Municipal Sector Study Impacts of Environmental Regulations on Municipalities

vvEPA
United States
Environmental Protection
Agency
Office of Policy
Planning and Evaluation
Washington DC 20460
EPA 230-09/88-038
September 1988
The Municipal Sector Study

Impacts of Environmental
Regulations on
Municipalities
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MUNICIPAL SECTOR STUDY
IMPACTS OF ENVIRONMENTAL REGULATIONS ON MUNICIPALITIES
Prepared for

Sector Study Steering Committee, Robert Wayland (Chair)
U.S. Environmental Protection Agency
401 M Street, S.W.
Washington, D.C. 20460
September 1988
by

Jasbinder Singh (Project Manager)
Raffael Stein, Sanjay Chandra

Policy Planning & Evaluation, Inc.
8521 Leesburg Pike, Suite 310
Vienna, Virginia 22180
&
Brett Snyder

Office of Policy Analysis
U.S. Environmental Protection Agency
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ACKNOWLEDGEMENTS
Policy Planning & Evaluation, Inc., wishes to acknowledge and
express its appreciation to the people who provided valuable assistance
and information for conducting this study. We thank the Program Offices
in EPA for providing us with data on the costs of environmental
regulations and programs. Our sincere appreciation goes to the hundreds
of municipal officials across the United States who sent us extensive
information on their financial systems and helped us compile our
fnancial database.

We would also like to thank Mr. Philip Dearborn, who provided PP&E
with expert advice on municipal finance from time to time, and who
helped develop the computer model used in this study. Finally, we wish
to express our sincere thanks to Messrs Robert Wayland and Ralph Luken
of EPA's Office of Policy Planning and Evaluation, whose untiring
efforts and valuable guidance were instrumental in producing this
report.
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TABLE OF CONTENTS

Page No.

EXECUTIVE SUMMARY i
I. INTRODUCTION I -1
A. PURPOSE OF THE STUDY I -1
B. LOCAL GOVERNMENT EXPENDITURES/COSTS TO HOUSEHOLDS.. 1-4
C. UNDERSTANDING FINANCING MECHANISMS 1-8
D. ORGANIZATION OF THE REPORT 1-10
II. METHODOLOGY OF THE STUDY 11 -1
A. GENERAL METHODOLOGY 11 -1
1. Development of Financial Database II-l
2. Development of Cost Database II-3
3. Determination of Weighted Average Costs II-4
4. Development of the MUNFIN Model II-4
5. Determination of Impacts of Regulations II-5
B. CRITERIA FOR DETERMINING IMPACTS 11 - 5
1. User Charge Impacts II-7
2. Ability to Raise Capital II-7
a. Ability to Issue Revenue Bonds in the
Long Term 11 - 8
b. Ability to Issue Revenue Bonds in the
Short Term II-9
c. Ability to Issue General Obligation Bonds ... II-9
C. DESCRIPTION OF REGULATIONS 11-11
1. Drinking Water Regulations 11-11
2. Sewer System Regulations 11-12
3. Solid Waste Regulations 11-13
4. Miscellaneous Regulations 11-14
III. IMPACTS OF THE ENVIRONMENTAL REGULATIONS III-l
A. COSTS OF REGULATIONS III-l
B. IMPACTS OF THE REGULATIONS III-4
1. Impacts on User Charges III-5
2. Impacts on Financial Health of Cities 111-12
a. Ability to Issue Revenue Bonds in the
Long Term 111 -14
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TABLE OF CONTENTS (Continued)

Page No.
B. IMPACTS OF THE REGULATIONS (Cont'd)
b. Ability to Issue Revenue Bonds in the
Short Term 111-18
c. Failure of Municipalities to Issue
General Obligation Bonds 111-21
IV. LIMITATIONS OF THE STUDY IV-1
A. VALIDITY OF THE SAMPLE OF CITIES IV-1
B. ADJUSTMENTS IN FINANCIAL CONDITIONS IV-1
C. CONSUMER WILLINGNESS AND FINANCIAL ABILITY IV-2
D. LIMITED AVAILABILITY OF INFORMATION IV-4
E. ENVIRONMENTAL SERVICES PROVIDED BY
PRIVATE ORGANIZATIONS IV-4
F. CONSTRAINTS ON LOCAL GOVERNMENT DEBT FINANCING IV-5
1. Tax and Expenditure Restrictions IV-5
2. The 1986 Reform Act IV-6
3. Infrastructure Outlays IV-7
G. BOND ISSUING PROCESS IV-10
V. POLICY CONSIDERATIONS V-l
A. PUBLIC EDUCATION INITIATIVES V-l
B. TECHNICAL ASSISTANCE INITIATIVES V-l
1. Technical Assistance V-l
2. Public partnerships v~2
3. Regionalizations V-2
C. FINANIAL INITIATIVES V-3
1. Reform of Existing Rate Structures V-3
2. Development Taxes V-3
3. Special Revenue Districts V-4
4. Enterprise Fund Management V-4
5. Direct Financial Assistance V-4
D. OTHER ACTIONS V-5
1. Extended Compliance Schedules V-5
2. Privatization V-5
E. ADDITIONAL RESEARCH V-6
APPENDICES
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LIST OF TABLES

Page No.

Table 1 Potential Cumulative Impact of Environmental
Regulations - Percent Increase in Household
User Charges iii

Table 2 Potential Increase in Annual User Charge Due
to Environmental Regulations v

Table 3 Potential Impact of EPA Regulations on the
Ability of Water and Sewer Systems to Issue
Revenue Bonds/Obtain Bank Loans in the Long Term vii

Table 4 Potential Impact of EPA Regulations on the
Ability of Municipalities to Issue General
Obligation Bonds/Obtain Bank Loans ix

Table III-l Number of Municipalities Potentially Affected by
Drinking Water Regulations III-2

Table III-2 Potential Weighted Average Capital and O&M Costs
for Additional EPA Regulations III-3

Table III-3 Potential Cumulative Impact of Environmental
Regulations - Percent Increase in Household
User Charges III-7

Table III-4 Potential Cumulative Impact of Environmental
Regulations - Post-Regulatory User Charges
As Percent of Household Income III-8

Table III-5 Potential Increase in Annual User Charge Due
To Environmental Regulations III-ll

Table III-6 Potential Impact of Drinking Water Regulations-
Post-Regulatory User Charges as Percent of
Household Income 111-15

Table III-7 Potential Impact of Wastewater Regulations-
Post-Regulatory User Charges as Percent
of Household Income 111-16

Table III-8 Potential Impact of EPA Regulations on the
Ability of Water and Sewer Systems to Issue
Revenue Bonds/Obtain Bank Loans in the Long Term 111-17

Table III-9 Potential Impact of EPA Regulations on the
Ability of Sewer and Water Systems to Issue
Revenue Bonds/Obtain Bank Loans in the Short Term 111-20

Table 111-10 Potential Impact of EPA Regulations on the
Ability of Municipalities to Issue General
Obligation Bonds/Obtain Bank Loans 111-22
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LIST OF TABLES (CONTD/
Page No.
Table III-ll Potential Impact of Miscellaneous and Solid
Waste Regulations on the Ability of Cities to
Issue General Obligation Bonds/Bank Loans

Table IV-1 Three National Needs Studies: Comparison
of Annual Capital Investment Requirements

Table IV-2 Three National Needs Studies: Comparison
of Annual Capital Investment Shortfalls

LIST OF FIGURES

FIGURE 1 Current and Potential Additional Average Annual
Household Costs for Environmental Services

FIGURE 1-1 List of Regulations Considered in the Municipal
Sector Study

FIGURE 1-2 Distribution of Municipal Expenditures
for Services in 1985-86

FIGURE 1-3 Current Average Household Costs
for Environmental Services

FIGURE 1-4 Variation in the Cost of Drinking
Water Services

FIGURE II-l General Methodology for Calculating Impacts
of Regulations,

FIGURE III-l Current and Potential Additional Average Annual
Household Costs for Environmental Services
111-24
IV-I
IV
1-2
1-5
1-6
1-7
II-2
111-10
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EXECUTIVE SUMMARY

A. IMPACTS

Today, Federal and state agencies charged with establishing new
standards of safety, health and environmental protection are redefining
what constitutes adequate qualities of community services. New
environmental regulations will require that stricter standards be met by
suppliers of drinking water, sewage treatment, and other environmental
services. Most environmental services are now operated and managed by
local government authorities (e.g., cities, towns, counties) . As a
result, local governments will be responsible for meeting the stricter
standards. The magnitude and timing of the additional investments in
environmental protection have raised questions about the ability of
municipalities to achieve these new levels of performance.

This study examined the impacts of 22 environmental regulations that
municipalities will have to comply with in the near future. The study
calculated the increases in user charges per household, and the ability
of municipalities to raise needed capital by issuing revenue and general
obligation bonds -- the two principal means of obtaining capital. The
evaluation of the results must take into account two qualifications.
First, some of the cost information is preliminary, because many
regulations are under development. The regulatory options and the ways
to alleviate the impacts of the regulations are under discussion within
EPA. The discussions could lead to results different from those found
in this study. Second, some of the regulations will go into effect in
four or five years and the municipalities appear to have sufficient lead
time to adjust their financial conditions and plan future debt issues.
The severity of impact will depend on their willingness, foresight, and
ability to make needed adjustments.
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The results of the analysis, based on an examination of the
financial conditions of 270 municipalities, suggest the following:

1. USER CHARGE IMPACTS

Small communities with populations of fewer than 2,500
will experience the largest user charge increases. About 20%
of these communities will experience cost increases of more
than 100% (Table 1) . The user charges of 35% of the cities in
this category will increase by 50 to 100 percent. Of the
cities in the other four categories no city will experience
rate increases of more than 100%, and up to 20% of the cities
will experience user charge increases of between 50 and
100%. Thus, the small communities will experience the largest
rate shock resulting from the regulations.

The environmental expenditures of small communities will
increase from about 1.3% to more than 2.0% of the average
gross household income (Figure 1) . This translates into
increased outlays of $170 per household per year for
communities with populations of fewer than 2,500 (Table 2).
Residents in the largest city size category will have to
increase their outlays by a little less than 0.5% of the
household income, but the dollar increase will be about the
same ($160). The corresponding increases for other city size
categories are much less — between $70 and $90.

Depending on the city size category, drinking water and
wastewater regulations could contribute significantly to the
cumulative household burden. Water and wastewater user
charges in communities with populations of fewer than 2,500
will increase by about $40 - $45 respectively, or, in other
words, these two groups of regulations will contribute about
50% of the increase in user charges for the smallest
communities. Drinking water regulations will increase user
11
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TABLE 1

POTENTIAL CUMULATIVE IMPACT OF ENVIRONMENTAL REGULATIONS
PERCENT INCREASE IN HOUSEHOLD USER CHARGES

Municipality Number
Size of
Category Municipalities
0 - 2,500 26,315
2,500 - 10,000 6,279
10,000 - 50,000 2,694
50,000 - 250,000 463
Over 250,000 59
Percent of Municipalities
Percent of Population
Percent of Municipalities in the

Increase as percent of current
0- 50% 50 - 100%
45%* 351
90 10
80 20
100 0
80 20
56 29
83 15
Category

charges
> 100%
20%
0
0
0
0
15
2
* This means that 45% of the municipalities in the 0 - 2,500 category
will experience an increase in user charges in the range of 0 - 50%
above the current charges.
111
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FIGURE 1. CURRENT AND POTENTIAL ADDITIONAL AVERAGE ANNUAL
HOUSEHOLD COSTS FOR ENVIRONMENTAL SERVICES
(PERCENT OF HOUSEHOLD INCOME)
o
t
w
V)
I
*
*•
z
w
u
0-2.5 K 2.5 K - 10 K 10 K - SO K 50 K - 230 1C >2SOK NAT'l AVG.
ciTr si?r CATraowrs
CL*REWT CMAHCES 1V\1 AOOTIONAL CMABCES
TOO
COO -
500 -
(DOUXtS PER HOUSEHOLD)
3OO
200 -
100
0-2.5 K 2.5 K - 10 K 10 K - SO K SO K - 250 K > 250 K NAT'I AVG.
CITY SIZE CATEGORIES
V/\ CURRENT! CHARGES IX\l ADOITIONAL CHARGES
Source : PP&E's Municipal Database
IV
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TABLE 2

POTENTIAL INCREASE IN ANNUAL USER CHARGE DUE TO ENVIRONMENTAL REGULATIONS
(Dollars Per Household)
Municipality
Size
Category
0 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 250,000
Over 250,000
Number
of
Municipalities
26,315
6,279
2,694
463
59

Drinking
Wastewater Water
$ 45* $ 40
20 15
20 5
20 10
60 15
Types of
Solid
Waste
$ 26
23
32
28
51
Regulations
Miscellaneous
$ 59
32
23
12
34

Cumulative
$ 170
90
80
70
160
* User charge increases have been calculated using weighted average costs of new regulations.
The costs that a municipality may incur will depend on the regulations it has to comply with.
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charges of other communities by only $5 to $15 per
household. The wastewater regulations, on the other hand,
will increase the user charges by about $60 in cities with
populations larger than 250,000 and by about $20 in
cities in the 2,500 to 250 , 000-population categories.
2. ABIT-TTy Qp ^QVl'HH AND
TO ISSUE REVENUE BONDS

Water and sewer systems raise the capital needed to comply
with environmental regulations by pledging future revenues as
security for the loans. Some of the water and sewer systems
may not be able to issue revenue bonds or obtain bank loans
because the post-regulatory user charges will be very high
when compared to the income of their customers. Three
thresholds -- 1.0%, 1.25% and 2.0% -- of the gross household
income have been used as criteria for determining the ability
of each utility system to issue revenue bonds in the long
run. Because households in approximately 95% of
municipalities pay less than 1.25% of the gross household
income, the impacts are discussed using the lower two
thresholds.

On a nation-wide basis between 9% and 21% of the systems
may find it difficult to issue revenue bonds in the long
run. About 26% of the water and sewer systems in the fewer-
than-2, 500-person category, and between 4% and 11% of the
systems in the other four categories may have difficulty
issuing revenue bonds in the long term, if the threshold of
1.0% is used as the evaluation criterion (Table 3) . On the
other hand, if a threshold of 1.25% is used as the criterion,
approximately 12% of the systems in the fewer-than-2 , 500-
person category and up to 3% in the other categories may not
be able to issue revenue bonds in the long run. Hence, water
and sewage systems in communities with populations of fewer
VI
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TABLE 3
POTENTIAL IMPACT OF EPA REGULATIONS ON THE ABILITY OF WATER AND SEWER

SYSTEMS TO ISSUE REVENUE BONDS/ OBTAIN BANK LOANS IN THE LONG TERM*
Municipality
Size Number of
Category Municipalities
0- 2,500 26,315
2,500 - 10,000 6,279
10,000 - 50,000 2,694
50,000 - 250,000 463
Over 250,000 59
Percent of Systems
Percent of Population
Percent of Systems Which May Fail to
Issue Revenue Bonds In the Long Term *
User
>1.0%
Charge / Household
>1.25%
26% (5 ***) 12% (2)
8 (2)
7 (3)
4 (4)
11 (4)
21 (4)
9 (4)
2 (1)
2 (1)
0 (0)
3 (0)
9 (2)
3 (1)
Income
>2.0%
2% (0)
0 (0)
0 (0)
0 (0)
0 (0)
1 (0)
1 (0)
* A water system or a sewer system fails to issue revenue bonds in the
long term when each individual system fails the user charge threshold
of 1.0%, 1.25% or 2.0%.

** Small communities generally do not issue revenue bonds; instead, they
get bank loans that are backed by user charges. The criteria used in
the above tests are applicable to small communities.

*** Percent of systems exceeding thresholds prior to complying with new
regulations (Numbers within parentheses are baseline failures).
VII
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than 2,500 and greater than 250,000 will be most affected by
the new regulations. Those systems that cannot issue revenue
bonds may have to ask communities supporting them to raise
capital by means of general obligation bonds.

3. ABILITY OF CITIES TO ISSUE GENERAL OBLIGATION BONDS

Cities also obtain long-term capital by pledging their
full faith and taxing powers. The ability of a city to issue
general obligation bonds (or obtain bank loans that have the
backing of the taxing powers)is evaluated in this study by
examining the ratios of debt service (after regulations take
effect) to municipal revenues, and debt service to market
value of taxable property. If both ratios exceed their
respective thresholds, the city is considered unable to issue
general obligation bonds.
Cities with populations of more than 50,000 do not fail
the test (Table 4) . This means that large cities will have no
economic difficulty in issuing general obligation debt. Even
if their water and sewer systems are unable to issue revenue
bonds, these cities have sufficient income and a tax base that
will enable them to obtain the required capital. The picture
is less favorable for small cities. Between 20 and 30 percent
of cities with populations under 2,500 fail this test and
therefore may not be able to obtain money from the capital
markets. The inability of water or sewer systems to issue
revenue bonds in the long term does not affect the capacity of
supporting communities to issue general obligation bonds or to
obtain bank loans by pledging their full faith and credit.
Difficulties arise mainly because of the inability of
financially weak municipalities to finance the requirements of
the solid waste and miscellaneous regulations.
Vlll
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TABLE 4

POTENTIAL IMPACT OF EPA REGULATIONS ON THE ABILITY OF MUNICIPALITIES

TO ISSUE GENERAL OBLIGATION BONDS/OBTAIN BANK LOANS*
Municipality Number
Size
Category
0 - 2,
2,500 - 10
10,000 - 50
of
Municipalities
500 26,315
,000 6,279
,000 2,694
50,000 - 250,000 463
Over 250,
Percent
Percent
000 59
of Municipalities
of Population
Percent Of Municipalities Which
G.O. Bonds/Obtain Bank Loans In
Test I ***
21% (8 ****)
4 (3)
2 (0)
0 (0)
0 (0)
16 (7)
3 (2)
May Fail To Issue
Each Category **
Test II
30% (12)
9 (9)
6 (6)
0 (0)
0 (0)
24 (11)
6 (5)
* Small communities generally do not issue general obligation bonds; instead they
get bank loans that are backed by the full faith and taxing powers of the
municipalities. The criteria used to determine G.O. bond failure are applicable
to small and large communities.

** A user charge/income threshold of 1.0% and results of the long term revenue bond
test were used to conduct this analysis. Results obtained with 1.25% and 2.0%
thresholds were virtually identical to those shown here.

*** Test I: (a) Annual Debt Service > 0.2 and (b) Annual Debt Service >, 0.008
Municipal Revenues Market Value of
Taxable Property

Test II: (a) Annual Debt Service > 0.15 and (b) Annual Debt Service > 0.006
Municipal Revenues Market Value of
Taxable Property

**** Numbers within parentheses are baseline failures.
IX
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B. POLICY CONSIDERATIONS

The EPA could undertake the following actions to support
communities' efforts to comply with environmental regulations:

• Public education programs may be expanded to make
people aware of the benefits of investing in
environmental protection, and to increase their
willingness to pay for the higher quality of
environmental services.

• Community outreach programs could be expanded to
help small cities understand the requirements of
numerous new laws, and help develop plans for
obtaining needed capital in order to reduce
financial impacts.

• Technical assistance programs could be provided
either in the form of guidance -- such as sharing
scientific, technical, or management information --
or technical services -- such as supplying
laboratory or engineering services.

• Direct financial assistance in the form of either
grants or loans for communities that cannot afford
the services in the long run may be provided by
state governments.

• Additional research should be conducted to identify
the characteristics of small communities that have
difficulty in financing and affording new
environmental controls.
x
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If certain environmental regulations do not seem
reasonable from cost or environmental risk points-
of-view, exemptions from strict compliance deadlines
and technical requirements may be given, to the
extent permitted by law.
XI
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1. INTRODUCTION
A. PURPOSE OF THE STUDY

Today, Federal and state agencies charged with establishing new
standards of safety, health, and environmental protection are redefining
what constitutes adequate qualities of community services. New
environmental regulations will require that additional measures to
protect public health and the environment be taken by suppliers of
drinking water, sewage treatment, and other environmental services.
Most environmental services are now operated and managed by local
government authorities (e. g., cities, towns, counties). As a result,
local governments will be responsible for meeting the stricter
standards. The magnitude and timing of the additional environmental
investments have raised questions about the ability of municipalities to
achieve these new levels of performance.

This Municipal Sector Study report has been prepared in response to
the EPA Administrator's request for an assessment of the combined
impacts of recent and forthcoming environmental regulations on
municipalities. The Administrator's request arose from the concern that
the EPA's regulatory review process focuses on only one regulation at a
time. When examined individually, the impact of each individual
regulation may be negligible, but the cumulative impact of multiple
regulations may impose an excessive financial burden on
municipalities. Indeed, during the last few years the number of
environmental regulations that apply to municipalities has increased
rapidly.

