Draft Final Report
The Cost of Environmental Protection:
EPA, the States, and Local Governments
Submitted to:
U.S. Environmental Protection Agency
Office of the Comptroller
Submitted by:
A. APOGEE RESEARCH, INC.
April 7, 1989
-------
ACKNOWLEDGEMENTS
This paper was written by Lynne Abdel-Megeid and Kenneth I.
Rubin of Apogee Research. Many at Apogee contributed to the
collection, analysis, and graphical interpretation of our data base
on environmental expenditures including: Russ Brodie, Amy Doll,
Lori Hyman, Sonny Jose, Neil Tender, and Jordan Ellenberg. John
Cromwell of Wade Miller Associates, Inc. provided insightful text
and comprehensive analysis of public and private expenditures under
the drinking water program. Paul Scodari of the Environmental Law
Institute provided estimates of the costs of all new environmental
regulations. The authors wish to thank the following EPA officials
for their constructive comments on early drafts: David Osterman,
Tim McProuty, Peg Binney, Skip Luken, Bill O'Neil, Brett Snyder,
and Alan Carlin.
i
-------
Sr-4^
o
PPO^t0
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
MAY 15 1989
MAY 0 4 1989
OFFICE OF
REGIONAL ADMINISTRATOR
OFFICE OF
ADMINISTRATION
AND RESOURCES
MANAGEMENT
MEMORANDUM
SUBJECT:
FROM:
Cost of EnvirlorWe
David P. Ryan
Comptroll
TO:
tection - Draft Report
Steering Committee o
Task Force on Public
Assistant Administrators
Regional Administrators
Assistant Regional Administrators
OARM Office Directors
ublie-Private Partnerships
Partnerships
As we discussed in earlier meetings, one objective of the
Public-Private Partnerships initiative is to document the current
and future costs of environmental protection to determine funding
needs. Accordingly, I am pleased to provide you with this draft
report entitled "The Cost of Environmental Protection: EPA, the
States and Local Governments" prepared by Apogee Research, Inc.
for your review and comment.
Purpose of the Study
This study documents the costs of environmental protection
for the public sector and uses the data to:
o Examine the growing gap between current expenditures and
future costs of environmental protection;
o Assess trends in the distribution of costs among EPA, states
and local governments; and
o identify the financial impact of environmental programs on
local governments, capital markets, and households.
-------
- 2
costs Examined
The study examines spending data for environmental programs
during 1981-1987 and projects them to the year 2000. This
projection estimates the future costs of maintaining existing
standards at 1987 levels of compliance.
It also incorporates the findings of the municipal sector
study. That study examined the future cost impact of 22 new
environmental regulations on municipalities. Both studies will
serve as building blocks for future EPA "Cost of Clean" reports.
Major Findings
1. The gap between current spending (1987) and future costs
is estimated to grow to nearly $ 21 billion by the year
2000.
Of this, $ 15.6B will be needed by governments to
maintain 1987 levels of compliance levels for
existing standards.
And, $ 5.3B will be needed by local governments to
comply with 22 new environmental standards.
2. There will be a shift in who pays for environmental
protection between the federal and local levels.
— For the period from 1981-2000, federal spending will
decline by about one-third, while local spending
will nearly double.
3. To accommodate these growing costs; by the year 2000, the
average family will need to spend more on environmental
services.
Specifically, average costs will increase by 54%,
from $419 per household in 1987 to $647 per
household in 2000.
— This represents an increase from 1.3 to 1.8 percent
of average household income.
During the same period, household costs in small
communities (population under 500) will double.
-------
- 3 -
implications of the Report
Although it is clear that the cost of environmental services
will increase in the future, this may be mitigated by a number of
factors. First, the higher cost must be viewed in the context of
expected cost increases for other commodities such as energy,
transportation and food. Second, it should also be recognized that
a portion of the increase will be covered by increases in future
revenues resulting from economic growth. Third, the development
of new technologies may reduce the costs of providing environmental
protection. Finally, costs can be reduced by implementing more
innovative and efficient ways of financing environmental
activities.
Public-private partnerships are one such innovative and
efficient way to finance these activities, particularly at the
local level. By reducing costs and freeing up resources for other
investments, these partnerships can increase the public monies
available for meeting environmental needs.
Next Steps
o Revise draft "Cost of Environmental Protection Report"
based on comments received.
o Consolidate data from this report with data collected on
private sector costs and incorporate analyses into OPPE's
Congressionally-mandated "Cost of Clean" reports.
o Conduct additional Sector Studies at the state and local
levels (OPPE).
Comments
Please provide any comments you have on the draft report by
May 24, 1989 to David Osterman, PM 225 or E-Mail 3720. Thank you
for your continuing cooperation and assistance in working to assure
the success of the Public-Private Partnerships initiative.
Attachment
I
-------
Note:
All spending figures in this report are
presented in 1988 dollars unless
otherwise noted
ii
-------
TABLE OF CONTENTS
EXECUTIVE SUMMARY v
PURPOSE OF THE STUDY V
WHAT COSTS ARE EXAMINED? V
SPENDING WILL HAVE TO INCREASE SIGNIFICANTLY TO MAINTAIN
CURRENT . vi
THE GAP BETWEEN CURRENT SPENDING AND FUTURE COSTS IS
ESTIMATED TO BE NEARLY $21 BILLION A YEAR BY THE
YEAR 2000 vi
SPENDING FOR WATER QUALITY WILL NOT INCREASE MORE SLOWLY
THAN FOR DRINKING WATER AND SOLID WASTE vi
THE LOCAL SHARE OF PUBLIC ENVIRONMENTAL SPENDING WILL
INCREASE vii
LOCAL DEMANDS FOR CAPITAL ARE PROJECTED TO DOUBLE (1981-
2000) *•••*****••••••••••••« v x x
HOUSEHOLD COSTS IN SMALL COMMUNITIES WILL INCREASE
DRAMATICALLY vii
WHERE DO WE GO FROM HERE? viii
CHAPTER I
INTRODUCTION AMD METHODOLOGY 1
DEFINITION OF EXPENDITURES 2
WHICH ENVIRONMENTAL SERVICES, REGULATIONS, AND SECTORS
ARE INCLUDED? 2
Calculating Expenditures to Maintain Current Levels
of Environmental Quality 2
Calculating Local Environmental Costs Associated
With New Regulations 4
How Future Costs Were Derived 6
COST ACCOUNTING PRINCIPLES USED IN THIS STUDY 7
CHAPTER II
OVERVIEW — THE COST OF ENVIRONMENTAL PROTECTION 8
THE COST OF CURRENT ENVIRONMENTAL REGULATIONS AND
SERVICES 8
Expenditure Trends by Environmental Program .... 10
Environmental Expenditures by Level of Government . 14
Local Governments 14
EPA 14
State Government 14
iii
-------
ADDITIONAL LOCAL COSTS OF NEW REGULATIONS 17
Total Local Year-2000 Expenditures by Media .... 22
CHAPTER III
IMPACT OF SPENDING FOR ENVIRONMENTAL PROTECTION
ON CAPITAL MARKETS 24
CAPITAL REQUIREMENTS OF ENVIRONMENTAL REGULATIONS ... 24
SUBSTITUTION OF LOCAL FOR FEDERAL CAPITAL 28
FINANCING LOCAL ENVIRONMENTAL FACILITIES 28
Wastewater Treatment 28
Water Supply
Solid Waste Management 32
IMPACT ON CAPITAL FORMATION 32
Can the Capital Markets Respond? ...» 32
Limitations on Municipal Capital Financing .... 33
CHAPTER IV
IMPACTS OF ENVIRONMENTAL SPENDING ON HOUSEHOLDS 36
HOUSEHOLD COSTS OF ENVIRONMENTAL PROGRAMS 38
Household Payments by City Size To Maintain Current
Levels of Environmental Quality 38
Household Payments for New Regulations 40
Household Payments for Environmental Programs
Compared to Income
Household Payments by Program 40
CHAPTER V
CONCLUSIONS 44
IMPACTS 44
POLICY CONSIDERATIONS 45
Appendix 1. List of Environmental Regulations Applicable to Local
Governments but not Included in the Cost Estimates
Appendix 2. Tables of Data Corresponding to Figures in the Report
Appendix 3. Differences in Methodology and Content Between the
Municipal Sector Study and this Report
Appendix 4. Average Annual Household User Charges for Environmental
Services in 1987, by Environmental Service
iv
-------
EXECUTIVE SUMMARY
Since the early 1970s, the U.S. Environmental Protection
Agency (EPA) has overseen a national mandate to restore and protect
our water, land and air resources. In this massive undertaking,
EPA has relied heavily on state and local governments to help
administer programs and to expend resources to comply with
requirements. However, the expanded programs and tightened
controls of the environmental legislation enacted in the 1980s
challenge our ability to pay for future environmental needs.
PURPOSE OF THE STUDY
This study documents the costs of environmental protection for
EPA, states, and local governments and uses these data to:
o Examine the growing gap between current expenditures
and future costs of environmental protection
o Assess trends in the distribution of costs among EPA,
states, and local governments
o Identify the cost impacts of environmental policies
on local governments, capital markets, and households
WHAT COSTS ARE EXAMINED?
This report examines environmental expenditures over the
period 1981-1987 and projects them to the year 2000. These
projections are estimates of the future costs of maintaining
existing environmental standards, assuming the same level of
compliance as in 1987. In addition, the report examines local costs
of new environmental regulations that local governments will bear
in the future.
The report complements the work of the Municipal Sector Study
recently completed by EPA. The Sector Study examined the future
costs of 22 new environmental regulations and their impacts on
municipalities. Both studies will serve as building blocks for the
1The Municipal SfiStfil StUdY? Impacts 2f Environmental
Regulations on Municipalities. Office of Policy Planning and
Evaluation, U.S. Environmental Protection Agency (September 1988).
See Appendix 3 for an explanation of the differences between the
methodology and content of the Sector Study and this report.
v
-------
Agency's upcoming "Cost of Clean" report.2
SPENDING WILL HAVE TO INCREASE SIGNIFICANTLY TO MAINTAIN CURRENT
PROGRAMS
In 1987, EPA, states, and local governments spent $40 billion
for environmental protection, compared to $31 billion a year a
decade earlier. If recent trends continue, they will need to spend
over $55 billion in the year 2000 just to maintain 1987 levels of
environmental quality.
THE GAP BETWEEN CURRENT SPENDING AND FUTURE COSTS IS ESTIMATED TO
BE NEARLY $21 BILLION A YEAR BY THE YEAR 2Qnn
Spending trends reveal two important cost gaps. The first,
about $15.6 a year by the year 2000, is the amount of government
spending needed, in addition to 1987 expenditures, to maintain 1987
levels of environmental quality. The second, $5.3 billion a year
in 2000, is the amount of local government spending needed to
comply with the new environmental regulations examined in this
study.
Together these gaps represent a difference of nearly $21
billion between what governments spent in 1987 and what we expect
them to spend by 2000 for environmental protection. The gap could
narrow if we are more efficient in meeting environmental goals.
However, these estimates are conservative since they do not include
the costs to EPA and states of new regulations or the costs
associated with future Congressional mandates and the growing
number of new state and local environmental mandates.
