United States          Office of           August 1989
               Environmental Protection     Water
               Agency            (WH-556)
&EPA        Financing  Strong State
               Water Programs In New
               Ways
               Proceedings Of A
               National Workshop
               March 20-21, 1989
               Denver, Colorado
               Co-Sponsored by:

               Association of State and Interstate
               Water Pollution Control Administrators

               Association of State
               Drinking Water Administrators

               Council of Infrastructure
               Financing Authorities

               Council of State Governments

               Government Finance
               Research Center

               National Conference of
               State Legislatures
               Proceedings Prepared by
               the National Academy
               of Public Administration
                                                Printed on Recycled Paper

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The National Academy of Public Administration
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to advance the effectiveness of government at all
levels through sound management and counsel on
the practical implications of public policy. In its
extensive work program, the Academy conducts
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county managers and mayors, and business and
independent sector leaders with significant public
service experience.
The products of Academy studies represent the
views of the participants and not necessarily the
Academy as an institution.

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                                  PREFACE


    The National  Academy  of Public Administration  agreed  to prepare  this
summary of the proceedings of the workshop  on  "Financing Strong State Water
Programs in New Ways" sponsored by the Office of Water, U.S. Environmental
Protection Agency.  The workshop took  place in Denver, Colorado on March 20
and 21, 1989.

    It was co-sponsored by the :

    Association  of  State  and  Interstate  Water  Pollution  Control
    Administrators

    Association of State Drinking Water Administrators

    Council of Infrastructure Financing Authorities

    Council of State Governments

    Government Finance Research Center

    National Conference of State Legislatures

    New requirements  imposed by  amendments  to the  Safe  Drinking Water Act
and the Clean Water Act coupled with  a prospective reduction of 50 percent
in federal funds available to states to support  their ongoing water quality
management  programs  made  it  imperative  to  review  financing  options
available to states.

    The National Academy of Public Administration was pleased to assist in
this important effort.

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Proceedings  Table of Contents
         Page  Title
             i  Glossary
             1   Introduction
             3  Summary of Recommendations for State and U.S. EPA
                Actions to Support Supplemental Funding Programs

                Presentations

             9  State Keynote Address
                   The Honorable Roy R. Romer
                   Governor of Colorado

            13  U.S. EPA Keynote Address
                   Rebecca W. Hanmer
                   Acting Assistant Administrator
                   Office of Water
                   U.S. Environmental Protection Agency

            17  The Challenge of Financing Environmental Protection
                   Charles L. Grizzle
                   Assistant Administrator for Administration
                   U.S. Environmental Protection Agency

                Panels

            21  State Needs: New Money; New Solutions; New
                Partnerships

            27  Designing and Adopting Fee Systems to Cover the
                Costs of State Services

            35  Designing and Adopting Special Taxes

            41  Designing and Adopting a System of Dedicated Fines
                and Penalties

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Page   Title


  45   Management Funds - Once the Money is Available,
       Pooling and Managing It for Revenue Growth

  53   Working with State Legislatures

  59   Reducing the State Programmatic Burden

  67   Collaborating with Other Agencies and Third Parties
       to Accomplish Water Program Goals

  67     Session 1

  73     Session 2

       Appendices

  79     A. Official Conference Attendance List
  89     B. Colorado Cash Fund Sources
  91     C New Jersey Pollutant Discharge Elimination
            System
  93     D. Idaho Water Pollution Control Account
  95     E. AWWA Recommended Funding Sources for
            Main Drinking Water Functions
  97     F. Vermont Environmental Infrastructure Financing
  103     G. Rural Community Assistance Programs
  109     H. New York Technical Assistance Programs

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Proceedings   Glossary
     ASDWA
   ASIWPCA

      AWWA
       CDBG
        CEM

         CES
         DEC

         DOJ
         EPA
       FMHA
        GAO
         HHS
        HUD
         ICC
       MTAS
     NARUC

       NEHA
     NJPDES
       NOAA
       NRWA
         NSF
        OMB
         PUC
       RCAP
         SCS
       SDWA
         SRF
       USDA
       USGS
         UST
       WPCA
Association of State Drinking Water Administrators
Association of State and Interstate Water Pollution
  Control Administrators
American Water Works Association
Community Development Block Grant Program
Office of Cooperative Environmental Management
  (U.S. EPA)
Cooperative Extension Service (USDA)
Department of Environmental Conservation (Vermont
  and New York)
U.S. Department of Justice
U.S. Environmental Protection Agency
Farmers' Home Administration (USDA)
Government Accounting Office
U.S. Department of Health and Human Services
U.S. Department of Housing and Urban Development
Illinois Commerce Commission
Municipal Technical Advisory Service (Tennessee)
National Association of Regulatory Utility
  Commissions
National Environmental Health Association
New Jersey Pollutant Discharge Elimination System
National Oceanic and Atmospheric Administration
National Rural Water Association
National Sanitation Foundation
Office of Management and Budget
Public Utility Commission
Rural Community Assistance Corporation Program
Soil Conservation Service (USDA)
Safe Drinking Water Act
State Revolving Loan Fund
U.S. Department of Agriculture
U.S. Geological Survey
Underground Storage Tank
Water Pollution Control Account (Idaho)

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Proceedings    Introduction
                  The workshop was a product of the U.S. Environmental Protection
                  Agency's (U.S. EPA's) Office of Water State Funding Study. Rebecca
                  Hanmer, the Acting Assistant Administrator for Water, initiated the
                  study in May 1988 as a result of her concern that States were facing
                  growing financial problems in carrying out their water programs.
                  States are crucial implementing arms of Federal policy as well as
                  their own State agendas, and new resources must be found to sup-
                  port State-based water management programs and new program
                  responsibilities.

