800R76104
 FINANCIAL ARRANGEMENTS
                      FOR
            WATER QUALITY
   MANAGEMENT PLANNING

                OCTOBER 1976
U. S. ENVIRONMENTAL PROTECTION AGENCY
           WASHINGTON, D. C. 20460

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       NOTE
       This document is not a replacement to the Act,  the Regulations, or official EPA
policy statements. It is a  supplement to these documents, to assist State and areawide
agencies in responding to water quality management program requirements. The guidance
in this Handbook does not constitute a uniform National EPA standard of acceptability.
Any clarification  and specific conditions applicable to a State or designated area should be
discussed with the EPA Regional Offices.

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                    UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

  DATEl
           s NOV
SUBJECT:  Draft Handbook on Financial Arrangements in Water Quality
         Management Planning

           Mr^Pisano^s^^l
         Director, WateTnMng Division (WH-554)
    TO:  All Regional Water Division Directors

         ATTN:  Regional 208 Coordinators

                                                 Technical Guidance Memorandum: TECH-22

         Purpose

         This memorandum transmits a draft of the handbook "Financial Arrangements
         in Water Quality Management Planning."  This draft is being distributed
         for use and comments.

         Background

         Water quality management plans prepared in accordance with section 208 of
         P.L. 92-500 must identify "measures necessary to carry out the plan
         (including financing)...".  Adequate financing is a prerequisite to under-
         taking most, if not all, of the pollution control actions specified in the
         plan.  For each action that will be funded through public budgets, arrange-
         ments among management agencies must insure the timely availability of an
         adequate amount of money.  This handbook is designed to assist managers and
         staff of planning agencies in developing these financial arrangements.

         Although the handbook is being circulated as a draft, it contains
         material which should be useful to State and areawide agencies.  We encour-
         age you to distribute the draft to these agencies for their use and review,
         and to solicit comments from the agencies on financial management issues.
         The final version of the handbook is not expected to be available for several
         months.

         If you would like further information on the handbook or additional copies,
         please contact George Fleming of the Program Development Branch (426-2522).
         Comments should be 'transmitted to the Program Development Branch.

         Attachment
 EPA Form 1320-6 (Rev. 3-76>

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                            PREFACE
    This handbook is one of a series designed to provide state and area-
wide agencies with assistance in carrying out water quality management
planning and implementation under Section 208  of P. L.  92-500,  Desig-
nation,  Grant Application and Work Plan, Cost Analysis, Interim Out-
puts,  Management Agencies,  State Continuing Planning Process, and
Public Participation handbooks have already been published.

    This handbook on Financial Arrangements is intended specifically to
supplement:

    .  40 CFR Part 131, which describes the required content of
      water quality management plans; and

    .  the Financial Arrangements chapter of the Draft Guidelines
      for State and Areawide  Water Quality  Management Program
      Development (February 1976).

    Although this handbook is intended for a very broad audience--public
officials, water  quality planners,  members of advisory committees, etc.
—it does attempt to address  specific financing  issues associated with
water quality management programs.

    The handbook deals with both the process and substantive  considera-
tions in determining financial arrangements. Part of the discussion is
necessarily theoretical,  reflecting literature on the subject.   However,
the handbook is oriented to the  typical situations that may confront water
quality management agencies.  In the course of preparation of the hand-
book, approximately 10 state or designated  areawide agencies were in-
terviewed.   The concerns these agencies expressed, as well as the exam-
ples they provided, have been utilized in directing the handbook.

    Other U. S. Environmental Protection Agency reference documents
and previously published handbooks dealing  with financial arrangements
in the water quality management process include:

    .  40 CFR, Part 130, Policies and Procedures for the State
      Continuing Planning Process;

    .  40 CFR, Part 131, Preparation of Water  Quality Manage-
      ment Plans;

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   . Cost Analysis Handbook for Section 208 Areawide Waste
     Treatment Management Planning, Federal Assistance Ap-
     plications (May 1975);

   . Management Agencies Handbook for Section 208 Areawide
     Waste Treatment Management (September 1975);

   . Revised Area  and Agency Designation Handbook for Section
     208 Areawide  Water Quality Management Planning (Novem-
     ber 1975);

   . Revised Grant Application and Work Plan Handbook for Sec-
     tion 208 Areawide Water Quality Management (December
     1975);

   . State  Continuing Planning Process Handbook (December 1975);
     and

   . Draft Guidelines for State and Areawide Water Quality Man-
     agement Program Development (February 1976).

   This handbook was prepared under Contract 68-01-3751 to Peat, Mar-
wick, Mitchell &  Co., with direction and support from the Program Devel-
opment Branch and  Program Management Branch.  E0 C.  Horn,  Jr.,  of
Region V, and C. C. Taylor,  S. Berdine,  and L. Martin of Region IV
reviewed preliminary versions of the document and provided many useful
comments.
                                Edmund Motzon, Acting Director
                                Water Planning Division

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                     TABLE OF CONTENTS


Chapter                                                  Page

           INTRODUCTION                                 iv

   1       WATER QUALITY MANAGEMENT - FINANCIAL
           CONCERNS                                      1

           Introduction                                     1
           Financial Arrangements and Management Agency
             Selection                                      6
           Relationship Between Construction Grants and
             Water Quality Management Planning in Terms
             of Financial Arrangements                      8
           Development of Financial Arrangements            10

   2       INVENTORY OF EXISTING CONDITIONS           13

           Introduction                                     13
           Definition of Data Requirements                   13
           Basic Data Required for Plan Development         15
           Development of Data Collection and Reduction
             Methods                                      20

   3       STRUCTURE AND EVALUATION OF ALTERNA-
           TIVES                                          27

           Introduction                                     27
           Development of Evaluation Criteria                28
           Sources of Capital Funds and Current Revenues     30

   4       ISSUES IN FINANCING WASTEWATER TREAT-
           MENT                                          37

           Costs Incurred                                  37
           Self-Sufficiency                                  37
           User Charge and Industrial Cost Recovery
             Requirements                                 38
           Excess Capacity                                 50
           Management Agency Consideration - Waste water
             Treatment                                    51
           Consolidation of Wastewater Treatment Systems    56

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                 TABLE OF CONTENTS (Continued)

Chapter                                                  Page

   5       FINANCING REGULATORY PROGRAMS           67

           Introduction                                     6 7
           Costs Incurred                                  68
           Incentives to Supplement Regulatory Requirements  72
           Program Approaches                             73
           Management Agency Considerations - Regulatory
             Program                                      74

   6       ADMINISTRATION AND CONTINUOUS PLANNING  83

           Introduction                                     8 3
           Approaches to Financing                          86
           Conclusion                                      90

   7       IMPLEMENTATION                              91

           Refinement of Financial Estimates and Formula-
             tion of Implementation Schedule                 91
           Preparation of Budgets and Cash Flow             94

           BIBLIOGRAPHY                                 97

           GLOSSARY                                    101

           APPENDIX A:  SOURCES OF CAPITAL FUNDS    A.I

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                     LIST OF ILLUSTRATIONS

Example                                                  Page

   2-1      Sample Data Collection Questionnaire              22
   2-2      Areawide Waste Treatment Management Program
              Total Costs by System Component               24
   4-1      Wastewater Treatment Case  Study                 60
   5-1      Regulatory Control - Case Study of Agricultural
              Financial Alternative                           77
   7-1      Projected Capital Improvements Budget 1980
              Through 2000                                  96

 Figure                                                   Page^

   1 -1      Factors in Agency Selection                        7
   2-1      Sanitary Sewer System Existing Cash Flow Pattern  23
   4-1      Developing the ICR System                        46
   4-2      Possible Factors in Management Agency Selection
              for Wastewater Treatment                      52
   4-3      Sample Requirements Checklist                   55
   5-1      Possible Factors in Management Agency Selection
              for Regulatory Programs                       75

 Table                                                   Page
    1       Authority and Responsibilities of Planning and Im-
              plementation Agencies                           v
   1-1      Financial Responsibilities Involved in Section.208
              Water Quality Management Planning              2
   1-2      Sections of P. L. 92-500 Identifying Plan Financial
              Requirements and Required Management Agency
              Authority                                       3
   1-3      Selected Regulations Concerned with Financial
              Planning                                       4
   4-1      Costs Incurred by Wastewater Treatment Facili-
              ties                                           37
   4-2      Costs Facing Industry as Direct Discharger
              Versus Costs Facing Industry as Indirect
              Discharger                                    48
   6-1      Decisionmaking in Continuous Planning            84
   7-1      Recommended Capital Program                   92
   7-2      Projected Annual Revenues and Expenses for
              Plant                                          93
                                111

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                        INTRODUCTION
    Water quality management plans prepared in accordance with Sec-
tion 208(b)(2)(E) must identify "measures necessary to carry out the
plan (including financing)...." Adequate financing is a prerequisite
to undertaking most pollution control actions and  therefore a prereq-
uisite to implementing water quality management plans.  Section 208
requires both the selection of a planning agency to prepare the water
quality management plan and the designation of a  management agency
Or agencies to implement the plan.  Both the planning agency and the
management agencies will have needs for funds that should.be taken
into account in determining financial arrangements. Table 1 shows
the authority and responsibilities of agencies carrying out the two
functions of planning and implementation.

    Both determination of agencies' compliance with requirements  of
Section 208(c)(2) and recommendations on designation of management
agencies for implementing the plan will depend heavily on financing
arrangements and requirements.  The people responsible for design-
ing financial arrangements to support the pollution control actions  set
forth in the plan have a complicated assignment.   From  the outset,
they must cope with an often complex existing system of public finan-
cing of pollution abatement involving numerous political  subdivisions
and potential management agencies, each having its own legal require-
ments  and limitations on the amount and manner in which it can gener-
ate revenues; its own formal and  informal rules on who is expected to
pay for what, how, and why; its own functions and clientele; and its own
attitude toward involvement  in the water quality management program.

    In many cases, agencies and entities assigned increased responsi-
bilities to carry out the water quality management program will need
to raise additional revenue and may need additional financing authority.
Certain methods currently utilized for raising revenue may be inappro-
priate  for water quality management or inconsistent with achieving
desired water quality at least cost.

    Entities and agencies with the best capability to raise revenue may
differ from those with the best organizational capability  in water quality
management.  Trade-offs may have to be made between  the desire to
establish management and financial arrangements more  directly respon-
sive to water quality considerations and the expediency of utilizing ex-
isting management and financial arrangements. The management agency
legal requirements in P, L.  92-500 must be carefully considered in de-
signing financial arrangements to implement the plan.
                                 IV

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    The subjects of this handbook are:

    . that part of the water quality management planning
      process which involves the determination of finan-
      cial arrangements as they are reflected in impacts
      on public  sector budgets; and

    . the designation of management arrangements as re-
      quired by Section 208(c).

    Subjects that are not within the scope of this handbook are:

    . estimation of costs associated with the various pol-
      lution control actions (although accurate  estimation
      of such costs is a necessary first step in determining
      financial arrangements);

    . management of the planning agency's grant funds for
      planning (a subject often characterized as fiscal
      management); and

    . economic impact analysis as such [required by Section
      208(b)(2)(E)]0 1

 However, financial arrangements will have definite economic effects
 that must be recognized; such effects are discussed in this handbook
 when they are germane to the financial arrangements.

    This handbook is primarily intended to .assist in the planning and
 implementation of financial arrangements by:

    . describing stages of a time-oriented process for
      determining the arrangements;

    . delineating tasks that should be performed for each
      of the broad stages  of the planning and implementa-
      tion processes;

    . highlighting major problems that may be encountered
      in accomplishing the tasks;
1 Economic impact analysis will be discussed in the forthcoming Envir-
 onmental Assessment Handbook*
                                 VI

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    .  presenting various options and related strategies for
      dealing with such problems;

    .  summarizing advantages and disadvantages associated
      with the options and  strategies presented; and

    .  presenting examples to illustrate the processes,  alter-
      natives, evaluation,  and selection.,

    This handbook is also  intended to be used by both planning and man-
agement agencies  during water quality program development and  imple-
mentation activities.  For the planning agency, the handbook should
assist in;

    „  understanding the  financial requirements for Section
      208 activities  as contained in P. L, 92-500;

    o  recognizing  complexities in financial arrangements
      that may result from these requirements; and

    .  evaluating (1)  viability of alternative financial ar-
      rangements, including compliance with requirements
      of P. L. 92-500, (2)  financial capability of potential
      management arrangements, and  (3) alternative finan-
      cial arrangements,  including complications and how
      they might be  resolved.

For management agencies, the handbook should assist in:

    .  understanding what information is needed as input
      to the implementation plan and how it is used; and

    .  emphasizing the importance of clearly delineating
      the financial aspects of management agency respon-
      sibilities.
                                 vn

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                         CHAPTER ONE

     WATER QUALITY MANAGEMENT - FINANCIAL CONCERNS


 INTRODUCTION

    Water quality management (WQM) is directed toward development
 of solutions for both point and nonpoint  sources.  Development of the
 financial portion of the water quality management program requires
 careful consideration of both specific and implicit legislative require-
 ments of Section 208 and the related financial requirements of P. L.
 92-500 as well.

 Specific and Implicit Legislative Requirements

    Financial requirements  for water quality management are outlined
 in Sections 208(b){2) and 208(c)(2).  In addition, implementation of Sec-
 tion 201(g)(l) (Grants for the Construction of Publicly Owned  Treat-
 ment Works) has an effect on financial planning in a substantial number
 of communities and states.  This is especially true of requirements in
 Section 204(b) of P. L. 92-5000

    Table 1-1 relates planning and management requirements to speci-
• fie and implicit financial issues.  These requirements apply to states
 for nondesignated areas as well as to planning agencies  in designated
 areas.1  The specific sections of P. L. 92-500 that identify plan finan-
 cial requirements and required  management agency authority are pre-
 sented in Table 1-2.

    The  pertinent regulations with respect to the financial portions of
 the plan are found in 40 CFR 131 and 40 CFR 35.  The most important
 of these regulations concerned with financial planning are presented
 in Table  1-3.

    Revised regulations are issued periodically as new procedures and
 requirements are established.   Updated summaries of all revisions are
 printed annually in book form.2
1 Natural Resources Defense Council et al v. Train et al, 396 F. Supp.
 1386 (D.D.C., 1975).

 40 Code of Federal Regulations,  Protection of the Environment, published
 by the General Services Administration, Office of Federal Regulation,
 National Archives and Records Service (can be obtained from GPO).
                                  -1-

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                                                TABLE 1-3
              SELECTED REGULATIONS CONCERNED WITH FINANCIAL PLANNING
             40 CFR 131.11 (h) (1)

Municipal waste treatment system needs

   .. .needs by five year increments over at least a 20-year
   period.. .an analysis of alternative waste treatment sys-
   tems including.. .total capital funding required for con-
   struction, and a program to provide the necessary finan-
   cial arrangements for development of such a system.
   (emphasis added)

             40 CFR 131.11 (j) (2)

Nonpoint source control needs

   .. .the evaluation shall include an assessment of non-
   point source control measures.. .the proposed regula-
   tory programs to achieve the controls.. .and the costs
   by agency and activity presented by 5-year increments
   to achieve the desired controls and a description of the
   actions necessary to achieve such controls, (emphasis
   added)

             40 CFR 131.11 (1) (3)

Urban and industrial stormwater system needs

   (3) A cost estimate for the needs identified. . .the
   reduction in capital construction costs brought about
   by nonstructural control measures, and any capital
   and annual operating costs of such facilities and
   practices.
             40 CFR 131.11 (n)  (1)

Regulatory Program Needs

  A description of existing state/local regulatory programs
  which are being or will be utilized to implement the
  state water quality management plan. The description
  shall include the regulatory approach to be employed,
  the statutory basis for the program, and relevant admin-
  istrative and financial program aspects.

                40 CFR 131.11 (o) (2)

Mangement Agency Needs

  Management agencies.. .depending upon an agency's
  assigned responsibility under the plan, the agency must
  have adequate authority and capability to:

     (IV)  accept or utilize grants from any source for
          waste treatment management or nonpoint
          source control,

      (V)  raise revenues including assessment of user
          charges,

     (VI)  to incur short- and long-term indebtedness,

    (VII)  to assure, in implementation of approved
          water quality  management plan that each
          participating community pays its propor-
          tionate share of treatment costs.

                40 CFR 35.208-2 (a) (5)

 Self-Sustained Planning

  The planning agency must submit a statement that the
  planning process will become financially self-sustaining.
                                                    -4-

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 Related Financial Requirements in P. L.  92-500

    In determining financial arrangements for and assuring implementa-
 tion of water quality management plans and supporting continuing plan-
 ning,  attention should be given to the related financial requirements in
 P. Lo  92-500.  One important related requirement is  contained in Section
 204(b)(l), which limits award of construction grants for treatment works
 to an applicant who:

        (A) has adopted or will adopt a system of charges
            to assure that each recipient of waste treatment
            services within the applicant's jurisdiction will
            pay its  proportionate share of the costs of oper-
            ation and maintenance (including replacement)
            of any waste treatment services provided by the
            applicant;1

        (B) has made provision for the payment to such ap-
            plicant  by the industrial users of the treatment
            works of that portion of the Federally-assisted
            cost of  construction attributable to treatment
            of such industrial wastes; and

        (C) has legal,  institutional, managerial and finan-
            cial capability to insure adequate construction,
            operation and maintenance of treatment works
            throughout the applicant's jurisdiction.

    These statutory limitations on construction 'grant  awards have two
 important implications for financial arrangements in  the water quality
 management  plan.  First, constraints are imposed on the manner in
 which funds may be raised to finance the often very significant costs
 associated with wastewater treatment works: the required "program
 to provide the necessary financial arrangements for the development
 of the (municipal waste treatment) systems"2for the area must com-
 ply with and reflect these applicable  requirements.3 Second, constraints
1A decision by the U. S0  Comptroller General (Decision File B-166506,
 July 2,  1974) ruled out use of ad valorem property taxes to fulfill this
 requirement.

240 CFR Part 131. ll(h)(l).

3 Ibid.
                                 -5-

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 are imposed on the management arrangements for plan implementation:
 management arrangements that involve grant-assisted projects must
 provide for fulfillment of these requirements.  These two points  are
 discussed below.
 FINANCIAL ARRANGEMENTS AND MANAGEMENT AGENCY
 SELECTION

    The overall management agency structure in any area must exhibit
 adequate  authority to perform the functions listed in Section 208(c)(2)
 of P. L. 92-500, several of which are related to financial capability.
 The management structure must be consistent with and supportive of
 the financial arrangements for carrying out the WQM plan.  In evalu-
 ating potential management agencies, emphasis  should be placed on
 whether the agency has adequate financial authority and capability to
 carry out the specific responsibility it is assigned.  Because the desig-
 nated management agencies will be responsible for generating  revenues
 and/or for budgeting and expending resources to implement the approved
 plan, determination of the management structure must be made in con-
 cert with determination of the financial arrangements  to carry out the
 plan.

    A number of considerations other than the financial arrangements
 must go into the selection of the management agency structure.  In
 Figure 1-1 these factors are represented by legal, institutional, and
 managerial capability and, along with financial capability, are con-
 sidered in light of the action to be  taken.  No one factor is entirely
 independent of any other factor.  In any particular situation, different
 factors may dominate in the selection.  As a minimum financial re-
 quirement for any management agency, however, there must be as-
 surance of adequate revenue for the agency to execute its assigned
 responsibilities.

    As Figure 1-1 indicates, the major source of funds for a needed
 action may be either very much under an agency's control (as in set-
 ting rates for wastewater treatment) or relatively divorced from the
 agency's control (as with intergovernmental grants),1  As a result,
1 The typical agency will exhibit neither complete autonomy nor complete
 dependence.  In setting rates, sewer authorities may be subject to the
 review of public utilities commissions, general purpose local govern-
 ments may be limited by state law as to the taxes  they may levy,  and
 agencies that receive the major portion of their funds in the form of in-
 tergovernmental grants may have some limited assessment authority.

