U.S. ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCE PROGRAM
2007-2008 Report
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EEffiNj
emlranmental finance center network
Helping to answer the
EFAB
"How to Pay"question.
U.S. ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCE PROGRAM
2007-2008 Report
Prepared by:
U.S. Environmental Protection Agency
Office of the Chief Financial Officer
Office of Enterprise Technology and Innovation
Environmental Finance Program
December 2008
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ACKNOWLEDGMENTS
The Agency would like to express appreciation to, and
acknowledge the contribution of, the following indi-
viduals. EPA is extremely fortunate to be the recipient
of such great efforts and dedication and is proud to utilize the
expertise and recommendations of this diverse group to help
yield far-reaching results for the nation.
First, we want to thank all the current members of the
Environmental Financial Advisory Board (EFAB). In particular,
we wish to acknowledge the leadership of A. James Barnes,
Professor of Public and Environmental Affairs, Indiana
University, who has served as chairman of EFAB since 2006,
following Chairman Lyons Gray, who went on to become EPA's
Chief Financial Officer. In addition, we wish to express our
appreciation for A. Stanley Meiburg, who is the EFAB
Designated Federal Official and has kept EFAB in his portfolio
of responsibilities even while on detail as EPA's National Liaison
to the Centers for Disease Control and Prevention.
We also want to recognize those EFAB members who have made
substantial contributions during their tenure but who, after long-
term service, have rotated off the board: Julie Belaga, Co-Chair,
Connecticut League of Conservation Voters; Steven Grossman,
Executive Director, Ohio Water Development Authority; Stephen
Mahfood, President, Mahfood Associates LLC; James Smith,
Environmental Finance Consultant; Billy Turner, President,
Columbus Water Works; and John Wise, Environmental Finance
Consultant. Further, as he prepares to retire from the United
State Senate, we wish to honor the long-standing commitment of
Senator Pete Dominici (New Mexico) for his long and generous
service to and support for EFAB. Finally, we want to recognize
and commemorate the excellent contributions of the Honorable
Vincent Girardy, Mayor of Peapack and Gladstone, New Jersey,
who passed away December 2006.
In addition, we want to thank the directors of the nine universi-
ty-based Environmental Finance Centers (EFCs), who strive
diligently to reach underserved communities with environmen-
tal tools and training tailored to specific needs. We are also
grateful for the contributions of two EFC directors who have
moved on to other opportunities after serving as expert witness-
es to EFAB and delivering much needed financial outreach to
the public sector: Dan Nees, University of Maryland, and Peter
Meyer, University of Louisville.
Many thanks also to the expert leadership of senior manage-
ment and staff in the Headquarters program offices, all of
whom have helped advance the work of EFAB, such as: Ben
Grumbles and Michael Deane in the Office of Water, and
Susan Bodine, Matt Hal, and Bob Hall in the Office of Solid
Waste and Emergency Response. We also want to include
Margo Oge and Mitch Greenberg, Office of Air and Radiation;
Marcia Mulkey and Susan Bromm, Office of Enforcement and
Compliance Assurance; and Brian Mannix, Charles Kent, and
Shana Harbour, Office of Policy, Economics and Innovation.
Additionally, we want to recognize and thank EPA regional senior
management such as John Askew and Bill Rice, EPA Region 7,
and Laura Yoshii, EPA Region 9, as well as all the regional staff
who have generously provided their skills and time in managing
the cooperative agreements with each of the EFCs. The EFC
Network would not exist without the regions' superb coopera-
tion, guidance, and support.
We extend grateful thanks and appreciation also to the staff of
the Environmental Finance Program, who work day-in and
day-out to keep the program running: Vanessa Bowie,
Environmental Finance Program Director; Vera Hannigan,
EFC Network National Coordinator; Sandra Keys, EFAB
Meeting Coordinator; Timothy McProuty, EFAB Projects
Coordinator; Pamela Scott, Analyst; Alecia Crichlow, Analyst;
and Susan Emerson, Analyst.
And finally, the Agency would like to salute Lyons Gray, EPA's
Chief Financial Officer, for his support and recognition of the
value of the Environmental Finance Program, and for his vision
in supporting the program as it provides the regulated commu-
nity — especially small communities — with essential tools to
achieve compliance with the environmental regulations and
mandates the Agency establishes.
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MESSAGE FROM THE CHIEF FINANCIAL OFFICER
I am pleased to present the 2007-2008 Environmental Finance
Program Report, highlighting the successes of the U.S.
Environmental Protection Agency's (EPA's) Environmental
Financial Advisory Board (EFAB) and the Environmental Finance
Center (EFC) Network.
The EFAB and EFC Network, key elements of the Agency's
Environmental Finance Program, help individual communities,
small businesses, and government agencies find ways to pay for and
comply with environmental regulations. For some in the regulated
community, these two entities are the "shot in the arm" that shows
them the way to compliance, teaches them how to reach new goals,
and ensures that they meet standards necessary to protect human
health and the environment. Without this assistance, some of these
regulated entities would continue to operate out of compliance,
putting the community and environment at risk, simply because
no other options were available or affordable.
I want to call attention specifically to the extremely valued volunteer
time of those who serve on EFAB. These experts bring vast knowledge and experience from their professional lives and
share it with the Agency for the benefit of the public. The level of our appreciation for this dedication and commitment
is immeasurable.
I also wish to acknowledge the value of the EFCs. Because each EFC is university based, we — and the nation —
benefit from the innovative and cutting-edge environment that a university community fosters. In addition to the
expertise of each EFC's director, staff, and participating professors, we also reap the benefits of student participation,
enthusiasm, and motivation; at the same time, students gain real-world experience solving the problems of paying for
environmental programs. I congratulate each EFC for its leadership and facilitation of the next generation of leaders
and problem-solvers.
EPA is grateful for the very important work that EFAB and the EFC Network accomplish year after year. This report,
which provides a snapshot of the remarkable contributions of EFAB and each EFC, also provides a measure of inspiration
and confidence for the future. I believe it shows the quality of environmental results that a small, dedicated group of
people with a specific mission can achieve. Although much work remains to address environmental challenges, the
Environmental Finance Program — along with many other Agency programs designed to address different needs —
is a solid and ever more necessary service that will continue to advance environmental protection.
Lyons Gray, Chief Financial Officer
U.S. Environmental Protection Agency
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CONTENTS
Executive Summary i
Summary — Guidebook of Financial Tools: Paying for Sustainable
Environmental Systems vii
Environmental Financial Advisory Board 1
EFAB Spotlight: SRF Leveraging and Air Finance Innovations 2
The Environmental Financing Challenge 3
EPA Environmental Goals and EFAB Environmental Finance Objectives 3
EFAB Operations and Membership 4
Summaries of EFAB Products and Projects 6
Full Text EFAB Reports/Letters and EPA Responses 13
- Relative Benefits of Direct and Leveraged Loans in State Revolving Loan
Fund (SRF) Programs Report 15
- Public Private Partnerships in the Provision of Water and Wastewater Services:
Barriers and Incentives Report 67
— Environmental Management Systems and the Use of Corporate Environmental
Information by the Financial Community Report 121
- Report on Innovative Finance Programs for Air Pollution Reduction 163
— EFAB Comments on EPA Document: Combined Sewer Overflows — Guidance
for Financial Capability Assessment and Schedule Development Report 181
- Private Activity Bond Letter 193
- The Use of Captive Insurance as a Financial Assurance Tool in Office of
Solid Waste and Emergency Response Programs Report 195
- Expanding the Definition of SRF Financial Assistance Report 209
- Sustainable Watershed Finance Report 227
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CONTENTS
Environmental Finance Center Network 257
New England EFC at the University of Southern Maine 259
Syracuse University EFC 265
University of Maryland EFC 281
University of North Carolina EFC 291
University of Louisville EFC 303
Great Lakes EFC at Cleveland State University 311
EFC at the New Mexico Institute of Mining and Technology 317
EFC at Dominican University of California 329
EFC at Boise State University 339
EFC at
Boise State University
VI
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EXECUTIVE SUMMARY
m
Introduction
The 2007-2008 Environmental Finance.
Report, compiled by the U.S. Environmental
Protection Agency (EPA)/Office of the
Chief Financial Officer, reports on the work of the
Environmental Finance Program, including the activities
and initiatives of the Environmental Financial Advisory
Board (EFAB) and the Environmental Finance Center
(EFC) Network.
Both EFAB and the EFC Network provide unique serv-
ices to the nation in terms of helping communities find
ways to pay for environmental programs and creating
incentives that promote environmental stewardship.
Together, within the Environmental Finance Program,
these entities seek to lower costs, increase investment,
and build capacity by creating partnerships with state
and local governments and the private sector to fund
environmental needs.
EFAB is an independent advisory committee established
to advise EPA on environmental financing challenges
facing the nation. Chartered in 1989 and operating
under the authority of the Federal Advisory Committee
Act (FACA), it provides advice and recommendations to
the EPA Administrator and program offices on environ-
mental finance issues, options, proposals, and trends.
The board is composed of approximately 30 members
appointed by the Agency's Deputy Administrator that
represent federal, state, and local governments; the
banking, finance, and legal communities; business and
industry; academia; and nonprofit environmental organ-
izations. It produces policy and technical reports on a
wide range of environmental finance matters of interest
to EPA, particularly with regard to the impact of these
finance issues on local governments and small
communities.
The EFC Network, composed of nine centers located
throughout the nation, is the only university-based
organization in the country that provides innovative solu-
tions to communities to help manage the cost of environ-
mental protection. The network works with both the
public and private sectors to promote a sustainable envi-
ronment by addressing the difficult issue of how to pay.
The network is supported by EPA's Environmental
Finance Program in the Agency's Office of the Chief
Financial Officer, as well as by additional funding from
other federal, public, and private entities. The centers are
located at the following universities:
• New England EFC at the University of Southern
Maine
• Syracuse University EFC
• University of Maryland EFC
• University of North Carolina at Chapel Hill EFC
• University of Louisville EFC
• Great Lakes EFC at Cleveland State University
• EFC at the New Mexico Institute of Mining and
Technology
• EFC at Dominican University of California
• EFC at Boise State University
The input of EFAB and the EFC Network provides
state-of-the-art expertise in an area outside of EPA's core
competency of developing and implementing environ-
mental programs. In addition, while the EFCs provide
services and advice directly to communities on how to
finance environmental protection, they also advise EFAB
about what works and what does not work from in-the-
field experience. EFAB then combines the real-life sce-
narios of the EFCs with its members' professional
experience and provides valuable guidance and advice to
the Agency for moving forward in the future.
EXECUTIVE SUMMARY
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EXECUTIVE SUMMARY
Highlights — Environmental
Financial Advisory Board
(EFAB)
EFAB provides expert advice to the EPA Administrator
on environmental financing issues, options, proposals,
and trends. In 2007-2008, the board issued reports to the
Administrator, making recommendations to EPA's Office
of Water; Office of Policy, Economics and Innovation;
Office of Air and Radiation; Office of Solid Waste and
Emergency Response; and Office of Enforcement and
Compliance Assurance. The following is a list of the
reports issued to the Administrator and the questions
posed by EPA that each addressed:
Relative Benefits of Direct and Leveraged Loans in State
Revolving Fund (SRF) Programs. To address national
infrastructure needs, should EPA support the use of lever-
aging by clean water and drinking water state SRFs?
Public-Private Partnerships in Water and Wastewater
Services. How could public-private partnerships help
address wastewater and drinking water infrastructure
needs over the next five to 10 years?
Environmental Management Systems and the Use of
Corporate Environmental Information by the Financial
Community. Which members of the financial and busi-
ness communities have an interest in Environmental
Management Systems? What are the current financial
services industry beliefs, practices, conventions, and chal-
lenges regarding the consideration of environmental per-
formance and systems?
Innovative Finance Programs for Air Pollution
Reduction. Could innovative financing options help
make the diesel truck retrofit kits developed by EPA's
SmartWay Program more attractive?
Combined Sewer Overflows Financial Capability
Guidance. Should EPA update and improve the 1997
document Combined Sewer Overflows— Guidance for
Financial Capability Assessment and Schedule Development,
given its age and importance?
The Use of Captive Insurance as a Financial Assurance
Tool. How can EPA strengthen financial assurance mech-
anisms to help ensure that adequate resources will be
available to address the environmental consequences of
industrial and business activities?
Expanding the Definition of SRF Assistance. Could
more funding for environmental projects be made avail-
able by allowing the Clean Water and Drinking Water
SRFs to provide a new form of financial assistance that
would not be yield restricted under Internal Revenue
Service arbitrage regulations?
Sustainable Watershed Financing. How can EPA increase
the capacity of local governments and groups to finance
actions/projects needed to implement watershed plans?
EFAB Projects Coordinator
Timothy McProuty
Phone: 202-564-4996
E-mail: mcprouty.timothy@epa.gov
Highlights — Environmental
Finance Center (EFC)
Network
The university-based EFCs deal with resource protec-
tion, pollution prevention, smart growth, green build-
ings, sustainability, and global climate change. While
each of the EFCs has a slightly different focus and con-
ducts slightly different initiatives to meet goals, they all
participate in the same types of activities, described in
the following sections.
TRAINING AND EDUCATION
Many of the EFCs provide outreach services by develop-
ing courses or workshops or otherwise educating com-
munities and relevant stakeholders about financial issues.
The New England EFC at the University of Southern
Maine, for example, developed a three-day workshop
series for citizen leaders with a curriculum of three eight-
hour, highly interactive and experiential sessions about
smart growth. The Syracuse University EFC organized
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EXECUTIVE SUMMARY
six Technical Assistance Partnership forums, with an
average of 20 to 30 attendees, covering various water
and wastewater technical topics. The University of
Maryland EFC developed a curriculum on watershed
financing by showcasing the strategies of six successful
watershed organizations.
The University of Louisville EFC co-sponsored the
"Sustainable City Workshop Series," designed to raise
local communities' awareness of sustainable practices.
With the ultimate goal of providing a catalyst to move
Louisville, Kentucky, and the region toward a sustain-
able model for the nation, each forum in the ongoing
series focuses on a different aspect of sustainable prac-
tice, including gardening and landscaping, architecture,
banking, and planning and development.
The EFC at the New Mexico Institute of Mining and
Technology developed and conducted a three-day train-
ing for tribal utility managers for the Indian Health
Service. Topics covered by the training included asset
management, capital planning and budgeting, utility
rate setting, and integrating utility management with
economic development.
To meet the needs of today's environmental systems
managers, the Boise State University EFC developed a
convenient online training system called Training on
Demand. The online conference workshops in environ-
mental finance and management reduce the Boise State
EFC's carbon footprint and allow EFC clients to fit
training into their demanding schedules.
DIRECT ASSISTANCE
Many EFCs work directly with and in communities to
assist with specialized needs. For example, the Syracuse
University EFC worked with Oswego County, New
York, to help facilitate public input into a year-long
process of evaluating alternative management and financ-
ing models for its integrated solid waste management sys-
tem. The University of Maryland EFC provided
technical assistance to Virginia's Shenandoah Valley com-
munities in developing financing strategies for natural
resource protection, including stormwater management,
rural land preservation, and greenway planning. This
involved planning and completing three charettes, identi-
fying pilot communities toward which to direct addition-
al assistance, and assisting pilot communities in goal
setting and finance strategy development.
In response to damages caused by Hurricane Katrina, the
University of North Carolina EFC assisted in the redevel-
opment of water resources in Corinth, Mississippi.
Specifically, the UNC EFC assessed the feasibility of
replacing the Corinth Gas and Water Department's
groundwater source with a surface water source.
Recognizing the important work the Clean Ohio
Revitalization Fund (CORF) does for large cities, the
Great Lakes EFC at Cleveland State University is devel-
oping a strategy for bringing CORF to Ohio's smaller
communities, beginning with examining best practices in
small community remediation, identifying small commu-
nities in need, and engaging these communities in a dia-
logue about environmental assessment.
To prevent drinking water contamination in the public
water systems representing 30 Native American tribes, the
New Mexico EFC provides technical assistance on compli-
ance issues, tests for potential health and safety concerns,
and assists water operators in conducting their own water
quality tests.
The EFC at Dominican University of California is work-
ing with the Greener Dominican Task Force to develop a
plan to green the Dominican University of California cam-
pus. Efforts will most likely include greening landscaping
practices, improving recycling, reducing energy use, and
adopting an environmental management system.
EXECUTIVE SUMMARY
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EXECUTIVE SUMMARY
TOOLS
Most of the EFCs have created reports, Web sites, soft-
ware, or other tools and products to disseminate financ-
ing information to communities and other relevant
stakeholders. To help New England communities respond
to the challenges of global climate change, for example, the
New England EFC developed the first of several publica-
tions that address issues such as the Regional Greenhouse
Gas Initiative, rises in sea level, and the changing socioeco-
nomic uses of the New England coast. The Syracuse EFC
distributes a listserv providing local government leaders
and technical assistance providers a means to submit ques-
tions or disseminate information about water rates, water
systems, wastewater treatment, finance programs, and
technology.
The Maryland EFC published a white paper report featur-
ing key recommendations for financing the implementa-
tion of the state's nutrient reduction commitments under
the Chesapeake Bay 2000 Agreement. In addition, the
Maryland EFC is part of a new EPA-led collaborative
effort to facilitate source water protection nationwide, and
is leading the effort to develop a Web-based source water
protection financing clearinghouse. The clearinghouse will
provide information on financing resource protection
efforts and will incorporate an interactive calculator tool
that will enable communities to assess the costs, benefits,
and cost savings of a variety of source water protection
strategies.
The Boise State EFC developed the Web-based
Plan2Fund™-OPT (Objective Prioritization Tool) decision-
making model, which helps stakeholders prioritize objec-
tives in the implementation of strategic nonpoint pollution
control and capital improvement plans. The Boise State
EFC is also working on the development of a new user-
friendly software tool known as the Financial Dashboard.
The Dashboard is designed to give officials rapid feedback
on the effect of their decisions on environmental facilities.
CONFERENCES
As part of their financial outreach efforts, most of the
EFCs spent a considerable amount of time organizing,
sponsoring, and attending conferences, workshops,
and other large-venue functions. The Syracuse EFC
co-sponsored two sustainability summits, each of which
attracted more than 1,000 attendees. One of the confer-
ences, the New York State Sustainability
Summit/LinkCNY, covered topics such as green build-
ings, energy conservation, energy pricing, greening of
schools, and technological innovations. The other,
Accelerate 2007, successfully targeted teens and college
students for volunteer work and attendance at the event.
In response to new septic regulations designed to
improve regional septic operations and the surrounding
environment, the Maryland EFC hosted a statewide
forum to present and discuss creative financing solutions
for low- and moderate-income septic system owners.
Potential solutions included developing a septic utility
district, developing low-interest loan programs, and
expanding subsidy programs.
The University of North Carolina EFC provided major
support to the Paying for Sustainable Water Infrastructure
Conference, which attracted approximately 650 attendees.
The EFC designed sessions and moderated events for the
"State and Local Innovations" track.
The Great Lakes EFC hosted three Urban Redevelopment
Forums in Ohio, attended by developers, environmental
engineers, lawyers, public finance professionals, and others
interested in sharing successful experiences in the remedia-
tion of environmentally contaminated properties.
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EXECUTIVE SUMMARY
OTHER
EFCs engaged in a variety of other activities as well. The
New England EFC began chairing and staffing the gov-
ernor's new initiative to protect Maine's quality of place.
The Syracuse EFC helped form, and currently co-
facilitates, the Creative Core GreenTeam, a task force
put together to promote and encourage sustainable and
smart economic growth. The group represents business,
government, economic development, academic, and non-
profit leaders throughout the region. Current GreenTeam
efforts include a study to assess regional industry, an
inventory of regional clean/green tech assets, and the pro-
motion of four targeted sites for development clean and
renewable energy centers.
The EFC at Dominican University of California serves
as a member of the California Healthy Nail Salon
Collaborative, exploring opportunities for source reduc-
tion, pollution prevention, and energy conservation in
nail salons. The EFC is working with the collaborative to
develop a Healthy Hair Show to showcase environmen-
tally friendly, healthier approaches to African American
hair care, as well as nail and other personal care.
EFC Network Coordinator
Vera Hannigan
Phone: 202-564-5001
E-mail: hannigan.vera@epa.gov
EXECUTIVE SUMMARY
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SUMMARY — GUIDEBOOK OF FINANCIAL TOOLS:
PAYING FOR SUSTAINABLE ENVIRONMENTAL SYSTEMS
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SUMMARY — GUIDEBOOK OF FINANCIAL TOOLS
The Environmental Finance
Program has updated and
extensively revised its signa-
ture reference work,
Guidebook of Financial Tools:
Paying for Sustainable
Environmental Systems. This
groundbreaking environmen-
tal finance document is com-
posed of more than 300 tools
covering a wide range of approaches that assist public-
and private-sector parties in finding the most appropri-
ate ways to finance their environmental protection
needs. The questions of how to pay and who pays for
environmental mandates are central themes for the work
of the Environmental Finance Program.
This 2008 revision includes more concise, user-friendly
write-ups and the addition of an important new section,
"Tools for Accessing State and Local Financing," which
introduces a wide variety of creative approaches used by
state partners in providing environmental assistance. The
10 sections of the Guidebook present outline informa-
tion on financial tools that can help make environmen-
tal protection initiatives more sustainable. This
publication also includes substantial revisions and addi-
tions to Section 7, "Tools for Financing and
Encouraging Pollution Prevention and Recycling," and
Section 8, "Tools for Financing Community-Based
Environmental Protection."
Sections 1 through 5 of the Guidebook examine compre-
hensive financial tools, such as environmental finance
organizations and Web sites, public-private partnerships,
traditional means of raising revenue, borrowing capital,
and enhancing credit. Sections 6 through 10 examine
specialized financial tools, many of which are geared
towards specific geographic areas and types of projects.
These specialized financial tools include approaches to
paying for pollution prevention, community-based envi-
ronmental protection, as well as brownfields redevelop-
ment. They also include ways of improving access to
capital for small businesses and the environmental goods
and services industry. Each financial tool in the
Guidebook is divided into a "Description" section and
a "Reference for Further Information" section that
includes Internet links and other references.
In response to growing interest from foreign environ-
mental officials and international organizations,
Environmental Finance Program staff recently began
work on a new section focusing on international envi-
ronmental financing tools. Tools in this chapter will
include valuable international environmental assistance
provided by U.S. government organizations such as the
Contents
Tools for Raising Revenue
-Taxes
- Fees and Special Charges
Tools for Acquiring Capital
- Bonds
- Loans
- Grants
Tools for Enhancing Credit and
Lowering Costs
Tools for Building Public-Private
Partnerships
- Public-Private Partnership Arrangements
- Public-Private Partnership Case Studies
Tools for Delivering Financial Outreach
Tools for Accessing State and Local
Financing
Tools for Financing and Encouraging
Pollution Prevention and Recycling
Tools for Financing Community-Based
Environmental Protection
Tools for Financing Brownfields
Redevelopment
Tools for Financing Small Businesses and
the Environmental Goods and Services
Industry
- Equity Capital
-Debt
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SUMMARY
GUIDEBOOK OF FINANCIAL TOOLS
Department of State/Agency for International
Development, the Department of Energy, the
Department of Commerce, and EPA itself. The
Environmental Finance Program will also develop tools
to present the important environmental assistance deliv-
ered by U.S.-supported international financial institu-
tions such as the World Bank, the Inter-American
Development Bank, and the Asian Development Bank.
Finally, essential international environmental programs
undertaken by the United Nations, selected foreign gov-
ernments, and nonprofit organizations will be included
in the new section.
The Guidebook is the product of an ongoing, collabora-
tive effort among the Environmental Finance Program
staff, members of the Environmental Financial Advisory
Board and Environmental Finance Center Network, and
other expert contributors. The Environmental Finance
Program staff will continue to undertake periodic
updates of the Guidebook and ask that users send com-
ments and suggestions for new tools and updates to
those already listed. The Guidebook is available online at
www.epa.gov/efinpage/guidebook.htm, and limited
hardcopies can be obtained through the Environmental
Finance Program staff's EFIN librarian. Also, EPA is
developing a searchable index for easy access to individ-
ual tools.
For comments, suggestions, or questions contact the EFIN
Librarian (efin@epa.gov). The side bar on page viii cap-
tures the titles for each section of the Guidebook.
GUIDEBOOK OF FINANCIAL TOOLS
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EFAB SPOTLIGHT: SRF LEVERAGING AND AIR FINANCE INNOVATIONS
EFAB REPORT: RELATIVE
BENEFITS OF DIRECT
AND LEVERAGED LOANS
IN SRF PROGRAMS
Issued: August 2008
Finance Highlight
At the U.S. Environmental Protection Agency's (EPA's)
request, the Environmental Financial Advisory Board
(EFAB) examined the performance of all State Clean
Water and Drinking Water Revolving Loan Programs.
The board found that state programs that leverage their
funds have provided greater assistance as a percentage of
their capitalization grants than states that use the direct
loan approach and recommends programs use leverag-
ing to help meet unmet demand.
EFAB also found that direct loan programs could main-
tain levels of assistance and increase the growth of
retained earnings by using leveraging. Augmenting their
equity capital through leveraging would allow these
states to increase available and future funding.
The board has already received indications of interest in
the report from EPA, the General Accounting Office,
Congressional committees, and state environmental
organizations.
See page 6 for a summary of this report; see page 15 for
the full report
*
EFAB REPORT:
INNOVATIVE FINANCE
PROGRAMS FOR AIR
POLLUTION REDUCTION
Issued: November 2007
Finance Highlight
EPA's Office of Air and Radiation asked EFAB to
review its Smart Way diesel retrofit program to look for
financing approaches to promote sales of their retrofit
kits aimed at reducing emissions of nitrogen oxides
(NOX), carbon dioxide (CO2), and particulates.
