EPA/205/R-92/999
United States Office of August?. 1992
Environmental Protection Administration and
Agency Resources Management ^f. /;,•/,;
v>EPA Alternative Financing
Mechanisms For
Environmental Programs
State Capacity Task Force
The Alternative Financing
Mechanisms Team Report
ENVIRONMENTAL
PROTECTION
AGENCY
DALLAS, TEXAS
LIBRARY
FINAL DRAFT
cycte
Printed on paper (hat contains
at least 50% recycled fiber
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For additional information please contact:
U.S. Environmental Protection Agency
Office of Administration and Resources Management
Office of the Comptroller
Resource Management Division (H-3304)
Washington, DC 20460
(202)260-1020
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ACKNOWLEDGEMENTS
The State Capacity Task Force, chartered in October 1991 by Deputy Administrator
F. Henry Habicht JJ, was established to examine ways EPA can help states augment their
ability to protect the environment The Task Force is co-chaired by John Wise, Deputy
Regional Administrator, EPA Region 9, and Laurie Goodman, Associate Administrator,
Regional Operations and State/Local Relations. The Task Force is organized around four
distinct teams that include: improving the state-EPA relationship, chaired by Robert S.
Currie; alternative financing mechanisms, led by John J. Sandy, building state capability,
directed by Michael B. Cook, and streamlining the grants process, headed by Harvey G.
Pippen, Jr. This report is the product of the Alternative Financing Mechanisms Team, led
by John J. Sandy, Director of the Resources Management Division, EPA, who gratefully
acknowledges the efforts of all the team members:
Alice Jenik - EPA Region 2
Don Niehus - Office of Water, EPA
Tim Jones - Office of Solid Waste and Emergency Response, EPA
Beth Cavalier - Office of Prevention, Pesticides and Toxic Substances, EPA
Steve Johnson - Office of Prevention, Pesticides and Toxic Substances, EPA
Kevin Keaney - Office of Prevention, Pesticides and Toxic Substances, EPA
Tina Parker - Office of Air and Radiation, EPA
Mary Mitchell - Department of Environmental Quality, State of Louisiana
Danyl Serio - Department of Environmental Quality, State of Louisiana
Charles Jones - Department of Environment, State of Kansas
George Ames - Resource Management Division, EPA
Vera Hannigan - Resource Management Division, EPA
The Environmental Financial Advisory Board (EFAB) Committee on Paying for
Environmental Mandates reviewed the drafts of the AFM report and offered substantive
comments and suggestions. Their expertise in environmental finance was essential to our
efforts and we would like to acknowledge them individually:
v - Mr. Joseph D. Blair, EFAB Chair of Paying for Environmental Mandates
Committee '"""~"
.' - Hon. Pete V. Domenici UNVfRONMENTAl
; - Hon. Beryl F. Anthony, Jr. PROTECTION
« > - Dr. Richard Fenwick, Jr.
Ms. Deeohn Ferris
^ 1 - Hon. Steve Goldsmith
" - Mr. John Gunyou
^, - Dr. Peggy Musgrave
Mr. Gerald Newfarmer
Mr. John V. Scaduto
Mr. Richard Torkelson, EFAB Chan-
Ms. Frieda K. Wallison, EFAB Vice Chan-
Mr. Herbert Barrack, ARA EPA Region 2, EFAB Executive Director
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TABLE OF CONTENTS
EXECUTIVE OVERVIEW i
INTRODUCTION 1
FINDINGS 3
RECOMMENDATIONS 9
ALTERNATIVE FINANCING MECHANISMS 15
FEES 18
UnLITY CHARGES 20
CONNECTION FEES 21
FACILITY PERMIT FEES/MONITORING FEES 22
APPLICATION/PROCESSING FEES 23
INSPECTION/CERTIFICATION FEES 24
EMISSIONS/DISCHARGE-BASED FEES 25
DISPOSAL FEES 26
PRODUCT REGISTRATION AND INSPECTION FEES 27
RECREATIONAL FEES 28
WETLANDS PERMIT FEES 29
SEPTIC TANK FEES 30
HAZARDOUS WASTE TRANSPORTER FEES 31
LICENSE FEES 32
IMPACT FEES 33
BONDS 34
GENERAL OBLIGATION BONDS 36
REVENUE BONDS 37
MORAL OBLIGATION BONDS 38
DOUBLE BARREL BONDS 39
MANDATE BONDS 40
CERTIFICATES OF PARTICIPATION 41
ANTICIPATION NOTES 42
LOANS 43
COMMERCIAL LOANS 45
WATER POLLUTION CONTROL STATE REVOLVING
FUNDS 46
STATE LOAN PROGRAMS 47
COBANK (NATIONAL BANK FOR COOPERATIVES)
LOAN PROGRAM 48
RURAL DEVELOPMENT ADMINISTRATION LOAN
PROGRAM 49
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GRANTS 50
RURAL DEVELOPMENT ADMINISTRATION
WATER AND WASTE DISPOSAL GRANT PROGRAM . . 52
ECONOMIC DEVELOPMENT ADMINISTRATION PUBLIC
WORKS AND DEVELOPMENT FACILITIES GRANT
PROGRAM 53
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
COMMUNITY DEVELOPMENT BLOCK GRANTS 54
APPALACHIAN REGIONAL COMMISSION (ARC)
SUPPLEMENTAL GRANTS 55
EPA GRANTS 56
STATE GRANT PROGRAMS 58
CREDIT ENHANCEMENT MECHANISMS 59
STATE BOND BANKS 61
RURAL DEVELOPMENT ADMINISTRATION LOAN
GUARANTEES 62
COMMERCIAL CREDIT ENHANCEMENTS 63
COLLATERAL ARRANGEMENTS 64
PUBLIC-PRIVATE PARTNERSHIPS 65
PRIVATE SECTOR OPERATION 68
TURNKEY ARRANGEMENTS 69
BUILD-OPERATE-TRANSFER/BUrLD-TRANSFER-OPERATE .. 70
LEASE-PURCHASE/OPERATING LEASE 71
LEASE-DEVELOP-OPERATE/BUILD-DEVELOP-OPERATE 72
SALE/LEASEBACK 73
TAX-EXEMPT LEASE 74
ECONOMIC INCENTIVES 75
LIABILITY ASSIGNMENT 77
TRANSFERABLE DEVELOPMENT RIGHTS 78
FINES AND PENALTIES 79
ASSURANCE/PERFORMANCE BONDING 80
WETLANDS MITIGATION BANKING 81
POINT SOURCE/NONPOINT SOURCE TRADING 82
EMISSIONS TRADING 83
LAND TRUSTS 84
SPECIAL DISTRICTS 85
ENVIRONMENTAL FINANCE CENTERS 87
TAXES 88
INDIVIDUAL INCOME TAX 91
CORPORATE INCOME TAX 92
CORPORATE GROSS RECEIPTS TAX 93
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DEATH AND GIFT TAXES 94
AD VALOREM PROPERTY TAXES 95
PERSONAL PROPERTY TAXES 96
SALES AND USE TAXES 97
ALCOHOLIC BEVERAGE TAXES 99
AMUSEMENT TAXES 100
FEEDSTOCK TAXES 101
FERTILIZER TAXES 102
HARD-TO-DISPOSE TAXES 103
HOTEL TAXES 104
INSURANCE PREMIUM TAXES 105
LITTER CONTROL TAXES 106
MARINE FUEL TAXES 107
MOTOR FUEL TAXES 108
REAL ESTATE TRANSFER TAXES 109
RENTAL CAR TAXES 110
SEVERANCE TAXES Ill
SPECIAL ASSESSMENTS 112
TOBACCO TAXES 113
WASTE-END TAXES 114
WATERCRAFT SALES TAXES 115
MISCELLANEOUS 116
EXACTIONS 118
TRUST FUNDS 119
WATER AND SEWER ACCESS RIGHTS 120
VOLUNTARY MECHANISMS 121
PRIVATE GUARANTY MECHANISMS 122
ATTACHMENT A: BIBLIOGRAPHY A-l
ATTACHMENT B: GLOSSARY B-l
ATTACHMENT C: THE CLEAN AIR ACT OF 1990: A GUIDE TO PUBLIC
FINANCING OPTIONS C-l
ATTACHMENT D: FUNDING STATE ENVIRONMENTAL PROGRAM
ADMINISTRATION: THE USE OF FEE-BASED PROGRAMS D-l
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EXECUTIVE OVERVIEW
INTRODUCTION
The State Capacity Task Force was established to examine ways EPA can help states
augment their ability to protect the environment The Task Force is organized around four
teams, each exploring a major facet of the funding challenge facing the states. In
recognition of his efforts to elevate environmental financing as an EPA priority, John J.
Sandy, Director of the Resources Management Division, was asked to chair the team on
alternative financing mechanisms (AFMs).
The AFM team addressed the fiscal constraints that hamper the ability of states and
localities to finance environmental protection. They recognized the need for a document
that provides information aimed at resolving two types of funding shortfalls: state capacity
(program personnel) and capital infrastructure needs. They decided to produce a
comprehensive encyclopedia of alternative financing mechanisms that could be used as an
information resource for states and local governments. To make it "user-friendly," the team
developed a format to furnish the information in a uniform fashion.
The Task Force also requested the Environmental Financial Advisory Board (EFAB)
to review the draft report of the AFM team. The EFAB was established to provide analysis
and advice on environmental finance to assist EPA in carrying out its mission. The EFAB
Committee on Paying for Environmental Mandates was briefed on the AFM report in early
May and reviewed the draft in mid-June concurrent with the members of the AFM team.
FINANCING CHALLENGE
The report outlines the financing challenge and a range of alternative financing
mechanisms at both the state and local level, presenting financing options without
advocating the use of any specific type. It is intended to provide information about the
principal features of AFMs, their relative advantages and disadvantages - with particular
attention given to administrative considerations — and some of the key questions and issues
associated with their use.
FINDINGS
The Findings section is intended to help state and local governments narrow their
search for an AFM to a category appropriate for their financing needs. For each of the
eleven AFM categories (with the exception of the Miscellaneous and EFC categories), the
findings note comparative advantages and disadvantages, outline the circumstances under
which the AFMs in a particular category might prove useful, and provide concrete examples
illustrating the funding needs for which a given category might be appropriate.
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RECOMMENDATIONS
One very important consideration is how to use the information in this report as a
tool to help fund environmental programs. At the state and local level, the team
recommended that states and localities conduct a study of their financing needs that would
identify areas of actual or potential shortfall, and examine their current financing
mechanisms to determine which categories of AFMs are not already being used. The
governments could then use the information about AFMs provided by the compendium, as
well as their own assessments of the viability of an AFM in their jurisdiction, to select a
financing mechanism that will meet their needs.
It is essential to assemble the wealth of information on environmental finance and
make it available to states and localities through key points of distribution. With this in
mind, the following outreach strategies are recommended:
• EPA is currently exploring the use of electronic bulletin boards as avenues for
information. As an example, in October, 1991, EPA's Office of Water led the
way in disseminating financial information to public entities by opening the
Environmental Financing Information Network (EFIN), which provides
information on financing alternatives for state and local environmental
programs and projects.
• The Agency should hold or sponsor national workshops and seminars to
transfer information about hands-on real world solutions. The Agency should
also provide publications and other types of technical assistance on
environmental finance. For example, EPA could provide technical assistance
on establishing certain types of AFMs, or operate a peer match service.
• In addition, EPA is developing Environmental Finance Centers (EFCs) in
land grant universities in the ten EPA Regions. EFC activities could include
education, technical assistance, and research on environmental finance on a
regional level. EPA support to EFCs could include staff assistance through
the Intergovernmental Personnel Act (IPA) and the Revitalizing
Environmental Infrastructure Through Volunteerism (REV) program, as well
as seed money for initial program operations. Two EFCs are being developed
for the Universities of Maryland and New Mexico.
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INTRODUCTION
THE FINANCING CHALLENGE
Historically, environmental protection has been a shared responsibility between the
federal government, the states, and local governments. Increasingly, however, the
responsibility of implementing, administering and enforcing federally mandated
environmental programs has shifted to the states. This trend places a growing financial
burden on state and local governments at a time when the gap is widening between the cost
of environmental protection and available resources. To meet this financial challenge, new
alternative sources of revenue and capital must be found to finance environmental
programs.
Compared with the U.S. economy as a whole, total public and private environmental
expenditures, as a percentage of gross national product (GNP), grew from 0.9 percent in
1972 to 2.1 percent in 1990. By the year 2000, environmental expenditures are projected
to rise to 2.8 percent of GNP.1 (In 1986 dollars, the GNP for 1990 was $4.7 trillion, and
for the year 2000, is projected to rise to $7.1 trillion.)
The gap between current resources and the investments needed to maintain existing
standards and meet new requirements is increasing. By the year 2000, total annual
environmental spending requirements (public and private) will be about $200 billion,
compared to a 1988 level of $115 billion.2 This huge difference can be met only through
greater efficiency, expanded public and private investment, and increased state and local
capacity to implement programs.
At the local level, the funding gap is even more dramatic. In the year 2000, local
governments will have to spend an extra $12.8 billion per year, or 65 percent more than they
did in 1988 just to maintain current levels of environmental quality. They will need to
spend at least another $3.6 billion per year to comply with new regulations. In all,
communities may need to spend 83 percent more per year by the year 2000.
Even if state and local governments could borrow enough to pay for capital
investments, annual cash flow requirements to repay their debts will outstrip their financial
capacity. Between now and the end of the century, local governments will need to raise 32
percent more money to cover operating and debt service costs. This amounts to an increase
in cash requirements of over 3.5 percent per year. Yet over the same period, U.S. GNP is
1 U.S. Environmental Protection Agency, Office of Policy, Planning and Evaluation,
Environmental Investments: The Cost of A Clean Environment, December 1990.
2 The Environmental Financial Advisory Board, Narrowing the Gap: Environmental
Finance in the 1990s, Progress Report (revised), May 1992.
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estimated to grow by only 237 percent per year and population to grow by only 0.66 percent
per year.3
The increase in anticipated expenditures coincides with a fiscal crisis in the states.
The growing competition among programs for funding from general revenues and the fact
that the economic downturn threatens even general revenue levels means that state and
local governments are forced to develop additional sources of funding to pay for their share
of environmental costs. Uncertain state economies and increasing budget deficits threaten
existing environmental programs as newly promulgated federal requirements compete for
limited funds and reduced staffing resources.
Financial pressures impose numerous constraints on state environmental programs
and investments. Implications include state programs returning to federal administration,
non-compliance and non-enforcement of state-run programs, delays in implementation of
required regulations and programs, and cancellation or postponement of necessary and
mandated environmental investments.
CURRENT APPROACH TO FINANCING
State and local governments typically support their environmental budgets through
a variety of revenue sources, including taxes, fee programs, penalties and fines, general state
funds, federal funds, and bond funds. State air, water, and solid waste programs have
historically relied upon federal grants, fees, and general revenues for the majority of then-
funds. There is no one common investment mix, as a great deal of variation exists across
environmental media and among states.
Trends clearly indicate that funding from federal resources and state general
revenues are decreasing. Consequently, states have been turning to alternative financing
mechanisms (ATMs) to fund a greater percentage of their environmental budgets.
Currently, fees are the most widely used AFM, particularly in air and water quality
programs. The trends also suggest that AFMs are being applied to a greater variety of
services, are becoming more complex and flexible, and are instituted with the primary
purpose of generating revenue and with the secondary aim of achieving particular goals.
FINDINGS
The AFMs included in this compendium can be used to finance a wide variety of
capital and operating costs on both the local and state level. However, not all AFMs will
be suitable for financing both state and local programs or for meeting all types of costs. To
identify an appropriate AFM for a particular need, state and local government officials must
3 The Environmental Financial Advisory Board, Narrowing the Gap: Environmental
Finance in the 1990s, Progress Report (revised), May 1992.
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consider the advantages and limitations of particular AFMs. For example, some AFMs are
more appropriate for financing capital costs than operating costs, and vice versa. Bond
financing is one AFM that is well-suited to financing capital projects, while other AFMs,
such as fees, are more suited to covering ongoing program costs.
When considering an AFM, state or local governments should consider the time and
resources required to implement various financing mechanisms. AFMs vary in the process
required for approval and the speed at which they can be implemented. For example, loans
can often be arranged more quickly than bonds can be issued and fees can often be enacted
more quickly than new taxes. Some AFMs inherently cannot be used for certain purposes;
a program could not, for example, issue bonds to cover an unexpected shortfall in annual
revenues.
The following sections provide concrete examples of circumstances under which a
particular category of AFM might be better suited for use by state and local governments.
These examples are options only. They are intended purely as a guide, and rely on general
statements that may or may not apply to a given state or locality. The usefulness of an
AFM as a financing tool will depend on the individual political, fiscal, and legal
characteristics of the area where it is implemented.
FEES
In many states, fees may be administratively imposed without legislative
approval, making them a viable option for state and local governments which
might face severe political opposition to tax increases.
Because administrative processes are usually faster than the legislative
process, administratively-imposed fees may be particularly well-suited to
providing revenues when it is necessary to increase program activities over a
short time frame — to implement a new program or to implement new
program requirements to administer new mandates. For example, if a
program needs to issue new permits, setting a fee to cover costs of permit
issuance can cover costs on a pay-as-you go basis.
Many states require that fees may not exceed the cost of services rendered.
Therefore, fees are best suited to covering those administrative and operating
costs that can be defined as services rendered to the feepayer.
In communities where fees already exist, officials may wish to examine their
rates and ensure that fees are covering the full costs of providing these
services.
Communities in fiscal crisis facing the choice of whether to cut services or
increase taxes may find that instituting service fees will enable them to
maintain services. For example, a county with a budget deficit might enact
park user fees rather than eliminate county park and recreation programs.
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BONDS
LOANS
Over the years, bonds have been used to finance around 60 percent of
environmental infrastructure. Bonds will continue to be a principal source of
capital financing. Because bond financing is restricted to capital projects or
other large, up-front expenditures, it is not suitable to cover annual operating
costs.
Restrictions implemented by the 1986 Tax Reform Act have generally
increased the cost of bond financing for environmental infrastructure.
Larger local governments may prefer bond financing to loans for capital
projects, since the bond market typically offers capital at lower interest rates
than the rates for commercial loans. Larger communities may also find it
easier to access the financial and legal expertise required to issue bonds.
Bond financing may be particularly suited to projects where the source of
repayment is raised by user charges from the project or facility financed by
the bond. For example, bond financing may be an appropriate mechanism to
finance a wastewater treatment facility where the debt service is repaid by
user charges.
State and local governments have a large amount of flexibility in structuring
bond issues to suit their needs. With advice from financial advisors,
repayments can be timed to suit the fiscal needs of a given community.
Generally, two types of loans are available: commercial loans and federal and
state loans. Many of the federal and state loan programs provide subsidies.
Loans are more suitable for financing capital projects and up-front
expenditures than operating costs.
Except for the SRF, federal loan programs are typically oriented to small,
economically disadvantaged, or rural communities. Overall, federal loan
programs fall far short of meeting needs.
State and local government officials should consider loans as a financing
mechanism if the project to be financed meets eligibility criteria for federal
or state low-interest loan programs, since acquiring low-interest capital
financing can improve the affordability of the project to the community.
Establishment of loan programs may unintentionally inhibit compliance if
communities opt to wait for loan funds.
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GRANTS
Smaller and economically disadvantaged communities may want to consider
loans since they may find it easier to acquire loan capital and be able to
command lower interest rates than on the bond market Loans are also a
viable option for smaller projects, particularly where the costs of bond
issuance would represent too high a percentage of the bond proceeds.
Unlike bonds, a government generally does not have to state a specific source
of repayment in order to arrange a loan. (The SRF Program authorized
under the Clean Water Act, is an exception.) Loans may be a viable option,
therefore, when the state or local government has not yet identified the
source of repayment, or where multiple revenue sources will be used.
Loan programs may be preferable to grant programs from state and federal
perspectives if repayments are available to provide assistance other
communities on a revolving basis.
In addition, since loans typically do not require voter approval, they may be
suitable for meeting short-term cash needs while the government is identifying
the ultimate source of funds.
Depending on the program, loans may be coupled with a grant for a portion
of project costs for certain small or economically disadvantaged communities.
State and federal grant programs have been and probably will remain a
supplementary source of funds for both operating and capital costs of state
and local programs. Grant funding, however, is inherently unstable to the
extent that it is dependent on the vagaries of an annual appropriations
process.
Establishment of grant programs may unintentionally inhibit compliance for
some communities that may opt to wait for grant funds.
Grant awards are often tied to meeting goals and requirements that may
increase overall project costs. On the other hand, grants can provide
subsidies that have positive incentive effects.
State and local governments should explore the possibility of funding specific
eligible activities with grants, as opposed to seeking funds for the entire
program. For example, an innovative part of a state air quality program may
be eligible for an air pollution control research grant from the EPA's Office
of Research and Development
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CREDIT ENHANCEMENTS
Credit enhancements are most useful to communities with no credit history
or a poor credit history, enabling them to gain access to capital or to acquire
capital at lower interest rates than otherwise anticipated.
Communities with strong credit histories may also find that they can
command a lower interest rate on either bonds or loans by using credit
enhancements.
Credit enhancements may be particularly useful to help finance innovative
projects, where credit providers may require additional reassurance of debt
repayment For example, credit enhancements may be helpful when issuing
a bond to finance stonnwater drainage improvement, since bondholders may
want added reassurance that the stonnwater district will indeed raise the
anticipated revenues.
PUBLIC-PRIVATE PARTNERSHIPS
Public-private partnerships are typically suited to financing activities that
involve the provision of services such as wastewater treatment, drinking water
provision, and solid waste collection and disposal.
The President's recent Executive Order on Privatization (# 12803, May 4,
1992) will cause regulatory and policy changes that have a significant potential
to increase investment in environmental facilities. States should inform local
governments of this potential and may want to consider participating in the
rulemaking process. In addition, as the order removes federal regulatory
impediments to public-private partnerships, states may wish to examine their
own laws and regulations and consider removing state legal and regulatory
impediments to public-private partnerships.
Through lease-purchase arrangements, where a private partner leases and
operates a public facility, paying debt service on publicly-issued bonds with
annual lease payments, state and local governments can gain the benefit of
private sector efficiency while retaining the low interest cost of public capital.
Public-private partnerships could also be applied in less traditional areas, such
as enforcement and monitoring of environmental regulations.
Public-private partnerships might be particularly well-suited to small
communities that can benefit from a private partner's size and specialized
experience. For example, due to economies of scale, a small community
requiring solid waste disposal services might benefit from a partnership with
a company that operated a large solid waste disposal facility for a number of
communities. The community may also benefit from the private partner's
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specialized experience in solid waste management However, without such
economies of scale, most small communities might find the transaction costs
(e.g., attorney and financial advisor fees) prohibitive.
ECONOMIC INCENTIVES
Economic incentive programs allow state and local governments to capitalize
on private sector innovations to achieve environmental quality goals.
Although incentive programs do not typically provide significant cash
revenues, in the long term they reduce program costs by achieving pollution
reduction without direct governmental expenditures.
Incentive programs also encourage development of innovative pollution
reduction technologies and management techniques that may have wider
applications to other state and local programs.
Since incentive programs can sometimes produce pollution reduction, state
and local governments facing state or federal deadlines on environmental
quality standards may find them particularly useful. For example, state
programs needing to meet water quality standards may want to use point
source/nonpoint source trading programs as a tool.
SPECIAL DISTRICTS
Special districts are generally formed by local governments or groups of local
governments to target costs and benefits of governmental services to a
particular population. Since the services provided by the district are paid for
only by the recipients, special districts serve as an innovative technique of
matching costs to benefits provided. For example, a local government may
find that a special wastewater district with taxation powers is the most
equitable means of extending municipal wastewater treatment services to a
new area.
Since special districts often have the power to issue revenue bonds, districts
can finance capital expenditures without straining local debt capacity. Cities
or counties with overloaded debt capacity may find special districts a useful
tool for meeting their capital financing needs.
Special districts are a particularly useful technique for financing needs that
fail to coincide with traditional political boundaries. For example, a number
of states have regional solid waste management districts that coordinate
response to solid waste problems on a regional basis.
By combining the resources of several local governments, regional special
districts can often capitalize on economies of scale. For example, a regional
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solid waste authority can often provide higher quality landfill services at lower
cost than individual counties.
TAXES
Since taxes generally provide ongoing revenues, they are most suitable for
financing recurring costs, such as employee salaries or annual debt service
payments on a bond or loan.
The use of tax revenues is typically not restricted to covering the costs of a
particular program or activity. Under these circumstances, taxes are well-
suited to supporting programs where state and local governments require
flexibility to use revenues for different activities from year to year. For
example, revenues from a tax on watercraft sales could be used for
monitoring water quality one year, and purchasing marine oil spill response
equipment the next
In most jurisdictions, instituting new taxes requires legislative approval.
Achieving such approval may be easier if the proposed tax is earmarked or
dedicated to fund a particular program that has strong public and/or
legislative support
Earmarking taxes need not reduce their flexibility; revenues may still be used
for a variety of purposes within any given program depending on how
specifically the revenues are dedicated.
Tax surcharges levied on a temporary basis may be used to help raise
revenues for specific projects that may not have been anticipated and are not
expected to recur with any regular frequency. A tax surcharge on residential
sewer bills, for instance, might finance the replacement of stormwater
retention basins that were destroyed during a hurricane.
RECOMMENDATIONS
Closing the gap between funding needs and revenue sources for environmental
programs requires action by all levels of government This compendium suggests a number
of mechanisms available to help narrow mis gap. Specifically, the State Capacity Task Force
recommends the following actions:
• State and local governments should examine their funding needs and
determine whether existing revenue sources are adequate to meet these
needs. If current resources are found to be insufficient, they should take
steps to analyze and characterize the shortfall and then evaluate and
implement AFMs such as those included in this compendium.
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• EPA should continue its efforts to provide financial technical assistance to
state and local governments through increased use of electronic bulletin
boards and national workshops and seminars, and by supporting the creation
of environmental finance centers in each of the ten EPA regions. The centers
would provide education, technical assistance, and research on environmental
finance on a regional level.
Each of these recommendations is described in more detail below.
SUGGESTED STEPS TO USE THIS COMPENDIUM
This compendium provides valuable information on alternative financingmechanisms.
State and local governments should use this information, where appropriate, to expand their
financial resources and widen the number of financing options available to them. To help
narrow the search for the most appropriate AFMs, state and local governments must first
identify their needs and the financing mechanisms that are currently being used to meet
them. In areas where shortfalls are identified, special attention should be given to
determining their nature and composition, and, where applicable, they should be ranked
according to priorities. They can then use the evaluation matrices provided in the
compendium, as well as their own assessment of the suitability of different AFMs to then-
particular situation, to help select an AFM to supplement current means of financing. The
steps involved in this process are described below.
Identify Present and Future Costs
First, state and local governments need to identify the type and extent of the present
and future costs associated with their environmental programs. Costs must be identified
both by dollar amount and by when the costs will need to be paid. For example, some
programs involve capital costs, or raising large sums over a relatively short period of time,
while other programs involve ongoing operating costs continuing over a period of years. In
looking at expenditures that will occur over time, governments should allow for the effects
of inflation, future environmental mandates, and potential economic or fiscal changes.
Various financial management techniques can assist state and local governments in
identifying the types and extent of environmental costs. For example, local governments
may want to use capital budgeting to assist in identifying capital costs. Capital budgets are
long-term financial plans that account for the construction and upkeep of the physical
facilities owned by public entities. Almost all capital budgets have four basic components:
• Identifying the scope of services for which the government is responsible;
• Identifying assets through a physical inventory, an assessment of condition,
and an evaluation of performance;
• Integrating the data with estimates of costs to operate and maintain existing
facilities and build new ones; and
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• Drafting a summary plan for distribution to (and concurrence by) all
government public works agencies and interested nongovernment groups.
Another technique that may assist governments in estimating operating costs is
workload analysis. Workload analyses detail the costs of carrying out particular programs.
For example, in support of an appropriations request to the legislature, the Wisconsin
Department of Natural Resources prepared a detailed workload analysis demonstrating the
costs associated with implementing the Clean Air Act Amendments of 1990. The analysis
included estimates of staff time required for the activities mandated by the Act, including
permit processing, site reviews, and environmental education.
Examine Current Financing Mechanisms
Once the nature and extent of costs have been identified, state and local governments
should examine their current means of financing capital and operating costs. Most states
finance their environmental programs through a combination of fees, taxes, bonds, grants,
and loans. In some cases, identifying the exact sources of revenues for a given program may
be difficult, since many governments fund environmental programs from general revenues,
and do not track sources of those revenues directly to their uses.
Examining current financing mechanisms allows governments to compare revenues
from existing sources to present and future costs, so that areas of actual or potential
shortfall can be identified. For example, some governments may find no shortage of
funding to meet day-to-day operating costs, but may have difficulty in meeting anticipated
capital costs. Some shortfalls may be caused by exceptional circumstances, such as a
budget crisis in a particular year, or localized economic distress causing a reduction in tax
revenues. Other shortfalls may occur because a revenue source has not yet been identified
for financing new requirements or activities. A survey of current financing mechanisms will
also identify which AFMs or which groups of AFMs may have been underutilized, and
therefore may be worth exploring as options.
Use the Compendium to Identify Suitable AFMs
State and local governments should examine these categories to see if any of the
AFMs might be applicable to their needs. The summary matrices preceding the categories
already provide an initial assessment of AFMs based on a number of factors, including their
applicability to capital and/or operating costs, applicability to state and/or local programs,
revenue potential, revenue stability, administrative feasibility, equity, and incentive effects
for pollution reduction. However, governments considering implementation of a particular
AFM need to go beyond what is provided in the compendium to determine the suitability
of an AFM for their particular situation. First, they need to determine what legislative or
regulatory actions may be necessary for implementation of the AFM. Next, they need to
perform revenue estimates to determine whether the AFM will provide sufficient and timely
revenues for their needs. Finally, the governments need to determine whether the AFM
will meet with political acceptance. In addition to using this compendium to identify
potential AFMs, state and local governments are encouraged to utilize the variety of
resources on environmental finance made available by EPA.
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EPA ACTIONS
Electronic Bulletin Boards
The Agency could set up electronic bulletin boards as avenues for information on
alternative financing techniques. Currently, the EPA sponsors a number of electronic
bulletin boards providing information on various issues, which state and local officials and
other interested parties can access with a computer modem. In October, 1991, the Office
of Water pioneered the Environmental Financing Information Network (EFIN), EPA's first
electronic bulletin board providing information on financing alternatives for environmental
programs. As an outreach mechanism, the bulletin board format has the following
advantages:
• Swift transmission of information to a wide audience;
• A menu-driven format that allows users to individually select the information
appropriate for them;
• Ongoing updating of contact numbers, names, and other rapidly-changing
information; and
• Interactive potential, so that users get the benefit of information placed on
the bulletin board by other users as well as by the board's sponsor.
Additional electronic bulletin boards could be set up by program offices to follow the
EFIN model. Alternatively, Environmental Finance Centers (EFCs) could sponsor bulletin
boards providing regionalized information on financing alternatives.
National Workshops and Seminars
The Agency should hold or sponsor national workshops and seminars for state and
local government officials on real world solutions to environmental finance issues. The
workshops should be interactive, serving both as a means of information transfer and as a
forum for officials to express their views on how EPA could make state and local
environmental finance easier. The national workshops should have the following
characteristics:
• The workshops should provide state and local government officials with
hands-on training and practical information on environmental finance issues;
• The interactive forum provided by the workshops should give the Agency a
chance to hear the perspectives of the officials who are responsible for
financing the execution of federal environmental mandates; and
• Workshop proceedings should serve as seed material for publications that
could present environmental finance issues from a national perspective.
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Environmental finance Centers (EFCs)
As part of its ongoing efforts to provide technical assistance on environmental
finance, EPA is developing Environmental Finance Centers (EFCs) to work with states and
local governments. Pilot efforts are now underway in two states — New Mexico and
Maryland — with the goal of opening an EFC in each of the ten EPA regions. What follows
is a description of the potential functions of EFCs and the ways in which EPA support could
be provided to them.
Potential Functions of EFCs
The EFCs could serve as the focal point for federal involvement in education,
technical assistance, and research on environmental finance. As federal, state, and local
environmental programs have increased in scope and overall cost, new and innovative
techniques for environmental finance have developed out of necessity. However, formal
academic study has lagged behind the development of these techniques, and few universities
are in the position to offer a broad-based introduction to the issues and themes related to
environmental finance, particularly an introduction that would be targeted to the needs of
state and local officials. The EFCs could integrate economic, political, financial, scientific,
and public policy expertise to create a multidisciplinary curriculum on environmental
finance. Such a curriculum would serve state and local officials currently on the front lines
of financing environmental programs, graduate students who could become future
professionals in these areas, and utility officials, investment bankers, and other private
individuals who may play crucial roles in financing partnerships for environmental facilities.
In addition to providing a general curriculum for state and local officials and other
parties involved in environmental finance, the EFCs could provide technical assistance to
communities on a case-by-case basis. This assistance could involve a number of activities:
• Calling together advisory panels made up of local officials, academic experts,
finance professionals, and EPA employees to advise a community on possible
solutions to a particular problem;
• Sponsoring workshops and forums on regional environmental finance issues,
and providing direct consultation and technical assistance to local
governments attempting to enter into regional compacts;
• Working with nonprofits and national associations such as the Government
Finance Officers Association (GFOA) and the International City and County
Managers Association (ICMA), operate a peer match service bringing
together communities that face similar problems and allowing them to benefit
from exchange of ideas and sharing of reports created for different
communities;
• Serving as a clearinghouse for innovative environmental financing
mechanisms, disseminating information and advising states and localities on
implementation and other issues;
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• Managing EPA, federal agency, and privately-funded pilot and demonstration
projects employing innovative financingtechniques, and providing consultation
and assistance on environmental finance and management on a fee basis to
existing state and local governments; and
0
• Compiling the results of the above activities into targeted, regionalized
publications on environmental finance issues.
For example, in New Mexico, where a pilot EFC is currently being developed, the
EFC could provide valuable technical assistance on regionalized solutions to wastewater
treatment provision to unincorporated communities. In New Mexico, a number oicolonias,
or unregulated and unincorporated communities, have sprung up in response to a thriving
job market along the U.S./Mexico border. Because they lack taxing power and other
financing capabilities of formalized governments, arranging extension of wastewater
treatment services to the colonias is difficult If an EFC were established in New Mexico,
it could sponsor the creation of an advisory panel to address this issue, bring together the
localities that would be involved in the solution, and produce a regionalized solution to the
problem.
It is anticipated that the EPA regional offices will work closely with the EFCs in then-
regions, which could uniquely position the EFCs to examine topics of environmental finance
from a regional perspective, and provide the EFCs with the contacts and expertise to
integrate research with their educational and technical assistance roles. For example, using
EPA regional contacts, an EFC might find it relatively easy to compile case studies of the
localities it advises on environmental finance, using their experience to help future clients.
A few potential topics for investigation include:
• The impact on user charges of public-private partnerships in the construction,
operation, and maintenance of environmental facilities;
• Financing strategies and experiences of local air programs helping to
implement provisions of the Clean Air Act Amendments of 1990;
• Investigation of regional solutions to solid and hazardous waste disposal
problems; and
• Innovative incentive programs and financingmechanisms used by localities for
nonpoint source pollution reduction.
EPA Support for EFCs
Siting the EFCs in land grant universities would foster the EFC's educational and
analytical functions and provide a regional base for EFC activities. The existing federal
interest in these universities would also facilitate the initial arrangements for developing the
EFCs. Alternatively, the EPA could seek public-private partnerships with private
universities or companies for siting EFCs.
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Under the auspices of the Intergovernmental Personnel Act, EPA could provide
EFCs with finance experts on a rotating basis. Intergovernmental Personnel Assignments
(IPAs) could be a crucial tool for enhancing the ability of EFCs to provide the highest
quality of technical assistance to states and localities. The IPAs that participate in these
interchanges would also benefit by bringing back to their home offices valuable new
perspectives gained from this assignment
Another possible source of staff for EFCs could be from the REV (Revitalizing
Environmental Infrastructure Through Volunteerism) program. EPA is exploring the
feasibility of establishing this program, which would match volunteers with communities that
need pro bono services. The EFCs could employ this resource in a number of ways. The
volunteers, many of whom would be retired engineers, could be invited to serve on advisory
panels, assist in developing and facilitating EFC workshops, or be assigned to advise
particular states or localities on issues relating to their expertise. The EFCs could employ
this resource in a number of ways.
EPA could assist in the development of EFCs by providing seed money to fund initial
operating costs and office space, and possibly to endow a professorship in environmental
finance. Funds for these purposes could come from fine or penalty revenues, EPA pilot
project grant funds, a share of a dedicated federal tax (such as the chemical feedstocks tax
or gasoline tax), or grant funds from private corporations. Regardless of source, seed
money could also be placed in a trust fund, so that interest payments could provide ongoing
support for EFC operations.
Part of the funds for educational programs could be provided by tuition fees charged
to the state and local officials who attend the courses sponsored by the EFCs. However,
in order to maintain the affordability of EFC courses, some of the costs involved in
developing the curriculum should be subsidized. Similarly, some communities may be able
to afford modest user fees for technical assistance or targeted research on regional
environmental finance issues. However, federal grant funds, fine and penalty revenues,
interest on any trust funds capitalized, and/or supplemental grant funds from private
corporations would be required to meet the gap between what communities could afford to
pay and the cost to the EFC of providing these services.
ALTERNATIVE FINANCING MECHANISMS
The phrase "alternative financing mechanism" (AFM) refers to any technique used
to fund environmental programs, facilities, or services, including both capital and operating
costs at the state and local level. The principal categories of AFMs identified in this report
are listed in Table 1. The AFMs are divided into eleven major categories as follows: taxes,
fees, bonds, loans, grants, credit enhancements, public-private partnerships, economic
incentives, special districts, environmental finance centers, and miscellaneous.
This report should be particularly useful to states and local governments. It outlines
a range of alternative financing mechanisms at both the state and local level and is intended
to provide information about the principal features of AFMs, their relative advantages and
14
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limitations — with particular attention given to administrative considerations — and some of
the key questions and issues associated with their use.
A total of 82 alternative financing mechanisms are presented in this compendium.
The entries for each individual AFM provide a description and analysis of each financing
mechanism in the following format:
Type: This section classifies the AFM into one of the eleven major categories.
Description: This section describes how the mechanism works. For example, if the
AFM is a fee or tax this section discusses the basis for charging a particular fee or
tax.
Actual Use: Where possible, this section identifies examples of the current use of
the AFM to fund state and/or local environmental programs.
Potential Use: Where possible, this section identifies potential alternative uses for
the AFM.
Advantages/Limitations: These two sections describe the most significant advantages
and limitations of a particular AFM from the perspective of the implementing
government The following issues were analyzed for each AFM, where applicable:
• Ease or difficulty of implementation and administration,
• Characteristics of the revenue stream (e.g., steady and predictable
revenues or periodic revenues),
• Legislative/political issues (e.g., whether the AFM would generally
require voter approval), and
• Economic impacts, if any (e.g., if the AFM has a disproportionate
impact on small businesses or has a diffuse impact on a broad
population).
Reference for Further Information: This section provides either a reference to a
document with further discussion of the AFM, or the name of a governmental agency
that has some experience with the relevant AFM.
