STUDY OF THE FUTURE FEDERAL
ROLE IN MUNICIPAL WASTEWATER
TREATMENT
REPORT TO THE
ADMINISTRATOR
U.S. ENVIRONMENTAL PROTECTION AGENCY
DECEMBER 1984
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TABLE OF CONTENTS
PAGE
EXECUTIVE SUMMARY vm
CHAPTER 1: INTRODUCTION 1-1
The Evolution of the Construction Grants Program .... 1-1
Managing the Transition 1-2
EPA's Future Funding Study 1-2
CHAPTER 2: AREAS OF CONSENSUS ON FUTURE FUNDING
INITIATIVES 2-1
Gradual Transition to State/Local Self-Sufficiency ... 2-1
Certainty and Flexibility in Funding 2-2
Future Needs Must Be Addressed 2-3
Continued Delegation to States 2-5
Continuity in Standards and Compliance Deadlines .... 2-6
Linkage Between Funding Strategy and Strong Enforce-
ment 2-6
Equitable Distribution of Funds and Affordable
Projects 2-7
Maximize Leveraging of Available Funds 2-7
CHAPTER 3: BACKGROUND 3-1
Funding Trends in Wastewater Facilities Construction . . 3-1
State and Local Governments Provided Most of the
Funds in the Early Years 3-1
State and Local Funding Declined as Federal
Funding Increased 3-1
What Has Been Accomplished? 3-3
The Construction Grants Program Has Helped Improve
Water Quality 3-3
Many Wastewater Treatment Needs Have Already
Been Met 3-4
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table of contents (continued)
PAGE
Distribution of Grant Money has Varied by
Community Size 3-6
Meeting Remaining Backlog Needs Is a Complex Under-
taking 3-7
Needs Vary Among Different Community Types 3-7
Level of Needs Remains High . . 3-8
CSO Correction is a Large Fart of the Needs 3-14
O&M Does Need Special Attention by Federal, State
and Local Governments 3-14
CHAPTER 4: BASELINE 4-1
Trends and Needs in Local Financing 4-1
Local Governments Face Problems in Meeting
Wastewater Treatment Needs 4-1
The Outlook for Long-Term and Short-Term Debt
Mechanisms is not Good 4-2
Revenues are Insufficient to Meet Needs 4-4
Local Governments Are Developing Alternative
Financing Sources for Wastewater Treatment 4-6
Assessment/Availability of Private Sector Financing .... 4-8
Privatization Techniques and Transactions Are
Viable for Financing Wastewater Treatment Facilities. . 4-8
Privatization Offers Some Programmatic Efficiencies
For Municipalities 4-9
Complexity and Federal Requirements May Limit the
Use of Privatization Techniques 4-10
Assessment/Availability of State Financing and Support. . . 4-12
States Have Developed Various Financing Alternatives. . 4-12
Current Federal Programs 4-21
Farmers Home Administration Provides Limited
Financial Assistance to Small Communities 4-21
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TABLE OF CONTENTS (CONTINUED)
PAGE
HUD Community Development Block Grants Provide
Little Support to the Construction of Waste-
water Facilities 4-23
Economic Development Administration Grant
is Planned for Phase-Out in FY 1984 4-23
Office of Community Services Offers Technical
Assistance Grants 4-23
The Construction Grants Program is the Primary
Source of Funds 4-23
Current Federal Programs Can Be Used as Models
for Financial Delivery of a New Program 4-24
CHAPTER 5: MAJOR FUNDING OPTIONS 5-1
Overview of Evaluation Criteria 5-1
Municipal Financing ... 5-3
Municipal Bonds with Cp*dit Enhancements 5-5
Federal Loams 5-8
Federal Grants 5-10
Capitalization Grants for State Revolving Funds 5-12
Summary of Major Funding Options as a Component of
a Transitional Program 5-17
CHAPTER 6: OVERVIEW OF A-TRANSITIONAL FEDERAL PROGRAM 6-1
Funding Levels and Commitments 6-3
Proposed Authorizations 6-3
Commitments Beyond FY 1989 6-3
Allotment Formula 6-3
State Choices: Project Grants vs. Capitalization
of State Revolving Funds 6-5
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TABLE OF CONTENTS (Continued)
PAGE
Types and Timing of State Decisions 6-5
Project Grants: Some Choices 6-5
State Capitalization Grants 6-5
Treatment of Set-Asides 6-5
Timing and Amount of Capitalization of
State Revolving Funds 6-6
Bonus for Establishment of State Revolving Fund. . . 6-6
State Matching Contributions ....... 6-6
State Assurances to Local Governments 6-8
Refinancing Option Under the State Revolving
Fund 6-8
Use of a State Financing Plan as an
Assurance Mechanism 6-8
State Assurances to the Federal Government: Managing
for Environmental Results 6-10
Need for Results-Oriented Program Requirements . . . 6-10
State Certification of Assurance 6-11
EPA Review for Compliance 6-11
Conditions and Options for Operating State
Revolving Funds 6-12
General Rules 6-12
Operating Strategies 6-12
Delivery Systems and Allowable Disbursements .... 6-13
Applicability of Title II Requirements and Other
Federal Laws 6-15
Local Assurances to the State Revolving Fund 6-16
Audits . 6-17
EPA Task Force Recommendations and Plans
for Implementation 6-21
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TABLE OF CONTENTS (Continued)
ATTACHMENTS (Special Analyses for Task force)
1. Office of Comptroller's Set-Asides Study
2. Office of Policy, Planning and Evaluation's Water Quality
Impact Study
3. Privatization (Peat, Marwick, Mitchell & Co.)
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LIST OF TABLES AND FI6URES
Page
Figure 3.1 Substituting State/Local
Funding with Federal Dollars 3-2
Figure 3.2 Wastewater Treatment Expenditures 3-5
Table 3.1 Meeting the Need for Wastewater
Treatment 3-6
Table 3.2 Distribution of Grant Dollars by
Community Size. 3-7
Figure 3.3 Backlog Treatment Needs Small Communities
Disproportionately Large in Relation
to Population 3-9
Figure 3.4 Backlog CSO and Pipe Needs Greatest
in Large Communities 3-10
Figure 3.5 Rehabilitation/Replacement and Additions
to Previously Funded Projects 3-13
Table 4.1 Long-term Municipal Debt Financing 4-3
Table 4.2 State Sources of Wastewater Treatment
Funding 4-13
Table 4.3 Federal Sources of Wastewater Treatment
Funding 4-22
Figure 5.1 Unleveraged State Revolving Fund 5-13
Figure 5.2 Leveraged State Revolving Fund 5-14
Table 6.1 Federal Funding Levels and Their Use. ... 6-3
Figure 6.1 Available Funds in SRF, Beginning of
Year 1995 . 6-4
Table 6.2 Grant Equivalence of SRF Loan
at Certain Interest Rates 5-14
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Table 6.3 State Revolving Fund Accounts 6-18
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APPENDICES*
APPENDIX A:
APPENDIX B:
APPENDIX C:
APPENDIX D:
APPENDIX E:
"Call for Papers" and Responses. . .
Management Advisory Group (MAG)
Report
Minutes of the EPA Task Force on the
Future Federal Role in Municipal
Wastewater Treatment .
Studies Prepared by Organizations
Outside EPA
Internal EPA Studies
• To be made available through NTIS
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EXECUTIVE SUMMARY
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EXECUTIVE SUM4ARY
THE CHALLENGE: MANAGING THE TRANSITION
OF THE CONSTRUCTION GRANTS PROGRAM
The Construction Grants Program is in a critical transition phase signaled by
the 1981 Amendments to the Clean Water Act. The economic, political, and
programmatic realities of the 1980s and 1990s are forcing a dramatic evolution
1n EPA's largest environmental program. The change is under way. The
challenge is to manage it wisely and effectively.
Before 1972, States and localities undertook most of the financial responsi-
bility for wastewater treatment. This was the trend of the times, and the
designers of the Federal Water Pollution Control Act Amendments of 1972
intended that it continue. The Federal dollars infused via the new
Construction 6rants Program were meant to help localities meet Federal water
quality standards quickly. States and localities were then to resume control.
But the need for the construction of wastewater facilities was underestimated.
As the program evolved, its focus changed. Billions in Federal construction
grants were spent to meet urgent national needs for wastewater collection and
treatment. The role of the Federal government expanded rapidly, while State
and local funding of publicly owned treatment works dropped to the minimum
level required.
Today, the program is changing again. More and more responsibility for
management and funding is being returned to the States. Over the next S to 15
years, managers will be increasingly concerned with operation, maintenance,
rehabilitation and expansion of existing facilities, rather than mainly with
meeting "core treatment needs." What is the best way to deliver limited
Federal funds in the upcoming years so that facilities will be completed,
water quality will be protected, and States and localities will receive
incentives for becoming self-sufficient over the long-term?
This is the basic question that was addressed by a wide variety of
participants in this study. Their consensus is presented here.
CONSENSUS FROM A OIVERSE ARRAY OF EXPERTS
UAS SOUGHT IN THE COURSE OF THIS STUDY
This year-long effort was coordinated through EPA's Task Force on the Future
Federal Role 1n Municipal Wastewater Treatment, as well as the Agency's
Management Advisory Group. The members of both entities were from diverse
backgrounds and sought opinion from a wide variety of other interested
parties. Most of EPA's Assistant Administrators had input, as did Regional
officials, State and local representatives, other Federal agencies,
environmental groups, wastewater engineers and manufacturers, and financial
and management experts. In addition, the Agency issued a "Call for Papers" in
the Federal Register to solicit input from the public and private sectors and
received about 30 detailed responses.
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Because the participants represented a highly diverse array of disciplines and
positions, there were—as was to be expected—some differing opinions on
aspects of the basic issues and strategies analyzed. What was astonishing,
however, was the degree of consensus between them in certain key areas.
EIGHT AREAS OF CONSENSUS EMERGED DURING THE STUDY
Several areas of consensus crystalized as the study progressed. They were
used to evaluate various strategies for future program design and management,
as well as the funding initiatives proposed. Briefly, participants agreed
that:
1. A gradual transition from Federal responsibility to State
and local self-sufficiency should be pursued.
2. While Federal aid continues, Its level should be certain and
States should be able to deploy funds flexibly.
3. Continuing and future wastewater treatment needs must be
made an element of any new funding scenario.
4. Delegation of Construction Grants Program responsibilities
to the States has been successful and should continue.
5. Major changes in standards and compliance deadlines efforts
are counterproductive.
6. Federal funding strategies must promote compliance and be
supplemented by strong enforcement actions.
7. Funds should be distributed equitably to meet core treatment
needs first, and States should be given the flexibility to
address project affordabillty issues.
8. The funding mechanism chosen must provide for both short-
and long-term financial "leveraging" of available funds.
That is, the earning power of each funding dollar must be
maximized.
THE CONSTRUCTION GRANTS PROGRAM HAS ACCOMPLISHED
MUCH, BUT NEEDS ARE STILL GREAT
Since the 1960s, over $113 billion from all sources has been spent on the
construction of wastewater facilities. Since 1972, these expenditures have
met many wastewater treatment needs nationwide, at the same time achieving
EPA's goal: Improved water quality. Water quality 1n many streams has been
maintained or improved. By 1982 there were over 15,000 wastewater treatment
plants in operation. The nunber of persons receiving secondary or greater
treatment increased 67% from 1972 to 1982, while the population increased only
111.
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However, there is still a long way to go. Future needs are staggering. EPA's
1982 Needs Survey identifies an estimated total backlog need of $92.6 billion.
By the year 2000, the need is expected to grow to $118.35 billion. The focus
of remaining concerns is core treatment needs (eligible for funds under the
1981 Amendments to meet standards), continuing operation and maintenance, and
future expansion, rehabilitation and reconstruction of facilities to maintain
compliance. With respect to operation and maintenance, $110 billion has been
spent by local communities since the 1960s, with costs expected to grow at a
rate equal to year 2000 needs as backlog needs are met. Study participants
concurred that State and local entities would assume greater responsibility
for wastewater financing over the long term if the right mechanisms and
Incentives for self-sufficiency established. An analysis of available funds
and fund-raising strategies was undertaken to aid 1n designing the most
effective future for the national wastewater treatment program. A summary of
that study follows.
STATE AND LOCAL WASTEWATER FINANCING ENTITIES NEED STRUCTURE AND
HELP FROM THE FEDERAL GOVERNMENT TO BECOME SELF-SUFFICIENT
State and local governmental entities have done much, in both the traditional
and innovative financial arenas, to explore funding initiatives for wastewater
construction. However, as the following sunmary indicates, they need interim
assistance from the Federal government to achieve long-term self-sufficiency
and compliance.
Local Financing
The financial capabilities of local governments have been sorely tested over
the last decade, and the outlook is not much better. High interest rates,
large increases in municipal operating deficits, burgeoning competition for
infrastructure financing, and the trend towards voter tax revolt have all had
negative impacts on the ability of local governments to finance wastewater
treatment needs. The response by local governments in general has been to
look for increased State and Federal assistance at the same time that new
borrowing and revenue alternatives are explored. The sheer magnitude of
wastewater treatment needs, and the fact that they are in competition for
funding with all of the other infrastructure and operating needs, means that
the best efforts of local governments may be inadequate in the foreseeable
future to achieve financial self-sufficiency and long-term compliance goals.
Also disproportionate burdens are being placed on different sized convnunities.
Thus, any future Federal or State assistance programs will have to address the
Issues of long-term municipal financial capability and the targeting of
assistance to those most in need if Clean Water Act goals are to be met and
maintained.
"Privatization" Shows Promise
"Privatization" of municipal services is a cooperative arrangement between
cities and the private sector, whereby cities are provided with access to tax-
advantaged private financing of capital improvements and contract operation of
such facilities. As a result, a city may benefit from lower capital costs and
a long-term contract for the provision of a needed municipal service.
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Successful privatization of wastewater treatment facilities may be an
effective funding alternative for some municipalities to meet their permit
effluent limitations in a timely fashion. While privatization is complex and
hardly a panacea, in conjunction with other funding program options it may
provide a practical solution to meeting some municipal needs, improving O&M
and keeping costs affordable, and could become an important factor in
financing wastewater treatment facilities for population and industrial
growth. Each privatization project must be carefully reviewed to be iure that
no legal obstacles will block the initiative and to determine that it can be
profitably owned and effectively operated. Technical assistance to localities
will be needed.
State Financing: Innovation is on the Rise
The States are finding themselves in the midst of the transition in
Federal-State-local roles in wastewater treatment funding, and are discovering
that their responsibilities have not only been increased but also have become
very diversified. They are reevaluating their current local assistance
programs and State financial c doth i tin ents.
Many States are exploring ways to expand the use of loans, loan guarantees,
bond banking, and bond marketing to ease and complete the transition from the
traditional State grant programs that drain their resources. States are also
examining methods of increasing revenues through the use of special taxes and
loan default penalties. The issue of equity in funding remains important,
especially since smaller communities are now showing themselves to be in
particular need of subsidy. In addition, some States have experienced
considerable difficulties in passing new programs through their legislatures.
Federal Financing
There are five major Federal programs that fund wastewater projects in
addition to EPA's Construction Grants Program: one under HUD, one under HHS,
one under the Economic Development Administration (EDA), and two under the
Farmers Home Administration (FmHA). The EDA program is being phased out this
year, and FmHA funds have been reduced. Although Federal assistance programs
were never intended to substitute for State and local financial programs, the
magnitude and distribution of Federal funding for municipal wastewater
treatment facilities is not going to meet all current or future needs. State
and local governments will be increasingly called upon to fill this void.
FIVE MAJOR FUNDIN6 OPTIONS HERE EVALUATED
After examining the areas of consensus, information on accomplishments and
future needs, and a baseline on financial capabilities and programs, EPA
evaluated five major funding options. Each option was assessed as to how well
it conformed to the areas of consensus and met four criteria: effectiveness,
efficiency, equity, and feasibility. The presence of undesirable features
that could cause tax losses or contingent liabilities to the U.S. Treasury
were also assessed.
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The pros and cons of each option were analyzed, as was its usefulness as a
component of the transitional program. The five options were:
• Municipal Financing - The traditional method used by State
and local governments to obtain funds has been the issuance
of long-term bonds. Privatization may offer an additional
mechanism.
• Municipal Bonds with Credit Enhancements - The Federal
government could either guarantee the repayment of a bond,
or pay local governments an amount that reduces the
effective interest rates on local borrowing to a lower rate,
such as 5%.
• federal Loans - The Federal government could make direct
loans to local governments at low interest rates.
• Federal Grants - Under the current program, the Federal
government provides annual grants for wastewater treatment
from annual appropriations. Funds are allotted to States
based on a complex formula that takes into account State
population and wastewater treatment needs.
« Capitalization 6rants for State Revolving Funds - Under a
concept similar to special revenue sharing and New
Federalism, the Federal government offers "seed" grants to
States with which to capitalize State Revolving Funds.
States loan monies to local governments for wastewater
treatment construction projects. Loan repayments are
re-lent ("revolved'') to other local governments for
additional wastewater treatment projects.
The analysis clearly showed disadvantages to most of the options.
The following conclusions were drawn:
• While municipal bonds are an important element in achieving
State and local self-sufficiency, many communities require
supplementary assistance to meet statutory deadlines and
enforceable requirements.
• Federal guarantees on bond repayments and Federal interest
subsidies would encourage local governments to continue to
rely on the Federal government for financial support and
could result in significant tax losses or contingent
liabilities to the U.S. Treasury.
• Direct Federal loans would not create a long-term capital
source for meeting future wastewater facility needs, and
could result 1n larger debt service costs to local
governments than under the current grants program.
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The construction grants program 1s in place, effectively
delegated, and operating well. In terms of leveraging
funds and the potential for targeting funds, 55% Federal
grants provide an excellent framework for proceeding with
the construction of many needed facilities. However, in
the past the program may have provided a disincentive to
increased State and local funding, some delays, and some
Inflexibilities. Moreover, grant money, once expended, 1s
gone, and no long-term State/local capitalization occurs.
This program should now be combined with mechanisms that
provide for enhanced State Incentives and flexibility to
promote long-term self-sufficiency and compliance.
Capitalization Grants for State Revolving Funds 1s an
effective and feasible approach to the transition to State
and local self-sufficiency. It provides States with a
growing, long-term source of funds that may be flexibly
targeted to wastewater treatment now and in the future.
The State Revolving Fund concept would Involve a dedicated
fund for municipal wastewater treatment, with repayments
returning to the fund for use in financing new municipal
wastewater treatment projects. Capitalization of the fund
would initially be provided with Federal funds through
State Capitalization Grants, but would increasingly rely on
local contributions in the form of loan repayments.
CONSENSUS OPINION SUGGESTS A MIX OF THE CURRENT
PROJECT GRANT PROGRAM AND STATE REVOLVING FUND
Beginning in FY 1986, States could shift to the State Revolving Fund (SRF)
concept. That is, States could choose whether to accept capitalization grants
for operating SRFs, to continue with the Federal project grant program, or
combine the two. States should be encouraged to move toward full implementa-
tion of the SRF concept as soon as possible, and be provided with the
incentives and flexibility to do so, because this mechanism best provides the
financial means to meet short- and long-term compliance needs.
In the short term, State governments could leverage additional monies for the
revolving fund through traditional long-term bond issues by using the Federal
seed monies as security for the bond issues. In addition, municipalities could
be encouraged to move quickly on their own, given the potential for
refinancing from the SRF in the future. In the long term, an established SRF
program could create a lasting source of monies for States and communities to
use 1n meeting total wastewater treatment requirements. Thus, SRFs would
provide for a phased transition to ultimate State/local self-sufficiency.
To Implement this transition, the Federal government could commit to
continuing $2.4 billion annually through FY 1991. Beginning in FY 1992, the
amount could be reduced to $1.8 billion, with final authorization of $1.2
billion and $0.6 billion for FY 1993 and FY 1994, respectively. This
transitional funding program would provide a total of $27.6 billion of Federal
funds for FY 1982 through FY 1994. While many participants in the study
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believed that these monies might be insufficient, the buying out of the most
pressing treatment needs is dependent on the pace and scope of State movement
into SRFs and the targeting of funds.
The States would have increased flexibility and discretion in the use of
Federal funds, but would make assurances that compliance needs would be
addressed and that maximum environmental results would be obtained. To
implement the SRF concept, States may need legislative changes and additional
financial expertise. Under the SRF concept, Federal government involvement
would be limited to ensuring that the program was managed to achieve
environmental results.
Local governments would be provided with increased certainty regarding the
availability of outside funding, and would be responsible for using such
knowledge to develop plans for expediting compliance with NPDES requirements.
Local governments receiving SRF financial assistance would also be responsible
for meeting their pledges to repay SRF loans.
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CHAPTER 1
INTRODUCTION
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CHAPTER 1: INTRODUCTION
THE EVOLUTION OF THE CONSTRUCTION
GRANTS PROGRAM
Representing one of the nation's largest Federal infrastructure development
programs, for the past decade EPA's grant program for wastewater treatment
plant construction has been the centerpiece of municipal efforts to meet the
nation's ambitious water quality goals. In 1972, the designers of the Federal
Hater Pollution Control Act Amendments (P.L. 92-500) believed that to meet the
stringent secondary treatment standards newly mandated by the Act, conmunities
needed a substantial boost over the past in Federal aid. Over the next 12
years, Congress appropriated over $40 billion to assist municipalities in
constructing wastewater treatment plants in a timely fashion. This large
input of Federal dollars, and cooperation of State and local governments, is
producing significant water quality improvements across the country.
By providing large amounts of Federal aid and an expanded Federal share (75
percent of eligible project costs), the 1972 Act spelled out a strong initial
Federal role under the new municipal wastewater treatment plant construction
program. However, its sponsors viewed the Federal intervention as a temporary
fix. Ultimately, they underscored, construction of needed facilities was and
should be a State and local responsibility. Moreover, the Act noted that
significant contributions to plant construction had been made with State and
local -resources prior to 1972. It expressed the hope that the same level of
conmitment would be made under the expanded program, and that localities could
continue to provide for the full costs of adequate operations and maintenance.
Highlighting the short-term nature of the Federal involvement and perhaps
the sponsors' optimistic estimate of the magnitude of the problem, the 1972
Act authorized $18 billion of contract authority for FY 1973-1975 for meeting
an estimated "backlog" of $24 billion (at a 75% Federal share).
The 1970s saw much progress and some frustrations for the municipal wastewater
treatment program. While the Federal government did not face the huge budget
deficits of today and continued to fund the program at a high rate ($4.5.
billion in FY 1978), municipal compliance goals were often not met. Projects
were sometimes delayed as grant procedures burgeoned and cornnunities waited in
line for funds, and EPA's Needs Survey continued to report large municipal
demands. In an effort to devise workable alternatives, the 1977 Amendments
clarified Congressional policy that States have the major responsibility to
manage and implement the program. On the theory that States are more
appropriate managers of the program because they are close to the problems,
the Amendments provided for the creation of State program delegation and
greater administrative flexibility.
By 1980, however, more far-reaching reforms in the program began to be
discussed. These reforms, aimed at putting the municipal wastewater treatment
construction program back on course, led to the 1981 Amendments to the Clean
Water Act (P.L. 97-117). Tnese major amendments signaled the sense of
Congress and the Administration that EPA's Construction Grant Program was in a
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period of major transition back to the original intent of P.L.
92-500--ultimate State and local self-sufficiency in the construction,
operation and maintenance, rehabilitation and replacement, and expansion of
municipal wastewater treatment facilities.
The transition envisioned by the 1981 Amendments was a gradual movement from
the prevailing high level of Federal financial involvement to a program
focused on increased State and local independence in fulfilling the full range
of obligations entailed by the Clean Uater Act. The long-range implications
of these Amendments were significant. Funding eligibilities were limited so
as to reduce the growing level of Federal financial commitment. Specifically,
there was a discontinuation of Federal grants for planning and design
activities (except under certain conditions)f and a reduction in the number of
eligible funding categories. By focusing the grants program on existing
rather than future needs, Congress limited the Federal role to completing
construction of facilities needed to treat wastewater discharges as prescribed
by the standards. Moreover, the 1981 Amendments specified that the Federal
share of eligible projects, with some limited exceptions, would drop to 55%
from 75% beginning in FY 1985. Finally, Congressional appropriations were
dropped from their earlier highs to $2.4 "billion per year from FY 1982-1985.
Managing the Transition
The major issue today is how this continued transition can be wisely and
efficiently managed to ensure the expeditious completion of needed facilities
and to provide for State and local incentives to achieve long-term compliance
on a self-sufficient basis. This challenge is great at a time when Federal
funds are limited and Federal budgetary deficit pressures are looming. This
challenge is even greater for States and municipalities as they move towards
the stringent 1988 compliance deadlines, and face a backlog of other
infrastructure demands, such as roads, bridges and housing. While States and
local citizens may accept the philosophical notion that wastewater treatment
needs must be woven into their own budgets and household expenses on an
ongoing basis (much like schools and hospitals), it is a far different matter
to deal with the possibility of any ultimate (however gradual) Federal
financial phase-out.
To address the future programmatic transition and prepare for reauthorization
of Title II of the Clean Water Act necessary for FY 1986, in January, 1984,
EPA initiated a year-long study on future Federal, State and local funding
roles and alternative funding mechanisms for municipal wastewater treatment.
EPA believed it was critical to determine how the pace of construction might
be increased and incentives enhanced to "buy out" core treatment needs, while
at the same time making preparations for the next generation of activities,
namely, adequate long-term O&M, rehabilitation/ replacement and needed
expansion of municipal wastewater treatment facilities.
EPA's Future Funding Study
To make these evaluations and lay the groundwork for the continuing transi-
tion, EPA's study focused on two major goals:
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Build a national consensus on the shape of alternatives for
future Federal financing of municpal wastewater treatment.
Develop a set of policy and legislative recommendations
regarding alternative program strategies that will best
promote both the intent of the Clean Water Act—long-term
State and local self-sufficiency, and the goal of the
Act--long-term municipal compliance.
The building of a national consensus on a future funding strategy for meeting
municipal wastewater treatment needs was conceived as a broad "building-block"
process. The purpose of EPA's year-long funding study was not to impose
solutions worked out internally at Headquarters, but to bring to the surface
and evaluate the real concerns and Issues of all parties Involved. To
accomplish this goal, a comprehensive approach was followed 1n which as many
and varied views as possible were collected, and a broad range of participants
were involved in decision making. This report reflects this ongoing work.
A multi-disciplinary EPA Task Force on the Future Federal Role in Municipal
Wastewater Treatment was organized to oversee the study. Headed by Assistant
Administrator for Water, Jack E. Ravan, and staffed by the Office of Water and
the Office of Municipal Pollution Control, the Task Force represented a broad
range of skills. Represented were the EPA Assistant Administrators for
Administration and Resources Management, for Policy, Planning and Evaluation,
for External Affairs, for Enforcement and Compliance Monitoring, for Solid
Waste and Emergency Response, and EPA's 6eneral Counsel. Members were also
drawn from three EPA Regions; the Region IV Administrator, the Region VI
Deputy Administrator, and the Region V Water Division Director. The Presi:s-t
of tne Association of State and Interstate Water Pollution Control
Administrators (ASIWPCA) served as an ex-officio member. The EPA Task Fcrce
met regularly throughout the year. Minutes of these meetings are induce: :r*
Appendix C.
EPA announced its initiation of the study and issued a "Call for Papers" on
its study plan in the Federal Register on February 16, 1984. In this notice,
EPA solicited input from the public and private sectors on the range of
funding options and evaluative criteria recomnended for consideration. In
addition, EPA outlined a number of parameters or "boundaries" of its study,
including the provisions under the 1981 Amendments for a 55S Federal share and
limited funding eligibilities (Categories I, II, IIIA and IVB), and adherence
to current U.S. Tax Code provisions. Responses came in from all
sectors—State and local governments, professional engineering firms and
associations, environmental and financial groups, and private citizens. The
Federal Register's "Call for Papers" and the approximately thirty, sometimes
highly detailed, responses are included in Appendix A.
