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PAYI
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LEANER
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ATER
THE STATE
FUNDING
STUDY
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It fo/ces money to gain and maintain
' clean drinking and surface water.
Federal, state and local governments
and the private^ectorhavesupplied
this money in varying proportions and
in varying$vay$ over the years.
However...
U.S. Environmental Protection 'Age&oy
Library, Room 2404 PM-211-A
401 M Street, S.W.
Washington. DC 20460
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.. .Several basic elements in the water quality picture have changed,
and the country is now at the brink of a new phase, and a new
opportunity, in water quality management. Congress substantially
amended the two basic laws that protect drinking and surface water
quality, the Clean Water Act and the Safe Drinking Water Act, in 1987
and 1986 respectively; the 1986 Tax Reform Act changed the
attractiveness of certain kinds of infrastructure financing mechanisms;
and continued concern about the federal deficit is causing federal grant
money to diminish.
It is particularly important that state and local governments understand
that federal grant monies to fund basic state program activities will be
diminishing, both because of statutory changes to the Clean Water Act
and because of increased pressure to minimize, and increased
competition for, federal appropriations. This is occurring at a time when
the new laws demand expanded state efforts in both traditional and
new water program areas.
It is also a time of new ideas and creativity in financial thinking. Many
states have packaged new ways to fund environmental programs, and
public-private partnerships have forged new bonds to support joint
environmental efforts. To take advantage of these new opportunities,
EPA's Office of Water has initiated the State Funding Study, intending
to work with those already implementing new financial mechanisms as
well as those looking for new ways to support state water quality
programs. We invite all concerned to join us in this new environmental-
financial partnership effort...
V-
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CLEANER WATER --
BUT WORK LEFT TO Do
Our Nation has made substantial progress in cleaning up water pollution, in spite of the
country's growth in both population and gross national product. One hundred years ago, the
number one health problem in the country was disease borne by contaminated drinking water.
This is no longer the case. Nor do we now hear stories about rivers so heavily polluted that
they catch on fire. As adults, we and our families can fish and swim in areas forbidden to us
as children.
Within the last two decades, we have gained improved water quality and, in the process,
expertise and sophistication in measuring and dealing with water quality problems. However,
some of our waters are still polluted, and much of the remaining pollution comes from sources
difficult and expensive to identify and control, such as toxic wastes and nonpoint source
pollution. We also face the physical, as well as chemical, degradation of our wetlands,
estuaries, and coastal waters. In addition, we have become increasingly aware of ground-
water contamination from large numbers of small sources such as Class V injection wells, and
of drinking water problems in very small public water systems.
Congress recognized this new stage of water quality management by passing Amendments to
two of our basic water laws the Clean Water Act and the Safe Drinking Water Act.
The two new sets of Amendments:
continue current base programs to maintain the quality we've achieved, and
add new requirements to attack the remaining problems.
New Requirement
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Clean Water Act
Increased Nonpolnf Source >
Managennent, - -'/'"-
Transition from Construction Grants 10.,
$Urte8evoMngU>an Funds ^ ^
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Base Actlvitfes
Planning and Standards
Enforcement *
Monitoring and Laboratory Wont
NPDES and olher permits
Review
- Data Management , ^r;r^v^f^:?T
Technical Assistance ^^I^^'^^K'
Management arid Adnrtnislmtiori * ^ J ;''' -t"
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WATER QUALITY MANAGEMENT
Is A JOINT FEDERAL/STATE EFFORT
Protecting water quality is a joint federal and state responsibility. In general, EPA establishes
nationwide goals, and states develop water quality standards to meet the national goals and
state-specific needs. States manage the majority of programs needed to meet their standards.
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dredged or tiff material into the waters of the
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MANY NEW REQUIREMENTS
NEED ADDITIONAL FUNDING
Together, federal, state, and local governments have solved many of our water problems.
and
The new Amendments and resulting EPA initiatives provide a new structure to begin to
solve the remaining problems.
However, states need new sources of funding not only to carry out the new requirements, but
also to maintain their current programs and achievements.
EPA's Office of Water estimates states will need an additional $255 million in fiscal year
(FY)1995 just to carry out the new requirements contained in the Amendments. This is a 77%
increase over current state budget expenditures which are funded by a combination of federal,
state, and local monies.
New Needs
$255 M
Ground/Drinking
Water
FY1988
FY1995
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DIMINISHING FEDERAL FUNDS FOR
SURFACE WATER QUALITY NEEDS
*
The state funding shortage is compounded for surface water quality programs under the Clean
Water Act because current federal funds used to support state base programs are diminishing.
States receive federal surface water quality management funds from two sources:
§ 106 planning and management money, which Congress authorized at constant funding
levels through 1990.
