Report to EPA
   FUTURE FUNDING OF MUNICIPAL

  WATER POLLUTION CONTROL NEEDS
         Prepared by the

 Management Advisory Group to the
Construction Grants Program  (MAG)
           May 15, 1984
    W."S. Environmental  Protection Agency
    Library,  Room 2404   PM-211-A
    401 M Street,  S.W.
    Washington,  DC   20460

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        MANAGEMENT ADVISORY GROUP TO THE CONSTRUCTION GRANTS PROGRAM
  *Mr. Leon C. Asadoorian
   President-Treasurer
   Methuen Construction Company

  *Mr. J. Edward Brown
   State Water Coordinator
   Iowa Dept. of Water, Air &
     Waste Management

  *Mr. John Foster, President
   Malcolm Pirnie, Inc.
       T

   Honorable Corinne Freeman
   Mayor of St. Petersburg

***Mr. Walter E. Garrison
   Chief Engineer and General Manager
   County Sanitation Districts of
     Los Angeles

  *Ms. Karen Gifford, Vice President
   Merrill Lynch

   Mr. Albert F. Gutierrez, President
   Gutierrez, Smouse, Wilmut
     & Associates, Inc.

   Ms. Terry Hoffman, Commissioner
   Minnesota Public Utilities
     Commission
  Honorable  Harry  Kinney
  Mayor  of Albuquerque

**Mr.  Joseph F.  Lagnese, Jr.
  Environmental  Engineering Consultant

 *Mr.  J..Leonard Ledbetter, Director
  Environmental  Protection Division
  Georgia Dept.  of Natural Resources

 *Mr.  Kenneth Miller, Vice President
  Division of Water Engineering
  CH2M Hill

 *Mr.  Larry  J. Silverman
  Executive  Director
  American Clean Water  Assn.

 *Mr.  Gerald H.  Teletzke, President
  Zimpro Incorporated

 *Mr.  F. Thomas  Westcott, President
  Westcott. Construction.Company	

  Mr.  Gordon E.  Wood
  Vice President and Director
  01 in Corporation
  Federal Government Relations
  *Member of MAG Task Force on Future Funding of POTWs.

 **Chairman of MAG Task Force on Future Funding of POTWs.

***Chairman of MAG; Member  of MAG  Task  Force on Future Funding of POTWs; Now
   Vice President of James M. Montgomery, Consulting Engineers.

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                               EXECUTIVE SUMMARY
    MAG REPORT:  FUTURE FUNDING OF MUNICIPAL WATER POLLUTION CONTROL NEEDS


The Management Advisory  Group (MAG) has  been an  official  advisory group  to
EPA's municipal wastewater treatment construction grant  program  for 11 years.
The  16-member MAG  combines   a  diversity  of  professional  backgrounds  and
includes wastewater  treatment engineering  and  management  experts,  equipment
manufacturers,  financial  specialists,  local  government  officals,  and
environmental  and  public  representatives.   MAG'members  are appointed  by  the
EPA Administrator.  Members are drawn from different parts of the country, and
serve without compensation for two year terms.

MAG's study on the future funding of municipal water  pollution  control needs
was  initiated in  the  Fall,  1983  at  the  request of  EPA.   As  Administrator
William Ruckelshaus  stated, it was  important  to  "tap  the collective wisdom of
MAG"  and  obtain   the  group's  best advice  on  the  financing  of  wastewater
treatment  for the country.    A special 11-member  MAG subgroup,  the Publicly
Owned Treatment  Works (POTWs)  Funding Task  Force,  carried out  much  of  the
work.   MAG  offers  its thanks to  Mr.  Joseph Lagnese,  Chairman  of the  POTW
Funding Task  Force,  and principal  author of  this  report.  The  views expressed
in this  report represent  a  consensus of MAG members,  and are  attributable to
them.

The MAG report is  intended to  provide  guidance to  EPA  in its current study on
the  fY  1986  Reauthorization • of^-Title  U  (the municrpa-1- wastewater- -treatment
construction  grant program)  of the  Clean  Water Act.*   In  the course  of  its
8-month  deliberations,  MAG  heard  from  a  variety of major  public  and  private
sector  organizations  representing  diverse   interests,   including  the  Water
Pollution  Control  Federation (WPCF),  Association of  Metropolitan  Sewerage
Agencies (AMSA), American  Consulting Engineers  Council  (ACEC) , National
Society  of  Professional  Engineers  (NSPE),  Water and   Wastewater  Equipment
Manufacturers  Association  (WWEMA),  National  Governors  Association  (NGA),
National Wildlife Federation  (NWF), Maryland  League  of  Women Voters  (MLWV),
Izaak Walton  League  (IWL), National League of Cities (NLC), and Association of
State  and  Interstate Water  Pollution  Control Administrators (ASIWPCA).   MAG
also  had  the benefit  of  discussions  with  persons  experienced   in  public
financing and  Federal tax regulations, and drew upon past MAG and EPA studies.
EPA  staff  assisted  in  answering  discrete  technical  and financial  questions
posed by MAG.