EFAB determined that several innovative financing
techniques, including the creation of Air Quality
Financing Authorities by state governments, could be
used to help finance the SmartWay program as well as
other air pollution reduction efforts.
EPA's Air Office has initiated both internal and external
discussions about options for creating State Air Quality
Financing Authorities and has incorporated a number
of the financing concepts from this EFAB report into
the request for proposals in a 2008 $3-4-million grant
solicitation for innovative finance projects.
See page 8 for a summary of this report; see page 163
for the full report.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
The Environmental Financing
Challenge
ENVIRONMENTAL FINANCE
CHALLENGE is GROWING
Since the creation of EPA in 1970, the nation has made huge
investments in, and significant progress toward, controlling
pollution and restoring environmental quality. Much of the
credit for this success is due to EPA's use of traditional regula-
tory and enforcement tools, and to the transfer of significant
resources from the federal government to state and local gov-
ernments to help develop environmental infrastructures.
Two trends challenge EPA's ability to maintain and improve our
standard of environmental quality. First, the needs and expecta-
tions for environmental protection continue to grow. Second,
federal deficits, tax reduction initiatives, and growing overall
demands on state and local resources increasingly constrain tra-
ditional public sources of environmental funding. The result is a
growing tension between the increasing costs of environmental
protection and the resources available to meet those costs.
EPA MUST ADDRESS THE
FINANCING CHALLENGES
Failure to address the environmental financing challenges
would threaten past environmental gains and future environ-
mental progress. It would put at risk ecosystems, human
health, and community well-being and quality of life.
To successfully address these environmental and resource chal-
lenges in a sustainable manner, EPA will need to consider the
full range of available finance-related alternatives. This effort
includes a continuing review of traditional regulatory and
enforcement tools and federal assistance programs. In addition,
it requires an evaluation of innovative projects and technolo-
gies, improved efficiencies, creative financing techniques, and
leveraged public-private partnerships.
EFAB WAS CREATED TO ADVISE
EPA ON FINANCING ISSUES
The Environmental Financial Advisory Board (EFAB) was
established in 1989 under the authority of the Federal
Advisory Committee Act (FACA) to provide expert advice and
recommendations to the EPA Administrator on environmental
financing issues, options, proposals, and trends. Through
public meetings and workshops, the board develops independ-
ent analysis and advice on "how to pay" for a clean environ-
ment. The board seeks practical ways of lowering costs,
increasing public and private investments, and building state
and local capacity. EFAB is sponsored and supported in its
work by EPA's Office of the Chief Financial Officer.
EPA Environmental Goals and
EEAB Environmental Finance
Objectives
EPA GOALS
The board's work in support of the Agency is carefully aligned
with the five major goals contained in EPA's 2006 - 2011
Strategic Plan. These goals include:
• Clean Air and Global Climate Change: Protect and
improve the air so it is healthy to breathe and risks to
human health and the environment are reduced. Reduce
greenhouse gas intensity by enhancing partnerships with
businesses and other sectors.
• Clean and Safe Water: Ensure drinking water is safe.
Restore and maintain oceans, watersheds, and their aquatic
systems to protect human health, support economic and
recreational activities, and provide healthy habitat for fish,
plants, and wildlife.
• Land Preservation and Restoration: Preserve and restore the
land by using innovative waste management practices and
cleaning up contaminated properties to reduce risks posed
by releases of harmful substances.
• Healthy Communities and Ecosystems: Protect, sustain, or
restore the health of people, communities, and ecosystems
using integrated and comprehensive approaches and
partnerships.
• Compliance and Environmental Stewardship: Improve envi-
ronmental performance through compliance with environ-
mental requirements, preventing pollution, and promoting
environmental stewardship. Protect human health and the
environment by encouraging innovation and providing incen-
tives for governments, businesses, and the public that promote
environmental stewardship.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
EFAB OBJECTIVES
In accordance with its charter, EFAB seeks to support EPA in
meeting the aforementioned major EPA goals by pursuing the
following finance-related objectives:
• Reducing the costs of financing environmental facilities and
discouraging polluting behavior.
• Creating incentives to increase private investment in the provi-
sion of environmental services and removing or reducing con-
straints on private involvement imposed by current regulations.
• Developing new and innovative environmental financing
approaches and supporting and encouraging the use of
effective existing approaches.
• Identifying approaches specifically targeted to small commu-
nity financing.
• Assessing government strategies for implementing public-pri-
vate partnerships, including privatization, operations and main-
tenance issues, and other alternative financing mechanisms.
• Improving government principles of accounting and disclo-
sure standards and how they affect environmental programs.
• Increasing the capacity of state and local governments to
carry out their respective environmental programs under
current federal tax laws.
• Increasing the total investment in environmental protection
of public and private environmental resources to help ease the
environmental financing challenge facing our nation.
EFAB Membership
The current members of EFAB are:
Terry Agriss
President
TAgriss Advisory Services
James Barnes (EFAB Chair)
Professor of Public and Environmental
Affairs
Indiana University
John Boland
Professor Emeritus
Johns Hopkins University
* Removing barriers and increasing opportunities for the U.S.
financial services and environmental goods and services indus-
tries in other nations.
EFAB Operations and Membership
EFAB OPERATIONS
The board is currently composed of 25 members who serve as
expert representatives of nonfederal interests. Members are
appointed by the Agency's Deputy Administrator and represent
federal, state, and local government; the banking, finance, and
legal communities; business and industry; and academia and
nonprofit organizations. Efforts are made to minimize the
influence of special interests through a careful balancing of the
points of view represented by the board membership.
The full board meets at least twice a year with a winter session
meeting in Washington, D.C., and a summer session meeting
in San Francisco, California. In addition, the board hosts
workshops and roundtables as needed to gather information
for its reports, papers, and advisories. All board meetings,
workshops, and roundtables are open to the public and
announced in the Federal Register as required by FACA.
The work of the board is led by its designated Federal Official
who must call or approve every meeting in advance, attend
said meetings, and adjourn the meetings when he/she deter-
mines it to be in the public interest. EFAB's designated Federal
Official is A. Stanley Meiburg, Deputy Regional Administrator
for EPA Region 4.
George Butcher
President
ButcherMark Financial Advisors LLP
Donald Correll
President and CEO
American Water
Michael Curley
Executive Director
The International Center for
Environmental Finance
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
Rachel Deming
Partner
Scarolo Ellis LLP
Honorable Kelly Downard
Chairman
Louisville Metro City Council
Mary Francoeur
Managing Director
Assured Guaranty Corp.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
James Gebhardt
Chief Financial Officer
New York State Environmental Facilities
Corporation
Scott Haskins
Vice President
Global Water Business Group, CH2M Hill
Jennifer Hernandez
Partner and Co-Chair
National Environmental Team, Holland
and Knight LLP
Keith Hinds
Financial Advisor
Merrill Lynch
Langdon Marsh
Fellow
National Policy Consensus Center,
Portland State University
Gregory Mason
Chief Operating Officer
Georgia Environmental Facilities Authority
Karen Massey
Deputy Director
Missouri Environmental Improi
Energy Resource Authority
Lindene Patton
Chief Climate Product Officer
Zurich North America
Cherie Rice
Treasurer and Vice President of Finance
Waste Management, Inc.
Helen Sahi
Director
Environmental Services, Bank of America
Andrew Sawyers
Program Administrator
Maryland Water Quality Financing
Division, Department of the Environment
Greg Swartz
Vice President
Piper Jajfray & Co.
Steve Thompson
Executive Director
Oklahoma Department of Environmental
Quality
Sonia Toledo
Managing Director
Merrill Lynch
Jim Tozzi
Director
Multinational Business Services, Inc.
Justin Wilson
Partner
Waller Lansden
FORMER MEMBERS
EFAB members who have left the board but who served during the period covered by this report include:
Julie Belaga Steven Grossman
Co-Chair Executive Director
Connecticut League of Conservation Voters Ohio Water Development Authority
Honorable Pete Dominici (New Mexico) Stephen Mahfood
U.S. Senate President
Mahfood Associates LLC
Honorable Vincent Girardy (deceased)
Mayor James Smith
Peapack and Gladstone, New Jersey Environmental Finance Consultant
Billy Turner
President
Columbus Water Works
John Wise
Environmental Finance Consultant
EFAB Composition
Business and
Industry
24%
Academia
12%
Independent
Consultants
4%
Legal
12%
Financial
Community
24%
State/Local
Government
24%
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Summaries of EFAB Products and
Projects
EFAB WORK
The board initiates and develops its work products in two basic
ways. It either receives direct requests from EPA on specific envi-
ronmental financing issues, or the board members independently
identity and decide on important environmental financing chal-
lenges that they believe the Agency should consider. Following
the identification of work projects, EFAB holds public meetings,
expert workshops, and working group sessions to develop advi-
sories, reports, and letters to Agency. These products represent
the board's independent and expert views on a wide range of
environmental finance issues and opportunities.
EFAB uses its annual summer meeting as an opportunity to
update its strategic action agenda to reflect projects completed,
update work on ongoing projects, and begin new projects of inter-
est to EPA and board members. During the 2007-2008 period
covered by this report, EFAB transmitted nine reports to the
Agency and is working on another six projects for 2009-2010.
SUMMARIES OF COMPLETED
REPORTS/LETTERS, 2OO7-2OO8
Areas covered by the board projects have ranged from its long-
time interest in public and private drinking water and wastewater
financing mechanisms to solid waste financial assurance tools to
air pollution reduction financing innovations. Some of the cur-
rent EFAB active projects include a continued examination of
solid waste financial assurance issues related to commercial insur-
ance and cost-estimation, investment options for state water
financing authorities, and prospective financial assurance issues
associated with the long-term storage of carbon dioxide in under-
ground wells.
The following project summaries provide information on recent
board work efforts. They include the report or project title, report
issue date, and a short narrative of the report or project, followed
by the primary Agency strategic goal and customer served, and,
where available, EPA's response.
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
Finance Spotlight:
Relative Benefits of Direct and Leveraged
Loans in State Revolving Fund (SRF)
Programs (August 2008)
EPA Strategic Goal: Clean and Safe Water
Primary Customer: Office of Water
EFAB Report: EPA and others have estimated that national
infrastructure needs for clean water (wastewater) and drinking
water range between $485 billion and $916 billion. While there
is no single correct estimate, all available data reveal a very large
environmental financing challenge. In light of this challenge,
EPA asked EFAB to determine if it should more strongly sup-
port or remain neutral with regard to the use of leveraging by
Clean Water and Drinking Water SRFs. The board conducted a
detailed analysis of National Information Management Data for
both the Clean Water and Drinking Water SRF programs sup-
plemented by individual EFAB member experiences working
with the state SRFs. Based on this analysis, the board concluded
that state programs that leverage their SRF funds have provided
greater assistance as a percentage of their capitalization grants
than states that use the direct loan approach. EFAB recommends
that EPA encourage direct loan states that have significant unmet
demand for clean water and/or drinking water loans carefully
consider leveraging (to help meet unmet demand). The board
also found that direct loan programs could maintain levels of
assistance and increase the growth of their retained earnings by
using leveraging. Augmenting equity capital through leveraging
would allow these states to increase available and future funding.
The board further recommended that EPA strongly support
leveraging and that it conduct a broad outreach to the states and
relevant national finance and professional associations about the
benefits of leveraging.
EPA Response: None, as of the report deadline. But the board
had already received indications of considerable interest in the
report from numerous sources, including EPA offices, the
General Accounting Office, Congressional committees, and
state environmental organizations.
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Public-Private Partnerships in Water and
Wastewater Services (April 2008)
EPA Strategic Goal: Clean and Safe Water
Primary Customer: Orifice of Warer
EFAB Report: The cosrs of, and need for, public-purpose envi-
ronmental infrastructure continue to grow while public resources
are increasingly constrained. These colliding trends have con-
tributed to a renewed interest in innovative and alternative
financing approaches, including public-private partnerships. The
interest in such partnerships derives from the ability of the pri-
vate sector to devote significant new capital and operational effi-
ciencies to environmental infrastructure projects. After
consulting with EPA management, the board focused this effort
on examining how these partnerships could, where appropriate,
help to address clean water (wastewater) and drinking water
infrastructure needs over the next five to 10 years. In this con-
text, EFAB identified the barriers and incentives to successful
partnerships and examined successful partnership models. This
work involved a thorough review of past public-private partner-
ships work undertaken by the board and EPA, as well as ongoing
partnership developments in all infrastructure areas, particularly
transportation. The board provided the Agency with a report
detailing its findings and recommendations in these areas.
In the report, EFAB recommended that Congress take action to
eliminate state volume caps on private activity bonds issued to
construct public-purpose water infrastructure, modify or termi-
nate the federal interest in facilities constructed with assistance
from the former EPA Construction Grants Program, and make
privately owned, public-purpose clean water facilities eligible for
grants and loans from the Clean Water SRFs. For EPA, the
board recommended that it review and report on state statutes
that restrict or prohibit public-private partnerships, and on the
use of state and federal subsidies that support government-
owned water facilities, but not private, public-purpose systems.
EFAB also recommended that EPA examine the public-private
partnership initiatives undertaken by the U.S. Department of
Transportation with an eye toward adapting or adopting those
activities that could produce environmental benefits. The board
further suggested that the Agency continue to disseminate infor-
mation on public-private partnerships, particularly successful
community case studies, and that it support with funding an
effort to track progress in eliminating federal and state barriers to
these partnerships.
EPA Response: The Agency agreed with EFAB's observations
regarding the value and limitations of public-private partner-
ships. EPA informed the board that EPA staff would be review-
ing and addressing some of the legal and institutional barriers to
public-private partnerships in the water industry presented in the
report. EPA also planned to have staff reexamine the period of
federal interest in previously grant-funded projects and to the
definition of public ownership. Finally, EPA management indi-
cated that it had directed staff to examine the partnerships initia-
tives undertaken by the U.S. Department of Transportation that
were highlighted in the report with the hope of emulating them.
Environmental Management Systems and the Use
of Corporate Environmental Information by the
Financial Community (April 2008)
EPA Strategic Goal: Compliance and Environmental
Stewardship
Primary Customer: Office of Policy, Economics and Innovation
EFAB Report: EPA's Office of Policy, Economics and
Innovation (OPEI) requested the board's advice in identifying
organizations and people in the financial and business communi-
ties having a demonstrated or potential interest in
Environmental Management Systems (EMSs), environmental
performance improvement, and financial risks/rewards. OPEI
also asked the board to help provide it with a better understand-
ing of current financial services industry beliefs, practices, con-
ventions, and challenges with regards to the consideration of
environmental performance and systems. Accordingly, EFAB
undertook an extensive dialogue with the Agency on these topics
and held interviews with representatives of the insurance and
equity sectors. In addition, the board held a formal workshop on
June 12, 2007, to collect information and ideas with respect to
how professionals in the areas of commercial banking/lending,
rating agencies, equity investment, and insurance use or do not
use a corporation's environmental information, such as EMSs, in
their financial analyses and other work. A detailed summary of
the workshop proceedings was developed and made publicly
available as required by law. The board processed the informa-
tion collected at the workshop and developed findings and rec-
ommendations that were included in a report to the Agency.
EPA Response: The Agency informed the board that it accepted
and was taking steps to implement recommendations from this
report. With regard to EFAB's recommendation that EPA
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
take a leadership role helping the financial sector and companies
better understand the relationship of EMSs, environmental per-
formance, and financial value, the Agency sponsored a dialogue
in New York City with the financial community to explore how
to improve access to, and understanding of, EPA databases. In
addition, the Agency committed to continuing to have its
Performance Track and Sector Strategies programs explore and
develop environmental metrics with their corporate partners.
*
EFAB Finance Spotlight:
Innovative Finance Programs for
Air Pollution Reduction (November 2007)
EPA Strategic Goal: Clean Air and Global Climate Change
Primary Customers: Office of Air and Radiation
EFAB Report: EPA's Office of Air and Radiation (OAR) asked
EFAB to determine if any innovative financing options could be
devised to help make the diesel truck retrofit kits developed by
its SmartWay Program more attractive. While the adoption of
these kits by truckers would significantly benefit the environ-
ment via emissions reductions, the costs of the kits are not
insignificant and pose a barrier. The board examined a number
of issues related to the use of the kits, including the possibility of
parties receiving monetary credits for emissions reductions, iden-
tifying/setting the values for credits, enabling national tradability
of the credits, and bundling credits for use by sources of financ-
ing for the kits. During this examination, EFAB realized that the
SmartWay Program addresses just one part of the nation's air
pollution problems, and, therefore, it also looked at the impact
of millions of small polluting diesel engines, either stationary or
mobile. EFAB determined that several innovative financing tech-
niques, including the creation of Air Quality Finance Authorities
(AFQAs) by state(s), could be used to promote the SmartWay
program as well as air pollution reduction for a wide variety of
other small, stationary emission sources. The board also suggest-
ed that the Agency meet with the U.S. Department of
Transportation (USDOT) to discuss whether allocations of a
small portion of private activity bonding authority provided to
the states (via AFQAs) could be undertaken in compliance with
already funded transportation programs to enhance the value of
the proposal. EFAB released the final report in November 2007-
EPA Response: The Agency responded on two occasions to this
important EFAB report.
In its first response, EPA agreed with the board regarding the
value of encouraging states to create AQFAs, and with its techni-
cal recommendations to allow such authorities to make bulk
purchases and take advantage of fleet discounts. The Agency also
agreed to consider EFAB's recommendation that it review its air
funding programs with the idea of using them as an incentive to
create the state authorities. EPA further informed the board that
it was already taking steps to include the creation of AQFAs as
an eligible activity under the diesel emissions reduction provision
of the Energy Policy Act of 2005- In response to EFAB's recom-
mendation to take advantage of existing transportation pro-
grams, EPA began a dialogue with USDOT to pursue the use of
bonding authority to finance diesel retrofits.
In its second response, EPA informed the board that using funds
appropriated for fiscal year 2008 under the Energy Policy Act of
2005 it had issued a $3.4-million grant solicitation to establish
innovative finance projects as part of the SmartWay Clean Diesel
Program. The Agency further noted that it had incorporated
concepts from EFAB's report in the Request for Proposals and
that it hoped to award projects consistent with the report recom-
mendations, particularly with regard to creating air quality
finance centers. Finally, EPA noted that it had already entered
into a cooperative agreement with the EFC in Region 5 to con-
duct demonstration projects on financial mechanisms to support
clean diesel projects.
Combined Sewer Overflows Financial Capability
Guidance (May 2007)
EPA Strategic Goals: Clean and Safe Water
Primary Customer: Office of Water
EFAB Report: In 1997, EPA published Combined Sewer
Overflows — Guidance for Financial Capability Assessment and
Schedule Development. This document provides the Agency's
approach to how a community's financial capability should be
assessed as the community develops and implements a long-term
control plan for dealing with its Combined Sewer Overflows
(CSOs). The document impacts more than just CSO, as it is
used to assess financial capability across EPA's clean water pro-
grams. Given the guidance's importance and age, the Agency
decided to conduct a detailed, multifaceted review to determine
whether modifications/improvements to it are warranted. As part
of this review, EPA asked the board to assess the guidance and
provide the Agency with comments on any necessary revisions
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
and updates. EFAB met with and kept EPA managers and staff
apprised of their preliminary findings, during the course of their
assessment. In June 2007, the board completed its review of the
guidance and released a final report to the Agency. In this report,
the board determined that the existing guidance has a number of
limitations and presented a set of detailed findings suggesting a
number of important technical improvements to the indicators
used in both phases of the current process.
EPA Response: The Agency accepted the board's report with
thanks and without comment. The Agency has not revised the
guidance as of this date.
Private Activity Bond Letter
EPA Strategic Goal: Clean and Safe Water
Primary Customer: Office of Water
EFAB Letter: The President's budget for EPA for Fiscal Year
2008 included a proposal that, if adopted, would exempt quali-
fied private activity bonds (PABs) used to finance the "furnishing
of water" and/or "sewage facilities" from the unified state volume
caps. After becoming aware of this important environmental
financing initiative, EFAB independently decided to author and
transmit to the Agency a letter indicating its strong support for
this action. Subsequently, the board sent a letter to the Agency in
April 2007 outlining its 16-year record of support for exempting
from state volume caps private activity bonds whose proceeds
finance public-purpose drinking water and wastewater facilities,
stressing the strong positive value of the proposed legislative
change, stating its full support for the administration's proposal,
and offering to assist EPA in any way possible in its efforts in
this area.
EPA Response: Senior managers and staff verbally expressed the
Agency's appreciation for the board's strong and unqualified sup-
port for the Administration's budget proposal.
The Use of Captive Insurance as a Financial
Assurance Tool (March 2007)
EPA Strategic Goals: Land Preservation and Restoration;
Compliance and Environmental Stewardship
Primary Customer: Office of Solid Waste and Emergency
Response
EPA Report: At EPA's request, EFAB is taking a detailed look at
the use of financial assurance mechanisms such as financial tests,
corporate guarantees, insurance, bonds, and trust funds to help
ensure that adequate resources will be available to address the
environmental consequences of industrial and business activities.
The board began its review with an evaluation of the use of the
financial test and corporate guarantees. In January 2006, EFAB
issued a report to EPA with its recommendations on strengthen-
ing these important tools. In June 2006, the board held a work-
shop with public and private representatives overseeing and
evaluating the captive insurance industry and users of captive
insurance. EFAB heard public comment at the workshop, and
later received formal written comments from business associa-
tions representing members with experience with the Resource
Conservation and Recovery Act (RCRA) and Superfund pro-
grams. In April 2007, the board forwarded a report on captive
insurance to EPA, providing recommendations on the strengths
and weaknesses of the use of captive insurance by corporations to
show that they have the capacity to meet their financial assur-
ance obligations.
In this report, EFAB recommended the use of independent cred-
it analysis for demonstrating the financial strength of a captive
insurer and supported strong, rigorous, and transparent oversight
by state insurance licensing authorities. The board concluded
that minimum capitalization requirements for captives were
needed and that a respected insurance rating agency such as AM
Best was in the best position to make these determinations.
EFAB also concluded that captive insurers should be treated the
same as regular commercial insurers (assuming effective state
oversight) and that policy language should be the same for both
types of insurers. Finally, the board recommended that EPA
require any financially responsible affiliate that uses a captive
insurance policy to either pass the financial test itself or possess
an investment grade rating, or that the captive entity issuing the
policy have a rating of secure or better with AM best or a com-
parable rating agency.
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EPA Response: The Agency thanked EFAB for including state
and EPA staff in many of its meetings and acknowledged the
value of the board's input as it moved forward with improve-
ments to RCPvA financial assurance requirements. It committed
to taking EFAB's findings and recommendations on captive
insurance under advisement and noted the consistency of those
current findings with EFAB's earlier work on the financial test
and corporate guarantee.
The Agency also took this opportunity to inform the board that
it is initiating its Action Development Process to more fully ana-
lyze its regulatory options regarding the RCRA Subtitle C finan-
cial test. EPA pointed out that as part of this process it will be
further analyzing the earlier EFAB recommendation that the
Agency include an independent ratings requirement to
Alternative I of the current financial test.
Expanding the Definition of SRF Assistance
(January 2007)
EPA Strategic Goal: Clean and Safe Water
Primary Customer: Office of Water
EFAB Report: Both EPA and EFAB are deeply interested in
leveraging existing funding to help address unmet environmental
needs facing communities nationwide. This project examined
how more funding might be made available to meet environ-
mental goals and objectives by allowing the Clean Water and
Drinking Water SRFs to provide a new form of financial assis-
tance to eligible projects that would not be yield restricted under
Internal Revenue Service (IRS) arbitrage regulations. Specifically,
the board examined how funding the capital and operating costs
of eligible projects could provide support equivalent to what is
currently provided as a debt service subsidy without triggering
IRS rules restricting yields on arbitrage earnings. Any increased
arbitrage earnings would flow back into the SRFs to provide
additional funds for approved program uses. The board sent a
report to the EPA Administrator in January 2007 summarizing
this approach and the programmatic changes that would be
needed to implement it.
EPA Response: The Agency reviewed the report and acknowl-
edged its innovative approach for using SRF resources, while
pointing out that the approach was beyond the existing authority
of the clean water and drinking water SRF programs. In that
regard, EPA noted that the report would add value and additional
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
perspective to the ongoing Congressional debate with regard to
developing legislation to reauthorize the SRF.
Sustainable Watershed Financing (January 2007)
EPA Strategic Goals: Clean and Safe Water; Healthy
Communities and Ecosystems
Primary Customer: Office of Water
EFAB Report: Nonpoint sources of pollution are significant con-
tributors to degraded water quality in most watersheds. Paying
for projects to correct nonpoint source problems is made diffi-
cult by the complexity of the sources and the declining availabili-
ty of government support. Over the past few years, EFAB has
worked closely with EPA's Office of Wetlands, Oceans and
Watersheds (OWOW) to address issues involving the capacity of
local governments and groups to finance actions/projects needed
to implement watershed plans. This work culminated in January
2007 when the board forwarded to EPA a report summarizing
its findings on sustainable financing and collaborative gover-
nance, and provided specific recommendations for enhancing
sustainable watershed financing.
In the report, EFAB recommended that EPA foster the use of
collaborative governance approaches, work with an EFC to dis-
seminate innovative financing tools, encourage the marketing of
ecosystem services, leverage existing financing mechanisms such
as the Clean and Drinking Water SRFs, work with the board
and the EFCs to develop a compendium of entities that could
implement watershed finance strategies, and initiate watershed
demonstration projects incorporating sustainable finance tech-
niques and collaborative governance approaches.