                                 -6-

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MANAGERIAL
   .  experience
   .  staff capability
   .  cost effectiveness
LEGAL
   .  authority [e.g.,
     as required by
     208 (c) (2)1
   .  case law

ANALYSIS OF
WQM PROBLEMS



"^^

POLLUTION
ABATEMENT
ACTION TO
BE TAKEN
                                 FINANCIAL
                                    .   ability to generate
                                       necessary revenue:
                                       .  general revenue
                                         appropriation
                                       .  charges and fees
                                       .  intergovernmental
                                         grants
                                    .   ability to conform to
                                       preferred financial
                                       arrangements
INSTITUTIONAL
   .  public acceptability
   .  relationships with
     affected parties
   .  commitment to
     water quality
     concerns
   .  other related
     responsibilities
                 FIGURE 1-1: FACTORS IN AGENCY SELECTION
                                              -7-

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 agencies will differ in the certainty with which they can secure
 revenues adequate to implement the portion of the plan assigned to
 them.

    In addition to the question of financial autonomy, questions of
 competition for the revenues generated may be important in selection
 of a management agency.  For example, funds raised by sewer autho-
 rities are normally restricted to use on the wastewater treatment
 system, while local general funds  may be utilized for a variety of
 purposes and are often subject to a very competitive budget process.
 Intergovernmental grants are themselves often subject to considerable
 competition,  and agencies relying  heavily on certain grant programs
 for major portions of their needed revenues may be unable to carry
 out their assigned functions if the grants do not materialize.

    With respect to financing arrangements in management agency
 selection, two questions must be considered:

    .  How should the action be financed?

    .  All factors considered, what agency  should be
       responsible for taking the  action?

 In some cases, such as when transfers of funds among agencies are
 relatively simple to arrange, it  will be possible to make these two de-
 cisions  separately. However, the  choice of the agency responsible for
 the action will often simultaneously determine the manner in which the
 action will be financed.   When such accommodation cannot be achieved,
 special  attention must be given to  management agency selection.
 RELATIONSHIP BETWEEN CONSTRUCTION GRANTS AND WATER
 QUALITY MANAGEMENT PLANNING IN TERMS OF FINANCIAL
 ARRANGEMENTS 1

     Federal grants for construction of wastewater treatment works
 are disbursed under what is commonly referred to as the "201
1 A February 9,  1976, memorandum discussed the "Relationship Between
 201 Facility Planning and Water Quality Management (WQM) Planning, "
 [Uo S. Environmental Protection Agency,  "Program Guidance Memoran-
 dum" (Construction Grants No0 66; Water Quality Management SAM-1)].
 This memorandum deals, among other items, with minimum require-
 ments for facility planning (Step 1) to be contained in initial WQM plans.
                                 -8-

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 program. " Although construction,  operation, and maintenance of treat-
 ment works is normally only one among several pollution abatement
 programs in a WQM plan,  it is a program that in many areas will be
 the most significant in terms of governmental agencies' expenditures.

     The Act establishes several requirements that must be fulfilled as
 conditions for receiving a  201 grant.  Among these requirements are
 cost effectiveness analysis,2 provision of reserve capacity,3 establish-
 ment of user charge and industrial cost recovery system, and legal,
 institutional, managerial,  and financial capability on the part of the ap-
 plicant to assure adequate construction, operation, and maintenance of
 treatment works.  Applicants' compliance with these provisions is cur-
 rently determined by EPA as part of the 201 program, with reference
 in some cases to outputs of any applicable (208) WQM plan.   However,
 the Section 208 WQM program is responsible for insuring that finan-
 cial arrangements most conducive  to water quality management--not
 merely the minimum 201-related requirements--are established.

     In certain cases the project-by-project orientation of the 201 pro-
 gram in approving such items as user charge and industrial cost re-
 covery systems--the major 201 requirements in financial terms—may
 (Footnote continued from preceding page)

 Selection of service areas,  projection of wastewater flows,  summary of
 environmental impacts,  preliminary determination of cost-effective
 treatment systems, etc., are included as  items to be provided by the
 WQM plan.  However, the memorandum does not directly address the
 relationship between financial requirements for treatment works--most
 of which are not directly addressed until Steps  2 and 3--and financial
 arrangements in the WQM plan.  As a result, the relationship between
 201 and 208 in financially related areas must be determined on an in-
 dividual basis in negotiations between the 201 and 208 planning agencies,
 states, and EPA regional offices.  There is no  specific requirement
 for  the WQM planning agency to review or certify such elements as UC/
 ICR systems,

Actually, the entire Title II of P. L. 92-500, including Section 208 and
 Section 201, deals with requirements for receiving construction grants<,

2P. L.  92-500,  Section 212(2)(B),

3Ibid.  Section 204(a)(5)0
                                -9-

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not in and of itself be adequate to insure such arrangements.
For example, the WQM plan may be concerned with whether various
approvable UC/ICR systems in various jurisdictions complement
or contradict other growth and development policies.   Satis-
fying the objectives of the WQM plan might require either
seeking an alternative means of complying with the requirements
or a method of supplementing the requirements.  Further
discussion of these issues is contained in Chapter Four.

     Once a WQM plan is approved and management agencies are
designated pursuant to Section 208 (c), Section 208(d)  of the
Act prohibits construction grants from being awarded to appli-
cants other than designated agencies.  Thus, not only must a
grant applicant fulfill the requirements of the 201 program,
but it must also have been designated by -the Governor as a
management agency for the 208 plan.   In recommending manage-
ment agency designations to the Governor, the planning agency
must take into account the ability of the agency to support
the financial arrangements for implementation of the plan.
DEVELOPMENT OF FINANCIAL ARRANGEMENTS


     Basic descriptions of financial considerations in WQM
planning are contained in Chapters Nine and Ten of the Draft
Guidelines,^ which should be consulted carefully in developing
financial arrangements.  This handbook discusses at greater
length the financial problems and issues that may have to be
addressed in the WQM plan.

     Chapter Two, Inventory of Existing Conditions, discusses
the development of a financial profile for the area.  The
inventory should indicate status of agencies and programs, and
•'-U.S. Environmental Protection Agency, Draft Guidelines for
State and Areawide Water Quality Management Program Development
(February 1976)
                           -10-

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financial policies and procedures (including local pricing rules) for
wastewater treatment,  continuing planning and management, and pro-
grams dealing with nonpoint sources of pollution.  The assembly of
current financial conditions, existing commitments, projected reve-
nues, and policies into  a baseline will assist  analysis of financial
feasibility  and potential financial impact of the plan alternatives.
When it is  expected that necessary implementation actions will be
constrained by certain  existing restrictions on financial  authority,
the inventory may serve as a basis for initiating corrective actions
prior to actual completion of the WQM plan.

    Chapters Three, Structure and Evaluation Alternatives; Four,
Issues in Funding Wastewater  Treatment; and Five,  Financing of Regu-
latory Programs, discuss the  financial objectives, which are (1) to
provide the best possible financial arrangements in terms  of funding
all proposed plan actions and (2) to the extent possible, to  minimize
the impact on public sector budgets.  To achieve these  objectives,
various financial alternatives must be developed based on  (1) trade-offs
between publicly owned treatment works' construction  and  utilization
of regulatory/pricing incentive approaches and (2) development of capi-
tal, operating and maintenance,  and  administrative arrangements for
various proposed alternatives.

    The major tasks include:

    .  development of evaluation criteria and measurement
      standards;

    .  development of revenue raising options for wastewater
      treatment, regulatory programs, and general manage-
      ment programs;

    .  development of financial aspects of management  agency
      arrangements; and

    o  to the extent possible, inclusion of financial incentives
      as a  potential mechanism for achieving water quality
      objectives.

    Chapter Six, Implementation, discusses agency and program bud-
gets,  which are the tools by which many commitments in the WQM plan
must  be implemented.  Without careful attention to how actions pro-
posed in the plan are to be assigned to agencies and how agencies' bud-
gets are to reflect such assignments, much of the effort in inventorying

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conditions and in structuring and evaluating alternatives for WQM may
be rendered ineffective,,  Developing implementation schedules for pol-
lution control actions that can be taken in a manner consistent with these
schedules is the critical financial task associated with plan implementa-
tion.  In addition, negotiations with affected agencies and the public are
necessary to ensure that the budgetary commitments contained in the
WQM plan are realistic and will be carried out.
                                 -12-

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                         CHAPTER TWO

            INVENTORY OF EXISTING CONDITIONS
INTRODUCTION

    The purpose of the financial inventory is to identify the current
financial conditions, commitments, and problems that will affect the
development and evaluation of proposed WQM alternatives and agen-
cies.  The inventory, which establishes a baseline of information,
must help determine how existing water quality programs are fi-
nanced and indicate how future needs may be met.  In developing this
information, it is  necessary to evaluate how total expenses for a
particular program relate to the revenues used to fund the program.

    To minimize duplicating efforts,  the financial inventory should be
designed in conjunction with other legal,  institutional,  and engineering
inventories. The  coordination can be accomplished by the joint de-
velopment of data  needs and acquisition activities and possibly by the
establishment of a central data base.

    The inventory  is conducted in two steps:

    . Define the specific data required, based upon an
      assessment  of needs.

    . Develop collection methods and collect present
      data in a useful form.
DEFINITION OF DATA REQUIREMENTS

    Because of both financial and time limitations, the entire spec-
trum of data that describe existing financial conditions and future
commitments within a WQM area cannot and should not be investi-
gated during the inventory stage.  Instead, the WQM agency must
select the minimum data elements that will adequately establish the
financial baseline required for plan development and evaluation.  The
identification  and selection of appropriate data necessary for finan-
cial planning are complicated by difficulty in anticipating data needs,
uncertainty of data availability, and limited available financial re-
sources.
                                -13-

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    The following three approaches to the design of the inventory can
be used when data requirements are uncertain and resources are
limited:

    o  Gather as much readily-available data as can be ac-
      q-oired within the  given resources at the study outset.

    o  Collect basic data on a first-round survey and detailed
      data on a second-round survey,,

    .  Collect only basic data at the beginning of the study,
      and acquire additional data on an "as needed" basis.

    The first approach is most relevant in areas where highly developed
and centralized data systems are present.  Unless the area is relatively
small and the agencies'  data are highly automated, the approach may not
provide much of the data and information required for plan development
and evaluation.  In most areas, a more focused data acquisition program
will be required.

    The second approach, preliminary data acquisition followed by a de-
tailed data collection effort after specific data needs have been clearly
defined,  provides a more efficient means of data collection in terms of
cost and time.  This approach provides time to develop the basic prob-
lems and issues and to define the data required to plan development.
However, this approach may not provide critical financial information
early in the structure and evaluation of alternatives stage. As a result,
plan development could proceed in an unfeasible direction (e, g,, capital
requirements exceeding financial capability). In addition, the study
could be involved in data acquisition when time and effort should be
directed toward plan development and evaluation.

    The third  approach, acquisition of data based on "best assessment"
and additional data as needed, enables early identification of existing
financial conditions and outstanding commitments for plan development.
It should be possible to  identify much of the specific data required based
on the best assessment  of financial data needs and on the inputs of the
other members of the WQM team (e.g.,  engineers,  legal and institutional
specialists).  The disadvantage of this approach can be acquisition of too
much, too little, or the wrong data and can result in a "redo" of the in-
ventory  rather than the  simple filling in of missing data.
                                 -14-

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    In developing a data acquisition approach, each of the following ques-
tions should be considered:

    .  How well can specific data requirements be antici-
      pated ?

    o  How extensive and costly is data acquisition rela-
      tive to the resources available ?

    o  How accessible and available are the required data?

    o  How well does the financial inventory fit into the
      other data acquisition tasks ?

For example,  in a very large area with hundreds of operating agencies,
it may not be possible to anticipate all of the critical data elements re-
quired,,  In such a case,  the data acquisition program should be geared
toward the second approach, which is based upon preliminary data ac-
quisition followed by detailed  data acquisition in a second-round survey,
The first round should provide information on availability of data which
might be sought in the second round,,
BASIC DATA REQUIRED FOR PLAN DEVELOPMENT

    In most cases,  a set of basic data items will be required for plan
development and evaluation.   These data must define the existing finan-
cial conditions of the area, provide a baseline against which alternatives
can be compared,  and provide early input into plan development.

    The basic  data requirements generally include:

    ,  current  expenditures and sources  of revenue by cate-
      gory (wastewater treatment, regulatory and admini-
      strative costs).  Such data should  be compiled by the
      agency managing the program and the  agency (or agen-
      cies) incurring the cost.

    .  revenue generating capability and  constraints,

    o  agency functions, including agency legal and financial
      limitations in terms of revenue generation, interagency
      agreements,  and operating functions (such as accounting
      systems and staff levels).
                                -15-

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Each of the above areas is concerned with (1) building a basic under-
standing of the existing conditions,  (2) obtaining the specific informa-
tion required for development and evaluation of plan alternatives, and
(3) identifying any major problems that can affect plan development
in time to take corrective action,,

    The major  specific data requirements include:

    o for point sources:

         o   compliance with user fee/industrial cost
            recovery provisions by  jurisdiction, as
            applicable;

         .   remaining debt capacity; and

         o   average household charges for wastewater
            treatment under different alternatives o1

    o for nonpoint sources:

         .   resources and objectives of existing programs
            and agencies; and

         .   legal and operational ability of agencies to
            finance programs,,

Current Expenditures and Sources of Revenue

    In developing the WQM plan there should be an understanding of
how total expenses relate to total revenues and how areas of expense
relate to specific sources of  revenue.  Thus,  for each agency/pro-
gram, there must be adequate cost and revenue data.

    For  expenditures, data should be consistent with the cost cate-
gories identified in the Draft  Guidelines.2 There are three main
 Such a figure would normally be utilized in determining cost-effective
 waste treatment system configurations.
o
 U» S0 Environmental Protection Agency,  Draft Guidelines for State and
 Areawide Water Quality Management Program Development (Washing-
 ton, D0C.: February 1976).
                                -16-

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categories of costs that may be incurred in carrying out water
quality activities:

    o  agency budget costs associated with the construction
      and operation of treatment works, including those for
      urban and rural runoff;

    o  agency budget costs of regulatory programs; and

    o  costs of general management programs, including
      continuous planning.

    The level of detail for costs by agency will depend upon the  study
needs„  Cost data that identify key plan development requirements
for each agency by  major activity/program (e,g,, wastewater treat-
ment  and regulatory program) should be developed.  In most cases,
agencies' accounting systems can provide aggregate values for  each
of these  categories.  However, to be able to associate specific  costs
with specific programs may require going into greater levels of cost
detail.  In addition, to be able to compare two or more agencies re-
quires that financial data be consistent, and this suggests that added
detail may be required,

    A major concern in determining sources of revenue is identifying
the existing revenue flow and revenue generating capability of the
agency.  Revenue sources can be grouped in three basic categories:

    ,  grants;

    ,  general revenues;  and

    .  user fees, including permits and fees.

    In terms of grants, the  inventory should provide an estimate of the
total expected grant income for the area based on filed or anticipated
applications and the program which provides the grant monies.   Capa-
bility to  provide local matching requirements for grants must also be
considered.

    In terms of user charges, the inventory should include the basic
rate structure, the basis for allocation of costs to users, and the
amounts of monies  paid by classes of users toward  different services.
The information should include:

    0  present basis for allocation (flow, strength, tax
      assessment);

                               -17-

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    .  legal authority;

    .  current rates; and

    .  inter juris dictional agreements.

In the first three items (basis for allocation, legal basis, and current
rates),  of vital concern are differences between agencies/jurisdictions,
since in many cases these differences must be resolved in plan formu-
lation and will affect alternative plan evaluation.

Revenue Generating Capability

    Data on debt service were discussed above under costs and  revenue.
In addition to the debt service requirement which must be paid for out
of current revenues,  funding of planned facilities and programs will be
contingent upon the area's capacity to raise capital money.   The basic
data required include:

    .  total outstanding debt by type of debt (e. g.,  general
      obligation bond, revenue bond), by project (e.g.,
      wastewater treatment works, collection facility), and
      by issuing agency;

    .  the maximum allowable debt and basis for limit by
      entity, as provided for by charter/law;

    .  data related to debt limit/capacity (e.g., total
      assessed valuation,  millage limJts, bond ratings);

    .  information on competing capital programs, parti-
      cularly those funded by local governments; and

    .  the relationship between the WQM capital programs
      and the overall area capital improvement programs.

    Each of these areas of information will be necessary to lay out
capital  funding programs in plan development and particularly in
evaluation  of plan feasibility.  Acquisition of the above data  should
identify agencies with limited debt capability and/or other existing
or possible constraints on debt  financing.  In  some cases it  will be
possible to  take remedial actions such as a change in legal require-
ments that will eliminate problems prior to plan development.
                                -18-

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    Not only must there be the ability to cover debt service, but
revenues .must be raised to cover operating and continuous planning
costSo  The ability to raise these revenues depends on the various
forms of user fees,  including User Charges,  permits, and fees.
The data required include the types of charges in use and the basis
for each.   The basis for each charge bears upon the present and
potential future ability to generate revenue,,

Agency Functions

    Administrative functions, interagency agreements, and legal and
institutional financial factors will affect plan  development,  particularly
with respect to selection of management agencies *  Following are the
general types  of information which may be useful:

    .  specific interagency agreements that can impede
      certain alternative plans without change or  con-
      tractual service agreements not in conformance
      with  user fee/industrial recovery requirements,,

    .  legal requirements that can affect plan  develop-
      ment such as debt limits, requirements for ref-
      erendum to bond, user charge rate-setting  re-
      quirement, ability to contract for services,  etc.

    „  accounting  system characteristics and  compara-
      bility of accounting systems among agencies.
      Some of the characteristics of concern  are  fiscal
      years used, accounting system basis (cash,  ac-
      crual, or a combination), separation of functions,
      and the system of accounts in use.

Special Data Needs

    In certain cases an alternative will be developed that will require
special detailed consideration.  One common case will be consolida-
tion of facilities or functions of management  agencies.  When con-
solidation becomes virtually certain, financial information on each
agency involved will have to be far more detailed to  identify possible
problems and develop reasonable plans.  Of major importance are
detailed assessments of accounting systems,  valuation of facilities,
and specific legal provisions that either preclude or would impact
consolidation.  For  example, when two  or more agencies are to be
taken over or consolidated into a single agency,  bond provisions  must
                                -19-

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be reviewed to see if there are any special provisions such as man-
datory recall of the unpaid portion of the bond before the agency is
abolished,,
DEVELOPMENT OF DATA COLLECTION AND REDUCTION METHODS

    Because most data collection programs will have time and mone-
tary constraints, a basic approach (described in preceding pages) for
increasing the collection efficiency is the two-phase collection tech-
nique.  The first phase is a general inventory of existing agencies,
during which a minimum financial description is developed.  These
data qan be examined, and a screening mechanism can be used to
identify those offices and agencies that will require in-depth surveys
in the second phase to complete data requirements. The first phase
can be completed through a self-completion questionnaire, telephone
interview, or existing reports.  The second phase includes direct con-
tact with the agency through an in-depth interview and review of avail-
able financial reports.

    One disadvantage is the difficulty with, the self-completion  question-
naire suggested in the first phase of the data collection technique.  Such
questionnaires are  subject to two kinds of errors:

    . response errors, which arise because the reported
      value differs  from the actual value of the variable
      concerned; and

    . nonresponse errors,  which may arise when not every"
      agency included in the survey returns the question-
      naires in time for analysis.

These problems  may be minimized by completing the questionnaire in
a personal interview with the agency,  but this procedure adds  time and
personnel costs to the inventory program.