EPA's Task Force also sought direct expression of opinions and views from
outside participants. EPA's Management Advisory Group to the Construction
Grants Program (MAG)—which nad been asked by Administrator William
Ruckelshaus in October, 1983 to study future funding mechanisms—began working
in earnest. An official advisory group to the Office of Water's Construction
Grant Program for the past 11 years, the 16-member MAG combines a diversity of
professional backgrounds including wastewater treatment engineering and
management experts, equipment manufacturers, financial specialists, local
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government officials, and environment and public representatives from
throughout the county. It was Important, as the Administrator stated, to "tap
the collective wisdom of HAG" and obtain the group's best advice on the
county's financing of wastewater treatment.
The MAG and a special 11-member subgroup met regularly over the next months to
hammer out its findings. In the course of its eight months of deliberations,
HAG heard from a variety of major public and private sector organizations
representing diverse interests, Including the Water Pollution Control
Federation (MPCF), Association of Metropolitan Sewerage Agencies (AMSA),
American Consulting Engineers Council (ACEC), National Society of Professional
Engineers (NSPE), Water and Wastewater Equipment Manufacturers Association
(VWEMA), National Governors Association (NGA), National Wildlife Federation
(NWF), Maryland League of Women Voters (MLWA), Izaak Walton League (IWL),
National League of Cities (NLC), and Association of State and Interstate Water
Pollution Control Administrators (ASIWPCA). MAG also had the benefit of
discussions with persons experienced in public financing and Federal tax
regulations, and drew upon past MAG and EPA studies. EPA staff assisted in
answering discrete technical and financial questions posed by MAG.
On May 10, 1984, MAG presented its final recommendations to EPA's Task Force.
The MAG report, titled "Future Funding of Municipal Water Pollution Control
Needs," represents a consensus of its members and is presented in Appendix B.
The Task Force gratefully acknowledges the expert, thoughtful and hard work of
the MAG members in drafting their guidance to EPA.
EPA's Task Force also heard directly from other Federal and State government
agencies involved in wastewater treatment programs. These Included the
Department of Agriculture's Fanners Home Attainistration (FmHA), the Treasury
Department's Federal Financing Board (FFB), the Office of Management and
Budget (0MB), and the State of New Jersey. On May 31, 1984, EPA held a public
hearing on future funding problems and directions, attended by twenty interest
group, governmental, and private sector representatives. As a final input,
ASIWPCA offered to prepare case studies on new State programs for financing
wastewater treatment. In July 1984, ASIWPCA submitted its survey to EPA,
which included special case histories of new funding programs developed in 10
States—California, Georgia, Minnesota, Maryland, Mississippi, Missouri, New
Hampshire, Pennsylvania, and Tennessee. EPA thanks the ASIWPCA staff and the
States for their invaluable contribution.
In short, this report is a product of many hands. In addition to the
above-mentioned contributions, special studies, appearing 1n Appendix E, were
prepared by EPA's Office of Policy, Planning and Evaluation (on water quality
benefits), Office of the Comptroller (on options for set-aside programs), and
Peat, Marwick, Mitchell & Co. (on privatization). Summaries of these studies
also are included as an attachment to this report. Other materials in direct
support of the study were prepared by the Office of Municipal Pollution
Control, with important contractural support from The Synectics Group, Inc.
(TSG), and the Government Finance Officers Association. The consensus,
background/baseline for the study, and the major options and evaluative
criteria presented in the following pages lay the groundwork for an important
progranmatic transition.
1-4
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CHAPTER 2
AREAS OF CONSENSUS
ON FUTURE FUNDING INITIATIVES
-------
CHAPTER 2: AREAS OF CONSENSUS ON FUTURE FUNDING INITIATIVES
A national consensus-building goal was adopted because of the complexity and
sensitivity of the funding and resource issues involved. This section
explores the balance of opinion which began to emerge as the study progressed.
This consensus crystalized gradually as discussions continued with govern-
mental representatives, engineering and financial experts, and environmental
groups throughout the country. Of course some major differences among groups
and individuals remain. What was gratifying, however, was the remarkable
degree of general consensus which did surface in broad areas. Without any
this general agreement, it would have been difficult to proceed. The eight
areas of consensus presented below thus serve as the underpinnings for the
detailed evaluation of major Federal, State and local funding options and
financial delivery systems presented in the final chapters of this report.
Gradual Transition to State/Local Self-Sufficiency
As signaled most clearly by the 1981 Amendments, there was a general agreement
that the municipal wastewater treatment plant construction program was moving
slowly from a period of high Federal financial support in the 1970s to greater
State and local independence in the 1990s. Several issues are involved in
such a shift: how quickly it should occur, the level of Federal funding during
the transition, and the Federal role in targeting funds to core and other
needs.
Even now, Federal funds are much more limited than in the past. Groups such
as the Environmental Protection Agency's Management Advisory 6roup (MAG) and
the Water Pollution Control Federation fWPCFl referred to this transition as
an "ultimate Federal funding phase-out. MAG thereby recommended a 10 year
period for withdrawal, and WPCF an even shorter period. Other groups avoided
the term "Federal phase-out," but discussed programs leading toward this.
Such programs would seek ways to increase the pace of construction, and
leverage monies in anticipation of limited future Federal funds.
The issue of "how much" Federal input was needed, however, raised a sharp
difference in views. For example, the MAG report recoirmended an annual
Federal infusion of $3.5 billion for ten years, while H.R. 3282 passed the
House with higher recoirmended levels. Many States and other groups, including
the Association of Metropolitan Sewerage Agencies and the National Governors
Association, agreed that an increase in Federal financial support was
necessary. However, a wide variety of groups, such as ASIWPCA, recognized
that it might be necessary to work within EPA's currently authorized and
projected level of $2.4 billion a year. A few others, such as the Water
Pollution Control Federation, favored a reduced Federal level after several
years. This was based on their concern that the bureaucratic red tape still
entailed by EPA's grant process delayed construction, and thus communities
might gain from funding projects themselves. These various opinions are
summarized in the MAG Report, which is included in Appendix B.
Another area of emerging consensus concerned a highly focused or targeted
Federal role needed to "buy out" core treatment needs as promptly as possible.
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Given limited and perhaps slowly diminishing Federal funds and tough
compliance deadlines, many participants agreed that these funds could be best
utilized to finance a share of the treatment-related needs as outlined in the
1981 Amendments and EPA's 1982 Needs Survey. Under the 1981 Amendments, the
eligible categories for Federal grants effective October l, 1984, are
generally limited to secondary treatment (Category I), advanced treatment
(Category II), infi1tration/inflow correction (Category 111A), and new
interceptor sewers (Category IVB). According to EPA's 1982 Needs Survey,
these account for $35.4 billion of total 1982 municipal needs, and it is these
needs which municipalities must meet under the 1988 compliance deadlines set
by the Clean Water Act and reinforced by EPA's 1984 National Municipal Policy.
In addition, those combined sewer overflow (CSO) projects authorized under
Section 201(n) are also eligible for Federal funding.
As discussed below, to continue to focus Federal funds on these core
treatment-related needs does not mean that funding strategies can neglect the
vast range of other important collection and CSO correction needs. According
to EPA's 1982 Needs Survey, these categories account for an additional $57.2
billion to serve 1982 needs. These needs are extremely pressing and growing
in many communities. However, a "first things first" strategy prevailed and,
as MAS noted, "time is a critical factor." Further impetus to the notion of
clearly targeted Federal funds, as outlined in the 1981 Amendments, arises
from a concern to complete core treatment needs before "second-round" grant
pressures arise.
A final area of strong consensus related to a gradual or phased transition
from high Federal participation to increased State and local support of
wastewater treatment. As participants argued, increases in State and local
costs should be accomplished gradually and incrementally in order to minimize
resistance to making the changes needed for locally self-sufficient wastewater
treatment. Also, a smooth transition will require a clear understanding of
the new roles and responsibilities by all participants. It must be clear that
EPA is not simply transferring program functions to State and local
authorities, but will be intensively involved in the transition, and will play
important on-going oversight and assistance roles after the transition has
been completed. EPA also recognizes that States are at different levels in
their capacity to accept increasing technical and financial responsibilities
for the program. The Agency will provide assistance where it is most needed
for the States to move successfully through the transition.
Certainty and Flexibility in Funding
In moving towards ultimate State and local self-sufficiency, a clear consensus
centered on the critical need to provide a stable and certain level of Federal
aid. This is seen as important if States are to initiate or revise programs
that will effectively meet municipalities' continuing and future wastewater
treatment needs. In addition, any funding alternative should be designed to
provide individual communities with a reasonable degree of certainty as to
whether or when Federal and/or State funding will be available to them. This
is necessary since the National Municipal Policy requires municipalities to
submit municipal compliance plans--based on the financing of
construction—with _or without Federal assistance.
The call for certainty in Federal funding is hardly new. Uncertainty seems to
have plagued the program, although stable annual appropriation levels over the
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past four years at the levels authorized by the 1981 Amendments has reduced
this problem somewhat. But uncertainty still exists concerning the future of
the grants program. Moreover, while participants may disagree on the amount
of needed Federal funds, they clearly agree on the importance of not
subjecting the Federal program to budgetary or politically motivated upheavals
every three to four years.
A more recent element of this consensus opinion is aimed at reducing the
tendency of some localities to "wait in line" for a Federal grant. Study
participants predicted that if greater certainty about future Federal funding
was provided, communities might acquire a more realistic expectation about the
likelihood of receiving funding. Moreover, any new program should be
structured so that communities are encouraged to proceed with construction as
quickly as possible, instead of waiting for a Federal grant, and to encourage
the most effective operation and maintenance of existing facilities to delay
or reduce needs for additional construction.
Flexibility for State governments is a key ingredient of this consensus.
While the current downward trend in Federal funding levels is resisted by
some, it appears that States and conmunities would support this trend if
provided with long-range certainty about the future levels of Federal funds
and a greater role in decision making.
New proposals for enhanced flexibility include discretionary authority for
States to devise innovative funding mechanisms and strategies to best meet
their particular needs. Some of these new funding mechanisms include the
State revolving loan and interest subsidy programs recommended by MAG, and the
revolving loan, bond guarantee, bond insurance, and interest subsidy programs
proposed under in H.R. 3282. States also strongly support the notion of
increased flexibility in designing mechanisms that address local affordability
issues. Since the financial condition of comnunities varies widely and
financially hard-pressed smaller communities may pose special problems, States
seek greater flexibility in funding specific construction projects. Such
affordability issues are discussed below.
Future Needs Must Be Addressed
Another area of strong consensus is that any future funding strategy must
address the full range of water pollution control needs facing communities,
including needs not eligible for Federal funding under the 1981 Amendments.
The importance of considering the total financial burden on comnunities is
stressed in EPA's February 16, 1984 Federal Register notice, "Call for
Papers," and serves as the underpinning of Chapter 3 of this report. As MAG
reported: "Since a large portion of [total] needs cannot be Federally funded,
some criteria of affordability and implementability will be needed to compare
different ways of reducing the municipal burden to a feasible level."
Not only must the totality of needs be considered, but future changes in the
character of needs must be addressea. In a very real sense, we are in a
period of transition from a wastewater treatment program aimed at building
core treatment facilities to a program dedicated to assuring effective
State/local operation and maintenance programs and local funding, and
accommodation of future needs for rehabilitation, reconstruction, replacement
and expansion. This'transition will occur naturally over time and will
accelerate in the 1990's as core needs are bought out.
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To conceptualize this transitional shift in emphasis and assist in the
targeting of funds, EPA divided community "needs" into three categories.
Concern 1: Core treatment needs are generally those that
remain eligible for Federal funds under the 1981 Amendments
effective October 1984. These needs should be targeted
first under any new funding strategy. These include:
- Treatment plant needs for existing populations
(Categories I and 11 - secondary and advanced
treatment) excluding new facilities that,
. replace (or add to) existing facilities that are
meeting current standards
. propose replacement of on-site systems that are
not based on approved facility plans
. propose replacement of on-site systems based on
approved facility plans, but that involve growth
increase of 50% or more.
- Infiltration/inflow correction costs where the existing
treatment plant is not meeting standards (Category
IIIA)
- New interceptor sewers and transmission pumping
stations necessary for conveying wastewaters that are
currently discharged raw or which are inadequately
treated at existing facilities which may be
abandoned (Category IVB).
- Some CSO (Category V) projects, as authorized under
Section 201(n) for State priority water quality
improvements.
Concern 2: Continuing operation, maintenance and replace-
ment of equipment to meet standards. Traditionally, these
have been costs that local communities have borne almost
exclusively and will take on increased importance in the
future. As the transition to State and local
self-sufficiency for upgrading, expansion, rehabilitation
and reconstruction of facilities becomes more prominent in
the next 5-15 years, these costs may rise. Concern 2 needs
specifically include annual operation and maintenance (O&M)
costs incurred in operating facilities within performance
levels required by standards, maintaining equipment to
ensure proper operations and service, and replacement of
minor equipment and appurtances.
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Concern 3: Future needs that ensure construction of
adequate capacity and ultimate rehabilitation and
reconstruction of facilities in categories not eligible
under Concern 1, and reserve capacity and plant expansion to
accomodate population growth. These costs, which have
received some Federal support in the past, should be
primarily a State and local government responsibility in the
future. These costs include:
- Reserve capacity for future growth
- Plant expansions
- New collector sewer projects (Category IVA)
- Many CSO (combined sewer overflow) correction needs
(Category V)
- Rehabilitation, replacement and reconstruction of
existing sewer sytems beyond those for correction of
infiltration/inflow (Category IIIB}
- Control of stormwater runoff (Category VI)
Plant reconstruction and expansion issues deserve special attention here
because of concerns raised that they could lead to pressures for "second-
round" grants. Consensus opinion on these issues underscored the idea that
promotion of local growth and economic development is best handled by State
and local governments and thus should be their responsibility. Where growth
is ocurring, States and local governments must be responsible for ensuring
that needed facilities are constructed; reserve capacity to accommodate future
growth is best addressed during preconstruction planning. All parties must
recognize that reconstruction, rehabilitation, and expansion will be
increasingly important aspects of the program. Consequently, strategies must
be developed to enhance the ability of State and local governments to uphold
their responsibilities for ensuring that existing facilities are operated and
maintained to meet compliance requirements and minimize needs for additional
construction, and also that existing facilities are rehabilitated,
reconstructed or replaced as required to continue to meet environmental
objectives.
Continued Delegation to States
This area of consensus evoked almost unanimous support, particularly from
ASIWPCA. On the assumption that States are the more appropriate managers
since they are closer to the program, 40 States have accepted full delegation
since 1977. As further indication of independent State interest and
creativity in devising innovative States programs, many States initiated new
programs to launch themselves toward greater financial and administrative
self-sufficiency in response to the 1981 transition. Discussed in Chapter 4,
these include improved bond management, new bond guarantee and insurance
programs, loan funding mechanisms, interest subsidies and the like. Thus,
there was agreement that any future funding option should result in an
increase in State responsibility in managing, administering and financing the
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option. Concurrently, States should be provided with increased flexibility in
how the program is managed, administered and financed.
Continuity in Standards and Compliance Deadlines
States and other participants agreed that to maintain progress and minimize
potential disruptions, major changes should not be made in the existing
standards. If changes are deemed necessary, all actors must be involved in
the revision process, including all levels of government and the private
sector. As MAG stated, it strongly "supports the need to establish
consistency in the Federal program, in terms of reliable, uniform, and
long-term goals and commitments upon which municipalities can then determine
without uncertainty what is expected of them." Likewise, ASIWPCA and other
groups supported retention of the 1988 goals and compliance deadlines in order
to provide milestones for State and local action.
Linkage Between Funding Strategy
and Strong Enforcement
There was much discussion of the need to design any new funding strategy
within the context of EPA's 1984 National Municipal Policy and 1988 compliance
deadlines. The potential for new strong and consistent Federal and State
enforcement was viewed as a key element for success in achieving compliance.
Under the National Municipal Policy, communities are required to meet
applicable NPOES permit requirements by July 1, 1988, whether or not they
receive Federal funding. Strong enforcement of this policy was viewed as the
best means of stimulating the innovation necessary for municipalities to
complete or improve the operation of needed facilities. In particular, where
delays are caused by coimuinities waiting for Federal financial assistance, it
was felt that such delays should be identified and corrected through
appropriate enforcement actions.
Although enforcement strategies can be used effectively to move municipalities
into compliance, it was noted that funding strategies should also be designed
with adequate incentives for municipalities to finance needed projects in the
short-term without outside assistance. Where possible, funding strategies
should create opportunities to reward, rather than penalize, those communities
that proceed in advance of outsided funding. Such options are discussed more
fully below under "Maximum Leveraging of Available Funds."
The attainment and continued maintenance of compliance by all municipal
facilities will also require enforcement of O&M requirements in permits, and
collection of adequate fees and revenues needed to meet rising O&M and
replacement costs. MAG noted that current local user fees do not always
reflect the true costs of providing wastewater treatment services, and that
local user fees may have to be increased. The National Municipal Policy
strategy for facilities that require improved O&M provides for development of
a Composite Correction Plan. Through examination of the financial management
system, this enforcement tool will provide a means of assuring that locally
collected user fees and other revenues are maintained at adequate levels and,
where appropriate, reflect the variation in demands placed on the system by
each user. In addition, the establishment of an adequate user fee system
could also be accomplished through conditions on outside financial assistance
that is made available to municipalities.
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Equitable Distribution of Funds and Affordable Projects
Equity and affordability issues attracted much attention. EPA's Task Force
noted that there was considerable tension between these two goals. Indeed,
equitable distribution of funds (i.e., directing limited Federal funds first
to conmunities who had not yet received grants) did not always enhance the
affordability of projects. Some financially hard-pressed communities simply
needed more financial support than others and, in particular, smaller
communities were sometimes affected by prohibitive "diseconomies" of scale in
treatment systems and costs. There was substantial agreement, however, that
both goals needed to be addressed.
In terms of equitable distribution of Federal grant awards, EPA, as well as
many States and outside participants, specifically noted that second-round
funding for facilities 1s not only Inequitable but also violates the goals of
long-term self-sufficiency and compliance. The communities receiving a
second-round grant—and other communities that are aware of the opportunity
for receiving second-round funding—will continue to look to the Federal
government as a source for funding future construction. Long-term compliance
efforts will be hindered if limited Federal funds are used to fund new growth
for complying facilities or replacement of facilities that have already
received CWA funding at the expense of funding improvements to facilities that
have never met standards or received Federal assistance.
Because project affordability issues pose special problems, the consensus was
that States were best equipped to address them. Rather than restructuring
Federal grants to encompass criteria such as per capita costs and local
financial capability on a nationwide basis, State governments should be
provided greater flexibility to provide for these problems on a State-wide
basis. Underscored was the notion that "unaffordable" projects delayed
compliance. If a community perceived a project as beyond its means, it would
simply delay the start of needed construction.
Maximize Leveraging of Available Funds
Given the limited Federal funds available, EPA, HAG, and many States agreed
that funding alternatives must be established that substantially increase
State financial capabilities in both the short- and long-run. A consensus
emerged that funding alternatives must provide for near- and long-term
leveraging of Federal dollars to increase the pace of construction, meet the
1988 compliance deadlines, and provide State and localities with sufficient
funds to meet future needs.
MAG specifically recommended that "States should be permitted to use Federal
funds as grants, revolving loans, and/or Interest subsidies." Revolving loan
funds, such as the one recently enacted in Georgia, would permit States to
recapture monies to capitalize their funds over time. Thus, States would
begin to accrue additional resources to finance future municipal wastewater
treatment needs. H.R. 3282 (98th Congress) also provided for an additional
$1.6 billion "sweetener" in Federal funds for State loan and loan guarantee
programs. In the short-term, State leveraging and local refinancing options
would help meet 1988 compliance goals. The State Revolving Fund concept is
described in more detail in Chapter 6.
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CHAPTER 3
BACKGROUND
-------
CHAPTER 3: BACKGROUND
FUNDING TRENDS IN WASTEWATER FACILITIES CONSTRUCTION
Over the years, more than $113 billion (constant 1982 dollars) has been spent
on the construction of wastewater facilities. Since I960, funding for
construction of wastewater facilities from all Federal, State and local
sources has increased significantly, reflecting the growing population and
better understanding of the need for municipal wastewater treatment. Until
the early 1970s, most of the funds came from State and local sources, with
some Federal funding (see Figure 3.1).
State and Local Governments Provided Most of the Funds
in the Early Years
In 1972, the grant program was drastically expanded, not only in terms of the
amount of Federal funding available, but also in terms of the Federal share of
project costs, and eligibilities. The reasons for such a substantial
exparrsion of Federal aid were two-fold: the standards mandated by the Federal
Water Pollution Control Act needed to be backed by a Federal financial
commitment and, since municipalities would be playing "catch-up" with water
pollution control standards, they needed a significant inducement to meet
these goals as quickly as possible. However, this intervention was viewed as
a one-time, short-term solution; funding to construct needed facilities in the
future ultimately rested with State and local goverrenents.
State and Local Funding Declined As Federal Funding Increased
Although it was unrealistic to expect attainment of standards by 1977 or even
1983 through the grants program alone, the backers of the 1972 Amendments did
note that States and municipalities had made significant contributions of
their own resources prior to 1972, and expressed the hope that the same level
of commitment would be made under the expanded program. Unfortunately, as
Federal funding for municipal wastewater treatment increased during the
1970's, there was a marked substitution of Federal dollars for State and local
dollars. As shown in Figure 3.1, Federal support increased in the period of
1970-1978, largely due to the growth in the Federal Construction Grants
Program under the 1972 amendments. Concomitantly, State and local funding
support declined. By 1976, Federal outlays peaked at $5.38 billion while
State/local spending dropped to under $1 billion, a decrease of more than 75%
from State and local funding levels in 1960 (constant 1982 dollars).
By 1978, the current funding patterns established by the 1972 Amendments were
in place. State and local governments contributed fewer dollars as Federal
funding increased, going little beyond the level required to "match" Federal
dollars. Funding of projects solely from State/local sources significantly
decreased. By 1982, for example, it is estimated that the dollar value of
State/local support not tied to the Federal Construction Grants Program was
3-1
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8
7
6
5
4
3
2
1
0
FIGURE 3.1 SUBSTITUTING STATE/LOCAL FUNDING WITH FEDERAL DOLLARS
/
\
./
9
/
/
v/
/
A /
/ \ /
\
v
I960
i—i—r
1965
T I"
¦ Federal Funding
• State/Local Funding
•• Total Funding
i—r
1970
Year
i r~
1975
i—r
i r~
1980
-------
less than $1 billion, down from an estimated $2.3 billion in 1970. Thus, even
though the number and dollar value of projects increased as a result of the
Construction Grants Program, the level of State and local spending for
construction in constant dollar terms actually declined. Despite this
decline, local governments have increased total spending to support operations
and maintenance costs of newly constructed facilities.
These trends suggest that State and local governments could pay more for
wastewater treatment as the Federal government slowly withdraws its support.
Such increases, however, will require that proper mechanisms for local capital
and O&M self-sufficiency be put in place.
WHAT HAS BEEN ACCOMPLISHED?
The Construction Grants Program
Has Helped improve Water quality
The Clean Water Act placed treatment requirements on municipalities in the
effort to improve the nation's water quality. In particular, they must meet
secondary treatment discharge limits by 1988. The efforts of the Construction
Grants Program has largely been directed to helping municipalities meet this
requirement. In some areas, even more stringent treatment requirements are in
place because of the need to protect or enhance water quality. EPA's guidance
for the development of State Construction Grant funding priority lists has
always emphasized water quality, and this emphasis has increased in recent
years.
Between 1972 and 1982, the population of the United States grew 111. At the
same time, removal of certain pollutants from municipal wastewater (biochemi-
cal oxygen demand or BOD, and suspended solids) increased by 651. Much of
this increased treatment capability can be attributed to the Construction
Grants Program, which has helped many municipal facilities achieve secondary
treatment levels. In addition, although the flow of municipal wastewater has
Increased by nearly seven billion gallons per day, the total amount of
pollutants discharged has not increased. States estimate that 1982 discharges
of pollutants woula have been 191% greater than the levels actually discharged
if the treatment capabilities had not been increased as they were under the
Construction Grants Program (America's Clean Water: The States' Evaluation of
Progress 1972-1982).
According to that report, water quality in many streams has remained the same
or improved in the past 10 years. For example, States report that 296,000
stream miles maintained the same water quality over that time; 47,000 miles
have improved; 11,000 miles have poorer water quality now than 10 years ago
(America's Clean Water: The States' Evaluation of Progress 1972-1982). A
significant part of this Improvement (or prevention of further degradation)
can be attributed to improved levels of municipal treatment, which have offset
the increase in pollutant loads caused by increases and shifts in population
and new sewers.
An important indicator of water quality is the attainment of uses designated
by States. An assessment of 758,000 stream miles showed a 79% increase in the
number of stream miles supporting designated uses from 1972 to 1982 (from
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272,000 miles to 488,000 miles). The number of stream miles partially
supporting designated uses increased 3.5 times (from 46,000 miles to 167,000
miles). Stream miles not supporting designated uses increased from 30,000 to
35,000. It must be noted, however, that much of the change reported can be
attributed to a more complete assessment in 1982 and not necessarily to an
increase or decrease in pollutants. Specifically in 1972, more than 410,000
miles were in the "unknown" category. This number fell to 68,000 miles in
1982 (America's Clean Water).
Kany Wastewater Treatment Needs Have Already Been Met
The accomplishments of the program can be determined 1n part from the 1982
Needs Survey, which collected data on existing and planned facilities. Data
include the number of wastewater facilities providing various levels of treat-
ment, costs associated with needed collection and treatment facilities, popu-
lation served and needing wastewater service. Data are aggregated as well as
broken down by State. As described below, considerable progress has been made
in meeting the Nation's need for wastewater facilities. For example, the
number of persons receiving secondary or greater treatment increased 67% from
1972 to 1982, while the population increased only 11%. Overall, the popula-
tion needing but not receiving sewage collect ion and treatment declined by
one-third in that period:
In 1982, there were 15,425 wastewater treatment plants in
operation, with a total flow of 101,794,000 cubic meters per
day (domestic waste accounts for about 85% of the total).
Planned facilities for secondary treatment and advanceo
treatment (Categories I, and II) totalled 7,075, with an
expected flow of 12,581,000 cubic meters (1982 Needs Survey,
Summaries of Technical Data).
For infiltration/inflow correction, replacement and/or reha-
bilitation of facilities, new collector and new interceptor
sewers (Categories IIIA, IIIB, IVA, and IVB), the 1982 Needs
Survey showed that 71.5% of the population is now served by
wastewater collection systems. The Survey estimated that
90.2% would be served in 2000.
As of July 1977, 37% of the secondary treatment plants required by the Clean
Water Act had been constructed. By June 1983, the number had increased to 69%
(National Water Quality Inventory: 1982 Report to Congress). Much of this
increase can be attributed to increased Federal funding in the mid-1970s.
Figure 3.2 shows the cumulative expenditures for wastewater treatment
construction in which some Federal funds were expended ($113.6 billion), as
well as the estimated value of construction grant-funded projects (Federal
plus State and local matching funds) and the cunulative constant Federal
dollars. All are in constant 1982 dollars.
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FIGURE 3.2 CUMULATIVE WASTEWATER TREATMENT EXPENDITURES
120
CO
cn
LU CM
I 975
YEARS
$1 13.9
I960
¦ Federal Share
• Federal and Grant Match
Total (Grant Funded Plue State/Local Funded)
I 980
$62.9
$42.2
-------
Table 3.1 summarizes changes in population served by various types of waste-
water facilities between 1972 and 1982. Fifty-seven million more persons were
served by secondary treatment in 1982 than in 1972. Four million fewer per-
sons were served by sewer lines carrying raw wastewater to streams. Overall,
one-third fewer persons needed but were not receiving public sewage collection
and treatment.
TABLE 3.1
MEETING THE NEED FOR WASTEWATER TREATMENT
Secondary (or more advanced) treatment
Sewer lines carrying raw wastewater to
streams
Persons needing but not receiving public
sewage collection and treatment
Population Served (Millions)
1972 1982 X Change
142
85
21
1
14
+67%
-80%
-33%
(Source: America's Clean Water)
Distribution of Grant Money
Has Varied By Comnumty Size
Small communities have received a large number of grants because many have
needed wastewater facilities and there are many more small communities in
comparison to large communities. Table 3.2 shows the number of grants and
distribution of dollars by comnunity size from 1973 to 1983. Small and very
small communities have received 66% of the grants but only 23% of the funds,
while very large and large conmunities have received only 15% of the grants
but 55% of the dollars. As the following section. Remaining Needs,
demonstrates, the needs in small and very small comnunities are much greater
than their percentage of the population.
