficult to calculate
as many currently eligible costs are not directly related to the attainment
of BPWTT. (Treatment needs are estimated at $34.5 billion in 1980 Needs
Survey, but these needs may be reduced somewhat due to attainability
reviews, the elimination of second-round grants, expansion of the
definition of secondary treatment, and the elimination of eligibility
for industrial flow. Pipe-related needs (including correction of
combined sewer overflows) account for the remaining $84.2 billion of
current needs, but a substantial portion of this need is not necessary
for achievement of BPWTT.) A more accurate cost calculation will be
made as States develop funding and management plans showing how
they will meet the water quality objectives of the Clean Water Act.
Based on these plans and anticipated funding levels, a goal for
achievement of BPWTT will be established.
As indicated previously, some modification of BPWTT requirements can
be expected as a result of anticipated analyses of water quality standards
and reviews of use attainability. In addition, consideration should be
given to a redefinition or modification of the secondary treatment require-
ments to allow trickling filters or other biological treatment alternatives
where water quality is not adversely affected.
POLICIES
In addition to establishing environmental goals, the Clean Water Act
affirms a number of implementing policies which deserve further
examination or elaboration as part of the 1990 strategy.
Policy:
To provide federal financial assistance for planning, design,
and construction of POTW's.
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The high remaining treatment needs indicate that continuing federal
funding is required to meet the goals of the Act. The Strategy assumes
a funding level of $4 billion a year (in 1980 dollars) through 1990 to
meet this end. It should not be anticipated, however, that a federal
grant program will continue beyond 1990, so States must carefully
prioritize their needs to accomplish program goals. The availability
of federal funding in the next decade will depend upon remaining
needs to meet essential water quality goals. Federal funding for
future replacement or expansion (second round grants) should not be
made available. The Strategy recommends consideration of a federal
loan program as a possible source of funding following achievement
of highest priority national water quality objectives.
Policy:
To prohibit the discharge of toxic pollutants in
toxic amounts.
A primary goal of EPA's water quality standards effort is to
establish toxic pollutant criteria and to prepare guidance relating
to the inclusion of toxic criteria in State water quality standards.
Discharge of toxic pollutants in toxic concentrations should be
controlled by effluent limitations and Section 402 permits at the
earliest possible date. This effort is discussed in detail in the
1990 Planning Strategy.
Development of local pretreatment programs is required by
July 1, 1983, and municipalities may receive construction grant
funding for development of pretreatment programs. As the 1990
Operations Strategy indicates, the pretreatment program should
receive higher priority, in combination with the exploration and
development of additional alternatives to control industrial toxic
pollutants under an integrated waste management approach.
Policy:
To ensure the operation of POTW's in compliance with
permit conditions and to establish economically self-
sustaining operations which will not require additional
federal funding.
In order to preserve water quality and protect the large Federal
investment in wastewater treatment systems, it is essential that POTW's
achieve compliance and be operated and maintained properly. Financial
management concerns and other aspects of compliance are discussed in
the 1990 Compliance Strategy.
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As an emerging major industry, annual wastewater treatment user
costs are expected to rise from nearly $6 billion today to a projected
$30 billion by 1990 (includes an inflation factor). It is anticipated
that local communities will be responsible for raising all wastewater
treatment costs, including operations and maintenance, expansion, and
eventual rehabilitation. In view of this, it is essential that waste-
water treatment systems be operated on a sound financial basis.
Policy:
To recognize, preserve and protect the primary
responsibilities and role of the States to prevent,
reduce, and eliminate water pollution.
Delegation of program management to the States will continue through-
out the 1980's. Primary responsibility for identifying critical needs
and managing the program to meet them will rest with the States. EPA's
role will be to provide technical assistance and program oversight with
a minimum of requirements. These considerations are discussed in detail
as part of the 1990 management strategy. However, as part of the state
responsibility, a well defined, realistic project management plan for
those projects which will be funded during the 1980's should be
developed. This plan, based on water quality impacts, should show
how the State will complete the construction program in order to meet
Clean Water Act goals.