In preparing  its  recommendations,  MAG  relied  on  the EPA  1982 Needs Survey and
the  requirements   outlined  by Congress  in  the  1981  Amendments  to  the Clean
Water  Act.   However,  in  outlining  funding  options and recommendations,  MAG
considered  the total water  quality needs and  financial  capabilities of local
communities.   Options examined by MAG ranged from a substantially decreased to
increased  Federal  presence.   These options included local programs and  private
financing  arrangements,  and  State  and   Federal   alternatives.    Below  are
summarized MAG's major findings and consensus recommendations.
*EPA's  study,  entitled "Federal Role  in Municipal Wastewater Treatment,"  is
 outlined in the Federal Register. 49 FR 6009, February 16, 1984.

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Summary of MAG Findings

     1.  Although there has been measured improvement in the condition of  our
         waterways,  water  pollution  control   efforts  by  municipalities  are
         incomplete and significant  abatement  needs  remain.

     2.  The  goals  of  the  national   program to  restore  and  maintain  the
         integrity of the nation's  waterways  must  remain consistent with  the
         intent of the 1972 Act.

     3.  Federal regulatory and   technological "strategies  should be  improved
         to fit the  prevailing political climate and to  employ resources in a
         more  cost-effective  manner.    There is  a critical  need  for  more
         applied and demonstration research  on technology.

     4.  Innovative Federal  enforcement programs  are needed  to  ensure.adequate
         operation  and  maintenance  of  completed  systems  and to  provide
         localities  with the  impetus  to  establish  innovative methods- to
         finance construction.   The  National Municipal Policy  is  a step in  the
         right direction, but fails to recognize the need  for more effective
         means such as connection  bans  and  cross-compliance  sanctions.

     5.  The 1988 deadline for municipal water pollution compliance should be
         retained.   Individual  "consent decree"  agreements should establish
         the deadlines for municipalities not  in  compliance.

     6.  Local operating agencies  and  users  must  be  totally -self-sufficient"in
         terms  of  operating  and  maintaining their  POTWs  and   for  capital
         improvements to satisfy growth.

     7.  The  Federal  government must  consider  the  full range of  water
         pollution  control  needs  facing communities, and  the possibility of
         meeting these within a desired time  frame.  Since  a large  portion of
         these  needs cannot  be   federally  funded,  some criteria  of afford-
         ability and implementability  will  be  needed to  compare different ways
         of reducing the municipal burden to a feasible  level.

     8.  A dual approach is required to assist municipalities  in  meeting  water
         pollution control  needs  in  a  reasonable  time frame.

          -  Some   type   of   Federal  aid  is   needed   to  enable
             municipalities to meet  current  eligible needs.

          -  Indirect  Federal   assistance   that  involves   tax
             advantages and  incentives  will  be  required to attract
             private sector funding  for noneligible  costs.

     9.  States  should  be given  discretionary authority to devise
         innovate  funding  mechanisms  which accommodate  differences
         between communities in terms  of size, revenue requirements,
         water quality, and private  investment potential.

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     10.  The  Federal  program  must  establish  consistent  and  reliable
         long-term  goals  and  commitments  so  municipalities can  be
         certain of what is required of them.
Suroary of  MAS  Recommendations

     1.  In  a  transition   period  over   the  next   10  years,
         municipalities  should  have  access  to  Federal  grants  to
         States of $35 billion.

     2.  During this  transition  period, States should be  permitted
         to use  Federal  funds as  grants,  revolving loans,  and/or
         interest  subsidies  within  prevailing  Federal  program
         requirements  for project  priorities  and planning  review/
         approval.

          •  For large-city projects already committed  to  a phased
             construction  schedule and  financing  plans  based "on
             grant approach, conventional grant assistance might  be
             most beneficial.

          -  For States with  modest current  needs but extensive
             anticipated growth,  the  revolvingloan  approach might
             assureresidual  funds   for   the   period  following
             termination of the Federal'grant program.
          -   For  States with large and immediate needs  that  require
           •  expedient project implementatii
             approach might be most useful.
expedient project  implementation,  the  interest  subsidy
            it
     3.   Implementation  of  the  above-recommended  funding   program
         should  be  pursued  in  a  manner  which  assures  an   orderly
         transition  with minimum interference with  the  ongoing
         municipal  construction  program.   A State  should  be
         committed  to  the  direct grant  approach  until   it has
         provided  the means  and  methods to  utilize  the revolving
         loan  and/or  interest subsidy approach.