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TABLE 3.2
EPA CONSTRUCTION GRANTS PROGRAM
DISTRIBUTION OF GRANT DOLLARS BY COMMUNITY SIZE
FISCAL YEAR 1973-1983 OBLIGATIONS
(in $ millions)
Number of
Communities
Receiving X of Total % of Total
Cownunity Size Grants Number Dollars Dollars
< 3,500 11,059
3,501-10,000 4,412
10,001-50,000 4,558
50,001-125,000 1,470
> 125,000 2,197
Total 23,696
47* 3,865 11%
19% 4,280 12%
19% 8,226 23%
6% 5,359 15%
9% 14,297 40%
100% 36,027 100%
(Source: U.S. Environmental Protection Agency, as reported in Alternative
Funding Mechanisms for Wastewater Treatment, Background and Trend AnalysTsT
Government Finance Research Center, April 23, 1984 Draft, p. 11-4).
MEETING REMAINING BACKLOG NEEDS IS A COMPLEX UNDERTAKING
Needs Vary Among Different Community Types
The 1982 Needs Survey identified a total backlog need of $92.6 billion. The
cost of meeting the core treatment needs (Categories I, II, IIIA, IVB) was
found to be $35.4 billion. Needs for rehabilitation, replacement, future
expansion, and uther costs not eligible under the 1981 .amendments totalled
$21.46 billion, in addition to approximately $35.74 billion needed for
correction of combined sewer overflows.
Needs for construction of wastewater facilities varies among communities of
different sizes, in different areas of the country, and even by type of
facility needed. Often these needs vary disproportionately within these
groupings. The EPA's 1990 Construction 6rants Strategy Study suggested that
the heaviest financial burden for wastewater treatment wouId fall on small and
older urban areas. In brief, reasons cited for small community (less than
10,000 population) financial incapability included higher per capita cost of
providing wastewater services due to a lack of economies of scale. Inadequate
financial management skills, lower median income levels, lower or no bond
ratings resulting in higher interest costs for Issuing municipal debt, and
greater probability of operating budget deficits. Alternatively, fiscally
distressed older urban centers were singled out as a consequence of aging
sewer systems in need of rehabilitation, combined sewer overflows, and urban
3-7
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stormwwater needs exacerbated by severely-strained financial conditions. As a
consequence, other methods for financing wastewater treatment are being
explored or expanded; these are discussed in Chapter 4, Baseline.
Figures 3.3 and 3.4 show the backlog of treatment needs by community size.
The backlog treatment needs in small conmunities in relation to population is
disproportionately large (i.e., while very small and small communities repre-
sent 301 or $7.2 billion of the backlog treatment needs, they comprise only
14.6% of total community population—a 2 to 1 ratio—as compared to large
conmunities which present 53.1% or $10.4 billion needs and 67.92 of the
population—approximately a 1 to 1 ratio). This 1s indicative of higher per
capita costs and the lack of "economies of scale" at work 1n small
communities. Small (3,500-10,000 people) and very small (< 3,500 people)
conmunities also represent a large share of total backlog collector and
interceptor pipe needs (41.5% or $10.7 billion). In contrast, large (50,000-
150,000) and very large (>150,000) communities comprise a very large share
(73% or $26.1 billion) of backlog CS0 needs. In addition, the need for
correction of combined sewer overflows (CSOs) accounts for 38.2% of the total
need in all five categories, and even this need is unevenly distributed (see
below, Magnitude of Needs). The need for CS0 correction is concentrated in
marine bays and estuaries, which represent 31% of the CS0 correction need but
only 10% of the facilities needing correction. Thus, the varied composition
of backlog needs in different sized communities requires that States be given
the flexibility to target dollars to effectively buy out these needs.
Level of Needs Rewains High
As described above, the 1982 Needs Survey yielded a total backlog need esti-
mate of $92.6 billion. By the year 2000, the need is expected to grow to
$118.35 billion. Given current eligibility for Federal funding (see
discussion of Concern 1), about $20-25 billion 1n Federal dollars would be
needed to meet eligible needs. At current funding levels ($2.4 billion per
year), this need could not be completely satisfied until the mid-1990s. And
with current core needs expected to increase from $35.4 billion to $57.3
billion 1n the year 2000 (1982 Needs Survey), this would equate to 13 years of
funding to meet minimum needs without accounting for inflation, remaining
phased/segmented projects, and set-aside allowances.
Needs for system construction and related operations and maintenance can be
broken down into three categories, generally covering eligible core needs
under the 1981 amendments, continuing 0&M costs, and future needs. These
groupings and the magnitude of needs associated with each are described below.
3-8
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FIGURE 3.3 BACKLOG TREATMENT NEEDS IN SMALL COMMUNITIES
DISPROPORTIONATELY LARGE IN RELATION TO POPULATION
(I 982 Needs Survey)
(Very Large)
43.5%
$10.4B
I
KO
TOTAL: $24.OB
KEY: VERY SMALL
=<3,500
SMALL
= 3,500 -
10,000
MEDIUM
= 10,000 -
50,000
LARGE
= 50,000 -
150,000
VERY LARGE
=>150,000
(Large
- i
NEEDS
POPULATION
14.2% (Large)
Small)
18.3% $4.4B
Small) 11.7%
$2.8B
um)17.2%
.IB
7.1% (Very Small)
7.5% (Small)
53.7%
(Very Large)
17.5% (Medium)
-------
FIGURE 3.4 BACKLOG CSO AND PIPE NEEDS
(I 982 Needs Survey)
COLLECTOR AND INTERCEPTOR PIPES
CORRECTION OF CSOs
CJ
I
(Very Large)
22.9%
$5.9B
(Large)
10.9%
$28B
24.6%
$6.3B
(Very Small)
26.0%
$6.7B
Smal1)
:: vi'vi?
V- < ' ' '9
ma ¦ ¦*.
(Very Small, Small,
and Medium)
$9.6B
27%
(Large and Very Large)
$26,IB
73%
CAT. IVA & IVB = $25.7B
CAT. V = $35.7B
KEY: SEE FIGURE 3.3|
-------
Concern 1 includes immediate core needs (generally backlog needs for those
categories that remain eligible under the Federal program that took effect on
October 1, 1984). Based on the 1982 Needs Survey, costs in such categories to
serve 1982 populations amounted to $35.4 billion, broken down as listed below.
Cost
($ in billions)
20.1
3.8
2.6
8.9
35.4
Note: The backlog estimates of the 1982 Needs Survey may
overstate the cost of meeting immediate pollution control
needs since the cost of adding new wastewater discharges to
streams is included in the estimates for currently unsewered
1982 populations.
On the other hand, the backlog estimates do not include the
cost of treating incremental flows from the population
growth occuring between 1982 and the date wherc. the facility
upgrade actually occurs.
In certain instances, Category V - Correction of CSO - might
also be included in Concern 1 if water quality benefits can
be demonstrated (c.f. Section ZOT(n), CWA).
An adjustment of Concern 1 cost estimates to reflect the
increase or decrease in need due to these factors has not
been included. Thus the figures cited above should be
viewed as only rough approximations of the dollar value of
Concern 1 needs.
Concern 2 includes continuing needs for operation and maintenance costs
incurred in operating facilities within performance levels required by permits
and standards, maintaining equipment to ensure proper operation and service,
training operators and replacing minor equipment and appurtenances. These
costs cannot be completely assessed. However, as reported in the 1982 AMSA
Rate Survey, current 0&M expenditures by 82 cornnunities, including Los
Angeles, Chicago, and Atlanta, total $1.38 billion per year. In addition,
historical trends show that total annual 0&M costs nationwide have increased
from $2 billion in 1972 to $5 billion projected for 1984. Bureau of Census
data estimate total 1972-1982 0&M costs of $37 billion. Future costs will
depend on inflation, construction of new facilities and the effectiveness of
0&M programs in cornnunities.
• Category I - Secondary Treatment
• Category II - Advanced Treatment
• Category IIIA - Correction of Infiltration/
Inflow
• Category IVB - New Interceptor Sewers
3-11
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Moreover, poor O&M practices can be expected to be more costly in both the
short- and long-term, since local governments may be forced to repair or
replace both minor and major capital equipment prematurely. There are also
documented cases of opportunities to decrease short- and long-term O&M budgets
by operating with greater efficiency through improved energy and chemical
consumption, personnel staffs, and sludge disposal techniques. Therefore, the
extent to which local and State governments must fund both capital and O&M
costs and the funding mechanisms available to them will determine the future
allocation of funds between capital and O&M.
Concern 3 is future needs for delivering and serving new flows, ensuring
adequate capacity and ultimate rehabilitation/replacement/expansion of
facilities. The 1982 Needs Survey reports the following needs by category:
Year 2000 Cost
in bi l lions)
• Category I - Secondary Treatment above
current backlog 11.0
• Category II - Advanced Treatment above
current backlog 2.0
• Category 11 IB - Rehabilitation/Replacement 4.7
of existing sewer systems
• Category IVA - New Collector Sewers 20.7
• Category IVB - New Interceptor Sewers above
imnediate backlog 8.9
47.3
Any discussion of plant reconstruction/rehabilitation and expansion must
address the inequities and disincentives to compliance that would be caused
by the issuance of second^round grants (i.e., additional funding for
facilities that have previously received construction grants). Second-round
funding for facilities is also inequitable in terms of the distribution of
limited Federal funds.
Consensus opinion on this issue underscored that the promotion of local growth
and development is the responsibility of State and local governments. If the
Federal government provides second-round grants at the expense of facilities
that have never met standards or received Federal assistance, long-term
compliance and self-sufficiency goals will be jeopardized. As shown in Figure
3.5, the pressures for second-round grants for rehabilitation/replacement and
additions to previously funded facilities will grow with an implicit demand of
$1 to $2 billion per year beginning by the mid-1990s.
3-12
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FIGURE 3.5 REHABILITATION/REPLACEMENT & ADDITIONS
TO PREVIOUSLY FUNDED PROJECTS
Projections for 1972-2022
»
n
o
(ft °
* c
o S
-j «
s c
m O
O
a
to
o>
PROJECTIONS BASED ON DOLLAR VALUE OF PREVIOUS GRANT AWARDS
TAL SECOND-ROUND
GRANT PRESSURE
ADDITIONS
I I I I I I I I I I I i i i v I I I I i t I I I I I I I I I I l I I I
75 80 85 90 95 2000 5 10 15
¦ Rehabilitation/Replacement
+ Additions
~ Totals
YEARS
-------
CSO Correction 1s a Large Part of the Needs
Continued Federal focus on core treatment needs means that State and local
funding strategies must address the vast majority of the $35.74 billion of
CSO needs. Combined sewers are designed to carry both sanitary waste and
storm water. During storm events, these systems may automatically overflow,
discharging untreated sewage together with storm water. Correction of CSOs is
estimated to cost $35.74 billion (1982 Needs Survey). Under the 1981
Amendments [Section 201(n) of the CWA], the Governor of a State can choose to
use Federal grant money for correction of CSOs if the projects are a "major
priority" for the State and significant water quality Improvements can be
demonstrated as a result of the project. Otherwise, funding of this need will
fall entirely on State and local sources.
Since the needs for CSO correction are concentrated 1n large urban areas, are
costly to correct, may exceed the combined sources of currently available
funds, and may not always result in any demonstrable improvement in water
quality, funding of CSO correction may not be amenable to handling through a
uniform national program. A series of studies done for the EPA Task Force on
the Future Federal Role in Municipal Wastewater Treatment by EPA's Office of
Policy, Planning and Evaluation (OPPE) have assessed the possible impacts on
water quality from spending on core treatment needs, CSO corrections, and
storm sewer projects. A summary of these OPPE studies is attached, and also ts
Included in Appendix E.
O&M Does Need Special Attention By
Federal, State and Local Governments
There has been long-standing Federal and State interest in effective
facilities operations and maintenance keyed to protection of the public
investment and improved compliance. Both levels of government recognize that
effective O&M can extend the life of existing facilities, reduce and delay the
need for additional construction, and save local governments significant
capital and O&M costs. Historically, the Federal program has emphasized
operations and maintenance requirments in construction grants (e.g.,
development of O&M manuals, plans of operation, startup services); general O&M
requirements in permits; and development of State operator training capability
(e.g., training of State trainers, development of curricula and materials, and
construction of State training centers under Section 109(b) of the Act) and
oversight and technical assistance to State training programs. State programs
have also emphasized O&M implementation through construction grants and
permits, as well as operator training programs primarily for certification and
upgrade. Operator technical assistance and O&M incentive programs have not
been used significantly 1n the past, but are Increasing.
As a result of EPA's 1984 National Municipal Policy, changes in the construc-
tion grants program, and on-site training and technical assistance efforts in
small communities, there has been increasing local recognition of their
compliance responsibilities and increasing attention at all levels of govern-
ment to operations and maintenance, financial management, and operator
training.
3-14
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Throuch the National c ".pal Policy, EPA f,as e-ohasized Uct stror.g Federal
and State erforcer.ent efforts ere the key to ir,proving local co-plience en:
support of improved operations and maintenance. EPA is also implementing the
new first year performance certification requirements contained in the 19S1
Amendments. The Agency is also considering a number of options regarding new
incentives for improved O&M at Federal, State, and local levels and by the
private sector. These options include:
Establishing State operator awards programs and EPA Regional
and national awards.
Capital construction bonuses for States with good compliance
rates, either modifying the allotment formula or utilizing
available reallotted funds. Another option for capital
construction bonuses would be keyed to the performance
certification required by grantees. Where a project meets
project performance standards, an allotment bonus could be
provided to the State for use in its revolving fund.
Increasing grants-related incentives, including updating of
user charge systems in noncomplying communities,
incorporating an O&M element in State priority systems
criteria, and ensuring grantee startup services funding.
Enforcing O&M requirements in permits.
Providing technical assistance through disseminating
information on the effectiveness of on-site training and
technical assistance, costs and benefits of privately
contracted O&M, cost-effectiveness of good O&M, and
effectiveness of State O&M subsidy programs.
Increasing the Federal investment in O&M through targeting
additional Sections 106, 205(g) and 104(g) funds to State
O&M and operator training programs, using academic training
grant funds more innovatively for local assistance, and
proposing Congressional consideration of tax incentives for
privatized facilities with good O&M.
Issuing consistent, coordinated policies and guidance and
working with States, professional associations, and interest
groups to emphasize the importance of O&M.
With the exception of statutory changes regarding State priority systems
criteria, tax incentives and increasing overall State grants funding levels,
the Agency can implement any of these options within existing authorities.
Major responsibilities for containing O&M, however, still rests with local
governments. They must improve their own operations and maintenance
management at the same time as Federal and State initiatives move forward.
The private sector has a significant role in O&M programs as well, especially
in the area of contracting for on-going O&M services.
3-15
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CHAPTER 4
BASELINE
-------
CHAPTER 4: BASELINE
TRENDS AND NEEDS IN LOCAL FINANCING
Before the advent of the Federal Construction Grants Program, cities and
municipalities were primarily on their own for the provision of wastewater
treatment. In the absence of water quality or discharge permit requirements,
wastewater treatment facilities often had lower priority in the competition
for limited local infrastructure financing. Roads, public transportation,
water supply, and solid waste disposal in many Instances took precedence.
Typically, water supplies were simply taken from upstream sources, and
wastewater deposited downstream to become "someone else's" problem.
Although considerable progress has been achieved with over $40 billion of
Federal assistance, huge backlog treatment needs still remain, operation and
management needs continue to require local budgeting, and future
rehabilitation, expansion, and replacement needs must be anticipated in the
capital planning of local government programs. With the non-Federal share of
construction costs doubling in FY 1985, the financial capabilities of local
governments will be of paramount importance in meeting Clean Water Act goals.
Local Governments Face Problems in Meeting
Wastewater Treatment Needs
Such increased reliance or, local funding, however, may be in conflict with the
reduced financial capability of local governments as trends in local financing
over the past decade continue. The municipal bond market — ine traditional
source of capital for local governments--^ been undergoing tuoulent cranes
due to the uncertainty surrounding trie :ro^.*ng Federal de~ici-, general
economic conditions, decreases investor confidence in long-term tax-ex =-,2:.
securities, and changes in marginal tax rates for upper bracket investors. In
addition, bonds for the financing of traditional public works, such as
wastewater treatment, must now compete with those issued for private-purpose
projects. The end result is that many local governments are experiencing
difficulties in financing public infrastructure needs, even though the
municipal bond market Itself is currently experiencing record sales.
To understand these trends and the challenges which local governments face in
meeting their wastewater treatment needs, 1t is Important to understand the
traditional financing mechanisms they employ. Although there is some overlap,
local financing can be considered in terms of two broad categories:
1) issuance of long-term and short-term debt for the financing
of capital costs associated with the construction,
rehabilitation, expansion, and replacement of wastewater
treatment facilities, and
2) revenues from user fees, connection charges, taxes, and
municipal enterprises which are used to repay revenue bonds
and to pay for ongoing operation and maintenance of
facilities.
4-1
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The Outlook for Long-Term and Short-Term
Debt Mechanisms Is Not 6ood
Currently in use are a variety of long-term financing mechanisms, including
general obligation bonds, limited or special obligation bonds, revenue bonds,
special assessment bonds, industrial development bonds, locally issued bonds,
and small denomination bonds—so-called "mini-bonds" (see Table 4.1). For
short-term financing, bond anticipation notes or grant anticipation notes
(where grants are available) are used.
With this variety of financing mechanisms available to local governments, it
would not seem likely that they would lack the financial capability for the
construction, replacement, and expansion of wastewater treatment facilities.
However, most of the traditional long-term financing mechanisms have serious
drawbacks:
6eneral obligation bonds are severely limited by statutory
debt and interest rate ceilings.
Revenue and other special obligation bonds which can escape
the debt ceiling carry lower bond ratings and therefore must
pay higher, sometimes prohibitive, Interest rates.
Once popular tax-exempt issues, such as special assessment
and industrial development bonds, have lost much of their
appeal to investors because of changes in tax laws which
have lowered marginal tax rates for the highest tax brackets
while at the same time have reduced the tax savings for
private investors who typically employ industrial
development bonds in sale/leaseback arrangements.
Locally issued bonds and mini-bonds, while avoiding the
expenses of acquiring bond ratings and Issuing bonds in the
municipal bond market, require a financial sophistication of
communities that often have very little experience in bond
marketing. Mini-bonds in particular require the sale of a
proportionately much larger number of bonds because of the
small size ($100 - $1»000) of their denomination.
The outlook for short-term financing is somewhat better. Bond anticipation
notes (BANS) are secured by a promise to repay them with the proceeds of long-
term bonds which are to be sold at a later date. Because BANS often carry a
lower interest rate than long-term bonds, they can be used to delay the sale
of long-term bonds until a better long-term Interest rate prevails. However,
State law often restricts how long local governments can "roll-over" their
short term debt, posing the risk that long-term rates may actually turn out to
be higher when the long-term bonds must be sold. Grant anticipation notes
(GANS), secured by the grant Itself, are used during the actual construction
phase. GANS have the advantage that as construction proceeds, the unused
portions of the GANS proceeds can be invested in an interest bearing account
4-2
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TABLE 4.1
LONG-TERM MUNICIPAL DEBT FINANCING
TYPE OF BOND
METHOD OF SECURING
ADVANTAGES
DISADVANTAGES
GENERAL
OBLIGATION
Secured by "ful) faith and credit" of
municipality. This meant that not only are
all current sources of general revenues ob-
ligated, but also that new taxes are
expected to be Imposed if necessary.
Because It Is backed by the full taxing
authority of the municipality. It carries
a lower interest rate.
There are severe limitations placed on its use
due to debt and Interest rate ceilings, and the
need for voter approval.
LIMITED OR
SPECIAL
OBLIGATION
Does not obligate full faith and credit
of government and specifically excludes
property taxes from obligation. Instead,
the bonds designate specific sources of
revenue, usually taxes, for repayment.
Because they do not obligate the full faith
and credit (particularly property taxes) of
the municipality, most courts hftve ruled
that these bonds are exempt froiji debt and
Interest ceilings.
The higher risk associated with these means that
they must pay higher Interest rates to the
Investor.
REVENUE
Secures bond Mlth user charges associated
with the facility being built by the bond's
proceeds.
Escapes statutory debt and interest
ceilings. Uses new sources of revenues
created by project.
Has lower bond rating and thus carries higher
interest costs. Also, bond Is not marketable
If project to be built will not generate
sufficient revenues.
SPECIAL
ASSESSMENT
Uses liens against property of those who
stand to benefit from a project as
collateral for bond.
Has appealed to Investors with high
marginal tax rates because of the bond's
tax-exempt status.
Recent changes In tax laws have reduced the
number of Investors who have high marginal tax
rates.
INDUSTRIAL
DEVELOPMENT
Secured by lease payments from private
Investors who have used bond proceeds to
build a facility.
Tax-exempt status appeals to some
Investors.
Limited use under Deficit Reduction Act of 1974.
The narrowing of the gap between taxable and
tax-exempt Interest rates has significantly
increased the costs of these bonds.
LOCALLY
ISSUED
Can be secured by ar\y of the above means.
Principal difference Is that bond terms
are negotiated privately and bonds are
marketed directly.
Avoids expense of obtaining credit rating
and fees of bond underwriters. Lower
Interest rate may be negotiated because
they are usually sold to Investors who have
a stake In the comrainlty.
Requires a level of financial sophistication
that many nunlclpalltles do not have. They
are also less attractive to Investors because
of the lack of a resale or secondary markets.
MINI-BONOS
Can be secured by any of the above means
and 1s also locally Issued and marketed.
Principal difference is the small
denomination (tlOO-SlOOO) of the bonds.
Same advantages as locally Issued bonds
plus the smaller denominations make It
possible for small local Investors to
channel civic Impulses.
Same disadvantages as locally Issued bonds
plus a substantially much larger number of
bonds must be sold to compensate for the
smaller denomination.
-------
(a process called arbitrage), which if handled successfully can eliminate most
or all of the interest cost from the CANS itself. Of course 6ANS are not an
independent source of financing; they are merely a temporary substitute for
grants.
Besides the individual drawbacks of current local financing mechanisms,
certain general trends in bond markets are having a negative impact on the
financial capabilities of local governments. As more and more cities have
approached and hit the statutory debt ceilings placed on general obligation
bonds, they have had to turn to other types of bonds which are not counted in
their debt limits. Invariably these other bonds have lower bond ratings
resulting in higher interest costs for the local government in order to com-
pensate the investor for the greater perceived risk.
Another trend which has had the effect of driving up interest costs has been
the burgeoning demand by municipalities for loanable funds. Competition for
these funds has come not only from increasing infrastructure needs, but even
more from the increasing use of municipal bonds for such non-traditional
purposes as single-family housing, private hospitals, and student loans. The
6A0 reported that because of these factors, in just four years the annual
volume of long-term municipal bonds rose from $43.3 billion in 1979 to $77.3
billion in 1982. The poor performance of the municipal bond market which has
caused the gap between average yields for taxable (private) and tax-exempt
(municipal) bonds to narrow has also taken its toll. It has been estimated
that this reduction in the spread between private and municipal bond interest
rates has increased the cost of borrowing for local governments by $130,000
for each one million dollars in bonds issued. Perhaps the best known negative
impact on local government financing has been the trenu towards a voter tax
revolt" which has severely limited the sources of revenues which most bonds
have depended upon for repayment. Where voter approval is required, most bond
issues face an almost insurmountable obstacle.
Current Revenues Are Insufficient to Meet Projected Needs
According to a survey by the Association of Metropolitan Sewerage Agencies
(AMSA), user fees are the major source (74.41) of revenue for wastewater
treatment operations and maintenance. However, because of the increasing use
of revenue bonds for the financing of wastewater treatment plants, user
fees are being obligated more and more frequently for debt repayment as well.
Depending upon the terms of the bond, repayments to bond holders may even take
precedence over meeting the costs of O&M if revenues are insufficient to meet
both demands. Studies by the General Accounting Office have shown that a
major cause of wastewater treatment plant operating problems has been
insufficient operating funds. Thus, the Increased demands on user fees to
meet bond repayments will only tend to exacerbate this situation.
Unfortunately, the outlook is for these conditions to worsen as O&M costs
increase due to the aging of facilities and general inflation.
The question of whether user fees are adequate to support operation and
maintenance costs for wastewater treatment plants was definitvely documented
in a study by the Government Accounting Office (GAO). According to this study
of a random sample of 36 municipal treatment plants, half of them were not
charging their users enough to cover current operating and maintenance costs.
4-4
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forcing then to rely upon other municipal revenues. However, this reliance
does not appear to be viable as a long-term option since a recent survey by
the Joint Economic Committee revealed that a high proportion of cities (43%)
had operating deficits, and that this proportion was increasing. This means
that the practice of shifting over general operating revenues to pay for
wastewater treatment facilities O&M costs will become decreasingly feasible.
The same 6A0 study found user fee systems deficient 1n two other respects:
56% were not setting aside funds for rehabilitation during the life of the
treatment plant, and only 3 of 36 municipalities were setting aside funds for
the replacement of the plant at the end of its useful life. Thus, current
user fees may not be adequate to meet the triple burden of paying off existing
capital debts, financing ongoing operations and maintenance, and setting aside
money for the rehabilitation and replacement of wastewater treatment
facilities.
In the wake of these demands, the pressure has been great for substantial
increases in user fees—a step which many conmunitles are reluctant to take.
Not only are such increases unpopular, but 1n many areas, a truly
disproportionate and "inequitable" distribution of charges to service users
would be realized by low and moderate income users. Many communities simply
cannot afford to meet all of the costs associated with wastewater treatment
facilities through user fees alone. The problems will continue to reduce the
effectiveness of operations and maintenance, increase the long-term costs to
conmunlties through higher energy and equipment replacement costs, and reduce
the useful life of the plants.
According to the same AMSA survey, the only other source of revenue which
accounted for more than 3% of total revenues generated for municipal
wastewater treatment financing was ad valorem (property) taxes. These taxes
accounted for 5.6% of their member agencies revenues. Unlike increases in
user fees, it is difficult to predict the effects of increases in ad valorem
taxes on low and moderate income users. It would depend upon whether personal
or real property was taxed, the indirect effects of real estate taxes on
non-property owners, and other factors. However, substantial increases in
property taxes are even less politically viable than Increases 1n user fees,
and because they represent such a relatively small percentage of revenues, ad
valorem taxes do not hold much potential for improving the condition of
municipal wastewater treatment, financing.
As a consequence of the limitations on traditional debt financing mechanisms
and sources of revenue, other methods are being explored to improve local
?overnment's ability to finance wastewater treatment. In the case of debt
inancing, these methods are aimed at enhancing the marketability and lowering
the Interest costs of municipal bonds. In the area of revenue generation, or
more broadly, non-debt financing, local governments have taken two approaches:
creating new revenues sources, such as system development charges and
developer requirements; and expanding the use of revenue sources such as
connection charges, special assessments, and municipal enterprises. The later
are already in use, but account for only a small fraction of current revenues.
4-5
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Local Governments Are Developing Alternative
Financing Sources for Wastewater Treatment
Although most local governments will continue to need Federal and/or State
assistance in meeting their wastewater treatment needs, local governments have
also been searching for ways to enhance their financial capabilities. This
has meant concentrating on finding ways to increase both their ability to
borrow and their ability to generate revenues. This two-pronged approach has
led to the development of alternatives which have either the effect of making
municipal bond issues more attractive, or have the effect of creating new (or
expanded) local sources of non-debt wastewater treatment financing:
Debt Finance Enhancement Techniques
• municipal bond insurance, and
• letters or lines of credit.
Non-Debt Financing
• connection charges
• special assessments
• systems development charges
• developer requirements, and
t municipal enterprises.
Debt Financing Enhancement Techmaues Lower Interest Rates
Mumcpa* bcni insurance involves :v>r.g a premium to an insurance company
that specializes in insuring bends. 7ms translates into a lower risk for the
investor since the insurance ccmoany will pay bond holders in the event of
default by the municipality. This makes the bond more attractive, thus
lowering the interest rate. The advantage is that the savings 1n interest
costs are greater than the cost of the insurance; a disadvantage 1s that the
insurance premium requires up-front money while the Interest savings are long-
term.
