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             NG  FOR
                                            THE STATE
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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.

U.S. Environmental Protection 'Age&oy
Library, Room 2404  PM-211-A
401 M Street, S.W.
Washington. DC  20460

 i   I
•-  ;
•; 'i
        .. .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...

                                           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
   #w*kj f«
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             Clean Water Act
        Increased Nonpolnf Source  >
        Managennent,          -   -'/'"-
        Transition from Construction Grants 10.,
        $Urte8evoMngU>an Funds   ^    ^
        Stormwater Control  ,  >.'   --,',-
                                 Base Actlvitfes
        Planning and Standards
        Enforcement  *
        Monitoring and Laboratory Wont
        NPDES and olher permits
- •  Data Management , ^r;r^v^f^:?T
 •  Technical Assistance ^^I^^'^^K'
 •  Management arid Adnrtnislmtiori * ^ J ;''' -t"
»	    	   '    ,    " ..v'  ?y',-.'"'",

                   WATER QUALITY  MANAGEMENT

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.
•w N-"*"•'» VX.X^V?''*?1^.  *

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54 Public Water Supply Programs      /

••••';: r-«:A''j"-.'".'/-.:' ••'•' ''' "•"-' -V''' -•"'•  i :--"'. ••
 ; 51 Construction Grant Programs

-.:••:.:i''V; nv- V"-::^''/:v':;1' :'-'; . •  '.;"   '.   •   J  -
"" •41 Uridergrpuriq Injection Control Programs


^/V   ^  ; ^i 25 Pretreatmerit Programs

                • 1 Dredge and Fill  (404)

                     Permit Program
                                       , K*
                                   ^* ^  V. •*-. % ^
                                        5-vv •
                      '", , ^x  " „" »
                       *" •".  ™
        >'  National Pollutant Discharge EKminatiori System^^f^^syy^^

    404  -  Section 404 of the Clean Water Act mandates permits foiffi^lBchamQOt $*L
           •   *   *  >*j*   ^  * » * .  ^j    „    «^*  .*-..« i.. _ ' •>'?•*&„'• 4&&£\£.*.%£?*/$&*?$£jy&&*
           dredged or tiff material into the waters of the
                                                     "*, I'^g^.,

                         MANY  NEW  REQUIREMENTS
                         NEED ADDITIONAL FUNDING
• Together, federal, state, and local governments have solved many of our water problems.


• 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



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
     Diminishing Federal Funding for State Water Quality Management*

   $61 M

!   $55 M
              Federal §106 Funding
 Excludes funds for construction grants/State Revolving Loan Fund administration; assumes Congressional
 appropriations follow Administration's FY 89 initial budget program.

                                                  A  STATE  FUNDING
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
               New Needs Added to Diminishing Federal Funds**
    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.

                             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
      • 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
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.

                         FOR  MORE
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