This study reviwed 39 major regulations that municipalities may
have to comply with in the near future (Figure 1-1). Estimates of
capital, operating and administrative costs were available for only 22
of these regulations. The cost information for the remaining 16
regulations was not available either because it is too early to decide
1-1
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FIGURE 1-1. LIST OF REGULATIONS CONSIDERED IN THE MUNICIPAL SECTOR STUDY
REGULATIONS WITH COST DATA
REGULATION STATUS
A. Drinking Water
Inorganic Compounds (lOCs)
Synthetic Organic Compounds (SOCs)
Volatile Organic Compounds (VOCS)
Fluorides
Lead and Copper Corrosion Control
Lead and Copper MCL
Coliform Monitoring
Surface Water Treatment Rule: Filtered
Surface Water Treatment Rule: Unfiltered
Radionuclides
Disinfection
In Development
In Development
Promulgated
Promulgated
Proposed
Proposed
Proposed
Proposed
Proposed
In Development
In Development
B. Wastewater Treatment
1. Secondary Treatment of Municipal Wastewater
2. Pretreatment Requirements
3. Sewage Sludge Disposal -- Technical
Regulations for Use and Disposal
Promulgated
Promulgated
In Development
C. Solid Waste Disposal
1. Municipal Landfill Subtitle D Criteria
2. Municipal Waste Combusters-Air Standards
3. Municipal Waste Combusters-Ash Standards
Proposed
In Development
In Development
D. Miscellaneous Regulations
1. Underground Storage Tanks - Technical Standards
2. Underground Storage Tanks - Financial Standards
3. Stormwater Management
4. Asbestos in Schools Rule
5. SARA Title III Requirements
In Development
Promulgated
In Development
Promulgated
Promulgated
1-2
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FIGURE 1-1. LIST OF REGULATIONS CONSIDERED IN THE MUNICIPAL SECTOR STUDY
(contd.)
REGULATIONS NOT INCLUDED IN THE COST ANALYSIS
A. Drinking Water
1. Well-head Protection Plan
2. Pesticides in Groundwater
3. Disinfection By-products
In Development
In Development
In Development
B. Wastewater Treatment
1. National Estuary Program
2. Wetlands Protection Program - 404 (c) permits
3. Nonpoint Source Regulations Guidance/Mgmt Plans
4. Section 304(1) - Toxics in Water Bodies
In Development
Promulgated
In Development
In Development
C. Solid Waste Disposal
1. National Contingency Plan - Superfund Program
2. Low-level Radiation Waste Standards
3. Toxicity Characteristics of Solid and
Hazardous Wastes
In Development
In Development
In Development
D. Miscellaneous Regulations
1. Heavy Duty Diesel Vehicles
2. Gasoline Marketing
3. Diesel Fuel Standards
4. Revisions to National Ambient Air Quality
Standards (Ozone, Carbon Monoxide,
Particulate Matter, Nitrogen Oxides,
Sulfur Oxides)
5. Asbestos in Public Buildings
Promulgated
In Development
In Development
In Development
May be Required
1-3
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which regulatory options will be selected, or because the regulations
affect municipalities indirectly and the extent of the impact is too
uncertain to be included in the analysis at this time.

B. LOCAL GOVERNMENT EXPENDITURES AND COSTS TO HOUSEHOLDS

Local governments* currently allocate a sizeable portion of their
budgets to environmental services. As shown in Figure 1-2, smaller
cities tend to direct a greater portion of their budgets to
environmental services than do larger cities. These services, for the
purpose of this figure, include drinking water, wastewater treatment,
and solid waste disposal. The costs of meeting some of the other
environmental requirements may fall under transportation, education,
fire protection, and administration. The proportions given in the
figure may therefore be underestimated.

Consumers in the smallest and largest communities tend to pay higher
costs for environmental services than do consumers in mid-sized
cities. Figure 1-3 shows how the average cost per household and the
percentage of gross household income spent on environmental services
varies across a sample of municipalities. Drinking water and wastewater
treatment costs, measured as a percentage of household income, tend to
be higher in small communities. Even though residents of small
communities tend to pay lower actual costs, their relatively low incomes
require that they allocate a larger portion of their income to
environmental expenditures than do residents of larger communities. The
solid waste costs tend to be lower for smaller communities, probably
because of the reduced level of service needed in these communities.

The average expenditures fail to reveal the variability of the costs
on a per-household basis. Figure 1-4 shows how costs for drinking water
services vary for sampled municipalities. While 40% of the communities
under 2,500 persons currently pay between 0.25% and 0.50% of their gross
*For the purposes of this report municipalities mean cities, towns,
townships, counties and other forms of local government units.
1-4
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FIGURE 1-2. DISTRIBUTION OF MUNICIPAL EXPENDITURES FOR SERVICES IN 1985-f
Municipalities Under 50,000 Persons
Energy (18.2%)
Miscellaneous (8.8%)
Interest on Debt (4.9%)

Administration (7.0%)
Natural Resources (3.7%)
Housing (2.0%)
Education (4. 6%)
Welfare (0.4%)
Health (3.8%)
Transport (9.9%)
Police/Fire (15.5%)
ENVIRONMENT (21.1%)
Municipalities Between 50,000 and 250,000 Persons
Energy (12.4%)

Miscellaneous (10.3%

Interest on Debt (5.2%)

Administration (5.8%)

Natural Resources (4.8%)
Housing (3.8%)
Education (10.3%)
Welfare (0.7%)
Health (3.6%)
Transport (9.5%)
Police/Fire (17.8%)
ENVIRONMENT (15.8%)
Municipalities Over 250,000 Persons
Energy (11.7%)
Miscellaneous (12.3%)
Interest on Debt (5.6%)

Administration (4.9%)
Natural Resources (3.9%)
Housing (4.5%)
ENVIRONMENT (14.0%)
Education (9.0%)
.Welfare (5.1)

Health (5.2%)
Transport (8.7%)
Police/Fire (15.1%)
Source 1984 - 1985 Census of Governments - City Finances
1-5
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FIGURE 1-3. CURRENT AVERAGE ANNUAL HOUSEHOLD COSTS FOR

ENVIRONMENTAL SERVICES
(PERCENT OF HOUSEHOLD INCOME)
to

*
h-
z
y
u
•e

t
0-2
T— ' * i*

.5K 25K-1OK 1OK-50K 50K-250K

CITY SIZE CATEGORIES

1771 SEWER rV\l WATER
I' ' ' • • • i •

>25OK NAT'L AVG.
SOLID WASTE
(DOLLARS PER HOUSEHOLD)
I/I

\
500

450

400

350

JOO

250

TOO

150

100

0
0-2.5K 2.5K-10K 10K-50K 50K-250K

CITY SIZE CATEGORIES

SEWER [V\l WATER
>250K
NAT'L AVG.
SOLID WASTE
Source : PP&E's Municipal Database
-------
FIGURE 1-4. VARIATION IN THE COST OF DRINKING WATER SERVICES

(percent of household income)
u
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• 3 "
40 -
39 -
30 -
J9 -

JO -

19 -
10 -
9 -

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/
y
/
/
/
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/
/
>
/
/
/
/
/
y
/
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y
y
/
/
/
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V
s
V
V
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v
s

s
^
I
'/>
K
^
^
-x'
ty
fj
I

/
/
/
/
/
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/
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s
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y,
%

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/
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r/

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\% ^^^ f/\j T7* R]
.00-.25 .25-. 50 .50-. 75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75 1.75-
PERCENT OF HOUSEHOLD INCOME
<2,500
2,500-10,000
>io,ooo
Source : PP&E's Municipal Database
1-7
-------
household income for drinking water, about 10% of them pay more than
1-0%. Geographic, demographic, and political factors contribute to the
variation in the costs of the services. For example, in some areas in
the country, inorganic chemicals naturally occur in the ground water.
If the ground water in these areas is the primary source of drinking
water, the communities will have to shoulder the cost of removing the
inorganic contaminants. Communities in other parts of the country may
not have to remove the same inorganic chemicals, hence they may provide
drinking water to their customers at lower rates.

Information on current fees are used to establish a baseline series
of user charges for drinking water, wastewater, and solid waste
services. The costs of the additional regulations and the subsequent
changes in user fees are used to address the impacts on households and
characterize the potential severity of these impacts on households and
municipal finances.

C. UNDERSTANDING FINANCING MECHANISMS

While some of the environmental regulations will impose only
administrative costs upon local governments, other regulations will
require that municipalities install capital equipment and notify
operating practices at existing facilities. This capital equipment must
be financed by some means. Some traditional forms of financing the
equipment include pay-as-you-go financing, special assessment bonds,
Federal grants, revenue bonds, and general obligation bonds. The
salient features of these mechani sms are discussed below.

Pay-as-you-ao financing involves dedicating a portion of revenues to
a capital reserve account. The revenues may come from taxes or user
fees. In practice, most cities have been unable to reserve adequate
funds for replacement of their deteriorating capital equipment. In
addition, this pay-as-you-go method is normally not feasible for
financing large expenditures.
I-f
-------
Special assessment bonds are means of issuing long-term debt with
repayment insured through compulsory charges or taxes levied on specific
properties that benefit from capital investment. Special assessments
are sometimes used to fund wastewater and drinking water treatment
extensions or improvements. Special assessment bonds usually have
maturities of five to ten years.

Federal grants to support public works were once a major source of
capital financing. EPA grants, for example, have contributed a
substantial proportion of the capital investment in wastewater treatment
made during the past 15 years. Funding for many programs has been
reduced and recast as Federal and state government loan programs.
Federal budget constraints will dictate the availability of federal
funds; however, the focus of municipal financing programs is expected to
shift to loan mechanisms administered by state personnel.

Revenue bonds are a primary means of obtaining capital for
environmental projects that are run as independent units of local
governments. They are backed by user charges paid by customers, and are
usually issued by authorities managing the system. The authorities have
the power and responsibility to recover expenses through an adequate
system of fees and user charges. Local governments have adopted this
mechanism to fund water supply, wastewater treatment, and, more
recently, solid waste disposal facilities.

General obligation (G. 0.) bonds are used by local governments to
finance construction of major general purpose facilities, including
public schools, municipal parking garages, highways, police stations,
and other public buildings. The bonds are backed by the full faith and
credit of local governments, and are repaid with revenues raised from
property, income, and other taxes. The proportion of G. 0. bonds issued
has declined recently because of voter approval requirements, the
complexity of the issuance process (especially where multiple
governments are involved), and a movement toward 'user-pay' principles
1-9
-------
of capital financing. Often double-barrel bonds, which are revenue
bonds with a backup G.O. pledge, are also used to raise capital.

A focal point of the study is to examine the ability of the
municipalities and their independent units to issue revenue and general
obligation bonds. These two mechanisms will be the primary means of
raising capital for cities subjected to the regulations. it is unlikely
that the other three mechanisms will be used to finance major capital
expenditures.

D. ORGANIZATION OF THE REPORT

The remainder of the report contains four chapters. The second
chapter describes, in more detail, the overall methodology used in the
study to measure economic impacts on households and city finances. The
third chapter discusses the anticipated regulatory impacts. The fourth
chapter describes the limitations of the study. The fifth chapter
contains recommendations based on results from the analysis. In
addition, several appendices are attached to provide the necessary
background information about the data and the model used in the
analysis.
1-10
-------
II. METHODOLOGY OF THE STUDY
This study uses financial data from the 1986 financial statements of
270 randomly sampled municipalities. These data form the baseline upon
which the costs of the regulations were imposed. Because there was
particular interest in describing the impacts of regulations on
communities of different sizes, the communities in the sample were
divided into five size categories. The study calculated impacts on user
charges and financial conditions of communities in each category. The
sample results were then extrapolated to the total population of
cities. If a certain percentage of cities in the sample failed a
criterion, it was assumed that an equal percentage of cities in the
total population would also fail that criterion. The criteria used to
determine the impacts are discussed in detail in the next chapter. The
study consisted of the following five steps.

i METHODOLOGY
1. DEVEIOH*FSfr OF FINANCIAL DATABASE

The overall methodology employed in the study is shown in Figure II-
1. As a first step in the study, two major databases were set up. The
first database, henceforth referred to as the municipal database,
contained fiscal year 1986 financial information on the operations of
270 randomly selected municipalities and their sewer, water, and solid
waste systems. To develop the database, various financial documents,
including municipal financial statements, sewer system annual
statements, and municipal bond statements, were obtained. In addition,
the municipal finance departments were contacted to obtain data on the
residential share of water and sewer system revenues and the market
value of property. These latter pieces of data were necessary for
calculating the impacts, but were often unavailable in the above
documents. The information contained in the database constitutes the
baseline expenditures and the financial conditions of municipalities.
II-l
-------
FIGURE II-l. GENERAL METHODOLOGY FOR CALCULATING IMPACTS OF REGULATIONS
COSTS OF ENVIRONMENTAL REGULATIONS
(Provided by EPA Program Offices)

WEIGHTED AVERAGE COSTS
OF GROUPS OF REGULATIONS

• Drinking Water
• Waste Water
• Solid Waste
• Miscellaneous Regulations
• All Regulations
o
MUNICIPAL DATABASE
(Financial Data from 270
Municipalities)

Financial Statement Data
examined:

• Enterprise Funds
• General Accounts
• Debt and Debt Service
• Statistical Sections
MUNFIN MODEL
Model imposes costs on each of the 270
municipalities and calculates:

• New User Charges
• New Annual Debt Service
• New Ratios
IMPACTS
Impacts are determined in terms of:

• New User Charges
• Percentage of Water and Sewer Systems
Unable to Issue Revenue Bonds,
- in the short term
- in the long term
• Percentage of Cities Unable to Issue
G.O. Bonds
II-2
-------
It was used for calculating the impacts of the regulations. The details
of the sample, the procedures for extracting relevant information from
financial documents, the data elements for which data were gathered, and
the quality and validity of the data are discussed in Appendix A.

2. DEVELOPMENT OF COST DATABASE

The second database, henceforth referred to as the cost database,
contained information on the capital, operating, and administrative
costs associated with each of the 22 environmental regulations shown
earlier in Figure 1-1. The cost information was prepared by EPA program
offices as part of the regulatory process. The data are summarized in
appropriate tables and are presented in Appendix B. in order to
determine differential impacts on small and large municipalities, the
cost data were analyzed for municipalities in eight population
categories. To determine impacts, these eight categories were
aggregated into five categories for two reasons: The sample sizes in
two smallest and the two largest size categories were relatively small
and the aggregation helped obtain samples of sufficient sizes, and it
did not alter the conclusion of the study. The impacts of the
regulations were calculated for the five categories shown below:

Population Size Categories Number of
Cost Data Impact Analysis Municipal ities

0 - 500
500 - 2,500 0 - 2,500 26,315
2,500 - 10,000 2,500 - 10,000 6,279
10,000 - 50,000 10,000 - 50,000 2,694
50,000 - 100,000
100,000 - 250,000 50,000 - 250,000 463
250,000 - 500,000 Over 250,000 59
Over 500,000
Source: 1984-1985 Census of Governments.
II-3
-------
Some of the cost information is preliminary, because many
regulations are under development. The regulatory options and the ways
to alleviate the impacts of the regulations are under discussion within
EPA. The discussions could lead to results different from those found
in this study.

3. DETERMINATION OF WEIGHTED AVERAGE COSTS

The primary purpose of this study is to determine the combined
impact of all the regulations on municipalities. The critical
information needed to achieve this objective is the number and type of
regulations that will affect a city. A city may be subject to only one
regulation, or it may face numerous regulations. Hence, the costs it
faces and its ability to meet those costs will depend upon the number of
regulations affecting it. Information on the number of regulations that
affect each of the 270 cities in our sample was not available. However,
the information on the percentage of cities affected (or the probability
of a city being affected) by each regulation for each of the size
categories was available. This information was used to determine
weighted average costs of five groups of regulations: Drinking water,
wastewater, solid waste, all other (miscellaneous), and all
regulations. The methodology to determine the costs for each is given
in Appendix C.

4. DEVELOPMENT OF THE MUNFIN MODEL

The MUNFIN model, a variation of the MABEL model, was used to
conduct this study. In its original form, the MABEL model evaluates a
municipality's ability to pay enforcement-related capital expenditures
and penalties. MABEL was designed to evaluate the ability of a single
city to comply with a single regulation. MABEL was modified for this
study so that it could process costs of the five groups of regulations
and determine the financial impacts on hundreds of communities
simultaneously. In addition, the output was modified to suit the
purposes of this study.
II-4
-------
The MUNFIN simulates the decision-making process of the financial
community when it considers lending money for long-term purposes. For
example, the model determines whether the loans will be supported by
user charges imposed on the customers of the water and sewer systems, or
by the full faith and credit of the governments. If the loans will be
supported by user charges, the model then examines the uncertainty of
future revenues from the systems. The focus of the analysis is on
variables that determine the long-term financial health of a
municipality. These variables include household income, debt service,
and the market value of property. Financial ratios that are often used
to examine the short-term financial health of a community are not
explicitly included in the model. A detailed description of the MUNFIN
model is given in Appendix D.

5. DETERMINATION OF IMPACTS OF REGULATIONS

After obtaining the costs of the regulations, the MUNFIN model was
used to determine the impacts of the regulations. The regulations were
divided into two groups: (1) water and sewer regulations affecting the
respective enterprise systems, and (2) all other regulations affecting
the general fund. The study first determined if water and sewer systems
could raise the needed capital by issuing revenue bonds, that is, by
pledging future revenues from the respective systems as collateral for
the bonds. If a water or sewer system could not issue revenue bonds,
then the municipalities supporting it were assumed to be responsible for
raising the needed money. Therefore, if neither system could issue
revenue bonds, a city was assumed to bear the costs associated with
meeting drinking water and/or wastewater regulations, as well as the
cost of solid waste and miscellaneous regulations.

B. CRITERIA FOR DETERMINING IMPACTS

The ability to obtain the capital for required environmental
improvements is only one factor that affects compliance with the
regulations. An equally important concern is the consumers' willingness
to pay the increased costs. If consumers perceive that costs are
II-5
-------
excessive, the mandates of the regulations will be difficult to meet.
Therefore, the study examines the expected increases in user charges
well as the expected impacts of the regulations on the municipalities'
ability to raise capital.

To analyze the impacts, the study divides a city's management of
environmental services into two categories:

• the enterprise systems, and
• the non-enterprise systems.

In general, sewer and water systems are run as enterprise systems.
Some solid waste systems using energy and resource recovery technologies
also fall into this category. The enterprise systems are designed to
operate as independent business units. They have the authority to
impose user charges and raise money in the financial markets by issuing
revenue bonds. Only when they are unable to issue revenue bonds, will
the cities owning them step in and raise the needed capital by issuing
general obligation bonds. The study assumes that the provision of
drinking water and wastewater systems are run as enterprise units, and
the drinking water and wastewater treatment regulations shown in Figure
1-1 affect them.

The non-enterprise systems typically are not supported by user
fees. These services are funded using tax revenues (typically property
taxes) , and the associated expenses are listed in the General Fund
accounts of the financial statements of cities. Capital needed for
these activities is usually raised by issuing general obligation bonds,
which are serviced by tax revenues. Environmental regulations raise the
costs of these activities, and will result in tax increases over the
long-term. Financing the capital investments called for by these
regulations will also increase the total debt of affected cities. The
solid waste and miscellaneous regulations lised in Figure 1-1 are
assumed to affect the non-enterprise parts of local governments.
II-6
-------
The criteria for determining the user charge and financial impacts
are discussed below.

1. User Charge Impacts

Households will incur two types of costs: (1) increases in user
charges to cover the costs of regulations imposed on water and sewer
systems, and, (2) increases in taxes to cover the costs of solid waste
and miscellaneous regulations affecting the General Fund. In this
study, both types of costs are combined and represented as an annual
user charge per household. The impact on user charges is calculated
separately for the following groups:

• drinking water regulations
• sewer system regulations, and
• all regulations.

The impacts on user charges were analyzed in three ways: (1) the
percent increase in user charges over existing charges, (2) the post-
regulatory user charges calculated as a percent of gross household
income, and (3) the increase in user charges expressed in dollars. To
calculate the percent increase in water and sewer rates, the current
user charges were used as the baseline. To calculate the percent
increase in user charges due to all regulations, the sum of drinking
water, sewer, and solid waste user charges is used as the baseline
cost. The cumulative baseline figures should include costs of
miscellaneous regulations, but they were excluded from the calculations
because the relevant data were not available from the financial reports
of municipalities. Their exclusion should not present a problem because
the current costs of miscellaneous regulations are extremely small, as
few, if any, are in effect.

2. Ability to Raise Capital

A water or sewer system has two preferred options to raise needed
capital. It will first attempt to raise money by issuing revenue
II-7
-------
bonds. If it cannot, then it will ask the municipalities supporting it
to issue general obligation bonds. However, the municipality may
already need to obtain additional capital to comply with solid waste and
other environmental regulations. Therefore, a municipality may have to
issue general obligation bonds to comply with not only the solid waste
and miscellaneous regulations, but also with drinking water and
wastewater regulations. The issues pertaining to the ability to issue
revenue and general obligation bonds in the long and short term are
discussed below.

a. Ability to Issue Revenue Bonds in the Long Term

The ability of a sewer or water system to obtain money from the
capital markets depends on the income of its customers, that is, the
residents of the community. For example, if the income of a community
is higher than another community's, it can obtain more money under the
same financial conditions. In the case of water and sewer systems, the
average gross household income was compared to the user charges that
households will be expected to pay for existing and new requirements to
determine the ability of the system to issue revenue bonds. The
percentage of gross household income that is devoted to sewer and water
services was separately calculated as follows:

System's User Charge Revenue x 100
Gross Household Income X No. of Households

Then, this ratio is compared to three different threshold limits:
1.0%, 1.25% and 2.0% of the household income. If this ratio exceeds a
threshold, that is, if user charges are more than the specified
percentage of gross household income, the systems are assumed to be
unable to issue revenue bonds. The 1.0% and 1.25% thresholds are
approximately equal to the mean plus two standard deviations of the
values of the user charge to income ratio for the 270 communities
sampled; hence, user charges of about 95% of the communities are less
than these thresholds. The 2% threshold, sometimes used to indicate
financial hardship, is not exceeded by any of the 270 communities in the
II-8
-------
sample. When the ratio exceeded a threshold, it was assumed that
lending institutions would consider the income to be too low to afford
the high charges and may not lend the money; thus, the community may not
be able to raise the needed capital. All those concerned with the
regulations -- consumers, bankers, and governments -- will gradually
accept the regulations and new user charge thresholds will eventually be
defined. Therefore, the thresholds should be used as relative
measures of the ability to raise money, or, of the willingness of
investors to lend money.

b. Ability to Issue Revenue Bonds In the Short Term

Some of the systems that can raise money in the long term
may find it difficult to raise money in the short term. Water and sewer
systems encounter this difficulty when they do not recover their
expenses through adquate user charges, that is, when their expenses
exceed their revenues. The deficits occur under many circumstances
including high unemployment, voter rejection of rate increases, and bad
management of utility operations. Investors look upon deficits with
great alarm, and consider them as indicators of uncertainty of future
revenues from the systems, or an inability of the community to make hard
choices. When the deficits occur, investors will usually not lend the
needed capital immediately; instead, they will ask the community to
demonstrate that it can raise the charges to adequate levels. Depending
upon the size of the deficit, communities may take anywhere from two to
four years to balance their water and sewer budgets.

C. Ability to Issue General Obligation Bonds

This test was used in those cases where regulations affect
non-enterprise units of the local government. Under the general
framework established in this study, this occurs when:

• a municipality is subject to solid waste and
miscellaneous regulations, and
II-!
-------
• water and sewer systems cannot issue revenue
bonds in the long term, so the supporting
municipalities have to obtain needed capital.