SPENDING FOR WATER QUALITY WILL INCREASE MORE SLOWLY THAN FOR
DRINKING WATER AND SOLID WASTE
With the exception of the air quality program, expenditures
to maintain current levels of environmental quality have steadily
increased in the 1980s and are expected to continue to do so in the
1990s. Spending for some programs, however, will increase more than
others.
In the 1990s, increases in government spending for water
quality are not expected to keep pace with rates of growth in other
environmental programs. Between 1987 and 2000, spending for
2The Clean Air and Water Acts require that EPA prepare a
Report to Congress every five years estimating the costs of
carrying out the respective acts. The next report will be
submitted in 1989.
vi
-------
38 percent, respectively. Spending for water quality will increase
by 24 percent.
THE LOCAL SHARE OF PUBLIC ENVIRONMENTAL SPENDING WILL INCREASE
Local spending is projected to increase significantly by the
turn of the century. In 1981, local spending was about $26
billion, or 76 percent of the government share of environmental
costs. By the year 2000, localities will need to spend over $48
billion to maintain 1987 levels of environmental quality and will
bear 87 percent of government costs for environmental protection.
In contrast, EPA expenditures are expected to decline by about
one-third, from $6.3 billion in 1981 to $4.3 billion in 2000. EPA's
share of spending on the environment will drop from 13 to 8 percent
between 1987 and 2000. This drop is due largely to the phasing-out
of EPA grants to build wastewater treatment plants.
Although little is known about future state outlays for
environmental programs, trends identified in a recent EPA study
suggest that by the year 2000 states will need to spend more than
twice the amount spent in 1987 to administer water programs.3 State
administrative costs could triple by 2 000 if the air and solid
waste programs impose similar demands.
LOCAL DEMANDS FOR CAPITAL ARE PROJECTED TO DOUBLE (1981-2000^
The key issue in examining the impact of environmental
spending on capital markets is the ability of local governments to
support higher levels of capital formation. We project that annual
local demands for capital to maintain current levels of
environmental quality could double from about $8 billion in 1981
to over $16 billion in 2000. Additional demands for capital
imposed by new regulations will add more than $2 billion a year by
2000. EPA analyses indicate that increased levels of capital
formation may prove difficult for many small and medium-sized
cities.
HOUSEHOLD COSTS TN SMALL COMMUNITIES WILL INCREASE DRAMATICALLY
Costs to households of environmental regulations are measured
by increased user charges, increased general taxes, and/or reduced
levels of services in other municipal programs. There are also
State Funding study. Details of State Needs. Funding. Funding
Gapf U.S. Environmental Protection Agency (August 8, 1988). Trends
in the State Funding Study were extended from 1995 to 2000 in order
to provide consistent data for this report.
vii
-------
levels of services in other municipal programs. There are also
indirect costs, such as when private industries pass their share
of environmental costs to households in the form of price increases
for goods and services.
The annual cost of environmental programs for the average
household is expected to increase by 54 percent from $419 in 1987
to $647 in 2000. Over the same period, however, household costs
for small cities are expected to increase more dramatically. In
cities with fewer than 500 people, they will more than double, from
$670 in 1987 to $1,580 in 2000.
The financial impact of environmental costs on households can
be examined by measuring costs as a percentage of household income.
The results show a significant impact on households in small cities
(less than 500 population), for whom expenditures are expected to
increase from 2.8 percent to 5.6 percent of household income
between 1987 and 2000. On average, impacts are much less for
households in all other city size categories, with projected
increases of about one-half percentage point to 1.8 percent of
household income by the year 2000.
WHERE DO WE GO FROM HERE?
The growing costs of environmental protection suggest the need
to reexamine how we make such investments. The large differences
between current spending and future costs clearly indicate the need
for more innovative ways to finance environmental programs,
particularly at the local level.
One way to meet this challenge is to charge more and spend
more on environmental services. On the other hand, we could reduce
costs by limiting environmental goals. However, increased public
support for a cleaner environment suggests that expenditures will
increase, not decline.
EPA is studying a third option, forming public-private
partnerships to help provide environmental services. Greater
private involvement can increase public resources available for
environmental protection in at least two ways:
o Private equity can free municipal resources for other
investments, and
o Even without private financing, properly designed and
executed partnerships can provide improved environmental
services at the lowest possible cost to the public
We must seek innovative financing strategies, particularly at
the local level, to meet the environmental resource challenges
facing this country in the 1990s and beyond. This is absolutely
viii
-------
necessary if we are to preserve and build on the many important,
hard-won environmental gains made during the past two decades.
ix
-------
CHAPTER I
INTRODUCTION AND METHODOLOGY
Since the early 1970s, the U.S. Environmental Protection
Agency (EPA) has overseen our national mandate to restore and
protect water, land, and air resources. Carrying out this mandate
has proven expensive for all levels of government.
Faced with escalating environmental protection costs in
competition with the fiscal pressures attributable to other public
programs, governments may be limited in their ability to finance
all the environmental protection activities anticipated by
Congress. The largest problems lie with local governments that have
low economies of scale in provision of environmental services and
limited ability to raise large amounts of capital.
This study documents recent government expenditures for
environmental protection and projects future costs to the year
2000. costs associated with new regulations are added to the costs
of maintaining current levels of environmental quality in order to
examine the growing gap between current expenditures and future
costs of environmental protection. In turn, trends in the
distribution of costs among EPA, states and local governments are
assessed. Finally, the impacts of environmental policies on local
governments, capital markets, and households are analyzed.
Trends in the expenditures of local governments and impacts
at the local level are examined in more detail than for other
levels of government because more local data are available at this
time. This analysis provides background for a separate evaluation
of financing alternatives to meet the rising cost of environmental
protection.
While this report focuses on the costs of environmental
regulations and the ability of local governments and households to
pay for environmental improvements, investments in environmental
quality yield substantial benefits. Those cited most often include
4epa is collecting data for the 1989 Report to Congress, The
cost of Clean Air and Water. In addition to the data Provided in
the present report, The Cost of Clean Air and Water will include
federal non-EPA expenditures and environmental expenditures by
private industry associated with current and new regulations.
'Apogee Research, inc., public-Private Partnerships—far
Environmental ApatOfflV*—InC^ntriy^B*
prepared for the U.S. Environmental Protection Agency, Office of
the Comptroller, Resource Management Division (October 17, 1988).
1
-------
reduced incidence of disease and death, reduced property damages,
increased levels of recreation, improved fish and shellfish yields'
enhanced property values, and related aesthetic improvements.
Investments in the environment also yield stronger local economies.
While such an analysis lies beyond the scope of this study,
understanding the links between such investments and community
well-being is important in helping identify financing alternatives
to support environmental programs.
DEFINITION OF EXPENDITURES
The terms expenditures, spending, and outlays are used
interchangeably in this report. They follow the definition of
expenditures used by the Bureau of the Census. Capital
expenditures include acquisitions of depreciable plant and
equipment, replacement, and expansion as well as expenditures for
construction in progress. Research and development spending is
excluded.
Operating and maintenance expenditures account for the
purchase of materials, parts, supplies, fuel, and power; upkeep or
leasing of equipment; direct labor; and purchased contract
services. Depreciation of plant and equipment are excluded, as are
the costs of financing capital equipment.
This report examines two kinds of expenditures:(1) those to
maintain the current levels of environmental quality and (2) those
to comply with new regulations.
WHICH ENVIRONMENTAL SERVICES , KEenditures tS MfllnUin CVHTrent Levels of
Environmental Quality
A. Environmental services
o Wastewater Treatment - expenditures pursuant to the Clean
Water Act, including expenditures for construction,
management, and operation of facilities to monitor and
control municipal and industrial wastewater
2
-------
0 nrInking Water - expenditures pursuant to the Safe
Drinking Water Act plus expenditures to supply adequate
quantities of potable water
n solid Waste - expenditures pursuant to Subtitle D of the
Resource Conservation and Recovery Act (RCRA) plus
expenditures for solid waste collection, transportation,
and disposal services
o ffar*yHnns waste - expenditures pursuant to RCRA,
exclusive of those for Subtitle D
ft Simerfund - expenditures pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA)
o Air Quality - expenditures pursuant to the Clean Air Act
o Tsubstances - expenditures pursuant to the Toxic
Substances Control Act (TSCA)
r> Pesticides - expenditures pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA)
o Energy - expenditures pursuant to the Energy Security Act
In addition, this study covers several EPA program areas that
are administered independently of the above programs, including
management and support, interdisciplinary, radiation, and the
Leaking Underground Storage Tank Trust Fund.
B. Sectors
Expenditures to maintain current levels of environmental
quality include those by EPA, states, and local governments, as
currently available in public budgets and national aggregate
statistics. Although a major effort was made to include most of
the relevant costs, several gaps in the data were unavoidable.
Expenditures that are included in this study and those that we were
not able to gather at this time are summarized below by sector.
Federal At the federal level, this study includes only
programs managed by the EPA, although other federal agencies
administer similar programs. EPA expenditures by program area were
derived from the agency's annual budget justification documents.
^he following programs are included: construction grants,
water quality, hazardous waste, solid waste, Superfund, air
quality, drinking water, toxic substances, pesticides, energy,
radiation, underground storage tanks, management and support, and
interdisciplinary.
3
-------
State Governments. The Bureau of the Census collects the only
consistent data on state expenditures to administer air, drinking
water, and wastewater treatment programs. They are reproduced in
this study as provided by Census. Expenditures for leaking
underground storage tank and hazardous waste programs were
estimated from the requirements to match federal grants. For each
of these program areas, it is impossible to distinguish among the
various types of state expenditures, such as program
administration, assistance to local governments, compliance, and
intergovernmental coordination. At this time, we are unable to
gather consistent time-series data on state expenditures for solid
waste, Superfund, or hazardous waste programs.
Local Governments. Local expenditures are also reproduced from
Census reports, although the figures for intergovernmental grants
to localities have been removed in this study, leaving only local
spending from own sources. Expenditures are included for drinking
water, wastewater treatment, and solid waste management services.
While local expenditures for other programs are not reported to the
Bureau of the Census in separate categories, they may be reported
under one of the above categories.
Local capital and operating expenditures for drinking water
and solid waste management cover both the delivery of adequate
quantities of services (water flows to meet all demands; adequate
garbage removal and disposal) and the assurance of mandated quality
of services (maximum concentration of pollutants in potable water;
testing and containment in landfills). To be fair in a comparison
of the effects of future regulations, one might argue that the
appropriate baseline is quality expenditures, exclusive of those
to deliver adequate ^antities. While arguably appropriate, the
data were not sufficiently detailed to separate expenditures for
quantity from those for quality of service. Therefore, in
projecting the cost of maintaining current programs, both of these
components were included.
Calculating Local Environmental SssJfeS Associated With New
Regulations
In this report, costs of new regulations include only those
for local governments. The new regulations considered in the study
are associated with local wastewater treatment, drinking water, and
solid waste programs. In addition, estimates of costs are provided
for several other regulations that are independent of these program
areas. In total, costs were estimated for 22 new regulations (see
Table 1).
The estimated local costs of new regulations were derived from
Regulatory Impact Analyses (RIAs) prepared for EPA program offices.