    In developing data collection methodologies and collecting the data,
diverse location  of sources of information within the planning area can
create high levels of cost.  A possible strategy for overcoming the
diversity of data sources is a combination of the use of existing  reports
and telephone and mail questionnaires.  Although this technique  reduces
data collection costs, it does introduce data collection errors  due to the
use of outdated reports and missing data.
                                -20-

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    Quality of available data may not be adequate for plan development
and evaluation,.  Inventory techniques probably cannot improve the
quality of the existing data except at considerable cost, but the data
sources that are incomplete and subject to uncertainty should be care-
fully noted to avoid improper conclusions based on inaccurate data,,

    The sheer volume of nonsegregated data available from the agen-
cies in the planning area can be a major collection problem0 In parti-
cular, the large metropolitan authorities  and  districts may have several
divisions, such as water, solid waste,  and wastewater treatment, with
a combination of individual  and common costs.  In such cases, added
detail may be required to develop data properly.  In the case of opera-
tions and maintenance and administrative costs,  it will be necessary
to develop a basis for allocating costs to specific programs to comply
with the user charge requirements of Pol,., 92-500.

    One of the most common data collection methods is a questionnaire,.
Properly structured and tested, the questionnaire can provide a rigor-
ous, standardized data collection instrument that minimizes the col-
lection problems discussed previously.  Structuring a questionnaire,
however,  requires translating the "general" data needs identified at
the outset into a set of very specific questions/tables for completion
by the respondent. Specificity and clarity are particularly critical in
mail-out surveys, since there are no other instructions except those
on the questionnaire.  Example 2-1 provides an illustration of how the
data need "Outstanding and  Committed Debt" might be addressed by
que stionnair e s.

    To be useful, the data must be placed in a structured data base
and, for working purposes, reduced to simple displays or summaries.
The displays or summaries can be by agency. For example, a total
indebtedness display would  summarize the existing and planned debt
for each agency in the area and would also indicate any other infor-
mation on debt necessary.  Conversely, simple displays for a single
agency listing all major data items can be developed for analysis  and/
or agency review.  Such displays are useful when data files must  be
developed and maintained on very large numbers of agencies.  Figure
2-1 and Example 2-2 present illustrations of a single agency flow of
funds and a cost display.
Nonsegregated financial data do not indicate the exact source or pro-*
gram for the revenue or cost, but rather report an overall cost  and
revenue  figure.
                                -21-

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                                                                      EXAMPLE 2-1
The following example illustrates how a questionnaire can be structured. The example focuses
upon obtaining information on debt conditions.

    Following is a set of questions that might be used to acquire needed debt information.

    The first area of concern is baseline debt, annual  debt service, and remaining time for repay-
ment by major facility. These data specify the current debt obligations of the agency and the
long-term commitments. The sample  question could be:

    Please specify total debt and annual debt service  by type of debt and major facility:

    Treatment Works                      Tntai <.  Tprm        Term       Annual Debt
                                          Total $  Term      Remajning        Service
       Bond type.
                        {specify)

       Other debt	
                         (specify)

     Collection and Transmission
       Bond type.
                         (specify)

       Other debt	
                         (specify)
     Other (etc.)

     *lf plan is not an even annual payment plan, please specify type in space provided (e.g.,
      deferred part, balloon part, etc.).

     The same questions should then be repeated to obtain information on committed or planned
additional debt for new or improved facilities for both the near and long-term future. These data
should cover each of the existing 201 grants and should provide a major input to the 20-year treat-
ment works plan. Finally, a set of questions should be framed to obtain data on potential problem
areas in terms of legal limits and/or constraints as follows:

     What are the sources of Capital Funds and what legal limits are on these sources
     which your agency is authorized to use?

      Type Debt                         Can Issue      Maximum and Limit      Constraints

     1.G.O. bond                       Yes/No      	      	
     2. Revenue bond                    Yes/No      	      	
     3. Other	
   f                    (specify)
     4. Etc.

     *Please list any constraints in issuing bonds or debt, e.g., bond requires referendum, etc.
                                           -22-

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                             -23-

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EXAMPLE 2-2
AREAWIDE WASTE TREATMENT MANAGEMENT PROGRAM
TOTAL COSTS BY SYSTEM COMPONENT

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I
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-24-

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    One of the major advantages of the inventory is the early identifica-
tion of problems that can or should receive corrective action.  These
can include identification of:

    o  user charge and industrial cost recovery systems
      which must be restructured to qualify for federal
      funding of wastewater treatment works;

    ,  inconsistent or inappropriate accounting systems
      which do not yield the data required for WQM
      financial arrangements;

    „  inadequate legal, managerial, or financial capa-
      bility of an agency to construct, maintain, and
      operate  a treatment works facility; and

    .  cases in which legislative authority will be re-
      quired for future WQM financial arrangements
      such as  increasing existing debt limits or pro-
      viding authority to incur certain types of debt or
      raise funds via certain mechanisms for any parti-
      cular agency*
                                -25-

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                       CHAPTER THREE

        STRUCTURE AND EVALUATION OF ALTERNATIVES
INTRODUCTION

    The financial role during the structure and evaluation of alternative
plans can be summarized as follows:

    .  Develop alternatives by comparing various capital-inten-
      sive, after-the-fact  solutions with regulatory and/or pric-
      ing incentives to minimize the generation of pollution.

    .  Develop financial arrangements to support capital, oper-
      ating, and administrative expenses under various alterna-
      tives.

    .  Develop financially sound management arrangements.

    The major tasks in this stage include:

    .  developing criteria and standards for evaluation of alter-
   '•  native financial arrangements.

    .  insuring appropriate fiscal policies (for example, pricing
      incentives for wastewater flow  reduction and preferential
      tax assessment incentives for land use management) are
      considered in developing plan alternatives.

    .  identifying and evaluating revenue-raising options for
      meeting costs of actions  in alternative plans:

           . agency budget costs associated with construction
             and operation of wastewater treatment works;

           . agency budget costs associated with regulatory
             programs; and

           . agency budget costs of general management pro-
             grams, including continuous planning.

    .  developing management agency arrangements consistent
      with and supportive of financial arrangements in  each al-
      ternative.
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DEVELOPMENT OF EVALUATION CRITERIA

    The overall planning criteria for WQM, as set out in the state and
areawide WQM guidelines, call for WQM plans to meet their objectives
in a cost-effective, feasible, and publicly acceptable manner.1

    These basic criteria are not exhaustive and can be defined in many
ways.  The specific criteria (and measures) used to evaluate alternative
financial arrangements in any given locale can be expanded or modified
to meet specific area objectives or needs.  However, public participa-
tion would be used to  develop and define the criteria, which need to be
agreed upon by both the WQM team and the appropriate publics.   In ad-
dition, alternative arrangements need to be developed in a manner that
facilitates public involvement in the evaluation of the criteria.

    For purposes of this handbook, however,  the three basic criteria
for evaluation that will be discussed are feasibility, equitability, and
efficiency.

    Evaluation of financial arrangements with respect to these criteria
will be based in part upon established data, research results, and tech-
nical inputs and in part upon subjective inputs that reflect the prefer-
ences, prejudices, and opinions of the evaluator.  In the former case,
evaluations will be made against quantitative  standards and/or estab-
lished facts (e. g.,  maximum bond levels allowable). In the latter case,
evaluations will be made based on judgments  and/or interpretations of
data and/or facts [e.g., general revenue funding is (is not) more equi-
table than user charge funding].

    To apply the criteria in a consistent manner,  a uniform set  of cri-
teria measures and/or standards must be used.  For purposes of this
handbook,  the following paragraphs discuss the general types  of stan-
dards and measures used to evaluate financial alternatives with respect
to the three criteria.
U. S.  Environmental Protection Agency, Draft Guidelines for State and
Areawide Water Quality Management Program Development  (February
1-976), Section 3. A.
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Feasibility

    Measuring or testing the feasibility of a particular approach or
program is the task of answering the following questions:

    .  Can this program be done?

    .  Will this program work just as it stands?

In most cases the answer may not be a clear "yes" or "no", but rather
"this approach is more likely to work than that approach. "  In testing
feasibility, there are several areas of concern:

    .  Are the financial arrangements certain or even possible?
      For example, in light of the maximum bond level,  the
      maximum allowable interest rates,  and competition from
      other capital programs,  can the total capital amount be
      bonded by the proposed plan over the proposed time
      frame?

    .  Is the proposed grant certain?  For example, can it be
      obtained in a timely fashion?

    .  Are the arrangements publicly acceptable?  For exam-
      ple, will the representatives of the area and subareas
      approve the approach or plan?

    .  Do the proposed arrangements comply with legal require-
      ments?  For example, where EPA-assisted treatment
      works are involved, do the arrangements ensure propor-
      tional allocation of costs to users as required by Section
      204(b)(l)(A)?

Equitability

    Equitability addresses the concern that the burden of WQM be
shared by the appropriate persons/organizations.  Each  person/orga-
nization may have a different perspective.   One  can, however,  make
an evaluation based on one of three philosophies:

    .  Do polluters pay?

    .  Do beneficiaries pay ?

    .  Does the general public pay (public good)?
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Efficiency

    Efficiency is concerned with developing the alternatives in such a
way that the least cost in terms of dollars and environmental quality
is incurred.  Questions that address efficiency are:

    .  Is the desired reduction in pollution achieved for least
      cost?

    .  Are administrative burdens minimized?
SOURCES OF CAPITAL FUNDS AND CURRENT REVENUES

    The proposed WQM plan should provide for sufficient revenue to
cover plan expenses,  including capital, operating and maintenance,  and
administrative costs.  Such provision requires an awareness of the po-
tential sources of revenue in the area and the advantages and disadvan-
tages of using each potential source for each particular WQM program
cost.  The following paragraphs review in  a general way the potential
sources and their advantages and disadvantages.

Sources of Capital Funds

    Initial capital funds will be required for wastewater treatment
(WWT) programs and, in some cases,  may be required for regulatory
programs.  In the case of WWT programs, capital funds may be re-
quired to pay for new construction, upgrading and expansion of exist-
ing plants, collection and transmission systems, land acquisition, and
other major equipment and facility costs.  In the case of regulatory
programs, capital funds may be required for land acquisition,  for
grant or loan programs,  to pay for development rights,  etc. Consid-
eration of sources of  capital funds must include a review of each poten-
tial source and a determination as to which source(s) best  provide(s)
for the capital needs of the program under consideration.  Potential
sources fall into two categories:  pay-as-you-use and pay-as-you-go.

    Under the pay-as-you-use approach, each capital improvement
(e. g., WWT works) is financed by debt issuance with maturities so
arranged that the retirement of the debt more or less coincides with
The pay-as-you-use/pay-as-you-go discussed in this handbook is based
upon materials presented in ICMA's Management Polices in Local Gov-
ernment (under "Capital Budgeting"), pp. 321-324.
                                -30-

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the depreciation of the project.  The interest and debt retirement
charges paid by taxpayers (or users) will coincide with the use of the
physical assets.

    Under pay-as-you-go approach,  capital projects are funded from a
current revenue fund usually created by allocating a portion of each
year's operating revenue to a fund until sufficient funds are available
to develop the capital project.  The  need for debt financing (and inter-
est costs) is eliminated.  This approach assumes that there is no le-
gal prohibition on  establishing sinking funds.

    However,  the pay-as-you-go approach has  several difficulties.
From a financial point of view,  the major problems are that:

    .  Projects need  to be spaced evenly over time to enable
      funding.

    .  Large projects relative to usual outlays must be kept
      to a minimum.

    .  Projects must be delayed until funds are available.

    .  Programmatic competition can create even longer proj-
      ect delays.

The time spacing and delay factors in pay-as-you-go financing can re-
sult in denial of very desirable and vital community facilities and, in
the case of WQM,  failure to obtain water quality in a timely fashion.

    The pay-as-you-go  approach also has problems from a conceptual
point of view because:

    .  By acquiring funds for future users,  government is assum-
      ing a savings function.  If the  money were not collected,
      it could be in use for private purposes.

    .  The entire cost of capital facilities may fall on existing
      residents, which  means that newcomers  to the commun-
      ity may not have to pay.

    .  On long term projects, older persons may be taxed for
      facilities used long past their  lifetime.  (The use of such
      facilities accrues to younger people.)
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    Most of these problems are eliminated under the pay-as-you-use
approach.  One argument that could favor pay-as-you-go is the
avoidance of interest cost for the use of money, and even this argu-
ment is tenuous when the private time value of money and inflation
factors are considered.

    In the development of financial arrangements, a capital program
with sources of money over a 20-year period in 5-year increments
must be developed.1   The magnitude of the WQM capital program can
be very large relative to the other capital improvements planned by
each of the jurisdictions in the WQM area.  As a result, the area de-
mand for capital monies for various projects can result in conflicts.

    Because capital improvement programs are basically a schedule for
capital investment, integrating the WQM plan with the participating
communities' CIPs to form a regional or area multifunctional CIP can
facilitate consistency and compatibility among various communities in
terms of timing construction and generating capital funds.

    To raise capital funds, the financial manager will, in most  cases,
be able to consider "the following types of mechanisms:

    .  pay-as-you-use:

            .  general obligation bonds;

            ,  revenue bonds;

            .  special assessment bonds; and

            .  state loans.

    .  pay-as-you-go:

            .  sewer service fund; and

            .  municipal capital improvement fund.

    .  state  and federal grants.

    Appendix A provides a brief discussion of some of the means for
raising capital funds and some of the advantages and disadvantages
associated with each.
'40 CFR 131.11(h)(l).
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Current Revenues

    Both wastewater treatment and regulatory programs may require
annual sources of revenues to pay for operations and maintenance,
planning, and debt service.  Such revenues may come from one or a
combination of the following sources:

    .  intergovernmental grants;

    .  general revenues; and

    .  user fees of various types, including permits and
      fees.

Each  of these sources can differ in terms  of who is paying and the
level  of difficulty associated  with collecting and using revenues from
that source.

    Intergovernmental Grants

    Federal and state grants  have traditionally been made available for
use in -research,  development, and capital programs such as WWT,
transportation, and other public works projects.   In general, grants
have not been made available for the operation of day-to-day programs
except when such programs fall into an "experimental" area.

    The major advantage associated with the use  of grants is that grant
funds are a source of funds external to the area and,  as a result, do
not impact the local  tax base or government credit.

    The disadvantages associated with grants are:

    .  nonavailability when required due to competition for lim-
      ited funds and  program changes;

    .  special requirements that must be met or prohibitions on
      use  of the  funds; and

    .  difficulty in application and approval procedures, which
      creates unacceptable delays in project development.

In spite of  these disadvantages, many capital projects cannot be under-
taken without the  use of federal grants.   Federal and state grants for
capital facilities  render smaller areas (which lack financial capability)
able to provide needed services and to achieve national objectives and
requirements.

                               -33-

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    General Revenues

    Financial support for community wastewater systems and treatment
 facilities has historically been obtained by ad valorem property taxes
 based on real estate/personal property.1  This system of funding has
 traditionally been used to fund local government services of all types.
 Funds for each program are budgeted from the general fund without
 discrimination of source,  and, the cost therefore falls equally on the
 jurisdiction's tax base.

    The principal advantage of this system is the administrative ease
 of raising funds:  there is no  need to measure or monitor use,  and  the
 added accounting and billing is minimal.2  . The overall concept is based
 on the idea that the system or program is in force for the public good
 and that the entire community benefits from the program by (1) having
 service available and/or (2) having clean water.

    The major problems associated with use of general revenues to fi-
 nance pollution control are that no distinction is made between major
 polluters and small or nonpolluters and no distinction is  made between
 beneficiaries and nonbeneficiaries.

    Another important problem associated with this system is that the
 total cost burden can be such that, to provide all services, taxes can
 become so high as to be a burden on the resident property owners.

    Finally,  use of general revenues for operations and maintenance
 costs of EPA-assisted treatment works does not meet the require-
 ments of Section 204(b)(l)(A)  in ensuring that such costs  are  borne
 proportionately by the users of the facility.

    User Charges

    User charges are direct charges made to users of facilities to  off-
 set the costs incurred, (for example, in providing wastewater  treatment
 services).3
 Financing and Charges for Wastewater Systems,  a Joint Committee Re-
• port (APWA, ASCE, and WPCF).

2Ibid.
3
 Mushkin,  Public Prices for Public Products (Washington,  D. C. :  The
 Urban Institute,  1972), pp.  53-82.
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    Most economists agree that if prices are closely related to costs
 there are substantial possibilities for better use of resources, re-
 duced level of charges on the average, and improved service, all of
 which are inherent in the pricing policies that are conceived in terms
 of economic efficiency.1  The use of prices  (user charges) can be a
 policy tool for apportioning wastewater services to intensity of demand
 and for providing a basis for investment.2

    The basis upon which user fees  are established is often only a
 rough estimate of the value of the direct  benefit of the service or of
 the cost of rendering the service.   User charges often  do not fully
 cover the benefit value or unit cost  of the service.3 The amount not
 covered can be justified in some cases by taking into account spillover
 benefits or costs, which should be covered by general revenues or, in
 some cases, by redistribution of costs for equity purposes.4 Benefits,
 however, usually accrue to users in proportion to their consumption of
 service,  and,  when beneficiary fees are  less than cost, redistribution
 of costs is not likely to be equitable.

    Conversely, it can be argued that the benefits of wastewater sys-
 tems are numerous and the beneficiaries extend beyond those who place
 wastewater in the systems.  Such beneficiaries include  property own-
 ers,  the value of whose property is enhanced by access to the system.

    Wastewater service fees determined  on the basis of water con-
 sumed tend to restrict water usage,  especially when rate structures
 do not offer lower rates for increased consumption. Service fees can
 financially motivate industries that  utilize water for various aspects of
 production to alter existing systems (for example,  to re-engineer flow-
 through cooling systems so that they become recirculatory systems).
 Engineering changes result in decreased loadings on the sewerage
 system, conservation of water resources, and reduction of total treat-
 ment costs.
 Mushkin, op. cit.
2
 ICMA, Management Policies in Local Government Finance, p. 177.

3For additional information see James A. Maxwell,  Financing - State
 and Local Governments (The Brookings Institution) and ICMA, op.  cit.

 Maxwell, op. cit., pp. 174-175.
                                 -35-

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    Permits and fees are a subset of user charges and usually entail
a one-time charge.1 A common one-time charge is the connection fee
collected at the time the user makes a connection to the system.  Per-
mits and fees can include building permit fees, discharge fees, and so
forth.

    The intent of permits and fees is two-fold:  to generate revenue
in accordance to a cost, service,  or value of pollution and, by estab-
lishing fees that serve as incentives to find alternatives, to control
activities that result in undesirable external effects. Such charges
are not based on benefits received but instead reflect actual or poten-
tial damage/social  costs.

    Permits and fees can provide a major regulatory tool for  local gov-
ernments and are critical to the development of regulatory programs.
U.S.  Environmental Protection Agency, Office of Planning and Manage-
ment,  Report on a  Study of Control Agency Revenue Fees (July 2, 1974).
                                -36-

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        ISSUES IN FINANCING WASTEWATER TREATMENT
COSTS INCURRED

   A wastewater treatment system includes facilities for collecting,
transmitting, treating,  and disposing of waste-water or stormwater run-
off.  These facilities incur costs for capital construction (debt service),
operation, maintenance, and replacement.  In addition, the overall sys-
tem incurs administrative costs for planning, organization, and control,
including regulatory programs governing sewer use.

   Table 4-1 below displays these cost items, sources of funds and
federal requirements.  The local service charge in a jurisdiction which
has received a grant under Section 201(g)(l) of P. L. 92-500 normally
will include the User Charge (UC), the Industrial Cost  Recovery (ICR)
payment  (both required by P. L. 92-500), the local debt service, and
any other charges.  These amounts should be separated on the users'
bills and User  Charge and ICR elements should be  carried in distinct
accounts.