The capital needed for compliance with the regulations will usually be
obtained by issuing general obligation (G. 0.) bonds.

A financial test that takes into account municipal revenues, debt
service, and property value was used to evaluate financial capability.
If a city fails this test it was assumed that it would be precluded from
issuing G.O. bonds,- that is, it would be unable to pledge its full faith
and credit to get additional capital.

The threshold values for the two ratios used in the general
obligation test were derived from an examination of the financial
conditions of about 30 cities with Baa bond ratings. Even though the
cities exceeding the two thresholds would generally not be able to issue
general obligation bonds, the thresholds derived from the data (called
primary thresholds for the purposes of this presentation) cannot be
treated as absolute; therefore, sensitivity analysis was performed by
using the following thresholds;
RATIO
PRIMARY
THRESHOLDS
ALTERNATIVE
THRESHOLDS
Debt Service
municipal revenues
0.2
0.15
Debt Service
Property Value
0.008
0.006
Note that only when both ratios exceed their respective thresholds,
is the city presumed to be unable to raise the needed money by issuing
general obligation bonds.
11-10
-------
C. DESCRIPTION OF REGULATIONS

To focus the analysis on cumulative impacts, the regulations have
been aggregated into four groups: drinking water; sewer (wastewater) ;
solid waste,- and the miscellaneous (all remaining) regulations. Salient
features of these groups are described below.

1. Drinking Water Regulations

Eleven regulations will affect drinking water systems in the near
future. These are:

Inorganic Compounds (lOCs)
Synthetic Organic Compounds (SOCs)
Volatile Organic Compounds (VOCS)
Fluorides
Lead and Copper Corrosion Control
Lead and Copper MCLs
Coliform Monitoring
Surface Water Treatment Rule (Filtered systems)
Surface Water Treatment Rule (Unfiltered system)
Radionuclides
Disinfection

These regulations are in various stages of development. They should
all be promulgated within the next few years. Because they will go into
effect within a short time of each other, the affected cities can comply
with them in a comprehensive, rather than, piecemeal fashion. For
purposes of this analysis, the impacts have been analyzed assuming that
all communities would install the necessary equipment to comply with all
regulations at the same time. However, it is expected that the smaller
municipalities -- those under 10,000 persons -- would make their
treatment decisions in 1992, and would implement the regulatory
requirements by 1996. Communities greater than 10,000 would make their
treatment decisions around 1989. Twenty-five percent of these cities
would start complying in 1990, another twenty-five would begin
11-11
-------
implementing requirements by 1992, and the rest would comply by 1996.
These long lead times should help communities plan to comply with the
regulations and reduce the severity of impacts to some extent.

2. Sewer System Regulations

Several major regulations and program changes either will or are
already affecting sewer systems. These include the establishment of
state revolving loan fund programs, strategies to clean water quality
limited waters, and the marine and estuarine protection program. The
costs of implementing the latter two programs were not available and
therefore were not included in the analysis. The costs associated with
the Secondary Treatment Requirements, Pretreament Program and Sewage
Sludge Disposal were included in the analysis.

All major and minor sewage treatment facilities are required to
comply with the secondary treatment requirements, and most of them have
taken the necessary steps to do so. The cost data for this program was
derived by using the Needs Survey information on unmet capital
requirements for major and minor facilities. The costs include the
total current construction needs of these facilities, including needs
for secondary and advanced treatment, infiltration/inflow correction,
sewer replacement/rehabilitation, new collector sewers, new interceptor
sewers, and correction of combined sewer overflows. In addition, costs
for all nondischarging minor facilities in need of further capital
investment are included in the data. The cost data does not include
unpermitted facilities that need to meet water quality goals, or
compliant facilities that have additional needs to maintain compliance.
Because these costs are expected to be significant, this analysis may
underestimate the impacts.

The costs may not reflect the actual costs to achieve
compliance. Systems may be able to modify current operating practices
to reducece the amount of additional capital needed. Because the Needs
Survey is organized by facility, the costs and population data do not
equate directly to municipality size. That is, costs of smaller systems
11-12
-------
were matched with smaller cities, and larger systems were matched with
larger cities. In reality, some smaller cities are tied into regional
systems, so their costs may be lower than that of cities operating their
own facilities. Despite these limitations, the cost data provide a
reasonable portrayal of how costs are likely to vary across different
community sizes. The number of communities affected is expected to be
larger than the number of communities identified as requiring additional
expenditures to achieve compliance.

Because most cities have already instituted pretreatment
programs, the associated costs used in this study were based on current
pretreatment costs incurred by a sample of cities. This regulation
imposes only administrative costs, primarily for larger cities (over
10,000 persons).

Of the fifteen thousand municipal wastewater treatment plants
about 3,000 are covered by the proposed rule. Of the 3,000, more than
85% use land application as a means of disposing of sludge. Other means
of disposal include incineration, ocean disposal, landfilling, and
distribution and marketing. The average costs used in the analysis are
based on cost information on all forms of sewage disposal.

3. Solid Waste Regulations

The regulations affecting municipal solid waste disposal facilities
examined in this study are the Subtitle 'D' criteria regulation and the
regulations affecting municipal waste combustors, (air and ash
disposal). The Subtitle 'D' Criteria establishes, among other things,
design, performance and ground water monitoring requirements for
municipal landfills.

Depending on the size of a municipality, the solid waste disposal
operations may be managed differently. In small cities, solid waste
collection and disposal is paid from the General Fund accounts, that is,
the general tax revenues; hence, it is treated as a non-enterprise
system. On the other hand, the solid waste disposal units are operated
11-13
-------
as enterpise systems in many large cities. This means that they are
established to recover their expenses through some system of user
charges, even though their expenses may initially be paid out of the
general revenues of the cities that own and operate them. with
increasing importance of the solid waste disposal problems,
municipalities are paying more attention to the cost of disposal and are
planning to institute user charge systems. In addition, solid waste
services are privatized to some extent in most areas (especially the
suburbs) . In large cities, the cost of the new regulations will be
passed to the users through higher fees. Because the preliminary
analysis indicated that the impacts on small communities would be of
concern to EPA, this study treats solid waste facilities as non-
enterprise units.

Air and ash regulations for municipal combustors affect one-third of
the cities in the 100,000-250,000 category and most cities over 250,000
people. The costs include more expensive disposal of ash residuals and
installation of technologies to reduce gas emissions from combustion
units.

4. Miscellaneous Regulations

Five regulations other than water, sewer, and solid waste
regulations have been included in this separate category. In general,
they will affect non-enterprise units of a municipality; therefore,
their costs will be paid from tax revenues. Four of the five
regulations, namely, Asbestos in Schools Rule, SARA Title III
Requirements, and Underground Storage Tanks (technical and financial
standards) are assumed to affect all municipalities in the country.
Stormwater requirements under consideration at this time will initially
affect only cities with populations greater than 100,000.
11-14
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III. IMPACTS OF THE ENVIRONMENTAL REGULATIONS

This chapter consists of two major sections. The first section
discusses the probability of cities being subject to one or more
regulations and presents the weighted average costs of the
regulations. Thee second section discusses the impacts of the
regulations on households and municipal government finances.

A. COSTS OF REGULATIONS

The capital and operating costs that a city must bear depend on the
number and type of regulations with which a city must comply. Because
several of the regulations affect only a small fraction of the cities,
it is unlikely that many cities will be affected by more than five or
six regulations (Appendix B) . This conclusion can be illustrated by
examining the data on the number of the municipally owned drinking water
systems. As shown in Table III-1, nine of the eleven regulations --
IOCS and Fluorides, VOCs, SWTR (Unfiltered), Colifom (Monitoring),
Disinfection, Lead and Copper MCLs, and Radionuclides -- will affect
either none or only a handful of cities with populations greater than
50,000.

Individual regulations often affect only a small percentage of the
total number of systems in the smaller size categories. For example,
the SOCs regulation will affect about 1,200 systems in the less than 500
persons category, about 9% of all systems in this category. IOCS and
Fluorides will affect less than 0.5% of the systems with populations of
less than 50,000. The small probability of occurrence of certain
contaminants means that a randomly selected city would be affected by
only a few regulations. The expected cost a city has to bear will be
much smaller than the cumulative cost of all regulations. To determine
the impacts of the regulations, weighted average costs for the five
groups of regulations were calculated. These are presented in Table
III-2.
III-l
-------
TABLE III-l
NUMBER OF MUNICIPALITIES POTENTIALLY AFFECTED BY DRINKING WATER REGULATIONS*
M
H
I
Municipality
Regulations
Fluorides
Disinfection
Lead Control
VOCs
IOCS
SOCs
Radionuclides (500)
Coliform Monitoring
SWTR (Unfiltered)
SWTR (Filtered)
Lead & Copper (MCL)
0
to
500
66
4,724
5,554
231
151
1,186
5,652
10,199
172
273
125
500
to
2,500
33
2,361
5,028
212
59
413
3,891
10,150
310
957
107
2,500
to
10,000
8
439
1,684
84
20
116
881
567
130
811
33
10,000
to
50,000
2
169
1,044
57
13
56
451
169
79
704
19
Size Category
50,000
to
100,000
0
3
185
7
0
8
30
35
20
209
3
100,000
to
250,000
0
0
52
3
0
3
8
0
4
70
1
250,000
to
500,000
0
0
55
2
0
2
8
0
4
69
1
Over
500,000
0
0
23
1
0
1
1
0
3
32
o
Total Number of Communities: 35,810

* All municipalities are subject to drinking water regulations. These are the estimated number of

municipalities that will need to invest in additional treatment technologies to comply with the regulations.

The number of municipalities affected by other regulations are shown in Appendix B.
Source : Office of Drinking Water, EPA
-------
Table III-2

POTENTIAL WEIGHTED AVERAGE CAPITAL AND O&M COSTS FOR
ADDITIONAL EPA REGULATIONS
(Thousands of 1966 dollars)

Drinking Water

H
H
OJ

Total
Municipality Capital
Size Category Cost
0- 40
500
500 - 46
2,500
2,500 - 105
10,000
10,000 - 274
50,000
50,000 - 1,132
100,000
100,000 - 1,869
250,000
250,000 - 6,421
500,000
Over 500,000 10,010
Annual
O&M
Cost
4
7
14
39
110
203
661
1,457

Wastewater
Total Annual
Capital O&M
Cost Coat
23 2
115 5
264 11
1,058 44
3,285 132
9,510 365
30,354 1,291
102,742 4,041
Type of Cost
Solid Waste
Total Annual
Capital O&M
Cost Cost
2 2
10 10
37 37
172 171
591 435
2,350 968
11,875 2,699
26,597 6,835

Miscellaneous**
Total Annual
Capital O&M
Cost Cost
37 5
43 6
114 11
390 35
770 72
1,889 233
3,999 612
9,632 1,066

Cumulative
Total Annual
Capital O&M
Cost Cost
102 13
212 28
519 73
1,894 289
5,778 750
15,618 1,769
52,649 5,264
148,980 13,399
Many of the cost estimates are based on existing regulatory development documents and are subject to change. For more information see
Appendix B.

Miscellaneous category includes underground storage tank controls, asbestos in schools, SARA Title III, and stormwater requirements.

Source: EPA Cost Estimates
-------
As shown in Table III-2, cities of different sizes will be affected
most by different groups of regulations. Table III-2 shows that:

• For cities with populations greater than
250,000, wastewater capital costs on average
will account for more than 50% of the costs of
all regulations. Drinking water and solid waste
regulations will account for about 7% and 15% of
the costs, respectively.

• In comparison, the miscellaneous and drinking
water regulations will account for about 60% and
25%, respectively, of the capital costs for
cities with populations under 500.

• Although wastewater capital costs dominate in
the 10,000 to 250,000 categories, drinking water
and miscellaneous costs constitute a significant
portion of the cumulative costs of the
regulations.

The costs given in Table III-2 were used as inputs to the MUNFIN
model in order to calculate the economic impacts to households and the
financial capabilities of cities.

B. IMPACTS OF THE REGULATIONS

This section is divided into two parts. The first part describes
the cumulative impacts of all regulations and the impacts of drinking
water and wastewater regulations on user charges. The second part
discusses the short and long-term ability of water and sewer systems and
municipalities to raise the capital needed to comply with the
regulations.
III-4
-------
1. Impacts on User Charges

The regulations will affect households in two ways. First, water
and sewer system revenue bonds will have to be supported by systems'
revenues, and therefore, the customers (households) will have to pay
higher user charges. Second, general obligation bonds, issued to comply
with solid waste and miscellaneous regulations and, when necessary,
drinking water and sewer regulations, will have to be supported by the
taxing powers of the governments. In the long run, local taxes will
have to increase to cover the cost increases. Hence, the net cost to
households will be the sum of user charges imposed directly by the water
and sewer systems, and a tax increase imposed by their governments. In
this study, the net cost was not separated into the two components.
Instead, it was calculated as a combined number that amounts to the
total burden on households. The household impacts were calculated as
follows:

• Increase in user charges in dollars and as a percent of
household income;

• Percent increase in user charges (over existing charges);

• Post-regulatory charges as percent of household income.

These impacts are given for weighted average costs of all
regulations combined. (Post-regulatory user charges for drinking water
and wastewater services are discussed in the section dealing with the
ability of the systems to issue revenue bonds in the long-term.) The
user charges are presented in two ways. First, the increases or the new
household charges are divided into several ranges. For example, the
percent increase in user charges is given in three ranges: 0-50%, 50-
100%, and greater than 100%. The distribution of impacts is determined
by calcuating the number of cities in the sample within each range.
Second, the user charge increases are given in terms of dollars required
of an average household in each of the city size categories. These data
are discussed below.
III-5
-------
Table III-3 shows the percent increase in user charges due to all
regulations. To calculate this increase, the sum of current drinking
water, sewer, and solid waste charges were used as the baseline of
current household expense. Thus, the increase measured was the percent
increase over the current costs of drinking water, wastewater and solid
waste services.

The analysis shows that small communities with populations of less
than 2,500 will experience the largest user charge increases. About 20
percent of these communities will experience cost increases of more than
100%. The user charges of 35% of the cities in this category will
increase by 50 to 100%. Only 45% of them will experience rate increases
of less than 50%. In comparison, none of the cities in the other four
size categories will experience cost increases of more than 100%, and
between 80% and 100% of the cities will experience rate increases of
less than 25%. Thus, the small communities will experience the largest
rate shock resulting from the regulations.

The rate increases will force the households in small communities to
pay a larger portion of income for environnmental services than
households in large communities in the post-regulatory period. Table
III-4 shows the post-regulatory cost of all environmental regulations
(that is, after the new regulations have taken effect). A larger
portion of the communities in the two smallest categories will pay more
than 2.5% of gross household income for environmental services than
communities in the other categories. About a quarter of the communities
in the less than 2,500 person category and 15 percent in the 2,500-
10,000 person category will pay more than 2.5% of their household income
for the environmental services. In comparison, about 10 percent of the
cities in the over 10,000 category will pay more than 2.5% of the
household income for the environmental services. Furthermore, while 50
to 70 percent of the communities in the 2,500 to 250,000 person sizes
will spend less than 1.5% of their income on environmental services,
only 40 percent of the communities in the less than 2,500 category and
30 percent in the greater than 250,000 category will do so as a result
III-6
-------
TABLE III-3
POTENTIAL CUMULATIVE IMPACT OF ENVIRONMENTAL REGULATIONS -
PERCENT INCREASE IN HOUSEHOLD USER CHARGES

Increase
0- 50%
45%
90
80
100
80
56
83
Municipalities in the

as percent of current
50 - 100%
35%
10
20
0
20
29
15
Category

charges *
> 1001
20%
0
0
0
0
15
2
Percent increase in user charge is calculated as follows:

Additional (Drinking Water+Wastewater+Solid Waste+Miscellaneous) Costs*100
Current (Drinking Water+Wastewater+Solid Waste) Costs
III-7
-------
TABLE III-4

POTENTIAL CUMULATIVE IMPACT OF ENVIRONMENTAL REGULATIONS --
POST-REGULATORY USER CHARGES AS PERCENT OF HOUSEHOLD INCOME

User Charges as Percent of
0 - 1.5% 1.5 - 2.
401 * 35%
55 30
50 40
70 25
30 60
44 34
50 37
in the Category

Household Income
5% >2.5%
25%
15
10
5
10
22
12
* This means that 40% of the municipalities in the 0 - 2,500 category
will experience an increase in user charges in the range of 0 - 1.5%
of the gross average household income.
III-I
-------
of the regulations. Almost 60 percent of the cities in the greater than
250,000 category will spend between 1.5% and 2.5% of the household
income on environmental expenditures.

The environmental expenditures of small communities will increase
from about 1.3% of the household income to more than 2.0% (Figure III-
1) . This translates into increased outlays of $170 per household per
year for communities with populations less than 2,500 (Table III-5) .
Residents in the largest cities will have to increase their outlays by
less than 0.5% of the household income, but the dollar increase will be
about the same ($160) . The corresponding increases for other city size
categories are much less -- between $70 and $90.

These results suggest that the greatest additional outlays for
environmental services will occur in small and large municipalities.
The relatively greater wealth of average households in larger cities
will diminish the impacts; however, almost every large city contains
pockets of low income residents who will bear a much greater burden than
higher income groups. Small municipalities will experience large
increases in rates. Households in these communities will have to
dedicate a greater portion of their income for these services than will
households in larger communities.

Water and wastewater user charges in the less than 2,500 category
communities will increase by about $40 and $45 respectively, or, in
other words, these two groups of regulations will contribute about 50% of
the increase in user charges for the smallest communities. Drinking
water regulations will increase user charges of other communities by
only $5 to $15 per household. The wastewater regulations, on the other
hand, will increase the user charges by about $60 in cities with
populations larger than 250,000 and by about $20 in communities in the
2,500 to 250,000 population categories.
III-9
-------
I/I

H
z
U

g
FIGURE III-l. CURRENT AND POTENTIAL ADDITIONAL AVERAGE ANNUAL

HOUSEHOLD COSTS FOR ENVIRONMENTAL SERVICES
(PERCENT OF HOUSEHOLD INCOME)
2.5K - 10K
10K -50K
50K - 250K > 2 5 0 K NAT'L AVG.
CITY SIZE CATEGORIES

V /\ CURRENT CHARGES P\\] ADDITIONAL CHARGES
(DOLLARS PER HOUSEHOLD)
0-2.5K 2.5K-10K 10K-50K 50K-25OK >250K NAT'L AVG
CITY SIZE CATEGORIES

V /\ CURRENT CHARGES |\\| ADDITIONAL CHARGES
Source : PP&E's Municipal Database
111-10
-------
TABLE III-5
POTENTIAL INCREASE IN ANNUAL USER CHARGE DUE TO ENVIRONMENTAL REGULATIONS

(Dollars Per Household)
M
H
Municipality
Size
Category
0- 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 250,000
Over 250,000
Number
of
Municipalities
26,315
6,279
2,694
463
59

Drinking
Wastewater Water
$ 45* $ 40
20 15
20 5
20 10
60 15
Types of
Solid
Waste
$ 26
23
32
28
51
Regulations
Miscellaneous
$59
32
23
12
34

Cumulative
$ 170
90
80
70
160
* User charge increases have been calculated using weighted average costs of new regulation.

The costs that a municipality may incur will depend on the regulations it has to comply with.
-------
2. Impacts of Costs on Financial Health of Cities

As discussed in Section C of this Chapter, water and sewer systems
have two options for raising the capital needed to build treatment
facilities:

• Issue Revenue Bonds*, and

• Request Municipalities Supporting Them to
Issue General Obligation Bonds

Because municipal water or sewer systems are typically run as
enterprise units, systems will prefer to issue a revenue bond and pledge
future revenues toward payment of the debt service. In those cases
where there exists a high degree of uncertainty in attaining the needed
level of future revenues, the cities will not be able to issue revenue
bonds. The uncertainty may arise when: (1) the system is not already
recovering its current expenditures through adequate user charges,
(perhaps, reflecting an unwillingness on the part of customers to bear
the cost of clean water); (2) income of the residents is too low; (3)
future revenues are based on highly uncertain growth of the service
population, and; (4) the national economy is expected to be in recession
in the immediate future. This study examines only two of these four
factors - whether the income is too low and whether the systems are
recovering their current expenditures. The inclusion of the other two
factors is beyond the scope of this study.
*Although small communities do not issue revenue bonds, financial
institutions will use criteria similar to those used by investment
bankers in cases involving large cities. To qualify small systems for
long-term loans, they will evaluate the performance history of the
system, the user charges to income ratio, and use revenues from the
system as collateral for the loan. Just as in cases where large cities
are denied access to revenue bonds, banks will refuse to approve loans
to small cities where their systems do not pass the criteria described
in this report. Similarly, small cities generally do not issue general
obligation bonds, but are evaluated in much the same manner as large
cities before being given long-term loans for capital purchases.
111-12
-------
Inadequate income is a long-term problem. When the income is
insufficient, that is, when the user charges are high with respect to
income, the customers may not be able to afford the charges. In
addition, investors may not be willing to lend money because they will
be uncertain about the customers' willingness and ability to pay charges
that are much greater than the rates charged elsewhere in the country.
In the absence of lenders' willingness to advance the capital, the city
will not be able to obtain the necessary financing. This will result in
long-term constraints on the availability of revenue bond financing for
water and sewer projects.

Inability to recover current expenditures through adequate user
charges is considered a short-term problem, provided the customers have
sufficient income. When water and sewer systems of a community are not
recovering their costs, investors usually refuse to lend money to
them. However, if the community demonstrates its willingness to raise
rates (by legally raising the rates and collecting sufficient revenues
for a period of one or two years) , investors are likely to change their
minds and agree to provide the capital. Depending on the size of the
deficit, a community may take anywhere from one to four years to balance
its books and demonstrate that it has an adequate performance history.