These estimates are conservative for a number of reasons. First,
4
-------
Table 1. New Regulations That Impose Local Costs
(Included in the Cost Analysis)
Regulation
Status
A. DRINKING WATER
1. Inorganic Compounds (IOCs)
2. Synthetic Organic Compounds (SOCs)
3. Volatile Organic Compounds (VOCs)
4. Fluorides
5. Lead and Copper Corrosion Control
6. Lead and Copper MCL
7. Coliform Monitoring
8. Surface Water Treatment Rule: Filtered
9. Surface Water Treatment Rule: Unfiltered
10. Radionuclides
11. Disinfection
B. WASTEWATER TREATMENT
1. Secondary Treatment of Municipal
Wastewater
2. Pretreatment Requirements
3. Sewage Sludge Disposal-
Technical Regulations
for Use and Disposal
4. Stormwater Management
C. SOLID WASTE DISPOSAL
1. Municipal Landfill Subtitle
D Criteria
2.. Municipal Waste Combusters
Air Standards
3. Municipal Waste Combusters
Ash Disposal
D. MISCELLANEOUS REGULATIONS
1. Underground Storage Tanks
Technical Standards
2. Underground Storage Tanks
Financial Standards
3. Asbestos in Schools Rule
4. SARA Title III Requirements
In Development
In Development
Promulgated
Promulgated
Proposed
Proposed
Proposed
Proposed
Proposed
In Development
In Development
Promulgated
Promulgated
In Development
In Development
Proposed
In Development
In Development
Promulgated
In Development
Promulgated
Promulgated
5
-------
of the 37 pending regulations with an impact for local governments,
only 22 had sufficiently precise cost estimates for inclusion in
this study.7 Second, when RIAs estimate capital costs, they
generally include only the installed cost of plant and equipment.
When these investments are financed with municipal or industrial
bonds or loans, transaction costs can add 20 percent or more to the
capital cost estimates. Moreover, this study cannot account for
several regulations that are currently under development pursuant
to the federal environmental statutes reauthorized in the mid-
1980s.8 Also, several major programs will be reauthorized in the
next few years including RCRA and the Clean Air Act. New costs
associated with these programs could be significant. Finally, this
study does not incorporate the cost of new state environmental
regulations that would impose costs in addition to those
attributable to federal regulations.
How Future Costs Were Derived
Current Regulations. The future costs of maintaining today's
level of environmental quality were estimated for each program area
and level of government by regressing five years of historical
trends in spending against time. This assumes that the factors
contributing to recent spending trends will continue to do so in
the future. such factors include population growth, the
implementation of current policies, rates of compliance,
replacement of current capital facilities, and budget cutbacks.
Significant changes in any of these factors could have an important
effect on costs. For example, rates of compliance are related to
enforcement efforts. If enforcement activities increase, then
costs would be expected to increase as a result of higher rates of
compliance. Full compliance is assumed in estimating costs of new
regulations.
New Regulations. The costs and timing of new regulations with
an impact on local governments were estimated based on information
included in Regulatory Impact Analyses (RIAs) prepared for EPA's
program offices. The Environmental Law Institute, which provided
all estimates on future costs, chose to represent demands for
capital attributable to each new regulation either as a single lump
sum in the year in which capital will first be required or
spread out in equal lumps over a relatively short average time
during which affected entities comply with programs. This method
'Appendix 1 to this report presents a list of the pending
regulations applicable to local governments but not included in
the cost analysis.
'including the 1984 Hazardous and Solid Waste Amendments to
the Resource Conservation and Recovery Act (HSWA), the 1986
Superfund amendments (SARA), the 1986 Safe Drinking Water Act
amendments, and the 1987 amendments to the Clean Water Act.
6
-------
of estimating demand for capital results in graphs showing erratic
changes from year to year. In practice, regulations will phase in,
imposing smoother demands for capital over a 5 to 10 year
compliance period.
COST ACCOUNTING PRINCIPLES USED IN THIS STUDY
This report presents three views of the costs of environmental
protection:
o A budgetary perspective that accounts for capital and
operating outlays in the year they are incurred as
reported in federal, state, and local budgets
o A canital markets perspective that isolates demands for
capital to build new facilities or expand existing
facilities to comply with environmental and service
standards
O a household impacts perspective that accounts for capital
expenditures as if they were financed with long-term
bonds, with annualized payments for capital added to
annual local operating and maintenance payments
Each view provides insights that may be significant to
different audiences. The details associated with each perspective
are discussed in subsequent chapters.
7
-------
CHAPTER II
OVERVIEW — THE COST OF ENVIRONMENTAL PROTECTION
Under Congress's statutory direction, the EPA has expended
considerable resources to develop the components of broad national
programs, including minimum national standards for environmental
quality, permit systems, enforcement procedures, and remediation
protocols. By offering grants and other forms of assistance, EPA
has encouraged states to help implement our national programs.
Most states, however, have also committed their own resources to
administer the basic programs and others that reach beyond minimum
federal standards. Despite federal and state grants to localities,
local governments that provide drinking water, wastewater, and
solid waste management services have contributed much of the cost
to build capital facilities and almost all of the cost to operate
and maintain them.
This chapter provides an overview of environmental
expenditures from 1981 to 2000, both to maintain current levels of
environmental quality and to meet standards associated with new
regulations. Expenditures are examined by program and by sector.
THE COST OF CURRENT ENVIRONMENTAL REGULATIONS AND SERVICES
In 1987, EPA, states, and local governments spent an estimated
$40 billion for environmental protection (see Figure 1) . If recent
trends continue, environmental expenditures by all levels of
government are expected to increase to $55 billion in the year 2000
just to maintain current levels of environmental quality.
Extending current trends assumes, of course, that recent levels of
compliance and rates of capital expansion and replacement remain
steady throughout the projection period.
The capital portion of these expenditure estimates may be low
if, as some experts argue, future spending will have to be higher
to recover from the effects of deferred maintenance and
rehabilitation. For this report, it was assumed that rehabilitation
and maintenance of capital Dlant would be undertaken at the same
rate as in recent years. If spending for maintenance and
'National Council on Public Works Improvement, Fragile
Foundations: A Report on the Nation's Public Works (February 1988).
The National Council on Public Works Improvement reported a steady
increase in net depreciated capital assets from 1960 to 1987 for
drinking water and wastewater treatment services, with asset bases
increasing by 2.5 percent each year for drinking water and by 4.4
percent each year for wastewater treatment. While some of this
investment is due to higher quantity and levels of service, it is
clear that new additions to the capital stock have outpaced the
depreciation of existing plant and equipment.
8
-------
Figure 1
Projected EPA, State, and Local Government
Expenditures to Maintain Existing Levels of Environmental
Quality Compared to Their Current Environmental Expenditures
—¦ 1 i
1981 1983 1985 1987 1989 1991
1993 1995 1997 1999
$15.6 Billion
Additional EPA, state,
and locaL government
spending to maintain
existing levels of
environmental quality
Fiscal Year
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years): Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years); Bureau of the Census, Pollution Abatement Coat
and Expenditure Survey (various years); U.S.EPA, Justification of Appropriation
Estimates for Committee on Appropriations (various years).
9
-------
rehabilitation has indeed been inadequate in the past, then
incorporating the historical trend of capital outlays in the
forecast of future costs embodies the assumption that the backlog
of infrastructure rehabilitation needs will continue to grow.
Capital expenditure estimates are particularly important for
drinking water and water quality because of the large amount of
capital plant associated with these services.
Expenditure Trends bv Environmental Program
With the exception of the air quality program, expenditures
to maintain current levels of environmental quality have steadily
increased in the 1980s and are expected to continue to do so in the
1990s (see Figure 2).10 Rapid growth in spending for "other"
environmental programs is attributable largely to steady increases
in Superfund program activities. Spending in some programs,
however, will increase more substantially than in others (see
Figure 3) . While spending for drinking water and solid waste
programs will increase as a percentage of the total, water quality
expenditures will decrease as a percentage of total spending.
Water Quality. In the 1980s, governments devoted roughly $16
billion a year, or 46 percent of all environmental expenditures,
to restore the quality of surface and ground water. Most of the $16
billion was used to build and operate municipal wastewater
treatment plants. In the 1990s, increases in national spending for
water quality are not expected to keep pace with rates of growth
in other environmental programs. Thus, compared to its 46 percent
share in 1981, water quality expenditures could drop to a 36
percent share of environmental expenditures by the year 2000.
Future water quality expenditures to maintain current levels of
water quality will be dominated by costs of building new or
upgrading existing facilities to provide secondary treatment as
required in the Clean Water Act (CWA). EPA estimated in 1988 that
$83.5 billion in capital expenditures would be required to bring
all municipal wastewater treatment facilities into compliance with
10The Clean Air Act was last reauthorized in 1976 and most of
the regulations attributable to the clean air program have had
their major cost effects already. Congress is now debating a new
Clean Air Act, which undoubtedly will impose new costs on
governments and the private sector. That these costs cannot be
included in this study probably underestimates the projected
outlays for air quality control.
"The "other" category also includes the Leaking Underground
Storage Tank Program, interdisciplinary studies, administration
within EPA, plus EPA programs in energy, radiation, pesticides,
and toxic substances.
10
-------
Figure 2
Total EPA, State, and Local Government
Expenditures to Maintain Current
Levels of Environmental Quality, by Media
1981 - 2000
60
50
w
u
CO
o 40
Q
CO
CO
05
^ 30
i
O
cn
o 20
• H
•
DQ
10
0
Fiscal Year
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years); Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years): Bureau of the Census, Pollution Abatement Cost
and Expenditure Survey (various years); U.S.EPA, Justification of Appropriation
for Committee on Appropriations (various years).
Other
Solid Waste
Water Quality/
Construction €
Drinking Water
Air Quality-,
Actual
Projected
1985
1901
1983
1987
1989
1991
1993
1995
1997
1999
11
-------
Figure 3
Percentage of Total Public Expenditures,
by Environmental Service, to Maintain
Current Levels of Environmental Quality
Water Quality (46%)
1981
$35 Billion
Drinking Water (35%)
Air Quality
Solid Waste (14%
Others (2%)
Quality (41%)
1987
$40 Billion
Quality (36%)
2000
$55 Billion
a
EPA, states and local governments
Source: Apogee Research from: U.S. Bureau of the Census. Gnvomn,.,,.
Finances (various years; Bureau of Economic Analysis, Pollution
Ahatpmpnt nnri Control Expenditures (various years); Bureau of the
Census Pollution Ahatement Cost and FYp^r.Hit,i>.A (various
years); EPA Justification of Appropriation Estimates fnr firm mi 11 a:
nn Appropriations (various years).
Drinking Water (38%
Water
Air Quality
Solid Waste (15%)
Others (4%)
Drinking Water (40%)
Others (7%)
Air Quality (2%
Solid Waste (15%)
Water
12
-------
12
minimum national standards.
r>rInking Water. Compared to $12 billion in 1981, accounting
for only 35 percent of all environmental expenditures, drinking
water expenditures are expected to nearly double to $22 billion a
year by 2000 and to account for 40 percent of total environmental
expenditures. Much of this increase is attributable to capital
replacement and expansion? but beginning in 1993, the cost of water
purification will grow considerably.