Each of the major categories has an introduction that describes the characteristics
and general advantages and limitations of the individual AFMs within that category. To
allow for comparison of individual AFMs, both within and among categories, a summary
table is included at the end of the introduction to each major AFM category. These
summary tables evaluate the AFMs, in very general terms, based on selected criteria. The
primary criteria are:
Capital Costs (Applicable, Partially Applicable, Not Applicable). Indicates whether
the AFM can easily be used to finance capital expenditures. Generally, this will
15
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depend on whether revenues can be raised in an amount sufficient to finance capital
expenditures.
Operating Costs (Applicable, Partially Applicable, Not Applicable). Indicates
whether the AFM provides ongoing revenues that can be used to meet annually-
recurring costs such as salaries.
State Programs (Applicable, Partially Applicable, Not Applicable). Indicates whether
the AFM can be used by state programs.
Local Programs (Applicable, Partially Applicable, Not Applicable). Whether the
AFM can be used by local programs.
Revenue Potential (High, Moderate, Low). Where applicable, provides a rough
estimate of the revenue-generating potential of the AFM. The estimate is based on
the size of the anticipated revenue base, typical rates, and past experience with the
AFM. This evaluation is meant only as a guide for comparing AFMs, and may not
be accurate for some areas, since the revenue potential of an AFM in a given area
will be strongly affected by the characteristics of the revenue base.
Revenue Stability (Stable, Partially Stable, Unstable). Provides a general assessment
of the potential revenue stability of the AFM, based on the volatility of the revenue
base, methods of collection, and the experience of state and local programs with the
AFM.
Administrative Feasibility (Easy, Moderate, Difficult). Provides a general evaluation
of administrative feasibility of each AFM, based primarily on whether the
implementing government can take advantage of existing administrative structures.
Equity (Who Pays? — Polluter, Beneficiary, General Public). Evaluates whether the
burden of payment falls on parties that contribute to the environmental problem (i.e.,
the polluter), on parties that benefit from cleanup of an environmental problem (i.e.,
the beneficiary) or upon the general public.
Incentive Effects (Yes, Uncertain, No). Indicates whether the AFM provides any
pollution reduction incentive effects.
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TABLE 1: ALTERNATIVE FINANCING MECHANISMS IN THE COMPENDIUM
FEES
Utility Charges
Connection Fees
Facility Permit Fees/Monitoring Fees
Application/Processing Fees
Inspection/Certification Fees
Emissions/Discharge Based Fees
Disposal Fees
Product Registration and Inspection Fees
Recreational Fees
Wetlands Permit Fees
Septic Tank Fees
Hazardous Waste Transporter Fees
License Fees
Impact Fees
BONDS
General Obligation Bonds
Revenue Bonds
Moral Obligation Bonds
Double Barrel Bonds
Mandate Bonds
Certificates of Participation
Anticipation Notes
LOANS
Commercial Loans
Water Pollution Control State Revolving Funds (SRFs)
State Loan Programs
CoBank (National Bank for Cooperatives) Loan Program
Rural Development Administration Loan Program
GRANTS
Rural Development Administration Water and Waste
Disposal Grant Program
Economic Development Administration Public Works and
Development Facilities Grant Program
Department of Housing and Urban Development
Community Development Block Grants
Appalachian Regional Commission (ARC) Supplemental
Grants
EPA Grants
State Grant Programs
CREDIT ENHANCEMENTS
State Bond Banks
Rural Development Administration Loan Guarantees
Commercial Credit Enhancements
Collateral Arrangements
PUBLIC-PRIVATE PARTNERSHIPS
Private Sector Operation
Turnkey Arrangements
Build-Operate-Transfer/Build-Transfer-Operate
Lease-Purchase/Operating Lease
Lease-Develop-Operate/Build-Develop-Operate
Sale/Leaseback
Tax-Exempt Lease
ECONOMIC INCENTIVES
Liability Assignment
Transferable Development Rights
Fines and Penalties
Assurance/Performance Bonding
Wetlands Mitigation Banking
Point-Source/Nonpoint Source Trading
Emissions Trading
Land Trusts
SPECIAL DISTRICTS
ENVIRONMENTAL FINANCE CENTERS
TAXES
Individual Income Tax
Corporate Income Tax
Corporate Gross Receipts Tax
Death and Gift Taxes
Ad Valorem Property Taxes
Personal Property Taxes
Sales and Use Tax Taxes
Selective Sales Taxes
Alcoholic Beverage Taxes
Amusement Taxes
Feedstock Taxes
Fertilizer Taxes
Hard-to-Dispose Taxes
Hotel Taxes
Insurance Premium Taxes
Litter Control Taxes
Marine Fuel Taxes
Motor Fuel Taxes
Real Estate Transfer Taxes
Rental Car Taxes
Severance Taxes
Special Assessments
Tobacco Taxes
Waste-End Taxes
Watercraft Sales Taxes
MISCELLANEOUS
Exactions
Trust Funds
Water and Sewer Access Rights
Voluntary Mechanisms
Private Guaranty Mechanisms
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FEES
Description: A fee is generally a charge for services rendered. Fees establish direct links
between the demand for services and the cost of providing them. For example, park user
fees require park visitors to pay for operating costs; utility charges require customers to pay
for the cost of providing water and wastewater services. Permit fees are used to help
finance pollution control activities by charging polluters the costs their discharges impose
upon society. In this case, the service rendered to the feepayer is pollution control.
Inspection and certification fees pay the cost of inspecting or certifying equipment, facilities,
or employees for compliance with environmental and other regulations. License and
registration fees are intended to finance oversight of the licensed or registered product or
service by the state. For example, fishing and hunting license fees pay for game and natural
lands protection; motor vehicle registration fees often pay for highway funds and state
administrative costs.
Advantages: Well-structured fees can be an equitable means of matching program costs
to program beneficiaries, or assigning cleanup costs to the parties responsible for the
original pollution. In other cases, instituting a fee essentially eliminates a subsidy for a
government service, freeing up general revenues that could be used to fund other
environmental programs. In many states, fees can be set administratively, meaning no
legislative action is required to impose the fee.
Limitations: Since they are targeted to a particular service or group, fees have a narrower
revenue base than most taxes. In many states, fees cannot exceed costs of providing a
service, although there is often wide latitude in defining what constitutes service. Some
states have expressed increasing concern over a growing resistance to fee programs among
industry groups, as well as the general public.
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Incentive Effects
(e.g., Pollution Red
• = Yes
A = Uncertain
o = No
o
0
o
o
*
o
•
>
o
•
o
o
o
-
Equity (Who Pays?)
• = Polluter
A = Beneflciary
o = General Public
•
-
•
•
o
>
m
m
•
0
*
Administrative Feas
• = Easy
A = Moderate
0 = Difficult
O"
»-
«<
•
>
»
>
>
>
>
>
>
-
-
Revenue Stability
• = Stable
A = Partially Stable
o = Unstable
•
o
•
•
-
•
»
^ >
>
>
m
o
Revenue Potential
• = High
A = Moderate
o = Low
«
*
-
O
-
»
^
>
»
>
O
-
1 CHARACTERIST
O
Crt
1 Local Programs
•
•
•
•
•
•
•
•
•
•
•
Ui
9
I
O
o
•
•
•
•
•
•
•
•
o
| Operating Costs
•
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m
•
•
•
•
•
•
•
>
n
•5
£
CO
•>
•
o
o
o
*
o
*
o
o
o
0
-
APPLICABILITY:
• = Applicable
A = Partially Applicable
O = Not Applicable
*1
M
Utility Charges
Connection Fees
Facility Permit Fees/
Application/
Processing Fees
Inspection/Certification
Fees
Emissions/Discharge
Based Fees
Disposal Fees
Product Registration
Recreational Fees
Wetlands Permit Fees
Septic Tank Fees
Hazardous Waste
License Fees
Impact Fees
19
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UTILITY CHARGES
Type: Fee
Description: Fees charged to customers for the receipt of a specific service, such as
drinking water, wastewater treatment, or stormwater drainage.
Actual Use: Generally limited to local governments. Examples of use include water utility
fees, wastewater fees and stormwater fees.
Potential Use: Fees could be used to cover the full cost of providing the service in question.
Local governments may subsidize the costs of such service (and hence maintain low rates)
by using general revenues to cover capital costs. User fees can then be set to cover
operating costs only. As most state laws allow fees to be charged to cover the full cost of
service provision, utility fees could be raised to cover the capital costs associated with such
services, such as renovation or expansion of water or wastewater systems.
Advantages: Broad revenue base; most utilities provide services that all residents require.
As a result, small increases in utility rates can raise significant revenues while imposing a
relatively small burden on households. This is especially important if a community has a
low household income.
Limitations: Some areas may be accustomed to a subsidized rate, making rate increases
difficult Usually a public hearing process is required to raise utility charges. In small or
economically disadvantaged communities, reliance on user charges for capital financing and
operations and maintenance costs may be unaffordable, based on fiscal indicators such as
median household income or community debt capacity.
Reference for Further Information: Ernst & Young National Environmental Consulting
Group, Ernst & Young 1990 National Water and Wastewater Rate Survey, New York, New
York, 1990. Contains survey of major cities' water and wastewater rates, as well as a basic
introduction to rate-setting procedures.
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CONNECTION FEES
Type: Fee
Description: Charged to property owners for connection to a municipal utility.
Actual Use: Generally limited to state and local governments. There are two types of
connection fees: annual fees charged to all users to stay connected to the system, and fees
for new service connections. Examples include hook-up fees and new connection fees in
residential developments to water supply services and wastewater collection systems.
Oklahoma, Texas and New Hampshire are states that have annual drinking water
connection fees.
Potential Use: Annual connection fees is another way for a system or state to charge users
to cost of maintaining the utility service. Many local governments charge low or no
connection fees, essentially subsidizing the cost from general revenues. New service
connection fees charge new users for the cost to hook up to the municipal utility, thus
freeing general revenues to be used for other purposes.
Advantages: New connection fees can be structured so that new users pay the expense of
extending services to them. Solves question of subsidy of long-time users. Annual
connection fees are a stable source of revenues.
Limitations: New connection fees provides funds only at time of new customer's arrival,
not in advance of the need for capacity. They are not a stable source of funding, and
generally only cover the costs of extending services to the new customers.
Reference for Further Information: Ernst & Young National Environmental Consulting
Group, Ernst & Young 1990 National Water and Wastewater Rate Survey, New York, New
York, 1990. Contains survey of major cities' water and wastewater connection fees.
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FACILITY PERMIT FEES/MONITORING FEES
Type: Fee
Description: Charged to a company or individual for the privilege of operating an
environmental facility.
Actual Use: Primarily used by states but also by local governments. Examples of this type
of fee include:
• Drinking Water Monitoring Fees (New Jersey, Iowa),
• Drinking Water Annual Operating Fees (South Carolina, Virginia, California,
Florida),
• Drinking Water Sanitary Survey Fees (Tennessee),
• Solid Waste Facility Fees (Delaware, New Jersey, Connecticut),
• Hazardous Waste Facility Fees (Pennsylvania, Maine, New York), and
• Underground Storage Tank Facility Fees (Maine).
Potential Use: Many states have privatized water supply plants, solid waste disposal
facilities, and vehicle emissions inspection facilities. Governmental monitoring of these and
other privatized facilities could be financed by facility permit fees.
Advantages: In addition to revenues, provides a means of tracking which facilities are
engaged in environmentally-sensitive activities.
Limitations: Small revenue base, in most cases. If set too high, fees may discourage private
companies from owning and operating environmental facilities. This may discourage
successful privatization of wastewater treatment plants, for example.
Reference for Further Information: Office of Underground Storage Tanks, U.S.
Environmental Protection Agency, Funding Options for State and Local Governments,
August, 1988. Paying for Safe Water: Alternative Financing Mechanisms for State Drinking
Water Programs, U.S. EPA 570\9-90-014, September 1990.
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APPLICATION/PROCESSING FEES
(Water Rights Fees, Filing Fees)
Type: Fee
Description: Application and processing fees are charged for processing costs associated
with the initial permitting of a facility or other permitted location. Such fees are also
charged for the costs associated with filing and registering a water right
Actual Use: Both state and local governments have used permit application fees to cover
the initial administrative costs associated with permit writing and issuance. Examples of this
type of fee include:
• State NPDES Program Permit Application Fees,
• Water Rights Application Fees,
• State Air Emissions Source Permit Application Fees, and
• Wetlands Permit Application Fees.
Potential Use: State and local governments can institute permit application fees for new
permits required under the recent reauthorization of the Clean Air Act or the future
reauthorization of the Clean Water Act
Advantages: May cover some or all of the start-up costs associated with the permit
application process.
Limitations: Unless permit renewal fees are also charged, revenues will drop off when most
facilities or businesses have been permitted.
Reference for Further Information: Office of Wetlands Protection, U.S. Environmental
Protection Agency, Financing State Wetlands Programs, November, 1990. Has description
of Michigan and New York wetlands permit application fees.
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INSPECTION/CERTIFICATION FEES
Type: Fee
Description: Charged for certifying or inspecting construction plans, operators, or outputs
of facilities which have an impact on the environment
Actual Use: Both state and local governments charge a number of inspection and
certification fees. Examples include:
Construction Permit/Plan Review Fees,
Solid and Hazardous Waste Facility Operator Certification Fees,
Drinking Water Permit/Plan Review Fees (AL, MA, WA),
Drinking Water Operator Certification Fees (MT, UT, NH),
Drinking Water Laboratory Certification Fees (TN, PA),
Underground Storage Tank Installer Certification Fees,
Septic Tank Installer Certification Fees,
Laboratory Certification Fees, and
Emissions Inspection Fees.
Potential Use: In addition to plan review and processing costs, construction inspection fees
could be used to pay for public notification required under EPA regulations or mitigation
of runoff/erosion problems associated with the construction process. Laboratory fee
revenues could pay for oversight of privatized environmental monitoring facilities, such as
private air emissions inspection contractors.
Advantages: Construction certification fees give states advance warning of potentially-
damaging construction, as well as the funds to analyze the extent of the potential impact
Laboratory and operator certification fees allow the state to maintain some oversight of
privately-owned and/or operated environmental facilities. In addition, construction fees
provide the state the ability to oversee construction to ensure that the supply of water will
meet minimum health standards.
Limitations: Certification fees may have a disproportionate impact on small businesses,
who may not be able to afford operator licensing or the costs of a construction permit
Reference for Further Information: Office Of Underground Storage Tanks, U.S.
Environmental Protection Agency, Funding Options for State and Local Governments,
August, 1988. Contains description of Maine underground storage tank installer
certification fee. Also see Office of Water, U.S. Environmental Protection Agency, Paying
for Safe Water: Alternative Financing Mechanisms for Safe Water Programs, September, 1990.
Contains several case studies of states that use laboratory certification fees to pay for safe
drinking water programs.
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EMISSIONS/DISCHARGE-BASED FEES
(Clean Air Act Title V Fees, Effluent Fees, NPDES Fees)
Type: Fee
Description: Charged on the volume of pollutants emitted into the atmosphere or
discharged into water.
Actual Use: Typically limited to state governments. Examples include the emissions fees
outlined in the Clean Air Act Amendments of 1990, where states will be required to charge
permitted sources the equivalent of $25 per ton of pollutant emitted, and the NPDES
program authorized by the Clean Water Act, which allows states to charge fees based on
volume and/or toxicity of discharges. Some localities also charge fees to users of municipal
wastewater systems for pretreatment of particular types of waste.
Potential Use: States could extend emissions-based permits to small sources that are
generally exempt from Clean Air Act permits but, because of overall volume, represent a
large share of overall emissions. States could also extend the concept of discharge-based
permits to agricultural nonpoint source control, estimating by land size or other measures
each property owner's contribution to the runoff problem.
Advantages: Provides incentive to reduce emissions or discharges. The charge is
proportional to pollution caused.
Limitations: Although sources can be required to monitor their own emissions, cost of
compliance and enforcement can be high. Depending on the structure of the fee, it may
not always represent a polluter's contribution to the environmental problem. For example,
a volume-based emissions fee does not take into account the difference in toxicity between
sulphur dioxide and carbon dioxide.
Reference for Further Information: The Clean Air Act Advisory Committee, The Clean Air
Act of 1990: An Introductory Guide to Smart Implementation, Washington, D.C. Contains
basic information on the Clean Air Act Amendments and resources for further information
on permit fees.
Northwest Pulp and Paper Association, Comparison, State NPDES Programs,
Bellevue, Washington, December, 1991. List of NPDES fees charged by selected states;
includes brief description of fee basis and rates.
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DISPOSAL FEES
(Tipping Fees, Septage/SIudge Fees)
Type: Fee
Description: Charged on volume of solid or hazardous waste disposed at management
facilities. The fee may be charged only on particular products, such as tires or cars, or on
all wastes.
Actual Use: A number of states and localities use disposal fees to finance solid waste
management costs, and use septage/sludge disposal fees to finance sludge management
programs.
Potential Use: Disposal fees could be more broadly applied as an incentive mechanism to
encourage participation in recycling programs, thus lowering overall waste management
costs by decreasing the volume to be disposed. For example, tipping fees for recyclable
items such as newspapers and soft drink containers could be set at high rates.
Advantages: Encourages waste reduction. Currently, solid waste disposers do not bear full
costs of disposal, which encourages the option of disposal as opposed to recycling. Tipping
fees should remove this disincentive if set at appropriate levels.
Limitations: Fees based solely on volume may not adequately capture revenue from the
most toxic or least degradable waste. Very high fees could encourage illegal dumping of
wastes. If significant waste reduction occurs in response to the fees, revenues will similarly
decline.
Reference for Further Information: New York State Department of Environmental
Conservation, Survey of State Funding for Solid Waste Management Programs, June, 1991.
Contains description of disposal fees in various states.
26
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PRODUCT REGISTRATION AND INSPECTION FEES
Type: Fee
Description: Charged for the registration and/or inspection of particular products that have
some environmental impact, such as fertilizers and pesticides.
Actual Use: Limited to state governments. A number of states have fertilizer inspection
programs, some of which finance non-point source pollution control. In Kansas, for example,
a state $1.70/ton fertilizer inspection fee is charged, with $0.30/ton dedicated to the fertilizer
inspection program and $1.40/ton dedicated to the State Water Plan, which funds
conservation, water quality, and water use projects throughout the state. Several states also
have pesticide registration fees.
Potential Use: Any environmentally-sensitive product could be registered. For example, a
registration fee could be charged for each quart of motor oil sold, with a rebate if recycled
motor oil is brought in at time of purchase.
Advantages: Discourages polluting behavior, since fees will be proportional to amount of
fertilizer or product used.
Limitations: May face opposition from agricultural lobbies.
Reference for Further Information: The Fertilizer Institute, Summary of State Fertilizer
Laws, 1988. Describes existing fertilizer registration and inspection fees in all fifty states.
27
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RECREATIONAL FEES
Type: Fee
Description: Charged for privilege of mooring boats on state waters, or for using state
parks and campgrounds.
Actual Use: Both state and local governments use mooring fees for a variety of purposes.
Some local governments charge mooring fees only at municipal marinas operated by
regional port authorities, where fee revenues finance port operations. Delaware charges a
$1.50 per square foot fee for private docks on state waters, which goes toward the state's
boat safely program. Both state and local governments also charge fees for park use, with
Arizona's park user fees generating over $1 million in yearly revenue for park operating
costs.
Potential Use: Mooring fees could be used to finance pumpout facilities for recreational
boaters. Park fees can be levied wherever state or local governments incur costs for the
provision of recreation services. Local governments could charge fees for lifeguard services
at local lakes; state governments could charge fees for nature center courses at state parks.
Advantages: Untapped revenue source in many states. Allows state to use natural
resources funding for habitat remediation instead of recreational provisions; allows state
general revenues to be used for other purposes.
Limitations: May be difficult to institute recreational fees if use of state waters and parks
has historically been free. May have a disproportionate impact on lower-income segments
of the population, who may have few other low-cost recreational opportunities.
Reference for Further Information: Delaware Department of Environmental Control,
Dover, Delaware. Has information on mooring permit fees in Delaware.
28
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WETLANDS PERMIT FEES
Type: Fee
Description: Charged for excavation, dredging, drainage, or fill of wetlands.
Actual Use: Limited to state governments: Maine, New Jersey, Wisconsin, Maryland, and
a number of other states have wetlands permit programs.
Potential Use: States could expand wetlands permit program to all areas classified as
valuable natural habitat
Advantages: Encourages wetlands conservation and provides state governments with
advance information about wetlands building plans.
Limitations: Revenues vary with level of wetlands development activity. In addition,
program must track ownership and development of wetlands, which can be administratively
expensive.
Reference for Further Information: Office of Wetlands Protection, U.S. Environmental
Protection Agency, Financing State Wetlands Programs, November, 1990. Has case studies
of several states' wetlands permit fee programs.
29
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SEPTIC TANK FEES
Type: Fee
Description: Fee charged for registering or operating household septic tanks.
Actual Use: Local governments have used septic tank fees to pay for inspection of septic
tanks and to provide mandatory tank pumpout services. Spokane, Washington, charges
septic tank users a $30 annual fee, which is used to fund water aquifer testing. Some septic
tank fee programs incorporate an insurance element, replacing or repairing septic tanks in
case of failure.
Potential Use: Septic tank registration fees could finance creation of septic tank
management districts to monitor and prevent spillage.
Advantages: If fee is used to provide pumpout services, allows governmental oversight of
environmental quality of septic tanks. Captures revenue from households who do not
connect to municipal sewers, but have an impact on water quality due to septic tank
leakage.
Limitations: May be difficult to identify and track owners of septic tanks.
Reference for Further Information: Apogee Research, Inc., Proposed Funding Strategy for
the Narragansett Bay CCMP, March 16th, 1992. Contains brief description of communities
that charge fees for septic tanks.
30
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HAZARDOUS WASTE TRANSPORTER FEES
(Septic Hauler Fees, Petroleum Product Transfer Fees)
Type: Fee
Description: Fees charged to company or individual for hauling solid or hazardous wastes,
septage, or petroleum products. Can be charged on volume of waste transferred, or as a
flat fee per hauler.
Actual Use: Used to pay cost of hazardous waste monitoring and spill response in a number
of states.
Potential Use: Revenues could be used to make road improvements on routes traveled by
hazardous waste transporters, to make them safer. Revenues could finance operating costs
of a state monitoring program for hazardous waste transport
Advantages: The fees could capture revenue from transporters who are responsible for
some waste spillage.
Limitations: Small revenue base. Depending on the structure of the fee, it may have a
disproportionate impact on small businesses. The fee might encourage polluters to dump
wastes illegally to avoid the costs of transportation to a legal site.
Reference for Further Information: Office of Underground Storage Tanks, U.S.
Environmental Protection Agency, Funding Options for State and Local Governments,
August, 1988. Contains information on Maine petroleum product transfer tax.
31
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LICENSE FEES
Type: Fee
Description: Fees charged to company or individual for privilege of engaging in an activity.
Actual Use: Both state and local governments use license fees to finance administrative
costs associated with related government agencies. Examples include:
• Boat and Aircraft License/Registration Fees,
• Motor Vehicle Registration Fees,
• Motor Vehicle Operator's License Fees,
• Pesticide Applicators' License Fees,
• Business License Fees,
• Occupational License Fees, and
• Commercial and Sport Fishing License Fees.
Potential Use: License revenues could cover the costs of environmental programs
associated with the licensed activity. For example, a share of boat license fee revenues
could be used to finance pumpout faculties for boat toilets. A share of liquor license
revenues could be used specifically to finance disposal of glass bottles.
Advantages: Most license fees have a built-in enforcement mechanism; the licensing
government can revoke the privilege granted with the license if fees are not paid.
Limitations: Because they generally apply only to a limited population, most license fees
have small revenue base in most cases, and it may be difficult to raise significant revenues
if fees are set at low levels. (Automobile license fees are an exception; because they have
a broad revenue base, automobile-related fees can generate significant revenues even at low
rates.)
Reference for Further Information: Fishing and hunting license fees: Maiolo, John, and
Tripp, Lisa, The Feasibility of a Saltwater Sportfishing License in North Carolina, North
Carolina Division of Marine Fisheries, September, 1990. Contains survey of East Coast
fishing license fees.
Motor vehicle license fees: The Clean Air Act Advisory Committee, The Clean Air
Act of 1990: A Guide to Public Financing Options, April, 1992. Contains several examples
of state motor vehicle license fees used to finance mobile source programs.
32
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IMPACT FEES
Type: Fee
Description: Impact fees are charged to new users of government services to pay for the
expansion of the services that they require.
Actual Use: Limited to local governments. Loveland, Colorado, has a wide-ranging impact
fee program requiring new residents to pay established fees for police, fire, water, natural
resources, and wastewater services.
Potential Use: Impact fees could be used to finance any service or additions that increased
population makes necessary. For example, local governments could use impact fees to
finance landfills and solid waste management facilities.
Advantages: Beneficiaries pay for the extension of local government services to them,
rather than having current users subsidize new customers.
Limitations: Impact fees provide capital only after, not in advance of the need created by
new residents. Thus, local governments will need some alternative means of raising capital
before new residents actually move in, or necessary expansion may not be completed in time
to serve new residents upon arrival.
Reference for Further Information: Lethe, Joni L., and Montavon, Matthew, Impact Fee
Programs: A Survey of Design and Administrative Issues, Government Finance Research
Center of the Government Finance Officers Association, May, 1990. Contains description
of selected areas' use of impact fees, fee structures, administrative issues, and advice to
those considering adoption of impact fees.
33
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BONDS
Description: A bond is a written promise to repay borrowed money on a definite schedule
and usually at a fixed rate of interest for the life of the bond. Bonds can stretch out
payments for new projects over a period of fifteen to thirty years. State and local
governments repay this debt with taxes, fees, or other sources of governmental revenue.
Since most government bonds are tax-exempt, bondholders are generally willing to accept
a correspondingly lower rate of return on their investment than they would expect on a
comparable commercial bond. Bond financing, therefore, can often provide state and local
governments with low-interest capital.
Some state and local governments are required by statute to seek voter approval for certain
types of bond issues. For example, most state and local governments cannot issue general
obligation bonds without voter approval. If achieving this type of approval is difficult or
time-consuming,
state and local governments may want to consider issuing bonds that do not require voter
approval, or exploring other options for capital financing, such as grants, loans, or
certificates of participation.
In addition to voter approval requirements, some governments have statutory limits, or caps
on the total amount of debt that can be issued. These limits may affect a given locality's
ability to use bonds to finance environmental programs.
The Tax Reform Act of 1986 altered the tax-exempt status of some government-issued
bonds. The Act reclassified bonds into two categories, governmental purpose bonds and
private activity bonds. Governmental purpose bonds are automatically tax-exempt, but
private activity bonds must meet certain criteria in order to be classified as tax-exempt To
qualify as a governmental purpose bond, at least 90 percent of the bond proceeds must be
used by a state or local government, and no more than 10 percent of the debt service on
the bond may be derived from or secured by a trade or business. If a bond does not meet
these criteria, it is classified as a private activity bond. Private activity bonds that are issued
for specific public-purpose projects — such as water supply facilities, sewage treatment
plants, solid waste disposal facilities, and some hazardous waste plants ~ can be tax-exempt
However, each state is limited to issuing private activity bonds in the amount of $50 per
capita or $150 million each year, whichever is greater.
Advantages: Bonds provide financing for immediate capital needs. If the project qualifies,
tax-exempt bonds can be a low-interest way of acquiring capital.
Limitations: Certain types of bonds require voter approval. Bonds only spread out costs
of a project; an ultimate revenue source still needs to be identified. May be some
competition for debt capacity at the state or local level. Some state and local governments
may also have statutory limitations on the dollar amount and/or number of bonds that can
be issued.
34
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BONDS
APPLICABILITY:
• = Applicable
A = Partially Applicable
O = Not Applicable
Capital Costs
Operating Costs
State Programs
Local Programs
CHARACTERISTICS:
Voter Approval Required
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A = In Some Cases
0 = No
Limitations on Issuance
• = Statutory Debt Limits
A = State Volume Caps (federally
imposed)
O = Strict Debt Service Requirements
Administrative Feasibility
• = Easy
A = Moderate
O = Difficult
Equity (Who Pays?)
• = Polluter
A = Beneficiary
o = General Public
Incentive Effects
(e.g., Pollution Reduction)
• = Yes
A = Uncertain
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GENERAL OBLIGATION BONDS
Type: Bond
Description: General Obligation (GO) bonds are bonds backed with the guarantee that the
issuing government will use its taxing power to repay the bond. There are two primary
types of GO bonds: unlimited ad valorem tax debt and limited ad valorem tax debt
Unlimited ad valorem tax debt: The government pledges its full faith and credit with no
limitations on possible property tax rates. Limited ad valorem tax debt: The government
pledges its full faith and credit, but with a cap on possible property tax rates to repay the
bond. This is regarded as less secure than an unlimited bond if the tax limits could
conceivably be reached within the term of the bond, or if other tax revenues are not
available for debt service.
Actual Use: Both state and local governments have used general obligation bonds to
finance capital projects related to environmental programs, including natural lands purchase.
Potential Use: GO bonds are suitable for financing any project that requires large amounts
of capital up-front
Advantages: GO bonds backed by full taxing power are regarded as safer than bonds
backed by a single revenue source, and generally command lower interest rates and lower
reserve fund requirements. GO bonds also have structural flexibility since the issuing
government can repay the bond with a variety of revenue sources.
Limitations: Voter approval is frequently required for GO bonds. Many states and cities
also place statutory limits on total GO debt, or on GO debt as a percent of property
valuation.
Reference for Further Information: Lamb, Robert, and Rappaport, Stephen, Municipal
Bonds, McGraw-Hill Book Company, New York, 1987. Contains good basic introduction
to GO bonds.
36
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REVENUE BONDS
Type: Bond
Description: Revenue bonds are generally backed by user fees or service charges paid by
users of a government service. A utility enterprise revenue bond is backed by the user
charges from a utility, while a lease rental revenue bond is backed through lease payments
from the rental of a facility, usually that facility whose construction or upgrade was financed
by the bond proceeds.
Actual Use: Both state and local governments have used revenue bonds to finance
environmental projects, including renovation of wastewater treatment plants and start-up
capital for stonnwater districts.
Potential Use: Revenue bonds can provide capital for projects that generate revenues, such
as solid waste landfills, wastewater treatment plants, drinking water utilities, or stonnwater
management districts.
Advantages: Beneficiaries of services ultimately repay revenue bonds through fees or taxes.
Revenue bonds are typically not subject to either voter approval or debt limits, and can
usually be issued more quickly than GO bonds.
Limitations: Revenue bonds are regarded as less secure than GO bonds, and therefore
have less market acceptance, higher interest rates, and higher reserve requirements.
Reference for Further Information: Lamb, Robert, and Rappaport, Stephen, Municipal
Bonds, McGraw-Hill Book Company, New York, 1987. Contains good basic introduction
to revenue bonds.
37
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MORAL OBLIGATION BONDS
Type: Bond
Description: A moral obligation bond is a bond secured from revenues from a financed
project, as well as a non-binding pledge that any deficiency in pledged revenues will be
reported to the state legislature, which may appropriate state monies to make up the
shortfall. Under most state laws, if a drawdown of the bond's debt reserve occurs, the bond
trustee must report the amount used to the governor and the state legislature. The state
legislature is then authorized to appropriate the requested amount to repay the
bondholders, although there is no legally enforceable obligation to do so.
Actual Use: Since 1960, over 20 states have issued moral obligation bonds. The first state
to issue this type of bond was New York, which issued moral obligation bonds to finance
a housing authority. In most cases, moral obligation bonds have been self-supporting, and
no state financial assistance has been required. In all recorded instances in which the moral
pledge was actually called upon, the respective state legislatures responded by appropriating
the necessary amounts of monies.
Potential Use: Moral obligation bonds can be used to acquire project capital at lower rates
than revenue bonds. Since they generally do not count against debt issuance limitations,
they are particularly useful for governments that are approaching debt limits.
Advantages: Typically, moral obligation bonds do not count against debt limitations.
Because they are backed by the pledge of repayment, moral obligation bonds command
interest rates almost as low as general obligation bonds.
Limitations: The process required to issue moral obligation bonds may involve legislative
action in some states. Because the pledge of repayment is not legally enforceable,
debtholders may expect slightly higher rates of return on moral obligation bonds than on
general obligation bonds.
Reference for Further Information: Raftelis, George A., The Arthur Young Guide to Water
and Wastewater Finance and Pricing, Lewis Publishers, Chelsea, Michigan, 1989. Contains
a basic introduction to bonds, including a description of moral obligation bonds.
38
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DOUBLE BARREL BONDS
(Self-Supporting Bonds)
Type: Bond
Description: A double-barrel bond is a revenue bond that is also backed by the full faith
and credit of the issuing government
Actual Use: Both state and local governments have used double-barrel bonds to finance
environmental improvements, including renovation of wastewater treatment plants and start-
up capital for stormwater districts
Potential Use: Double-barrel bonds can provide cheaper capital than revenue bonds for
projects that generate revenues, such as solid waste landfills, wastewater treatment plants,
drinking water utilities, or stormwater management districts.
Advantages: Double-barrel bonds are a good way for states or localities with a low credit
rating to command lower interest rates on bond issues.
Limitations: Some state or local governments may have statutory limitations on the
issuance of double-barrel bonds, or they may be subject to the same statutory limitations
as GO bonds.
Reference for Further Information: Lamb, Robert, and Rappaport, Stephen, Municipal
Bonds, McGraw-Hill Book Company, New York, 1987. Contains good basic introduction
to double barrel bonds.
39
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MANDATE BONDS
Type: Bond
Description: The Government Finance Officers Association (GFOA) has proposed the
creation of a new category of tax-exempt bonds called "Mandated Infrastructure Facility
Bonds" (MIFs) for which many of the federal restrictions on tax-exempt financing would be
eased. The proposal suggests that bonds used to finance facilities that are built, acquired,
renovated, or rehabilitated because of a requirement in a federal statute or regulation
should receive the same tax treatment or even more favorable tax treatment than general
governmental bonds. Specifically, an MEF bond would ease the following restrictions
contained in the 1986 tax act
• The private business use and security or payment test would be 25 percent
rather than 10 percent;
• The 5 percent private business or disproportionate use test would not apply;
• Arbitrage rebate requirements would not apply, except that pre-1986 yield
restrictions would govern investments, and arbitrage earnings would be used
for the project;
• Interest earned on the bonds would not be subject to either individual or
corporate minimum alternative taxes; and
• Financial institutions would be allowed to deduct 80 percent of the cost of
purchasing and carrying the bonds without regard to issuance limitations.
By targeting the proposal to mandated infrastructure and requiring that the property be
governmentally owned, the GFOA hopes to allay possible Treasury fears that creation of
this new bond is a step toward the return to pre-1986 bonds.
Actual Use: Mandate bonds are still in the proposal stage, and have not yet been used.
Potential Use: Mandate bonds could be used by state and local governments to finance
federally-mandated construction, renovation, expansion, and upgrade of environmental
facilities.
Advantages: Mandate bonds would allow state and local governments to retain tax-exempt
status for bonds used to finance capital projects that involve greater private participation
than is currently allowed for tax-exempt governmental bonds.
Limitations: Creating mandate bonds would require federal legislative action.
Reference for Further Information: Government Finance Officers Association (GFOA),
Washington, D.C.
40
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CERTIFICATES OF PARTICIPATION
Type: Bond
Description: Certificates of participation are financial instruments backed by physical assets,
such as wastewater plants or equipment The assets are held by a trustee, and the
certificate issuer pays yearly lease payments to the certificate holders until the debt is
repaid. If the certificate issuer should default on the lease payments, the trustee is
responsible for selling the physical assets and using the proceeds to reimburse the certificate
holders. Certificates of participation are similar to bonds, but are not legally classified as
such, meaning that state and local governments can issue them without voter approval and
without affecting their overall bonding capacity.
Actual Use: Used primarily by local governments to finance purchase of physical assets,
such as mass transit buses or sports facilities.
Potential Use: A wastewater treatment or solid waste management facility might be
financed through certificates of participation. A certificate of participation can also provide
opportunity to structure a public-private partnership (see Public-Private Partnerships
category).
Advantages: Certificates of participation do not require voter approval, and do not count
against debt capacity limits. In some states, special districts cannot issue bonds but may
issue certificates backed by equipment
Limitations: Certificates can only be issued to finance physical capital that is suitable as
collateral, and only in jurisdictions in which local authorities are allowed to negotiate long-
term leases.
Reference for Further Information: National League of Cities, Financing Infrastructure:
Innovations at the Local Level, Washington, DC, 1987. Contains case studies of two
certificate of participation projects in California.
41
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ANTICIPATION NOTES
(Tax Anticipation, Revenue Anticipation, Grant Anticipation)
Type: Bond
Description: Anticipation notes are short-term bond instruments repaid with anticipated
revenues from various sources. They can be used to acquire immediate capital when other
funding sources are delayed or unidentified. For example, if a city anticipated a future
federal grant for a project, the government might issue a Revenue Anticipation Note to
meet interim construction costs.
There are four primary types of anticipation notes: Tax Anticipation Notes are issued in
anticipation of tax receipts and paid from those receipts; Revenue Anticipation Notes are
issued in anticipation of other sources of future revenues, often federal or state aid; Bond
Anticipation Notes are supposed to provide financing until a future bond offering is made;
General Obligation (GO) notes are not backed by any particular revenue source, but by the
full faith and credit of the issuing government
Actual Use: Both state and local governments have used anticipation notes to meet short-
term capital needs while awaiting other sources of revenue.
Potential Use: Anticipation notes can be to meet short-term gaps in project finance, when
the ultimate revenue source (grants, bonds etc.) has been delayed, or when suitable revenue
sources have not been identified.
Advantages: Provides immediate funds for capital projects.
Limitations: Interest rates are typically higher than on longer-term securities. Only
temporary source; ultimate source of funding still needs to be identified.
Reference for Further Information: Lamb, Robert, and Rappaport, Stephen, Municipal
Bonds, McGraw-Hill Book Company, New York, 1987. Contains good basic introduction
to anticipation notes.
42
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LOANS
Description: A loan is money that must be repaid in a set amount of time at a negotiated
interest rate. State and federal loan programs typically provide capital at subsidized rates
for projects that meet their eligibility criteria. Many of these programs have criteria
targeted to small and/or rural communities, since such communities often need assistance
in acquiring capital.
Advantages: State and federal loan programs sometimes provide loans at lower interest
rates than available for bond financing on the capital markets. Arranging a loan may be a
quicker means of acquiring capital than issuing bonds, and involves fewer transaction costs.
Loans can also be acquired without voter approval, and do not generally have statutory
limitations. Smaller and economically-disadvantaged communities may find arranging loans
easier than issuing bonds to acquire needed capital.
Limitations: Subsidized loan programs may have significant competition and it may be
difficult to meet criteria for low-interest loans. Commercial loan programs will generally
have higher interest rates than most states and localities could command for bond issues.
43
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LOANS
APPLICABILITY:
• = Applicable
A = Partially Applicable
o = Not Applicable
Capital Costs
Operating Costs
State Programs
Local Programs
CHARACTERISTICS:
Targeted to Small and/or
Rural Communities
• =High
A = Moderate
o = Low
Subsidy Provided
(e.g., below market rates)
• = Yes
o =No
Administrative Feasibility
• =Easy
A = Moderate
O = Difficult
Equity (Who Pays?)