When water and sewer systems cannot issue revenue bonds, they can
ask the municipalities supporting them to issue general obligation
bonds. However, other financial obligations or poor financial
conditions may dictate that a city is unable to issue general obligation
bonds. When cities are unable to use either mechanism, the water and
sewer systems will not be able to raise the needed capital. *
*Municipalities may be able to increase their ability to issue general
obligation bonds over time by reducing the level of debt service. But
it usually is much harder to do this than it is to adjust user charges
for environmental services. The ability of the municipality to adjust
its financial conditions by taking advantage of alternative financial
mechanisms, though possible, is not addressed in this report. It should
be noted that small communities generally have fewer options to make
adjustments than large cities.
111-13
-------
a. Ability to Issue Revenue Bonds in the Long Term

Post-regulatory user charges affect the ability of the water and
sewer systems to issue revenue bonds. According to the criteria
established for this study, if the new charges for these services for
each utility exceed 1.0%, 1.25% or 2.0% of the gross household income,
then the systems will not be able to issue the revenue bonds in the long
term. Note that the lower two thresholds are approximately equal to the
mean plus two standard deviations of the values of the ratios for 270
municipalities surveyed in the study. Therefore, user charges, for
water and sewer services separately, in approximately 95% of the
municipalities are less than the two thresholds. The user charges may
have to double or quadruple before they exceed the 2% threshold.

Table III-6 provides the post-regulatory user charges for drinking
water services as a percentage of average household income. Depending
on the size of the city, user charges of between 68 and 96 percent of
the systems will be less than 1.0 percent of household income (one of
the two thresholds for determining if costs of drinking water services
are excessive) . This suggests that a large portion of systems in all
city size categories will not have trouble raising money in the capital
markets in the long term. Similarly, as shown in Table III-7, the
customers of the vast majority of sewer systems will have to pay less
than 1.0% of their gross household income -- one of the thresholds above
which the charges are considered excessive -- for sewer services.

The data also show that a significant portion of the water and sewer
systems will exceed the lower two thresholds, and therefore, may have
trouble raising the needed capital in the long term. Table III-8 shows
that about a quarter of the water and sewer systems in the less-than-
2,500- persons category and between 4% and 11% of the systems in the
other four categories, may have difficulty issuing revenue bonds in the
long term, if the threshold of 1.0% is used as the evaluation
criterion. On a nation-wide basis, 21% of the water and sewer systems
will exceed this threshold. Comparatively, if the threshold of 1.25% is
used as the criterion for evaluation, about 12% of the systems in the
111-14
-------
TABLE III-6
POTENTIAL IMPACT OF DRINKING WATER REGULATIONS-
POST-REGULATORY USER CHARGES AS PERCENT OF HOUSEHOLD INCOME

Municipalities

User Charges as Percent of
0-0.5% 0.5-1
36%* 32%
44 44
61 35
52 36
50 33
39 35
51 36
.0% 1.0-1.5
28%
6
2
12
17
23
4
in the Category

Household Income
% 1.5-2.0% > 2.0%
2% 2%
6 0
2 0
0 0
0 0
2 1
2 1
* This means that for 36% of the municipalities in the 0 - 2,500 category
the new user charges will be 0 - 0.5% of the gross average household income.
111-15
-------
TABLE III-7

POTENTIAL IMPACT OF WASTEWATER REGULATIONS-
POST-REGULATORY USER CHARGES AS PERCENT OF HOUSEHOLD INCOME
Municipality Number
Size of
Category Municipalities
0 - 2,500 26,315
2,500 - 10,000 6,279
10,000 - 50,000 2,694
50,000 - 250,000 463
Over 250,000 59
Percent of Municipalities
Percent of Population
Percent of
User Charges
0-0.5% 0.5-1
35%* 40%
59 35
58 34
71 29
44 50
41 39
56 37
Municipalities in the Category
as Percent of Household Income
.0% 1.0-1.5% 1.5-2.0% > 2.0%
171 81 01
600
800
000
000
14 6 0
6 1 0
* This means that for 35% of the municipalities in the 0 - 2,500 category
the new user charges will be 0 - 0.5% of the gross household income.
111-16
-------
TABLE III-8

POTENTIAL IMPACT OF EPA REGULATIONS ON THE ABILITY OF WATER AND SEWER

SYSTEMS TO ISSUE REVENUE BONDS/ OBTAIN BANK LOANS IN THE LONG TERM*
Municipality
Size Number of
Category Municipalities
0 - 2,500 26,315
2,500 - 10,000 6,279
10,000 - 50,000 2,694
50,000 - 250,000 463
Over 250,000 59
Percent of Systems
Percent of Population
Percent of Systems Which May Fail To
Issue Revenue Bonds in the Long Term*
User
>1.0%
Charge / Household
>1.25%
26% (5 ***) 12% (2)
8 (2)
7 (3)
4 (4)
11 (4)
21 (4)
9 (4)
2 (1)
2 (1)
0 (0)
3 (0)
9 (2)
3 (1)
Income
>2.0%
2% (0)
0 (0)
0 (0)
0 (0)
0 (0)
1 (0)
1 (0)
* A water system or a sewer system fails to issue revenue bonds in the
long term when each individual system fails the user charge threshold
of 1.0%, 1.25% or 2.0%.

** Small communities generally do not issue revenue bonds; instead, they
get bank loans that are backed by user charges. The criteria used in
the above tests are applicable to small communities.

*** Percent of systems exceeding thresholds prior to complying with new
regulations (Numbers within parentheses are baseline failures).
111-17
-------
smallest--under 2,500 persons -- category, and up to 3% of the systems
in the other categories , will have difficulty in issuing revenue bonds
in the long term. Nationally, about 9% of the systems exceed this
second threshold. Thus, regardless of the two thresholds chosen,
systems in the smallest and largest category will be most affected by
the regulations and many may not be able to pledge future user charge
revenues as security for their bank loans. These systems will likely
have to ask communities supporting them to raise money by means of
general obligation bonds. Note that the new environmental regulations
are not totally responsible for the long-term difficulty in issuing
revenue bonds. As shown in table III-8, the user charge to income
ratios of between two and five percent of the systems are more than the
1.0% threshold. This means that these systems will have difficulty in
issuing revenue bonds even in the absence of new regulations.

b. Ability to Issue Revenue Bonds in the Short-Term

Some of the systems that can issue revenue bonds in the long term
may not be able to issue them in the short-term because of their history
of obtaining adequate revenues to cover the costs of services. Table
III-9 shows the systems that will fail to issue revenue bonds in the
short term, but will be able to issue them in the long term. These
systems do not recover their expenses through sufficient user charges,
but their customers have adequate incomes to permit them to raise the
rates and balance expenditures and revenues. The short-term inability
to issue revenue bonds means that the regulations will require these
communities to discontinue practices that pay the deficits through
subsidies or tax revenues. To comply with the new regulations and issue
revenue bonds, communities will have to raise the rates. Because tax and
rate increases are politically unpopular, a political problem may arise
before the economic one. The communities are expected to be able to
raise their rates because their income is adequate, that is, the new
user charges are less than either 1.0% or 1.25% of the annual household
income -- the two scenarios considered in this analysis. The 2.0%
threshold is not used in this part of the study because the user charges
of none of the systems exceed it.
111-18
-------
As shown in Table III-9, 16% of the water and sewer systems will
find it difficult to issue revenue bonds in the short-term if the
threshold of 1.0% (ratio of user charges to household income) is taken
as the evaluation criteria. On the other hand, if the threshold of
1.25% of the household income is taken as the evaluation criteria, 18%
of the water and sewer systems may experience difficulty issuing revenue
bonds in the short-term. The data in the table do not show any
consistent pattern of difficulty among large and small cities. The
absence of a pattern is not surprising, however. The budget deficits
occur for two main reasons: inability of a system to increase rates
during bad economic times and poor management.

The hard economic conditions occur in different parts of the country
at different times and affect communities of all sizes. For example,
the drop in oil prices has adversely affected the oil states during the
last two years, but the drought is affecting the agricultural states
this year. Communities that were in relatively weak financial condition
before the adverse economic conditions are probably in much poorer
shape. They have probably cut budgets, reduced services, and delayed
tax or rate increases. If the water and sewer systems in these hard hit
communities have had to comply with new environmental requirements, they
may be experiencing budgetary deficits and covering them by using
revenues from the general treasury or short-term loans.

The budget deficits may also result from periodic water shortages
during which water supplies usually decrease. Costs of obtaining or
treating water rise, but the water and sewer rates remain stable. The
resulting shortfall is covered by short-term loans, capital reserves, or
revenues from other sources. Finally, the deficits may occur due to
inadequate management practices, which make it difficult to track and
control expenditures.

The financial conditions of water and sewer systems may change over
time. A water system may gradually raise costs to its customers in
order to recover the cost of supplying water. Usually, it is possible
111-19
-------
TABLE III-9
POTENTIAL IMPACT OF EPA REGULATIONS ON THE ABILITY OF SEWER AND WATER SYSTEMS

TO ISSUE REVENUE BONDS/OBTAIN BANK LOANS IN THE SHORT TERM*
Municipality Number of
Size Municipalities
Category
0 - 2,500 26,315
2,500 - 10,000 6,279
10,000 - 50,000 2,694
50,000 - 250,000 463
Over 250,000 59
Percent of Municipalities
Percent of Population
Percent of Systems Which May Fail to Issue
Revenue Bonds/Obtain Bank Loans In Each Category
User Charge / Household Income
<1.0% < 1.25%
171 181
17 21
10 12
13 13
7 10
16 18
13 15
* A system falls to issue revenue bonds in the short term, when it passes the
user charge threshold (i.e. when user charge/household income ratio is less
than 1.0% or 1.25%) and fails the performance history test.

** Small communities generally do not issue revenue bonds; instead, they get
bank loans that are backed by user charges. The criteria used in the above
tests are applicable to small communities.
111-20
-------
to adjust the rates by small amounts each year. Depending on the level
of the annual deficit (difference between expenditures and revenues)
some water systems may take four to five years to raise their rates to
adequate levels. This study did not examine the ability of the systems
to make needed adjustments. The results presented below simply indicate
if the systems had large deficits in 1986. If they had large deficits,
it was assumed that they may not be able to raise the needed capital if
subject to the regulations in the short-term.

c. Failure of Municipalities to Issue General Obligation Bonds

When either water or sewer systems cannot raise capital by issuing
revenue bonds, they will ask the municipalities to assist them by
issuing general obligation (G. 0. ) bonds. Because a city bears the costs
of the solid waste and miscellaneous regulations, a city may find itself
responsible for the following kinds of costs.

• Costs of Sewer, Drinking Water, Solid Waste and
Miscellaneous regulations

• Costs of either Water or Sewer, Solid Waste and
Miscellaneous regulations

• Costs of only Solid Waste and Miscellaneous
regulations

The capital cost component of the above costs will have to be raised
by issuing G.O. bonds. Depending on the ability of the sewer and
water systems to issue revenue bonds, some of the cities may have to
raise greater amounts of money via G.O. bonds. The financial health of
some cities may be affected to a greater extent by the same
environmental regulations than other cities.

Table 111-10 shows the cumulative affect of the regulations on the
ability of cities to issue G.O. bonds. The results are given for two
scenarios. The first scenario pertains to the user charge threshold of
111-21
-------
TABLE 111-10
POTENTIAL IMPACT OF EPA REGULATIONS ON THE ABILITY OF MUNICIPALITIES

TO ISSUE GENERAL OBLIGATION BONDS/OBTAIN BANK LOANS*
Municipality
Size
Category
0 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 250,000
Over 250,000
Number
of
Municipalities
26,315
6,279
2,694
463
59
Percent of Municipalities
Percent of Population
Percent of Municipalities Which May Fail To Issue
G.O. Bonds /Obtain Bank Loans In Each Category*
Test I ***
21% (8 ****)
4 (3)
2 (0)
0 (0)
0 (0)
16 (7)
3 (2)
Test II
30% (12)
9 (9)
6 (6)
0 (0)
0 (0)
24 (11)
6 (5)
* Small communities generally do not issue general obligation bonds; instead they
get bank loans that are backed by the full faith and taxing powers of the
municipalities. The criteria used to determine G.O. bond failure are applicable
to small and large communities.

*** Test I: (a) Annual Debt Service ^ 0.2 and (b) Annual Debt Service >. 0.008
Municipal Revenues Market Value of
Taxable Property

Test II: (a) Annual Debt Service ^ 0.15 and (b) Annual Debt Service > 0.006
Municipal Revenues Market Value of
Taxable Property

**** Numbers within parentheses are baseline failures.
111-22
-------
1.0% and a G.O. bond test with threshold values for annual debt service
to municipal revenues, the debt service to market value of taxable
property of 0.2 and 0.008 respectively. The second scenario uses the
same user charge threshold, but decreases the two debt service
thresholds to 0.15 and 0.006 respectively. A larger number of cities
should fail the smaller threshold values of the bond test. Thus the two
scenarios provide a range of the percent of cities that may fail to
raise capital by pledging their full faith and credit. *

Table 111-10 shows that cities with populations of larger than
50,000 people are not expected to fail the test under either scenario.
This implies that large cities are not likely to have difficulty in
issuing general obligation debt to finance additional environmental
requirements. Even if their water and sewer systems are unable to issue
revenue bonds, the city governments have sufficient revenues and tax
bases to come to their rescue and obtain the required capital. The
picture is less favorable for small cities. Between 21% and 30% of
cities with populations under 2,500 fail this test. Therefore, about a
quarter of cities in this category may not be able to obtain money from
the capital markets. The current weak financial conditions of small
communities are responsible for some of the difficulty. Table 111-10
shows that 8.0% and 12.0% of the communities in the less than 2,500
person category are in poor financial health if tests I and II
respectively are used as the criteria for evaluation. These communities
are expected to find it difficult to issue general obligation bonds even
in the absence of regulations.

The combined costs of solid waste and other miscellaneous
regulations also contribute to the difficulty cities may have obtaining
the funding. Of those communities whose water or sewer systems fail to
issue revenue bonds, most are able to issue general obligation bonds or
otherwise get bank loans by pledging their full faith and credit. Table
III-ll shows the cumulative effect of solid waste and miscellaneous
* This study examined the G.O. bond failure rate at the 1.25% and 2.0%
thresholds for user charge. The results were found to be virtually
identical to those given in Table III-IO.
111-23
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TABLE III-11
POTENTIAL IMPACT OF MISCELLANEOUS AND SOLID WASTE REGULATIONS ON THE

ABILITY OF CITIES TO ISSUE GENERAL OBLIGATION BONDS/OBTAIN BANK LOANS*
Municipality Number
Size
Category
0 - 2,
2,500 - 10
10,000 - 50
of
Municipalities
500 26,315
,000 6,279
,000 2,694
50,000 - 250,000 463
Over 250,
Percent
Percent
000 59
of Municipalities
of Population
Percent of
May Fail
All
Regulations
211 **
4
2
0
0
16
4
Municipalities
To Issue G.
Which
0. Bonds
Miscellaneous
+ Solid Waste
181
3
1
0
0
14
3

Small communities generally do not issue G.O. bonds; instead,
they get bank loans that are backed by the full faith and
credit of the municipalities. The criteria used to determine
G.O. bond failure are applicable to small and large communities.

Analysis is based on the following thresholds:

(a) User Charge Threshold = 1.0%

(b) Annual Debt Service = 0.2
Municipal Revenues

(c) Annual Debt Service = 0.008
Market Value of
Taxable Property
111-24
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regulations. About 18% of the cities in the less-than-2,500-person
category have difficulty financing the solid waste and miscellaneous
regulations. Therefore, in those cases where cities need to cover the
additional costs of financing water and sewer regulations, an additional
3% of the cities in this size category may face financial constraints.

In summary, the regulations are likely to affect municipalities in
the following ways:

• Small communities with populations of fewer than 2,500 are likely to
experience the largest user charge increases,- as a result,
households in these communities are likely to pay a larger portion
of their income for environmental services than households in large
communities in the post-regulatory period. The largest impacts, in
terms of dollars, should be felt by the smallest (fewer than 2,500)
and the largest (greater than 250,000) size categories.

• The majority of water and sewer systems, in all city size
categories, should not have trouble raising money by means of
revenue bonds in the capital markets in the long term. However, it
is likely that between 12 and 26 percent of the systems in
communities with populations less than 2,500 will not be able to
raise money in the long term due to inadequate income. In addition,
between 16 and 18 percent of the water and sewer systems will find
it difficult to issue revenue bonds in the short term due to
budgetary deficits. These systems will have to adjust their budgets
and/or rates to obtain adequate revenues.

• Communities with populations over 50,000 should be able to issue
general obligation bonds. But some of the smaller communities are
likely to have difficulty issuing G.O. bonds. In other words, these
communities should experience greater difficulty in obtaining long-
term financing for environmental compliance. This impact would be
felt the hardest in the smallest size category with populations of
less than 2,500 where between 21 and 30 percent would be unable to
issue G.O. bonds.
111-25
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IV. LIMITATIONS OF THE STUDY

This study, by necessity, undertook several simplifying procedures and
made many assumptions. These are discussed below.

A. VALIDITY OF THE SAMPLE OF CITIES

Considerable care was taken to obtain a statistically valid sample
of cities. The cities from different size categories were selected
using random selection techniques. The validity of the sample is
indicated by many results of the baseline analysis that are consistent
with other EPA databases on costs and user charges for services.
Furthermore, the results were found to be internally consistent. For
example, the means and variances of user charges of the eight municipal
size categories had similar statistical characteristics. None of the
means was so different from others as to indicate unreasonable
results. This internal consistency indicates that the results of this
study are reflective of the total population of the cities in the
country. Still, one should keep in mind that the municipal database is
a relatively small sample of communities, and there is an element of
uncertainty about the inferences made from the sample to the entire
population. To reduce this uncertainty, EPA has collected data for 50
to 100 randomly selected additional small cities. Preliminary results
indicate that the means and variance of the new sample are virtually
similar to those of the earlier sample.

B. ADJUSTMENTS IN FINANCIAL CONDITIONS

The financial database was prepared using records from 1986
financial statements. The fiscal conditions of communities are
contingent upon many factors in the economy (e.g. inflation,
unemployment, international trade). Depending on the influence of the
economy, the financial conditions of municipalities may become better or
they may become worse than they were in 1986. Note that we are not
discussing financial conditions of specific municipalities in our
sample. This study does not attempt to address the future changes in
IV-1
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financial conditions of cities.

Another adjustment can be predicted with greater certainty. Some of
the regulations will go into effect in four or five years. Therefore,
the municipalities have sufficient lead time to make adjustments to
their financial conditions and to plan future debt issues. Whether or
not they have the willingness, foresight, and ability to make needed
adjusments is open to question.

In interpreting these results, one should take into account the
ability of municipalities to make fiscal adjusments, and the resulting
new standards of affordability. For example, practically all systems
subject to the regulations will eventually raise their user charges.
This means that the average user charges will increase to new levels.
The needed adjustments usually take several years, and they occur only
after all concerned parties (bankers, consumers, and the governments)
accept the environmental requirements and the associated increases.

The systems in strong financial condition, that is, whose post-
regulatory rates are expected to be below the thresholds will lead the
way. They should be able to get the needed capital, but it may take
them many years to raise the rates by the desired amounts. Some of
these strong communities may not be able to issue revenue bonds
immediately because of large rate increases. They may have to issue
either double barrel bonds that are supported by both system revenues
and the full faith and credit of the municipalities, or short-term
notes. Thus, the adjusment may take a long time. Some of the systems
whose post-regulatory rates are expected to exceed the thresholds may be
able to issue revenue bonds, but only after the systems with strong
financial health have demonstrated that they can successfully raise the
rate to cover the cost of new regulations.

C. CONSUMER WILLINGNESS AND FINANCIAL ABILITY

The financial willingness and ability criteria are heavily based
upon current household user fees and debt serviced by the
IV-2
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municipality. These criteria are limited in their ability to accurately
forecast the consumer's willingness to pay for environmental services.
The criteria serve as useful indicators, but only when local governments
make arrangements to raise fees or initiate a bond referendum to finance
new construction will the preferences be known. Indeed, EPA expects
that consumers, bankers, and governments eventually will accept the new
requirements and will be willing to pay much higher charges for improved
environmental services.

Many of these environmental services are goods for which consumers
can make some adjustments in their consumption patterns, so as prices
rise, their demand for the services may change. The study also fails to
allow for major changes in the production of environmental services,
some of which may decrease the eventual cost of meeting the
regulations. Municipalities may choose to enter into regional services
in order to take advantage of scale economies. They may choose to
privatize services, which could free them from the responsibility of
raising funds to finance the construction of facilities. They may also
purchase services from adjacent municipalities or special districts.
These actions may relieve the smaller communities of raising capital.

The impact evaluation criteria show if a municipality will have
difficulties when faced with the new requirements, in the absence of
other capital needs. Some municipalities may not have to reach the
thresholds used in the study before they find themselves constrained,
particularly in light of the large number of additional public works
demands being made of local governments. The criteria may, therefore,
be construed as being too conservative. The thresholds have been
developed using empirical data,- hence, they cannot be treated as
absolutes. The variables themselves are used by the financial
community for assessing financial conditions. PP&E Inc. conducted a
review of the variables and their thresholds by testing them on
financial conditions of selected cities and confirmed their suitability
for this study. The results of the review will be made available in the
near future.
IV-3
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D. LIMITED AVAILABILITY OF COST INFORMATION

Information on both the baseline costs as well as costs of new
regulations was limited. The cost of all environmental services is not
available from the financial reports of municipalities. For example,
the cost of complying with the asbestos regulations is not given in any
particular line item. In this study, the baseline environmental costs
were assumed to be the sum of drinking water, wastewater and solid waste
water services. These costs constitute between 80% and 90% of the total
costs. Therefore, the actual increase in user charges as a percent of
existing envronmental costs will be a little lower than those given in
the report.

Another consideration in interpreting the results of the study is
the limited set of EPA regulations that were included in the cost
analysis. Although more than 40 actions in the list of 85 considered in
the study were identified as having some implications for local
government, only 23 regulations were at that stage of development where
cost data were available. Several of the omitted requirements may
require significant investments in local government resources (e.g.,
asbestos in public buildings), or may lead to major changes in current
land use patterns (e. g., groundwater protection, nonpoint source
guidelines) . The results of this study therefore provide a somewhat
limited picture of the environmental needs of local governments. This
study captures only a portion of the total picture.