                  The study is quantifying the need for increased funding to support
                  State water programs, identifying possible solutions such as alterna-
                  tive financing mechanisms and increased general revenues, and
                  investigating ways to reduce the amount of resources needed in
                  implementing the laws and regulations.

                  States face an increasing financial shortfall in funding their water
                  management programs.  The shortfall is caused by two events - new
                  legislative requirements and diminishing Federal funding for estab-
                  lished Clean Water Act programs.

                  New requirements of the amendments to the Safe Drinking Water
                  Act (SOWA) in 1986 and the Clean Water Act in 1987 will demand
                  new State resources that by 1994 could double the current State oper-
                  ating budgets.

                  In drinking water programs, States must promulgate 83 new and
                  revised drinking water regulations over the next five years and 25
                  additional regulations every three years thereafter. States must also
                  increase monitoring activities as  well as establish more stringent
                  enforcement programs, and regulate some 20,000 drinking water
                  systems previously unregulated. In surface water programs, States
                  must increase toxic and nonpoint source control, and add sludge
                  management and stormwater control.

                  At the same time, 50 percent of the Federal funds historically avail-
                  able to States to support their ongoing water quality management
                  programs will be greatly reduced by the end of fiscal year 1990 and
                  terminated altogether by the end of fiscal year 1994. These funds are
                  available through set-asides to the Federal construction grants pro-
                  gram, which will end and be replaced by State revolving loan funds.

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Although necessary, increasing Federal and State funding of water
management programs from general revenues is proving to be
difficult, given the Federal deficit, tax reform changes, and the anti-
tax climate in the nation. As a nation, we need to decide our policy
on Federal support of State water programs, increasing State sup-
port, and adopting supplemental financing mechanisms that will
add new sources of revenue to those that traditionally fund water
programs.

This workshop sought to:

(1) make known the severe problem facing States in managing their
water programs;

(2) share the "how to" information from States that are already
successfully implementing alternative financing mechanisms;

(3) help forge new partnerships among the water administrators,
legislators, and the financial community to stimulate new financing
opportunities; and

(4) obtain recommendations from workshop participants on actions
States and U.S. EPA can take to support implementation of alterna-
tive financing mechanisms.

The workshop was sponsored by U.S. EPA's Office of Water, with
cosponsorship by six other concerned organizations:

• the Association of State and Interstate Water Pollution Control
   Administrators

• the Association of State Drinking Water Administrators

• the Council of Infrastructure Financing Authorities

• the Council of State Governments

• the Government Finance Research Center

• the National Conference of State Legislatures

The National Academy of Public Administration prepared these
proceedings of the two-day meeting, based on an edited transcript of
the workshop and review of the proceedings by speakers and panel-
ists from the sessions.

Participants at the workshop included representatives from over 30
States, State and Federal legislators and staff, the financial industry,
and private interest groups.  Appendix A contains a complete listing.

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            Summary  Recommendations for State and U.S. EPA

                         Actions to Support Supplemental Funding
                         Programs

General Considerations  •  Water in the United States is cheap and underpriced; until we
                            realize the true value of water, our economic problems will only
                            become more severe.

                         •  There is no single revenue solution to the State funding gap, rather
                            a number of partial solutions need to be undertaken.

                         •  We need to have better accountability to show what water pro-
                            grams are producing and we should not be afraid to say what we
                            cannot produce because of lack of resources.

                         •  Supplemental financing mechanisms should be pursued, but
                            improved efficiencies, better financial management, and cost
                            saving organizational or programmatic changes should receive
                            equal attention.

                         •  Leveraging techniques should constantly be sought in the expen-
                            diture of funds.

                         •  Utilities should establish reasonable reserve rates within the price
                            of water to reflect depreciation of their existing facilities.

                         •  We need to try to protect our existing funding sources, recogniz-
                            ing that others may want to use our methods, especially our sur-
                            pluses, if any.


       U.S. EPA Actions  •  Develop a State/U.S. EPA consensus on how to move forward in
          Recommended     partnership.

                         •  Promote better communications between States and U.S. EPA.

                         •  Re-examine the issue of Federal funding criteria, and the need for
                            a Federal policy to determine how much support for State pro-
                            grams should be provided at the Federal level.

                         •  Give explicit support to the Federal obligation to help pay an equi-
                            table share of program operating costs.

                         •  Take the lead in defining what is affordable for environmental
                            programs.

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                       •  Set up a permanent water program financing task force.

                                                       •?
        Fee Systems  •  States are using fees to support their core program. Fees can not,
                          however, fill the entire funding void; there is an upper limit.

                       •  We need a balanced approach to funding with a major role for
                          fees; do not fragmentize funding sources.

                       •  We need to be flexible, recognizing we will have a period of inno-
                          vation and experimentation.

                       •  There are administrative complexities which must be recognized.