FUNDING POLICY RECOMMENDATIONS
Assumption
In recommending the following options, it is assumed that the
construction grants program will be funded at $4 billion annually
(in 1980 dollars) until 1990. This funding level should be continually
reevaluated, however, based upon the proposed State funding and
management plans and future needs surveys. Considerations should also
be given in the future to a federal loan program or a federal loan
guarantee program. Since the amount of funding will not meet all needs,
States must direct limited funds to priority projects and the program
must strongly encourage POTW economic self-sufficiency.
Funding Priorities
Recommendation:
Direct funds to States, who will be required to develop
a funding and management plan by 1982 showing how they
will meet the water quality goals of the Clean Water Act.
In making this plan, projects will be prioritized according
to their anticipated water quality impacts.
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This recommendation represents the keystone of the strategy in
establishing priorities among eligible needs. Projects dealing with
impaired uses, public health problems (including groundwater concerns),
or protection of outstanding national resource waters would receive
highest priority. The State plans will also include plans for meeting
other program needs such as attainability reviews and monitoring data
needs. A fuller discussion of this approach can be found in the 1990
Planning and Management Strategies.
Since priorities will be established by means of the water quality
plan, there is no need for a major redefinition of eligibilities. Some
modifications of eligibilities should be made, however, to support the
water quality based priorities. Recommended changes in eligibilities
follow.
Eligibilities
Recommendation:
For effluent limited receiving waters, expand the
definition of secondary treatment to include other
biological treatment alternatives (such as trickling
filters) where water quality is not adversely affected.
The definition of secondary treatment based on effluent limitations
of 30 mg/1 BOD and 30 mg/1 suspended solids has effectively disqualified
trickling filters which historically have performed at slightly better
than 40/40. EPA analysis suggests that roughly 30 percent of Category I
plants identified in the Needs Survey could consider construction of a
40/40 trickling filter instead of the proposed 30/30 secondary plant
on a water quality basis. Construction of trickling filters in these
instances would result in substantial capital and operating savings.
A preliminary estimate puts the ten-year capital savings in the 1 to 4
billion dollar range.
Recommendation:
For water-quality limited receiving waters, funding of
projects should be linked to the demonstration of attainable
water quality goals. Comprehensive before and after stream
monitoring should be done for all of these projects.
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This approach essentially continues the present policy embodied in
PRM 79-7 which focuses funding on treatment critical to meeting water
quality and beneficial use objectives of the Act. However, the present
plan is under review and may be modified in the future.
It is important to determine what measures will be necessary to attain
beneficial uses. Funding of AWT projects should be considered if reasonable
further progress can be made in achieving beneficial uses. The delineation
of this policy is part of the Action Plan.
AWT deferrals currently total over $100 million. It is expected that
more stringent justification procedures and application of better attain-
ability criteria in the future will save money through the construction of
fewer, more cost-effective AWT projects. However, it should be emphasized
that in many areas, AWT projects will be needed.
States should prioritize their standards reviews in accordance with the
five-year construction grants priority list. Streams where AWT projects are
anticipated over the next five years should be reviewed first, so that
facility planning is based on attainable uses and appropriate criteria
adopted through the standards revision process.
Similar to AWT projects, water quality analyses should be completed
to determine the need of CSO projects in relation to achieving beneficial
uses. Due to the level of funding need and the interrelationships to
stormwater, the 1990 strategy is recommending that a CSO/storm-water
strategy be developed. (See later section.)
Recommendation:
Fund collection systems for communities of 3500 population
or less, or for larger communities where necessary for
the integrity of the treatment works in order to meet
the enforceable requirements of the Act. FmHA should
provide assistance for collector systems for small
communities in the form of an expanded loan program.
Similarly, interceptors should be funded when necessary
for the integrity of a treatment system being funded in
order to alleviate existing pollution problems.