     4.   States  should  be  given discretionary  authority  over
         eligibility  and  priority for  Federal   funding  to assure
         optimum  water  pollution  control  in  differing  municipal
         water pollution conditions.

     5.   The  existing  tax  incentives  for  private sector  involvement
         in municipal water  pollution  control—such  as  investment
         tax   credits and  accelerated  cost recovery—should remain
         available.

     6.   Industrial  development bonds  with  their tax-free  interest
         features  should  remain  available  for  private  sector
         financing of water pollution control  projects.

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                       ENVIRONMENTAL PROTECTION AGENCY'S
         MANAGEMENT ADVISORY GROUP TO THE CONSTRUCTION GRANTS PROGRAM
                        EVALUATION AND RECOMMENDATIONS
                            POLLUTION CONTROL NEEDS
GENERAL

It is the intent of  the  Management  Advisory Group to the Construction  Grants
Program  (MAG)  to  develop  guidance  for the  Environmental  Protection  Agency
(EPA) in  its  development of recommendations  to the Congress  for the  future
funding of  the remaining publicly  owned  treatment works (POTW)  construction
needs of the national water  pollution control  program.

To  obtain  the  advice   and  counsel  of those  directly  concerned  with  the
implementation of the municipal water pollution control facility  planning  and
construction program, major  organizations  that represent the  interests of such
individuals  and  institutions  were  invited  to  present  their  views  to  the
Conmittee.   The  organizations  that participated  in  this  concensus  effort
include  the  Water  Pollution  Control  Federation  (WPCF),  Association  of
Metropolitan Sewerage Agencies  (AMSA),  American Consulting  Engineers Council
(ACEC),  National  Society   of Professional  Engineers  (NSPE), Water  and
Wastewater  Equipment Manufacturers  Association  (WWEMA),  National  Governors
Association  (NGA),   National Wildlife  Federation  (NWF),  Maryland  League  of
Women Voters  (MLWV), Izaak  Walton  League  (IWL), National   League of  Cities
(NLC),  and  Association  "of  State " and- :Interstate :^atBr_"^oHirt1x)n.ii'ControT
Administrators (ASIWPCA).

We  also  had  benefit of  discussions  with  persons  experienced  in  public
financing of municipal  sewerage projects and  in  the Federal tax  regulations
relevant to the use of private  sector financing of these projects.

A  special  MAG task  force was  set  up  to  perform the  initial  inquiries  and
evaluations.  The task force also reviewed other recent MAG task  force efforts
in  this  area,  as  well  as   EPA staff-prepared fact sheets  relating  to  the
funding  question.     The MAG  reports  reviewed   include  "Self  Financing  of
Wastewater  Treatment,"  January 1983,  and  "Alternative Methods  of  Financing
Wastewater Treatment," January 1982.  Also  reviewed  were EPA's outline  of its
on-going evaluation of "POTW Self-Sufficiency/Compliance:  Appropriate Federal
Roles" and  EPA's notice  in  the February  16, 1984  Federal Register  entitled
"Federal Role in Municipal Wastewater Treatment:  Study"."

In addition, the task force  utilized the input of all the MAG members who are
also representative  of   the  many  disiplines  involved in the municipal   waste
pollution control program, as  well  as those concerned  with the public  impact
of the program.


BACKGROUND

Since  1972,   approximately  $40.34  billion  has  been  appropriated  for
construction of POTWs.  Currently,  $2.4 billion per year is authorized through
fiscal year  1985.    Based on the  EPA 1982 Needs  Survey and original  (1972)

                                 -1-

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eligible funding categories, there remains a total backlog of $92.6 billion of
construction to  serve  the 1982 needs  (with  no allowance for  growth  to  serve
future needs) as follows:


