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 ------- 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. ------- 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. ------- 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. ------- 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. ------- 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- ------- 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- ------- 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- ------- 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- ------- • 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- ------- 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- ------- 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- ------- 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- ------- 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- ------- 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. -10- ------- 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. -11- ------- |