EPA
    20M-2004,
United States
Environmental Prote'
Agency
                                    tTtA*
Administration And
Resources Management
20M-2004
Fall 1990


                                  pectives  0
«*«,

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Printed on Recycled Paper

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PAYING FOR PROGRESS:
PERSPECTIVES ON FINANCING
ENVIRONMENTAL PROTECTION
U.S. Environmental Protection Agency

Fall 1990

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              EDITOR
  COVER ILLUSTRATION
Ellen Fahey
Todd Dawson
PHOTOGRAPHIC CREDITS

  Pages 7,22, 36, 65, 69

               Page 8
             Page 15
             Page 19

             Page 34
             Page 38
             Page 45
             Page 72

             Page 80

             Page 84
All photos not listed below: Steve Delaney
Copyright Washington Post
Reprinted by permission of the D.C. Public Library
Washington Convention and Visitors Association
Photo supplied by Metcalf & Eddy
Photo supplied by National Environmental Technology
Applications Corporation (NETAC)
Photo supplied by Du Pont
Photo supplied by Pamela P. Plumb
ARCO Photo Library
American Consulting Engineers Council
Boyle Engineering Corporation
Carl Saytor Photography
Tacoma, Washington
David Osterman

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CONTENTS
                  1   FOREWORD

                  2   OVERVIEW
                            William K. Reilly
                            Administrator
                            U.S. Environmental Protection Agency

                  9   I. THE CHANGING ROLES OF FEDERAL, STATE, AND LOCAL GOVERNMENT

             
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27   II.  CREATIVE APPROACHES TO ENVIRONMENTAL FUNDING

28   ENVIRONMENTAL NEEDS, RESOURCES, AND POLICY OPTIONS:
     A ROLE FOR PUBLIC-PRIVATE PARTNERSHIPS?
            Gerald W. Johnson
            John G. Heilman
            Associate Professors of Political Science
            Auburn University

32   PUBLIC-PRIVATE PARTNERSHIPS:  THE EXPERIENCE OF A LARGE CORPORATION
            E. S. Woolard, Jr.
            Chairman and Chief Executive Officer
            E.I. du Pont de Nemours and Company

35   CAN PUBLIC-PRIVATE PARTNERSHIPS HELP?
            Pamela P. Plumb
            City Councilor
            Portland, Maine

39   AN INDUSTRY VIEWPOINT OF EPA's PUBLIC-PRIVATE PARTNERSHIPS PROGRAM
            David M. Roderick
            Board Member and Retired Chairman and Chief Executive Officer
            USX Corporation

42   CLEANER AIR:  TOWARD A MORE RATIONAL APPROACH - AN ARCO VIEW
            William D. Leake
            Vice President for Environmental Protection
            ARCO

46   THE USE OF FINANCING TECHNIQUES TO INCREASE THE BENEFITS OF THE
     STATE REVOLVING FUND PROGRAM
            Robert F. Mabon, Jr.
            Consultant and Former Principal of Morgan Stanley & Co., Inc.

50   Toxic WASTE:  A NATION AT RISK
            Jay  D. Hair
            President
            National Wildlife Federation

54   AN INTEGRATED WASTE MANAGEMENT STRATEGY FOR CALIFORNIA
            Jananne Sharpless
            Secretary of Environmental Affairs
            State of California

57   MEETING TOMORROW'S ENVIRONMENTAL NEEDS WITH TODAY'S LIMITED RESOURCES
            Senator Fred W. Finlinson
            Utah Senate

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63   III. OVERCOMING BARRIERS AND INTRODUCING INCENTIVES

64   FUNDING OUR ENVIRONMENTAL INFRASTRUCTURE
            Senator Pete V. Domenici
            United States Senate

67   FINANCING ENVIRONMENTAL INFRASTRUCTURE: THE FEDERAL-STATE-LOCAL PARTNERSHIP
            Representative Beryl Anthony, Jr.
            United States House of Representatives

70   KEEPING THE FAITH: THE DEEPENING CRISIS IN ENVIRONMENTAL PROTECTION FINANCING
            Howard M. Messner
            Executive Vice President
            American Consulting Engineers Council

            Laurence D. Bory
            Managing Director for Government Affairs
            American Consulting Engineers Council

73   REASSUMING THE FEDERAL MANDATE
            David Seader
            Vice President
            DnC America  Banking Corporation

76   BANKS MUST BECOME FULL PARTNERS IN ENVIRONMENTAL PROTECTION
            Warren Tyler
            Vice President
            State Savings Bank
            Columbus, Ohio

79   PUBLIC-PRIVATE PARTNERSHIPS WITH EPA: FACT, FICTION, OR FANTASY?
            Doug Sutherland
            City Manager  of SeaTac, Washington
            Former Mayor of Tacoma, Washington

            Jerry Ficklin
            Environmental Consultant
            Tacoma, Washington

83   THE CASE FOR AN ORGANIC ENVIRONMENTAL PROTECTION ACT
            Russell Train
            Chairman
            World Wildlife Fund
            The Conservation Foundation

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OVERVIEW
by William K. Reilly
     hen I became Administrator of EPA, I was
struck by how the United States and much of the
world seemed poised to make a significant commit-
ment to the protection and restoration of the environ-
ment. Over the twenty years since EPA was
founded, the country has learned several lessons,
including the fact that the money we spend on sound
environmental programs makes an indispensable
contribution to the nation's well-being.  We have
  Mr. Reilly became the Administrator of EPA in February
  1989. He has held several environmental positions during the
  previous two decades, including President of World Wildlife
  Fund - U.S. and President of The Conservation Foundation.
  Mr. Reilly has served on the boards of numerous private and
  public organizations, and has received many awards for his
  contributions to environmental progress.
realized enormous benefits from our pollution
control investments. We recognize, too, that environ-
mental improvements must keep pace with economic
growth, for our prosperity is inextricably linked to
our nation's environmental health; from our national
wealth comes the wherewithal to pay for environ-
mental protection.

Today, the question is no longer whether we will
take action on environmental problems, but how.
This new context, taking shape at a time of scarce
resources and competing priorities, makes the pur-
suit of environmental goals in the most economically
efficient manner all the more important.

Paying for environmental programs presents us with
one of the major challenges of the 1990s.  The cost of
environmental protection will continue to grow
significantly in the coming years. And consequently,
the country needs to make the effort, starting now, to
look past daily problems and crises to develop long
term funding strategies. Protecting public health and
assuring the continued productivity of our natural
resources are not the sole responsibility of any one
sector or any one level of government. The effort
must be shared. And, thus, new thinking and inno-
vative approaches are required in both the public and
private sectors.

For this reason, I invited leaders from different levels
of government, conservation groups, the financial

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world, industry, and academia to contribute their
thoughts on the nature of the funding challenge and
creative solutions to it. Their essays are collected in
this document. The key issues that they address are
the changing roles of federal, state, and local govern-
ments; creative approaches to environmental fund-
ing; and barriers to and incentives for alternative
financing, including public-private partnerships.

 NATURE OF THE CHALLENGE

To set the stage for this discussion, background on
the nature and status of the environmental funding
challenge and what EPA is
doing may be helpful.          ^^^—m^^^^*^m
                    In 1990, as we celebrate the twentieth anniversary of
                    both Earth Day and the founding of EPA, the envi-
                    ronmental movement has come of age in this country
                    as well as around the world. In public opinion polls,
                    U.S. citizens consistently rank environmental protec-
                    tion as one of their highest priorities. Time magazine
                    recently recognized the importance of the global
                    environment by hailing Earth as the "Planet of the
                    Year". This reflected heightened concern over the
                    loss of tropical forests and endangered wildlife,
                    threats to the earth's ozone layer and climate, ocean
                    pollution, and other global environmental problems.
                    President Bush, demonstrating his commitment to
                    environmental progress, has proposed the creation of
                   ^^^^^^^^^^^^^   a Cabinet-level Department
                                         of the Environment.
It is my privilege to lead EPA      y''        ,.        71.
at a time when environmental     -"^ meeting pUullC
protection has moved from
the margins to the main-
stream of the public policy
agenda. Over the past twenty
years, the United States has
made great strides in control-
ling pollution and enhancing
the environment. We have
passed about a dozen major
laws and many minor ones to
address particular environ-
mental problems.
expectations for faster
action comes at a steep
price.. .constrained federal
resources have  limited the
traditional means of
environmental  funding.
As a result, most conventional air pollutants have
been reduced significantly since 1970. For example,
emissions of particulates have declined by 64 percent
and lead by 96 percent. On balance, the quality of
the nation's waters have held their own.  We've also
added large acreage to our national parks and wil-
derness areas.

These environmental gains were made during a
period when the real gross national product in-
creased about 70 percent. Of course, environmental
problems are still with us—some longstanding, like
runoff from agricultural lands; other newly recog-
nized, like the pervasive spread of toxic contamina-
tion.
                      Yet meeting public expecta-
                      tions for faster action comes
                      at a steep price. Congress
                      has expanded EPA's old
                      programs and created new
                      ones to respond to environ-
                      mental concerns and to
                      reflect the growing under-
                      standing of pollution. At the
                      same time, constrained
                      federal resources have
™^^^^™^^^^™^™   limited the traditional means
                      of environmental funding.
 Gone are the days when the federal government
 directly provided large blocks of money to deal with
 these needs.

 One result has been that state and local governments
 are assuming more of the responsibilities for implem-
 entation, while EPA is moving toward a support role.
 Local governments often find themselves under a
 regulatory layer cake, with layer upon layer of
 environmental mandates from the federal and state
 levels. Although in general they are not opposed to
 the goals, they quite understandably want a say in
 the process and more flexibility in spending the
 money to achieve compliance.

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                                                                    JLhe Agency's
                                                                   response must be
                                                                   to seek and support
                                                                   creative ways to
                                                                   leverage available
                                                                   resources while
                                                                   achieving the level
                                                                   of environmental
                                                                   protection  the citi-
                                                                   zens of this country
                                                                   are demanding.
In response to the difficulty of financing environ-
mental protection, EPA sponsored a series of studies
examining the resource impacts of environmental
programs. One of these reports, although prelimi-
nary, indicates the the public and private sectors will
need an additional $61 billion per year to meet
current and new environmental mandates by the
year 2000. This requires greatly increased levels of
capital that may be difficult for small and medium-
sized cities to raise.

 WHAT is EPA DOING ABOUT THIS SITUATION?

The political and economic realities of the 1990s
suggest that public resources will not keep up with
environmental needs. The Agency's response must
be to seek and support creative ways to leverage
available resources while achieving the level of
environmental protection the citizens of this country
are demanding. To this end, we are pursuing several
directions at EPA that will deliver results and make
environmental protection more cost effective.

At the core of many of our new policy initiatives is
the concept of sustainable, environmentally sound
development. By this, we mean an approach to
economic growth that cuts waste, improves effi-
ciency, and conserves natural resources for the use of
this and future generations.  It recognizes the need to
secure the ecological base upon which long term
economic prosperity and environmental well-being
depend. To use an investment analogy, it means
keeping the natural resource capital intact, while
living off the interest.

This is where pollution prevention, one of our
Agency's major new thrusts, comes in to play. This
has become a priority throughout our programs.
Strong environmental programs that encourage the
prevention of pollution before it is generated can
help increase efficiency, productivity, competitive-
ness, and community goodwill, while reducing
environmental contamination and the burden on our
nation's landfills.

Another means we are employing to maximize our
effectiveness in the face of scarce resources is to build
on our traditional regulatory programs by incorpo-
rating market-based incentives whenever we can.
For example, in his clean air proposals the President
sought to harness the forces  of the marketplace to
improve air quality. The bills that passed the Senate

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and House (and at the time I write is before a confer-
ence committee of the Congress) apply tough stan-
dards for sulfur dioxide and air toxics reductions, yet
give the private sector flexibility as well as responsi-
bility in deciding how to cut harmful emissions while
meeting overall targets. I expect that this approach
will be utilized in other environmental initiatives as
well.

We are also using strategic planning to target the
most serious risks and allocate scarce Agency re-
sources; total quality management to improve our
operating efficiency; geographic targeting and multi-
media approaches to protect public health and the
most vulnerable productive ecosystems; aggressive
enforcement to assure compliance; environmental
education to foster a sense of individual and collec-
tive stewardship; and community right-to- know
laws to empower citizens and private groups to help
tackle environmental problems.

At some point, Congress may entertain the notion of
an integrated, multi-media approach to reducing
health and environmental risk through consolidation
of environmental laws into a single new statute. The
potential of reducing risks and costs simultaneously
makes it an idea worth contemplating.

Our Cooperative Environmental Management effort
focuses on providing states and localities with the
tools they need to implement required environmental
programs by stimulating the development and  use of
new techniques and technologies that will reduce the
cost of compliance. It fosters cooperative approaches
to solving environmental problems and expands the
use of technology transfer through training and
information dissemination.
The Agency's Public-Private Partnerships Initiative
was set up specifically to help state and local govern-
ments develop new ways to finance required envi-
ronmental improvements. One of the main goals of
the initiative is to increase private sector participation
in all phases of environmental infrastructure devel-
opment, from financing to outright ownership of
facilities. The effort also encompasses promoting
other alternative financing methods such as state
revolving funds.

An early accomplishment of this Initiative was the
establishment of the Environmental Financial Advi-
sory Board. This independent Board, comprised of
prominent representatives from the public and
private sectors, is charged with suggesting innova-
tive environmental financing techniques as well as
working to identify legislative and regulatory barri-
ers to alternative financing. The members are experi-
enced in municipal financing, so their advice will be
directly applicable to state and local situations.

A NEW FEDERAL-STATE-LOCAL
PARTNERSHIP IN ENVIRONMENTAL FINANCE

All of these approaches to environmental protection
acknowledge that reinvigorating our environmental
infrastructure will require an unprecedented degree
of communication and cooperation among all levels
of government, the private sector, conservation
groups, and citizens.  The job is big, new money is
hard to find. And, thus, it has never been more
important to challenge the creativity and dynamism
of all these parties to contribute new, vitally needed
ideas and energy to solve America's environmental
problems.                                      Q

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I.   THE CHANGING  ROLES  OF  FEDERAL,
     STATE, AND  LOCAL GOVERNMENT
   rom the outset, environmental protection has been viewed as a shared responsibility between
EPA, the states, and local government. State governments, and the local governments which are
their creations, are meant to be equals to EPA in bringing about a cleaner environment for all
citizens. This understanding became written policy in the early 1980s, under the second term of
former EPA Administrator William Ruckelshaus. Although rocky at times, the relationship held
out as long as the money to pay for environmental protection was plentiful.

Now, though, good intentions are being put to the test. Resources at all levels of government
are harder to come by, public expectations are greater, and environmental laws have become
more complex and hold those who implement them more accountable. Increasingly, the
responsibility has devolved to the point where state and local governments are the prime agents
answerable for environmental protection.

Our authors in this section address the issues which arise from the changing roles of federal,
state, and local governments in environmental protection.  The articles present an almost
universal theme of establishing realistic priorities and tackling the biggest problems first within
available resources.  This disciplined approach is prevalent among non-federal forms of
government and private entities, where balanced budgets are requirements rather than
aspirations. An important underlying theme, though, is one of simplifying and systematizing
environmental protection goals.  The topic is not simply allocating resources, but also managing
public expectations for environmental protection.  Such a task has always been the daily
responsibility of state and local governments and  businesses who routinely deal directly with
the needs of private  citizens.

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PAYING FOR
ENVIRONMENTAL PROTECTION:
THE NEXT TWENTY YEARS
by Paul R. Portney
T
  .he United States now has twenty years of com-
prehensive federal environmental regulation under
its belt. During that time, we have developed a
patchwork approach to paying for the control of air
and water pollution, hazardous wastes, pesticides
and herbicides, drinking water contaminants, and
   Dr. Portney is Vice President and Senior Fellow at
   Resources for the Future. He was also Director of that
   organization's Center for Risk Management and Quality of
   the Environment Division. He is the author or editor of a
   number of journal articles and books, including the recent
   book, Public Policies for Environmental Protection.
other threats to human health and the environment.
Some costs have been paid initially by the federal
government—costs that include a substantial share of
building local sewage treatment plants and of the
Superfund used to clean up abandoned hazardous
waste disposal sites. State and local governments
have picked up part of the initial tab for these pur-
poses as well. Individuals have borne some of these
initial costs directly, as when they buy a new car or
truck, or a new wood stove—both of which cost more
than they would without EPA pollution control
requirements. But by far the largest share of the
initial burden has been borne by the manufacturing
and other industries that have been the major focus
of EPA regulation over the last two decades.

I have four observations to offer about the financing
of environmental regulatory programs over the next
twenty years. They concern the following areas: (i)
the ultimate incidence of the costs of any regulatory
program; (ii) the importance of keeping score with
respect to these costs; (iii) the inevitability of balanc-
ing benefits and costs in choosing environmental
goals; and (iv) the necessity of least-cost approaches.
Let me consider these seriatim.

REGULATORY COSTS BORNE BY ALL OF Us

First, it is worth emphasizing, again and again, that
all environmental regulatory costs are ultimately
borne by ourselves and our fellow citizens. True, the
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burdens will be somewhat different if the federal
government subsidizes the cost of that local sewage
treatment plant than if the local government is
required to foot the whole bill. True, a different set
of individuals will feel the pinch if "potentially
responsible parties" are identified and required to
pay for that hazardous waste site cleanup than if the
cleanup is paid for out of the federal budget. True,
the bearers of the burden will differ if a company can
pass on pollution control costs in higher prices than if
it is forced to "eat" those costs out of corporate
profits.
                                                  ticide, Fungicide, and Rodenticide Act (FIFRA); the
                                                  Toxic Substances Control Act (TSCA); or other lesser
                                                  regulatory programs administered by the EPA.

                                                  How big might these costs be? When asked, I gener-
                                                  ally hazard the guess that the annual cost of comply-
                                                  ing with all federal environmental programs is in the
                                                  neighborhood of $85 billion. This is based on the two
                                                  years I spent making CEQ's estimates, on EPA's Cost
                                                  of Clean Air and Water Report, on work by my col-
                                                  leagues at Resources for the Future,  and on whatever
                                                  other fragmentary data I can uncover.
But there are no disembodied entities, corporate or
otherwise, into whose pockets we can reach to pay
for clean air, water, and so on. Eventually, all regula-
tory costs filter down to us
and our fellow citizens as     •"•"•••••••••••••l
taxpayers, consumers of
regulated products, or
stockholders or employees
of regulated firms. Would    ing, again and again, that all
that it were otherwise, but
it's not. Too frequently
forgotten, this important
lesson should be borne in
mind when thinking about    OUrSelVCS and OUT
                           y-,
                           f-
                                       IS WOrtk
                           environmental regulatory
                           costs are ultimately borne by
regulatory programs.

KEEPING SCORE OF COSTS
OF COMPLIANCE
                           citizens.
My second observation may seem similarly unexcep-
tional, but I believe it, too, is important. We must
keep better score of the costs of complying with
federal environmental regulatory programs. The
Council on Environmental Quality (CEQ ) used to
make annual estimates of the cost of complying with
all federal environmental regulations. Unfortunately,
this practice ceased with the evisceration of CEQ
during 1981-89.  EPA periodically reports to Con-
gress on the costs associated with the Clean Air and
Clean Water Acts, and these reports are useful. But
EPA is not required to make similar estimates for the
costs of complying with the Resource Conservation
and Recovery Act or the Superfund, where costs are
escalating rapidly. Similarly, virtually no informa-
tion is available about the costs associated with the
Safe Drinking Water Act (SDWA); the Federal Insec-
 Comes now a recent report, prepared for EPA,
 estimating that federal, state, and local governments
 alone spent $40 billion for environmental protection
                    in 1987, and I am even less
 •••••••••••••   confident about my estimate.
                    Surely, the combined compli-
                    ance costs that fall on manufac-
                    turing and other industrial
                    facilities and on individuals
                    directly amount to more than
                    $45 billion annually. Indeed,
                    individuals may pay $15
                    billion annually on account of
                    the Congressionally-mandated
                    vehicle emissions standards.
                    And air pollution control costs
^^^^^^^^^^^   in the electric utility industry
                    alone now amount to more
 than $10 billion annually (soon to increase by about
 $4 billion per year on account of acid rain legislation).
 Throw in other industrial air and water pollution
 control costs, an additional $5-10 billion each year for
 RCRA and Superfund, and my $85 billion estimate
 looks low even without accounting for FIFRA, TSCA,
 and SDWA.

 My basic argument is this:  we shouldn't have to
 guess at these numbers.  While estimating annual
 compliance costs is no picnic, EPA already does it for
 its two largest regulatory programs and should do so
 for the other programs as well.  Costs are only part of
 the equation, of course.  It should go without saying
 that the Agency's efforts to estimate the considerable
 beneficial effects of its programs, in physical terms or
 even in dollars (where possible), should be given the
 strongest support possible as well.
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INEVITABILITY OF BALANCING BENEFITS AND COSTS

My third observation is that if we are concerned
about how we shall pay for the steadily growing
costs of environmental programs, we have a respon-
sibility to pursue only those which return more than
they cost.  A seemingly innocuous point, yet one
often obscured by heated debates over the valuation
of lives saved, species protected, illnesses averted,
and so on. Forget for the moment assigning dollar
values to the benefits of environmental regulation. In
a society where so many are poorly fed, clothed,
housed, and educated can one really argue that it is
wrong to ask whether a particular regulation is
worth what we must sacrifice to have it?  I simply
cannot believe the answer is "yes" and, thus, am
discouraged by statutes which prohibit regulatory
officials from making even qualitative comparisons
of benefits and costs.

NECESSITY OF LEAST COST APPROACHES

A fourth and final point follows directly from the
above. Once we have decided on our environmental
goals, whether through balancing or other means, we
must pursue these goals through the least expensive
ways possible. This will often mean substituting
incentive-based regulation (marketable permits or
effluent charges, for instance) for its command-and-
control counterpart. It may also mean pollution
prevention, waste reduction, negotiated rulemaking,
or other innovative and cost-saving techniques.

EPA is the exemplar among federal regulatory
agencies in making use of least-cost approaches, but
it can do much more. For instance, marketable
discharge permits have made little or no inroads in
water pollution control even though the potential
cost savings there are enormous. Similarly, incen-
tive-based techniques have played no role in pesti-
cide or toxic substance regulation, nor in the control
of hazardous wastes, although these techniques have
some promise in those areas as well. In some of these
cases, Congressional action would be required, but it
will not be forthcoming until and unless creative
alternatives to existing approaches are identified and
put forward.