EPA Response: In its response to the report, the Agency either
accepted, or agreed to further consider how to best implement,
all of these recommendations. For a number of the recommen-
dations that EPA accepted, it committed to implementation
(with funding) as well.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
ONGOING PROJECTS 2OO8-2OO9
Financial Assurance: Commercial Insurance
EPA Strategic Goals: Land Preservation and Restoration;
Compliance and Environmental Stewardship
Primary Customers: Orifice of Solid Waste and Emergency
Response; Office of Enforcement and Compliance Assurance
Project Summary: As part of its longer-term work examining the
full range of financial assurance tools used to help assure that
adequate resources will be available to address the environmental
consequences of industrial and business activities, EFAB is exam-
ining in detail commercial insurance. States, in particular, have
voiced concerns about the use of insurance as a financial assur-
ance tool raising issues regarding the difficulty of ensuring that
the coverage in policies meets regulatory requirements, and ques-
tions as to whether claims will be paid. To address these and
other concerns, the board is examining the strengths and pitfalls
of insurance, the value of minimum ratings and capitalization
requirements for insurers, and the feasibility and advisability of
standard policy language for insurance used to provide financial
assurance. The board has already hosted an information gather-
ing workshop with experts from business and industry, the insur-
ance community, and state regulators to explore these topics in
detail and to spur additional thought and discussion. EFAB will
be drafting a report advising EPA on the use of commercial
insurance in the coming year.
Financial Assurance: Cost-Estimation
EPA Strategic Goals: Land Preservation and Restoration;
Compliance and Environmental Stewardship
Primary Customers: Office of Solid Waste and Emergency
Response; Office of Enforcement and Compliance Assurance
Project Summary: To expedite its financial assurance work on
behalf of EPA, EFAB has concurrently undertaken the exami-
nation of a second important financial assurance issue, cost-
estimation for RCRA closure, post closure, and corrective
action. EFAB recognizes that good cost-estimates are both
complex and the foundation of successful financial assurance.
The board's goal in this project is to identify a methodology or
process that will allow for greater confidence that the cost esti-
mates will be sufficient to pay for remediation of the environ-
mental risks remaining at sites which are subject to financial
assurance. Inclusion and support of the leadership from the
States will be critical in developing a successful program model.
Potential issues to be explored include the consistency with which
EPA develops, or oversees the development of, cost estimates;
tools being utilized today (e.g., COST-PRO, RACER); the need
for more refined estimating protocols; improved coordination on
cost-estimation among offices within EPA, the states, and indus-
try; the idea of a national cost-estimation/financial assurance body
or institute; and the proper priority for cost-estimation within the
Agency. An important step in the project will be the convening of
a workshop to allow for subject matter experts to discuss the sta-
tus of cost estimation methodologies and to give the board a
chance to further explore the need for both improvements in ana-
lytical techniques and organizational arrangements which would
improve the reliability of cost estimates.
Exploring Clean Water and Drinking Water State
Revolving Fund (SRF) Investment Options
EPA Strategic Goal: Clean and Safe Water
Primary Customer: Office of Water
Project Summary: In its recent report on SRF leveraging, EFAB
identified as an area for further study whether there are modifi-
cations to the current approaches used to invest SRF equity that
might better meet the objectives of the Clean Water and
Drinking Water SRF Programs, including making them more
sustainable. The board noted in the report that the SRFs have
been capitalized or "endowed" with equity capital in excess of
$38.4 billion. This equity is invested in very conservative invest-
ments such as high-grade tax-exempt interest rates. An invest-
ment strategy that is more typical for such large endowed funds
would be expected to significantly increase the growth rate of
SRF equity.
EFAB plans, in this new project, to examine in some detail the
equity investment question posed above. As part of this effort,
the board also plans to generally explore the benefits and risks of
an endowment-like approach to the investment of Clean Water
and Drinking Water SRF funds, any regulatory issues affecting
the implementation of the new approach, and any related
impacts, such as impacts on the approach to debt issuance that
would be required to implement a new endowment-like invest-
ment approach.
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
-------
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Innovative Use of Assessments and Special Districts in
Air Pollution andNonpoint Water Pollution
EPA Strategic Goal: Clean Air and Global Climate Change
Primary Customers: Orifice of Air and Radiation
Project Summary: This project is a direct follow-up to two
important EFAB reports, Innovative Financing for Air Pollution
Reduction (SmartWay Transport) and Sustainable Watershed
Financing. The new project will involve an examination of inno-
vative uses of tax and financing incentives and the development
of new techniques for implementing environmental projects. In
particular, the board will consider the development and use of
federal, state, and local assessments as well as the creation of spe-
cial air quality and stormwater districts. These new mechanisms
could be used to help finance air pollution reduction at truck
stops or drayage yards and nonpoint source water pollution
activities involving manure control systems, animal feedlots, or
riparian buffer zones.
Financial Assurance and C02 Underground
Injection Control (UK)
EPA Strategic Goals: Clean and Safe Water; Clean Air and
Global Climate Change
Primary Customers: Office of Water
Recognizing the growing importance of climate change and the
Supreme Court's ruling regarding the regulation of CO2, EPA
has begun to explore a range of approaches to addressing these
issues. It is clear that global greenhouse gas emissions associated
with industrial development and economic growth and the emis-
sion reductions needed to reach climate protection goals are in
conflict. Carbon capture and storage through underground injec-
tion in storage wells could be an important and necessary com-
ponent of any future emissions reduction plan.
This new EFAB project will seek to identify and examine financ-
ing issues related to implementing a CO2 underground injection
control program. Such a program would include the provision of
the financial assurance needed to address potential future liabili-
ties associated with the underground injection of CO2 in storage
wells for the purpose of carbon capture and long-term sequestra-
tion. In this project, the board will seek to use and build upon
the expertise that it has developed while exploring the use of
financial assurance in solid waste programs.
Financing Water/Energy Conservation in Water
Distribution Systems ("Leaky Pipes")
EPA Strategic Goal: Clean and Safe Water; Clean Air and
Global Climate Change
Primary Customer: Office of Water
The growing U.S. population is stressing available water supplies.
While the population nearly doubled between 1950 and 2000,
public demand for water during that same period more than
tripled. This increased demand has put additional stress on water
supplies and distribution systems, threatening both human
health and the environment. Increased water use also has a sig-
nificant energy component and a corresponding impact on cli-
mate. By using water more efficiently, we can help preserve water
supplies for future generations, save money, and protect human
health and the environment.
In this new era, water utilities can no longer simply accept ineffi-
ciencies in their distribution systems such as the loss of water
through leaks in underground pipes. In addition to the environ-
mental impacts such as increased water consumption and air
emissions, these water leaks are very costly in terms of increased
costs for water treatment, pumping, and operations. Moreover,
they impact the utility's environmental reputation and its ability
to ask customers to conserve.
This new board effort will examine financing alternatives to
detect and reduce leaks and improve water and energy conserva-
tion in water distribution systems.
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
WWW.EPA.GOV/EFINPAGE
-------
Fuuu TEXT EFAB REPORTS/UETTERS AND EPA RESPONSES
-------
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes
Chair
Terry Agrlss
Julie Belaga
John Boland
George Butcher
Donald Cotrell
Michael Curtey
Rachel Denting
Pete Domenici
Kelly Domtard
Maty Francoeur
James Gebhantt
Steve Grossman
Scott Hasklns
Jennifer Hernandez
Keith Hinds
Sieve Mahfood
Langdon Harsh
Greg Mason
Llndene fatten
Cherie Rice
Helen S,ilii
Andrew Sawyers
Jim Smith
Greg Sttrartz
Steven Thompson
Son/a Toledo
Jim Tozzl
Justin Wilson
John Wise
Stan Iteiburg
Designated
federal Official
AUG 28 2008
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board (EFAB) is pleased to
submit the enclosed report, "Relative Benefits of Direct and Leveraged Loans in
State Revolving Loan Fund (SRF) Programs" for the Agency's consideration.
Based on the Board's analysis of data on both the Clean Water and
Drinking Water SRFs, this report shows that state programs that leverage their
SRF funds have provided greater assistance as a percentage of their capitalization
grants than those that use the direct loan approach. The Board recommends that
EPA encourage a careful evaluation of the benefits of using leveraging by States
that have significant unmet current demand for clean water or drinking water
loans.
Revolving loan funds, however, are intended to both provide
environmental assistance today and to develop sustainable means for providing
assistance in the future. An SRF will become sustainable when, on an annual
basis, its recycled federal and state capitalization and retained earnings are
sufficient to continue its existing level of project funding in inflation adjusted
dollars. Under this definition, the SRFs have not yet achieved sustainability.
It is sometimes argued that SRF leveraging increases current assistance at
the expense of future projects. However, SRFs that currently use the direct loan
approach could maintain the current level of assistance and increase the growth of
their retained earnings by using a leveraging approach to fund their loans and
investing their remaining equity to grow retained earnings. Augmenting their
equity capital through leveraging could allow such States to increase available
and future funding for construction of environmental infrastructure regardless of
any future changes in Federal capitalization grants.
Providing Advice on "How To Pay" for Environmental Protection
-------
EFAB recognizes lhal EPA has worked to educate states about the
potential benefits of leveraging. However, we recommend that the Agency
expand the audience it is trying to reach. Some State financial officers, for
example, may not he especially familiar with the SRF program or how it can be
most effectively used. Appearances by EPA at meetings of the Government
Finance Officers Association, the National Association of State Treasurers or the
Governors' Association may be a productive supplement to meetings with those
who already have significant knowledge of the SRF program,
In addition to encouraging leveraging as described above, EFAB believes
that there are several other actions the Federal government could take to enhance
the potential for SRFs to become self-sustaining over the long term.
1. Allow states to elect an approach that would eliminate the connection
between Federal capitalization grant draws and the expenditure of funds
for construction of SRF funded projects, similar to what has been done in
the pas!.
2. Interpret the perpetuity rule on a dynamic rather than a static basis, by
measuring compliance taking account of an SRF's expected earnings over
time, rather than based on annual year-end results
3. Exempt the federal and slate investment in the SRFs from federal arbitrage
regulations.
Finally, EFAB believes that there are additional potential opportunities to
expand the sustainabilily of SRF's by expanding the kinds of investments that
SRFs can use. An investment strategy that is more typical for large endowed
funds, such as pension funds, would be expected to significantly increase the
growth rate of SRF equity needed to achieve SRF sustainability. We believe that
EFAB could provide valuable information to the Agency by exploring the
benefits of more aggressive investment of SRF equity. If the Agency would like
EFAB to explore this topic in greater depth we would be pleased to do so, with
the objective of making recommendations to EPA regarding any appropriate
program changes.
The Board appreciates the continuing opportunity to provide financial
advisory assistance to EPA on issues of national importance. We want to thank
the Agency for the exceptional support we have received in this review from staff
in the Office of Water, especially Kit Farber and Howard Rubin, who provided
invaluable assistance to our deliberations.
-------
We would be pleased to answer any questions or brief you or any of your staff
should you desire additional information about this report, and we look forward to
continuing to assist EPA hi the mission of protecting human health and the
environment,
Sincerely,
A. James Barnes
EFAB Chair
Enclosure
A. Stanley'Meiburg
EFAB Designated Federal Official
cc: Marcus Peacock, Deputy Administrator
Ben Grumbles, Assistant Administrator for Water
Lyons Gray, Chief Financial Officer
-------
Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott Haskins
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Lindene Patton
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Steve Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Relative Benefits of Direct and Leveraged
Loans in State Revolving Loan Fund (SRF)
Programs
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
August 2008
Printed on Recycled Paper
-------
Report on the Relative Benefits of the Direct Loan and Leveraged Loan
Approaches for Structuring State Revolving Loan Funds
Executive Summary
Introduction
USEPA estimates national wastewater infrastructure needs range between $331 and $450 billion
and that drinking water infrastructure needs range between $154 and $466 billion. There is no
single correct estimate for needs, but the available data illustrate the growing gap between
infrastructure needs and spending levels.
In light of the great need and increasing demand for water and wastewater financing, in August,
2006, the Environmental Financial Advisory Board ("EFAB" or "the Board") initiated a review
of States use of a financing technique known as leveraging in the management of the State Clean
Water and Drinking Water State Revolving Funds (SRFs). Leveraging refers to the practice of
using Federal SRF capitalization grants as security for bonds the proceeds of which are deposited
in the SRF, as authorized in 33USC1383(d) [Clean Water Act] and 42USC300j-12(2) [Safe
Drinking Water Act]. State SRF Programs lend the bond proceeds to communities to support the
development of wastewater and drinking water infrastructure.
The questions before the Board were whether States which used leveraging tended to have higher
rates of loans as a percentage of their Federal capitalization grants, whether leveraging would
improve the sustainability of the SRFs, and whether the Board ought to recommend that EPA do
more to promote the use of leveraging. To assess this, EFAB compiled and analyzed substantial
data on both the Clean Water and the Drinking Water SRFs.
SRF Programs by Lending Structure
States have substantial flexibility in the design of their SRF programs and, in particular, their
lending structures. There are two broad types of SRF loans. Direct loans are made by states
directly from SRF equity. Leveraged loans are funded in whole or in part with borrowed money
raised in the bond market. The use of bond proceeds permits the amount of loans to exceed the
amount of SRF equity. Every SRF program that uses leveraged loans also has some direct loans
within its portfolio. This report groups leveraged SRFs by - low (up to 33.33% of loans funded
with bond proceeds), medium (between 33.33% and 66.67% of loans funded with bond
proceeds), or high (more than 66.67% of loans funded with bond proceeds).
Table 1 details the number of states with direct loan and leveraged loan SRF programs.
Table 1: Number of States by Lending Structure
SRF Program
Clean Water
Drinking Water
Direct Loan
States
24
31
Leveraged ~
Low States
9
4
Leveraged ~
Medium States
9
6
Leveraged ~
High States
9
10
-------
their need to use SRF equity for loans and the need to invest equity to generate retained
earnings for future SRF uses.
The "opportunity cost" of an SRF program is the difference between: (a) how much an SRF
"earns" on equity used to make a loan; and (b) the investment return that an SRF could have
earned on that same amount. The higher the opportunity cost to an SRF, the less sustainable
its program will be. EFAB's analysis shows that leveraged loan programs can better enable
states to sustain their SRFs than direct loan programs.
The following analysis shows how direct loan programs may increase retained earnings
through leveraging.
• If a state has $100 of projects that need to be funded and provides a 50% interest rate
subsidy versus a borrower's normal 4% tax-exempt borrowing cost, the state could use
$100 of equity for a direct loan. In this case, the SRF would earn around 2% on the $100,
or $2.00.
• However, if the state issued bonds to fund the $100 of loans, it could use $50 of equity to
support the loans and invest the remaining $50 of equity. In this case, the SRF would be
able to earn a taxable market rate of return of about 4.5% on the invested $50, or $2.25, a
12.5% better return.
Potential uses for additional SRF earnings include supporting additional projects immediately
by making additional leveraged loans or retaining such earnings to grow SRF equity and,
thus, enhance the SRF's capacity to fund future projects.
There are also at least two administrative actions the USEPA can take to further enhance the
potential for SRFs to be perpetually self-sustaining:
• EPA could allow states to elect an approach that would eliminate the connection between
federal capitalization grant draws by the state and the construction pace of SRF funded
projects. Since all grant draws must remain within the SRFs, the federal contributions
would remain secure but could be used to accelerate the growth of SRF retained earnings.
• EPA also could interpret the agency's "perpetuity rule"1 on a dynamic, rather than, static
basis. By measuring perpetuity rule compliance based on expected earnings over time,
rather than current year-end results, project funding capacity can grow more rapidly.
EPA can also promote sustainability by supporting Congressional action to exclude SRF
investments from arbitrage regulation. For grant monies pledged to support tax-exempt
1ln actuality, there is no specific USEPA "perpetuity rule" although USEPA and the states recognize that the SRFs must be maintained in perpetuity. The
Clean Water Act requires that the fund balance in each SRF "shall be available in perpetuity for providing ... financial assistance." [33 U. S. C. 1383
§603(c)J Similar language appears in the Safe Drinking Water Act, "The fund corpus shall be available in perpetuity for providing financial assistance...."
[42 U.S.C. 300j-12(c)J. While EPA does not have any specific rule that implements this language, in its definition of CWSRF Financial Indicators (see
CWSRF 01-3,dated October 31 2000), for example, the agency seeks to gauge sustainability of the fund by determining if retained earnings, net of
cumulative state match bonds repaid, is equal to or greater than zero. If this test is met, "the CWSRF is deemed to be maintaining its contributed
capital..."
-------
bonds, SRFs would be able to retain market interest returns within the SRFs instead of
rebating earnings to the federal government.
O Another potential opportunity that EFAB can explore is expanding SRF investment
opportunities. Generally, SRFs are restricted to using only the most conservative investments.
An investment strategy similar to large endowed funds, such as pension funds, can increase
the growth rate of SRF retained earnings.
Primary Conclusions
O SRF programs have been very successful in financing clean water and drinking water
projects, regardless of program design.
O EFAB's analysis of data on both the Clean Water and the Drinking Water State Revolving
Funds (SRFs) shows that state programs that have leveraged their SRF funds have provided
greater assistance as a percentage of their capitalization grants than those that have not
leveraged.
O If federal capitalization grant dollars decrease, to be able to sustain their SRF programs states
will need to maximize their earnings on SRF equity.
O States can increase project funding capacity and increase retained earnings by utilizing
innovative financing concepts that are now being applied in some states.
O States can enhance project funding capacity if compliance with the perpetuity rule is
determined based on expected earnings over time, rather than current year-end results.
Compared to direct loan programs, leveraged programs can fund more loans with the same
amount of equity.
Recommendations
O EPA should encourage direct loan states to improve SRF sustainability by showing those
states how leveraging can be used to increase their retained earnings.
O EPA should assist states to develop sustainable SRFs by administratively allowing states to
accelerate capitalization grant draws, modifying its interpretation of the perpetuity rule, and
by advocating for arbitrage relief focused specifically on SRF programs.
O EFAB should explore the benefits of developing more aggressive parameters for SRF equity
investments and recommend appropriate program changes to EPA.
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Report on the Relative Benefits of the Direct Loan and
Leveraged Loan Approaches for Structuring State
Revolving Loan Funds
Section I. Introduction
USEPA estimates national wastewater infrastructure needs range between $331 and $450 billion
and that drinking water infrastructure needs range between $154 and $466 billion. There is no
single correct estimate for needs, but the available data illustrate the growing gap between
infrastructure needs and spending levels.
In light of the great need and increasing demand for water and wastewater financing, in August
2006, USEPA's Environmental Financial Advisory Board ("EFAB" or "the Board") began an
extensive review of both the Clean Water State Revolving Fund ("SRF") and the Drinking Water
SRF. The goal of this effort was to determine whether States which used leveraging tended to
have higher rates of loans as a percentage of their Federal capitalization grants, whether
leveraging would improve the sustainability of the SRFs, and whether the Board ought to
recommend that EPA do more to promote the use of leveraging.
Leveraging refers to the practice of using Federal SRF capitalization grants as security for bonds
issued the proceeds of which are deposited in the SRF, as authorized in 33USC1383(d) [Clean
Water Act] and 42USC300j-12(2) [Safe Drinking Water Act]. State SRF Programs lend the
bond proceeds to communities to support the development of wastewater and drinking water
infrastructure. There are two primary kinds of SRF loans, direct loans and leveraged loans.
Description of Direct and Leveraged Loans
Direct loans are made by states "directly" from SRF equity which includes federal contributions,
state contributions, and retained earnings. For direct loans, a subsidy is provided to borrowers by
charging a lower interest rate than would be charged on a market rate loan, i.e., by forgoing
potential earnings on equity. The maximum subsidy is achieved by providing a 0% loan. For
such a loan, the borrower's subsidy equals the market interest rate at which the SRF loan
recipient would otherwise have borrowed, which is the tax-exempt or taxable market interest rate.
In contrast, leveraged loans are funded in whole or in part with the proceeds of bonds issued by
the SRF, including 100% bond funded leveraged loans and loans which include various
combinations of bond proceeds and equity. States, EPA and the national bond rating agencies
categorize SRF leveraging structures as "blended loan," "cash flow," "hybrid" and "reserve
fund" models. Each of these leveraging structures share the following common themes: (1)
bond proceeds are deposited to the SRF; (2) bond proceeds increase lending capacity; and (3)
bond proceeds are secured by combinations of equity investments and other SRF loans (both
bond-funded and direct loans).
-------
The descriptions of the types of loans discussed in this report are simple examples of the basic
types of leveraging methods rather than specific examples of any individual state program. In
actual practice, many SRF programs originate direct loans and leveraged loans through a variety
of leveraging structures tailored to the needs of a particular state. Section V analyzes the direct
loan, blended loan and reserve fund approaches. This is done to illustrate a primary conclusion
of this report, which is that by leveraging their SRF programs, states that currently make only
direct loans can increase lending or can maintain lending and simultaneously increase retained
earnings.
Contents of the Report
The Report includes detailed historical data on both the Clean Water and Drinking Waters SRFs.
It then analyzes that information, identifying various characteristics of the general types of SRF
programs managed by all the states and Puerto Rico. Following the discussion of the states' SRF
programs' characteristics, the Report offers a detailed analysis of how use of the direct loan and
leveraged loan models can affect the long-term sustainability of states' SRF programs and offers
recommendations of how the federal government can improve the opportunities for such
sustainability.
The Report includes the following sections:
O Section II - Historical Data for the SRF Program
This section provides information from the inception of the SRF programs to June 30, 2007
regarding the amount and source of equity in the Clean Water and Drinking Water SRFs, the
amount of retained earnings in each state program, and the amount of executed loans as a
percent of the federal contribution. Section II also includes the states grouped by lending
structure.
O Section III - Analysis of Historical Data
Using the data provided in the tables in Section II, this section summarizes and explains the
data.
O Section IV - Characteristics of States by Leveraging Factor
This section defines "leveraging factor" and uses that factor to indicate how that factor
affects or is affected by the role of a financing agency or authority in a state's program, the
distribution of states funding their required state match through bonding programs, the
relationship between leveraging factor, and the amount of assistance provided to
disadvantaged communities and the correlation of leveraging factor to the amount of retained
earnings in the SRF programs.
O Section V - Detailed Analysis of the Direct Loan and Leveraged Loan SRF Approaches
-------
Building on the information in prior sections, Section V evaluates the relative effectiveness
of the direct loan and leveraged loan models. In addition to reviewing the techniques used by
each model to provide subsidized loans for clean water and drinking water projects, this
section provides a meticulous analysis of the costs of providing loans under each model, the
effectiveness of each approach in growing retained earnings in order to maximize the
sustainability of the SRF program and then looks at the policy alternatives regarding the
benefits of providing more loans currently versus investing for future sustainability of the
SRF programs.
Section VI - Conclusions and Recommendations
Drawing from the body of the Report, Section VI outlines the conclusions that are derived
from the data and analyses presented and makes recommendations to USEPA regarding how
the federal government can improve the opportunities for states to ensure the sustainability of
their SRF programs.
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Section II. Historical Data for the SRF Program
To begin its analysis of SRF leveraging, EFAB compiled the most comprehensive data available
to date on both the Clean Water SRF and the Drinking Water SRF. Data is provided for each of
the 50 states' and Puerto Rico's SRF programs.
The tables that follow show the total federal and state contributions to the SRF programs as of
June 30, 2007. The tables also provide information on the dollar value of the SRF loans made by
each state, the amount of leveraged bond proceeds as a percent of loans executed, and the
amount of retained earnings as a percent of equity in the program. Finally, the tables show the
amount of SRF loans made as a percent of the federal capitalization in each state.
The four tables in this Section include:
a Table 4-A: CWSRF Data by State as of June 30, 2007
States are sorted alphabetically.
a Table 4-B: CWSRF Data by Lending Structure as of June 30, 2007
States are grouped by lending structure:
• Leveraged ~ High - more than 66.67% of loans funded with bond proceeds.
• Leveraged ~ Medium - between 33.33% and 66.67% of loans funded with bond proceeds.
• Leveraged ~ Low - up to 33.33% of loans funded with bond proceeds.
• Direct Loan - loans are solely funded with equity.
a Table 5-A: DWSRF Data by State as of June 30, 2007
States are sorted alphabetically.
a Table 5-B: DWSRF Data by Lending Structure as of June 30, 2007
States are grouped by lending structure:
• Leveraged ~ High - more than 66.67% of loans funded with bond proceeds.
• Leveraged ~ Medium - between 33.33% and 66.67% of loans funded with bond proceeds.
• Leveraged ~ Low - up to 33.33% of loans funded with bond proceeds.
• Direct Loan - loans are solely funded with equity.
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Table 4-A
CWSRF Data by State as of June 30, 2007 (millions)
Federal
Capitalization
State
Capitalization
Rquity
Retained
Karnings as
% of Equity
Leveraged
Bond
Proceeds
Loans
Executed
Leveraged
Bonds as %
Loans
Executed
Executed
Loans as %
of Federal
Capitalization
267.3%
United States 23,549.3 5,309.4 32,899.3 16.6% 27,735.1 62,949.1 44.06%
Leveraged ~ High 6,499.9 1,498.9 8,477.7 10.6% 19,116.9 22,333.0 85.60%
Leveraged ~ Medium 5,252.9 1,153.0 7,311.2 16.4% 7,226.0 15,968.1 45.25%
Leveraged ~ Low 5,148.6 1,177.6 7,442.8 18.9% 1,392.2 11,814.4 11.78%
Direct Loan States 6,647.9 1,479.8 9,667.5 20.3% - 12,833.6 0.00%
343.6%
304.0%
229.5%
193.0%
355.9%
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut!