                       •  We could benefit from more technical transfer among the States.
     U.S. EPA Action  •  Develop a clearinghouse for collecting, analyzing, and sharing
       Recommended     information on traditional and innovative ways of financing State
                          water programs.
 fines and Penalties  •  The primary purpose of fines should continue to be to ensure
                          compliance, with the hope that fines eventually will not be neces-
                          sary.

                       •  In the meantime, fines should be viewed as an opportunity to have
                          the polluter pay back into the system.

                       •  This requires preparation of a system that can receive and use the
                          fine revenues. The impetus and commitment to make the penalty
                          work will affect the development of such a system.
     U.S. EPA Action  • Play a strong clearinghouse role in sharing information on sizes of
        Recommended     penalties for various violations, and uses of proceeds from penal-
                          ties.
Funding Allocations  • We need to look at the allocation of Federal monies to States and
                          perhaps tie these more strongly into needs and performance.
               Funds  • If possible, revenues from fees and taxes should be combined into
                          a single dedicated fund, not mixed with general revenues.
        Management  • State and Federal governments need to be leaner and meaner, and
                          think smarter.

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                     We need to survey State water program needs on a regular basis.

                     We should encourage all possible efficiencies in program admini-
                     stration.

                     In the drinking water program, we need to encourage regionaliza-
                     tion, consolidation, and circuit riders.

                     There should be greater use of pollution prevention, water conser-
                     vation and water demand management.

                     We should encourage greater use of pretreatment to reduce the
                     amount of waste generated.

                     We should develop industrial incentives for cost reduction.

                     We should take some risks to "think smart" even if it is not busi-
                     ness as usual. We could even be radical; for example, experiment
                     with procurement.
U.S. EPA Actions   •  Review the various Federal laws and regulations to give States
   Recommended      more flexibility within the needed accountability.

                   •  Involve States and other interested parties in defining require-
                      ments and promulgating regulations.

                   •  Remove legal impediments to public-private partnerships at the
                      Federal level, and promote such partnerships at the State level.

                   •  Work to keep reporting requirements and programs simple to hold
                      down costs so that U.S. EPA money can support public health pro-
                      tection and not be used merely to report back to U.S. EPA.
       Priorities  •  Resources are short enough that we will have to compromise.
                      Therefore, it is important to focus on water quality objectives and
                      make decisions on what is most important to accomplish.

                   •  We need clearer separation of the "musts" from the "mays and
                      mights."
U.S. EPA Actions  •  Recognize, because of their differences, the importance of flexibil-
   Recommended     *tyto *e States in setting priorities and program objectives.

                   •  Allocate resources according to priorities.

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   Public Support  •  We need to convince the public of the benefits of our water pro-
                        grams, not just the need for additional people to run the programs;
                        funding for administrative costs will follow with increased pro-
                        gram funding.

                     •  We should encourage greater individual responsibility, commu-
                        nity participation, and education of the legislatures and the public.

                     •  We must better present the benefits of water programs to gain
                        public support.
   U.S. EPA Action  •  Do a better job of stimulating public and congressional awareness
     Recommended     of the need for water programs and resources to support them.
State Legislatures  •  Find and work with key State legislators as advocates for the pro-
                        grams and needed resources.

                     •  Remember that if fees are set too high, without collaborative work
                        with those who will pay them, legislative constituencies may
                        protest.
       EPA Actions  •  Give strong assistance to State agencies in translating requirements
     Recommended     and communicating the new needs to the State legislatures.

                     •  Recognize that departments of health are often the lead agency for
                        water programs and are at a disadvantage competing with larger,
                        more visible agencies.

                     •  Make clearer to State legislators that the Clean Water Act is going
                        to raise administrative operating costs, since it may not be appar-
                        ent that these are not infrastructure costs.
             Taxes  •  A new tax will require extensive consensus-building which must
                        include private business and utilities.

                     •  In obtaining a new tax, it is important to keep the effort simple and
                        focused.
   U.S. EPA Action  •  Develop model State legislation that deals with new taxes.
     Recommended

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Technical Assistance  •  Technical assistance organizations can accomplish goals and work
                           in places that States cannot.

                        •  Technical assistance can reduce overall State and community costs.

                        •  At least one technical assistance agency, such as the Municipal
                           Technical Advisory Service in Tennessee or a Rural Community
                           Assistance Corporation, should be supported with additional
                           funding, if necessary, in each State.

                        •  Relationships need to be strengthened between technical assistance
                           organizations and the States.

                        B  Coordination can be improved between agencies.

                        •  Success stories should be publicized.


     U.S. EPA Actions  •  Make more of a hands-on outreach effort to ensure coordination by
        Recommended     getting interested parties together and helping the States identify
                           who needs assistance.

                        •  Form a team to help solve technical problems rather than put new
                           money into programs.
        Third Parties  • States could extend their resources by making better use of public
                           health professionals who are available.

                        • States could make better use of third parties such as the National
                           Sanitation Foundation for things such as service and laboratory
                           certification.
      U.S. EPA Action  • Work with other agencies, local governments and third parties as
        Recommended     wel1 as States-

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Excerpts from  State Keynote Address
         Speaker  The Honorable Roy R. Romer
                   Governor of Colorado

                   Ever since the Clean Water Act and the Safe Drinking Water Act were
                   passed in the 1970s, Congress has incrementally added to the areas
                   that State water quality programs are required to address. Controlling
                   conventional water pollution and point sources has been successful;
                   now we must implement programs to control toxics and nonpoint
                   sources.