                     Category                          Billion Dollars

            I        Secondary Treatment                     20.1

           IIA       Advanced Secondary Treatment             3.3

           IIB       Advanced Treatment                       0.5

          IIIA       Infiltration/Inflow                      2.6

          1IIB       Replacement and/or Rehabilitation        4.7

           IVA       New Collector Sewers                    16.8

           IVB       New Interceptor Sewers                   8.9

            V        Combined Sewer Overflows                35.7

                                                 Total       92.6


Under the 1981  Amendments  to ,the_CJean_Watec-:J\c±^,_the...eVigible..categories,for
Federal  grants  are  generally  limited Jto -secondary/.~tr^tment^4.)^- -advanced-
secondary  treatment  (IIA),  advanced  treatment  (IIB),  infiltration/inflow
(IIIA),  and  new interceptor sewers (IVB). These account  for  $35.4 billion of
the total.  The Federal grant share as of October 1984 will be reduced from 75
percent  to 55 percent, and  capacity  for  growth will  no longer be eligible for
Federal  funding.  Based on  these eligibilities, approximately $35.4 billion of
backlog  requires funding,  and on  the basis  of  a  55% Federal  share,   total
Federal  appropriations of  at  least $19.47 billion  will be required.  However,
because  of  those phased/segmented projects  which  retain the  prior  75%  share
through  their  completion  and  "set-aside" allowances  for  State discretionary
•jse,  the Federal potential  exposure  for  construction grant funding  will  be
iomewhat greater  than  this minimum  projection.   At  the  present $2.4 billion
vter year funding rate and disregarding inflation, it will take approximately 8
 'ears to fund the minimum projected needs of $19.47 billion.

 PA has  also determined  that  by the  year  2000,  the needs of  all  categories
will  increase from  $92.6  billion  to $118.35 billion with the current eligible
 ategories  increasing   from  $35.4  billion  to  $57.3  billion.    At  55%
participation,  the  Federal  share • increases  to  a minimum  of  $31.5  billion.
Again,  at  $2.4  billion  per year, this  would equate  to about  13 years  of
funding  to  meet minimum  needs,  without  respect   to  inflation,  remaining
phased/segmented projects,  and the State  "set-aside" allowances.
                                      -2-

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 INFLUENCING FACTORS IN MAG DELIBERATIONS

.In trying to evaluate all the considerations relating  to  th'e  continued  Federal
 participation of  the municipal  construction  program,  four  aspects appear to
 have benefit of general agreement:

     •  Significant progress has been made in the improvement  of  the
        nation's waterways  as  a result of  the  accelerated national
        program since 1972.

     •  A major factor  limiting  the completion  of program goals  is
        the substantial  level  of municipal water pollution  control
        needs that remain unresolved.

     0  Public  support  for  completing  the  national  program  and
        achieving the original goals remains at  a high level.

     •  The  continued  commitment  of  the  Federal  government  to
        municipal  water pollution control  is required  because of  the
        interstate and international nature of water pollution.

 There  is also agreement  that  the unresolved municipal  water  pollution  control
 needs  stem  from both the need for  new  facilities and  the need to  improve the
 performance of  existing  facilities.  Continuing  pollution  appears to result
 from:
          -  Untreated sewage-discharges.--^;--		   ~
 ^

          -  Treated  sewage  discharges which do  not meet  enhanced
             water quality criteria for receiving  streams.

          -  Incomplete  projects  of large cities being  implemented
             within phased segmented programs.

          -  Inadequate performance of existing  treatment facilities
             due     to    insufficient    capacity,     excessive
             infiltration/inflow,   excessive   or    incompatible
             industrial  loading,   improper  technology  application,
             and inadequate operation and maintenance.

          -  Unsatisfactory sludge/solid waste management practices.

          -  Inadequate control  and/or  treatment  facilities for
             combined  storm-sanitary overflows.

 However,  remedial  measures,  particularly those relating to continued  Federal
 funding,  provoke  differing responses from the  many  interested  and  concerned
 parties.   For  the  most part, all  agree to some continued Federal funding but
 disagree  on  the extent and duration.   Generally,  three  perspectives  appear to
 influence the positions:

      •  The  major  impetus  for  reduced  Federal  funding  assistance
        relates to  concerns  for the  prevailing  large  Federal
        deficits  and  the suggested  need  to subject  the  water

                                      -3-

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        pollution  control  program  to  the  seme financial  scrutiny
        imposed  on  all Federal programs.  Further argument on behalf
        of this  position  comes  from  those  who  suggest that  the
        Federal  grant  program has not been effective and  remains  a
        deterrent  to the type of  local  self-sufficiency  considered
        essential for  long-term achievement and compliance.

        The  concern for  fairness  and equity strongly  influences  the
        position in  favor  of  continued  Federal  funding.    Those
        municipalities  and  regional  agencies  who have not  yet
        received the  Federal  funding  required  to  meet  all  the
        statutory  requirements  imposed  upon  them question  the
        fairness of Federal  policy that threatens to deprive them of
        equal  treatment  only because  of their "position  in  line".
       ,They  contend that  such a policy exacerbates the  problem that
        all  local   governments,  particularly  large cities, face  in
        satisfying   increasing responsibility  for other  burgeoning
        social  and infrastructure needs  resulting from reduced
        Federal  participation.    Fairness   suggests  to   these
        proponents  that  all the  unresolved  needs  of  POTWs should be
        funded to  the  same extent as provided  to  those  who preceded
        them  with higher  priorities.   They also suggest  that without
        Federal  assistance  for  their  POTW  needs, competition  for
        limited  revenues  and funds  available  to  the  municipalities
        will  adversely impact their  water  pollution  control  efforts
        and  significantly  delay implementation.