It is clear that our existing environmental programs
will continue to cost money—big money. So, too,
will the new programs that are sure to arise as new
problems are identified. As long as it is understood
that we and our fellow citizens eventually pay all
these costs, and so long as we ensure that these costs
are accurately measured, minimized using a variety
of techniques, and justified by the protection they
will provide, we will have done all we can to protect
the environment given our scarce resources and the
other equally important and daunting responsibili-
ties our nation faces.                            Q
                                                 12

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THE ENVIRONMENTAL  CRISIS
FACING  LOCAL  GOVERNMENT
by Harvey Goldman
E,
   invironmental issues came to the forefront of our
national consciousness almost 20 years ago with
Earth Day. Today, issues like the greenhouse effect,
acid rain, the thinning of the ozone layer, toxic
wastes, and water quality have moved to the interna-
tional arena. The United States is now playing a key
role in fostering international cooperation on global
  Mr. Goldman is the Executive Vice President and Chief
  Financial Officer & Treasurer of Air & Water Technologies
  Corporation. Prior to joining AWT in 1985, Mr. Goldman
  was a partner at Arthur Young. He has authored The
  Privatization Book, a widely acclaimed guide to financ-
  ing environmental facilities.
environmental concerns.

But, from the perspective of Main Street USA, a
paradox and an impending crisis loom. In the pro-
cess of directing national attention and resources to
solving international and regional problems, local
governments—the level of government that does
much of the day-to-day work of dealing with envi-
ronmental problems—have been left to their own
devices. Has the new global focus redirected na-
tional concern for the environment to the point of
abandoning local needs? Local needs and environ-
mental quality awareness are steadily mounting
while available resources are rapidly diminishing.

A concise historical review of the environmental
movement leads one to conclude that a profound
transition is occurring and that the transition requires
a focused federal government effort to ensure domes-
tic ecological security.

THE FEDERAL ROLE IN THE 1970s

The decade of the 1970s saw the first assault on
domestic environmental problems with the passage
of the Clean Water, Clean Air, and Safe Drinking
Water Acts.  These initiated the extensive body of
laws, regulations, standards, and enforcement proce-
dures that states and localities were responsible for
meeting. The 1970s also saw the institutionalization
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of methodologies for meeting environmental stan-
dards. States and localities were given the tools,
through federal regulations and funding mecha-
nisms, to implement solutions.

An example of this is the Construction Grants pro-
gram. In 1972, Congress recognized that our waters
were being degraded due to inadequate wastewater
treatment. The solution was the grants program.
The regulations set forth the procedural implementa-
tion methodology and awarded grants to fund the
work. Later in that decade, the Superfund legislation
was enacted to regulate and finance certain solutions
to hazardous waste problems. The mind-set of this
era viewed local environmental issues as national
problems and sought        ____^_^^^^^__
solutions that traditionally
had been used in the public
works arena.
 Ihe catalytic role of the
1990s encompasses direct
support of new initiatives,
dissemination of
information to the
newly responsible entities,
and a variety of facilitative
federal-level actions.
A SHIFT TO LOCAL
RESPONSIBILITY

The 1980s, or Reaganomics
decade, saw a transference
of responsibility for solving
problems from the federal
government to the state and
local levels.  Due to both
fiscal realities and philo-
sophical reasons, the
implementation burden      ~^^^^^^~^^^~^~""
was delegated downward.
Soon after, that delegation was paralleled by adverse
funding changes. Federal funding programs were
significantly reduced and made more restrictive.  Tax
laws that had been used in part to finance innovative
solutions were diluted, tax-exempt debt to capitalize
facilities was constrained, and funding was changed
from grants to loans, all resulting in the transference
of financial responsibility. The most meaningful
indicator of that process—local taxes and user fees—
began to grow in response to those forces. But while
rising user fees are inevitable, they also have limits,
limits measured by economic viability and political
realities.  As a result, economic stagnation and
environmental degradation are occurring in too
many areas.
 THE FUNDING CRISIS IN THE NINETIES

 As we enter the 1990s, we are confronted by two
 harsh realities: that the responsibility has been
 transferred to lower government levels without
 adequate support and that the resulting federal
 posture has not recognized the increased complexity
 and interrelatedness of "local" problems. To mitigate
 the impending crisis, the federal government can
 again be productive by adding to its roles of regula-
 tion and enforcement that of being a catalyst to
 effective transition management.

 The catalytic role of the 1990s encompasses direct
 support of new initiatives, dissemination of informa-
                    tion to the newly responsible
^HMM^^^^^^M   entities, and a variety of facili-
                    tative federal-level actions. In
                    essence, these activities have to
                    do with both the funding and
                    the management of processes
                    for planning and implementing
                    local solutions. The techno-
                    logical solutions are available;
                    the need is the building of a
                    supportive institutional basis
                    for new management tech-
                    niques, including the mobiliza-
                    tion of capital funds and
                    professional operating capa-
                    bilities that are readily avail-
                    able to solve many local needs.
                                         Several examples will illus-
                      trate. While there is a great deal of discussion today
                      at the federal level about public-private partnerships,
                      there is insufficient movement toward creating an
                      institutional framework to accommodate and pro-
                      vide incentives for private sector participation.
                      Private sector involvement can be used to effectively
                      reduce user fees whether the facilities are publicly or
                      privately owned.

                      Private sector management (contracting-out) of
                      publicly owned treatment facilities is an important
                      tool for local officials to consider when evaluating
                      how to provide reliable essential public services at
                      the lowest user fee. While private operating
                      contracts are generally  acknowledged to offer
                                                14

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For years, Auburn struggled to resolve its wastewater problems through the traditional format of combined federal and state funding.
In the end, the city's low-priority position on Alabama's EPA funding list and limited federal funding forced city officials to look to
the private sector. Auburn took an innovative step and formed a public-private partnership with Metcalf & Eddy to develop two new
wastewater treatment plants. Metcalf & Eddy redesigned, financed and managed the construction of the 7-mgd system and presently
owns, operates, and maintains them under a long-term agreement. An additional benefit of the public-private partnership was that it
allowed the Auburn facilities to be brought on-line 12-18 months sooner than facilities developed through conventional means.
communities reliable service plus a 10 to 20% cost
savings in operations and maintenance, a newly
emerging advantage is the ability to creatively use
properly structured operating contracts to save in
annual debt service fees.

The traditional financing criteria for wastewater
treatment facilities is to employ relatively level debt
service payments and to amortize the facility's debt
over a 20 to 25-year period. That period corresponds
to less than 50% of the useful life of a properly oper-
ating and maintained facility, but reflects the finan-
cial market's fear that project owners may elect to
defer maintenance costs to contain user fees.  Most
private operations contracts include both preventive
and emergency maintenance spending provisions,
tied to the private operator's desire to protect both
the performance of the plant and the operator's
reputation.
It is reasonable to expect that the financial commu-
nity will offer communities creative financing con-
cepts, related to an expected longer economic life of
the facility and resulting in significantly lower an-
nual debt service fees, if the facility's financing
program is tied to a properly structured professional
operating contract.

CREATING AN ENVIRONMENT CONDUCIVE
TO PUBLIC-PRIVATE PARTNERSHIPS

The tax law changes of the mid-1980s and the current
federal and state funding methodologies (such as
state revolving loans and bond banks) removed
incentives and created obstacles for private sector
participation with local governing units in the devel-
opment of treatment facilities to serve the  public's
needs. The tremendous management capabilities,
                                                    15

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entrepreneurial skills, and financial resources of the
private sector are, in effect, being withheld from the
public good.

Creating a conducive tax environment (to include
investment credits and favorable depreciation sched-
ules), blending available governmental funding
vehicles with private participation, and taking even
simpler steps, such as revising certain restrictive
OMB regulations, are ways to unleash tremendous
amounts of capital and provide the fuel for private
sector involvement. As has been demonstrated by
various case studies, private sector involvement can
increase the timeliness and cost-effectiveness of
solutions to our environmental problems and can
serve to spur economic development.

Furthermore, local governing units "owning" feder-
ally and state-funded treatment facilities should have
the flexibility to recycle those funds to areas of
current environmental need.  Through EPA's Con-
struction Grants program, more than $100 billion has
been invested in wastewater  treatment systems. The
potential to enable grantees to access this capital,
through asset sales, sale/leasebacks, or other refi-
nancing techniques should be immediately explored.
The funds-recycling concept  is as simple as a home-
owner refinancing his house  through a home equity
loan, which provides the capital to address current
needs.

Funds recycling and investment credits are not new
to federal programs. Programs have been put in
place that provide tax credits for private investments
in areas that are deemed suitable from a public policy
perspective. Appropriate versions of these concepts
should be developed to free up funds previously
awarded to EPA grantees and to mobilize  capital for
new public-private partnerships.
THE FEDERAL ROLE

An impending crisis of the coming decade is that the
environmental management challenges facing our
local governing units will become overwhelming.
Simply put, local units cannot continue doing it
alone.  The reality is that the environmental problems
are vast and complex and the financial and manage-
ment capabilities of local governments are already
severely strained.

Federal initiatives to help local units are essential.
The recycling of federal and state sunk investments
in local treatment facilities, private sector incentives
to form public-private partnerships, and entrepre-
neurial approaches to implementing and operating
needed facilities are among the needed actions.
Success in attaining a safer environment while
maintaining economic vitality will substantially
depend on the ability of the local governing units to
access capital and to engage the tremendous re-
sources of the private sector. And the ability of local
units to access these items is highly dependent on a
facilitative and catalytic federal role.              Q
                                                 16

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A NEW APPROACH TO
ENVIRONMENTAL TECHNOLOGY
COMMERCIALIZATION
by Wesley W. Posvar
T,
   he United States is at a critical juncture in its
developing ability to meet a broadening range of
environmental challenges. American industry is only
now beginning to appreciate its own case for pursu-
ing environmental goals: that it is good business to
design environmental protection into manufacturing
processes and products, and unprofitable not to.
 Dr. Posvar is president of the University of Pittsburgh and
 chairman of the Environmental Protection Agency's
 National Advisory Council for Environmental Technology
 Transfer. He is a founding member and former chairman of
 the Business-Higher Education Forum, an organization of
 chief executives and presidents of leading universities
 concerned with capital formation, science and technology
 R&D, and regulatory reform.
This constructive approach to environmental dangers
may signal the birth of a farsighted new global
industry—an environmental technology industry—in
which the U.S. can take the lead. But there is much to
be done, and we are most fortunate that the EPA is
embracing the challenge with energy and
intelligence.

National awareness of threats to the environment has
advanced dramatically in recent years. Disasters at
Bhopal and Chernobyl, diplomatic confrontations
over acid rain abatement and solid-waste disposal,
the traumas of Love Canal and Three Mile Island, the
specter of barges of waste roaming from port to port,
of medical and other hazardous refuse washed
ashore on East Coast beaches, of denuded tropical
watersheds, of oil-drenched salmon bays—such
tangible crises now lend definition to more abstract
issues such as a greenhouse effect and ozone deple-
tion.  Real-life dramas like those relentlessly tracked
by the media mobilize public concern as no program
of public education could. They promise to engrave
on the collective global conscience a new ethic of
environmental responsibility.

CONVEYING ENVIRONMENTAL ETHICS
INTO THE MARKETPLACE

But the real challenge is to convey that ethic into the
marketplace. Paper recycling programs in many
                                        17

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communities are failing to solve waste paper prob-
lems because consumers continue to prefer cheaper
non-recycled products. Regulations could encourage
or force greater demand for such products, but
widespread efforts to create more environmentally
conscious shoppers would still be required to stabi-
lize and enhance the market for more environmen-
tally sound products.  It therefore still remains very
difficult to obtain the necessary and proper financial
investment to develop and implement new environ-
mental technologies.
 process for certain hazardous materials activities is
 often so time-consuming and difficult that it hinders
 development and implementation of newer and
 more effective technologies that could improve the
 environment.

 EPA FOSTERING MECHANISMS
 FOR THE GLOBAL MARKET
Technical, regulatory, and public policy questions
affecting these technologies are also becoming more
complex, limiting and delaying our ability to tackle
the range of environmental
problems we have. The        <^™^^™1^™^^™
environmental industry is
controlled by a myriad  of
laws and regulations, often
derived from public concerns    technology, UH mVeStOT Will
that do not consider the full
 In light of the scope and challenge of these various
 important problems, it is highly encouraging that the
 Environmental Protection Agency is today fostering
 new mechanisms for the global market through an
 innovative National Advisory Council for Environ-
 mental Technology Transfer (NACETT), of which I
 _^^^__^^^^^_   am chairman. This Council
                      complements the Agency's
                      important Science Advisory
range of consequences. Pub-
lic law is sometimes exces-
sively repressive, based on
superficial data. All this leads
to uneven and inconsistent
enforcement of environmental
regulations—and further       ••••^^•••M^MMI
confuses the marketplace by
decreasing the need to comply. Without adequate
regulatory enforcement, there is little motivation for
persons responsible for environmental compliance to
utilize technologies that can reduce or treat waste. In
the absence of motivating factors like enforcement or
monetary payback, many companies allow current
unsound practices to continue unchecked. Thus, the
regulations on the books not only need to be sound,
but they also need to be backed by an adequate
enforcement program.

Both financial institutions and technical groups
believe the process of gaining licenses and permits is
an additional and very significant regulatory barrier
that creates an extraordinary risk factor.  No matter
how promising a technology, an investor will not
finance a project with a low probability of making it
through the process of issuing permits. The approval
••* T                                     important science Advisor
1Vo matter how promising a    Board'with both reporting
                      '           °      to the EPA Administrator.
                                         NACETT is comprised of
not finance a project with a
low probability of making it
through the process of
issuing permits.
                      some three dozen leaders
                      drawn nationwide from
                      industry, state and local
                      government, venture capital
                      firms, environmental advo-
                      cacy groups, universities,
                      and the media. Through the
^^^^^^^^^^^™   collective expertise of
 NACETT, the EPA will seek ways to enhance its
 performance as regulator with innovative coopera-
 tive programs that stimulate the creative potential of
 American environmental expertise and industry.

 This new EPA direction can be a catalyst for Ameri-
 can business as the international demand for envi-
 ronmental technologies is already immense and
 growing. Furthermore, it is intrinsically good for the
 environment. In the traditional enforcement ap-
 proach, for example, environmental protection has
 called for selecting best-available-technology and
 making it the standard, without incentive to do
 better. Reformed regulations can begin to encourage
 the development of technologies meant to reduce
 industrial waste.  More broadly, NACETT can de-
 velop continuously a bank of ideas on technology
 innovation and economic stimulus, public education,
                                               18

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  NET AC performs bench-scale testing of innovative technolo-
  gies to study their feasibility.
and international collaboration, from which the EPA
can draw in its mission. The diverse and enthusiastic
membership of the Council will help the Agency
coordinate the many public and private interests that
share responsibility for environmental protection.

PUBLIC-PRIVATE PARTNERSHIPS
PLAY A PART IN TECHNOLOGY UTILIZATION

There is also a new action device of the EPA for this
economic-incentive concept. The National Environ-
mental Technology Applications Corporation (NE-
TAC) has been established with EPA support in what
was once called the "City of Smoke," Pittsburgh, to
encourage industrial ingenuity in the development of
technologies for a healthy environment.

NETAC was an innovative response to the Federal
Technology Transfer Act of 1986 and the Presidential
Executive Order on April 10,1987. The Act and
Executive Order arose in recognition of the important
role public-private partnerships can play in technol-
ogy utilization and encouraged federal agencies to
implement a variety of programs to facilitate transfer
of science and technology to the marketplace. This
provided a new opportunity for EPA to augment its
emphasis so as to assist in the commercialization of
promising technologies.

NETAC helps environmental technology developers
demonstrate their technology and find appropriate
investors.  Conversely, NETAC works with investors
to identify promising environmental technology
investments.  NETAC also provides independent,
third-party evaluations and field demonstrations—
something which can be crucial to speed public and
regulatory acceptance. For the technology user,
NETAC can serve as a buffer to screen the plethora of
technology solutions proposed for a problem and
identify those technologies that are most promising.

Today, NETAC is identifying promising projects in
environmental technology nationwide, ushering
them through applied research and testing and into
production. Such projects include more effective
incineration techniques, processes for accelerating
the natural consumption of waste by microbes, and
new engineering processes to minimize the amount
of waste produced. The EPA has also designed
NETAC as a model for commercialization centers
elsewhere, intended to spawn a new breed of envi-
ronmental businesses.

Environmental problems, by their nature, are coop-
erative and transcend political boundaries. They are
also inescapable; they shall inexorably shape the
global economy more and more in years to come. As
a product, environmental protection sells itself.
Environmental responsibility makes good economic
sense in an international market.

If American government, industry and the research
enterprise join in full partnership, the potential for
new environmental technology is great. We can
produce products and services exportable to the
world that will make this planet a cleaner, safer
place. In the wake of the disastrous Valdez oil spill, it
would be only fitting if America designated environ-
mental technology as our hottest—and cleanest—
growth industry for the 21st century.             G
                                                19

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MEETING  ENVIRONMENTAL
CHALLENGES
by Alan Beals
    .ow can the United States and the Environ-
mental Protection Agency best meet the challenge of
addressing environmental expectations in the face of
competing priorities on the national agenda?

For the 16,000 cities and towns across the nation
represented by the National League of Cities, the
    Mr. Beals recently became the President and CEO of
    the Savannah Area Chamber of Commerce. He was the
    Executive Director of the National League of Cities
    when he authored this article. He served two periods
    totaling twenty years with that organization.
answers to these questions are of significant conse-
quence. As former EPA Administrator Lee Thomas
said when he spoke to the Big Seven in the spring of
1988, more than any other federal agency, EPA has
the potential to bankrupt the nation's municipalities.

As things stand now, the nation's cities and towns
face ever-increasing and ever more costly environ-
mental mandates simultaneously with ever-declining
and rapidly evaporating federal resources to help
meet the costs of compliance. In addition, tax code
revisions have steadily eroded the ability of local
governments to finance federal mandates with their
own resources or to leverage private investment
through so-called public-private partnerships.
REASSESSMENT OF FEDERAL, STATE, AND
LOCAL PARTNERSHIP

We believe a reassessment of the federal partnership,
i.e, relationships among the federal, state and local
governments, is essential if we are to deal with
environmental problems realistically, effectively, and
affordably.  The current system is not working. More
often than not, local governments are viewed as "the
regulated community," that is, when we are noticed
at all.
                                          20

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Examples of this abound:

•  In developing regulations for underground
    storage tanks, EPA exempted both the federal
    government and states from requirements to
    obtain virtually unavailable insurance. Munici-
    palities, on the other hand, none of whom are
    permitted to deficit spend, some of whom have
    budgets bigger than some of the small states, are
    not.

•  In developing a policy for dealing with munici-
    palities that have Superfund sites, industry was
    more of a major participant than munici-
    palities. To the best of
    our knowledge, no city    •••^•^^^^•MMM
    sat at the table when the
    policy for dealing with
    industrial potentially
    responsible parties
    (PRPs) was developed.

•  In announcing his Clean
    Air bill, the President
    acknowledged those
    who had been con-
    sulted: environmental-
    ists, the business com-
    munity, and states.
    Where were local gov-
    ernments—the ones who  ^^^•^••••^^^^
    are penalized when the
    clean air strategies don't work?

We must create a true partnership among all three
levels of government if we are to succeed in meeting
the nation's environmental objectives both substan-
tively and financially.

MANY PRODUCTIVE INITIATIVES START
AT THE LOCAL LEVEL

A constant frustration for our nation's municipalities
is our stepchild status in the federal system. We are
at the receiving end of mandates—from the federal
f\. constant frustration for
our nation's municipalities
is our stepchild status in
the federal system.  We are
at  the receiving end of
mandates...with little and
decreasing financial or
technical assistance.
 technical assistance. We are met at every turn with
 hammers, penalties and fines, rarely with helping
 hands, financial resources, or understanding. And
 yet, many of our most productive initiatives have
 come from the local level.

 There are infinite examples, but to give only a few:

 •  In the area of solid waste reduction, local actions
    to decrease the volume and toxicity of garbage
    that we generate have been in place, adopted and
    enforced long before EPA developed its "Agenda
    for Action." Local recycling ordinances have
                    been in effect for years in
                    some communities and the
^^"^^"••^^^™   widely touted "25 percent"
                    recycling goal has been
                    attained in many of them.
                     •   Municipal ordinances to
                         ban the use of products
                         containing chlorofluoro -
                         carbons (CFCs) have also
                         been initiated and
                         adopted by local govern-
                         ments.

                     •   Los Angeles and Denver
                         are in the forefront of
                         devising new strategies
   ^^^^^^^^^~        for reducing or eliminat-
    ing pollutants that befoul the air in over 100
    metropolitan areas. It is their initiatives that are
    now being proposed as national strategies to
    assist the nation in its pursuit of the ever-elusive
    goal of clean air.

    Stormwater management programs were devel-
    oped and implemented in Bellevue, Washington
    and Philadelphia prior to the enactment of the
    stormwater management provisions in the 1987
    Clean Water Act Amendments. Yet scant atten-
    tion has been paid to these initiatives in develop-
    ing national programs to control pollutants from
    urban runoff.
government to the states; from the states to local
government—with little and decreasing financial or     The federal government cannot continue to play only
                                               21

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A municipal worker monitors water level during a drought.
the role of overseer.  It must make strides in substan-
tially improving its working relationship with its
sister governments at the local level, both in develop-
ing laws and regulations on environmental issues
and in facing the reality of how the nation will
finance environmental cleanup.

The federal government must be a leader, providing
technical assistance,  developing technology, and
investing in research to  determine the causes of and
the solutions to our environmental problems. And, it
must head up a debate on defining the parameters of
what needs to be done—how clean is clean.

It must account for the cost of its proposals and
recommend from where the necessary revenues can
be derived. The mismatch between federal mandates
and federal cutbacks is not just hypocritical, but
reinforces opposition to local efforts to fund such
federally imposed costs.

MUNICIPALITIES SHARE  CONCERN
FOR THE ENVIRONMENT

Municipalities share concerns about the environ-
ment; every city is either upwind or downstream
from another jurisdiction. So it is important to us,
environmentally and economically, that the laws are
applied and the regulations implemented in an
evenhanded manner.

Furthermore, we live in our cities and towns and
recognize that our local environment is an important
part of our ability to grow, to attract an employment
base. To deal with cities and towns as if their main
objective is  to figure out how not to comply with
federal law is lunacy.