Letters or lines of credit are one of the simplest ways a municipality has to
lower its interest costs on bonds. Uhat 1s Involved is establishing with a
bank or other lending Institution a pre-arranged credit line specifically ear-
marked to pay bondholders when revenues are Insufficient to meet the obliga-
tions of the bond. As long as revenues are sufficient, the credit line is
never actually tapped, meaning no additional cost to the municipality is
Incurred. Even so, the assurance that an automatic mechanism for timely pay-
ment to the bond holder 1s available 1n case of temporary insolvency lowers
the risk perceived by the investor, resulting 1n a lower interest ratff for the
bond. Of course, if the credit line 1s used 1t will increase the costs to the
municipality, since it will be paying interest to both the bond holder and the
lending institution.
4-6
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Non-Debt Financing Techniques Are In Increased Use
Connection charges for public services such as water supply, electricity, and
gas lines are not new. However, the incidence of their use to cover the cost
of extending sewer service is on the rise, both in terms of the number of
communities employing connection charges, and the size of the charges them-
selves. In addition to recovering the cost of sewer extension, a new trend
has been to charge enough to also recoup the capital costs of annual
depreciation attributable to a newly constructed wastewater treatment
facility.
The use of special assessments levied against service users is also on the
increase. These assessments are currently being utilized to finance new
treatment facilities and rehabilitate or expand existing facilities. However,
a few local governments have begun using them as a source of funds for opera-
tions and maintenance as well.
Systems development charges are levies on developers over and above connection
fees and developer requirements. They are presently used to recover the costs
of serving new residents with existing or new facilities. A few
municipalities are also using systems development charges to fund O&M costs.
Although it is not yet clear whether this use will develop Into a general
trend, it is yet another example of alternatives which demonstrate the search
by local governments for new financing mechanisms.
Some rapidly-growing conmunlties have looked to developers to provide needed
system improvements in return for permission to build new housing. In such
cases, rather than imposing charges or connection fees, the developer is
required to construct or provide for the construction or expansion of the
wastewater treatment facilities necessitated by the new development. The
developer, in turn, would pass on such costs in the price of the new housing.
This approach has the potential for providing wastewater treatment facility
financing without incurring debt.
Municipal enterprises associated with wastewater treatment operations are
another clear illustration of a local funding source which has multiple appli-
cations to wastewater treatment financing. The sale of treatment services to
other municipalities or to private haulers, and the sale of fertilizer or
crops from land treatment operations are used by many communities to offset
operations, maintenance, and replacement costs. In fact, there is a general
trend towards an enterprise fund approach to O&M costs in which wastewater
treatment operations are designed to be self-supporting rather than compete
for general municipal funds. Expanding the use of municipal enterprises then,
can help fill the void left by declining Federal construction assistance.
4-7
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ASSESSMENT/AVAILABILITY OF PRIVATE SECTOR FINANCING
In response to reduced Federal funding, rising interest rates, and growing
difficulties in obtaining conventional financing, municipalities have become
more and more interested in attracting private sector investment in wastewater
treatment facilities. The private sector also is enthusiastic about investing
in wastewater treatment facilities.
While privatization of wastewater treatment projects is new, as a financial
transaction private sector financing, ownership, construction and/or operation
of traditionally public utilities is well established. For decades, hundreds
of communities have obtained their drinking water and other essential
government services from private sector owned and operated sources. More
recently, a number of resource recovery plants—total1ing over $500 million in
the past year alone--have been built and operated on a "turnkey0 basis by the
private sector.
The attractiveness of the concept lies in the use of accelerated depreciation
of a facility and its equipment, the availability of investment tax credits,
and the use of tax exempt industrial bonds—all of which may be used in
wastewater treatment facilities if the transaction is properly structured.
Although altered in some respects, the Deficit Reduction Act of 1984 recon-
firmed the use of these tax benefits. Thus, privatization activity may be
further stimulated on the part of both municipalities and the private sector.
While the private sector can not finance all wastewater treatment needs, any
contribution can be significant and lessen the financial burden faced by
municipalities. There may be substantial cost savings and progranmatic effi-
ciencies which can be realized if proper financing methods and overall
transactional structure are employed. These are explored below.
Privatization Techniques and Transactions Are Viable
for Financing Wastewater Treatment Facilities
There are numerous privatization approaches and variations: with or without
equity or direct ownership, Industrial development revenue or pollution
controls bonds, etc. While each approach has its own particular characteris-
tics, they all have one common element—they rely on the tax-exempt revenue
bond market to raise the debt necessary for construction (from 755 to 100% of
project cost, depending upon whether the equity investment 1s part of the
transaction). As experienced with solid waste and other utility operations,
wastewater privatization projects can be financed on their own merits if they
are economically viable and if they incorporate adequate security mechanisms.
Wastewater issues could be particularly attractive to bond buyers because, in
addition to the legal and financial security aspects, the systems are
literally in the ground, with users dependent on continued performance for the
maintenance of public health. This creates the presumption that 1n the event
of problems, technical or financial, all necessary remedial actions will be
taken to keep a system operating.
The parties to a privatization project can be many, including the owners, the
operator of the facility, the engineer who plans and designs the facility, the
builder who constructs the facility, the municipality that leases the site to
4-8
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the Crt^e- cnd recei.es t^e ser\',ces ce""»e: *'ro~i the facility, c- ssuer of
any tax-exempt ceDt, and an investment barker that raises the eq„-.ty c'C
underwrites tne oeDt. Some of these parties, especially municipalities, nil
need special legal, t2x, and financial advice before undertaking a project.
Not every privatization transaction can be structured to capture the benefits
of tax-exempt industrial development bonds, accelerated depreciation and the
investment tax credit. A transaction that can provide such benefits to the
private sector is a service contract agreement with a municipality, where any
combination of private sector firms finance, own, and operate the treatment
facility. The firms are eligible to realize all of the available tax
benefits. The private sector obtains the benefits of accelerated depreciation
and the investment tax credit by using a service contract under which the
private owners also operate the facility. In addition, the private sector may
finance up to 80S of the facility costs with tax-exempt development bonds.
The municipality may enter into a long-term lease agreement for the site and
build in other protections.
The service contract agreement method is now being used extensively for
resource recovery projects and is readily transferable to the financing of
wastewater treatment. With wastewater treatment facilities, the opportunity
is present for the private sector to pass some of the lower costs of this
arrangement back to the municipality through a lower service fee which would
be negotiated with a municipality.
Despite widespread interest and discussion, privatization of municipal
wastewater treatment systems is still new and only a few examples currently
exist. These include:
The initiation of construction for the first stage of a
plant in Chandler, AZ.
The completion of the financial planning for a WWT plant in
Norco, CA.
The financing of a $100 million interceptor in Denver, CO.
Bank ownership of a new interceptor in Missoula, MO.
Communities that are actively considering privatization and have published
"requests for qualifications -for privatization," include Salt Lake City in
conjunction with Utah. Auburn, Alabama and Orlando, Florida, and other
cities have already accepted construction bids.
Privatization May Offer Programmatic Efficiencies for Municipalities
Privatization may offer many advantages to municipalities. Most
significantly, by minimizing Federal and State involvement in local affairs,
privatization allows communities greater operational flexibility. Thus, a
greater sense of local responsibility is established and projects may be more
responsive to specific local needs. In addition, there may be important cost
savings to municipalities. These include:
4-9
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Reduction in User Fees. The economics of pri\atizatior.
may De able to combine construction savings and tax benefits
into lower user fees. A properly structured transaction may
be a cost-effective alternative to local communities, as
measured by the user fees necessary to establish, operate
and maintain a self-sustaining facility. The user fees
under an acceptable privatization transaction should be
lower than under 1001 local funding for the same facility.
Construction Efficiencies. Privatization proponents have
argued that construction efficiencies associated with
private financing transactions can lead to lowered overall
costs for construction, a reduction in construction time,
and greater flexibility in sizing. Such cost savings would
presumably be gained by reducing delays in construction
caused by Federal grant regulations for the planning, design
and construction of facilities and avoiding Federal pro-
curement laws and regulations under private financing
transactions. In addition, privatization might be able to
focus more closely on flow-matching the sizing of a facility
to current needs, modular designs, and sequential
investments to meet future needs. Proponents have argued
that decreases of 20% to 40% in the capital costs of a
facility can be realized.
Operating Efficiencies. Contract operations by the private
sector may make sense in a number of cases if a conmunity
cannot attract and retain the necessary talents to operate a
treatment facility in compliance with discharge permit stan-
dards. In other cases, through assumed economies of scale,
a private operator may be able to operate a facility at a
cost less than the public operating mode, even considering a
profit allowance. Centralized administration, centralized
maintenance, bulk ordering of chemicals and supplies,
sharing key personnel among multiple facilities, etc., could
contribute to these economies.
Complexity and Federal Requirements May Limit
the Use of Privatization Transactions
While privatization is a promising and feasible concept, a note of caution is
that privatization by its very nature is complex, involving numerous parties
and unique relationships. It is expensive and time consuming for all parties
concerned to participate in the conception or execution of a privatization
project. There are numerous complex technical, financial and legal
considerations that must be addressed. Considerable critical analysis is
required to determine the conditions under which 1t is a prudent mechanism for
providing the public with wastewater treatment at a reasonable cost.
Communities will need to acquire expertise 1n reviewing financial arrangements
and contracts and develop oversight provisions and flexibility. In addition,
privatization may prove to be more suitable to some localities (e.g., new or
fast-growing corrmunities) than to others (e.g., very large or very small
communities).
4-10
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Finally, the Office of Management and Budget (OMB) Circular A-102 must be
observed for treatment facilities that have received Federal financial
assistance and are dependent on private funding for the expansion or upgrading
of facilities. In effect, this circular prohibits the title to Federally
assisted facilities from being transferred to the private sector. However,
privately owned components that are distinct entities in the treatment
process, such as a sludge handling unit, may be added to facilities without
losing their private Identity.
There are other potential hindrances to privatization transactions:
The success of privatization Is highly dependent on
provlsons 1n the U.S. Tax Code, which may be subject to
change because of economic and fiscal constraints.
State or local government procurement rules may effectively
prohibit privatization. For example, State or local laws or
ordinances may prohibit a negotiated contract and require
competitive bidding. Competitive bidding may not be the
most feasible way to effect the arrangement.
Privatization may concentrate on the immediate need for
sewage treatment facilities and neglect future needs since
the greatest tax benefits would be realized during the
initial five year period. Thus, privatization may focus on
capital investment and ignore the need to adequately finance
operation and maintenance costs.
Public Utility Conmissions may require approval of user fees
ard fee increases, increasing the complexities associated
wich privatization initiatives.
The fact that equipment intensive projects are subject to
the greatest financial returns may influence the design of
the plant. The greater the depreciable amount, the greater
the return on the Investment to the private investor. For
example, some technologies are more equipment intensive than
others. A biological treatment plant will have a larger
depreciable cost than a land-based lagoon system as the land
1s not subject to depreciation.
Small communities may be less able to take advantage of
privatization. Land oriented treatment projects may not
make an attractive Investment for the private sector. Also
the small conmunity may not be rated credit worthy enough to
be a partner 1n this type of joint public/private endeavor.
Private owners need protection from price controls, changes
in discharge requirements, or other forms of regulation that
might force them to accept less than a fair rate of return.
This could cause negative effects on the owner's ability to
provide adequate service.
• Existing labor contracts between municipalities and unions
could preclude tfie transfer of operation and maintenance of
the plan* to the private sector.
d-11
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ASSESSMENT/AVAILABILITY OF STATE FINANCING AND SUPPORT
The "hnninent reduction in the level of Federal grant funds for wastewater
treatment has promoted State action to examine different options of financial
assistance for local conmunities. Over the past decade, States have provided
significant funding for wastewater treatment and have made significant
progress in meeting the goals of the Clean Water Act, though individual States
have varied 1n their sophistication and level of financial commitment. Still,
a.great deal remains to be accomplished if the nation's wastewater treatment
needs are to be met. In light of this continuing need and the impending
reduction 1n Federal monies, many States have taken action. For example, five
States (Colorado, Florida, Kansas, New Mexico, New Jersey, and Tennessee) have
already increased their own State share in anticipation of the reduced Federal
share, while thirteen States are conducting comprehensive studies on
alternative funding mechanisms. States also have explored methods of reducing
project construction, operation and maintenance and replacement costs.
States Have Developed Various Financing Alternatives
The States goal has been to leverage the dollars that they do have in order
to support as many projects as possible, as well as to raise more dollars
through innovative methods. One of the most interesting examples of fund
leveraging is the Utah State Wastewater Credit Enhancement Program, which has
successfully achieved a leveraging ratio of 39 to 1 by vastly improved bond
ratings through State guarantee of local bonds. In addition, Georgia recently
has enacted a State revolving fund that will provide for additional resources
to finance future municipal wastewater treatment needs. Utah and Georgia are
just two examples of many that demonstrate how States can be effective in
their involvement with assisting local conmunities in financing wastewater
treatment by methods other than grants. On the other hand, there are States
whose financial involvement with wastewater treatment is not as extensive as
-UtahVs. North and South Dakota both provide funds for cleaning up lakes but
not for wastewater treatment. As demonstrated by these two States, some States
are finding themselves forced to prioritize their clean water projects because
of limited funds. Even with recent financing innovations such as bond
narfceting and special taxes, however, State resources will be inadequate to
meet all continuing and future wastewater treatment needs.
Various means of financing wastewater treatment needs are available to States;
Table 4.2 displays the range of financing programs that are being conducted.
The most commonly employed approach designed to assist local conmunities in
meeting their wastewater treatment needs 1s the use of State grants, and these
are typically patterned after the Federal Construction 6rants Program.
California, Illinois, and New York run very large and sophisticated grant
programs with large financial cornnitm^nts to wastewater treatment while South
Carolina's and South Oakota's programs are very modest in scope. Over half of
the States use matching grants for projects that are receiving EPA wastewater
treatment funds, with the State funds ranging from 51 to 25% of the eligible
project costs. In more than 20 States, projects with costs that are ineli-
gible for Federal funds are often granted State funds that cover from 15-
(Minnesota) to 100% (California, Hawaii, and New Mexico) of project costs.
Some States employ grants that are exclusively Intended to assist projects
that are not receiving Federal funds, and these funding levels range from 50%
4-12
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TABLE 4.2 STATE SOURCES OF WmSTEWATER TREATMENT FUNDING
6RANTS TO LOANS FOR USE OF STATE STUDIES OF FINANCIAL
MATCHING COMMUNITIES FACILITY REVENUES TOR NtW FINANCING BOND TECHNICAL OCOT BONO RE VOL ft Ng
STATE GRANTS W/O EPA HELP CONSTRUCTION LOANS/GRANTS PROGRAMS BANKS ASSISTANCE WNAGEWCWT POOL fUNOS
KltbM
Mull
»
•
*
Rrliona
*
Irtant^f
*
•
•
»
«
•
California
•
*
*
«
Colorado
•
Connecticut
•
•
*
*
•
Dclawar*
•
Florida
•
•
•
*
ieorgla
*
•
#
*
•
Hawaii
*
*
*
Idaho
«
»
«
Illinois
*
Indiana
*
*
~'Not yrt established
-------
TABLE 4.2 STATE SOURCES OF WASTEWATER TREATMENT FUNDING (continued)
STATI
GRANTS TO LOANS FOR USC OF STATE STUMCS OF FINANCIAL
HATCHING COtHJNfTfCS FACIUTT REVENUES FOR NEW FINANCING BONO TECHNICAL
DtiT
POOL
RtVOLfINt
FiAm
lOMC
*
*
#
Unfit
Kentucky
Louisiana
Malna
*
«
*
»
Maryland
•
•
•
•
Massachusetts
*
«
Michigan
•
»
*
*
Minnesota
#
•
«
*
Mississippi
*
Missouri
«
«
»
#
«
*
Montana
«
«
Nebraska
#
•
Nevada
«
•
4*
I
-------
TABLE 4.2 STATE SOURCES OF WASTEWATER TREATMENT FUNDING (continued)
GMNTS TO LOANS FOR USE OF STATE STUDIES OF FINANCIAL
MATCHING COMMUNITIES FACILITY REVENUES FOft NEU FINANCING BOND TECHNICAL DEBT BOND REVOLVING
STATE GRANTS W/O EPA HELP CONSTRUCTION LOANS/CHANTS PROGRAMS BANKS ASSISTANCE MANAGEMENT POOL FUNDS
New Hampshire
•
«
ft
ft
New Jersey
*
•
«
•
»
New Mexico
*
*
•
ft
New York
*
ft
•
North Carolina
*
•
ft
ft
North Dakota
Ohio
ft
Oklahoma
Ortqon
*
Pennsylvania
•
ft
«
Rhode Island
•
South Carolina
•
•
•
South Dakota
Tennessee
*
-------
TABLE 4.2 STATE SOURCES OF WASTEWATER TREATMENT FUNDING (contlnutd)
6RMTS TO 10WS lift USC OF STATE STUTIIES OF FIMNCfAl
HATCHING COWWIITIES FACILITY REVENUES FOR WW FINANCING BONO TECHNICAL DEBT BORO REfOUTtNC
STWt GRANTS W/O CP* HUP CONSTRUCTION IOAHS/GRAHTS PROGRAMS BANKS ASSISTANCE HANAGEHCWT POOL FWPS
Ttiit
*
•
Ut«h
«
Vermont
•
*
«
Virginia
«
Washington
«
•
«
West Virginia
•
•
* •*
*
•
Wisconsin
•
*
Wyoming
•
»
*" Not yet established
-------
to 80% of the project cost. However, in light of Increased demands on State
funds, almost all current State financial assistance programs will have to be
modified in order to effectively assist in meeting all wastewater treatment
project costs.
Current State Emphasis 1s on New Aspects
of Loans and Loan Guarantees
State emphasis appears to be shifting from such heavy reliance on grants to
serious exploration of the various ways that loans and loan guarantees, bond
banking and bond marketing, technical support, and credit enhancement
techniques can be employed in assisting local conmunltles. Some of these
alternative financing methods leverage dollars to fund more projects, and
others raise more revenues to be used for project funding:
As of August 1982, 13 States had loan programs designed
specifically to assist local governments with wastewater
treatment projects. Of these programs, nine provided loans
for both federally funded and ineligible projects.
At present, for projects receiving Federal assistance, loans
range from 10 to 25% of the total costs, and for projects
with no Federal funding, 100% of the costs are usually
covered. Loans are generally secured by local taxes or sewer
charges and are occasionally secured by other means.
Georgia has recently enacted a State "revolving fund, although
it will not be in operation until 1985. A study, expected to
be completed by the end of 1984, is reevaluating local
finance needs, and will provide recorronendations concerning
program management procedures and funding levels.
Loan guarantees are being considered at the departmental or
legislative levels in Arkansas, Oklahoma, South Carolina, and
Utah. In addition, Massachusetts has pursued legislation
that would permit the State to provide 90% pre-financing of
local construction grant projects with funds that would be
repaid through the 75% Federal match and a 15% State grant.
To date, seven States have established bond banks, one State
has developed a bond pool, and three States have either
established or are in the midst of establishing revolving
loan funds. Maine, Nevada, New Hampshire, North Dakota, and
Vermont allow bond banks to purchase the bond Issues of a
number of small localities and reissue their own lower
interest bonds (backed by the aggregate local bond issues) in
order to raise money for wastewater treatment loans.
Alaska, Maryland, and North Carolina assist in the marketing
or selling of bond issues, the proceeds of which are used
toward project funding.
4-17
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Effective as many of these mechanisms can be, they all require some source of
revenue, and the States are hard-pressed to generate more money. The predo-
minant sources of State monies for many of these grant and loan programs are
general obligation bonds, revenue bonds, current State revenues, and specific
taxes. State grant programs are funded primarily in one of three ways: State
current revenues (8 States use this method). State general obligation bonds
(used by 14 States), or a combination of the two (6 States). However, these
particular sources of State revenue are beaming more strained because of the
demands of competing infrastructure needs ir. addition to wastewater treatment
projects. The States are being forced to assume more and more fiscal respon-
sibility for many public projects as the Federal government is reducing its
share, and the already limited amount of State funds is being even more
severely stretched because of these new pressures. As a result, many innova-
tive loan options may go unfunded.
State Are Exploring Innovative Approaches
for Future Needs
For the States that apply a portion of their revenues to wastewater treatment
financing, the increased burden resulting from the decreased Federal share
will not likely be supported by these revenues and instead will need to be
assumed by other financing mechanisms. These mechanisms take various fonns
and can provide effective responses to revenue problems that are emerging as a
result of greater demands on State monies.
The application of monies from specific taxes or set-asides (such as inheri-
tance and tobacco taxes in Idaho, mineral royalty taxes in Wyoming, and oil
and gas revenues in California) to wastewater treatment is gaining popularity.
Some of these taxes are voluntary; for example, North Carolina provides
counties with the option of levying a .5% tax on tobacco goods specifically
for application to wastewater treatment. Another growing trend in obtaining
funds is the charging of taxes and fees to entities engaging in activities
that either cause or exacerbate water pollution problems, as Wyoming does with
its coal Impact tax. Another alternative source of monies are various mecha-
nisms for dealing with loan defaults. In the event that a locality defaults
on a loan, Kentucky may levy a tax of up to 2% on customer water service, and
California and Ohio are empowered to seize a facility (eminent domain powers)
and impose and collect user charges to cover an unpaid loan. However, only a
few States have devised and currently employ such mechanisms. Currently,
various studies and evaluations are being undertaken by other States in search
of ways and means to alleviate the burden of increasing the amount of already
limited funds.
The issue of equity also will play an important role in the States1 decisions
on which communities will receive State financial assistance for their waste-
water treatment needs. Currently, small communities such as those in New
Hampshire and Vermont have the greatest unmet need for wastewater treatment
facilities. Of all communities affected by the reduced Federal share, 77% of
these are very small, with populations of less than 3,500. However, these
communities account for only 132 of the affected population, while 582 of the
affected population lives in very large comnunities with populations in excess
of 50,000. In terms of economy of scale, projects in very large metropolitan
4-18
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areas are much more economical to finance than those 1n small rural areas
because more people benefit from the project, user charge.s per capita are
lower due to the large population able to share the cost, and the metropolises
themselves are more financially flexible. In addition to the question of the
economical allocation of funds, the question of who receives the limited funds
must first be considered. Many of these small rural conmunities have waited
for years to become eligible for funds, and now that they are on top of the
State priority lists, project eligibilities and Federal funding have been
reduced. Thus, the States will have to seriously evaluate their project
funding criteria in order to assure a reasonable degree of equity.
Much of the focus of State funding has been on completing projects that are
already underway or on beginning projects for which there 1s an obvious need.
The funds have been directed toward meeting core needs, but now, with the
changes in the Federal Construction Grants program, other concerns are
emerging as priority to the States. The operation and maintenance of the
constructed facilities is now acknowledged as being an equally serious concern
as 1s the expansion, rehabilitation, and replacement of the facilities. At
present, only New York and New Hampshire provide local subsidies based on
effective operations and maintenance. New York pays approximately 17% of
annual operations and maintenance costs to comnunlties that maintain effective
O&M throughout the year. Communities apply for funds from the State and are
reimbursed from available funds. New York appropriates approximately $33
million annually and last year assisted a total of 505 communities. New
Hampshire agrees to pay 80% of the grantee's 25% share of construction costs
at the rate of one-twentieth of the bonded indebtedness plus interest over a
20 year period. The State pays the comnunities' annual bond costs as long as
the community meets its permit limits and maintains effective operations and
maintenance. A total of 90 plants participate at an annual cost to New
Hampshire of about $10 million.
Pennsylvania subsidizes the grantees share of construction costs, but the
subsidy is not linked to 0&M performance. The State pays 2% of the grantee
share annually. In 1983, 945 communities received a total of $17,100,000.
Massachusetts subsidizes up to one-half of a conmunity's annual chemical
costs. This is a form of an 0&M subsidy but It 1s also not contingent on
effective 0&M.
The Agency intends to evaluate, these subsidy programs, to provide information
to States on their effectiveness, and to encourage voluntary State implementa-
tion in the second round of a SRF program.
Although 0&M and compliance are viewed as essentially local responsibilities,
many States are increasing their 0&M training efforts and working to develop
self-sufficient State/local operator training programs. States are also
re-orienting their 0&M and training programs to ensure permit compliance.
Most States have traditionally relied heavily on Federal grants (primarily
Section 106 of the Clean Water Act) to support State-wide 0&M and operator
training programs. Since 1982, additional Congressional add-on funds under
Section 104(g)(1) are being used by States to provide on-site training and
technical assistance to operators of small municipal treatment plants, and to
develop improved financial management and user charge systems to monitor and
recover costs of 0&M. A majority of the States have established training
4-19
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centers, under Section 109(b) funding authority, to provide entry level and
continuing in-service operator training. A total of 44 States maintain
mandatory operator certification programs with increasing emphasis on
demonstrated operator capability to operate and maintain the facilities.
4-20
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CURRENT FEDERAL PROGRAMS
There are a variety of Federal programs which in one way or another contribute
funds to the planning, design, and construction of municipal wastewater treat-
ment facilities. But although the EPA, the Fanners Home Administration, the
Department of Housing and Urban Development, the Economic Development Adminis-
tration, and the Department of Health and Human Services all provide funding
sources, the similarity ends there. Some programs provide grants and some
provide loans. Some are based on a needs test and others are not. Some have
stable funding, others are being reduced, and one 1s being phased out alto-
gether. These Federal programs also vary significantly in terms of what types
of communities may apply for assistance, eligibility requirements, and the
level of government which determines eligibility.. Host significant however,
is that only one program, the EPA Construction GraTTIs program, is oeoicatefl
solely to wastewater treatment and water quality goals.
Because of the multiplicity of funding sources and different legislative
intents. Federal assistance has not been wel1-coordinated, producing gaps in
the equitable distribution of Federal monies. However, even with coordina-
tion, it is apparent that their combined resources will cover only a portion
of current or future needs, particularly as overall funding declines (see
Table 4.3). By far the largest reason for this decline 1s the reduction in
funding for the EPA's Construction Grants Program which currently accounts for
about 90% of all Federal assistance. To put the pivotal role of the
Construction Grants Program into context though, it is necessary to present an
overview of the other Federal programs, especially in terms of what they can
do and what limitations and restrictions they must abide under.
Farmers Home Administration (FmHA) Provides
Limited Financial Assistance to Small Communities
The Farmers Home Administration currently administers two programs. The Water
and Waste Disposal Systems for Rural Comnunities Program is a loan/grant
program which provides money to States, counties, cities, non-profit corpora-
tions, and Indian tribes for use in rural communities of less than 10,000
people, although preference is given to communities of less than 5,500. Its
budget for FY 1984 is $360 million, with 75% ($270 million) earmarked for
loans and 25% ($90 million) in grants. Interest rates range from the
prevailing market rate for rural bonds down to 5%, depending upon the
proportion of families whose median Incomes fall below a specified poverty
level. However, the Government Accounting Office determined that historically
less than a third of these funds have gone to wastewater treatment. This
implies that less than $90 million in loans and less than $30 million in
grants were actually available in FY 1984 to supplement the Construction
Grants Program.
FmHA also administers the Community Facilities Loan Program, which provides
funding to the same types of comnunities described above. There are no
grants available, however, and wastewater treatment facilities are only one of
a great many types of facilities for which these loans can be used, such as
hospitals, courthouses, and recreation facilities.
4-21
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TABLE .3
FEDERAL SOURCES OF WASTEWATER TREATMENT FUNDING
PROGRAM
CONCERN*
12 3"
ELIGIBLE
C0MWNI1IES
TYPE OF
FUNDING
ADVANTAGES
DISADVANTAGES
TOTAL
PROGRAM
FUND I fir,
FY 1984
l/AMOUNT
PROVIDED FOR
NUHIC1PAL WWT*
EPA CONSTRUCTION
GRANTS
State and local
governments
Grants of 55-751 for
cost of constructing
wastewater treatment
plants.
Provides over 901
of all Federal
assistance.