                              TABLE 4-1
                 COSTS INCURRED BY WASTEWATER TREATMENT FACILITIES
COSTS
Capital


Operating and Maintananca

Othar
SOURCES OF FUNDS
Fadaral grant
SUM grant
local funds
Bonditwa
Local Fundt
Sanica chargat
Ganaral ravanuM
Sanic* charoai
FEDERAL REQUIREMENTS
UNDER P.L.12-5M*
Grantat mutt raconr grant fun* allocabta to
industry (*a ICR)
Nona
Nona
Grantaa mutt induda all Oparating and Malntananea
Charga fyitam
Nona
              iff It only to lura»
             P.L. W-600.
                           aimanm
SELF-SUFFICIENCY

    The long-term federal cost objective for publicly owned treatment
works is to ensure that (1) costs are paid by users in proportion to use
and (2) treatment works are self-sufficient with respect to operation and
maintenance.1 To obtain self-sufficiency the sum total of revenues must
Federal Guidelines, User Charges for Operation and Maintenance of
Publicly Owned Treatment Works,  40 CFR Part 35, Appendix B0
                                 -37-

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cover the sum total of costs,  and to ensure proportionality the sources
of revenues should equate with the sources of cost.  To achieve these
objectives, a full accounting of costs and a separation of receipts from
other local funds must be maintained.  The full accounting of costs and
separation of receipts ensures that users in fact are paying the true
operating and maintenance and administrative costs of the system.
USER CHARGE AND INDUSTRIAL
COST RECOVERY REQUIREMENTS

    To obtain EPA grant assistance for construction of publicly owned
treatment works, applicants must,  among other requirements, estab-
lish a user charge and industrial cost recovery system throughout their
jurisdiction.1 In terms of financial arrangements, the WQM plan has
three concerns with respect to these requirements.

    .  to ensure that financial and management arrangements com-
      ply with the requirements  when they apply;

    .  to explore, as  appropriate, alternative approaches to ful-
      fill the requirements; and

    .  to supplement these requirements as necessary or desirable.

These three concerns are discussed below,  with separate sections for
user charges and industrial cost recovery.

    In ensuring that financing and management arrangements comply with
applicable requirements, the WQM planning agency may assume several
possible roles:

    .  assuring that agencies and officials potentially subject
      to the requirements have a plan for timely compliance;

    .  assisting in exploration by jurisdictions of alternative
      means of complying with the requirements; and
EPA guidance on establishing such systems includes the following docu-
ments:  Federal Guidelines,  User Charges for Operation and Maintenance
of Publicly Owned Treatment Works,  40 CFR Part 35, Subpart E,
Appendix B; Program Guidance Memo 28 (April 1974), replaced by
USEPA Program Requirement Memo  75-10; Program Guidance Memo 37
(July 9,  1974),  replaced by USEPA Program Requirement Memo 75-19;
and Program Guidance  Memo 38  (July 16, 1974), replaced by USEPA
Program Requirement Memo 75-20.
                                -38-

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    .  providing on an areawide or statewide basis certain actions
      necessary to achieve compliance,  including development of
      model ordinances.1

    In addition, an understanding by the  WQM planning agency of the
UC/ ICR requirements can help assure that implications of the plan for
ICR and UC payments  are taken into account.  Decisions in the plan on
the "location, modification,  and construction of any facilities, " for in-
stance, should take into account the UC/ICR implications of such decis-
ions for users of the facilities.

Compliance with Requirements  - User Charges

    Section 204(b)(l) requires that the financing procedures for publicly
owned wastewater treatment works in jurisdictions receiving grants in-
clude :

      A system of charges to assure that each recipient of
      waste treatment services within the applicant's juris-
      diction will pay its proportionate share of the costs of
      operation and maintenance (including replacement) of
      any waste treatment services provided by the applicant.

    The objective of the user charge system is to "distribute the cost of
operation and maintenance of publicly owned treatment works to the pol-
lutant sources and to promote self-sufficiency of treatment works with
respect to operation and maintenance, " including replacement costs.3
 Applicants for 201 grants should indicate in writing to EPA annad the
 state what elements, if any, necessaryfor UC/ICR compliance will be
 provided through the Section 208 planning process or by the WQM plann-
 ing agency.  This delegation of responsibility should be clear  and specif-
 ically adopted by the WQM agency.  A time schedule should be agreed
 upon by the concerned entities to ensure the work will be completed in
 a timely manner and can be accommodated by the WQM agency's work
 program. There should be some demonstration of how costs will be
 accounted for with respect to Section 208 and 201 requirements and the
 different elegibilities for cost sharing.

2P.L.92-500 Section 204(b)l(A).
2
 Federal Guidelines,  User Charges for Operation and Maintenance  of
 Publicly Owned Treatment Works, 40 CFR Part 35  Appendix B(c).


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    The following general steps are presented as an outline of the devel-
opment of the system and are not an exhaustive description of formulat-
ing a user charge system:

    (1)  Identify and classify system users:  analyze users'
        wastewater characteristics, including flow, bio-
        chemical oxygen demand (BOD), and suspended
        solids (SS).

    (2)  Perform cost analysis:  allocate costs  to capital and
        operation andtmaintenance, and categorize operation
        and maintenance costs into components including treat-
        ment, transmission, and collection.

    (3)  Develop unit costs (on the basis, for example, of flow,
        BOD, SS),

    (4)  Allocate costs to achieve proportionality.

    Identify and Classify System Users

    The characteristics of wastewater in the system are identified
through sampling or historical records.  The typical parameters are
flow, BOD,  and SS0   Other wastewater parameters (e.g., hexane solu-
ables), may  need to be identified if such parameters significantly affect
the costs of system components.  In multiple jurisdiction systems,
wastes may be characterized for each participating community, with
each community responsible for characterizing users of its facilities.
A User Charge system for regional treatment  authorities' should have
common units and unit costs established throughout its jurisdiction for
flow, BOD,  SS,  or other treatment parameters.  Contracts between
such authorities and other municipal entities must provide a vehicle to
meter, measure,  monitor, or otherwise provide control and/or surveil-
lance of industries and others discharging wastes to the treatment works
for the purpose of levying surcharges, excluding or requiring pretreat-
ment.

    Perform Cost Analysis

    Cost analysis is concerned with identifying the total cost to be allo-
cated to the users.  The User Charge system  as outlined in the Federal
Regulations is specifically concerned with allocating the  costs of opera-
tion and maintenance (including replacement) of the treatment works.
                                 -40-

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 "Replacement, " as defined in the EPA Regulations, does not include
 local capital costs or recapitalization.1 These latter costs cannot be
 included in the User Charge per se, but they can be recovered through
 other revenue sources (overall service charge, property tax, general
 fund, etc.).

    The operation and maintenance costs  can be further divided into
 costs associated with each major system component:

    . treatment

    . transmission

    . collection

 Costs should be divided in this manner when separate management agen-
 cies are involved or will be involved.  In the first year of operation,  de-
 velopment of detailed cost estimates for these system components may
 require_using agency budgets and/or cost estimates by engineers. In
 subsequent years the accounting systems of the grant recipient should
 identify the treatment system costs components.

    Develop Unit Costs

    The operation and maintenance costs  identified in the cost analysis
 step are allocated to system loading factors of volume, BOD, and SS,
 or other factors based upon an engineering analysis.  For example,  the
 operation and maintenance costs for collection may be allocated on a
 100-percent flow basis,  but treatment costs may be allocated 40 percent
 to flow,  30 percent to BOD,  and 30 percent to SS.  The costs associated
 with the volume loading factor are then summarized and divided by the
 total projected volume of water that will  enter the system to obtain a
 cost per unit of volume.  The use of total flow, BOD, or suspended sol-
 ids to establish unit costs is questionable where there is infiltration/
 inflow and/or combined sewer flows and  loads. It may be more appro-
 priate to use billable flows and loads to reflect true unit rates,

    Allocate Costs to Achieve Proportionality

    To calculate  each group's share of costs, the unit costs  are multi-
 plied by the appropriate wastewater characteristics of the user groups
X40 CFR Part 35, Appendix B(d).
                                -41-

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participating in the treatment system.  This calculation may be compli-
cated by existing inter-local service agreements and contracts.  These
existing contracts  may bind a sewer agency into a rate formula for a.
given period of time and may have to be renegotiated or modified to
reflect the new cost allocation of any approved User Charge system.

    Two basic user charge cost allocation techniques are presented in
the Federal Guidelines for User Charge Systems.  The first system
charges:

      Each user a share of the treatment works operation
      and maintenance costs based on his  estimates of mea-
      sured proportional contribution to the total treatment
      works loading.1

The proportional contribution may be based on a flow percentage or a
more complete analysis of flow, BOD, and SS contribution.

    The second system  establishes:

      classes for users having similar flow and wastewater
      characteristics, i.e., levels of biochemical oxygen
      demand, suspended solids, etc. Each class is  then
      assigned its share of the waste treatment'works ope-
      ration and maintenance costs based on the proportional
      contribution of the class to the total treatment works
      loading.2

Grouping users into classes can reduce the amount of sampling  and mon-
itoring since a sample from a representative user could be  used to indi-
cate the entire class's wastewater characteristics.
 See 40 CFR Part 35, Appendix B, Federal Guidelines,  User Charges
 for Operation and Maintenance of Publicly Owned Treatment Works.

 Ibid.
                                 -42-

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   Alternative Approaches - User Charges

   The major determinant of any individual's User Charge, obviously,
is the per capita operating and  maintenance cost of the treatment sys-
tem of which the individual is a part.  Once the facilities to be built are
decided upon, the User Charge is a relatively straightforward computa-
tion.  The direct impact of system costs upon a User Charge  is,  in
fact, intended to encourage both construction of the most cost-effective
facilities and the economical use of such facilities.

   However, there is  some limited flexibility in the manner of comply-
ing with User Charge requirements that may merit exploration by the
planning agency.  For  example,  larger system boundaries may allow
costs to be spread among a larger number of users, thereby reducing
very high  charges  which would otherwise be assessed against a small
group of users, or avoiding or reducing significant rate differentials
among adjacent areas. The degree to which enlargement of system
boundaries is allowable under the User Charge requirements is deter-
mined by the EPA  Regional Administrator.  Factors to be taken into
account include hydraulic or  administrative interconnections among
facilities and jurisditions. If the optimal system boundaries for User
Charge purposes are larger than existing administrative jurisdiction,
some problems might be encountered in trasferring funds from entities
whose rate generates revenues in excess of costs to entities whose rate
does not fully cover  costs. The consolidation of administrative juris-
dictions to conform to  the optimal system boundaries for  User Charge
purposes might offer a solution to such fund transfer problems.

   It should be noted that enlargement of system boundaries to spread
costs more equitably among users may have  adverse effects.  To the
extent that rates in the larger system do not  reflect the true cost of
service, enlargement of boundaries may eliminate valuable price sig-
nals to persons determining in which facility service area to locate.

   Supplementing Requirements - User Charges

   The requirements of Section 204(b)(l)(A)  apply to the User Charge
for operation and maintenance,,  Such a user  charge is normally only
one component of a total service charge that  may include  debt service,
surcharges, and such other charges as the jurisdiction has the legal
authority to levy.  Since  the  non-User Charge components of the ser-
vice charge are a  matter  of local discretion,  other objectives may be
                               -43-

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considered in supplementing the User Charge.  Among the objectives
which might be pursued are:

    . providing a greater incentive for conservation of water
     through pricing, possibly as a surcharge during periods
     of drought, or to reduce groundwater depletion and/or
     saltwater intrusion;

    . generating funds to finance continuing water quality plan-
     ning and management for the area (see Chapter Seven); and

    . complementing the area's development policies through
     use of sewer pricing policies.1

    Another objective may  be amelioration of interjurisdictional charge
differential which results when the most cost-effective treatment works
configuration does not equalize effluent requirements on dischargers to
water quality limited segments.  In some cases, several municipal
plants in various jurisdictions in the area may all be contributing a pol-
lutant to a stream in violation of the water quality standard.  However,
the most cost-effective solution may be to concentrate abatement respon-
sibility on a single one of the facilities.  Although this solution would
minimize total costs of compliance, it may be  resisted by the facility
bearing the abatement burden unless it can be compensated by the other
facilities.  Otherwise, the minimum cost solution for the area might
maximize the compliance cost for one particular plant. Unless all the
involved jurisdictions are  hydraulically or administratively intercon-
nected, the User Charge system probably cannot itself be utilized to
compensate for this problem.  Funds transfer, then,  would have to pro-
vide for financing local capital costs of the impacted plant, since User
Charges would have to be borne by the actual facility users.  In this way,
it might be possible for  all users in an area to benefit from the minimum
cost, or most cost-effective,  allocation of a required waste load reduc-
tion.

    Because these objectives can be part of the WQM plan,  they should be
considered in the design of financial arrangements for carrying out the
plan, although they are not a requirement in establishing User Charge.
 Donald A.  Downing, "Sewer and Water Pricing and Investment Policies
 to Implement Urban Growth Policy," Water Resources Bulletin (Ameri-
 can Water Resources Association) 11,  2 (April 1975).
                                -44-

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Compliance with Requirements - Industrial Cost Recovery

    Industrial Cost Recovery,  as defined in Section 204 (b)l(B) of P. L.
92-500,  requires industrial users of publicly owned treatment works to
make payment for "that portion of the cost of construction of such treat-
ment works which is allocable to the treatment of such industrial wastes
to the extent attributable to the Federal share of the cost of construc-
tion". The basic steps in the development of an ICR system are shown
in Figure 4-1 and include:

    . identification of industrial users and development of the
      industrial data base;

    . classification of user groups;

    o determination of ICR cost base;

    . determination of ICR payments;

    . development of ICR  billing procedures;

    . establishment of funds management; and

    . submission of ICR system to EPA for approval.

A complete description of this development is contained in "Supplemental
Information Federal Guidelines - Industrial Cost Recovery Systems. "2

    Half of the funds generated through industrial cost recovery are re-
tained by the applicant.3 Of this retained amount, four-fifths must be
utilized  for future plant expansion and construction associated with the
project, but one-fifth is discretionary * Availability and use of retained
funds should be included in the discussion of financial  arrangements for
the WQM plan's implementation.  For example, the discretionary portion
of retained funds might be utilized to finance continuous plannings(see
1P.L. 92-500, Section 204(b)l(B).

2EPA MCD-44 (August 1976).

340 CFR Part 35.928-2.

 The only prohibited uses of  retained funds are given in the Federal
 Guidelines,  Industrial Cost  Recovery Systems,  Section 16(D)(2).

5As required by 40 CFR  Part 35. 208-2(a)(5).
                                 -45-

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   IDENTIFY
INDUSTRIAL USERS
DEVELOP THE INDUSTRIAL
      DATA BASE
                 CLASSIFY USER GROUPS

                   QUANTIFY FLOWS
                     AND LOADS
                (BY USER OR USER GROUPS)
                    DETERMINE THE
                    ICR COST BASE
                    DETERMINE THE
                    ICR PAYMENTS
                     DEVELOP ICR
                  BILLING PROCEDURE
                   ESTABLISH FUNDS
                     MANAGEMENT
                  SUBMIT ICR SYSTEM
                    DESIGN TO EPA
                    FOR APPROVAL
   FIGURE 4-1:  DEVELOPING THE ICR SYSTEM
                           -46-

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Chapter Seven),  while the nondiscretionary retained funds would finance
a portion of identified treatment works needs,1

   Alternative Approaches - Industrial Cost Recovery (ICR)

   ICR payments can be significant costs to some-industries  and can
be expected to influence behavior of industries in terms of direct/in-
direct discharge decisions and reduction of flow and strength of waste.
Table 4.2 attempts to compare in summary form the costs facing indus-
try as a direct discharger and the costs facing industry as an indirect
discharger subject  to ICR payments. Awareness of and attention to the
potential effects of ICR on the behavior of industries  can reduce the
likelihood that unforeseen industry actions will severely disrupt the
financial arrangements established in the WQM plan.

   By being able to utilize a POTW for treatment of its wastes,  an an-
dustry realizes  a sizable interest subsidy and may enjoy greater econo-
mies of scale than it would realize in its own treatment works. These
advantages provide incentives for an industry to be an indirect dis-
charger.

   There are, however, certain disincentives for an industry to be an
indirect discharger and,  in EPA grant-assisted works,  to be subject to
ICR  provisions.  One major disincentive occurs when pretreatment re-
quirements are  nearly equivalent to direct discharge requirements.  In
such cases, the industry may view use of a POTW as a totally unneces-
sary capital and operating cost.
    A careful evaluation of the costs of the direct/indirect discharge op-
tions facing industries may indicate that a certain schedule of ICR pay-
ments  may drive the industry out of the POTW system.  When the  depar-
ture of an industry would have major impact on the per unit treatment
costs of remaining users (especially when plants have already been built
or are under construction), it may be appropriate to explore  alternative
payment provisions which would conform to ICR requirements but  are
less onerous to industry,,
Identification of municipal waste treatment system needs over at least a
20-year period, and of the program to provide the necessary financial
arrangements for development of such systems, is required  as part
of the plan by 40 CFR Part 131. ll(h).
                                 -47-

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                                             TABLE 4-2

                    COSTS FACING INDUSTRY AS DIRECT DISCHARGER
            VERSUS COSTS FACING INDUSTRY AS INDIRECT DISCHARGER
Situation
                  DIRECT DISCHARGER
                    (Not subject to ICR)
Industry treats its wastewater and
   discharges direct to receiving
   water
                                              INDIRECT DISCHARGER
                                              	(Subject to ICR)
                                                    PRETREATMENT
Industry may treat wastewater
   before discharge to POTW
                                                                  POTW TREATMENT
POTW treats wastewater received
   from industry, then discharge
   to receiving water
Effluent
Requirements
BPT, BAT or more stringent
   limitations as required by
   water quality standards
   (Sections 301 (b) (1) (A),
   301 (b}(1) (C)and301
   (b) (2) (A) of P.L. 92-500))
Any applicable federal, state
   or local pretreatment
   requirements or standards
   (Section 307 (a) of P.L.
   92-500)
Secondary treatment or BPWTT
   (Sections 301 (b) (1) (B) and
   301 (b) (2) (B))
Capital
Costs
Borne by industry for treatment
   and transmission to receiving
   water; effective cost may be
   reduced by federal tax
   benefits available
Borne by industry for on-site
   pretreatment; effective cost
   may be reduced by federal
   tax benefits
Industry required to repay over
   30-year period at least 75%
   of original capital cost
   attributable to it
Interest
Rate
Cost of capital to the industry
   may be approximated as
   long-term rate on corporate
   bonds
Same as column one
Effective interest rate on ICR
   portion is zero; (share on
   local capital costs at
   interest rate on municipal
   bonds)
Fixed
Costs
Capital costs are fixed; that is,
   industry cannot avoid costs
   by ceasing to use facility,
   since it is industry-owned
Same as column one
If industry withdraws, ICR
   payment ceases; in effect,
   this makes at least 75% of
   capital costs variable from
   firm's perspective
                                                       -48-

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       The major source of flexibility  in  establishing ICR
 payments is determination of  which costs are "attributable"
 to industry and,  as with user charges, determination of
 system boundaries.   Any such  determination, however, must
 be approved by the  EPA Regional Administrator.
    Supplementing Requirements - Industrial Cost Recovery

    ICR payments are designed to recover only the federally shared por-
tion of construction costs attributable to industry.  There are no federal
requirements with respect to the nonfederal portion of capital costs
attributable to industry.

    Because of the substantial disruption in financing  arrangements that
the departure of a large-volume user from an existing system may cause,
however,  the  locality may wish to supplement federal ICR requirements.
Both incentives and penalties may be utilized to supplement such require-
ments.  For example, a locality may determine not to recover any of the
local share from industry, thereby providing some subsidy and incentive
for the industry to stay in the system.  On the other hand, the locality
may attempt to secure a more firm commitment from industry regard-
ing use of facilities.  Letters of intent, required by EPA regulation in
design stages of POTW's are a necessary but not always sufficient ele-
ment in ensuring that industries remain in the system and completely
pay for those  costs which are incurred in their behalf.  The EPA-re-
quired ICR payment ceases upon withdrawal of an industry from a facil-
ity.1 However, the locality may attempt to secure a more long lasting,
contractual commitment from industries with respect to the local share
of capital costs.   When major industrial users  must make these long-
term commitments for repayment, provision might be made for transfer
of the commitment, as by sale.  This would allow an  industry to leave
the system without forfeiting its entire investment.
i
Federal Guidelines, Industrial Cost Recovery, Section 12.
                                -49-

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EXCESS CAPACITY

   An example of a cost that may not be allocated based on current
wastewater discharges is the debt service associated with excess ca-
pacity in the treatment plant and the interceptors.  These costs are
not incurred as a result of current discharges to the system and should
not be allocated to the communities based on current  discharges.  Some
communities may have very limited growth potential and will not need
the excess capacity, while others may have significant growth potential
and desire a great deal of excess capacity.