E. ENVIRONMENTAL SERVICES PROVIDED BY PRIVATE ORGANIZATIONS

The supply of environmental services to households is currently
undertaken by governmental units and private companies. The pattern of
supply varies for several reasons, including geographic, political,
economic, and historic or institutional considerations. In many parts
of the country private companies own and operate drinking water and
waste disposal operations. Wastewater treatment plants are, however,
predominantly owned and operated by governments. A small proportion --1
to 2 percent-- of the sewer systems are operated under service
IV-4
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contracts whereby the firm provides services for a fee. Over 50 percent
of community water systems are owned and operated by private investors,
associations, and institutions other than local governments. The
majority of these private operations are small systems serving fewer
than 1000 persons. Approximately 20 percent of municipal landfills are
owned and operated by private firms, and a large proportion of
governments owning landfills contract for collection services.

The issue of ownership is an important aspect to consider when
addressing the financial implications of an expanding environmental
program. Most private firms can directly bill consumers, when required,
to expand their operations without having to meet the financial and
legislative procedural requirements made of governments. Private firms,
unless regulated as a public utility, will not have to meet the voter's
approval on raising rates or incurring additional debt to fund capital
improvements. But they may be constrained in raising user fees, should
they wish to retain customers, when substitute services are available.
There are other issues surrounding aspects of public versus private
provision of environmental services, but these issues are beyond the
scope of this report.

F. CONSTRAINTS ON LOCAL GOVERNMENT DEBT FINANCING

The ability to issue new bonds or use other types of financing may
be constrained by many state and Federal statutes, and by the need to
improve all public infrastructures, including highways and rapid transit
systems. The analysis does not take into account the following
constraints that municipalities may face in issuing debt.

1. Tax and Expenditure Restrictions

Many state governments have legislated tax and expenditure
restrictions for local governments. These restrictions prevent local
governments from exceeding either the established tax rate or levies
(revenues) for a given fiscal year. Other limits are set on assessment
increases resulting from appreciating property values. Limits may be
IV-5
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placed on total debt incurred by a local government, expressed as a
percentage of taxable or assessed property values. Voter approval may
be required for a bond referendum, and the criteria for approval can be
strict (e. g., two-thirds majority vote, 80% approval of local council
members). There are many exceptions to the statutory limitations, and
few local governments have reached the limits set by state
governments. Nevertheless, with rapidly expanding environmental and
other public infrastructure needs, there may be instances where these
limits will be binding, particularly when large commitments fall upon
smaller governments.

2. The 1986 Tax Reform Act

An important action affecting capital financing by local governments
was the 1986 Tax Reform Act. Changes in the tax codes have implications
for financing mechanisms that enjoyed tax-exempt status under earlier
rules. Revenue and G.O. bonds or "governmental purpose" bonds will
maintain their tax-exempt status, provided that private involvement
represents less than 10 percent of the uses of the proceeds. when and
if tax-exempt status cannot be obtained, the investors will expect
higher interest rates and customers will have to pay higher user charge
rates to cover the higher cost of debt.

The new tax codes also have implications for private operation and
ownership of public facilities. Many of the tax advantages enjoyed by
private firms and local governments through public-private financing
have been eliminated. Limitations on tax-exempt status for private-
activity bonds do not void the option for private operation of public
facilities. Maintaining tax-exempt status for capital financing,
however, will require governments to retain ownership of, and
obligations for supplying, the environmental service. This will not
lead to noticeable differences in current practices, but it may affect
future capital financial decisions.
IV-6
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3. Infrastructure Outlays

Infrastructure constructed made during the 1950s to the 1970s are
reaching the end of their useful lives and are in need of rehabilitation
and replacement. New requirements have placed greater demands on
existing services, and reduced federal grant funding of programs is
placing greater responsibility for financing public works on local
governments. Government spending for public works has increased in real
terms from $60 billion in 1960 to $105 billion in 1985. However, public
works expenditures as a percentage of national economic indicators, such
as Gross National Product, have steadily declined from 3.5 percent to
2.5 percent over this same period. The proportionate rate of decline in
capital outlays has been more precipitous, falling from 2.3 percent to
1.1 percent.

Estimates of future public infrastructure needs have been prepared
by several private and governmental institutions (Table IV-1) . They
suggest that there are large current capital needs in all areas of
public infrastructure that will extend into the next century. These
projections do not include many of the costs that will be incurred when
meeting the additional EPA regulations examined in this study. The
reports on capital needs project major shortfalls in funding (Table IV-
2) . New environmental requirements will increase the size of these
shortfalls. It should be noted that analyses by the Office of
Management and Budget have suggested methods of better defining needs by
taking into account the consumers' willingness to pay for these
services. These methods may lower the overall level of estimated
capital needs and may show no shortfall at all. In any case, the
consumers are expected to continue to pay for all infrastructure needs
for the foreseeable future. The analysis in this report examines the
ability of communities to incur environmental expenditures only. Costs
of other infrastructure needs may make it difficult for some communities
to raise needed capital even for environmental projects.
IV-7
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TABLE IV-1

THREE NATIONAL NEEDS STUDIES;

COMPARISON OF ANNUAL CAPITAL INVESTMENT REQUIREMENTS

(In billions of 1982 dollars)
Infrastructure Category

Highways and Bridges
Other transportation (mass transit,
railroads, airports, ports, locks,
waterways)1
Drinking water
Wastewater treatment
Drainage
Total
ACG Study
(19 yr. ave.)
$ 62.8 "
17.5
6.9
25.4
5.6
CBO Study
(1983-90)
$27.2
11.1
7.7
6.6
NA
JEC Study
(1983-2000)
$ 40.0
9.9
5.3
9.1
d
$ 118.2 $ 52.6 $ 64.3
"The time frame for addressing needs varied by specific infrastructure category from 5 to 25 years and averaged 19 years.
Highways only. Bridges were estimated separately at an additional, one-time repair cost of $51.7 billion.
'Needs for locks and waterways were not available from the JEC study; and needs for railroads were not available from
the CBO study.
Included under wastewater treatment.
Source: Peterson, et. al, Infrastructure Needs Studies: A Critique, a
provement by The Urban Institute, July 1, 1986.
paper prepared for
the National Council on
Public Works Im-
AGC : Associated General Contractors of America
CBO : Congressional Budget Office
JEC : Joint Economic Committee
-------
TABLE IV-2

THREE NATIONAL NEEDS STUDIES;
COMPARISON OF ANNUAL CAPITAL INVESTMENT SHORTFALLS
(in billions of 1982 dollars)
Infrastructure Category

Highways and bridges
Other transportation
Drinking water
Wastewater treatment
Drainage
Total Shortfall
Total Shortfalls as a percentage
of total needs
ACG Study
(19 yr. ave.)
$ 44.8
4.8
4.5
18.4
NA
$ 71.7

60.7%
CBO Study
(1983-90)
b
b
b
NA
$ 17.4

33.170
JEC Study
(1983-2000)
$14.7
4.9
2.3
2.7
d

$ 24.6

38.3%
"The time frame for addressing needs varied by specific infrastructure category from 5 to 25 years and averaged 19 years.
Shortfall figures for individual infrastructure categories were not specified, but are included in the total.
'Ohter transportation includes mass transit, railroads, airports, ports, locks, and waterways. Shortfall estimates for railroads
were not available for the CBO study, and shortfalls for mass transit, airports and ports were not available for the AGC study.
Neither the AGC nor the JEC study estimated the shortfall for locks, waterways, dams, or the air traffic control system. These
however, are maintained in CBO's estimate of total annual shortfall.
Included under wastewater treatment.
Source: Peterson, et. al, Infrastructure Needs Studies: A Critique, a paper prepared for the National Council on Public
Works Improvement by the Urban Institute, July 1. 1986
AGC : Associated General Contractors of America
CBO : Congressional Budget Office
JEC : Joint Economic Committee
IV- <
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G. BOND ISSUING PROCESS

This study made two simplifying assumptions regarding the bond
issuing process. First, the study assumed that water and sewer systems
issue revenue bonds. In practice, however, it is the supporting cities
that conduct the required administrative tasks and issue bonds on behalf
of the systems. Second, the study assumed that cities prefer to issue
revenue bonds, but often it is cheaper to issue G.O. bonds. Therefore,
a city may choose G.O. bonds over revenue bonds, especially if the city
is in good financial condition.

For the above reasons, care should be taken in interpreting the
results of the study. One of the primary goals of this undertaking is
to better understand the difficulty of considering the ramifications of
proposed EPA actions on local governments. Whether or not the results
of this study can be used to accurately predict the number of
municipalities that will have difficulties in meeting these new
regulations is uncertain. The fact that EPA acknowledges the importance
of this information and has made an effort to tackle this issue, in and
of itself, is a positive step toward developing a better regulatory
process.
IV-10
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V. POLICY CONSIDERATIONS
The primary finding of the municipal sector study is that many small
and some large communities will face serious difficulty in raising the
capital needed to improve environmental services. The problem is partly
due to the timing of the needs -- a large new set of requirements to be
met in a fairly short time period -- partly due to weak financial
conditions of water and sewer systems and municipalities.

A number of activities have been suggested to support the efforts of
all communities to comply with environmental regulations.

A. PUBLIC EDUCATION INITIATIVES

Public education has two purposes. First, making the people aware
of the potential net benefits to be gained by investing in environmental
protection should increase their stated willingness to pay for the
project or service. Second, where the environmental benefits are
diffuse and it is difficult to assign benefits to specific groups of
payers (e. g., long-distance air pollution), moral suasion may improve
compliance as people become aware of the larger cooperative undertaking
that is being proposed. Public notification reqirements, and efforts
to better communicate informtion on pollution risks, are but a few of
the methods at the disposal of federal, state and local governments for
including the public in establishing environmental programs and setting
priorities.

B. TECHNICAL ASSISTANCE INITIATIVES

1. Technical Assistance

In many cases, small communities do not need full-time personnel in
all specialties or service areas. Provision (for a fee) of such
services by a central authority, either the federal government or state
V-l
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governments could allow small communities to gain from economies of
scale and scope.

Such technical assistance programs could take the form of either
guidance -- such as sharing scientific, technical, or management
information -- or such technical services as supplying laboratory or
engineering services. In addition, educational institutions (technical
and academic) can continue to play an important role in working with
local communities in need of their particular levels of expertise.

2. Public Partnerships

Partnerships provide an informal mechanism for communities to share
expertise, to pruchase services and goods in larger volumes for
discounts, and, more formally, to raise capital in larger, more cost-
effective blocks. Partnerships between unequal entities could be
encouraged by providing incentives to the larger (wealthier) partner.
Potential partners include large cities and small cities, well-to-do
cities and poor cities, and urban cities and rural cities.

3. Regionalization

Regionalization is a more structured form of partnership, in which
two or more communities create a joint venture for a particular purpose,
such as construction of a water supply system. This action allows a
variety of efficiency gains, including economies of scale and scope, and
large-volume purchase discounts. The use of regionalized services may
be more suitable for some environmental services, but not necessarily
for all services. For example, in those instances where regionalization
may lead to a central waste collection and disposal service and to
concentration of pollution risks, the centralization of treatment and
disposal operations must be examined.
V-2
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C. FINANCIAL INITIATIVES

1. Reform of Existing Rate Structure

In cases where the basic management structure is in place, rate
reform may still be needed. Rate reform may include raising the level
of rates (increasing revenue) or changing the rate structure (e.g.,
instituting marginal cost pricing, including peak load pricing when
appropriate) . Communities can examine current rate structures to insure
that rates are generating revenues equal to the full cost of services.
Current provisions for obtaining federal grants include this element,
and efforts are underway to evaluate whether communities have been
establishing suitable rate structures.

2. Development Taxes

Special taxes may be levied in areas undergoing rapid growth and
development. These assessments could be earmarked for the improvement
of environmental services and could be levied on developers directly or
on property owners who expect to profit from development. As
environmental improvements often affect property values, a similar
approach might be used even in relatively low-growth areas. Many
specific versions of development taxes have been devised. A few of the
more common are:

• ad valorem on property;
• exactions from developers (in kind or cash); and
• tax incremental financing (tax rates are not
changed, but as property values rise, property tax
revenues above a baseline are devoted to special
uses, such as sewage system construction or road
building).
V-3
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3. Special Revenue Districts

Certain geographic areas, within one political jurisdiction or
several jurisdictions, are created for the purpose of raising revenue
from residents in the area to be used for specified purposes. Examples
include road districts, sewer and water districts, or other types of
local service districts.

4. Enterprise Fund Management

Utilities or enterprise fund management systems are used to ensure
that revenues raised from certain groups of payers are used for the
intended purpose and are managed according to sound financial
principles. Organizations of these types can help to balance costs and
revenues by improving financial management and, therefore, can improve
access to capital markets.

5. Direct Financial Assistance

Direct financial assistance may be appropriate for low-income
communities where it is agreed that the environmental protection
services should be made available to all citizens, regardless of ability
to pay. it may be appropriate to provide assistance only to those
communities that fail an "income" or other "means" test. Such
assistance could be from state governments, which would need to consider
adopting appropriate tests for directing financial assistance, and
utilizing them in a consistent manner across their states. Direct
financial assistance could be in the form of either grants or loans for
communities that cannot afford the services in the long run or loans for
communities that are experiencing short-term cash-flow problems.
V-4
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D. OTHER ACTIONS

1. Extended Compliance Schedules

If certain environmental regulations do not seem reasonable for a
specific group of people, or if the timing of the compliance schedule is
not reasonable, then a delay of the regulation or a permanent exemption
may be appropriate. Such actions should only be allowed subject to
certain constraints, such as that no "unreasonable risk to health" would
be created. In all instances, the ability to grant exemptions is
dictated by existing legislation. Several existing laws allow for
exemptions, but the rules are not consistent, and do not dictate what
measures should be consided when allowing for an exemption. The EPA
does not have an internally consistent method for determining when the
costs of a requirement are unaffordable, either to the household, or for
purposes of evaluating the cumulative economic impacts of its
programs. Efforts are underway within EPA to resolve existing
inconsistencies, and establish a protocol for granting exemptions where
allowed for by law.

2. Privatization

Communities can explore methods of working with private companies to
assist in the provision of environmental services. Several aspects of
privatization include:

• Private sector ownership, construction and/or operation
facilities (reduce cost of services by taking advantage of
economic and/or administrative efficiencies
• Private financing of new capital formation, or refinancing
existing financial obligations (reduce financial obligations
of community).

Private companies have been involved in the provision of several
environmental activities, particularly solid waste and drinking water
services, and a growing number of companies are expressing interest in
providing wastewater treatment services.
V-5
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Despite the potential advantages of public/private partnerships, the
current supply of private firms is relatively small. Private
involvement in many environmental services can be affected by federal
and state tax requirements, several of which have undergone significant
revisions in recent years. Some of the revisions have reduced the tax
advantages of public/private ownership, in addition, decisions to use
private companies require considerable effort in establishing
contractual arrangements and liability responsibilities in cases of
damages or permit violations. EPA is currently investigating this issue
in greater depth, and plans to hold several conferences with experts in
the field and interested parties in the coming months.

E. ADDITIONAL RESEARCH

An important finding of the municipal sector study is that not all
small communities are expected to face financial difficulties. This
fact suggests that further analysis should be conducted to identify the
characteristics of small communities that make them more likely to
experience difficulty in financing and affording new environmental
protection. For example, does a problem typically arise in small
communities that are:

• very small or sparsely populated (lack economies of scale and
scope),
• poorly managed (have poor access to financial markets) ,
• low income (are unable to afford environmental protection),
• rural (have poor access to technical services),
• uninformed (lack understanding of the importance of
environmental protection),
• facing significant environmental burdens (are currently
investing an above average amount of resources to combat
existing pollution problems), or
• located in a particular state (are some states more aggressive
in assisting their financially constrained communities) ?

If EPA could identify those characteristics of small communities that
-------
inhibit compliance with environmental regulations, then it could design
an assistance strategy that is targeted to the sources of the problem.
V-7
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APPENDIX A
BASELINE DATA
-------
APPENDIX A - BASELINE DATA
Table of Contents
I. GENERAL DATA DESCRIPTION

Table A-l: Number of POTWs by Flow Category

Table A-2: Distribution of Municipal Database Sample
by Municipality Size Categories

Table A-3: Municipalities Responding to PP&E's User Charge Survey

Exhibit A-l: Data Extracted from Financial Reports

II. WATER BASELINE DESCRIPTION

Table A-4: Water Charges as Percent of Gross Household
Income

Figure A-l: Water Charges as Percent of Gross Household
Income (All Communities)

Figure A-2: Water Charges as Percent of Gross Household
Income (Communities with populations less than 2,500)

Figure A-3: Water Charges as Percent of Gross Household Income
(Communities with populations between 2,500 and 10,000)

Figure A-4: Water Charges as Percent of Gross Household Income
(Communities with populations greater than 10,000)

Figure A-5: Annual Household Expenditures for Water

III. SEWER BASELINE DESCRIPTION

Table A-5: Sewer Charges as Percent of Gross Household Income

Figure A-6: Sewer Charges as Percent of Gross Household Income
(All Communities)

Figure A-7: Sewer Charges as Percent of Gross Household Income
(Communities with populations less than 2,500)

Figure A-8: Sewer Charges as Percent of Gross Household Income
(Communities with populations between 2,500 and 10,000)

Figure A-9: Sewer Charges as Percent of Gross Household Income
(Communities with populations greater than 10,000)

Figure A-10: Annual Household Expenditures for Sewer
-------
IV. SOLID WASTE BASELINE DESCRIPTION

Table A-6: Solid Waste Charges as Percent of Household Income

Figure A-ll: Cost of Solid Waste Services as Percent of
Gross Household Income (All Communities)

Figure A-12: Cost of Solid Waste Services as Percent of
Gross Household Income (Communities with
populations less than 2,500)

Figure A-13: Cost of Solid Waste Services as Percent of
Gross Household Income (Communities with
populations between 2,500 and 10,000)

Figure A-14: Cost of Solid Waste Services as Percent of
Gross Household Income (Communities with)
populations greater than 10,000)

Figure A-15: Annual Household Expenditures for Solid Waste

V. GENERAL OBLIGATION BASELINE

Table A-7: Debt Ratios

Table A-8: Derivation of Debt Ratio Threshold Limits

Figure A-16: Distribution of the Ratio Annual Debt Service to
Government Revenues (All Communities)

Figure A-17: Distribution of the Ratio Annual Debt Service to
Government Revenues (Communities with populations less
than 2,500)

Figure A-18: Distribution of the Ratio Annual Debt Service to
Government Revenues (Communities with populations
greater than 2,500)

Figure A-19: Distribution of the Ratio Annual Debt Service to Market
Value of Taxable Property (All Communities)
-------
I. GENERAL DESCRIPTION OF THE DATA

A. THE SAMPLE

The sample was taken from a population of approximately 12,000
Publicly Owned Treatment Works. Sample cases were selected by means of
a stratified random sample for five different flow ranges (Table A-l) .
Of the 700 local governments in the sample 285 responded by sending
various financial documents. The final database for the Municipal
Sector consists of 270 cases (Tables A-2, A-3) .

The local governments in the sample were contacted several times.
First, all 700 communities were reached by telephone in order to explain
what was needed and to find out to whom the request should be sent.
Then letters were mailed to all the communities. A few weeks after the
first round of letters had been sent, follow up letters were sent to
everyone who had yet to respond. After this stage, hundreds of calls
were made to obtain information from those who failed to respond and to
get additional specific data for the purpose of completing the study
The result of this effort was a relatively high response rate.

B. DATA EXTRACTION

Various types of documents were received by local governments and
authorities including:

• Comprehensive Annual Financial Reports.
• Official General Obligation and Revenue Bond
Statements.
• Water and Sewer system annual and financial reports.
• Ordinances and service rate schedules.
• Various types of planning reports.