Delaware
Florida
Georgia
Hawaii
Idaho
IlboU
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
233.0
143.3
154.9
168.5
1,765.2
203.3
337.0
117.1
838.8
455.9
180.9
113.8
1,074.0
566.1
282.9
210.5
322.0
274.4
184.7
558.7
861.5
1,018.4
451.0
223.7
108.3
30.2
42.3
36.5
468.1
41.0
103.9
23.0
189.3
97.0
70.9
23.7
123.0
64.2
43.9
69.2
57.2
40.9
114.3
184.2
212.5
126.1
48.6
341.7
209.4
209.0
233.2
2,611.5
253.8
477.9
149.8
1,324.3
717.9
313.1
172.8
1,492.6
666.0
354.9
245.6
479.6
380.2
803.8
1,307.8
1,262.2
666.0
352.5
11.2%
20.0%
10.0%
15.1%
17.3%
7.1%
10.7%
9.7%
25.0%
26.9%
22.0%
23.1%
17.7%
3.8%
14.8%
0.0%
21.2%
15.8%
15.4%
20.5%
22.8%
5.8%
16.2%
25.4%
587.1
449.6
116.9
298.9
648.7
950.5
150.7
97.3
160.9
3,291.1
2,219.8
1,066.7
829.3
237.0
764.7
403.3
3,869.0
727.5
1,120.3
175.5
2,567.7
808.7
355.6
278.3
2,028.8
1,756.6
797.6
523.5
436.6
426.0
1,178.8
3,776.7
2,463.3
1,811.1
472.3
70.79%
0.00%
58.79%
28.99%
7.73%
89.17%
84.84%
0.00%
5.87%
0.00%
0.00%
0.00%
9.34%
96.03%
33.30%
58.21%
0.00%
0.00%
22.84%
13.65%
87.14%
90.11%
58.90%
0.00%
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Table 4-A (continued from prior page)
CWSRF Data by State as of June 30, 2007 (millions)
Federal
Capitalization
State
Capitalization
Equity
Retained
Earnings as
% of Equity
Leveraged
Bond
Proceeds
Loans
Executed
Leveraged
Bonds as %
Loans
Executed
Executed
Loans as %
of Federal
Capitalization
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennesse
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
642.2
116.0
11Q 9
113.5
227.5
1,019.2
124.1
2,482.1
441.5
114.6
1,363.2
172.9
156.3
281.0
102.9
387.7
1,257.8
134.4
110.7
568.2
415.9
62.4
608.4
77.3
159.0
36.9
26.5
22.8
51.3
236.6
30.0
534.3
95.8
30.0
270.4
41.3
54.8
194.0
66.1
32.6
57.2
24 2
81.8
262.3
27.6
23.1
118.7
86.6
75.5
127.0
25.9
852.6
158.4
168.2
146.1
316.1
1,647.6
192.9
3,129.8
675.9
162.7
1,678.5
227.3
388.2
1,121.0
378.5
185.7
493.2
137.6
650.1
1,630.0
178.6
132.7
925.8
605.6
464.3
872.2
96.4
1,569.7
1,638.1
229.6
9/iK 9
95.82%
0.00%
0.00%
34.13%
0.00%
42.80%
0.00%
82.39%
0.00%
39.84%
42.91%
28.49%
0.00%
0.00%
0.00%
70.03%
0.00%
16.96%
0.00%
40.81%
0.00%
0.00%
40.37%
0.00%
255.1%
197.9%
OOC no/
270.3%
196.2%
269.9%
165.6%
373.5%
201.0%
164.9%
280.1%
296.4%
242.4%
188.8%
111.0%
480.7%
209.0%
260.6%
216.5%
314.7%
193.1%
121.3%
276.5%
223.7%
148.1%
227.8%
348.9%
-------
Table 4-B
CWSRF Data by Lending Structure as of June 30, 2007 (millions)
Federal State
Capitalization Capitalization
United States
Leveraged ~ High
23,549.3 5
6,499.9 1
Leveraged ~ Medium 5,252.9 1
Leveraged ~ Low
Direct Loan States
Leveraged ~ High ~
Indiana
Missouri
Michigan
Colorado
Massachusetts
Connecticutt
New York
Alabama
Rhode Island
5,148.6 1
6,647.9 1
,309.4
,498.9
,153.0
,177.6
,479.8
Leveraged Bonds Funded More than 66
566.1
642.2
1,018.4
203.3
861.5
337.0
2,482.1
233.0
156.3
Leveraged ~ Medium ~ Leveraged Bonds Funded
Minnesota
Arizona
Kansas
Ohio
New Jersey
Texas
Virginia
North Dakota
Nevada
Leveraged ~ Low ~
Iowa
Arkansas
Oklahoma
Maine
451.0
154.9
210.5
1,363.2
1,019.2
1,257.8
568.2
114.6
113.5
Leveraged Bonds Funded Up
282.9
168.5
172.9
184.7
123.0
159.0
212.5
41.0
184.2
103.9
534.3
108.3
32.6
Equity
32,899.3
8,477.7
7,311.2
7,442.8
9,667.5
6 7% of Total
666.0
852.6
1,262.2
253.8
1,307.8
477.9
3,129.8
341.7
185.7
Between 33.33% and 66
126.1
42.3
43.9
270.4
236.6
262.3
118.7
30.0
22.8
to 33.33%
64.2
36.5
41.3
40.9
666.0
209.0
245.6
1,678.5
1,647.6
1,630.0
925.8
162.7
146.1
Retained Leveraged
Earnings as Bond
% of Equity Proceeds
16.6%
10.6%
16.4%
18.9%
20.3%
CWSRF Loans
3.8%
10.4%
5.8%
7.1%
22.8%
10.7%
9.7%
11.2%
1.8%
27,735.1
19,116.9
7,226.0
1,392.2
-
1,686.8
1,569.7
2,219.8
648.7
3,291.1
950.5
7,637.0
587.1
526.2
Loans
Executed
62,949.1
22,333.0
15,968.1
11,814.4
12,833.6
1,756.6
1,638.1
2,463.3
727.5
3,776.7
1,120.3
9,269.8
829.3
751.4
Leveraged
Bonds as %
Loans
Executed
44.06%
85.60%
45.25%
11.78%
0.00%
96.03%
95.82%
90.11%
89.17%
87.14%
84.84%
82.39%
70.79%
70.03%
Executed
Loans as %
of Federal
Capitalization
267.3%
343.6%
304.0%
229.5%
193.0%
310.3%
255.1%
241.9%
357.8%
438.4%
332.4%
373.5%
355.9%
480.7%
67% of Total CWSRF Loans
16.2%
10.0%
0.0%
6.1%
30.4%
10.0%
28.5%
16.6%
9.9%
1,066.7
449.6
464.3
1,638.6
1,177.4
1,615.1
634.3
75.3
104.7
1,811.1
764.7
797.6
3,818.8
2,751.0
3,957.8
1,571.3
189.0
306.8
58.90%
58.79%
58.21%
42.91%
42.80%
40.81%
40.37%
39.84%
34.13%
401.6%
493.7%
378.9%
280.1%
269.9%
314.7%
276.5%
164.9%
270.3%
of Total CWSRF Loans
354.9
233.2
227.3
257.7
14.8%
15.1%
16.7%
15.4%
186.5
116.9
146.0
97.3
560.1
403.3
512.5
426.0
33.30%
28.99%
28.49%
22.84%
198.0%
239.3%
296.4%
230.6%
-------
Table 4-B (continued from prior page)
CWSRF Data by Lending Structure as of June 30, 2007 (millions)
Federal State
Capitalization Capitalization
South Dakota
Maryland
Illinois
California
Florida
Direct Loan States -
Alaska
Delaware
Georgia
Hawaii
Idaho
Kentucky
Louisiana
Mississippi
Montana
Nebraska
New Hampshire
New Mexico
North Carolina
Oregon
Pennsylvania
Puerto Rico
South Carolina
Tennesse
Utah
Vermont
Washington
West Virginia
Wisconsin
Wyoming
102.9
558.7
1,074.0
1,765.2
838.8
- CWSRF Loans Funded Only
143.3
117.1
455.9
180.9
113.8
322.0
274.4
223.7
116.0
119.2
227.5
124.1
441.5
262.5
841.8
306.4
281.0
387.7
134.4
110.7
415.9
362.4
608.4
77.3
Equity
24.2 137.6
114.3
198.9
468.1
189.3
with
30.2
23.0
97.0
70.9
23.7
69.2
803.8
1,492.6
2,611.5
1,324.3
CWSRF Equity
209.4
149.8
717.9
313.1
172.8
479.6
57.2 380.2
48.6
36.9
26.5
51.3
30.0
95.8
54.8
194.0
66.1
352.5
158.4
168.2
316.1
192.9
675.9
388.2
1,121.0
378.5
57.2 493.2
81.8
27.6
23.1
86.6
75.5
127.0
25.9
650.1
178.6
132.7
605.6
464.3
872.2
96.4
Retained
Earnings as
% of Equity
22.5%
20.5%
17.7%
17.3%
25.0%
20.0%
9.7%
26.9%
22.0%
23.1%
21.2%
15.8%
25.4%
5.0%
16.4%
14.8%
22.8%
23.2%
21.1%
16.1%
8.0%
32.4%
30.3%
12.4%
2.6%
19.9%
8.9%
21.4%
46.9%
Leveraged
Bond Loans
Proceeds Executed
45.5 268.2
160.9 1,178.8
189.5 2,028.8
298.9 3,869.0
150.7 2,567.7
237.0
175.5
808.7
355.6
278.3
523.5
436.6
472.3
229.6
268.2
446.3
205.5
887.4
636.4
1,589.2
340.0
587.4
839.3
259.5
134.3
930.3
536.8
1,386.2
269.7
Leveraged
Bonds as %
Loans
Executed
16.96%
13.65%
9.34%
7.73%
5.87%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Executed
Loans as %
of Federal
Capitalization
260.6%
211.0%
188.9%
219.2%
306.1%
165.4%
149.9%
177.4%
196.6%
244.6%
162.6%
159.1%
211.1%
197.9%
225.0%
196.2%
165.6%
201.0%
242.4%
188.8%
111.0%
209.0%
216.5%
193.1%
121.3%
223.7%
148.1%
227.8%
348.9%
-------
Table 5-A
DWSRF Data by State as of June 30, 2007 (millions)
Federal
Capitalization
State
Capitalization
Equity
Retained
Earnings as
% of Equity
Leverage
Bonds
Loans
Executed
Leveraged
Bonds as %
of Loans
Executed
Executed
Loans as %
of Federal
Capitalization
United States
Leveraged ~ High
Leveraged ~ Medium
Leveraged ~ Low
Direct Loan States
6,534.2
1,612.0
888.2
522.9
3,511.2
1,875.5
570.1
217.4
117.5
970.5
9,212.7
2,465.8
1,269.7
679.9
4,797.4
8.7%
11.5%
12.9%
5.8%
6.6%
4,856.0
3,685.4
984.1
186.5
11,952.2
4,683.8
2,084.5
771.4
4,412.5
40.6%
78.7%
47.2%
24.2%
0.0%
182.9%
290.6%
234.7%
147.5%
125.7%
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticutt
Delaware
Florida
Georgia
Hawaii
Idaho
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
110.1
80.6
91.1
62.1
611.7
98.9
58.1
54.2
145.3
79.5
59.8
63.3
282.8
138.9
147.4
100.7
75.6
92.6
47.7
43.0
217.3
241.1
127.7
80.7
39.7
19.6
19.4
20.6
160.7
25.2
16.8
15.0
58.0
30.1
17.2
15.9
59.7
24.9
25.8
23.6
27.3
14.3
16.9
19.5
57.1
62.3
40.9
20.7
167.4
102.2
113.3
89.3
810.0
129.4
83.1
71.8
238.2
114.0
81.2
83.1
364.2
170.3
179.0
135.9
110.8
108.8
68.0
74.1
339.9
321.9
184.5
119.3
10.5%
2.0%
2.5%
7.4%
4.6%
4.1%
9.9%
3.6%
14.7%
3.9%
5.2%
4.7%
6.0%
3.8%
3.2%
8.5%
7.1%
1.7%
5.0%
15.7%
19.3%
5.7%
8.6%
15.0%
191.0
158.1
219.5
105.3
255.6
93.1
268.5
681.4
409.4
177.0
253.1
121.1
348.7
96.2
616.0
267.5
75.5%
0.0%
45.3%
0.0%
0.0%
82.1%
87.2
71.9
274.1
130.1
69.5
80.6
417.4
299.5
233.2
373.1
96.6
91.6
60.0
76.2
768.0
417.8
368.8
119.3
79.8%
0.0%
0.0%
0.0%
0.0%
0.0%
25.2%
85.3%
39.9%
72.0%
0.0%
0.0%
13.8%
0.0%
88.7%
98.0%
48.0%
0.0%
230.0%
150.3%
383.0%
154.8%
100.7%
270.4%
-------
Table 5-A (continued from prior page)
DWSRF Data by State as of June 30, 2007 (millions)
Federal
Capitalization
State
Capitalization
Equity
Retained
Earnings as
% of Equity
Leveraged
Bonds
Loans
Executed
Leveraged
Bonds as %
of Loans
Executed
Executed
Loans as %
of Federal
Capitalization
Missouri
Montana
Nebraska
Nevada
New Hampshire
Newjersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tenne
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
92.7%
0.0%
0.0%
0.0%
0.0%
46.9%
215.6%
131.7%
178.6%
156.6%
205.5%
199.5%
06.4/0
412.3%
114.1%
156.3%
231.5%
223.2%
141.6 /o
149.9%
106.3%
231.3%
135.3%
149.8%
145.7%
95.0%
111.,2%
107.3%
171.6%
144.5%
105.1%
127.4%
127.8%
10
-------
Table 5-B
DWSRF Data by Lending Structure as of June 30, 2007 (millions)
United States
Leveraged ~ High
Federal
Capitalization
6,534.2
1,612.0
Leveraged ~ Medium 888.2
Leveraged ~ Low
Direct Loan States
Leveraged ~ High ~
Michigan
Missouri
Massachusetts
Indiana
Colorado
Connecticutt
Alabama
Oklahoma
Kansas
New York
522.9
3,511.2
Leveraged Bonds Funde
241.1
111.1
217.3
138.9
98.9
58.1
110.1
122.3
100.7
413.6
State
Capitalization
1,875.5
570.1
217.4
117.5
970.5
Equity
9,212.7
2,465.8
1,269.7
679.9
4,797.4
Retained
Earnings as
% of Equity
8.7%
11.5%
12.9%
5.8%
6.6%
Leveraged
Bonds
4,856.0
3,685.4
984.1
186.5
-
Loans
Executed
11,952.2
4,683.8
2,084.5
771.4
4,412.5
Leveraged
Bonds as %
of Loans
Executed
40.6%
78.7%
47.2%
24.2%
0.0%
Executed
Loans as %
of Federal
Capitalization
182.9%
290.6%
234.7%
147.5%
125.7%
d More than 66.67% of Total DWSRF Loans
62.3
33.2
57.1
24.9
25.2
16.8
39.7
22.3
23.6
265.0
Leveraged ~ Medium ~ Leveraged Bonds Funded Between 33
Rhode Island
Minnesota
Ohio
New Jersey
Arizona
Iowa
Leveraged ~ Low ~
North Dakota
Illinois
South Dakota
Maine
Direct Loan States ~
Alaska
56.2
127.7
233.1
232.7
91.1
147.4
15.1
40.9
74.8
41.4
19.4
25.8
321.9
147.1
339.9
170.3
129.4
83.1
167.4
143.3
135.9
827.6
33%and66.67°/
75.0
184.5
392.1
325.8
113.3
179.0
5.7%
1.9%
19.3%
3.8%
4.1%
9.9%
10.5%
-0.9%
8.5%
18.0%
409.4
221.9
681.4
255.6
219.5
69.6
191.0
200.4
268.5
1,168.1
417.8
239.5
768.0
299.5
267.5
87.2
253.1
273.1
373.1
1,705.0
98.0%
92.7%
88.7%
85.3%
82.1%
79.8%
75.5%
73.4%
72.0%
68.5%
173.3%
215.6%
353.5%
215.6%
270.4%
150.1%
230.0%
223.2%
370.7%
412.3%
xo of Total DWSRF Loans
4.9%
8.6%
21.5%
15.9%
2.5%
3.2%
80.5
177.0
257.8
217.6
158.1
93.1
130.1
368.8
539.5
464.2
348.7
233.2
61.9%
48.0%
47.8%
46.9%
45.3%
39.9%
231.3%
288.8%
231.5%
199.5%
383.0%
158.3%
Leveraged Bonds Funded Up to 33.33% of Total DWSRF Loans
90.1
282.8
102.3
47.7
DWSRF Loans Funded
80.6
22.4
59.7
18.5
16.9
119.4
364.2
128.3
68.0
5.8%
6.0%
5.8%
5.0%
43.4
105.3
29.5
8.3
140.8
417.4
153.2
60.0
30.8%
25.2%
19.3%
13.8%
156.3%
147.6%
149.8%
125.8%
Only with DWSRF Equity
19.6
102.2
2.0%
_
121.1
0.0%
150.3%
11
-------
Table 5-B (continued from prior page)
DWSRF Data by Lending Structure as of June 30, 2007 (millions)
Arkansas
California
Delaware
Florida
Georgia
Hawaii
Idaho
Kentucky
Louisiana
Maryland
Mississippi
Montana
Nebraska
Nevada
New Hampshire
New Mexico
North Carolina
Oregon
Pennsylvania
Puerto Rico
South Carolina
Tennesse
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Federal
Capitalization
62.1
611.7
54.2
145.3
79.5
59.8
63.3
75.6
92.6
43.0
80.7
79.7
40.2
57.9
33.9
52.1
150.5
59.3
239.3
103.7
73.7
76.1
507.8
44.4
41.9
48.1
150.9
55.3
161.3
86.7
State
Capitalization
20.6
160.7
15.0
58.0
30.1
17.2
15.9
27.3
14.3
19.5
20.7
17.1
16.8
18.4
17.8
15.1
35.8
26.6
50.4
19.9
19.3
20.7
122.9
15.1
16.7
31.0
42.0
15.1
32.5
18.4
Equity
89.3
810.0
71.8
238.2
114.0
81.2
83.1
110.8
108.8
74.1
119.3
99.7
62.4
80.8
56.8
71.3
202.1
94.2
323.7
124.6
105.7
105.2
646.3
62.1
60.7
83.7
208.5
73.8
219.0
114.0
Retained
Earnings as
% of Equity
7.4%
4.6%
3.6%
14.7%
3.9%
5.2%
4.7%
7.1%
1.7%
15.7%
15.0%
2.9%
8.7%
5.6%
9.0%
5.8%
7.8%
8.8%
10.5%
0.8%
12.0%
8.0%
2.4%
4.2%
3.5%
5.5%
7.5%
4.6%
11.5%
7.8%
Leveraged Loans
Bonds Executed
96.2
616.0
71.9
274.1
130.1
69.5
80.6
96.6
91.6
76.2
119.3
105.0
71.8
90.6
69.7
45.0
171.8
83.9
358.7
110.3
99.7
110.8
482.5
49.4
44.9
82.6
218.1
58.1
205.5
110.8
Leveraged
Bonds as %
of Loans
Executed
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Executed
Loans as %
of Federal
Capitalization
154.8%
100.7%
132.7%
188.7%
163.6%
116.1%
127.3%
127.8%
99.0%
177.2%
147.8%
131.7%
178.6%
156.6%
205.5%
86.4%
114.1%
141.6%
149.9%
106.3%
135.3%
145.7%
95.0%
111.2%
107.3%
171.6%
144.5%
105.1%
127.4%
127.8%
12
-------
Section III. Analysis of Historical Data
Clean Water SRF Program
To review and compare data, states were grouped into one of four lending structures:
Q Direct Loan - Includes 24 states that originate CWSRF loans only with CWSRF equity.
Q Leveraged ~ Low - Includes 9 states that have issued leveraged bonds to fund up to 33.33%
of their total CWSRF loans.
Q Leveraged ~ Medium - Includes 9 states that have issued leveraged bonds to fund between
33.33% and 66.67% of their total CWSRF loans.
Q Leveraged ~ High - Includes 9 states that have issued leveraged bonds to fund more than
66.67% of their total CWSRF loans.
As of June 30, 2007, EPA has awarded
more than $24.9 billion in Capitalization
Grants to CWSRF Programs throughout
the United States. Of this $24.9 billion
awarded, states have allocated $23.5
billion to capitalize the CWSRF
("CWSRF Federal Capitalization"), $1.0
billion to administer the CWSRF, and
$381.8 million for transfer to the
DWSRF. The chart to the right depicts
the allocation of the $23.5 billion in
CWSRF Federal Capitalization by the
four groups of states.
CWSRF Federal Capitalization June 30, 2007
Leveraged ~
Medium
$5,252,900,000
22%
Leveraged ~ High
$6,499,900,000
28%
Leveraged ~ Low
$5,148,600,000
22%
Direct Loan
$6,647,900,000
28%
Both direct loan and leveraged loan programs have been successful in making loans in excess of
federal capitalization. The $23.5 billion of CWSRF Federal Capitalization has enabled states to
originate more than $62.9 billion in CWSRF loans as of June 30, 2007.
As shown in the chart to the right,
the 24 states that operate direct
loan programs have originated
$12.8 billion in loans - 20% of the
total loans originated through June
30, 2007. The 27 states that
leverage have originated $50.1
billion in loans - 80% of the total
loans originated. It is worth
noting that 9 states categorized as
"Leveraged ~ High" originated
36% or $22.3 billion of the total
loans.
$62.9 Billion of CWSRF Loans Executed, June 30, 2007
Leveraged ~ Low
$11,814,400,000
19%
Leveraged
Medium
$15,968,100,000
25%
Direct Loan
$12,833,600,000
20%
Leveraged ~ High
$22,333,000,000
36%
13
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As a result of lending state contributed capital, recycled federal and state contributed capital, and
retained earnings, all states have, in effect, "leveraged" their CWSRF federal grants by
originating an amount of loans that exceeded their CWSRF Federal Capitalization. As shown in
the chart below, the average "leveraging factor" for all state CWSRF programs was $2.67 of
loans for each $1.00 of CWSRF Federal Capitalization.
$ of Loans per $1.00 of CWSRF Federal Capitalization
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$3.44
$2.67
$3.04
$2.29
$1.93
Direct Loan
Leveraged ~
Low
All States
Average
Leveraged ~ Leveraged ~
Medium
The highest "leveraging factor" for a single state was $4.94 of loans for each $1.00 of CWSRF
Federal Capitalization and the lowest "leveraging factor" was $1.11.
Through June 30, 2007, twenty-
seven states have issued more than
$27.7 billion in leveraged bonds to
meet demand for CWSRF loans.
As shown in the chart to the right,
the nine states categorized as
"Leveraged ~ High" have issued
69% of the total leveraged bonds
through June 30, 2007.
$27.7 Billion in Leveraged Bonds, June 30, 2007
Leveraged ~ High
$19,116,900,000
69%
Leveraged ~
Medium
$7,226,000,000
26%
Leveraged ~ Low
$1,392,200,000
5%
Direct Loan
Each SRF program has three components within their CWSRF equity:
Q Federal Capitalization - The amount of federal funding held in perpetuity as an asset within
the CWSRF in the form of a loan receivable, cash, or an investment.
Q State Capitalization - The amount of state match funding held in perpetuity as an asset within
the CWSRF in the form of a loan receivable, cash, or an investment.
Q Retained Earnings - The amount of loan interest payments and investment earnings
generated and retained by the CWSRF in the form of a loan receivable, cash, or an
investment. Unlike federal and state contributions, retained earnings are not required to be
held in perpetuity as long as their use/expense is directly related to repaying either match or
leveraged bonds.
14
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Many states have a fourth component of CWSRF "related equity" which is held outside EPA's
definition of the CWSRF. Loan fees, for example, are not deposited into the SRFs in many
states.
Loan fees can be used for any purpose related to the enabling federal CWSRF statutes and do not
need to be held in perpetuity. However, it is reasonable to assume that states will eventually
expend loan fees to administer the CWSRF or for some other purpose related to the CWSRF.
Accordingly, this report excludes loan fees from the analysis of retained earnings.
Based on data reported annually by each state to EPA, it is possible to measure and compare
CWSRF retained earnings. The chart below depicts retained earnings as a percentage of CWSRF
equity as of June 30, 2007. Due to the greater volume of subsidized loans originated, states
categorized as "Leveraged ~ High" and "Leveraged ~ Medium" typically have less retained
earnings as compared to states categorized as "Leveraged ~ Low" and "Direct Loan." On
average, states have 16.52% of their CWSRF equity in the form of retained earnings.
Retained Earnings as % of CWSRF Equity, June 30,2007
5.00%
0.00% -\
Direct Loan
Leveraged'
Low
All States Leveraged ~ Leveraged ~
Average Medium High
Table 6 provides additional detail on retained earnings. The data indicates that twelve of the
twenty-four direct loan states have retained earnings within the top third of all states. In contrast,
seven of the nine Leveraged ~ High states have retained earnings within the bottom third.
Table 6: Analysis of Retained Earnings as % of CWSRF Equity
Ranking of States by % of Retained Earnings Top Third Middle Third Bottom Third
Average Retained Earnings as % of Equity
# of States
Direct Loan (24 States)
Leveraged ~ Low (9 States)
Leveraged ~ Medium (9 States)
Leveraged ~ High (9 States)
Average Loan Rates (Overall Average is 2.10%)
Borrowed Match as % of Total Match
Loan Disbursements as % of Loans
25.95%
12
2
2
1
2.14%
9.31%
79.31%
16.97%
7
7
2
1
2.42%
15.96%
87.51%
7.68%
5
0
5
7
2.01%
41.65%
91.11%
15
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In addition to the impact of issuing leveraged bonds, other factors influence the amount of
CWSRF retained earnings including:
Q Source of State Match - Appropriated match can have a comparatively positive effect on
retained earnings while borrowed match can translate into less retained earnings.