                   Initially these new responsibilities were supported by set-asides from
                   the Federal construction grants program. In 1987, Congress enacted a
                   plan to replace the construction grants program with State revolving
                   loan funds dedicated to constructing and expanding wastewater
                   treatment plants.

                   By 1995, U.S. EPA estimates that half of the federal funding formerly
                   available to States for water quality will be gone. And what is left will
                   not fully address the needs for which it is provided. This conference
                   will be focusing on supplemental financing which we can use to fill
                   the funding gap that will exist.

                   In Colorado, more than 50 percent of the funds supporting the Health
                   Department's water quality programs come from the Federal govern-
                   ment. Our commonly discussed options are new Federal or State ap-
                   propriations, increased permit fees, tap fees, and pollution taxes or
                   effluent fees.

                   New Federal and State appropriations are likely to be few and selec-
                   tive, given the Federal deficit and the prevailing political attitude
                   concerning taxes in Colorado and many other States. While we can
                   and should expect Congress to continue to refine and initiate water
                   quality legislation, the States must continue to insist that the Federal
                   government share the costs of the legislation.

                   The nation's governors have asked Congress not to create new State
                   obligations without sufficient funding assistance to share the cost of
                   those obligations. In no area is that request more important than in
                   the area of water quality.

                   In Colorado, talk of new appropriations from the State's general fund
                   gets  about as good a reception as talk of wilderness water rights gets
                   from western water developers.

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                            Permit fees now provide about 22 percent of the revenues for the State
                            program which is only slightly less than the 26 percent provided from
                            the State's general fund. But permit fees cannot be raised indefinitely,
                            and we are thoughtful about how much more burden can be put upon
                            the dischargers.

                            Tap fees are appealing to some because they spread the costs across
                            the broadest possible base, the consumers, who are also the beneficiar-
                            ies of water quality programs. However, I have reservations. It could
                            be argued that pollution is morally wrong, and that the pollutants
                            rather than the consumers should pay.

                            As an economist I must raise the flag of economic efficiency and talk
                            about pollution taxes, or effluent fees. These can force polluters to
                            recognize the cost of pollution as part of the cost of production. If tax
                            rates are properly set, they can insure that those who encourage pollu-
                            tion through buying the products which result pay for the conse-
                            quences of that pollution. However, as a politician I recognize that the
                            resulting burden falls largely upon large municipalities and large
                            industries, who will take a long, hard look at pollution taxes and the
                            alternatives.

                            What this all means is that none of these solutions are without advan-
                            tages and disadvantages. Together, political leaders and water pollu-
                            tion control experts will have to make some tough choices about these
                            traditional options for filling the water quality financing gap. Any
                            choice we make  will require that we invest in a healthy amount of
                            public education about the importance of environmental quality in
                            general and water quality in particular.

                            There is another way of addressing the funding gap. Let me challenge
                            you to look beyond the revenue side and think more creatively about
                            the ways we manage our water quality programs and the costs of
                            those programs. These ways ought to be explored thoroughly before
                            State water quality programs seek supplemental revenues.

                            1.  Consider new ways of organizing and managing to gain greater
                               efficiency. We have an obligation as public servants to take every
                               dollar spent on water quality and stretch it as far as possible.

                               •  Recognize that managing financial resources requires close
                                  collaboration with other agencies and with the legislature.

                               •  Look closely at program organization and ask tough questions.
                                  Are there other ways of achieving water quality goals than the
                                  status quo? Rethink how we can do our jobs more efficiently.

                               •  Since personnel for enforcement are limited, one idea we will
10

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                                 be exploring is an outreach program for dischargers to train
                                 and certify operators to do their own comprehensive inspec-
                                 tions.

                            2.  Actively promote water conservation which would increase the
                               supply and leave less water to be treated, thus reducing treatment
                               costs. Some possibilities would be requiring low-flow fixtures for
                               consumers; and for agriculture, a big user in Colorado, setting up
                               financial incentives to conserve, perhaps by selling the water
                               savings to other users.

                            3.  Encourage pretreatment programs. These are not only important
                               for compliance, but can greatly reduce burdens on wastewater
                               treatment plants and encourage waste reduction in the private
                               sector. Industrial discharges to plants create some serious prob-
                               lems including health hazards to the public and workers; interfer-
                               ence with proper operation of treatment plants; increased expense
                               of toxic pollutant disposal; damage to pipes and equipment; and
                               the potential for explosion caused by highly volatile wastes. Re-
                               ducing these problems through pretreatment saves municipal
                               money. Shifting the costs to dischargers may also provide addi-
                               tional incentives to implement cost-saving waste reduction tech-
                               niques.

                            4.  Promote individual responsibility and community participation.
                               Increasing education on pollution prevention and cleanup prac-
                               tices can make us all part of the solution and could include such
                               activities as proper disposal of used engine oil, alternatives  to
                               sanding and salting techniques for de-icing, and proper land use
                               decisions.

                            Let me wrap  this up by summarizing what I think all this means.

                            First, there is not likely to be a single solution to the water quality
                            funding gap. There are only a number of partial solutions which,
                            when combined in creative ways, may allow States to preserve a
                            strong water  quality program.