• = Polluter
A = Beneficiary
O = General Public
Incentive Effects
(e.g. , Pollution Reduction)
• = Yes
A = Uncertain
o =No
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COMMERCIAL LOANS
Type: Loan
Description: Banks or financial institutions will offer state and local governments loans to
finance a variety of capital projects.
Actual Use: States have used commercial loans where lower-interest financing is
unavailable.
Potential Use: Commercial loans could be used to finance privatized public-purpose
facilities that are ineligible for governmental bond financing, or for communities whose
bonding capacity is exhausted.
Advantages: The application process for commercial loans can be faster than for
government loan programs. Commercial lenders have no set eligibility criteria and no set
limits on total amount available.
Limitations: Generally higher interest rates and less favorable payback terms than
government-funded loan programs.
Reference for Further Information: Most commercial banks have public finance
departments that will assist with inquiries on loan programs.
45
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WATER POLLUTION CONTROL STATE REVOLVING FUNDS
(State Revolving Funds)
Type: Loan
Description: Under Title 6 of the Clean Water Act (CWA) states receive federal monies
to capitalize revolving loan fund (SRF) programs. States must provide a 20 percent match
to the funds. The SRFs are authorized to make loans to localities for financing local
wastewater treatment facilities, nonpoint source pollution control activities and estuary
program activities. The loans are made at low interest rates (ranging from 0 percent to
market rate) over terms of up to 20 years. States are also authorized to use the loan funds
to refinance previously executed debt obligations, guarantee local debt obligations, purchase
bond insurance for local debt obligations, or guarantee bonds issued by municipal and
intermunicipal revolving funds. In addition, states may use up to 4 percent of the federally-
provided funds to cover their own administrative costs. States may set their own criteria for
determining which municipalities have access to the loans and other fund uses each year.
Actual Use: According to a GAO Report on states' use of the CWA revolving loan funds,
the funds have primarily financed wastewater treatment facilities; as of October, 1990, only
two states were funding nonpoint source pollution projects. However, 21 states said that
they plan to use SRF money for nonpoint projects in the future. Eleven states had used the
funds to refinance existing debt obligations, but no states had used the SRFs for any of the
other authorized activities.
Potential Use: States could apply the concept of revolving loan funds to other media such
as hazardous waste remediation, Superfund cleanups, or solid waste finance. Some states
have already used their own funds to finance revolving funds to assist localities with various
capital projects.
Advantages: Extremely low-interest loans at very favorable terms. Can be more flexible
than commercial banks — states can adjust loan terms to suit localities' ability to pay.
Limitations: Competing with other applicants for revolving loan funds can be difficult
Federal requirements can increase project costs.
Reference for Further Information: Office of Municipal Pollution Control (OMPC), U.S.
Environmental Protection Agency, State Revolving Fund (SRF) Report to Congress: Financial
Status and Operations of Water Pollution Control Revolving Funds, May, 1991. Describes
status and operation of Water Pollution Control Revolving Funds in forty-six states.
Also from OMPC: Funding of Expanded Uses Activities by State Revolving Fund
Programs: Examples and Program Recommendations, August, 1990.
U.S. General Accounting Office, Report to the Chairman, Committee on Public
Works and Transportation, House of Representatives: Water Pollution: States'Progress in
Developing State Revolving Loan Fund Programs, March, 1991.
46
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STATE LOAN PROGRAMS
Type: Loan
Description: A number of states have loan programs that assist localities in financing
infrastructure or other projects. Many of these loan programs operate as revolving funds,
meaning that the program is at least partially financed by repayment of earlier loans.
Actual Use: The Washington Public Works Trust Fund operates as a revolving loan fund,
providing low interest (1 to 3 percent) loans for critical public works projects. Texas created
a Water Development Fund to make loans to political subdivisions for the construction of
dams, reservoirs, and water supply systems. Among other programs, the Kentucky
Infrastructure Financing Authority provides low cost loans for drinking water facilities.
Potential Use: State loan programs can be used to assist localities in financing
environmental facilities.
Advantages: Can often provide low interest loans with favorable terms. States can target
investments to specific project types, encouraging localities to build particular facilities.
Limitations: Loan program may have significant start-up costs; needs source of revenue
for capitalization.
Reference for Further Information: Washington Department of Community Development,
Public Works Trust Fund 1992 Priorities Legislative Report, 1992. Contains a description of
the operation of the Trust Fund's revolving fund program.
Government Finance Research Center of the Government Finance Officers
Association, Credit Pooling to Finance Infrastructure: An Examination of State Bond Banks,
State Revolving Funds and Substate Credit Pools, September, 1988. Contains description of
a number of state revolving fund programs.
47
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COBANK (NATIONAL BANK FOR COOPERATIVES)
LOAN PROGRAM
Type: Loan
Description: CoBank is a federally-chartered private financial institution owned by
approximately 2,400 agricultural cooperatives and rural utilities that are also its customers.
CoBank's customers capitalize the bank by providing equity capital based on borrowings.
Earnings of the bank are distributed in the form of patronage refunds based on loan usage.
Actual Use: CoBank provides long-term and interim water and wastewater construction
loans to private water systems and communities with populations under 20,000. The loans
have terms of up to 20 years, with fixed or variable rates. A cash investment service is also
provided.
Potential Use: Loans are available for interim construction or long-term financing of plant
and equipment of water and waste disposal systems.
Advantages: CoBank is a cooperative bank with competitive interest rates and flexible
terms.
Limitations: Loan applicants must meet eligibility requirements (population of 20,000 or
less) and a test of acceptable credit quality.
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Small Community Financing Strategies for Environmental Facilities, August 9,1991.
Contains description of CoBank loan program. Prospective loan applicants can also contact
Richard Fenwick at (303) 740-4057 or James Allison at (303) 7404035 directly at the
CoBank offices in Denver, Colorado.
48
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RURAL DEVELOPMENT ADMINISTRATION LOAN PROGRAM
Type: Loan
Description: The Rural Development Administration (RDA, formerly the Fanner's Home
Administration) provides financial assistance for the installation, repair, improvement, or
expansion of water systems, wastewater collection and treatment systems, and solid waste
disposal facilities. RDA provides loans at three interest rates: market-rate loans,
intermediate-rate loans (i.e., halfway between 5 percent and the market rate) and 5 percent
loans. Applicants can qualify for the 5 percent rate when the loan is needed to meet a
health or sanitary standard and the median household income of the service area is below
the poverty level. Applicants can qualify for the intermediate rate when the median
household income of the service area is less than the nonmetropolitan median household
income for the state.
Actual Use: In FY 1990 the Farmers' Home Administration spent $350 million on this loan
program, which is now under the Rural Development Administration (RDA).
Potential Use: Could be used to acquire capital for renovating wastewater and drinking
water utilities to bring them into compliance with the Clean Water Act and the Safe
Drinking Water Act
Advantages: Low interest rates and favorable loan terms.
Limitations: Applicable only to facilities which primarily serve a rural area or communities
of less than 10,000 population.
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Small Community Financing Strategies for Environmental Facilities, August 9,1991.
Contains description of RDA loan program.
49
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GRANTS
Description: A grant is a sum of money awarded to a state or local government or non-
profit organization. Typically, grants are awarded by the federal government to state or
local governments, or by states to local governments, for the purpose of financing a
particular activity or facility.
Advantages: The primary advantage of grants is that state and local governments do not
have to use their own resources to pay the costs that the grant covers. Since all the grants
covered in this section share this common advantage, discussion of comparative advantages
has been omitted from the individual grant program descriptions.
Limitations: Applying for grants can be costly and time-consuming. Due to the intense
competition at both the state and the local level for a limited pool of funds, state and local
governments may find it difficult to acquire funding for most projects.
Due to project eligibility limitations, only a percentage of the total project costs may be
eligible for project assistance. Alternatively, some grant programs may also specify that the
grantee must provide a share of the funds. Even if funding is approved, the grantee may
need to seek short-term debt instruments to cover cash shortages while awaiting the arrival
of the funds.
Finally, grant funds often have conditions that affect the scope, intent, nature or cost of the
project or program in question. For example, EPA Section 105 grants are negotiated grant
agreements which obligate the state air programs to use the funds to perform certain
activities that may or may not coincide with the state's own priorities for its air program.
Certain grant conditions, such as mandatory grant reviews and production of detailed
reports, may increase the overall cost of the project
50
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GRANTS
APPLICABILITY:
• = Applicable
* = Partially Applicable
0 = Not Applicable
Capital Costs
Operating Costs
State Programs
Local Programs
CHARACTERISTICS:
Administrative Feasibility
• = Easy
* = Moderate
o = Difficult
Equity (Who Pays?)
• = Polluter
* = Beneficiary
O = General Public
Incentive Effects
(e.g., Pollution Reduction)
• = Yes
A = Uncertain
0 =No
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51
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RURAL DEVELOPMENT ADMINISTRATION
WATER AND WASTE DISPOSAL GRANT PROGRAM
Type: Grant
Description: Provides financial assistance for the installation, repair, improvement, or
expansion of water systems, wastewater collection and treatment systems, and solid waste
disposal facilities that primarily serve a rural area or communities of less than 10,000
population.
Actual Use: Most of the funded projects involve water or wastewater systems.
Potential Use: Could be used to acquire capital for renovating wastewater and drinking
water utilities to bring them into compliance with the Clean Water Act and the Safe
Drinking Water Act
Limitations: Grants (as opposed to loans) are made only when necessary to reduce user
charges to a reasonable level. To qualify for a grant of up to 75 percent of eligible project
costs, the service area's median household income must be below the poverty level, or below
80 percent of the state's nonmetropolitan median household income (whichever is higher).
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Small Community Financing Strategies for Environmental Facilities, August 9,1991.
Contains description of loan guarantee program.
52
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ECONOMIC DEVELOPMENT ADMINISTRATION
PUBLIC WORKS AND DEVELOPMENT FACILITIES
GRANT PROGRAM
Type: Grant
Description: EDA awards grants to finance construction of public works and development
facilities that will promote long-term economic development and contribute to private sector
job creation and retention in areas experiencing severe economic distress. State and local
governments and public and private nonprofit organizations are eligible for the grants.
Actual Use: Water and wastewater treatment systems are among the types of projects
eligible for assistance. On average, EDA grants cover 50 percent of project costs, although
areas experiencing severe economic distress are eligible for grants of up to 80 percent of
project costs. Priority is given to applications that maximize the local share of project costs.
Potential Use: Could be used to acquire capital for renovating wastewater and drinking
water utilities to bring them into compliance with the Clean Water Act and the Safe
Drinking Water Act
Limitations: The grant program is limited to communities experiencing economic distress.
Generally, the community must provide matching funds.
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Smatt Community Financing Strategies for Environmental Facilities, August 9,1991.
Contains description of EDA grant program.
53
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
COMMUNITY DEVELOPMENT BLOCK GRANTS
Type: Grant
Description: The Community Development Block Grant program is intended to finance
activities that benefit low-to moderate income citizens. States administer the grants to
localities. Each state determines its own selection criteria.
Actual Use: Water and wastewater treatment systems are among the types of projects
eligible for assistance. On average, the grants cover 50 percent of project costs, although
areas experiencing severe economic distress are eligible for grants of up to 80 percent of
project costs. Priority is given to applications that maximize the local share of project costs.
Potential Use: Depending on each state's grant criteria, might also be used to finance solid
waste facilities.
Limitations: The grants are limited to communities experiencing economic distress.
Community must also provide matching funds.
Reference for Further Information: U.S. Department of Housing and Urban Development,
Programs of HUD, October, 1989. Contains description of Community Development Block
Grants and other HUD programs.
54
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APPALACHIAN REGIONAL COMMISSION (ARC)
SUPPLEMENTAL GRANTS
Type: Grant
Description: Awards grants to assist in job creation and community development
Actual Use: Water and wastewater treatment systems are among the types of projects
eligible for assistance. In FY 1990, the federal government set aside $26 million for the
ARC grant program.
Potential Use: Could be extended to solid waste facilities, or waste-to-energy facilities.
Limitations: Limited to Appalachian counties; generally only provides supplemental funds
to other grants; at least 20 percent of eligible costs must be obtained from sources other
than the federal government
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Small Community Financing Strategies for Environmental Facilities, August 9,1991.
Contains description of ARC grant program.
55
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EPA GRANTS
Type: Grant
Description: Federal Grants for state and local program research, demonstration,
development, and implementation. The amount available, the application criteria, and
requirements differ from grant to grant, depending on Congressional authorization and
internal EPA grant policies. Some grant programs are specifically authorized for a
particular purpose, while other grant programs give significant discretion to the supervising
EPA office.
Actual Use: The table on the following page provides a list of EPA grants in 1991,
organized by the office that administers the grant This list is provided only as an example;
it is not necessarily comprehensive or current, since grants change from year to year
according to Congressional authorization. Historically, EPA grants have funded both state
and local programs in all media. A number of grants are targeted to research and
demonstration projects; other grants provide support for state and local program activities
that coincide with federal environmental quality priorities.
Potential Use: State and local governments could use grant funds to cover costs of
whatever program activities and/or capital purchases meet grant criteria.
Advantages: Federal grants provide state and local governments with the means of meeting
national environmental quality goals. They may also provide funds otherwise unavailable to
state or local programs.
Limitations: Funds may be targeted to specific statutory goals. Programs must compete
for limited funds and sign EPA grant agreements to perform activities.
Reference for Further Information: Government Printing Office, Catalog of Federal
Domestic Assistance, 1991. Contains description of all federal grant programs. The
respective EPA program offices will also have information on grant programs that they
oversee.
56
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PARTIAL LISTING OF EPA PROGRAM GRANTS BY OFFICE, 1991
Office of Water
Water Pollution Control State and Interstate Program Support Grants
(Section 106 of the CWA)
Water Quality Control Information System Grants
State Public Water System Supervision Grants
State Underground Water Source Protection Grants
Water Pollution Control - Lake Restoration Cooperative Agreements
(Clean Lakes Program Grants)
National Estuary Program Grants
Nonpoint Source Planning Grants
Nonpoint Source Set-Asides (under Title VI of the CWA)
Wetlands Protection - State Development Grants
Office of
Research and
Development
Environmental Protection - Consolidated Research Grants
Air Pollution Control Research Grants
Pesticides Control Research Grants
Solid Waste Disposal Research Grants
Water Pollution Control - Research, Development and Demonstration Grants
Drinking Water Research and Demonstration Grants
Toxic Substances Research Grants
Safe Drinking Water Research and Demonstration Grants
Office of
Administration
Environmental Protection Consolidated Grants - Program Support
Office of
Pesticides and
Toxic Substances
Consolidated Pesticide Compliance Monitoring and Program
Cooperative Agreements
Toxic Substances Compliance Monitoring Program Grants
Asbestos Hazard Abatement (Schools) Assistance
Toxic Release Inventory Data Quality Assurance Program
Office of Policy,
Planning; and
Evaluation
Pollution Prevention Incentives for States
Office of Solid
Waste and
Emergency
Response
Hazardous Waste Management State Program Support
Hazardous Substance Response Trust Fund (Superfund)
State Underground Storage Tanks Program (UST Program) Underground
Storage
Tank Trust Fund Program
Superfund Innovative Technology Evaluation Program
Solid Waste Management Assistance Grants
Source: Catalog of Federal Domestic Assistance, 1991
57
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STATE GRANT PROGRAMS
Type: Grant
Description: Many states have grant programs providing funds to eligible localities for
environmental programs. In seeking grants, localities should be aware that grant assistance
can be found among a variety of agencies, not necessarily the primary environmental agency.
For example, a number of states have drinking water quality grants available through
departments of health, rather than an environmental department Alternatively, a
community might be able to finance wastewater treatment improvements through a grant
from a community development agency. Since grant programs vary widely from state to
state, localities should seek grant catalogs or other information directly from their state
governments.
Actual Use: Virtually every state offers some form of grant for environmentally-related
programs. Massachusetts has awarded grants to public entities for purposes ranging from
restoring environmentally degraded lakes to assessing solid waste disposal needs. Maryland
awarded grants to local air programs for air quality activities.
Potential Use: States can use grant programs as incentives to encourage localities to focus
their efforts on particular areas. For example, if state officials saw a need for greater local
involvement in air programs, a grant program could provide an incentive for localities to
begin air quality management activities.
Limitations: From the state perspective, grant programs can strain already-limited state
financial resources. Unlike revolving fund loan programs, grant programs are not self-
supporting. From the local perspective, some grant programs can involve significant
restrictions or contain requirements that increase overall project costs.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Reference Guide on State Financial Assistance Programs, February, 1988. Describes
some of the logistics involved in setting up state grant programs.
Executive Office Of Communities and Development, Commonwealth of
Massachusetts, Catalog of State Grants for Municipal Officials, 1988-1989. Provides an
example of a catalog of state grants.
58
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CREDIT ENHANCEMENT MECHANISMS
Description: Essentially, credit enhancement serves as an assurance to lenders and
bondholders that they will be repaid if the debtor government should default By providing
additional guarantees for bond and/or loan repayment, credit enhancement mechanisms
improve the ability of governments to acquire capital, or to acquire capital at a lower
interest cost
Advantages: State and local governments with poor credit ratings or no credit ratings may
be able to gain access to capital markets and/or loan funds through credit enhancements.
Limitations: Commercial credit enhancements involve additional costs that may outweigh
the financial advantage from the lower interest rates achieved through the enhancements.
There may be intense competition for federal and state credit enhancement programs.
59
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CREDIT ENHANCEMENT
MECHANISMS
APPLICABILITY:
• = Applicable
A = Partially Applicable
o = Hot Applicable
Capital Costs
Operating Costs
State Programs
Local Programs
CHARACTERISTICS:
Insurance Provided
» = Yes
A = In Some Cases
o =No
Administrative Feasibility
• = Easy
A = Moderate
O = Difficult
Incentive Effects
(e.g., Pollution Reduction)
• = Yes
A = Uncertain
o =No
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STATE BOND BANKS
Type: Credit Enhancement Mechanism
Description: A bond bank is an institution that pools together offerings of individual bonds.
Actual Use: To assist smaller communities and communities without a credit rating, a
number of states have formed bond banks to pool offerings into a single bond issue that can
then be issued at a lower interest rate than any single community's issue could command.
Potential Use: States can use bond banks to help small communities meet environmental
quality goals. For example, states could use pooled bond bank issues to help smaller
communities finance wastewater treatment plants, solid waste management facilities, or
drinking water facilities.
Advantages: Provides small communities with access to national bond markets, and utilizes
the state's credit rating, which usually provides lower interest rates. Pooled offerings reduce
issuance costs for each participant
Limitations: Not as useful to larger communities and small communities with good ratings,
who can usually command lower interest rates on their own. To finance the bond bank,
part of the state's credit capacity is used for municipal projects; capacity to finance state
projects may be impaired.
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: Small Community Financing Strate^es for Environmental Facilities, August 9,1991.
Contains case study of Maine Municipal Bond Bank.
61
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RURAL DEVELOPMENT ADMINISTRATION LOAN GUARANTEES
Type: Credit Enhancement Mechanism
Description: A program for guaranteeing third-party loans for water and wastewater
projects to bring municipal facilities into compliance with a health or sanitary standard.
Actual Use: As of FY 1990, no communities had used these loan guarantees (Note: This
program was under the Fanners' Home Administration in 1990).
Potential Use: Could be used to acquire capital for renovating wastewater and drinking
water utilities to bring them into compliance with the Clean Water Act and the Safe
Drinking Water Act
Advantages: Unlike commercial letters of credit and lines of credit, RDA loan guarantees
involve no cost to the community.
Limitations: Applicable only to water and wastewater projects in communities where the
median household income of the service area is less than the median nonmetropolitan
household income of the state.
Reference for Further Information: Environmental Financial Advisory Board, EFAB
Advisory: SmaUCommuiiity Financing Strategy for Environmental Facilities, August 9,1991.
Contains description of loan guarantee program.
62
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COMMERCIAL CREDIT ENHANCEMENTS
(Commercial Bond Insurance, Lines of Credit, and Letters of Credit)
Type: Credit Enhancement Mechanism
Description: Commercial credit enhancements are guarantees that assure lenders and
bondholders that interest will be repaid in the event of default by the government that
contracted or issued the debt Lines of credit assure potential lenders that borrowers will
have access to cash if necessary, although lenders have no guarantee that borrowers will not
use this line of credit for other purposes. Letters of credit specifically state that funds will
be used only for loan repayment In exchange for a premium paid by the issuer, commercial
bond insurance guarantees that interest will be paid.
Actual Use: State and local governments have used commercial bond insurance to make
their bond offerings appear more secure from default and therefore more attractive to
potential investors. Letters of credit and lines of credit have been used to assure lenders
of the security of the loan.
Potential Use: Communities ineligible for subsidized federal or state credit enhancements
may be able to use the commercial market
Advantages: Credit enhancements reduce the cost of borrowing. Arranging commercial
credit enhancements may be faster than federal or state credit enhancement mechanisms.
Limitations: State and local governments may have difficulty finding commercial bond
insurance, lines of credit, and letters of credit at reasonable rates.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Reference Guide on Financial Assistance Programs, February, 1988. Contains basic
description of commercial bond insurance, lines of credit, and letters of credit
63
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COLLATERAL ARRANGEMENTS
(Fund Leveraging)
Type: Credit Enhancement
Description: A collateral arrangement, or leveraging of funds, is using grant or loan funds
as security to issue additional debt For example, where federal regulations permit, states
can make use of federal grant or loan funds by using them to back the issue of additional
debt, and then loaning or granting the additional funds to localities.
Actual Use: A number of states have increased the funds available for lending from their
Water Pollution Control State Revolving Funds through leveraging. Many of them have
used the EPA grant funds to set up a reserve fund to secure a revenue bond issue, using
the proceeds as backing for additional loans. The reserve fund assures bondholders of
repayment In addition, interest on the reserve funds can be used to pay part of the debt
service on the bonds, reducing the amount of loan payments by the locality to the state.
Potential Use: State governments could leverage federal funds where regulations and laws
allow. Local governments could also leverage state grant and loan funds.
Advantages: Can provide additional capital for state and local needs.
Limitations: Use of funds for leveraging may not be permitted by the regulations of some
federal and state grant and loan programs.
Reference for Further Information: U.S. General Accounting Office, Report to the
Chairman, Committee on Public Works and Transportation, House of Representatives,
Water Pollution: States'Progress in Developing State Revolving Loan Fund Programs, March,
1991. Contains description of the extent of leveraging of federal State Revolving Fund
monies by states.
64
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PUBLIC-PRIVATE PARTNERSHIPS
Description: Public-private partnerships involve private participation in the design,
financing, construction, ownership, and/or operation of a public purpose facility or service.
For example, a wastewater treatment plant might be owned by the public sector and
operated by the private sector, or might be both owned and operated by a private company.
Public-private arrangements involve a variety of techniques and activities to promote more
involvement of the private sector in providing traditional government or public services. It
enables each party to do what it does best and can result in a "win-win" solution to
providing public services.
In the past, some public-private partnership arrangements, particularly in the area
of wastewater treatment, had been hindered by regulations requiring repayment of the
federal interest on federally-grant funded property. Recognizing this impediment, the
President recently issued an Executive Order (#12803, May 4, 1992) directing executive
agencies to make policy and regulatory changes to encourage and facilitate private
investment in and involvement in local infrastructure, including federally-grant funded
facilities. The order is intended to do the following:
• Assist local privatization initiatives,
• Remove federal regulatory impediments to private sector involvement,
• By relaxing federal repayment requirements, increase state and local
governments' proceeds from privatization arrangements, and
• Protect the public interest by ensuring that privatized assets continue
to be used for original purposes and that user charges will remain
consistent with current federal conditions that protect users and the
public.
In response to the Executive Order, EPA issued a federal register notice on June 29,
1992, requesting comment on potential regulatory and policy changes to encourage public-
private partnerships in federally-grant funded wastewater treatment plants. In addition to
requesting public comment, the notice announced a public meeting and solicited
participation in an inclusionary rulemaking process.
Advantages: Depending on the nature of the arrangement, a public-private partnership may
be able to capitalize on a number of private sector resources. If private sector financing is
used, the burden on public debt capacity can be reduced. If private sector operation is
used, efficiency savings are generally realized. Private sector procurement and construction
methods typically provide significant savings as well. Due to specialized expertise, the
private sector can sometimes provide services that would be otherwise unavailable to the
public sector, or services at a higher level of quality. Finally, private sector operations can
often have a shorter implementation time.
65
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Limitations: The primary concern of governments who turn over services or facility
operation and/or ownership to a private partner is loss of control. When the public agency
is no longer involved in day-to-day operations, it does not have the same control over
quality, including compliance with state and federal environmental standards and permits.
The public partner may also have no control over the private partner's inability to uphold
the terms of the contract, such as unscheduled service interruptions or bankruptcy, or over
the quality of the service provided. If the partnership involves operation of a facility which
charges fees, the public partner may be concerned about losing control over rate increases.
66
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PUBLIC-
PRIVATE PARTNERSHIPS
APPLICABILITY:
• = Fully Applicable
A = Potentially Applicable
0 = Not Applicable
State Programs
Local Programs
Existing Facilities
(upgrade, expansion, or operation)
New Facilities
C3IARACTERISTICS:
• = Yes
A = Potentially
0 =No
Lowers Construction Costs
Lowers Operating Costs
Provides Private Capital Financing
Private Sector Operation
.
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67
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PRIVATE SECTOR OPERATION
(Service Contracts, Private Contract Operations)
Type: Public-Private Partnership
Description: A private partner is contracted to provide a specific municipal service, such
as solid waste removal, or to maintain and operate a publicly-owned facility, such as a
wastewater treatment plant
Actual Use: Local governments have used contract services to operate wastewater treatment
plants, water utilities, and other municipal services. State governments have contracted out
various portions of their environmental programs. For example, monitoring of wastewater
discharges is contracted out to a private laboratory by the Wisconsin water quality program.
Potential Use: Contract services can be used to perform water and air quality monitoring,
provide wastewater treatment, solid waste disposal, hazardous waste facility management,
drinking water facility operation, or activities in any other media.
Advantages: Depending on the nature of the activity, private sector operators can achieve
efficiency savings of 10-30 percent over public sector operation. Under some agreements,
risk of operations is transferred to private partner.
Limitations: In some cases, the transfer of formerly public services to private companies
can cause labor difficulties among public employees.
Reference for Further Information: Office of Administration and Resources Management,
U.S. Environmental Protection Agency, Public Private Partnerships Case Studies: Profiles of
Success in Providing Environmental Services, September, 1989. Contains several case studies
on contract operations in wastewater treatment, solid waste removal, and drinking water
utilities.
68
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TURNKEY ARRANGEMENTS
(New Facility Construction)
Type: Public-Private Partnership
Description: Under the turnkey model, a public agency will contract with a private
investor/vendor to build a complete facility in accordance with specified performance
standards and criteria agreed to between the agency and the vendor. The private developer
will contract to build the facility for a fixed price and will then absorb the construction risk
of meeting that price commitment Generally in a turnkey transaction the private partners
will be able to use fast-track construction techniques (such as design-build) and will not be
bound by public sector procurement regulations. The combination often enables the private
partner to complete the facility in significantly less time and for less cost than could be
accomplished under traditional construction techniques. In a turnkey transaction, financing
and ownership of the facility can rest with either the public or private partner. For example,
the public agency might provide the financing, with the attendant costs and risks.
Alternatively, the private parry might provide the financing capital, generally in exchange
for a long-term contract to operate the facility.
Actual Use: A number of state and local governments have used turnkey agreements to
build wastewater treatment plants and solid waste disposal facilities. For example,
Huntsville, Alabama, contracted with a private partner to construct and operate an
incinerator on behalf of the Solid Waste Disposal Authority.
Potential Use: Turnkey agreements would be particularly suited to build facilities that
require highly-specialized technology, such hazardous waste disposal, waste-to-energy
generation, or vehicle emissions inspection.
Advantages: Turnkey agreements take advantage of the private sector procurement process
and construction efficiency, which allows private faculties to be built faster and more
cheaply than comparable public facilities.
Limitations: Implementation of a turnkey transaction requires that a public agency be able
to negotiate a contract with a private vendor; the traditional "low-bid" procurement will not
work for a turnkey project
Reference for Further Information: Office of Administration and Resources Management,
U.S. Environmental Protection Agency, Public Private Partnerships Case Studies: Profiles of
Success in Providing Environmental Services, September, 1989. Contains several case studies
on turnkey operations.
69
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BUILD^)PERATE-TRANSFER/BUILD-TRANSFER-OPERATE
(New Facility Construction, Operation, and/or Ownership)
Type: Public-Private Partnership
Description: Under the Bwld-Operate-Transfer (EOT) option, the private partner builds a
facility to the specifications agreed to with the public agency (most likely under a turnkey
arrangement), operates the facility for a specified time period under a contract or franchise
with the agency and then transfers the facility to the agency at the end of the specified time
period. In most cases, the private partner will also provide the financing for the facility, so
the length of the franchise must be sufficient to enable the private partner to obtain a
reasonable return on the investment through user charges. At the end of the franchise
period, the public partner can assume operating responsibility for the facility or can contract
the operations to the original franchise holder or a new contractor. The Build-Transfer-
Operate (BTO) model is similar to the Build-Operate-Transfer model, except that the
transfer to the public owner takes place at the time construction is complete rather than at
the end of the franchise period.
Actual Use: The City of Bristol, Connecticut, entered into an arrangement with a private
partner to design, build, operate, and own a resource recovery facility. Lee County,
Alabama contracted with a private company to site, construct, operate and own a landfill
in the county.
Potential Use: EOT and BTO arrangements could be used to build new wastewater and
solid waste management facilities.
Advantages: Allows the public sector to capitalize on construction efficiency of private
sector. Depending on arrangement, may also allow public partner to reap benefits of
private sector operating efficiency, and may allow private partner to enjoy tax benefits of
ownership.
Limitations: Like turnkey arrangements, BOT and ETO arrangements must be individually
negotiated; traditional low-bid governmental procurement policies will not work.
Reference for Further Information: Apogee Research, Inc., Unpublished Paper: Private
Sector Involvement in Transit Maintenance: Sharing the Benefits and the Risks, April, 1992.
Contains several examples of BTO and EOT arrangements.
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LEASE-PURCHASE/OPERATING LEASE
(New Facility Construction)
Type: Public-Private Partnership
Description: In the lease-purchase model, the private sector builds a facility which it then
leases to the public agency. At the end of the lease term, the property may be bought by
the public agency at a fair market price. Under this arrangement, the facility may be
operated by either the public agency or the private developer.
Actual Use: Lease-purchase arrangements have been used by the General Services
Administration for building federal office buildings, and by the Pennsylvania Department
of Corrections to build prisons.
Potential Use: Lease-purchase arrangements could be used to provide new wastewater
treatment and solid waste disposal facilities.
Advantages: The basic reason for this transaction is to enable a public agency to obtain a
new facility without the need for the additional capital investment The private sector puts
up the investment and, in effect, the public agency pays for it over time. In addition, the
construction efficiency results in lower costs than would be incurred by a public agency.
Limitations: The cost of the private capital used to finance the project is typically higher
than the cost of public capital, and may or may not outweigh the benefit gained from private
sector construction efficiency.
Reference for Further Information: Apogee Research, Inc., Unpublished Paper: Private
Sector Involvement in Transit Maintenance: Sharing the Benefits and the Risks, April, 1992.
Contains several examples of lease-purchase arrangements.
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LEASE-DEVELOP-OPERATE/BUILD-DEVELOP-OPERATE
(Existing Facility Purchase or Renovation)
Type: Public-Private Partnership
Description: Under this model, the private party buys or leases a facility from a public
agency, modernizes and/or expands it, and then operates the facility under contract with the
public agency.
Actual Use: A number of municipal facilities have been sold or leased and developed under
Lease-Develop-Operate (LDO) and Build-Develop-Operate (EDO) arrangements.
Potential Use: LDO and BDO arrangements could be used to acquire private capital to
finance upgrades to local environmental facilities, such as wastewater treatment plants or
solid waste management facilities, to bring them into compliance with environmental
regulations. By facilitating the sale and/or lease of federally-grant funded wastewater
treatment works, the President's Executive Order on privatization will enable many localities
to enter into LDO or BDO arrangements.
Advantages: The public sector does not have to provide capital for upgrading or expanding
facilities, and can take advantage of private sector construction and operations efficiency.
The private partner gets the right to operate the facility.
Limitations: State and local governments may be concerned about guaranteeing the right
operating contract to a particular vendor. The sale or lease of publicly-owned assets may
require regulatory or statutory action in some areas.
Reference for Further Information: Apogee Research, Inc., Unpublished Paper: Private
Sector Involvement in Transit Maintenance: Sharing the Benefits and the Risks, April, 1992.
Contains several examples of LDO and BDO arrangements.
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SALE/LEASEBACK
Type: Public-Private Partnership
Description: A sale/leaseback is a financial arrangement in which the owner of a facility
sells it to another entity, and subsequently leases it back from the new owner. Both public
and private entities enter into sale/leaseback arrangements for a variety of reasons. For
example, a tax-exempt lease (see p. 102), is a particular type of sale/leaseback arrangement
in which a public entity sells a facility to a private partner in order to finance construction
or upgrades, and repays the private partner's investment with lease payments. Another
innovative application of the sale/leaseback technique is the sale of a public facility to a
public or private holding company for the purposes of limiting governmental liability under
environmental statutes. Under this arrangement, the government that sold the facility leases
it back and continues to operate it Since ownership remains with the holding company,
however, the government may not be held financially liable for potential violations of
environmental regulations.
Actual Use: Sale/leaseback arrangements can be used by both state and local governments.
Phoenix, Arizona is setting up a sale/leaseback arrangement to sell an environmental facility
to a municipal holding company that has the power to issue tax-exempt bonds. The
government will lease and operate the facility while the holding company will retain
ownership and the risk of environmental liability associated with the facility.
Potential Use: Sale/leaseback arrangements could be used to limit potential governmental
liability from operation of hazardous waste disposal facilities.
Advantages: Sale/leaseback arrangements can sometimes provide private sector financing
for a facility (as with a tax-exempt lease), and may be able to limit a government's potential
liability. If a sale-leaseback arrangement involves private ownership, the private partner
gains the tax benefits of depreciation on the facility.
Limitations: Enacting sale/leaseback arrangements may be difficult under state or local law.
In exchange for the protection from liability, the public partner may be concerned about
losing control over the facility.
Reference for Further Information: Gelfand, M. David, State and Local Government Debt
Financing, Volume 2, Callaghan& Company, Deerfield, Illinois, December, 1988. Contains
general definition and description of sale/leaseback arrangements. For further information
on sale/leaseback arrangement in Phoenix, contact George Britton, Deputy City Manager,
(602) 256-3248.
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TAX-EXEMPT LEASE
Type: Public-Private Partnership
Description: Under a tax-exempt lease arrangement, a public partner finances capital assets
or facilities by borrowing funds from an investor or financial institution. The private partner
generally acquires title to the asset, but transfers it to the public partner either at the end
or at the beginning of the lease term. The portion of the lease payment that is used to pay
interest on the capital investment is tax-exempt under state and federal laws.
Actual Use: Tax-exempt leases have been used to finance various capital assets, including
computers, buses, and stadiums.
Potential Use: Tax-exempt leases are another method of capital financing that could be
applied to any environmental facility. Since the lease arrangements do not count against
local debt limitations, they may be a particularly useful tool for communities whose debt
capacity is nearly exhausted.
Advantages: A primary advantage of a tax-exempt lease is that the public partner can
acquire capital from the private sector without issuing a bond. The public partner can use
a tax-exempt lease to acquire private capital at discounted rates. The private partner gains
the benefit of tax-exempt income from the interest portion of the lease payments.
Limitations: Since some lease arrangements are long-term, the public partner will need to
have the power to enter into long-term contracts.
Reference for Further Information: Apogee Research, Inc., Unpublished Paper: Transit in
the ISTEA Era: A Guide to Financing Opportunities, July, 1992. Contains a description of
tax-exempt lease arrangements.
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ECONOMIC INCENTIVES
Description: Economic incentive programs use market-based tools to encourage reductions
in polluting behavior. For example, the financial burden of fines and penalties serves as an
economic disincentive for polluters who might otherwise violate environmental laws or
regulations. Many incentive programs incorporate a market element, allowing participants
to trade "rights" for emissions or discharges among themselves. For example, a number of
water quality management programs have adopted or are considering adopting point
source/nonpoint source nutrient trading programs. Under such programs, point source
dischargers of nutrient-laden effluent can receive credits for financing nonpoint source
pollution reduction.
Advantages: The primary advantage of incentive-based programs is the reduction in
polluting behavior that they are designed to produce. The economic incentive mechanism
encourages the private sector to develop innovative techniques for pollution reduction,
including selection of manufacturing processes that generate less pollution, development of
new technologies for waste reduction, and unproved best management practices.
Limitations: Although well-structured economic incentive programs generally achieve
pollution reduction, and thereby reduce program costs, they typically are not a good source
of cash revenues for program operations. Some incentive-based programs, such as fines and
penalties, rely on polluting behavior to generate revenues. As this behavior changes,
revenues will fall. Other incentive-based programs, such as emissions trading, involve
transfer of funds among private parties, not the implementing government
75
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ECONOMIC INCENTIVES
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76
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LIABILITY ASSIGNMENT
Type: Economic Incentive
Description: Assignment of liability relates to the creation of insurance markets where
premiums would reflect the relative degree of risk that activities pose to the environment
Premiums send price signals to polluters and provide incentives (i.e., the possibility of lower
insurance costs) to modify behavior and reduce risks.
Actual Use: Liability is assigned through common law (negligence is a common standard)
or environmental statutes. Liability assignment has served two broad purposes. First,
liability rules provide incentives to prevent pollution or to avoid behavior that will result in
paying damages to aggrieved parties. The Federal Superfund program's liability standards
create strong incentives to avoid future liability for waste management practices. The
Resource Conservation and Recovery Act (RCRA) program includes a financial
responsibility requirement under which disposers of hazardous substances must demonstrate
that they can handle the costs of corrective action, which encourages companies to purchase
insurance to cover the costs of potential damages and provides incentives to avoid releases
of hazardous wastes or constituents into the environment Second, liability standards are a
means to fund remediation activities, for example, responsible parties are liable for cleanup
costs under the Superfund program. The RCRA program requires purchase of insurance
for underground storage tanks to cover cleanup costs in the event of tank leakage.
Potential Use: Liability assignment could be used for many types of pollution problems to
provide incentives to modify behavior. Liability assignment may be more practical, and have
a more direct incentive effect, in circumstances where the relationship between activities and
environmental damage is clearly defined.
Advantages: Where insurance premiums accurately reflect the degree of risk, or the
expected frequency and severity of damages, then companies have a financial incentive to
take actions that reduce their potential liability.
Limitations: It may be difficult for insurers to underwrite risks for certain types of
behavior. In some cases, insurers have been unwilling to write liability policies and thus
insurance markets have not developed as expected. In addition, the unpredictability of
court decisions on damage awards makes it difficult for polluters and their insurers to assess
potential risks.
Reference for Further Information: Moore, John L., et al., Using Incentives for
Environmental Protection: An Overview, Washington, DC: Congressional Research Service,
June 2, 1989.