Specific financial and debt information was extracted from the
documents. The data includes: environmental expenses and revenues
A-l
-------
TABLE A-l
NUMBER OF SELECTED POTWs
BY FLOW CATEGORY
(Providing Secondary or Greater Treatment)
Flow Ranges
(mgd)
less
0.01
0.11
1.01
2.01
10.01
than 0.01
- 0.10
- 1.0
- 2.0
- 10.0
and up
Number of
Plants
445
2,759
5,381
1,031
1,450
494
11,560
Number Selected
for Sample
-0-
144
149
132
140
132
697
Source: 1986 Needs Survey Database and PP&E analysis
A-2
-------
TABLE A-2

Distribution of Municipal Database Sample
by Municipality Size Categories
Municipality Size Number in Sample
Categories
Average Household
Income
0 - 2,500

2,500 - 10,000

10,000 - 50,000

50,000 - 250,000

> 250,000
59
55
83
54
19
$ 24,505

$ 29,336

$ 30,438

$ 33,343

$ 32,238
TOTAL
270
A-3
-------
TABLE A-3
CITIES RESPONDING TO PP&E'S
CITY

TRUSSVILLE AL
OXFORD
SPRINGVILLE AL
ULM
SILOAM SPRINGS AR
JUDSONIA
SULPHUR SPRINGS AR
SCOTTSDALE AZ
TUCSON
PALO ALTO
SEASIDE
STOCKTON
NOVATO
LOMPOC
RIVERSIDE
PETALUMA
IRVINE
SO SAN FRANCISO CA
REDDING
SANTA BARBARA CA
HAYWARD
ESTES PARK
GLENWOOD SPRS CO
HOTCHKISS CO
MILLIKEN
Northglenn
FORT COLLINS CO
ECKLEY
LONGMONT
NEW LONDON CT
NORWALK
HARTFORD
BRIDGEPORT CT
Dover
BRADENTON FL
WNTER HAVEN FL
PORT ST JOE FL
PENSACOLA FL
PLANTATION FL
Atlanta
DALTON
AUGUSTA
MACON
GRIFFIN
ANAMOSA
UNDERWOOD IA
DUBUQUE
MERRILL

ST
AL
AL
AL
AR
i AR
AR
SAR
AZ
AZ
CA
CA
CA
CA
CA
CA
CA
CA
)CA
CA
iCA
CA
CO
iCO
CO
CO
CO
CO
CO
CO
CT
CT
CT
CT
DE
FL
1FL
FL
FL
FL
GA
GA
GA
GA
GA
IA
IA
IA
IA

CITY
HARLAN
FAIRFAX
CARROLL
BEACON
ORANGE CITY
BOXHOLM
WEISER
SANDPOINT
SYCAMORE
OTTAWA
URBANA
SPRING VALLEY
WAUKEGAN
ROCK FALLS
CRYSTAL LAKE
ELGIN
DURAND
BOLINGBROOK
MAHOMET
AURORA
CARTERVILLE
QUINCY
HEYWORTH
DONGOLA
CORDOVA
SPRINGFIELD
COLUMBUS
RUSHVILLE
EVANSVILLE
ELWOOD
MORGANTOWN
ABILENE
WELLINGTON
Kansas City
Shawnee
EDGERTOWN
KENSINGTON
TOPEKA
HUTCHINSON
HERINGTON
CONCORDIA
OVERLAND PARK
MIDDLESBORO
MONROE
SAREPTA
OAK GROVE
HOUMA
THIBODAUX

ST
IA
IA
IA
IA
IA
IA
ID
ID
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IL
IN
IN
IN
IN
IN
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KY
LA
LA
LA
LA
LA
USER
CITY
FITCHBURG
MILFORD
LOWELL
MONTAGUE
LAWRENCE
GAITHERSBURG
Rockville
Upper Marlboro
CHURCHTON
WATERVILLE
PORTLAND
OLD ORCHARD BEA
PITTSFIELD
CHARGE SURVEY
ST
MA
MA
MA
MA
MA
MD
MD
MD
MD
ME
ME
MIE
ME
THREE RIVERS Ml
GRAND RAPIDS
FLINT
NILES
BAY CITY
CADILLAC
ADRIAN
SCOTVILLE
DETROIT
MILFORD
SHAKOPEE
GRAND RAPIDS
GLYNDON
STARBUCK
RICHMOND
WINONA
RENVILLE
MOTLEY
STEPHEN
ALDEN
FORESTON
FRANKFORD
ST. JAMES
HERMITAGE
Hillsboro
URBANA
CALHOUN
WARRENSBURG
KANSAS CITY
INDEPENDENCE
ASHLAND
GREENVILLE
OCEAN SPRINGS
ARTESIA
MOSS POINT
Ml
Ml
Ml
CITY
JACKSON
CORINTH
ST
Ms
Ms
ROANOKE RAPIDS NC
DURHAM
BOILING SPRS
Greensboro
WINSTON-SALEM
BUNN
MONROE
WILLIAMSTON
CHARLOTTE
GASTONIA
ALBEMARLE
THOMASVILLE
CANDO
RUGBY
YORK
Ml SIDNEY
Ml
Ml
Ml
Ml
Ml
MN
MN
MN
MN
MN
MN
MN
MN
MN
MN
MN
MO
MO
MO
MO
MO
MO
MO
MO
MO
MS
MS
MS
MS
MS
GRAND ISLAND
FRIEND
SCOTTSBLUFF
BROWNVILLE
TECUMSEH
CONCORD
LAMBERTVILLE
CHERRY HILL
BRIDGETON
RARITAN TWP
NC
NC
NC
NC
NC
NC
NC
NC
NC
CITY
ORRVILLE
MAUHEE
STEUBENVILLE
TROY
RAVENNA
GREENVILLE
VANDALIAI
BATAVIA
ANDOVER
MCALESTER
ARDMORE
WOODWARD
NCCHOCTAW
NC
ND
LINCOLN CITY
DALLAS
ND REEDSPORT
NE
NE
NE
NE
NE
NE
NE
NH
NJ
NJ
NJ
NJ
MOUNT LAUREL TWNJ
HADDONFIELD
ROSWELL
JEMEZ SPRINGS
ARTESIA
LAS VEGAS
GREENE
SUFFERN
LONG BEACH
ROCHESTER
MAYBROOK
HORNELL
ARCADE
NORTH TONAWAND/
WALLKILL
OBERLIN
NJ
NM
NM
NM
NV
NY
NY
NY
NY
NY
NY
NY
\NY
NY
OH
Cleveland City OH
DAYTON
LOGAN
LIMA
OH
OH
OH
HERMISTON
CANBY
LANCASTER
CHAMBERSBURG
TOPTON
SAEGERTONN
PITTSBURGH
INDIANA
PALMYRA
MYERSTOUN
SLATINGTON
CHARLEROI
CLAIRTON
YORK
LEWISBURG
IRWIN
NEW BRIGHTON
UNION
GREENVILLE
MYRTLE BEACH
GAFFNEY
GAFFNEY
AIKEN
SPRINGFIELD
SHELBYVILLE
MEMPHIS
OAK RIDGE
Nashville
SPRINGFIELD
CLEVELAND
GALVESTON
FARMERSVILLE
ST
OH
OH
OH
OH
OH
OH
OH
OH
OH
OK
OK
OK
OK
OR
OR
OR
OR
OR
PA
PA
PA
PA
PA
PA
PA
PA
PA
PA
PA
PA
PA
PA
Pa
SC
SC
SC
SC
SC
SC
SD
TN
TN
TN
TM
TN
TN
TX
TX
CITY
KNOX CITY
FREEPORT
WEBSTER
PALESTINE
CALDWELL
BRENHAM
ST
TX
TX
TX
TX
TX
TX
RICHARDSON TX
HOUSTON
TX
WICHITA FALLS TX
ROBERT LEE
DALLAS
EL PASO
TYLER
TX
TX
TX
TX
CORPUS CHRISTI TX
LOGAN
SALT LAKE CITY
UT
UT
LURAY.TOWNOFVA
CHRISTIANSBURG
ROANOKE
NEWPORT NEWS
EVERETT
WENATCHEE
OAK HARBOR
VANCOUVER
TACONA
WINLOCK
SILVER LAKE
GREEN BAY
BEAR CREEK
DE PERE
ELEVA
ETTRICK
WATERTOUN
WILTON
KENOSHA
HUDSON
BELOIT
CASHTON
Parkersburg
BLUEFIELD
CHARLESTON
LA BARGE
KEMMERER

VA
VA
VA
WA
WA
WA
WA
WA
WA
Wl
Wl
Wl
Wl
Wl
Wl
Wl
Wl
Wl
Wl
Wl
Wl
wv
wv
wv
WY
WY

A-4
-------
information regarding residential use; numerous items concerning debt
and debt service,- general government revenues; and, market value of
taxable property (Exhibit A-l) .

C. THE QUALITY OF THE DATA

The financial data was gathered from over 1,000 documents and over
500 telephone calls for additional specific information. The financial
documents were thoroughly examined . Approximately one half of a man-
year was spent analyzing, assimilating and compiling the data.

As a result of this massive effort, many costs were accurately
identifed. For example, the percentage of total revenues from
residential users was ascertained as well as the number of households
using a particular system or service. Another example was the discovery
of what households were actually paying for their water and sewer
services. Specifically, it was determined whether general obligation
debt (for water and/or sewer) was serviced by general funds (i.e.
property taxes) or enterprise funds (i.e. user fees).

D. THE VALIDITY OF THE DATA

The baseline data was compared, to the extent possible, with census
results. These comparisons, which allowed for inflation and other
factors, revealed only small (e.g. 5 percent) discrepancies in the
baseline data.

Furthermore, 95% confidence intervals were calculated for sewer,
water, and solid waste means, with excellent results. The mean of
annual household income for sewer was 0.44 % with a confidence interval
of plus or minus 0.03 %; for water the mean was 0.53% with a confidence
interval of plus or minus 0.04 %; and for solid waste the mean was 0.32
% with a connfidence interval of plus or minus 0.04 %.
A-5
-------
EXHIBIT A-l

DATA BEING EXTRACTED FROM

FINANCIAL REPORTS OF CITIES IN THE STUDY

CITY: DATE : SEWER REV. RATING: /
G.O. BOND RATING: /
Moody'S/S&P

1. ENVIRONMENTAL EXPENSES
(Source: Enterprise Fund/General Fund)

SEWER WATER SOLID WASTE

PAGE #, DOCUMENT:

O&M:

DEPRECIATION
Less Depreciation on
contributed assets

INTEREST EXPENSE

Less INTEREST REVENUE

Other Non-Operating
Expenses less Revenue

G.O. BOND Int.
(Source: Debt
Service Fund) Princ.

Other (e.g. Extraordinary
loss/gain on refunding:

TOTAL

REVENUES

Net Transfers out

Increase in
Retained Earnings
A-6
-------
II. HOUSEHOLDS

# of Households:

# of Service Conn.

Population

Monthly Charge:
(9,000 gal/mo.)

III. SEWER/WATER USERS

Residential:

Commercial:

Industrial:
Pg/Doc.
Pg/Doc.
NUMBER
FLOW
REVENUES
Pg/Doc.
Pg/Doc.
IV. DEBT
Annual debt service (prin. & int.)
(Source: Governmental fund types)
(Debt Service, General Fund &
Special Revenue):
General Obligation Debt:

Enterprise G.O. Debt:

Revenue Debt:

Other:

Total Direct Long-term Debt:

Overlapping Debt:
Total Direct and Overlapping Debt:

Legal Debt Limit:

Legal Debt Margin:

Voting

Nonvoting:
A-7
-------
Revenue Debt Margin:

Voting:

Nonvoting:

V. LOCAL GOVERNMENT REVENUES

General Fund:

Special Revenue:

Debt Service:

Capital Projects:

Special Assessment:

Expendable Trust:

TOTAL

VI. TAXABLE PROPERTY

Market Value of Property:

OR Calculate Market Value

Assessed Value:

Assessment Rate:

OR Calculate Assessment Value

Property Tax Rate:

Property Taxes Collected:
A-1
-------
II. WATER BASELINE DESCRIPTION

The average household pays approximately one half of one percent
(0.532%) of its gross income on water (Figure A-l) . The average for
households in municipalities with populations of less than 2,500 is
higher (0.562%) (Figure A-2). The percent of gross household income
devoted to water services is also higher for municipalities with
populations between 2,500 and 10,000 than it is for the overall average
(Figure A-3) . The average for large municipalities with populations
over 10,000 is smaller (0.501%) than the national average (Figure A-4).
Residents of smaller municipalities typically pay a higher percent of
their gross income on water services than do residents of larger
municipalities.

The national mean and standard deviation were calculated to be 0.53%
and 0.29%, respectively. For the purposes of this study, we developed
three thresholds, 1.0 %, 1.25 % and 2.0 %, that represent varying
degrees of excessive user charges (Table A-4) .

The average annual household expenditure for water services is $149
for the nation (Figure A-5).
A-!
-------
TABLE A-4
WATER CHARGES AS A PERCENT OF HOUSEHOLD INCOME
Size Category
Less than 2,500
2,500 - 10,000
Greater than 10,000
All Cases
Number of
Cases
35
34
101
170
Mean
.562
.59
.501
.532
Standard
Deviation
.303
.351
.262
.293
A-10
-------
WATER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME
(All Communities)
FIGURE A-1
u

B
z
w
o
I
45

40 -

35 -

30 -

25 -

15 H

5
0
T-
.00-.25 .25-.50 .50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75
PERCENT OF HOUSEHOLD INCOME
i
1.75-
A-ll
-------
WATER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME"
(Communities with Population
Less Than 2,500)
If,
o
z
w
c
w
a.
10
FIGURE A-2
.00-.25 .25-.50 .50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75
PERCENT OF HOUSEHOLD INCOME
1.75-
A-12
-------
45
If.
to
r
z
i»
o
40 -

35 -

30 -

10 •

5 •
WATER USER CHARGES AS PERCENT

OF GROSS HOUSEHOLD INCOME

(Communities with Population

Between 2,500 and 10,000)
FIGURE A-3
S77,
.00-.25 .25-.50 .50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75 1.75-

PERCENT OF HOUSEHOLD INCOME
A-13
-------
WATER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME"
(Communities with Population
Greater Than 10,000)
FIGURE A-4
tn
IM
K
O
5
c
u
45
40 -
i i i r-
.00-.25 .25-.50 .50-.75 .75-1.0 1.00-1.25 1.25-1
.50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75 1.75-
PERCENT OF HOUSEHOLD INCOME
A-14
-------
ANNUAL HOUSEHOLD EXPENDITURES FOR WATER
[In Dollars)
FIGURE A-5
(A
V
If!
<
o
z
Ml
u
<$75 $75-$125 $125-$175 $175-$225 $225-$275 $275-$325

DOLLARS PER HOUSEHOLD
>$325
A-15
-------
Ill. SEWER BASELINE DESCRIPTION

The average annual household expenditure for sewer is 0.44 percent
of gross household income (Table A-5 and Figure A-6) . This average was
also determined for three population categories: communities under
2,500 (0.511%); communities between 2,500 and 10,000 (0.442%) and;
communities over 10,000 (0.426%). (See Figures A-7, A-8, and A-9) .
Smaller communities (less than 2,500), on the average pay significantly
more per household for wasewater services (19.8%) than larger
communities (over 10,000). This is a relatively greater difference than
that found in drinking water user fees compared with water costs.
Wastewater facilities are more capital intensive. Some of the
difference between the two is attributable to economies of scale in the
production of wastewater treatment. There may also be a reluctance on
the part of smaller communities to recover the final costs of water
treatment through user fees, and rely instead on partial recovery
through general revenues (e.g., property taxes).

The national mean and standard deviation were calculated to be 0.44%
and 0.25%, respectively. For the purposes of this study, we developed
three thresholds, 1.0 %, 1.25 % and 2.0 %, that represent varying
degrees of excessive user charges.

The average annual household expenditure for sewer services is $127
(Figure A-10) .
A-16
-------
TABLE A-5
SEWER CHARGES AS A PERCENT OF HOUSEHOLD INCOME
Size Category
Less than 2,500
2,500 - 10,000
Greater than 10,000
All Cases
Number of
Cases
48
51
132
231
Mean
.511
.442
.426
.447
Standard
Deviation
.337
.203
.226
.251
A-17
-------
SEWER USER CHARGES AS PERCENT

OF GROSS HOUSEHOLD INCOME
(All Communities)
FIGURE A-6
M
-------
SEWER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME
(Communities with Population
Less Than 2,500)
FIGURE A-7
o
_rf
o
.00-.25
.25-.50
.50-.75
.75-1.0 1.00-1.25 1.25-1.50 1.50-1.75 1.75-
PERCENT OF HOUSEHOLD INCOME
A-19
-------
SEWER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME
(CommunitieswithPopulation
Between 2,500 and 10,000)
FIGURE A-8
^
o
z
b
u
10
.00-.25
.25-.50 .50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75

PERCENT OF HOUSEHOLD INCOME
A-20
-------
SEWER USER CHARGES AS PERCENT
OF GROSS HOUSEHOLD INCOME
(Communities with Population
Greater Than 10,000)
FIGURE A-9
M
U
<
O

o
I
O
5
.00-.25
.25-.50
.50-.75 .75-1.0 1.00-1.25 1.25-1.50 1.50-1.75 1.75-
PERCENT OF HOUSEHOLD INCOME
A-21
-------
ANNUAL HOUSEHOLD EXPENDITURES FOR SEWER

(In Dollars)
FIGURE A-10
y.
w
IB

o
c
^

&
40
35
30 -
25 -
20
15 -\j
10 -'
5 -/
m
<$75 $75-$125 $125-$175 $175-$225 $225-$275 $275-$325

DOLLARS PER HOUSEHOLD
$325<
A-22
-------
IV. SOLID WASTE BASELINE DESCRIPTION

In many communities, residents pay for private solid waste disposal
services; hence the data obtained in financial requests represents only
the costs of solid waste disposal when the service is provided by the
municipality. Based on the data available from the financial reports of
these cities, the average annual household expenditure for solid waste
services (collection and landfill) is 0.32 percent of gross household
income (Table A-6 and Figure A-ll). This percentage varies
significantly depending on the size of the population: communities with
populations less than 2,500 (0.213%); communities with populations
between 2,500 and 10,000 (0.321 %) ; and communities with populations
greater than 10,000 (0.351 %) . (Figures A-12, A-13 and A-14) .

The average annual household expense for solid waste is $ 92 (Figure
A-15) .
A-23
-------
TABLE A-6
SOLID WASTE CHARGES AS A PERCENT OF HOUSEHOLD INCOME*

Size Category
Less than 2,500
2,500 - 10,000
Greater than 10,000
All Cases
Number of
Cases
16
19
67
102

Mean
.213
.321
.351
.32
Standard
Deviation
.093
.239
.228
.22
*These costs represent costs paid by the city and exclude
costs paid by consumers directly to disposal service
companies.
A-24
-------
*COST OF SOLID WASTE SERVICES AS
PERCENT OF GROSS HOUSEHOLD INCOME
(All Cities)
FIGURE A-11
n
u
,/
B
o
.00-.25 .25-.50 .50-.75 .75-1.00 1.00-1.25 1.25-1.50 1.50-1.75 1.75-

PERCENT OF HOUSEHOLD INCOME
*These costs represent costs paid by the city and exclude costs
paid by consumers directly to disposal service companies.
A-25
-------
M

O
_)

o
z
hf
O
*COST OF SOLID WASTE SERVICES AS

PERCENT OF GROSS HOUSEHOLD INCOME

(Communities with Population

Less Than 2,500)
FIGURE A-12
20.
10-
//7s
.00-.25 .25-.50 .50-.75 .75-1.00 1.00-1.25 1.25-1.50 1.50-1.75 1.75-

PERCENT OF HOUSEHOLD INCOME
*These costs represent costs paid by the city and exclude costs
paid by consumers directly to disposal service companies.
A-26
-------
*COST OF SOLID WASTE SERVICES AS
PERCENT OF GROSS HOUSEHOLD INCOME
(Communities with Population

Between 2,500 and 10,000)
FIGURE A-13
u
_J
<
fv
*.
^

c
f~
z
.00-.25
.25-.50
.50-.75 .75-1.00 1.00-1.25 1.25-1.50 1.50-1.75 1.75-

PERCENT OF HOUSEHOLD INCOME
*These costs represent costs paid by the city and exclude costs
paid by consumers directly to disposal service companies.
A-27
-------
*COST OF SOLID WASTE SERVICES AS
PERCENT OF GROSS HOUSEHOLD INCOME
(Communities with Population
Greater Than 10,000)
FIGURE A-14
K
U
«<

c
u
o
_L
.00-.25 .25-.50 .50-.75 .75-1.00 1.00-1.25 1.25-1.50 1.50-1.75 1.75-

PERCENT OF HOUSEHOLD INCOME
*These costs represent costs paid by the city and exclude costs
paid by consumers directly to disposal service companies.
A-28
-------
ANNUAL HOUSEHOLD EXPENDITURES FOR SOLID WASTE

(In Dollars)
FIGURE A-15
u
.J

5
o
<$50
$50-$100 $100-$150

DOLLARS PER HOUSEHOLD
> $150
A-29
-------
V. GENERAL OBLIGATION BASELINE DATA

A. All Cases

Two tests were devised to predict whether or not a community could
issue general obligation debt. The first test is based on the ratio of
the community's annual debt service to general government revenues, and
the second is based on the ratio of annual debt service to total market
value of taxable property (Table A-7). These two ratios are a good
reflection of the financial condition of a municipality. Furthermore,
there is a high correlation between these ratios and other financial
ratios used in municipal credit analysis. These ratios also provide an
indication of how much additional debt can be supported by the
municipality.

The baseline average for the first ratio, debt service to government
revenues, is 8.1 %. In other words, communities devote, on the average,
8 % of their revenues to meet their debt service needs (Figure A-16).
This average is higher (10.5 %) for communities with populations less
than 2,500. There is also a very high standard deviation for small
communities. This is understandable because small communities either
have no general obligation debt, or if they do, it constitutes a
relatively high percentage of their revenues. Accordingly, there is a
bimodal distribution of this ratio for small communities (Figure A-17).
The second ratio, debt service to market value of property has a
baseline average of 0.22 percent for all communities (Figure A-19).

B. Baa-rated Cases

The purpose of the general obligation bond test, as with other parts
of the MUNFIN model, is to simulate some of the decisions made in the
municipal bond market. In this market, the ability of a municipality to
issue general obligation bonds at affordable interest rates largely
depends on the bond rating. The threshold limits in the model represent
points beyond which communities will experience great difficulty in
A-30
-------
attempting to issue general obligation debt.

Threshold limits were determined by examining a sample of
financially weak communities within the overall municipal database. The
selection was based on the community's bond rating. Approximately 30
communities were chosen that have a Baa bond rating, the lowest
investment grade bond rating possible. The Baa bond rating indicates
that the bonds are neither highly nor poorly secured. Ratings below Baa
denote that the bond issue is either speculative or in some form of
default.

The calculated means of the debt ratios for the Baa cases are
significantly higher than for the municipal database (which includes all
the Baa cases and many unrated cases) . The means °f the ratio of debt
service to government revenues are 8 % for the complete database and 12
% for the Baa sample (Tables A-7, A-8). The means of the ratio of debt
service to market value of taxable property are 0.005 for the complete
database and 0.008 for the Baa sample (Tables A-7, A-8).