   A possible solution to this problem is the allocation of the excess
capacity costs to the communities,  based on the capacity reserved for
each community.  Although this allocation scheme will provide a more
equitable distribution of pollution costs to the participating communities,
the cumulative charge for reserve capacity to a developing area may be
excessive, and a deferred payment schedule may have to be  developed.
The deferred amount  would be paid by current users, creating a "loan"
to the community with high reserve  charges.  This loan would be repaid
plus interest in the future as the new community developed and was cap-
able of raising reveues.

   A second technique would recover excess capacity costs  from  future
users of the system through land assessment or property taxes. (How-
ever, in some cases the future user of the excess capacity may not cur-
rently be connected to the treatment system.)

   As a third alternative, the  debt service associated with excess capa-
city in the treatment plant and  interceptors could be recovered through
techniques (such as connection fees) designed to  direct  or restrain the
location and timing of growth in the  treatment system.1  The WQM plan-
ning agency should try to ensure that the pricing policy of reserve capa-
city is consistent with the growth control provisions in  the WQM plan.

    A fourth alternative approach is the  use of serial bonds with payment
schedule arranged to produce rising annual debt  service.2 This technique
will postpone payment for a portion of the excess capacity but tends to
Downing, op. cit.

 L.  K. Moak and A.  H.  House, Concepts and Practices in Local Govern-
 ment Finance (MFOA.-1975).
                                 -50-

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increase the cost of borrowing and may be restricted by bond laws.1  It
assumes that the area will grow at a given rate and that more users  will
be in the system when the larger payments are due,,  If this does not
occur, the current users will be assessed larger user charges in the
future to meet the increasing debt service payments.

    Another issue associated with allocation is the  differences in rates
to users of different treatment systems in the same area.  These dif-
ferences can occur as a result of either of the following:

    (1)  cost differences:

            . differing requirements due to outfall location,
             industrial wastes treated, etc.; and

            . differing efficiency of operation.

    (2)  financing  differences: subsidies from tax system
        versus full recovery
MANAGEMENT AGENCY CONSIDERATION -
WASTEWATER TREATMENT

    The selection of management agencies for wastewater treatment
should, as discussed in Chapter One,  take into account a number fac-
tors.  Figure 4-2 illustrates specific  concerns that may be associated
with these factors.

    The financial requirements  that should be met by a management
agency cannot be clearly separated out from managerial,  legal, and in-
stitutional requirements,, As a result,  evaluating existing management
agency candidates and/or formulating methods to meet financial require-
ments must include consideration of the interdependency among finan-
cial,  legal, managerial, and institutional requirements.

    To illustrate this problem,  Figure 4-2 shows the basic interdepen-
dency between the general financial requirements and each other func-
tion:  institutional, legal,  and managerial.,   For example, to meet the
i
J. R. Aronson and E. Schwartz, Management Policies in Local Govern-
ment Finance (Washington,  D. C. :International City Management
Association, 1975).
        *                        ~ 0 JL""

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     Can the accounting system
     of the agency assure compliance
     with applicable UC/ICR
     requirements?
     Can the agency provide cost
     effective management of the
     treatment works?
   1- Etc.
                                    I
DETERMINATION OF
   WASTEWATER
TREATMENT WORKS
AND NEEDS IN AREA
      Does the agency have authority
      to:
      -  accept and utilize grants?
      -  assess charges?
      -  assure participating commun-
         ities pay their proportionate
         shares of treatment costs?
                                                                       INSTITUTIONAL
- Does the public favor use of
  the agency?
- Can the agency support applicable
  interjurisdictional agreements?
L- Etc.
  SELECTION OF AGENCY(S)
FOR WASTEWATER TREATMENT
                                                Can the agency secure capital
                                                funds at acceptable rates?
                                                Can the agency adopt UC/ICR
                                                revenue systems easily to
                                                comply with Section 204 (b) (1)?
                                                Can the agency secure and
                                                manage grant funds?
                                                Can the agency assess proportionate
                                                shares among communities it serves?
                                                Etc.
               FIGURE 4-2: POSSIBLE FACTORS IN MANAGEMENT AGENCY
                             SELECTION FOR WASTEWATER TREATMENT
                                              -52-

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financial requirement of obtaining and using grants, an agency must also
have (1) the legal authority to accept grants, (2) the managerial ability
to apply for, obtain, and apply the grant, and (3) the institutional rela-
tionships with other entities and/or  programs to ensure proper con-
sideration of grant applications.

    In addition to the requirement of 208(c)(2), the basic financial con-
cerns that should be addressed in a  management agency selection in-
clude:

    .  extent to which financing procedures can/will comply with
      204(b) (ICR/User Charges);

    .  adequacy of  accounts classification system for formula-
      tion and implementation of ICR and UC systems;

    .  capability for negotiation and renegotiation of inter juris -
      dictional agreements, including such things as accounts
      class  functions and billing standards;

    .  capability to  draw, when appropriate, on revenue sources
      other  than the user charge revenues (e.g.,  permit fees for
      pretreatment compliance inspection); and

    o  capability to benefit  other environmental programs from
      user charge financing as required under 201(g).

    In most  cases,  the selection of the agencies to manage wasterwater
treatment programs will be a choice among municipalities,  special dis-
tricts, counties and regional authorities and/or between each of the
former agencies and a "new" agency.

    The selection and/or creation of a new  agency must, from a finan -
cial point of view,  be based upon the specific financial requirements
under 208(c)(2), the concerns listed above, and the interdependency of
the financial requirements with the other functional requirements.  To
develop such assessments  and "select"  a management agency based upon
that assessment may require trading off strengths in one functional area
to gain strengths in another.

    For example,  one agency may have the best capability to raise reve-
nues from a financial and legal point of view but only limited managerial
capability with respect to staff size  and  financial management (account-
ing) systems.  A second agency may have excellent managerial capabil-
ity but only a portion of the revenue raising capability desired.  At this

                                -53-

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point, one of two actions would be possible:  one agency or the other
could be selected by trading off the less important concer, or the agency
deemed to have the best potential could be improved by adding the lack-
ing capability.  Adding capability could include, for example, obtaining
legal authorities, increasing staff levels, and developing and installing
accounting systems.

    The above example is simple in the extreme.  In fact, assessments
will have to take into account all of the requirements and concerns for
all potential candidates  at the same time.  Thus, the trade-off process
and/or formulation of strategies to meet requirements can be a complex
task not easily accomplished.

    Figure 4-3 is an illustrative checklist of some of the requirements
that should be reviewed for different types of agencies.  The checklist
provides for three types of checks: compliance with the various acts,
specific legal authorities to meet the requirements, and assessment of
the capability to perform.  The first two checks are fairly straightfor-
ward and can, for the most part, be assessed on a "yes °r no" basis.
These checks should be available from the inventory process discussed
in Chapter Two.

    The third check category is an assessment or evaluation.  Such eval-
uations  can be based upon both the feasibility and the efficiency of a  par-
ticular management agency.  This determination will focus upon how well
(or if) a particular candidate management agency can meet the require-
ments.   Some of the assessments can be clear and straightforward.
For example, bond ratings are classified by letters, such as AAA or AA,
The bond rating indicates the ease and, in some cases,  the possible cost
that will be associated with issuing bonds.

    Other assessments will be more qualitative in nature. For example,
determinations as to the level and skills of staff and their ability to con-
duct the wastewater treatment program will require judgment on the part
of the evaluatorSo

    The  evaluation,  assessments, and trade-offs can be conducted based
upon the specific needs and problems of a particular area.  The assess-
ments,  however, irrespective of local needs and problems,  should con-
sider the concerns discussed above if major problems in plan implemen-
tation are to be  anticipated.  Such problems can include:

    . loss of Title II and fund eligibility;

    . interruption of funds flow through state priority systems;

                                -54-

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    .  recovering of federal funds on active grants;

    .  failure to develop nonfederal revenue sources for opera-
      tion and maintenance, replacement,  and expansion for
      WWT facilities; and

    .  legal, institutional, and administrative resources by
      system user against  management agency authorities.
CONSOLIDATION OF WA5TEWATER TREATMENT SYSTEMS

    The WQM alternative may call for consolidating the waste water
treatment system for a specific jurisdiction or treatment system under
a single management agency to minimize administrative problems and
provide the most cost-effective and financially advantageous system.
In such cases, financial arrangements may have to provide for equitable
acquisition and/or transfer of existing facilities  and debt from present
owners/operators to the consolidated facilities' management agency.
Specific financial problems which can arise are valuation of existing
facilities, compensation for facilities,  and disposition of outstanding
debt.  Examples of when these problems might arise are:

    .  consolidation of several sewer  districts in a metropolitan
      area,  each district having its own system, into  a single
      areawide system managed by one entity;

    .  a major metropolitan system expanding around a small
      local municipal system; and

    .  developer-owned and -operated package plants for major
      subdivisions.

Valuation and Compensation for Acquired Facilities

    When single or independent facilities, owned  and operated by pri-
vate operators, municipalities, or independent sewer districts, are to
be incorporated into an existing or areawide management agency, it may
be necessary as provided for by state and local law to provide a finan-
cial basis for acquiring the facility from the preconsolidation owner/ope-
rator.

    To accomplish this, the management agency for the consolidated
facilities may have to "purchase" or otherwise acquire the facility and
compensate the owners.  In certain cases, subsequent to valuation, it

                                -56-

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may be in the best interest of the consolidated agency--to avoid unrea-
sonable and inequitable increases in debt obligation, operating costs, and
ultimately increased user charges--not to acquire the facility, but rather
to assume management and leave the previous entity as a paper entity in
the bank to service debt.  This situation can occur when no systemwide
savings result from consolidation,  when acquisition would result in non-
users sharing or bearing acquisition cost, or when the cost to the users
of the acquired facilities would increase disproportionately to added ser-
vices.

    Approaches to Valuation

    Four basic approaches to valuation of facilities should be acquired:
historical cost,  replacement cost,  market value, and dedication.

    Historical Cost.  Historical cost for valuation assumes that the
owners should be compensated for  their original cost less that portion
of the economic  life used at time of acquisition.   The value is calculated
by depreciating the original cost, based upon the  economic life to the
value remaining at time of acquisition.  This approach would be appli-
cable to public organizations and accounts for actual cost and use of
the facility.

    Replication Cost.  Replication  cost is the estimated cost to build an
identical facility with equivalent remaining life at time of acquisition.
Thus,  the value of the facility is set at the cost of replication and assumes
that if the facility to be acquired did not exist, .that would be the cost to
the consolidated agency.  This method captures,  for the owner, the value
of inflation associated with the plant,

    Market Value.  Market value valuation is simply establishing the
price based upon the  "market" or that amount for which the seller will
sell and the buyer will buy..  Because there is no  true market,  this -
approach tends to be  a "negotiated" valuation for  acquisition,  and in
some cases when agreement cannot be reached value can be set by the
courts.

    Dedication.  Dedication can occur or be used as the acquisition
means in cases where the owner/operator is willing or required to "turn
over" the facility to a bonafide management agency.  This is most likely
The approaches given are basic. Additional information can be obtained
in most advanced accounting texts.

                                -57-

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to be the case when a developer has constructed a subdivision package
plant and has agreed in advance to dedicate the  plant to a public waste-
water treatment system.

    From a total cost point of view,  the historical value method will,  in
an inflation economy, always be less than the replacement cost method.
Thus, from the "seller's" point of view,  the greatest return in most
cases should be with  replication costs.  From the "buyer's" point of
view, there should be no difference  in total dollar outlay between con-
struction of a new plant and purchase at  replication  cost. If the cost
of an existing, in operation plant is  the same as the cost of construction
a new plant,  there will be no obvious cost saving to purchase an existing
plant at  replication  cost.

    The major problem with replacement and market approaches is
establishing a value agreeable to both parties.  The historical value
approach is based on actual cost data and previously established econo-
mic life as indicated  by the depreciation  schedules in use.

    Approaches to Compensation

    Once a valuation has been set, agreement must be reached on com-
pensation to the "owner. "  Compensation can take the form of direct
cash payment or credit to that agency for participating share.  Cash
payment requires  the consolidated agency to raise sufficient  revenue
for payment  and in most cases means acquiring capital through tradi-
tional sources.  "Credit" for the participating share of the community
can avoid debt financing through traditional sources.

    The  approach most advantageous to a particular area will depend
upon the state and local legal requirements and conditions in the area.

Outstanding Debt

    If facilities have  outstanding debt obligations, consolidation can be
complicated.  The problems that can arise include transferability of
debt obligations and assumption of responsibility for debt. In the first
case, certain bond provisions call for full payment if any portion of the
facility is  transferred to another entity.  If the bonds that would have
to be recalled are issued at interest rates lower than current market,
and if new bonds have been sold to pay off the recalled bonds , then  sub-
stantial added interest costs and refinancing costs will be incurred.
                                -58-

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   In the second case, it must be determined who -will assume the debt
obligation.  In most cases, the agency (or agencies) can assume the
debt and deduct that amount from the valuation of the facility.  In some
cases, however,  the amount of debt is either greater than the value of
the facility or in the form of nontransferable general obligation bonds.
In such cases, facility users may have to pay a service charge that could
be equivalent to the old service charge plus a piggyback charge for debt
not transferred or considered excessive.  This could occur if the con-
solidated system service charge is not sufficiently lower than the local
service charge and the acquiring agency does not incoporate the exces-
sive debt into the overall system and charges the cost of the excessive
debt to the local users.  The only solution to this problem would be to
defer consolidation until such time as the debt is retired or an equitable
valuation aligns  debt without increasing areawide costs.
                                -59-

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                                                  "EXAMPLE 4-1
WASTEWATER TREATMENT CASE STUDY
    The following case study example is presented to demonstrate devel-
opment of financial arrangements for a wastewater treatment alternative
within a subarea.

Background

    The planning subarea is relatively rural, with a total population
of 10,000 in 1975.  Village A is expected to remain the dominant urban
center in this area, increasing to a. population of 5,000 in the year 1985.
In comparison, two other villages in the study area, Villages B and C,
are much smaller. About 40 percent of the total population of the plan-
ning area currently resides in the three villages.  The urbanized pro-
portion of the study area is  expected to increase in population by 15, 000
people by the year 1985.

Financial Arrangements

    The selected plan elements include the following: (1) expanded treat-
ment plant at Village A to accommodate wastewater flows from a public
park operated by Villages B and C, (2) expected urban development in
unincorporated areas, (3) meeting final NPDES effluent limitation re-
quirements by upgrading the plant; (4) construction of interceptor from
the park to the treatment plant; (5) construction of collection systems
in the developed portions of Villages  B and C, and (6) increase in the
size of the proposed park pumping station to accommodate additional
flows generated in Village C.

Cost Sharing Arrangements

    Distribution of the capital construction costs may be accomplished
in several ways,  depending upon operational responsibilities.  The
treatment plant which is to  be expanded and upgraded represents a sunk
cost for Village A.  The capital cost  sharing arrangements are shown
in Table 4-1-1.

Alternative Revenue Sources - Initial Capital Costs

    Development of alternatives and selection of financial arrangements
must consider meeting the local share of the initial capital costs of con-
structing wastewater facilities.  Six alternatives were considered.
                                -60-

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                                                      "EXAMPLE 4-1 (Continued)
                                TABLE 4-1-1

           ALLOCATION OF INITIAL CAPITAL COSTS FOR
     RECOMMENDED REGIONAL WASTEWATER FACILITIES1
""""-\^^ SHARE OF COST
^^\BY ENTITY
ITEM ^^-^^
Treatment Plant5
Upgrading6
Expansion7
Interceptor7
Local Sewers
Village B
Village C
TOTAL
VILLAGES B AND C
AND COUNTY3

$ 73,424
169,440
169,200

262,000
445,000
$1,119.0648
VILLAGE A4

$101,664





$101,6648
NOTES:
   1. The costs presented are approximate and will be refined upon detailed
     engineering design.
   2. The allocation of the costs shown is only an example and does not
     represent a recommended approach. Although either Village A or the
     county may accept responsibility to undertake management agency
     responsibility, the costs may be distributed in a number of ways.
   3. Includes Villages B and C and the unincorporated portion of the county
     connected to the interceptor sewer.
   4. Includes Village A and the area immediately adjacent to City A.
   5. The approximate division of the capital costs for these improvements
     to the existing plant is 40 percent for upgrading and 60 percent for
     expansion.
   6. Costs were allocated based on expected proportionate wastewater flows:
     Villages B and C and the county at 26 percent; City A at 36 percent and
     park at 38 percent.
   7. Costs were allocated based on expected proportionate wastewater flows:
     Villages B and C and the county at 40 percent and park at 60 percent.
   8. This amount is the total estimated cost; the project is eligible for 75
     percent funding under the 201 program.
                                      -61-

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                                       EXAMPLE 4-1 (Continued)
   General Obligation Bond
   In this case state law limits governmental indebtedness resulting
from the issuance of general obligation bonds to 10 percent of the asses-
sed valuation of property within the community.  Only 1 percent of this
total may be obligated without voter approval, since an increase in prop-
erty taxes may be necessitated by the issue.  Because many other public
needs can be financed only through general obligation bonds, communi-
ties will be reluctant to use  this  funding mechanism for revenue produc-
ing facilities such as sewers and wastewater treatment plants.  The cur-
rent assessed valuation of the  affected entities according to the County
Auditor's Office are as  follows:
             ViUage A                        $   3, 588, 555
             Village^                              571,190
             ViUage C                              680,950

             The County                      $294,190, 767
              (includes municipalities)

    If Village A were to accept management and financial responsibility
for all recommended facilities, its share of the local cost would be
approximately $305, 000.  If general obligation bonds  were used, Village
A's entire 10 percent limit would be necessary, assuming unlikely voter
approval of such a bond issue.  This approach  would also preclude gen-
eral obligation financing of other needed municipal projects.  Village B
and C would face similar problems if they were responsible for financ-
ing the recommended local sewer systems in these communities.  Fol-
lowing are the 25 percent shares and 10 percent bond limits:

           25 Percent                      General Obligation
         Share of Sewers                    	Limit	

     Village B   $ 65,500                       $57,000
     Village C   $111,250                       $68,000

    General obligation financing should be ruled out by the villages, but
it may be viable for the county.

    Revenue Bonds
    Constraints on revenue bond financing include higher interest charges
 and changing conditions in the bond market.  General marketability im-
 proves for larger governmental units (e. g.,  the county would be able to
 obtain more favorable terms than Village A, B, or C.)
                             -62-

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                                        EXAMPLE 4-1 (Continued)

   Sinking Fund

   Comprehensive capital programming is not currently practiced by
any of the affected governmental entities. This approach is not appli-
cable.

   Assessments

   Assessments could be used to provide the 25 percent local share
required to finance local sewers in Villages B and C.  Based on current
population figures,  such an assessment would be approximately $1, 000
per household in Village C and $700 Village  B.  (This does not  include
costs for house connections.)

   State Loan

   This program enables smaller communities to overcome bond mar-
ketability problems.  Villages A, B,  and C and the county are eligible.
 Since repayment of the loan would  be made  through funds generated
by user charges,  the  effect is comparable to revenue bond financing and,
in some cases, obligation bonds. Institutional arrangements would not
be affected through state financing.