        In between  these  two perspectives are compromising proposals
        that  attempt  to  accommodate  some  of both concerns.   These
        include:

          -   Reduce effluent  standards,  both  at  the  secondary
             treatment level and  at  the higher levels dictated  by
             water  quality considerations.

          -   Reduce eligibility and extent of Federal  participation.

          -   Extend time  frame for compliance.

          -   Provide other Federal funding approaches.

          -   Develop  new  non-Federal  funding  and/or  financing
             approaches.

The major interest  at  this time  appears to  be  directed  toward  the  alternative
Federal   and  non-Federal  funding/financing  possibilities.   The  most notable
considerations,  in  these  areas include the following:

Local Options

        Use   of  private  sector  to  take advantage  of  accelerated
        depreciation/investment   tax  credits  and   industrial
        development bonds, referred to  hereafter as  "private
        financing."

                                      -4-

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     •  Use of depreciation allowance  in  user charge determination
        to  provide  funds  for  future capital   improvements  and
        replacements.
     •  Use of tax exempt  municipal bonds.
     •  Use of special  revenue  sources such  as  sewer availability
        fees  and  connection  charges,  and  sale   of  treatment
        byproducts (methane  and  soil  conditioners) and reuse water.
     •  Use of ad valorem taxes  to finance capital needs to provide
        subsidy  to  the .  POTW  user  in  the  form of Federal  tax
        deduction.
       T
State Options
     •  State grant  program funded  by  State revenues  for capital
        improvements.
     0  State  loan  program  funded  by  State bond   issues  and/or
        Federal  seed  money.
     •  State subsidy program for  annual  O&M  costs  funded  by State
        revenues.
     •  State loan guarantees7 to increase-l-ocal-credit ra-tings,-:-^
     •  State operation  of POTWs,  with  uniform user costs across the
        State.
Federal Options
     •  Categorical grants,  altered from current  program in terms of
        eligibility,  participation, and term.
     •  Block grants to States for Federally subsidized  needs,  with
        States   having   full  responsiblity   for   the  funding
        delineation.    In  expanded  form  (megablock   grants),  this
        represents the "New Federalism" proposal.
     •  Federal  loan program, with interest  subsidy  costs  borne by
        Federal treasury from  general revenues.
     •  Federal  loan guarantee  program,  with  loans from  private
        sector guaranteed  by  Federal Government  and  default  costs
        being Federal burden.
     •  Federal  trust  fund,  with  Federal  costs  subsidized  by
        specific  revenue sources.
                                     -5-

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        Federal  tax  subsidy which is,  in  fact, the  Federal  burden
        and/or  contribution  resulting   from  the  Federal   tax
        incentives  involved  in  the  local   option  types  of private
        financing.

The extent of  opinion divergence on the Federal grant approach is found in the
positions taken by the organizations who met with MAG on this issue.

WPCF  favors  a specific  phaseout  of  the  Federal  funding  program,  with  the
national  program relying  hereafter  on other  alternative  financing  methods,
extension of  program  deadlines, and greater reliance  on water  quality
considerations  for  setting  treatment  standards.    The Federation  suggests
Federal  funding  phaseout  by  1992,  reducing  annual  total  grants from  $2.4
billion currently  to  $0.4  billion  in  1992, and limiting Federal  participation
to 55%. ,

ACEC  favors  the  stabilization  of the  Federal  grant  program,  with  at least
another 5 years  authorization at the  current $2.4 billion annual level.  NSPE
proposes  a  combination  of  Federal   loan  guarantees   and  Federal  interest
subsidies,  with  Federal  grants  limited   to the  remaining phased segmented
projects.

AMSA,  however, is  quite  emphatic in its position  that  Federal  funding should
•be continued,  and at much greater than present levels.  They maintain that the
funding  should  be  adequate to  permit ^the  large   cities  to  complete  the
originally mandated  programs for  which they have made  large commitments  in
plann i ng -and^f inancingv '---^lO^year- period "of^l^era^gr^ntr^und'wg' a^«aF^Tev e^
of $2.4 billion per year with 75% participation is indicated to" be required to
meet  just the needs of  their constituent  cities and  regional  agencies  to
satisfy compliance  requirements.   AMSA further suggests  that a  total Federal
funding level  of $5  billion per year  would  provide $2.6  billion  per  year for
all other communities of the  nation.  As to  grant eligibility, AMSA favors the
exclusion of growth expansion but the inclusion of combined sewer overflow.