Q Loan Disbursements as % of Loans - States that disburse loan proceeds slowly are more
likely to earn and retain income on cash balances before loan proceeds are disbursed to
borrowers.
Q More Recent Financing Innovations -Since the late 1990s, there have been various financing
innovations which have enabled states to invest at higher yields and retain the income.
Drinking Water SRF Program
Similar to the CWSRF analysis, to review and compare DWSRF data, states were grouped
organized into one of four lending structures:
Q Direct Loan - Includes 31 states that originate DWSRF loans only with DWSRF equity.
Q Leveraged ~ Low - Includes 4 states that have issued leveraged bonds to fund up to 33.33%
of their total DWSRF loans.
Q Leveraged ~ Medium - Includes 6 states that have issued leveraged bonds to fund between
33.33% and 66.67% of their total DWSRF loans.
Q Leveraged ~ High - Includes 10 states that have issued leveraged bonds to fund more than
66.67% of their total DWSRF loans.
As of June 30, 2007, EPA has awarded more than $8.1 billion in Capitalization Grants to
DWSRF and Set-Aside Programs throughout the United States. Additionally, states have
transferred $381.8 million of funding from the CWSRF to the DWSRF. Of this $8.5 billion
awarded or transferred to the DWSRF, states have allocated $6,522.6 million to capitalize the
DWSRF, $689 million to DWSRF forgivable principal, $1,299.1 million to administer set-aside
programs, and $11.6 million to set-aside loan programs.
The $6,522.6 million of DWSRF
capitalization and the $11.6 million of
set-aside loans can be collectively
considered as the DWSRF Federal
Capitalization. The chart to the right
depicts the allocation of the $6,534.2
million ($6.5 billion) in DWSRF
Federal Capitalization by the four
groups of states.
Both Direct Loan and Leveraged Loan
programs have been successful in
making loans in excess of the DWSRF
DWSRF Federal Capitalization, June 30,2007
Leveraged ~
Medium
$888,150,000
Leveraged ~ Higr
$1,612,020,000
Direct Loan
$3,511,200,000
53%
14%
Leveraged ~ Low
$522,850,000
8%
16
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Federal Capitalization. The $6.5 billion of DWSRF Federal Capitalization has enabled states to
originate more than $11.9 billion in DWSRF loans as of June 30, 2007.
As shown in the chart to the right,
the 31 states that operate direct
loan programs have originated
$4.4 billion in loans - 37% of the
total loans originated through
June 30, 2007. The 20 states
that leverage have originated
$7.5 billion in loans - 63% of the
total loans originated. It is
worth noting that 10 states
categorized as "Leveraged ~
High" originated 40% or $4.7
billion of the total loans.
$11.9 Billion of DWSRF Loans Executed, June 30,2007
Leveraged ~
Medium
$2,084,540,000
17%
Leveraged ~ High
$4,683,800,000
40%
Leveraged ~ Low
$771,400,000
6%
Direct Loan
$4,412,460,000
37%
As a result of lending state contributed capital, recycled federal and state contributed capital, and
retained earnings, most states have, in effect, "leveraged" their DWSRF federal grants by
originating an amount of loans that exceeded their DWSRF Federal Capitalization. As shown in
the chart below, the average "leveraging factor" for all state DWSRF programs was $1.83 of
loans for each $1.00 of DWSRF Federal Capitalization.
$ of Loans per $1.00 of DWSRF Federal Capitalization
Di
The highest "leveraging factor" for a single
state was $4.12 of loans for each $1.00 of
federal capitalization and the lowest
"leveraging factor" was $0.86.
Through June 30, 2007, twenty states have
issued more than $4.9 billion in leveraged
bonds to meet demand for DWSRF loans. As
shown in the chart to the right, the ten states
categorized as "Leveraged ~ High" have
issued 76% of the total leveraged bonds
through June 30, 2007.
All States
Average
Leveraged ~ Leveraged ~
Medium High
$4.9 Billion in Leveraged Bonds, June 30, 2007
Leveraged ~ High
$3,685,420,000
76%
Leveraged ~
Medium
$984,100,000
20%
Leveraged ~ Low
$186,500,000
4%
Direct Loan
17
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Each DWSRF program has three components within their equity:
Q Federal Capitalization - The amount of federal funding held in perpetuity as an asset within
the DWSRF in the form of a loan receivable, cash, or an investment.
Q State Capitalization - The amount of state match funding held in perpetuity as an asset within
the DWSRF in the form of a loan receivable, cash, or an investment.
Q Retained Earnings - The amount of loan interest payments and investment earnings
generated and retained by the DWSRF in the form of a loan receivable, cash, or an
investment. Unlike federal and state contributions, retained earnings are not required to be
held in perpetuity as long as their use/expense is directly related to repaying either match or
leveraged bonds.
Many states have a fourth component of DWSRF "related equity" which is held outside EPA's
definition of the DWSRF. Loan fees, for example, are not deposited into the SRFs in many
states.
Loan fees can be used for any purpose related to the enabling federal DWSRF statutes and do not
need to be held in perpetuity. However, it is reasonable to assume that states will eventually
expend loan fees to administer the DWSRF or for some other purpose related to the DWSRF.
Accordingly, this report excludes loan fees from the analysis of retained earnings.
Based on data reported annually by each state to EPA, it is possible to measure and compare
DWSRF retained earnings. The chart below depicts retained earnings as a percentage of
DWSRF equity as of June 30, 2007. On average, states have 8.72% of their DWSRF equity in
the form of retained earnings.
Retained Earnings as % of DWSRF Equity, June 30,2007
14.00%
12.00%
Direct Loan Leveraged ~ All States
Low Average
Leveraged ~ Leveraged ~
Medium High
It is worth noting that the six states categorized as "Leveraged ~ Medium" and the 10 states
categorized as "Leveraged ~ High" have above average DWSRF retained earnings. This
contrasts with the CWSRF where "Leveraged ~ Medium" and "Leveraged ~ High" states have
below average retained earnings. In part, this can be explained by leveraging innovations states
have employed as a result of lessons learned in CWSRF leveraging from 1989 through the
implementation of the DWSRF in 1997-1998.
18
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Table 7 provides additional detail on DWSRF retained earnings. Similar to the CWSRF data
detailed in Table 6, the source of state match can have an effect on DWSRF retained earnings.
Appropriated match can have a comparatively positive effect on retained earnings while
borrowed match can translate into retained earnings.
Table 7: Analysis of Retained Earnings as % of DWSRF Equity
Ranking of States by % of Retained Earnings Top Third Middle Third Bottom Third
Average Retained Earnings as % of Equity
# of States
Direct Loan (31 States)
Leveraged ~ Low (4 States)
Leveraged ~ Medium (6 States)
Leveraged ~ High (10 States)
Average Loan Rates (Overall Average is 2.20%)
Borrowed Match as % of Total Match
Loan Disbursements as % of Loans
14.90%
9
0
3
5
2.38%
16.37%
79.55%
6.34%
11
4
1
1
2.08%
13.65%
80.39%
3.10%
11
0
2
4
2.16%
34.64%
77.30%
19
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Section IV. Characteristics of States by Leveraging Factor
Clean Water SRF Program
As stated earlier within Section III, each state has a "leveraging factor" which measures the
amount of executed CWSRF loans based on the amount of Federal CWSRF Capitalization. As
of June 30, 2007, states have executed $62.9 billion of CWSRF loans based on $23.5 billion of
Federal CWSRF Capitalization. The national average for CWSRF loans executed was $2.67 of
loans for each $1.00 of Federal CWSRF Capitalization; in other words the average CWSRF
"leveraging factor" was $2.67.
All states can be ranked by their CWSRF leveraging factor and placed into the top third, middle
third, and bottom third. The leveraging factor for the top third of the states ranged from $4.94 to
$2.70, the middle third ranged from $2.70 to $2.01, and the bottom third ranged from $1.98 to
$1.11. For detail on individual states, see Table 4-A or Table 4-B.
As a means of comparing and contrasting states, Table 8 shows the number of states by:
1. Leveraging Factor, and
2. Lending Structure.
Table 8: CWSRF Leveraging Factor and Lending Structure
Lending Structure
Leveraged ~ High
Leveraged ~ Medium
Leveraged ~ Low
Direct Loan States
Total Number of States
Top Third
Leveraging Factor
7
7
2
1
17
Middle Third
Leveraging Factor
2
1
5
9
17
Bottom Third
Leveraging Factor
0
1
2
14
17
As shown in Table 8, states in the top third for leveraging factor are significantly more likely to
be "Leveraged ~ High" and "Leveraged ~ Medium" states. In contrast, states in the bottom third
are significantly more likely to be "Direct Loan" states.
As another means of comparing and contrasting, states can be categorized into one of four
categories by the role of a finance authority/agency in day to day CWSRF management:
O Lead Role - A finance authority/agency serves as the lead contact and manages all aspects of
the CWSRF from generating the Intended Use Plan to servicing loans.
O Significant Role - A finance authority/agency manages some, but not all, aspects of the
CWSRF including programmatic and financial aspects.
O Minor Role - A finance authority/agency may service loans and may issue state match or
leveraged bonds on behalf of the CWSRF.
O No Role - No finance authority/agency is involved in any aspect of the CWSRF program.
20
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Table 9 shows the number of states by:
1. Leveraging Factor
2. Finance Authority/Agency Role
Table 9: CWSRF Leveraging Factor and Finance Authority/Agency Role
Finance Authority /Agency Role
Lead Role
Significant Role
Minor Role
No Role
Total Number of States
Top Third
Leveraging Factor
11
4
2
0
17
Middle Third
Leveraging Factor
5
2
5
5
17
Bottom Third
Leveraging Factor
3
•5
3
5
6
17
As shown in Table 9, states in the top third for leveraging factor are significantly more likely to
assign a lead or significant CWSRF management role to a finance authority/agency. In contrast,
states in the bottom third are more likely to assign a minor or no management role to a finance
authority/agency.
Table 10 presents CWSRF national averages for five program measures and compares these
national averages to the averages by leveraging factor rankings.
Table 10: CWSRF Leveraging Factor and Program Measures
Program Measure
Average Interest Rate
Average % of Loans Funded with
Leveraged Bonds as % of Total Loans
Average % of Match
Bonds as % of Total Match
Average % of Disadvantaged
Assistance as % of Equity
Average % of Retained
Earnings as % of Equity
CWSRF
National
Average
2.10%
44.1%
24.1%
10.9%
16.6%
Top Third
Leveraging
Factor
2.32%
62.4%
37.2%
10.1%
13.5%
Middle Third
Leveraging
Factor
2.28%
29.5%
14.6%
5.4%
20.1%
Bottom Third
Leveraging
Factor
1.96%
4.9%
13.8%
21.2%
16.7%
Based on the data in Table 10, states ranking in the top third for the CWSRF leveraging factor
are:
1. more likely to set CWSRF interest rates above the average interest rate of 2.10%,
2. significantly more likely to fund CWSRF loans with leveraged bonds,
3. significantly more likely to rely on bonds for CWSRF state match,
4. somewhat less likely to provide disadvantaged terms to CWSRF borrowers, and
5. less likely to have CWSRF retained earnings, as a percentage of equity, above the
average retained earnings of 16.6%.
21
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In contrast, states ranking in the bottom third for the CWSRF leveraging factor are:
1. more likely to set CWSRF interest rates below the national average of 2.10%,
2. significantly more likely to fund CWSRF loans with CWSRF equity,
3. significantly more likely to rely on appropriations for CWSRF state match,
4. significantly more likely to provide disadvantaged terms to CWSRF borrowers, and
5. likely to have CWSRF retained earnings, as a percentage of equity, approximately equal
to the average retained earnings of 16.6%.
Drinking Water SRF Program
Similar to the above analysis of the Clean Water SRF, each state has a "leveraging factor" which
measures the amount of executed DWSRF loans based on the amount of Federal DWSRF
Capitalization. As of June 30, 2007, states have executed $11.9 billion of DWSRF loans based
on $6.5 billion of Federal DWSRF Capitalization. The national average for DWSRF loans
executed was $1.83 of loans for each $1.00 of Federal DWSRF Capitalization; in other words the
average DWSRF "leveraging factor" was $1.83.
States can be ranked by their DWSRF leveraging factor and placed into the top third, middle
third, and bottom third. The leveraging factor for the top third of the states ranged from $4.12 to
$1.77, the middle third ranged from $1.73 to $1.35, and the bottom third ranged from $1.33 to
$0.86. For detail on individual states, see Table 5-A or Table 5-B.
As a means of comparing and contrasting states, Table 11 shows the number of states by:
1. Leveraging Factor, and
2. Lending Structure.
Table 11: DWSRF Leveraging Factor and Lending Structure
Lending Structure
Leveraged ~ High
Leveraged ~ Medium
Leveraged ~ Low
Direct Loan States
Total Number of States
Top Third
Leveraging Factor
8
5
0
4
17
Middle Third
Leveraging Factor
2
1
3
11
17
Bottom Third
Leveraging Factor
0
0
1
16
17
States in the top third for leveraging factor are significantly more likely to be "Leveraged ~
High" and "Leveraged ~ Medium" states. In contrast, states in the bottom third are significantly
more likely to be "Direct Loan" states.
Identical to the CWSRF analysis, states can be categorized into one of four categories by the role
of a finance authority/agency in day to day DWSRF management:
O Lead Role - A finance authority/agency serves as the lead contact and manages all aspects of
the DWSRF from generating the Intended Use Plan to servicing loans.
22
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n Significant Role - A finance authority/agency manages some, but not all, aspects of the
DWSRF including programmatic and financial aspects.
O Minor Role - A finance authority/agency may service services loans and may issue state
match or leveraged bonds on behalf of the DWSRF.
O No Role - No finance authority/agency is involved in any aspect of the DWSRF program.
Table 12 presents the number of states by:
1. Leveraging Factor, and
2. Finance Authority/Agency Role.
Table 12: DWSRF Leveraging Factor and Finance Authority/Agency Role
Finance Authority /Agency Role
Lead Role
Significant Role
Minor Role
No Role
Total Number of States
Top Third
Leveraging Factor
10
3
1
3
17
Middle Third
Leveraging Factor
3
4
5
5
17
Bottom Third
Leveraging Factor
O
5
3
2
9
17
States in the top third for leveraging factor are significantly more likely to assign a lead or
significant DWSRF management role to a finance authority/agency. In contrast, states in the
bottom third are more likely to assign a minor or no management role to a finance
authority/agency.
Table 13 presents DWSRF national averages for five program measures and compares these
national averages to the averages by leveraging factor rankings.
Table 13: DWSRF Leveraging Factor and Program Measures
Program Measure
Average Interest Rate
Average % of Loans Funded with
Leveraged Bonds as % of Total Loans
Average % of Match
Bonds as % of Total Match
Average % of Disadvantaged
Assistance as % of Equity
Average % of Retained
Earnings as % of Equity
DWSRF
National
Average
2.20%
40.6%
21.5%
32.3%
8.7%
Top Third
Leveraging
Factor
2.47%
62.8%
24.4%
42.2%
13.2%
Middle Third
Leveraging
Factor
2.36%
25.3%
18.8%
31.3%
7.2%
Bottom Third
Leveraging
Factor
1.79%
0.34%
19.9%
21.3%
4.8%
23
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Based on the data in Table 13, states ranking in the top third for the DWSRF leveraging factor
are:
1. significantly more likely to set DWSRF interest rates above the average interest rate of
2.20%,
2. significantly more likely to fund DWSRF loans with leveraged bonds,
3. more likely to rely on bonds for DWSRF state match,
4. significantly more likely to provide disadvantaged terms to DWSRF borrowers, and
5. significantly more likely to have DWSRF retained earnings, as a percentage of equity,
above the average retained earnings of 8.7%.
In contrast, states ranking in the bottom third for the DWSRF leveraging factor are:
1. significantly more likely to set DWSRF interest rates below the average interest rate of
2.20%,
2. significantly more likely to fund DWSRF loans with DWSRF equity,
3. more likely to rely on appropriations for DWSRF state match,
4. significantly less likely to provide disadvantaged terms to DWSRF borrowers, and
5. significantly more likely to have DWSRF retained earnings, as a percentage of equity,
below the average retained earnings of 8.7%.
24
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Section V. Detailed Analysis of the Direct Loan and Leveraged Loan SRF
Approaches
Introduction
Both the direct loan approach and the leveraged loan approach are methods for implementing the
purpose of EPA's State Revolving Fund ("SRF") Program - to encourage environmental
compliance by providing low-cost or "subsidized" loans to qualifying environmental projects
both currently and in the future. The purpose of this section is to evaluate the relative
effectiveness of the two approaches in furthering EPA's objectives for the SRF Programs.
The topics discussed below with respect to the two approaches include:
O Descriptions of the two approaches and variations thereof;
O The techniques employed under each approach to provide interest subsidies for qualifying
loans;
O The capacity to provide loan subsidies under each approach and the loan capacity of an SRF
under each approach;
O The relative cost to an SRF under each approach of providing loan subsidies;
O The effective returns under each approach on SRF equity used to provide interest subsidies,
including the impact of the Internal Revenue Service ("IRS") arbitrage regulations which
limit the investment returns on SRF equity under certain circumstances;
O The effectiveness of each approach in generating retained earnings in order to grow the
amount of equity in the SRF; and
O The policy tradeoff that exists between (i) applying earnings on SRF equity to provide loan
subsidies today and (ii) retaining such earnings and utilizing the earnings thereon to provide
loan subsidies in the future on either existing or future SRF loans.
Subsidized Borrowing
Loan subsidies are provided by SRF's using two basic approaches (as used herein, "loan"
includes purchased obligations as defined in the Clean Water and Drinking Water Acts):
O Direct Loan Approach. Making loans to finance qualifying projects at below market rates
funded solely from SRF equity ("direct" loans). The "equity requirement" for a direct loan
equals the amount of the loan; the loan rate on the SRF equity equals the target subsidized
loan rate.
O Leveraged Loan Approach. Making loans to finance qualifying projects at below market
rates funded in whole or in part with borrowed money ("leveraged loans"). For an SRF using
25
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a leveraged loan approach, the capacity of the SRF to make loans for qualifying projects will
exceed the amount of the SRF's equity. Historically, two basic techniques have been used to
create leveraged loans, the reserve fund approach and the blended loan approach. The
descriptions of the types of loans discussed below are simple examples of the basic types of
leveraging methodologies that are used in SRF programs. They are the building blocks that
states use to design their unique programs. In actual practice, many SRF programs use some
or all of the basic loan methodologies in combination (referred to herein as the "cash flow
approach"). There are a variety of permutations of the basic approaches which are used
together with various financial innovations described later in this report.
• Reserve Fund Approach. Making leveraged loans from money borrowed at market rates
and using earnings on invested SRF equity to pay or reimburse part of the interest cost on
the bonds issued to fund the loans. The invested SRF equity is typically deposited into a
reserve fund. The equity requirement for a loan under the reserve fund approach is the
amount of equity, invested at the market interest rate, necessary to produce the target
interest subsidy. To produce a loan rate equal to x% of the market rate, i.e., a loan
subsidy equal to (1 minus x%) of the market rate, the equity requirement equals (1 minus
x%) times the loan amount
• Blended Loan Approach. Making leveraged loans from a combination of equity and
money borrowed at market rates. The borrowers' interest cost is a combination of the
market rate on the portion of the loans derived from the borrowing and a significantly
below market rate (e.g., 0%) that is charged by the SRF on the portion of the loans
derived from equity. In order to repay the bonds, the SRF must charge the bond interest
rate on the portion of the loan made from bond proceeds. So, if any bond proceeds are
used, the borrower's interest cost will be more than 0%. The "equity requirement" for a
loan under the blended loan approach is the amount of equity bearing a 0% loan rate that
in combination with the balance of the loan (which is funded from bond proceeds and
bears a market interest rate) produces a combined loan rate equal to the target subsidized
loan rate. To produce a loan rate equal to x% of the market rate, the equity requirement
equals (1 minus x%) times the loan amount. Under the blended loan approach, the cost to
an SRF of funding the portion of its loans made from bond proceeds is the tax-exempt or
taxable market rate. Economically, to use the minimum amount of equity to support the
loans (i.e., the equity requirement), the equity must be lent at a 0% interest rate. The SRF
may choose to quote a single "blended" interest rate for the entire loan. However, in this
discussion, a distinction will be made between the loan rate on the portion of the loan
made from bond proceeds (i.e., the market rate) and the 0% loan portion made from
equity.
The direct and leveraged loan approaches have been used with success by various SRFs. Over
time, many leveraged SRF programs have evolved to incorporate elements of both the blended
rate and the reserve fund approaches. The equity requirements described above for each
approach represent the minimum amounts of equity needed to support a given subsidized loan. In
the discussion below, it is always assumed that the amount of equity associated with a loan under
either the blended loan or direct loan approach equals the equity requirement since it would be an
inefficient use of SRF resources to utilize more equity than the equity requirement to support a
loan.
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SRF Financing Models Best Understood in Three Basic Forms
To understanding the financial workings of SRFs it is necessary to understand in some detail
how SRFs work in their basic forms. The subsidy provided to an SRF borrower is the difference
between (a) the rate at which the entity could otherwise borrow (a tax-exempt or taxable
municipal rate, e.g., 4%) and (b) the SRF loan rate (e.g., 2%). Given the illustrative 4% and 2%
municipal bond and SRF loan rates, respectively, the loan subsidy provided would be 2% (i.e.,
the market rate minus the loan interest rate), which represents a 50% subsidy versus the
borrower's alternative 4% cost of funds. The loan subsidy as a percentage of the market rate is
referred to below as the "subsidy percentage". The technique employed to provide an interest
subsidy and the capacity of the SRF to make subsidized loans depend on the SRF's particular
approach.
O Direct Loan Approach. For a direct loan SRF with $100 in equity, the SRF could make up to
$100 of 2% equity-funded loans. The subsidy is provided by only charging 50% of the
market tax-exempt rate that the SRF borrower would otherwise pay. The 2% loan interest
(which represents 1 minus the subsidy percentage times the market tax-exempt rate) would
go to retained earnings. As the loans are repaid, the SRF equity originally used for the loans
would be repaid and become available for new projects in the same amounts as the principal
repayments. An SRF's effective return on equity used to make a direct loan is structurally
limited to the sum of the subsidy provided plus actual loan interest. Such sum will always
equal the interest cost that the borrower would otherwise have paid on a loan, i.e., the market
rate.
Nationally, approximately 25% of SRF loans are considered "hardship" loans, which are
loans with interest rates below the state's average SRF loan rate. Hardship loans can be made
with a 0% interest rate, or, in the case of the drinking water program, with a rate below 0%,
i.e., some principal "forgiveness," which in effect is a grant of some amount. For a 0% loan,
there is no benefit to leveraging since earnings on $ 1 of equity are needed for each $ 1 of 0%
loan. So, 0% loans are made as direct loans, even by leveraging SRFs unless additional state
support from outside the SRF is used to pay debt service.
O Blended Loan Approach. For a leveraged SRF originating blended loans (funded by a
combination of equity and bond proceeds), the SRF could make $100 of loans funded from (a)
$50 of bond proceeds that are lent to the borrowers at the market rate of 4% and (b) $50 of
equity that is lent to the borrowers at 0%. The result is that the borrowers' overall rate would
be 2%. The subsidy percentage achieved under the blended loan approach is the equity
amount used to make loans divided by the total loan amount (i.e., 50% in our example). The
effective return on equity used to make the 0% direct loans is structurally limited to the
subsidy provided thereon, which equals the market rate on the bonds. As the loans are repaid,
the equity originally used to make loans would be repaid and become available for new
projects in amounts equal to the subsidy percentage times the principal repayments. The
remaining $50 of equity could be similarly used to provide an additional $100 of 2% loans.
So, the loan capacity would be twice as much as under the direct loan approach. The loan or
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"leveraging" capacity of a blended loan approach, stated as a multiple of SRF equity, equals
1 divided by the subsidy percentage (i.e., 2 times SRF equity in our example). Alternatively,
rather than being used for additional loans, the remaining $50 could be invested specifically
to generate retained earnings.
O Reserve Fund Approach. For a reserve fund SRF with $100 of equity, the SRF could make
$100 of loans from $100 of bond proceeds and use the interest earnings on $50 of equity (e.g.,
invested at 4%) to pay 50% of the interest on the bonds. The equity required equals the loan
amount times the subsidy percentage. As the loans are repaid, the equity originally deposited
in the reserve fund would be released and become available for new projects in amounts
equal to the subsidy percentage times the principal repayments. The remaining $50 of equity
could be similarly used to provide an additional $100 of 2% loans. So, the loan capacity
would be twice as much as under the direct loan approach. The loan or "leveraging" capacity
of a reserve fund approach SRF, stated as a multiple of SRF equity, equals 1 divided by the
subsidy percentage (i.e., 2 times SRF equity in our example). Alternatively, rather than being
used for additional loans, the remaining $50 of equity could be invested specifically to
generate retained earnings.
When leveraging there are transaction costs associated with the issuance of debt used to fund all
or a portion of the SRF loans. In the absence of the SRF program, borrowers would incur most of
the same costs. However, when using the direct loan approach, certain of the costs (in particular
underwriters' discount) are not incurred by the SRF or the borrower to raise the funds used to
make loans.