Solid Waste. Garbage collection and the construction and
operation of solid waste management units (mostly landfills)
accounted for $5 billion to $6 billion a year (or 14 percent of
environmental expenditures by governments) in the 1980s. The low
priority of solid waste management relative to other local
environmental services is due, in part, to the shifting of
resources from regulation of solid to hazardous waste, with passage
of the Resource Conservation and Recovery Act of 1976 (RCRA). EPA
was authorized in Subtitle D of RCRA to provide financial and
technical assistance to states and local governments to develop
solid waste management plans. However, federal funds for Subtitle
D were not appropriated after 1980.
Costs will escalate in the 1990s, so that by the year 2000,
solid waste spending will account for 15 percent of environmental
expenditures. It is likely that these estimates areconservative,
however oiven the extent of the solid waste disposal problem in
the United States. Approximately 450 000 tons oI waste are being
generated every day, 95 percent of which are being disposed of in
landfills that are rapidly reaching the end of their capacity «
Increased siting problems are already leading to much higher
disposal costs. It takes four to five years to implement plans for
a sanitarv landfill, and demand far exceeds supply of these
facilities! On average, disposal costs in 1987 were four times the
cost in 1977 having increased from $3 or $4 per ton in 1977 to $20
or more in 1987. Waste-to-energy facilities and incinerators are
increasingly favored by local governments for solid waste
management. They are more expensive to build and operate, however,
and face siting problems similar to those of landfills.
Air oualitv. Government costs to administer air quality
control programs matched expenditures for solid waste management
in 1981. However, by the year 2000, solid waste expenditures are
Needs giirvav Report to (jiQpgressi Assessment of Publicly-
ownArf Y.ci
(February 1987).
13r W Beck and Associates, The Patign'g Public Wprftg; Report
on finHd Was**° M^mment. prepared for the National Council on
Public Works Improvement (May 1987).
13
-------
estimated to be four times those for air quality programs. In the
absence of renewed programs or changes in recent rates of
compliance, air quality spending will remain flat through the turn
of the century.
Environmental Expenditures by Level of Government
The future cost of maintaining current levels of environmental
quality (the shaded area shown on Figure 1) falls unevenly on
different levels of government, with municipalities expected to
underwrite a growing share in the future. While EPA expenditures
are expected to decline by a third between 1981 and 2000, local
spending could almost double (see Figure 4).
Local Governments. Annual environmental expenditure by local
governments is expected to nearly double by the turn of the century
— just to maintain today's level of environmental quality.
Assuming environmental standards are enforced, local capital
expenditures also have to double to compensate for scheduled
reductions in federal grants. Operating expenditures, paid entirely
by local governments, are also escalating due to the use of more
sophisticated chemical and energy-intensive treatment technologies.
In 1981, local governments spent about $26 billion or 76 percent
of the public sector share of environmental costs to comply with
federal mandates (see Figure 5). By 1987, these communities were
spending $33 billion a year and the local share had grown to more
than 82 percent. By the year 2000, localities are expected to
spend over $48 billion and bear more than 87 percent of the public
sector cost of environmental programs.
EPA. EPA expenditures to maintain current programs are
expected to decline by about one-third, from $6.3 billion a year
in 1981 to $4.3 billion a year in 2000. This drop — from 18 per
cent of national environmental expenditures in 1981 to less than
8 per cent in 2000 — is attributable largely to the phasing-out
of federal grants to build wastewater treatment plants. EPA's
Construction Grants program will gradually decline from today's
$2.4 billion authorization to zero in 1991. Federal grants to help
capitalize state wastewater treatment revolving loan funds will
peak at $2.4 billion in 1991 and decline to zero by 1995. There
is no comparable federal assistance program in solid waste, and
none anticipated within EPA or the Congress. EPA grants to states
to administer the Safe Drinking Water Act have declined by 27
percent in real terms, from a high of about $56 million in 1979 to
an estimated $41 million in 1989.
State Governments. The Bureau of the Census estimates that
state outlays to administer environmental programs, comply with
them where applicable, and provide assistance to localities for
their compliance, have grown slowly from just under $2 billion a
year in 1981 to about $2.1 billion in 1987. The Census data are
14
-------
Figure 4
Expenditures to Maintain Current Level of
Environmental Quality, by Sector, 1981-2000
60
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Year
Source: Apogee Research, from the following: Bureau of the Census, Pollution
Abatement Costs and Expenditures, various years; EPA, Justification of
Appropriation Estimates for Committee on Appropriations, various
years;
-------
Figure 5
Proportion of Environmental Outlays (Capital and 0 & M),
by Level of Government, to Maintain Current Levels of
Environmental Quality, 1981-2000 (in 1988 Dollars)
1981
18%)
Total spending =
$35 Billion
STATE (6%)
LOCAL
1987
(5%)
Total spending =
$40 Billion
LOCAL
2000
LOCAL
EPA (8%)
(5%)
Total estimated spending =
$55 Billion
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years); Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years); Bureau of the Census, Pollution Abatement Cost
and Expenditure Survey (various years); U.S.EPA, Justification of Appropriation
Estimates for Committee on Appropriations (various years).
16
-------
roughly comparable to the results of a recent survey of state
environmental expenditures that reported 1986 state outlays of $1.9
billion for air pollution, drinking water, hazardous waste, indoor
air pollution, marine and coastal initiatives, pesticides, solid
waste, and water quality. If current trends continue, state
environmental expenditures could reach $2.6 billion a year in 2000.
This represents a decrease in the share of total public sector
environmental expenditures accounted for by states, from 6 percent
in 1981 to 5 percent in 2000.
Over the period 1982 to 1986, EPA grants to states funded 47
percent of state air quality control programs, 38 percent of water
quality programs, and 54 percent of hazardous and solid waste
control programs.15 The remainder of state program budgets are
financed with fees, dedicated taxes, and general tax revenues. Of
particular note, however, is the fact that grants to states have
generally declined in real dollars as state program costs have
increased, the net result being a rather precipitous drop in the
proportion of state environmental budgets covered by EPA grants
over the period (see Table 2).
ADDITIONAL LOCAL POSTS OF NEW REGULATIONS
The costs to local governments associated with new regulations
are estimated to reach $5.3 billion by the year 2000 (see Figure
6).16 It was assumed that costs of municipal waste combustion air
standards, $2.5 billion, would be incurred in 1992, resulting in
a large peak in that year. It is more likely, however, that these
costs will be more evenly distributed over several years.
The $5.3 billion estimate is conservative, reflecting only a
portion of the costs of federal environmental regulations that will
take effect over the five to ten years, none of the
environmental programs envisioned by Congress beyond 1987, and none
of the growing number of new state or local environmental mandates.
Additional regulations currently in place, but too new to project
costs for, could add to this increment. Of course, future statutes
and associated regulations could increase costs as well.
wSee Council of State Governments, Resource Guide to State
Environmental Management. Lexington, Kentucky (1988).
"congressional Budget Office, Environmental Federalism:
Allocating Responsibilities for Environmental Protection. Staff
Working Paper (September 1988).
16Estimates were prepared by the Environmental Law Institute
from data abstracted from Regulatory Impact Analyses prepared for
EPA's major pending rules.
17
-------
Table
2. State Budgets and EPA Grants to
and Hazardous Waste Programs
States
for Air, Water,
Total State
(in millions of
Budgets
1987 dollars)
EPA
Grants as
Of State
a Percentage
Budgets
Air
Water'
Hazardous
Wasteb
Air
Water"
Hazardous
Wasteb
1982
$210
$23
$64
49%
49%
76%
1983
213
274
76
45
38
66
1984
206
296
110
46
35
47
1985
202
326
146
48
34
41
1986
213
336
169
46
33
40
Source: Congressional Budget Office, Envj.r9rm$ntal Federalism;
Allocating Re^pgihiiities for Environmental Protection,
Staff Working Paper (September 1988).
a Includes water quality programs; some drinking water programs may be
excluded
b Includes both hazardous and solid waste programs
18
-------
Figure 6
Projected Local Government Expenditures to Maintain
Current Levels of Environmental Quality Plus Local
Expenditures to Comply With New Environmental Standards
>
\
/
$5.3 Billion
Additional local
spending to comply
with new
environmental
standards®
$15.8 Billion
Additional local
government spending
to maintain
current level of
environmental
quality
i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—r
1981 1963 1965 1987 1989 1991 1993 1995 1997 1999
Fiscal Year
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years) and data prepared by the Environmental Law Institute
from Regulatory Impact Analyses
Includes spending for drinking water, water quality, solid waste, air and others.
19
-------
Water Quality
Local costs of new water quality regulations will average $2.6
billion per year in the 1990s (see Figure 7). Most of these new
costs are associated with building new or upgrading existing
facilities to provide secondary treatment as required in the Clean
Water Act. EPA estimated in 1986 that $76 billion would be required
to bring all municipal wastewater treatment facilities into
compliance with minimum national standards.17
Drinking Water
In the year 2000, expenditures for new drinking water
regulations are estimated to be only 2 percent of total
expenditures. The percentage is low because most water supply
expenditures relate to the quantity attributes (included in
estimates of future expenditures to maintain current programs) and
the program initiated in the 1986 Amendments to the Safe Drinking
Water Act (SDWA) has been slow getting started. The costs of new
drinking water regulations will be relatively low in the early
1990s, averaging $36 million a year. By 1994, however, costs are
projected to jump to $539 million as the capital costs associated
with these regulations start to be incurred. For the rest of the
century, annual costs will average $830 million.
Solid Waste
New regulations included in this study increase estimated
solid waste expenditures by a large percentage. In 1992, for
example, costs associated with new regulations are estimated at $3
billion, almost half of the $7 billion spent to maintain current
environmental standards. Thi-S large increase is due to capital
costs associated with municipal waste combustion air standards.
It is assumed that these costs, $2.5 billion, will all be incurred
in 1992. For the rest of the 1990s, costs of new regulations are
about $1.2 billion each year.
Local solid waste management is likely to be a focus of
Congress in the 1990s and the potential for new and more costly
regulations is large. Concerns about the hazardous constituents in
the residue from incineration of municipal solid waste have already
led Congress to consider regulation of municipal ash as a hazardous
waste. Potential costs for local governments would be very high.
Also, the outcome of EPA's investigation of regulatory alternatives
to control air emissions from municipal waste combustion will be
an important determinant of future costs to local governments for
,7198 6 Needs Survey Report to Congress; Assessment of Publicly-
Owned Wastewater Treatment Facilities in the United States. USEPA
(February 1987).
20
-------
Figure 7
Local Government Expenditures to Maintain
Current Levels of Environmental Quality and Additional
Costs to Comply with New Environmental Standards, For
Each Environmental Service
DRINKING WATER
24
22
20
18
lfl
14
12
10
8
0
4
2
0
Actual
Projected
—,—,—,—
Current Level of Spending
YEARS
WATER QUALITY
Actual
I
s
a
©
fl
— Current Level of Spending
im in
YEARS
22
= 16
SOLID WASTE
o
s
o
5
m
Actual
Projected
Current Level of Spending
1981 1883 1985 1987 1989 1991 1993 1993 1997 1999
YEARS
$0.5 Billion
Additional local spending to comply
with new environmental standards
$6.9 Billion
Additional local spending to
maintain current level of
environmental quality
$3.0 Billion
Additional local •pendlnf to comply
with n«w environmental cUndarda
$6.7 Billion
Additional local (pending to
maintain current level of
environmental quality
$1.4 Billion
Additional local spending to comply
with new environmental standards
$2.2 Billion
Additional local spending to
maintain current level of
environmental quality
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years) and data prepared by the Environmental Law Institute from
EPA Regulatory Impact Analyses.