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TRANSFERABLE DEVELOPMENT RIGHTS
(Purchase Development Rights, Easements)
Type: Economic Incentive
Description: Under Transferable Development Rights (TDR) programs, owners of rural
or less developed land are assigned a certain number of TDRs. The landowners may then
sell these rights to developers at a mutually-agreeable price. By selling the development
rights, the owner of the undeveloped land agrees not to develop it or to develop it at a very
low intensive use, and a permanent anti-development restriction, or "easement" is placed on
the deed to the property. Developers can use the TDRs purchased to exceed height and
density restrictions in other, already-developed areas.
Actual Use: Limited to local governments. Fauquier County, Virginia, and Montgomery
County, Maryland have existing TDR programs that preserve land but do not generate
revenues.
Potential Use: Since the landowners receive all funds for the purchase of development
rights, existing TDR programs are either revenue-neutral or are operated at some cost to
local governments. If the local government received a percentage of each transaction, some
funds might be used for other land conservation activities, such as natural lands purchase.
Advantages: Allows local government to control where growth occurs. Gives rural
landowners full value for land and permits further economic development in already-
developed areas.
Limitations: As currently structured, not a revenue-generating mechanism.
Reference for Further Information: The Growth Dilemma: The Chesapeake in the 21st
Century (Conference Proceeding?), Maryland, November, 1989. Contains good description
of TDR programs and rules of thumb for implementing successful TDR programs.
78
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FINES AND PENALTIES
Type: Economic Incentive
Description: Violators are usually required to pay fines and penalties to compel compliance
with environmental laws. Where appropriate, enforcement settlement agreements may
include commitments for direct funding of environmental projects in lieu of dollar penalties.
Actual Use: State and local governments have used fine revenues to set up trust funds for
pollution control. For example, the Massachusetts Bay Environmental Trust Fund was set
up with $2.5 million in fine revenues. In 1977, Allied Chemical Corporation was fined $13.2
million for polluting Virginia's James River with Kepone. Encouraged by the federal judge
to develop a way for the fine to be used for the benefit of the people of Virginia, Allied
made a voluntary contribution of $8 million to start an environmental fund to disburse
grants for Virginia. The Virginia Environmental Endowment (VEE) was created from the
Allied contribution. In 1981, the Endowment received an additional $1 million from FMC
Corporation as a result of a guilty plea agreement in a federal felony prosecution. The
Endowment supports research and projects aimed at solving today's environmental
problems, and preventing problems in the future.
Potential Use: Whereas fees and taxes are collected on everyday activities, fines and
penalties are collected only on deviant behavior, so revenues are erratic. Fine revenues are
generally not suited to fund program operating costs on a regular basis, but can be used
to set up trust funds for future operating expenses, to fill in unexpected gaps in yearly
budgeting, or for one-time capital expenditures.
Advantages: "Windfall" revenue; depending on nature of fine, can be large source suitable
for financing capital costs or setting up trust funds for future costs. Provides incentive to
change polluting behavior.
Limitations: Revenues unpredictable. If program funding relies heavily on fines, changes
in polluting behavior will decrease revenues. Some state and local governments do not
dedicate fines to particular programs, but direct them to general funds. Programs that do
dedicate fines are sometimes criticized for a conflict of interest, since the program will
benefit from any fines it levies.
Reference for Further Information: Buzzards Bay National Estuary Program, Buzzards Bay
Comprehensive Conservation and Management Plan. Financial plan provides basic description
of fines and penalties and a case study on the Massachusetts Bay Environmental Trust
Fund. State Civil Penalty Authorities and Policies, a report prepared by the Environmental
Law Institute for the U.S. EPA, September 30, 1986. Also see: U.S. Environmental
Protection Agency, Office Of Water, Discussion Paper on Alternative Financing Mechanisms
for State Water Programs, Washington, D.C., November 1989. Contains description of
Virginia Environmental Endowment and a discussion of the potential use of fines and
penalties as an AFM.
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ASSURANCE/PERFORMANCE BONDING
Type: Economic Incentive
Description: One method of incorporating social cost into decision making by polluters or
developers is to require them to purchase dated assurance or performance bonds that reflect
the full value of potential worst-case costs to remediate environmental damage resulting
from their actions. The bond would be repaid in full (possibly with interest) at the time of
maturity if the bondholder demonstrates that the potential damage has not occurred. The
bond would be repaid in part if some level of damage less than the potential baseline has
occurred, and would be forfeited if worst-case damages are incurred. If damages did occur,
the bond could be used to remediate the environment damages or to compensate injured
parties.
Actual Use: Performance bonding has been used in surface mine reclamation programs to
provide assurance that surface mined areas will be reclaimed.
Potential Use: An assurance/performance bonding requirement could be administered by
a state regulatory agency, which would act as the bonding agency. If the bonds were
administered through another agency, the regulatory agency would have to be integrally
involved.
Advantages: Assurance/performance bonding is designed to incorporate environmental
criteria and uncertainly (i.e., the process and extent of damages is uncertain prior to
development) into the market system. This approach reflects the estimated cost of potential
future environmental damages in the value of the bond. It provides a strong economic
incentive to minimize damages and to develop innovative, cost-effective pollution control
technologies.
Limitations: Although based on scientific information on potential damages, setting the
value of the bond would still be a subjective decision dependent on numerous assumptions.
Where the value of the bond is based on the cost of remediation or replacement, depending
on the circumstances, it may not capture the full social cost of environmental damage.
Setting bond values might be subject to lengthy legal challenges, requiring extensive
documentation and possibly causing program delays.
Reference for Further Information: Costanza, Robert and Perrings, Charles, "A Flexible
Assurance Bonding System for Improved Environmental Management," Ecological
Economics (1990), pp. 57-75.
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WETLANDS MITIGATION BANKING
Type: Economic Incentive
Description: In general, a mitigation bank is a publicly owned and managed wetlands site
that has been enhanced, restored, or created by a public agency and provides wetlands
mitigation credits to permittees for an established fee. These credits may be drawn upon
in order to fulfill wetlands mitigation requirements for development impacts in other
locations, usually within the same watershed or habitat area. Fees may be based on the
number of impaired acres and/or the value of impaired wetlands. In some cases, credits
may be sold to other permit applicants.
Actual Use: Wetlands mitigation banking provides one mechanism for fulfilling mitigation
requirements under federal and state regulatory programs when on-site solutions are not
possible. Mitigation is frequently required as a condition of Section 404 permits (under the
Clean Water Act) to compensate for adverse impacts on wetlands due to removal or fill
activities that otherwise comply with the requirements of the permit program. A February
1990 U.S. Army Corps of Engineers and EPA Memorandum of Agreement (MO A) provides
guidance on compensatory mitigation for wetlands. The MOA establishes mitigation
banking as an acceptable form of mitigation, subject to satisfaction of specific criteria to
ensure an environmentally successful bank. Some state programs also require mitigation
as a condition of state permits, for example, the Removal-Fill Permit Program administered
by the Oregon Division of State Lands that requires mitigation as a permit condition when
necessary to compensate for any unavoidable adverse impacts on wetlands.
Potential Use: States may operate more than one mitigation bank at the same time and
such banks may be used for both public and private developments. Mitigation banks can
be administered by a different division or agency than the one that administers a state's
wetlands regulatory program. State and local agencies that have continuing development
needs (e.g., transportation agencies or port authorities) may be likely candidates for new
mitigation banks.
Advantages: Requiring compensatory mitigation for public and private developments that
cause unavoidable adverse impacts is consistent with the goal of protecting the nation's
remaining wetlands. Mitigation banking offers a potentially more efficient and more
publicly beneficial approach by compensating in advance for unavoidable adverse impacts
on wetlands caused by development projects rather than the more conventional case-by-case
compensatory off-site mitigation. Mitigation banking can allow essential public or private
development projects to proceed without costly delays and, if properly designed, without
compromising regulatory protection of wetlands.
Limitations: Mitigation banking may not offer significant revenue potential even though
it requires compensation for adverse impacts on wetlands. Revenues are dependent upon
the number and type of development projects that occur in areas covered by the mitigation
bank.
Reference for Further Information: U.S. Environmental Protection Agency, Wetlands
Protection Hotline, at 1-800-832-7828.
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POINT SOURCE/NONPOINT SOURCE TRADING
Type: Economic Incentive
Description: Although it can take many different forms, point source/nonpoint source
trading in principle involves point sources financing reductions in nonpoint source pollution
in lieu of undertaking more expensive point source pollution reduction.
Actual Use: In North Carolina's Tar-Pamlico watershed, the Tar-Pamlico Basin Association
(a coalition of point source dischargers) and state and regional environmental groups
proposed a two-phased nutrient management strategy that incorporates point
source/nonpoint source trading. The plan obligates Association members to finance
nonpoint source reduction activities in the Basin if their nutrient discharges exceed a base
allowance.
Potential Use: Several conditions appear necessary if a point source/nonpoint source
trading program is to achieve ambient water quality objectives. First, the waterbody must
be identifiable as a watershed or segment There must be a combination of point sources
and controllable nonpoint sources that each contribute a significant portion of the total
pollutant load, and accurate and significant data to establish targets and measure reductions.
There must be significant load reductions for which the marginal cost (cost per pound
reduced) for nonpoint source controls are lower than for upgrading point source controls.
Finally, point sources must be facing requirements to either upgrade facility treatment
capabilities or trade for nonpoint source reductions in order to meet water quality goals.
Advantages: Point source/nonpoint source trading programs increase the potential for cost-
effective reduction in pollutant loading, since nonpoint source reductions funded by trading
are typically achieved at lower cost per unit of pollutant than point source reductions.
Under ideal conditions, a trading program should produce both cost savings to point source
dischargers and improved water quality. The inclusion of both point and nonpoint sources
in a single management strategy also tends to force the development of a watershed-wide
or basin-wide approach to pollution reduction.
Limitations: Implementing trading programs may require cooperation and information
sharing between agencies withoutprevious cooperative experiences (e.g., regulatory agencies
with water quality authority and farmer assistance programs.) Technical limitations between
point source and nonpoint source controls can make it difficult to arrive at an appropriate
trading ratio. Administrative costs are also incurred for review and approval of individual
trades.
Reference for Further Information: Office of Water, Office of Policy, Planning and
Analysis, U.S. Environmental Protection Agency, Incentive Analysis for Clean Water Act
Reauthorization: Point Sowce/Nonpoint Source Trading for Nutrient Discharge Reductions,
April, 1992. Provides an analysis of trading programs, including case studies of trading
programs in North Carolina and Colorado.
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EMISSIONS TRADING
Type: Economic Incentive
Description: Emissions trading programs allow sources of air pollutants to trade pollutants
in some fashion, either geographically, over time, or among other sources. Many emissions
trading programs incorporate a "bubble" structure. A bubble program treats multiple
emission sources as if they were included within an imaginary bubble, allowing existing
sources to adjust emissions levels within the bubble as long as an aggregate limit on
emissions is not exceeded. "Offset" programs allow new sources to obtain emissions credits
from existing sources to offset new emissions. "Banking" programs allow sources to store
emission reduction credits for future use or sale, while "netting" programs allow sources
undergoing modification to avoid new source review if plant-wide emissions are reduced.
Actual Use: The EPA's air emissions trading program began in 1975 with a proposal to
exempt emissions at new or modified existing sources from New Source Performance
Standards as long as total emissions from the facility did not increase. Since that proposal,
the EPA's air emissions trading program has included bubbles, offsets, banking, and netting
elements. An emissions trading program is an integral part of the sulfur dioxide control
plan outlined in the Clean Air Act Amendments of 1990. In California, the South Coast
Air Quality Management District is setting up a Regional Clean Air Incentives Market
(RECLAIM) that will allow around 2,000 sources of reactive organic gases, nitrogen oxides,
and sulfur oxides to buy and sell emission reduction credits on an open market
Potential Use: State and local air programs may be able to use emissions trading as a tool
to meet the air quality standards outlined in the Clean Air Act Amendments of 1990.
Advantages: According to a GAO study, emissions trading can save up to 90 percent of
private control costs. It encourages private research into air pollution control technologies,
and allows the private sector to allocate its resources to produce emissions reductions in the
most cost-effective manner.
Limitations: Emission trades may require extensive and time-consuming prior approval, and
may be hindered by legal and regulatory requirements. Establishing emissions and air
quality levels before and after trading is often difficult
Reference for Further Information: American Petroleum Institute, The Use of Economic
Incentive Mechanisms in Environmental Management, June, 1990. Provides a general
discussion of all types of economic incentive programs, including a discussion of current and
historical emissions trading programs.
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LAND TRUSTS
(Land Banks)
Type: Economic Incentive
Description: Land trusts are trust funds that can actively acquire, manage, and protect
natural lands and resources on behalf of a state or local government Land trusts can be
financed by a variety of revenue sources, although many localities choose to dedicate land-
related revenues, such as land transfer taxes, to this purpose. The existence of the land
trust serves as an incentive for natural resources protection.
Actual Use: In response to extreme development pressure, residents of Nantucket Island,
Massachusetts, created a Land Bank in 1983 to acquire up to 15 percent of the island's
shores and moors by 1990. The Bank also actively manages these resources to ensure public
access to recreational areas. The Bank is funded primarily by a transfer fee of 2 percent
of the price of all property sold in Nantucket County.
Potential Use: States and localities could use land trusts as a mechanism to encourage
protection of natural lands.
Advantages: Land trusts combine financing, management, and planning functions in a single
entity, allowing localities to focus efforts and encouraging the creation of a broad-based
strategy to protect natural lands. Land trusts may also be used to funnel donations from
the private sector to natural lands protection.
Limitations: Staffing land trusts can be administratively expensive, although Nantucket
avoids this expense by recruiting volunteer commissioners. Legislative action may be
required to set up land trust and arrange a dedicated revenue source.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Financing Marine and Estuarine Programs: A Guide to Resources, September, 1988.
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SPECIAL DISTRICTS
(Special Purpose Districts, Regional Authorities)
Type: Special District
Description: A special district is an independent government entity formed to provide and
finance governmental services for a specific geographic area. Residents of special districts
pay taxes to finance the improvements that they will benefit from. For example, a sewage
special district might tax residents to finance extension of wastewater treatment services.
Actual Use: At the local level, special districts have been formed for a wide variety of
purposes. Examples include:
• Sewer Districts,
• Water Districts,
• Irrigation Districts,
• Stormwater Management Districts,
• Regional Solid Waste Authorities,
• Water Resource Authorities,
• Regional Port Authorities, and
• Regional Air Quality Management Districts.
Special districts are formed for a variety of reasons. Some communities form special
districts to target costs and benefits of services to a particular population. For example, a
drinking water district might be formed to finance extension of municipal drinking water
services into a newly-developed area. The district could be financed by special taxes on
district residents.
Since special districts may issue revenue bonds in a number of states, local governments
have also used special districts to finance capital facilities independently, relieving the
burden on general debt capacity. For example, a regional port authority might be able to
issue a revenue bond to finance port construction and/or renovation.
A consortium of local governments may form a special district to address a common
problem that crosses traditional political boundaries. Examples of this type of special
district include regional air quality and solid waste management authorities.
(Continued on following page)
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SPECIAL DISTRICTS (CONTINUED)
Potential Use: Special districts could be formed from the nonattainment areas classified by
the Clean Air Act Amendments, so that special taxes on residents of these areas could
finance air quality control programs.
Advantages: Costs are borne only by taxpayers who will benefit from improvements.
Regional special districts can often provide more specialized services than smaller local
governments (e.g., a regional solid waste authority may be better equipped to finance a solid
waste facility than any one county.) Special districts can also issue bonds, which may reduce
some of the debt load on the general purpose government
Limitations: Special districts are not directly accountable to the electorate ~ most special
district officials are appointed, not elected. May require special legislation to set up special
districts in some areas.
Reference for Further Information: Porter, Douglas R., Lin, Ben C., Peiser, Richard B.
Special Districts: A Useful Technique for Financing Infrastructure, Washington, D.C., Urban
Land Institute, 1987.
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ENVIRONMENTAL FINANCE CENTERS
(EFCs)
Type: Environmental Finance Center
Description: EFCs would be regional centers providing state and local governments with
educational, technical, and research assistance in matters of environmental finance.
Actual Use: The Universities of Maryland and New Mexico are currently developing EFCs
to assist governments in those regions with environmental finance.
Potential Use: The EFCs could provide technical assistance to states and localities,
reducing the costs involved with identifying suitable financing mechanisms. The following
are concrete examples of ways in which local governments could call on EFCs for assistance:
• A government facing a solid waste disposal problem could ask an EFC to
sponsor an advisory panel made up of local officials, academic experts,
finance professionals, state environmental officials, and EPA employees;
• A group of small communities with wastewater treatment problems could ask
an EFC to sponsor workshops and forums on regional solutions to wastewater
treatment;
• State governments in a particular region implementing mobile source
emissions inspection programs mandated by the Clean Air Act of
Amendments of 1990 could be matched by the EFC, bringing together
programs that face similar problems, and allowing them to benefit from an
exchange of ideas or sharing of reports created for different states;
• A local government attempting an innovative recycling program could finance
initial operations with a pilot project or demonstration grant through the
regional EFC.
Advantages: By sharing information and providing a clearinghouse on environmental
financial issues, EFCs could help states and localities identify and implement suitable
AFMs.
Limitations: Although the EFCs may be able to award grant funds for EPA pilot projects,
their primary role will be helping states and localities identify and implement other AFMs,
and they will not be a long-term source of capital or operating funds.
Reference for Further Information: Office of Administration and Resources Management,
U.S. Environmental Protection Agency. Has further information on plan to develop EFCs
in each of the ten EPA regions.
87
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TAXES
Description: Most taxes are charged against either personal or corporate income, property,
or sales of a commodity. Income taxes are charged on a percent of the money earned by
an individual or corporation. Property taxes are based on a percentage of the value of
property owned. Commodity taxes, or sales and use taxes, are charged at a percentage of
the commodity's value, or at a flat rate per transaction. Most states have a general sales
and use tax on retail sales of commodities, and local governments often have riders charging
an additional surtax to fund local government In addition to a general sales and use tax,
state and local governments sometimes impose selective taxes on the sale of a particular
product or service. Severance, or natural resource extraction taxes, are also charged on
selected commodities, but usually at the point of extraction rather than point of sale.
Advantages: Taxes typically have a broader revenue base than fees, and therefore can
generate high revenues at relatively low rates. For example, since millions of pounds of
fertilizer are sold each year, states can levy fertilizer taxes at a rate of cents per pound and
still generate millions of dollars in annual revenue.
Dedicating a surcharge on an existing tax to environmental programs involves little
additional administrative costs. Alternatively, local governments can sometimes pass a
"piggy-back" tax on an existing state tax, generating local revenue without substantial
additional administrative cost, although in some states this may require legislative
authorization and/or approval. In many states, income, sales, and property data are already
reported. This can reduce the administrative costs of implementing taxes with these bases.
Limitations: Imposing or increasing taxes generally requires legislative action, and public
opposition to new or increased taxes often hinders passage in the legislature. Unlike fees,
most taxes have historically remained undedicated to a particular program, and in some
states, institutions do not exist for arranging the dedication of taxes to particular programs.
If state and local governments rely primarily on undedicated tax revenues for program
finance, the funding will be subject to the yearly budget process, and may be diverted to
other uses.
Unless the tax is targeted to a particular type of property or income, there is only an
indirect relationship between the tax base and the use of funds.
By definition, revenues from taxes are dependent on the base - income, property, or
commodity value — on which they are levied. Depending on the market in question, some
taxes may be inappropriate financing mechanisms for those pollution control activities that
require a predictable amount of revenue every year.
Selective taxes in particular may have a negative impact on the market for the product or
service singled out for taxation, thereby reducing potential revenues. This impact can take
several forms:
• The producer of the service or product can increase prices, passing along to
the consumer the cost of the sales tax. For example, a tax on f ertilizer may
-------
be passed on to fanners, which might cause them to raise food prices. This
could result in reduced competitiveness for farmers in areas affected by the
tax, reducing profitability and endangering the health of the farm economy in
that area.
Alternatively, fanners might choose to reduce fertilizer use. Although this
reduction would result in lower tax revenues, it might also reduce non-point
source pollution from fertilizer runoff. If the product or service being taxed
has an environmental impact, reduction in use can be desirable, regardless of
the impact on tax revenues.
Rather than increase prices, a fertilizer retailer might absorb the cost of the
tax. However, if the cost were too high, some retailers may go out of
business, or stop selling that particular product, which will also reduce
potential tax revenues.
89
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GENERAL TAXES
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INDIVIDUAL INCOME TAX
Type: General Tax
Description: Taxes based on percentage of income earned.
Actual Use: States and counties typically use income taxes for general fund support Some
states earmark a share of the state income tax for local governments.
Potential Use: A percent of state or local income tax could be dedicated to environmental
programs with broad impact
Advantages: Relatively stable revenue base.
Limitations: No direct correlation between environmental programs and income taxes. In
many states, it is politically difficult to increase and/or dedicate income taxes to specific
programs.
Reference for Farther Information: National Conference of State Legislatures, Earmarking
State Taxes, Washington, DC, September, 1990. Lists state income taxes that are dedicated
to specific purposes.
91
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CORPORATE INCOME TAX
Type: General Tax
Description: Taxes on net income earned by corporations in a given state.
Actual Use: Limited to state governments. Ohio dedicates 1.2 percent of its corporate
income tax to litter control and recycling. A federal tax on corporate income provides
funding for the Federal Superfund.
Potential Use: Corporate income taxes could be dedicated to finance environmental
programs that stem from the corporate activity itself. For example, if two percent of
revenues were generated from mining companies, the state could earmark that portion for
erosion control, habitat restoration, and other activities that mitigate the environmental
impacts of mining. Similarly, revenues from soft drink bottlers could be used to finance
state recycling programs.
Advantages: Relatively broad revenue base; tax can be charged at a relatively low rate and
still generate significant revenues. Can spread costs of environmental impacts of business
activities to out-of-state consumers, adding pollution control to the overall costs of
production. For example, a paper company might pass on the cost of a corporate income
tax to its customers through a price increase. These revenues could be used to help
mitigate environmental impacts of the paper production process.
Limitations: Increasing corporate tax rates may be politically difficult, since states attempt
to be competitive with other states in order to attract corporations. Net income may not
serve as a good measure of the actual size of a corporation, since many corporations have
small incomes relative to their gross receipts. Further, net income varies tremendously
from year to year, so it may not be a suitable revenue source for funding environmental
programs that require a predictable stream of revenue. Finally, corporate headquarters may
be located in a different state from production activities, meaning that the revenues from
the income tax may not go to the state that experiences environmental damage from the
production activities.
Reference for Further Information: National Conference of State Legislatures, Earmarking
State Taxes, Washington, DC, September, 1990. Lists state corporate income taxes that are
dedicated to specific purposes.
92
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CORPORATE GROSS RECEIPTS TAX
Type: General Tax
Description: Taxes on gross receipts of businesses.
Actual Use: Several states have general taxes on gross receipts of businesses. Washington
state has a targeted gross receipts tax of 0.15 percent on manufacturers, retailers, and
distributors of products that contribute to litter disposal problems, such as paper products,
newspapers, magazines, soft drinks, and alcoholic beverages. Revenues from this tax are
dedicated to state litter control programs. New Jersey requires owners and operators of
hazardous waste facilities to pay a 5 percent tax to municipalities where the facility is
located.
Potential Use: Gross receipts taxes in each state could be targeted to particular businesses.
For example, funds from gross receipts of dry cleaning businesses could be used to fund
small source emissions reduction programs.
Advantages: When the tax is targeted, businesses engaged in environmentally-sensitive
activities pay for remediation of problems. Unlike net income taxes, gross receipts taxes are
based on the full size of the business and is charged against a broader revenue base.
Limitations: May have a disproportionate impact on smaller businesses and on businesses
with high receipts but also high costs. No incentive to improve management practices that
contribute to problems (i.e., producers would pay the same percent tax regardless of
recycling programs or other efforts at reducing solid waste). This limitation could be
overcome if the tax were structured to provide rebates for recycling or waste reduction
activities.
Reference for Further Information: Office of Underground Storage Tanks, U.S.
Environmental Protection Agency, Funding Options for State and Local Governments,
August, 1988. Contains information on New Jersey hazardous waste facility gross receipts
tax.
93
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DEATH AND GIFT TAXES
(Inheritance Taxes)
Type: General Tax
Description: Taxes on inherited property or on gifts worth more than a set amount
Actual Use: State death and gift taxes are often dedicated to local government, pension
funds, and local police and fire protection funds.
Potential Use: States could earmark a portion of death and gift taxes for general
environmental programs. Alternatively, states could structure death and gift taxes to
encourage land conservation. Bargain sales of natural land to state and local park services,
or anti-development deed restrictions (easements) could be regarded as non-taxable gifts
by the landowner, as is done under the federal tax code. While this does not raise revenues
per se, it would lower the costs of natural lands acquisition.
Advantages: Broad revenue base. If tax is structured to provide incentives for land
donation, may give state or local parks additional lands at lower cost than outright purchase.
Limitations: Using death and gift taxes to provide incentives for land conservation
decreases cash revenues. May be difficult to evaluate which gifts are actually valuable
natural lands.
Reference for Further Information: The California Coastal Conservancy, The Non-Profit
Primer: A Guidebook for Land Trusts, Oakland, California, 1989. Provides basic
information on tax implications of land donations.
94
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AD VALOREM PROPERTY TAXES
Type: General Tax
Description: Charged to real property owners based on a percentage of the assessed
property value.
Actual Use: Generally limited to local governments. Some dedicate specific percentages
to environmental programs. For example, in June, 1990, Dade County, Florida, dedicated
over $45 million in yearly revenues from a property tax increase to funding for local natural
areas.
Potential Use: A share of property taxes could be used for land-based protection programs,
or for improving infrastructure services, such as stormwater drainage or wastewater
treatment
Advantages: Most local governments already have system in place for assessing real estate
values, which reduces administrative costs. Relatively large revenue base.
Limitations: Some cities and counties have statutory limits on property tax levels. Well-
established revenue source; may be fierce competition for revenues. No direct relationship
between tax and polluting behavior.
Reference for Further Information: The Nature Conservancy, State Funding for Natural
Areas, Progress Report, June, 1990, Arlington, Virginia. Contains information about Dade
County, Florida, property tax increase.
95
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PERSONAL PROPERTY TAXES
(Tangible Property Taxes)
Type: General Tax
Description: Taxes on assessed value of personal property. Sometimes limited to property
worth more than a specified dollar value (e.g., $2,000) or specific types of property, such as
automobiles, large appliances, etc.
Actual Use: Used by both state and local governments for various purposes.
Potential Use: State and local governments could dedicate revenues from personal property
taxes to mitigating negative environmental impacts of personal property use. For example,
a tax on refrigerators could be used for freon disposal; a tax on lawnmowers and small
engines could be used for small source emissions reduction. In addition, states could
structure personal property taxes to encourage emissions reduction by discounting tax rates
on high-efficiency appliances (heaters, refrigerators, air conditioners) and low-emissions
vehicles.
Advantages: Depending on structure of tax, may provide incentive for taxpayers to purchase
higher efficiency appliances and low-emissions vehicles.
Limitations: Few governments have systems in place to track ownership of personal
property, aside from automobiles, so administrative costs could be high and the tax may be
difficult to enforce. It is not clear whether states have the right to tax high emissions or
low-efficiency automobiles; automakers are currently disputing a proposed Maryland "gas
guzzler" tax on the grounds that it constitutes interference with federal regulation of
automobiles.
Reference for Further Information: Virginia Department of Revenue. Has information on
Virginia state personal property tax.
96
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SALES AND USE TAXES
(Sales and Use Tax Rider)
Type: General Tax
Description: Taxes on goods sold in retail stores. May also be applied to sale of mail order
goods.
Actual Use: Many states dedicate a percent of their general sales and use tax to
environmental programs. Missouri dedicates 2.9 percent of its tax revenues to a
conservation fund; North Carolina dedicates 0.1 percent of its revenues to a Wildlife
Resources Fund; and Idaho dedicates 1.5 percent of its revenues to water pollution control.
Some states also allow counties or cities to charge an additional rider on the state tax, which
may also be dedicated to environmental programs. In Sacramento, California, the county
rider on the state sales tax is dedicated to funding the local air quality management district
Potential Use: States could earmark a specified percentage of the sales and use tax for
environmental programs. Cities and counties could charge riders on the existing tax and
dedicate them to local programs.
Advantages: Broad revenue base; a small percentage of the general sales tax can bring in
significant revenues.
Limitations: No direct correlation between general sales tax and polluting behavior.
Reference for Further Information: Sacramento County Air Quality Management District,
Sacramento, California. Has information on sales tax funding for local air program.
97
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SELECTIVE
SALES TAXES
Alcoholic Beverage Taxes
Amusement Taxes
Feedstock Taxes
Fertilizer Taxes
Hard-to-Dispose Taxes
Hotel Taxes
Insurance Premium Taxes
Litter Control Taxes
Marine Fuel Taxes
Motor Fuel Taxes
Real Estate Transfer
Rental Car Taxes
Severance Taxes
Special Assessments
Tobacco Taxes
Waste-End Taxes
Water-craft Sales Taxes
98
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ALCOHOLIC BEVERAGE TAXES
Type: Selective Sales Tax
Description: Taxes on alcoholic beverages based on volume or value.
Actual Use: Both state and local governments use alcohol taxes for a variety of purposes,
including local government revenue-sharing and state alcoholism prevention programs.
Potential Use: Alcohol is distilled from agricultural products; state or local governments
could dedicate a surcharge on the alcohol tax to agricultural runoff control or other land-
based programs. Alternatively, since breweries discharge wastewater, revenues could be
dedicated to point source water pollution control programs.
Advantages: Because administrative records of alcohol sales already exist, a tax would be
administratively simple. In addition, since demand for alcohol is somewhat inelastic
(unresponsive to price changes), a tax increase may not cause a decrease in sales sufficient
to fully offset revenues.
Limitations: Depending on state, could face political opposition from alcohol industry
lobby.
Reference for Further Information: U.S. Advisory Committee on Intergovernmental
Relations, Significant Features of Fiscal Federalism, Volume 1,1991. Contains comparison
of state alcoholic beverage taxes.
99
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AMUSEMENT TAXES
(Parimutuel Taxes)
Type: Selective Sales Tax
Description: Taxes on ticket sales to sporting or entertainment events, or on gross receipts
from events. Parimutuel taxes are charged on amounts wagered at race tracks.
Actual Use: Used by both state and local governments for a variety of purposes, including
stadium construction and renovation. Illinois dedicates a share of proceeds from its
parimutuel tax to local park districts.
Potential Use: Revenues from amusement taxes could be used to offset the impact of large
numbers of visitors to a particular area. For example, a county with a sports arena could
use the funds to cover additional solid waste disposal costs created by visitors. States could
dedicate amusement taxes to recycling, litter control, or beautification programs.
Advantages: Spreads the costs of providing government services, including solid waste
disposal, to visitors who benefit from them. Ticket sales are relatively easy to track,
meaning low administrative costs.
Limitations: Demand for tickets is relatively sensitive to price increases; tax could reduce
the number of tickets bought and thereby lower revenues.
Reference for Further Information: National Conference of State Legislatures, Earmarking
State Taxes, Washington, DC, September, 1990. Lists state parimutuel taxes that are
dedicated to specific purposes.
100
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FEEDSTOCK TAXES
(Front-End taxes)
Type: Selective Sales Tax
Description: Taxes on the primary chemicals that produce hazardous products and
ultimately hazardous wastes.
Actual Use: A federal tax on chemical feedstocks finances the Superfimd program. New
Jersey has a tax on petroleum and chemical feedstocks that is used to fund hazardous waste
cleanup.
Potential Use: The tax could be used to fund any activities that address problems or issues
raised by the use of these substances. Hazardous waste landfills could be financed through
this mechanism, as could contaminated sediment remediation.
Advantages: Because of the large volume of petrochemicals used, the tax can generate
significant revenues even at low rates. The tax is directly correlated to the activities it will
be used to finance, and may encourage manufacturers to substitute less hazardous chemicals
where possible.
Limitations: If waste-end taxes also charged on end products, generators could be taxed
twice.
Reference for Further Information: Office of Management Systems and Evaluation, Office
of Policy Planning and Evaluation, U.S. Environmental Protection Agency, State Use of
Alternative Financing Mechanisms in Environmental Programs, June, 1988. Contains an
overview of the various alternative financing mechanisms used in different states to finance
environmental programs.
101
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FERTILIZER TAXES
Type: Selective Sales Tax
Description: Taxes on fertilizer, levied either as a retail tax or as an "inspection fee."
Actual Use: Kansas charges a per-ton fertilizer inspection fee, with the proceeds going to
support the State Water Plan, which funds conservation, water quality, and water use
projects throughout the state.
Potential Use: Because of the impact of fertilizer use on agricultural nonpoint source
pollution, this tax could fund remediation of agricultural nonpoint source pollution. It could
also be used to fund research into farming techniques that have reduced environmental
impact
Advantages: Because of relatively large volume of fertilizers used, the tax can generate
significant revenues. The tax may discourage excessive use of fertilizers.
Limitations: Agricultural lobby will oppose tax.
Reference for Further Information: The Fertilizer Institute, Summary of State Fertilizer
Laws, 1988.
102
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HARD-TO-DISPOSE TAXES
(Tire Taxes, Battery Taxes)
Type: Selective Sales Tax
Description: Taxes on hard-to-dispose items that contribute heavily to solid waste disposal
problems, including tires, batteries, beds, fast food, new cars, and oil. The taxes can be
assessed at a flat rate per item, or as a percentage of the value of the taxed items.
Actual Use: Limited to state governments. Arkansas charges $1.50 for each tire sold at
retail and $10.00 for each battery if customer does not bring old battery in exchange.
Florida charges $1 for each new tire or battery purchased, while North Carolina charges 1
percent of the value of each tire purchased.
Potential Use: Taxes could be imposed on any item contributing to landfill problem, such
as diapers, or on surrogates for landfill use, such as plastic garbage bags.
Advantages: Encourages consumers to conserve taxed commodities, saving landfill space.
As in Arkansas, a tax could be structured to encourage recycling of reusable commodities.
Limitations: May be administratively difficult to separate out specific commodities for
taxation.
Reference for Further Information: New York State Department of Environmental
Conservation, Survey of State Funding for Solid Waste Management Programs, June, 1991.
Contains description of various product fees and taxes used in all states to finance solid
waste management programs.
103
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HOTEL TAXES
(Occupancy Taxes)
Type: Selective Sales Tax
Description: Taxes on hotel rooms, either per night or as a percentage of the room rate.
Actual Use: Both state and local governments have used hotel taxes for various purposes,
including alleviating the burden placed by tourism on the local infrastructure. For example,
Dare County, North Carolina, used occupancy tax proceeds to finance a new wastewater
treatment facility made necessary by the influx of seasonal tourists.
Potential Use: Occupancy taxes could be used to finance operating costs for state and local
parks and natural areas that attract tourists. Revenues could also finance operating and
capital costs for local services. For example, occupancy tax revenues could finance capital
costs for the expansion of a solid waste facility to accommodate the influx of tourists to a
particular area.
Advantages: Occupancy tax spreads the costs of maintaining state and local natural areas
and government services to those who benefit from them.
Limitations: Since demand for hotel space is relatively elastic, a price increase could reduce
occupancy rates, and ultimately tax revenues, particularly if a city or county unilaterally
imposes an occupancy tax higher than in surrounding areas. If no occupancy tax currently
exists, collecting occupancy information for hotels, motels, and rental units each month
could involve high administrative costs.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Financing Marine and Estuarine Programs: A Guide to Resources, September, 1988.
Contains case study on occupancy tax in Dare County, North Carolina.
104
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INSURANCE PREMIUM TAXES
Type: Selective Sales Tax
Description: Taxes on insurance premiums, or on gross receipts of insurance businesses.
Actual Use: Limited to state governments, generally used for state pension funds.
Potential Use: Proceeds from premium taxes could be dedicated based on the type of
insurance. For example, proceeds from taxes on auto insurance could fund air pollution
control, and proceeds from taxes on homeowner's insurance could fund operating costs of
sewage and wastewater facilities. Alternatively, no direct link need be established. A
proposal has been made by the American International Group, for example, to dedicate a
federal tax on commercial insurance to finance Superfund cleanups.
Advantages: Large revenue base. For mandatory types of insurance, such as auto liability,
demand will be completely inelastic, and revenues will be extremely dependable.
Limitations: Insurance industry lobby could make implementation politically difficult
Premiums are not a good proxy for assessing the environmental risk of an individual. For
example, an air pollution control tax based on auto insurance premiums would capture less
revenue from older cars that have lower premiums, but generally higher emissions levels,
than from newer cars.
Referencefor Further Information: Apogee Research, lac., Preliminary Review of Alternative
Superfund Financing Schemes, Unpublished Report, July, 1991. Describes advantages and
limitations of proposal to use tax on commercial insurance to finance Superfund activities.
105
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LITTER CONTROL TAXES
(Virgin Newsprint Tax)
Type: Selective Sales Tax
Description: Taxes on paper products or other products that contribute significantly to solid
waste volume.
Actual Use: Limited to state governments. Nebraska's litter tax funds solid waste disposal.
The tax can also be structured to encourage conservation. For example, to encourage
newspapers to use recycled newsprint, North Carolina taxed virgin newsprint and dedicated
the proceeds to a solid waste management trust fund.
Potential Use: Could be used to finance operating costs of solid waste disposal facilities or
state recycling program costs.
Advantages: Encourages consumers to buy less of a taxed commodity, reducing the total
amount of solid waste.
Limitations: Could face political opposition from the paper industry or other affected
industries.
Reference for Farther Information: North Carolina League of Municipalities, Digest of
Municipal Legislation, 1991 Regfdar Session, The North Carolina General Assembly,
September, 1991. Provides a brief description of the virgin newsprint tax in North Carolina.
106
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MARINE FUEL TAXES
Type: Selective Sales Tax
Description: Taxes on fuel used in either commercial or recreational boats. Many states
have "highway" fuel taxes from which marine fuel users can be exempt A marine fuel tax
could be implemented either by removing the exemption and dedicating the resulting
revenues to environmental programs, or by instituting a separate marine fuel tax at a
different rate.
Actual Use: Generally limited to state governments. In Alaska, the tax funds water and
harbor facilities. In Iowa, the marine fuel tax is dedicated to the Department of Natural
Resources.
Potential Use: Could be used to fund research on water pollution or marine fuel spill
prevention and response, or sewage pumpout stations for recreational boaters.
Advantages: Users pay some of the costs of pollution control associated with their activities.
Limitations: If state does not already tax marine fuel, it could be costly to set up a
collection system.
Reference for Further Information: Puget Sound Finance Committee, Funding the Cleanup
and Protection of Puget Sound: Report of The Puget Sound Finance Committee, Seattle,
Washington, December, 1989. Contains an evaluation of the feasibility of a marine fuel tax
in Washington state and information about existing marine fuel tax programs in Oregon,
Alaska, and California.
107
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MOTOR FUEL TAXES
Type: Selective Sales Tax
Description: Taxes on fuel used in all vehicles (except off-road vehicles).
Actual Use: Generally limited to state governments; often dedicated to highway
construction and maintenance. Rates range from $0.08 per gallon in Alaska to $0.22 per
gallon in Nebraska. The Federal Leaking Underground Storage Tank Trust Fund is
financed by a gasoline sales tax.
Potential Use: Because of the impact of auto emissions on air quality, revenues from the
tax could be used to fund air pollution research or air pollution control. State motor fuel
taxes could also finance underground storage tank cleanups.