                            Second, we cannot look only at supplemental financing mechanisms
                            to bridge the funding gap. Improved efficiency, better financial man-
                            agement, and cost-saving organizational or programmatic changes
                            should receive at least as much attention from water quality manag-
                            ers.

                            Third, States may find that the best they can do is to preserve a strong
                            core program of planning, standard setting, permitting, monitoring,
                            and enforcement. Increased reliance on private sector and locally
                            generated solutions will become increasingly important in the  years
                            ahead.
n

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                            Fourth, we must all remember that the primary goal of our efforts is to
                            protect and enhance the quality of the water supplies upon which all
                            life depends. There are at least as many ways to achieve that goal as
                            there are creative minds devoted to the task. At all levels of govern-
                            ment, and in the private sector, we need to appreciate that and pre-
                            serve the flexibility to experiment with new approaches to meet the
                            great challenges which lie ahead.
12

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        Excerpts from  U.S. EPA Keynote Address
                  Speaker Rebecca W. Hanmer
                           Acting Assistant Administrator for Water
                           U. S. Environmental Protection Agency

                           State water programs are heading very rapidly into a brick wall—
                           greatly expanded legislative mandates to be met despite a funding
                           shortfall which will hamper meeting even our current mandates. As
                           we contemplate how to deal with this crisis, we need to ask ourselves
                           a whole series of brand new questions.

                           We need to think in a new and broader context than simply program
                           funding levels. We need to be asking other questions, such as: How do
                           we manage and run the water pollution control and drinking water
                           programs more efficiently? How do we find ways to strengthen the
                           involvement of local citizens and local governments in what we are
                           doing? How do we engage citizens in an intelligent discussion on how
                           those things should be paid for? How do we engage the private sector
                           more effectively in terms of monitoring, permit conditions, and com-
                           pliance?

                           The State funding gap is large. In spite of all our great ideas on doing
                           business differently, it will still be necessary, and, in fact, crucial, to
                           find additional monies to fund strong State water programs ade-
                           quately.

                           Why do we care so much about administration costs of State water
                           programs? We are constantly reminded that while the States are
                           spending millions of dollars, this pales in comparison to the billions of
                           dollars invested in infrastructure at the local and private levels. How-
                           ever, without strong State programs, the billions of dollars we're
                           spending on infrastructure at the public and private levels may not be
                           spent in a way that ensures healthy, dean water Statewide and, ulti-
                           mately, nationwide. In fact, some of those billions of dollars might not
                           be spent at all without the State's regulatory role.

                           But with all the money that has been invested, we have made very few
                           of the inherent problems go away. In most areas, we have put huge
                           systems of concrete, pumps, and electrical systems between us and a
                           potential pollution deluge that is always there. Those systems have to
                           be maintained all the  time.

                           Strong State programs are crucial. Not only do States perform a regu-
                           latory role, but they set water quality standards and goals, and they
13

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                            ensure that priority problems are addressed first, that downstream
                            jurisdictions don't suffer from decisions made by upstream jurisdic-
                            tions, that small communities which can't afford to manage their infra-
                            structure are assisted, and that we meet and maintain the bottom line
                            of clean water and healthy drinking water.

                            We believe that the States and their partner local governments are in
                            the best position in this country to deal with the site-specific water
                            problems as efficiently and as cheaply as possible. They have the site-
                            specific knowledge, connections, and familiarity to get results most
                            effectively and efficiently.

                            In addition, States must meet multiple environmental requirements in
                            other area besides water. They are therefore in a good position to
                            evaluate all the individual environmental problems and requirements
                            affecting their given areas, and to develop coordinated, prioritized,
                            effective solutions that take into account the resources available at the
                            State level.

                            Also, much of the remaining water quality problems come from a vast
                            universe of small, diverse, and complex pollution sources. These
                            nonpoint sources are most effectively dealt with by State and local
                            authorities because the solutions involve thousands of individual local
                            decisions and local behavioral changes. The same principles apply in
                            the wellhead protection program in terms of protecting our ground
                            water. We are not dealing with an easily regulated small universe of
                            very large sources. Rather, we are dealing with millions of small
                            problems that can only be assisted by people who are near those
                            problems, their causes, and their solutions.

                            The comprehensive new amendments to the Safe Drinking Water Act
                            in 1986 and the Clean Water Act in 1987 present us with major new
                            challenges, and give the States a tremendous new agenda to imple-
                            ment. These amendments also clearly recognize the primacy of the
                            States for responsibility for most of the remaining work to be done in
                            water pollution control. If the States cannot give these new programs a
                            solid start, it means that either U.S. EPA or the States will have to
                            spend considerably more money down the line for enforcement and
                            remediation, or suffer a return to the water quality conditions of the
                            1940s and '50s, which we thought we had grown well beyond. And it
                            will be more expensive and difficult this time around because of the
                            tremendous increase in our population and our economic activity
                            since we began this trek 20 or 30 years ago.

                            For all these reasons, I regard supporting and building State capacities
                            as one of the main goals of the Office of Water and, indeed, of the U.S.
                            Environmental Protection Agency. We sent this message to Lee Tho-
                            mas, who authorized us to begin this study, and to Bill Reilly, our new
                            Administrator, and we are going to be saying it even more forcefully
14                          in our 1991 planning sessions.