The threshold limits for the two ratios were set at the mean plus
one standard deviation. The limits are 0.20 and 0.008 for the debt
service to government revenues ratio and the debt service to market
value of property ratio, respectively (Table A-8). The debt service to
government revenues threshold limit of 20 percent is similar to the mean
plus one standard deviation of the municipalities with populations less
than 2,500. This implies that the smaller municipalities are less able
to cope with increased debt service expenses. This has been confirmed
by other baseline analyses which show that a higher proportion of the
small municipalities exceed the threshold limits than do other
municipality size categories. Finally, these threshold limits were
tested on some randomly selected municipalities to see what their
general financial condition would be if they had to support an
additional amount of debt. Our analysis showed that when these
municipalities reached the threshold limit they would be unable to
assume any more debt.
A-31
-------
TABLE A-7
DEBT RATIOS
Annual Debt Service/Government Revenues

Size Category
Number of
Cases
Standard
Mean Deviation
Debt Service/Gov' t Revenues
Less than 2,500
Greater than 2,500
All Cases
Debt Service/Market
of Taxable Property
All Cases
34
163
197
Value
197
.1052 .1123
.0769 .0685
.0818 .0785

.002236 .002841
A-32
-------
TABLE A-8
DERIVATION OF DEBT RATIO THRESHOLD LIMITS
(Based on Baa Cases)

Number of Cases
Mean
Standard Deviation
Threshold Limits*
Debt Service/
Gov't Revenues
28
.1200
.0835
.20
Debt Service/
Market Value
26
.0038
.0041
.008
*Threshold limit = Mean + Std. Dev.
A-33
-------
DISTRIBUTION OF THE RATIO ANNUAL DEBT
SERVICE TO GOVERNMENT REVENUES
(All Sampled Communities)
if.
o
_i
I
z
w
o
5 -
FIGURE A-16
0%-5%
51-10% 101-15%
DEBT SER/GOVT REV
15%- 2 0%
20%-
A-34
-------
DISTRIBUTION OF THE RATIO ANNUAL DEBT
SERVICE TO GOVERNMENT REVENUES
(Communities with Population
Less Than 2,500)
FIGURE A-17
tn
3
o
I-
w
O
u
0%-5%
51-10% 101-15%
DEBT SER/GOVT REV
15% - 2 0
A-35
-------
DISTRIBUTION OF THE RATIO ANNUAL DEBT

SERVICE TO GOVERNMENT REVENUES

(Communities with Population

Greater Than 2,500)
FIGURE A-18
W

»•
o
z
u
O
0%-5%
15%-20%
20%-
A-36
-------
DISTRIBUTION OF THE RATIO ANNUAL DEBT SERVICE

TO MARKET VALUE OF TAXABLE PROPERTY

(All Communities)
FIGURE A-19
M

3
z
u
o
10
'///A v///\
v///\
0%-.02%
r

.021-.041 .041-.061 .061-.081 .08%-!.0% 1.01-1.21 1.21-

DEBT SERVICE/MARKET VALUE
A-37
-------
APPENDIX B
COST DATA
-------
DESCRIPTIONS OF REGULATIONS
-------
DATA SUMMARY; FLUORIDE IN DRINKING WATER

Type of Action
Final rule (52 FR 11396; April 2, 1986) establishing a maximum
contaminant level (MCL) for fluoride in drinking water.

Regulatory Option Considered
The rule sets the MCL for Fluoride at 4 mg/1.

Data Sources Used
A. "Economic Assesment of Reducing Fluoride in Drinking Water",
Abt Association Inc., November 1985.

B. Cost spreadsheet on public water systems developed for Office of
Drinking Water, revised in July, 1988.
DATA SUMMARY; DISINFECTION

Type of Action
Advance Notice of Proposed Rulemaking (48 FR 455502; October 5,
1983) to establish maximum contaminant levels (MCLs) for
disinfection in drinking water.

Regulatory Option Considered
Option will establish MCLs, monitoring, and public reporting
requirements for disinfection (primarily with chlorine) of drinking
water.

Data Sources Used
A. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
B-2
-------
DATA SUMMARY: LEAD CORROSION CONTROL

Type of Action
Proposed rule (53 FR 31516; August 18, 1988) drinking water
suppliers to install certain corrosion control treatments (including
pH adjustment, carbonite, alkalinity adjustment, and corrosion
inhibitors) . The regulation also will include monitoring and public
education requirements depending on water quality characteristics and
EPA's judgements regarding the efficacy of treatment techniques.

Regulatory Options Considered
The base case option requires drinking water suppliers to install
corrosion control treatment in all systems that exceed no-action
levels for pH, alkalinity, or average lead content.

Data Sources Used
A. "RIA of Proposed National Primary Drinking Water Regulations for
Lead and Copper" (draft), Wade Miller Associates, Inc., June 1,
1988.

B. Cost spreadsheet on public water system developed for ODW,
revised in July, 1988.
DATA SUMMARY; VOLATILE ORGANIC COMPOUNDS IN DRINKING WATER

Type of Action
Final regulation (52 FR 25690; July 8, 1987) establishes maximum
contaminant levels (MCLs), monitoring, and public reporting
requirements for eight volatile organic compounds (VOCs) in drinking
water.
Regulatory Option Considered
The MCL established for most of the VOCs is 5 ug/1.
B-3
-------
Data Sources Used
A. "Economic Impact Analysis of Proposed Regulations to Control
Volatile Synthetic Organic Chemicals (VOCs) in Drinking Water",
USEPA/ODW, October, 1985, as amended May 19, 1987.

B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
DATA SUMMARY; INORGANIC COMPOUNDS IN DRINKING WATER

Type of Action
Proposed rule (50 FR 46902; November 13, 1985) to establish new
maximum contaminant levels (MCLs) for eight inorganic chemicals.

Regulatory Option Considered
The proposed rule would set levels ranging from a low of 3 ug/1 for
mercury to a high of 10,000 ug/1 for nitrate. Our analysis
considers the preferred MCLs (most closely corresponding to MCLGs)
for only three chemicals — arsenic, cadmium, and copper -- because
these are the only three chemicals where the costs for the preferred
MCL are larger than costs of existing regulation.

Data Sources Used
A. "Regulatory Impact Analysis of Proposed Inorganic Chemical
Regulations", Wade Miller Associates, Inc. for USEPA, November 1987.

B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
DATA SUMMARY: SYNTHETIC ORGANIC COMPOUNDS IN DRINKING WATER

Type of Action
Regulation, under development, will establish maximum contaminant
3-4
-------
levels (MCLs) and monitoring requirements for certain synthetic
organic chemicals (SOCs) in drinking water. The regulation is
presently in draft form.

Regulatory Option Considered
The draft proposed MCLs vary from a low of 0.0005 ug/1 for
chlordane, to a high of 2000 ug/1 for toluene.

Data Sources Used
A. "Draft Regulatory Impact Analysis of Proposed Synthetic Organic
Chemicals", USEPA, Office of Drinking Water, August 17, 1987, and
revisions of October 13, 1987 to Chapter IV.

B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
DATA SUMMARY; RADIONUCLIDES

Type of Action
Advance Notice of Proposed Rulemaking (51 FR 34836; September 30,
1986) to establish MCLs and monitoring and public reporting
requirements for certain radionuclides.

Regulatory Option Considered
EPA is considering alternative MCLs ranging from 1,000 pci/1 to 160
pci/1. The analyses used an MCL of 500 pci/1 for estimation
purposes.

Data Sources Used
A. "Preliminary Radon Summary Impacts Table", April 12, 1988,
Office of Drinking Water, USEPA.

B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
B-5
-------
DATA SUMMARY: TOTAL COLIFORM RULE

Type of Action
Proposed regulation (52 FR 42224; November 3, 1987) to amend the
maximum contaminant levels (MCLs) for total coliform bacteria in all
public water systems.

Regulatory Option Considered
The option involves the amendment of MCLs for total coliform
bacteria. The proposed MCL is determined simply by the presence or
absence of coliform bacteria in a percentage of the samples, rather
than by the density, by the frequency of sampling. EPA is
reproposing the MCLG of zero and a limit for heterotrophic
bacteria. The rule also proposes monitoring requirements and
analytical methodology.

Data Sources Used
A. "Regulatory Impact Analysis: Benefits and Costs of Proposed
Surface Water Treatment Rule and Total Coliform Rule", USEPA/Office
of Drinking Water, September 1, 1987.

B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
DATA SUMMARY; SURFACE WATER TREATMENT RULE

Type of Action
Proposed rule (52 FR 42178; November 3, 1987) setting maximum
contaminant level goals (MCLGs) for Giardia Lamblia viruses and
Legionella and national primary drinking water regulations for
public water systems using surface water sources.

Regulatory Option Considered
In addition to setting MCLGs of zero for Giardia Lamblia viruses and
-------
Legionella, the regulation proposes a treatment technique in lieu of
an MCL for the contaminants. The option also proposes filtration
and disinfection requirements, criteria, and procedures by which the
state would determine which systems must comply with the regulation.

Data Sources Considered
A- "Regulatory Impact Analysis: Benefits and Costs of Proposed
Surface Water Treatment Rule and Total Coliform Rule", Wade Miller
Associates, Inc., September 1, 1987.
B. Cost spreadsheet on public water systems developed for ODW,
revised in July, 1988.
DATA SUMMARY; LEAD AND COPPER MCL

Type of Action
Proposed rule (53 FR 31516; August 18, 1988) set MCL for lead and
copper. Regulations control both occurrence due to source waters
and corrosion of lead and plumbing material (see corrosion control
rule).

Regulatory Option Considered
The MCL options are 5 ug/1 for lead and 1300 ug/1 for copper
entering distribution systems. Technologies for treating lead and
copper in source water include coagulation/filtration, ion exchange,
lime softening, and reverse osmosis.

Data Sources Used
A. "RIA of Proposed National Primary Drinking Water Regulations for
Lead and Copper" (draft), Wade Miller Associates, Inc., June 1,
1988.

B. Cost spreadsheet on public water systems developed for ODW
revised in July, 1988.
B-7
-------
DATA SUMMARY; SECONDARY TREATMENT REQUIREMENTS

Type of Action
Secondary treatment requirements set water quality standards on
effluent limitations for municipalities - Sections 301 (b) (1) (B) and
(C).

Regulatory Option Considered
Municipalities are required to achieve and maintain compliance with
their National Pollutant Discharge Elimination System (NPDES)
permits in accordance with the requirements of the Clean Water Act
(CWA). Permits require municipalities to meet effluent limitations
including secondary treatment or more stringent treatment. In order
to comply with permits many municipalities require construction of
secondary or advanced treatment processes, sewer construction,
correction of excessive infiltration/inflow, or correction of
combined sewer overflows.

The cost data reflects average capital, O&M and administrative
expenditures for systems out of compliance with secondary treatment
requirements as of 1986 that would be necessary to bring them into
compliance. In addition, capital and O&M costs for improvements to
existing or new non-discharging wastewater treatment facilities are
included in the analysis.

Data Sources Used
A. "Needs Survey Report to Congress", USEPA, 430/9-87-001,
February, 1987.

B. Information from Office of Water concerning methods for deriving
O&M and administrative costs from the capital costs data. These are
based on data from the sewage sludge rule prepared by Office of
Water Regulations and Standards.
-------
DATA SUMMARY; PRETREATMENT PROGRAM

Type of Action
Final Rule (40 CFR 403) setting requirements for the establishment
and administration of the pretreatment program.

Regulatory Option Considered
The regulation implements the National Pretreatment Standards for
controlling pollutants which interfere with a Publicly Owned
Treatment Work's (POTW) treatment processes or pollutants that pass
through a treatment plant untreated. Administrative and reporting
responsibilities are established for federal, state, and local
governments as well as private industry.

Data Sources Used
A. Cost worksheets for administrative requirements of
municipalities, based upon data derived from the Pretreatment Audit
Summary System which contains audit data from local pretreatment
programs nationwide and is maintained by EPA's Office of Water
Enforcement and Permits.
DATA SUMMARY; SEWAGE SLUDGE MANAGEMENT

Type of Action
Two regulations are under development: one setting technical
standards to establish allowable concentrations of pollutants in
sewage sludge for each sludge use and disposal option, and the other
setting requirements for approval of state sludge management
programs and sludge permitting.

Regulatory Option Considered
Option 3 in the Regulatory Impact Analysis on technical standards
which would regulate critical sites based on maximum exposed
individual risks. The disposal methods affected include land
B-9
-------
disposal, monofills, incineration, ocean disposal, and distribution
and marketing.

Data Sources Used
A. "Draft Regulatory Impact Analysis of the Proposed Regulations
for Sewage Sludge Use and Disposal", prepared by Eastern Research
Group, Inc. for USEPA, July, 1987.
DATA SUMMARY; SUBTITLE D CRITERIA

Type of Action
Proposed rule to establish revisions to RCRA Subtitle D criteria for
municipal solid waste landfills.

Regulatory Option Considered
The proposal establishes general facility standards, groundwater
monitoring requirements, post closure standards, and performance and
operating requirements. The cost data are associated with federal
point-of-compliance (POC) option.

Data Sources Used
A. "Draft Regulatory Impact Analysis of Proposed Revisions to
Subtitle D Criteria for Municipal Solid Waste Landfills", prepared
by Temple, Barker & Sloane, Inc. for the USEPA, December 11, 1987.
DATA SUMMARY; ASBESTOS IN SCHOOLS

Type of Action
Final Rule (40 CFR Part 763; October 30, 1987) requiring school
officials to inspect schools for asbestos-containing materials (ACM)
and remove ACM when found. Rule was promulgated under authority of
section 203 of Title II of TSCA.
B-10
-------
Regulatory Option Considered
The rule pertains to all public elementary and secondary schools.
Costs were calculated using expected degree of action required (e.g.
inspection, maintenance, containment, removal).

Data Source Used
A. "Final Schools Rule: Asbestos Hazard Emergency Response Act
Regulatory Impact Analysis", Office of Toxic Substances, USEPA,
September 1987.

DATA SUMMARY; TITLE III OF SARA

Type of Action
Title III requirements are set out in four separate regulations
which are in various stages of rulmaking. These include:

(1) Final rule establishing emergency planning and release
notification requirements (52 FR 13378; April 22, 1987);

(2) Proposed rule setting toxic chemical release reporting
requirements (52 FR 21152; June 4, 1987);

(3) Proposed rule setting trade secret claims for emergency planning
and right-to-know information requirements (52 FR 38312; October
15, 1987); and,

(4) Final rule setting emergency and hazardous chemical inventory
forms and community right-to-know reporting requirements (52 FR
38344; October 15, 1987).

Regulatory Option Considered
The above final and proposed rules set out various requirements for
chemical reporting and emergency planning and release notification.
B-ll
-------
Data Sources Used
A. "Title III SARA Supplemental Briefing Package: Economic
Impacts", December 11, 1987.
DATA SUMMARY: MUNICIPAL WASTE COMBUSTERS

Type of Action
Advanced notice of proposed rulemaking (52 FR 25399; July 7,
1987) . A preliminary assessment of air emissions from municipal
waste combusters was made to determine how much they may contribute
to public health risks and the potential costs of controlling these
risks. This assessment was made in response to a petition for
rulemaking filed by the Natural Resources Defense Council and the
states of New York, Connecticut, and Rhode Island. Based on the
assessment results, the EPA is examining the regulation of MWC
emissions under Sections 111 (b) and (d) .

Regulatory Option Considered
The assessment considers the costs associated with a baseline
scenario -- which considers the status quo in add-on control
technology for both existing and planned facilities, and associated
with a controlled scenario -- which considers uniform application of
0.02 g/dscf outlet loading standard using spray dryer/fabric filter
systems and highly efficient ESP systems for existing and planned
MWCs.

Data Source Used
A. "Municipal Waste Combustion Study: Report to Congress", OSWER,
USEPA, June 1987.

B. Cost worksheets for three types of planned and existing MWC
facilities -- RDF, mass burn and modular -- derived from the report
to Congress and discussions with OAQPS staff.
-------
DATA SUMMARY; MUNICIPAL ASH STANDARDS

Type of Action
Regulation under development to establish standards for the handling
and disposal of municipal combustion ash.

Regulation Option Considered
Informtion from OSW and OPPE staff using data provided in Subtitle
D criteria analysis. Used engineering costs of providing landfills
receiving municipal ash with synthetic liner/synthetic cover
technology.

Data Source Used
A. "Draft Regulatory Impact Analysis of Proposed Revisions to
Subtitle D Criteria for Municipal Solid Waste Landfills", prepared
by Temple, Barker & Sloane, Inc. for the USEPA. December 11, 1987.

DATA SUMMARY; STORMWATER REGULATION

Type of Action
Regulation, under development, governing stormwater permit
application requirements.

Regulation Option Considered
The Water Quality Act requires EPA to promulgate regulations
governing stormwater permit applications requirements for stormwater
discharges from large municipal systems and medium municipal
stormwater systems. Costs are based on projected costs of
developing stormwater management plans, and establishing an
enforcement program for stormwater systems.

Data Sources Used
A. Data from preliminary discussions and analyses performed by the
Office of Water Enforcement and Permits.
B-13
-------
DATA SUMMARY; UNDERGROUND STORAGE TANKS - FINANCIAL RESPONSIBILITY

Type of Action
Proposed rule requiring owners and operators of Underground Storage
Tanks (UST) to maintain evidence of financial responsibility for
taking corrective action and compensating third parties for bodily
injury and property damage caused by releases from USTs.

Regulatory Option Considered
SARA establishes a minimum amount of financial responsibility at $ 1
million per occurrence. The cost data reported are for Assumption
#1 : all firms that presently do not have insurance and do not
qualify for self insurance will be able to obtain insurance.
Insurance rates will be $1,000/year/facility (3 tanks per facility),
except for smaller municipal operations (2 or fewer facilities) when
costs will be $2,500/year/facility.

Data Sources Used
A- "Regulatory Impact Analysis of Proposed Financial Responsibility
Requirements for Underground Storage Tanks Containing Petroleum",
prepared by Meridian Research Inc., for USEPA, March 30, 1987.
DATA SUMMARY; UNDERGROUND STORAGE TANKS - TECHNICAL STANDARDS

Type of Action
Proposed rule (53 FR 37082; September 23, 1988) establishing
requirements for leak detection, leak prevention, and corrective
action for underground storage tanks.

Regulatory Option Considered
The option considered (Option 11) consists of requirements for
manual inventory control, monthly leak detection installed within 3
years, corrosion protection for all new tanks, and upgrading to new
tank standards within ten years of promulgation.
B-14
-------
Data Sources Used
A. "Regulatory Impact Analysis for Proposed Technical Standards for
Underground Storage Tanks", Sobotka and Company, March 30, 1987.
-------
TABLE B-l

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Fluoride in Drinking Water
Tvces of Costs (1986 dollars)
Municipality Size Capital 0 & M
(population served)** (total) (annual)
0 - 500 6,589 3,182
500 - 2,500 289,040 17,207
2,500 - 10,000 1,300,000 120,000
10,000 - 50,000 1,800,000 150,000
50,000 - 100,000 -0- -0-
100,000 - 250,000 -0- -0-
250,000 - 500,000 -0- -0-
Over 500,000 -0- -0-
No. of
Affected
Systems
66
33
8
2
0
0
0
0
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-16
-------
TABLE B-2

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Disinfection
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs (1986 dollars)
Capital 0 & M
(total) (annual)
14,479 2,889
33,862 8,877
76,067 15,213
147,016 28,432
333,333 -0-
-0- -0-
-0- -0-
-0- -0-
No. Of
Affected
Systems
4,724
2,361
439
169
3
0
0
0
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
i-17
-------
TABLE B-3

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Lead Corrosion Control
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs
Capital
(total)
3,995
7,798
54,887
142,726
490,576
554,382
554,382
835,089
(1986 dollars)
0 & M
(annual)
1,584
4,446
15,026
30,507
37,273
74,923
74,923
358,739
No. Of
Affected
Systems
5,554
5,028
1,684
1,044
185
52
55
23
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-18
-------
TABLE B-4

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Volatile Organic Compounds in Drinking Water
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
over 500,000
Tvpes of Costs
Capital
(total)
32,524
77,165
176,699
463,337
1,150,488
3,416,666
3,416,666
32,926,406
(1986 dollars)
0 & M
(annual)
2,027
7,913
12,430
39,105
112,691
333,433
333,433
3,791,441
No. Of
Affected
Systems
231
212
84
57
7
3
2
1
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-19
-------
TABLE B-5

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Inorganic Compounds in Drinking Water
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs (1986 dollars)
Capital 0 & M
(total) (annual)
256,608 14,133
447,324 70,638
1,050,000 101,011
1,844,245 156,998
-0- -0-
-0- -0-
-0- -0-
-0- -0-
No. Of
Affected
Systems
151
59
20
13
-0-
-0-
-0-
-0-
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-20
-------
TABLE B-6

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Synthetic Organic Compounds in Drinking Water
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvces of Costs
Capital
(total)
63,536
137,250
1,018,103
1,645,057
4,368,365
12,400,000
12,400,000
47,528,706
(1986 dollars)
0 & M
(annual)
11,053
25,940
153,163
251,802
613,884
1,740,577
1,740,577
6,837,012
No. Of
Affected
Systems
1,186
413
116
56
8
3
2
1
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-21
-------
TABLE B-7

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)**
REGULATION: Radionuclides (500 MCL)
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Types of Costs
Capital
(total)
73,069
125,984
186,713
448,311
1,589,375
5,048,750
5,048,750
19,880,000
(1986 dollars)
0 & M
(annual)
716
1,186
12,196
37,467
155,068
603,818
603,818
2,470,068
No. Of
Affected
Systems
3,019
1,753
470
240
16
4
4
1
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-22
-------
TABLE B-8

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Coliform Monitoring
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs
Capital
(total)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(1986 dollars)
0 & M
(annual)
404
722
431
413
500
-0-
-0-
-0-
No. Of
Affected
Systems
10,199
10,150
567
169
35
-0-
-0-
0
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.
Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-23
-------
TABLE B-9

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Surface Water Treatment Rule (Unfiltered)
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs
Capital
(total)
144,344
403,456
1,412,500
2,653,987
7,963,061
34,666,666
34,666,666
34,666,666
(1986 dollars)
0 & M
(annual)
15,868
44,126
52,359
253,635
519,275
2,861,991
2,861,991
2,861,991
No. Of
Affected
Systems
172
310
130
79
20
4
4
3
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-24
-------
TABLE B-10

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Surface Water Treatment Rule (Filtered)
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Types of Costs
Capital
(total)
13,297
21,597
59,237
86,555
182,067
301,204
301,204
794,686
(1986 dollars)
0 & M
(annual)
8,935
16,588
19,039
23,252
38,985
48,811
48,811
239,801
No. Of
Affected
Systems
273
957
811
704
209
70
69
32
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-25
-------
TABLE B-

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
REGULATION: Lead and Copper
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
(affected systems
(MCL)
Types of Costs
Capital
(total)
207,417
402,754
1,575,000
2,128,709
2,667,750
5,500,000
5,500,000
-0-
only) *
(1986 dollars)
0 & M
(annual)
15,557
39,665
100,000
180,154
667,750
1,000,000
1,000,000
-0-

No. Of
Affected
Systems
125
107
33
19
3
1
1
-0-
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-26
-------
TABLE B-ll