Advantages: Broad tax base; has the potential to raise considerable revenues at low rates.
Most states already have motor fuel taxes, so dedicating a tax increase to air pollution
control would involve few additional administrative costs.
Limitations: Many states have historically dedicated motor fuel taxes to highway funds; in
some states, revenues from these taxes may be statutorily dedicated to these uses. Since the
tax is increasingly used to raise general revenues at the state level, competition for this
revenue source could be fierce.
Reference for Further Information: Office Of Underground Storage Tanks, Environmental
Protection Agency, Funding Options for State and Local Governments, August, 1988.
Contains discussion of advantages and limitations of motor fuels taxes.
108
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REAL ESTATE TRANSFER TAXES
(Deed Recordation Tax, Documentary Stamp Tax, Land Transfer Tax)
Type: Selective Sales Tax
Description: Taxes charged to buyer or seller of real property at time of transfer, based on
a percentage of the assessed value of property transferred, a flat deed registration fee, or
combination of both.
Actual Use: Used by both state and local governments. While not always dedicated to a
particular program, at the state level, the tax has funded trust funds for acquisition of
natural lands, salaries for park rangers and other operating costs for state parks, and habitat
restoration projects. At the county and city level, the tax has funded natural lands
acquisition.
Potential Use: Could be expanded to any activity that mitigates the impacts of rapid land
development, such as agricultural and urban runoff control.
Advantages: Since real property values are high, a real estate transfer tax based on value
generates a large amount of revenue at relatively low rates. Most governments already have
system in place for recording real estate sales.
Limitations: Revenues dependent on level of activity in real estate market, which is subject
to fluctuations. The application of the tax may have inequitable distribution effects, and
may cause an increase in housing costs in some areas.
Reference for Further Information: The Nature Conservancy, State Funding for Natural
Areas, Progress Report, June, 1990, Arlington, Virginia. Contains survey of states with land
transfer taxes, including estimates of yearly revenues.
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RENTAL CAR TAXES
Type: Selective Sales Tax
Description: Taxes on rental cars, or on gross receipts of rental car businesses.
Actual Use: Many states and counties use rental car taxes for tourism promotion.
Potential Use: Because of rental cars' impact on air quality, a share of the tax could be
dedicated by state or local governments to fund operating costs of air pollution control
programs. Alternatively, the tax could be used to finance water quality activities in lake and
seaside areas frequented by tourists, or to mitigate any environmental problems exacerbated
by increased tourism.
Advantages: Could spread costs of maintaining air and water quality to tourists who benefit
from it Tax might also serve as an incentive for visitors to use public transportation,
reducing mobile source emissions.
Limitations: On the local level, imposing a new tax or increasing an existing tax could
cause a city or county to lose rental car business to other, lower-tax counties.
Reference for Further Information: Virginia Department of Revenue, Richmond, Virginia.
Has information on Virginia rental car tax.
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SEVERANCE TAXES
(Water/Groundwater Withdrawal Taxes, Oyster/Shellfish Taxes,
Timber Taxes, Fuel/Mineral Taxes)
Type: Selective Tax
Description: A severance tax is a tax on natural resources extracted from the land or
waters of a state. Examples of severance taxes include the following:
• Water/Groundwater Withdrawal Taxes (Based on volume of water
withdrawn);
• Oyster/Shellfish Taxes (Based on volume or value of shellfish
harvested);
• Timber taxes (Based on volume of timber logged), and
• Fuel/Mineral Taxes (Based on volume of oil, gas, or minerals
extracted).
Actual Use: Generally limited to state governments. Arizona charges industrial well users
a $0.02 per acre foot fee per year, and dedicates the revenues to water management
programs. Maryland and Georgia use revenues from shellfish taxes to fund shellfish
replenishment programs and state department of fisheries administrative costs. New Mexico
charges severance taxes at various rates on minerals and fuels mined from areas within the
state; revenues are used to protect natural areas and threatened and endangered species.
Several states, including Alabama and North Carolina, dedicate taxes on timber to state
forestry replenishment programs.
Potential Use: Severance taxes could be directly dedicated to activities that will mitigate
the environmental impacts of natural resources extraction, such as habitat restoration.
Advantages: Spreads costs of remedying impact of extraction activities to businesses that
engage in them, or to consumers; essentially adds the cost of pollution control and
remediation to the cost of resource extraction.
Limitations: By definition, severance tax revenues depend on the level of extraction activity.
If tax base fluctuates (e.g., if the shellfish harvest varies widely from year to year) may not
be suitable for funding environmental programs that require a stable revenue source.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Financing Marine and Estuarine Programs: A Guide to Resources, September, 1988.
Contains case studies on oyster tax programs in Maryland and Georgia.
Ill
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SPECIAL ASSESSMENTS
(Tax Increment Financing)
Type: Selective Tax
Description: Special assessments are a charge levied on that sub-group that accrues
particular benefits from an environmental service or improvement not enjoyed by the
remainder of the population in that area. If a community wanted to finance a river cleanup,
for example, residents with riverfront property could be charged a special assessment if it
could be shown that such residents would benefit more from the river cleanup than others
in the area, through higher property values or increased levels of business activity. Where
the benefit is manifested through higher property values, "tax increment financing" (TIP)
can be used. TIF generates revenue from the incremental change in property values caused
by the improvement being financed. For example, if a government issued a tax increment
bond to revitalize a downtown neighborhood, the bond might be backed by the additional
property taxes collected due to the anticipated increase in property values in that
neighborhood.
Actual Use: Generally limited to local governments. Orlando County, Florida, financed
water and sewer improvements using special tax districts, and funded a downtown
revitalization project using tax increment financing.
Potential Use: Tax-increment financing could be used to finance large-scale cleanup of
waterways, anticipating benefits to waterfront property owners.
Advantages: Environmental projects are paid for by their beneficiaries.
Limitations: If improvements do not yield expected benefits, bonds may have to be repaid
through other means.
Reference for Further Information: National League of Cities, Financing Infrastructure:
Innovations at the Local Level, Washington, DC, 1987. Contains case studies of tax
increment and special tax financing
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TOBACCO TAXES
Type: Selective Sales Tax
Description: A tax on tobacco, based on volume or value.
Actual Use: Generally limited to state governments. Washington state uses tobacco tax
revenues to finance water quality projects including cleanup projects and capital and
operating costs for water pollution control facilities. California dedicates tobacco taxes to
health programs.
Potential Use: Because some agricultural non-point source pollution is caused by tobacco
farming, a tobacco tax could be used to finance programs for agricultural non-point source
control, such as offering economic incentives to encourage tobacco farmers to use best
management practices. In states without tobacco fanning, the tax could be dedicated to
indoor air pollution control.
Advantages: Since demand for tobacco is relatively inelastic, tax increase might not cause
decrease in sales.
Limitations: Due to well-entrenched and powerful tobacco lobby in some states, may be
politically difficult to implement
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Financing Marine and Estuarine Programs: A Guide to Resources, September, 1988.
Contains case study on Washington state tobacco tax.
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WASTE-END TAXES
Type: Selective Sales Tax
Description: Waste-end taxes are charged on hazardous waste after generation. They may
be assessed against waste generators, transporters, storers, treaters, or disposal facility
operators. The tax may be calculated based on a flat rate, on the volume of waste disposed,
stored, or transported, a combination of volume and toxicity of the waste, or kind of
disposal method.
Actual Use: A number of states use waste-end taxes to finance state hazardous waste
programs. As an example, Washington State has a State Toxics Account, which helps fund
the drinking water program.
Potential Use: If correctly structured, waste-end taxes can be used by states to encourage
preferred disposal methods.
Advantages: Encourages waste reduction. Allows state to generate revenues from
privatized hazardous waste facilities. Tax can also be structured to encourage the use of
particular disposal methods.
Limitations: Depending on type of waste, waste-end taxes can have a small revenue base.
Reference for Further Information: New York State Department of Environmental
Conservation, Division of Solid and Hazardous Waste, Financing New York's Hazardous
Waste Remedial Fund, 1982. Contains description of various hazardous waste taxes.
National Conference of State Legislatures, Survey Report: Alternative Funding Mechanisms
for State Drinking Water Programs, July 1992.
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WATERCRAFT SALES TAXES
(Boat Sales Tax)
Type: Selective Sales Tax
Description: A tax on boat sales.
Actual Use: Limited to state governments; generally not dedicated.
Potential Use: Because of the impact of recreational boating on water quality, a tax or a
percentage of a tax on boat sales could be specifically dedicated to water pollution control
or marine fuel spill cleanup.
Advantages: Boat owners pay some of the costs of maintaining water quality.
Limitations: In states with large boatbuilding industries, tax could be politically difficult to
implement For example, due to boat industry lobbying, Virginia and Maryland boat sales
taxes are actually several percentage points lower than the standard sales and use tax.
Reference for Further Information: Virginia Department of Taxation, Research and Tax
Policy Divisions, 1990 Virginia Sales and Use Tax Expenditure Study. Contains comparative
information on watercraft sales tax rates on the East Coast
115
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MISCELLANEOUS
Miscellaneous AFMs are financing tools that do not fall into a particular category.
Since they share few characteristics, it is not possible to describe common advantages and
limitations. Instead, the advantages and limitations of each miscellaneous AFM will be
described individually.
116
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MISCELLANEOUS
APPLICABILITY:
• = Applicable
A = Partially Applicable
o = Not Applicable
Capital Costs
Operating Costs
State Programs
Local Programs
CHARACTERISTICS:
Revenue Potential
• =High
A = Moderate
O = Low
Revenue Stability
• = Stable
A = Partially Stable
0 = Unstable
Administrative Feasibility
• = Easy
* = Moderate
O = Difficult
Equity (Who Pays?)
• = Polluter
A = Beneficiary
O = General Public
Incentive Effects
(e.g., Pollution Reduction)
• = Yes
A = Uncertain
o = No
Exactions
•
0
A
.
A
O
A
.
A
•8
1
^
e/3
•
.
-
.
N/A
N/A
A
N/A
A
v j2
•o ee
s a
.
.
o
.
o
o
o
.
.
Voluntary
Mechanisms
.
•
•
.
A
0
.
N/A
.
Private Guaranty
Mechanisms
•
o
-
•
•
o
A
A
•
A
117
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EXACTIONS
(Proffers)
Type: Miscellaneous
Description: Exactions may be broadly defined as money, land, or construction materials
provided by a developer to a public jurisdiction. Traditional exactions include mandatory
land dedications for rights of ways, parks, and the like, and cash payments in lieu of land.
Exactions may be offered voluntarily or negotiated individually with each developer.
Actual Use: Limited to local governments. Napa, California, had a competitive exactions
program that assigned building permits partially based on level of exactions offered by
different developers.
Potential Use: Exactions could be extended to cover all necessary government services
required by new developments, including water and sewer services and stormwater drainage.
Advantages: Developers pay for the true cost of community expansion out of their direct
benefit from that expansion. When exactions take the form of construction materials or
facilities, having the developer perform the construction may prove cheaper than having the
work performed by the jurisdiction itself. Because they can be individually negotiated,
exactions allow more flexibility than set impact fees.
Limitations: Since they are individually negotiated, exactions are not always considered as
equitable a system as impact fees.
Reference for Further Information: National League of Cities, Financing Infrastructure:
Innovations at the Local Level, Washington, DC, 1987. Contains case study of Napa,
California competitive exaction program.
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TRUST FUNDS
Type: Miscellaneous
Description: A trust fund is a special account that is established to receive and disburse
revenues from taxes and fees that are dedicated to a particular program or activity. There
are two ways that states earmark revenues for handling in trust funds — constitutionally or
legislatively. Most constitutionally earmarked funds require no legislative appropriation to
release trust fund deposits. Deposits accrue to the trust fund automatically and are
generally available only for the purpose named in the state constitution. In other cases, the
state legislature dedicates revenues from a funding source and/or sources and creates a trust
fund to manage them. Legislative appropriations may or may not be required to release
these statutorily earmarked funds.
Actual Use: On the federal level, the Inland Waterways Trust Fund is financed by receipts
from a federal waterways fuel tax and funds construction, rehabilitation, and repair of
navigation systems on the inland and coastal waterways. At the state level, the Washington
Public Works Trust fund was created as a revolving loan fund designed to help local
governments finance critical public works projects. The fund is capitalized by dedicated
revenues from utility and sales taxes on local water, sewer, and garbage collection, and from
a share of the real estate excise tax. Loans are made to local governments on favorable
terms, based on selection criteria such as the need for project assistance and the local effort
in meeting public works management needs. Local governments can also use trust funds.
In Corpus Christi, Texas, water and sewer trust funds funded by dedicated revenues from
various water and wastewater fees financed construction of necessary water and sewer lines.
Potential Use: Trust funds could be used to capitalize state grant or loan programs to
finance environmental programs and capital expenditures in any media.
Advantages: The use of trust funds ensures that dedicated revenues are used only for the
purposes intended. Trust funds also increase the flexibility program managers have over
the use of program revenues. Where dedicated revenues are predictable (e.g., from fees
or taxes on a well-defined base) trust funds can provide greater certainty of the amount of
revenues available for program activities than appropriations from general revenues.
Limitations: Some administrative burden is involved in establishing and maintaining trust
funds. There may be political opposition to trust fund accounts in some states.
Reference for Further Information: Office of Water, U.S. Environmental Protection
Agency, Financing Marine and Estuarine Programs: A Guide to Resources, September, 1988.
Contains case study on several trust funds.
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WATER AND SEWER ACCESS RIGHTS
(Capacity Credits)
Type: Miscellaneous
Description: To finance expansion or upgrades of water and sewer facilities, some
communities have sold water and sewer access rights.
Actual Use: Water and sewer access rights programs are structured in many different ways.
The basic principle is that for a set charge, the purchaser of a water and/or sewer access
right is guaranteed the right to connect to the system in the future.
Potential Use: The principle of "access rights" to a new facility could be broadly applied.
For example, developers and householders could be required to purchase access rights to
solid waste management removal services, and revenues from the sale of the rights could
be used to finance construction of future solid waste management facilities.
Advantages: New users of government services pay for the expansion. Provides needed
capital in advance of construction.
Limitations: May be difficult to sell credits in advance, particularly if community is not
experiencing a high demand for new housing.
Reference for Further Information: National League of Cities, Financing Infrastructure:
Innovations at the Local Level, Washington, DC, 1987. Contains case studies of several
capacity credit programs in California.
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VOLUNTARY MECHANISMS
Type: Miscellaneous
Description: Voluntary mechanisms rely on donations or the voluntary purchase of affinity
products to raise funds for environmental programs. Examples of voluntary mechanisms
include donations (solicited by an associated non-profit foundation or as a line item on a
state or local tax return), lotteries that raise funds from the sale of tickets, and auto license
plate programs that generate revenues from the sale of special edition license plates.
Actual Use: Many states have associated foundations that provide supplemental funding for
cleanup efforts in particular media or geographic areas. In Maryland, protection of water
quality in Chesapeake Bay is partially funded by donations to the Chesapeake Bay
Foundation. Many states also use a check-off box on the state income tax return to allow
taxpayers to earmark refunds for nongame wildlife programs and natural areas. Others use
the sale of special edition license plates to finance environmental protection. Maryland has
a "Save the Bay" license plates program that has generated over $1 million in funds for
Chesapeake Bay cleanup efforts.
Potential Use: Voluntary programs are best suited to finance environmental programs that
could attract significant public interest For example, programs that are tied to a well-
known estuary, such as the Chesapeake Bay, would be good candidates for highly-publicized
voluntary programs.
Advantages: Little public opposition to voluntary mechanisms. Can also raise public
awareness of environmental programs.
Limitations: Donations and purchase of affinity items will fluctuate with economy. Some
voluntary mechanisms require capital for start-up costs.
Reference For Further Information: The California Coastal Conservancy, The Non-Profit
Primer: A Guidebook for Land Trusts, Oakland, California, 1989. Provides basic information
on voluntary means of raising funds.
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PRIVATE GUARANTY MECHANISMS
Type: Miscellaneous
Description: The International Committee of the Environmental Financial Advisory Board
has proposed the creation of an International Environmental Financial Guaranty Fund to
guarantee bond issues for wastewater treatment facilities in U.S./Mexico border areas. The
plan is intended to help finance the over $7 billion in environmental needs of border areas
from California to Texas.
Actual Use: The International Guaranty Fund is still a proposal.
Potential Use: The proposed guaranty fund would be capitalized by contributions from
companies active in the border areas. If each company currently gave $50,000 to finance
a 7 percent debt reserve fund, $1.2 billion in capital funds could be accessed. The bonds
would be issued by special districts created in these areas.
Advantages: Private guarantee mechanisms allow governments to tap the resources of the
private sector, relieving potential strain on public sector finances.
Limitations: The creation of the guaranty fund may require legislative action.
Reference for Further Information: Environmental Financial Advisory Board, International
Activities Committee. Has further information on private guarantee arrangements in New
Mexico.
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ATTACHMENT A: BIBLIOGRAPHY
-------
ATTACHMENT A: BIBLIOGRAPHY
General
Cordes, Joseph, State Environmental Taxes and Fees: An Overview, Department of
Economics, George Washington University, Washington, D.C., 1991 (presented at
National Tax Association Conference on State Taxation of Business).
Eisenlohr, Gainor, Overview of Current Work on Alternative Sources of Funding for
Environmental Programs, U.S. Environmental Protection Agency, Office of Policy,
Planning and Evaluation, Office of Management Systems and Evaluation, Program
Evaluation Division, Washington, D.C., July 20, 1984.
Environmental Financial Advisory Board, EFAB Advisory: Incentives For Environmental
Investment: Changing Behavior and Building Capital, Washington, D.C., August 9,
1991.
Environmental Financial Advisory Board, EFAB Advisory: Private Sector Participation in the
Provision of Environmental Services: Barriers and Incentives, Washington, D.C.,
November 25, 1991.
Environmental Financial Advisory Board, EFAB Advisory: Public Sector Options to Finance
Environmental Facilities, Washington, D.C., November 25, 1991.
Environmental Financial Advisory Board, EFAB Advisory: Small Community Financing
Strategies for Environmental Facilities, Washington, D.C., August 9, 1991.
Environmental Financial Advisory Board, Narrowing the Gap: Environmental Finance in
the 1990s, Progress Report (revised), May, 1992.
Feldman, Roger D., Mudge, Richard, Rubin, Kenneth L, Financing Infrastructure: Tools for
The Future, Executive Enterprises Publications Co., New York, New York, 1988.
Gelfand, M. David, State and Local Government Debt Financing, Volume 2, Callaghan &
Company, Deerfield, Illinois, December, 1988.
Jessup, Deborah, Guide to State Environmental Programs, Bureau of National Affairs,
Washington, D.C., revised August, 1990.
National League of Cities, Financing Infrastructure: Innovations at the Local Level,
Washington, D.C., 1987.
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The Nature Conservancy, State Funding for Natural Areas, Progress Report, Arlington,
Virginia, June, 1990.
Shields, Evelyn, Funding Environmental Programs: An Examination of Alternatives, National
Governors' Association, Washington, D.C., 1989.
Stockhill, Rebecca, Comparison Report of Environmental Permitting Fees, Louisiana
Department of Environmental Quality, April, 1992.
U.S. Advisory Committee on Intergovernmental Relations, Significant Features of Fiscal
Federalism, Volume 1, Washington, D.C., 1991.
U.S. Environmental Protection Agency, Office of Policy, Planning and Evaluation,
Environmental Investments: The Cost of A Clean Environment, December, 1990.
U.S. Environmental Protection Agency, Office of Water, Environmental Infrastructure
Financing Guidebook (Draft), Washington, D.C., March 4, 1992.
U.S. Environmental Protection Agency, Program Evaluation Division, Office of
Management Systems and Evaluation, Office of Policy, Planning and Evaluation,
State Use of Alternative Financing Mechanisms in Environmental Programs,
Washington, D.C., 1988.
Air
ABB Environmental, Inc. for the U.S. Environmental Protection Agency, Summary of State
and Local Operating Permit Programs, Chapel Hill, North Carolina, September, 1990.
The Clean Air Act Advisory Committee, The Clean Air Act of 1990: A Guide to Public
Financing Options, May, 1992.
The Clean Air Act Advisory Committee, The Clean Air Act of 1990: An Introductory Guide
to Smart Implementation, Washington, D.C, 1992.
U.S. Environmental Protection Agency, Office of Air and Radiation, Office of Program
Management Operations, Air Resources Study, Washington, D.C., September 1988.
U.S. Environmental Protection Agency, Office of Air and Radiation, Outreach and
Economic Incentives Staff, Task Force Report on State and Local Permit Fees,
Washington, D.C., November 5, 1987.
U.S. Environmental Protection Agency, Task Force on Permit and Emission Fees, State and
Local Air Pollution Permit Fees - Briefing, Washington, D.C., November 23, 1987.
A-2
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Hazardous Waste
Apogee Research, Inc, Preliminary Review of Alternative Superfund Financing Schemes,
Unpublished Report, July, 1991.
De Castro, Rey, Guide to State Taxes and Fees for Hazardous Waste Generation and
Management, Washington, D.C., National Solid Waste Management Association,
December 1989.
De Castro, Rey, State Taxes and Fees for Hazardous Waste Generation and Management in
Waste Alternatives/Hazardous Wastes. March/April 1989.
U.S. Environmental Protection Agency, Office of Emergency and Remedial Response,
Office of Solid Waste and Emergency Response, Handbook: Options for Financing
State Response to Cleanup of Hazardous Substances and Wastes, Washington, D.C.,
October 1983.
U.S. Environmental Protection Agency, Office of Solid Waste and Emergency Response,
Policy Analysis and Regulatory Management Staff, Revenue Sources For RCRA,
Washington, D.C., 1991.
Zemanian, Lewis, Supplement to the Survey of the Fifty States' Fee Systems Charged for Air,
Water, and Hazardous Waste Pollution as ofJufy, 1986, Congressional Budget Office,
1986.
Solid Waste
Association of State and Territorial Solid Waste Management Officials, State Funding
Mechanisms for Cleanup ofNon-NPL andNPL Hazardous Waste Sites, Washington,
D.C., June, 1988.
Bohm, Robert A. and Kelsay, Michael P., Taxes and Fees to Control Costs of Recycling and
Waste Disposal, University of Tennessee, 1991 (presented at National Tax Association
Conference on State Taxation of Business).
Kerns, Keith, Pennsylvania's Recycling Law Implementation: Use of Fees to Fund Grants and
Market Development Programs, Milwaukee, Wisconsin, July 16, 1990, (presented at
the Association of State and Territorial Solid Waste Management Officials 1990
National Solid Waste Forum).
Loughran, David S. and McCarthy, James E, Financing Solid Waste Management Programs:
A Survey of the States, Congressional Research Service, Washington, D.C., 1989.
A-3
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McCarthy, James E., Funding Solid Waste Management Programs: State Efforts and Federal
Prospects, Milwaukee, Wisconsin, July 16, 1990, (presented at the Association of
State and Territorial Solid Waste Management Officials 1990 National Solid Waste
Forum).
New York State Department of Environmental Conservation, Survey of State Funding for
Solid Waste Management Programs, Albany, New York, June, 1991.
U.S. Environmental Protection Agency, Office of Underground Storage Tanks, Funding
Options for State and Local Governments, August, 1988.
Water
American Petroleum Institute, Policy Analysis Department, Clean Water Act Reauthorization:
Analysis of Financing Options: Draft Working Paper, Washington, D.C., 1991.
Apogee Research, Inc., Financing State Wetlands Programs, prepared for the Office of
Wetlands Protection, U.S. Environmental Protection Agency, 1990.
Donahue, Edward J. ID, Impact Fees Revisited, Peat Marwick Main & Co. for the Water
Pollution Control Federation, Washington, D.C., 1988.
Doyle, Paul, States as Water Quality Financiers: Legislative Options for the 1990s, National
Conference of State Legislatures, Denver, Colorado, May, 1991.
Government Finance Research Center, Financing for the Next Generation: A National
Conference on Innovations in Financing Wastewater Facilities, Washington, D.C., 1987.
National Academy of Public Administration, Financing Strong State Water Programs in New
Ways -- Proceedings of a National Workshop, Denver, Colorado, March, 1989.
Northwest Pulp and Paper Association, Comparison, State NPDES Programs, Bellevue,
Washington, December, 1991.
Raftelis, George A, The Arthur Young Guide to Water and Wastewater Finance and Pricing,
Lewis Publishers, Chelsea, Michigan, 1989.
U.S. Environmental Protection Agency, Office of Water, Office of Marine and Estuarine
Protection, Office of Policy, Planning, and Evaluation, Financing Marine and
Estuarine Programs: A Guide to Resources, September, 1988.
U.S. Environmental Protection Agency, Office of Water, Discussion Paper on Alternative
Financing Mechanisms for State Water Programs, 1989.
A-4
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U.S. Environmental Protection Agency, Office of Water, Paying for Safe Water: Alternative
Financing Mechanisms for State Drinking Water Programs, September, 1990.
U.S. Environmental Protection Agency, Resources Management and Evaluation Branch,
Summary of Current State Funding Practices Designed to Supplement State Program
Resources, Washington, D.C., 1988.
U.S. Environmental Protection Agency, Water Policy Branch, Office of Policy Analysis,
Office of Policy, Planning, and Evaluation, Storm Water Utilities: Innovative Financing
for Storm Water Management, Washington, D.C., March, 1992.
Taxes
National Conference of State Legislatures, State Budget and Tax Actions, Washington, D.C.,
1991.
National Conference of State Legislatures, Earmarking State Taxes, Washington, DC,
September, 1990.
National Tax Association, How Should States Tax Business? — Proceedings from a Seminar
Sponsored by the National Tax Association, San Antonio, March 7-8, 1991.
U.S. Department of Commerce, Bureau of the Census, State Government Tax Collections in
Government Finances Series, Washington, D.C., 1990
Fees
Ernst & Young National Environmental Consulting Group, Ernst & Young 1990 National
Water and Wastewater Rate Survey, New York, New York, 1990.
Lethe, Joni L., and Montavon, Matthew, Impact Fee Programs: A Survey of Design and
Administrative Issues, Government Finance Research Center of the Government
Finance Officers Association, May, 1990.
Public Policy Institute of New York State, The Fees that Ate New York How Hidden Taxes
are Hurting Our Economy, Albany, New York, February, 1992.
U.S. Environmental Protection Agency, Office of Administration and Resources
Management, Agency Task Force on Fees: Interim Report, Washington, D.C., 1986.
A-5
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U.S. Environmental Protection Agency, State Capacity Task Force, Funding State
Environmental Program Administration: The Use of Fee-Based Programs, Draft Report,
August 7, 1992 (attached).
Bonds
Lamb, Robert, and Rappaport, Stephen, Municipal Bonds, McGraw-Hill Book Company,
New York, 1987.
Moody's Public Finance Department, Moody's On Municipals: An Introduction to Issuing
Debt, Moody's Investor's Service, Inc., New York, New York, 1989.
Loans
U.S. Environmental Protection Agency, Office of Municipal Pollution Control (OMPC),
State Revolving Fund (SRF) Report to Congress: Financial Status and Operations of
Water Pollution Control Revolving Funds, May, 1991.
U.S. Environmental Protection Agency, Office of Municipal Pollution Control (OMPC),
Funding of Expanded Uses Activities by State Revolving Fund Programs: Examples and
Program Recommendations, August, 1990.
U.S. General Accounting Office, Report to the Chairman, Committee on Public Works and
Transportation, House of Representatives, Water Pollution: States' Progress in
Developing State Revolving Loan Fund Programs, March, 1991.
Washington Department of Community Development, Public Works Trust Fund 1992
Priorities Legislative Report, 1992.
Grants
Commonwealth of Massachusetts, Executive Office of Communities and Development,
Catalog of State Grants for Municipal Officials, 1988-1989.
U.S. Department of Housing and Urban Development, Programs of HUD, October, 1989.
U.S. Environmental Protection Agency, Office Of Water, Reference Guide on State Financial
Assistance Programs, February, 1988.
U.S. Government Printing Office, Catalog of Federal Domestic Assistance, Washington, D.C.,
1991.
A-6
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Credit Enhancement Mechanisms
Government Finance Research Center of the Government Finance Officers Association,
Credit Pooling to Finance Infrastructure: An Examination of State Bond Banks, State
Revolving Funds and Substate Credit Pools, September, 1988.
Public-Private Partnerships
Apogee Research, Inc., Unpublished Paper, Private Sector Involvement in Transit
Maintenance: Sharing the Benefits and the Risks, April, 1992.
Apogee Research, Inc., Unpublished Paper, Transit in the ISTEA Era: A Guide to Financing
Opportunities, July, 1992.
Kelly, Cynthia C, Making Public-Private Partnerships Work for Solid Waste Management,
Milwaukee, Wisconsin, Jury 16, 1990, (presented at the Association of State and
Territorial Solid Waste Management Officials 1990 National Solid Waste Forum).
U.S. Environmental Protection Agency, Office of Administration and Resources
Management, Public Private Partnerships: A Self-Help Guide For Local Governments,
May, 1990.
U.S. Environmental Protection Agency, Office of Administration and Resources
Management, Public Private Partnerships Case Studies: Profiles of Success in Providing
Environmental Services, September, 1989.
Economic Incentives
American Petroleum Institute, The Use of Economic Incentive Mechanisms in Environmental
Management, June, 1990.
California Coastal Conservancy, The Non-Profit Primer: A Guidebook for Land Trusts,
Oakland, California, 1989.
Costanza, Robert and Perrings, Charles, "A Flexible Assurance Bonding System for
Improved Environmental Management," in Ecological Economics. 1990, pp. 57-75.
The Growth Dilemma: The Chesapeake in the 21st Century (Conference Proceedings),
Maryland, November, 1989.
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Moore, John L., eL al., Using Incentives for Environmental Protection: An Overview,
Congressional Research Service, Washington, D.C., June 2, 1989.
U.S. Environmental Protection Agency, Office of Water, Office of Policy, Planning, and
Analysis, Incentive Analysis for Clean Water Act Reauthorization: Point
Source/Nonpoint Source Trading for Nutrient Discharge Reductions, April, 1992.
Special Districts
Porter, Douglas R., Lin, Ben C, Peiser, Richard B, Special Districts: A Useful Technique for
Financing Infrastructure, Urban Land Institute, Washington, D.C., 1987.
Single State Studies
Apogee Research Inc., An Inventory of Financing Options for the Albemarle-Pamlico Sound,
prepared for the Albemarle-Pamlico Estuarine Study, December, 1991.
Apogee Research, Inc., Ohio Guide to Existing and Potential Financing Sources for Remedial
Action Plans Implementation, prepared for the U.S. Army Corps of Engineers and the
Great Lakes National Program Office, February, 1992.
Apogee Research, Inc., Proposed Funding Strategy for the Narragansett Bay CCMP, March
16th, 1992.
Apogee Research, Inc., Financial Strategies for Nutrient Control Measures in Long Island
Sound, prepared for Long Island Sound Study, January, 1991.
Arkansas Department of Pollution Control and Ecology, Regulation for the Fee System for
Environmental Permits, 1988.
Berry, Mary, Hagman, John; and Kessler, Kevin, Environmental Fee Study, Wisconsin, 1982.
Buzzards Bay National Estuary Program, Buzzards Bay Comprehensive Conservation and
Management Plan, August, 1991.
Colorado Water Quality Control Commission, Annual Fee Schedule of the Colorado Water
Quality Control Commission, 1991.
Connecticut Department of Environmental Protection, Application Fees Required by the
Connecticut Department of Environmental Protection, 1991.
A-8
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Delaware Department of Natural Resources and Environmental Protection, Fees Assessed
by the Delaware Department of Natural Resources and Environmental Protection, 1991.
Kansas Legislative Research Department, Proposal No. 16 — Financing the State Water Plan,
Kansas, 1988.
North Carolina League of Municipalities, Digest of Municipal Legislation, 1991 Regular
Session, The North Carolina General Assembly, September, 1991.
Puget Sound Finance Committee, Funding the Cleanup and Protection ofPuget Sound: Report
of The Puget Sound Finance Committee, Seattle, Washington, December, 1989.
State of Louisiana, Department of Environmental Quality, Office of Water Resources,
Louisiana Water Pollution Control Fee System Regulations, Baton Rouge, October 20,
1986.
State of New Jersey, Department of Environmental Protection, Division of Water
Resources, New Jersey Pollutant Discharge Elimination System: Annual Fee Report and
Assessment of Fees, 1991.
Tuminiski, Ronald S, Background Paper on New Jersey's Use of Alternative Funding
Mechanisms to Fund Environmental Programs, New Jersey Department of
Environmental Protection, 1989 (presented at Workshop on Alternative Funding
sponsored by the National Governors' Association).
Virginia Department of Taxation, Research and Tax Policy Divisions, 1990 Virginia Sales
and Use Tax Expenditure Study.
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ATTACHMENT B: GLOSSARY
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ATTACHMENT B: GLOSSARY OF TERMS
AFM — See Alternative Financing Mechanism.
Ad Valorem Tax — A tax based on the assessed value of property. Counties, school
districts, and municipalities usually are authorized to levy ad valorem taxes. Special districts
can also be authorized to levy ad valorem taxes.
Administrative Feasibility—A measure of the difficulty of administering an AFM. Factors
affecting administrative feasibility include whether the implementing government can take
advantage of existing administrative structures, whether any data required is available (e.g.,
for a commodity tax, whether sales of the commodity are easy to track), and the number
of employees required to administer the mechanism.
Alternative Financing Mechanism (AFM) — Refers to any technique used to fund
environmental programs or services, including both capital and operating costs, at the state
and local level.
Arbitrage — The investment of low interest bond or note proceeds at higher interest rates.
Arbitrage earnings are fully taxable with few exceptions. Municipal issuers are allowed to
make arbitrage profits under certain restricted conditions, but Section 103(c) of the Internal
Revenue Code prohibits the sale of tax-exempt bonds primarily for the purpose of making
arbitrage profits.
Assurance/Performance Bonding—Performance or assurance bonding is a requirement that
users of environmnetal resources place in an escrow account a sum of money adequate to
cover potential future environmental damages.
Banking Program — See economic incentive programs.
Beneficiary Pays Principle — See equity.
Bond — An interest-bearing certificate issued by governments and corporations when they
borrow money. The issuer agrees to pay a fixed principal sum on a specified date (the
maturity date) and at a specified rate of interest In measuring municipal bond volume, a
bond is a security maturing more than one year from issuance; shorter-term obligations are
usually termed notes or commercial paper.
Bond Anticipation Note (BAN) — A note issued by public agencies to secure temporary
(often partial) financing for a project that will eventually be fully financed (and the BAN
repaid) through the sale of bonds.
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Bond Bank — A state-chartered organization that purchases the bonds of local governments
and secures its own debt with the pool of local bonds. This arrangement cuts borrowing
costs for the local issuers because the bond bank's debt usually carries higher ratings than
that of the municipalities, whose issues are usually too small to be rated anyway. Credit
enhancements, such as bond insurance, are also cheaper when purchased for larger issues.
Localities' use of the bond bank is voluntary.
Bond Counsel — A lawyer who reviews the legal documents and writes an opinion on the
security, tax-exempt status and issuance authority of a bond or note.
Bond Election — The process by which voters approve or reject bond issues.
Bond Insurance — Insurance that can be purchased by an issuer for either an entire issue
or specific maturities, which guarantees the payment of principal and/or interest This
security usually provides a higher credit rating and thus a lower borrowing cost for an issuer.
Bond Proceeds — The money the issuer receives from its bond sale.
Bubble Program — See economic incentive programs.
Capacity Credit — A reservation of future capacity in a public facility purchased generally
by private real estate developers prior to the construction of that facility. Typically, the
revenue generated from selling capacity credits is used to finance facility construction. For
example, some communities have built new wastewater treatment facilities by selling
capacity credits.
Capital Budget — A unified financial plan that accounts for needs and spending levels for
a group of current and prospective capital facilities within a broader governmental budget
Capital Costs — Expenditures that typically result in the acquisition or addition to fixed
assets that have a useful life of over one year and a cost greater than a threshold value
established by the owner. Capital costs include expenditures for replacements and major
additions, but not for repairs.
Certificates of Participation (COPS) — Certificates of participation are financial
instruments backed by physical assets such as wastewater plants or equipment The assets
are held by a trustee, and the issuer pays yearly lease payments to the certificate holders
until the debt is repaid. If the certificate issuer should default on the lease payments, the
trustee is responsible for selling the physical assets and using the proceeds to reimburse the
certificate holders. Certificates of participation resemble bonds in function, but are not
legally classified as such, meaning that state and local governments can issue them without
affecting their overall bond limits.
Commercial Loan — A loan from a privately-owned bank at market rates.
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Conditional Sale Lease — See tax-exempt lease.
Connection Fee — A charge assessed to new users of a utility system to cover the costs of
constructing capacity for their use.
Credit Enhancement—Credit enhancements enable a state or local government to improve
its credit rating and/or acquire capital by providing additional assurance of repayment
Some forms of credit enhancement are subsidized, such as the Rural Development
Administration's loan guarantees. Others, such as commercial bond insurance, require the
debtor government to pay a fee for the credit enhancement
Credit Risk — The risk of default on a bond or a loan.
Debt Limit — The legal maximum debt-incurring power of a state or locality. Can also be
called the debt ceiling. Debt limits are often imposed by constitutional, statutory, or local
charter provisions.
Debt Per Capita — Bonds divided by population. When compared with other jurisdictions,
this statistic serves as an indicator of the use of public debt capacity in the area in question.
Debt Ratio — The ratio of an issuer's debt outstanding to a measure of property value.
Debt Service — The amount of money necessary to pay interest and principal charges on
an outstanding debt
Debt Service Reserve Fund — A fund created by a bond indenture and held by the trustee,
usually amounting to principal and interest payment for one year, and used only if normal
revenues are not sufficient to pay debt service.
Default — The failure to make timely payment of interest or principal on a debt instrument;
or the occurrence of an event as stipulated in the indenture of trust resulting in an
abrogation of that agreement An issuer does not default until it fails to make a payment
Double-Barreled Bond — A bond with two pledged sources of revenue, generally earmarked
monies from a specific enterprise or aid payments as well as the general obligation taxing
power of the issuer.
Easement — In most states, an easement is a legal restriction contained within a deed that
prohibits certain land uses in perpetuity. For example, an easement might prohibit
development of more than one house on twenty acres of oceanfront property. Private
landowners who place easements on their property for natural resources protection can take
a tax write-off representing the value lost on the property due to the deed restrictions.
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Earmarking — Statutory or constitutional dedication of revenues to specific government
projects or programs.
Economic Impact — Refers to the effects of AFM implementation on state and local
economies. Some AFMs could have a disproportionate impact on a particular area or
population. For example, a tax on watercraft sales might affect the competitiveness of a
particular state's shipbuilding industry. Other AFMs can have a diffuse economic impact
on a large population. For example, a motor vehicle license fee may have a small impact
on a large population.
Economic Incentive Programs — Economic incentive programs use market-based tools to
encourage reduction in polluting behavior. The programs can be structured in a variety of
ways. "Bubble" programs treat multiple pollution sources as if they were included in an
imaginary bubble, allowing existing sources to adjust pollutant levels within the bubble as
long as an aggregate limit is not exceeded. "Offset" programs allow new sources to obtain
credits from existing sources to offset pollutant emissions, while "netting" programs allow
sources within a single plant undergoing modifications to avoid new source review processes
if plant-wide emissions are reduced. "Banking" programs allow sources to store pollution
reduction credits for future use or sale.