O For SRF's that leverage for the purpose of funding more loans than can be funded under the
direct loan approach, any increased transaction costs are simply the price of funding loans for
additional projects. However, the impact of such costs needs to be considered when
evaluating the relative benefits of using the direct or leveraged loan approaches in funding
the same amounts of loans. To measure the impact, the amount of such costs should be
deducted in determining the financial benefits of the leveraged approaches relative to the
direct loan approach. However, if a direct loan program does not impose the same transaction
charges as the borrowers otherwise would have to pay if they borrowed outside the SRF, the
actual debt service cost to SRF borrowers is slightly lower than the costs under either
leveraged approach.
O Assuming average incremental transaction costs of $7.50 per thousand dollars of loans, the
additional transaction costs for $100 of bonds under the reserve fund approach would be 75
cents. The additional transaction costs for $50 dollars of bonds under the blended loan
approach would be 37 cents. As detailed below, even with transaction costs, the increases in
retained earnings that can be achieved under the leveraged approaches are significantly
greater than the increases in transaction costs under those approaches.
O However, additional transaction charges, such as state bond charges, may be imposed on an
SRF in connection with the issuance of SRF bonds. Such charges could offset any relative
financial benefit of the leveraged approaches over the direct loan approach. Where such
charges are present, a specific analysis of their impact would be required.
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In both the direct loan approach and the blended loan approach, the subsidy is created by
investing SRF equity in loans to SRF borrowers and by foregoing earnings that could be realized
if the loans to the borrowers were made at market rates. In the reserve fund approach, the subsidy
is created by (1) making other (i.e., non-SRF loan) investments with SRF equity (which could be
taxable investments) and (2) using the earnings thereon to pay or reimburse a portion of the
interest cost on the debt issued to fund the borrowers' SRF loans. If the debt is tax-exempt, the
taxable investment rate may be higher than the interest cost on the debt. The investment return
on SRF equity is restricted under certain circumstances by the "arbitrage regulations"
promulgated by the Internal Revenue Service. In particular, the arbitrage regulations provide that
the investment return on bond proceeds (including such equity) may not exceed the yield on the
tax-exempt bonds.
O Assume for example that an SRF: (1) borrows $100 at a tax-exempt rate (e.g., 4%) to fund
SRF loans, (2) invests $50 of equity in higher rate taxable investments (e.g., at 4.50%) and (3)
uses the earnings to provide loan subsidies (i.e., by paying or reimbursing a portion of the
interest cost on the debt). The arbitrage regulations require that any amount by which the
investment earnings exceed the interest cost on the debt (i.e., 0.5%) must be rebated to the
IRS. So, the equity deposited in a reserve fund is effectively invested at the market tax-
exempt rate. Given that the debt interest rate and the "net" equity investment rate are the
same, the subsidy percentage achieved under the reserve fund approach is the equity amount
deposited in the reserve fund divided by the loan amount (i.e., 50% in our example). To the
extent that SRF equity is not invested in loans and is not treated as bond proceeds, the
earnings thereon are neither structurally nor legally limited to the bond yield.
O However, financial innovations which have evolved since inception of the SRF programs
have enabled leveraging SRFs to achieve higher investment returns on uncommitted SRF
equity by either (a) using funds that are already yield restricted (such as existing direct loans)
to fund new loan subsidies or (b) reducing the amount of dollars required to be invested to
fund loan subsidies, by using both the principal and interest of direct loans or scheduled
releases of principal from other pledged investments to fund loan subsidies. Conserving and
investing on an unrestricted basis equity that would otherwise have been pledged to support
loan subsidies on a restricted basis would on average increase an SRF's program investment
returns by the difference between the arbitrage restricted tax-exempt and unrestricted taxable
investment rates. Such increased return could be immediately used to increase funding
capacity or captured as retained earnings.
Except for hardship loans within the drinking water SRF, the maximum loan interest subsidy that
can be provided by making a direct loan of SRF equity is achieved by making a 0% loan. The
subsidy in our example would be 4%, i.e., the difference between the borrower's alternative tax-
exempt borrowing cost (4%) and the 0% loan rate, which represents a 100% interest subsidy.
O For a leveraged loan under the blended loan approach, a 0% rate would not be possible if any
portion of the loan were derived from bond proceeds (unless a state provides additional
support from outside of the SRF). The result of eliminating the bond proceeds (in order to
achieve a 0% interest rate) is a loan derived solely from equity, i.e., a direct loan.
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n As noted above, for a leveraged loan under the reserve fund approach, the subsidy percentage
achieved equals the equity amount deposited in the reserve divided by the loan amount. So,
to provide a 100% subsidy from earnings on SRF equity, a dollar of equity must be used (i.e.,
invested in the reserve fund) for each dollar of loans, just as under the direct loan approach.2
The "opportunity cost" to an SRF of funding a subsidized loan is the difference between (a) the
investment return on the equity used to make the subsidized loan and (b) the investment return
that such equity could earn if it were not used to make a subsidized loan. For this purpose, the
"investment return" on equity used to make a direct loan includes both the actual loan interest
and the amount of the subsidy that is provided to the loan recipient. Under both the direct loan
and leveraged loan approaches, the opportunity cost to the SRF of providing the subsidy on a
tax-exempt loan is greater than the subsidy itself. If the equity were simply invested by the SRF
in taxable fixed income investments, the SRF would earn a taxable rate, e.g., 4.5%. Given a 4%
tax-exempt rate, the cost to the SRF of providing a 50% subsidy (2% loan rate) will exceed the
subsidy provided to the borrower by 0.5% times the amount of equity used to provide the loan
subsidy. To make $100 of loans to a tax-exempt borrower under the direct loan approach, 2.5%
in earnings are forgone (the taxable interest rate at which the equity could otherwise be invested
minus the loan interest rate) of which 2% represents the subsidy and 0.5% would be lost to the
SRF. To make $100 of loans to a tax-exempt borrower using the blended loan approach, the $50
equity portion of the loan would earn 0%. So, 4.5% of potential investment earnings on $50
would be foregone and the subsidy created on the equity portion of the loan would be 4% (the
market tax-exempt rate minus the loan rate). The additional 0.5% that could be earned on a
taxable investment would be lost to the SRF. To make $100 of loans to a tax-exempt borrower
under the reserve approach, $50 of equity would be invested in taxable investments at 4.5%. Of
the 4.5%, 0.5% would be rebated to the IRS and so lost to the SRF and 4% would be used to
fund 50% of the interest on the $100 loan.
O The opportunity cost of providing $100 of direct loans is 0.5% on $100, whereas the
opportunity cost of providing the same amount of subsidized loans under either the blended
loan or reserve fund approach is 0.5% on $50.
O Without the limitations imposed by the arbitrage regulations, an SRF could retain all 4.5% of
earnings on the equity invested under the reserve fund approach. The additional 0.5%
earnings could go to retained earnings, reducing the cost of the subsidy to 2%. So, the
subsidy and the cost to the SRF of providing the subsidy would be identical. If arbitrage
relief were achieved, the reserve fund approach and the cash flow approach could be used to
generate higher retained earnings, because of the taxable investment rate, than either the
direct loan or blended rate approach.
There are basically three potential uses for earnings and forgone earnings on SRF equity,
whether such equity is invested in SRF loans or in other investments:
2 Note that Massachusetts has used a leveraged approach to fund 0% loans without using a dollar of equity for every dollar of loan. However, other
state monies were used to make debt sen/ice assistance payments equal to the loan interest that was not funded with earnings on equity.
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n Earnings and foregone earnings on equity can be used to fund loan subsidies as described
above.
O Earnings on equity can be retained by the SRF, which increases the SRF's equity.
O Earnings on equity (including interest on equity-funded loans) can be used to pay debt
service on bonds ("state match bonds") that are issued to fund all or a portion of the SRF's
required state match. For SRF's that use earnings to pay state match bond debt service, there
are fewer earnings on SRF equity available to provide loan subsidies or to grow retained
earnings.
An SRF's capacity to provide loan subsidies, to grow retained earnings, and to pay state match
bond debt service, which are all funded from actual or foregone earnings on equity, is
determined at any point in time by the amount of equity held by the SRF.
Sources of SRF Equity - Retained Earnings
Universally, the principal sources of equity in state SRFs are the federally provided capitalization
grants, the required (20%) state matching grants (collectively "contributions"), and any
additional state contributions or fees charged to borrowers, to the extent that all of the foregoing
have been received and deposited in the SRF ("contributed capital"). An additional source of
equity in all SRFs is retained earnings, i.e., earnings that are not immediately spent to fund loan
subsidies or to pay state match bond debt service. An SRF's "equity" is comprised of its
contributed capital and retained earnings.
Retained earnings are created (a) from loans made from SRF equity under the direct loan
approach if the loan interest rate exceeds 0%, or (b) under the blended loan approach if the loan
interest rate on the direct loan portion of the SRF loan exceeds 0% or, if applicable, the rate
necessary to fund debt service on any state match bonds, or (c) if under the reserve fund
approach, the SRF applies less than all of its investment earnings (after arbitrage rebate) toward
loan subsidies. Another source of retained earnings is investments made with equity that has
been repaid by a borrower or released from a reserve ("recycled") and that has not yet been
redeployed by the SRF. Retained earnings could also be generated by specifically investing a
portion of the SRF equity solely for the purpose of generating retained earnings, rather than, as is
common, using the same dollars of equity to fund loan subsidies and to pay any state match bond
debt service and also to generate retained earnings. An advantage of this approach is that the
earnings on such specifically invested equity, or program investments as the term is used by
some leveraging SRFs, (1) may not be restricted by the arbitrage regulations and (2) would not
be effectively restricted by operation of the direct loan or blended rate approach.3
Equity may be invested directly in interest-bearing loans related to a project and may be invested
in other investments to generate earnings. Such interest and other earnings can be used to fund
loan subsidies currently or to grow retained earnings. Due to the perpetuity rule4, contributed
3 The financial ma
to achieve higher investment returns than can be achieved under the direct loan approach.
4In actuality, there is no specific USEPA "perpetuity rule" although USEPA and the states recognize that the SRFs must be maintained in perpetuity. The
Clean Water Act requires that the fund balance in each SRF "shall be available in perpetuity for providing ... financial assistance." [33 U.S.C.1383
§603(c)] Similar language appears in the Safe Drinking Water Act, "The fund corpus shall be available in perpetuity for providing financial assistance...."
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capital derived from federal and state contributions cannot be used directly to pay loan subsidies,
only the earnings (or foregone earnings) on contributed capital can be used for loan subsidies.
However, retained earnings can be used in all of the same ways as contributed capital - to fund
loans and to generate additional earnings - and, in addition, can be directly applied to pay loan
subsidies. The flexibility to use retained earnings directly to fund loan subsidies has been
important in enabling financial innovation in many SRF leveraging programs.
Each state SRF must make a policy choice as to (a) the portion of its potential earnings on
equity that are used to meet current environmental needs, by funding subsidies on loans made
today, and (b) the portion of such earnings that are used to increase the SRF's capacity to
meet future environmental needs, by growing retained earnings. Using more earnings to grow
equity makes it easier to achieve sustainability in two respects: (1) it reduces the amount of
projects that can be funded currently, thus lowering the funding level that has to be sustained
(although obviously this has negative environmental impact), and (2) it increases the amount
of equity that will be available in the future to fund loan subsidies.
Historically, a leveraged approach has been used to increase or maximize an SRF's ability to
meet current environmental needs. By contrast, some states may determine to use a direct loan
approach if they have lower loan demand or place a greater emphasis on increasing their capacity
to meet future environmental needs. However, by taking advantage of financial innovations
developed by leveraging states, a direct loan SRF that makes interest-bearing loans can use
leveraging to both (a) make the same amount of subsidized loans that it would otherwise have
made and (b) increase the rate of growth of its retained earnings. This result is achieved by
devoting separate portions of the SRF's equity to funding loan subsidies and to growing retained
earnings. Using both the principal and interest of the equity investments that fund the subsidy,
rather than interest only, reduces the principal amount of equity that must be invested to fund the
subsidy and permits more equity to be used to grow retained earnings. The equity devoted solely
to growing retained earnings can be invested without any yield restriction under the arbitrage
regulations.
Comparison of Direct Loan and Leveraged Loan Approaches
Using the direct loan approach, $1 of equity is required for each $1 of loan provided for
qualifying projects. In many cases because of SRF resource constraints, this may limit the
portion of an individual project that can receive SRF financing; e.g. some states cap the total loan
amount a project may receive from the SRF. An advantage of the leveraged approach is the
ability to provide subsidized loans for a significantly greater amount of qualifying project costs.
The direct loan approach could be utilized to give the same amount of loan subsidies to the same
specific projects (by giving 0% direct loans for only a portion of each such project). However,
there is a much clearer identification that the benefit of the SRF program is being conveyed to
the entire project under the leveraged approaches because a loan can be given to the borrower by
the SRF for the entire amount of qualifying project costs.
[42 U.S.C. 300]-12(c)J. While EPA does not have any specific rule that implements this language, in its definition ofCWSRF Financial Indicators (see
CWSRF 01-3,dated October 31 2000), forexample, the agency seeks to gauge sustainability of the fund by determining if retained earnings, net of
cumulative state match bonds repaid, is equal to or greater than zero. If this test is met, "the CWSRF is deemed to be maintaining its contributed
capital...."
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Given any particular interest subsidy, stated as a percentage of the market rate, the leverage
factor on SRF equity that can be created using a leveraged loan approach is 1 divided by that
subsidy percentage. The loan capacity equals the amount of SRF equity times the leverage factor.
So, given a 1/2 market rate interest subsidy, SRF equity can be used to provide 2 times that
amount of SRF loans. Given a one third market rate interest subsidy, SRF equity can be used to
provide 3 times that amount of SRF loans. If an SRF is fully leveraged (i.e., the targeted loan
amount equals the loan capacity), the earnings on equity of the leveraged SRF (other than
earnings on recycled equity) would be fully utilized to fund the subsidies on the loans. By
contrast, a direct loan SRF that provides a one third of market rate interest subsidy receives loan
interest equal to 2/3 of the market interest rate to grow retained earnings, which can be used to
provide loans in the future. A direct loan program that provides a 1/2 market rate interest subsidy
receives loan interest equal to 1/2 of the market interest rate to grow retained earnings.
Consequently, a typical direct loan SRF that makes interest-bearing loans should have more
retained earnings (as a percentage of SRF equity) than a typical SRF that uses a leveraged
approach.
The additional loan capacity that is available under the leveraging approaches can be used to
meet more of the SRF's potential loan demand and to provide loans with longer repayment
periods. The Board has previously issued a report entitled "Application of Useful Life Financing
to State Revolving Funds" in which, for a variety of reasons described therein, the Board
recommended that EPA approve state requests for approval of useful life financing with
repayment terms beyond 20 years. One impact of an SRF moving from providing 20 year loans
to providing 30 year loans would be a reduction in the amount of equity that is recycled on an
annual basis. For a direct loan SRF, such a reduction in recycled equity would in turn reduce the
amount of loans that could be funded annually by the SRF. However, leveraging can be used to
maintain a similar level of project funding in both the short and intermediate term.
If federal capitalization grant contributions decline in the future, the SRFs will have to depend
more on internal growth of equity to sustain their programs. Such internal equity growth comes
from retained earnings. Reducing or eliminating impediments to the growth of retained earnings
will help the SRFs to become more sustainable.
EPA could enhance the ability of SRFs to grow earnings using financing innovations in two
ways.
• EPA could allow states to make draws on federal capitalization grants independent from
the expenditure of funds for project costs. This was formerly the case for states that
elected to use aggressive leveraging at the outset of the SRF. Given that the purposes of
the SRF program include meeting both current and future environmental needs, EPA
should be financially indifferent whether capitalization draws are used immediately to
fund projects or invested to grow retained earnings. This is particularly true because
permitting the latter will enable some SRFs to grow their equity faster.
• EPA could apply the perpetuity rule on a dynamic, rather than a static basis. Under this
alternative approach, compliance would be measured over time based on the SRF's
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reasonable expectations regarding future investment earnings (including earnings on
future investments) rather than be based on current year-end results.
Impact of Debt Structure on Effective Loan Rate
Under today's market conditions, callable bonds are generally sold with a bond coupon (e.g., 5%)
that is significantly higher than the yield (e.g., 4%) that the borrower pays until the call date (the
"stated yield"). The bonds maturing in years 11 and thereafter are typically callable beginning in
10 years. The price of the bonds is increased to reflect the fact that the borrower will receive
interest at 5%, even though the bond yield is 4%. For example, the price of a $100 bond might be
increased to $103 to reflect the higher bond coupon. The additional $3 above the amount of the
bond is referred to as a "bond premium", and such a bond is referred to as a "premium callable
bond". But, the adjusted price only reflects the assumption that the 5% coupon will be received
until the call date. As a result, the bond yield until the call date would be 4% (taking account of
the impact of the bond premium). But, the borrower's interest cost after the call date would equal
the bond coupon, i.e., 5%.
O Due to the prevalence of "premium" callable bonds in the municipal market, the market rate
from which the loan subsidy is deducted after year 10 (i.e., after the bond call date) for a
leveraged SRF will initially be higher than for a direct loan SRF. If, as is typical, premium
callable bonds are used by an SRF, after the call date, the effective interest rate on the bonds
will increase from the stated yield (e.g., 4%) to the bond coupon (e.g., 5%). So, the interest
rate, before application of the interest subsidy, on the portion of the SRF's loans that are
made from bond proceeds would increase after the call date from the stated yield (e.g., 4%)
to the bond coupon (e.g., 5%). For an SRF using the blended loan approach and providing a
50% interest subsidy, the subsidized loan rate in this example would increase after the call
date from 2% to 2.50%. For an SRF using the reserve fund approach, under the arbitrage
regulations, the 50% reserve fund could be invested at only at 4%, both before and after the
call date. So, the effective loan rate in this example would increase after the call date from
2% to 3%. By contrast, the loan rate from which the subsidy is deducted for a direct program
is typically the stated market tax-exempt yield (e.g., 4%) and does not change during the life
of the loan. So, given a 50% subsidy, the loan rate would be 2% throughout the life of the
loan.
O If a leveraged SRF issues premium callable bonds and thereafter tax-exempt interest rates
decline sufficiently, the SRF's bonds can be refunded for savings relative to the original
stated yield. Taking account of refunding savings, the loan rate under a leveraged approach
may ultimately be lower than the loan rate under the direct loan approach. Even without a
decline in rates, the callable bonds might be refunded to reduce the SRF's interest cost after
year 10 to a rate below 5%. However, unless the interest rate after year 10 (net of refunding
transaction costs) can be reduced to or below the stated yield of the original financing (i.e.,
4%), the leveraged loan borrowers will pay a higher subsidized rate than the direct loan
borrowers with the same market rates and interest subsidy.
SRFs using a leveraged approach can completely avoid the premium bond phenomenon by
issuing non-callable bonds, which have a yield (e.g., 4%) that does not change during the
term of the bonds. For a leveraged SRF that uses non-callable bonds to fund its SRF loans,
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the rate from which the subsidy is deducted would remain the same during the entire term of
the SRF loans, just as in the case of the direct loan approach. Also, callable bonds are used by
bond issuers with the expectation that the opportunity to refund the bonds in the future will
ultimately result in a lower borrowing cost. SRF Borrowers would also face the same
dilemma - whether to use callable or non-callable bonds - if they were to fund their projects
outside of the SRF program. Accordingly, in the analyses discussed herein, the possible use
of premium bonds is ignored and the stated bond yield (e.g., 4%) is used to evaluate the
financial benefits of the leveraged approaches relative to the direct loan approach.
Impact of Bond Refunding on Effective Loan Rate
If general interest rate levels decline after an SRF loan is made, a borrower could refinance a
market rate loan originally made in a higher (e.g., 4%) market rate environment at the current
lower (e.g., 3.50%) market rate. Given the ability to lower the cost of a market rate loan and that
the borrower would have acted to refinance a market rate loan, the borrower's effective loan
subsidy also declines. If a state refinances SRF bonds, the loan subsidy would decrease from the
original 2% to 1.50% (3.50% less the 2% loan rate) unless the SRF loan is also refinanced.
O Generally, there have been few circumstances where states have refinanced direct loans when
market interest rates decline. If a direct SRF loan remains unchanged, the 2% loan interest
would continue to be allocated to retained earnings and the borrower's effective loan subsidy
would be 1.50%. Recreating a 50% interest subsidy would require a reduction in the loan
interest rate to 1.75%, reducing the growth in retained earnings by 0.25%.
O For a leveraged loan using a blended loan approach, the bonds issued to fund the market rate
portion of the loan could be refinanced to the lower, 3.50% market rate. The equity portion of
the loan would remain, in this example, at 0%. The 50 basis point savings on the market rate
portion could either be (a) used to reduce the borrower's net interest cost to 1.75% by
lowering the loan rate on the market rate portion of the loan to 3.50% (thereby maintaining a
50% interest subsidy) or (b) retained by the SRF (in effect increasing the rate on the equity
portion of the loan to 0.50%) and used to increase retained earnings or to fund loan subsidies,
in which case the borrower would have a 2% loan rate and a 1.50% interest subsidy. There
should be no impact on SRF equity specifically invested to generate retained earnings.
O For leveraged loans using a reserve approach, the entire loan could be refinanced to the lower
interest rate (3.50%). If the reserve fund were yield restricted to the new 3.50% tax-exempt
loan rate, the result would be the same as for the blended loan approach - a 50 basis point
savings on the loan which could be allocated either to the borrower or to retained earnings or
loan subsidies. However, consistent with the arbitrage regulations, reserve fund SRF
programs have been able to refinance much of their debt initially issued to fund loans to
lower interest rates while retaining the earnings on the related reserve funds that remain
invested at the higher original bond yield.5 The result is that reserve fund leveraged programs
can generate more earnings to provide loan subsidies or to accumulate retained earnings than
5 In accordance with IRS' Universal Cap Rule, the amount of investments on which earnings are subject to yield restriction is limited to the amount of
tax-exempt bonds outstanding. Therefore where bonds are refunded in advance of the call date, the amount by which the invested balances in the
resetve and refunding escrow exceeds the bonds outstanding can be invested unrestricted
35
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programs using either the blended rate approach or the direct loan approach. There should be
no impact on SRF equity specifically invested to generate retained earnings.
Managing for Optimal Program Performance
For any specific amount of interest-bearing loans that could be funded using the direct loan
approach, a better economic result might be achieved in several areas using a leveraged approach
by:
O Specifically investing a portion of the SRF's equity for the purpose of growing retained
earnings, to the extent that such equity can be invested without yield restriction (certain
considerations relating to the ability to invest equity without yield restriction are discussed
below);
O Taking advantage of financial innovations adopted by leveraging states which increase the
amount of earnings that can be generated and retained under a leveraged fund approach; and
O Taking advantage of reductions in market rates (either to lower the borrower's subsidized
interest rate or to make the interest savings available to the SRF) without adversely affecting
the originally anticipated growth in retained earnings.
In the $100 example, the present value benefit of an additional 0.50% of earnings on the $50
dollars of equity that could be invested without yield restriction under either the blended loan or
reserve fund approaches would exceed $2.10 for a 20 year loan and $2.75 for a 30 year loan.
Table 14 at the end of this section summarizes an analysis of the financial benefits of the blended
loan approach and reserve fund approach relative to the direct loan approach given various
assumptions regarding leverage factors, loan maturities, and refunding opportunities. The
indicated benefits are achievable to the extent that the equity specifically invested to grow
retained earnings can be invested without yield restriction.
As noted above, other program costs such as state bond charges could reduce or eliminate the
indicated financial benefit of the leveraging approaches as shown in the chart.
Financing innovations adopted by leveraging states have capitalized on existing retained
earnings balances to achieve higher equity growth rates. This was achieved by (a) pledging
either equity invested at the tax-exempt bond rate (as allowed under the arbitrage rules) or
reserve releases and direct loan principal and interest payments to meet contracted subsidy
obligations and (b) investing recycled SRF equity in unrestricted investments in amounts
sufficient to restore paid out equity. Assuming the tax-exempt bond rate is 4% and the taxable
investment rate is 4.5%, under the innovative arrangement in use by some states, recycled equity
sufficient to restore paid out equity over the life of the subsidy obligation can be invested at the
unrestricted 4.5% taxable rate instead of the restricted 4% tax-exempt rate. This represents a
12.5% increased annual return on such equity. The additional return can be captured as a direct
increase in retained earnings or by applying such earnings as interest subsidy for additional
projects. The additional projects that can be financed are equal to the equity conserved times the
leveraging rate. Either approach raises SRF project funding capacity beyond that which can be
36
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achieved with the three basic forms. This is a highly desirable outcome in that it extends the
reach of finite SRF equity.
The added value captured by the innovative financing approach can be demonstrated by looking
at the relationship between financial assistance benefits delivered and equity allocation needed to
deliver the benefits. The three basic loan forms, the direct loan, blended loan, and reserve models
provide benefits on a percentage basis that can correlate with the percentage equity allocation
made to support the targeted benefit. For each of models discussed, expressed in percentage
terms, the benefit/equity ratio (the ratio of the interest subsidy percentage to the equity used as a
percentage of the loans made) is 1:1 with the exception of direct loan financings where the loan
rate is greater than zero. In such cases the benefit/equity ratio is less than 1:1. However, the
new innovative financing approaches can turn the benefit/equity ratio positive. In the above
example, the ability to generate cash flow at the unrestricted taxable rate of 4.5% results in a
positive 1.125:1 benefit/equity ratio. The ratio between the taxable/tax-exempt yield spread and
the tax-exempt yield will drive the benefit/equity ratio. The more positive the taxable/tax-
exempt spread, the greater the benefit of investing equity on an unrestricted basis and the higher
the benefit/equity ratio for any given tax-exempt yield. In the example cited where the tax-
exempt rate equals 4%, if the available taxable/ tax-exempt spread rises by an additional 0.50%,
the benefit to equity ratio rises to 1.25:1. The benefit/equity ratio can be an effective measure of
SRF equity utilization. Table 15 at the end of this section shows the benefit-to-equity
relationship for the basic and innovative financing models discussed in this section.