   Community Development Program

   The county's current community development preapplication includes
several waste-water projects but none in the  reservoir area.  Village C
has filed a separate pre-application including a request for $70,000 to
be used as part of the local match for EPA funding local sewers.  If
community development funds are obtained from HUD, an additional
$40, 000 will still be required to fund 25 percent of the sewerage sys-
tem  in City C.  Village B did not apply  for community development
funds for sewer use.  As a result,  Village B will have to raise the 25
percent matching funds without benefit of an intergovernmental grant.

    Some of the possible financing options available to the area are:

    1. Village Responsibility. Villages B and C may each apply
       separately for 75 percent federal grant. Local funds may
       be raised through property  assessments, community de-
       velopment grant, or piggyback service charge (either
       billed separately or by the wastewater treatment plant
       agency).
                             -63-

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                                     EXAMPLE 4-1 (Continued)
   2. County Responsibility.  The county may be desig-
      nated the wastewater management agency for various
      portions of the regional system, including (a) total
      system,  (b) interceptor sewer and local sewers in
      unincorporated areas, or (c) interceptor sewer and
      local sewers in unincorporated areas areas and in
      Villages B and C.  If the county assumed responsi-
      bility for financing the local systems in Villages B
      and C, these projects would be included in a consoli-
      dated appplication to EPA for funding under Section 201.
      For the local share of the cost  of these sewers, the
      county could select one of the following approaches:
      property assessment, service charges (to reflect amor-
      tization of the indebtedness of the local sewers),  or  a
      combination of these approaches.  With county financing,
      the local sewers would be owned and maintained by the
      county.

   3. Village A Responsibility.  Village A could also be the
      designated wastewater agency for the total system,
      including the financing and operation of local sewerage
      systems in Villages B and C. As under county manage-
      ment, a consolidated 201 application would be prepared.
      The local share for the Village B and C subsystem,  as  in
      the case of the county,  could be raised through property
      assessments, service charges, or a combination of the
      approaches.

   Financing Mechanisms

   The  most reaonable method for each of the villages to raise capital
funds appears to be either revenue bonds or the state loan program
since:

    .  In each case general obligation bond limits would be
      almost completely used or excluded.

    .  Sinking funds are not available.

    .  Assessments for Villages B and C sewers appear to
      be very high per household and possibly not accept-
      able (judgmental).
                          -64-

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                                        EXAMPLE 4-1 (Continued)
The county, however, based upon the 10 percent limit of assessed valua-
tion, appears to have the capability to use general obligation funding as
well as revenue bonds or state loans.  If the county assumes responsi-
bility for raising capital,  selection of the financing mechanism can be
based upon an assessment of which is best,  given existing debt, CIP
program,  bond market conditions, and so forth.

   A review of each entity's financial capability, management of waste -
water treatment and related facilities' capability,  and implementations
of the areawide wastewater treatment management plan capability
suggests that either the county or Village A is in the best position
to be designated as the management agency.1 The county has the finan-
cial capability: the overall area coverage for plan implementation.
Village A has the financial capability (but not quite as  strong as the
county) and demonstrated plant management  capability (present opera-
tions).  Villages B and C do not appear to have the same financial
strength or management capability.1

Existing Indebtedness

   The existing Village A treatment plant has a current indebtedness
of just under $300,000.  If the county is designated the management
agency, this financial obligation of Village A could be  assumed by the
county (subject to possible limitations in the bond).

   Amortization of the total debt (currently outstanding indebtedness
plus new expansion and upgrading) could then be included in the service
charge (user charges and other charges) for all users. Or,  using the
differential rate approach, the old and new debt could  be considered
separately. For example, Village A sewer rates would reflect a charge
for operation of the treatment plant  and the local sewers,  amortization
of the old debt, and a small proportionate charge for the new debt for
upgrading of the treatment plant.
Requirements under 208(c)(2).

Management strength assumed, for example.
                               -65-

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                           CHAPTER FIVE

              FINANCING REGULATORY PROGRAMS
INTRODUCTION

    Regulatory programs will in many instances be important elements
in water quality management.  Arising from state and local police power,
they may be directed at the use of publicly owned treatment facilities or
at the manner in which land is developed or utilized.  For example,  part
of the waste water treatment program may contain regulatory require-
ments that compel connection of households to the facilities and also re-
strict the substances that can be introduced into the treatment system.
On the other hand, regulatory programs may be oriented to controlling
a nonpoint pollution source such as runoff from construction sites.  For
each of exposition,  this chapter discusses regulatory programs in the
context of the  orientation toward nonpoint source control,,

    Any effective regulatory program must include several components
cited in the Guidelines:1

    .  an indication that the agency (or agencies) with regulatory
      responsibility possess the statutory authority to carry out
      regulation or have initiated legislative proposals to obtain
      such authority and to utilize the specific forms of regula-
      tion called for in the program;

    .  an indication  of which form(s) of regulation (land use, per-
      mits, licenses,  pretreatment standards, and associated fis-
      cal policies) will be  applied to pollution sources;

    .  a specification of the technical requirements to be incorpo-
      rated into the regulation;

    .  provisions that those affected by regulation will have ade-
      quate notice,  rights  of appeal, and other legal safeguards
      to encourage  full compliance;  and

    .  establishment of financial arrangements to support the  regu-
     • latory program,,
Federal Guidelines, User Charges for Operation and Maintenance of
Publicly Owned Treatment Works, pp0 9-2 and 9-3.
                                 -67-

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    This chapter discusses only the first and last of these components,
with emphasis on the latter.
COSTS INCURRED

    The costs of a regulatory program may be broken into two catego-
ries:  those borne through the budget of the implementing agency and
those borne directly by private entities,,   The latte-r costs—those in-
curred to comply with the regulatory requirements--are often the major
component of the total economic cost of the regulatory program.  The
emphasis of this chapter, however,  is on those  costs which are borne
by public agencies and for which resources must be obtained and bud-
geted.

    Elements of costs borne through agency budgets include (1) start-up
costs, (2) facilities costs, (3) personnel and other costs for monitoring,
enforcement, and administration,  (4) agency-assisted compliance costs,
and (5) compensatory costs.   The first three items can often be mini-
mized by relying on an existing agency,  as is encouraged by 40 CFR
Part 1319ll(n).

Start-Up Costs

    Start-up involves one-time costs that will not ordinarily recur once
the regulatory program is implemented and operating. These may in-
clude such items as legal fees for refinement of ordinance; fees for de-
velopment of administration records, budgets,  initial wage and salary
policies; and initial operating practices.

Facilities Costs

    Facilities costs for offices, transportation, monitoring and commu-
nication equipment, etc., may be incurred to administer the program.
Budgets and schedules for capital investments usually require longer
periods for planning and approval, so a preliminary estimate of capi-
tal items should be considered for the earliest possible budget cycles,,
Land acquisition by the agency may be considered in this category even
when its purpose is to prevent polluting activity from occurring on the
parcel,,

Personnel Costs

    Personnel costs for development, implementation, and monitoring
of regulatory programs will often be one of the  most substantial pro-
gram costs.
                                  -68-

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Compliance Costs

    Compliance costs are incurred when an individual or a firm must
use its land for activities other than those most economically reward-
ing or must spend money to provide pollution abatement measures or
practices on the land.  The management agency or other government
organizations may provide grants or loans to help persons comply with
requirements. Such costs should be reflected in financial arrange-
ments.

Compensatory Costs

   Compensatory costs are incurred by the public sector budget when a
court decrees that the regulatory action constitutes a "taking" of land
for which the owner is entitled to compensation.  The designated man-
agement agency,  however, may not be responsible for providing com-
pensation funds.  Rather, such costs will usually have to be borne by
the entity—state or local general purpose government—that created
the program and delegated responsibility for implementation to  the
operating agency. In either case, it is very difficult to anticipate com-
pensation awards and provide resources in the budget.
REVENUE SOURCES FOR REGULATORY PROGRAMS

    As discussed in a previous section, revenue to operate regulatory
programs can be obtained from grants, general revenues, user charges,
and fees and permits.

Grants

    Federal grants have traditionally been made available and used for
planning research, development, and construction of capital facilities.
In addition, such grants can provide necessary planning and  start-up
funds for the management agency (or agencies). There has been rela-
tively little availability of federal grant funds for operation of state and
local regulatory programs. However, a major grant program applicable
to regulatory programs is operated by the U.S. Department  of Agricul-
ture Soil Conservation Service and the 3, 000 associated Soil Conserva-
tion Districtsol This program is designed to assist public and private
landowners in improving land management practices and installing im-
provements to control soil erosion.  In certain cases, federal and state
grants can possibly provide a source of funds to assist private entities
in meeting compliance costs.
National Association of Conservation Districts,  America's Conservation
Districts 9id Conservation Districts  and Non-Point Pollution Control and
U.S.  Department of Agriculture Soil  Conservation Service, SCS & 208:
Water Pollution Control.           _gg_

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    The major difficulties with the use of grant funds for program de-
velopment are:

    .  the uncertainty as to whether funds will be available and in
      sufficient amounts when required;

    o  competition among groups for limited grant funds;

    .  difficulty in complying with grant conditions; and

    .  restrictions (by granting agencies) on the uses and appli-
      cation of grants.

    Even when grant funds are not restricted as to use, and the funds
are used to operate and maintain a regulatory program, a major prob-
lem of refunding  will be faced on a periodic basis.  Failure to receive
grant money in a subsequent time  period might necessitate suspension
of the program until new local sources of revenue are obtained.

General Revenues

    Regulatory programs can be financed from the local government's
general revenues.  This financing can occur by placing the program in
the budget as another line item in the general fund.  In addition to di-
rectly financing the operation and maintenance of the regulatory pro-
gram, the general revenues can also indirectly absorb costs associa-
ted with program operation. For example, if a tax incentive  (reduced
tax) is used to alter land use in selected cases,  revenues that would
normally accrue  to the general fund would be foregone.

    In either case, the burden of the publicly borne costs of the pro-
gram falls on the local government and therefore  on the residents of
the local jurisdiction.

    Use of general revenues to support a regulatory program should in
most cases provide  an efficient  source of revenue since both  collection,
appropriation and payment procedures and measures are already es-
tablished.  In terms of economic efficiency, use of general revenues
doss not provide  incentives to reduce  sources of pollution. However,
when compliance costs are borne  by those regulated in proportion to
their contribution to pollution, this impact of using general revenues
for administrative costs may be minimal,,
                                 -70-

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User Charges

   User charges attempt to establish a relationship between the use of
a resource and the charge paid by the beneficiary or polluter.  The user
charges can in theory be designed to recover both publicly borne com-
pliance costs and costs for overall administration and maintenance of
the regulatory program.

   The principal argument for user charges is that requiring the user,
or polluter, to pay costs associated with his use  or pollution is equita-
ble and encourages more  efficient resource allocation.  However,  in
regulatory programs the difficulty of implementation may negate the
theoretical advantages, and a user charge on the regulated party may
even be inappropriate.  Since a regulatory program's intent is to  con-
trol pollution-generating activities in order to produce an acceptable
level of pollution,  compliance with the program's requirements would
imply that the regulated party's activity is acceptable and that no  addi-
tional charge is warranted.  This would appear to be the case, for exam-
ple, when a regulatory program requires that no development increase
runoff above naturally occurring conditions.

   Similar difficulties are encountered in attempting to levy beneficiary-
charges,  which  are discussed in more detail in Chapter Six.

Permits and Fees

   Fees are a variation of user charges that attempt not so much to re-
late activities to charges  for activities, but rather to recover the costs
of administering a permit program. Fees have historically been  levied
for activities such as approval of permits for septic tank installations,
inspections and  approval of new sewer service hook-ups, and initial or
annual inspections of water treatment facilities.  It is estimated that
such fees and permits can provide up to 30 percent of the revenues re-
quired to meet regulatory costs.

   Based upon a recent EPA study, however,  it  was found that local
officials often consider fees and permits unfair to those less able to
pay.1  Asa result,  substantial changes in local attitudes and financial
policies may be required  before permits and fees can become a prac-
tical revenue source.
U«S. Environmental Protection Agency, Office of Planning and Manage-
ment,  Report on a Study of Control Agency Revenue Fees (July 2, 1974).
                                 -71-

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INCENTIVES TO SUPPLEMENT REGULATORY REQUIREMENTS

    Special excise or externality taxes can be employed in much the same
manner as permits and fees, and can produce many of the same advan-
tages and disadvantages.  For example, a parcel of agricultural land in
the path of urban development may be taxed at a lower rate to encourage
continued use  in agriculture and to avoid development in an ecologically
sensitive portion of the area.  In this case, the landowner may be com-
pensated for his loss of developmental income by an offsetting reduction
in taxes on that portion of his land.  The public budget cost of regulation
is tax revenue foregone.

    The development of tax incentives may be difficult.  Determining the
value of authorized land uses or the environmental damage values in sup-
port of the application of externality and excise taxes  is difficult and, in
some cases, may not be feasible.  The primary difficulty is the ability
to agree  on the cost of the pollution without cost and economic data suf-
ficient to establish a clear and quantified position. A similar problem
would develop if a change in the ad valorem property tax were made to
shift assessments based on use (largely based on an assessor's best es-
timate).  'However,  once established, the taxing mechanisms for collec-
tion would tend to be more efficient than ths process of collecting on
many permits or fees.

    A potential application of an externality tax would be  a form of ex-
cise charge for excessive pollution when  an existing land use conflicts
with water quality goals and continuation  of that use requires an in-
creased  cost for control.  In such a case an externality tax equal to the
cost of pollution control during the year is established and collected un-
til land uses are changed to comply with the water quality objectives,,

    Excise taxes may  also be desirable when applied directly to certain
production processes  or to certain products that inadvertently  result in
undesirable affects on water quality,, For example, use  of certain fer-
tilizers may affect water quality in proportion to amounts used. Costs
to maintain water quality could be applied as an excise tax on those fer-
tilizers.  The tax may also reduce usage, assuming that demand is not
perfectly inelastic with respect to price,

    Implementation of tax incentives requires the  collection and analysis
of data to support an assessment of costs, development of a method of
land use classifications, and full descriptions of the property attributes
such as size,  environmental characteristics, and external effects  ab-
sorbed by members of the society.  One disadvantage in implementing
creative tax modifications is the legal constraint that requires  tax rates
                                 -72-

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to apply uniformly to all entities that are subject to the geographic area
of the taxing authority.   This could imply that a special tax on one prop-
erty near a stream bed would require a  similar decision for all other
properties in the lesiglative area.  However, once tax rates have been
developed, the taxing mechanism for collection would tend to be more
efficient than the process of collecting on many permits or fees.
PROGRAM APPROACHES

    Revenue strategies should include projection of which portions of the
programs can be supported by federal or state government. For exam-
ple, drainage from an orphan mine after a state-approved and -regulated
mining project has terminated might receive more positive levels of state
support than a proposal for financial assistance in administering an urban
stormwater program in a growth area.

    In many cases, no single source of revenue will support the  regula-
tory programs,  but rather a mixed set of sources will be used.  It is
possible for a program to be funded in part by state general funds, in
part by local area general funds, and in part by a special permitting and
fee system.  The reasonableness (based on feasibility, equitability, and
efficiency) must in the last analysis be determined at the local level.

    A principal weakness of many regulatory programs is failure to in-
clude provisions for securing compliance.  This problem is especially
serious when compliance is not just a one-time matter but consists of
a continuing activity.  For example,  urban  stormwater containment fa-
cilities that were initially effective may become less useful as siltation
and sludge residuals and other refuse and vegetation accumulate.  In
this case, the regulatory control ordinance or other authorizing com-
pliance documents should clearly identify the  self-monitoring require-
ments and the maintenance arrangements as well as the inspections by
the regulatory control agency.
                                                  G
    Several options are available in most instances.  For new construc-
tion, performance bonds may be utilized to ensure proper compliance
with a site plan or water containment measure.  Fees can be applied to
the construction permit, and then it is possible to (1) require an ongoing
self-monitoring program (supported by the  landowner) combined with a
periodic regulatory control inspection or re-issuance of  a permit, (2)
establish that an ongoing maintenance and monitoring program will be
required and include sufficient charges with an annual permit to offset
those costs for performance by the regulatory agency,'or (3) seek gen-
eral revenue funds for  supporting the ongoing inspections and mainte-
nance costs.
                                  -73-

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    If the landowner is not diligent in performing self-monitoring,  pol-
lution control cannot be achieved.  As indicated earlier, the compli-
ance documents for continuing maintenance activities should explicitly
state terms for enforcing compliance, including revocation of permits.
MANAGEMENT AGENCY CONSIDERATIONS - REGULATORY PROGRAM

    The requirements for designation of management agency(s) apply
to regulatory programs as well as to waste water treatment programs.
Although there are some differences between the two programs in man-
agement agency considerations, many financial issues are similar.
The discussion in this section is intended to focus on the concerns
relatively specific to regulatory aspects.  Figure 5-1 provides a
schematic diagram of one approach to selection of a regulatory man-
agement agency.  While the emphasis of this section is on financial
issues, Figure 5-1 indicates that other issues must be considered in
management agency designation.

    The ability to finance regulatory programs may be one of the
greatest single water quality management concerns.  Several of the
major components of a plan for financing and budgetary regulatory
control programs are (1) cost allocation plans, (2) resource esti-
mates, and (3) revenue source So  Participating agencies will normally
benefit from the  regulatory program and should plan to participate in
the sharing of overall costs of the program.  Methods of cost alloca-
tion,  such as geographic proportions, population, use of water, or
other similar bases, should be  defined into an acceptable plan for
sharing costs.

    Staffing and administrative costs are expected to be the  major
costs of most regulatory control programs. Estimates of available
and new resource needs should be thoroughly documented and realis-
tically projected on the basis of the planning studies.   The review of
existing and participating agencies should be identified in the overall
resource plan, as should the needed resources from each agency
developed in accordance with the cost allocation plans. Staffing
schedules,  salaries, facilities costs,  and other expenses are expec-
ted to be the major budget elements.  Budgets should be compatible
with local budget processes so that integration and planning with
other local  financial programs can be accomplished.

    The  ability to raise revenue is a major criterion for selecting the
regulatory control agency.  Potential sources of revenue  and the effi-
ciency of the programs for raising these revenues are major  compo-
nents of the revenue source plans.  The revenue sources for the budget
                                  -74-

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        MANAGERIAL
LEGAL
           Does the agency possess the
           requisite technical skills to
           implement the program?
           Is the staff skilled in the
           subject area?
           Does the agency have
           proven capability to
           manage the program at
           acceptable cost?
Does the agency possess
legal authority, or
authority similar to that
deemed necessary?
Does case law support use
of this type of agency for
regulatory purposes?
ANALYSIS OF
WQM PROBLEMS
THAT REQUIRE
REGULATION
-
SELECTION OF
REGULATORY
PROGRAMS
NEEDED
                                          SELECTION OF AGENCY(S)
                                        FOR REGULATORY PROGRAMS
-  Runoff from construction
   sites
-  Erosion from land worked
   by tenant farmers
L-  Etc.
           FINANCIAL
INSTITUTIONAL
    What is the public
    attitude toward use
    of the agency?
    Is the agency too close/
    not close enough to the
    regulated parties?
    Does the agency accept
    water quality as an
    objective?
    Does the agency already
    have a role in a related
    (air, solid waste)
    regulatory program?
              Can the agency secure the funds
              needed to implement the selected
              regulatory program?
              Can the agency generate the funds
              in a publicly acceptable manner?
              If Federal or State grants or loans
              are to be utilized in financing
              compliance  costs, does the agency
              exercise some control over dis-
              bursement of such funds?
           L- Etc.
               FIGURE 5-1:  POSSIBLE FACTORS IN MANAGEMENT AGENCY
                               SELECTION FOR REGULATORY PROGRAMS
                                                    -75-

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period and the specific vehicles for obtaining the sources should be
identified.  These should be summarized into a revenue source  sched-
ule,  showing overall funds to be received.  For example, funds to be
received from general revenues collected and disbursed to the regu-
latory control agency from the  treasury on an annual basis will re-
quire a considerable planning and budgeting cycle before they actually
become available to the regulatory control agency.