This recommendation essentially continues present policy for collectors
as detailed in PRM 78-9, which limits collection system eligibility to
systems proven to be "necessary and cost-effective" in addition to meeting
the substantial human habitation and two-thirds role requirements. Some
additional flexibility is given to small communities less than 3,500 in
part due to their limited financial capability. The collection system
must also be proven to be more cost-effective than decentralized or on
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lot systems. Collectors may be eligible if rehabilitation of on-lot
systems is not feasible, or where necessary in order to attain the highest
priority treatment.
Funding for interceptors should only be considered when they are
necessary for the integrity of the treatment system. However, interceptors
should be eligible if built in lieu of a treatment plan in order to convey
sewage to another location for treatment if this option is more cost-
effective.
The rural initiative program which coordinates several federal funding
programs for sewerage facilities should be implemented. Consideration
should also be given to increasing the funds managed by FmHA.
Recommendation:
Reserve capacity should be funded according to current
guidelines, but when funded, a financial plan outlining
long-term planning to finance rehabilitation and
expansion would be required. A water conservation
program should be encouraged to increase the time
before expansion is necessary.
Funding reserve capacity will help keep the State/local cost share
down and increase the potential for municipal economic self-sufficiency.
Also, reserve capacity can be used as an incentive to promote financial
planning and water conservation.
Recommendation:
Fund rehabilitation only for projects which will
contribute significantly to improving inflow/infiltration
problems. Rehabilitation of aging infrastructure of
older inner cities should be part of Urban Strategy
administered by the Department of Housing and Urban
Development (HUD).
The current policy on rehabilitation funding remains in effect
with this recommendation. The amount of funding required to bring
into good repair the sewer systems of older inner city areas is
unknown, but is believed to be extremely large. The Needs Survey of
eligible costs is not an estimate of true costs, nor are current program
funds adequate to meet these needs. A current Congressional proposal
would include sewer rehabilitation as part of an overall Urban Strategy
under HUD leadership to assist declining older cities. The primary role
for EPA in this approach would be to continue ORD research into better
methods of rehabilitation and to provide technical assistance.
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Recommendation:
Expand Step I planning eligibilities and modify conditions
for grantee eligibility.
Proposed expanded eligibilities for planning would include funding
the development of local financial management systems, compliance
diagnostics and studies on integrated waste management which includes
municipal and industrial sludges and pretreatment program options.
Planning for municipal facilities should also consider in appropriate
situations the impact on water supply, solid waste management and
energy recovery. Expanding eligibilities will promote a greater return
on the federal water quality investment and will assist in ensuring that
operating plants live up to initial expectations.
In promoting an effective construction grants process, the Agency
envisions a greater use of 201 funds by State agencies and third party
managers. Modifying current eligibility to include third party or
State management of grants is designed to benefit grantees with existing
management deficiencies, especially small grantees. This approach is also
particularly well suited to areas where 201 wastewater treatment projects
raise legitimate planning opportunities beyond its scope of the individual
grantee's expertise or needs, or where State involvement is otherwise
desirable, for example, in the development of a State-wide model.
There are two ways a State agency or a third party may become eligible
for 201 funds:
o Funds may be received by executing a subagreement with an
eligible grantee to undertake part or all of the management
of the grant;
o The agency can be designated as the management agency for a
function in the State Water Quality Management Plan (as
required by Section 208).
As an example, New York and New Jersey State agencies have been
designed as the pretreatment planning agencies and thus have received
201 grant funds.
Recommendation:
Modify the existing multi-purpose funding policy to the
115 percent option.
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This option increases incentives for the multiple-purpose approach
in an attempt to encourage recycling, reclamation, and energy recovery
projects consistent with the goals. In order to address concerns over
the national cost implications and to identify any possible diversion
of funds from other needs categories, EPA should make every effort to
project and monitor total program costs, as well as benefits which
will result from this recommendation. This option is consistent with
EPA policy on single-purpose I/A projects.
The 115 percent option uses the following eligibility formula for
I/A projects: 115% of the ratio of (a) the present worth cost of the
most cost-effective single-purpose option, to (b) the present worth
cost of the multiple-purpose project, with a minimum eligibility of
115% of the capital cost of the single purpose alternative. Non-I/A
projects should be eligible at the cost of the single-purpose
alternative.