Constraints on this modification to the leveraging model that have been required by bond
counsels for some issuers consist of (a) the present value of the subsidy commitments, to be
directly paid by equity, must be less than accumulated retained earnings on the bond closing date
(this is necessary to assure that the SRF perpetuity rule is not violated) and (b) only recycled
equity and retained earnings can be used to make unrestricted investments (to avoid any nexus
between new federal grant draws and the bonds issued to fund leveraged loans).
An SRF program that previously made interest bearing direct loans can (a) use the direct loan
principal and interest to fund the interest subsidies on its new loans as described above and (b)
invest its recycled equity at an unrestricted yield to grow retained earnings (rather than investing
or making direct loans with the recycled equity to fund such subsidies). The interest rates on
existing loans are already fixed and using such interest to fund interest subsidies on new loans
does not subject such interest to yield restriction. So, using such interest on existing loans would
not adversely affect the investment returns of the SRF. Also, a direct loan SRF can use
leveraging to fund all of its loan demand using new capitalization grants and specifically invest
all of its recycled equity at an unrestricted yield to grow retained earnings. This strategy would
also flip the benefit/equity ratio of such programs from <1:1 to > 1:1.
It is possible that the innovations described in the preceding two paragraphs can be applied using
new capitalization grants as well as recycled equity. The legal issue for some SRF bond
counsels is whether there is a sufficient nexus between the new capitalization grant draws and
the bonds issued to make leveraged loans that such grants would be treated as bond proceeds,
even though they are not used to pay or secure the bonds. EPA could eliminate the legal issue,
and thus increase the ability of the SRFs to grow their equity, by modifying any provisions of the
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SRF regulations that may be viewed as creating a nexus between the capitalization grant draws
and an SRF's bonds. For example, capitalization grant draws could be made on a quarterly basis,
as was at one time permitted for states that elected to use "aggressive leveraging." To the extent
that funds are drawn before being applied to fund loans, such funds would contribute to the loan
capacity and/or sustainability of the SRF by generating additional retained earnings.
Another regulatory provision that, as currently applied, limits an SRF's ability to grow its equity
using the innovations described above is the perpetuity rule. EPA could address this issue by
viewing compliance with the perpetuity rule on a dynamic, rather than a static, basis. For
example, compliance could be certified by each SRF taking account of its reasonably expected
earnings over the life of its loan portfolio, rather than by looking only at the equity available in
the SRF at the end of each year. This change could allow states that adopt the new innovative
financing approaches, discussed in this report, to further reduce the amount of equity needed
(together with the earnings thereon) to fund interest subsidies. Consequently, it would decrease
the amount that is subject to yield restriction and permit a larger amount of unrestricted equity to
be invested specifically to grow retained earnings.
The Trade-Off between Current and Future Loan Capacity
A policy issue affecting SRF programs that provide loan subsidies of less that 100%, (i.e.,
interest-bearing loans) is what portion of the earnings on SRF equity should be allocated to
retained earnings rather than being used to provide loan subsidies today on a larger amount of
loans for qualifying environmental projects. A decision by an SRF to apply a portion of its
current earnings on SRF equity toward retained earnings, rather than loan subsidies, can be
reflected either in a lower loan subsidy percentage or in a lower dollar amount of loans. Such a
decision might reflect a thoughtful policy determination that balances current and future
environmental needs.
As noted above, retained earnings can be used to make loans or can be invested in market rate
securities or structured investments to generate additional earnings. In either case, such retained
earnings would be available in the future to provide loan subsidies for current or future projects.
Over a very long period of time, the retained earnings accumulated by an SRF will contribute to
the "sustainability" of its SRF program. Achieving sustainability is an important goal of the SRF
program. For this purpose, an SRF would be expected to achieve "sustainability" at that point in
the future at which it is projected to develop the ability using its current loan funding approach to
continue to provide subsidized loans for qualifying environmental projects solely from recycled
equity derived from its contributed capital and retained earnings (i.e., without receiving
additional funding grants beyond such point, but assuming the continuation of the current level
of funding grants until such point) in an amount equal to some target funding level (e.g., the
amount of loans that the SRF provides today) and in real (i.e., SRF project cost inflation-adjusted)
dollars. Even over a long period of time, in order for an SRF to achieve sustainability, a
significant portion of the earnings on the SRF's equity would have to be allocated to retained
earnings, rather than being applied to provide loan subsidies today.
Allocating a larger share of the earnings on SRF equity to retained earnings would increase the
rate of growth of retained earnings, thus reducing the time required to achieve sustainability. But,
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it would also make it easier to achieve sustainability in a somewhat misleading way. Since such
an allocation reduces the amount available to provide loan subsidies today, it reduces the SRF's
current ability to make loans. If the target funding level were defined in terms of today's funding
level, such an allocation would make it easier to achieve sustainability simply by lowering the
target funding level.
An Area for Further Study
A potential area for further study by the Board is whether there are modifications to the current
approaches used to invest SRF equity that might better facilitate meeting the objectives of the
SRF Program, including making SRFs more sustainable.
In aggregate, the state SRFs have been capitalized or "endowed" with contributed capital in
excess of $32.6 billion and with total equity in excess of $38.4 billion. Such SRF equity is
invested in extremely conservative investments. In fact, it is overwhelmingly invested at high-
grade tax-exempt interest rates. An investment strategy that is more typical for such a large
endowed fund would be expected to significantly increase the growth rate of SRF equity.
Observations
O In the context of state pension funds, every state has extensive experience in managing the
investment of pools of equity that have achieved long-term investment returns in excess of
both tax-exempt and taxable fixed-income returns.
O What is important to the future health and success of the SRF Program is the investment
return achieved over the long term, not the result achieved from year to year. This highlights
the importance of viewing compliance with the perpetuity rule on a dynamic, rather than
static, basis.
O As discussed herein, it is currently possible for SRFs to invest a portion of their equity on an
unrestricted basis with no impact on loan funding capacity. As further noted, through various
regulatory changes, EPA can enhance the ability of SRFs to invest equity without yield
restriction. Such unrestricted equity could be invested using a modified investment approach
that produces higher investment returns.
O If SRFs could achieve endowment-like returns on SRF equity, it might be advantageous for
them to fund a portion of their loan demand with taxable bonds in order to fully avoid any
yield restriction. The expected benefit of the unrestricted investment would exceed the
increase in borrowing cost.
O The incremental investment return benefit could be significant on the portion of SRF equity
invested using the new approach, conservatively 1% to 1.5%. However, for credit reasons,
only a portion of the SRF equity could be invested using the new approach, perhaps as much
as 33% to 50% of the invested portion of SRF equity. Also, given existing investments and
bond financings, it would take a period of years for the alternative approach to be fully
implemented. Finally, an endowment-like investment approach can be expected to achieve a
higher investment return over the long-term.
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By using a modified investment approach, SRFs that currently leverage could both (1)
continue to make the same amount of loans that they would have previously made, given
their available equity and (2) achieve additional earnings growth that is neither rebated to the
IRS nor required to fund loan subsidies.
Arbitrage relief would enable SRFs to achieve the best of both worlds - to fund all of their
loan demand at low tax-exempt rates and to maximize the investment returns on their equity.
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Table 14: Comparison of the Example Leveraged
Approaches to the Direct Loan Approach
Assumptions
Project Cost
Reserve Approach Loan Par
Blended Loan Approach
Equity Loan Par
Blended Loan Market Rate
Loan Par
Maturity
Tax-exempt Bond Interest
Rate
Loan Rate
Leveraging Factor
Reserve Fund
Reserve Investment Rate
Transaction Costs/Si 000
Refunding Rate
Bonds Refunded Under
Reserve Approach
$ 100
$ 101
$ 67
$33.58
20
4.00%
1.33%
1.5
$67.17
4.50%
$7.50
3.25%
33%
$ 100
$ 101
$ 67
$33.58
30
4.00%
1.33%
1.5
$67.17
4.50%
$7.50
3.25%
33%
$ 100
$ 101
$ 50
$50.38
20
4.00%
2.00%
2
$50.38
4.50%
$7.50
3.25%
50%
$ 100
$ 101
$ 50
$50.38
30
4.00%
2.00%
2
$50.38
4.50%
$7.50
3.25%
50%
$ 100
$ 101
$ 33
$67.17
20
4.00%
2.67%
3
$33.58
4.50%
$7.50
3.25%
67%
$ 100
$ 101
$ 33
$67.17
30
4.00%
2.67%
3
$33.58
4.50%
$7.50
3.25%
67%
Results for Reserve Fund Approach versus Direct Loan Approach
PV Benefit of Original
Reserve Fund Approach
Loan Debt Service (A) ($0.57) ($0.52) ($0.61) ($0.57) ($0.66) ($0.63)
PV Benefit of Reserve Fund
Approach Loan Debt
Service After Refunding (B) ($0.24) $0.34 ($0.09) $0.77 $0.07 $1.25
PV of Reserve Fund
Approach Retained Earnings
(C) $1.29 $1.68 $2.12 $2.78 $2.97 $3.92
Total Original Benefit of
Reserve Fund Approach
(D=A+C) $0.72 $1.17 $1.50 $2.21 $2.31 $3.29
Total Benefit of Reserve
Fund Approach After
Refunding (E=B+C) $1.05 $2.02 $2.03 $3.55 $3.04 $5.17
Results for Blended Loan Approach versus Direct Loan Approach
PV Benefit of Original
Blended Loan Approach
Loan Debt Service (F) ($0.25) ($0.25) ($0.38) ($0.38) ($0.50) ($0.50)
PV Benefit of Blended Loan
Approach Loan Debt
Service After Refunding (G) $0.09 $0.61 $0.15 $0.97 $0.23 $1.38
PV of Blended Loan
Approach Retained Earnings
(H) $1.49 $1.94 $2.27 $2.98 $3.07 $4.06
Total Original Benefit of
Blended Loan Approach
(I=F+H) $1.24 $1.69 $1.89 $2.60 $2.57 $3.56
Total Benefit of Blended
Loan Approach After
Refunding (J=G+H) $1.58 $2.55 $2.42 $3.95 $3.30 $5.43
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Table 15: Comparison of Basic and Innovative Financing Models
Using the Benefit/Equity Ratio
Financing Amount: $100.00. In all cases, the SRF loans are assumed to be
tax-exempt and the market loan rate is assumed to be 4%. Under the three
basic approaches, the taxable/ tax-exempt spread does not affect the outcome
because the SRF equity is legally or structurally yield restricted to a 4%
investment rate. For leveraged loans, the SRF equity allocation for each
scenario equals (A) the interest subsidy percentage divided by (B) the
effective investment rate divided by the loan rate.
Model
Available
Taxable
Rate/Effective
Investment
Rate
Interest
Subsidy
Benefit
SRF Equity
Allocation6
Interest
Subsidy
Percentage
SRF Equity
Allocation
Percentage
B/E
Ratio
Direct
(2)
4.5/4
4.5/4
(3)
(4)= see
above
100.00
100.00
(5)=(2)/4% (6)=(4)/(100 =(5)/(6)
50 100 .50
100 100 1.00
Blended
Loan
4.5/4
4.5/4
50.00
25.00
50
25
50
25
1.00
1.00
Reserve 4.5/4
4.5/4
50.00
25.00
50
25
50
25
1.00
1.00
Innovative
4.5/4.5
4.5/4.5
44.44
22.22
50
25
44.44
22.22
1.125
1.125
5.0/5.0
5.0/5.0
40.00
20.00
50
25
40.00
20.00
1.25
1.25
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Section VI. Conclusions and Recommendations
Conclusions
O The federal State Revolving Fund (SRF) programs for clean water and drinking water allow
states substantial flexibility in the design of individual state programs.
O Both direct loan and leveraged loan programs have been successful in funding SRF projects
representing significantly greater value than the amount of federal capitalization grants.
O In both direct and leveraged loan programs, a subsidy to borrowers is provided by the SRF
using some or all of the earnings on SRF equity that could otherwise be used to grow
program equity.
O If federal capitalization grant contributions decline in future years, the SRFs will have to
depend more on internal growth of equity to sustain their programs.
O Leveraged loan programs make it possible for an SRF to meet a greater amount of current
loan demand by using more of its earnings on equity to provide loan subsidies currently,
rather than to grow retained earnings.
O Historically, the direct loan approach has been used by SRFs that have less current loan
demand or that place more emphasis on growing retained earnings to meet future
environmental needs. However, by taking advantage of recent financial innovations
developed by leveraging SRFs, direct loan SRFs can use leveraging to fund the same amount
of loans as they would currently fund and can simultaneously maximize their earnings on
SRF equity by investing a portion of their equity specifically to enhance the growth of their
retained earnings.
O EPA can administratively facilitate the use of such financial innovations to grow equity, and
thereby develop more sustainable SRFs by allowing states:
• To allow draws of capitalization grants, without regard to the expenditure of SRF funds
for project costs; and
• To interpret the perpetuity rule on a dynamic, rather than a static, basis, by measuring
compliance taking account of an SRF's expected earnings over time, rather than based on
current year-end results.
O Arbitrage relief for SRFs would have an even greater impact on the ability of SRFs to
become sustainable.
O A potential area for further study by the Board is whether a different approach to investing
SRF equity would enhance the ability of SRFs to grow equity, meet long term program
demands, and to become sustainable.
43
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Recommendations
O EPA should encourage direct loan states to improve SRF sustainability by showing the states
how leveraging can be used to increase those states' retained earnings.
EPA should assist states to develop sustainable SRFs by administratively allowing states to
accelerate draws of capitalization grants, modifying its interpretation of the perpetuity rule
and by advocating for arbitrage relief focused specifically on SRF programs.
EFAB should explore the benefits of developing more aggressive parameters for SRF equity
investments and recommend appropriate program changes to EPA.
44
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes
Chair
Terry Agrtss
Julie Belaga
John Holand
George Butcher
Donald Com 11
fllcfiacl Cu/fcy
Hjchcl Deming
fete Ooiaea/cl
Hetty Dotmard
nary Frmntoeur
James Gebhardl
Steve Grossman
Scott HasAJns
Jennifer Hernandez
Keith Minds
Stft^ flanfood
Langdon Marsh
Greg Mason
Llndeae ration
Cherle K/ce
Helen Sahl
Andrew Sawyers
Jim Smith
GregSwartl
Steren Thompson
Soula Toledo
Jim Ton I
Justin Wilson
John Wise
Stan Melburg
Designated
rederdl Official
APR 29 2008
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board (EFAB) is pleased to submit
the enclosed report, "Public Private Partnerships in the Provision of Water and
Wastewater Services: Barriers and Incentives," for the Agency's consideration and
use. This report presents an important opportunity for the Agency to strengthen its
continuing efforts to insure sustainable water and wastewater services.
The report responds to the Agency's request for an assessment of the
potential of public private partnerships (PPPs) to help alleviate chronic funding
problems in the water industry. In preparing for this assessment, the Board
reviewed previous EFAB reports as well as earlier Agency initiatives. We
describe the present role of PPPs in the water industry and analyze various
barriers to wider implementation. Information on eleven existing PPPs is
reviewed and tabulated. We also examined the efforts of the US Department of
Transportation to remove barriers to private sector participation in that sector. The
report concludes with a number of specific recommendations for action by the
Agency and by Congress, all designed to remove unnecessary barriers to
beneficial use of PPPs.
PPPs cannot solve all water and wastewater utility financing or
management problems and are not appropriate in every situation. However,
experience has shown that these partnerships can be helpful and beneficial in
many cases. In fact, the private sector has at all times maintained a substantial
presence in the water industry.
The Board has found that the need for wider use of PPPs is well
demonstrated, the mechanisms for considering and structuring these arrangements
are known, and success stories and model applications are available. In certain
situations, these partnerships can reduce costs, improve the quality of service, and
speed the provision of needed infrastructure. Even though PPPs may not be
Providing Advice on "How To Pay" for Environmental Protection
-------
The report takes that view that, while there are no easy choices, there are a number of current and
developing innovative finance tools that may be used to help fill the gap that watersheds face.
Some of the tools are well established, such water and sewer rate increases and special districts
for flood control and management of septic tanks and stormwater. Others are innovations such
as special purpose financing as in Maryland's Bay Restoration Fund and transfer of development
rights. Potential future tools include payments for and markets in ecosystem and other
intergenerational services.
Critical to the success of any whole watershed financing mechanism will be the choice of
the right collaborative governance approach to reach agreement across multiple jurisdictions and
among government, business, utility, nonprofit and citizen organizations on the best mix of
finance tools to implement the watershed plan or other needed projects. The report recommends
that EPA strongly encourage the use of collaborative approaches to achieving sustainable
watershed finance and educate potential participants in their use.
The recommendations contained in the report urge EPA to further knowledge and
development of whole watershed sustainable finance approaches. In particular, the report urges
EPA to assist in the development and dissemination of innovative finance mechanisms,
collaborative governance approaches, ecosystem services markets and appropriate watershed-
wide implementing entities. To demonstrate some of these recommendations, we recommend
that EPA assist in funding one or more demonstration projects that use a collaborative
governance approach to implement one or more innovative financing mechanisms.
We thank you for the opportunity to present these recommendations and look forward to
your response. We will be glad to answer questions or do further work as you may request.
.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
cc: Ben Grumbles, Assistant Administrator for Water
Lyons Gray, Chief Financial Officer
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Executive Director
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott Haskins
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Lindene Patton
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Steve Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Public Private Partnerships in the Provision
of Water and Wastewater Services:
Barriers and Incentives
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
April 2008
Printed on Recycled Paper
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Environmental
Financial Advisory Board
PUBLIC PRIVATE PARTNERSHIPS IN
THE PROVISION OF WATER AND
WASTE WATER SERVICES:
BARRIERS AND INCENTIVES
April 2008
-------
Table of Contents
EXECUTIVE SUMMARY iv
Public Private Partnerships iv
Barriers to Public Private Partnerships vi
Review of Selected Partnerships viii
Recommendations viii
Conclusion x
I. INTRODUCTION 1
II. PUBLIC PRIVATE PARTNERSHIPS 2
The Provision of Water Services 2
Public Private Partnerships in the Water Sector 3
Public Private Partnerships in the Transportation Sector 6
Alternative Institutional Arrangements 9
III. BARRIERS TO PUBLIC PRIVATE PARTNERSHIPS 9
State and Federal Subsidies 9
Legal and Institutional Barriers 10
Barriers Created by Past Grant Funding 11
Public and Political Obj ections to Private Sector Participation 12
Previously Identified Barriers 13
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IV. EFAB REVIEW OF SELECTED PARTNERSHIPS 18
2007 Review 18
City of Atlanta Experience 20
IV. RECOMMENDATIONS 20
For Action by the U.S. Congress 20
For Action by EPA 20
V. CONCLUSION 22
APPENDIX
2007 EFAB Review of Selected Partnerships 23
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EXECUTIVE SUMMARY
Various sources, including EPA's 2002 "Gap Analysis," have pointed to a large and growing
investment shortfall in the water industry. In the case of clean water, symptoms include
continued reliance on combined sewer systems, problems with combined sewer overflows, and
frequent sewage spills—not to mention a long series of consent decrees addressing the worst of
these problems. Infrastructure problems in the drinking water industry are less frequently
publicized, but probably not less serious. Aging treatment plants, century-plus-old water mains,
crumbling structures all add up to a need for major investments to rehabilitate existing facilities
plus more major investments to meet future demands.
A parallel discussion has taken place with respect to utility operating revenues. While some
utilities have sound rate-making and financing practices, many others fail to cover the full cost of
operating and maintaining water systems, much less the cost of replacing and expanding
infrastructure. Among the remedies proposed for this problem, wider use of public private
partnerships (PPPs) may help enforce full cost pricing in some situations, while offering
communities the opportunity to increase efficiency and maintain desired levels of service.
EFAB has been asked to consider the potential for PPPs to alleviate the chronic funding
problems in the drinking water and clean water industries. This report discusses the nature of
PPPs, their present role in the industry, and certain barriers or disincentives to wider use of PPPs.
PUBLIC PRIVATE PARTNERSHIPS
This report utilizes the following definition of a PPP:
A public private partnership (PPP) is a contractual, institutional, or other relationship
between government and a private sector entity that results in sharing the duties, risks,
and rewards of providing a service in which the government has an interest, recognizing
that the government retains ultimate responsibility for insuring that social needs and
objectives are met.
Water Sector
The private sector has always had a prominent role in the provision of drinking water in the U.S.
Considering only the largest systems, serving populations of 100,000 or more, about 16 percent
are investor-owned utilities. This fraction has been roughly constant for many years. More
recently, there is anecdotal evidence of expansion in the diversity of PPP types, other than
investor-ownership. One industry source lists 15 major drinking water PPPs in effect in 2006, as
well as 29 major clean water PPPs.
PPPs in the water sector take many forms. Services provided by the private sector partner may
range from support functions (e.g., laboratory services) to facility-level activities (e.g., operating
a wastewater treatment plant) to contract operation of all facets of the utility. Among the
variants commonly employed are contracts for design-build (DB), design-build-operate (DBO),
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design-build-finance-operate (DBFO). build-operate-transfer (BOT), etc. An important
characteristic of many of these contracts is that they require a long-term relationship between the
public and private sector. In the U.S., contract terms for PPPs may range up to 25 years; in other
countries, longer-term contracts may be found.
Where PPPs are used, government retains the responsibility to regulate private sector partners so
that the public goods are preserved. Regulation can take the form of drinking water quality
standards, requirements for universal access, regulatory commission or local government
oversight of rates and charges, environmental regulations and standards, contractual provisions,
etc. Each form of partnership imposes different regulatory requirements and has advantages and
disadvantages in specific applications.
Transportation Sector
An incipient crisis in infrastructure investment has been noted for the transportation sector and,
similar to the water sector, PPPs have been suggested as one approach to enhancing the
availability of funds and improving the capability for project execution. Unlike the water
industry, the public highway component of the transportation sector has no significant history of
private sector infrastructure provision, or of PPPs. Other activities within the sector—such as
rail, air, river crossings, and water transportation—have had varying degrees of private sector
involvement in the past.
The U.S. Department of Transportation (US DOT) has moved aggressively to clear the way for
wider use of PPPs, both by working to remove legal and institutional barriers and by
disseminating information on PPPs to various transportation agencies. The Federal Highway
Administration (FHWA) has developed a PPP website, published a User Guidebook on
implementing PPPs, and produced model legislation designed to remove unnecessary barriers in
state law. Changes in federal law have exempted from state caps up to $15 billion in Private
Activity Bonds for transportation projects.
The US DOT PPP website reports that, as of October 2007, 21 states and one U.S. territory have
enacted statutes which enable the use of PPPs for transportation projects. Among the large-scale
PPPs that have emerged recently are the 75-year leased operation of the Indiana Toll Road
(valued at $3.85 billion) and the 99-year leased operation of the Chicago Skyway (valued at
$1.83 billion). Additional initiatives in the transit sector have led to, among other things,
contract design, construction, and operation (DBO) of the Hudson-Bergen Light Rail Line for
New Jersey transit (total value $1.67 billion).
Alternative Institutional Arrangements
It is a commonplace observation that many drinking water and clean water utilities are too small
to provide the kind of professional management and technical competence that is required in the
present regulatory environment. It is also apparent that, because of economies of scale and other
reasons, user charges are often dramatically higher for small utilities, as compared to large
metropolitan systems. Still, small systems persist, usually for political, jurisdictional, or
geographical reasons.
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Consolidation of small systems can be accomplished within a governmental ownership structure,
perhaps by means of a quasi-corporate, fiscally autonomous management structure (sometimes
called "commercializing" the utility). This promotes professional management, reduces unit
costs, and facilitates innovation and performance improvement. Local governments can
maintain their ultimate control over commercialized utilities through appointments to the
governing board and through approval of tariffs.
BARRIERS TO PUBLIC PRIVATE PARTNERSHIPS
State and Federal Subsidies
The Clean Water State Revolving Fund (CWSRF) has become an important source of debt
capital to wastewater utilities. However, the CWSRF does not permit borrowings by privately-
owned systems for abatement of point source pollution, except in a rare case where private point-
sources are cited in the Comprehensive Conservation & Management Plan (CCMP) of a National
Estuary Program. To the extent the that CWSRFs offer below-market, or even zero interest
rates, this policy creates a substantial subsidy for government-owned wastewater systems.
Several states accompany their SRF programs with other programs that offer grants for specific
infrastructure improvements, such as wastewater treatment upgrades. In many cases, privately-
owned wastewater facilities are not eligible for subsidies. Whether conveyed through interest
rates or outright grants, these subsidies amount to significant barriers to those forms of PPP
which involve private ownership of treatment facilities. The Board finds that the rationale for
this exclusion is flawed, since rate of return regulation causes all subsidies to flow through to
ratepayers, where they are intended to reside.
Legal and Institutional Barriers
Some public sector utilities are bound by state and local statutes or regulations which constrain
the contracting process in ways that are inconsistent xvith PPPs. In particular, there may be term
limits on contracts, prohibitions on negotiated contracts, prohibitions on take-or-pay agreements,
and no authorization for private parties to collect service fees. These constraints, where present,
may require a change in legislation or revised regulations. Many states, in the interest of
facilitating PPPs, have undertaken these changes. No survey on this issue was performed in
connection with this report, but a 1988 survey performed by EPA found that 19 states had
modified legislation in an attempt to eliminate certain contracting barriers. The Board has
learned of recent legislative changes in two states (Texas and New Jersey) which have led
directly to new PPP initiatives in both states.