WWEMA also  favors increased  funding  levels and the  retention of 75% Federal
participation.

Most  of  the  other  organizations  appear   to  favor  continued  Federal  grant
funding  until  the  municipal  needs   are  satisfied, but  at  a  55  percent
participation  level.

The National  League  of Cities,  however,  suggests  that  if  Federal  funding  is
not continued, the timetables for meeting the  requirements of the Act should
be postponed or  delayed.  The National Governors Association proposes that the
States  be  permitted  to adapt Federal grants to a  State  loan  program  and  that
inflation be recognized in  the continued Federal grant program.

Although  both  organizations favor continued  Federal  funding  of  POTWs,  the
Izaak Walton League and the National Wildlife Federation prefer that long-term
funding  issues be postponed  until other important changes  in the Clean Water
Act are effected,  hopefully not  later than FY 1985.
                                      -6-

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SUMMARY OF FINDINGS

As a result of our deliberations  with  representatives of organizations having
diverse  interests  in  water   pollution   control,  with  EPA  officials,  with
financial  specialists,  and  with  each   other,  MAG  has  come  to  a  better
understanding of  the  difficult and  complex aspects of  the important national
issues on  future funding  of  the municipal  water  pollution  control program.
From this we have been  able to develop a general consensus on the delineation
of the major factors involved   in developing a national policy.

First, opinion is unanimous that  although  there  has  been measured improvement
in  the condition of  our  waterways,  the  water  pollution  control  effort  by
municipalities is incomplete and significant abatement needs remain.

Second, there is  agreement  that  the goals of the national  program to restore
and maintain the  physical,  biological, and chemical  integrity of the nation's
waterways  should  not  be  compromised  but should remain consistent  with the
intent of the 1972 Act and  its amendments.

Third,  there  is  strong   feeling  within  MAG,  however,  that  many  of  the
regulatory and technological strategies followed in the  initial program should
be altered to better  fit  the  prevailing  political  climate and to benefit from
previous  experiences.   The strategies  must  now take  into account  that the
competition  for   financial  assistance at  all  levels of  government  is  more
intense, that the public  support is more  rational,  and  that public policy is
more directed to decentralization of governmental authority.  These  strategies
must  ?,lso- .recognize_.,tbe-.-.experiences,., that--have . dramatically  revealed  the
differen.ee .between  a  technology^ -capab.iliiyr^and -its_"-ACh_iev.abi>ii:y;.^and_jthe-
critical relationship  of  this difference  to  the commitment of  resources for
the development and operation  of  the  technology.  More  than ever, applied and
demonstration research by universities, manufacturers, and municipal operating
agencies  is  required  and  is   deserving  of the  highest  priority  for Federal
assistance and encouragement.

Fourth, one  required  new strategy directly related  to  funding  initiatives is
municipal enforcement.  We  all agree  that the Federal government must improve
its enforcement programs  and  efforts.   This essential element of the national
program  will,  in  our judgment,  not  only  encourage  the  local  initiative  to
operate and  maintain  the  completed systems  at  a proper  level  of performance
and physical  integrity,  but  it will  also provide  the   impetus  to  create the
type  of  imagination  and  innovation necessary for the  municipalities  to
complete the needed facilities.

The National Municipal  Policy  recently released  by  EPA  is a beginning to this
needed  effort,  at  least  with respect  to the  rescheduling of noncomplying
municipalities.   However,  it  still  fails to  deal  with the  need  for  more
effective  elements  of  enforcement, such  as  connection bans  and  cross
compliance sanctions.   This aspect  of  the enforcement program has plagued the
national  program  from  its  inception  and  fails  to encourage  the type  of
self-reliance  necessary  for   the   desired  Federal   disengagement  from
construction funding.
                                      -7-

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Fifth,  it  is  also  obvious  to  MAG  that time  is  a critical  factor  and  an
important  variable  in  the  consideration   of  funding   for  municipal  water
pollution control.  We do not believe that  a useful or  meaningful analysis  of
funding  needs  can  be  achieved without  the  imposition  of  time constraints.
Accordingly,  we  strongly  urge  that  time  be   an  element  of   analysis  and
comparison  for  all  financial  assistance  options  and   financial  capability
evaluations.  As both a matter of enforcement and time consideration, the  1988
deadline for municipal compliance  is now deserving of special  concern.  It  is
quite obvious that the deadline cannot and  will  not be  met, and  there appears
to be a range of strategies which can be considered.