Discourages self-sufficiency and
local Initiative. Encourages
second-round grant requests. Does
not always target cornnunltles
most In need of assistance. Is
being phased out. Limited funding
for future needs.
$2.4
billion
$2.«
1001/
billion
FARMERS HOME
-ADMINISTRATION
WATER ANO WASTE
DISPOSAL SYSltHS
TOR RURAL
C0KIUNIT1ES
States, counties,
cities, and non-
profit corporations
for use In rural
comnunlties of
less than 10,000
and Indian tribes.
Need based
criteria
Loan and loan/grant
combinations.
Interest rates vary
according to need.
Grants available
for up to 751 of
total project costs.
Water and waste
disposal are the
only types of facil-
ities it finances.
Program was cut In half 1n 1982.
Interest rates have risen from
original flat rate of SI. Less
than 1/3 of funds have gone to
wastewater treatment. Serves
only rural conmunltles.
$360
million
321/
illS million
Requires project to be based
upon sources of money sufficient
to repay loans. Only a fraction
of Us funds go to wastewater
treatment. Serves only rural
communities.
•Ch
I
fS)
rs>
FARMERS HOKE
ADMINISTRATION
COMMUNITY
FACILIIIES LOAN
• Same as above.
Loans only. Variety
of other types of
facilities available.
Is actually an
interest rate
subsidy program.
lowers Interest
costs of needy
rural communities.
$130 <11/
million <$1 million
HUD COMMUNITY
DEVELOPMENT
BLOCK GRANTS
States, counties,
and local govern-
ments. Need based
and competitive.
Grants.
Can help states set
up self-supporting
programs. Fundinq
appears to be stable.
Gpals are economic opportunity
and suitable housing, not
water quality per se. Only
6-7X of funds go to water and
sewer projects combined.
$3.5
zt r
billion $69 million
10*/*
$17 million
ECONOMIC
DEVELOPMENT
ADMINISTRATION
GRANTS FOR PU8LIC
WORKS AIIO
DEVELOPMENT
FACILITIES
State and local
governments,
economic develop-
ment districts,
regional planning
comal ss Ions, and
non-profit org-
anizations rep-
resenting • re-
development
district.
Grants and grant/
loans, although
loans are rarely
used.
Not applicable.
Planned for phase-out in FY B4.
Main goals are economic growth
and creating Jobs. Funds only
wastewater collection, not
treatment. Does not fund resi-
dential wastewater collection.
$170
million
OFFICE OF
COKUJNITY SERVICES
IN lilt
DEPARTMENT OF
HEALTH AND
HUMAN SERVICES
Regional organ-
izations for
technical
assistance to
small communities.
Grants.
Technical assist-
ance grants can
save many more
dollars in the
construction, oper-
ation and mainten-
ance of facll(ties
than the actual
dollars expended.
Funding Is only In the $2 million $2 1001/
per year range. million $2 million
* Total funding In FY 1984 approx. $2.6 billion
* Approximate percentage
t M..irT t
* n ~ I n
-------
HUD Community Development Block Grants Provide Little
Support to tne Construction of Wastewater Fac111ties""
The Department of Housing and Urban Development makes grants to States, coun-
ties, and cities, based on need. Community Development Block Grants (CDBG)
are competitive, using a complex formula that takes into account population,
poverty level, housing conditions, and local economic growth. Here again,
wastewater treatment facilities are only one of many types of eligible pro-
jects. Water supply and wastewater treatment facilities together account for
only 6-71 of CDBG grants, amounting to about $250 million a year for both.
This 1s not surprising though, since the legislative Intent of this program is
economic opportunity and suitable housing for persons of low and moderate
Income, not water quality per se.
Economic Development Administration (EDA)
Is Planned for Phase-out in FY 1984
EDA provides grants (and on rare occasions, loans) to State and local govern-
ments, economic development districts, regional planning commissions, and non-
profit organizations representing redevelopment districts. Its main goals are
to spur economic growth and create jobs. Wastewater collection projects, but
not wastewater treatment, are eligible. Its effect has been negligible and it
is planned for phase-out in FY 1984.
Office of Community Services Offers Technical
Assistance Grants
Falling into a different category because of the ineligibility of actual
construction costs, are the grants available from the Office of Coimunity
Services within the Department of Health and Human Services. These grants are
awarded solely to regional organizations to provide technical assistance to
small communities for the planning and design of wastewater treatment
facilities. Conceivably, this could complement the loss of funding for Steps
1 and 2 within the Construction Grants Program. However, present funding is
only $2 million per year.
The Construction Grants Program is the
primary source ot hunos
Even at a reduced funding level of $2.4 billion, in FY 1984 the Construction
Grants Program accounted for over 90S of all Federal funding for wastewater
treatment needs. Although exact figures are not available, the best estimate
of Federal assistance which will continue to be available from the other
previously mentioned programs is less than $200 million. Thus, it is clear
that the Construction Grants Program Is and will continue to be the major form
of Federal assistance for municipal wastewater treatment. However, it should
be noted that Concerns 2 and 3 are not addressed by the Construction Grants
4-23
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Program, although Clean Water Act Sections 106, 205(9), 104(g)(1) funds
provide limited state support for 0&M (Concern 2) activities. With respect to
Concern 3, one of the specific intents of the 1981 Amendments was to avoid
second-round grant pressures for replacement and expansion of facilities. In
order for all categories of needs to be met, both in the present and in the
future, a revised Construction Grants Program will be necessary.
Current Federal Programs can be Used as Models for
Financial Delivery of a Hew Program
While it is apparent that current and anticipated Federal funding sources are
inadequate to meet all backlog and future needs, the question remains whether
present Federal programs, or elements of these programs, could be used as a
model for financial delivery of a new or revised program. In looking at the
array of current Federal funding programs for wastewater treatment, certain
elements do seem to offer constructive ideas for a revised Construction 6rants
Program framework:
Loans on the model of FmHA Interest-subsidy programs could
be used as a way of leveraging Federal assistance dollars.
HUD's block grant approach could be employed to enable
States to establish their own loan or credit enhancement
programs, thereby encouraging self-sufficiency.
Technical assistance grants--l i'
-------
CHAPTER 5
MAJOR FUNDING OPTIONS
-------
CHAPTER 5: MAJOR FUNDING OPTIONS
OVERVIEW OF EVALUATION CRITERIA
EPA—aided by its multi-disciplinary Task Force on the Future Federal Role in
Municipal Wastewater Treatment, the Management Advisory Group to the
Construction Grants Program, numerous Federal and State government agencies,
and other public-interest groups—identified five major funding alternatives
that might provide feasible mechanisms for the support of wastewater treatment
plant needs:
• Municipal financing
• Municipal bonds with Federal credit enhancements,
• Federal loans,
• Federal grants, and
• Leveraged and unleveraged State revolving funds.
The funding options were evaluated in relation to the extent that they conform
to the areas of consensus and how well they meet four criteria:
Effectiveness as measured by how quickly an option will
target funds to meet core treatment needs, the ability to
promote capital formation for State/local self-sufficiency,
and the potential flexibility in influencing long-term
compliance.
Efficiency as measured by the ability to allow communities to
meet wastewater treatment requirements at the least cost, to
encourage the use of appropriate low-cost capital and O&M
solutions, and to increase State flexibility in the use of
funds.
Equity as measured by the potential flexibility in addressing
the issue of affordability across communities, and the
potential fiscal impacts on Federal, State, and local
budgets.
Feasibility as measured by the complexity (and related cost)
associated with administrative requirements to Federal,
State, and local governments, and any potential negative
political or legal precedents.
Funding options were also assessed as to the presence and extent of the
following undesirable features:
Creation or use of Federal off-budget entities to manage or
oversee a new funding alternative.
5-1
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• Creation of large contingent liabilities for the U.S.
Treasury.
• Creation or use of mechanisms that would result in
significant net increases in Federal tax losses.
t Direct Federal assistance that would expand project
eligibilities or increase the grant share, thus undercutting
the CWA goal of State and local long-term self-sufficiency.
The pages that follow sunmarize the five major funding alternatives in terms
of their utility as an element of a transitional program that will provide for
the attainment of the long-term goals of State/local self-sufficiency and
compliance with the CWA.
5-2
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MUNICIPAL FINANCING
This option was analyzed as the "baseline" case. Traditionally, State and
local governments have obtained funds for large capital projects by issuing
long-term bonds. Borrowing at the State and local government level has been
necessary because these governments utilize most, if not all, of their
available revenues to pay current operating expenses. Thus, there is little
or no available surplus to pay for large capital improvenents on a "pay as you
go" basis.
A key feature of municipal bonds 1s their exemption from Federal (and in most
cases. State and local) income taxes. Since purchasers of municipal bonds are
willing to accept lower interest rates to avoid taxation on the interest,
issuers of municipal bonds can finance capital projects at interest rates
which are lower than those available to private borrowers.
Municipal bonds are generally classified as general obligation, limited
obligation and revenue bonds:
General obligation bonds are secured by an unconditional
pledge of the issuing government to levy unlimited taxes to
retire the bonds. Due to strong security features, the
interest rates of general obligation bonds are generally the
lowest available.
Limited obligation bonds and revenue bonds are obligations of
the issuer payable from a specifically designated source. No
taxes are levied or pledged as a backup. Because the issuer
is obligated to pay debt service only from specified sources,
limited obligation and revenue bonds generally are considered
to be higher risk investments and customarily carry a lower
credit rating and higher interest cost than general
obligation bonds.
A more recent financing innovation has been privatization, which refers to
involvement of the private sector in the financing, ownership, and operation
of public facilities. Under privatization, private companies are able to take
advantage of certain Federal tax benefits such as depreciation and tax credits
that cannot be used by the public sector. In conjunction with the tax-exempt
status of industrial development bonds, there may be opportunity for
significant reductions in the financial burdens faced by communities (see also
Chapter 4, Assessment/Availability of Private Sector Funding).
Advantages
Tax-exempt bonds are the traditional State/local financing
source and would not burden municipalities with increased
administrative responsibilities.
• Such financing methods would allow State/local control of
funding capital projects, resulting in the continuation of
delegated program reponsibilities.
5-3
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• Use of revenue (and other) bonds may allow issuers to avoid
statutory debt ceilings.
• Privatization may speed the pace of construction and,
because of construction and operating efficiencies, may pass
on significant cost savings to local governments in terms of
reduced user fees, construction and operating efficiencies.
Disadvantages
• Many communities may not be able to rely solely on this
option, and thus construction and compliance goals will not
be met.
• While the issuance of municipal bonds requires no direct
Federal participation, indirect financial support would be
provided through exempting bond interest earned from
individual and corporate income tax. Such tax expenditures,
or loss of tax revenues, are of great concern to the U.S.
Department of Treasury.
• Municipal bond market has recently been plagued by high
interest rates, increased volatility, federal regulation,
and declines in participation from institutional investors.
• 6eneral obligation bonds are often restricted by debt
ceilings and usually require voter approval.
• Revenue bonds usually contain restrictive covenants which
may restrict operations.
• Municipal financing lacks controls needed to target funds to
buy out core needs. (This disadvantage could be mitigated
by strong enforcement actions.)
• The tax-exempt feature of municipal bonds and the tax
benefits available .under privatization are subject to change
by the Congress and the Supreme Court.
Usefulness as a Component of the Transitional Program
As long as their tax-exempt feature remains Intact, municipal bonds are a
feasible method to be used as one element in achieving State and local
self-sufficiency. And, in conjunction with private sector support, it may
provide a partial solution to meeting some wastewater treatment construction
needs and in keeping OSM costs 1n the affordable range. However, at this
time, municipal financing alone will neither adequately promote the capital
formation needed to meet future needs nor necessarily promote the goals of
long-term State and local self-sufficiency and compliance.
5-4
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MUNICIPAL BONDS WITH CREDIT ENHANCEMENTS
Federal Guarantees
Under this approach, no Federal grants are made. Rather, the Federal
government guarantees the repayment of the municipal bond although the local
government remains responsible in the first instance. Due to the full faith
and credit backing of the Federal government, State and local issuers are able
to market their bonds at reduced rates. No insurance premiums would be
charged. The Federal government absorbs the costs of administering the
program and any losses incurred from defaults by local governments.
Advantages
• Improves the marketability of State and local debt,
especially those issuers with credit access problems.
• Lowers the interest rates of State and local bonds, thereby
reducing their debt service.
• Allows States and localities to use bonds other than full
faith and credit obligations, thereby freeing up general
obligation debt capacity for other purposes.
Disadvantages
• Shifts the risks of non-payment from the investor to the
Federal government; the U.S. Department of Treasury has a
general rule against Federal guarantee of tax-exempt debt
because of the risk of default and potential for tax losses.
• Unless strictly enforced, future forgiveness of defaulted
loans may be seen as a free financing source.
• Excessive use of Federal guarantees may drive up interest
costs of non-Federally-backed municipal bonds.
• Another Federal program may further complicate the municipal
credit market and impose control in the manner in which
States and localities may issue debt.
Usefulness as a Component of the Transitional Program
Federal guarantees are not a very useful device in promoting State and local
self-sufficiency. Although this option may reduce interest costs, it may
create a dependency on back-stop credit devices with only a marginal reduction
in overall debt service burdens.
5-5
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Federal Interest Subsidies
Under this alternative, local governments issue bonds to pay for the
construction of wastewater treatment and collection projects. Each year, the
Federal government pays local governments an amount that reduces the effective
interest rate on local borrowing to a lower rate, such as 5%. Thus, the
Federal government subsidizes local debt service.
This debt-service subsidy could be combined with a taxable bond option; that
is, local governments elect to borrow funds using taxable bonds. Local
governments would pay a higher nominal interest rate for these funds, but
Federal subsidies would reduce the effective interest rate through annual
payments.
Advantages
• Since communities with low financial capabilities are likely
to pay higher interest rates than communities with greater
capabilities, a Federal subsidy that reduces the effective
rate of borrowing to 5% could provide a larger subsidy to
the communities with low financial capability.
• The taxable bond option would reduce Federal tax losses that
result from the tax-exempt status of interest on State and
municipal bonds.
• By withholding interest and amortizing payments to local
governments, an incentive to comply with performance
standards could be implemented.
Disadvantages
• The interest subsidy spreads the required Federal
expenditures over an extended period of time.
• Since local governments would depend upon the Federal
government to provide the debt service subsidy, this option
would not promote State and local self-sufficiency.
• This option could require Increasing the Federal dollar
input for each successive year.
• If the Federal subsidy payments are made from annual
appropriations, there will be uncertainty about future
levels of funding. This may increase the risks borne by
bond holders and, concomitantly, the interest rates of the
local bonds.
• This option would be complex to administer. It would
require calculating separate subsidy levels for each local
community.
5-6
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• Although this option could be designed to help local
conmunities fund future treatment capacity, some statutory
limit would likely be placed on the extent of future needs
to be funded. Once the limit was met, local conmunities
would be left to fund their own needs.
• Unless complemented with sane grant aspects, this option
cannot contribute the significant cost share available under
the current grant program.
• Shifts the risk of non-payment from the investor to the
Federal government, providing for possible contingent
liabilities to the U.S. government due to defaults as late
payments.
Usefulness as a Component of the Transitional Program
The Federal debt service subsidy option does not appear to be a good vehicle
for promoting local self-sufficiency. While it may provide proportionally
more support to corrmunities with less financial capability, it encourages
local governnents to rely on the Federal government for financial support.
5-7
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FEDERAL LOANS
Under this option, the Federal government lends money to local governments at
low interest rates (e.g., at 5%) with level repayments over a 20 year period.
Federal loans would be made only for portions of projects that are currently
eligible to receive grants. Local governments would finance the non-eligible
portion of projects through tax-exempt bonds issued on the municipal bond
market.
The option could be structured so that States provide a match for Federal
loans. That 1s, the Federal government would loan local governments 90% of
eligible costs, and the State would loan the remaining 101. States might also
be made responsible for administering the loans and collecting local
repayments.
Advantages
• This option reduces the Federal tax losses that result when
local governments issue tax-exempt bonds to pay for the 451
eligible costs not currently funded under the Construction
Grants Program. It does not eliminate Federal tax costs,
however, since local governments will still issue tax-exempt
debt to finance project costs that are not eligible for
funding.
• In targeting monies to eligible needs, this option increases
the likelihood that those needs will be met, and that
construction will be carried out in a timely manner.
Disadvantages
t The option does not promote State or local Institution-
building or self-sufficiency. It substitutes one Federal
program for another and potentially by-passes State
governments. Local governments will continue to rely on the
Federal government for low Interest loans, and no long-term
source of capital is created.
• The option provides no additional flexibility in decisions on
what types of needs to target, or in what projects should
receive additional funds.
• This option creates substantial contingent liability for the
Federal government, and does not adequately leverage the
Federal dollar.
• This option is very expensive to both the Federal and local
governments. The Federal government borrows at a taxable
rate that is higher than the local tax-exempt rate. Although
5-8
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the Federal government recoups some of the difference between
the taxable and tax-exempt rates through income taxes on
interest earnings, it must still pay debt service on its
borrowing. In order to shift the full cost of this debt
service to local governments, the Federal government would
have to charge local governments high interest rates.
• Even at low interest rates, the local governments pay higher
costs than they would have under the current Construction
Grants Program. The EPA eligibility constraint requires that
the option only provide funds for the grant eligible portion
of projects. Currently, EPA provides grants to local
governments at 55% of eligible project costs. This grant is
roughly equivalent to a zero-Interest 100% loan for eligible
project costs—that is, it costs local governments roughly
the same amount to finance wastewater facilities 1f they
receive a zero-interest loan for the entire amount of
eligible costs, or 1f they receive a grant for 55% of
eligible costs and borrow the rest at market interest rates
(e.g., 10.2%). Consequently, if the Federal government
charges any interest on the loans, it will cost local
governments more than a 55% grant. The only way that the
Federal government can make this option attractive to local
governments is by expanding the eligible categories.
• While this option reduces losses to the Treasury as
tax-exempt bonds are not issued, it does not eliminate
Federal tax losses. Local governments will still Issue
tax-exempt debt to finance costs that are not eligible for
funding.
• Under this funding alternative, debt service is paid twice on
the same amount of capital. The Federal government pays debt
service on its borrowed funds and local governments pay debt
service (albeit at low interest rates) on the Federal loans.
Usefulness as a Component of the Transitional Program
The direct Federal loan option is not considered an effective alternative
means for financing wastewater collection and treatment. It provides no
additional long-term capital to meet future wastewater facility needs nor does
it promote local flexibility or self-sufficiency. While the option reduces
the Federal tax costs that result from large amounts of tax-exempt borrowing,
it 1s expensive because it results 1n large debt service costs to Federal and
local governments and substantial Federal contingent liabilities.
5-9
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FEDERAL GRANTS
This option encompasses the current project grant program, whereby the Federal
government provides annual grants for wastewater treatment from annual
appropriations. These finds an allocated to States on 'tis Jiasis of a complex
formula that takes State population and wastewater needs firto account. The
federal government specifies what class of wastewater needs (e.g., treatment,
interceptors) are eligible for funding* and the proportion of eligible costs
"that can be funded w+th Federal funds.
State governments establish priorities for -funding and a list of local
wastewater treatment and collection projects that will he funded. The States
administer the Federal grants and provide matching State grants. Local
governments issue bonds to finance project costs that are not funded through
Federal or State grants.
Advantages
• Hie Federal "grant system for wstewater treatment is in
operation and is effectively nonaged and delegated. EPA,
States and local governments know and understand their
roles; no major administrative changes would be required.
• Funds are directly targeted for State and nationally
designated needs. Thus. Federal monies are effectively used
to meet specific wastewater treatment and objectives.
• The current 551 Federal share provides for a very high
dollar leverage, unlike the previous 75% Federal share.
Thus, it results in lower cost to the. Federal government and
increased local responsibility.
• The Federal grant program allows States sane flexibility in
selecting which projects to fund. It does not allow them
flexibility, however, in deciding the types of needs to be
funded.
• Extensive State involvement in the program is provided
through delegation and development of State priority lists.
Disadvantages
• The grant program does not promote long-term capital
formation for State and local self-sufficiency. Since
Federal grants substitute or replace State/local
expenditures, the program does not provide adequate
incentives to transfer the true cost of treatment and
collection to the users of the system and does not encourage
the development of State/local sources of funding.
5-10
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• When a program of Federal grants is terminated, other
sources of funding will not be immediately available unless
States and local governments have undertaken adequate
financial planning for funding future needs.
• Although a 55X Federal share provides for high short-term
leveraging of dollars, for every dollar invested by the
Federal government, one dollar or less is targeted to
imnediate treatment needs due to the provisions for State
mandatory set-asides and discretionary uses of funds for
otherwise ineligible projects.
• The large number of remaining "grandfathered"
phased/segmented projects which are eligible for funding at
a 75% Federal share significantly dimishes the amount of
averaging allowable under the Federal grant program.
• With a uniform grant share, a "stand-alone" grant program is
inflexible in addressing financial "incapability"
situations.
• Construction delays, red tape, program changes, and some
"waiting in line" are endemic to any large Federal grant
program.
Usefulness as a Component of the Transitional Program
Federal grants currently target funds for wastewater treatment and collection
needs designated as priorities in national legislation and State priority
lists. They have not, however, promoted local self-sufficiency, and may
actually hinder the transition to State and local self-sufficiency. The
history of program funding shows that Federal funding has provided some
disincentive to direct State and local funding and program involvement.
Nonetheless, the program is 1n place. In terms of leveraging of funds and the
potential for targeting funds, administrative flexibility, and addressing
financial capabilities, it provides a total framework for the construction of
needed facilities. This program could be combined with new mechanisms that
provide for enhanced State incentives and flexibility to promote long-term
self-sufficiency and compliance.
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CAPITALIZATION 6RANTS FOR STATE REVOLVING FUNDS
Under this option, the Federal government offers "seed" grants to States with
which to capitalize State Revolving Funds. The States lend the seed monies to
local governments for wastewater treatment projects. States set the interest
rates that the local governments will pay, as well as the maturities of the
loans. The local governments repay the loans, and the States re-lend
('revolve") the repayments to other local governments 1n the form of
additional loans for wastewater treatment projects (see Figure 5.1).
The monies given to States under this option are essentially "State monies" to
be administered by States for dedicated wastewater treatment purposes.
Conceptually, this option differs dramatically from the existing project grant
approach, and 1s similar 1n many respects to predecessor Federal programs,
such as block grants, revenue sharing and special revenue sharing, and the
recent New Federalism proposals. As such, broad as opposed to detailed
guidelines are attached to State administration of SRFs, and increased State
responsibility and flexibility is encouraged wherever possible.
The monies in the State Revolving Funds (SRFs) will grow over time as a
function of several factors: the Interest rates charged to the local
governments, the loan maturities, local defaults, and the interest rate earned
from short-term investments of Idle revolving funds. Greater interest rates,
shorter maturities, and lower rates of default will capitalize the revolving
fund at faster rates. Of course, a major factor affecting SRF capitalization
is the amount of money dedicated or accepted into SRFs over time.
One variation of the capitalization grant option has State governments using
the Federal seed monies as security for State bond issues that "leverage"
acamonal monies for the revolving fund (See Figure 6.2). The Federal monies
would be used to fund a debt service reserve fund for the State bond. This
security would reduce the risk to the bond holders and, thus, help lower the
interest costs that the State would have to pay.
Advantages
• Although it would take time to build up sufficient funds to
finance all wastewater treatment costs through State
Revolving Funds, once established, the revolving fund would
provide a lasting source of State funds to provide for
Improved and sustained compliance. Thus, the long-term
leveraging of limited Federal funds 1s significant.
• The predictability of revolving fund revenues Increases the
certainty of project funding, and allows States and local
governments to plan over the long term. This provides an
incentive for States to accept an active management role.
5-12
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FIGURE 5.1 UNLEVERAGED STATE REVOLVING FUND
tTATl REVOLVMQRJND
BLOCK. GfMMT
Wo MONEY) 0
-------
FIGURE 5.2 LEVERAGED STATE REVOLVING FUND
LOCAL GOVERNMENT
STATE GOVERNMENT
FEDERAL GOVERNMENT
LOANS
(BONO PROCEEDS
• REPAYMENTS)
MATCMNG SHARE
-------
• Given certainty in funding and the potential for local
refinancing in the future, local governments could proceed
inmediately with construction instead of waiting for outside
financial assistance.
• States would be allowed greater latitude in the use of
funds, and thus would have greater Incentives and
flexibility needed to promote long-term self-sufficiency in
capital formation, operation and maintenance of facilities,
and compliance.
• The growth of revolving fund revenues would enable States to
address future wastewater treatment and collection needs.
• The State Revolving Fund concept provides for continued
delegation of long-term program responsibility to States.
It provides substantial administrative flexibility, such as
leveraging, by issuing State bonds.
• The State Revolving Fund would provide States with the
Incentives and means to achieve long-term self-sufficiency,
since 1t establishes a State-level source of funds that
would be available in the future without Federal funding
support.
Disadvantages
• In the short-term, the State Revolving Fund may not be as
highly leveraged as a 551 Federal grant (i.e., it may result
in a lesser dollar amount of construction), unless States
supplement it with their own funds or use capitalization
grants as security for State-issued bonds.
• Since one initial objective would be to quickly capitalize
the revolving fund, it is likely that loans would be made to
coomunities with adequate financial capability to quickly
repay the loans. Thus, Initially, communities with low
financial capability may not receive funds for wastewater
treatment. However, as the revolving fund grows, 1t is
possible that special consideration can be given to
communities with low capabilities.
t If Inadequately capitalized, the revolving fund would
provide limited repayments for future loans. The
capitalization rate 1s highly dependent on the timing and
the pace of State assumption of SRF responsibilities, and
the amount of monies dedicated to SRF. purposes. (See Figure
6.1).
• The administration of a revolving fund is complex, and
requires additional financial expertise on the part of State
officials.
5-15
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Usefulness as a Component of the Transitional Program
The Federal capitalization grant and State Revolving Fund option could provide
States with a growing, long-term source of funds that may be flexibly targeted
to wastewater treatment projects. As such, this option would be an effective
and feasible method of transition to State and local self-sufficiency.
5-16
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SUMMARY OF MAJOR FUNDING OPTIONS AS
A COMPONENT OF A TRANSITIONAL PROGRAM
Having analyzed the five funding options against the areas of consensus, the
evaluation criteria, and undesirable features, it is clear that certain
options do not adequately address the continuing and future transitional needs
for adequate wastewater treatment. A tax-subsidized Federal or direct loan
program, for example, encourages State/local dependency on Federal financial
support as do Federally guaranteed municipal bonds. In addition, the concept
of the Federal guarantee of tax-exempt debt is contrary to the policies of the
Department of Treasury.
The 551 Federal share available under the grant program has limited use in the
transition to State/local self-sufficiency. It does target funds to
nationally designated needs, provides for greater dollar leverage than the
aforementioned options, is familiar to all participants, and requires no major
administrative changes. However, it does not score well in other areas. It
neither promotes long-term capitalization of State programs nor State
flexibility in addressing the varying needs of communities. Thus, it does not
promote long-term self-sufficiency or provide incentives for long-term
compliance in Its current form. Nevertheless, the grant program offers an
effective approach to providing for the construction of needed facilities.
The consensus opinion suggests a near-term mix of the current categorical
grant program and a Capitalization 6rant/State Revolving Fund concept, with a
shift to the latter as quickly as possible. Once established, the Funds would
provide a lasting source of monies to States and comnunities in meeting
wastewater treatment needs for the greatest leverage per ^Federal dollar.
Thus, they would provide for a gradual transition to ultimate State/local
self-sufficiency. State governments, by using the Federal grants as security
for bond issues, could leverage additional monies for the revolving fund
through traditional long-term bond issues. Capitalization Grants would be
used to fund a debt service reserve fund for State bonds, reducing bond holder
risk and interest costs to States. In addition, municipalities could be
encouraged to supplement these programs with local financing options, with the
possibility of obtaining refinancing from the State Revolving Fund in the
future.