   Effective development and implementation of financial policies for
new regulatory control programs will often require the cooperative
efforts of several organizations.  Montgomery County, Maryland,
provides an example of a cooperative effort.  Costs for reviewing sub-
division plans which include erosion, sediment, and stormwater con-
trol measures in Montgomery County (staff of 11) are  supported from
general revenues (raised largely by  local property  taxes).  Technical
assistance is obtained from the local conservation district, which is
supported by Soil Conservation Service staffs of the Department of
Agriculture (staff of four).  Urban developers support the costs of
the inspection program through a development fee and post  a bond
to ensure compliance with standards.
                                 -76-

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                                              EXAMPLE 5-1
REGULATORY CONTROL - CASE STUDY OF AGRICULTURAL
FINANCIAL ALTERNATIVE

    Two midwestern states designated a WQM area in a watershed that
includes land in both states and contains a growing urban center.  The
total study area was divided into three geographic subareas: an urban
area, a suburban growth area (the land directly in the path of urban
growth and agricultural lands contiguous to the developed residential
and commercial lands), and rural and agricultural lands.  The rural
technical studies were conducted in each subarea to identify nonpoint
pollution problem.3 and to characterize wastes so that the sources of
the pollution could be identified,,  The primary nonpoint source pol-
lution problems were identified as agricultural sediments  resulting
from farmland erosion and pesticides.

    Once  the major pollution sources were identified, it was neces-
sary to consider the technical options available for solutions that
meet the  water quality objectives and the financial and management
approach to implementation and operation.  To accomplish this, the
the following questions were addressed:

    .  What are the cost elements of each regulatory pro-
      gram for b'oth start-up and ongoing maintenance ?

    .  Who will pay start-up and program costs?  Should
      strategies be designed to recover costs from the
      private land owners?  From the tax payers? Or
      from a combination of these?

    .  Can strategies bs designed to ensure  that no single
      group need pay more than its share ?

    .  How should management and organization be ap-
      proached, and what should the relationship of the
      management agency be to other related activities
      and entities, such as:

        .  the State 208 program;

        .  the federal agencies involved;

        .  the advisory committees; and

        .  the other local government agencies
           and programs ?
                             -77-

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                                       EXAMPLE 5-1 (Continued)'
    Since agricultural sedimentation was identified as a major problem,
the rural area was further divided into three categories:  cropland,
forestland, and grassland. Although regulatory controls were  devised
to address sedimentation problems associated with each use, only the
regulatory costs and financial considerations for cropland are discussed
in this example.  Three categories of control were developed:

    .  crop rotation and pesticide controls;

    .  strip-cropping, terracing, diversion ponds; and

    .  reduced crop areas and converted land uses.

Crop  Rotation and Pe sticide Controls

    The areas with the least serious pollution runoff problems  re-
quired improved farming  practices, including crop rotation programs
and pesticide controls. Public sector budget costs for developing and
implementing crop rotation and  pesticide controls included an initial
cost for development of a new pesticide control ordinance and continu-
ing costs for crop rotation instruction programs  and monitoring acti-
vities.

    In the past, the soil conservation district provided farmers with
information on crop rotation and some assistance in selecting proper
pesticides.  Continuation  of those activities will meet the instruction
requirements of the program without adding new  costs.  Development
and enforcement of the pesticide controls, however, will require an
ordinance specialist and several staff members to perform the moni-
toring and enforcement activity. It was  assumed that these functions
could be performed by the present conservation district staff with the
addition of several new people.  Ths added staffing costs  to the dis-
trict were estimated at $100, 000 per year.  It was determined that
the added cost could be financed by:

    .  a small increase in assessments to members of the
      soil conservation district; or

    ,  a tax assessment levied by the local government on
      lands in agricultural use.

    The first approach, increased assessment to members of the dis-
trict, has the advantage of being administratively simple. The added
cost, when divided among members, would not place a burden on any
                             -78-

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                                      "EXAMPLE 5-1 (Continued)'
single member. Because the membership accounted for most of ths
lands with which the problem was associated,  the added cost appears
to be reasonably equitable from the point of view that the polluters
were paying the cost of abatement.

    The second approach, increasing the local tax assessment on lands
in agricultural use, would require (1) an increase in taxes,  (2) an ad-
ministrative means to transfer funds from the taxing authority to the
conservation district, and (3) a possible increase in administrative
costs to the taxing authority for preparing the tax assessments. Be-
cause of the relatively small amount of money concerned, there did
not  appear to be justification for delay of implementation and admini-
stration.  Using either approach, the  same parsons, (the landowners)
would bear the cost (i.e., the  added fee or agricultural tax).

Strip-Cropping. Terracing, and Diversion Ponds

    The second category  of cropland contained a soil type and drainage
pattern which  would require substantially  improved farming practices
to meet water quality standards. These practices could include strip-
cropping,  terracing,  and diversion ponds.  Implementation of strip-
cropping practices  might reduce crop yields, placing a cost burden
on the farmer in terms of foregone income.  Added operating and
capital costs would be incurred  by the farmer as a result of terracing
and construction of diversion ponds.

    Because the agricultural community is not likely to increase ex-
penditures for these items on  a  purely "conservation"  basis, additional
ordinances will ba required to implement these controls.  The  addition-
al ordinances  will provide enforcement authority to achieve compliance
with necessary farming practices.  Technical assistance to assist in-
dividual farmers in selecting the most cost-effective pollution reduction
approaches would be provided for by the soil conservation service.

    The regulatory  program costs expected for this category of crop-
land are:

    . regulatory agency  staff costs to develop ordinances,
      provide  technical assistance, and perform monitoring
      and enforcement; and

    . landowner compliance costs for developing terraces
      and retaining ponds and foregone crop revenues.

The staffing costs must be paid  by the regulatory agencies.  The rev-
enues to meet these costs can be funded in the same way suggested
for the first case,  crop rotation.
                                  -79-

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                                     EXAMPLE 5-1 (Continued)
    Compliance costs must be absorbed by the individual farmers.
Because of these costs, capital costs for terracing or construction
of ponds can present a  major problem to the farmer. One means to
assist the fanner is to develop  a federal- or state -supported loan pro-
gram to provide low-interest loans to farmers on the basis of economic
need and water quality  impact.  The funds for such a program could
be generated by tax -free bonds. The public agency budget costs in
this case would be the opportunity costs on  money loaned.  This
approach has the advantages of  providing capital and of using public
mechanisms and credits to raise funds, while maintaining private
financial responsibility for repayment. Program development and
administration for screening applicants would require resources
and could be integrated with  present local soil conservation pro-
grams.  A second strategy would be to acquire direct grant funds
the  farmer.

Reduced Crop Areas and Converted Land Uses

    The third category  of cropland contains small areas with soil,
drainage,  and terrace conditions under which continuation of farming
practices under any reasonable circumstances would prevent the
achievement of water quality standards.  To achieve the desired
water quality would require  reducing the acreage in cultivation and
converting these areas to grassland or very limited grazing.

    To implement the program, land use  must be regulated. This can
be accomplished by developing  a new zoning ordinance.  As in the pre-
vious case, two costs are incurred:  costs to the public agency to
cover ordinance development,  monitoring,  and enforcement; and com-
pliance costs to farmers in terras of foregone income.  The public
agency costs can be met either  by using general revenues or special
assessments.   Ths foregons revenue cost is borne by the farmer.
However, if it were determined that all or a portion of that cost
should be absorbed by  the public agency budget as a "cost of clean
water, " then the following programs could be developed:

    .  A land acquisition program could b2 used where the
      new agricultural zoning ordinance eliminated profit-
      able  fanning.  In instances where agriculture goals
      and environmental goals could not be  reconciled, a
      program of land  acquisition would be  developed.
      Long-term bonds would be used for acquisition of
      parcels  whare it was determined that farming was
      not feasible under the  zoning ordinance. The bonds
      would be repaid by the general funds  since it is im-
      plied that the lands are being acquired for the public.
                               -80-

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                           EXAMPLE 5-1 (Continued)
Limited cost/sharing grants from federal,  state,
or local public revenues could be provided to far-
mers during  the period of transition from cultiva-
tion to grassland.  Conversion from cropland to
usable pasture land may require a transition
period of several years.   Cost/sharing could re-
sult in the difference  between  abandonment of a
piece of property and transition to another.
                      -81-

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                            CHAPTER SIX

           ADMINISTRATION AND CONTINUOUS PLANNING


 INTRODUCTION

    Many aspects of what is often referred to as overall management of
 the WQM program also serve managerial functions for  specific waste
 treatment and regulatory programs and/or agencies. The Guidelines
 list examples of activities of a management program:

    Program supervision and coordination:

    .  water quality monitoring and surveillance;

    .  development of revised work plans and State/
      EPA Agreement;

    .  performance evaluation for each planning area;

    o  determination of the need to revise  elements of
      the plan and delegation of revision to regional,
      State, or Federal agencies;

    . coordination with other planning programs;

    . public participation in plan implementation.

    Continuous planning:

    „ plan revision and updating;

    „ annual certification of plan.

    Fiscal management:

    . budget development;

    . development of financial arrangements to im-
      plement plans;

    .  financial consulting with affected management
      agency(s) during plan implementation.1
1 Draft Guidelines for State and Areawide Water Quality Management Pro-
 gram Development, p. 10-7.

                                  -83-

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    Because many of these activities can and do serve both specific pro-
grams and overall management functions, views may differ on whether
the activities' costs are properly allocable to specific programs or
should be a general financial responsibility of all the people and programs
in the area.  Asa practical matter, several of these activities' costs will
often not be absorbed by wastewater treatment or  regulatory programs or
the agencies  responsible for such programs, and the costs must be accom-
modated through some other method,,

    A necessary first step in designing financial arrangements for  overall
management  is determination of the specific activities or products that
are (1) required for producing, implementing,  and maintaining the WQM
plan and (2) not obviously the responsibility of specific waste treatment
or regulatory programs.  A second step is determination of the principal
agency responsible for performing  the activity or  generating the product.
(Categorization may change as more activities become incorporated into
organizational routines and budgets of one or more agencies.)' Decisions
must then be made  as to how the activity will be performed or the output
produced and how it will be financed.  These are two closely related  con-
siderations.

    Table 6-1 illustrates this point  for continuous  planning. In the first
step, a decision based on the problems of the area and adequacy of the
existing plan.is made as to whether a major planning update requiring
substantial resources is required or whether a minor assembling into
one document of information from management agencies will suffice.
Presumably an entity, perhaps the  original planning agency, has been
assigned responsibility for preparing the plan update. This entity is rep-
resented in column one of Table 6-1 as the  continuous planning agency.
Decisions must then be made on how the assignments will be completed
and how they will be financed.

    Agencies other than the nominal continuous planning agency may un-
dertake certain other assignments  necessary for plan update and revision.
These other agencies are represented in column two.

    The rows of Table 6-1 indicate  sources of revenue to finance assign-
ments „  The  first row represents revenues, such  as service charges for
a sewer district,  accruing to the entity from established programs.  The
second row represents revenues from sources other than established
revenue producing programs under the agency's jurisdiction.

    In some cases,  a particular entity with continuous planning assign-
ments may not have jurisdiction over any separate program; in other
cases, it may be inappropriate to utilize existing programs to finance
                                 -85-

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continuous planning activities. Such situations will necessitate either
development of new revenue sources or reassignment of responsibilities.
Some agencies with programs controlling strong revenue sources may be
assigned not only specific activities to be financed by such programs,
but also responsibility for providing revenues to other agencies—proba-
bly the continuing planning agency—to fulfill their  assignments.  There
may be legal and political limitations on interagency fund transfers,
and these limitations must be recognized and taken into account.  The
following paragraphs discuss  alternative approaches to financing when
existing programs are not utilized as the source of funds and additional
sources must be employed.
APPRQA CHE S TO FINANCING

    As with costs associated with wastewater treatment and regulatory
programs, there are three different perspectives on equity in financing
management  and continuous planning:  "polluters pay, "  "general govern-
ment pays, "  and "beneficiaries pay. "  Each approach has its own implica-
tions for assignments of responsibility and for potential feasibility and
efficiency. In addition, the method of implementing each general  ap-
proach to equity will affect the degree to which the desired equity  is ac-
tually achieved.

    The approach selected to finance continuous planning will depend in
part upon the institutional arrangements, as discussed above.  For ex-
ample,  to the extent that  operating agencies perform continuous planning
functions,  the costs are more likely to be  covered by existing revenue
sources; this is often de facto a polluter pay approach because most
revenue sources are based  on it.  Equitability determination must be
made by the  affected agencies and the public.  The feasibility arid  effi-
ciency of each approach depend primarily upon the administrative ability
to provide a  mechanism to collect or  obtain funds and the ability to dis-
tribute  costs to the target population.

Polluters Pay

    This approach presumes that those persons or activities which pol-
lute the water should bear the cleanup costs, including  overall manage-
ment and continuous planning costs. Major difficulties in implementing
this approach are:

    . identifying all polluters;

    . determining to extent of their pollution; and

    . establishing a charge system.

                                 -86-

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One apparent advantage is that several ongoing programs in the area
probably attempt to assess "polluters, " and small charges  could be
easily added to assessments.  Additionally, if charges are related di-
rectly to extent of pollution generated, there could be incentive to re-
duce pollution.

   Administratively, the costs of continuous planning could most easily
be covered by a piggyback charge on the existing wastewater treatment
system (in much the same way that the activity would be financed if
responsibility were assigned directly to the operating wastewater treat-
ment  system).  Many polluters, however, will not be connected to a dis-
tinct treatment system.  More complete coverage would require inclusion
of permit fees on pollution generating activities,  etc., and  achieving
this coverage could increase the administrative burden and reduce the
efficiency of the financial arrangements Such an expanded system could
require three or four separate agencies to collect revenues and transfer
funds to the planning entity. For example,  conservation district member
fees,  local government permit fees for construction, and sewer district
assessments might all be used to finance a council of governments as-
signed continuous planning  functions,

   A variation to the piggyback user charge described above would be
the agency chargeback system.  In this approach, the planning agency
would charge the operating agencies directly for  overall management and
planning  service provided.   Unless all the continuous planning  costs
were  included in these "services, " however, there would still  be expendi-
tures not covered.  Disputes between the service agency and operating
agencies over the quality and  control of the services could be major im-
pediments to a successful system of this nature„   One management strat-
egy for overcoming such an impediment would be placement of officials
of operating agencies on a board overseeing or serving as policy advisors
to the planning or service agency.

General  Government Pays

   Conceptually, this approach is based upon the idea that  clean water
is at least in part a "public good. "  Asa result, general management
and planning costs of providing clean water should be borne without as-
signing costs to specific persons or programs,, Traditionally,  most func-
tions  considered public goods are financed through general  revenues  of
local  governments.  The equity of the financing depends on  the particu-
lar manner in which the local government raises its general revenues--
through property taxation,  sales taxes, etc. --and on how costs are di-
vided among various local governments in the area.
                                 -87-

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   The general government approach would be most practical when a
council of governments is designated as the continuous planning agency.
Where there is an existing council of governments, one approach would
be to pay the costs of continuous planning on the same basis that the
existing council of governments is funded. Under this approach,  each
participating government would pay its share of continuous planning under
the existing formula used to assess the local governments for their share
of costs.  Before this could be done, however, the charter of the Council
of Governments may have to include a provision that  would enable the
council to legally perform the service and collect under the existing ar-
rangements.

   Although this  approach would be  procedural!/ easy, there could be
political problems with the participating jurisdictions over applying the
existing formula to continuous planning.   In such a case,  assessment of
local government  share might have to be developed specifically for the
cost of continuous planning.  The bases for the allocation of costs could
include, but are not limited to: population, land area,  total tax base,
employment, dwelling units, or some combination of the above.  The ad-
vantages or disadvantages of any one of these methods would in part de-
pend upon the characteristics of the  area. For example, in densely popu-
lated,  highly industrialized areas, water quality planning will be primarily
concerned with industry  discharges, urban stormwater runoff, and resi-
dential wastewater; this  would argue for population and employment as a
basis  for  cost sharing.  Conversely, areas with large,  open farm land
areas and major nonpoint source problems associated with such farm
land could argue that total land area provides the best basis of cost shar-
ing.
    As an alternative to securing revenues locally, the responsible agency
could seek a state/federal grant.  At present, however, federal mechan-
isms for funding continuous planning and plan update do not exist.  As
a result, the level of uncertainty associated with waiting for grants is
very high and can result in loss of continuity and key staff and in default-
ing on accepted responsibilities.

Beneficiaries Pay

    This approach would direct the costs of administration and continu-
ous planning to people who benefit from the improved quality of the
water.  Disadvantages of this approach include identifying beneficiaries
and charging in proportion to benefits received.  Persons  who swim  or
fish in, boat on, or  consume water can be affected by improved water
quality.  One possible advantage is that if many users or beneficiaries
reside outside the area but participate in water-related activities within
the area, the beneficiaries pay approach may facilitate exportation of
some costs.

                                 -88-

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    The basic implementation tactics for charging beneficiaries involve
 such techniques as recreational charges (e.g,, waterfront hotel taxes,
 add-on charges to fishing licenses,  boat license charges) and increases
 in water bills.  Two major problems arise with either of these ap-
 proaches:

    o Implementation of billing, collection of funds,  and trans-
      fer of funds back to the planning agency may be adminis-
      tratively very difficult.

    . Equitable coverage of all beneficiaries is almost impos-
      sible.

 The first problem, administrative difficulty associated with collection
 and transfer of funds back to the planning agency,  arises because of (1)
 the potentially large number of agencies/entities involved, (2) legal and
 administrative constraints on transfer of funds between agencies,  and (3)
 the high cost of collecting funds relative to the amount to be collected.

    In some cases, the number of agencies involved may be  directly
 related to breadth of coverage. For example, if the costs of continuous
 planning are to be obtained from the users of a river or lake,  it will be
 necessary to obtain contributions from fishermen, swimmers, boaters,
 picnickers, waterfront hotel users, etc.  As the attempt is made to be
 more and more inclusive and equitable,  more  agencies/entities become
 involved, and users may be double-charged. Even with maximum ex-
 pansion, it may not be  possible to charge  all users or beneficiaries,
 such as swimmers outside a specific swimming area where  fees are
 collected,,

    Constraints on fund transfers may limit the'number of feasible  solu-
 tions.

    The problem of high administrative costs may be a very real one.
 When fees are relatively small,  administrative costs may consume a
 large part of total revenues,   A survey by EPA indicated that adminis-
 trative costs of fee systems might be 10 percent or more of total reve-
 nues.  This is in marked contrast to such revenue forms as the property
 tax, estimated to have  an administrative cost of 1  to 2 percent of re-
 ceipts.2 The cost problem can be reduced if charges are "tacked"  on to
JEPA Fee Study.

2Netzer,  Economics of ths Property Tax.
                                  -89-

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 existing mechanisms such as fishing licenses, park use fees, etc,,  rather
 than creating new billing and collection systems.