Recommendation:
No federal program is recommended for subsidizing low
income households. EPA should work closely with State
and local governments to explore possible State or
local assistance options for mitigating the impacts
of cost increases upon low income families.
EPA is aware of the concern for the impact of high costs on low
income families resulting from the construction grants program.
Assistance, however, should remain a function of the local or State
government. EPA's role should be limited to providing technical
assistance to States or localities considering such options.
Recommendation:
Eliminate funding for second-round grants.
A second-round grant has been defined as a grant for planning,
design or construction associated with expansion (including construction
of a new plant), upgrading or replacement for a POTW previously funded
by the 201 program. Second and subsequent portions of a "phased" or
segmented project will not be considered second-round grants if
specifically planned in the original facility plan as segmented
portions of 20-year cost effective treatment works. Limited funding
for corrective action for new plants out of compliance due to design
error or equipment failure should be eligible, but would be followed
up with an attempt to establish liability and recover costs.
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Second-round grants are inconsistent with the goal of encouraging
self-sufficient POTW's. They also strain the limited amount of grant
funds available.
Summary of Eligibility Recommendations
As noted earlier, it is not possible to quantify the anticipated
savings resulting from recommendations which give priority to water
quality benefits. Funding for the five needs categories has not been
deferred or eliminated, but rather modified to obtain the greatest
water quality improvements possible with existing resources. These
modifications., operating through State management plans, will reduce
the dollar needs for the various categories of projects as follows:
CATEGORY
I Secondary Treatment
1980 NEEDS*
(Billions)
$28.8
II Advanced Treatment
IIIA I/I
IIIB Rehabilitation
IVA Collectors
IVB Interceptors
$ 5.6
$ 2.5
$ 5.6
$18.4
$20.8
V CSO (recreational uses) $36.5
(fish and wildlife) $23
COST IMPACTS OF
MODIFICATIONS
Could be reduced by $840 million
to $4.6 billion over a ten-year
period by including trickling
filters in definition of secondary;
further reductions possible if
other processes included; use of
Industrial Cost Exclusion (ICE)
could save $5.9 billion in
Categories I and II.
Could be reduced by attainability
reviews.
Could be reduced by modifying
cost benefit evaluations.
Could be reduced by restrictive
definitions of eligible projects.
Could be further reduced as full
effect of PRM 78-9 is felt.
Could be reduced by restricting
eligible projects to those
needed for integrity of entire
system; use of ICE could save
$1 billion.
Could be reduced by focus on
attainable uses.
Change to this water quality
objective could save approximately
$13.5 billion.
*(1980 Needs are preliminary figures and may differ slightly from the
final report)
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Additional cost savings will occur with the elimination of second-
round grants. The federal share of costs will decrease if States make
significant use of the recently enacted lower federal share option.
FEDERAL SHARE
Recommendation:
Continue the recently passed option which allows
States to establish a lower federal share for
all projects within the State.
The recent 1980 authorization bill permits a State to lower the
federal share if the state prefers, while retaining the federal
commitment to fund up to 75 percent. This option provides flexibility
for States and will broaden the impact of federal funds. If States
electing the option assume the additional costs, no additional
financial hardship will impact municipalities. Recommendations have
not been made to require mandatory lowering of the federal share.
This option may produce a financial hardship in states the majority
of whose projects are in SMSAs or small communities which often
have problems with financial capability.
STATE PRIORITY SYSTEM
Recommendati on:
States should maintain control and responsibility for
overall priority system and priority list. Through
a water quality management strategy States should
prioritize projects to be funded in order to
complete the municipal construction program.
The State priority system should be in conformance
with the management strategy.
Because of limited funds, projects must be prioritized, and two
important priorities which should be an integral part of all state
priority systems are: (1) enforceable requirements, and (2) water
quality impacts/beneficial uses.
But for these priorities to be implemented fully, States must
strengthen their planning resources and allocation process, as well
as develop resources for adequate time management of the program.
EPA should assist States in developing this capability.