5-17
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CHAPTER 6
OVERVIEW OF A TRANSITIONAL PROGRAM
-------
CHAPTER 6: OVERVIEW OF A TRANSITIONAL FEDERAL PROGRAM
The State Revolving Fund concept described 1n Chapter 5 offers the most
effective and feasible approach to managing the continued transition to State
and local self-sufficiency. Structured to provide States with the funds,
incentives and flexibility needed to permit improved and continued compliance,
1t will provide the best financial means to meet the short-and long-term water
quality goals of the Clean Water Act. Specifically, it pro/ides for:
• Short-term leveraging of limited Federal funds,
• Incentives for States
• Transfer of an active management and financial role to
States
• Long-term State capital accrual that can be flexibly
targeted to wastewater treatment needs now and in the
future.
The recommended transitional SRF program is consistent with the goals of the
1977 and 1981 Amendments to the CWA. It also addresses the eight areas of
consensus goals (described in Chapter 2) that emerged from the diverse array
of experts that had input into the study. It is consistent with a trend
towards "New Federalism/ giving States and localities Increased independence
in fulfilling their obligations. 6iven current economic, political and
programmatic realities, no stand-alone grant, bond or loan program can offer
all these opportunities.
This chapter presents key elements of a transitional Federal program employing
the State Revolving Fund concept. The transition provides States with a
choice: whether to pursue the SRF option, to retain the current project grant
program, or adopt a mix of the two. However, it also provides a clear signal
of the end of direct Federal funding as of FY 1995, and encourages States to
implement those mechanisms which best provide for the continuity of programs
into the future.
Specifically, the option is designed to achieve the following objectives:
• To encourage full State participation in the SRF program as
quickly as possible, but allow States 1n the pace and scope
of SRF assumption and maximum flexibility in tailoring
programs to their own needs
• To phase-out Federal funding over a ten year period (1985-
1994) as SRFs became more viable as sources of funding
• To assure local governments of the availability, timing and
amount of State and Federal funding during the transitional
period
6-1
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• To ensure that Federal funds are being directed to
completion of needed treatment-related projects
The sections that follow provide details on each element of the SRF concept:
• Funding levels and conrnitment
• State choices
• State assurances to local governments
• State assurances to the Federal government
• Conditions and options for operating SRFs
• Local assurances to the SRF
• Audits
• EPA Task Force recommendations and plans for implementation
6-2
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FUNDING LEVELS AND CQMUTUENTS
The transitional program would be subject to some of the same fiscal
constraints as the current project grant program, including the budgetary
process that requires authorizations and appropriations. While authorizations
may provide a basis for predicting future levels of funding, from the State
and local perspective it 1s only the actual appropriated funds that count.
Uncertainty about future funding can cause delays in a program, and that
uncertainty can be significantly increased 1f appropriated funds are consis-
tently below authorized levels. For this reason, authorization levels should
be set so that there 1s a reasonably high expectation that the full amount can
be appropriated. Experience with the program in the late 1970's indicates
that high authorizations by no means assure high future appropriations, and
may introduce uncertainty about the future levels of funds.
Proposed Authorizations
Based on the above considerations, an initial authorization period could be
for five years, FY 1986-FY 1990, at the current level of $2.4 billion per
year. Such amounts and timing would be consistent with the consensus at the
time of the 1981 Amendments and planning figures contained in the President's
FY 1985 Budget. In addition, an annual authorization of $2.4 billion may be
considered a realistic level for obtaining full appropriations.
A second authorization period of four years (FY 1991-1994) could provide an
additional $2.4 billion for the first year, with $1.8 billion, $1.2 billion
and $0.6 billion available for FY 1992, 1993, and 1994, respectively. In
1989, prior to the final authorization, EPA should conduct a study assessing
the status of municipal compliance and implementation of the SRF program in
States.
Commitments Beyond FY 1990
It is Important to provide a clear signal of the authorizations that could be
expected beyond the initial authorization period. Thus, the legislative
proposal should contain a policy statement, including a notice of intent, to
continue the program to, but not beyond FY 1994, with a gradual phase-out at
the end (see Table 6.1). Future authorization planning figures could be cited
in legislative guidance to States on factors to take into account in designing
their project priority lists for the period FY 1990-1994.
Allotment Formula
The allotment of appropriated funds would be made among the States in accor-
dance with the prevailing allotment formula provided by law. To encourage
stability and certainty in the program, 1t 1s recommended that the allotment
formula be fixed at the beginning of the authorization period and continue the
existing formula.
6-3
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TABLE 6.1 POSSIBLE FEDERAL FUNDING LEVELS AND THEIR USE
Fiscal Authorizations & Project Capitalization
Year Appropriations Grants** Grants**
ILLUSTRATIVE EXAMPLE
1982
$2.4
$2.4
$0.0
1981
1983
$2-4
$2.4
$0.0
Authori-
1984
$2.4
$2.4
$0.0
zation
10 Years at
1985
$2.4
$2.4
$0.0
Annual Fund-
1986
$2.4
$2.4
$0.0
Next
ing Levels
1987
$2.4
$1.8
$0.6
Authori-
Set Forth in
1988
$2.4
$1.2
$1.2
zation
the 1981
1989
$2.4
$0.6
$1.8
Amendments
1990
$2.4
$0.0
$2.4
1991
$2.4
$0.0
$2.4
Final
3-Year
1992
$1.8
$0.0
$1.8
Authori
Transition
1993
$1.2
$0.0
$1.2
zation
Phase-out
1994
$0.6
$0.0
$0.6
1995
$0.0
$0.0
50.0
TOTALS $27.6* $15.6** $12.0**
* Total reflects all projected total Federal authorizations and appro-
priations, FY 1982-1994. (Actual totals would be subject to authori-
zation and appropriation by Congress and the President.)
**Illustrative example of how States might phase-in loan programs under
State Revolving Fund option.
Dedicated Funds
As defined more fully below, State Revolving Funds must be dedicated to
wastewater treatment purposes as prescribed in Section 212 of the Clean Water
Act.
6-4
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STATE CHOICES: PROJECT GRANTS VS. CAPITALIZATION
OF STATE REVOLVING FUNDS
Types and Timing State Decisions
Beginning in FY 1986, each State would have a choice of whether to use its
allotment for project grants as currently provided, or whether to accept all
(or a portion) of its allotment as a State Capitalization Grant for estab-
lishing a State Revclving Fund. The choice to establish a State Revolving
Fund would be left entirely to each State. However, three months prior to the
beginning of each fiscal year, any State intending to use all or a portion of
Its allotment as a State Capitalization Grant would need to inform EPA of its
decision regarding the mix of State Capitalization Grants and project grants.
Project Grants: Some Choices
A State choosing to continue total participation in the existing project grant
program would remain subiect to current program law and regulations. If a
portion of the State's allotment were used for SRF purposes, the project grant
funds would still be subject to all Title II requirements.
State Capitalization 6rants
If a State Revolving Fund is established that conforms to the limited Federal
requirements (see especially the discussion of environmental results
assurances and audits below), a State could use all or a portion of its
allotment as a State Capitalization Grant. A State Capitalization Grant would
comprise an obligation of the Federal government to disburse funds directly
from the U.S. Treasury to the appropriate SRF account. The obligation of
funds would occur once a State had notified EPA of its decision, negotiated a
grant agreement, and once appropriated funds had become available for
obligation by the Administrator. To reduce the magnitude of temporary
increases in Federal payments (outlay "bulges"), the payments could be made to
the SRFs in equal installments over a period of eight (8) quarters.
Treatment of Set-Asides
If a State chooses to exercise its option of using a portion of the allotment
as a State Capitalization Grant, all existing set-asides, with the exception
of State Management Assistance Grants (205(g)) and Water Quality Management
Planning 6rants (205(j)), would only be applicable to the project grant por-
tion of a State's allotment. To encourage State participation in the SRF
concept, Section 205(g) and 205(j) monies could continue to be set-aside "off
the top" of the total State allotment. The former could be used for State SRF
adninistrative costs, while the latter could be discretionary.
6-5
-------
Timing and Amount of Capitalization
ot state Revolving mnas
The earlier a State establishes a revolving fund the greater the leverage per
dollar. Figure 6.1 portrays the effect of various SRF start dates on the
amount of funds available in the SRF by the beginning of 1995. The
relationship between the year a SRF 1s established and the end of period funds
1s shown for two interest rates, 21 and 41. Assumptions Include: a constant
Interest rate; $1 added to the SRF each year at the beginning of the year
(1986-1991); $0.75 added at the beginning of 1992; $0.50 added at the
beginning of 1993; $0.25 added at the beginning of 1994; all funds (including
accumulated Interest are loaned lnnediately in the beginning of each year; no
additional funds are added after 1994 (when Federal funds are proposed to be
terminated); and interest on the loan 1s accrued for the entire year and paid
at the beginning of the next year. The decrease in Federal funds (beginning
1n 1992) is made to reflect the phase-out 1n the level of Federal funding
planned. As these figures demonstratet the earlier a SRF 1s established, the
greater the size of the fund by 1995. In addition, a State can increase
leveraging in the short-term if they supplement the SRF with their own funds
or use capitalization grants as security for State-Issued bonds.
Bonus for Establishment of State Revolving Funds
To encourage the early creation of State Revolving Funds, financial rewards
could be built into the program so that States proceeding with SRFs received
additional funds from within a given year's appropriation. Under such an
incentive program, a specific portion of the appropriation (e.g., 10*) could
be set aside for making bonus payments to those States that had established
SRFs. Since it may take States two years to pass enabling legislation to
establish SRFs, the bonus program could begin in FY 1988, and might be
increased over time (e.g., up to 251). Provisions should provide a "cap" on
the bonus any single State could receive. Unused bonus money should be
carried over into the next year's "bonus pool."
State Matching Contributions
To ensure adequate capitalization of SRFs, another option could be to
encourage a State matching contribution to a SRF. In H.R. 3282 ( 98th
Congress) a mandatory State match of 20% was required. A State matching
contribution would certainly help a State meet Its environ- mental results
assurances as well as fund Its non-core treatment needs, especially 1n the
start-up years. Over time, State contributions would Increase the rate of SRF
capitalization and, thus, help prevent under-capitalIzation. However, these
objectives need to be balanced with a State's willingness and capability to
adopt the SRF concept in the first place.
6-6
-------
o\
I
<3
©
>-
OJ
£
c
c
'5
®
CD
m
O)
O)
o
n
"co
>
<
M
"O
c
3
f 1.000
10.900 -
$0,800
SO.700
$0,600
10.500 -
10.400 -
$0,300 -
$0,200 -V,.
/
•• '
J0.100
fO.OOO
\
V
\
\
V
\
"to
%
\
\
s
\
FIGURE 6.1 AVAILABLE FUNDS IN SRF, BEGINNING OF YEAR 1995
With Variable Start Dates
*
j
1996 1987 1908
1009 1900 1991
Years Shf Starts
V
iA
JEZL
199!
P
1993 1994-
[ . • I 496 Intoitv.J
I I 2% Interest
-------
STATE ASSURANCES TO LOCAL GOVERNMENTS
EPA's 1984 National Municipal Policy requires that municipal wastewater
treatment facilities be brought into compliance with the enforceable
requirements of the Act by July 1, 1988. It also requires that facilities in
need of construction to comply with these standards make arrangements for
financing that construction, regardless of the availability of outside
funding. The National Municipal Policy, in its guidance on State Strategies
and Municipal Compliance Plans, suggests a designation of such facilities as
either "fundable" or "unfundable" in terms of outside funding. Many of the
facilities requiring construction to comply with these requirements are
expected to fall into the category of unfundable prior to 1988.
Refinancing Option Under the State Revolving Fund
The SRF concept offers the opportunity for municipalities to proceed with
early construction of needed facilities using their own financial resources,
without sacrificing the possibility of receiving some outside financial
assistance for the project at a later date. Based on the existing but revised
mechanism of the State Project Priority Lists (see below), communities would
be informed as to whether their projects were considered fundable or
unfundable, and when such assistance might be made available. Under the SRF
option, projects designated as unfundable prior to 1988 could be financed by
the local community from short-term local debt, with the prospect of
refinancing that debt with a loan from the SRF once loan funds became
available. The priority list--based on planning figures for Federal
appropriations, State contributions and repayment of loans to the SRF~would
indicate the length of time that might elapse before refinancing could be
achieved.
The refinancing option hinges on the States' ability to provide adequate
assurances that future loan monies will be available. Although this requires
that States be certain of the availability of Federal funds, the degree of
certainty over future funding will became increasingly dependent on a State's
utilization of repayments to the SRF. If States properly manage their SRFs,
local communities may be able to act on the "green light" of future funding,
and provide for needed treatment works as quickly as possible through their
own short-term resources.
Use of a State Financing Plan as an Assurance Mechanism
To provide each locality facing enforceable NPDES permit requirements with
some certainty regarding the availability of funding. State Project Priority
Lists could be modified by adding all municipal wastewater treatment projects
(including those not otherwise contained on existing lists) that require
construction to comply with applicable requirements. For such projects, as
well as all other projects regularly on the priority lists, each State would
6-8
-------
Identify those projected to receive funding. The form of the funding (grant
vs. loan), and timing of monies for each project would be determined Based on
the following planning figures:
• Federal appropriations for FY 1982 through FY 1994 in the
amount of $27.6 billion, available as either grants or loans
or both beginning FY 1986
• The State's estimate of any State contributions it would
make to the SRF during the period FY 1986-1994
• The State's estimate of the annual amounts of loan repay-
ments to the SRF during the period FY 1986-1994
• The State's estimate of the amount of the proceeds from any
water pollution control bonds that would be issued by the
State for deposit in the SRF during the period FY 1986-1994
Such a State Financing Plan would include all project grant awards and loan
commitments for the period FY 1986 through 1994. The plan would also
designate as unfundable any project requiring construction to meet enforceable
requirements that would not receive grant or loan funding prior to a given
fiscal year. Projects expected to receive a grant award or loan commitment
would need to be identified on the State Project Priority List with at least
the following information:
• The total eligible wastewater treatment project cost
• The total eligible Category I, II, IIIA, IVB project costs
• The projected date of the grant award or loan commitment
• The dollar amount and Federal share of the grant award, or
the dollar amount, interest rate and maturity period of the
loan commitment
If a State opted to use 100% of its allotment as a State Capitalization Grant,
the State decisions on the selection of fundable projects would be controlled
by State law and procedures governing the appropriation of State revenues. In
addition, State governments would be required to hold public hearings on their
decisions on the use of allotments as grants/loans, with timely prior
notification of, and consultation with, all local jurisdictions that are
potential recipients of Federal funds. If a portion of the allotment is used
for Title II grants, then the existing regulatory requirements applying to the
State Project Priority List would also be applicable.
6-9
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STATE ASSURANCES TO THE FEDERAL GOVERNMENT:
MANAGING FOR ENVIRONMENTAL RESULTS
Need for Results-Oriented Program Requirements
Since the needs of States and local communities are so diverse both in terms
of wastewater treatment and financial needs, maximum flexibility must be
provided in deciding how to structure and use Federal funds during any transi-
tional program. Since State and local governments are in a better position to
make more Informed decisions on how to achieve a balance between State and
local issues than the Federal government, flexibility during a transitional
period Is not only appropriate, but desirable.
However, in providing such flexibility, there is also a potential conflict
with the goal of meeting the enforceable requirements and deadlines of the
Clean Water Act—i.e., those relating to the imninent, needed construction of
core treatment projects. The transitional funding concept must therefore
provide some assurance that improved compliance will result from Federal
expenditures. Thus, the Federal interest during a transition period will drive
the program to focus not only on protecting against waste, fraud, and abuse
through minimal audit requirements, but also on obtaining assurances that
needed environmental results will be achieved.
To assure that the transition is managed for environmental results, and does
not needlessly intrude on State decision-making, a program performance
standard could be used. A results-oriented goal would be set for a State
program to attain—for example, the award of at least 'x' dollars to core
treatment-related projects within a two year period. Under such
results-oriented program requirements, a State would be allowed maximum
flexibility in choosing how to meet the performance standards. A State would
only be penalized if the desired level of performance had not been attained.
In setting results-oriented standards for a transitional program,
consideration must be given to the fact that while the SRF concept offers the
best means for long-term capitalization of State programs, in the short-term,
the SRF may not result in the maximum leveraging of Federal dollars since 100%
SRF loans may result in less dollars of construction than 551 Federal grants.
Thus, this results-oriented strategy should be designed to maintain progress
in buying out core eligible needs at a rate comparable to that which might
occur in the short-term under the grants program, at the same time as allowing
States flexibility and opportunities for long-term leveraging. It is proposed
that a State opting to accept a State Capitalization Grant must commit to tar-
get funds in such a way that the core eligible amount of construction
(Categories l, H, IIIA, IVB backlog needs) and CSQs authorized under Section
201(n) will be an amount equal to at least lOOt of the State Capitalization
Grant.
This 100% assurance to buy out core eligible treatment needs should not be
difficult to meet. If a State elects to take any of its allotment for SRF
purposes and loans the money only for core eligible treatment needs, the 100%
6-10
-------
assurance is automatically achieved. Of course, loans made for core eligible
treatment projects for less than full project costs (e.g., 60X-90X) would
increase the leveraging and the environmental assurance level met.
State Certification of Assurance
Each State moving into the SRF program would be required to certify that they
Intended to meet the 100Z assurance level, and indicate the manner in which
they expected to do so. The basis for these assurances would be the submission
of the State-Project Priority Lists to EPA. Such lists would contain ja]2
projects requiring construction to comply with the enforceable requirements of
the Act (core eligible projects by definition), all projected project grant
awards, and all projected loan commitments.
The State Project Priority List could also contain information on the costs of
the total eligible project costs 1n Categories 1, II, I1IA, and IVB. (This
Information is already provided on State Priority Lists.) The Project
Priority List information could thus be the basis for assessing the State's
certification. Each State would then have two years within which to make good
on its assurances that the total core eligible project costs resulting from
SRF construction loan conmitments would equal or exceed 100% of the State's
total payments of Capitalization Grants.
EPA Review for Compliance
Prior to the completion of a grant agreement for any given fiscal year, EPA
could review the State's Financing Plan, State Project Priority List (or other
appropriate State certifications of assurance). If EPA determined that the
assurances were inadequate, EPA could withhold award of a State Capitalization
grant to an SRF.
Within the two year performance period, a State would be required to complete
loan commitments needed to attain the required performance assurance level.
As proof of attainment, a State would submit to EPA a list of the funded
projects at the end of two years. If the EPA review of the funded list
indicated that required performance assurance levels had not been attained,
then subsequent disbursements of State Capitalization Grant monies would be
withheld up to an amount equal to the difference between the funded level and
the assurance level. Such withheld funds would be subject to reallotment
among other States.
6-11
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CONDITIONS AND OPTIONS FOR OPERATING STATE REVOLVING FUNDS
General Rules
In designing their SRFs, States could be allowed considerable flexibility and
discretion. Although SRFs would have to be structured to conform to generally
accepted principles of accounting practice and thus be amenable to annual
audits, States could manage the SRF in a number of ways. Such management,
however, would be governed by several overriding rules:
(1) All SRF disbursements would have to be made for the
purposes of supporting municipal wastewater treatment
facilities (as defined in Section 212 of the Clean Water
Act).
(2) All payments of principal and interest on SRF loans would
be "proprietary receipts" of the SRF and would have to be
repaid to the SRF.
(3) Federal monies (State Capitalization Grants) could only be
used as loans (or as security for State bond issues, the
proceeds of which would be used for direct loans).
(4) While Feaeral funds were used to support SRF activities,
States would have to make assurances as to the level of
environmental res-1 is to be obtained by the use of the
State's allotment.
In addition to these gerjra1. conditions, the operations of the SRF would be
-governed by zne specific concizions and opt 7ons ciscusseo below.
Operating Struggles
The amount of funcs available to the SRF woula be cepender.t on the choice of
operating techniques for the SRF:
t unleveraged (with or without a State appropriation to the
fund)
• leveraged (with or without a State contribution)
In the unleveraged mode (both with and without a State contribution), the
State Capitalization Grants (and any State appropriation to the fund) could be
used to make an initial series of loans. As repayments began to trickle back
to the SRF, the amount of funds available to the SRF would steadily increase.
Although slower in start-up, the unleveraged option would provide
opportunities for significant capital growth over a long period of time.
In the leveraged mode, funds for the Initial series of loans would be obtained
from the proceeds of a State bonds issue, which would be secured by a SRF
reserve account established with State Capitalization Grants or State monies.
If properly managed, leveraging on the order of two to five times the amount
6-12
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of the reserve account could be obtained. Although significant sums could be
generated initially (which might be an appropriate strategy for moving as many
projects as possible at once), if debt service payments to the bondholders
claimed all or most of subsequent local loan repayments, then the capital
growth of the SRF would be limited.
Any of these operating strategies would be permissible provided that the SRF
satisfied the 100* environmental results assurances an3 annual audit
requirements (see below).
Delivery Systems and Allowable Disbursements
The SRF concept requires that loans and loan repayments to the SRF be made, so
that a source of return revenue—the revolving feature—will result in
Increasing capital accrual. Loans from a State Revolving Fund can be designed
to provide a smaller local debt service than if financing 1s procured directly
through the bond market. Table 6.2 shows the reduction in debt service (or
grant equivalency) of a SRF loan provided at a given interest rate over a
20-year repayment period as compared to the cost of financing through the
traditional bond market. For example, if a local government receives a 2% SRF
loan rather than procuring needed funds through local bond issues (carrying a
102 interest rate), the SRF loan would be equivalent to a 481 grant.
In the discussion that follows, "first cycle" refers to SRF disbursements made
with the State Capitalization 6rant. "Second cycle" refers to SRF
disbursements made from loan repayment monies.
First Cycle of SRF Funding
In the first cycle of funding (i.e., those involving a Federal investment),
State Capitalization Grants could be restricted to two uses: (1) loans
(unleveraged operations), or (2) as security for State debt that is used to
make loans (leveraged operation). The following eligibilities and conditions
would apply in the first cycle of funding:
• Loans could be made to any municipal water pollution control
project within the definition of Section 212 of the Act,
although the total project construction resulting from the
combined State program of grants and SRF loans would have to
meet the required environmental results assurances.
• SRF financing could be used to refinance 100X of locally
funded projects.
t SRF financing could be used for planning and design work,
although such loans would not count towards environmental
results assurances.
6-13
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TABLE 6.2 GRANT EQUIVALENCE OF SRF LOAN
AT CERTAIN INTEREST RATES
INTEREST RATE FROM BONO MARKET
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
0%
0%
10%
18%
26%
32%
38%
43%
47%
51%
54%
57%
60%
63%
11
-
0%
9%
18%
25%
31%
36%
41%
46%
49%
53%
56%
59%
2%
-
-
0%
9%
17%
24%
30%
35%
40%
44%
48%
51%
54%
3%
-
-
-
0%
9%
16%
23%
29%
34%
39%
43%
46%
50%
4%
-
-
-
-
0%
8%
16%
22%
28%
33%
37%
41%
45%
5%
-
-
-
-
-
0%
8%
15%
21%
27%
32%
36%
40%
6%
-
-
-
-
-
-
0%
8%
14%
20%
26%
31%
35%
7%
-
-
-
-
-
-
-
0%
7%
14%
20%
25%
29%
8%
-
-
-
-
-
-
-
-
0%
7%
13%
19%
24%
9%
-
-
-
-
-
-
-
-
-
0%
7%
13%
18%
10%
-
-
-
-
-
-
-
-
-
-
0%
6%
12%
11%
-
-
-
-
-
-
-
-
-
-
-
0%
6%
12%
_
-
_
_
-
-
-
-
-
-
-
0%
ASSUMPTIONS:
• Project would have been 100% grant/loan eligible
• Loan is for 100% of project costs
• Loan maturity is 20 years with level debt service
6-14
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During the first cycle, the State would be provided with complete flexibility
and discretion in:
9 Selecting the recipients of loans and the type of projects
assisted (within the definition of Section 212 of the Act
and required environmental results assurances)
• Determining the amount of the loan and the portion of the
project costs to be covered by the loan
• Setting the interest rate that would apply to each SRF loan
• Setting the loan maturities, although the term of the loan
should not be greater than the design life of the project,
e.g., 20 years.
Second Cycle of Funding
Once a SRF had established an adequate stream of return revenue from its
portfolio of outstanding loans, the SRF could have Increased flexibility in
the choice of how funds would be delivered to municipal wastewater treatment
projects. Thus, States might want to have an option of disbursing some of the
second cycle return revenues to the SRF through other mechanisms: interest
subsidies, payments for the purchase of bond insurance, guarantees for
locally issued debt, or grants. Unlike loans, however, none of these
mechanisms would result in helping to establish a self-sustaining SRF.
A State could also have total flexibility in using second cycle monies to fund
any project within the scope of Section 212, including non-core projects and
projects currently ineligible for Federal assistance. That 1s, the 100%
environmental results assurance does not apply to return revenues. Such
fundable projects include combined sewer overflow correction, non-treatment
related pipe projects, plant rehabilitation, replacement and reconstruction,
the treatment of discharges from separate storm sewers, and minor
replacements.
Since return revenues from loan repayments would be projected twenty years or
more into the future, States could consider assessing the possibility of using
such funds to refinance local projects that were started in advance of the
availability of any SRF loans.
Applicability of Title 11 and Other Federal Requirements
Because the SRF concept 1s fundamentally and philosophically different from
project grants, and to encourage State and local participation in the SRF
concept, t&e Federal government will not require that Title II requirements
and most other Federal laws apply to projects receiving financial assistance
from SRFs. To ensure proper management, overall SRF requirements (such as use
of State priority lists, audits, environmental assurances) would be appli-
cable, but kept to a minimum.
6-15
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LOCAL ASSURANCES TO THE STATE REVOLVING FUND
In order to assure the solvency of the SRF, States should take care that the
loans are sound, and that all loans made by the SRF be backed by dedicated
sources of local revenue sufficient to pay all principal and interest payments
required. Commonly, such security is provided by local governments in the
form of a bond, note or agreement pledging user fees or some other form of
local revenue towards repayment of the loan.
State Revolving Funds obtaining adequate dedications of funds from local
conmunities would enhance the leveraging potential of the SRF since State bond
issues could be secured with such known revenue streams. Under existing and
proposed State programs, some States have been able to insert protective
measures 1n the loan agreements that would allow States to intercept State (or
other) aid that would otherwise have gone to the community that is in default.
For example, General Revenue Sharing payments to a local government could be
pledged by that government as payment to the SRF in the event other pledged
revenues (e.g., user fees) were insufficient to meet the principal and
interest on an outstanding SRF loan.
6-16
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AUDITS
Each State receiving a State Capitalization Grant would have, in accordance
with 0MB Circular A-102 (Attachment P), an independent annual audit of its
accounts and financial statements. To ensure full accountability of Federal
Funds, each State would have to deposit its State Capitalization Grant in a
special SRF Federal funds account and maintain an audit trail of all
expenditures financed—directly or Indirectly—by those receipts. Where
Federal funds were co-mingled with State and other funds, the audit
requirements would have to ensure that all expenditures from that account were
accounted for and audited as 1f they were Federal funds. Audits on Federal
funds or accounts containing Federal funds would be conducted in accordance
with the auditing procedures of the General Accounting Office (GAO).
A Federal audit of the local projects funded by the SRF would not be required.
Although each project would be required to maintain an audit trail capable of
allowing audits 1n accordance with GAO procedures, the management and
oversight of the program would be left essentially to the States. States
would be free to Impose any audit requirements that 1t deemed necessary to
ensure appropriate use of loan monies from the SRF. Where waste, fraud, or
abuse was suspected, the Criminal Code of the United States (Title 18, U.S.C.)
would be applicable to criminal offenses relating to the expenditure,
accounting, and auditing of such funds by a State or local government.
Each State would be responsible for making a full and complete annual report
on the SRF and its expenditures, and having an independent review and audit
conducted. Such reoorts would need to provide certification that the
conditions of z~>e State Capitalization Grant had been satisfied, e.g., that
treatment facilities or that environmental results assurances had been
attainec. TaD" e 6.3 orov'ces an example of how State Revolving Funds might be
structured to c"i"o« proper accounting of receipts and expenditures.
6-17
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TABLE 8.3 STATE REVOLVING FUND ACCOUNTS
ACCOUNT NAME
Federal Funds
Loanable Funds
a*
I
M
CO
Loan Repayments
ALLOWABLE RECEIPTS
(Payments to Accounts)
(1) State capitalization grant
disbursements from the U.S.