Elasticity — Elasticity is an economic measure of consumer response to price changes. A
product or service has an elastic demand if the demand for the product will decrease very
quickly as the price increases. Concert tickets typically have an elastic demand — as prices
increase, fewer consumers buy tickets. A product or service has an inelastic demand if the
demand for the product is not sensitive to price change. Alcohol and tobacco typically have
inelastic demands; consumers will be less sensitive to price changes on these products and
are more likely to continue buying them. When considering implementing taxes or fees on
products that will be sold, state and local governments need to consider the elasticity of
demand, in order to determine whether the tax or fee will reduce sales, and thereby reduce
revenues.
Electronic Bulletin Board — An information service operated from a central computer that
allows information to be transmitted electronically to multiple users who dial in with a
computer modem.
Emissions Trading Programs—Emissions trading programs allow sources of air pollutants
to trade pollutants in some fashion, either geographically, over time, or among other
sources. See economic incentive programs.
Exactions — Exactions are money, land, or construction services and materials provided
by a developer or property owner to a public jurisdiction. Also known as proffers, exactions
are sometimes required in order for developers or homeowners to gain public approval for
building. Local governments can use exactions to require developers to extend wastewater
treatment, solid waste management, and other environmental services to new areas.
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Equity — Equity reflects the fairness of the distribution of the funding burden for an AFM
among individuals. Equity can be approached from two directions — those who create or
contribute to environmental problems should bear the funding burden (the "polluter" pays),
or those who benefit from program activities should bear the funding burden (the
"beneficiary" pays.)
Fee — A fee is generally a charge for services rendered. Although laws vary widely, many
states require that fees be set at rates that will cover only the costs of the services provided.
Fines and Penalties — Fines and penalties require offenders to pay monetary damages for
violating government laws or regulations.
Full Cost Recovery — Full cost recovery means charging fees to completely cover costs
incurred by a particular activity or service. Some state and local governments, as well as
local utilities, are beginning to practice full cost recovery by legislatively requiring that fees
be set to cover the complete cost of services rendered.
Full Faith and Credit — The pledge of the general taxing power of a government to pay
its debt obligations.
General Obligation Bond — A security backed by the full faith and credit of a state or
locality. In the event of default, the holders of general obligation bonds have the right to
compel a tax levy or legislative appropriation in order to satisfy the debt obligation.
Grant — A grant is a sum of money awarded to a state or local government or non-profit
organization that does not need to be repaid. Typically, grants are awarded by the federal
government to state or local governments, or by states to local governments, for the purpose
of financing a particular activity or facility.
Grant Anticipation Notes (GAN) — Notes issued by public agencies to secure temporary
financing for projects awaiting the receipt of permanent funding through governmental
grants. The GAN is repaid from grant proceeds.
Guaranty or Guaranty Agreement— The agreement of a third party to pay debt service on
a debt in the event of default by the issuer.
Impact Fee — A fee assessed against private developers in compensation for the new
capacity requirements their projects impose upon public facilities.
Income Taxes — A tax charged against individual or corporate income.
Interest— The charge or cost of borrowing money, measured in terms of a percentage per
annum of the principal amount
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Issuance Costs — The costs incurred by bond issuers in connection with bond offerings.
These include underwriter spread, feasibility studies, and various professional fees.
Land Trusts — Land trusts are trust funds that can actively acquire, manage, and protect
natural lands and resources on behalf of a state or local government Land trusts can be
financed by a variety of revenue sources, although many localities choose to dedicate land-
related taxes, such as land transfer taxes, to this purpose.
Lease — A conditional sale agreement under which a municipal government leases
equipment, using borrowed funds, that it acquires at the end of the lease period. The loans
are backed by the equipment itself and are renegotiated annually.
Lease Rental Bonds — Bonds for which the principal and interest are payable exclusively
from rental payments from a lessee. Rental payments are often derived from earnings of
an enterprise that may be operated by the lessee or the lessor. Rental payments may also
be derived from taxes levied by the lessee.
Letter of Credit — A contractual obligation by a bank to pay principal and interest in the
event of an issuer default
Leveraging — The use of grant or loan funds as reserve funds for the issuance of debt
Leveraging is used by several states participating in the Water Pollution Control State
Revolving Fund program to increase the amount of funds available for loans.
Liability Assignment — Liability assigned through common law or statute, whereby
individuals or companies may be held financially responsible for environmental damage
resulting from their activities.
Line of Credit — Lines of credit assure potential lenders that a debtor government will be
able to draw on a specified sum of money from another source in the event of default
Unlike letters of credit, lines of credit can be used for any purpose, so debtholders have no
guarantee that the debtor will not use the line of credit for other purposes.
Long-Term Debt—Debt that is payable more than one year from the date it was incurred.
Mandate Bond (MIFs) — A new category of tax-exempt bonds known as Mandated
Infrastructure Facility (Mil1) Bonds. Under a proposal by the Government Finance Officers
Association (GFOA), the bonds could be issued to finance facility construction, acquisition,
renovation, or rehabilitation required by federal statutes or regulations. The proposal would
essentially allow more private participation in such projects than is currently allowed for tax-
exempt bonds.
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Moral Obligation Bond — A state or municipal bond that is not backed by the full faith and
credit of the issuer. The issuer of a moral obligation bond asserts the intent of the
legislative body to make appropriations sufficient to cure any deficiency in monies required
to meet debt service, but the issuer has no legally enforceable obligation to do so.
Notes — Interest-bearing certificates of governments or corporations that come due in a
shorter time than bonds.
Netting Program — See economic incentive programs.
Offset Program — See economic incentive programs.
Operating Costs — Typically, costs that are directly related to rendering of services, sale
of merchandise, production and disposition of commodities, collection of revenues, and
other ongoing activities.
Point Source/Non Point Source Trading — Point sources discharge pollutants in a well-
defined geographic location. Municipal and industrial outfalls (pipes) that discharge into
lakes and rivers are examples of point sources. Nonpoint source pollution is diffuse, and
results from a variety of human activities that take place over a wide geographic area. For
example, fertilizer or other agricultural chemicals that are washed into rivers are classified
as nonpoint source pollution sources. Point source/nonpoint source trading in principle
involves point sources financing reductions in nonpoint source pollution in lieu of
undertaking more expensive point source pollution reduction.
Polluter Pays Principle — See equity.
Public-Private Partnership — Public-Private partnerships involve a variety of techniques
and activities to promote more involvement of the private sector in providing traditional
government services. Partnerships can include involving a private partner in construction,
financing, operation, and/or ownership of a facility.
Ratings — Credit quality evaluation of bonds and notes made by independent rating
services and brokerage firm analysts. Generally, a higher bond rating lowers the interest
rate expected by debtors for repayment, and therefore overall capital costs. State and local
governments can improve their bond ratings by using credit enhancement mechanisms.
Revenue Anticipation Notes (RANs) — Notes issued in anticipation of nontax revenues,
generally from other governmental entities ( i.e., state aid to a school district).
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Revenue Base — The revenue base is the value of the product, income, property, or the
number of population against which a fee or tax is charged. For example, the revenue base
for a state tax per ton of fertilizer sold would be the tons of fertilizer sold in the state, while
the revenue base for a motor vehicle license fee would be the number of vehicles licensed
in the state. The size and characteristics of the revenue base, along with the rate of the fee
or tax, determine the revenue potential of fee and tax programs.
Revenue Bonds — Bonds whose principal and interest are payable exclusively form earnings
of a public enterprise.
Revenue Potential — A measure of the amount of money that can be raised by a particular
financing mechanism. For fee and tax programs, revenue potential is a function of the rate
of the fee or tax and the size of the revenue base. State and local governments need to
consider the revenue potential of an AFM in their jurisdiction in order to determine if it
meets their financing needs.
Revenue Stability — Revenue stability refers to the pattern of revenues from a particular
revenue source. Some sources provide revenues in stable amounts annually. Other revenue
sources are unstable, providing only one-time or erratic revenues from year to year. State
and local governments should match ongoing program costs to stable revenue sources, while
non-recurring costs can be matched to less stable revenue sources.
Revolving Fund — A revolving loan fund program may consist of several accounts or
revolving funds that make loans or other types of assistance available for various projects.
Typically, the fund is initially capitalized by appropriations, grants, or other monies. After
the initial loans are made, future loans are supported by repayments, making the fund
"revolving."
Severance Taxes — Severance taxes are charged for the extraction of natural resources from
the land or waters of a state. Examples of severance taxes include water and ground-water
withdrawal taxes, oyster and shellfish taxes, timber taxes, and fuel and mineral taxes.
Short-Tenn Debt — Debt that falls due in a period of under a year.
Special Assessment — A charge imposed against certain properties to defray part or all of
the cost of a specific improvement or service deemed to primarily benefit those properties.
Special Assessment Bonds — Bonds payable from the proceeds of assessments imposed
against properties which have been specially benefitted by the construction of public
improvements.
B-8
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Special Districts — An independent unit of local government organized to perform a single
governmental function or a limited number of related functions. A single purpose or local
taxing district can be organized for a special purpose such as a road, sewer, irrigation or fire
district Special districts usually have the power to incur debt and levy taxes.
Special Tax Bond — A bond that is secured by a special tax, such as a liquor tax.
Tax — A tax is generally a charge against sales, income or property. Unlike fees, most
jurisdictions do not require that there be a direct relationship between a tax and the use of
funds.
Tax Anticipation Notes (TANs) — Short-term debt that will be retired with taxes to be
collected at a later date.
Tax-Exempt Lease — A lease in which the lessee has the option of applying lease payments
to the purchase of a facility for a reduced price. The lessee is owner for tax purposes. Also
known as a conditional sale lease.
Tax Base — See revenue base.
Tax Increment Financing — The dedication of incremental increases in real estate taxes to
repay an original investment in improved public facilities that created increased real estate
values.
Tax Omit — The maximum rate of taxation which a local government may levy.
Tax Rider—A tax rider allows a locality to "piggy-back" on an existing state tax by charging
an additional levy. State laws vary, but most states require the authorization of the state
legislature before a locality is permitted to enact a rider on a state tax.
Tax Surcharge — An increased percentage or dollar amount charged by a taxing authority
on an existing tax. Temporary surcharges can be a good method for financing non-recurring
needs.
Transferable Development Rights (TDR) Programs — These programs allow owners of
rural or undeveloped land to sell an assigned number of development rights to developers
at a mutually-agreeable price. The developers can then use the rights purchased to exceed
height and density limitations in other, already-developed areas. Ideally, a TDR program
is intended to preserve rural and undeveloped land while allowing landowners to reap the
full value for their property.
Trust Fund — Trust funds are created by state and local governments to receive revenues
generated by a specific tax or other funding mechanism, and disburse funds for the purposes
for which the revenues are collected.
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Turnkey Arrangement — A public-private partnership in which a public agency contracts
with a private vendor to build a complete facility with specified performance standards
agreed to between the agency and the vendor. Since ownership remains with the private
partner until construction is complete, generally the private partner will not be bound by
public procurement regulations, which often enables the facility to be completed in
significantly less time and for less cost than could be accomplished under traditional
construction techniques.
Wetlands Mitigation Banking — Wetlands mitigation banking programs allow developers
to purchase credits in a publicly-owned and managed wetlands site that has been enhanced,
restored, or created by a public agency. The developers may use these credits to fulfil
wetlands mitigation requirement for impacts in other locations, generally within the same
watershed or habitat area.
Workload Analysis — A workload analysis details the cost of carrying out particular
programs or activities. An analysis generally includes estimates of the time required to
perform such activities as permit processing and review, compliance inspections, and
enforcement activities. Workload analyses help state and local governments estimate costs
for program implementation.
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ATTACHMENT C:
THE CLEAN AIR ACT OF 1990:
A GUIDE TO PUBLIC FINANCING OPTIONS
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THE CLEAN AIR ACT OF 1990:
A GUIDE TO PUBLIC FINANCING OPTIONS
FINAL DRAFT
Prepared for:
The Clean Air Act Advisory Committee
Subcommittee on Federal/State Relations
Under the Auspices of:
The Environmental Financial Advisory Board
May 1992
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TABLE OF CONTENTS
EXECUTIVE SUMMARY i
INTRODUCTION 1
REQUIREMENTS OF THE CLEAN AIR ACT OF 1990 1
MEETING THE FINANCIAL NEEDS OF THE CLEAN AIR ACT OF 1990 2
NEW REVENUE SOURCES 4
Fees 5
Taxes 7
Fines and Penalties 8
REGIONAL AUTHORITIES 9
NEW INSTITUTIONAL APPROACHES 10
Revolving Loan Funds 11
Trust and Enterprise Funds 11
Bond Banks 12
PUBLIC-PRIVATE PARTNERSHIPS 13
ADDITIONAL SOURCES OF INFORMATION 15
APPENDLX A A-l
APPENDIX B B-l
APPENDIX C C-l
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THE ENVIRONMENTAL FINANCIAL ADVISORY BOARD
The Environmental Financial Advisory Board (The Board) is an independent
organization of financial experts drawn from all levels of government, the financial
community, business and industry, national associations, and academia. The Board was
established in August 1989 to provide authoritative analysis and advise to the Administrator
of the U.S. Environmental Protection Agency (EPA) regarding environmental finance issues
to assist the Agency in carrying out its environmental responsibilities.
The Board focuses on environmental finance issues at the federal, state, and local
levels with a particular regard to impacts on small communities. It addresses the issue of
the capacity of state and local governments to carry out their respective environmental
programs and responsibilities under current federal laws. The Board endeavors to facilitate
the efficient provision of environmental services and increase investment in environmental
protection via greater leveraging of public and private resources.
Board Cam-
Mr. Richard Totkefcon
Deputy Commissioner far
Administration
New York State Department
of Environmental
Conservation
Vice Chair
Ms. Frieda K. Walloon
Partner
Jones, Day, Reavit & Pogue
Exeeotnc Director
Mi. Herbert Barrack
Assistant Regional
Administrator for Policy and
Management
US. EPA. Region n
Hon. Pete V. Domemci
Senator
US Senate
Hon. Beryl F. Anthony, Jr.
Representative
US House of Representives
Hon. Anne Meagher
Northnp
Stale Legislator
Kentucky State Legislature
Hon. Stephen Goldsmith
Mayor
Indianapolis,
Mr. J. James Barr
Viet President and Treasurer
American Water Works
Company, Inc.
Mr. Philip Beachem
Executive Vice President
New Jersey Alliance for
Action, Inc.
Mr. Joseph D. Blair
Executive Director
Massachusetts Industrial
FiMih^d Agency
Mr.PeteBntkns
Public Works Trust Fund
Washington Department of
Mr.WuuamH.Chew
Senior Vice President
Municipal Finance
Department
Standard & Poor's
Corporation
Mr. Michael Corky
Heartland Resources, Inc.
Mr. Roger D. Feldman, PXX
Partner
McDermott, Wffl & Emery
Dr. Richard Fenwick, Jr.
Vice President, Corporate
Economist
CoBank National Bank for
Cooperation
Ms. Deeohn Ferris
Director, Environmental
Quality Division
National Wildlife Federation
Dr. William F. Fox
Associate Director
Center for Business &
Economic Research
University of Te:
Mr. Shockley D. Gardner, Jr.
Executive Director
Virginia Resources Authority
Mr. Harvey Goldman
Executive Vice President and
Chief Financial Officer
Air and Water Technologies
Corporation
Mr. John Gunyou
Cammaaaner
Minnesota Department of
Finance
Mr. William B. James
Managing Director, Public
Prudential Securities, Inc.
Mr. David M- Lick
Partner
Loomis, Ewert, Ederer,
Paisley, Davis & Getting,
PXX
Mr. Robert F. Mabon, Jr.
Morgan Stanley and
Company, Inc.
Mr. John C. -Mac* McCarthy
State Director
Fanners Home
Administration
US. Department of
Mr.MarlinL.Mosby,Jr.
Managing Director
Public Financial
Dr. Peggy Musgrave
Professor of Public Finance
University of California at
Santa Cruz
Mr. Gerald Newfarmer
City Manager
Cincinnati, Ohio
Mr. George A. Raftetts
Partner
Ernst & Young
Ms. Heather L. Ruth
President
Public Securities Association
Ms. Roberta H. Savage
Executive Director
Association of State &.
Interstate Water
Pollution Control
Administrators
Mr. John V. Scadnto
County Treasurer
Nassau County, New York
Mr. Warren W. Tyler
Vice President
State Savings Bank
Ms. Jane G. Witberidge
Vice President
Waste Management, Inc.
Ms. Elizabeth Ytell
Director, Walcr-Wastewater
Division
Rural Community Assistance
Corporation
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EXECUTIVE SUMMARY
Under the Clean Air Act Amendments of 1990 (CAAA), state and local governments
are responsible for implementation and compliance activities. As EPA's partners, state and
local air quality agencies must expand many existing regulatory programs and add new ones
to fully implement and comply with the CAAA.
The benefits of the new Act are expected to be enormous ~ EPA estimates that 56
billion pounds of pollution will be removed from the air each year. In human terms, these
measures will significantly reduce lung disease, cancer, and other serious health problems.
The impact on the environment will be equally significant- less acidic lakes, more abundant
crops and forests, and enhanced visibility.
Clearly, the costs of achieving such health and environmental benefits will be
substantial. While the eventual cost is still unknown, air programs across the nation are
currently assessing the costs of these new and expanded regulatory programs and
compliance actions, and the share of the financial burden that will be borne by state and
local governments.
This guide examines opportunities both within the provisions of the CAAA and
within current air program financing arrangements for state and local authorities to meet
the funding requirements of the new Act In the Act, Congress provided authority to all
state and local air agencies to charge emissions fees at levels sufficient to cover their air
permit programs. Even with this new authority, state and local governments will need to
explore alternative funding mechanisms and other arrangements to cover program costs not
associated with the permit program. The financing mechanisms described in this guide may
provide additional funding for state and local air quality agencies and are intended to
supplement, but not replace, existing general revenues or federal grant assistance.
The CAAA also encourages several market-based programs, such as an allowance
trading program that enables utilities to buy and sell emission credits and mobile source
trading between fleets of vehicles. While these and other innovative programs can reduce
the overall cost of implementation to both the public and private sectors, the focus of this
guide is on public financing options to support implementation and compliance activities.
By "working smart," state and local governments can lower the costs and increase the results
of implementing the Act
Historical Sources of Funds - Federal Grants, Permit Fees, and General Revenues
Historically, state and local air agencies have relied on three sources of revenues to
support air programs - federal grants available under Section 105 of the Clean Air Act, a
variety of fees and charges, and state and local general revenues. On average, federal
grants have funded some 35 percent of state and local programs. The percentage of fees,
Financing the Clean Air Act of 1990 Page i
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charges, and general revenues that make up the remaining balance is as diverse as are the
hundreds of state and local air agencies.
Broadening Sources of Funds and Financial Arrangements to Meet CAAA Challenges
While the CAAA's new air emissions permit fees (under Title V) are expected to
fully fund direct and indirect expenses associated with running these programs, these fees
will not recover the costs of running many other air quality control activities, such as mobile
and area source control. To finance these and other air program responsibilities, state and
local agencies may have to explore a wide variety of approaches, including:
• New Revenue Sources, such as fees other than Title V emissions fees, taxes
on polluting activities or on inputs that cause air pollution, and fines and
penalties.
• Regional Authorities and Special Districts that provide an efficient means of
implementing air programs because of their ability to consolidate
administrative requirements, capture economies of scale, target problem
areas, and raise revenues through special assessments or service charges.
• New Institutional Approaches, such as revolving loan funds, trust and
enterprise funds, and bond banks, that help publicly owned sources comply
with CAAA requirements at low cost, and that match revenues to then-
intended uses.
• Public-Private Partnerships that may accomplish certain program elements
at lower cost than can purely public alternatives, depending on the
characteristics of the partnership. Possible candidates include mobile source
emissions inspection, emissions inventories, and ambient monitoring.
Matching Financing Sources to Air Program Activities
The alternative revenue sources and institutional arrangements discussed in this guide
demonstrate that there are an array of options for financing state and local regulatory
programs and compliance activities. Individual revenue sources may be more appropriate
for some uses than others. When selecting revenue mechanisms, program managers should
consider the timing of revenues, total revenue potential, reliability of revenues over time,
and fairness across those who pay and those who either benefit or cause air pollution.
Similarly, financial management mechanisms should be carefully matched with the
uses of funds to be managed. Important considerations in structuring such arrangements
include local characteristics such as conventions for balancing intergovernmental powers,
authority to raise revenues or manage funds on behalf of the public, budgeting and
accounting conventions, and political willingness to delegate fiscal responsibility.
Financing the Clean Air Act of 1990 Page u
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Public financing is only one of the many challenges facing states and local
governments as they address the requirements of the new Act The mechanisms suggested
here, while not the answer to all program needs, can provide the financial foundation for
new and expanded state and local programs.
Financing the Clean Air Act of 1990 Page iii
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INTRODUCTION
Under the Clean Air Act Amendments of 1990 (CAAA), state and local governments
must establish an array of new and expanded programs to protect the nation's air quality.
To be sure, these programs will be costly, but the federal Environmental Protection Agency
is also taking a more flexible approach to implementing these laws, and providing multiple
options to clean the air. By "working smart," states and local governments can help achieve
clean air in a cost-effective way. Critical to the success of the CAAA is the development
of adequate resources to implement the many new and expanded requirements of the law.
This paper examines financing alternatives that can be used to support state and local
implementation activities. The financing mechanisms described in this guide may provide
additional funding for state and local air quality agencies and are intended to supplement,
but not replace, existing general revenues or federal grant assistance.
This guide is intended to assist state and local authorities as they explore alternative
financing options for implementation of the requirements of the CAAA. The sections
below describe the requirements of the law and related state and local program
requirements, and introduce a range of financing mechanisms and institutional approaches
that state and local governments can draw upon in establishing new program activities.
REQUIREMENTS OF THE CLEAN AIR ACT OF 1990
The Clean Air Act of 1990 will result in the single largest environmental regulatory
program initiated under a federal statute. The Act is comprised of 11 titles, covering a wide
variety of air quality issues ranging from bringing nonattainment areas into compliance with
air quality standards to addressing the problems of acid rain and ozone depletion.
Appendix A presents the key provisions of the CAAA by title.
Under the Act, state and local regulators are on the front-line of implementation.
To implement the new Act, states or local governments, where authorized, will need to
adapt and enhance basic programmatic and regulatory activities as follows:
• Prepare and implement State Implementation Plans (SIPs);
• Implement permit programs for stationary sources;
• Create economic incentives programs, including emissions fees and
marketable permits;
• Improve monitoring of emissions of stationary sources;
• Create new inventories of ozone-causing emissions;
• Adjust their inspection and maintenance programs for mobile sources to
comply with the basic and enhanced provisions of the Act;
• Take the CAAA into consideration in transportation planning, including the
creation of new transportation control programs under the 1991 Intermodal
Surface Transportation Efficiency Act;
Financing the Clean Air Act of 1990 Page 1
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• Enforce Stage n control programs at gasoline stations; and
• Bring state and local public facilities (including stationary sources and state
fleets) into compliance.
Implementation of these activities will increase the size, scope, and cost of state and
local air programs over the next several years. The costs of these new or expanded
programs, and the share of the financial burden that will be borne by state and local
governments is currently being assessed by governments across the nation.
MEETING THE FINANCIAL NEEDS OF THE CLEAN AIR ACT OF 1990
Historically, states have relied on three sources of revenues to support air program
activities — federal grants (and in particular §105 funds), state permit fees, and general
revenues. In the past, federal grants have comprised as much as 35 percent of state and
local program funding. A significant portion of state and local air program funding has also
come from state general revenues. In Maryland, for example, general fund revenues
accounted for 36 percent of the total expenditures of the Air Management Administration
in 1991 (total expenditures of $5.5 million). Federal grants provided 35 percent of funding
needs, with permit fees accounting for 18 percent, and 11 percent coming from
reimbursements and other sources. As of 1990, at least 24 states and 25 local air authorities
had air permit programs that were supported at least in part with permit fees.
Title V of the CAAA requires that states impose emissions fees on stationary sources
at levels sufficient to finance the Title V permit program. States must charge at least $25
per ton per regulated pollutant unless they can prove that a smaller charge will cover the
full direct and indirect costs of the permit program. This program will greatly augment
states' financial resources to administer pollution control programs by requiring sources of
pollution to pay their share of the costs of states' air pollution programs. While this helps,
it will not meet all of the new program requirements outlined above because: (1) fee
revenues can be used onfy for the Title V permit program (which covers primarily stationary
sources); and (2) fees are not likely to cover the full cost of the program, especially in the
interim period before full implementation, since a number of states are choosing to phase
in full-cost-recovery fees over several years.
Even with increased permit fees, it is clear that states will need to do more to meet
the increased costs of the CAAA. Four categories of possible actions are described here:
• New revenue sources;
• Regional authorities;
• New institutions; and
• Public-private partnerships.
Financing the Clean Air Act of 1990 Page 2
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Financing mechanisms and institutional arrangements within these four categories
build on opportunities in the provisions of the CAAA and in current air programs for state
and local authorities to meet the funding requirements of the new Act The following
matrices summarize these options and offer a framework for assessing the relevance of
options to particular funding needs at the state and local levels.
The first matrix lists the revenue options available to state and local air pollution
programs and assesses the applicability of each revenue option at both the state and local
level. It delineates between capital and programmatic costs because a revenue source is
often more appropriate for one or the other classification of cost Applicability is assessed
based on the timing of revenue collection versus the timing of the costs being incurred, the
availability of the various revenue sources, along with their relative reliability.
The second matrix summarizes relevant fund management mechanisms, identifying
the revenue source with which they are commonly associated, the level of government most
likely to use the mechanism, and the level of government benefiting from or receiving the
funds.
Summary of Revenue Options
Sources of
Revenue
State-Administered
Programs
Locally-Administered
Programs
Capital
Costs
Pmgram
Costs
Capital
Costs
Program
Costs
Federal Grants
Fees
Taxes
Fines/Penalties
Privatization
State Loans and
Credit Enhancements
O
e
o
Q
O
O
e
o
o
Q
Q
O
£ FuEy
Applicable
Q PaitiaDy
Applicable
O Not
Applicable
Financing the Clean Air Act of 1990
Page 3
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Summary of Fund Management Mechanisms
Management
Mechanisms
Annual Appropriations
Revolving Funds
Bond Banks
Enterprise Funds
Trust Funds
Associated Source
of Revenue
General Revenues
Loans
Debt
Fees
Grants or Loans
. . . ^^
By:
State or Local
State
State
State or Local
State
Manages Funds
on Behalf of:
State or Local
Local
Local
State or Local
State or Local
NEW REVENUE SOURCES
While the Title V permit fee program provides an important funding source to states,
it is only one source and its applicability is limited. In addition, it will take a number of
years for states to implement permit fee programs because, in most cases, new state
legislation is needed and because EPA must approve all permit programs. Each state must
submit a permit program to EPA for approval by November 15, 1993. EPA then must
approve or disapprove the program within one year of its submittal. Within one year after
a state has an approved program, it must have collected applications from sources. All
permits must be issued within three years of program approval (by November 1997, at the
latest). Some states will be able to have a program in place and be collecting fees earlier,
but there may be states that will not collect fees until the end of this implementation period.
Some states are collecting interim fees prior to full implementation to help cover the start-
up costs associated with establishing the new permit program, but these fees do not
necessarily exactly match the federally mandated permit fees; nor are they set to recover the
full cost of implementation.
States will need to identify alternative funding mechanisms to cover new air program
costs not associated with the permit program and to fund the short-term costs of
implementing new permit programs before the fees are fully implemented. Possible funding
mechanisms include fees (other than the Title V permit fees), taxes, and fines and penalties.
Not every financing mechanism will be appropriate for every state or local program.
Within each jurisdiction, political, administrative, and legal characteristics will influence the
selection, design, and implementation of a financing mechanism. The accompanying box
lists eight key factors that can be used to evaluate the merits of each in the context of the
program it is designed to finance. In general, no single financing mechanism will completely
satisfy all criteria. Equity considerations, for example, may be qualified by concerns over
administrative costs, economic impacts, and incentive effects. Taken together, however,
these criteria form the basis for selecting an appropriate financing mechanism for a specific
program activity.
Financing the Clean Air Act of 1990 Page 4
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Criteria for Evaluating Financing Mechanisms
Equity refects the fairness of die distribation of the fimding bimfen among individuals. Equity in dean
air programs can be approached from two directions—those who createor contribute to environmental
problems should bear the funding burden (the "polluter* pays) or those who benefit from program
activities should bear the funding burden (the "beneficiary* pays).
I*£ssfc^acw5pta$*%^ financing mechanism. There are unique
legislative predispositions in each state that often influence the choice of a financing mechanism.
PubEc acceptability reflects the willingness of those subject to a feeor tax to pay, or the willingness of
the pubfic to make a particular sector pay.
Feasibility relates fa the legal authority to impose a fee or tax as well as to factors that affect the
workability of a nnancrngmechamsm. :
Revenue potential is measured by the amount of money that can be raised with a particular financing
mechanisnv and whether a mechanism provides a: one-time or continuing source of revenues.
Flexibility reflects the ability to use revenues from alternative financing mechanisms as needed for a
variety of program activities.
AdmimstratneKquirementsrelsieto the effort needed to implement an alternativefinancingmechanism,
including start-tip costs and on-going collection and management of funds.
Impacts relate to whether a financing mechanism creates incentives for desirable (or possibly
undesirable) behavior, and whether it places an undue financial burden on industry or general
taxpayers.
Source; Discussion Paper
-------
In Maryland, for example, the Air Management Administration (AMA) has imposed
an Asbestos Contractors License fee of $75-$450 (depending on the number of employees
engaged in asbestos projects). The fee is charged to businesses, contractors, and public
entities who engage in an asbestos project Other fees funding the AMA's budget include
permit-to-construct fees, fees for new emission-generating facilities operating in a non-
attainment area, and permit-to-operate fees. Oregon has instituted an emission-based
motor vehicle fee of $2 for pre-1980 cars and $1 for newer cars levied at the time of
registration. The estimated $3.5 million in annual revenues will go to a special Department
of Transportation fund to be used for alternative transportation projects to mitigate motor
vehicle air pollution.
New York is considering a broad array of new or increased fees to finance both
stationary and mobile source requirements, including an emissions fee of $250 per emission
point for non-tide V sources (e.g., small boilers), increased inspection and registration fees,
a new vehicle fee, and fees on "excess" vehicle-miles-travelled (VMT). In addition to raising
revenues, several of these options are intended to create incentives to reduce air pollution.
For example, the "excess" VMT fee might encourage drivers to be more efficient in using
their vehicles (e.g., by combining trips) or to shift to an alternative mode of transportation.
Surcharges on existing mobile source fees could also provide support for state and
local air pollution programs. For example, Florida finances state and local air programs
through a
$1 surcharge on auto license tags. If a county has a local air pollution control program that
the state has declared eligible for funding, it receives $0.75 of the surcharge from the
automobiles registered within the county. If the county does not have such a program, the
entire amount is dedicated to the state's air pollution control program. As of March, 1992,
over seven Florida counties had programs which were partially supported by this license fee.
In many cases, fees are set to recover thejutf cost of the service for which they are
being collected. Indeed, this is a requirement of the Title V permit fee programs by the time
they are fully implemented. One way to ensure maximum utilization of a financing
mechanism such as the Title V permit fee is to ensure that all of the activities related to the
permit program are included in the costs to be recovered through permit fees. For example,
a comprehensive Title V permit program would include not only the cost of issuing a
permit, but also the indirect costs of administering the program, such as monitoring
emissions, inspecting facilities, developing and maintaining new source inventories, and
planning-related activities, as well as indirect departmental overhead costs.
Advantages. A fee is often the most equitable means of matching program costs with
those parties responsible for or benefiting from program activities. Both legislatures and
the public are increasingly comfortable with charging "fees for service." Fees can generate
substantial revenues at relatively low rates where the base is fairly large. In addition, fees
can be designed to tap "new" sources of revenues that do not overlap or compete with
Financing the Clean Air Act of 1990 Page 6
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existing sources of program funding or general revenues. Finally, fees can induce desirable
changes in behavior (such as reduced air emissions).
Disadvantages. Many state legislatures are reluctant to set fees high enough to
recover program costs. Historically, states and localities have charged only a nominal
amount for services, with the remaining costs financed with general revenues. As a result,
"fees" that are acceptable to the public today are relatively low. This creates a dilemma for
state programs that rely on fees to support then- program activities but that cannot raise fees
to cover full cost without encountering public resistance. Another potential disadvantage
of fees is that where they fall on the same parties, materials, or activities as another
assessment, there may be competition from other programs that already rely on that source
of funds (e.g., many vehicle-related charges may compete with highway or transit programs).
Finally, if fees are perceived as too high, they could create incentives to avoid payment
through relocation, noncompliance, or other means.
Taxes
A tax is generally a charge against sales, income, or property. Taxes are typically used
when program funding needs are large and when the benefits of an activity are widespread.
Unlike fees, there may be less of a direct relationship between the tax and the use of funds. Taxes
are the primary source of general fund revenues. Sales and income taxes comprise the
majority of state general revenues, while property taxes are the primary source of revenues
for local governments (exclusive of revenue sharing from the state). The mix of revenues
from different taxes varies significantly from state to state, reflecting factors such as the
level of manufacturing or industrial activity, political predispositions, and historical
preferences.
Air programs have two options for using taxes to support their programs. They can
seek financial support from legislatures in the form of increased appropriations from general
revenues or seek dedication of specific tax revenues. As states and localities face increasing
demands on their general funds, environmental programs are experiencing decreased
appropriations even as new regulatory requirements are driving program costs up. In the
face of such competition, it may be more constructive to look for new and dedicated taxes,
rather than attempt to capture a greater share of general fund appropriations from year to
year.
For state or local air quality programs, taxes on sales or income provide some
opportunity for establishing a dedicated revenue source. A sales tax could be levied on
products or activities that contribute to air pollution, such as gasoline or automobiles. An
income tax or tax surcharge could be imposed on those businesses whose industrial activities
contribute to air pollution. New York is considering an excise tax on automotive parts to
help finance its mobile source program. In California, the Sacramento Air Quality
Management District is partially funded by a local option sales and use tax on retail sales
in the county, a share of which is dedicated to the local air authority. Other examples
Financing the Clean Air Act of 1990 Page 7
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include severance taxes on coal and oil, tolls, a value-added tax (VAT) on certain
manufacturing processes, and property transfer taxes.
Advantages. Depending on the base, a tax can build directly on the principle that the
polluter or beneficiary pays. For example, a tax on products that contribute to pollution
problems (such as pesticides or gasoline) falls on "polluters," while a tax on protected
resources falls on "beneficiaries." Where the tax base is broad (e.g., sales or income), a tax
at even a low rate can generate substantial revenues. Imposition and collection of taxes
may be relatively straightforward - generally, the commodities on which a tax is levied have
value and the point of transaction (e.g., sales) can be clearly identified. Further, the
mechanisms of existing state agencies may be used to collect revenues. Finally, taxes can
be designed to avoid state-to-state and international competitiveness concerns by targeting
consumers as opposed to producers of products, thus avoiding possible relocation by
industry to avoid the tax.
Disadvantages. A major disadvantage to using taxes to fund state air programs is
public and legislative opposition. In particular, many legislatures resist dedicating tax
revenues to particular programs; instead, they may reserve their taxing authority (and tax
revenues) for the general purposes of the state, and insist that state air programs compete
with other public programs for revenues. In today's tax climate, public resistance to new
taxes is also high. Also, where a clear opportunity for dedicated taxes exists (such as an
automobile excise tax) there may be competition from other programs or from the state's
general fund for those revenues (e.g., in Washington, an auto manufacturer's tax, which was
initially proposed to support cleanup of Puget Sound, was diverted by the legislature to the
state's air program). A further objection to taxes for specific program funding is that the
relationship between the tax base and target populations (polluters or beneficiaries) is
sometimes tenuous. Some taxes may be difficult to justify beyond the fact that they raise
needed program funds. Finally, taxes may be regressive, imposing greater costs on low
income households relative to higher income households.
Fines and Penalties
Fines and penalties are imposed primarily for violations of federal or state requirements
or regulations. Whereas fees and taxes may be collected on everyday activities, fines and
penalties are collected only on the exceptions to normal operations. As such, fines and
penalties do not typically provide a steady stream of revenue. More often, fines and
penalties have been used to create positive incentives (e.g., improved compliance).
Advantages. Fines and penalties adhere closely to the principle of "polluter pays."
As a result, they enjoy both public and legislative acceptability. They may also be an
effective means of creating incentives for desired behavior, if violations can be detected and
the resulting fine is higher than the cost of the desired behavior (such as installing a
preventative measure). Finally, states may exercise considerable discretion in the use of
revenues from fines and penalties.
Financing the Clean Air Act of 1990 Page 8
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Disadvantages. The feasibility of fines and penalties is dependent on the enforcement
authority's ability to detect potential violations. This may require extensive inspection,
monitoring, and enforcement activities. Without such enforcement activities, the value of
fines and penalties as a source of funds or as an incentive is lost Revenues from fines and
penalties may be sporadic, and do not provide a steady and predictable stream of revenues
for program operations. Finally, reliance on fines or penalties as the onfy source of funds
for program activities could create perverse incentives for the state agency to pursue
unnecessary enforcement actions.
REGIONAL AUTHORITIES
A regional authority is an independent agency created through an intergovernmental
agreement among participating local jurisdictions. The authority is generally governed by a board
of directors comprised of representatives from the participating governments. In some states,
implementation of air programs may be better managed at a sub-state level. At the same
time, the county or local level of government may be too small to capture the geographic
aspects of air emissions and dispersion of pollution. In response, some states have allowed
for the creation of regional authorities to deal with the problem. Regional authorities may
offer a cost-effective means of implementing program requirements.
Several states have long-standing regional air pollution control authorities. In
Oregon, state law expressly allows cities and counties to form regional air pollution control
authorities by adopting local ordinances. If the state Environmental Quality Commission
determines that the boundaries of the authority are reasonable and the proposed financing
is sufficient, the state delegates its air permitting activities to the regional entity. There is
currently one such regional authority in Oregon, which is financed through a combination
of state and federal grants, permit fees, local funding, and enterprise activities. Because the
local authorities are ultimately responsible for their own financing, the cost of air permit
implementation to the state may be reduced.
Special districts offer another means of forming a sub-state or regional entity that
encompasses several local jurisdictions. Special districts are limited-purpose local governments
created as separate entities, often with substantial independence from general-purpose local
governments (e.g^ counties, municipalities, and townships). A special district can be created
by state law to provide environmental program services. Characteristics of special district
governments differ widely among the states, with varying degrees of administration and
fiscal autonomy provided for by state legislative provisions. Special district governments are
known by a variety of titles, including districts, authorities, commissions, and boards.
Options for sources of revenue include special fees or taxes, special assessments, and tax
increment financing. Of the special districts in the United States, 43 percent have the power
to impose district-wide property taxes, 24 percent impose service charges, and 14 percent
have the power to impose special assessments.
Financing the Clean Air Act of 1990 Page 9
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The state of California has created independent local air pollution control districts
to implement air quality programs. The principle sources of revenue for these districts are
permit fees, automobile registration surcharges, and local special taxes. For example, the
Sacramento Air Quality Management District, which has been in existence since 1975,
finances its $8 million budget through a combination of local sales taxes, county automobile
registration fees, permit fees, and federal and state grants.