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Financing is most of the name of the game, and it is also something
that can never be taken for granted. These issues need to be shared
constantly with the public. So, despite the fact that not all these ideas
are new, they are new to a whole generation of leaders and people
who will be expected to pay the cost. That is why we initiated and are
publicizing our State Funding Study in every forum we can—in the
news media, in mailings, in work with interest groups, and in brief-
ings to congressional staff.

We are serious. This is an urgent issue. We do not have much time,
but we do have a lot of ideas. Now is the time to take those ideas and
put them into an effective form that we can use to communicate at the
national level.

We have gathered information on alternative financing solutions and
presented this information in appropriate forums. Of course, many
States are well ahead of us at the Federal level in designing and imple-
menting innovative solutions. We are trying to help the States, pursu-
ing common ends with not only them and with interest groups, but
with other U.S. EPA program offices, such as the Office of Air and
Radiation, which faces very similar problems, and with the financial
community.

We have a task force of Federal and State members who have been
providing us with advice on how best to support the State efforts, and
they will be meeting again after this workshop. We hope this work-
shop will help publicize the State funding problem. We would like to
provide a forum for States with successful alternative financing pro-
grams to tell others how they did it. We would like to stimulate new
partnerships between the various parties that need to be involved in
this issue. And we would like to obtain recommendations from you,
the participants, for actions the Office of Water could take to help the
States solve the funding problem.

The final element in the next couple of months will be to examine
what the Federal role needs to be in supporting  State environmental
programs. There has been Federal funding for State water pollution
control programs at least since the 1956 Federal  Water Pollution Con-
trol Act. At the time those Federal funding mechanisms were set up,
there was a recognition on the part of the Congress that people were
entitled to a certain minimum level of water quality and safe drinking
water regardless of whether they lived in a poor or rich State. As a
result, Congress set up an income redistribution mechanism by pro-
viding State grants from the Federal tax base.

In addition, States carry out national mandated  water pollution con-
trol or safe drinking water activities that go beyond what their own
citizens would ask for, demand, and be willing  to finance. Supporting

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this State role is an integral part of achieving the national goal for
dean water. And the Federal taxpayer through the Federal tax system
should, in fact, pay to support this goal.

The final report from the State funding study effort will contain an
implementation plan to help address the funding crisis. We have
called our initial effort a funding "study/' but we have always in-
tended it to result in an action plan to support State programs.

I would like to mention some of the ideas we have received already
about follow-up actions and the federal role. Some have suggested
that U.S. EPA might act as a clearinghouse for information on innova-
tive State financing mechanisms over time, to carry on the work we
have been doing into future years, and that we might maintain a
network of financial experts that the State and local governments
could go to for assistance. We need to continue our public awareness
campaign. We might partially fund personnel exchanges between
State and U.S. EPA staff in the area of creative financing. We might
work to remove unnecessary legal impediments to beneficial public
and private partnerships and encourage States to do the same. We
might consider increasing the private sector role in some areas of our
regulatory activity by providing a certification for self-monitoring of
certain activities. We might provide more technical assistance on
financial mechanisms and other technical subjects. And we also
should periodically examine our underlying regulations to see if we
can develop less burdensome ways to reach our water quality goals in
working with State and local governments. We are very eager to hear
your recommendations at this workshop.

In closing, I would like to note that we at U.S. EPA are well aware that
we are not leading the parade in finding solutions to these financial
problems. All we can do is help foster the parade that is already on its
way. State water programs have been fashioning creative funding
programs for some time.

I'm very much looking forward to hearing from you the actions you
want us to take and the leadership and support you want from us.
Every time Congress has made major amendments to our clean water
and drinking water laws, U.S. EPA, the States, and local governments
have entered a new phase of our partnership in program manage-
ment, in funding, and in ways to work together. Now, more than ever,
we need a coalition. There is no way that we alone, at any level of
government, are going to be able to ensure our citizens of clean drink-
ing water, clean surface water, and diverse and healthy ecological
systems. Clean water is necessary for all of us and it costs money. We
are seeking new partnerships. We have new ideas. And we, at the
Federal and State levels, are actively looking for ways to make our
bureaucracy operate more efficiently and effectively. We are open to
new ways of doing business and we are all in this together.

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        Excerpts from   The Challenge of Financing
                            Environmental Protection
                 Speaker   Charles L. Grizzle
                            Assistant Administrator for Administration and Resources Management
                            U. S. Environmental Protection Agency

                            The current environmental challenge is the result of two concurrent
                            trends.

                            Needs and expectations for environmental protection are growing.
                            Legislation reauthorized or proposed by Congress has placed major
                            resource requirements on States and communities, much of it to
                            meet new water quality requirements such as toxic wastes, non-
                            point pollution, sludge, degradation of wetlands, estuaries, coastal
                            waters, and ground water.

                            Federal budget constraints, changes in tax laws, and increasing
                            demands in all service areas limit traditional funding sources. The
                            resulting shortfall jeopardizes past, present, and future environ-
                            mental improvements.

                            We now estimate that the funding gap just to maintain existing
                            environmental standards will reach $20 billion annually by the year
                            2000. This does not include new regulations or new problems such
                            as ocean pollution, stratospheric ozone depletion, and the inability of
                            high-density urban areas to meet U.S. EPA air quality standards for
                            ozone. This shortfall affects all levels of government and, due to the
                            Federal deficit, we can no longer rely on the Federal government to
                            meet as great a share of environmental protection costs. For example,
                            the amount Congress appropriated to U.S. EPA to implement the
                            Clean Water Act falls significantly below what was authorized.