We, at the local level, have much creative energy to
devote to the development of solutions to the na-
tion's environmental problems. For ourselves, we
have. We don't have all the answers, but neither do
our sister governments. Perhaps more positive
interest and more cooperative attitudes toward local
government by the other levels of government would
move us  more quickly, more affordably, and more
efficiently toward a cleaner environment.         Q
                                                22

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PROTECTING  OUR  ENVIRONMENT:
A  SHARED  RESPONSE
by George E. Saurman
R
   Decently I had the opportunity to visit Mesa
Verde in Colorado. It was amazing to be able to step
into a civilization centuries old and envision how
these people were able to adjust to the environment.
It was most interesting to learn that even in such a
limiting existence they were aware of the need to
provide for trash disposal by setting aside a portion
 Mr. Saurman has been a member of the House of Represen-
 tatives of the State of Pennsylvania since 1981.  He is a
 member of the Energy Task Force of the American Legisla-
 tive Exchange Council, and has held numerous community
 leadership positions.
of the ground for burial of materials which would
attract wild animals or decay and smell.

Our society is, of course, far more complex and
threatens to become even more so with every passing
day and with every new technological discovery.
The by-products of these technologies often impact
negatively on our environment.

To what extent these substances are caused by our
constantly expanding chemical manipulation is a
matter of great debate. That very subject, however,
must in the final analysis be determined by some
authority. In similar deliberations with regard to
foodstuffs and medication, that authoritative position
is filled by the Food and Drug Administration. In the
realm of environmental considerations, we must be
able to look to the Environmental Protection Agency.
That means that EPA must establish a credibility not
presently enjoyed.

The federal government has at its call the best minds
in academia and the most brilliant scientists in the
world. Certainly the first step in developing a re-
sponsive partnership is to incorporate those re-
sources. The fact is that federal payrolls are not
substantial enough to maintain the kinds of special-
ists in its employment that are required to  establish
the intricate regulations which must be met by a
                                         23

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constantly changing industrial society in competition
with foreign interests, many of which operate in a
relatively free fashion, often simply ignoring compa-
rable restrictions.

This requires that regulatory impositions must be
sound and based upon research and fact rather than
emotional reaction to a public opinion too often
formulated by non-scientific rumors and an attitude
that it is better to outlaw
something because it        ^^^^^^H^^^^^^^^^MM||||H^H
"might" prove to have        _
dangerous consequences.      J j WOUld Undoubtedly be
It is at this point that we                                 J
must look to EPA to take a
leadership position which
challenges the rumors and
sets forth the facts.
                      EPA's ROLE: PROVIDING LEADERSHIP AND
                      GUIDANCE

                      However, EPA cannot accomplish this gigantic task
                      by itself. Again, it can and must provide leadership
                      and guidance. The responsibility for establishing
                      goals and objectives which are uniformly distributed
                      throughout the nation and universally understood
                      should rest with EPA. Therefore, EPA should set the
                                       goals and then delegate respon-
                     MMUB^^^H^^ sibility to the states to ensure
                                       compliance.
helpful for the lead agency
to establish a central focal
point for the information
about unique funding
initiatives, highlighting the
utilization of governmental
tax incentives, bonding
Every function performed
by or for an individual in
our complex, crowded
society has an impact on
our environment. That
impact, multiplied by the
tremendous number of       ammnteeS, and Other
similar functions, combines    o             '
to pose a major environ-      traditional andfoT new
mental challenge. Whether
it be solid waste, human
•waste, or industrial waste,
it must be handled just as
the natives in Mesa Verde    	
handled their waste.         ^^^^^^^^™^^
However, the method of
disposition has become critical because the masses
involved have become so great and the substances
involved have become so sophisticated.
methods of securing
necesssary funding.
EPA has taken a first step in
establishing a methodical
procedure to untangling the
environmental backlash by
asking for a report setting forth
the various problems facing
EPA and establishing the rela-
tive risks.

In a report entitled "Unfinished
Business: A Comparative
Assessment of Environmental
Problems," a comprehensive
listing of those problems has
been made and a method to
determine priorities in dealing
with them was suggested. It
would seem vital to an overall
strategy to first look at these
areas of concern and identify
"who must respond".
Thoughtful planning and careful production meth-
ods must combine to minimize, if not eliminate, the
danger to the environment. Those elements which
threaten human and/or the ecosystems must be
regulated and monitored. Clean air and clean water
are not subject to regional interpretation.
                      In matters of interstate involvement, the federal
                      government must play a major role. But many
                      problems properly belong with the states in which
                      the problem exists.  Those matters should be dele-
                      gated to the states for resolution.  There are still
                      plenty of areas for the federal government to be
                      active.  It may be appropriate for some federal dollars
                      to be available to supplement state, local and private
                      funds.
                                              24

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It would undoubtedly be helpful for the lead agency
to establish a central focal point for the information
about unique funding initiatives, highlighting the
utilization of governmental tax incentives, bonding
guarantees, and other traditional and/or new meth-
ods of securing necessary funding.

As goals are met, the public must be informed. This
is how credibility will be established.  Constant
evaluation is required to ascertain the effectiveness of
the process.  Monitoring of EPA projects, following
up on goal achievement where responsibility has
been designated, and determining newly created or
discovered areas of concern are necessary.

In summary, EPA must establish itself as a leader in
environmental matters. It should be a dependable
source of information and a clearinghouse for the
latest scientific knowledge.

This can only be done by creating an ongoing rela-
tionship with our colleges and universities, our
research centers, and our industries. This is the first
and most important partnership needed to deal with
environmental issues. EPA must be the authority—
the final word—and it can only serve in that capacity
by enlisting the best minds in the nation and, indeed,
in the world.

Secondly, EPA must inventory the tasks to be per-
formed. Once they have been identified it must
determine who should be the responsible party to
deal with the problem. Unless it deals with interstate
issues or those involving neighboring countries or
waters, the individual states should be given the
responsibility for dealing with the matter.

The key word is integration which, when supple-
mented with cooperation between government at all
levels, industry, and the nation's brain trust, consti-
tutes a dynamic partnership that will systematically
address the issues which pose a threat to our quality
of life and specifically to health, ecology, and eco-
nomic welfare.                                  -I
                                                 25

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26

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II.   CREATIVE  APPRO ACHES  TO
       ENVIRONMENTAL  FUNDING
T
 ±he
  . he shift from federal to state and local primacy has forced environmental funding issues to
the forefront. While commitment to a better environment is important, progress hinges on the
ability to pay for what is needed. Favorably, the dilemma rests on the shoulders of those most
capable of finding the answers.

State and local governments have been called hotbeds of creativity, and this is true for their
innovative approaches to environmental funding. Programs and facilities across the country
are being financed through such methods as user fees, incentives systems, public-private
partnerships, bond pools, and revolving loans.  What the states begin, the federal government
often extends, such as in the case ofEPA's State Revolving Fund for Wastewater Construction
and the Public-Private Partnerships Initiative.

The series of articles to follow explores questions about whether private sector involvement is a
viable option, what the climate for creative financing is, and who should pay for environmental
protection. The authors offer a range of views and proposals based on their own experiences and
observations. While it is understood that there is no single approach that fits all circumstances,
the articles suggest that the best way to guarantee environmental progress is through the
applied creativity of both the government and the private sector.
                                    27

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ENVIRONMENTAL  NEEDS,  RESOURCES,
AND  POLICY OPTIONS:  A ROLE FOR
PUBLIC-PRIVATE PARTNERSHIPS?
by Gerald W. Johnson
   JohnG. Heilman
     John G. Heilman
  Drs. Johnson and Heilman are Associate Professors of
  Political Science at Auburn University. They have served
  as consultants to many state and local government organi-
  zations. They recently completed a national study of
  wastewater treatment privatization, and are currently
  conducting a national study of State Revolving Funds
  authorized by the Water Quality Act of 1987.
  . he environmental policy and program arena is
shaped by the reality of increasing needs and de-
creasing resources. Even though the federal govern-
ment has invested billions of dollars in environ-
mental programs over the past two decades, needs
still exceed resources. Current budgetary constraints
at the national level of government have resulted in
the devolution of programmatic and budgetary
responsibility from the federal to state and local
levels of government. How are these units of gov-
ernment going to be able to close the gap between
decreasing resources and increasing demands?

Multiple but increasingly limited options exist to
meet these needs. In the capital intensive area they
include revolving funds; self-supporting, fee-based
projects; bond financed projects; grants; and public-
private partnerships. The options in the broader area
of public-private partnerships include co-production,
tax expenditures, deregulation, sale of assets, vouch-
ers, contracting for services, capital-intensive privati-
zation, and volunteerism. To meet existing and
projected needs, all of these options will need to be
used during the coming decade and into the 21st
century. For this reason, it is imperative that all
options be carefully and thoughtfully considered,
including public-private partnerships.

The following brief essay presents observations and
conclusions about public-private partnerships that
                                      28

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the authors have reached as a result of conducting
research on this topic since 1982.1  While our research
has focused on one kind of public-private partner-
ship, privatization, in one service area, wastewater,
our findings have implications for the broad range of
public-private partnership options found in multiple
public service areas. Specifically, the essay addresses
the fundamental dynamic of a public-private partner-
ship and the importance thereof; its current feasibil-
ity level; and, what is needed to develop public-
private partnerships.

THE DYNAMICS OF PUBLIC-PRIVATE PARTNERSHIPS

Around the world there is a "movement" to increase
reliance on the private sector to provide, produce,
and deliver traditional
public services. The public-  .I^^^B^^B^^MBB^^
private partnership is
defined and used in various
ways in different settings.
In Europe, it generally
means denationalization.
In the United States, at least
in the past, it most often
referred to contracting for
services. However, new
forms of public-private
partnerships emerged in
the U.S. in the 1980s, in-     ^^^^^^^^^^
eluding privatization—the
private sector ownership, production, and delivery of
traditionally public services. The movement draws,
in part, on the need to do more with less, the concept
of efficiency. It also draws upon the political ideol-
ogy which places blame for fiscal and social failures
on government, places faith in the perceived inherent
efficiencies of the private sector market, and calls for
a general reduction of the role of the public sector,
particularly at the national level. And it draws upon
the desire to create new  market opportunities.

Whatever its motivation, the result, in its newer
forms, calls for a restructuring of the relationships
between the public and  private sectors.  As the 1988
Report of the President's Commission on Privatiza-
tion states:
1 ublic-private partnerships
are highly dependent on  the
specifics of the local setting,
the service involved, and
the type of public-private
partnership.
       The United States is experiencing a renewed
       interest in the systematic examination of the
       boundary between public and private deliv-
       ery of goods and services. Privatization is
       much more than a set of specific changes in
       who performs an activity and how.  It is part
       of a fundamental political and economic
       rethinking that today is reassessing the roles
       of government and the private sector in the
       modern welfare state—a rethinking that is
       having an influence on all segments of Ameri-
       can opinion.2

 Privatization is thus both an "economic adaptation"
 and a "political strategy to alter the electoral land-
 scape".3  Both of these implications of a public-
                    private partnership need to be
••^•"••••••"^   understood and appreciated
                    because they are interrelated in
                    theory and practice—one
                    cannot take place without the
                    other. The public-private
                    partnership "movement"
                    addresses the fundamental
                    questions of who can and
                    should provide, produce, or
                    deliver traditional public
                    services. It raises questions
                    related both to process (what is
	   it, and how does it work?) and
                    outcome (how efficient is it,
 how much accountability does it admit, and what
 risks does it raise for implementing authorities?).
 The more fundamental questions address the inter-
 play of the public and private sectors. What can the
 state do, what should it do, and what should it not
 do? What role can and should the private sector
 play?

 THE FEASIBILITY OF PUBLIC-PRIVATE PARTNERSHIPS

 Privatization can be a feasible option to meet some
 environmental needs in specific settings.  That is,
 public-private partnerships are highly dependent on
 the specifics of the local setting, the service involved,
 and the type of public-private partnership.  A part-
 nership strategy which works well in certain settings
                                                29

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will not necessarily be transferrable to other func-
tions and governmental arrangements.

Public-private partnerships can be highly productive,
including the privatization form.  For example, in
1985 the City of Auburn, Alabama privatized the
financing, construction, operations, and ownership of
two new wastewater treatment works. The facilities
are owned and operated by a private sector company
under a long term contract with the City. The
privatization option for Auburn was the most cost
effective and productive available. In addition, the
process used and the long term contract defined and
established a true partnership between the two
sectors that adequately addressed issues of public
and political accountability.

However, if a partnership is not structured appropri-
ately, the project can be extremely complex and
costly, both financially and politically. Thus, while
some long-established forms of public-private part-
nerships are clearly feasible, and success stories
abound, many of the newer forms, such as privatiza-
tion, are not sufficiently understood or developed to
stand as recognized and feasible options.

WHAT is NEEDED TO DEVELOP
PUBLIC-PRIVATE PARTNERSHIPS?

Four areas need to be addressed in order for public-
private partnerships to contribute substantially to
meeting environmental and related needs. These
include research, policy, education and training,  and
implementation.

RESEARCH. Much is to be gained from the detailed
study of individual public-private partnership
structures, particularly privatization, in specific
service areas. Definition and understanding of the
economics and politics of public-private partnerships
is needed. As the National Academy of Public
Administration noted in its 1989 report on Privatiza-
tion: The Challenge to Public Management, to date,
these partnerships, at least in some of their forms,
"remain poorly understood.  Much of the recent
debate has proceeded in philosophical terms that
rarely get down to the nuts and bolts of actual opera-
tions."4  Currently, several initiatives along these
lines are underway. In addition to advocacy work
being done by "think tanks" and by private sector
companies, basic research on public-private partner-
ships is  now being conducted in several areas. This
needs to continue.

POLICY.  Policy developments in the 1980s served both
to promote and to inhibit public-private partner-
ships. For example, the 1981 and 1982 tax reforms
provided incentives for private sector involvement in
public sector capital-intensive projects related to
meeting environmental needs.  However, the 1986
tax reforms and the 1987 Water Quality Act reduced
both the incentives for private sector participation
and the availability of federal resources. These shifts
in national policy, coupled with the absence of
uniform state level policy, leave partnership develop-
ment in a quandary. Adequate policy and guidelines
for the development and implementation of public-
private  partnerships need to be developed based on
sound understanding of the context, dynamic, and
application of these partnerships. Again, basic
research makes an essential contribution to such an
understanding.

Certainly, some programmatic developments did
take place during the 1980s. Examples include the
establishment of the Office of Privatization in the
Office of Management and Budget; creation by
Executive Order No. 12607 of the President's  Com-
mission on Privatization; the establishment by the
U.S. Environmental Protection Agency (EPA) of a
Public-Private Partnerships Initiative; and the enact-
ment by a number of states of permissive privatiza-
tion legislation. These efforts are all, however,
outside of a context of coordinated national policy or
uniform state policies.

EDUCATION AND TRAINING. The Report of the National
Academy of Public Administration also noted that
privatization has a powerful impact on public man-
agement that calls for the revision of public admini-
stration training and practice. At Auburn University,
the development of public-private partnerships has
led to the creation of curricular specializations in
Public-Private Administration and Policy in both the
MPA and Ph.D programs. More broadly, a concerted
                                                 30

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and organized effort is needed to inform, educate,
and train potential participants in public-private
partnerships, including policy makers, public admin-
istrators, private sector personnel, and the public.

IMPLEMENTATION. Public-private partnerships involve
complex contractual arrangements between a gov-
ernmental unit and a private sector company. The
development of the contract can be a costly process
requiring professional financial, technical, and legal
counsel. Issues of political and public accountability
must be addressed. And, after a contract is executed,
the partnership requires a continuing oversight role
for the governmental unit. On the private sector side,
the partnership relationship requires a stability in the
company or industry sufficient to assure long term
production or delivery of what may be an essential
public service. Thus, implementation of a public-
private partnership, as well as its development,
requires trained and able  administrators and rein-
forces the need for research, education, training, and
information dissemination in this area.

SUMMARY

In summary, these are first steps in what needs to be
a continuing and intensified review, analysis, and
development of public-private partnerships. The
importance of the issues and the potential contribu-
tion of public-private partnerships to meet environ-
mental and other needs warrant the initiation of a
full-scale effort to take these steps.                LJ
REFERENCES:

1  See John G. Heilman and Gerald W. Johnson (1989)
  "System and Process in Capital-intensive Privatiza-
  tion: A Comparative Case Study of Municipal
  Wastewater Treatment Works."  Policy Studies
  Review 8, 3 (Spring 1989):  549-576; Johnson and
  Heilman (1987) "Metapolicy Transition and Policy
  Implementation: New Federalism and
  Privatization." Public Administration Review 47, 6
  (November/December): 468-478; and Laurence J.
  O'Toole, Jr. (1989) "Goal Multiplicity in the Im-
  plementation Setting:  Subtle Impacts and the Case
  of Wastewater Treatment Privatization."  Policy
  Studies Journal and "Operating Cost and Perform-
  ance in Municipal Wastewater Treatment: A
  Comparative Study of Public and Private Manage-
  ment," Unpublished manuscript.

2  Report of the President's Commission on Privatiza-
  tion (1988) Privatization-Toward More Effective
  Government. Washington, D.C., xii and 1.

3  Jeffrey R. Henig, Chris Hamnett, and Harvey B.
  Feigenbaum (1988) "The Politics of Privatization: A
  Comparative Perspective." Governance: An Interna-
  tional Journal of Policy and Administration 1,4 (Octo-
  ber): 242-268.

4  National Academy of Public Administration (1989)
  Privatization: The Challenge to Public Management. A
  Report by the Academy's Panel on the Manage-
  ment of Privatization, Washington, D.C.
                                                 31

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PUBLIC-PRIVATE PARTNERSHIPS:
THE EXPERIENCE  OF A
LARGE  CORPORATION
by E. S. Woolard, Jr.
    _ow can we best involve industrial corporations
in public-private partnerships to achieve environ-
mental goals? Doing so successfully hinges on two
main points.

First, it's essential to appreciate that most large
manufacturers already are major players in environ-
mental affairs. At Du Pont, for example, the
 Mr. Woolard is chairman and chief executive officer of E.I. du
 Pont de Nemours and Company. He joined the company in
 1957 as an industrial engineer. Mr. Woolard serves on the
 boards of several major corporations. He is also a member of'
 the Bretton Woods Committee and World Affairs Council
 and a member of the Policy Committee of the Business
 Roundtable.
resources we will devote worldwide to environ-
mental cleanup, pollution control, new process
technology, plastics recycling and so on will run into
the hundreds of millions of dollars during the next
decade.

Because the benefits of these investments will be
experienced in towns and states where we operate,
these efforts to minimize the environmental impact
of our operations represent in themselves a kind of
partnership with the communities that surround our
facilities. In fact, our company policy is to involve
community representatives in all major planning
activities relevant to public health and the environ-
ment at our manufacturing sites.

What about more specific partnerships? Here there
is also a role for large manufacturers, especially when
the opportunities presented take advantage of the
particular strengths of a large corporate enterprise.
Partnering with a large corporation is likely to work
best when the solution to a problem requires technol-
ogy for which the company is a center of expertise.
And major manufacturing companies perform very
effectively when the problem to be solved also
presents a business opportunity.

Du FONT'S PUBLIC-PRIVATE
PARTNERSHIP ACTIVITIES

At Du Pont, we can point to some cases of partnering
                                        32

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that indicate where these corporate strengths are
helping us work with the public sector to achieve
environmental goals.
companies are hopeful that the air quality controls
imposed will be based on actual local conditions so
that the area can achieve environmental quality while
maintaining economic viability.
One example involves an agreement between Du
Pont and the state of Illinois.  Du Pont is a major
manufacturer of polymer materials. For some time
we have been working to develop industrial uses for
recycled polymers.  Illinois, which has a very pro-
gressive attitude toward recycling solid waste but
which faces the challenge of
what to do with the plastics     ^"^^^"^"™^^™^—"^^"^^"™
portion of the waste stream,       ~T\
agreed to enter into a plastics     ±  artmring With 0, large
recycling development part-
nership with us to investigate
opportunities for reusing
recycled plastic. In the first
stages of the program, we are
working with the Illinois
Department of Transportation
to identify needs and to
design and test products from
recycled plastics to be used in
highway construction and
maintenance projects.
Only time will tell how fruit-
ful our relationship with the
state of Illinois will be. But as
Governor Thompson of
Illinois has said, if successful,     "~~~^^~~~~^^
we will have a model for
public-private involvement in plastics recycling and
market development programs. And in the process,
both public and private sector participants are learn-
ing how to work with one another to advance an
important social objective, while also creating a
potentially attractive business opportunity.

We are pursuing a partnership opportunity of a
different sort at our Sabine plant in East Texas. Du
Pont has joined with some 20 other corporations to
pursue an agreement with the Texas Air Control
Board and EPA's Region 6 to create a regional air
monitoring network. Because they are operating in
an ozone nonattainment area, Du Pont and the other
                              corporation is likely to work
                              best when the solution to a
                              problem requires technology
                              /•   jnlijrh the mnwanu is a
                              JOY wniCYl me Company IS U
                              center of expertise. And
                              major manufacturing
                              companies perform very
                              effectively when the problem
                              to be solved also presents a
                              business opportunity.
However, at this time there are not sufficient state
funds to accomplish such a comprehensive study. So
the companies propose pooling their resources with
those of the state. The partnership, if approved, will
provide the public with even more information than
                     would otherwise be gath-
""^^"^^"^^™^^"1  ered, because the corpora-
                     tions have decided to cover
                     the cost of expanding the
                     studies to collect informa-
                     tion on pollutants other than
                     ozone precursors as well.
                     And like any good partner-
                     ship, the benefits would go
                     beyond the sharing of costs.
                     The government agencies
                     involved recognize the value
                     of industrial data and
                     analytical tools as well as the
                     additional manpower of the
                     industry technical experts
                     who will work with the
                     monitoring network. It's an
                     excellent example of how
                     public-private partnerships
                     can help achieve public
                     environmental goals.
                                                 At our Victoria, Texas plant, we entered into still
                                                 another kind of partnership with Rice University and
                                                 the Texas Water Commission to conduct in situ bio-
                                                 remediation experiments aimed at removing trichlo-
                                                 roethylene and tetrachloroethylene from ground
                                                 water.  Du Pont is supplying proprietary technology
                                                 that encourages the natural activity of biological
                                                 organisms that metabolize the chemicals. Rice
                                                 University's Department of Environmental Engineer-
                                                 ing will direct microbial work, do laboratory simula-
                                                 tions, and will also do mathematical modeling to
                                                 support the field work. A Water Commission geolo-
                                                 gist has assisted in designing the experiment, advis-
                                                 ing on regulations, and obtaining permission to
                                                 proceed.  This partnership is on a local scale, but has
                                              33

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An employee of the Plastic Recycling Alliance (a joint venture of
Du Pont and Waste Management Inc.) sifts through some flake
from recycled PET bottles.

potential for national impact. Trichloroethylene and
tetrachloroethylene are commonly used solvents
throughout the United States, and ground water
contamination problems due to them are common. If
demonstrated to be feasible and effective, Du Font's
process could help clean up ground water not only in
Texas but throughout the U.S and in other countries.