21
-------
disposal of solid waste.
Total Local Year-2000 Expenditures bv Media
Adding the local costs of new regulations to the costs of
maintaining current levels of environmental quality shows a small
change in the proportion spent for each environmental program
between 1987 and 2000 (see Table 3). Water quality and drinking
water expenditures overshadow those for solid waste by about 2 to
1 over the period. The most important shift between 1987 and 2000
is the 5 percent increase in water quality expenditures from 35 to
40 percent of total expenditures and corresponding 3 percent
reduction in the percentage that is expended for drinking water,
from 45 to 42 percent. This change is due primarily to the
increased local costs of financing wastewater treatment facilities
as federal grants are phased out. This is reflected in the fact
that while local spending on water quality is increasing, total
public sector spending for water quality is estimated to decrease
by 5 percent between 1987 and 2000 (from 41 to 36 percent). While
spending for other programs is only $1.3 billion by the year 2000,
the percentage increase from 1987 is large due to costs imposed by
new regulations examined in this study (Underground Storage Tank
Standards, Asbestos in Schools and SARA Title III Requirements).
22
-------
Table 3. Summary of Local Government Environmental Expenditures by Service
(billions of $1988)
Program
1987 Percentage
of Total
2000* Percentage
of Total
Total Local
Spending
$32.6 100.0% $53.7
100.0%
% Increase
1987-2000
Water Quality
$11.4
35.0%
$21.1
39.3%
85%
Drinking Water
14.8
45.4
22.2
41.4
50
Solid Waste
6.1
18.7
9.7
18.0
59
Others
0.3
0.9
0.7
1.3
133
327%
• costs of maintaining current levels of environmental quality plus costs
of new regulations.
, tt e Bureau of the Census and data
source: Environmental Law Institute from EPA Regulatory
Impact Analyses.
23
-------
CHAPTER III
IMPACT OF SPENDING FOR ENVIRONMENTAL PROTECTION
ON CAPITAL MARXETS
This chapter examines the impact on capital markets of the
financing needs of local governments. The focus is on local
governments because of the dramatic increase in local demands for
capital for environmental services relative to other sectors and
due to the availability of local cost estimates for new
regulations. The capital markets view is an important one when
examining local costs because localities rely on municipal bonds
to finance environmental facilities. Increasing local demands for
capital signal proportional increases in demand for new bond
issues.
CAPITAL REQUIREMENTS OF ENVIRONMENTAL REGULATIONS
Capital formation by EPA, states, and local governments to
maintain current levels of environmental quality is expected to
fluctuate between $13 billion and $20 billion a year between 1987
and the year 2000 (see Figure 8). If recent trends continue, by the
year 2000 most of the demand for capital to maintain current
programs will be accounted for by local governments. Local demands
for capital are estimated to increase from $9.5 billion a year in
1987 to $16.5 billion a year in 2000 (see Figure 9). State demands
for capital are stable over the period and are relatively small,
averaging about $680 million per year.
Estimated local capital costs of new regulations add an
average of $3 billion a year to local capital needs associated with
current environmental regulations. As a result, localities are
estimated to have capital needs of nearly $19 billion a year by
2000 (see Figure 9).
Moreover, as operating expenses grow, local governments could
be forced to rely more heavily on borrowed funds to finance their
capital needs. Operating and maintenance expenditures are expected
to increase by 45 percent, from roughly $23 billion a year in 1987
to $35 billion a year in 2000 (see Figure 10). This rate of
increase in operating expenditures — 3.6 percent a year — is
almost three times the rate of population growth expected over this
period. New environmental programs will add another 10 to 20
24
-------
Figure 8
Total Capital Expenditures, by EPA,
States, and Local Governments, to Maintain
Current Levels of Environmental Quality and
Local Capital Spending to Comply with
New Regulations, 1981 - 2000
¦ Total Capital Expenditures + Local Capital Expenditures
to Maintain Current Levels to Comply With New Regulations
of Environmental Quality
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years); Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years), Bureau of the Census, Pollution Abatement rn«t
and Expenditure Survey (various years); U.S.EPA. Justification of Appropriation
Estimates for Committee on Appropriations (various years).
25
-------
Figure 9
Local Capital Expenditures to Maintain Current
Levels of Environmental Quality and
Comply with New Regulations, 1981-2000
cn
u
«3
o
CO
CO
OJ
CO
a
o
QQ
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Fiscal Year
H Current 522 New
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years); Bureau of Economic Analysis. Pollution Abatement and Control
Expenditures (various years); Bureau of the Census, Pollution Abatement Cost
and Expenditure Survey (various years); U.S.EPA. Justification of Appropriation
Fstlmates ft"- rnmmitteg on Appropriations (various years).
26
-------
Figure 10
Local Government Capital and Operating/Maintenance
Expenditures to Maintain Current Levels of Environmental
Quality and Comply with New
Regulations, 1981 - 2000
w
s*
cti
O
Q
CO
CO
05
tn
d
o
m
~i i i i I i i i i i i r 1—i V—i t
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Fiscal Year
Capital
+ 0 & M
Source: Apogee Research from: U.S. Bureau of the Census, Government Fin.n™.
(various years); Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years): Bureau of the Census, Pollution Abatement Cost
and Expenditure Survey (various years); U.S.EPA, Justification of Appropriation
Estimates for Committee on Appropriation* (various years)
27
-------
percent to these totals.
SUBSTITUTION OF LOCAL FOR FEDERAL CAPITAL
Aggregate costs tend to mask shifts in the projected share of
capital formation. While local demands for capital are estimated
to increase by 97 percent between 1987 and 2000, under current
policy EPA's capital grants for environmental services will end by
1995 (see Figure 11). To a large extent, the substitution of local
for federal capital is due to the phasing-out of EPA's construction
grants for wastewater treatment facilities. Capital grants are
expected to decline from $4.5 billion a year in 1981 to zero once
grants to capitalize state wastewater treatment revolving funds
expire in 1994.
FINANCING LOCAIrf fNVIRONMENTAk FACILITIES
Because of the variation in intergovernmental roles,
wastewater treatment facilities are currently financed differently
fhpr water supply or solid w&svg fdcilitiGs*
S2" federal role in fencing wastewater treatment works is
significant compared to the other two areas.
Wastewater Treatment
. f in the 1980s, municipal bonds have substituted for
- , .®? -I arants to finance wastewater treatment plants.
declining federal grants to federal grants hava financed
^uoMHal? of ill ««teSatei facilities over the period 1980 to
bonds provided another $2.3 billion a year in
1984. Municipal bonds pro ^ ^ qrant_to_bond dollars has
capital, on fron 2.93 in 1980 to 0.56 in 1988 (see Table
failen dramatically, from ^ivata loanSi retained earnings, and
private eq^it^ constituted the remaining sources of wastewater
capital.
-4. fnr wastewater treatment will be near zero by
Federal support for wastew« program „ by tar the larges£
1994. EPA''s constro wastewater treatment plants — will
source of federal aw
28
-------
Figure 11
EPA Capital Expenditures to Maintain Current
Levels of Environmental Quality Compared with
Local Capital to Maintain Current Levels of
Environmental Quality and Comply with New
Regulations, 1981 - 2000
I I I 1 1 i —i i i i 1 -j—
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Fiscal Year
¦¦ EPA capital E3 Local capital
Source: Apogee Research from: U.S. Bureau of the Census, Government Finances
(various years); Bureau of Economic Analysis, Pollution Abatement and Control
Expenditures (various years); Bureau of the Census, Pollution Abatement Cost
and Expenditure Survey (various years); U.S.EPA, Justification of Appropriation
Estimates for Committee on Appropriations (various years).
29
-------
Table 4 Estimated Sources of Capital Used to Finance Municipal
Wastewater Treatment Works (current dollars)
Year Federal Municipal Ratio of
Grants* Bonds Grants/Bonds
1980
$4,720
$1,610
2.93
1981
4,293
1,620
2.65
1982
4,113
2,870
1.43
1983
3,416
2,410
1.42
1984
2,969
3,150
0.94
1985
2,900
7,007
0.41
1986
3,113
6,823
0.45
1987
2,920
4,517
0.65
1988
2,514
4,498
0.56
Average
$3,440
$3,834
0.90
Sources:—Published and unpublished data supplied by the Bureau of
the Census and The Public Securities Association
Includes EPA Construction Grants, Farmers Home Administration
Sewer Grants; The Department of Housing and Urban
Development's Community Development Block Grants (sewer uses) ;
Economic Development Administration Grants (sewer uses).
30
-------
be eliminated after 1991.18 Beginning in 1989, federal grants will
help capitalize state revolving loan funds (SRFs) in place of
construction grants, but they will expire in 1994. The federal role
in financing local wastewater treatment plants will be reduced to
a handful of small, targeted programs. in many states, the SRF
programs are not expected to meet financing needs.19 if the
difference between wastewater construction needs and funds that
might reasonably be expected as grants or loans through current
intergovernmental aid programs is financed from strictly local
sources, some 20 states will face a combined financing burden of
nearly $57 billion.
Moreover, municipalities in many of these states and others
face rapidly escalating operating expenses, tending to put upward
pressure on user fees which, on the margin, will make capital
financing more difficult. In 1960, for example, the local
operating cost per person served by central sewer systems was
$17.67 a year. At the beginning of EPA's Construction Grants
program in 1972, local operating costs per person served were
$19.35 a year. By 1984, local operating costs had skyrocketed to
$41.61 per person. Per-capita operating costs should continue to
increase as more sophisticated energy and chemical-intensive
treatment processes come on line, especially in small communities
with limited economies of scale. Higher operating expenses can
reduce the ability of local governments to issue debt for capital
investments, particularly in cities where the average annual income
is low.
Water SuppIv
While water supply capital needs ($4 to $5 billion a year in
the 1980s) are equivalent to those of the nation's wastewater
treatment plants, water systems have almost no federal assistance.
Traditionally, municipal systems have financed capital needs
through a combination of tax exempt municipal bonds (about 60
percent of all capital)» retained earnings (20 to 30 percent);
18Other federal aid programs that can be used for local
wastewater treatment works include the Farmers Home
Administration's water and sewer grants and loans and the Economic
Development Administration's grants to under-developed regions.
19Some states such as New York are planning to meet the
shortfall with highly leveraged SRFs. That is, the original
capitalization will be used to secure bonds, raising up to five
times the amount available for loans in the original capitalization
grants.
20For details, see Apogee Research, Inc. The Nation's Piihi
Works; Rennrt on Wastewater Management, prepared for the National
Council on Public Works Improvement (May 1987).
31
-------
state and federal grants (5 to 10 percent)? and other sources such
as private loans, special tax assessments, and private equity (5
to 10 percent). Larger water systems tend to rely more heavily on
bonds than do small ones, which generally rely on private bank
loans to finance their capital needs.
Solid Waste Management
There is no federal aid for local solid waste management.