                            You have heard about State problems. At the local level, to maintain
                            today's level of service, environmental expenditures are expected to
                            nearly double by the turn of the century. Communities will spend
                            over $48 billion annually, about 65 percent of the national cost, while
                            Federal support will drop from 12 percent to less than six percent by
                            the year 2000, mostly due to phasing out of the Construction Grants
                            Program as mandated by Congress.

                            The problems at each level of government are interrelated. The
                            inability of the Federal government to provide the necessary re-
17                           sources places burdens on the States, and the difficulties that local

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                             governments have in financing their infrastructure needs also place
                             additional requirements on State administrative structures.

                             As our environmental problems evolve and mature, it is dear that
                             State and local governments are being called upon to take on more
                             implementation responsibilities while U.S. EPA moves to a support
                             role. Historically, shifts in Federal/State relationships are not so
                             unusual. Roles have changed before in some of the more traditional
                             government services such as housing, health care, and highways. But
                             this is the first time environmental programs have been on the table.
                             And despite the wisdom gained from experience, the process has not
                             become any easier.

                             The message that the State must assume more responsibility is some-
                             times interpreted to mean that the feds are imposing significant new
                             requirements without providing the means to implement them. I can
                             well understand this perception. We at the Federal level must work
                             with the states and municipalities to ensure that a broad range of
                             alternative and effective financing strategies are available.

                             The growing costs of environmental protection require a re-examina-
                             tion of how the nation finances and  pays for such investments. The
                             gap between current and future needs and spending dearly calls for
                             bold and innovative approaches at all levels of government — Fed-
                             eral, State, and local. We are at a critical point in the history of the
                             environmental movement, and we need to go beyond the traditional
                             approaches.

                             With all this in mind, U.S. EPA has developed several initiatives —
                             traditional and non-traditional — to encourage whatever institu-
                             tional and policy changes are required to meet the challenges of the
                             future. These initiatives seek to promote greater cooperation and co-
                             ordination between U.S. EPA and the environmental community, i.e.,
                             State and local governments, private industry, the financial commu-
                             nity, associations, and academia. They also encourage the use of
                             innovative techniques, procedures, and technologies to manage and
                             meet environmental expectations.

                             U.S. EPA is encouraging States to adopt:

                             •  Fees on State environmental services.

                             •  Taxes on products that contribute to pollution.

                             •  Fines on polluters.

                             •  Trust and revolving funds for administrative and infrastructure
                                needs.
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                             At the Federal level, U.S. EPA is promoting:

                             •  The Superfund to finance cleanup of hazardous waste sites
                                through a tax on oil and chemical manufacturers.

                             •  The State Revolving Fund for seed money for construction of
                                wastewater treatment facilities. This may be extended to other
                                areas.

                             •  Fees on -

                                -   pesticides registration;

                                -   toxic pre-manufacture notices;

                                -   ocean dumping; and

                                -   radon certification.

                             In addition, U.S. EPA is seeking to enlist market place forces and in-
                             genuity and the resources of the private sector by actively promoting
                             public-private partnerships. These would not only attract private
                             capital, but also help change the adversarial relationships between
                             the regulating and regulated communities. Nineteen States have
                             legislation which promotes these partnerships and other States are
                             encouraged to adopt such legislation.

                             Other U.S. EPA initiatives include:

                             •  A new unit within my office to serve as a national focal point for
                                innovative financing and public-private partnerships. It is cross-
                                media in scope, and will coordinate U.S. EPA efforts and develop
                                national strategies to encourage Federal, State and local use of
                                public-private partnerships and innovative financing.

                             •  A new U.S. EPA Office of Cooperative Environmental Manage-
                                ment (CEM) to improve environmental results by creating a coop-
                                erative climate in problem solving, shared knowledge, and tech-
                                nology transfer through technical assistance, training and infor-
                                mation dissemination.

                             •  A National Financial Advisory Board to serve the CEM's National
                                Advisory Board on Environmental Technology Transfer. The
                                board would provide a nationally recognized body of experts that
                                would advise U.S. EPA, States and local governments on finan-
                                cial, tax and legal matters. The board will be composed of elected
                                State/local officials, financial experts, bankers and industry
                                officials.
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                              •  A new Pollution Prevention Office to serve as a focal point for
                                 prevention activities.

                              •  A national outreach effort including:

                                 -   a new small community ombudsman;

                                 -   a State/local roundtable;

                                 -   the State/U.S. EPA committee; and

                                 -   conferences such as this one.

                              U.S. EPA is also aware that environmental legislation and its subse-
                              quent implementation have tremendous impact on the finances of
                              federal, State, and local governments, the private sector and the
                              general population. Accordingly, the agency will review its ap-
                              proaches to legislative and regulatory development to assure that
                              the laws are fair, effective, flexible and, of course, affordable.
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      Panel  State Needs:  New Money; New Solutions;

               New Partnerships


Introduction  As U.S. EPA and the States move into a new phase of water program
               management, it appears that an increasing share of the funding bur-
               den will fall on the States. Several factors contribute to this. New
               requirements under the Clean Water Act and the SDWA place addi-
               tional responsibilities on the States. At the same time, 50 percent of
               the Federal funds that States used to support their water quality base
               programs in 1988 will disappear by 1995 due to the termination of
               U.S. EPA's construction grants programs and the set-asides from
               them. The Federal deficit makes new Federal funds from other
               sources difficult to obtain, and the 1986 Tax Reform Act changed the
               attractiveness of some infrastructure financing mechanisms. To fill the
               financial gap, we need new money, new solutions, and new partner-
               ships to support State efforts in protecting water resources.