One approach is  to  extend  the deadline  again and  pace  it with considerations
of feasibility  and  affordability.   However, the  sense  of national  commitment
would  be lost  by such  a  strategy.   While the  original  deadlines  focused
attention on the need for  national  commitment, continued  extensions  do  not.
Thus, another  approach  is to allow the  1988 deadline to  stand  as  a milepost
and reminder.   For  those municipalities who  have  satisfied  their commitment,
it can  serve as a measure  of satisfaction   and accomplishment,  with possibly
special  national  recognition.   For those  municipalities  who  will  not  have
completed their commitment,  the deadline  date will  remain as a reference  from
which  eventual  accomplishment can  be  measured  in  terms  of "how soon  after"
compliance was achieved.  Individual "consent decree" agreements  could then  be
the vehicle  by which  EPA and the  States would establish deadlines  for  each
municipality not  in compliance by  1988,  as appears  to  be the  intent  of the
recent  National  Municipal  Policy.   MAG believes  there  is merit  in the  latter
approach, particularly if a  program of incentives could be conceived to  reward
expeditious compliance.  Realistically,  however, the MAG suspects that it  will
require  until  the  "end  of the century"  to  accomplish  the original objectives
of the  Clean  Water  Act,  and it is  probably in terms of  improvement o"h  this
time frame that all  funding  alternatives should be  evaluated.

Sixth,  there  is  full  concurrence  within   MAG  that  improved   operation  and
maintenance  of  POTWs  must  remain the full  responsibility   of  the  local
operating  agency.   These  agencies,  and the users  they serve, must  become
totally  self-sufficient  in  terms  of maintaining  and preserving  their  POTWs.
Further,  we are  in  agreement  that they must  also be   responsible  for  the
capital  improvements required to satisfy growth needs.  Neither O&M nor  growth
within the system should ever be a component of Federal  assistance or subsidy.
However, as the total  burden on  municipalities  for satisfying  water pollution
control  needs  are  evaluated,  the  contribution of these  local  costs  to  this
total burden should  be fully  taken into account.

Seventh,  we believe strongly  that  the  achievement of  the water  pollution
control  goals   requires  that  all  the  needs be  satisfied.   Therefore,  the
Federal  government  must  be equally concerned with  all  needs,  particularly  as
relates  to  their affordability and  implementability within the  desired  time
frame of achievement.  Based  on the 1982 Needs Survey, this concern represents
a  cost  burden, uncorrected  for  inflation,   of  over $118  billion through  the
year  2000.   Based  on  current eligibility and  Federal  participation, Federal
assistance will  be  limited to approximately  $20  billion  or about  17%  of the
total  needs, .leaving nearly  $100 billion to be  funded  .by the municipalities.
We do not have  a basis at this time to judge whether this magnitude of unaided
needs  can   be  achieved  within   the   funding  options now   available to
municipalities.   It is,  however,  our  intuition that they cannot and  that  a


                                      -8-

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 large  of  portion  the  total  municipal  needs  will  be  unaffordable  and
 unfeasible.   To permit  a  rational  policy  development  in  this  area,  some
 criteria  of affordability and implementability  will  be needed as  a  basis for
 determining and  comparing  the  different  ways  and  means  of  reducing  the
 municipal  burden to a  feasible  level.   The price of water  pollution  control
 service is  likely  to  rise  and  probably  should.    Nonetheless,  the  greatest
 challenge of the national  program  is  to keep clean water affordable.

 Eighth, we  believe  the Federal  concern that the municipalities  satisfy all
 water pollution control  needs in any reasonable timeframe will require a dual
 approach.   One effort will  have  to continue to deal  with the  assistance needed
 to permit  municipalities  to satisfy   the  current  eligible needs;  this  is
 presently being satisfied  by the  Federal  grant program.   The  second  effort
 will  need to find ways  to assist  in  the satisfaction  of the  far  greater costs
 relating  to the  presently  noneligible  needs  as well  as  growth  capacity and
 inflation.   If municipal  pollution  abatement is  to  be achieved by the year
 2000, the two  efforts will  have  to be pursued concurrently.

 It is our  intuition that  some type  of  direct Federal funding in  the  form of
 grants and/or  loans  will  still be  required to meet current eligible needs.  To
 keep   the  needs  within feasible  and  affordable  levels,  it  is our  further
 intuition  that indirect  Federal  assistance  involving  tax  advantages  and
 incentives   will  be required to  attract  a  large  amount of  private  sector
 funding.   This intuition  is further premised  on the  idea  that with proper tax
 incentives  the  private sector  will  provide  an  efficient and economic  way to
 satisfy a  portion  of  the costs  of  the .remaining  needs.    It  is,  however,
 discouraging that at the present  time the  Congress,'in  its zeal to  control
-past  abuses" of ihese • taxr "provis ions-*  is-'considertng- proposals'^ toeTd€rny —tax%vsc"
 incentives to  private  investment  in  municipal  water  pollution control
 projects.   Unless these  efforts are  redirected,  an  important alternative to
 the  Federal  grant  approach  for  completing the municipal  water  pollution
 control program in  our  nation will be  lost.   The  avoidance of  this possiblity
 should be a very high priority  for EPA and the Administration.