Treasury
Federal Funds Account
Loan Repayments Account
Bond Proceeds Account
State Contributions Account
Temporary Investmbnt Account
(1) Local government sources of
revenue covering the principle
and Interest on loans made by
the SRF
(1!
(2)
(1)
EXPENDITURES
(Payments from Accounts)
Loanable Funds Accounts
Debt Service-Reserve Accounts
Direct loans for construction of
municipal wastewater treatment
facilities meeting the
definition of Section 212 of the
Act, where the loan recipient
has pledged a dedicated source
of revenue 1n the form of a
bond, note or other agreement
for repayment of the loan to the
Loan Repayments Account of the
SRF
(1) Loanable Funds Account
(2) Debt Service Account
(3) State Administrative Expenses
Account
(4) Miscellaneous Expenditures
Account
Bond Proceeds (1)
The proceeds from any sale of a
bond secured In whole or 1n part
by State capitalization grant
funds deposited 1n a Debt
Service-Reserve Accounts
(1) Loanable Funds Account
(2) Reasonable payments to
Debt Service-Reserve Account
(2) The proceeds of any bond sale
secured by the Debt
Service-Reserve Account or by
dedication of revenues from
outstanding SRF loans
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TABLE 6.3 STATE REVOLVING FUND ACCOUNTS (Continued)
ACCOUNT NAME
Debt Service
Debt Service-Reserve
o>
I
ID
ALLOWABLE RECEIPTS
(Payments to Account)
(1) Loan Repayments Accounts of
revenue dedicated to debt
service on State bonds
(2) Debt Service-Reserve Accounts If
dedicated local repayments prove
insufficient
(3) State Contribution Account
(1) Federal Funds Account, if bond
proceeds have been deposited in
Loanable Funds Accounts
(2) Reasonable portions of bond
proceeds from Bond Proceeds
Accounts
(3) Interest earned 1n Temporary
Investment Accounts
EXPENDITURES
(Payments from Acounts)
(1) Payments of principle and
Interest to bondholders of
State-Issued debt; the proceeds
of which were used to make SRF
loans
(1) Debt Service Accounts to cover
the debt to bond holders when
dedicated local repayments of
loans prove Insufficient
(2) Temporary Investment Accounts
(3) Loanable Funds Accounts, 1f
State debt has been retired, or
1f Debt Service-Reserve accounts
exceed debt service coverage
requirements
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TABLE 6.3 STATE REVOLVING FUND ACCOUNTS CContlnotd)
ACCOUNT NAME
State Contributions (1)
State Administrative (1)
Expenses (2)
Miscellaneous (1)
Expenditures (2)
ALLOWABLE RECEIPTS
(Payments to Accounts)
Any State appropriations to the
SRF
Loan Repayments Account
State Contributions Account
Loan Repayments Account
State Contributions Account
EXPENDITURES
(Payments from Accounts)
(1) Any SRF Account
(I) Administrative expenses Incurred
by the State 1n operating the
SRF
(1) the purchase of bond Insurance
for State-Issued or
locally-Issued debt that
supports construction of
municipal wastewater treatment
projects
(2) interest subsidies on local debt
Issued to construct municipal
wastewater treatment facilities
Temporary Investment
Account*
~For each account 1n the SRF, temporarily Idle funds (such as reserve accounts) may be Invested at rates that
protect the value of the funds, provided that such Investments of SRF funds comply fully with arbitrage and
other requirements of the IRS Code and applicable tax laws.
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EPA TASK FORCE RECOMMENDATIONS AND
PLANS FOR IMPLEMENTATION
New Federal and State legislation will be required to implement of the State
Revolving Loan concept. With the current Federal construction grants program
authorization expiring at the end of FY 1985, now is the time to prepare
additional and detailed revisions to the Clean Water Act. These revisions
should authorize a transition from traditional project grants to
Capitalization Grants for State Revolving Funds, from which loans for
municipal wastewater treatment can be made. Federal legislation should
reflect the consensus reached among various groups that funding goals include:
• Returning fiscal responsibility for wastewater facility
construction to States and localities.
• Ensuring continued and certain Federal support through a
defined time period.
• Meeting core treatment needs first.
• Increasing State management responsibility.
• Providing for funding mechanisms that ensure short- and
long-term leveraging of funds.
New legislation should be structured (through the provision of both broad and
specific incentives) to encourage full State participation in the
Capitalization Grant/State Revolving Fund program as soon as possible.
Although flexibility in the timing, pace and scope of State assumption of SRF
responsibilities should be provided, and States should be encouraged to tailor
their Funds to meet their particular needs, adequate long-term capitalization
of Funds is necessary to prepare effectively for the future. Federal
legislation should also provide for broad SRF auditing and accountability
procedures.
Federal initiatives pertaining to the current construction grant program might
also be needed to remove specific obstacles to prompt State movement into the
proposed SRF program. While the independence provided to States establishing
SRFs represents a fundamental and philosophical change from the traditional
Federal project grant program, some changes in Title II requirements for
project grants might be made. For example, EPA Task Force members noted that
pressure for second-round grants (i.e., grants to communities that have
already received a grant) could prevent a smooth transition to ultimate State
and local self-sufficiency. In addition, EPA Task Force members examined a
number of changes in the current Title II mandatory set-aside programs.
Finally, a large number of 751 Federal-share grants for eligible
phased/segmented projects might limit the potential leveraging of Federal
construction grants, create pressures for continuation of the project grant
program, and slow the pace of State assumption of SRF responsibilities and
long-term SRF capitalization.
6-21
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Improved compliance and operations and maintenance (O&M) received special EPA
Task Force attention towards the close of the study. Consensus centered on
the fact that implementation of EPA's 1984 National Municipal Policy, strong
enforcement strategies, and the opportunities to increase the pace of con-
struction in the short-term provided by the SRF approach, were key to
improving local compliance rates and, thereby, O&M as well. Specifically, the
Task Force noted that while the primary responsibility for O&M remains with
local governments, renewed Federal and State attention to improving O&M might
be necessary. For example, several financial Incentive programs (such as
capital bonuses to States with good compliance rates, and special awards for
effective and innovative O&M programs) were discussed. Other opportunities to
focus on O&M might also be provided through the new first year performance
certification requirements. Federal and State operator training programs.
State priority lists and NPOES permits, and through private contract
operations and other local programs.
The Task Force concluded Its work by emphasizing that States would need
adequate time, special enabling legislation, and perhaps constitutional
amendments to establish SRFs with effective financial and administrative
capabilities. Moreover, a smooth transition calls for a clear understanding
of the new roles and responsibilities by all participants. EPA cannot simply
transfer program functions to State and local authorities. It must play an
important and ongoing oversight and assistance role. EPA realizes that States
differ in their capacity to accept technical and financial responsibilities
for the program. Thus, EPA must develop strategies, an oversight framework,
revised technical assistance programs, and education and guidance materials
that address these varying needs. This includes further study of such areas
as the role of adequate O&M and other financing options as components of
successful wastewater treatment programs.
Finally, EPA should conduct, over the next several years, a detailed evalua-
tion of State SRF implementation and recommend potential programmatic
improvements to adjust to new areas of consensus and enhance the movement
towards ultimate State and local self-sufficiency.
6-22
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ATTACHMENT I
Suraary of Office of Comptroller Study
of Set-Aside Prograns for the POTW Funding Study
Introduction
Context and Objectives
This appendix is a summary of the Office of the Comptroller's analysis of
the set-aside programs in the Construction Grants Program. The Office of the
Comptroller prepared this paper to support the work of the Construction Grants
Task Force in formulating and analyzing alternatives for the future design of
the Construction Grants Program. This appendix provides a brief summary of the
set-aside programs, identifies the major policy issues associated with these
programs, and identifies and analyzes a variety of policy alternatives for
modifying them.
The set-aside provisions in Title II of the Clean Hater Act authorize, and
in some cases mandate, the setting aside of certain percentages of Construction
Grant funds to be used for financing selected types of projects or activities.
For example, one set-aside authorizes the setting aside of 4% of states'
allotments to help finance their costs of managing delegated responsibilities
under the Construction Grants program, and for selected other purposes. There
are also set-asides for "Innovative/Alternative" (I/A) projects, for funding
certain types of projects 1n small communities and in highly dispersed areas of
larger municipalities, and for funding various water quality management
planning activities.
There are two major reasons why the Office of the Comptroller, in its role
as a member of the Task Force, assessed the possible need for modifications to
the set-aside programs. First, the set-aside provisions exert a strong
influence on spending patterns for a large amount of funds made available under
the Construction Grants program. Therefore, 1t 1s important to consider fully
the policy objectives of the set-asides, their actual effects (e.g., are there
any unintended detrimental effects of the programs), and ways of Improving
these programs, especially in light of their potential for helping promote the
Task Force's "consensus goals" for the future of the Construction Grants
Program. Second, as described in the body of this report, the Task Force is
strongly considering an approach under which the federal government would help
states establish revolving funds, from which the states would finance
construction projects. Such a major revision may make It appropriate to revise
some or all of the set-aside programs in order to help promote this objective.
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2
Methodology
In conducting this analysis, we reviewed all pertinent written
documentation, including prior studies, and relevant statutory and regulatory
provisions. In addition, we conducted Interviews with EPA managers and staff
who are Involved in managing the set-aside programs, and with selected members
of the Task Force. Quantitative data used In this report was obtained from
Office of Water reports and from the Agency's Financial Management System, with
the assistance of the Grants Administration Division. Contractor assistance
was provided by American Management Systems, Inc. (AMS).
Several interim documents were prepared as part of this study; they were
circulated for comment to Task Force members and others. One of the Interim
documents, dated September 20, 1984, was An Overview of Construction Grants
Set-As1des and Policy Issues Associated With These Programs. In addition, in
late October we circulated an interim analysis ot potential modifications to
the set-aside programs. That document, entitled Interim Progress on the
Definition and Analysis of Alternatives for the Construction Grants Set-Aside
Programs, was also circulated for comment. We considered ail comnents received
in formulating our analysis and 1n preparing our final paper (An Overview of
the Construction Grants Set-Aside Programs and An Analysis of Potential
Modifications to These Programs). That paper 1s summarized in this appendix.
Overview of the Set-Aside Prograas
State Management Assistance Set-Aside
Under section 205(g) of the Clean Water Act, EPA 1s authorized (but not
required) to set aside up to 4% or $400,000 (whichever 1s greater) of a state's
Construction Grants allotment to be used directly by the state to finance the
reasonable costs of administering delegated activities under the Construction
Grants program or selected other EPA programs — e.g., approved Section 402
(NPDES) and 404 (Dredge and Fill) programs. States generally use these amounts
to finance the salaries of state employees who administer delegated functions
under the Construction Grants program. This set-aside was created by the 1977
amendments to the Clean Water Act, to encourage delegation of the Construction
Grants and other programs. Any state or territory that accepts partial or full
delegation of the Construction Grants program is eligible for this set-aside.
Presently, forty-nine states and Puerto R1co have met this eligibility test.
(Oregon is the exception and Is expected to assume partial delegation by 1986.)
While the 205(g) program appears to be a success 1n achieving Its primary
policy objective — to encourage delegation — there are a variety of Important
policy Issues associated with the program. One key Issue 1s "banking" of
205(g) funds. To date, the federal government has obligated approximately S188
million more to the states under 205(g) than the states have actually expended.
In addition, approximately S45 million 1n funds potentially available for
obligation under 205(g) have not yet been obligated. In all, there 1s
currently approximately S234 million 1n unexpended 2C5(g) allotments. Some
states have more than four years' worth of available but unexpended 205(g)
funds.
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3
Some critics of the 205(g) program argue that maintaining large amounts of
"banked" 205(g) funds is poor policy, for one or more of the following reasons:
(1) many of the states with large amounts of "banked" 205(g) resources have
nevertheless failed to move beyond only partial delegation; and (2) there are
many potential high priority uses for these funds. A different view, expressed
by many, 1s that it is logical, and good policy, for states to "bank" at least
some of their 205(g) funds, to ensure the long-run stability of the management
of their delegated responsibilItles, especially In light of the need to ensure
an orderly phase-out of federal funding for the program should such a decision
be made.
The 205(j) 'Planning* Set-Aside
Under this provision, EPA 1s required to set aside IX or $100,000
(whichever 1s greater) of a state's Construction Grants allotment to be used
directly by the states for water quality management planning activities
Including, for example, studies to identify the most cost-effective and locally
acceptable point and nonpoint measures to meet and maintain water quality
standards. This program was established by the 1981 amendments to the Clean
Water Act, and is viewed by some as a replacement for the 208 grant program
("Area-Wide Waste Treatment Management Planning"), which by then had been
essentially phased out. To date, a wide array of planning and analysts
projects have been funded under the 205(j) set-aside — for example, studies of
issues associated with nonpoint runoff, pretreatment, groundwater, integrated
environmental management, and other areas.
One of the key issues 1s whether 205(j) should continue to be funded as a
mandatory set-aside derived from Construction Grants funding. Many individuals
believe that 205(j) is essentially a "budgetary gimmick" — a way of replacing
208 funding by tying the funding to a program less subject to changes in annual
appropriations. According to this argument, 205(j) represents a net drain on
the Construction Grants program, because 1t takes away IX of the funds that
otherwise would be available for construction purposes and the resulting
planning studies have little direct relevance to the Construction Grants
program. A contrasting view 1s that the 205(j) progran is invaluable, because
1t funds many types of high-priority studies, and the Agency as a whole derives
a net benefit from the program.
The 205(h) 'Rural* Set-Aside
Under this provision, EPA 1s required to set aside 4X of the Construction
Grants allotment for any state that meets a specified definition of "rural".
At present, 34 states meet this definition. In addition, the Governors of
other states may request that the Administrator set aside funds for this
purpose; to date, 2 states (Connecticut and Massachusetts) have requested and
have received such treatment.
Funds in the 4X rural set-aside reserve can be used solely for financing
the federal share of POTW construction projects that: (1) are in small
communities or in highly dispersed sections of larger municipalities; and (2)
employ "alternatives to conventional sewage treatment...." A state loses to
the reallotment pool any rural set-aside funds that are not obligated for these
allowable uses within two years of when the funds are initially made available.
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4
One Important policy issue related to this program is whether it should
distinguish between rural and urban states. Some observers believe that if
this set-aside is mandatory in rural states, it also should be mandatory in
urban states (or that 1t should be optional in both), in order to help ensure
that small communities in urban states are treated the same as their
counterparts in rural states.
Another Important policy Issue associated with the rural program is whether
It has an overly strong effect on how states rank projects for federal
financial assistance. Each year states rank proposed projects and, in
cooperation with their EPA Regional Office, decide which projects should be
funded. In some cases, to ensure that none of the rural set-aside funds are
lost to reallotment, some states award "bonus" points to some projects that
would qualify for rural set-aside funding, to ensure that the projects move
Into the fundable range. In other cases, states employ "bypass" procedures to
achieve the same result (i.e., they skip higher priority projects, to fund
lower-priority, small community projects). Both procedures (bonus points and
bypass procedures) are allowable under the state priority list system. Some
Individuals involved in the management of the program believe that the net
effect is that too many lower-priority projects are being funded as a result,
and that removing the threat of reallotment of unused Rural set-aside funds
would help alleviate this problem.
The 205(1) "Innovative/Alternative" Set-Aside
The Innovative/Alternative (I/A) set-aside program, established by the 1977
amendments to the Act, was designed to provide explicit encouragement for
greater use of innovative and alternative technologies for projects funded
under the Construction Grants program. Section 205(i) provides that a minimum
of 4% of a state's construction grants allotment 1s to be made available solely
for an I/A reserve; a state can elect to put up to 7.5% in this reserve. These
funds are used exclusively for providing financial incentives to encourage
municipalities within the state to employ innovative or alternative
technologies. This incentive is in the form of a bonus. For projects that
employ conventional technology, the federal share of the eligible costs is 55%.
However, for municipalities that employ innovative or alternative technologies,
the federal share can be 75%. The extra 20% bonus is financed by the I/A
set-aside reserve. (Prior to FY 85, baseline federal funding was 75%, and the
I/A bonus was 10%.) If a state elects to have less than 4% set aside for its
I/A reserve within two years of the initial appropriation, the amount not set
aside 1s lost to the reallotment pool.
One of the key features of the I/A program Is that any portion of the I/A
reserve that 1s used by a state for I/A projects exerts a strong influence on
the state's other available Construction Grants funds. For each dollar of its
I/A reserve that a state wants to use for m 1/A bonus, tHe"state must ailocale
iz.75 ot its other available "regular" f-T.'eral Construction Grant dollars tor
that project.
This additional $2.75 1s sometimes referred to as the I/A "pull".
For example, suppose that State Y wants to fund Municipality X's
SI,000,000 I/A project, and that State Y elects to award it a 20%
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5
bonus — $200,000 — out of the state's I/A reserve. To use
J200,000 of Its I/A reserve as a bonus for Municipality X's
project, the state also has to commit $550,000 of its regular
federal Construction Grant dollars (i.e., the usual 55% federal
share) for that project.
Similar to the rural set-aside program, one of the key policy issues
associated with the I/A program 1s that It may provide an overly strong
Incentive for the states to select I/A projects for funding, using "bonus
point" and "bypass" procedures. Again, the concern is that in order to avoid
losing dollars to reallotment, states are selecting some I/A projects that are
relatively low priority compared to other, conventional projects that are
competing for funding. In combination with the "pull" factor, this may
substantially reduce the payoff (in terms of water quality objectives) of
available Construction Grant resources. As discussed 1n more detail in the
next section, among the alternatives for addressing this issue would be to make
this set-aside optional or to remove the threat of reallotment of unused I/A
set-aside funds.
Potential Modifications to the Set-Aside Programs
Approach for Developing Options
In developing a range of potential modifications to the set-aside programs,
we primarily considered the following two factors:
o Key policy issues associated with the set-aside programs. As
summarized above, we identified a range of key issues associated
with the set-aside programs. In developing a set of policy
options, one of our objectives was to ensure that each of these
key policy issues was addressed by at least one option. For
example, one of the key issues associated with the 205(g)
set-aside 1s "banking". Since this is an important issue we have
formulated a policy option that addresses it. In developing this
option, we are not necessarily endorsing the view that banking is
a bad practice; we are,-however, endorsing the idea that a banking
limit is an important option to consider. As described below,
this option has both merits and potential problems.
o The Construction Grants Task Force's "Consensus Goals" for the
future construction brants Krogram. In aeveloping a range oF
modifications to the set-asides, we have also attempted to develop
alternatives that would directly promote the "consensus goals"
Identified by the Construction Grants Task Force. For example, we
have developed potential modifications to the set-asides that
would help achieve the Task Force's goal of promoting further
delegation of the Construction Grants program to the states.
After circulating Initial lists of modification options for comment, we
formulated a set of seven basic options for the set-aside programs, some of
which cut across several of the programs.
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6
Options Primarily Aitned at Increasing State Flexibility
Options 1 and 2 are designed primarily to address the consensus goal of
Increasing the capability of states to use their available Construction Grants
resources as flexibly as 1s practicable.
Option 1: Make the Mandatory Prograas Optional
Under this option, the three mandatory set-as1des (I/A, rural and
planning) would be made non-mandatory. States would be able to elect to set
aside any amount they choose for these set-as1des, up to the celling amounts
specified for these programs. Under the rural set-aside, states would be able
to set aside anywhere from OX to 4%; under the planning set-aside, 0% to 1%;
and under the I/A set-aside, 0* to 7.5%. To further Increase the flexibility
of the I/A set-aside, states could elect to use funds out of the I/A reserve to
fund the baseline federal share (i.e., 55%) of qualified projects. (Currently,
the I/A set-aside can be use only to fund bonuses for qualified projects; as
described 1n Chapter II, this creates the I/A "pull".)
This option would help achieve several Task Force consensus goals.
First, making the set-asides optional would give states more flexibility in
deciding how to utilize their Construction Grants allotments, a key Task Force
consensus goal. In addition, this option would help states aaxfHrize leveraging
of available funds. As described above, currently some states award "bonus
points" and use "bypass procedures" to use set-aside dollars for relatively
low-priority projects that happen to qualify for the set-aside. Under this
option, because the states could decide on the appropriate levels for paricular
set-asides, this problem would be reduced. In addition, because fewer dollars
would be going to lower-priority projects, this option would Increase the
effectiveness of Construction Grants allotments 1n helping achieve higher
compliance rates. Finally, this option may Increase equity. For various
reasons, some states cannot fund the types of projects that are eligible under
the I/A or rural set-as1des. By making these set-as1des optional, this will
help ensure that some states do not lose a portion of their Construction Grants
allotment to reallotment for reasons beyond their control. In addition, to the
extent that this option reduces the award of "bonus points" and the use of
"bypass procedures", some municipalities may perceive that this increases the
fairness of the overall program.
This option also may hinder the achievement of some Task Force goals.
First, making the I/A and rural set-as1des optional may reduce the anount of
funds set aside by states for Innovative and alternative projects. This may
hinder the achievement of the goal of encouraging affordable projects, because
innovative and alternative projects pften are less costly than projects that
use conventional technology. In addition, while Option 1 may Increase equity
1n certain respects (as described above) this option also may reduce equity in
other respects. Specifically, one of the basic reasons originally given for
establishing the rural program 1s that 1t would increase equity, by giving
small conmunlties a better chance to receive their fair share of federal
Construction Grants dollars. By making the rural program optional — and
because presumably some rural states would chose not to exercise the option --
some small communities might perceive this modification to lessen the equity of
the Construction Grants program. Finally, there are also other considerations
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7
that must be weighed. Specifically, Option 1 may decrease the incentives for
states to seek out high-priority I/A, rural or planning projects or activities
-- especially for those states that happen not to agree with the underlying
federal policy objectives of these set-asides.
Option 2: Remove Reallotaent Provisions
A different approach could be used to increase state flexibility.
Under this option, the I/A, rural and planning set-as1des would still be
mandatory. For the first two years after a state's Construction Grant
allotment 1s first made available to the state, IX (or J100.000) would be
available solely for setting aside Into a planning reserve, 4% would be
available solely for setting aside Into an I/A reserve, and for rural states,
4X would be available solely for setting aside into a rural reserve. However,
under Option 2, after two years, 1f a state set aside less than the full amount
called for under a particular set-aside program, the difference would not be
automatically lost to the reallotment pool. Instead, the difference would
automatically be made available to the state as part of Its regular allotment.
Under Option 2, a state would have to try for at least two years to
utilize these set-asides for their Intended purposes. In contrast, under
Option 1, once a state receives Its Construction Grant allotment for a
particular year it could immediately decide not to utilize the I/A, rural or
planning set-as1des. Option 2 essentially represents a compromise
Option 1 (making the set-as1des totally optional) and tne status quo (in wmcn
states either "use or lose" resources earmarked for the I/A, rural anc planning
set-asides). Option 2 1s not a perfect compromise -- during the two-year
period, some states probably would not try very hard to fir,s opportjmties to
use the full amount of the set-asides for their intenaed policy purposes -- z~z
1t probably would result in a higher utilization of the set-asides than unce-
Option 1, without removing all of their mandatory elements.
Option 2 would help achieve the same Task Force consensus goals as
Option 1. Option 2 would increase state flexibility, because states wouIg have
more flexibility than under the status quo to decide how to utilize their
Construction Grants allotments. In addition, because Option 2 would remove the
threat of reallotment of unused set-aside funds, states would feel less
pressure (or none) to award bonus points or to use bypass procedures to fund
relatively low-priority projects that happen to qualify for funding from the
I/A or rural set-aside. This will result 1n more leveraging of available
funds. In addition, because more dollars would be available for high priority
projects (at least In some states), this options would help increase
compliance. Option 2 would also help Increase equity for the same reasons as
Option 1 (e.g., because states would have less of an Incentive to use bypass
procedures and to award bonus points, some municipalities may see this as
increasing the fairness of the process for deciding which projects should be
funded).
Option 2 also would hinder some Task Force consensus goals. First,
Option 2 might reduce Incentives for states to encourage their municipalities
to utilize innovative or alternative technologies, because any resources not
utilized for the I/A or rural set-as1des would not be lost to reallotment.
This may weigh against the goal of encouraging affordable projects. In
addition, like Option 1, under Option 2 fewer states may utilize the full
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8
amount of the Rural set-aside, which was originally designed to increase equity
for small communities. Finally, from an overall perspective. Option 2 may
reduce the effectiveness of the set-asides in achieving their intended policy
objectives, because states will have less of an incentive to utilize these
set-asides fully.
Options Prlaarily Aiaed at Increasing Leveraging of Available Funds
Options 3 and 4 are primarily aimed at minimizing the extent to which funds
are set aside for low priority uses (e.g., for "banking"; for relatively
low-pr1or1ty planning activities).
Option 3: Needs-Based Allocation Foriulas
Under this option, the state management assistance, water quality
planning and rural set-asides would be modified to Incorporate needs-based
allocation formulas. Currently, each of these programs authorizes or mandates
the setting aside of a flat percentage of a state's Construction Grants
allotment Into a set-aside reserve. In some cases, there 1s both a flat
percentage and a dollar amount, and the amount of the set-aside 1s set at the
larger of the two. Under Option 3, the state management assistance, water
quality planning and rural set-asides would be optional, and the allowable
amount for the set-aside would be based on a state's demonstrated need, talcing
Into account different needs among the states for the various set-as1des. Any
amount not set aside would be made automatically available to the state for its
"regular" construction purposes. Option 3 would not apply to the 205(i) I/A
set-aside because it would be difficult, 1f not Impossible, to develop a
needs-based formula for this set-aside.
This option would help achieve several Task Force consensus goals.
First, this option would help Maximize leveraging of available funds. For
example, 1n some cases more resources are currently placed into the planning
and rural reserve than needed, and as a result some relatively low-priority
projects are funded under this set-aside. Option 3 would help reduce the
allocation of funds for these low-priority purposes. Option 3 also may promote
further delegation to the states, because the amount of 205(g) funds available
to a state would vary according to the degree of delegation accepted by the
state. As described above, under Option 3 all of the set-as1des would be made
optional. For this reason, Option 3 would Increase states' flexibility in
using their available Construction Grants allotments. In addition, since there
would not be a pre-determined celling on the set-as1des, states that can
demonstrate a particularly large need for a particular set-aside would have the
flexibility to set aside a larger amount than 1s currently allowed.
Option 3 also may hinder the achievement of some Task Force consensus
goals. Of particular concern, this option might create uncertainty for
Individual states with respect to the amount of 205(g) funds that may be
available 1n the future. This may reduce the willingness of some states to
consider greater delegation. In addition, 1t may be difficult to develop
needs-based formulas for the various that are widely perceived as being
equitable. This may be especially difficult because both administrative and
construction costs can vary widely among the states, therefore making the same
level of need more expensive to satisfy 1n different states. In addition,
switching to a needs-based formula for 205(g) may be perceived as "unfair" by
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9
some states that have previously accepted selected delegated responsibilities
on the assumption of continued high levels of 205(g) funding and continued
capabilities to set aside (and "bank") excess 205(g) funds. Further, this
option may reduce flexibility In funding because under a needs-based approach,
some states probably would not be able to set aside as much as they want to for
certain set-asides. For example, this almost certainly would be the case for
some states for the 205(g) set-aside; many states that currently set aside 4%
for this reserve would not be able to demonstrate a need for that amount. As
another example, some states that set aside the full IX for the water quality
planning set-aside might not be successful In demonstrating a need at this
level. For states in this situation, Option 3 might represent a reduction in
the flexibility of the Construction Grants program compared to the status quo.
Finally, because Option 3 would make the rural and planning set-asides
non-mandatory, this option might reduce their effectiveness in promoting their
Intended policy objectives. For example, a state may elect to set aside less
Into the rural reserve than its eligible ceiling amount.
Option 4: Limit Banking Under the State Management Assistance
Set-Aside
As described previously, a much larger amount of funds has been
obligated to the states under 205(g) ttian has actually been expended by the
states, and in addition a large amount of funds are potentially available but
not yet obligated under 205(g). In all, more than one-quarter of a billion
dollars are currently available but not yet expended — often referred to as
"banked" funds. Some states have more than four years' worth of such funds.