These examples demonstrate how a major manufac-
turing corporation like Du Pont can participate in
public-private partnerships to improve the environ-
ment. More can be done, and EPA and state environ-
mental agencies can encourage developments by
lowering or eliminating some hurdles to constructive
voluntary action.

DISINCENTIVES TO
PUBLIC-PRIVATE PARTNERSHIP FORMATION

Important among these are what we call "definitional
problems". For example, at our Pontchartrain plant
in Louisiana, in the interest of good product steward-
ship, we wanted to take back a customer's wastes for
processing, rather than have the customer turn the
waste over to another party. But in doing so, we
would technically become a "commercial" facility
and face additional permitting requirements and
disposal fees.

Another kind of disincentive can arise when a com-
pany wants to accelerate corrective action for an
environmental problem in advance of what the law
requires. Many in industry worry that an unantici-
pated control standard may be promulgated later by
regulators that would have the effect of nullifying the
company's investment.  Companies interested in
reducing SARA Title III emissions are concerned that
they may spend large amounts to reduce emissions
voluntarily, only to have the government later man-
date a different technology. To avoid this, laws
should recognize such voluntary efforts by providing
credits, for example.

Inadvertent disincentives can penalize a company for
taking a common-sense approach to meeting an
environmental need. The result is that the environ-
mental impact may be increased.  As environmental
partnerships become more common or as industrial
responses to environmental problems become more
innovative, these disincentives will have to be dealt
with. By demonstrating flexibility, by taking into
account a company's track record, and by acknowl-
edging that unique situations often lend themselves
to unique resolutions, EPA and state agencies can
encourage companies and local governments to
eliminate inefficiencies that stress the nation's envi-
ronmental protection system.

There is no doubt that many major manufacturing
companies in the private sector are prepared to work
closely with public sector partners at all levels of
government. We have reason to be optimistic that in
the future such partnerships will offer a vehicle for
putting public and private resources where they will
do the most good for the environment.            Q
                                                 34

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CAN PUBLIC-PRIVATE
PARTNERSHIPS  HELP?
by Pamela P. Plumb
T
 JLh
  . he cost of environmental cleanup and regulation
is enormous. If we as a nation are committed to
achieving the goals of clean air and water, of reduced
trash and proper trash disposal, we are going to have
to find the resources to make that possible. Unfortu-
nately, the past several years have been marked by
legislation and regulations which have contained
  Ms. Plumb has been a City Councilor in Portland, Maine
  since 1979 and served as Mayor from 1981-1982. She is
  also past president of the National League of Cities. She
  has served on a variety of related boards and her public
   service has been recognized by numerous awards.
rules, mandates and penalties but very little in the
way of resources to meet the goals. Local govern-
ments, which are at the bottom end of the mandates
ladder, are staggering under the weight of regula-
tions and working with the smallest selection of
resources. Can public-private partnerships help?
Yes and no.

PROPER STRUCTURE OF A PUBLIC-PRIVATE
PARTNERSHIP is CRITICAL

There are clearly areas in which contracting with a
private industry or business can help a public entity
provide a service less expensively. But it is impor-
tant to remember some key issues. Private industry
will only be interested in and remain in areas where
there is a profit to be made. Although a community
may be able to reduce the cost of trash disposal,
collection, or snow plowing, there will still be a
public cost. Involving a private contractor does not
make it a free lunch. Additionally, the local commu-
nity will continue to be the party at risk, and the
more that it distances itself from responsibility the
more likely it is to run into trouble. There are risks in
loss of public control.

Let me use trash in our area as an example. For
generations, towns in Maine put their trash in a hole
in the woods. For those towns without city collec-
tion, the dump was a social center as well as a grim
                                           35

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environmental scar. With the advent of environ-
mental legislation, dumps were ordered closed and
replaced with lined, leachate collecting, properly
sited, expensive landfills or other environmentally
acceptable solutions. The goal was clearly laudable.
The cost to local government was very high.

 PARTNERSHIP EXAMPLES:
 PUBLIC OWNERSHIP MAINTAINED

In southern Maine, there were two large trash-to-
energy projects developed  to meet this challenge.
Both involved the private sector, but to different
degrees, and the comparison is instructive. Regional
Waste Systems (RWS), an organization that grew out
of an interlocal agreement among nine communities,
ran a trash baler and landfill. In the early eighties, its
communities began an extensive planning process for
the next generation of trash disposal.  That planning
process involved a  variety  of experts who were hired
to help the communities assess the different disposal
possibilities for feasibility,  costs, and environmental
implications. The result of that planning is a new
twenty-community RWS, which has constructed a
500 ton per day mass burn facility that sells electric-
ity.

RWS, which is run  by a Board of Directors from the.
local communities, owns the facility. RWS made the
key decisions on what technology was used as well
as other design, siting, and performance issues.  After
an extensive RFP and bid process, RWS chose a
private company to design, build, and operate the
facility.

The process ran into one difficulty at the completion
of construction. The company chosen, Dravo, had a
change of chief executive officer, and the new leader-
ship decided to get out of the trash business by
selling its trash subsidiary. The contracts had not
carefully foreseen this possibility, forcing Dravo and
RWS to negotiate the rights of assignment to a new
operator. But even through this difficulty, which
ended in RWS taking over  the management itself and
retaining many of the Dravo personnel, RWS owned
the facility and had the leverage and control to make
the key decisions.

Could RWS have avoided this problem with the
change in operations management? The decision by
Dravo to leave the trash to energy business would
have been difficult to predict. At the time of the RFP
and bid process, all of the companies presenting bids
were examined by outside experts for financial
soundness; the reports on the Dravo Company were
very positive.  It appeared  to be financially strong
                                                 36

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and have deep resources. In the two years between
the awarding of the bid and the completion of the
plant several of its subsidiaries weakened financially,
and a new CEO was brought in to sell subsidiaries
and prevent a takeover.  The trash subsidiary was
losing money because it was just entering the busi-
ness, and plants such as RWS were seen as loss
leaders to serve as marketing tools for their growth in
the business. As a result, it was put on the auction
block.
                     The low prices and the simplicity were very appeal-
                     ing compared to RWS' rates at $30 per ton and the
                     work in planning the plant. The communities did
                     not go through lengthy planning processes of their
                     own, nor in many cases did they hire the expertise to
                     evaluate the technology, the realism of the rates, or
                     the operating plan of the company and its staying
                     power.
However, this rapid change of direction by Dravo
underscores the need for high quality expert advise,
not just on the technical side but on the financial and
legal sides as well. The changes in Dravo might not
have been predictable, but it
is critical to have a thorough   ™^^^^™^^^^™^^^^™
analysis of the capacity of       HH
any corporation with which a   Lhe environmental
community contracts and to
have legal counsel well-
versed in the details of this
type of contracting. Al-
though the RWS contract
was very tight in many areas,
it did not plan for this par-
ticular problem. Fortunately,
RWS's problems were satis-
factorily negotiated, but all
too often the parting of the     ^^^^m^mm
ways between public and
private entities involves long and costly litigation.

EXPERIENCE WITH PRIVATE OWNERSHIP
                     Unfortunately, MERC has run into a series of prob-
                     lems with the plant operation and its financial projec-
                     tions. As a result, it has gone back to its communities
                     insisting on an additional $30 per ton. Although the
                     communities all have signed contracts at fixed rates,
responsibility for trash,
sewage, and  the like will be
inescapable for local towns.
They cannot lose control
over the mechanisms  that are
dealing with these problems.
MERC has argued that if they
want a place to put their
trash, they will need to meet
MERC's financial needs.
Without ownership and
involvement the towns have
not been able to control key
decisions or tend to little
problems before they became
big ones.  And in the end, the
problems of disposing of the
trash are still their responsi-
bility. Leaving that responsi-
bility to the private sector
looked like a bargain but left
them holding the bag.
Thirty-one other communities in southern Maine
signed contracts for trash disposal with a private
company, Maine Energy Resources Company
(MERC).  MERC designed and built a facility to sort
and burn trash for profit and offered contracts to
surrounding towns for various rates, from $4 to $15
per ton, to receive their trash. The towns' only
involvement or responsibility was a put-or-pay
agreement for a fixed amount per ton. They did not
participate in the decisions on the technology to be
used, have any ownership in the facility, or have any
say in its operation. They did not appear to have any
responsibility for the cost of the facility but were
bound by put-or-pay agreements.
                     Could the problem have been avoided? Certainly, a
                     thorough investigation of the company, its technol-
                     ogy, its financial plan, and national comparisons
                     would have warned communities that its projections
                     at $4 to $15 per ton were way below the national
                     norm of $40 to $50 per ton for trash-to-energy plants.
                     Secondly, if the towns had planned collectively for
                     the type of plant they wanted, they might have
                     picked one with fewer operating problems. Lastly, a
                     quasi-public ownership would at least have let them
                     own the facility in the end after paying off the debt
                     service with their tipping fees.

                     There have been other successful contracts with the
                     private sector within the RWS system. RWS con-
                     tracts with a private company to haul ash, bypass
                     materials, and baled bypass to the landfill site and to
                                               37

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Regional Waste Systems waste-to-energy facility in Portland, Maine.
operate the site, just as it did when it ran the baler.
Contractors are better able to maintain a variety of
heavy equipment and trucks because they can use
them for other contracts as well. However, it is
important to note that the last time this contract came
up for renewal, and was put out to bid, RWS put in
its own bid. Not only did it ensure competition for
the private operator, it proved that in this case that
the private company was the cheapest alternative.
That type of competition has worked successfully in
other communities such as Phoenix, where trash
collection is bid district-by-district, and the city
retains the capacity to do the job and bids along with
the private sector.

LESSONS LEARNED

Yes, there are ways and projects in which involve-
ment of the private sector can provide cost savings
and efficiency for local government.  But it is impor-
tant for local governments to maintain enough
control, ownership, or competition to ensure that
they don't get stuck when the profit margin begins to
drop. In addition,  the environmental responsibility
for trash, sewage, and the like will be inescapable for
local towns. Therefore, they cannot lose control over
the mechanisms that are dealing with these prob-
lems.

Finally, there is no free lunch. Private involvement in
effective ways can reduce cost, but not eliminate it.
Public-private partnerships are helpful, but not a
substitute for intergovernmental financial assistance.
There is still an enormous public cost to meeting
environmental mandates from the federal and state
governments.  Local governments still have only
limited resources. Local communities can, should be,
and already are part of the solution to environmental
problems. They can and must apply their own
financial resources to the solutions. But unless there
is also a financial partnership among levels of gov-
ernment, all the partnerships in the world will not
provide the local governments with the resources to
respond to mandates and meet our environmental
goals.                                           J
                                                 38

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AN  INDUSTRY  VIEWPOINT OF
EPA's PUBLIC-PRIVATE  PARTNERSHIPS
PROGRAM
by David M. Roderick
  . here has never been a better time than now to
recognize the great potential benefits to the nation's
environment from cooperative activities between the
private and public sector. The progress of the past
decades in addressing air, water, and solid waste
problems has resulted to a large part from independ-
ent actions by both sectors as the nation's laws and
  Mr. Roderick is a board member and former chairman and
  chief executive officer of USX Corporation. He began his
  career with that company in 1959. He is also chairman of
  the International Environmental Bureau, and the past
  chairman of the National Alliance of Business.
regulations established a demanding command-
control approach for cleanup. This strategy not only
provided stringent requirements and timetables, but
also largely ignored the limitations of technology or
the cost-effectiveness of the systems applied.

INCREASING DEMANDS FOR FURTHER
ENVIRONMENTAL IMPROVEMENTS

As we enter the decade of the nineties and beyond,
the demands for further environmental improvement
are increasing. Public awareness and concern is
being addressed by Congress with new legislation
and reauthorization for clean air as well as other
environmental statutes.

Whereas the nation is already spending about $74
billion annually for environmental protection with
prospects that this will increase to over $100 billion
over the next several years, it is essential that alterna-
tives be examined for more cost-effective strategies to
realize environmental progress. It will be particu-
larly important to develop systems that provide for
significant improvements on public/community
projects since there is a critical shortage of govern-
ment funding for infrastructure development activi-
ties that have direct environmental consequences.

The significant progress in environmental quality
over the past two decades has largely been the result
                                        39

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of pollution controls, process changes, and techno-
logical advances by business and industry.  This
environmental achievement has been accomplished
during a period when population increase and
economic and industrial growth has been unprece-
dented. The construction of cleaner industrial pro-
cesses, modernization of older plants, and shutdown
of less efficient factories have all made contributions
to this progress.
There continues to be a serious concern that only
limited progress can be realized from the private
sector in the future because of the inherent high costs
associated with attempting to remove the last incre-
ment of pollution. It has often been shown that the
costs escalate from hundreds of dollars per ton
removed when attacking the first 70% to 90% of
pollutants to tens of thou-
sands of dollars per ton in      ^^^^^m^^^^^m
attempting to remove the last
few percent of  a contaminant.
The private sector or the
nation cannot seriously
attempt to approach its
environmental policy goals
through a  command/control
strategy if it hopes to remain
competitive in  the global
marketplace.
                    COMMUNITY-INDUSTRY STEEL PLANT PROJECTS

                    Most of our steel plants across the country have
                    participated in this type of project work and continue
                    to do so when opportunities arise. For example, we
                    recently have been working with local governments
                    at Falls Township, Pennsylvania and Gary, Indiana
                    on facilities to help resolve solid waste disposal
                    problems common to both the municipality and the
                    company. We are also investigating the potential for
                    such projects in Fairfield, Alabama; Lorain, Ohio; and
                    Pittsburgh, Pennsylvania.
                    The steel facilities can provide not only suitable
                    property for siting landfill operations, but also have
                    capability for recycling the metallics from municipal
                    and industrial solid waste materials.  Existing plants
                                          can provide ancillary needs
^^•^•M^^MM^^^^MH^^MM^^H^MI    such as utilities, manage-
                                          ment services, and other
 T                                        support systems. These
1 ncentives can perhaps vest      cooperative projects have
                                          significant economic and
                                          environmental benefits to
                                          both the companies involved
                                          and the community.
be addressed in terms of
government policies that
provide motivation.
                                          We feel there are other
                                          opportunities for such
It is therefore timely, as well as technologically and
economically reasonable, to give serious considera-
tion and support to EPA's program for cooperation
through public-private partnership initiatives.

From an historical perspective, industry has tradi-
tionally worked with local governments in all types
of activities for the mutual good of the communities
adjacent to manufacturing facilities. This has in-
cluded design and construction of entire municipali-
ties, including all infrastructure facilities, in certain
locations such as remote mining or refining opera-
tions. More commonly, public-private partnerships
involved joint sewage treatment or public water
                    partnerships in air pollution abatement and water
                    quality improvement.  However, there must be a
                    significant improvement in circumstances not only to
                    provide further incentives to encourage development
                    of public-private partnerships, but also to remove
                    many of the impediments now prevalent which
                    discourage such arrangements.

                    GOVERNMENT POLICIES THAT COULD MOTIVATE
                    PARTNERSHIP FORMATION

                    Incentives can perhaps best be addressed in terms of
                    government policies that provide motivation. Areas
                    for potential within EPA include facility permits,
                    consent decrees, and other settlements with industry
systems or in some cases civic projects such as recre-     whereby credit and recognition for public-private
ational areas.
                                                40

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partnerships is considered. Other incentives might
be created through grant funding, educational pro-
grams, and specific action programs such as EPA
workshops through regional offices to facilitate and
encourage creative thinking concerning partnership
arrangements.

Finally, it must be recognized that there are impedi-
ments that are preventing the development of public-
private partnerships.  These impediments include
delays in permitting of facilities and regulatory
requirements that prevent full use and advantage of
joint waste treatment, such as overly stringent "pre-
treatment regulations" in sewage-industrial waste-
water systems. Impediments can also result from
certain cultural and institutional problems due to
misunderstanding and lack of trust between industry
and the public.

Industry has enormous potential to bring to the task
of resolving major environmental concerns that can
benefit our local communities and the nation. Dis-
cussions with industry leaders indicate a desire to
participate with the public in these activities. EPA is
to be commended for initiating discussions in this
area and for its leadership in providing a forum to
further examine alternatives in resolving one of the
more important domestic issues  we face. We cannot
ignore for long the need to strengthen the infrastruc-
ture  of our communities while continuing to improve
the environment.                               ^
                                                 41

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CLEANER AIR:
TOWARD A MORE RATIONAL
APPROACH - AN ARCO VIEW
by William D. Leake
  "tarting with the Clean Air Act of 1963 and subse-
quent amendments, the nation's fundamental ap-
proach to cleaner air has been to impose increasingly
stringent controls on air emissions with the basic
assumption that these controls would improve air
quality. Indeed, air quality has improved—we are
making progress, but not without cost. The nation is
  Mr. Leake is Vice President for Environmental Protection
  for ARCO, which he joined in 1955 as an engineer.
  He is responsible for company policies on health, safety,
  and environmental protection.
now spending at an annual rate of $35 billion to
control air pollutants. Some proposals before us call
for additional annual expenditures in the range of
$20 to $50 billion, perhaps substantially more. The
task is not trivial.

Despite these efforts, the nation has not yet achieved
attainment of the federal standards for a number of
the criteria pollutants in many areas—the stand-out
exception being lead. Of particular concern is nonat-
tainment of the ozone standard.

All of the plans introduced so far would extend the
same basic approach—more stringent emission
controls—with the concurrent hope that more of the
same will finally accomplish the task. The "more
stringent controls" approach has become an institu-
tionalized article of faith.

In our view, the time has come for a change of direc-
tion—a more rational, reliable and focused ap-
proach—in dealing with this seemingly intractable
problem. Twenty-six years of experience in address-
ing this issue should have taught us how to deal with
the problem in a more focused way. It has not.

Make no mistake, the nation's goal of achieving
healthful air quality is both legitimate and worthy.
ARCO is strongly committed to this goal—as is
evidenced by our introduction of a reformulated
                                       42

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gasoline for older cars in the Southern California
market. (If this type of reformulated gasoline were
used by all pre-catalytic cars in the area, the pollut-
ant load would be reduced by a substantial 350 tons
per day.) We took this action [the introduction of
refromulated gasoline] outside of the regulatory
framework.  As a private business entity, though, we
are strongly  committed to the important principle
that clean air goals must be reached in the most
efficient and reliable way possible. The concept of
planning the achievement of air quality improve-
ments in the most cost-effective way is neither the
current practice nor is it embodied in the proposals
being considered by Congress.

TOWARD A MORE
RATIONAL APPROACH

To the best of our knowledge, the nation has not
taken advantage of the experience which should
have been gained from our air emissions control
history. If attempts have been made to analyze
which methods worked, which did not, and why
before promulgating new controls, such a reasoned
perspective has not been made available to the
regulated public.
                  If we are to be successful in
                  meeting the challenge of the
                  future, we need a better approach
                  to managing our air quality
                  problems.

                  ADVANCED PLANNING

                  We suggest a way which should
                  get the task done in the fastest
                  and most efficient way possible.
                  For want of a better descriptive
                  term, we will call it "Advanced
                  Planning". The formula for
                  Advanced Planning can be simply
                  stated:

                  KEY ELEMENTS

                  (1) Analyze, with appropriate
                     rigor, the local air emissions
                     situation—including invento-
	     ries, source characterizations,
                     and meteorology;

 (2) For controls that have been imposed, find out
    what worked, what did not, and why;

 (3) Determine what more needs to be done to attain
    the standards;

 (4) Develop an array of control measures and project
    their specific contribution to air quality improve-
    ment (based, in part, on an analysis of experience
    in (1) and (2), and based, in part, on modeling or
    other appropriate analytical techniques);

 (5) Determine the cost of these control measures;

 (6) Rank order the control measures in terms of cost
    per unit of air quality improvement-(not cost per
    unit of inventory reduction—which does not
    produce the same result);

 (7) Implement control measures in rank-order of
    cost-effectiveness until the standards are attained;
    and

 (8) Continually monitor and reevaluate both prog-
    ress and projected strategies to attain healthful air
    quality, and develop mid-course corrections as
    appropriate.
                                                43

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Current proposals call for item (1) plus the enhanced
use of modeling, but they sorely lack the remaining
key steps of Advanced Planning.

REQUIREMENTS FOR PROGRESS

If the desired progress towards attaining clean air
goals is to be made, reasonable criteria must be
established to measure that progress.  Criteria and
time tables could be established that would key off of
meaningful improvements in air quality. Any such
criteria should include, at least, two factors:  (1)
reductions in population exposure above the stan-
dard or other equally meaningful measures; and (2)  a
reasonable time table to
achieve progress depending    •••••••^•^•MHB
on the severity of the local
situation. While Congres-
sional debate appears to have
settled on appropriate sched-
ules to reach attainment, it has
not, in our view, dealt with
the question of progress
toward attainment in a mean-
ingful way. It appears that
the intent of the act and the
proposals is to force action,
but it should not force incor-
rect action simply for action's
sake.
                     STATE IMPLEMENTATION PLAN (SIP) PROCESS

                     The appropriate place to conduct Advanced Planning
                     is in the SIP process.  The current presumption is that
                     the cost of clean air to the community is no object.
                     Advanced Planning, on the other hand, would bring
                     an element of cost-effectiveness into development of
                     a strategy and in the selection of control measures for
                     the SIP process and should, therefore, be a prerequi-
                     site to the approval of a SIP. This would set the stage
                     for a comprehensive and rational strategy from
                     which the local air districts would then draw in the
                     development of specific control measures.
nn
 Ihe Advanced Planning
approach offers the prospect
of a faster, more direct, more
certain, as well as more
economical way of attaining
healthful air quality goals.
FEASIBILITY

The analytical tools to do Advanced Planning are
rapidly becoming available. The costs of such plan-
ning are large, but, we are convinced, not as large as
missteps in the imposition of failed control strate-
gies—both in terms of wasted resources, but more
importantly, in terms of delays in accomplishing the
goals.  In any case, the Advanced Planning approach
offers the prospect of a faster, more direct, more
certain, as well as more economical way of attaining
healthful air quality goals. Further, such a course
addresses  the air quality management issue in a
rational way from a health, science, and economic
standpoint.
                    TIME TO CONDUCT
                    ADVANCED PLANNING

                    Advanced Planning will take
                    time and resources. Sufficient
                    time to conduct Advanced
                    Planning has not been allowed
                    either by the Clean Air Act or
                    in the proposals. We propose,
                    therefore, that amendments to
                    the Act rectify this deficiency in
                    the SIP process for the current
                    round of SIP calls by both
^•"•^^•^^^^•"^  providing time and rational
                    direction to the process. In our
                    view, in order to do a work-
 man-like job, the Advanced Planning process would
 take at least two years (one year after development of
 inventories). This does not mean that progress
 toward cleaner air stops until Advanced Planning is
 in gear. The Agency as well as the state agencies and
 local air districts promulgate new emissions control
 rules daily, and this process will continue.  But until
 Advanced Planning takes hold, we will still lack an
 economically and scientifically rational direction to
 the process.