 Ninth, MAG  recognizes  that  the  municipal  need for  assistance  in  completing
 water pollution control programs  will  vary extensively, depending upon size,
 prevailing  revenue  requirements,  water  quality  needs,  private  investment
 potential  and  other  similar factors.   There is concern in MAG that  some effort
 must  be made  to  accommodate  the gross  disparity  in  municipalities'  financial
 and management capability, and, unless  addressed, the opportunity  for  private
 sector assistance  will  be  impaired.   Insofar  as  direct Federal  assistance
 programs  of transition  are  involved, MAG favors the  concept of  discretionary
 assistance  opportunity, so  long  as  the discretion  authority  rests with the
 States.

 Tenth, MAG strongly supports the need  to establish consistency in  the  Federal
 program,  in terms of  reliable,  uniform,  and long-term goals and  commitments
 upon   which municipalities  can  then  determine  without uncertainty  what  is
 expected  of them.
                                      -9-

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RECOMMENDATIONS

We have attempted  in  the  previous section  to  provide insight that  might  help
guide EPA  in establishing  the most productive role for  the  Federal  government
in assuring that adequate  funding  will  be available  to  complete  the municipal
water pollution  control  program.  In most  cases, the direction  which  we  have
given requires  further research  and  evaluation  far  beyond  the  scope of  our
time  and  resources but  which hopefully  EPA will  be able  to satisfy  in  its
financial capability evaluation  now underway.

We do feel that it  is appropriate, however,  to make firm  recommendations  on
some  aspects of  both  the  direct Federal  assistance  and the  indirect  Federal
assistance programs, which we  believe represent  the most critical and pressing
matters now requiring the  attention of EPA  and the Administration.

For the  transitional  grant  program  effort which we  believe  is  essential,  we
recommend that:

     •  Federal  grants  of  $35 billion (in  constant  dollars)  should
        be made  available  to States  for municipal POTW  needs during
        a  transitional  period  over  the   next   10  years,  with   the
        intent that thereafter,  responsibility  for the  program will
        remain with municipalities and the  States.

     •  During   the  transitional  period, the States should  be
        permitted  to  use the Federal  funds as grants, loans,  and/or
        interest subsidy,-'*!:!  witfiiri^tb^pi^aiiing^^                        '.'.?-.
        requirements  for   project  priorities  and  planning   review/
        approval.  The conventional  grant  assistance approach might
        be most  beneficial for large city projects already committed
        to a phased construction schedule and a  financing plan based
        on the grant approach.   For States  with  modest current needs
        but extensive  growth potential,  the revolving loan  approach
        could assure  residual funds  for  the  periods following  the
        termination  of the   Federal  grant  program.    The   interest
        subsidy  approach  might  be  useful  for  those States  with a
        large  and immediate  need requiring expeditious  project
        implementation.

     •  Implementation  of   the  above-recommended  funding   program
        should be  pursued  in  a  manner which ensures minimum  inter-
        ference  with  the ongoing municipal  construction  program.   A
        State should be committed to the direct  grant approach until
        it has provided  the  means and methods  to make   a transition
        to or  utilize  the  revolving  loan and/or  interest  subsidy
        approach.

     •  The eligibility and  priority  for Federal  funding should  be
        flexible,  with the  States being  given  sufficient  discre-
        tionary  authority  to assure optimum control of the differing
        municipal water pollution conditions throughout  the  nation.
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For the indirect Federal  assistance and incentives  needed  to encourage private
sector  involvement  in  municipal  water  pollution  control  unaided  by  the
transitional Federal  grant program, we recommend  that:

     •  The existing tax  incentives,  such as  investment tax credits
        and accelerated  cost recovery system,  for private  investment
        in water pollution control  facilities  remain  available.

     •  Industrial  development bonds, with their  attractive tax-free
        interest  features, remain  available for private sector
        financing  of water pollution control  projects.

It is strongly recommended that the  administration make known to  the Congress
the importance of these  provisions  to the water pollution  control  needs of the
nation and the potential  they provide to increase private  sector  participation
in the program and  to decrease direct Federal  funding.
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