    As discussed earlier in this handbook,  a charge for use that reflects
 the cost of providing facilities (including clean water) can, under certain
 circumstances, generate useful information as to the level of facilities
 that should be provided.  In this respect, employing beneficiary charges
 might conceivably provide information on the economically efficient level
 of facilities--in this case, water quality—that should be provided.   How-
 ever, two factors substantially weaken this argument. First, continuous
 planning and overall management are related very indirectly to provision
 of a certain water quality or protection of a certain designated use.  There-
 fore, charges made to beneficiaries on the basis of such costs do not
 bear the direct cost of service/value of service  relationship necessary
 for decisions concerning the level of service that should be  provided.
 Second,  because the established water quality standards are determined
 largely apart from information on fees,1  the usefulness of a fee system
 as a source of policy guidance is questionable.  In fact,  once the level
 of water quality to be  provided is established, a fee system may actually
 reduce  the total benefits produced by that water quality. This results
 from the fact that a price increase on a good such as swimming will al-
 most always reduce use or consumption of the good and thus reduce the
 total realized benefits it provides,,  This point is discussed more fully
 elsewhere.2
 CONCLUSION

    As with other activities, of critical importance in financing overall
 management and continuous planning are clear, specific assignments of
 responsibilities and definite commitments from agencies to carry out
 these assignments.
 The procedure for setting water quality standards is established in 40
 CFR Part 130.17, and in Chapter 5 of the Guidelines.
2
 See,  for example, Ee J. Mis nan,  Economics for Social Decisions  (Lon-
 don:  George Allen & Unwin, Ltd., 1972),  Chapters 5  and 6.
                                   -90-

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                       CHAPTER SEVEN

                       IMPLEMENTATION
   Agency and program budgets are the tools with which many com-
mitments in the WQM plan must be implemented.  Without careful at-
tention to how actions proposed in the plan are to be assigned to agen-
cies and how agencies' budgets are to reflect these assignments, much
of the effort in inventorying conditions and structuring and evaluating
alternatives for WQM may be rendered ineffective. Developing imple-
mentation schedules for pollution control actions consistent with estab-
lished priorities and ensuring that budgets are consistent with these
schedules are the critical financial tasks associated with plan imple-
mentation.  Negotiations with affected agencies and the public are nec-
essary to  ensure that the budgetary commitments explicit or  implied in
the WQM plan are realistic and will be carried out. Much of this de-
tailed negotiation must occur even after the  recommended plan has
been partially designed. The development of detailed budgetary infor-
mation should provide the basis for final public review of the plan pri-
or to its submission for approval.  From a financial perspective,
there are two elements in the implementation phase:

    . an implementation schedule that relates financial re-
     sources to plan priorities; and

    . program budgets that commit the financial resources
     necessary to carry out the plan in accordance with the
     implementation schedule.

The plan  should indicate  projected expenditures and revenue
patterns  for all programs for the 5-year period following
plan approval.   (As discussed in Chapter 10  of  the Guidelines,
the  total plan cost is  composed of these budgetary items  and
of other  costs not budgeted  through public sector entities.)
Development of the implementation schedule and program budgets
(see Tables 7-1 and 7-2)  can  be viewed  as  a  part of the overall
plan implementation.   In  most cases it  is  impractical to  draw
up detailed budgets for  each  year of the 20-year planning  period.
However a means must  exist to ensure that  over  the planning period
the budgets of management agencies continue  to  be consistent
with assigned responsibilities.

REFINEMENT OF FINANCIAL  ESTIMATES AND
FORMULATION OF IMPLEMENTATION OF SCHEDULE

     Although the implementation schedule  for  the actions  contained
in the WQM plan is the basis  for determining financial  arrangements,
                             -91-

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                       -92-

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the schedule itself is highly dependent on financial factors.  An imple-
mentation schedule developed without careful consideration of financial,
legal, technical,  and political factors can result in the selection of a
schedule that is not feasible.  For example, if referendums are re-
quired for bond issues, capital construction projects will have to be
scheduled subsequent to placing the  issues on the ballot,  actual voting,
and preparation and sale of issues (assuming a yes vote). Once an im-
plementation schedule is prepared,  cost estimates for the actions to be
taken are made.

    The financial manager must be aware  of the accuracy of the cost
and revenue estimates that he uses  since preliminary engineering con-
struction estimates are usually only within +20 to 25 percent and final
estimates still are only accurate to  within +5 percent. Understanding
these factors is important because budget estimates  and  bond issues
should take into account possible overruns caused by inaccurate esti-
mates.
PREPARATION OF BUDGETS AND CASH FLOW

    The implementation schedule is the basis for the development of the
budgets and cash flow analysis.  The budgets are a detailed projection
of the expected program or activity costs and the estimated revenues
available to meet these  costs. The 5-year budget ensures that program
financing will be available to  carry out each project as scheduled.  A
20-year budget should also be prepared in somewhat less detail to bal-
ance the long-term expenses  and revenues of the WQM program.  The
implementation budgets must be integrated into and reflected by the
budgets of all designated management agencies and the state.

    Coordination of the budgets of several agencies may  require the
identification of important budget dates for all interacting governmen-
tal units.  Integration of budgets may require standardization of budget
categories, including:

     . financial year ending;

     . capital costs;

     . operation and maintenance costs;  and

     o administrative costs.
                                 -94-

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This will be required to ensure that each cost category presented re-
flects the same costs over the same time frame for each participating
jurisdiction.
                                                                  i
   A 20-year overall budget summary is illustrated in Example 7-1.
The 20-year budget summary shown summarizes individual agency and
program budgets and provides a long-range financial description of the
WQM plan costs and revenues.   The detailed supporting budgets for
each agency and program describe the source of all funds, information
on allocating,  and project expenses.

   Although the budget balances total annual receipts  and total  annual
expenses, it does not indicate the  actual timing of receipts and  ex-
penses during the year.  A cash flow statement can be used to monitor
cash receipts  and disbursements to avoid cash shortages and excessive
cash balances in non-interest-bearing accounts.  The  cash flow is a
particularly useful tool for planning cash management with municipal
budget cycles  and can indicate, for example, when payment may be
made by the municipality to the  sanitary district and the amount of
short-term loans needed to meet daily cash expenses until the pay-
ment arrives.

   Budgets and projected cash flow statements are based on the as-
sumption that  costs and revenues will occur on time in the amounts
specified.  In actual practice payments can be  late, additional sources
of funds may become available,  or unpredicted expenses can occur.
The  portion of the total costs of the program that is paid for by grants
change as the  program is implemented.  New grant funds may become
available, and other anticipated funds  may be eliminated, arrive late,
or be postponed until the following year.
Illustrative only.  Actual budgets should be based on local budget for-
mats and systems (reference state uniform system accounts).
                                 -95-

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                         BIBLIOGRAPHY
Abt Associates. Incentives to Industry for Water Pollution Control:
    Policy Considerations. Prepared for the Federal Water Pollution
    Control Administration. Cambridge.

APWA,  ASCE,  and WPCF.  Financing and Charges for Wastewater
    Systems. A Joint Committee Report.

Armstrong,  J.   "State Environmental Utilities for Waste Management."
    Journal of the Water Pollution Control Federation 44, 9 (September
    1972).

Aronson, J« R.  and Schwartz, E., eds.  Management Policies in Local
    Government Finance.  Washington, D. C.: International City Manage-
    ment Association, 1975.

Arthur D0 Little, Inc.  Interim Report on Economic Incentives in Water
    Quality Management,  Alternative Effluent Charge Methods.  Pre-
    pared for the Vermont Board of Water Resources.
                                             <*
Banks, H. O. and  Owen,  H. J.  Alternative  Institutional and Financial
    Arrangements  for Areawide Waste Treatment Management.   For
    the U.S. Environmental Protection Agency.  1975.

Delogu, O. E.  "Effluent Charges: A Method of Enforcing Stream
    Standards." Maine Law Review 19 (1967), 29.

Dorfman, R. and Jacoby,  H. D.  "A Model of Public Decisions Illus-
    trated by a  Water Pollution Policy Problem. "  In Public Expendi-
    tures and Policy Analysis, edited by R.  H.  Haveman and J.  Mar-
    golis, Chicago: Markham,  1970.

Dorfman, N. and Snow, A.  Who Bears the Cost of Pollution Control?
    Public Interest Economics Center, Washington.

Downing, D0  A. Pricing and Investment Policy for Sewer Extensions:
    A Potential Growth Policy Tool for Montgomery County, Maryland.
    Prepared for presentation at A.I.P. Conference (1974).

Downing, D.  A. "Sewer and Water Pricing  and Investment Policies to
    Implement Urban Growth." Policy Water Resources Bulletin (of
    the American Water Resources Association) 11, 2 (April 1975).
                                 -97-

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"Financing the Sewer System." Management Information Services
   (July 1961).

Hanke, S. H.  "The Theory of User Fees and Its Application to Water."
   In Public Prices  for Public Products, edited by Se J. Mushkin,
   Washington,  D. C.:  The Urban Institute, 1971.

"Intergovernmental Approaches to Municipal Services."  Management
   Information Services 2 (March 1970).

Kneese, A, V. The Economics of Regional Water Quality Management.
   Baltimore:  Johns Hopkins Press, 1964.

Kneese, A. V. and Schultze,  C.  L.  Pollution,  Prices and Public Policy.
   Washington,  D. C.:  Br cokings Institution,  1975.

Leonard,  R. L.  Pricing of Industrial Wastewater Treatment Services.
   Storrs:  University of Connecticut Institute of Water Resources,
   November 1973.

Loop, W. J., HI.  Alternative Methods  of Financing  Waste Treatment
   Facilities, Water and Water Engineering.  March 1970.
                     *
"Markets in Licenses and Efficient Pollution Control Programs. "  Journal
   of  Economic Theory 5, 3  (December 1972),  395-418.

Maxwell,  J. A.  Financing - State and Local Governments.  The Brook-
   ings Institution.

McKewen, T. D.  "Wholesaling Environmental  Services. "  Environmental
   Science and Technology 6,  4 (April 1972), 324.

Meta Systems, Inc.  Effluent Charges:  Is the Price  Right?  For the U.S.
   Environmental Protection  Agency.   Cambridge:  1973.

Moak,  L. K. and House, A. H. Concepts and Practices in Local Gov-
   ernment Finance.  MFOA: 1975.

Mushkin,  S. J.  Public Prices for Public Products.  Washington, D. C.:
   The Urban Institute, 1972.

Prakash,  V. and Morgan, R.  H.,  Jr.  Economic Incentives and Water
   Quality Management Programs.  Research Report 41.  Madison:
   University of Wisconsin Water Resources Center, May 1969.
                                -98-

-------
Reed, K. L.  "Economic Incentives for Pollution Abatement:  Applying
   Theory to Practice,," Arizona Law Review 12 (1970), 511.

Rose-Ackerman, S.  "Effluent Charges: A Critique."  Canadian Journal
   of Economics 6 (1973),  512.

Schultze, C. L.  "The Role of Incentives,  Penalties and Rewards in At-
   taining  Effective Policy,, "  In Public Expenditures and Policy Analy-
   sis, edited by R. H0 Haveman and J. Margolis,  Chicago:  Markham,
   1970.

Selig, E. I.,  reporter.  Effluent Charges  on Air and Water Pollution:
   A Conference Report.  Cambridge: Environmental Law Institute,
   1973.

Surrey, S.  S.  "Tax Incentives as a Device for Implementing Govern-
   ment Policy: A Comparison with Direct Government Expenditures."
   Harvard Law Review 83 (1970),  705.

U.S. Environmental Protection Agency. Draft Guidelines for State and
   Areawide Water Quality Management Program Development. Febru-
   ary 1976.

U.S. Environmental Protection Agency, Office of Planning and Manage-
   ment.   Report on a Study of Control Agency Revenue Fees.  July 2,
   1974.

U.S. Environmental Protection Agency, Office of Water Programs.
   Alternative Financing Methods for Clean Water. September 1971.

Urban Systems Research and Engineering, Inc.,  Methods for Financing
   Water Pollution Abatement from Point  Sources.  Prepared for the
   U.S.  Environmental Protection Agency.  August 1971.

Vermont Department of Water Resources.   Development of a State Efflu-
   ent Charge.  For the U.S.  Environmental Protection Agency.  Feb-
   ruary 1972.
                                 -99-

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                             GLOSSARY
Financial Manager;  the individuals) with the responsibility for develop-
ing (1) financial data, (2)  financial alternatives for implementation of each
technical plan alternative, (3) evaluation of alternatives on a financial
basis, and (4) preparation of detailed implementation financial schedules
for the selected plan.

Public Budget Costs and Revenues;  those costs and revenues which are
either paid or accrued by the general fund of a political operating juris-
diction.  Costs are expenditures made by the jurisdiction for services and
goods.  Revenues are funds accrued by the jurisdiction through normal
fund-raising means--property tax, sales tax, fees, etc.

User Charge:  the term "user charge" is used in two ways in the hand-
book.  When the term User Charge is capitalized it refers to the specific
User Charge system for WWT in compliance with EPA requirements.
When the term is not capitalized,  it refers to the broader meaning of
any charge for use  of a public facility or service»

Water Quality Management; the process of setting up a management pro-
gram and institutional arrangements to integrate water quality and other
resource management decisions.  The central purpose of this management
program is the development and implementation of Water Quality Manage-
ment Plans.

WQM Agency:  the designated  agency responsible for  preparing the water
quality management plan.
  .S. Environmental Protection Agency: Draft Guidelines for State and
Areawide Water Quality Management Program Development. (Washing-
ton, D.C.,  February 1976),  p.1-1.
                                 -101-

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                        APPENDIX A

                SOURCES OF CAPITAL FUNDS
    The following paragraphs describe some of the various means
 for raising capital funds, the normal or usual use of the source,
 and some of the advantages and disadvantages associated with each.
 GENERAL OBLIGATION BONDS

    General obligation bonds are backed by the full faith and credit
 and the financial resources of the issuer,  who has the power to levy
 taxes to repay the principal and interest on the bond* General obliga-
 tion debt traditionally has been payable from property tax revenues,
 but in practice other sources of revenue can be applied on the pay-
 ments „

    Since these bonds are backed by the full faith and credit of the
 community, they can usually command a lower interest rate than
 other types of bonds.  Because of their relative  security and general
 standardization,  they are usually highly salable  and incur lower
 overhead costs for capital facilities*  Tnis is because the security
 is the credit of the community and,  as a result,  costly market, finan-
 cial, legal, and engineering reports on specific  projects are not as
 necessary as in the case of the revenue bond.

    Although general obligation bonds  can be used for almost any
 type of facility,  there are certain disadvantages.  The total amount
 of debt  that a community can carry  is often limited by law (state or
 local) or by the  credit rating of the  community.  As a result, if debt
 levels become too high relative to community revenue capability, ad-
 ditional bonds are difficult or expensive to market. In cases where
Additional and more detailed discussion can be found in;
    1 - AFWA, ASCE, and WPCE, Financing and Charges for Waste-
        water Systems; a  Joint Committee Report,  Chapter 4:  Finan-
        cing of Capital Costs, pg. 8-21
    2 - Financing State and Local Governments, James  A.  Maxwell,
        Studies Chap  9 pages 185-206
    3 - Management Policy in Local Government Finance; ICMA.
        Chap0 12
                                A.I

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communities have excessive debt or poor credit ratings in the bond
markets,  it may be possible to obtain better interest rates using
revenue bonds associated with a specific project,,

    Because of the fixed limit in general obligation bonds that can be
generated by a community,  the community may not wish to use a dis-
proportionate share for WQM to avoid precluding other major capital
needs not fundable by other  means.  Finally, the general obligation
bond in many communities requires a voter referendum for approval
of the issue,, As a result, if the general obligation bond is planned
as a funding mechanism in an alternative plan, voters may disallow
use, thus negating the planned mechanism,
REVENUE BONDS

    Revenue bonds are backed by a pledge of an expected income
stream and have no support from taxes. These bonds are commonly
used to finance the construction of wastewater treatment facilities„
Their success and costs depend on the reliability of the projected
revenues,,  Purchasers of revenue bonds demand compensation for
additional risk and examine the past performance of the borrower,
methods for timely collection of revenues, potential for default,
ratio of expected revenues to payment requirements, and provision
for increasing charges to meet debt service  requirements.

    In some cases,  these bonds are backed by the full faith and
credit of the issuer as well.  Such bonds are called combination
bonds.  The additional backing minimizes risk and can make the
bond more attractive in the bond market.

    Revenue bonds are one of the most popular finance mechanisms
because many authorities and commissions have no other means
available for raising capital funds.  Moreover, revenue bonds can
be used to fund projects when community debt limits have been ex-
ceeded and/or when the use of the funds precludes special assess-
ment bonds.

    From the point of view of the WQM financial manager, one of
the major advantages to the revenue bond is  that revenue bonds can
be used to finance multijurisdictional projects and are not con-
strained by geographic limitations.  Moreover, in cases where
                               A. 2

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existing WQM operations have, over time, developed an excellent
record of earnings and bond repayment,  it may be possible to ob-
tain lower interest rates on revenue bonds than on general obliga-
tion bondso

    Finally, an additional technique is to "cross-pledge" the  rev-
enue bonds to an established system to finance the proposed project,.
This is effective when the existing system has a solid history of
revenue generation.  In most cases, this is only permitted when  the
cross-pledged systems  (e.g., water and wastewater) are combined
systems.

    Revenue bonds may  not be marketable or the interest rates may
be excessive in cases where there is no  record of earnings to be
evaluated by potential purchasers.  In addition, the bond market
may require that revenues be higher than necessary to cover debt
service.   The amount of coverage (revenue over and above debt)  can
vary the risk of the issue substantially and, as a result, the  interest
rate required for sale.
SPECIAL ASSESSMENT BONDS

    Special assessment bonds are issued to cover the cost of an im-
provement directly tied to benefiting property owners.  The bonds
are repaid by receipts from assessments, apportioned according
to direct or indirect benefits of the improvement.  This type of
financing is commonly used for local area sewers since the bene-
fiting property owners are easily identifiable.  In some cases
special assessment bonds are not backed by full faith and credit of
a governmental unit,  and purchasers examine the collection pro-
visions, penalties for unpaid assessments, and the relative status
of the assessment as a lien on the property. In other  cases, such
as New Jersey, special assessments are backed by the full faith
and credit of the issuer and thus provide the same advantage as in
a combination general obligation/revenue bond.

    When authority is granted, special assessment bonds  can be
used by municipalities, special purpose districts, commissions,
and other types of public bodies.   The  major advantage to the
special assessment bond is the development of collection  facilities
that serve a specific  subdivision or subarea.  However, because
in most cases special assessment bonds are not backed by the  full
faith and credit of the community, investment risk and, therefore,
                               A. 3

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interest are higher, and the marketability of the special assessment
bond is lower than a backed is sue „  To avoid this, communities can
borrow, using general obligation bonds which in turn are repaid
based on a special assessment.,
SEWER SERVICE FUND,  OPERATING FUND,  AND MUNICIPAL
GIF FUND

    Revenues from publicly owned wastewater facilities are often set
aside in a special capital  improvements account for future expansion,
modification, or replacement to the facility,,  The yearly contribution
to this fund can be planned as part of a capital budget or provide for
capital  expenditures from operating revenues*, This service fund also
minimizes the need for short-term borrowing to pay for unexpected
capital  projects o

    Wastewater treatment facilities that serve a distinct municipality
or group of municipalities may be eligible for funds from the general
capital  improvement account.  The capital improvement account is
set up by the municipality and administered to plan for and meet the
capital  needs of the various municipal programs.

    These types of sources are only possible when the funds and
mechanisms required to fill the funds have been established,,  The
use of these approaches are pay-as-you-go approaches.
STATE AND FEDERAL AID

    To protect small municipalities from high interest rates, and ad-
ministration costs of floating bonds in the open market,  some states
provide low interest loans and bonding programs.  These programs
provide municipalities with the necessary funds, and repayment is
based on revenues generated from the project.  The expected revenue
stream determines the amount of money the state may loan.

    Limited special federal funds are available to help pay the local
share of the  capital costs. The U.S. Department of Housing and
Urban Development (HUD) sponsors a community development pro-
gram, which provides funds for a wide variety of community improve-
ment programs.  These programs range  from street improvements to
urban renewal and can include wastewater projects,  It, should be noted
                               A. 4

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that these sources may have special provisions.  For example, the
HUD Community Block Grants can be used for collection facilities but
not for wastewater treatment,,

   When aid funds are available, they can provide a major source of
capital funds, which, in cases of grants,  do not require repayment
or debt service.  Hence, during plan development all local and federal
sources should be investigated.

   However,  in long-term financing plans, aid funds (particularly
under special programs) should not be counted on or built  in as the
mainstay of capital funding for two reasons:

   o  Competition for total aid/grant funds  available
      may be such that it precludes an area from
      obtaining the amounts they require,

   o  Program changes can either modify or eliminate
      the source of funds.
                               A. 5

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