Local governments spend about $700 million a year for capital
improvements. The literature is far less insightful on the
financing of solid waste facilities than on the other two municipal
services. The few reports that do address the issue agree that
municipal bonds provide the majority of all investment capital for
publicly-owned waste management facilities. Like water and
wastewater plants, however, some publicly-owned facilities finance
capital improvements with retained earnings, private bank loans,
and private equity.
IMPACT ON fftpTTAT, FORMATION
The impact of capital demands for environmental programs on
local capital formation can be examined from two perspectives: the
ability of the market to respond to capital demands, and the
ability of local governments to raise capital. Assuming that the
market will respond if the price of capital can be met, the key
issue is municipal ability to support capital formation.
Whereas private companies are often able to pass along the
costs of capital to consumers in the price of goods and services
they provide, local governments are more limited in their ability
to meet capital needs. Often, elected officials face political
difficulties in raising taxes or fees, or constraints on their
authority to raise revenues imposed by statutes, regulations, or
state constitutions. In other cases, local resources may be
insufficient to support large amounts of debt. This is particularly
true for small municipalities that face relatively high fixed costs
of issuing bonds, constrained by limited revenue bases and no
economies of scale. If capital-intensive facilities are forced on
these and other cities, the cost of increased levels of capital
formation could crowd out other investments.
can the capital Markets Rggppnfl?
If the gap between current capital formation and future
capital requirements for environmental programs were to be financed
entirely with new bonds, municipalities would have to issue roughly
twice as much environmental debt as they currently do. Compared
21See, R.W. Beck and Associates, Report on Solid Waste.
32
-------
to the volume of tax-exempt bonds issued to finance water, sewer
and solid waste projects so far in the 1980s — from $4.5 to $9
billion a year — this change in volume would not be unusual. In
water supply, for example, meeting the capital needs of the 1986
Safe Drinking Water Act will require an estimated $0.5 billion to
$1.0 billion a year in new capital financing over the period 1994
to 2000. This would represent a 25 to 35 percent increase over the
current volume of water supply bonds — fluctuations well within
the range in volume for such bonds between 1977 and 1985.
In addition, debt issued for environmental purposes is a small
percentage of total debt issued by state and local governments (see
Table 5). Debt issued for water and sewer projects was only 14
percent of total state and local debt in 1960 and 1970 and declined
to 9 percent of the total by 1987.
Limitations on Municipal Capital Financing
The overall volume of bonds necessary to meet new capital
requirements is not unmanageable from the perspective of market
expansion. However, large capital demands associated with
environmental services often cause large peaks in capital needs
that can crowd out other investments. For example, San Diego has
total outstanding debt of about $1.3 billion but is faced with a
cost of $800 million for an ocean outfall (conveyance of treated
wastewater to the ocean). If financed by long term debt, the cost
of the conveyance would represent a 61 percent increase in the
city's total outstanding debt. The large capital demands for this
project will limit the amount of debt the city can issue for other
purposes.
In addition, the ability of some cities, especially small
ones, to issue new debt is limited and most of the nation's
environmental systems are in small communities. Nearly 90 percent
of all community water systems serve fewer than 3,300 residents;
88 percent of all wastewater treatment systems handle less than 1
million gallons per day; and most of the solid waste landfills in
the nation serve communities under 10,000.
Because they are not well known, small communities have
limited access to financial markets, forcing them to seek generally
higher-cost commercial loans to finance capital expansion. When
they are able to issue bonds publicly, small denominations often
bear a high cost of capital for two reasons: because the fixed
costs (e.g., legal fees and underwriters fees) are more burdensome
when spread over a small base, and because the credit markets
22For details, see Apogee Research, Inc. and Wade Miller
Associates, Inc., pr»h™a ln Financing and Managing Smaller p^H7
Works prepared for the National Council on Public Works
Improvement (September 10, 1987).
33
-------
Table 5. Water/Sewer Debt as Percentage of Total State and Local
Debt (billions of 1988 dollars)
Water/Sewer
Water/Sewer Total State & as Percent
Year Debt Local Debt of Total
I960
1970
1980
1987
$4.57
8.14
4.49
9.17
$31.67
59.02
60.91
105.83
14%
14
7
9
Source: Apogee Research from data compiled by the Public Securities
Association
34
-------
generally demand a premium to compensate the risks of lending money
to little-Known communities with a less certain ability to repay
principal and interest.
The EPA recently completed a study that examines the ability
of different sized cities to raise capital for environmental
programs through the bond market. If the increases in debt
service attributable to either the capital demands of all new
drinking water regulations or new water quality regulations were
limited to 1 percent of gross household income (about a doubling
in current user fees), EPA estimates that 26 percent of all cities
under 2 500 persons (nearly 7,000 cities and towns) could have
trouble'issuing revenue bonds. Fewer than 10 percent of cities
with populations between 2,500 and 250,000 would have similar
problems Eleven percent of cities with populations above 250,000
could have trouble issuing new revenue-backed debt.
Even if municipalities were willing to offset user fees with
oeneral revenues and their full taxing powers were brought to bear
on the issuance of general obligation bonds to support new
environmental initiatives, most small cities would be no better
off In contrast, medium and larger cities would benefit
sianificantlv. While about 21 percent of all small cities would
Still face difficulties issuing new bonds, the proportion of medium
and large cities expected to have trouble in the capital markets
would decline to 3 percent and 0 percent, respectively.
But these calculations account for only the capital demands
imposed by nf- ~„.,l,tlons. The ability of many cities (regardless
of size) to support new bonds to cover tPtal Capital by the
vear 2000 — capital replacement plus the demands of new programs -
- worsens the outlook presented above.
23EPA, Municipal Sector Study (September 1988).
35
-------
CHAPTER IV
IMPACTS OF ENVIRONMENTAL SPENDING ON HOUSEHOLDS
As municipalities are the primary providers of environmental
services, local government responses to increasing costs of these
services' will determine, to a large extent, the impact on
households. There are three ways local governments may respond (see
Figure 12). Local budgets could accommodate increased demand for
resources by increasing own-source revenues through (1)higher user
charqes or taxes (2)increasing the efficiency of current programs,
or (3)shifts to environmental services from spending in other
budqet areas. Second, local governments could seek alternative
sources of finance, either through federal and state assistance or
bv involving private companies in finance and provision of
environmental services. Finally, local governments may choose not
to accommodate the higher costs of environmental services, which
could lead to noncompliance or reduced quality or quantity of
service.
For this report, it was assumed that local governments would
seek to increase own-source revenues. To the extent that local
governments can exercise other options, particularly private
involvement in service provision, household costs may be reduced
Estimates of combined capital and operating cost savings associated
with private provision of environmental services compared to public
provision range from 5 to 40 percent.
Meetina the increasing costs of environmental services with
local revenues means that households and businesses pay for
regulations financed at the municipal level through increased user
charaes increased general taxes, or reduced levels of services in
cnarges, in programs. Household effects of environmental
2n«^5g iSSilrtS assuming all capital facilities are
financed with long-term bonds
assumptions Jg- ^dTo operatinf and ^intena^
outlays each^eW' The result is divided by the number of
°utlay8 'Bac y . t provide an estimate of household resources
households s environmental services. Recalculating to take
nSid to? industrial and commercial facilities, the
estimates reflact^ increases in direct costs for average
24According to a recent report by a prominent investment
banking firm, overall savings attributable to a properly structured
privatization transaction (prior to tax reform) may reduce user
fees by 15 to 40 percent, compared to conventional Construction
Grants funding. See Dean, Witter, Reynolds, Inc., Privatizatlpp«
A Financing Alternative for State and Local Governments (October
1986)
36
-------
Figure 12
Local Government Responses to Increasing
Costs of Environmental Protection
Increasing Local Costs c f
Environmental Protectior
Local Budget s
I Accommodate
Increased
Demand for
Resources
Local Resource,
Stay Level
Reduce Spending In\
Other Budget Areas
M Increased Efficiency I
Local Resources
Increase
Higher User Charges
Search for
Non-Local
Sources of
Finance
Federal & State
Assistance
Private Involvement
Local Budgets
Do Not
Accommodate
New Demand
for Resources
Reduce Quantity
or Quality of
Service
Higher Taxes
More Debt
37
-------
households.25
To the degree that costs to private companies are passed on
to consumers in the form of increased prices for goods anS
services, household costs will increase. While it is not possible
to forecast these effects exactly, for most companies environmSltaf
compliance costs constitute only a small portion of their
cost of production, so resulting price increases will not hav-t
significant effect on consumption of a product or service.
HOUSEHOLD COSTS OF ENVIRONMENTAL PROGRAMS26
If current trends continue, the average household will snenH
$647 a year by the year 2000 for environmental services includi™
drinking water, wastewater treatment, and solid waste manaaemen?
(see Table 6). This represents 54 percent more than the averZal
household payment for such services in 1987. The laraest incr»in«^
$599 dollars a year in 2000 - is attributable to "Sv
maintaining the current level of environmental and servirl
standards. The average annual cost of complyina with
regulations is estimated to be $48. ew
Household Payments bv City Size To Maintain Purred
Environmental Quality ,rr Tl* QL
Implementing current environmental programs will have more
profound effects for households in smaller cities than in laroer
ones. Small cities face limited economies of scale in the
provision of environmental services and generally higher costs of
capital. These two effects combined tend to drive up the price of
environmental protection for small cities.
As a result, households in the smallest cities are expected
to pay substantially more than those in large and medium-sized
cities through the turn of the century. Household costs are
expected to increase by about 88 percent, from $670 in 1987 to
$1,263 in 2000 in the smallest cities (less than 500 population!
Household payments to maintain current programs in medium-sized
cities (populations from 50,000 to 100,000) will increase bv 38
percent, on average — from $373 in 1987 to $515 in 2000
Household costs in large cities (populations in excess of 500 oooi
will increase by 36 percent, from $393 in 1987 to $533 in 2000
25See Appendix 3 to this report for an explanation of
differences in methodology between this report and the Municipal
Sector Study.
26 Cities were divided into the following population-size
categories: less than 500; 500-2500; 2500—10,000; 10,000-50,000*
50,000-100,000; 100,000-250,000; 250,000-500,000; more than
500,000.
38
-------
Table 6 Average Annual Household Payments for Environmental services
for a Sample of 8,032 Cities, Towns, and Townships (1988 dollars)
City
Size
Average
payments
in 1987
Additional
payments to
maintain
current levels
of environmental
quality in
2000
500 or
less
500-
2,500
2,500-
10,000
10,000-
50,000
50,000-
100,000
100,000-
250,000
250,000-
500,000
500,000
or more
Population
Weighted
Average
$670
473
433
444
373
291
335
393
9419
$593
223
143
197
142
111
126
140
$180
Additional
payments to
comply with
new
environmental
and service
standards
in 2000
Total
estimated
household
payments for
environmental
protection
in 2000
$317
67
29
24
24
34
68
93
$48
$1,580
763
605
665
539
436
529
626
$647
Source:
Apogee Research, from U.S. Bureau of Census, 1986 Survey of
Community Water Systems, and data compiled by the Environmental
Law Institute from EPA Regulatory Impact Analyses.