Advantages. Regional authorities can consolidate administrative and other activities
in a single agency, eliminating duplication of effort among local agencies. Due to
economies of scale, a regional authority can often perform required air pollution monitoring
and permitting activities more cost-effectively than individual local agencies. Since the
regional authority is sometimes financed by contributions from the local governments
involved, it can reduce the burden on the state budget and increase the chances that the
costs of air pollution control will be shared equitably among local governments. Regional
air pollution districts allow states to target air pollution efforts to a particular area,
implementing more stringent regulations and monitoring only where necessary, thus
directing funds where the needs are greatest
Disadvantages. State governments may be concerned about loss of state control over
regional air programs that have been entirely delegated. Since the regional authorities are
smaller, the state program may be able to achieve greater economies of scale. If the
regional authority is financed by local funds, it may be vulnerable to local budget problems,
intergovernmental financial disputes, or regional economic downturns. Local politics may
hinder regulation of economically important industries, and cause uneven implementation
across regions, even where conditions are similar. Regional authorities may also encourage
a narrower focus on the problems of a particular area, while decreasing focus on wider,
interstate air pollution concerns.
NEW INSTITUTIONAL APPROACHES
In addition to implementing new administrative programs to ensure private
compliance with the CAAA, state and local entities will have to bring their own facilities
into compliance with the Act This will mean that increased investment at the state and
local level will be required to ensure compliance of publicly owned stationary sources of air
pollution as well as mobile sources, such as state or local fleets.
There are several institutional initiatives states can develop to facilitate public capital
investments. These include:
• Revolving loan funds;
• Trust and enterprise funds; and
• Bond banks.
Financing the Clean Air Act of 1990 Page 10
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These institutional approaches offer several advantages to states. Trusts and
enterprise funds can ensure that revenues from specific sources (such as a fee or special tax)
are dedicated to their intended uses. Dedication through a trust or fund may also enhance
public acceptability of a new fee or tax, because it reinforces the link between the revenue
and its intended use. Revolving loan funds and bond banks may lower the cost of raising
capital, thereby making it easier for states and local governments to finance needed capital
investments in air pollution control measures.
Revolving Loan Funds
Revolving loan funds provide loans to local governments for capital investments. The
repayment of these loans over time allows the fund to revolve its lending ability in perpetuity. The
State Revolving Loan Fund (SRF) program established to replace the construction grants
program in wastewater treatment could provide a model for the development of an air
quality loan institution. The revolving loan fund (RLF) concept could be applied to air
programs to help local governments meet the anticipated need for capital investment to
bring public facilities, such as municipal incinerators or public transit systems, into
compliance with the CAAA. A revolving loan fund could be capitalized with a grant from
the federal government, or with state bond proceeds.
Revolving loan funds can be designed to provide assistance based on environmental
needs and/or financial need. The current SRF program bases loan applications on the
former, but several states also take into account a community's ability to pay. Interest rates
can be fixed or flexible. For example, very poor communities could be offered loan terms
at a lower or zero rate of interest Revolving loan funds could even provide grants.
Advantages. The primary advantage of a revolving loan fund is that it is a self-
sufficient source of capital for capital investments. RLFs also are flexible in that they can
be structured to offer subsidies where needed.
Disadvantages. Creating a revolving loan fund requires a sizeable investment of
capital. With federal grant funds diminishing and state bonds increasingly extended, it may
be difficult to capitalize a revolving loan fund for a new program area such as air pollution
control. Several problems could arise if revolving loan funds are not administered or
designed carefully. The most obvious concern is the potential for depletion of the fund
corpus, either because interest rates are set too low, or because default rates are too high.
A second concern is whether particular states have sufficient demand for such an institution.
Without a sufficient volume of lending activity, a revolving loan fund may not provide a
cost-effective means of financing public investments.
Trust and Enterprise Funds
Financial management mechanisms link sources of funds with their intended uses, and
can also be used to increase the value of resources between the time they are collected and
Financing the Clean Air Act of 1990 Page 11
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disbursed. Three mechanisms are summarized here. Trust funds are created by states to
receive revenues generated by a specific tax or other funding mechanism and disburse funds
for the purposes to which the revenues are dedicated. A variation on this concept is an
environmental endowment, which can be created to promote state air quality goals. In
general, an endowment is an independent, incorporated legal entity that directs funds
toward a variety of research and program activities. Endowments may receive revenues
from a number of sources, including dedicated taxes, fines or legal settlements, or voluntary
contributions. Enterprise funds are used to manage the finances of government activities that
are largely self-supported through user fees or another specified revenue source. An
enterprise fund is really no more than an accounting mechanism to separate the financing
of a particular activity from the general fund. As a result, income and outlays can be
segregated from the general government budget For instance, state and local air programs
may wish to establish enterprise funds to segregate the income and expenditures associated
with the Title V permit fee program to guarantee that the use of these funds is for Title V
related activities.
Advantages. The major advantage of funds, and the primary reason for using them,
is to ensure that revenues from specified sources are used only for their intended purposes.
Funds also help insulate program activities from the vagaries of the appropriations process.
Funds help preserve program revenues by preventing them from reverting to the general
fund at the end of the budget period. Finally, where interest on fund balances accrues
directly to the fund, revenues can grow through good financial management
Disadvantages. Funds place an additional administrative burden on the state, and
may only be cost-effective where program revenues are substantial. There may be legislative
opposition to the use of funds because of the loss of control over disbursements of state
revenues. Finally, where fund balances may be subject to interfund transfers to meet other
funding needs of the state, they may provide only limited security for program revenues.
In Connecticut, the legislature recently transferred $4 million from the Auto Emissions
Fund and $6 million from the Leaking Underground Storage Tank Fund to cover increased
expenditures for a low-income energy assistance program.
Bond Banks
Bond banks assist local governments, and especially small communities, in gaining access
to the municipal debt markets and in lowering the cost of debt financing. Currently, at least 13
states have bond banks. Small and economically disadvantaged communities frequently do
not have established credit ratings, making it difficult and costly for them to issue bonds for
capital projects. Those communities that can issue bonds pay high costs of capital because
the fixed costs of issuance impose a greater burden when spread over a smaller bond issue
and may pay a higher yield because of their credit risk. Communities without sufficient
credit experience may be required to secure bond insurance that raises the cost of capital
further. A bond bank can help lower the cost of capital for local communities and can be
of special assistance to small or economically disadvantaged communities. It will either sell
Financing the Clean Air Act of 1990 Page 12
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bonds in the bond market and use the proceeds to purchase bonds from local communities,
or it may purchase local issues, pool them, and sell the debt as one large bond issue.
Proceeds from the pooled bond sale are loans to the participating local communities, which
repay the loan from facility revenues or from other local revenue sources. The costs of
capital are lowered because pooling lowers the associated risk of default, similar to the way
insurance policies operate.
Advantages. The primary advantage of a bond bank is that it helps communities gain
access to the municipal debt markets where they may not have been able to on their own.
It also lowers the cost of debt financing for communities.
Disadvantages. Unlike a revolving loan fund, a bond bank must constantly go back
to the bond market for new capital because loan repayments from local governments are
used to pay debt service on previous bond issues. Thus a bond bank's ability to assist local
governments will fluctuate with the general level of bond activity. In addition, because bond
banks rely on the sale of bonds backed solely by loan repayments, they cannot offer the
interest rate subsidies of revolving loan funds.
PUBLIC-PRIVATE PARTNERSHIPS
Public-private partnerships can be defined as private sector involvement in historically
public sector activities, ranging from performing contract labor for a public agency to private
ownership and operation of a public purpose facility. Through public-private partnerships in
the performance of CAA-mandated activities, state and local governments may be able to
reduce the public capital and operating costs involved in the implementation of the CAAA,
thereby reducing the need for state funds. The Act requires state and local governments
to undertake numerous activities, including, but not limited to, inspection, inventory, and
monitoring of air quality and emissions. In addition, states will be required to bring their
own emission sources into compliance with the CAAA requirements. Depending on each
state's situation, it may be cost effective for state and local governments to consider
employing private sector resources, in lieu of state resources, for some or all of the required
activities.
Public-private partnership arrangements fall into two broad categories: capital and
operating; and operating only. Capital arrangements involve some form of private
ownership and operation of a public facility. By permitting private ownership, capital costs
can be shifted to the private sector, eliminating the need to acquire public capital and
relieving the burden on public debt capacity. In addition, cost savings can be achieved
because private capital construction costs are often lower than public construction costs, in
part because the private design, procurement, and decision-making processes are often
faster than the public construction processes, and in part for the same reasons listed below
for operating costs. Private operating costs can often be lower because: (1) a private
company may be more responsive to competitive pressure; (2) a private company may
experience lower labor costs; and (3) a private company can achieve economies of scale by
Financing the Clean Air Act of 1990 Page 13
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operating multiple facilities, even in multiple states. As an example, in other environmental
programs such as solid waste removal and wastewater treatment, the private sector has often
been 15 to 20 percent more cost-efficient than its public counterpart in both capital and
operating costs.
One area where public-private partnerships have already been applied in a number
of states is vehicle emissions inspection. Stricter vehicle emission inspection requirements
in the Act will involve capital expenditures for new inspection equipment and facilities. If
the final EPA regulations require the more intensive I/M-240 emissions test, many states
may have to invest in new equipment and facilities. For example, New Jersey estimates that
its 30 state-run inspection facilities will need to expand from 3-4 inspection lanes per facility
to 10 lanes per facility. The state is currently exploring the option of having a private
company build, own, and operate the new facilities. New York is also considering
centralizing its emissions inspection program by contracting out to private, non-repair auto
maintenance companies. Such arrangements have already been successfully applied to
emissions inspection programs in many states. For example, inspection facilities in
Maryland were sited, built, and operated by a private company after a competitive bidding
process. Here, part of the fee paid to the operator is dedicated to state oversight and data
collection, so that the cost to the state of operating the program is limited. North Carolina
has recently added emissions testing to the annual inspection program operated by private
gas stations. States will need to consider the tradeoffs between centralized and
decentralized programs in then* consideration of privatization options.
When capital facilities are not involved or when private ownership arrangements are
not the best option, operational savings can still be captured by contracting out certain
activities to the private sector, e.g., monitoring and inventory activities called for in the Act
The Wisconsin Bureau of Air Management is beginning a pilot program to contract out to
private companies certain permitting and information and education activities required by
the CAAA. This pilot resembles an existing state program using a private laboratory to
monitor permitted wastewater discharges, and is another example of a public-private
partnership in environmental compliance activities.
Public-private partnerships have already been successfully applied to public facilities
and services in the areas of wastewater treatment and solid waste management To reduce
the cost of bringing government-owned facilities into compliance, state and local
governments may also want to take a similar approach for those public facilities subject to
CAAA requirements. For example, selling a municipal incinerator to a private company
might allow a municipal government to avoid the capital cost of emissions controls needed
to bring the facility into compliance with CAAA requirements.
Under any public-private partnership arrangement, it is important to recognize that
the ultimate responsibility for the provision of public services remains with state and local
government officials. As such, there are a number of considerations that should be
examined before undertaking any form of public-private partnership. Two of the more
Financing the Clean Air Act of 1990 Page 14
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important issues to explore are the cost-effectiveness of the arrangement and the potential
impacts on public employees.
Since cost savings is often one of the first reasons to consider a public-private
partnership, there must be a careful accounting of all costs associated with the proposed
operation. A full accounting of costs should include both short-term and long-term needs,
pricing factors, and the distribution of economic risks. The full cost of providing
comparable services under public or private arrangements can then be compared to
determine whether a public-private partnership is cost-effective.
Public officials must also consider the potential impact on public employees. There
are steps that can be taken to mitigate the potential impacts on public employees, including
agreements by the private sector to hire public employees and honor existing labor
agreements, early retirement options, and education and retraining programs.
Advantages. Private sector efficiency may lead to cost savings in both construction
and operation of facilities. State officials surveyed in 1991 cited higher quality services, the
provision of services that would otherwise be unavailable, and shorter implementation time
as primary advantages of public-private partnerships. The shorter implementation time
might be a significant advantage for states required to meet the deadlines set out in the Act
for state program implementation. Private investment in needed capital facilities will also
reduce the amount of public capital investment needed and reduce the impact on public
budgets.
Disadvantages. Statutory or regulatory changes may be needed in order to arrange
public-private partnerships, which might delay implementation of the activity in question.
Cost savings and other benefits of private sector involvement may not always outweigh other
financial and administrative costs associated with a particular public-private arrangement
Governments may also be concerned about the potential loss of government control in a
partnership. Finally, some governments may face significant political opposition from
government workers who fear the transition to private sector employment, or from hostile
public opinion.
ADDITIONAL SOURCES OF INFORMATION
The information presented here provides a starting point for states and local
governments to explore possible financing mechanisms for implementing the requirements
of the CAAA. We welcome your comments and suggestions on how EPA can provide
additional assistance. Please contact
The Environmental Financial Advisory Board
c/o U.S. EPA, Office of Administration and Resources Management
H3304, 401 M Street, S.W.
Washington, B.C. 20460
Phone: (202) 260-1020 Fax: (202) 260-0710
Financing the Clean Air Act of 1990 Page 15
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For questions concerning implementation of the CAAA and other guidance, contact:
The Clean Air Act Advisory Committee
c/o U.S. EPA, Office of Air and Radiation
ANR-442, 401 M Street, S.W.
Washington, D.C 20460
Phone: (202) 260-7400 Fax: (202) 260-5155
For additional information see Appendix B for a listing of federal, state, and local
air program organizations and Appendix C for a bibliography of relevant sources on
financing air programs.
Financing the Clean Air Act of 1990 Page 16
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APPENDIX A
Key Provisions of the Clean Air Act of 1990
Title I (Nonattainment Areas)
Ozone (1993-2010)
Carbon Monoxide (1995 & 2000)
Paniculate Matter (1995 & 2002)
Technological control requirements for major and
minor sources;
Emission offset requirements at new/modified
sources;
Enhanced motor vehicle inspection and
maintenance;
Stage n controls (systems to capture evaporative
emissions at service stations);
Automatic contingency measures;
Transportation control programs;
Clean fuels/advanced controls; and
Mandatory sanctions.
Title n (Mobile Sources)
Reformulated Gasoline (beg. in 1995)
Oxygenated Fuels (beg. Nov. 1992)
Fleet Program (1998-2001)
CA Pilot Program
(Model Yrs. 1996 & 1999)
Tier I Tailpipe Std. (1994-1998)
Tier II determination (2003-2006)
Reformulated gasoline in 9 ozone nonattainment
areas;
Oxygenated fuels in 41 carbon monoxide
nonattainment areas;
Clean fuel fleet programs in 25 ozone or carbon
monoxide nonattainment areas;
Tailpipe emission standards;
Clean fueled vehicle programs and standards; and
Fuel requirements and standards.
Title m (Air Toxics)
Major Sources (1992-2000)
Area Sources (1999)
Great Lakes and Coastal Waters
(1995)
Industry Provisions (Nov. 1993-2003)
Accidental Releases (1993)
Incinerators (1991-1994)
Technological requirements and health based
standards (if necessary) for major sources;
Reduction requirements at area sources;
Great Lakes and coastal waters monitoring;
Industry specific provisions and standards;
Development of plans to prevent, detect, and
respond to accidental releases of toxic air pollutants;
and
New source performance standards for solid waste
incinerators.
Title IV (Acid Rain)
Sulfur Dioxide (1995 & 2000)
New Utility Units (by 2000)
Nitrogen Oxide (1995 & 2000)
Emissions Monitoring (1995 & 2000)
SO2 reductions required at affected sources in two
phases, with trading and banking allowed;
New utility units must obtain allowance for emissions;
Required NOZ controls at sources affected under SO2
control program; and
Continuous emissions monitoring required at sources
affected under the SO2 and NOr programs.
Financing the Clean Air Act of 1990
PageA-1
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Key Provisions of the Clean Air Act of 1990
Title V (Permits)
Permits are required for sources subject to acid rain
control requirements, major sources, other sources
subject to new source performance standards or
hazardous air pollutant standards, other sources
required to have a permit by Title I, and any other
stationary source in a category designated by EPA;
and
Collection of an annual or equivalent fee sufficient to
cover all reasonable (direct and indirect) costs
required to develop and administer the permit
program. The amount collected shall not be less
than $25 per ton of each regulated pollutant, or an
amount sufficient to recover full program costs.
Title VI (Stratospheric Ozone)
Production Phase-Outs (1991-2030)
Recovery and Recycling (1992 &
1994)
Motor Vehicle Air Conditioners
(1992)
Nonessential Product Ban
(1992 & 1994)
Warning Labels (mid 1993-2015)
Safe Alternatives (1992)
Production of CFCs, 3 halons, carbon tetrachloride,
methyl chloroform, and HCFCs to be phased out;
Trading of production and consumption allowances;
Standards regarding use and disposal of Class I
substances during service, repair, or disposal of
appliances and industrial process refrigeration;
Standards for safe disposal of class I and II
substances; and
Regulations for the servicing of motor vehicle air
conditioners.
Title VIE (Enforcement)
Assess administrative penalties up to $200,000;
Criminal violations upgraded to felonies; and
Citizen suits against polluters.
Title Vm (Miscellaneous)
Federal grant stipulations;
Regulate outer continental shelf emissions;
Visibility programs; and
International border area plans.
Title IX (Clean Air Research)
EPA research programs;
Environmental health research; and
Acid rain assessment program.
Titles X and XI
Disadvantaged business concerns; and
Clean air employment transition assistance.
Financing the Clean Air Act of 1990
PageA-2
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APPENDIX B: STATE AIR QUALITY AGENCIES
Department of Environmental
DtoT Health
s Division
Air Division
1751 Cong. W. L. Dickenon Dr.
Montgomery, AL 36130
(202) 271-7861
Department of Environmental
Con«ervatioa
Air Quality
Management Section
P.O. Box O
Juneau. AK 99811-1800
(907) 465-5100
Department of Environmental
Quality
Office of Air Quality
P.O. Box 600
Phoenix, AZ 85001-0600
(602) 257-2308
Department ofPoilatioa Control
and Ecology
Air Division
8001 National Dr.
PJO. Box 9583
Littk Rock, AR 72209
(501) 562-7444
Air Resources Board
P.O. Box 2815
Sacramento, CA 95812
(916)445-4383
Department of Health
Air Pollution Control Division
4210 East llth Avenue
Denver, CO 80220
(303)331-8500
Department of Environmental
Protection
Bureau of Air Management
165 Capitol Avenue
Hartford, CT 06106
(203)566-2506
Department of Natural Resources
and Environmental Control
Division of Ah- and Waste
Ma yia gf mf nT
Air Resources Scitiuu
89 Kings Hwy. PX>. Box 1401
Dover. DE 19903
(302) 739-4791
Department of Consumer and
Regulatory Attain
Environmental Control Dhiara
Air Quality Control and
Monitoring Branch
2100 M. Luther King Ave, SE
Washington. DC 20020
(202)404-1120
Department of Environmental
Regulation
Air Resources Management
2600 Bbir Stone Road
Twin Towers Office Building
Tallahassee. FL 32399-2400
(904)488-1344
Air Surrefllsiice and Analysis
Banco
1270 Queen Emma St, Ste 900
HonobhLHI 96813
(808)586-4019
Drriaioa of Environmental Quality
Air Quality Bureau
1410 N. Hilton. 3rd Fir.
Bone. ID 83706
(208)334-5898
Air Qnafity Division
P.O. Box 30028
Lansing. MI 48909
(517) 373-7023
FoUutiani
Btral Agency
Air Quifity Division
520 Lafayette Road North
StPanlMN 55155
(612) 296-7331
Division of Air Pollution Control
2200 amrchul Road
P.O. Box 19276
Sptmgfield.IL 62794-9276
(217)782-7326
Quality
Office of PoOntion Control
Air Division
P.O. Box 10385
Jackson, MS 39289
(601) 961-5171
Office of Air Management
P.O. Box 6015
105 South Meridian Street
Indi.innnlB.IN 46206-6015
(317)232-8384
Department of Natural Resource.
Air Quality Section
Henry Wallace Building
900 East Gaud
De* Momes. IA 50319
(515)281-8852
Department of Natural
Division rf Environmental Quality
Air Poftirion Contzol Program
P.O. Box 176
JefiersonCity. MO 65102
(314) 751-4817
£•
Air Quality Bureau
Cogswell Building. Rm AIM
Helena, MT 59620
(406)444-3454
Bureau of Air and Waste
Forbei Held. Building 740
Topeka, KS 66620
(913)296-1593
Protection
Division for Air Quality
316 SL Chir Man
Frankfort. KY 40601
(502)564-3382
Quality
Office of Air Qnaaty and
Radiation Protection
Air Quality Division
FJO. Box 82135
Baton Rouge, LA 70884-2135
(504) 7654110
Department ofl
Control
Air Quality Control
301 CenteanxU MaD South
Box 98922
Lincoln. ME 68509-8922
(402)471-2189
Division of Environmental
Protection
Bureau of Air Quahry
123 West Nye Lane
Canon City, NV 89710
(702)687-5065
Air Rtsowni Division
64 N. Main St, CaDerBx. 2033
Concord. NH 03301
(603) 271-1370
DVBIOD of EnvnonDCBtsU QQabQr
Department of Natural Resources
Environmental Protection Division
Air Protection Branch
205 Butler SL.SE.Rm 1162
Atlanta. CA 30334
(404)656-6900
Protection
Bureau of Air Quahty Control
State House. Station 17
Augusta. ME 04333
(207)289-2437
Department of the Eanronment
AirMaoagementAdmmi5tratio&
2500 Broenmg Highway
Baltimore, MD 21224
(301)631-3255
Deyni Inn nt of Earirntimfntal
Protection
Division of Ah-Qnanty Control
One Winter Street. 8th Floor
Baton, MA 02108
(617)292-5630
401 East State St, 2nd Floor
Trenton. NJ 08625
(609) 292-6710
New Mexico Eorironment
Division of Air Resource*
SOWotfRoad
Abany. NY 12233-3250
(518)457-7230
Department of Eanronment,
Health, and Natural Raoorca
Air Quality Section
fJO. Box 27687
Raleigh. NC 27611
(919) 733-3340
North Dakota State Department of
Health
1200 Missouri Avenue,
Rm 340, P.O. 5520
Bimarck. ND 58502-5520
(701) 221-5188
Ohio Environmental Protection
Divicion of Air Pollution Control
1800 Watermark Drive
Cotambui. OH 43266-0149
(614) 644-2270
Air Quality Service
1000 NE 10th Street
fJO. Box 53551
Oklahoma City, OK 73152
(405)271-5220
ntof
IQnaliqr
Air Quality Control Division
$11 SW 6th Avenue
Portland. OR 97204
(503)229-5287
EmronmeBtalRooaree.
Bureau of Air Qnanty Control
101 South 2nd Street,
Executive House, Room 116
Hamburg, PA 17105
(717)787-9702
Department of Environmental
Division of Air and Hanrdom
Materials
291 Promenade Street
Providence, RI02908-5767
(401) 277-2808
Health and Environmental Coatn
Bureau of Air Quality Control
2600 BuD Street
Columbia, SC 29201
(803)7344750
Department of Environment and
Natural Resource*
Pom
Ettv*t**nnr nl jl Protection Division
Air Quahty Division
HaroU Rnnaeb Buflding. RBL
S2100
PJQ. Box 26110
Santa Ft, NM 87502
(505)827-0070
New York Stale Department of
: Control Program
523 East Capitol Avenue
Joe FOB Building
Pierre. SD 57501
(605) 773-3351
T«na*B»nr Department of
Environment and CooMrvation
Division of Air PoDntion Control
Customs House, 4th Floor
701 Broadway
Nashville, TN 37243-1531
(615) 741-3931
Tcau Air Control Board
12124 Park 35 Circle
Austin. TX 78753
(512) 908-1000
Department of Environmental
Quality
Division of Air Quality
1950 West North Temple
Salt Lake City, UT 84114-4820
(801)536-4000
Agency of Natural Resources
Air Pollution Control Division
103 S Main SL, BIdg. 3 South
Waterbmy,VT 05676
(802)244-8731
Department of Air Pollution
Control
FJO. Box 10089
Richmond. VA 23240
(804)786-2378
Department of
Ecolosr
Air Prognn
P.O. Box 47600
Or/mpia,WA 98504-7600
(206)4594632
Air PoDntion Control Commission
1558 Washington St, East
Charleston. WV 25311
(304)348-2275
Wiaeonaia Department of Natural
Bureau of Air Management
(AM/10)
P.O. Box 7921
Madison, WI53707
(608)266-7718
Wyoming Air Qnality Drrision
122 West 25th Street
Cheyenne, WY 82002
(307)777-7391
Department of Planning and
Natural Resources
Division of Environmental
Protection
Watergnt Homes 1118
US VI 00820-5065
(809)7734)565
Puerto Rico Environmental
Quality Board
.Ah- and Water Division
DelFarqneSt,*204
Comer Pumarada SL
SantOTce, Puerto Rico 00910
(809)767-8071
Environmental Qnality
Governor's Office
Pago Pago, American Samoa
96799
011(684)633-4116
Guam Environmental Protection
Agency
Complex Unit D-107
130 Rops Street
Harmon Guam 96911
011(671)646-8863
Page B-l
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APPENDIX C: BIBLIOGRAPHY
ABB Environmental, Inc. for U.S. Environmental Protection Agency. Summary of State
and Local Operating Permit Programs. Chapel Hffl, North Carolina: September, 1990.
Cordes, Joseph. State Environmental Taxes and Fees: An Overview. Washington, D.C.:
Department of Economics, George Washington University, 1991 (presented at National
Tax Association Conference on State Taxation of Business).
Porter, Douglas R., et al. Special Districts: A Useful Technique for Financing
Infrastructure. Washington, D.C.: Urban Land Institute, 1987.
Eisenlohr, Gain or. Overview of Current Work on Alternative Sources of Funding for
Environmental Programs. Washington, D.C.: U.S. Environmental Protection Agency,
Office of Policy, Planning and Evaluation, Office of Management Systems and
Evaluation, Program Evaluation Division, July 20, 1984.
Shields, Evelyn. Funding Environmental Programs: An Examination of Alternatives.
Washington, D.C.: National Governors' Association, 1989.
U.S. Environmental Protection Agency, Office of Air and Radiation, Office of Program
Management Operations. Air Resources Study. Washington, D.C., September 1988.
U.S. Environmental Protection Agency, Office of Administration and Resources
Management Agency Task Force on Fees: Interim Report. Washington, D.C., 1986.
U.S. Environmental Protection Agency, Office of Administration and Resources
Management Paying for Progress: Perspectives on Financing Environmental Protection.
Washington, D.C., Fall 1990.
U.S. Environmental Protection Agency, Office of Administration and Resources
Management Public Private Partnerships for Environmental Facilities: A Self-Help Guide
for Local Governments. Washington, D.C., May 1990.
U.S. Environmental Protection Agency, Program Evaluation Division, Office of
Management Systems and Evaluation, Office of Policy, Planning and Evaluation. State
Use of Alternative Financing Mechanisms in Environmental Programs. Washington, D.C.,
1988.
U.S. Environmental Protection Agency, Task Force on Permit and Emission Fees. State
and Local Air Pollution Permit Fees - Briefing. Washington, D.C., November 23, 1987.
U.S. Environmental Protection Agency, Office of Air and Radiation, Outreach and
Economic Incentives Staff. Task Force Report on State and Local Permit Fees.
Washington, D.C., November 5, 1987.
Financing the Clean Air Act of 1990 Page C-l
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ATTACHMENT D:
FUNDING STATE ENVIRONMENTAL PROGRAM ADMINISTRATION:
THE USE OF FEE-BASED PROGRAMS
-------
FUNDING STATE ENVIRONMENTAL PROGRAM ADMINISTRATION:
THE USE OF FEE-BASED PROGRAMS
Draft Report
Prepared for:
State Capacity Task Force
Prepared by:
Office of Administration and Resources Management
Resource Management Division
August 7, 1992
-------
TABLE OF CONTENTS
I. INTRODUCTION 1
The Funding Picture 1
Defining Fees 2
II. OVERVIEW OF STATES' USE OF FEES FOR ENVIRONMENTAL
ADMINISTRATION 6
Review of Source Materials 6
Establishing a Baseline 7
III. INNOVATIVE PROGRAMS 10
Wisconsin (Water) 10
New York (Hazardous Waste) 11
Massachusetts (Hazardous Waste) 11
IV. CHARACTERISTICS OF SUCCESSFUL PROGRAMS 12
Basic Conditions 12
Importance of Program Goals 12
V. TRENDS AND OPPORTUNITIES 14
APPENDIX: ANNOTATED BIBLIOGRAPHY 20
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FUNDING STATE ENVIRONMENTAL PROGRAM ADMINISTRATION:
THE USE OF FEE-BASED PROGRAMS
I. INTRODUCTION
The mission of the State Capacity Task Force is to examine the capacity of states to
finance their environmental programs and to identify ways in which states can augment their
administrative capabilities. This interim report on fees is intended to provide the Task
Force with an overview of the status of states' use of fee-based programs and to offer a
baseline from which the Task Force can assess the future capacity of states to use fees to
maintain and possibly expand their financing activities. The focus of this report, therefore,
is on state administrative programs and not on the use of fees in financing public capital
investments, which occurs largely at the local rather than the state level.
This section outlines the funding challenge facing states and defines fees and fee-
based programs. The second section offers an overview of the information readily available
on states' use of fees for environmental programs. The third section describes several
"innovative" programs that various states have implemented, noting what makes them
innovative. The fourth section introduces a discussion of characteristics that may lead to
successful programs. The fifth section provides some insight into trends in the use of fees.
This final section may help the State Capacity Task Force in defining their future work as
it relates to fees and fee-based programs.
The Funding Picture
Historically, the financial responsibility for environmental programs has been shared
by the various parties involved, including federal, state, and local governments, as well as
private parties. Increasingly, however, the responsibility of implementing, administering and
enforcing federally mandated environmental programs has shifted to the states. This trend
places a growing financial burden on state and local governments at a time when the gap
is widening between the cost of environmental protection and available resources. To meet
this financial challenge, new alternative sources of revenue and capital must be found to
finance environmental programs.
Compared with the U.S. economy as a whole, total public and private environmental
expenditures, as a percentage of gross national product (GNP), grew from 0.9 percent in
1972 to 2.1 percent in 1990. By the year 2000, environmental expenditures are projected
to rise to 2.8 percent of GNP.1 (In 1986 dollars, the GNP for 1990 was $4.7 trillion, and
for the year 2000, is projected to rise to $7.1 trillion.)
1 U.S. Environmental Protection Agency, Office of Policy, Planning and Evaluation,
Environmental Investments: The Cost of A Clean Environment, December 1990.
D-l
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The gap between current resources and the investments needed to maintain existing
standards and meet new requirements is increasing. By the year 2000, total annual
environmental spending requirements (public and private) will be about $200 billion,
compared to a 1988 level of $115 billion.2 This huge difference can be met only through
greater efficiency, expanded public and private investment, and increased state and local
capacity to implement programs.
At the local level, the funding gap is even more dramatic. In the year 2000, local
governments will have to spend an extra $12.8 billion per year, or 65 percent more than they
did in 1988 just to maintain current levels of environmental quality. They will need to
spend at least another $3.6 billion per year to comply with new regulations. In all,
communities may need to spend 83 percent more per year by the year 2000.
Even if state and local governments could borrow enough to pay for capital
investments, annual cash flow requirements to repay their debts will outstrip their financial
capacity. Between now and the end of the century, local governments will need to raise 32
percent more money to cover operating and debt service costs. This amounts to an increase
in cash requirements of over 3.5 percent per year. Yet over the same period, U.S. GNP is
estimated to grow by only 237 percent per year and population to grow by only 0.66 percent
per year.3
The increase in anticipated expenditures coincides with a fiscal crisis in the states.
The growing competition among programs for funding from general revenues and the fact
that the economic downturn threatens even general revenue levels means that state and
local governments are forced to develop additional sources of funding to pay for their share
of environmental costs. Uncertain state economies and increasing budget deficits threaten
existing environmental programs as newly promulgated federal requirements compete for
limited funds and reduced staffing resources.
Increasingly, states are turning to fees to help fund their environmental programs.
Fees are only one source of state funding, but one that states are depending on more.
Defining Fees
A fee is generally defined as a charge for a particular activity or service. Fees for
public services are intended to establish a direct link between the service provided and the
cost of providing that service. Alternatively, a tax is generally charged against sales, income,
or property, where there may be a less direct relationship between the tax and the use of
2 The Environmental Financial Advisory Board, Narrowing the Gap: Environmental
Finance in the 1990s, Progress Report (revised), May 1992.
3 The Environmental Financial Advisory Board, Narrowing the Gap: Environmental
Finance in the 1990s, Progress Report (revised), May 1992.
D-2
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funds. In practice, however, the distinction between fees and taxes is less clear. For
example, one state may charge what they call a hazardous waste tax which is identical in
form to another state's hazardous waste fee. The distinction made between fees and taxes
varies across states, and depends on the states' constitutions, legal codes, and general
practices.
The fees charged by state agencies are made part of a state administrative program.
The following components help to define such a program:
• Specified source(s) of funds - i.e., which parties are charged for what actions;
• A collection mechanism ~ whether through the state department of
environmental protection or the state department of revenues, for example;
• Financial management mechanisms — the state's general fund, a special trust
fund, or some other form of directing revenues to intended purposes;
• Uses of funds - whether specified to fund the administration of the fee
program itself or other state activities, or not specified at all.
These components and many other elements of fee systems must be defined by state
program officials. For example, fees can be set as either fixed or variable charges, as one-
time assessments or charged periodically. The determination of each element shapes the
revenue-generating potential and the ultimate effectiveness of a given fee program. Each
element is shaped by the legal and political environment in a given state. For instance, in
some states, it is difficult to dedicate or earmark revenues, while in others new revenue
programs are most likely to be accepted if revenues are dedicated to a particular purpose.
Fees are charged for a wide range of state services from permitting industrial
activities to licensing recreational hunters and fishermen. Following is a list of commonly
applied fees:
•. Permit fees — charge for permits issued by state;
• Application fees — charge for processing an application for a permit or
variance;
• Installation fees — charge for the installation of equipment;
• Certification and inspection fees — charge for inspecting and/or certifying a
facility or activity;
• Construction and review fees — charge for the review of construction plans;
D-3
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• Discharge and disposal fees — charge for the discharge or disposal of materials
(e.g., wastewater, industrial wastes);
Monitoring, sampling and laboratory fees — charge for monitoring operation,
sampling water supplies, and laboratory analysis of samples; and
• Impact fees - charge for the incremental burden, or impact, placed on public
services by new development4
Figure 1 on the next page illustrates the relationship of the financing elements of a state
administrative program. Below each box are examples of the elements that must be
defined in establishing state revenue programs.
4 U.S. Environmental Protection Agency, Office of Water, Discussion Paper on
Alternative Financing Mechanisms for State Water Programs, November 1989, p. 15.
D-4
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II. OVERVIEW OF STATES' USE OF FEES FOR ENVIRONMENTAL
ADMINISTRATION
This section has two purposes: to review the information available on state fee
programs and to draw inferences from these materials as to the current use of fees to
finance state administrative programs.
Review of Source Materials
In the course of preparing this draft report, relevant published and unpublished
academic and trade association books and reports, federal and state government documents,
and materials from various conference proceedings were reviewed. Source materials were
found for general, air, hazardous waste, solid waste, water, and single state information.
The general materials included non-program specific materials or materials that covered
more than one program area. The state-specific materials included documents discussing
a particular state's fee system in some detail.
While the volume of these materials reviewed would suggest a wealth of information,
which there is, the source materials do not appear to be as comprehensive as might be
desired. Although there are individual studies for particular media (air, water, solid and
hazardous waste) or for particular states, there are few studies that attempt to be
comprehensive — that is, to cover all media across all states. One study that attempts to do
this is a survey completed by the National Governors' Association in 1989 of states' use of
alternative financing mechanisms across all media.5 This study is somewhat dated and also
suffers from the fact that the manner by which states characterize their programs in survey
responses is somewhat inconsistent and thus difficult to summarize.
Unfortunately, the information provided in the various studies does not lend itself
to being combined. Studies that cover particular media, for example, cannot easily be
combined to get a picture across media because most only include information on a subset
of states. For example, the Congressional Research Service completed a study on financing
solid waste programs from a survey of all 50 states, which describes the sources of funds,
including fees. Meanwhile, there is an EPA study of state drinking programs which surveys
only 11 states. It is thus difficult to combine studies like these to get a full picture.
Another difficulty is that some studies give information on what kinds of fees are
charged, but do not give revenue information. For example, a survey completed of state air
program officials for EPA provides information on states' permitting programs and includes
information on what fees are charged, but includes no information on either the revenues
generated or the uses of these revenues. Other studies give revenue information, but no
breakdown of individual fees. Very few, if any, address the uses of fee-generated funds.
Attempting to use these materials together to compile comprehensive results poses problems
5 Evelyn Shields, Funding Environmental Programs: An Examination of Alternatives,
National Governors' Association, 1989.
D-6
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because of the differences in the type of information included, the method of collection, and
the timing of collection. A final difficulty is that the information becomes outdated very
quickly. These materials, therefore, can be used to capture a sense of how states are using
fee programs, but not to build a comprehensive or systematic database of such programs.
Establishing a Baseline
Given the limitations of the source material, only a general picture of states' use of
fee programs can be drawn. Nevertheless, it is apparent that states use a myriad of fee
systems to support their environmental programs. As noted above, the most comprehensive
census-like data available on states' use of fees to finance their environmental programs is
a survey conducted by the National Governors' Association (NGA) in 1988-1989.6 This
report was used to establish an aggregate assessment of the use of fees across states. Other
materials will be used to supplement the information in this report and to provide state-
specific information. According to the NGA survey:
• Forty-three states reported the use of 272 different fees;
• These states raised an annual $240 million from fees, as of 1988;
• Almost 75 percent of reported fee revenue is dedicated; 25 percent goes to
general funds; and
• Hazardous and solid waste fees account for 40 percent of state fee revenue,
air 23 percent, water 19 percent, with 18 percent unclassified.
Table I presents the number of states reporting fee programs in each of the four
media groups (air, water, hazardous waste, and solid waste) and the total revenues
generated by these fees.7
6 Evelyn Shields, Funding Environmental Programs: An Examination of Alternatives,
National Governors' Association, 1989.
7 The NGA report did not distinguish between solid waste and hazardous waste fees.
Based on the descriptions of each fee, we have assigned waste fees to either category.
D-7
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TABLE I
The Use of Fees, by Media (1988-89)
# States with Fees Total Revenues
Air 23 $ 55,914,248
Water 30 $ 44,632,827
Hazardous Waste 29 $ 81,598,882
Solid Waste 16 $ 14,673,600
Unclassified 21 $ 41,886,004
Some states have only one or two fees in a program area, while others rely on as
many as a dozen or more. Table II shows the distribution of the number of fees charged
by individual states, as reported in the NGA survey.