               New money is necessary, because State needs for water programs are
               expanding, while Federal funds are diminishing. States need funds
               from new sources, as well as increased general revenues (the tradi-
               tional form of environmental program financing) to support these
               programs.

               New solutions are critical to respond to a State's expanding and
               increasingly complex program because of the inflexible and some-
               what uncertain future of general revenue funding due to budget
               deficits. Supplemental financing mechanisms not only provide new
               revenue sources, they can also creatively link the type of financing
               approach taken to the specific environmental programs it supports.

               New partnerships are important because States do not operate their
               programs in a vacuum: U.S. EPA and municipalities play obvious
               supporting or direct operational roles with State water programs. The
               private sector can also have much to contribute, not only as a regu-
               lated interest, but as a creative partner in solving environmental
               problems.
  Moderator  Mr. Michael Quigley
               Director
               Office of Municipal Pollution Control
               U. S. Environmental Protection Agency

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   Key Points by Panelists  Ms. Linda Eichmiller
                           Deputy Director
                           Association of State and Interstate Water Pollution Control
                           Administrators (ASIWPCA)

                           An ASIWPCA survey of 50 State administrators (43 responded)
                           showed:

                           •  Present water programs are underfunded by 24 percent ($76 mil-
                               lion).

                           •  Fifty percent of existing funds come from State general revenues,
                               21 percent from Section 106,14 percent from Clean Water Act set-
                               asides, and 15 percent from alternative financing and miscellane-
                               ous funds.

                           •  The funding gap will increase from $116 million in 1988 to $439
                               million in 1992.

                           These estimates will increase as we learn more about how we will
                           implement the requirements. For example, State estimates to imple-
                           ment pretreatment were very high, and that was not a 1987 amend-
                           ment requirement, but an existing requirement whose resource de-
                           mands are now becoming clear. Inflation is eroding the base such that,
                           in real dollars, funding for water programs is not much ahead of 1972.
                           In looking at what a Federal fair share would be, at 25 percent, which
                           is conservative, it would more than double the 1990 Section 106 State
                           grant program above FY 89 levels. To implement the Clean Water Act,
                           not only will more resources be necessary, but the national program
                           must be made more efficient and effective through streamlining re-
                           quirements.
                            Mr. Frederick Marrocco
                            Chief, Division of Water Supplies
                            Department of Environmental Resources
                            Pennsylvania
                            Past President, Association of State Drinking Water Administrators
                            (ASDWA)

                            An ASDWA survey responded to by 34 States and one territory cover-
                            ing 71 percent of all community water systems showed:

                            • $96 million being spent currently on State public water supply
                              programs (two-thirds State and one-third Federal);

                            • $32 million shortfall to implement current drinking water program
                              responsibilities;
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                            •  $131 million in new requirements annually by 1992; and

                            •  $200 million in initial one-time costs between 1987 and 1992.

                            •  The rules that have the biggest resource implications for States are
                               disinfection, volatile organics, radionuclides, surface water treat-
                               ment and lead.

                            Because of the funding shortages which will exist, U.S. EPA is going to
                            have to be flexible in negotiating what can not be done with the States
                            and aggressive in going back to Congress with the results.

                            Fourteen States surveyed employed some form of user fees, and eight
                            others are contemplating it. Fees included:
             i
                            II  Annual fees paid by public water suppliers based on population
                               served or water production volume.

                            •  Laboratory fees.

                            •  Operation permit/licensing fees.

                            •  Plan review fees.

                            Eight States indicated fees were totally dedicated to drinking water;
                            four indicated less than half were dedicated; two indicated that all fees
                            go into the State's general fund.

                            Greater recognition and visibility is needed for drinking water pro-
                            grams and cooperative work with the constituencies of the National
                            Governors' Association and the National Conference of State Legisla-
                            tures on the importance of a safe drinking water program.

                            U.S. EPA should be more flexible to allow States to deal with their
                            unique needs. We should not be afraid to say what we cannot accom-
                            plish due to lack of resources. Defensiveness will not get new money.


                            Mr. Thomas Looby
                            Assistant Director for Health and Environmental Protection
                            Department of Health
                            Colorado

                            In Colorado, about 17 percent of the funds for the Office of Health and
                            Environmental Protection are devoted to water quality control. Forty-
                            two percent is financed by the State and 58 percent by the Federal
                            government. A listing of Colorado Cash Fund Sources is contained in
                            Appendix B.
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24
                           By 1991, about $1 million now provided by the Federal government
                           must be made up by the State to maintain current services. The shift is
                           too big for such a short time period. States cannot pay for all the new
                           programs alone. Cutbacks in State services will be necessary. One of
                           the most troubling is cutbacks in monitoring. The Federal government
                           needs to provide more funds, at least during the transition period.