39
-------
Household Payments for New Regulations
Added to the large increases in household costs of current
programs are the additional costs of new regulations. Households
in cities with populations below 500 will pay an additional $317
a year to comply with new regulations in 2000; for the largest
cities new regulations will cost the average household $93 more
each year by 2000. Households in medium-sized cities, with
populations of 10,000 to 50,000 and 50,000 to 100,000, are faced
with additional costs of just $24 each year.
Household Payments fEnvironmental Programs Compared to Income
The difference in costs between households based on city size
is even more dramatic when examined as a percentage of household
income (see Table 7). For the smallest cities with lower
household income and higher costs per household, the cost of
environmental protection as a percentage of household income will
increase from 2.8 percent in 1987 to 5.6 percent in 2000. For
medium-sized cities the percentage is ejected to change slightly
over the period 1987 to 2000, from 1.0 to 1.2 percent, and in large
cities, to change from 1.1 to 1.5 percent.
Estimates of costs as a percentage of household income may be
Estimat t the extent that companies pass through
conservative because, x.o me
environmental costs to consumers, household income will be reduced.
As a result, the costs of environmental protection as a percentage
of household income could be higher.
Household p^yinp-nts hv Program
HnilsohnTrf costs of each environmental program, including those
to maintain levels of eiwironmental quality and to comply with new
to maintain ie 2000, differ by city size category (see
Tabled "Households in smaller cities will pay comparatively more
Table 8). Househ medium-sized cities. Pending wastewater
than in both additional future costs of maintaining
improvements along with the^aatai guality will cost the averag|
current levels of ^ ^ lesg abQUt $259 a year by 2000^ when
household in citie® re assumed to be on-line. Drinking water
all regulatory progr another $366 a year and solid waste
regulations wifjv g .g This a
-------
Table 7. Cost of Environmental Protection Per Household As Percentage of
Household Income, By City Size (1988 Dollars)
1987
2000
City
Size
Average Average Cost as a
Household Household Percentage
Cost of Income of House-
Environ- hold
mental Income
Programs
Average Average Cost as a
Household Household Percentage
Cost of Income of House-
Environ- hold
mental
Programs8
Income
500 or
less
500-
2,500
2,500-
10,000
10,000-
50,000
$670
473
433
444
50,000-
100,000 373
100,000-
250,000 291
250,000-
500,000 335
Over
500,000 393
Weighted
Average 419
$24,277
26,361
30,546
31,685
37,189
33,769
31,943
34,756
31,617
2.8%
1.8
1.4
1.4
1.0
0.9
1.0
1.1
1.3
$1,580 $28,357
30,792
763
605
665
539
436
529
626
647
35,680
37,010
43,440
39,445
37,312
40,597
36,931
5.6%
2.5
1.7
1.8
1.2
1.1
1.4
1.5
1.8
¦ includes costs of maintaining. current Revels of environmental quality
plus costs of complying with 9
0aeo)
-------
Table 8. Increase in Annual Household User Charges in 2000 to Maintain
Existing Levels of Environmental Quality and to Comply with New
Regulations (in 1988 Dollars)
Municipality Average Additional Fees By Program
Size Payments jp tfre Year 2Q0Q
Category in Wastewater Drinking Solid Other Total
1987" Treatment Water Waste Additional
Fees
Less than $25g $366 $218 $67 $910
500" 174 59 43 14 290
2,500 473
2'500~ 85 59 19 9 172
10,000 433
10,000- 71 19 7 221
50,000 444 J-*4*
50,000- 64 20 5 166
100,000 373
100,000- 63 14 5 145
250,000 291
250,000- 43 33 4 ig4
500,000 335
0ver 146 42 40 5 233
500,000 393 14t>
a
See Appendix 4 for average 1987 payments by media.
Source: Apogee Research from U.S. Bureau of the Census 1986
Community Water Systems, and data compiled by the Enviro«^l^-
Law institute from EPA Regulatory Impact Analyses. 1
42
-------
comparably much less than the smallest ones. Wastewater treatment
and solid waste show decreasing economies of scale with the result
that households in large cities will pay more for these services
than those in medium-sized cities. However, household costs are
much less than in the smallest cities. Households in large cities
will pay 56 percent of the amount paid for wastewater treatment in
small cities and 18 percent of that paid for solid waste. As
drinking water shows increasing economies of scale, households in
large cities will only pay 11 percent of household costs in small
cities. This is in addition to a baseline of $393, that is only 59
percent of the 1987 cost for households in small cities.
prtnUnq Water. The largest cost to households in small cities
in the year 2000 is estimated to be for drinking water programs.
About 95 percent of the total estimated costs of drinking water-
programs in 2000 is associated with current Safe Drinking Water Act
programs and the provision of adequate quantities of water.
Wat-.pr Quality. Wastewater treatment is the highest cost
service for households in most city sizes. Costs are estimated to
be particularly high for households in the smallest cities, where
substantial investments are necessary to bring wastewater treatment
facilities into compliance with minimum national standards.
snUd waste. Household expenditures for solid waste show a
trend similar to that for the other environmental services, with
households in smallest cities expected to pay more than 5 times the
amount paid by households in larger cities. For the larger size
categories, estimated household costs of solid waste programs show
reverse economies of scale. This is due to the amount of quality
and quantity-related costs included ^ in total solid waste
expenditures. There are limited economies of scale in providing
greater quantities of solid waste services. Costs of maintaining
existing levels of environmental quality, that are mostly quantity-
related, constitute the majority of total costs in cities larger
than 2,500. Thus, for the most part, larger cities do not benefit
from economies of scale normally associated with environmental
service provision as compared to medium—sized cities.
43
-------
CHAPTER V
CONCLUSIONS
The growing costs of environmental protection suggest a
reexamination of the way in which the nation finances and pays for
investments in environmental protection. Increasing costs of
onvironmental programs to governments at all levels, from $40
billioITa year in 1987 to $55 billion in 2000 to maintain current
Standards challenge their ability to finance future environmental
needs New regulations will only increase demands, adding $5.3
billion a year in municipal expenditures alone by the year 2000.
Growing demand for municipal resources will require tradeoffs
between financing environmental mandates and balancing limited
local budgets. Local governments with responsibilities for
rtrHniHna water, wastewater, and solid waste management services
face an increase from 76 percent of the public sector's bill to
comDlv with federal environmental mandates in 1987 to 87 percent
bv 2000 This increase will mean that real annual environmental
outlays by all local governments will nearly double by the turn of
the century.
impacts on tfTjiNTCipftt-I'riES.—ffAPITAL MftPPET?»—ftffP flQ,V?EHQI'P$
The relative effects on municipal budgets of spending for
onvli»e. " regardless of their nature - should focus
on small to medium-sized localities.
tal markets can be expected to meet expanded demands
fleet risk and supply-demand interactions, the key
once prices reflect risJ ££ Capital markets is the ability
i"u® ®^"ine9„ts to support capital formation. Increasing
of local governm upward pressure on interest rates, which
demand for capital can put upwa ^ Qf environlnental COBlpiiance.
in turn, t the income or industrial base to finance these
Communities without JJ This is particularly true for small
expenses could face ha ^ ^ &re by relatively high fixed costs
of "issuing V^ds, constrained by limited revenue bases, and without
the benefits of economies of scale.
Tf rurrent trends continue, households in the smallest cities
If current zx substantially more for environmental
will be e*Pect®^0g. in large and medium-sized cities, with
programs than tno doubling in the smallest cities by the
household costs mor household income, households in the
year 2000. As a percem.»y«
44
-------
smallest cities will be expected to pay 5.6 percent of household
income on environmental programs while households in large and
medium-sized cities will pay 1.5 and 1.2 percent, respectively.
POLICY CONSIDERATIONS
Given the strong legislative and popular support for a rioa«a
environment, there will be pressure for strict*; ® Cleaner
standards in the future. One way to meet the challenge of fiSSSiJ1
environmental mandates is to simply charge more and «««»,! ?g
provide adequate levels of enviro^entalTe^icesto
governments could take steps to reduce the cost of environmental
A third alternative —encouraging greater involvement of th*
private sector in the provision of environmental services -
reduce pressure on local budgets, with the potential to
such services in the most efficient manner. Greater £££?*
involvement can increase public resources available J
environmental protection in at least two ways. First < *r
equity can free municipal resources for other investments'
even without private financing, properly designed and* execufc^
partnerships can provide improved environmental services «f J!
lowest possible cost to the public. Improvements in effieion™
over provision of service, by strictly public agencies, can lo£«
public costs of compliance, w^ch in turn, frees municipal
resources for other investments." Areas for fed*»r-*i p f
action include investigating the use of tax policy to dSHo?
partnerships; reformulating federal environmental regulation?'*
reduce bias against public-private partnerships; and workinoJiX
states to reduce their barriers to private involvement such
state restrictions on interstate shipping of solid waste'.
Finally, financial management assistance could be provide *
small and medium-sized cities to promote implementation
innovative solutions to financing environmental programs T^.f
decision makers and private vendors of environmental services
need better information to make informed investments.
Inc., Report on Public Private
See Apogee Resear , Qervlcea. Policy ISSUES and Options,
rm-tirrrnir« in ,i frntrrti- ^
prepared for ***—6 Management Division (September 26, 1988).
Comptroller, Kesouj.
45
-------
Appendix 1. List of Environmental Regulations Applicable to Local Governments
But Not Included in the Cost Estimates
Regulations
Status
A. Drinking Water
Well-head protection Plan
Pesticides in Groundwater
Disinfection By-products
B. Wastewater Treatment
National Estuary Program
Wetlands Protection Program - 404(c) permits
Nonpoint Source Regulations
Guidance/Mgmt. Plans
Section 304(1) - Toxics in Water Bodies
C. Solid Waste Disposal
National Contingency Plan - Superfund Program
Low-Level Radiation Waste Standards
Toxicity Characteristics of Solid and
Hazardous Wastes
In Development
In Development
In Development
In Development
Promulgated
In Development
In Development
In Development
In Development
In Development
D. Miscellaneous Regulations
Heavy Duty Diesel Vehicles
Gasoline Marketing
Diesel Fuel Standards
Revisions to National Ambient Air Quality
Standards (Ozone, Carbon Monoxide,
Particulate Matter, Nitrogen Oxides,
Sulfur Oxides)
Asbestos in Public Buildings
Promulgated
In Development
In Development
In Development
May Be
Required
-------
Appendix 2. Tables of Data
FIGURE 1. PROJECTED EPA, STATE, AND LOCAL
GOVERNMENT EXPENDITURES TO MAINTAIN
EXISTING LEVELS OF ENVIRONMENTAL
QUALITY COMPARED TO CURRENT ENVIRONMENTAL
EXPENDITURES (MILLIONS OF $1988)
vfar TOTAL SPENDING TO MAINTAIN
X EXPENDI- EXISTING LEVELS OF ENVIRONMENTAL
TURES QUALITY IN ADDITION TO EXISTING
EXPENDITURES (1987)
1981
34,608
0
1982
33,293
0
1983
34,316
0
1984
34,765
0
1985
36,958
0
1986
39,312
0
1987
39,749
0
1988
41,160
1,411
1989
45,508
5,759
1990
46,478
6,729
1991
50,418
10,669
1992
50,240
10,491
1993
50,115
10,367
1994
49,956
10,207
1995
49,814
10,065
1996
50,957
11,208
1997
52,078
12,329
1998
53,178
13,429
1999
54,258
14,509
2000
55,320
15,571
-------
FIGURE 2. EPH, STATE, RND LOCRL GOVERNMENT EXPENDITURES TO MRINTRIN
CURRENT LEVELS OF ENVIRONMENTAL QUALITY, BY MEDIA, 1981-2000
-------
FIGURE 4. PROPORTION OF ENVIRONMENTAL OUTLRYS (CRPITRL HNO 0&M>, BY LEVEL OF GOVERNMENT, TO MAINTAIN
CURRENT LEVELS OF ENVIRONMENTAL QUALITY, 1981, 1907, AND 2000
-------
Figure 5.