 REVIEW AND UPDATE

 Periodically, those areas that have not attained the
 standards should be required to repeat the planning
 cycle and make mid-course corrections as necessary.
                                                44

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These cycles should not be less than three years nor
more than five years.

In our view, Advanced Planning should become a
significant part of the amendments to the Clean Air
Act fashioned in the 101st Congress. Failure to do so
means that we continue the same outmoded ap-
proach to managing air quality for another five years,
and perhaps even much longer.

We have the opportunity and the ability to avoid
failed policies now. We should take advantage of
this opportunity. The costs of failed policies will be
delays in achieving healthful levels of air quality, not
to mention wasted resources that could have been
effectively used to deal with the concern.           -I
Reformulated gasoline will substantially reduce automotive emissions from pre-catalytic cars.
                                                  45

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THE USE  OF  FINANCING  TECHNIQUES
TO INCREASE THE BENEFITS OF THE
STATE  REVOLVING  FUND PROGRAM
by Robert F. Mabon, Jr.
     ith the enactment of the Water Quality Act of
1987, public finance investment bankers and financial
advisers to states and cities began to consider financ-
ing methods to increase the benefits of the State
Revolving Fund (SRF) Program. The methods de-
vised to date provide a good example of how joint
  Mr. Mabon is presently a consultant to Morgan Stanley &
  Co., Inc. When he authored this article, he was a Principal
  in the Tax-Exempt Securities Department of that firm.
  Prior to that, he was Vice President of the Public Finance
  Department for Solomon Brothers. He is also a member of
  EPA's Environmental Financial Advisory Board.
efforts between the public and private sector can
assist Clean Water Act compliance.

THE EXTENT OF THE FUNDING GAP
IN THE WATER QUALITY AREA

As state officials responsible for establishing and
operating the SRFs are well aware, the major short-
coming of the SRF is the small amount of financial
assistance authorized by the Water Quality Act
compared to the projected costs of Clean Water Act
compliance. Looking at the SRF from a national
perspective, and assuming that all states would elect
to deposit the maximum authorized amount of
federal funds (Title II transfers included) to capitalize
the SRF, the total funding, including the 20% state
match, is in excess of $16.5 billion. When compared
with the 1988 Needs Survey showing projected
expenditures for wastewater facilities of $83 billion
by the year 2008, the SRF capitalization left state and
local governments with a gap of $66 billion to finance
with debt and revenues. Moreover, because federal
funds appropriated for the SRF have been  less than
the amounts authorized, while Needs Survey esti-
mates have increased, this gap has widened.

To reduce this funding gap, investment bankers have
developed financing techniques to increase the
amount of funding from the SRF by adding bor-
                                     46

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rowed funds to the federal and state contributions.
This approach to increasing the funding capability of
the SRF is referred to as leveraging. Because waste-
water funding needs can vary substantially from
state to state, several different financial structures
have been developed by investment bankers to
provide the most effective leverage structure for a
particular state.  Variables to be considered in devel-
oping a leverage program include the size and timing
of wastewater expenditures and the credit ratings of
cities and local governments participating in the SRF.
 BASIC LEVERAGE
 STRUCTURE IMPROVED TO
 RESPOND TO DIFFERENT
 STATES' NEEDS
 bonds at 8%. By combining these two funding
 sources, State X would be able to make $120 million
 of loans available to local governments at 4%.

 This basic leverage structure has been improved by
 investment bankers. These improvements have been
 assisted by guidance documentation published by
 EPA which allows states substantial flexibility in
 using the federal grant and state match contributions
 to the SRF. For example, one financing approach
 invests the federal and state monies in U.S. govern-
 ment debt instruments. The income derived from the
 interest payments is paid to the local governments
                    participating in the SRF to
^^™^•^Ml^^™^—  reduce costs on the revenue
                    bonds sold to supplement the
                    SRF.1
In all leverage structures
developed to date, the lever-
age mechanism has been tax-
exempt revenue bonds. These
bonds are sold with
maturities of up to 30 years at
interest rates which have
ranged between 7% and 8%
over the last 12 months,
depending on market condi-
tions and revenue bond credit
ratings. As funds are raised
from revenue bonds, they are   ^^^^^^^^^^^^^
added to the federal grant and
state matching funds in the SRF. The funds are then
loaned to local governments. There is a wide range
of differences in how states arrive at the interest rate
charged to communities. For example, several states
use a blended interest rate representing the interest
rate assigned by the state to the federal and state
matching funds, which can be as low as zero, and the
interest rate on the revenue bonds.

To use a simple example to illustrate how this works,
assume that State X has $60 million deposited in the
SRF representing  the federal grant contribution and
the state 20% match.  State X has determined to lend
these funds to local governments at a 0% interest
rate. These funds are supplemented by another $60
million raised through the sale of tax-exempt revenue
 Variables to be considered in
developing a leverage           Another financing structure
        lo           o             uses the federal and state
program include the size and  capital contributions to the SRF
 ...      f      .      .              both to lower the interest rate
timing of wastewater
expenditures and the credit
ratings of cities and local
governments participating
in the SRF.
                    on loans made by the state to
                    local governments and increase
                    the credit rating of revenue
                    bonds issued to leverage the
                    SRF, without the need for
                    credit enhancement such as
                    bond insurance or letters of
                    credit. Under this approach,
^M^^M^MM^^H  proceeds of revenue bonds and
                    the federal and state monies
 deposited into the SRF are loaned to localities.  Each
 locality enters into a separate loan agreement with
 the state. As described above,  the interest rate on
 each loan is a blended rate consisting of the interest
 rate on the revenue bonds and the interest rate, if
 any, assigned to the federal and state capitalization
 funds. Debt service payments  on each loan are
 structured to equal (i) debt service on the portion of
 the loan funded by revenue bonds and (ii) debt
 service on the portion of the loan funded by federal
 and state contributions to the SRF.

 In addition to providing a blended loan rate, this
 leverage approach utilizes the federal and state
 capitalization funds to provide additional security
 for the revenue bonds. In this structure, the revenue
                                               47

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bonds are secured by repayments of all the loans to
local governments. Because loan repayments meet
the payment requirements of the portion of the loans
funded by the federal grant and the state match, total
loan repayments exceed debt service on the revenue
bonds. The credit for the revenue bonds is structured
so that the repayments of the loans from both sources
are pledged first to pay the revenue bonds. As the
debt service requirements on the revenue bonds are
paid, the excess loan repayments then satisfy the
repayment requirements of the loans funded from
the federal and state contributions. Such payments
are then recycled to fund additional loans.

The excess debt service payments pledged to the
revenue bonds represent coverage on the revenue
bonds, which enables the revenue bonds to receive a
higher credit rating than if the revenue bonds were
secured by loan repayments exactly equal to debt
service on the revenue bonds.  A coverage factor of
150% should enable most states to obtain ratings of A
or as high as AA on the revenue bonds used to
leverage the SRF.

BENEFITS OF LEVERAGE STRUCTURE  TO STATES
AND LOCAL COMMUNITIES

This leverage structure also resolves a major political
problem affecting states using revenue bonds to
leverage SRFs. Unlike a traditional "bond bank"
financing where the rating agencies generally base
the credit quality of the bonds on the "weakest link,"
i.e., the local government with the lowest credit
rating, this leverage structure enables loan repay-
ments from one community to cover loan repay-
ments from another. The weakest link concept does
not apply in this situation due to this "cross-cover-
age" effect. Consequently, cities with AA ratings
should not have to pay higher financing costs by
participating in a revenue bond financing also in-
cluding cities with BBB credit ratings.2

This leverage structure provides another benefit to
local communities. Participation in the SRF requires
local governments to comply with several provisions
of federal law, including Title II review criteria and
Davis-Bacon. For local governments not otherwise
required to meet these requirements, compliance has
been estimated to increase the costs of wastewater
construction by 20 to 30%. These compliance re-
quirements, which create a substantial economic
disincentive  against SRF participation, can be satis-
fied earlier through leverage. Once a state meets its
annual "equivalency" requirements from SRF loans
generated by the federal capitalization grants and
state match, additional loans may be used for proj-
ects that do not have to meet federal cross-cutting
requirements. By leveraging the SRF, a state may
designate projects for purposes of meeting the
equivalency  requirement, which for any year would
be equal to the amount of the federal and state funds
used to capitalize the SRF for that year. Loans made
in that same  year in excess of the equivalency
amount would not have to meet these federal re-
quirements.  This approach enables a state to
broaden the  appeal of the SRF, especially for smaller
communities.

As an alternative, if a state prefers to satisfy all of its
equivalency  requirements for capitalization grants
anticipated through federal fiscal year 1994, it could
apply funds  banked in excess of current equivalency
requirements against subsequent year equivalency
requirements. Using this strategy,  a state would
require all local governments participating in the
early years of the SRF to meet equivalency require-
ments. Once the equivalency requirements are met,
loans could be provided in later years to participants
not able to meet the requirements.

The use of these leverage techniques narrows the gap
between federal and state funding  and the projected
cost of wastewater compliance. For example, using
the third leverage structure described, and assuming
a 0% interest rate on federal grant contributions and
the state match and an 8% interest  rate on revenue
bonds issued to leverage the federal/state contribu-
tions, loans totaling $56.2 billion could be generated
between now and the year 2008 at  a blended cost of
4%.  While this appears to expand  dramatically the
funding of the SRF, the subsidy level to communities
from SRF loans is far below the subsidy level that
had been provided by the Title II grant program.
Even at relatively low interest rates, the combination
                                                 48

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of capital and operating costs for wastewater facili-
ties will exceed levels that some communities can
afford. Thus, while investment bankers and financial
advisers have been able to increase SRF funding
using leverage methods, additional federal and/or
state funding will be necessary for many local gov-
ernments to be able to comply with the Clean Water
Act.                                          U
REFERENCES:

1   State match can be financed through the issuance
   of tax-exempt bonds, as well as through appro-
   priations or other alternatives. However, if tax-
   exempt bonds are used, then caution must be
   taken concerning yield restrictions.

2   This technique worked well for the New Jersey
   Wastewater Treatment Trust's Series 1989 bond
   issue. As financial adviser, Morgan Stanley
   structured the Series 1989 B bond issue to obtain
   Aa/AA ratings from Moody's and Standard  &
   Poor's despite the fact that over one-third of the
   principal amount of loans in the participant pool
   were rated less than Aa/AA.
                                                49

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Toxic WASTE:   A NATION AT  RISK
by Jay D. Hair
w,
      isdom holds that an ounce of prevention is
worth a pound of cure. That advice should serve as a
cornerstone of our nation's waste prevention policy
in an age of budget constraint.

It is clear we currently do not heed this advice:

•  Americans generate about 14 tons of solid waste
  Dr. Hair is the President of the National Wildlife Federa-
  tion, the nation's largest conservation organization. He
  serves on several boards, including Clean Sites, Inc., a
  private nonprofit hazardous waste cleanup organization,
  and The Global Tomorrow Coalition.  He is also the recipi-
  ent of numerous awards for conservation.
   per person each year, throwing away 16 billion
   disposable diapers, 2 billion plastic razors, and
   220 million tires.1

•  Preschool-aged children are exposed to higher
   risks of cancer due to hazardous levels of cancer-
   causing pesticides in their fruits and vegetables.2

•  Ground water reserves are polluted by runoff
   from agricultural pesticides, fertilizers and
   herbicides, and industrial byproducts  such as
   lead, arsenic, mercury, and PCBs from toxic
   dumps and landfills.

•  Acid rain degrades lakes, kills forests, and stunts
   crops.

•  Global warming looms as primarily man-made
   gases trap the Earth's heat and cause an acceler-
   ated greenhouse effect. This could cause frequent
   droughts, severe storms, coastal flooding and
   erosion.

•  Tropical deforestation occurs at a rate of over 27
   million acres per year—about one football field
   per second.

THE BURDEN OF POLLUTION

What does all this mean? Scientifically speaking, the
"proof" is not yet absolute. Evidence still is being
                                              50

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weighed. But it is clear we are shattering our
planet's life support system by dismantling our
irreplaceable, infinitely complex and interrelated
land, sea and atmospheric resources. We are de-
stroying the conditions needed for life to thrive on
earth.

The primary suspects: hazardous chemicals, pollut-
ants and industrial byproducts that threaten the
delicate organic balance of our common environ-
ment. Pollutants of all kinds must be prevented
before they contaminate our environment. This must
become a national priority, in spite of budgetary
constraints. The cost of failing to act will be far
greater.
                             T1
                             1 he National Wildlife
                             Federation  believes the
                             surest way to reduce the
                             pollution  threat is to
                             prevent pollution.  This
                             must  be a top priority in all
                             sectors  of our society.
Consider that in 1987 alone,
9.7 billion pounds of toxics
were released into streams
and other bodies of water,
according to EPA's Toxic
Release Inventory. More
than 2.7 billion pounds of
toxic chemicals poured into
the air from manufacturing
facilities;  1.9 billion pounds
deposited into municipal
wastewater treatment plants;
2.4 billion pounds dumped
into landfills; 3.2 billion
pounds injected into under-
ground wells and 2.6 billion   •••^•^••••^•^•MM
sent to offsite treatment and
disposal facilities. The  total weight of this dangerous
refuse from one year alone equals that of 26,000
Boeing 747 jumbo jets!

But these are merely numbers. They can't fully
illustrate  the burden of pollution. These numbers
include only 328 chemicals, and not all industries are
required to report these emissions. According to the
National Research Council, no information on toxic
effects is available for more than 75 percent of the
EPA's toxics inventory.3 And in twenty years since
EPA's establishment, there is still no comprehensive,
accurate,  and up-to-date public source of information
on toxic releases. The EPA's inventory is a step in
the right direction, but it is not enough.
 Meanwhile, mismanagement of hazardous wastes
 leads to extensive contamination of air, water, and
 land resources—and the impacts of accumulating
 toxic burdens are becoming clearer.

 It is time for public and private sector leaders to
 accept responsibility for this catastrophe, and for its
 prevention. It is time to set our budgetary priorities.
 It is time for action.  The National Wildlife Federation
 believes the surest way to reduce the pollution threat
 is to prevent pollution. This must be a top priority in
 all sectors of our society.

 But federal, state, and  local leaders worry about
 funding for this effort. Indeed, new problems and
                   demands require additional
^^^^^^^^^^^^  capital at a time when govern-
                   ments struggle with growing
                   environmental responsibilities.
                   Traditional funding sources are
                   becoming tighter and tighter.
                   The Department of Commerce
                   estimates that national expendi-
                   tures on the environment went
                   from almost $30 billion in 1975
                   to almost $70 billion in 1985.
                   The Office of Technology As-
                   sessment (OTA) recently calcu-
                   lated an annual cost of $100
                   million for hazardous waste
                   management.
                                                                     But consider just one example of
                                                  the cost of inaction. Our unnecessary emissions of
                                                  CFCs, by destroying the protective atmospheric
                                                  ozone, are linked to a steady increase in skin cancers,
                                                  causing exorbitant health care costs and an expected
                                                  20,000 deaths each year by the year 2100. We must
                                                  replace harmful emissions with safe alternatives and
                                                  reduce emissions overall. Only then will we assure
                                                  sustainable economic growth. The economic conse-
                                                  quences of declining human health and environmen-
                                                  tal degradation will dwarf the costs of prevention.

                                                  In the near-term, there seem to be two choices to
                                                  reduce waste management costs: decrease regulation
                                                  and reduce enforcement. But in the long-term, the
                                                51

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costs to environmental health would be immoral,
socially and politically unacceptable, and prohibi-
tively expensive.

POLLUTION PREVENTION MUST BE A TOP PRIORITY

The only intelligent choice is to reduce hazardous
waste production. The Congressional Budget Office
projects annual savings of $2.7 billion in industrial
expenditures if waste reduction opportunities are
pursued.

Actual cost savings for specific industries prove the
benefits. For example, over the last 12 years, 3M has
instituted nearly 2,100 projects which eliminated the
annual discharge of nearly 100,000 tons of air pollut-
ants, one billion gallons of wastewater, and 280
thousand tons of sludge and solid waste. At the
same time, the program saved more than $390 mil-
lion by reducing pollution control facilities, operating
and manufacturing costs, and promoting the accept-
ability of environmentally sound products.
Hazardous waste reduction opportunities taken to
date represent only the tip of the cost savings iceberg.
Too few industrial facilities and too few processes
within facilities have been targeted for waste reduc-
tion programs.

Many state and local governments have taken initial
steps toward establishing waste reduction programs.
But many more have not. The most common reason
cited is the lack of funds.  In many instances, busi-
nesses are willing to take steps to reduce toxic waste
generation, but do not know where to find the neces-
sary research. Federal funds must be available for
state technical assistance programs to help businesses
obtain source reduction information.

We must all act now to pass stronger laws that
emphasize pollution prevention rather than pollution
control. The Waste Reduction Act introduced by
Congressman Howard Wolpe (D-MI), and the Pollu-
tion Prevention Act introduced by Senator Frank
Lautenberg (D-NJ), represent important first steps
                                                 52

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towards achieving substantial waste reduction. The
bills would generate new information on waste
reduction, provide mechanisms for information
transfer to states and industries, and reorganize EPA
with a greater emphasis on waste reduction.

Equally important, though, is the public. And if the
public is to play a role in implementing the national
policy of reducing hazardous waste generation and
toxic chemical emissions, source reduction informa-
tion must be available to everyone.

It is incredible that we dump so much waste into our
environment, yet lack a national industrial pollution
prevention policy to guide us to a cleaner and health-
ier planet. Clearly, the mismanagement of hazardous
waste threatens America's environmental health and
economic stability. We must all act immediately to
promote strong waste reduction policies. Our very
survival depends on it.                          -J
REFERENCES:

1  Dr. Gerald V. Poje, Statement before the House Sub-
committee on Transportation, Tourism and Hazardous
Materials, United States Congress, April 21,1988.

2  Robin Whyatt, Brad Sewell; Intolerable Risk: Pesti-
cides in our Children's Food, Natural Resources De-
fense Council, New York, February 1989.

3  National Research Council, Toxicity Testing: Strate-
gies to Determine Needs and Priorities, National Acad-
emy Press, Washington, D.C., 1984.
                                                 53

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AN INTEGRATED WASTE
MANAGEMENT STRATEGY
FOR CALIFORNIA
by Janarme Sharpless
  "olid waste is a fact of life, and it's a big one. Each
day, California buries over 100,000 tons of trash, but
existing landfill capacity is rapidly shrinking. In its
1988 Annual Report, the California Waste Manage-
ment Board showed nearly one quarter of the state's
counties do not have the minimum required eight
years of capacity remaining in their landfills. In the
  Ms. Sharpless is the Secretary of Environmental Affairs for
  the State of California. Prior to this appointment, she
  served as Chief Deputy Secretary. From 1973-1983, she
  was principal consultant for the California Assembly Ways
  and Means Committee, where she analyzed legislation
  concerning toxics and hazardous waste disposal and state
  administration.
case of Los Angeles County alone, the 45,000 plus
tons of waste generated daily are expected to fill the
currently permitted limits by the end of 1993.

At the same time, the continued feasibility of land
disposal—which is used for some 90 percent of the
state's solid waste—is constrained by:

•  Increased difficulty in siting new landfills due to
   environmental concerns and urbanization of
   potential locations.

•  Higher costs to comply with new regulatory
   requirements and to transport wastes farther to
   more distant new sites beyond urban areas.

•  Limited public funds to address this and other
   emerging environmental issues.

This last factor is a particular constraint in California.
Local property tax revenues were limited through
Proposition 13. Proposition 4 placed overall spend-
ing caps on both the state and local governments,
restricting their ability to spend new revenues when
they do occur.  Other initiatives and statutes limit the
"discretionary" portion of the state budget to about
eight percent of the General Fund, which must be
shared between new programs and existing needs in
areas as diverse as public safety, general government,
consumer services, business programs, and resource
management. These limits mean that any new
                                         54

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environmental programs by the state must make
better use of existing resources, utilize fee-supported
and other alternative funding sources, and seek
cooperative efforts when possible with the private
sector.

COMPREHENSIVE PROGRAM FOR SOLID
WASTE MANAGEMENT INVOLVES PUBLIC
AND PRIVATE SECTORS

This overall situation demands a new approach if
California is to safely handle its solid waste genera-
tion into the next century. In early 1989, Governor
Deukmejian instructed the involved state agencies to
prepare an Integrated Solid Waste Management Plan.
As implemented in a series of bills signed by the
Governor, a comprehensive program is now in place
and calls for:
   Cities and counties to
   reduce waste dumped into
   landfills by 25 percent by
   1995 and by 50 percent by
   2000, with technical
   assistance from the state
   for developing programs
   and preparing the re-
   quired local integrated
   waste management plans
   to meet these standards.

   A new full-time California
   Integrated Waste Manage-
   ment and Recycling Board
   to replace the existing       •"•••^^^^•^^^
   part-time Waste Management Board.

   A temporary Source Reduction Advisor
   Committee to recommend actions to reduce
   waste volumes, including improving packaging
   and product design, developing product durabil-
   ity standards, increasing recycled feedstock use,
   reducing toxicity of packaging and products, and
   applying new technology.