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CSO/URBAN RUN-OFF STRATEGY
Recommendation:
Develop, refine, and implement a combined CSO/Stormwater
Strategy.
During the next two years, EPA will be developing and implementing
elements of a combined CSO/Urban Runoff Strategy. The work areas include:
completion of a CSO handbook, establishment of conditions for deviations
from standards for stormwater events, refining the definition of CSO/
Urban Runoff needs for the 1982 Needs Survey, coordination of point source
and non-point source pollution control as part of the Stormwater Management
Program, and developing the technical base for cause/effect relationships
of urban runoff controls under the National Urban Runoff Program (NURP).
In the interim the moratorium on funding stormwater treatment should be
extended from 1982 to 1985.
FUNDING IMPLICATIONS OF INFLATION
The recommended funding proposals set forth in this paper assume
that forty billion 1980 dollars will be available for grants over the
next ten years. Inflation will have tremendous impacts on this long-term
program if it is not drastically reduced or considered in appropriations.
This is illustrated by the following figures which indicate annual
funding levels required at several inflation rates in order to fund
$40 billion worth of projects by 1990.
Program Cost in Annual Funding Levels
Billions of 1980 Dollars at Various Inflation Rates
$40 0% 7% 10% 13%
4.0 5.7 6.5 7.4
Under current estimates, the 1990 goal for fishable/swimmable waters
where attainable appears to be feasible if federal funding is available
throughout the decade at a rate of approximately $4 billion annually in
1980 dollars. The feasibility of this goal and the funding level required
will be continually reevaluated as cost estimates are refined and updated.
If funding is reduced much below this level, however, the ability
to meet this goal will be severely compromised. One particular
problem involves States with large urban projects. With smaller
allocations under reduced funding, many States would have insufficient
funds to complete very large projects even if the entire allotment
were committed to those projects for several years. Alternatively,
the commitment of most of a State's funds to a few large projects
could end progress on other important projects in the State.
102
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There is a major need for a realistic priority list so communities
can be adequately prepared to raise local funding or, if far down the
list, can make a decision to proceed on their own.
ALLOTMENT SYSTEM
Recommendation:
Retain the current allotment formula. The FY 82/83
formula shouTd be based on the current State population
and 1980 Needs Survey. Adopt a two-tier appropriation
to provide incentive of additional funds to States ready
to proceed.
Analyses of modifications to the funding formula (varying percentage
of population and needs) indicated minimum changes in funding distribution.
As population figures and needs are refined, current data should be used
in the formula. Although a major priority of the program is to direct
funds into projects which will have greatest impact on water quality,
a factor is retained related to population. This will retain a level
of funding to States which have met priority needs to fund secondary
priorities. Without doubt over the next decade, reassessment of funding
allocation will be required.
A two-tier program within an appropriation should be adopted which
will help to correct existing inbalances between remaining allotments
and readiness to proceed. Fast moving States will divide up incentive
monies in proportion to their share of the first-tier allotment.
FUNDING MECHANISM
Recommendation:
Investigate with Congressional staff, the feasibility
of establishing a loan or loan guarantee program.
Two options for a loan program could be considered. A loan
guarantee or loan program may be necessary to assist localities
unable to raise money at reasonable rates of interest in the open
market to meet capital needs for expansion or rehabilitation. This
could also provide broader coverage for project eligibility to
assist in meeting the water quality objectives of the Act.
Given the compliance problems and the large federal investment,
another option could be considered. The current grant program for
construction could be converted to a modified loan program. The loan
pro'gram would be linked to compliance by exempting a municipality from
103
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all or a portion of principle and interest payments each year the POTW
is in compliance. The potential administrative problems need to be
explored with this concept, but given the compliance problems the
concept may have merit.
SET-ASIDE PROGRAMS
Recommendation:
Maintain a one percent set-aside program for innovative
projects but eliminate any special account for alternative
projects. Modify the project eligibilities in the rural
set-aside program.
