WASHINGTON, D.C. 20460
                         FEB   1  2005

                        U.S EPA Headquarters LibrarV
                        .onno Mail code 3404T
                        ^Pennsylvania Avenue NW
                           Washington, DC 20460
                                                                            . OFFICE OF THE
                                                                      ^  CHIEF FINANCIAL OFFICER
SUBJECT:   Innovations in Watershed Financing
Charles E.
Chief Financi
Stephen L. Johnson
Acting Administrator
       I am pleased to transmit the attached Environmental Financial Advisory Board (EFAB)
letter.  This letter presents the Board's recommendations to the Agency and the Office of Water
on innovative ways to build the capacity of watershed organizations by developing and
implementing finance strategies to obtain and leverage funding.  This also includes influencing
funders to support plans and projects that will improve water quality and achieve other goals
found in the Clean-Water Act and other statutes.

       The Board believes that the collaborative efforts currently between its;Non-Point Source
Financing Workgroup and the Office of Water's Sustainable Finance Team will continue to
provide and promote effective activities that will support the vital work of watershed-based
groups in restoring and enhancing the nation's water quality.

       As the Agency moves  forward in continuing and expanding work in the area of non-point
source financing, EFAB offers its assistance consistent with its charter.  If you have questions or
comments regarding this letter, please call me or have your staff contact Joseph Dillon of my
staff-at 564-9673.

                            Internet Address (URL)
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                                  January 10,2005       .        . ',
Mr. Stephen L. Johnson
Deputy Administrator
United States Environmental Protection Agency.          .                     '
1200 Pennsylvania Avenue, NW
Washington, DC 20460                                   '.              '

Re: Innovations in Watershed Financing         .

Dear Mr. Johnson:

      The Environmental Financial Advisory Board (EFAB), through its Non-Point Source
Financing Workgroup, has been looking at innovative ways to finance the wide variety of
improvements needed to restore watershed health. We have undertaken this project based on our
conclusion that financing infrastructure and related natural resources projects to improve and
restore watershed health presents a major challenge for EPA, the states, municipalities, and
watershed management groups.  We believe that there is a huge potential for maximizing
available financing for watershed management by informing and training watershed managers,
coordinators and groups to overcome the multiple financing challenges they face in getting
coordinated projects underway.                                         '

      Since the early 1990s, the EPA's Environmental Finance Team (EFT) in the Office of the
Chief Financial Officer has explored ways to encourage innovative and effective financing of
important environmental projects.  In the course of EFAB's recent review of ongoing activities,
we became aware of the Office of Water's recent creation of the Sustainable Finance Team in the
Office of Wetlands, Oceans and Watersheds (OWOW). The Team's charter is broad enough to
encompass most of the concerns that EFAB has identified to meet the challenge and potential
noted above. We have reviewed the Team's ambitious and well-targeted work plan, which gives
EPA an excellent start on implementing the goal of assisting watershed groups and managers to
increase their knowledge and use of all available financing tools.

      We would like to urge you to continue to support and, in certain areas, expand work in
the area of non-point source financing, including the work of OWOW's Sustainable Finance
Team. For its part, EFAB is willing to assist and supplement the work of the Team and others
with financial expertise and other contributions.      .                  .

       In addition to the excellent work they are already undertaking, there are a few areas where
we would like to see the Agency and its Sustainable Finance Team focus its efforts, with.
appropriate contributions from EFAB's Non-Point Source Workgroup and other experts in the
area, including the EPA-supported, university-based, Environmental Finance Center Network
(EFCN). These include:                                               ,_                '

       a.     Continue to develop a new paradigm for watershed-based finance that moves from
             a limited grant-funded approach to a portfolio strategy that builds partnerships and
             targets public funds, private financing and other resource contributions from a
             range of potential sources. The Team has properly emphasized leveraging
             financing and funding at local, regional, state levels, i.e., government programs,
             business investment decisions, bank loans. A roundtable involving
             representatives from states, localities, financial institutions, businesses, nonprofits
             and others to expiv/re the full range of possible financing options and partnerships
       1      would be a good beginning.  EFAB is considering convening such a roundtable,
             and will work with the Office of Water and the Office of the Chief Financial
             Officer to help  stage and facilitate this effort.              "

       b.     Expand training for watershed groups, managers and .coordinators in the use of
             innovative financing and funding tools and of local resources and networks to
             increase financing and funding options. The greatest sources of innovation in
             assembling a portfolio of nontraditional, nongovernmental and leveraged
             financing are likely to be at the watershed level. Increasing the capacity of
             watershed groups and managers to identify and develop these sources will be
             crucial to long-term success. The EFCs and others are working on this issue, and
             in Region 10, for example, the EFC's Plan2Fund watershed financing tool and .
             Directory of Watershed Resources represent two excellent foundations for much-
             needed training. These are tools that not only help watershed groups do the right
             things, but also make the best use of the limited time that volunteers at the local
             level can commit to meeting local watershed goals. Existing training capacity
             through the Association of State and Interstate Water Pollution Control
             Administrators (ASWIPCA), the Council of Infrastructure Financing Authorities
             (GIFA) and other groups should be utilized and expanded.

       c.     Develop additional case studies to provide practical experiences and lessons
             learned for watershed managers. The EFCs and other university watershed and
             finance centers should be asked to contribute case studies to an EPA database.

       d.     A complementary approach you may want to consider is to encourage or require
             recipients of EPA watershed grants to receive training in financing tools and
             approaches like the EPA Watershed Academy distance learning module on
             watershed financing or other learning tools.

      "EFAB believes that these approaches are well in line with Enlibra principles, such as
putting markets before mandates, recognizing true benefits and costs, and pursuing solutions that
transcend political boundaries. Watershed financing offers the kind of challenge where Enlibra
principles can work, and the EFAB/EFCN/EFT team can add value to the efforts of the Agency
and its Sustainable Finance Team in this regard.
       The Board thanks you for the opportunity to provide our comments and recommendations
to you. We hope they will promote activities that will support the vital work of watershed groups
and managers in restoring and enhancing the nations water quality.                       ,

                              .         Sincerely,                 -          
Lyons Gray, Chair
Environmental Financial Advisory Board
A. Stanley Meiburg
Executive Director
cc: Charles E. Johnson, Chief Financial Officer
   Benjamin H. Grumbles, Acting Assistant Administrator, OW
   Diane Regas, Director, OWOW