   A California Recycling Markets Development
   Commission to spur commercial markets for
   recycled products.
                       A Solid Waste Cleanup and Maintenance Advi-
                       sory Committee as already provided in law to
                       ensure continued use of a multi-media approach
                       in efforts to address leachate and gas migration
                       problems with landfills.

                       State government commitment to increase recy-
                       cling through in-house recovery programs,
                       revised procurement procedures to help create
                       markets for recycled materials, and compost use
                       to replace or supplement fertilizers now pur-
                       chased by state agencies.

                       Incentives to business to help government meet
                       the goals through Recycling Market Development
                       Zones, tax credits for machinery and equipment
                       using recycled wastes to make new products, and
                                        R&D grants to small busi-
                      ^^••••^•^^•B  nesses.
At the state level, annual
fees will  be collected from
permitted landfills based
on  the amount of waste
each handles, net of any
recycled  or inert materials
removed from  the waste
stream.
Increased resources
available to both busi-
ness and government to
meet the goals through
R&D research by the
university systems,
career development
programs to train the
needed new technicians
and professionals, and
public information and
education efforts
focused on source
reduction and recy-
cling.
                    SOURCES OF FUNDING
                    Funding is drawn from several sources.  At the state
                    level, annual fees will be collected from permitted
                    landfills based on the amount of waste each handles,
                    net of any recycled or inert materials removed from
                    the waste stream.  Local revenues can be raised
                    through landfill fees to fund planning and enforce-
                    ment activities, or from other sources as a local
                    option. As already provided under existing law,
                    local governments will also continue to be eligible for
                                              55

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Public information and education efforts focus on source reduction and recycling.
state grants to fund corrective actions at existing
landfills and to develop collection systems for haz-
ardous wastes, including household hazardous waste
programs. The legislative package also requires the
new Waste Board to develop a proposal to levy "full
cost disposal" fees on certain types of disposable
goods. This study will give the highest priority to
materials that make up the largest percentage of the
waste stream and that have the greatest potential for
environmental degradation.

The emphasis of this new approach is on source
reduction and recycling. But the integrated strategy
recognizes that government and the application of
limited public resources alone cannot be the only
answer. Plans can be prepared and standards set,
but success will depend on working with the private
sector in fostering new technologies to reduce waste
generation and new markets to recycle waste materi-
als. Combining regulatory standards, investment
and research incentives, government procurement
practices to initiate new markets, and heavy partici-
pation by business in the new advisory bodies, the
Integrated Waste Management Plan applies the
energies of both the public and private sectors in
solving California's solid waste problems.
                                                  56

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MEETING TOMORROW'S
ENVIRONMENTAL NEEDS
WITH  TODAY'S LIMITED  RESOURCES
by Fred W. Finlinson
I
  ,n its February 1989 report to Congress on the
assessment of the needs of the nation's publicly
owned wastewater treatment facilities, EPA and the
states identified that nearly $99.4 billion was required
to satisfy all categories of wastewater needs through
the year 2008. Imagine, a cost nearly equal to the
current gross national product of West Germany to
 Mr. Finlinson has been a member of the Utah State Senate
 from 1973 to the present, and he is chairman of its Energy
 and Natural Resources Committee. He is a past president of
 the National Republican Legislators Association (NRLA)
 and currently a member of the Executive Committee. He is
 also a director and shareholder of Callister, Duncan &
 Nebeker.
meet a need as basic as properly disposing of our
wastewater! How will the next generation meet this
staggering cost? How will we meet the estimated
$81.0 billion of today's wastewater needs? To even
remotely accomplish these objectives will require a
pooling of federal, state, and community resources.

Since the 1972 passage of the Clean Water Act, the
federal government has invested tens of billions of
dollars in grants to assist communities in meeting
wastewater needs. Still, in my state of Utah (and
many others), more wastewater construction remains
to be done to meet current needs than has been
accomplished in sum total since 1972. This, notwith-
standing that on the average three out of every five
Utah communities have received a federal grant for
wastewater facilities construction. It appears we
must reshape our thinking on how to meet the
nation's environmental problems.

THREE AREAS WHERE WE MUST
CHANGE OUR THINKING

There are three problem areas which are contributing
to Utah's inability to meet our current and future
environmental needs. The first is our complacency
regarding the costs to meet these needs. While we
are willing to spend $20 to $30 per month for cable
television service, we are reticent to spend more than
the bare minimum for water, sewer, and solid waste
                                       57

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disposal services. In Utah, the current monthly bill
per household for sewer service is $11.20, or 0.49% of
median household income. Nationwide, according
to a recent publication of the Water Pollution Control
Federation, the average is $12.17 per household, or
0.50% of gross household income. However, our
Utah rates have remained the same over the last four
years in spite of growing needs.
A second problem is our lack of vision.  If we are to
begin addressing these growing environmental
needs, we must become more farsighted in our
planning rather than simply embracing the attitude
of "getting by" today. Unless
our communities can develop ^^^^™^™"™^^™^^™"^^™"—
an attitude of self-sufficiency
and self-reliance, there will      T   T T4-  1*             It  f
always remain a dependency   -*-™ LltUil, US U TcSliil Oj
on the state and federal
governments not simply to
provide assistance on needed
projects but to fully fund
them.
                     mental demands with our limited resources?  Para-
                     mount in this effort must be our willingness to
                     commit ourselves to tackling rather than evading the
                     problem. The first step in doing so must be a com-
                     munity-by-community assessment of existing envi-
                     ronmental facilities including their integrity and
                     ability to meet current needs. This assessment would
                     also include a financial analysis to ensure that rev-
                     enues generated from water, sewer, and solid waste
                     management systems are sufficient to meet operating
                     expenses. This study should then focus on the future
                     needs attributable to population growth, develop-
                     ment, and increased environmental standards. Once
                                        the capital construction and
                     ""^^™"^^™*^^™"  operating needs have been
                                        estimated, a financing plan can
                                        be developed to meet those
                                        needs.
effective planning, the
larger towns and districts
have implemented a pay-as-
you-go philosophy
regarding water, sewer, and
solid waste management
facilities.
A third problem encountered
is meeting the demands of
heightened environmental
requirements. These require-
ments are born out of man's
increasing impact on a fragile
environment. Pending legis-   ^_^^^^
lation and regulations include
the following: new sludge disposal regulations;
more stringent water quality standards; increased
emphasis on ground-water pollution; new landfill
performance criteria and siting restrictions; increased
requirements for well head protection; lead/copper
restrictions in water supplies; and new medical waste
disposal regulations. The nationwide costs associ-
ated with implementing these requirements will be
in the billions of dollars.

NEED COMMUNITY-BY-COMMUNITY ASSESSMENT
OF EXISTING ENVIRONMENTAL FACILITIES

The question remains, given the above problems,
how do we meet the current and future environ-
                    In 1982, the Utah Water Pollu-
                    tion Control Committee
                    promulgated rules requiring
                    each wastewater treatment
                    entity in the state to develop a
                    Facilities Management and
                    Financial Plan (FMFP) to
                    ensure that sewerage works
                    construction, operation, main-
                    tenance, and replacement
                    needs would be met in a
^^^^^^^^^^^^^  timely manner. The scope of
                    the FMFP was driven by the
 remaining "life" of existing facilities. For facilities
 with a design life of five years or less, the FMFP was
 required to be of sufficient detail to permit the prepa-
 ration of detailed design plans.  For facilities with a
 design life exceeding five years, the level of detail for
 the FMFP was not as great. Communities were
 encouraged to establish enterprise funds, separate
 from the general fund, to account for user charges
 and other assessments for system operation, mainte-
 nance, debt service, and capital replacement. Re-
 gardless of the remaining life of facilities, an estimate
 of long-term facilities needs was required.

 The FMFP not only allowed communities to establish
 a plan to address their current and future waste-
 water needs, but also allowed the  state regulatory
                                               58

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agency to rank more appropriately, in a priority
fashion, the communities with the greatest needs.
This ranking was then used to apportion the limited
financial assistance available through the EPA Con-
struction Grants Program and the Utah Wastewater
Loan Program. While not a panacea for all commu-
nities (many communities without centralized treat-
ment facilities were exempt from submitting an
FMFP), the FMFP provided a mechanism to identify
and finance waste water needs.

PAY-As-You-Go PHILOSOPHY FOR
LARGER TOWNS AND DISTRICTS

In Utah, as a result of effective planning, the larger
towns and districts have implemented a pay-as-you-
go philosophy regarding water, sewer, and solid
waste management facilities. One example is Salt
Lake City, which recognized in 1979 that major
improvements at its wastewater treatment facility
would be needed to meet discharge requirements
and to provide adequate facilities to serve a growing
population. The city also recognized that its chances
of receiving a federal grant were remote and that
bonding, while able to provide the immediate availa-
bility of construction funds, was not a feasible finan-
cial option due not only to high interest rates but also
to the uncertainty of growth rates and the strength of
the local economy.
                                                59

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Therefore, the City chose to develop a 20-year finan-
cial plan which adopted a pay-as-you-go philosophy.
As a result of this plan, Salt Lake City has been able
to meet operation and maintenance costs and existing
plant rehabilitation costs through monthly user fees
and the cost of new facilities through connection fees.
This has been accomplished while maintaining
affordable user fees which have actually decreased
by 29% since 1982. However, even with effective
planning, some communities (mostly smaller ones)
remain unable to afford needed environmental
facilities. In these instances, a pooling of state,
federal, and local resources may be necessary to
bring the facilities plan to
fruition.                      ^••••^^^M^^^MI
LEVERAGING OF RESOURCES

In 1982, the need for capital for
water projects, both for water
quality and quantity, triggered
in part by the lack of federal
funds, was brought to the
legislature in a very short
budget session. The legislature
was ready to adopt a change in
attitude so that state funds
would be available for waste-
water treatment as well as for
improvement of culinary
systems.  A task force worked   ^^^^^^^^^^^^
during the interim of 1982 and
presented to the 1983 general
session a package of two bills that created the lever-
aging mechanisms mentioned herein and provided
$50 million dollars from a state general obligation
bond to activate the programs. The funds were
available for the development of new sources, waste-
water treatment plants, and culinary delivery sys-
tems. The historic merger of funding for both quan-
tity and quality had been achieved.

A key factor in the success of the 1983 legislation was
the building of a coalition of both quantity and
quality support groups, which established sufficient
political support to obtain the funding. A new
reservoir of 40,000 acre feet was conceived, planned,
oince 1983, through its
Wastewater and Water
Loan  Programs, Utah has
funded 75 projects resulting
in $150 million of capital
construction  using $48
million of assistance from
the state.
 and built. Incredibly, filing started within a two and
 one-half year period. Contrast this time frame with
 the average of 40 years for federal water develop-
 ment projects. The leveraging results for develop-
 ment and culinary projects are as impressive as those
 in the wastewater treatment area. With State in-
 volvement in the funding, a new resource was added
 to the pool of already existing local and federal
 funds.

 Since 1983, through its Wastewater and Water Loan
 Programs, Utah has funded 75 projects resulting in
 $150 million of capital construction using $48 million
                     of assistance from the state.
^^^^^^""^^^"^  Roughly 25% of the existing
                     wastewater facilities in Utah
                     have received assistance
                     through the state's wastewa-
                     ter loan program. Eighty-five
                     percent of the funds thus far
                     expended have been allocated
                     to projects which have re-
                     sulted in facilities being
                     brought into compliance with
                     state or federal standards
                     regarding wastewater treat-
                     ment and disposal. This
                     assistance has taken the form
                     of loans to communities to
                     buy municipal bond insur-
^^^^^^^^a—_„  ance, purchase locally issued
                     bonds at favorable interest
 rates, and issue loans which may be blended with a
 locally issued bond to yield a desired repayment rate.
 Repayments from the bonds/loans are then made
 available for other projects. Leveraging the state loan
 monies at a ratio of three local dollars for every state
 dollar has allowed the limited funds to be stretched
 to their maximum use.  A continuation of this idea on
 the federal level is the instigation of the State Revolv-
 ing Fund (SRF) Program which is replacing EPA's
 Wastewater Construction Grants Program.

 PUBLIC-PRIVATE PARTNERSHIPS

 Another tool available to wage the battle to meet  our
 environmental expectations may be to invite the
                                                60

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private sector to form a partnership with communi-
ties in order to meet the growing environmental and
resource challenges of the future. Options may
involve privatization, where the private party owns,
builds, and operates a facility; turnkey projects,
where a private party designs, constructs, and oper-
ates a facility owned by the public sector; and con-
tracting, where a private party operates and main-
tains a publicly owned facility.

Whatever the tool, be it a public-private partnership,
leveraging of state, federal and local resources,
effective long-term community planning, or a combi-
nation of all three, it is apparent that the time to
prepare to meet future environmental expectations is
now. We can no longer afford as a society to  wait for
the federal or state governments to provide grants for
capital construction needs. The magnitude of the
funds necessary to embrace such a philosophy are
not available, nor will they ever be.  The time has
come for us all to realize that our environment is a
limited resource which we must earnestly protect
through our concerned efforts today and through our
investment in the future.                         3
                                                 61

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62

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 III.   OVERCOMING  BARRIERS
         AND INTRODUCING INCENTIVES
A
      the state, local, and federal governments struggle to pay for environmental progress,
new financing techniques and applications will be tried across the country. Some will stand the
test, others won't. But what about the times when a financing plan never makes it off the
ground, not because the project is inviable, but because of the barriers which prevent its
consideration?

Barriers to innovative financing exist at all levels, and come in many forms. Our authors were
asked to present their ideas as to what the barriers are, and suggest what incentives are appro-
priate to create greater opportunities for environmental funding. Of course, federal tax policies
are a major source of both impediments and potential incentives. Other barriers include regula-
tory restrictions and the uncertainty of future environmental requirements, state prohibitions
against certain financing and contractual procedures, and straighforward reluctance to try
anything new.

Overcoming barriers, and creating incentives in their place, is a long and arduous process. It
requires Acts of Congress, changes to state constitutions, and probably the hardest of all,
changes of mindset. This document hopefully will hasten those incentives which have long-
lasting and beneficial results for our environment.
                                    63

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FUNDING OUR
ENVIRONMENTAL  INFRASTRUCTURE
by Senator Pete V. Domenici
-/JLme
     lericans have become increasingly aware that
our nation confronts what some have termed a crisis in
infrastructure funding. The problem is particularly
acute in the environmental area. Some examples are
more dramatic than others, but every day disasters such
as unsafe drinking water, inadequately treated sewage,
and inappropriate disposal of hazardous wastes occur
  Senator Domenici has represented New Mexico in the U.S.
 Senate since 1972. He is the ranking minority member on the
 Senate Budget Committee, and was Chairman of that
 Committee from 1981-1986. The Senator is also a member of
 EPA's Environmental Financial Advisory Board. He is the
 recipient of many honors and awards, including the 1988
 National League of Cities Award for Outstanding Perform-
 ance in Congress.
in cities and towns across America.

I have had a long-standing interest in these environ-
mental infrastructure financing issues. In this article, I
would like to discuss some of the findings of two
distinguished groups who have studied the situation, as
well as describe my proposed legislation based on their
recommendations, to address the problem.

STUDIES OF INFRASTRUCTURE STATUS
CALL FOR ACTION

Several years ago, as Chairman of the Senate Budget
Committee, I established the Private Sector Advisory
Panel on Infrastructure Financing, comprised of distin-
guished public officials and private citizens, to advise
the Committee on techniques Congress might use to
increase investments in roads, dams, airports, bridges,
water systems, and waste disposal. Subsequently, the
National Council on Public Works Improvement
released its 1988 study, Fragile Foundations: A Report on
America's Public Works.

Both reports concluded that America faces a great
challenge in reviving our decaying public works invest-
ment. These reports underscore the severity of the
problem by documenting the sharp reduction in infra-
structure spending that has occurred. The Council
found that capital spending for public works has
dropped from 2.3 percent of GNP in 1960 to
1.1 percent today, and that the share of each dollar spent
                                           64

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by American governments for public works dropped
from 20 cents in 1950 to 7 cents in 1984. This trend, if it
continues, will have dire consequences on our produc-
tivity and quality of life.

To rectify this situation, the Council recommends "a
national commitment, shared by all levels of govern-
ment and the private sector, to increase capital spending
by as much as 100 percent above current levels."

To demonstrate the magnitude of the need, it has been
estimated that compliance with the Clean Water Act
between now and the year 2000 will require $109 billion
in new investment. In regard to water supply, the
estimates vary from $75 to $110 billion to maintain and
upgrade safe and dependable water supply systems in
urban areas, with another $40 billion needed to provide
safe drinking water to small communities and rural
areas. Compliance with federal requirements for the
management and disposal of solid and hazardous
wastes will cost tens of billions of dollars more.
In studying local options to finance facilities to improve
the environment, the Private Sector Advisory Panel
found that state and local governments will have to
continue to rely on traditional financing devices—
general and dedicated revenues, short-term borrowing,
special assessments, and bonded indebtedness. In
addition, the Panel found that private sector spending
on infrastructure offered significant potential for
growth.

FEDERAL TAX CODE PLAYS CRITICAL ROLE

Both bond indebtedness and the formation of public-
private partnerships are particularly responsive to the
Federal Tax Code.  The ability of local governments to
finance public facilities through bonds is governed
directly by the tax-exempt bond rules of the Code. If
the private sector is to enter the picture, the tax law
must allow facilities to generate an adequate return on
investment. Unfortunately, recent federal tax law
changes have discouraged investments in public works.

Beginning in 1982 and continuing with the 1986 Tax
Reform Act, provisions that were written into the Code
to prevent abusive private use of tax-exempt financing
for hotels, stadiums, and other similar investments
spilled over onto projects that are publicly owned and
operated to serve the general public.  The Panel noted
that the effect of these provisions is to constrain state
and local autonomy and jeopardize financing for those
projects that serve the general public.

The Tax Code now classifies a state or local bond as a
"private activity" bond, regardless of the nature of the
facilities financed, if more than 10 percent of the pro-
ceeds are "used" and more than 10 percent of the
proceeds are "secured" by one or more private busi-
nesses.

What does this mean?  It means that once the 10 percent
limit is exceeded, and it usually is, bonds for the entire
facility no longer can be exempt from taxation unless
the bonds fit within the state's private activity volume
cap. These caps were reduced as a result of the 1986
Tax Reform Act, further restricting the use of tax-
exempt financing. It is now possible for one large
                                                   65

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sewage treatment plant to take up as much as 15 per-
cent of a state's allowable volume, a volume for which
many worthy public projects must compete fiercely.

But even if bonds for an environmental facility were
safely classified as "governmental," they continue to
face increased restrictions such as the rebate of any
profits from higher yielding investments that might be
made during a brief, pre-construction period. This
requirement prevents local governments from manag-
ing bond proceeds efficiently.

BILL CREATES TAX-EXEMPT "INFRASTRUCTURE BONDS"
AND ENCOURAGES PUBLIC-
PRIVATE PARTNERSHIPS         •^^••^^••^•i
                     Act, in that they would not be subject to a cap nor to the
                     alternative minimum tax, and can be refunded at any
                     time. Furthermore, this bill allows local governments to
                     reinvest proceeds from infrastructure bond issues
                     temporarily at higher yields, granting local govern-
                     ments greater flexibility in financing.

                     The second major thrust of my bill encourages private
                     investments in public facilities. Public-private partner-
                     ships have taken on new importance as we search for
                     capital to meet public needs. This bill extends to all
                     types of environmental facilities the same tax treatment
                     that is now given only to solid waste facilities.
The tax-exempt status for state
and local bonds is sound
national policy, and it is an
integral component of a strong
partnership between the
federal and other levels of
government. In order to
encourage investment in those
portions of our nation's
infrastructure that enhance
our environment, I introduced
the Environmental Infrastruc-
ture Act of 1989. This bill       im^—m,^——m
seeks to make environmental
public works improvements less costly as investments,
both to local governments and to the private sector, by
restoring at least a portion of the tax-exempt status
previously enjoyed by state and local bonds.

First, the bill creates a new category of tax-exempt state
or local bonds called "infrastructure bonds". This new
class of bonds would be used to finance wastewater
treatment facilities, solid waste disposal facilities,
hazardous waste disposal facilities, public water sup-
plies, and facilities required to achieve compliance with
regulations issued by the Environmental Protection
Agency.

These bonds would be freed from the constraints
imposed on tax-exempt bonds by the 1986 Tax Reform
 1 he tax-exempt status for
state and local bonds is
sound national policy, and
it is an integral component
of a strong partnership
between  the federal and
other levels of government.
Currently, municipal wastewa-
ter treatment plants are depre-
ciated over 15 years, and water
and sewer facilities over 20
years. To attract private
investment, these facilities
must hold the promise of
profitability. Projects of this
sort are long-term investments.
They do not generate a quick
profit; the return is low and
spread over many years. The
cost-recovery rules now in the
Tax Code lessen the economic
feasibility of such arrange-
ments.
                     Under my proposal, all of these facilities will be placed
                     in the 7-year accelerated cost recovery class. If they are
                     financed with tax-exempt bonds, they will be depreci-
                     ated over 10 years. Thus, environmental facilities will
                     become more attractive investments.

                     I see this bill as one step forward in a comprehensive
                     program to meet America's infrastructure needs. This is
                     a sound way to strengthen our commitment to the
                     environment and our nation.

                     It is not extreme to say that our competitive future
                     hangs in the balance.                            Q
                                                 66

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FINANCING ENVIRONMENTAL
INFRASTRUCTURE:    THE FEDERAL-
STATE-LOCAL PARTNERSHIP
by Congressman Beryl Anthony, Jr.
    Listorically, the federal government has made
substantial investments in the nation's infrastructure.
This was particularly true for environmental systems in
the 1970s and 1980s. During this period, the Environ-
mental Protection Agency (EPA) distributed over $60
billion to state and local governments.

The results indicate that this federal money for the
  Congressman Anthony has represented Arkansas' Fourth
  District in the U.S. Congress since 1978, where he serves
  as a member of the House Ways and Means Committee. He
  is also the Chairman of the Democratic Congressional
  Campaign Committee. In 1988, he formed the Anthony
  Public Finance Commission. Congressman Anthony is a
  member ofEPA's Environmental Financial Advisory
  Board.
environment was well spent. Thousands of miles of
rivers, streams, and lakes have been restored and
protected; the air in our cities is cleaner and healthier;
and important steps have been taken in dealing with
hazardous wastes, toxic chemicals, and pesticides.