While some observers believe that allowing banking under 205(g) helps
encourage states to accept delegation under the Construction Grants program,
others have argued that banking should be limited. Option 4 would create such a
limit. Specifically, under this option, which was also identified by the
Office of Water, states would be limited to accumulating a maximum of three
years' worth of obiigated-but-not-yet-expended 205(g) funds. Any states with
banked funds in excess of this amount would lose eligibility for further
obligations of 205(g) funds until the balance of banked 205(g) funds fell below
three years' worth, and then the state would be eligible to set aside only
enough funds into its 205(g) reserve to bring the amount of the reserve up to
the three year limit. There would still be a 4% ceiling on the amount that a
state could set aside out of its Construction Grants allotment for an
individual year.
As part of this option, EPA would develop an explicit policy of
encouraging states to use 205(g) funds for their authorized non-Construction
Grants purposes (e.g., water permitting and enforcement). Specifical ly, states
would be encouraged to use for these alternative purposes any 205(g) funds in
excess of three years' worth and any other 205(g) funds not needed for
administering delegated Construction Grants activities.
This option would help achieve several Task Force consensus goals.
First, this option would help aaxinlze leveraging of available funds. Option 4
would help reduce the amount of available funds that are being obligated but
not expended under the Construction Grants program. This option probably would
result in a greater proportion of Construction Grants funds being expended for
other high priority state management activities (e.g., NPDES permitting and
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10
enforcement) and wastewater treatment plant construction projects. Option 4
also would help promote continued delegation to states. Under this option,
states would still have the capability of banking sufficient funds (up to three
years' worth) to manage both ongoing activities and an orderly phase-out of
federal funding, while making more funds available for construction or other
priority needs. Of note, this option also may create an incentive for
Increased use of 205(g) funds for their alternative authorized purposes (e.g.,
for financing state costs of managing the NPOES program). Certain states may
prefer to channel excess 205(g) funds — i.e., funds 1n excess of three years
worth — into these alternative purposes, rather than Into construction.
Of particular concern, this option might hinder the achievement of the
two Task Force consensus goals. First, this option might in fact reduce
Incentives for continued delegation to states. Senior managers 1n many states
believe that large amounts of banked 205(g) funds provide security against
uncertainties and volatility 1n federal Construction Grants funding (e.g.,
delays in appropriations). Reducing the amount of banked 205(g) funds may
increase the states' perceived risk of assuming greater delegation. In
addition, Option 4 might be perceived as reducing equity. This shift in
policy may be perceived as unfair by states that have based prior decisions on
the assumption that banking would continue to be allowed.
Hew Set-Aside Priaarily Aimed at Promoting State Revolving Funds
In developing options for modifying the set-aside programs, we also
considered the possibility of developing new set-asides. However, set-asides
typically add complexity and federal oversight requirements, and therefore
developing new set-asides generally cuts against the overall objectives for the
future of the program. While taking a conservative approach, we were able to
Identify one new set-aside that is specifically designed to help accelerate
turning over the Construction Grants program to the states. This option was
developed by the Office of Water at the specific request of the Deputy
Administrator.
Option 5: New Set-Aside for Encouraging the Establishment of State
Revolving Funds
As described earlier, one of the major modifications being considered
for the future design of the Construction Grants Program is the establishment
of state revolving funds, out of which states would make loans to
municipalities to fund their construction needs. The federal government would
help finance these revolving funds by enabling states to use part or all of
their Construction Grants allotments for startup funding for such revolving
funds.
Under Option 5, EPA would develop j new set-aside program, designed to
encourage states to adopt state revolving funds. Under this new set-aside, EPA
would reserve a certain percentage (e.g. 10%) of the annual Construction Grants
appropriation into a new "incentive" reserve, controlled by EPA. For example.
If the annual Construction Grants allotment for a particular year is $2.4
billion, EPA would allocate 10% -- $240 million -- into the new Incentive
reserve. EPA would then make regular Construction Grants allotments to the
states from the balance of the appropriation -- i.e., S2.16 billion — using
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11
the statutory allocation formula specified 1n Title II of the Clean Water Act.
As a result, each state's normal allocation of Construction Grants dollars
would decrease by 10%.
However, all states that agree to set up a Construction Grants
revolving fund would be eligible to receive a special allotment out ot tTTe
Incentive reserve. For example, assume that in a typical year. State X's
normal allotment of Construction Grants dollars would be $100 million. Under
Option 5, State X's allotment would be only $90 million (I.e., 90% of S100
million). However, if State X agrees to set up a state revolving fund, the
state would be eligible for a special allotment from the incentive reserve.
For example, EPA might award State X a $15 million special allotment from the
Incentive reserve, thereby bringing State X's total allotment for the year to
$105 million — which 1s substantially larger than what its normal allotment
would have been had the state not elected to set up a revolving fund. In
contrast, states that elect not to set up a revolving fund would receive only
90% of their normal allotment of Construction Grants dollars.
This option would help achieve several Task Force consensus goals.
First, this option would help promote greater state and local self-sufficiency.
Option 5 would provide tangible Incentives for states to adopt state revolving
funds. Adoption of revolving funds 1s an Important way for states to obtain
greater self-sufficiency and for the federal government to shift the
responsibility of the Construction Grants programs to the states and
localities. Option 5 also would promote greater flexibility In finding,
because revolving funds afford states more discretion in how to utilize
Construction Grants resources.
This option may hinder one Task Force consensus goal — equity. At
least in the medium-term, some states-that are not well-equipped to establish a
revolving fund may perceive this shift in policy as unfair, because it will
reduce their allotments of Construction Grants resources. This option may be
perceived as being more fair 1f there were a phase-in period before it takes
effect.
Modified Status Quo
We identified one option for modifying the status quo that is not
Incorporated in one of the previous options but is of potential importance.
Option 6: Modified Rural Prograa
Under this option, the rural set-aside would be expanded to cover
appropriate conventional technology. Currently, the rural set-aside can be
used only to fund projects that employ alternatives to conventional sewage
treatment. However, 1n some cases appropriate conventional technology can meet
or exceed the cost-effectiveness of innovative or alternative technology for
small communities or for highly dispersed areas of larger municipalities.
This option would help achieve two Task Force consensus goals. First,
this option might help increase equity. By making appropriate conventional
technology fundable under this set-aside, Option 6 may be perceived as more
fair for small comnunities that cannot currently obtain access to rural
set-aside funds even though they would be willing to use appropriate,
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12
small-scale conventional technology. In addition, this option may help
Increase compliance. Because states would be able to fund a wider range
projects under this option (i.e., appropriate conventional technology), some
states may perceive less of an Incentive to award bonus points or employ bypass
procedures to fund otherwise lower-priority small community projects that
happen to use alternative technology. This may result in states funding
projects that have additional water quality Improvement Impacts.
Of particular Importance, this option also may hinder the achievement
of one Task Force consensus goal — equity. It may be difficult to define
"appropriate conventional technology" sufficiently tightly to ensure that there
1s consistent decision-making on eligibility under this set-aside, in fact as
well as 1n appearance.
Option 7: Give States More Flexibility In Using the I/A Set-Aside
Currently, states can use resources 1n their I/A set-aside reserves
only for providing 20% bonuses for innovative or alternative projects -- i.e.,
bonuses on top of the regular 55% baseline federal share. (States provide the
55% baseline share out of their regular Construction Grants allotments.) As
described 1n more detail above, because tie I/A reserve can be used only to
provide bonuses, this creates the I/A "pull" effect; for every il.00 a state
allots to a project cut of the I/A reserve towaras a bonus "payment, the state
also must allot $2.75 to the same project out of its regular Construction
Grants allotment. linear Option 7, states woula be given the option to use
resources 1n the I/A reserve to func the Daseline (55%) portion of innovative
or alternative projects. States would not be requirea to use I/A set-asiae
resources for bonus payments but they woula retain the option to do so.
Option 7 would help achieve several Task Force consensus
First, Option 7 would he:? increase stiie flexibility, because states ^oulo
have more flexibility than uncer the status quo to decide hew to utilize tneir
I/A set-aside resources. In addition, because states would have the option of
using these resources for baseline payments (rather than bonuses), this woula
reduce the I/A "pull". This would help increase leveraging of available funds,
because some states that currently use "bonus points" and "bypass procedures"
as a means of fully utilizing their I/A reserve would feel less of an incentive
to do so. In other words, the decision to use $1.00 of the I/A reserve on a
particular Innovative or alternative project would not necessarily mean that
the state has to commit another $2.75 to that project. Option 7 also may
Increase equity to the extent that some states currently do not or cannot fully
use their full I/A set-aside plus the I/A pull.
Option 7 may hinder the achievement of some Task Force consensus
goals. In particular, 1n some states fewer resources would end up being
committed to Innovative or alternative projects, to the extent that these
states use I/A resources for baseline funding rather than bonus payments. This
may reduce the overall utilization of Innovative or alternative technologies,
which may cut against the Task Force goal of encouraging affordable projects.
In addition, 1f a particular state decides to no longer use Its I/A resources
for bonus payments — but instead only for funding the 55% baseline federal
share — this will reduce the Incentives the I/A set-aside provides for
municipalities. Specifically, In those states a municipality no longer would
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13
be able to receive 75% federal funding of an Innovative or alternative project,
only the same 55% that any other type of project is eligible to receive. This
may weaken the overall effect of the I/A set-aside to achieve the goals that
Congress designed it to achieve — in particular, to provide additional
financial incentives for municipalities to use innovative or alternative
technologies.
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ATTACHMENT 2
SUMMARY OF SPECIAL ANALYSES ON WATER QUALITY IMPACTS
PREPARED FOR THE EPA TASK FORCE ON REAUTHORIZATION OF THE
MUNICIPAL WASTEWATER TREATMENT CONSTRUCTION GRANT PROGRAM
by THE OFFICE OF POLICY, PLANNING, AND EVALUATION, EPA
The Office of Policy, Planning, and Evaluation performed
a number of studies for the Task Force to assess the effects of
different types of municipal pollution controls on water quality.
The results pointed to a need for flexibility—States should have
the ability to respond to a particular water quality need with
whatever controls are most appropriate for meeting that need.
Sufficient variation in needs exists across regions and pollutants
to warrant a financial assistance program flexible enough to provide
support to all types of treatment programs.
The first study compares the relative urban loadings of total
suspended solids (TSS), BOD, total phosphorus (TP), and lead
{Pb) from municipal point sources (sewage treatment plants) with
those from nonpoint urban sources (stormsewers, combined sewer
overflows (CSOs), and unsewered areas). The results differentiate
between urban areas which have CSOs and urban areas which do not
have CSOs. Some results are shown for Region III and the Nation
in Figure 1. For example, in Region III, 88% of the TSS loadings
are from non-point urban runoff and 12% are from municipal sources.
For Region III and the Nation, the majority of urban loadings of
BOD and TP are from municipal sources, while most urban loadings
of TSS and Pb come from non-point urban runoff. The results suggest
that non-point source controls might be a better way of reducing
TSS and Pb loadings than would municipal source controls, while
municipal controls might be most appropriate for reducing BOD and
TP loadings.
The second study compares the effect of municipal point
source controls on reducing BOD, TSS, TP, and Pb water quality
violations with the effect of controlling these pollutants
through non-point source controls. The analysis assumes secondary
treatment is in place and examines the relative reduction in water
quality violations as a result of additional advanced secondary
(AST), advanced wastewater (AWT) and/or CSO and urban stormwater
runoff (URO) controls.
Figure 2 displays the results for an average urban area in
Regions I, II, and III. The upper left hand graph represents
violations in dissolved oxygen standards resulting from BOD dis-
charges, and the proportional reduction in these violations upon
adoption of further BOD controls. In the first cluster of bars on
the left, the first bar represents secondary treatment with no
non-point source control and no advanced treatment. The number of
violations here are set equal to 1 because secondary treatment
alone is the base case. The next bar to the right in this cluster
represents AST with no non-point source control. This is equal to
0.4 which means there will be 40% as many violations (or a 60%
reduction) of water quality standards due to BOD loading if a
municipality builds AST (and no non-point source control) as compared
-------
Figure 1
relative percentage of municipal and non-point urban runoff
Region III with CSOs
TSS BOOS IP
P71 th»w^ai Ww\ Rinor
Region III without CSOs
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-------
Figure 2
Indices of Relative Water Quality Irproveme rrts ;r L'rtsr Areas w-,er Movi rc f rcr
Seccnceri Tre=u*rr. tc Advancec Municipal fojnt anc tar-Ftint Treatment^,
ir. Regions 1, II , anc III.
Reduced Vlololiors in B0~> V^cier Qjclil
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1. Analysis assures only secondary treatment is in place to determine basel*i*
Mter quality conditions. Percentages reflect likelihood of an equivalent
number of water quality violations experienced with only secondary treatment
In place and the subsequent reduced probabilities with various combinations
of additioral advanced point and/or non-point controls in-place.
Abbreviations - POLLUTANTS: BOD ¦ Biological Oxygen Demand (S-day), TSS » Total
Suspended Solids, TPr ¦ Tbtal Phosphorus, Pb ¦ Lead; VASTDnATER CONTROLS:
Secondary ¦ Secondary Treatment, AST ¦ Advanced Secondary Treatment,
AWT • Merced Wastewater (Tertiary) Treatment; CSO ¦ Oanbi ned Sewer Overflows,
URO ¦ Urban Ruroff (Storm Sewers arid Ursewered Areas), No NFS ¦ no CSO or URO
controls, Both NPS " Botfc CSO and URO controls.
-------
-2-
to just having secondary treatment. The first bar of the second
cluster reflects CSO and secondary with no advanced treatment.
This is equal to 0.9 which means there will be a 10% reduction in
BOD-related water quality violations if a community in Regions
I-III adds CSO controls to a secondary treatment system. Thus, a
greater reduction in BOD water quality violations takes place
when AST is added (60%) to secondary than when CSO is added (10%).
The upper right hand chart, TSS water quality violations,
reveals a different picture. If only AST is added to secondary
treatment facilities, there is a 5% reduction (to .95) in TSS
water quality violations. If only CSOs are added, TSS water
quality violations are reduced by about 20% (to .80). If only
urban runoff controls are added to existing secondary treatment
(the first bar of the third cluster of bars) TSS water quality
violation are down to 0.3, a 70% reduction. This particular
chart shows that non-point source controls are generally more
effective in reducing TSS water quality violations in Regions I,
II, and III than are additional municipal point source controls.
On the whole in Regions I, II, and III, urban runoff control
appears more effective than municipal point source control in
reducing TSS and Pb water quality problems, while BOD and TP
problems are likely to be better addressed by municipal controls
than by non-point controls. Analysis of other EPA Regions ob-
tained similar results.
The study further compares the cost-effectiveness of using
point-source controls and non-point source controls to reduce
pollutant loadings. The study assumes secondary treatment is in
place and estimates the average cost per pound of reducing pol-
lutant loadings with control options beyond existing secondary
treatment (AST, AWT, CSO or Urban Runoff-URO). A comparison can
be made between each control's estimated average cost per pound
of reduced pollutant loadings to determine which control option
offers the most cost-effective solution for each pollutant.
The results are displayed in Figure 3. The graph in the
upper right gives the average cost per pound removed for TSS
using four control options. The first bar, labelled AST, is
equal to SO.68, which means that moving from secondary treatment
to AST will remove additional TSS at an average cost of $0.68
per pound. The additional cost of moving from secondary treatment
to AWT* as shown with the second bar, would cost about $1.44 per
additional pound of TSS removed. The third and fourth bars
indicates that moving from secondary treatment to CSO and URO
controls costs $0.50 per additional pound and $.30 per additional
pound, respectively. The results indicate it would be more
cost-effective to first consider non-point source controls
rather than AST or AWT to reduce TSS loadings.
-------
Figure 3
Average Cost per Pound of Reduced Pollutant Loadings when Moving
from Secondary Treatment to Advanced Municipal point
and Non-Point Treatment in Regions I, II, and III
Average Cost per Pouna for B0D5
Average Cost per Pouna for TbS
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-3-
The graph in the upper left is the average cost per additional
pound of removing BOD. The average cost is SO.68 per pound for
AST and SI.44 per pound for AWT. The average cost for CSO control
is $3.03 per pound and $7.12 per pound for URO. Therefore, it
would generally be more cost-effective to first use point source
controls to handle BOD before considering non-point source controls.
The remaining two graphs suggest that point source controls are
more cost-effective for reducing TP while non-point source
controls are more cost-effective for reducing Pb.
All three studies—on loadings, on water quality violations,
and on cost-effectiveness—yield the same result with respect
to the relative effect of municipal point and non-point controls
on four major pollutants. TSS and Pb are most effectively
addressed by non-point controls; BOD and TP by point source
controls. This suggests the value in allowing communities broad
flexibility in addressing their water quality problems. For
some types of water quality problems a community would be better
off with additional municipal controls, while in other cases
additional non-point source controls would yield greater results.
Further analysis considered only projects specifically
providing secondary or advanced treatment of municipal sewage. A
statistically random sample of eligible projects in categories I,
IIA, and IIB taken from the 1982 Needs Survey was analyzed to
determine the extent to which these projects would contribute to
improving identified water quality problems. The sample results
(shown in Table 1) suggest that about half of these projects
are located on water bodies currently meeting designated use
standards (e.g., recreational, drinking water, fishery, agricul-
tural , etc.) .
When the projects are weighted by their cost rather than
simply counted, it appears that about 30% of the dollar needs for
categories I and II are for projects affecting water bodies currently
meeting designated use standards. It is clear that smaller, less
costly projects are more frequently on water bodies meeting standards
than are the larger, more expensive projects.
These results suggest that continuing attention should be
given in the future to assisting those wastewater treatment pro-
jects most likely to be critical in meeting water quality standards.
State priority lists generally assure this result satisfactorily
now. In the future, as projects on streams not meeting standards
are funded, an increasing fraction of the unfunded treatment needs
in categories I and II may be on water bodies already meeting
standards. There are very good reasons for funding many such
projects—the secondary treatment requirement and a desire to
maintain high-quality waters, for example. From the limited per-
spective of attaining water quality standards, though, states may
occasionally wish to ,fund other sorts of projects ahead of some
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TABLE 1
RECEIVING WATER STATUS TOR SAMPLE OF FACILITIES FROM 1982 NEEDS SURVEY
(Weighted by Nunber of Facilities and Costs)!
Classification
Weighted by Nunber of Facilities
% in Sample Extrapolated
Nunber in on Waters to
Population Meeting Standards population
Weiyhted by Cost of Facilities
% in Sample Extrapolated
Facilities on Waters to population
($ millions) Meeting Standards ($ millions)
By Cost Magnitude^
Large
644
22
140
15,170
21
3,210
Median
5,041
43
2,170
6,980
44
3,070
Snail
10,113
58
5,880
1,880
57
1,070
By Treatment Type^
Secondary
11,645
53
6,170
14,870
33
4,910
Advanced
4,153
49
2,040
9,260
27
2,500
All Treatment
Plants
15,798
52
8,200
24,130
31
7,500
Source: National Overview of Construction Grants Program, by GKY & Associates, Inc. for office of Policy Analysis,
U.S.E.P.A., (Washington, D.C.: September, 1984).
1. Percentages are derived by weighting the sample distribution to reflect the number of facilities, and cost of
facilities, each observation represents for the population.
2. Cost magnitudes are defined as folcws: Large = > $5 million; Mediim = $.05-55 million;
and Snail =» < $0.5 million.
3. Definitions of treatment type correspond with 1982 Needs Survey definitions: Secondary = Category I and
-J — n-,» t t * 7 tn
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-4-
municipal treatment needs. The financial assistance program should
be flexible ehough to accomodate this. Moving the construction
grant program towards greater flexibility in the funding of other
than just core projects will give localities the opportunity to
select the wastewater treatment program that best meets their
needs and the national water quality goals of the Clean Water Act.
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ATTACHMENT 3
EVALUATION OF PRIVATE FINANCING
FOR
MUNICIPAL WASTEWATER TREATMENT FACILITIES
(EPA Summary of Report Prepared by Peat, Marwick, Mitchell & Co.)
There Is an opportunity for private financing to provide a share of the funding
of municipal wastewater treatment facilities needed to the year 2000. (This
concept has come to be known as privatization).
The Hef1c1t Reduction Act of 1984 largely continued tax benefits for service
contract agreements between municipalities and private entities for private
financing, building, owning and operating municipal wastewater treatment facilities.
Municipalities would pay a fee for the service.
The tax benefits that are available to the private entity 1n service contracts
agreements can include:
1.
Depreci ation
0
0
Equipment and Other Personal
Real Property
Property
5 years accelerated depreciation (ACRS)
18 years accelerated depreciation (ACRS)
2.
Investment Tax Credits
10% allowed
3.
Industrial Development Bonds
(IDBs)
Quantity limited to the greater
of $150 per State resident
or $200 million per State
A service contract agreement can result 1n a municipality obtaining wastewater
treatmpnt facilities at a cost that is equal to, or less than that resulting from
a 55% Federal grant, depending on whether or not tax exempt industrial development
bonds are used 1n the financing.
Privatization can be utilized to fund and operate new treatment facilities.
EPA's 19R4 Needs Survey database Indicates that a total of 8895 new treatment
systems will be needed by the year 2000. Of these, 7402 will be for communities
below 35H0 1n population. (A viable financial package for privatization funding
Is suggested by some experts to be around $5,000,000 or more, unless several
towns pool together 1n the same financial package).
Privatization also has a potential market in expanding or Improving facilities
that have not been financed with Federal funds. In these cases it may be possible,
under State and local laws, to transfer title of the existing facilities to
private ownership for expansion, Improvement, and operation and maintenance.
Where Federal funds have been Invested 1n an existing facility, 0MB has Issued a
written opinion (following Circular A-102) that the continuing Federal interest
1n the purpose of the facility would prevent any encumbrance or transfer of
the municipal title. However, distinct new portions of the facility may be
privately financed, owned and operated, such as a new sludge handling facility.
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(2)
Peat, Warwick and Mitchell's comparison of municipality costs and potential
lost revenues to the Federal Treasury for several alternative methods of financing,
Including privatization, are as follows:
Potential Lost Revenues
Financing Options Cost to Municipality to U.S. Treasury
($10,000,000 Facility)
1. inn% Funding by $10,000,000 $1,613,000
Municipal1ty
2. 55% Grant and 7,635,000 3,597,000
Public Financing
3. Private Municipal 14,492,000 +1,970,000
Lease
4. Private Service 7,761,000 3,268,000
Contract w 'o nBs
5. Private Service <5.705,00? 4,730,000
Contract w'th IDBs
(These data ma.' vary dependng or c!,'crerert assjrstions).
The assumptions and the financing model from wni^n these data are derived
are described on the next f-e? wn~cn are fro"i ceat,
Marwick and Mitchell Report.
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ASSUCD FACILITY COSTS AND PWERTY CLASSES (000's)
CAPITA.
USEFUL
AOS
ODER
PRtPERTY
COSTS
LIFE
PROPERTY
DEP. S0GXLE5
builsiic
ISM
91
18 YEAR
tt-VEM (STRMWT LUC)
LAND
9M
MR
EDU1PKNT
4M
IS
9 YEAH
9 YEAR (123* LEASE)
STRUCTURES
4C0B
9
S YEAR
a YEAR 1125* LEASE)
•TOTAL PROJECT COST
10,800
CPS SCENARIO: FINAfCIW SSSUPT106 FOR (PT1D6
4306
57m
7£23
73W
w
-WIIVATE FINBtCIf©-
-PUBL1C FMAttHC-
-PROJECT COSTS- (000's)
IMVE5TDR TRX BRACKET -
INVESTOR EOUITY >
REQUIRED HOI(AFT. TBI) >
IKTESST RRTE(IDB) •
MATURITY ¦
ITC ELIGIBLE COST «
CDWJRATE ROTE ¦
WTE USB) Dl MBCL ¦
4&.m
a. ft
2180*
173*
2t YEWS
FEBERfL WCY COST
TW-OCT>T »T* >
RBTUR1TY PERIOD >
12.001
12. K
1.71* EPA ELIGIBLE ¦ 4X1•*
173* EPfl IfCUBIBLE • 57.« >
a YEARS LOCAL FINBCD6 >
(UIHI S3* BPHT)
RJROIASE PRICE
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Peat, Marwick, Mitchell t Conoany
Description of Financing Model and Qotions
1001 Public Financing. With tills option, the municipality finances, owns,
and operates the entire treataent and collection facility. The facility is
financed with tax-«xempt municipal bonds. The following cost calculations
are Bade:
Cost to Treasury ¦ Present value cost of tax-exempt borrowing
(discussed subsequently in this section)
Cost to Municipality " Present value of annual debt service payaents by
municipality
55Z Crant and Local Financing. The municipality owns and operates the
facility ana finances it using an EPA grant for 552 of the eligible costs
with the remainder financed locally with tax exempt municipal bonds. Costs
are calculated as follows:
Cost to Treasury • (551 x grant eligible cost) + present value cost of
tax exempt borrowing
Cost to Municipality " Present value of the annual debt service payments
for the local share of the project costs
Municipal Lease Financing. In this option, the private entity finances and
constructs the facility and leases It back to the municipality. The
facility Is operated by the municipality. Under the new tax laws,
accelerated cost recovery is severely limited for municipal leases,
particularly for tangible property (versus real property), thus hinceri^g
the economic attractiveness of this option. Costs are calculatea as rollows:
Cost to Treasury - Present value of lost (or gained) taxation +
present value cost of tax-exempt (IDB) financing
(only If available)
Cost to Municipality ¦ Present value of annual lease payments over the
financing term
Service Contract. A full service contract arrangement assumes that the
private entity finances, contracts, owns, and operates the facility. The
option allows ACRS depreciation and investment tax credits (1TC) for
eligible property. The model includes purchase options at years 10 and 20
Is which the facility is sold to the municipality which finances it with
tax-exempt bonds. These options are evaluated separately from the
no-purchase option. The costs are calculated as follows:
Cost to Treasury ¦ Present value of lost (or gained) taxation +
present value cost of IDB financing (only if
available)
Cost to Municipality " Present value of annual service charges over
financing term
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Cost of Lost Taxation
In Che private financing options, the tax benefits allowed represent a cost
to the U.S. Treasury (relative to public financing with no tax benefits).
Tax benefits can also be passed on to the nunlclpallty In terns of lower
service charges. The cost to the Treasury Is calculated as:
Cost of Lost Taxation " (Income before taxes x sarglnal tax bracket) +
Investment tax credit (If eligible)
The present value Is calculated for the stream of projected tax losses over
the financing tern. This approach assumes that the private company or
Investor will have sufficient Income to use all tax benefits In the year
Incurred. Carryback and carryfoward of taxes for use against taxable Income
in other years Is not considered.
Cost of Tax-Exempt Financing
The cost of tax-exempt financing Is calculated for financing with municipal
bonds and IDfis. The approach assumes that the project is financed at
tax-exempt Interest rates where It would otherwise be financed at commercial
taxable rates. The method used In estimation Is based on that used by the
U.S. Treasury.1 The calculation equation follows:
Cost to Treasury " tr*ic*P
where:
tr " (it ~ *e^/*t
and
marginal tax rate of Investors switching
from taxable to tax-exempt bonds
taxable Interest rate of bonds
tax-exempt Interest rate of bonds
principal of loans outstanding
This cost Is calculated in the model annually over the financing term anc on
a present value basis.
^ Modelling Revenue and Allocation Effects of the Use of Tax-Exempt Bones
for Private Purposes. Department of Treasury, OTA Paper 44, Decemoer 1*60.
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UNITED STATES ENVIROtMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OFFICE OF
WATER
We regret the supply of the publication entitled "Study of the
Future Federal Role in Municipal Wastewater Treatment - Report to the
Admini s t r a t o r " (De cem.be r 1984) is depleted. We do not intend to
reprint, but copies may be purchased from the following addresses:
U. S. Department of Commerce
National Technical Information Service (NTIS)
S28S Port Royal Road
Springfield, Virginia 22161
Telephone: (703) 487-4650
Ordering Number: PB85164341/AS
Paper Copy Cost: $18.95*
Microfiche Cost: $ 6.50*
Instruction Resource Center(IRC)
1200 Chambers Road, Room 310
Columbus, Ohio 43212
TELEPHONE: (614) 292-6717
Ordering Number: 236T
Paper Copy Cost: $9 .-3 4 / f- Od
~NTIS has an additional handling charge of $3.00 for each order.
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