COST OF REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only) *

REGULATION: Construction Grants (15% capital grant)
Types
of Costs
Municipality Size Capital
(population served)** (total)
0 - 500 42,
280,
612,
1,181,
500 - 2,500 280,
612,
1,207,
1,972,
2,500 - 10,000 663,
1,547,
3,077,
5,525,
10,000 - 50,000 180,
3,442,
7,293,
12,070,
500
500
000
500
500
000
000
000
000
000
000
000
200
500
000
000
(1986 dollars)
0 & M
(annual)
2,300
14,000
24,000
48,000
14,000
27,000
50,000
80,000
27,000
61,000
123,000
222,000
69,000
133,000
282,000
467,000
No. Of
Affected
Systems
31
117
118
136
117
510
813
129
209
168
303
55
36
100
200
85
(Continued)

*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-27
-------
TABLE B-ll (Continued)

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Construction Grants (15% capital grant)
Tvoes
Municipality Size
(population served)**
50,000 - 100,000

100,000 - 250,000

250,000 - 500,000

Over 500,000

of Costs
Capital
(total)
4
11
24
44
12
33
91
4
54
57
327
,250,
,475
,395
,115
,750,
,745,
,970,
,165,
,910,
,800,
,250,
000
,000
, 000
, 000
000
000
000
000
000
000
000
(1986 dollars)
0 & M
(annual)
200,
436,
927,
1, 676,
475
1,259,
3,431,
156,
2,049,
2,160,
12,205,
000
000
000
000
,00
000
000
000
000
000
000
No. Of
Affected
Systems
6
26
17
11
18
1 9
5
4
19
3
7
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-28
-------
TABLE B-12

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Pretreatment Program
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvpes of Costs (1986 dollars)
Capital 0 & M
(total) (annual)
-0- -0-
-0- -0-
-0- 11,250
-0- 14,167
-0- 47,699
-0- 110,149
-0- 380,533
-0- 380,533
No. Of
Affected
Systems
-0-
-0-
10
10
10
10
10
10
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-29
-------
TABLE B-13

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Sewage Sludge Technical Standards
Types of Costs
Municipality Size Capital
(population served)** (total)
0 - 500 285,062
11,518
-0-
-0-
500 - 2,500 427,593
11,518
-0-
-0-
2,500 - 10,000 855,187
11,518
-0-
-0-
10,000 - 50,000 1,372,750
311,857
-0-
-0-
(1986 dollars)
0 & M
(annual)
40,199
20,000
3,280
-0-
60,299
20,000
3,280
-0-
120,598
20,000
3,280
-0-
400,000
71,428
15,228
-0-
No. Of
Affected
Systems
54
51
931
11,256
61
58
1,062
12,842
27
26
476
5,750
10
6
168
2,510
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-30
-------
TABLE B-13 (Continued)
COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Sewage Sludge Technical Standards
Municipality Size
(population served)**
50,000 - 100,000

100,000 - 250,000

250,000 - 500,000

Over 500,000

Tvces of Costs
Capital
(total)
1,372,750
311,857
-0-
-0-
1,372,750
311,857
-0-
-0-
2,032,500
-0-
-0-
-0-
2,032,500
-0-
-0-
-0-
(1986 dollars)
0 & M
(annual)
400,000
71,428
15,228
-0-
400,000
71,428
15,228
-0-
500,000
100,000
35,714
-0-
500,000
100,000
35,714
-0-
No. Of
Affected
Systems
1
1
20
301
1
0
9
130
1
1
33
0
1
0
23
0
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
i-31
-------
TABLE B-14
COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
(affected systems
REGULATION: Subtitle 'D1 Criteria
Types of Costs
Municipality Size Capital
(population served)** (total)
0 - 500 -0-
6,385
3,193
1,064
500 - 2,500 63,852
38,311
19,156
6,385
2,500 - 10,000 -0-
159,629
79,815
26,605
10,000 - 50,000 -0-
766,221
383,110
127,703
only) *

(1986 dollars)
0 & M
(annual)
-0-
6,750
3,375
1,125
67,500
40,500
20,250
6,750
-fl-
ies, 750
84,375
28,125
-0-
810,000
405,000
135,000

No. Of
Affected
Systems
0
234
3,097
8,960
42
428
2,230
11,324
0
107
678
5,494
0
30
268
2,396
(Continued)
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-32
-------
TABLE B-14 (Continued)
COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
REGULATION: Subtitle 'D1
Municipality Size
(population served)**
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
(affected systems only) *
Criteria
Tvoes of Costs (1986 dollars)
Capital 0 & M
(total) (annual)
-0- -0-
1,915,552 2,025,000
957,776 1,012,500
319,259 337,500
-0- -0-
-0- -0-
2,234,810 2,362,500
774,937 787,500
-0- -0-
-0- -0-
4,788,880 5,062,500
1,596,293 1,687,500
-0- -0-
-0- -0-
-0- -0-
4,256,782 4,500,000

No. Of
Affected
Systems
0
0
37
286
0
0
3
137
0
0
1
34
0
0
0
24
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
-------
TABLE B-15

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
(affected systems only)*
REGULATION: Asbestos in Schools Rule
Types of Costs
Municipality Size Capital
(total)
0 - 500 75,918
-0-
-0-
131,943
27,459
-0-
500 - 2,500 91,102
-0-
-0-
158,332
32,591
-0-
2,500 - 10,000 288,488
-0-
-0-
508,383
104,344
-0-
(1986 dollars)
O&M + Admn.
(annual)
3,

1,
4,
3,

2,
5,
12,
1,
4,
1,
6,
18,
279
402
112
487
726
913
935
482
334
584
071
895
460
528
226
851
559
670
No. Of
Affected
Systems
3,786
1,192
5,998
258
0
1,057
4,319
1,360
6,844
295
0
1,206
1,934
609
3,064
132
0
540
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
i-34
-------
TABLE B-15 (Continued)
COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
(affected systems
REGULATION: Asbestos in Schools Rule
Municipality Size
(population served)**
10,000 - 50,000

50,000 - 100,000

100,000 - 250,000

Types of Costs
Capital
(total)
1,047,668
-0-
-0-
1,820,813
378,934
-0-
2,019,419
-0-
-0-
3,509,684
730,409
-0-
4,600,631
-0-
7,995,746
1,664,015
-0-
-0-
only) *
(1986 dollars)
0 & M
(annual)
45,250
5,548
15,346
6,721
23,819
67,800
87,222
10,693
29,579
12,594
45,912
130,686
198,708
24,361
29,512
104,596
297,728
67,387

No. Of
Affected
Systems
830
261
1,315
57
0
232
99
31
158
7
0
28
43
14
3
0
12
68
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-35
-------
TABLE B-15 (continued)

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
(affected systems only)*
REGULATION: Asbestos in Schools Rule
Municipality Size
(population served)**
250,000 - 500,000

Over 500,000

Tvoes of Costs
Capital
(total)
8,070,083
-0-
-0-
14,025,541
2,918,892
-0-
23,815,477
-0-
-0-
41,390,519
8,613,888
-0-
(1986 dollars)
0 & M
(annual)
348,558
42,733
118,206
51,768
183,474
522,252
1,028,622
126,107
348,834
152,772
541,446
1,541,208
No. Of
Affected
Systems
11
3
17
1
0
3
7
2
12
1
0
2
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-36
-------
TABLE B-16
COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Sara Title III Requirements
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 - 500,000
Over 500,000
Tvoes of Costs
Capital
(total)
160
960
3,920
19,200
48,000
112,000
208,000
416,000
(1986 dollars)
0 & M
(annual)
26
156
637
3,120
7,800
18,200
33,800
67,600
No. Of
Affected
Systems
12,291
14,024
6,279
2,694
323
140
35
24
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-37
-------
TABLE B-17

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Municipal Inceneration - Air and Ash Disposal
Municipality Size
(population served)**
0 - 500
500 - 2,500
2,500 - 10,000
10,000 - 50,000
Tvpes of Costs (1986 dollars)
Capital. 0 & M
(total) (annual)
-0- -0-
-0- -fl-
ue, 269 51,000
945,381 137,313
No. Of
Affected
Systems
-0-
-0-
6
33
50,000 - 100,000
2,136,842
218,407
30
100,000 - 250,000
4,692,393
443,765
47
250,000 - 500,000
10,215,215
944,020
66
Over 500,000
22,340,604
2,335,298
24
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-38
-------
TABLE B-18

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*
REGULATION: Stormwater
Municipality Size
(population served)**
Types of Costs (1986 dollars) No. of
Capital 0 & M Affected
(total) (annual) Systems
0 - 500
-0-
-0-
500 - 2,500
50,000 - 100,000
-0-
-0-
-0-
-0-
-0-
2,500 - 10,000
10,000 - 50,000
-0-
-0-
-0-
-0-
-0-
-0-
-0-
100,000 - 250,000
141,026
70,513
140
250,000 - 500,000
614,525
307,263
35
Over 500,000
614,525
307,263
24
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-39
-------
TABLE B-19

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY

(affected systems only)*

REGULATION: Underground Storage - Financial and Technical Standards)
Tvces of Costs
Municipality Size
(population served)**
0 - 500

500 - 2,500

2,500 - 10,000

10,000 - 50,000

Capital
(total)
11,
11,
11,
11,
11,
11,
11,
11,
11,
9,
17,
17,
068
068
068
068
068
068
068
068
068
365
878
878
(1986 dollarsl
0
& M
(annual)
2,
12,
22,
2,
12,
22,
2,
12,
22,
2,
12,
22,
700
700
700
700
700
700
700
700
700
900
900
900
No. Of
Affected
Systems
11,568
708
15
13,200
808
17
5,910
362
8
2,388
291
15
(Continued)

*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
i-40
-------
TABLE B-19 (Continued)

COST OF THE REGULATION FOR A TYPICAL SYSTEM/CITY
(affected systems only)*

REGULATION: Underground Storage Tanks - Financial and Technical Standards)
Types of Costs
Municipality Size Capital
(population served)** (total)
50,000 - 100,000 23,
32,
32,
100,000 - 250,000 47,
47,
64,
250,000 - 500,000 378,
386,
420,
Over 500,000 378,
386,
420,
838
352
352
676
676
703
002
516
570
002
516
570
(1986 dollars) No. of
0 & M Affected
(annual) Systems
7,
17,
27,
14,
24,
34,
45,
55,
65,
45,
55,
65,
200 228
200 82
200 13
400 60
400 54
400 26
600 12
600 9
600 14
600 8
600 7
600 9
*System means school system, water system, sewer system etc.
**Population categories may be combined appropriately if needed.

Source: EPA -- Cost estimates are based on existing regulatory development
documents and are subject to change.
B-41
-------
APPENDIX C

COSTS METHODOLOGY
-------
METHODOLOGY FOR CALCULATING WEIGHTED AVERAGE COSTS
The weighted average costs for each of the four
regulation categories -- drinking water, wastewater, solid
waste, and miscellaneous -- were calculated on the basis of
the number of municipalities affected by the regulation in
each size category. The following example will make the
concept clear.

Consider the regulation Fluoride in Drinking Water.
Let us assume that to comply with this regulation, each
affected municipality in the 0-500 size category requires a
total of 'C' dollars. Further assume that out of a total of
'N' municipalities in this population category, 'n' are
affected by fluoride in their water systems and need to do
something about it. Therefore,

Fraction of municipalities affected = _n_
N

Average cost for 0-500 category = C * n
N

To get a weighted average cost for the category of
water regulations, one would need to carry out the above
computation for each of the water regulations and sum up the
results. To illustrate, let us define the following
variables for, say, the 0-500 population category:
th
C-j_ = Cost per municipality for the i regulation;

N = Total number of municipalities with 0-500
persons; and,

_ Number of municipalities affected by the i
1 regulation.

So, if there were 10 drinking water regulations, the
variables for the first one would be C-i,N, and n-i . The
corresponding variables for the second regulation would be
C2 / N, and r\2 and so on. Therefore, the weighted average
cost for drinking water regulations for the 0-500 population
category would be given by
cav = (cl * %) + (C2 * B2) + + (C10 * n1Q)
N N N
C-l
-------
Simplifying,

cav - (cl * ni) + (C2 * n2) + + (C10 * n10)
-

or,
N
C
av
1.,
-------
APPENDIX D
DESCRIPTION OF THE MUNFIN MODEL
-------
DESCRIPTION OF THE MUNFIN MODEL
MUNFIN is a modified form of MABEL, an earlier computer model, which
was designed to evaluate a municipality's ability to pay for enforcement
penalties and incur capital and operating costs associated with sewer
systems. MUNFIN can be used to solve financial problems faced by sewer,
water, solid waste systems and municipalities. it uses the same general
logic as MABEL which was developed after reviewing the financial
guidebook prepared for the Construction Grants Program, the literature
on financial crises experienced by cities in the U.S. during the 1970s,
the criteria for issuing municipal bonds, and the tax capacity
literature.

The underlying factors in MUNFIN are the wealth and debt of a
community. All other variables in the model are related to these two
factors. The value of taxable property, the general tax base, household
income are all related to the wealth. The debt service is the amount a
community is obligated to pay to the bankers periodically. It is
considered to be a better measure of the ability to carry additional
debt than total debt itself.

The model uses selected ratios pertaining to user charges and
municipal debt to evaluate financial capability. It divides the
operations of a city into two parts: enterprise units and non-
enterprise units. The enterprise units have the authority to recover
their expenses by imposing user fees on their customers and their debt
is backed by future user charge revenues. In general, water and sewer
systems are operated as enterprise units. The non-enterprise units are
funded out of the general treasury, that is, their activities are funded
by taxes. Their debt is backed by the full faith and credit of the
local governments and hence supported by their taxing powers. The model
has the ability, therefore, to examine both the enterprise and non-
enterprise units of a local government. To a large degree, the model
duplicates the decision criteria that bankers use to evaluate the
financial condition of a community before giving it a long-term loan.
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A. THE LOGIC OF THE MODEL

MUNFIN is divided into three parts that correspond to the answers to
the following three questions (See Figure 1) :

• Can enterprise funds issue revenue bonds in the long
term, or, can consumers afford the increased user
charges?

• Can enterprise funds raise capital in the short term
via revenue bonds?

• Can municipalities raise money via general
obligation bonds?

The ability of the water or sewer system to issue revenue bonds in
the long term is determined by comparing the ratio of annual user charge
per household and household income to threshold values. Two alternative
values of 1.25% and 1.0% are used as the thresholds for the purposes of
this study. User charges vary across the country for many reasons
including the quality of service, demands of the community, fee
structure of the enterprise and willingness of consumers to pay higher
rates; therefore, it is important to note that the thresholds are not
absolute, but relative measures of financial affordability.

If a city exceeds the threshold it is assumed not to be able to
issue revenue bonds in the long term. The inability to issue bonds
arises not from the willingness of the customers to pay higher user
charge rates (although in some communities consumers may protest against
rate increases) but from the unwillingness to bankers to accept rates
that are much higher than the existing rates of most communities in the
country.
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The model only examines user charges paid by residential customers
and not charges paid by the industrial customers. Hence, the revenues
required to cover the increased costs must be appropriated to the
different user classes. Nonresidential customers in the U.S. account
for a majority of the revenue of the systems. This means that they
share a large part of the costs of building, operating and maintaining
the systems. Often the institutional customers pay the same sewer rates
as the residential customers. The model appropriates the cost of
environmental improvements to different types of customers, calculates
the user charges per household and determines the ability to issue
revenue bonds in the long run.

Not all water and sewer systems that can increase user charges to
cover the costs of a regulation can raise the capital in the short
term. This problem can be compared to the problem faced by a consumer
who can afford the mortgage payments but cannot get a loan from lending
institutions because of a poor past performance or current debt
obligations. Before lending the money, bankers usually examine the past
performance of the system and ask whether the system has recovered its
expenses through adequate user charges, and should the user charges be
raised to recover additional costs to the system?

The model answers the above question by examining the recent history
of the city's revenues and costs. if it determines that the
expenditures have exceeded the revenues by a certain amount, it is
assumed that the system will have difficulty in issuing revenue bonds in
the short term. it will have to raise the user charge rates and show
that it can collect sufficient revenues before bankers approve any long-
term loan. if it has a sufficient income base, that is, if the user
charge to income ratio is below the threshold, a system can raise the
user charges. However, it may take more than two years to show that it
is politically feasible to raise the user charges and that the rates are
adequate. In the meanwhile, the system will have to obtain short-term
financing if it wants to construct environmental control facilities.
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Inability to raise money by means of revenue bonds does not mean
that the system cannot raise money at all. It can issue either double
barrel bonds or general obligation bonds. In the case of double barrel
bonds, the bonds are backed by the revenues of the system and full faith
and credit of the city. In the case of general obligation bonds, the
bonds are secured by the full faith and credit (i.e. taxing authority)
of the city. In both instances, the financial condition of the city
plays an important role. Usually the supporting cities ask bond rating
agencies such as Moody's or Standard and Poor's to rate their bonds.
Total debt, employment and economic conditions, and accounting and
financial management practices are some of the major factors that these
firms take into account before negotiating the terms of the bond.
MUNFIN evaluates two ratios related to these factors.

1. Debt service of the municipality
Total revenues of the municipality

2. Debt service of the municipality
Market value of all taxable property

The model calculates new values of these ratios after calculating
the debt service resulting from the pollution control general obligation
bonds. The new values are then compared with threshold values for the
two ratios. Two alternative threshold values for each ratio are used as
the criteria. The ratio of debt service and municipal revenues has the
primary threshold of 0.20 and an alternative threshold of 0.15. This
means that when 20% or 15% of municipal revenues go toward payment of
debt service, the municipality is considered to have excessive debt.
The ratio of debt service and value of property has the primary
threshold of 0.008 and an alternative threshold of 0.006. This means
that when debt service amounts to more than about 0.8% or 0.6% of the
value of the property, the municipality is considered heavily
leveraged. The thresholds for the two ratios were developed by
analyzing the data for more than 30 cities that had the lowest grade
investment bond rating (Baa). The primary thresholds represent the mean
plus two standard deviations of the values of the ratios for the 30
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cities in the sample.

The model calculates the values of the ratios in the post compliance
period, that is, after a municipality has complied with the laws. If
the calculated values exceed the threshold values, the city is assumed
to be unable to raise the required money. The values of both ratios
must exceed their respective thresholds for a city to fail the G.O. bond
test and be unable to issue general obligation bonds.
B. SELECTED EQUATIONS IN THE MODEL
Equation A: Determine the annual debt service for the proposed
construction costs.
= R * (1 + R) T * Y
(1 + R)T - 1
S]_ - Change in annual debt service due to new debt.

R = Yield for municipal bond or loan.

T = Number of years to maturity for bond or loan.

Y = Capital cost required to comply with regulations.
Equation B: Determine the operating revenue required to pay for the
increase in costs using new costs and the information in
the 1986 annual report.
D + X2 + 1.25 * (SI + S2) -
Estimated change in operating revenue based on projected
costs .
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X]_ = Estimated change in O&M costs due to pollution control
expenditure.

D = Depreciation of the new equipment.
X = Existing O&M and replacement costs of the utility.
1.25 = Debt Service Coverage Ratio.

S2 = Existing debt service of the utility.
R = Existing operating revenue for the utility.
Equation C: Determine if the new user charges are affordable.

H < L
I

I = Average Household Income.

L = Threshold limit (portion of income that can be spent on
current costs plus the costs of the new regulations).

H = New User Charges.
Equation D: Determine the ability of a municipality to issue general
obligation bonds.

1. Determine whether the proposed debt service is a reasonable
fraction of the total revenue for the municipality.

S03 + SO2 ^. 0.2 or .15
PD
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S03 = Change in annual debt service for the municipality due to
pollution control debt.

SO „ = Existing annual debt service for the municipality.

RO = General government revenue for the municipality.
2. Determine whether the proposed debt service is a reasonable
fraction of the market value of taxable property.
SOo+_SO0 < 0.008 or 0.006
= Market value of taxable property.
C. SELECTED VARIABLES

The municipal financial data base provides many important variables
for the equations used in MUNFIN. This section contains a brief
description of some of these variables.

1. Utility Variables

(a) Utility Expenses

The utility expenses consist of the operating expenses
excluding the interest expense and capital expenditures. Major capital
expenditures usually pertain to capital equipment additions or
replacements, hence they were not included in the total operating
expenses. The interest expense results from the debt carried by the
utility. Whether or not a utility carries debt does not directly affect
the operations of a utility and therefore, its operating costs.
Interest expense was included in the utility's debt service.
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(b) Utility Revenues

For the purposes of MUNFIN, the utility's revenues were those
revenues that were collected from users of the utility's services and
hence, represent what the users pay. Interest revenues were not
included in this figure.

The utility's debt service is the sum of yearly interest and
principal payments that the utility must make to meet the terms of the
bond (or other debt instrument) that was issued.

(d) Residential Share of the Operating Revenues

A critical variable for the MUNFIN model was the user charges
per household. To calculate its value, the share of the revenues that
the households paid was needed. This percentage, in most cases, was
obtained by examining a utility's annual report or by contacting
officials from the utility. In those instances where it was impossible
to obtain the percentage, a reliable standard default based on the
utility's size and capacity was used.
2. General Government Variables

(a) Annual Municipal Debt Service

The annual municipal debt is the sum of the interest and
principal paid by the municipality in a given year to comply with the
terms of the G.O. debt. It is an expense for the municipality and must
be paid if the city wants to avoid bankruptcy. in the model, the debt
service is a major variable and therefore careful attention was paid so
that it was calculated accurately. To calculate the municipal debt
service, principal and interest payments for General, Special Revenue,
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and Debt Service Funds were added.

(b) General Government Revenues

A municipality obtains its revenues from a variety of
sources: taxes, grants, bond proceeds, special assesments, pension
funds. Some of these were not included in the numbers used in the
model. Local govermment revenues were calculated by adding the revenues
from the Governmental Fund Types (i. e., General, Special Revenue, Debt
Service, Capital Projects, and Special Assessment) and one Fiduciary
Fund Type (i.e. Expendable Trust). Those not included were: Propriety
Fund Types (e.g. Enterprise and Internal Service); and, Fiduciary Fund
Types (e.g. Pension Trust, Nonexpendable Trust, Agency).
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