Management set-asides from EPA's construction grants appropriation. Many states use
these set-asides to maintain part of their basic staff and program. Four set-aside provisions
allocate funds through various formulas calculated from the construction grant allotments
based on actual Congressional appropriations. Under the Amendments to the Clean Water
Act, the set-asides will terminate by the end of FY 1994.
(The construction grant program itself will also disappear, to be replaced by State Revolv-
ing Loan Funds (SRFs) initially capitalized by 80% federal money. Under the 1987 Amend-
ments, the Federal SRF capitalization grants-also terminate in FY 1994. Since construction
grants for municipal wastewater treatment plants do not fund basic state management
programs, EPA excluded them from this study.)
The Office of Water is concerned that states may not have the necessary funds to continue
base program activities to maintain the water quality improvements they have already
achieved.
Diminishing Federal Funding for State Water Quality Management*
$116M
t
$61 M
\'
i,
! $55 M
J
Construction
Grant
Set-Asides
Federal §106 Funding
FY1988
FY1995
Excludes funds for construction grants/State Revolving Loan Fund administration; assumes Congressional
appropriations follow Administration's FY 89 initial budget program.
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A STATE FUNDING
SHORTFALL
Calculating the cumulative effect of the many new statutory drinking and surface water require-
ments coupled with the diminishing federal funds that partially support ongoing state surface
water quality programs, the Office of Water projects a state funding shortfall which increases
yearly, peaks in 1994 at $322 million and totals approximately $309 million in 1995 aJone.
This $309 million shortfall includes a potential $61 million reduction in federal construction
grant set-asides for water quality management and an estimated $255 million in increased new
funds needed to support activities mandated by the Clean Water Act/Safe Drinking Water Act
requirements.*
New Needs Added to Diminishing Federal Funds**
Anticipated
GAP
FY1988
FY1995
To arrive at this estimate or the general magnitude of the problem, EPA used a "constrained needs*
approach in calculations for new requirements, assuming that state program budgets win take time to
respond to large increases in program demands. Given the funding uncertainties, EPA projected that federal
Section 106 and drinking water grants, state water budgets, and base program costs would remain
essentially constant, and did not include inflationary factors or specified project funds such as construction
grants, SRF capitalization grants, or Clean Lakes grants.
Federal funding is composed of Section 106, Public Water Supply, and Underground Injection Control
grants, which EPA projected at a constant level for this study, and construction grant set-asides, which will
disappear by the end of 1994. These study assumptions are conservative, but even if one projects greatly
increased funding from traditional sources, the state funding gap would remain large.
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THE STATE FUNDING STUDY
Without additional funds, states may not be able to maintain their current water programs and
meet new legislative requirements. There is no one solution to fill the funding gap, and the
variety of creative solutions that must be employed are coming from all constituencies,
including federal, state, and local governments and the private sector.
In the initial phase of this study, the Office of Water found that some states are already
financing large portions of their water programs through "innovative" financing mechanisms
(that is, funding sources other than general state revenues).
Building on this information, the Study will investigate the following questions:
What are the most promising alternative means of financing state/local water
programs?
Increased or new fees for state permitting or other activities?
Special taxes on specific products or activities?
Raised rates or surcharges on water or sewer use?
Increased or additional state revolving loan funds?
Other financing mechanisms?
What financial information already exists that others could benefit from receiving?
Is there a need for more information exchange and technical assistance?
What is the appropriate federal role in addressing this issue?
How does the shortfall in water program funding fit in the national budgetary debate
over the federal deficit?
How can the nation preserve environmental gains in the face of decreased federal
funding?
The Study will also seek to:
Broaden understanding of the issues.
Establish a data base of current and planned innovative techniques, and the literature
describing them.
Solicit ideas, comments, and success stories on possible solutions.
Coordinate information exchange and technology transfer.
This must be a collegia! effort only through a partnership between the various public and
private sectors will we find and implement alternative sources of funding for water programs.
We need your help.
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FOR MORE
INFORMATION
Please write or call EPA's Office of Water State
Funding Study (address below) with your ideas,
success stories, and comments. We would appreciate
receiving them by December 31,1988, and will compile
our information and your comments, share them with
those concerned, and use them as a basts for a
blueprint for action.
You may also request a copy of:
EPA's initial study titled "State Use of Alternative
Financing Mechanisms,* an indepth look at
programs in eleven states.
"Public-Private Partnerships Bulletin", published
by a new EPA-wide program to explore public-
private partnerships and innovative financing
techniques for ali environmental programs.
Elizabeth Miner
State Funding Study
Office of Water WH-546
U.S. Environmental Protection Agency
Washington, D.C. 20460
(202) 382-5818
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