But much remains to be done. Many environmental
needs have never been met. We have now outgrown
some of the systems built with these past investments
and still others are in need of repair and replacement.
EPA estimates that more than $80 billion in construction
will be needed to bring communities into compliance
with clean water standards alone.

Meanwhile, federal mandates affecting state and local
governments continue to grow. Congress has passed
more than thirteen major environmental laws since the
mid-1980s, including the Superfund reauthorization,
Safe Drinking Water Act Amendments, and Clean
Water Act of 1987. Potential new laws range from the
Clean Air Act reauthorization to action on radon, global
warming, and ozone.

As a result, we find ourselves in need of a renewed
financial commitment to infrastructure. However, the
continuing federal budget deficit threatens our ability to
make the investments needed to ensure the future
economic strength of our country. This has created
what many call the infrastructure financing crisis, a
challenge that all levels of government must address.
                                       67

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ANTHONY COMMISSION FORMED

Faced with reductions in federal support for state and
local projects and the new restrictions placed on tax-
exempt financing by the 1986 Tax Reform Act, a num-
ber of my constituents asked me to look at overall cuts
in federal aid to states and localities.  In January 1988,1
formed the Anthony Commission on Public Finance to
review the effects of the 1986 Tax Reform Act on the
abilities of state and local governments to finance their
growing responsibilities, particularly in the infrastruc-
ture area.
                    their citizens would otherwise have to shoulder to
                    finance essential community needs.

                    In recent years, this ability has been restricted by federal
                    tax policies. Congress imposed the restrictions to: (1)
                    curb tax-exempt financing of private facilities with
                    limited public benefit and (2) help reduce the federal
                    budget deficit.  Although Congressional intentions were
                    good, the Commission found that after implementation,
                    a number of the provisions in the 1986 Act had an
                    unintended impact on appropriate and needed public
                    borrowing.
During the next year and a half,
this group of state and local
officials and public finance
professionals carefully re-
viewed the effects of changes in
federal program requirements
and tax laws on state and local
financing capabilities.  Al-
though the Commission's
report, issued in October 1989,
applies to all infrastructure
investment, it is pertinent to the
area of environmental infra-
structure. Let me share with
you some of what we have
learned from the Commission's
work.

COMMISSION OVERVIEW
 Ihe ability of state and
local governments to
finance needed
infrastructure, such as
environmental facilities, is
critical to the public health
and welfare of our citizens
and to  continued eonomic
growth.
The Commission reviewed the history of tax-exempt
finance and considered the problems that state and local
governments face.  The review confirmed a simple but
important point: the ability of state and local govern-
ments to finance needed infrastructure, such as environ-
mental facilities, is  critical to the public health and
welfare of our citizens and to continued economic
growth.

The Commission noted in its report that tax-exempt
municipal bonds are the basic tool used by states, cities,
counties, and towns to pay for needed public facilities
and services. This  ability to sell debt with interest
exempt from federal income taxes is critical to state and
local borrowers. It directly reduces the tax burdens that
                      We all recognize the valid
                      federal interest in preventing
                      tax abuses and achieving tax
                      equity. However, we must
                      also understand that state and
                      local governments face a
                      harsh reality: substantial
                      federal support for many state
                      and local projects has ended at
                      the same time that the ability
                      of these governments to
                      access the tax-exempt bond
                      market has been reduced and
                      made more costly.

                      Compounding this serious
                      situation is the disturbing
^MHMM^H^M^B^M  trend identified by the Com-
                      mission of a reduced percep-
 tion of partnership between the federal government and
 state and local governments. Many at the federal level
 increasingly see state and local governments as "just
 another special interest group". I disagree with this
 view. Our system is based upon shared powers and
 responsibilities between different levels of government.
 Further, we must always remember that all government
 expenditures (federal, state, and local) are ultimately
 paid for by the taxpayer.

 COMMISSION RECOMMENDATIONS

 The Commission concluded that many of the provisions
 of the 1986 tax reform have a harsh impact on the ability
 of state and local governments to issue bonds for
                                                68

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legitimate public purposes. The Commission's specific
recommendations reflect a strong belief in the desirabil-
ity of a public policy that:

•  recognizes the right of state and local governments
    to use tax-exempt debt to finance basic governmen-
    tal facilities and services;

•  accepts the responsibility of Congress to prevent
    abusive use of tax-exempt financing;

•  promotes cooperation between all levels of govern-
    ment in encouraging the use of tax-exempt financ-
    ing to help meet the huge need for public infrastruc-
    ture projects and governmental services;

•  does not require that public projects be financed in
    any particular way, but recognizes the need for
    different state and local approaches, including
    public-private partnerships; and
•  encourages (1) re-examination of tax provisions that
    go far beyond stated purposes in preventing abuses
    and (2) the application of true cost-benefit analysis
    when evaluating the costs of legislation.

The recommendations made by the Commission are
significant. In general, they address restrictions on (1)
the ability of state and local governments to pay for
public projects with tax-exempt municipal'bonds and
(2) the attractiveness of these bonds to investors.

Recommendations for curing the first include: treating
bonds as tax-exempt if the facility financed is publicly
owned or the benefits from it accrue to the community
as a whole; and creating certain exceptions to arbitrage
rebate requirements.

To encourage investment  in these bonds, the Commis-
sion endorses eliminating the tax-exempt interest
preference for private activity bonds under the indi-
vidual and corporate minimum taxes, eliminating tax-
exempt interest from adjusted current earnings, and
increasing the $10 million small-issuer exemption to $25
million to ease the placement of tax-exempt debt with
banks.

CONCLUSIONS

I believe that the Commission's report offers a sound
basis for creating a public  financing policy that protects
legitimate federal interests yet assists state and local
governments in meeting demands for public services. If
we at the federal level acknowledge the increasing costs
that state and local governments face and try to reduce
that burden where possible, we can help them solve
their infrastructure problems.

Our policies must enable state and local governments to
achieve the goal that we at the federal level share with
them—that of a sound and healthy foundation for
America's communities.                          Q
                                                   69

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KEEPING  THE  FAITH:   THE DEEPENING
CRISIS IN ENVIRONMENTAL
PROTECTION FINANCING
by Howard M. Messner
   Laurence D. Bory
     Laurence D. Bory
 Mr. Messner is Executive Vice President of the American
 Consulting Engineers Council. From 1983-1987, he was the
 EPA Assistant Administrator for Administration and
 Resources Management, and has held a variety of other
 public service positions. Mr. Bory is the Managing Director
 for Governmental and International Affairs for the Ameri-
 can Consulting Engineers Council. He has extensive
 experience in public works development in  both the public
 and private sectors.
    I ot a day goes by that the media does not cite to
readers, listeners, and viewers the results of another
poll. This strange phenomenon of telling the public
what the public thinks on any current issue is only one
by-product of the information age. There is one issue,
however, in which the public never deviates in any poll:
a continuing commitment to, and willingness to pay for,
an improved environment—for cleaner air, water, soil,
beaches, roadsides, and public spaces of all kinds. Yet,
during the last decade the public investment in environ-
mental cleanup has consistently declined.

Since the passage of the Environmental Quality Act of
1970, more than a dozen major regulatory and manage-
ment laws have been enacted. Despite many legislative
and court fights, the support of environmental pro-
grams by citizens and the private sector has consistently
improved. The resistance of the early '70s to clean
water, clean air, and toxics removals goals has steadily
faded. In fact, businesses now recognize that effective
environmental management is good business policy.
This is not to say that specific sectors or industries have
not opposed particular regulatory or enforcement
efforts. But, in general, private investment and support
nationally for these goals have steadily climbed.

PUBLIC SECTOR COMMITMENT SLIPPED

But somewhere in the last ten years the public sector
commitment slipped. The twin political movements of
                                       70

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"getting the government off the people's back" and
"deficit reduction" combined to produce two results.
First, there was a relaxation of environmental compli-
ance standards that produced inequities and unfair
competitive impacts within industries by rewarding
"foot draggers". This caused the regulated community
to hire lawyers to avoid statutory requirements to the
detriment of those who hired engineers to solve their
environmental problems.

This was followed by a cutback in domestic federal
spending with no change in compliance deadlines that
impacted decade long plans for local public environ-
mental management facilities. The largest casualty was
the Federal Water Pollution
Control Act (Clean Water Act)
Title II Construction Grants
Program. But it was only one
of a number of infrastructure
programs impacted by the
"double hit" of federal cuts.
Changes in the 1986 Tax
Reform Act also undercut
public investment, as did the
trend to encourage public-
private partnerships for envi-
ronmental facilities.
In 1981, American Consulting
Engineers Council (ACEC) and
many other organizations        ^^^•^^^^HB^H
whose members were involved
in the supply, fabrication, design, and construction of
environmental facilities strongly supported regulatory
reform. That same year we endorsed a ten-year reau-
thorization plan to transition the water pollution facili-
ties grant program to a loan program with the objective
of creating permanent state environmental infrastruc-
ture banks. Congress reluctantly went along in 1987.

The success of this approach depended on two factors:
the continuing commitment of federal appropriations at
the authorized level through 1994 and a streamlined
mechanism to encourage the states and localities to
accept the idea that infrastructure banks were the future
and not to count on further Congressional extension of
compliance deadlines or additional federal cash.
/\s such goals are reached
only by long-term invest-
ments in the environmental
infrastructure, they must be
based on policies which are
more insulated from  the
push and shove of budget
and tax politics.
 Unfortunately, neither commitment was kept. The
 reduction of federal revenues and increasing spending
 led to the Gramm-Rudman budget compromise and the
 consequent cutting of the so-called discretionary portion
 of the budget. Concurrently, the 1986 tax law, in an
 attempt to "find" revenue leaks, redefined "public
 purpose" for tax free revenue bonds. This reduced the
 municipal bond market and the marketability of such
 bonds for sewage treatment plants, water treatment
 facilities, solid waste handling centers, and many other
 environmental infrastructure projects.

 This was particularly true of so called "privatization"
                       projects in which local com-
m|^—^^^^m   munities met their wastewater
                       facilities requirements by
                       contracting with private
                       entities not just for the design
                       and construction of plants,
                       but also for the ownership
                       and operation of the systems.
                       Privatization showed great
                       promise, accelerating comple-
                       tion of projects and the
                       consequent improvement of
                       stream quality by halving the
                       seven to ten year time frame
                       for completion experienced
                       under the federal assistance
                       grant program with its many
                       approvals and regulatory and
                       social requirements.
                    The undercutting of the municipal bond market (the
                    dollar value of bond issues sold dropped by 50%
                    between 1987 and 1988) was compounded by the
                    Donnelly amendment added to the Technical Correc-
                    tions Act in 1987. This bill was the necessary fix of the
                    errors and the clarifications of the ambiguities in the
                    1986 tax law. The Donnelly amendment, introduced by
                    Representative Brian Donnelly (D-MA), restricted
                    arbitrage in the bond market. It grew out of a concern
                    that mortgage bankers were "churning" bond issues by
                    reissuing municipal bonds at intervals shorter than the
                    full term of the bonds. But an unknown and unfortu-
                    nate side effect of the amendment was to make imple-
                    mentation of the EPA Clean Water State Revolving
                                                71

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                   "~! 's'""" ™'"""'8!   '•       '  .^nt****^
The Water Conserv II project in Orlando, FL, an award winning design of Boyle
Engineering Corporation, was conceived during the worst drought in Florida's history.
It's expected to solve Orlando's wastewater disposal problems while providing a
dependable water source for area citrus growers.
Fund (SRF) included in the 1987 reauthorization diffi-
cult, if not impossible, for many states to implement.

It certainly did not encourage or provide incentives for
states to establish state environmental infrastructure
banks with construction grants funds in advance of the
time when all the federal funds under the Clean Water
Act would be converted to allocations to states to create
loan funds, rather than the individual grants to munici-
palities. Moreover, applying statutory restrictions and
requirements that contribute to the seven to ten year
completion time for projects to the first round of loans
removes some of the savings and incentives which
made the idea of a loan program attractive.

NEED FOR INCENTIVES

The accomplishment of environmental goals with a
combination of incentives and sanctions, a mix of
financial assistance carrots and regulatory sticks, is
necessarily being reappraised in a time of trillion dollar
deficits. However, as such goals are reached only by
long-term investments in the environmental infrastruc-
ture, they must be based on policies which are more
insulated from the push and shove of budget and tax
politics. There are too many players at different public
levels and in the private regulated community whose
cooperation and leadership are needed to accomplish
the goals.  Sanctions by themselves encourage public
and private "polluters" to hire lawyers to defend and
negotiate the current behavior which the goals seek to
change. The policies of incentives and making environ-
mental goals "good for business" require a "keep the
faith" attitude that encourages "polluters" to hire
engineers and scientists to solve environmental prob-
lems and find profit in pollution control.
                                                    72

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REASSUMING THE   FEDERAL MANDATE
by David Seader
  . here is no need to reiterate the mass of data demon-
strating the growing need for investments in environ-
mental infrastructure, nor to point to the widening
disparity between environmental control requirements
and the means to pay for them. So much is increasingly
apparent. What is not clear is how American communi-
ties are going to pay for future environmental manage-
  Mr. Seader is Vice President for Privatization Finance at
  DnC America Banking Corporation. He is a co-founder and
  sponsor of the Privatization Council, and has served as its
  Executive Director. He is also active in several professional
  associations and the author of many articles on project
  financing and alternative energy projects.
ment facilities. The source of the needed capital—
public or private—notwithstanding, two aspects of
capital application remain the same: (1) the public
ultimately pays for it; and (2) capital expended on
environmental assets is not available for other produc-
tive investments.

FEDERAL GOVERNMENT MUST MAKE
CERTAIN KEY DECISIONS

Given those two facts, it is incumbent upon the federal
government to decide with respect to environmental
quality: (1) how much will its citizens be asked to
spend; and (2) what will the spending priorities be? In
neither of these cases has the government been much
good at providing explicit answers, either in evaluating
and setting trade-offs among competing goods, or in
determining the just incidence of the costs.

Implicitly, of course, both factors get determined in the
political process. The flow of environmental control
legislation and regulation represents the choice of "the
people" to value national environmental spending
above or below some other priorities. The legislated
mandates and control regulations also inherently
determine a price tag for the spending, though not one
that is easily calculated. After all, EPA requiring certain
levels of local spending for landfill design, operation
and closure has the same effect as an appropriation of
                                             73

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public funds for the same purpose—though not of
federal funds. The same can be said for the implicit
capital requirements inherent in new sludge regula-
tions, incinerator ash classification or pending acid rain
legislation. They all represent national spending   ,
priorities and dip into the taxpayer pocketbook.

If the federal government is deciding how much and on
what monies are to be spent, it is also incumbent upon
the government to show leadership in marshalling
funds for accomplishing its (and our) objectives. Tradi-
tionally, the federal government has subsidized many
of its mandates for environmental capital expenditures
through outright grants (wastewater treatment) or
subsidized, tax-exempt financing (resource recovery,
certain air pollution controls, etc.). Strangely, in some
cases it did neither (drinking     ^^^^^^^^^^^^
water).
                                lo appropriate a rallying
                                cry of an earlier George,
                                responsibility without
                                resources is  tyranny.
In recent, deficit-ridden times
the federal government has
abandoned its subsidies and
shed its responsibilities to
others. Thus, in the guise of
deficit reduction and revenue-
neutral tax reform, the federal
government simply added to
its own coffers at the expense of  •"•^^"•^^^«1^™
other levels of government and
private concerns. The fixes included turning grants into
loans, restricting the use of tax-exempt debt and elimi-
nating tax benefits for equity investments. The net
result? Higher cost for environmental control and a
shift of the burden from federal to state and local tax
bills.

After all, turning grants into state revolving loan funds
increases the capital costs and passes them on to oth-
ers—loans cost more than grants. Limiting tax-exempt
financing for environmental infrastructure just makes
the projects more expensive to the taxpayers. Even
seeking private capital to fill the gaps through public-
private partnerships raises the cost of capital to taxpay-
ers (especially if the tax subsidies of investment tax
credits and accelerated cost recovery are withheld).
Passing the buck-raising to others may appease federal
budget cops, but it does little to solve the basic problem:
 the creation of more and more clean-up responsibilities
 without the provision of resources to comply. Sooner or
 later, something has to give in this zero-sum game.

 To appropriate a rallying cry of an earlier George,
 responsibility without resources is tyranny. The federal
 government should reclaim its proper role of subsidiz-
 ing the public's financing of its mandates. Spreading
 the overall cost of capital over the largest possible
 group—all U.S. taxpayers—is the fairest system and the
 one most reflective of national priorities. While it might
 be attractive to argue for the return and expansion of
 federal grant programs as the cheapest form of subsidy,
 such a stance is not practical or even desirable. Grant
 programs are inefficient distributors of funds, enor-
 mously expensive and time-consuming to run, and
^^^^^^^^^^^^   generally wasteful. The more
                       efficient mode of delivering
                       the federal subsidy is through
                       the tax code, albeit at the
                       expense of the shibboleth of
                       revenue-neutrality, thereby
                       letting financial markets
                       operate to allocate funds to
                       serve environmental goals.
                       For better or worse, tax policy
                       is the most effective available
"•^^•"•^^••^^•m"   tool for accomplishing the
                       task.

 TAX POLICY MOST EFFECTIVE MEANS TO
 CHANNEL INVESTMENTS

 At the federal level, several dramatic tax law revisions
 would explicitly channel public and private investment
 into supporting environmental management, and give
 localities the wherewithal to accomplish their tasks.

 Firstly, the universal availability and use of tax-exempt
 financing would efficiently allocate the subsidy for
 environmental control. All debt financing of every
 qualified environmental facility should be tax-exempt.
 Qualified environmental facilities (QEFs) would include
 all projects that fulfill defined public-service require-
 ments, serve the general public, or are mandated for
 private compliance with federal regulations.
                                                  74

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Tax-exempt status would be automatically granted for
all QEF debt instruments, regardless of whether they
are financed by private commercial bank loans, capital
or operating leases, or by bonds from state or local
authorities. The exemption would be based on the use
of the funds rather than the source, much like the tax
treatment model for IRA's. There is no reason to limit
the source of tax-exempt debt to specific issuing au-
thorities or agencies. Tax-exemption for QEFs would
also be available regardless of the ownership of the
facility, making the distinction between "public pur-
pose" and "private purpose" irrelevant, as long as there
were a qualified environmental purpose. The tax
exemption should be "clean"—not subject to tax prefer-
ence under the alternative minimum tax or other
limitation. This would allow, among other things,
privately-financed revolving funds or QEF infrastruc-
ture banks with an enormous potential to attract capital.

Universality of QEF tax exemption makes EPA enforce-
ment easier. By making tax-exempt financing readily
available, communities and industries will have few
economic excuses for delay or non-compliance. Locali-
ties, for example, will not have to wait for SRF priority,
for low cost financing, or for cap allocation for private
activity bonds. EPA would command a level playing
field whereon compliance is dictated solely by environ-
mental quality. And make no mistake, the single most
important incentive for investment in QEFs and clean-
ups is the strong, even-handed and universal enforce-
ment of the laws and regulations already on the books,
not the promulgation of new ones.

Secondly, to support the financing of QEFs all impedi-
ments to proper credit support and loan structuring
should be cleared away, such as by allowing unlimited
commingling of public and private funding for QEFs.
Existing QEFs should be allowed to be refinanced,
contributed as local share, or used as collateral, regard-
less of original funding sources  (e.g., Section 201 grants).
One of the biggest and fastest growing impediments to
environmental financing is the environmental risk and
hazardous waste liability of financing institutions.
Having passive financiers  subject to environmental
liability makes no sense, is a cynical scapegoating of
responsibility and, in fact,  stifles cleanup efforts, a
paradoxical result of the regulations. Passive financing
institutions—banks, leasing companies, insurance
companies, pension funds—should be exempt from
liability under all circumstances, including foreclosure
on a QEF site or project itself.

Thirdly, private investment in QEFs should be strongly
encouraged by permanently and drastically reducing
long-term capital gains taxes on all QEF equity invest-
ments and private equity investments in new environ-
mental control technologies, recycling processes or
waste clean-up efforts. This would encourage public-
private partnerships, innovation and venture funding,
giving communities wider choices, more flexibility and
the ability to raise equity as well as debt for their
projects. For those who raise the objection that this
proposal violates the spirit of the Tax Reform Act, it
should be remembered that this is not the first proposal
made for a capital gains break; it is already Administra-
tion policy and may soon be law.                   LI
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BANKS  MUST BECOME  FULL  PARTNERS
IN  ENVIRONMENTAL PROTECTION
by Warren W. Tyler
   'anks and financial institutions have become
reluctant partners in environmental compliance. Due
to liabilities which result from possible customer
non-compliance or ignorance of environmental
regulations, financial institutions sometimes prefer to
avoid transactions with customers who present such
risks. However, these risks can be managed cost
 Mr, Tyler is Vice President of the State Savings Bank in
 Columbus, Ohio. He also serves as Chairman of the Ohio
 Water Development Authority, and is a member of EPA's
 Environmental Financial Advisory Board. From 1985-
 1987, he was the Director of the Ohio Environmental
 Protection Agency and Director of the Ohio Department of
 Commerce.
effectively, and with minimal investment, to the
benefit of the bank and the customer.

As the awareness of environmental risk increases,
banks realize that expert assistance is needed. How-
ever, with the proliferation of environmental consult-
ants and testing services and environmental legal
services, it can be difficult for the bank to know when
it needs such assistance, what type of assistance it
needs and who should provide that assistance.
Banks face a dilemma: avoiding environmental
issues presents too high a risk; unnecessary, and
often expensive, testing requirements can hurt the
bank's competitive position.

Banks can learn to distinguish between transactions
that call for particular expertise and when such
expertise imposes needless layers on the business
decision. Learning how to manage environmental
risk must start inside the bank and become part of
the "know how" of loan and trust  officers. By under-
standing this comparatively new area of risk under-
writing, these officers will know when outsiders
should be called for help, and how these new embed-
ded costs can and should be avoided to the extent
possible.

BACKGROUND

When compared with regulations  in other areas, such
as securities and banking, environmental regulation
                                        76

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is relatively new. In addition, initial environmental
laws primarily covered visible pollution—basically
contaminants that we can see, taste or smell. As this
area of regulation matures, more emphasis is being
placed on contaminants that are not so readily identi-
fiable. Often this suggests that the cost of the remedy
will be higher.