PROPORTION OF ENVIRONMENTAL OUTLAYS , BY LEVEL OF GOVERNMENT, TO MAINTAIN
CURRENT LEVELS OF ENVIRONMENTAL QUALITY, 1981, 1987, AND 2000
-------
Figure 6.
PROJECTED LOCAL GOVERNMENT EXPENDITURES TO
MAINTAIN CURRENT LEVEL OF ENVIRONMENTAL QUALITY AND
COMPLY WITH NEW ENVIRONMENTAL STANDARDS
(IN MILLIONS OF 1988 DOLLARS)
CURRENT LEVEL ADDITIONAL SPENDING ADDITIONAL SPENDING
OF LOCAL TO MAINTAIN CURRENT TO COMPLY WITH
YEAR SPENDING ENVIRONMENTAL QUALITY NEW STANDARDS
1981 26,340
1982 25,680
1983 27,677
1984 28,399
1985 30,029
1986 32,036
1987 32,581
1988
1989
1990
1991
1992
1993
1994
1995
1996 44,810
1997 45,740
1998
1999
2000 48,424
0 0
0 O
0 0
0 0
0 0
0 0
0 0
34\068 1,487 2,362
37 933 5,352 2,986
38,973 6,392 3,411
42,520 9'939 3,874
42,857 10,276 6,985
43,223 10,642 4,111
43 542 10,961 4,665
43,859 11,278 4,815
12,229 4,970
13,159 5,750
46!652 14,071 5,542
47 546 14,965 6,677
15,843 5,297
-------
Figure 7.
LOCRL GOVERNMENT EXPENDITURES TO MR1NTRIN CURRENT LEVELS OF ENV1COMMENTRL QUHLITY HNO TO COMPLY WITH
NEW ENUIRONMENTRL STRNORROS, BY MEOIR
DRINKING WRTER
WRTER
QURL1TY
SOLID
URSTE
CURRENT
NEW
CURRENT
NEM
CURRENT
NEM
YE OR
PROGRHMS
PROGRRMS
TOTAL
YERR
PROGRRMS
PROGRRMS
TOTRL
YERR
PROGRRMS
PROGRRMS
TOTRL
<1988 *MM)
<1988 ~NM>
<1988 *MM>
<1988 *MM>
<1988 *MM>
<1988 «MM>
<1988 *MM>
<1988 *MM>
<1988 »MM>
1901
12,073
0
12,073
1981
9, 086
O
9086
1981
4948
O
4948
1982
12,087
0
12,087
1982
8,309
O
8309
1982
5043
0
5043
1963
12,547
O
12,547
1983
9,693
O
9693
1983
5163
O
5163
1984
12,533
0
12,533
1984
lO,169
O
10169
1984
5384
O
5384
1985
13,625
O
13,625
1985
lO,295
O
10295
1985
5771
O
5771
1906
14,873
0
14,873
1986
10,967
O
10967
1986
5858
O
5858
1987
14,816
O
14,816
1987
11,376
O
11376
1987
6050
O
6050
1988
15,348
0
15,348
1988
12,148
2052
14200
1988
6233
O
6233
1989
15,879
1
15,880
1989
15,288
2130
1741B
1989
6426
O
6426
1990
16,411
24
16,434
1990
15,605
2266
17871
1990
6617
O
6617
1991
16,942
26
16,968
1991
18,433
2305
20738
1991
6804
357
7161
1992
17,474
35
17,509
1992
18,054
2506
20560
1992
6987
3194
10101
1993
18,005
94
18,lOO
1993
17,710
2499
20209
1993
7166
1035
02O1
1994
18,537
539
19,076
1994
17,322
2S74
19896
1994
7340
1069
84 lO
1995
19,068
580
19,648
1995
16,938
2650
19588
1995
7510
1104
8614
1996
19,600
625
20,225
1996
17,192
2725
19917
1996
7675
1138
8813
1997
20,131
1,296
21,427
1997
17,429
2800
20229
1997
7836
1172
9009
1998
20,663
951
21,614
1998
17,651
2875
20526
1998
7994
1234
9228
1999
21,194
1,030
22,225
1999
17.0S8
2951
208O9
1999
8150
1297
9447
2000
21,726
497
22,223
2000
18,052
3026
21078
2000
8302
1361
9663
-------
YEAR
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Figure 8.
TOTAL CAPITAL EXPENDITURES BY EPA,
STATES, AND LOCAL GOVERNMENTS,
TO MAINTAIN CURRENT LEVELS OF
ENVIRONMENTAL QUALITY AND
LOCAL CAPITAL SPENDING TO
COMPLY WITH NEW REGULATIONS, 1981-2000
(IN MILLIONS OF 1988 DOLLARS)
Total Capital Local Capital
Expenditures to Maintain Costs to Comply
Current Levels of With New
Environmental Quality Regulations
13,274
11,334
11,399
11,010
12,205
13,468
12,935
13,267
16,433
16,718
19,749
18,640
17,574
16,550
15,567
15,892
16,217
16,541
16,865
17,188
0
0
0
0
0
0
0
2,199
2,881
2,994
3,313
5,892
2,177
2,617
2,610
2,597
3,209
2,774
3,707
2,110
-------
Figure 9.
LOCAL CBPITHL EXPENDITURES
TO MAINTAIN CURRENT LEVELS OF
ENVIRONMENTAL OUALITY AND TO
COMPLY WITH NEW REGULATIONS,
1981 - 2000 (Millions oF *1988)
CURRENT NEW TOTAL
YEAR CAPITAL CAPITAL CAPITOL
EXPENDITURES COSTS
1981
8374
0
8374
1982
6877
O
6877
1983
7883
O
7883
1984
7853
0
7853
1985
8650
0
8650
1986
9810
0
98 lO
1987
9547
0
9547
1988
10262
2199
12461
1989
13379
2881
16260
1990
13689
2994
16683
1991
16517
3313
19830
1992
16112
5892
22004
1993
15728
2177
17905
1994
15366
2617
17983
1995
15024
2610
17634
1996
15337
2597
17934
1997
15650
3209
18859
1998
15962
2774
18736
1999
16275
3707
19982
2000
16587
2110
106'37
-------
Figure 10.
LOCRL GOVERNMENT CRPITRL RNO
OS.M EXPENDITURES TO
MHINTHIN CURRENT LEVELS OF
ENVIRONMENT!*. QUHLITY
RNO TO COMPLY WITH
NEW REGULATIONS
(MILLIONS OF $1388)
YEAR
LOCRL
LOCRL
LOCRL
Capital
O&M
Total
1981
8,374
17,966
26,340
1982
6,877
18,803
25,680
1983
7,883
19,794
27,677
1984
7,853
20,546
28,399
1985
8,650
21,379
30,029
1986
9,BIO
22,225
32,036
1987
9,547
23,034
32,581
1988
12,461
23,969
36,430
1989
16,260
24,659
40,919
1990
16,683
25,700
42,384
1991
19,830
26,564
46,394
1992
22,004
27,838
49,842
1993
17,905
29,429
47,334
1994
17,983
30,224
48,207
1995
17,634
31,040
48,674
1996
17,934
31,846
49,781
1997
18,859
32,631
51,490
1998
18,736
33,459
52,195
1999
19,982
34,242
54,223
2000
10,697
35,O17
53,714
-------
Figure 11.
EPfl CRPITRL OUTLBYS TO MRINTR1N
CURRENT LEVELS OF ENVIRONMENTRL QUHLITY
COHPRRED WITH LOCRL CRPITRL
SPENDING TO MRINTRIN CURRENT LEVELS OF
OF ENVIRONMENTAL QUHLITY AND COMPLY WITH
NEW REGULATIONS, 1901 - 2000
tMlLLlONS OF *1988)
EPR
LOCAL
YERR
CRPITRL
CRPITRL
OUTLRYS
OUTLRYS
1981
4,511
8,374
1982
4,071
6,877
1983
3.2SO
7,883
1984
2,848
7,853
1985
3, 126
8,650
1986
3,258
9,810
1987
2,967
9,547
1988
2,566
12,461
1989
2,362
16,260
1990
2,325
16,683
1991
2,288
19,829
1992
1,689
22,004
1993
1, 108
17,905
1994
545
17,983
1995
O
17,635
1996
O
17,934
1997
O
18,859
1998
O
18,736
1999
O
19,902
2000
o
10,696
-------
Appendix 3. Differences in Methodology and Content Between the
Municipal Sector Study and This Report
1. The Municipal Sector Study (MSS) estimates local costs
associated with new regulations assuming that costs of existing
environmental regulations remain constant over the period studied,
1988 to 1996. This report (Cost Report) incorporates these data
and, in addition, provides data on expenditures pursuant to current
regulations. For the Cost Report, local expenditures pursuant to
existing regulations are provided for 1981 to 1986 and projected
to the year 2 000 to estimate local costs of existing regulations.
Tables indicating costs to municipalities and households in year
2000 include both costs of maintaining current programs and costs
of new regulations.
? Th« final vears of cost projection differ for the two studies.
L\hVMq
-------
Figure 13
Q
i—?
o
a:
w ^
gg
S3
0£
U
a.
CO
U
2
Cd
K
0
Q
CO
ao
01
COMPARISON OF THE OFFICE OF DRINKING WATER
SURVEYS AND THE MUNICIPAL SECTOR STUDY SURVEY
PER HOUSEHOLD REVENUE ESTIMATES
<600
500-2600 2900-10,000
"0"-M'00° 280,000-000,000 OO^OOO*
CITY SIZE CATEGORIES
OFFICE OF DRINKING WATER
1982 SURVEY
+ OFFICE OF DRINKING WATER
1988 SURVEY
MUNICIPAL SECTOR STUDY SURVEY
-------
Appendix 4. Average Annual Household User Charges for Environmental
Services in 1987 (1988 Dollars) ^onmentai
Municipality
Size Category
Drinking
Water
Water
Quality
Solid
Waste
Total
Less than 500
$ 304
$304
$62
$670
500-2,500
210
213
50
473
2,500-10,000
191
174
68
433
10,000-50,000
182
184
78
444
50,000-100,000
150
143
80
373
100,000-250,000
126
106
59
291
250,000-500,000
127
92
116
335
Over 500,000
108
100
185
393
Weighted Average
172
1S4
83
419
Source: Apogee Research from data compiled by the U.S. Bureau of
the Census and 1986 Survey of Community Water Systems, conducted
by the Research Triangle Institute for the Environmental Protection
Agency, Office of Drinking Water, October 23, 1987.
------- |