The set-aside programs, while important to meet program goals,
require some modification for operational purposes. To minimize the
grantee uncertainty over the continual availability of funds under
the current three year I/A authorization, the innovative set-aside
program should be made a permanent part of the construction grants
program. Innovative projects as well as alternative projects should
be funded at 85 percent. A one percent set-aside should be retained
which converts to a national pool for innovative projects if not
obligated. Major administrative modifications are made to this program
which are detailed in the Operations Strategy.
The rural set-aside program should also be modified and EPA should
encourage governors of States which are not currently designated as
rural to establish a rural set-aside program. This is based on the
fact that 41 percent of the rural needs (communities under 10,000
population) are in the 15 urban states. Individual states should have
the option to increase the rural set-aside above the present 4 percent
level. The population criterion for the set-asides should be expanded
from 3,500 to 10,000. However, the criterion should be accompanied by
safeguards to ensure that projects serving urban fringe areas are not
funded over truly rural projects.
It is reasonable to conclude that the 4 percent set-aside was
established to fund alternatives to the traditional, costly collection
and treatment system. Expanding eligibilities to include all good
cost-effective projects is in line with the intent in establishing
the set-aside. Therefore projects employing conventional technology
that are found to be cost-effective approaches should be eligible for
the set-aside if they demonstrate low cost pollutant removal benefits.
Reference should be made to the small community strategy.
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CHAPTER VIII
ACTION PLAN
The action items for implementation of the funding strategy
recommendations are outlined below and summarized in Figure VIII.1.
The items are organized according to whether the proposed changes
are to be made by legislation, regulation, or administrative action.
First, however, is a brief discussion of action items from the
planning and management strategies which are of critical importance
to the funding strategy.
FEDERAL FUNDING UNDER DELEGATION
Under the recommended management strategy, EPA will move to
fully delegate the program to the States and to change its role to
that of Environmental Manager. In conjunction with this new role,
the grant funding mechanism should be changed to provide greater
authority to States acting as agents for EPA. The management strategy
action plan calls for submission of this proposed legislative change
as part of the 1983 budget submission and legislative package.
FEDERAL FUNDING UNDER WATER QUALITY MANAGEMENT PLANS
As the primary recipients of EPA grants, States will be required
to develop a funding plan by 1982 showing (1) how they will meet the
water quality goals of the Act and (2) how they will prioritize projects
according to their water quality impacts. Actions to implement this
concept are included as part of the planning strategy.
LEGISLATION PACKAGE
1. Propose legislative change to appropriation process and
funding mechanism to adopt a two-tier appropriation to provide an
incentive of additional funds to States proceeding rapidly with
construction.
2. Propose legislative change to modify the existing multiple-
purpose funding policy to provide for the 115 percent option.
3. Propose legislative change to modify the present I/A set-aside
program by eliminating set-asides for alternative projects and making
the innovative set-aside a permanent part of the construction grants
program. (Also see operations strategy.)
105
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4. Propose legislative change to expand the rural set-aside to
allow funding for cost-effective conventional processes as well as
alternative projects. There is some question as to whether this will
require legislative change. A memo is being prepared for the
Office of General Counsel and a ruling is expected by the end of
January. (Also see operations strategy.)
REGULATIONS
1. Develop regulations to implement provisions of Stafford Amendment
allowing individual States to voluntarily establish a lower federal share
for projects within their jurisdictions.
2. Develop regulations to implement provisions of Stafford Amendment
to limit Step 3 grant funding for industrial flows.
3. Develop regulatory proposal and supporting memorandum to expand
definition of secondary treatment to include additional biological
treatment alternatives in situations where water quality is not
adversely affected.
GUIDANCE
1. Develop and issue policy to define second round grants and
eliminate funding for them.
2. Develop and issue policy defining range of eligibilities under
expanded view of Step 1.
3. Develop and issue policy indicating financial planning require-
ments to be included as part of Step 1 requirements. This will be done
in conjunction with major overhaul of guidance linked to program
delegation. (See operations strategy.)
LONG-RANGE ISSUES
1. Develop, refine, and implement a combined CSO/stormwater strategy.
2. Investigate the feasibility of establishing a loan or loan
guarantee program as a future substitute for construction grants funds.
106
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