Number of
States
TABLE II
Charging X Number
IFee 2-4 Fees
Air
Water
Hazardous Waste
Solid Waste
Unclassified
13
16
12
11
11
7
10
16
4
7
of Fees
5 or More Fees
3
4
1
1
3
D-8
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Not only does the number of fees that individual states charge vary, but the revenues
these fees generate also vary tremendously. This is, in part, a function of the base covered
by the fee (e.g., the size of the state or the size of industry), but also suggests that some
states are charging far less or far more than others. Table in gives a sense of the range of
revenues from low to high that various states reported raising through fee programs. The
arithmetic mean and median are also listed to provide an indication of central tendency, or
the distribution of states between the low and high.8 In this case, the median suggests that
the majority of states are closer to the low than the high, meaning that a few states with
substantial revenues are skewing the average upward.
TABLE III
Annual Revenue Raised by State Fee Programs
Low High
Air $24,500 $10,000,000
Water $20,000 $18,499,000
Hazardous Waste $10,500 $33,179,000
Solid Waste $ 8,200 $ 5,128,836
Mean8 Median
$2,431,000 $450,000
$1,539,063 $513,100
$2,914,000 $909,032
$ 917,100 $304,346
This information provides a snapshot, although a somewhat dated one, of how states
have used fees to fund their environmental programs. The same NGA survey cited above
reported 16 states with tax programs generating nearly $500 million, which is more than
double the total revenues generated by all reporting states from fees. The majority of these
tax revenues are dedicated to specific environmental programs.
8 The arithmetic mean is the total amount of fees charged divided by the total number
of states. The median is the value for which one half the states will have greater amounts
and one half the states will have lesser amounts.
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III. INNOVATIVE PROGRAMS
Given this aggregate baseline, examining individual state fees offers further insights
into the basis for differences among state programs and may begin to suggest the direction
states are heading in developing fee programs. This section presents several examples of
"innovative" programs, giving a general description of the overall program, but focussing on
the particular element that makes the program innovative.
Wisconsin (Water)
Wisconsin has an innovative program in at least two respects: (1) it has established
an unusually comprehensive fee system for its water program and (2) it recovers the total
direct and indirect program costs. The state's water pollution control programs are
administered through the Bureau of Wastewater Management In addition to having
authority to run the federal National Pollutant Discharge Elimination System (NFDES)
permit program, the state is one of few states to have an additional program for issuing
general permits to various industrial sources. The categories covered by this secondary
program include non-contact cooling water, concrete products operations; sand, gravel, or
crushed stone operations; swimming pools; petroleum storage terminals; water treatment
plants; dredging project involving uncontaminated sediments; and other similar facilities.9
This program generates an estimated $4 million annually.10 In addition to the discharge
permit program (NR101 program), Wisconsin charges at least 15 other water-related fees
that generate close to $3 million more in revenues.11
The NR101 program is set up to recover the full cost of the regulatory program. The
state provides up-front funding with general purpose revenues and then the Bureau collects
fees equivalent to expenditures and the fee revenue is then paid into the general fund to
repay the state. Revenues from the other fee programs (non-NRlOl) are deposited into an
environmental fund which finances a variety of activities. The Wisconsin water program is
said to be more than 75 percent funded with fees and this level is said to be increasing.12
9 Deborah Hitchcock Jessup, Guide to State Environmental Programs, Bureau of
National Affairs, 1990.
10 Personal communication, Joe Polasek, Director, Wisconsin Bureau of Wastewater
Management
11 NGA Survey, 1988 and personal communication, Joe Polasek, Director, Wisconsin
Bureau of Wastewater Management
12 Personal communication, Joe Polasek, Director, Wisconsin Bureau of Wastewater
Management
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New York (Hazardous Waste)
New York's hazardous waste program is administered by the state Division of
Hazardous Substances Regulation. The primary fee charged is the state's hazardous waste
permitting fee, which raises nearly $33 million annually for the state.13 The state also runs
a pesticide permitting program. Revenues from the hazardous waste permitting fees are
used for environmental enforcement and the state superfund account The pesticide fee
revenue is used solely to run the pesticide program. New York's program is also said to be
more than 75 percent fee-supported. New York is now exploring the possibility of
instituting a new fee for interstate shipments of hazardous waste.
Massachusetts (Hazardous Waste)
Massachusetts' hazardous waste program is administered by the Hazardous Waste
Division of the Waste Prevention Bureau. The program has several components. First,
Massachusetts imposes a hazardous waste transportation fee, revenues from which are used
to pay debt service on a bond issued for waste site clean-up. Second, Massachusetts has a
hazardous waste application fee. These revenues are placed into an Environmental Trust
Fund, which funds salaries, programs, and permitting activities. Massachusetts also imposes
a transporter compliance fee which is used to cover the cost of the state's compliance
program.14
These programs are carefully set to recover only partial program costs. To set rates,
the department assessed the direct and indirect costs of running the programs and then
adjusted that cost by the amount subsidized by state and federal funds; the difference is
then covered by the fee revenue. The implementing legislation states that the fees will only
be collected if the other sources of funds remain at their initial level.
Massachusetts has also initiated an all new electronic system to run the permitting
program. Information is fed from the facility master file, already maintained, and the same
information is now used for billing purposes. The start-up costs are high, but over the
longer term, it is expected that this new system wfll reduce the administrative costs of the
program substantially.
13 NGA Survey and personal communication, David Mafric, Associate Director, New
York Division of Hazardous Waste Substance Regulation.
14 Personal communication, Al Nardone, Environmental Engineer, Heidi O'Brien, Fee
Program Manager, Hazardous Waste Division of the Massachusetts Waste Prevention
Bureau, 1992.
D-ll
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IV. CHARACTERISTICS OF SUCCESSFUL PROGRAMS
Innovation in and of itself does not assure that a fee program will be successful.
Instead, there are a wide range of characteristics that lead to, or that are generally
associated with, successful programs. This section identifies some of the most common or
important among them.
Basic Conditions
There are a number of basic conditions for establishing a successful fee-based
environmental program. First and foremost is the existence of an identifiable target, or
potential fee payer, that can be reached easily. This may be a group of beneficiaries of a
service, such as fishermen seeking fishing licenses or builders needing permits to construct
facilities. Alternatively, it may be a group of polluters that can be easily distinguished as
causing a particular harm to the environment In this case, the ability to measure harm
inflicted either directly or through proxies is important
Once the payer group is identified, public support for the program and for the
charging of fees to particular parties is an essential ingredient to establishing a successful
program. Successful programs are thus those that can build support, through coalition
building efforts if necessary, and that can create a program that is legislatively passable,
which may mean compromising on particular components of the program. For example,
many successful programs have yielded to the regulated community on such issues as caps
on the fees assessed or other fee structure elements to generate support for the overall
program.
A key element to obtaining the necessary public support is the sense of fairness that
a fee program incorporates. Successful programs are those that establish a link between the
payers and the activity to be financed that is based on a principle of fairness. For instance,
permitting programs that are paid for through fees on permittees demonstrate a link
between the cost of the service and the fee paid. Similarly, programs that impose fees on
polluters establish a link between the source of pollution and the potential harm or cleanup
cost and thus appear to be fair as well.
Importance of Program Goals
Beyond the basic conditions for establishing a fee program, whether and to what
extent a fee program can be deemed to be successful depends on how the primary goals of
the program are defined. There are at least two potential goals of any fee program: to
generate revenue or to change behavior. These can be complementary goals, but in some
respects do lead to differences in fee structures. For instance, if the primary goal of a
program is to raise revenue, the fee structure will be as broad based as possible, with the
highest possible level of fees on all payers. Alternatively, if the primary goal of a fee
program is to change behavior, such as encouraging pollution reduction, the fee structure
will be based on pollution volume and should reward pollution reduction. If a fee program
D-12
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with the primary goal of changing behavior is "successful," revenue will automatically decline
because the fee causing activity will be reduced. Whereas, if a fee program has revenue
generation as its primary goal, pollution reduction may hurt the "success" of the program.
Therefore, it is important to recognize the primary goal of a program prior to any
assessment of its relative success.
For those programs that have revenue generation as their primary goal, the following
are characteristics that generally allow for successful implementation.
Political Acceptability. In order to be established, a fee program must be politically
acceptable. This will occur when the fee structure incorporates equity concerns by matching
program costs to program beneficiaries ("beneficiary pays") or assesses costs on the sources
of pollution ("polluter pays") or when a disenfranchised group is made to pay, such as "sin
taxes" imposed on items such as alcohol and cigarettes.
Ease of Administration. The ease with which a fee program is administered is an
important component to successful implementation of a fee program. One way to facilitate
the administration is to build on existing collection mechanisms. It is also important to have
in place systems to measure both the direct and indirect costs of the program so that the
program will be in a position to recover the full costs of providing the service, which
includes indirect costs such as administrative support functions as well as more direct
program costs.
Broad Revenue Base. The revenue base is the element on which fees are assessed
(e.g., emitters of particular pollutants, companies of a particular type). The broader that
base, the lower the individual fee burden. In addition, a broad revenue base helps to level
out revenue fluctuations due to changes in economic activity of payers.
Revenue Stability and Predictability. In order to maintain its self-sufficiency, an
environmental program that is funded through specific fee revenues must have a stable and
predictable revenue source. One compromising element is often found when a fee program
has behavior modification as a secondary goal. If it is successful at changing behavior, the
fee program also reduces the revenues to the program. However, it may also reduce the
revenue needs of the program by addressing the underlying problem being regulated, in
which case revenue reduction is not detrimental.
Cash Flow Matching. The matching of revenue flows with expenditure needs is a
consideration in implementing a fee program. Fees are most appropriate as revenue
sources when the timing of the uses of the funds more or less matches the collection of
funds. For government entities that can borrow funds short-term, the matching of revenue
flows and expenditures is less important, but for some it remains an important element of
fee program administration.
Ability to Earmark Revenues. While the generation of additional revenues, with or
without earmarking, helps the larger government entity by freeing general revenues for
D-13
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other purposes, the ability to earmark or dedicate revenues is important to the individual
department or agency to ensure that the new revenues are used for their intended purpose.
This also helps build support for the fee program by confirming the link between the cost
of the service or program and the fee being assessed and guarantees to the payer that the
revenue is being used for its intended purpose, thus building support for the program.
For those programs that have behavior modification, rather than revenue generation,
as their primary goal, a different set of characteristics can be associated with successful
implementation.
Incorporation of Equity Concerns. As noted above, the incorporation of equity
concerns is essential to the success of many fee programs, because it helps to build support
for the program both in the public arena and among the fee payers. The incorporation of
equity concerns is fundamental to fee programs that have as their primary goal behavior
modification.
Fees Set High Enough to Change Behavior. A common flaw in the establishment of
fee programs that are meant to modify behavior is that the fees are not actually set high
enough to encourage behavior to be modified. For instance, if new equipment is required
to reduce pollution and the cost of that equipment is greater than that of the fee itself, the
fee payer will choose to pay the fee rather than make the equipment change. Successful
programs thus make sure to set fees high enough to encourage the desired behavior
modification. However, there is often a political constraint imposed where the fee level that
would need to be set to encourage behavior modification is very high because such a high
rate is politically unacceptable. Therefore, a fee may be established at an acceptable lower
rate and fail to achieve any behavior modification.
Recovery of Administration Costs. Even if the primary goal of a program is the
changing of behavior of a particular group of individuals, it is important mat the fee
program at least cover the costs of administering the program. Otherwise, there is a
revenue loss associated with modifying the behavior and thus the change is not entirely
positive.
While the assessment of a fee program's relative success is inextricably linked to the
definition of program goals, the characteristics discussed here are components that are
commonly associated with, or provide the basis for, successful implementation of fee-based
programs. Any evaluation of fee programs should consider these elements in light of the
particular set of circumstances because each program and associated fee system is different
and there is thus a unique balance or relative importance among the program elements.
V. TRENDS AND OPPORTUNITIES
From a review of state programs, which included discussions with representatives
from state environmental agencies and regional offices, several trends have been identified.
This section introduces these trends and provides some supporting evidence. Below is a
short list of the identified trends, which is followed by evidence of these trends.
D-14
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• Fees are increasing in use and are being applied to a greater variety of
services.
• States are charging higher fees for services.
• Fee systems are becoming more complex.
• An increasing percentage of environmental budgets are being funded with
fees.
• But, when environmental programs enact new fee programs, they sometimes
get caught losing general fund support, resulting in a simple substitution of
fees for other state funds.
• States are moving towards dedicating fee revenues to environmental programs
more.
• States are initiating fee programs with the primary purpose of generating
revenue, and only a secondary aim of achieving particular environmental
goals.
• As a result of increasing program costs, states are also considering
terminating programs and returning primacy to EPA.
Fees are increasing in use and are being applied to a greater variety of services.
Evidence of this tendency can be found by looking at individual programs:
• For example, at least four coastal states have instituted recreational saltwater
fishing licenses since 1980 and use revenues to cover administrative costs.15
• Oklahoma funds its state water testing program through lab fees16; Rhode
Island recently passed legislation instituting laboratory fees to fund all state
15 John Maiolo, Lisa Tripp, The Feasibility of a Saltwater Sportfishing License in North
Carolina: Final Report, North Carolina Division of Marine Fisheries, September 1990, pp.
11-13.
16 Personal communication, Tern Klingman, Oklahoma State Pollution Control
Department
D-15
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labs;17 Wisconsin requires private labs that do environmental monitoring to
pay a state fee.18
• There was a proposal in Wisconsin for a "Safe Water Fund" which would
assess water users $0.10 for every 1,000 gallons of water consumed, with a
possibility of generating $20 million. The suggestion to the legislature was
that by establishing this program it would free up general funds which could
be used for special programs such as municipal water grants and Great Lakes
clean-up.19
States are charging higher fees for services.
• From discussions with state representatives throughout the media programs
and across states, this trend has been noted.
Fee systems are becoming more complex.
• New Jersey's NPDES program, for example, has a very complex methodology,
developed in the last 10 years.
• Wisconsin has developed a new fee structure for discharges based on volume
of pollutants separate from the NPDES program, which uses a similar
methodology to that of New Jersey.
• Both these programs, and others like them, have complicated procedures to
recover the full cost of their regulatory programs by setting rates retroactively.
An increasing percentage of environmental budgets are being funded with fees.
• From discussions with state environmental administration representatives, fees
fund anywhere from less than 10 percent to more than 75 percent of
administrative costs, but almost without exception, wherever the current level
is, it is described as increasing. In order to do so, an increasing number of
programs are moving toward full cost pricing strategies.
• A recent study in New York stated that "the $59 million that the [Department
of Environmental Conservation (DEC)] collected in business permit fees
alone last year is more than the entire budget of numerous other state
17 Personal communication, George Welly, Rhode Island Budget Office.
18 Personal Communication, Gail North, Wisconsin Department of Natural Resources.
19 Personal communication, Joe Polasek, Director, Wisconsin Bureau of Wastewater
Management
D-16
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agencies." The report also cited the fact that five years ago, in the 1985-86
fiscal year, general fund appropriations to DEC equalled $87 million, while
special revenue funds (fees, penalties, and other charges) accounted for $43
million. By 1989-90, these special revenues surpassed general fund
appropriations. Business permit fees charged by New York's DEC increased
by 2,161 percent, according to this study.20
New Jersey's funding breakdown for 1982 and 1989 shows a significant
increase in both the absolute contribution of fees and the contribution as a
percentage of overall expenditures (Fees go from 16 percent and $12.7 million
to 27 percent and $52.7 million, see following diagram).21
New Jersey Department of Environmental Protection:
Sources of Operating Funds
sax
47*
1S6
23X
1982
Total Operating Funds
$73,178
2756
1989
Total Operating Funds
$195,258
On thousands of do I lars}
Genera I State Fund
Taxes
Federa I Funds
Bond Funds
Fee Programs
But, when environmental programs enact new fee programs, they sometimes get caught
losing general fund support, resulting in a simple substitution of fees for other state funds.
• The budget crisis in Connecticut, for example, has threatened fee revenues
generated by the state's air permit program. Generally, half of the proceeds
20 Public Policy Institute of New York State, The Fees that Ate New York: How Hidden
Taxes are Hurting Our Economy, February 1992.
21 Ronald S. Tuminiski, Background Paper on New Jersey's Use of Alternative Funding
Mechanisms to Fund Environmental Programs, 1989.
D-17
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are to go to the general fund and half to an environmental quality fund.
Funds do not necessarily flow back to the air program and, in fact, the air
program does not know what its budget is for planning purposes.22
• When Nevada's solid waste program initiated a waste permit fee two years
ago, general fund support was eliminated. Funding now comes from a small
federal grant and programmatic fees.23
• A recent study stated that "though almost $420 million in revenue from
environmental taxes and fees are earmarked to support environmental
programs, total spending on these programs in the states that collected fees
or taxes was a little over $3 billion. Thus, earmarked sources defrayed about
ten cents of each dollar of spending for environmental programs."24
States are moving towards dedicating fee revenues to environmental programs more.
• As the earlier data showed, approximately three-quarters of fee revenue is
dedicated to environmental purposes. An estimated 90 percent of hazardous
and solid waste and water fee revenue is earmarked and 50 percent of air
program fee revenue.25
• State representatives explain that this is because it is often more politically
acceptable to enact dedicated revenue programs and because what was once
accomplished through "gentleman's agreements" now takes legislation to
ensure.
States are initiating fee programs with the primary purpose of generating revenue, and only
a secondary aim of achieving particular environmental goals.
• Discussions with state representatives suggests this is a growing tendency in
program design and administration across states and media program areas.
• A representative from Massachusetts' environmental program, for example,
explained that they have become a fee dependent agency, as he sees it, if they
22 Personal communication, Steve Peplau, Director of Engineering and Enforcement,
Connecticut Bureau of Air Management
23 Personal communication, Doug Martin, Supervisor, Compliance, Enforcement and
Planning for the Nevada Waste Management Bureau.
24 Joseph Cordes, State Environmental Taxes and Fees: An Overview, March 1991.
25 Joseph Cordes, on NGA study.
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do not run the program, they cannot collect the fees, and they would be
forced to eliminate the whole staff."26
• A representative from Minnesota explained that the primary purpose is to
generate revenue, with a small element of behavior modification. He said,
"the motivating force behind the fee is that the legislature wanted to collect
money from somewhere other than the general fund."27
As a result of increasing program costs, states are also considering terminating programs
and turning back federally mandated programs to EPA.
• For example, in South Dakota, according to a survey of EPA regional staff,
"the state is submitting before the state legislature, three packages for fee
programs to help fund environmental programs. If the legislature does not
support these fee-based programs, the state may not pursue primacy for
additional environmental programs such as NPDES."
• California has indicated that it may not be able to take on the lead and
copper rule of the Drinking Water Program.
• Similarly, Colorado considered giving back to EPA some environmental
programs for which it has primacy, the Drinking Water Program being the
most susceptible.
• New Jersey has refused state authorization for the Underground Injection
Control Program.28
As these trends and opportunities demonstrate, there is a growing reliance by states
on fees and fee-based programs. Fees have become the solution to a host of financing
problems and have served to replace general revenue funding in many instances. At issue,
however, is to what extent an increased reliance on fees can be expected to fill the current
and anticipated funding gaps facing state environmental programs.
26 Personal communication, Al Nardone, Environmental Engineer, Hazardous Waste
Division of the Massachusetts Waste Prevention Bureau.
27 Personal communication, Ed Meyer, Supervisor, Minnesota Hazardous Waste
program.
28 State Fiscal Impact of Delegated EPA Programs, Draft, collected from survey of EPA
regional administrators, 1991.
D-19
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APPENDIX
ANNOTATED BIBLIOGRAPHY
States' Use of Fee-Based Approaches
to Finance Environmental Programs
General
Cordes, Joseph. State Environmental Taxes and Fees: An Overview. Washington, D.C.: Department
of Economics, George Washington University, 1991 (presented at National Tax Association
Conference on State Taxation of Business).
This paper discusses the role currently played by environmental taxes and fees at the state
and local level. It also develops a framework for assessing the effectiveness of state and local
environmental taxes as sources of state and local revenue compared with other revenue
sources and as instruments of environmental regulation. It relies heavily on a National
Governors' Association report also cited in this bibliography. This report provides aggregate
information on states' use of taxes and fees as well as aggregate revenue data. It also
includes revenue information on individual states' assessment of fees and taxes for
environmental programs and the coverage of environmental costs such assessments entail.
While this paper provides aggregate data and analysis of states' tax and fee programs, it does
not provide breakdowns by program area. It does not provide any information on the
specific types of taxes or fees imposed by particular states nor on the individual rates
charged.
Eisenlohr, Gainor. Overview of Current Work on Alternative Sources of Funding for Environmental
Programs. Washington, D.C.: U.S. Environmental Protection Agency, Office of Policy, Planning and
Evaluation, Office of Management Systems and Evaluation, Program Evaluation Division, July 20,
1984.
This paper summarizes the findings of three major studies by the U.S. Environmental
Protection Agency and more than 20 program-specific analyses on the use of permit fees as
an alternative source of funding for environmental programs administered by EPA. The
paper, organized into three sections, presents a brief description of the studies performed
in 1974 and hi 1981-83, followed by a discussion of their major findings. The final section
looks at several questions that have been left unanswered by the analysis: the current status
of fee use, the rationale for fee collection, and the legal and statutory basis for fees.
This paper is obviously dated, as is the data it draws from. It does provide some information
on states' use of permit fees in the air, water, and hazardous waste program areas, but the
data is from a 1982 study. The report includes references for a number of studies on the use
of permit fees at the state and federal level. These reports, however, are also dated, mostly
published in 1982 and 1983.
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Jessup, Deborah. Guide to State Environmental Programs. Washington, D.C.: Bureau of National
Affairs, revised August 1990.
This reference book includes information on air, water, and solid and hazardous waste
programs. It includes information about state permit fees, state revolving loan funds (SRFs),
and other loan programs. The book is arranged by state and includes a brief description of
each state's environmental programs and a listing of the permit fees it uses to finance these
programs.
This book does not provide specific fee assessment information or revenue estimates, but
may provide a useful listing of the fee programs used across states.
National Academy of Public Administration. Financing Strong State Water Programs in New Ways -
- Proceedings of a National Workshop. Denver, March 1989.
The proceedings include printed materials from panel discussions on state needs, both
technical and financial, potential funding solutions, and management issues regarding state
financing strategies. Funding options covered include the design and implementation of fees,
special taxes, and dedicated fines and penalties.
National Conference of State Legislatures. State Budget and Tax Actions. Washington, D.C.
This publication includes an annual section on waste and environmental taxes and fees which
lists all states with new or changed environmental taxes or fee programs. This report format
is available for the years 1984 - present and may provide a starting point for compilation of
state tax and fee information.
The publication does not provide information on rates or revenues generated, only on
whether or not a state has a new program or has changed their existing program.
National Tax Association. How Should States Tax Business? - Proceedings from a Seminar Sponsored
by the National Tax Association. San Antonio, March 7-8,1991.
One session of this conference was devoted to Environmental Taxes and Fees on Business
Activities and included several presentations on state and local taxes and fees, with some
emphasis on the waste disposal and water quality program areas.
Public Policy Institute of New York State, The Fees that Ate New York: How Hidden Taxes are
Hurting Our Economy. Albany, New York, February 1992.
This short report addresses the growing use of fees in New York and the implications of this
for New York residents and industry. One chapter of the report focuses on environmental
fees and fines and presents this as the are hi which fees are growing the fastest. The report
also provides a list of recently changed fee programs in the state.
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Shields, Evelyn. Funding Environmental Programs: An Examination of Alternatives. Washington,
D.C.: National Governors' Association, 1989.
This report presents the results of a survey of states' use of alternative financing mechanisms
(AFMs) to fund environmental programs, conducted in 1988. The report provides an
overview of the following financing approaches: fee programs, tax programs, revolving loan
funds, general obligation and revenue bonds, public-private partnerships, and other revenue-
generating programs. The survey results are tabulated to illustrate current state experiences
in using alternative financing mechanisms. Programs covered include the use of hazardous
and solid waste fees, air program fees, water program fees, tax programs, revolving loan
funds, bond programs, and other unclassified programs.
The survey results presented in this report are comprehensive in that all states and territories
were surveyed and all environmental programs included However, four states did not
respond to the survey and in some areas, especially in regards to revolving loan funds, the
responses were inconsistent with actual practices or from state to state. Some states included
certain programs as being alternative financing mechanisms, while others did not. At this
point, the data from this survey is fairly dated and much may have changed since its
compilation.
U.S. Department of Commerce, Bureau of the Census. State Government Tax Collections in
Government Finances series. Washington, D.C,
This annual report and others in the Government Finances series provide information on
state taxes and fees. The data in the final reports is often aggregated, but the raw data may
be available to perform more detailed analysis.
U.S. Environmental Protection Agency, Office of Administration and Resources Management.
Agency Task Force on Fees: Interim Report. Washington, D.C., 1986.
This report examines the feasibility of developing fee systems for a wide range of
environmental programs. In addition, it discusses the major issues related to implementation
of fees for federal programs as well as issues of special concern to the states. The report
covers the following main areas: selection of candidate fees, treatment of programs affecting
states, the overall approach toward states, and legislative considerations and use of funds.
This report focuses on federally-imposed fees and not states' use of fees. The extent to
which it examines states' administration of fee programs is with respect to those fee programs
that are delegated or potentially delegated to the states, such as NPDES permits and permit
fees under the Clean Air Act The report does include a summary of state fee collections
for air quality, water quality, hazardous waste, and water supply programs. It is, however,
rather dated because it was developed from a 1982 National Governors Association "State
of the States" report. It does not include any rate information for these programs.
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U.S. Environmental Protection Agency, Program Evaluation Division, Office of Management
Systems and Evaluation, Office of Policy, Planning and Evaluation. State Use of Alternative Financing
Mechanisms in Environmental Programs. Washington, D.C., 1988.
This report presents the results of a study of states' current use of alternative financing
mechanisms (AFMs) to support environmental programs. The study focused on the use of
AFMs to fund the administrative and operating costs of regulatory programs, rather than
project or facility construction costs. The basics of alternative financing mechanisms are
presented, along with information about states' use of AFMs, including the state
characteristics that influence their use. Various approaches and potential barriers to
establishing or implementing AFMs are discussed. The report concludes with a discussion
of EPA's potential role in encouraging or supporting the use by states of AFMs.
States were grouped into three categories based on their use of AFMs. Eleven states were
then selected to provide a cross-section of high to low use of AFMs. Program managers in
the water quality, air, hazardous waste, underground storage tank, underground injection
control, drinking water, and solid waste program areas in these 11 states were interviewed.
For the eleven states included in the survey, there is complete information on fee structure
and administration and revenues generated.
Air
ABB Environmental, Inc. for U.S. Environmental Protection Agency. Summary of State and Local
Operating Permit Programs. Chapel Hill, North Carolina: September, 1990.
This report summarizes the status of existing state and local agency operating permit
programs in anticipation of the Clean Air Act amendments. A questionnaire on permit
programs was sent to all state and local agencies by STAPA/ALAPCO. Forty-three state and
62 local air pollution control agencies responded to the survey. The resulting report gives
an overview of the current status of state and local programs with regard to the Title V
requirements. It includes some information on fees, but is limited to whether or not states
have fee programs and on what sources, but does not provide revenue information.
U.S. Environmental Protection Agency, Office of Air and Radiation, Outreach and Economic
Incentives Staff. Task Force Report on State and Local Permit Fees. Washington, D.C., November
5,1987.
This report contains a discussion of issues considered by the Task Force and
recommendations for a stronger role for the U.S. Environmental Protection Agency in
developing and upgrading these permit fee systems. The report addresses deficiencies in the
states' use of permit fees, examines options to correct deficiencies and recommends solutions
targeted toward assisting the state and local agencies in increasing revenues.
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U.S. Environmental Protection Agency, Office of Air and Radiation, Office of Program Management
Operations. Air Resources Study. Washington, D.C., September 1988.
This report presents the conclusions of the Task Force on State and Local Permit and
Emission Fees regarding the use of air permit fees. It also provides some documentation of
current use, as of 1988, of fee programs by individual states.
U.S. Environmental Protection Agency, Task Force on Permit and Emission Fees. State and Local
Air Pollution Permit Fees - Briefing. Washington, D.C., November 23,1987.
This short briefing paper provides information on the findings of the Task Force on Permit
and Emission Fees and includes reference to minority opinions regarding the Task Force's
findings. This report also provides an outline of the Task Force's recommendations on this
issue.
Hazardous Waste
De Castro, Rey. Guide to State Taxes and Fees for Hazardous Waste Generation and Management.
Washington, D.C.: National Solid Wastes Management Association, December 1989.
This book reports the results of a survey of states' use of hazardous waste taxes and fees
conducted by the National Solid Wastes Management Association (NSWMA).
The study provides information on particular states' use of fees and taxes for hazardous
waste and the general characteristics of such fee and tax programs (ie what hazardous waste
activities are subject to the tax or fee). It does not include revenue estimates.
De Castro, Rey. State Taxes and Fees for Hazardous Waste Generation and Management in Waste
Alternatives/Hazardous Wastes. March/April 1989.
This article reports the preliminary results of a survey of states' use of hazardous waste taxes
and fees (which culminated in the book by the same author referenced above). The survey
was conducted by the National Solid Wastes Management Association (NSWMA). All states
received surveys in September 1988 and the study findings were collected in 1989. The
article provides a brief summary of the findings and a table that reports individual states' use
of taxes and/or fees.
The article provides information on particular states' use of fees and taxes for hazardous
waste and the general characteristics of such fee and tax programs (ie what hazardous waste
activities are subject to the tax or fee). It does not include specific rate information or
revenue estimates.
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Zemanian, Lewis. Supplement to the Survey of the Fifty States' Fee Systems Charged for Air, Water,
and Hazardous Waste Pollution as ofJufy, 1986. Congressional Budget Office, 1986.
This report provides a brief description of pollution fee systems imposed at the state
government level. It covers air, water, and hazardous waste pollution and includes discussion
of 23 states. It includes information on rates charged and purposes for which fee revenue
is used, but does not include information on actual revenues.
The information in this report is at least five years old and it is not comprehensive in terms
of states included or in terms of programs covered, but it does provide some basic
information about what some states are doing.
Solid Waste
Bohm, Robert A. and Kelsay, Michael P. Taxes and Fees to Control Costs of Recycling and Waste
Disposal University of Tennessee, 1991 (presented at National Tax Association Conference on State
Taxation of Business).
This presentation included a compilation of data on states' use of taxes and fees for recycling
and waste disposal. It identifies the use of solid waste disposal fees and surcharges, including
the rates charged. It outlined which states impose solid waste excise taxes and on what items
the tax; applies. The presentation also summarized other taxes used hi solid waste programs
and reviewed states which have special charges for out-of-state waste, including rate
information.
Loughran, DavidS. and McCarthy, James E. Financing Solid Waste Management Programs: A Survey
of the States. Washington, D.C.: Congressional Research Service, 1989.
This report presents the results of a telephone survey of state solid waste management
officials in 50 states and the District of Columbia. It examines the current budgets and
sources of funding for solid waste management. The survey found that states with alternative
financing mechanisms (e.g. dedicated surcharges, fees, and taxes) also have the most
extensive solid waste management programs.
U.S. Environmental Protection Agency, Office of Solid Waste and Emergency Response, Policy
Analysis and Regulatory Management Staff. Revenue Sources For RCRA. Washington, D.C., 1991.
This paper discusses the RCRA program and potential funding options to increase revenues.
These include increased authorizations from the general fund, new user fees, and/or a new
EPA tax. The paper presents the goal of expanding funding sources for RCRA as being the
identification of financing mechanisms with the power to generate revenues to support the
RCRA program. The paper then discusses the advantages and disadvantages of each of the
funding options as well as the revenue potential of each option. It then cites examples of
fees and taxes that the Agency could use.
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Water
American Petroleum Institute, Policy Analysis Department Clean Water Act Reauthorization:
Analysis of Financing Options: Draft Working Paper. Washington, D.C., 1991.
This report was written in response to requests for an assessment of possible funding sources
for Clean Water Act environmental programs. It describes several proposed funding
mechanisms, including the following: noncompliance penalties, toxic effluent discharge fees,
product fees, water fees, permit fees, effluent charges, and recreational charges.
This report does not provide information on what states are currently doing, but rather
provides a theoretical discussion of potential revenue sources at both the federal and state
levels and the revenue potential and impacts of each identified funding option.
Apogee Research, Inc. Financing State Wetlands Programs. Prepared for The Office of Wetlands
Protection, U.S. Environmental Protection Agency, 1990.
This guidebook reviews alternative financing mechanisms that are being used to finance state
wetlands programs. It begins with a general discussion of alternative financing mechanisms,
specifically fees, taxes, fines and penalties, and bonds. For each it introduces the wide range
of methods used by states. The report then provides a framework for evaluating the
different funding options. The report includes 26 case studies that profile how states have
used a variety of these mechanisms, including fees and taxes, to finance wetlands programs.
The case studies include information on the financing mechanism used, funds management
and implementation, lessons learned, and some information on revenue experience.
Donahue, Edward J. DDE. Impact Fees Revisited. Washington, D.C.: Peat Marwick Main & Co. for
the Water Pollution Control Federation, 1988.
This paper addresses several subjects affecting the use of impact fees. Impact fees are
defined and their sources and uses identified. The legal basis and goals for impact fees are
presented and the standards that impact fees can be based on are described. Aspects
covered include the carrying costs of unused capacity, adjusting for capital payments included
in user fees, stability and defensibility of user fees, and financing sources to support revenue
bonds.
This paper also provides information on Florida-specific experiences with impact fees,
including the effect of impact fees on rates and particular legal considerations and litigation.
Doyle, Paul. States as Water Quality Financiers: Legislative Options for the 1990s. Denver, Colorado:
National Conference of State Legislatures, May 1991.
This book addresses funding options for state water quality programs and presents case
studies to illustrate how states raise new sources of revenue.
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Government Finance Research Center. Financing for the Next Generation: A National Conference
on Innovations in Financing Wastewater Facilities. Washington, D.C., 1987.
This document consists of the published proceedings from the National Conference on
Innovations in Financing Wastewater Treatment held on November 18-20, 1986, in New
Orleans, Louisiana. The following issues were presented at the conference: marketing a
state loan program, user charges, financial and capital planning and forecasting, developing
the necessary authorities for initiating a state revolving loan fund, privatization, state grant
and loan programs, user charges and other innovative financing approaches. The conference
participants and presenters included representatives from a wide spectrum of national, state,
local, and academic organizations involved in the water program area.
The document itself includes only brief talking points on the topics covered at the
conference.
Northwest Pulp and Paper Association. Comparison, State NPDES Programs. Bellevue, Washington:
December, 1991.
This is a list compiled by the Northwest Pulp and Paper Association of the NPDES fees
charged by various states. It includes a very brief description of each charge, including rates
for each identified state.
U.S. Environmental Protection Agency, Resources Management and Evaluation Branch. Summary
of Current State Funding Practices Designed to Supplement State Program Resources. Washington,
D.C., 1988.
This document provides very basic information on charges by some states to support drinking
water programs. It includes information on rates, assessing agencies, and calculation of
charges.
This is only a compilation of data and does not provide any analysis. Nor does it provide
revenue information. It also only covers eleven states. It is unclear whether this is because
these are the states with innovative programs or because this was the only information
available.
U.S. Environmental Protection Agency, Office of Water. Discussion Paper on Alternative Financing
Mechanisms for State Water Programs. 1989.
This paper was prepared as part of the Office of Water's State Funding Study. It examines
the need for increased funding to support implementation of state program requirements
under the Clean Water Act and the Safe Drinking Water Act. It then identifies alternative
financing mechanisms that can be used to fund state water quality programs. It concludes
with a list of steps that EPA can take to support the use of alternative financing mechanisms
by states and assist states in closing the funding gap in water programs. The funding options
considered include the following: fees, taxes, fines and penalties.
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The discussion of fees in this report provides an evaluation of various kinds of fees: permit,
application, installation, certification and inspection, construction, discharge and disposal,
monitoring, sampling, laboratory, and impact fees. The report also makes reference to
examples of fee programs from several states.
U.S. Environmental Protection Agency, Office of Water. Paying for Safe Water Alternative
Financing Mechanisms for State Drinking Water Programs. September 1990.
This is an EPA report that addresses the use of alternative financing mechanisms by states
for their drinking water programs. The report includes a fairly extensive enumeration of the
charges levied by various states (still seeking copy of this report).
Single State Studies
Arkansas Department of Pollution Control and Ecology. Regulation for the Fee System for
Environmental Permits. 1988.
The Fee System Regulations outline the requirements and restrictions of the Arkansas Fee
System and include a review of fees charged
Berry, Mary; Hagman, John; and Kessler, Kevin. Environmental Fee Study. Wisconsin, 1982.
This study describes the primary source of state funds available for financing the Department
of Natural Resources programs - general revenues and user fees and charges. It identifies
seven criteria for evaluating revenue sources—basis, reliability, administration, total revenue,
equity, political feasibility, and income redistribution. It presents a detailed description of
Wisconsin's well driller and pump installer permit fees. This report is dated and only applies
to Wisconsin.
Colorado Water Quality Control Commission. Annual Fee Schedule of the Colorado Water Quality
Control Commission.
This document provides the fee schedule imposed on dischargers to cover the expenses of
the discharge permit system of the state.
Connecticut Department of Environmental Protection. Application Fees Required by the Connecticut
Department of Environmental Protection.
This document provides the fee schedule imposed on dischargers to support the Connecticut
Department of Environmental Protection program.
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Delaware Department of Natural Resources and Environmental Protection. Fees Assessed by the
Delaware Department of Natural Resources and Environmental Protection.
This document provides the fee schedule for the Delaware Department of Natural Resources
and Environmental Protection fee program.
Kansas Legislative Research Department. Proposal No. 16 ~ Financing the State Water Plan. Kansas,
1988.
This series of memoranda, prepared by the Kansas Legislative Research Department for the
Special Committee on Energy and Natural Resources, provide discussion of alternative
financing mechanisms and estimates of revenue potential of various funding options.
Options included are a solid waste tipping fee, sales and use tax, a dedicated trust fund, a
gaming revenues fund, water user surcharge, fines and penalties, fertilizer and pesticides
taxes, and severance taxes. Also included is a brief discussion of financing state water
programs in other states, including some revenue estimates of the financing programs
examined.
State of Louisiana, Department of Environmental Quality, Office of Water Resources. Louisiana
Water Pollution Control Fee System Regulations. Baton Rouge, October 20,1986.
The Water Program Fee Regulations establish a fee system for funding the operation and
activities of the Office of Water Resources of the Department of Environmental Quality of
Louisiana.
This document provides limited information on the fee system in Louisiana.
State of New Jersey, Department of Environmental Protection, Division of Water Resources. New
Jersey Pollutant Discharge Elimination System: Annual Fee Report and Assessment of Fees.
This annual report provides detailed information on New Jersey's program to regulate the
discharge of pollutants to the surface and ground waters of the state. The report provides
detailed financial and administrative information on the state's permit fee assessment
program.
Tuminiski, Ronald S. Background Paper on New Jersey's Use of Alternative Funding Mechanisms to
Fund Environmental Programs. New Jersey Department of Environmental Protection, 1989
(presented at Workshop on Alternative Funding Sponsored by the National Governors' Association).
This paper describes alternative funding mechanisms that are currently being used to support
New Jersey's environmental programs and documents their use in the state, including
revenue experience. The paper provides a short history of the development of alternative
financing mechanisms in New Jersey and draws lessons from this description. The report
also provides supporting evidence of the change in the states' use of alternative financing by
including breakdowns of funding sources for the Department of Environmental Protection.
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