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).
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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.
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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.
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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.
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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
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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
-------
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
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-24-
-------
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.
-27-
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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.
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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.
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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.
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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).
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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
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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.
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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.
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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).
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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.
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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
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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).
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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).
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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
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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).
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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
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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.
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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""
-------
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
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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
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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;
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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
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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.
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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.
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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.
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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.
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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.)
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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).
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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).
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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.
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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.
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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.
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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_
-------
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,,
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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).
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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
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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.
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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
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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
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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.
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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 ?
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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
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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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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).
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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.
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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-
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ruary 1972.
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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.
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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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