The risk to banks, and other third parties, was recog-
nized in the reauthorization of the Superfund
Amendments and Reauthorization Act (SARA).
Provisions assist a third party who:
"did not conduct or permit the
generation, transportation,
storage, treatment, or disposal
of any hazardous substance
and...did not contribute to the
release or threat of release of a
hazardous substance through
any action or omission...and
exercised due care in light of
all relevant facts and circum-
stances, and took precautions   pollution  effects US d
against foreseeable acts or       '             JJ
omissions".
(Complex and sometimes
ambiguous statutes and
regulations  lead financial
institutions to view
significant and potentially
expensive  underwriting
exposure.
However, even with the
provisions, complex and
sometimes ambiguous stat-
utes and regulations lead
financial institutions to view     ^^^™^^™"^^^™
pollution effects as a significant and potentially
expensive underwriting exposure. As a defense
against potential contingent liability that may be
perceived in a credit decision, banks often require a
series of analyses and tests, the costs of which are
borne by  the customer.

Too often, the results of these tests are inconclusive,
duplicative, possibly unnecessary and never inexpen-
sive. The customer is dismayed because of the
expense and dubious value of such requirements.
Often the bank does not know whether the proper
questions have been asked, let alone whether the
answers are adequate.
 LEARNING TO MANAGE ENVIRONMENTAL RISK

 By using a five-step process, banks can effectively and
 efficiently manage the underwriting risk associated
 with environmental issues. In the process they are
 better able to respond to their customers' financing
 needs, and they become full and willing partners in
 financing environmental compliance.

 1. Training. The first step in managing this risk is to
 train appropriate bank staff on the principal provi-
 sions of environmental regulations.  This will help
                      put environmental risk in a
^^fmm^^^^^^^^,   more practical and logical
                      context. The training should
                      highlight the impact of
                      selected case law, clarify
                      state and federal authority
                      and responsibility, and
                      recommend specific tech-
                      niques that can be used to
                      determine if further under-
                      writing analysis is needed.
                      Staff can also be instructed
                      on alternative methods of
                      risk distribution when
                      environmental issues are
                      part of the underwriting.
                                          As a result of the training,
                   mm^m^^^^^^^^^   banks should have a better
                                          understanding of when it
                    should seek affidavits and/or environmental compli-
                    ance assurances such as test borings, chemical and/
                    or biological analyses, geological and/or hydrogeol-
                    ogical studies, and tests for metals and inorganic/
                    organic compounds.

                    Furthermore, bank staff will be in a better position to
                    work with the customer and gain his or her confi-
                    dence about why the requested information is valu-
                    able for both parties.

                    2. Loan/Investment Underwriting and Monitoring.
                    Loan and investment personnel should be directed to
                    develop customer-sensitive policies and processes to
                    underwrite and monitor variable environmental risks
                                               77

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more effectively. While this may also require outside
training, the objective is to slow or stop the growth of
contingent liability in the bank's credit and invest-
ment portfolios (particularly trust assets) caused by
the possibility of customer non-compliance with
environmental regulations.

3.  Existing Loan/Investment Portfolio Review.
Systems can be designed to identify opportunities to
rewrite or decline to renew certain credits, or liqui-
date certain assets, based on environmental risk.
Such "environmental risk suspect systems" are
equally useful in re-evaluating bank-owned property
or other assets acquired as a result of mergers or
acquisitions.

Not only do such systems reduce the existing contin-
gent liability in the bank's portfolios, they also
expand the bank's ability to identify and monitor
portfolios to include compliance with environmental
regulations.

4.  Bankruptcy and Foreclosure Management.
Banks must establish a reliable process to evaluate if
and when they should take possession of collateral
when a possible liability exists due to non-compli-
ance with environmental regulations. This evalu-
ation should include a review of the terms on which
such collateral should be taken.

The objective of instituting such an evaluation is to
assist the bank in avoiding ownership of property
that presents difficult and costly environmental
remediation.

5.  Updates on Rule Changes. Environmental regu-
lations change rapidly. Federal and state authorities
are continually working on revising existing regula-
tions as well as developing regulations to address
new concerns. In addition, the courts are constantly
interpreting these laws and regulations.  Public
concern with environmental issues assures that this
activity will continue in the years to come.

Banks need access to sources of information that will
sort through significant changes for them and alert
them to areas which may require changes in their
policies, procedures and environmental risk under-
writing guidelines.
EVERYONE BENEFITS

When banks learn to more effectively underwrite and
manage the risk associated with environmental
protection, everyone benefits:

• Banks reduce their cost and avoid a potentially
   large contingent liability.

• Customers benefit when the bank takes a more
   informed and predictable approach to environ-
   mental assessments because the costs associated
   with financing are reduced.

• Society wins because as banks improve their
   understanding of environmental protection
   techniques, they will be more willing to finance
   and invest in environmental compliance.       D
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PUBLIC-PRIVATE PARTNERSHIPS
WITH EPA:
FACT,  FICTION,  OR  FANTASY?
by Doug Sutherland
   Jerry Ficklin
        Jerry Ficklin
  Mr. Sutherland recently became the City Manager for the
  newly incorporated city ofSeaTac, Washington. When he
  wrote this article, Mr. Sutherland was Mayor of Tacoma,
  Washington, a position he held since 1982. Mr. Ficklin is
  an environmental consultant and was formerly Environ-
  mental Services Manager for Simpson Tacoma Kraft
  Company.
                                           R
  . ublic and private partnerships which benefit both
sectors to the overall benefit of the general public are
not new or unusual, particularly in the human
resources areas. However, such partnerships involv-
ing environmental regulatory agencies and their
regulated community are rare. Our environmental
legislative and regulatory framework may not pro-
hibit partnerships with private entities; however, it
certainly discourages such joint ventures. As un-
usual as such partnerships may seem, it is becoming
very obvious that they must occur, and soon, to
enable this nation to accomplish many of its environ-
mental objectives. Such partnerships and voluntary
actions are particularly necessary to address many of
the problems caused by former legal activities where
the environmental consequences of such actions were
not known. The inherent unfairness of coercing
expensive remediation for past legally codified and
encouraged actions demands that an atmosphere be
created which both favors and rewards voluntary
efforts through public and private partnerships.

Many of the environmental accomplishments over
the past twenty years or so have been gained under
circumstances clouded by mistrust, bitter legal
proceedings, and progress only under the threat of
severe penalty. Recognizing this climate and the
often mutually exclusive public interest viewpoints,
how can these often warring factions be brought
together to form alliances for the public, private, and
environmental good?
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View of Tacoma 's Superfund remedial site.
Recently, actions taken by the Simpson Tacoma Kraft
Company (Simpson) located in Tacoma, Washington
to remediate a Superfund site serves as a good
example of how, despite the obstacles, such a part-
nership can be formed to promote environmental
improvement.

TACOMA'S WATERFRONT DESIGNATED
A SUPERFUND SITE

In the early 1980s virtually all of the City of Tacoma's
waterfront and industrial tideflats were designated
as a Superfund site and placed on the National
Priorities List. The area designated is referred to as
the Commencement Bay Nearshore/Tideflats Super-
fund Site.

Within this broadly designated area is a large manu-
facturing complex operated by St. Regis Corporation
for over 50 years and acquired by Simpson in 1985
from Champion International. The facility occupies a
57-acre peninsula bordered on its three sides by
Commencement Bay and the Puyallup River.
For the more than 60 years of operation at the site,
Commencement Bay received all of the wastewater.
Wastewater was discharged untreated for thirty-six
years, until primary wastewater treatment was
initiated in the mid 1960's. Secondary treatment was
installed in 1977. This history of discharge, plus
other ancillary operations, such as in-water log
storage, hydraulic debarking of the logs, wood chip
handling, and runoff from the facility had severely
contaminated the nearshore marine sediments in
Commencement Bay adjacent to the plant.

Concurrent with the changes in the facility's owner-
ship, a joint investigation conducted for Washington
State's Department of Ecology and the Environ-
mental Protection Agency determined that the
nearshore marine sediments adjacent to the facility
were one of the "hot spots" within the Commence-
ment Bay Nearshore/Tideflats Superfund Site.

Simpson, as the current owner,  was then faced with
the dilemma of how to address  this designation.
Should the company wait for the slow, ponderous
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regulatory process to define the extent of contamina-
tion, their sources, and the possible remedial actions
available, or should they initiate a remedial action
ahead of the regulatory process? The company
elected to proceed with a remediation project.

DECISION TO INITIATE REMEDIAL ACTION
AHEAD OF THE REGULATORY PROCESS

The decision to proceed with a project was based on
several factors, including:

•  the need to complete the wastewater treatment
    process;

•  the need to initiate source control programs
    designed to prevent further contamination;

•  the strong belief that a project could be designed
    that would be more environmentally protective,
    more cost-effective, and that could be imple-
    mented years prior to any action that may result
    from the regulatory process. This was the strong-
    est factor influencing the decision to proceed.

The first step in initiating the project was to collect
the environmental data necessary to define the extent
and degree of the contamination. A conceptual plan
was devised that would, through source control
efforts, effectively sever the facility from Commence-
ment Bay, except for the protectively designed new
effluent discharge system; environmentally isolate
the contaminated sediments to preclude future
environmental harm; and enhance the physical
habitat of the entire area which would allow it to
become a biologically productive part of the Com-
mencement Bay-Puyallup River ecological system.

SPECIAL INTEREST GROUPS REVIEWED PLAN

Recognizing the inherent prejudices that the commu-
nity, Indian tribes, environmental organizations, and
local, state, and federal agencies would have against
such a unilateral action by industry, a decision was
made to take the conceptual plan to these special
interest groups in order to "flesh it out".
Initial contacts were made with environmental
professionals from the Puyallup Indian Tribe and
with local environmental leaders and, based upon
the input received, the plan was refined considera-
bly. The plan was then informally presented to every
environmental and local permitting agency which
may have had jurisdiction or interest in such an
action. Additional refinements were then made
based upon input from those meetings. The informal
meetings and briefing sessions, which went on for a
period of approximately six months, were expanded
to include local, state, and federal political leader-
ship. While the input was overwhelmingly positive
and constructive, a definite federal regulatory hesi-
tancy was beginning to form  that stated simply, "You
can't do this, as what you are planning is both ahead
of and outside our regulatory framework".

Due to the fact that a strong coalition consisting of
community, political, and environmental leaders had
formed endorsing the plan of action and encouraging
its implementation, the companies elected to proceed
despite the lack of official Environmental Protection
Agency endorsement. While EPA could not officially
accept the plan or enter into any consent decree
concerning the planned action, it actively encouraged
the company  to proceed. It should be recognized
that the existing legislative and regulatory process is
often an impediment to innovative actions that may
accelerate timely cleanup.

The strength of the coalition and the soundness of
Simpson's plan for remedial action is evidenced by
the fact that this major project, which involved:
placement of a new 30 million gallons per day treated
effluent discharge line into Commencement Bay;
dredging of nearly 300,000 cubic yards of materials
from the Puyallup River for the encapsulation of
severely contaminated marine sediment; and the
construction of approximately 17 acres of new shal-
low water and inter-tidal habitat, was completely
permitted in just five and one-half months from the
date of the first permit application. The Audubon
Society further underscored the broad support for
the project by nominating it for the State of
Washington's award for environmental excellence.
The State agreed and the Governor presented the
award to Simpson in the Spring of 1988.
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LESSONS OF THIS PUBLIC-PRIVATE PARTNERSHIP

What are the lessons of the Simpson Superfund
remediation project? How can similar efforts be
encouraged, enhanced, and formalized so that true
public-private partnerships can become routine?

In this case, the company had defined the broad
bounds of the project, the problem, the resources,
and the goal. The issue was then presented to the
local leadership (community, environmental, and
Indian) most concerned with the problem for concur-
rence and a determination of how the issue could
best be resolved.  Essentially, within those loosely
defined project bounds, control of the project was
turned over to that interested
public. The project was       ^^^^^^^^^^^^
solidified through details
being proposed, debated,
rejected, and accepted in an
atmosphere of equal footing,
with the company depending
upon the wisdom and sense
of fair play of the involved
community. The lesson?
The involved individuals
were aware that they had
control over developing the
project and that they were
not being asked to endorse  a
fait accompli. Simpson,
citizens, state and local
agencies had the flexibility  to adapt their operating
methods to take advantage of a unique opportunity
to expedite a project.  This same general concept or
process could be followed by EPA and state environ-
mental departments in which a broad range of
criteria would be established. Local government and
affected private sector entities would then develop
the specific remedial program, timing, and then
negotiate with the federal and state authorities for
concurrence.

Certainly, expedited actions may involve a higher
degree of risk than following the ponderous route
prescribed by legislation and regulations designed to
cover all contingencies and reduce risk to near zero.
However, the costs of achieving "zero risk" also
needs to be assessed. In the Simpson case, such a
clean-up action had never been taken before and
there certainly was the remote possibility that "some-
thing" would occur to cause the project to fail.  The
apparent benefits, however, outweighed any per-
ceived risks.  Because the company, city and state
were willing to accept this risk and act, the marine
sediments and biological habitat have been immeas-
urably improved over their unremediated state. The
area, previously categorized as a biological "Dead
Zone", is now a dynamic biological community
contributing  positively to the Bay's ecological sys-
tems. If this  project had stayed within the "system",
remedial action would be many years in the future.
            or
 While EPA could not
officially accept the pla
enter into any consent
decree concerning the
planned action, it actively
encouraged the company to
proceed.
                     There is no question that
                     there should be a federal
                     regulatory process that, in
                     many cases, must be followed
                     through to its conclusion;
                     however, perhaps it is time to
                     allow a portion of that regula-
                     tory function to take and
                     share risk, to proceed outside
                     and ahead of the regulatory
                     process. Shouldn't a portion
                     of the process be directed
                     toward coalition building and
                     problem solving? In circum-
^^—^^——^^f^—   stances such as the  one cited
                     here, where a significant
 environmental problem developed over years of
 legal activity, shouldn't the emphasis be on enticing
 correction through incentives and legal protections
 rather than sanctions? Couldn't, under broadly
 defined federal guidelines, many problems be ad-
 dressed locally with the federal role limited to assis-
 tance? What is needed locally are funds, expertise,
 and the ability to incorporate some risk in order to
 take advantage of opportunity.                  Q
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THE  CASE  FOR AN ORGANIC
ENVIRONMENTAL  PROTECTION  ACT
by Russell E. Train
A
    , popular theme among environmental policy-
makers today suggests that the convergence of two
trends—fiscal restraint and increased environmental
requirements—has created a dramatic shortfall in
public revenues to meet environmental expectations.
Recent economic studies and government spending
analyses support this viewpoint.
 Mr. Train has been the chairman of the board of directors of
 World Wildlife Fund and The Conservation Foundation
 since 1985. Before that, he served as President and Chief
 Executive of World Wildlife Fund since 1978. Mr. Train
 was the first chairman of the Council on Environmental
 Quality and the second Administrator of EPA.
Budgetary constraints adversely affect our investments
in all types of infrastructure, including that for the
environment. Infrastructure spending, whether it be for
environmental facilities or bridges and highways, is
capital intensive. When the money becomes tight,
current projects are scaled back or delayed and new
plans remain on the drawing board. Tight budgets eat
into spending for operations and maintenance as well,
putting further strain on the existing infrastructure.

The disparity between demand and resources for
environmental protection is unique, though. Tradition-
ally, infrastructure needs are a function of aging and
population growth. Environmental demands, while
subject to those pressures, are also based on statutory
requirements. Environmental laws often leave public
entities little choice when it comes to the decision on
whether to spend or not. Those laws, especially the
ones passed within the past decade, establish compli-
ance schedules and deadlines, which must be met
regardless of a state's or community's financial situa-
tion.

To their credit, state and local governments are initiat-
ing a variety of alternative financing mechanisms to pay
for the growing number of environmental programs.
Unfortunately, there is the very real possibility that the
states' success in using funding alternatives will simply
perpetuate our existing approach to environmental
protection, without addressing the equally important
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need for innovation in the way environmental protec-
tion is managed in this country.

WE NEED TO REFORM ENVIRONMENTAL LAWS

No policy debate on financing is complete without
examining the potential for more efficient ways to
accomplish your objective.  Before we become locked
into what might be an irreversible course, it is time to
rethink on the broadest scale how we intend to manage
environmental protection in the future.

The first step is to identify the sources of inefficiency in
our current methods. While there might be many
minor sources, for sake of brevity, this article will be
limited to one overriding concern. That is, environ-
mental protection as it is now constituted is a patch-
work of laws, each passed at different times, each
pertinent to a different environmental medium, and
each with varying standards for the way that medium is
to be regulated.

Many inherent difficulties ensue from EPA's statutory
framework. First, since protection efforts are autono-
mous from the outset, general oversight and manage-
ment of environmental programs will be disjointed at
best. At the operational level, environmental problems
can only be dealt with in terms of separate, vertically-
oriented programs, each staffed with personnel increas-
ingly specialized in a particular medium. This frag-
mented management approach makes it more difficult
to set priorities and allocate resources according to
management decisions. Progress within a program area

 Environmental laws have burgeoned over the last two decades.
often comes at the expense of accomplishment in
another.

Another problem with EPA's statutory framework that
flows from the first is that the laws often work at cross
purposes.  The regulated community, seeking to com-
ply with the rules governing one medium, will run
afoul of a different set of regulations that govern an-
other. An example here is where the regulated entity
adds treatment technology to remove certain organic
compounds from wastewater, only to find that doing so
places them in violation of Clean Air Act standards for
the release of volatile organic compounds.

The regulated community, faced with pitfalls of that
sort, must commit a significant portion of its total
environmental spending to figuring out which laws
apply and under what circumstances. The complexity
of our environmental laws causes confusion within
EPA as well, especially in the case of major new regula-
tions that affect more than one environmental medium.
Unfortunately, regulatory gridlock, such as that which
has occurred over standards for sludge and incinerator
ash, has a very real cost in terms of delayed capital
spending decisions.

Management and efficiency problems that arise because
of our fragmented and unrelated environmental laws
cannot be fixed by tinkering with each law as it comes
up for reauthorization.  What is needed is a wholesale
change in our overall approach to environmental
protection. This change should most properly come as
a federal initiative, rather than simply allowing state
governments to tailor their own solutions. Although
the states have proven their capacity to test and adopt
new methods, these innovations are mostly reactions to
federal policies. To make state environmental pro-
grams more efficient, we must change our national
environmental protection policy.

THE TIME is RIGHT FOR AN ORGANIC ACT

After twenty years of experience with environmental
protection under the direction of a single federal
agency, and at a time when Congress and the President
have signaled their willingness to raise the Environ-
mental Protection Agency to cabinet-level status, the
time is right to bring all environmental laws under the
umbrella of an organic environmental protection act.
Although the effort that would be required to design,
                                                   84

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pass, and implement such an act should not be taken
lightly, the benefits that would accrue are well worth
the time expended. Most importantly, the difficulties
outlined above would be mitigated to a great degree, if
not entirely.

Regulated entities, public and private sector alike,
would avoid the trouble of seeking numerous permits
for their activities that affect the environment. Instead,
states could issue a comprehensive permit based upon
the integrated impacts of those activities on the whole
environment.

There would also be efficiencies gained through elimi-
nation of competition for
funding sources and dedi-      •••••^^^•^^^^^
cated revenue streams. A
single, larger fee could be
charged for an integrated
environmental permit, with
the revenues flowing into one
account rather than many.
This reduces administrative
costs and increases the flexibil-
ity and fiscal strength of the
consolidated account. The
model for this comprehensive
state environmental protection
fund would most likely be the
current State Revolving Fund
for wastewater construction,
although its scope would need
to expand to cover all environ-
mental media.
 decisions alike could be made on the basis of their total
 environmental effect, making it easier to consider ways
 to reduce the overall burden of a given activity.

 THE LINK BETWEEN POPULAR SUPPORT AND
 WILLINGNESS TO PAY

 Finally, and perhaps most importantly, a coordinated
 approach to environmental protection would do much
 to transform popular support for environmental protec-
 tion goals into the actual dollars needed to rebuild and
 expand the environmental infrastructure. Despite the
 success some states have had raising additional reve-
 nue, there is still a strong tendency on the part of
	  ratepayers to resist new or
                     increased fees.  Experience has
                     also shown that the public
                     resists those fees because they
                     are not convinced of the
                     benefits of the program or the
                     ability to accomplish stated
                     goals. An organic environ-
                     mental protection act, which
                     allows environmental manag-
                     ers to protect the whole envi-
                     ronment instead of a frag-
                     mented part, helps the public
                     to understand how infrastruc-
                     ture renewal is related to
After twenty years of
experience with
environmental protection
under the direction of a
single federal agency...
the time is right to bring
all environmental laws under
the umbrella of an organic
                   ,           .             overall environmental protec-
environmental protection  act.    ti0n. when such an
A further benefit to be derived from an organic environ-
mental protection act is the greater opportunity for
pollution prevention. A unified view of environmental
media is necessary to avoid the situation where regula-
tions only serve to shift pollution from one medium to
another. Such an approach would be possible only if
EPA could manage its regulatory decisions through a
process that takes cross-media impacts into consider-
ation. Despite current good intentions to tack this
approach on top of the present management structure,
wholesale change of environmental legislation would
be a more lasting and effective measure. Once an
organic act is in place, government and private sector
                      standing is reached, the financ-
                      ing task will be linked in the
 public mind to the widely accepted goal of environ-
 mental protection.

 The linkage between popular support and willingness
 to pay is critical to our national effort to avert a crisis in
 financing environmental protection. Although it is
 proper and necessary to seek increased funding, rev-
 enues are only half the formula.  We must also seek
 ways to better manage environmental expectations.
 Properly structured, an organic environmental protec-
 tion act completes the equation for continued environ-
 mental progress.                                Q
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       PUBLIC-PRIVATE PARTNERSHIPS INITIATIVE
       U.S. ENVIRONMENTAL PROTECTION AGENCY
       Charles L. Grizzle
       Assistant Administrator
       Office of Administration and Resources Management

       David P. Ryan
       Comptroller

       John J. Sandy
       Director, Resource Management Division

       David Osterman
       Chief, Resource Planning and Analysis Branch

STAFF   Leonard Bechtel
       Margaret Binney
       Ellen Fahey
       Keith Hinds
       Kim Lewis
       Joanne Lynch
       Timothy McProuty
       Eugene Pontillo
       For additional information, contact:
       The Public-Private Partnerships Initiative
       U. S. Environmental Protection Agency (H3304)
       401 M Street, S.W.
       Washington, DC 20460

       (202) 245-4020

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