Barriers Created by Past Grant Funding
Prior to 1987, many wastewater utilities received substantial grant assistance from the federal
government through the Construction Grants Program. As a result, there is an existing federal
interest in many wastewater facilities that may be candidates for transfer, through sale or long-
term lease, to a private partner. This requires that the PPP agreement be reviewed and approved
by EPA. The Board is not aware of any instance in which EPA has failed to approve a proposed
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disposition of a grant-funded facility. However, the need to apply for such approval as well as
the potential requirement for distributing the proceeds from a sale or lease amounts to a
significant perceived barrier to PPPs involving grant-funded facilities.
Public and Political Objections
Proposals to enter into PPPs often face considerable public and political opposition. Some of
this reflects unfamiliarity with the new arrangement and skepticism regarding claimed
advantages. Some opponents distrust the reliability of private sector arrangements to deliver
services as important as drinking water and wastewater management. Others believe that it is the
duty of government to provide these services, and that private sector provision is somehow
inappropriate. Another concern has to do with the utility's labor force. One effect of most PPPs
involving operations and maintenance is that some employees are no longer needed. They may
be terminated, or the new operator may reduce staff through attrition. Either way, there is often
public and political concern about this effect.
In most cases, though, the issue is simply one of economics: some people assume that the
involvement of the private sector will result in higher rates and charges. Obviously, PPPs should
not be entertained if their only effect is to increase costs. But public concern remains.
Previously Identified Barriers
A 1991 EFAB report identified twelve possible barriers to PPPs, affecting contracting, financing
arrangements, tax liability, and other factors. The 1991 report pointed out the need for
legislative changes at federal and state levels and made a number of recommendations for EPA
action on certain barriers. As noted above, the Board has not conducted a survey of state and
local legislative changes, but is aware of significant changes in some states. With respect to any
other EPA or government action that may have been taken subsequent to the Board's 1991
recommendations, it appears that there were some initiatives in the first ten years, mostly
directed to utility outreach and to the preparation of various kinds of guidance. Recently, EFAB
and EPA have gone on record as supporting an Administration proposal to exempt water projects
from state-level caps on Private Activity Bonds (PABs). Overall, however, there is no indication
of a comprehensive, coordinated effort at the federal level to lower barriers or to otherwise
facilitate PPPs.
REVIEW OF SELECTED PARTNERSHIPS
In order to assess the current industry perception of barriers to PPPs, the Board performed a
limited review of the experience of private sector firms presently active in various kinds of
partnerships. Seven firms were contacted; five were able to provide substantive responses for a
total of eleven variants of PPPs. The information provided by the companies is tabulated in an
Appendix to this report.
Some of the noteworthy results of this review include:
• Some operators reported problems with political will or with local concern over job
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security for existing employees and others noted protracted, complex negotiations. The
most significant barrier mentioned was a Texas statutory prohibition on DB contracts,
which required legislative action to overcome.
• Two factors in the success of these contracts were mentioned multiple times: (1) the
ability to arrange for comparable jobs for existing employees who would no longer be
needed and (2) the proximity of existing operations of the private sector partner. The
latter factor may be most important for PPPs in relatively small communities, where the
private partner can easily bring to bear technical and management expertise that would
normally be unavailable in a small operation.
• Nearly all of the PPPs described by the companies are claimed to provide operational
improvements, improved performance, and lower costs. Since these are existing,
successful PPPs, these results would be expected, but some of the reported cost savings
are surprisingly large (e.g., United Water reported a 30% cost reduction in Indianapolis).
In some cases, performance improvement seemed especially noteworthy (e.g., American
Water in Buffalo).
In addition to these successful PPPs, the report also takes note of the unsuccessful experience of
the City of Atlanta. In that case, a long-term operating contract for the water system was
dissolved after less than four years, amid evidence of failed expectations on both sides.
RECOMMENDATIONS
For Action by the U.S. Congress
• Eliminate the state-level caps on public-purpose PABs issued for construction of drinking
water and clean water infrastructure.
• Modify or terminate the federal interest in clean water facilities constructed with
assistance from the former EPA Construction Grant Program, so that communities are
free to consider PPPs in connection with these facilities.
• Make privately-owned, public purpose clean water facilities eligible for loans and grants
from the CWSRFs on the same footing as government-owned systems.
For Action by EPA
State and Federal Subsidies
• The Agency should conduct and publish a survey of state and local programs, linked to or
separate from the SRFs, that offer grants or other forms of subsidy to government-owned
drinking water or clean water agencies, but which deny such assistance to privately
owned, public purpose systems.
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State-Level Statutory Barriers
• Conduct and publish a survey of existing state statutes which restrict or prohibit various
forms of PPPs, either through procurement policies and other means.
• Assist the States in identifying and correcting these restrictions, including the preparation
of draft model legislation, similar to the US DOT effort.
• Monitor the results of this initiative.
• The Agency should examine the initiatives undertaken at the US DOT with respect to
PPPs as a possible model for federal agency activity in this arena. The Agency should
adapt/adopt those activities that would advance the use of such partnerships where
beneficial for environmental utilities.
Tax Policy Barriers
• Conduct and publish a survey of existing state and local taxing policy with respect to
government-owned vs. investor-owned drinking water and clean water utilities. The
survey should address access to state-tax-exempt bond financing, real and personal
property taxes, inventory taxes, gross receipts taxes, etc. The purpose of the survey is to
identify cases where tax exemptions to government-owned utilities act as hidden
subsidies.
• Assist the States in identifying and correcting tax policy distinctions which discourage
consideration of some kinds of PPP.
• Monitor the results of this initiative.
Information Barriers
• Continue to disseminate information on PPPs, including case studies which document
specific situations in which these arrangements were beneficial to the community. In
particular, describe the process of tailoring a PPP to a community's needs, so that it:
o Is cost-effective
O Protects the interests of all parties
O Avoids unacceptable impacts on customers including low income households, and
O Maximizes gains to the community as a whole.
• Disseminate information on structural reform of government-owned utilities, as an
alternative or as an adjunct to PPPs. EPA should encourage state and local initiatives to
regionalize water and sewer utilities where cost reductions and operational improvements
are likely to result.
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Monitoring Progress
• EPA should consider funding an extra-governmental organization to track progress in
eliminating barriers to PPPs, at both federal and state levels, and to monitor the results of
these changes.
CONCLUSION
PPPs are not the solution to every problem afflicting the delivery of drinking water and clean
water services and they are not appropriate in every community or in every situation. However,
experience has shown that PPPs can be helpful and beneficial in many cases. Despite this
experience, these arrangements are often precluded or restricted by a number of barriers
originating in law, regulation, policy, and perception.
The Board has found that the need for wider use of PPPs is well demonstrated, the mechanisms
for considering and structuring these arrangements are known, and success stories and model
applications are available. What is now required is a strong initiative by EPA to clear barriers
and to take other steps needed to facilitate PPPs where they are appropriate. Since many of the
barriers exist in legislation and at both state and federal levels, this initiative will require more
than programs, guidance, and workshops. It requires committed and sustained leadership by
EPA.
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I. INTRODUCTION
In 2002, EPA published the widely noted "Gap Analysis," which examined the growing disparity
between infrastructure needs and investments in the drinking water and clean water industries.
Following a series of "needs" assessments, the Gap Analysis was the first detailed attempt to
assess the likelihood of meeting current and future infrastructure needs, given existing financing
practices and sources. The Gap Analysis stated, for example, that a continuation of then-current
investment rates would result in an expected cumulative twenty-year investment shortfall of
$122 billion for clean water, and $102 billion for drinking water (measured in 2001 dollars):
$224 billion in total. Given the various sources of uncertainty, the report suggests that the true
shortfall could almost double to $444 billion.
While the specific numerical results of the Gap Analysis have been controversial, there is no
doubt that the water sector, as a whole, has suffered from substantial underinvestment for some
time. In the case of clean water, symptoms include continued reliance on combined sewer
systems, problems with combined sewer overflows, and frequent sewage spills—not to mention a
long series of consent decrees addressing the worst of these problems. Infrastructure problems in
the drinking water industry are less frequently publicized, but probably not less serious. Aging
treatment plants, century-plus-old water mains, crumbling structures all add up to a need for
major investments to rehabilitate existing facilities plus more major investments to meet future
demands.
While there are public sector examples of efficiently managed utilities with adequate, well-
maintained facilities, there remains widespread skepticism as to the ability of the bulk of the
industry to self-finance needed improvements. This concern has led to a vigorous discussion,
still continuing, of available options. Measures have been proposed, including various proposals
by EFAB, to strengthen the state Revolving Funds and otherwise increase the borrowing capacity
of government-owned utilities. EFAB has also addressed the availability of Private Activity
Bonds for investor-owned utilities. EPA and EFAB have strongly advocated full-cost pricing by
utilities. But the perception remains that government-owned utilities frequently face capital,
management, and/or political constraints which make it difficult to finance needed
improvements. Among the remedies proposed for this problem, wider use of PPPs may help
enforce full cost pricing in some situations, while offering communities the opportunity to
increase efficiency and maintain desired levels of service.
A parallel discussion has taken place with respect to the operating and maintenance costs
associated with drinking water and clean water utilities. The Gap Analysis reported that rate-
making and budgeting practices observed as of 2001 would, if they continued, result in an
expected twenty-year shortfall of $309 billion in operating and maintenance costs. Note that this
number is even larger than the capital shortfall estimated in the same report. Consistent,
industry-wide application of full cost pricing, as advocated by EPA and EFAB, would erase this
gap, but many utilities are very far from this goal.
1 U.S. EPA, "The Clean Water and Drinking Water Infrastructure Gap Analysis," EPA-816-R-02-020, September
2002.
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For these reasons, EFAB has been asked to consider the potential for PPPs to alleviate the
chronic funding problems in the drinking water and clean water industries. This report discusses
the nature of PPPs, their present role in the industry, and certain barriers or disincentives to wider
use of PPPs.
II. PUBLIC PRIVATE PARTNERSHIPS
THE PROVISION OF WATER SERVICES
In every modern urban society, the economy and many aspects of the quality of life depend upon
the provision of efficient and adequate infrastructure services. These essential services include
transportation, communications, energy, and water-related services. In all cases, and particularly
in the case of water, the way in which these services are provided has important implications for
the quality of life and of the environment as well as equity and fairness. For all of these reasons,
it has always been understood that government has a broad responsibility for insuring
appropriate provision of infrastructure services, even if government itself is not the provider in
every case.
Since the latter half of the 19th century, water and wastewater services in the U.S. have most
often been provided by local government. The public is accustomed to looking to government
for safe and adequate drinking water supply, for wastewater services, for insuring that these
services are consistently and universally available, and that the cost of providing them is
reasonable and fairly allocated. Government is also expected to insure that there is no significant
damage to the environment or unnecessary exploitation of natural resources.
To understand government's responsibility, it is helpful to divide these requirements into two
categories. The first category consists of water supply and wastewater services provided to
individual users. These services are, in the language of economics, ordinary market goods. They
can be sold for a price, non-payers can be excluded, and others are not necessarily worse off if
some do not purchase the service. Water and wastewater services, as market goods, can be
provided by government, as they often are, but they can also be provided just as effectively by
the private sector.
The second category of services is qualitatively different. This category includes the quality and
safety of drinking water, universal access to services, fair and equitable cost sharing,
environmental protections, resource conservation, etc. These are public goods. The benefits
extend to all, regardless of who pays for the service, or whether anyone pays. Public goods are
distinguished from market goods because they do not lend themselves to private sector provision.
There is no incentive for an individual to pay for such services, since they receive them whether
or not they pay. Consequently, it is difficult for a for-profit firm, acting on its own, to insure a
revenue stream which covers the cost of providing these public goods. The responsibility falls to
government, to be exercised by itself or through a PPP.
This report utilizes the following definition of a PPP:
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A public private partnership (PPP) is a contractual, institutional, or other relationship
between government and a private sector entity that results in sharing the duties, risks,
and rewards of providing a service in which the government has an interest, recognizing
that the government retains ultimate responsibility for insuring that social needs and
objectives are met.
At the most simplistic level, it may be argued that there is an advantage to pure government
provision in that it centralizes responsibility and minimizes the need for regulation, while it can
also be argued that the use of the private sector improves efficiency and relieves various
constraints associated with the public sector (access to capital, for example). But it is not
necessary to choose one side or the other. Private sector firms can be involved in varying
degrees, through a wide range of possible PPPs.
Where PPPs are used, government retains the responsibility to regulate private sector partners so
that the public goods are preserved. Regulation can take the form of drinking water quality
standards, requirements for universal access, regulatory commission or local government
oversight of rates and charges, environmental regulations and standards, contractual provisions,
etc. Each form of partnership imposes different regulatory requirements and has advantages and
disadvantages in specific applications. The following sections describe some of the forms of
PPPs that have proven useful in the past.
PUBLIC PRIVATE PARTNERSHIPS IN THE WATER SECTOR
Historical Perspective
The private sector has always had a prominent role in the provision of drinking water in the U.S.
In 2005, EPA identified 52,837 community water systems, about half of them classified as
private sector providers. A large majority of these private sector providers are very small, often
not-for-profit, organizations (community associations, etc.). Considering only the largest water
systems, serving at least 100,000 people each, the 2005 survey found 61 private sector providers
out of a total of 386 (16 percent) utilities. The private sector providers also account for
approximately 16 percent of the 126 million people served by utilities in this category.3 It is safe
to assume that most of these private sector entities are for-profit firms, and that a majority of
those are subject to price regulation by state-level public utility commissions.
Some historical perspective can be gained from a survey EPA commissioned in 1982. This
survey found 262 utilities serving populations of 100,000 or more, of which 47, or 18 percent,
were private.4 Using the data from this survey, a later calculation concluded that, of the 91
million persons served by these 262 utilities, 14.8 million (16.3 percent) were supplied by private
2 U.S. EPA, "Factoids: Drinking Water and Ground Water Statistics for 2005," downloaded Aug. 6, 2007;
"community water systems" provide year-round service to a non-transient population of at least 25 persons,
through at least 15 service connections.
3 Calculations taken from Boland, John J., "The Business of Water," Journal of Water Resources and
Management, ASCE" vol. 133, no. 3, May/June 2007, pp. 189.
4 Temple, Barker & Sloane, Inc., "Final Descriptive Summary: Survey of Operating and Financial Characteristics
of Community Water Systems," for U.S. EPA, Washington, D.C., 1982, pp. II-2 and II-3.
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utilities.5
After allowing for the uncertainties inherent in surveys as well as the likely restructuring of
many utilities during the intervening 23 years, it is still possible to conclude that there has been
little change in the number or importance of the largest privately-owned and operated drinking
water utilities in recent decades. There are many other kinds of PPP, where water service
remains a government function but the private sector provides important services. There is no
comprehensive list or survey of these arrangements, now or in the past, so it is not possible to say
anything about their prevalence.
Comparable statistics could not be located for the clean water industry, but anecdotal evidence
suggests that private sector provision is much less common, especially for the larger
communities.
Possible Forms of PPPs
As discussed above, PPPs take many forms. Two polar cases are:
• Investor-owned utility.—A drinking water or clean water utility is wholly owned and
operated by a for-profit firm; the public sector role is limited to regulation, normally by a
state-level public utility commission
• Contract service provision.—A drinking water or clean water utility is wholly owned and
managed by a government entity; the private sector role is limited to contract provision of
specific services
In the second case, services provided by the private sector partner may range from support
functions (e.g., laboratory services) to facility-level activities (e.g., operating a wastewater
treatment plant) to contract operation of all facets of the utility.
A 1991 EPA document considered six kinds of participation in service provision:6
5 Boland, J.J., "Water/Wastewater Pricing and Financial Practices in the United States," for U.S. AID,
Washington, D.C., 1983, p. 1.2.
6 U.S. EPA, "Public Private Partnerships for Environmental Facilities: A Self-Help Guide for Local
Governments," 20M-2003, July 1991, p. 4.
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A
B
C
D
E
F
Function
Decision to provide services
Facility design
Financing
Construction
Ownership
Operation and maintenance
Each of these functions can be performed by a government entity or by a private sector entity.
The different forms of PPPs are distinguished by different combinations of functions allocated to
each partner. Some possibilities are shown on the following list.
• Investor-owned utility: functions A, B, C, D, E, F (often subject to government
regulation)
• Design-build (DB): functions B, D
• Design-build-operate (DBO): functions B, D, F
• Design-build-finance-operate (DBFO): functions B, C, D, F
• Build-operate-transfer (BOT): functions C, D, E (until transfer), F (until transfer)
• Developer financing: function C
• Contract utility operation: functions B, C, D, F
• Contract service provision: function F (for part or all of utility O&M)
Other combinations of services are possible, as local needs dictate.
An important characteristic of these partnerships (with the possible exception of some kinds of
contract service provision) is that they require a long-term relationship between the public and
private sector. In the U.S., contract terms for PPPs may range up to 25 years; in other countries,
longer-term contracts have been used.
Overview of Current Status
Public Works Financing publishes an annual summary of the major long-term water PPPs in the
U.S. The 2006 summary lists 15 drinking water partnerships, totaling some 850 MOD of
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capacity, and 29 clean water partnerships, involving a total of 1,363 MOD of treatment capacity.7
In most cases, these are contract operation arrangements, with contract terms in the range of 10
to 25 years. A few are DBO or BOT contracts. The largest drinking water partnership is with
Seattle, WA, where two treatment plants with a combined capacity of 300 MOD have been
constructed and are being operated under DBO arrangements. The largest clean water
partnership is with Milwaukee, WI, where 550 MOD of wastewater treatment capacity is under
contract operation, under a 10-year contract.
Public Works Financing also reports that the total outsourcing market (defined as contract
operation plus DBO fees) has remained relatively constant over the past seven years, fluctuating
in the range of $1.5 to $1.9 billion per year.8
PUBLIC PRIVATE PARTNERSHIPS IN THE TRANSPORTATION SECTOR
A similar crisis in infrastructure investment has been noted for the transportation sector.9 In
response to this problem, the U.S. Department of Transportation (US DOT) has become an
active proponent of innovative funding mechanisms, especially PPPs, to enhance the availability
of funds and the capability for project execution.
Unlike the water industry, the public highway component of the transportation sector has no
significant history of private sector infrastructure provision, or of PPPs. Other activities within
the sector—such as rail, air, river crossings, and water transportation—have had varying degrees
of private sector involvement. As concerns have arisen regarding infrastructure needs and the
perceived limitations of the ability of governments to secure adequate financing, proposals for
increased use of PPPs have appeared.
Highway transportation planning, funding, and construction are handled primarily by state
departments of transportation. State user fees, in the form of gasoline taxes and motor vehicle
registration fees, are the primary sources of funds, with additional support from the Federal-Aid
Highways program of the Federal Highway Administration (FHWA). Transportation facilities
for other modes such as airports and seaports have a strong history of self-support through user
fees. Mass transit obtains revenue from user fees, but is substantially subsidized by state and
federal grants.
PPP Initiatives by US DOT
Despite its well-established role in supporting highway and transit maintenance and
improvements, the US DOT actively promotes PPPs as a source of funding and as an alternative
means of project delivery. The most recent federal funding authorization, SAFETEA-LU10,
provided for, among other things, $15 billion in Private Activity Bond allocations for highway
7 "PWF's 11th Annual Water Outsourcing Report," Public Works Financing, Vol. 214, March 2007, p. 10.
8 Ibid., p 4.
9 Testimony of Assistant Transportation Secretary Tyler Duvall before House Committee on Transportation and
Infrastructure, February 13, 2007.
10 SAFETEA-LU is the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users,
signed into law on August 10, 2005.
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projects, as well as authority to implement tolls on some interstate highway projects. The
FHWA has also developed model legislation that states may use to authorize and encourage PPP
transportation projects.11 Previously, under TIFIA,12 FHWA established a program for providing
federal loans and guarantees as a means to encourage private investment in transportation
projects. Also, DOT has established a website in order to provide access to various PPP-related
resources.
The DOT PPP website was created "for the transportation community in response to the growing
interest in capitalizing on new forms of partnerships between the public and private sectors to
plan, finance, build and operate the nation's transportation infrastructure." The website provides
information from a variety of sources on a broad array of transportation PPPs. The website has
links to other websites, informational resources including case studies, a glossary and a calendar
of events.
FHWA has created a User Guidebook on Implementing Public-Private Partnerships for
Transportation Infrastructure Projects in the United States that was published July 2007 and is
available from the website. In preparing model PPP legislation, FWHA included an overview of
the 28 key elements for PPP enabling legislation for highway projects, together with an
explanation of their importance and sample provision text for each of the elements.
FHWA has also taken action to reduce impediments to the use of PPP procurement that result
from federal regulation. The first, Special Experimental Project Number 15 or SEP-15 derives
from section 502 of title 23, and it allows the Secretary to waive the requirements of title 23 and
the regulations under title 23 on a case-by-case basis. SEP-15 allows FHWA to experiment in
four major areas of project delivery - contracting, right-of-way acquisition, project finance, and
compliance with the FHWA's National Environmental Policy Act (NEPA) process and other
environmental requirements. While FHWA has long encouraged increased private sector
participation in federal-aid projects, SEP-15 allows FHWA to actively explore much needed
changes in the way it approaches the oversight and delivery of highway projects to further the
Administration's goals of reducing congestion and preserving our transportation infrastructure.
The second initiative is increased access to tax-exempt financing. Section 11143 of Title XI of
SAFETEA-LU amends Section 142 of the Internal Revenue Code to add highway and freight
transfer facilities to the types of privately developed and operated projects for which Private
Activity Bonds may be issued. This change allows private activity on these types of projects,
while maintaining the tax-exempt status of the bonds. The law limits the total amount of such
bonds to $15 billion and directs the Secretary of Transportation to allocate this amount among
qualified facilities. The $15 billion in exempt facility bonds is not subject to the state volume
caps. Providing private developers and operators with access to tax-exempt interest rates lowers
the cost of capital significantly, enhancing investment prospects.
While not technically part of its PPP initiative, the FHWA has created a federal credit program
11 See:
12 The Transportation Infrastructure Finance and Innovation Act of 1998.
13
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under TIFIA whereby DOT may provide three forms of credit assistance - secured (direct) loans,
loan guarantees, and standby lines of credit. The program's fundamental goal is to leverage
federal funds by attracting substantial private and other non-federal co-investment in critical
improvements to the nation's surface transportation system. The DOT awards credit assistance
to eligible applicants, which include state departments of transportation, transit operators, special
authorities, local governments, and private entities. The program has awarded over $3.66 billion
in assistance to projects that had total investments of over $15 billion.
Status of PPPs in the Transportation Sector
Even as the US DOT initiatives have encouraged some projects to move forward with a PPP
structure, individual states had already begun to make use of design-build (DB) arrangements
with private firms. These contracts integrate design and construction functions, often in a way
that sets performance standards for the private partner, but allows considerable latitude to
minimize costs. The projects are turned over to the government on completion. These
arrangements are sometimes labeled "turn-key" projects. Some partnerships call upon the private
partner to arrange financing (DBF), and others are DBO or BOT contracts.
It is worth noting that, prior to the US DOT initiatives, many states lacked legislative authority
for PPPs involving highway projects. The US DOT PPP website, as of October 2007, reports
that 21 states and one U.S. territory have since enacted statutes that enable the use of PPP
arrangements for transportation infrastructure.
As of the end of 2006, the largest PPPs in the highway transportation field are the 75-year leased
operation of the Indiana Toll Road (valued at $3.85 billion) and the 99-year leased operation of
the Chicago Skyway (valued at $1.83 billion).14 In each of these instances, the government
entered into a concession agreement for which it received an up-front payment. Over the course
of the concession, the private party must operate, improve, and maintain the project. In turn, it
has the right to receive the toll revenues under a regime that is generally regulated by consumer
price index or gross national product deflator increases.
Partnerships have also been reported for the rail transit sector. New Jersey Transit has developed
the Hudson-Bergen Light Rail line using contracted design and construction, contracted
equipment supply, and contracted O&M (total value $1.67 billion).15 Meanwhile, the U.S.
Federal Transit Administration (FTA) announced a PPP Pilot Program in January 2007 with the
purpose of promoting, funding and studying transit PPPs, to highlight advantages and
disadvantages. The initiative contemplates the selection of up to three projects with "high
demonstration value" for the pilot program. Projects selected may be eligible for "New Starts"
funding and other benefits, depending on the specific scheme. It is interesting to note that the
FTA program contemplates a possible need to alter state and local legislation in order to permit
some projects.
14 "U.S. and Canadian Transportation Projects Scorecard," Public Works Financing, Vol. 214, March 2007, p. 14.
15 Ibid.
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ALTERNATIVE INSTITUTIONAL ARRANGEMENTS
It is a commonplace observation that many drinking water and clean water utilities are too small
to provide the kind of professional management and technical competence that is required in the
present regulatory environment. It is also apparent that, because of economies of scale and other
reasons, user charges are often dramatically higher for small utilities, as compared to large
metropolitan systems. Still, small systems persist, usually for political, jurisdictional, or
geographical reasons. Consolidation of small systems can be accomplished within a
governmental ownership structure, but it requires moving operating responsibility to either a
higher level of government or to a special-purpose government corporation (authority,
management district, commission, etc.).
The latter alternative involves creating a quasi-corporate management structure and requiring
fiscal autonomy (sometimes called "commercializing" the utility). This promotes professional
management and facilitates innovation and performance improvement. Local governments can
maintain their ultimate control over commercialized utilities through appointments to the
governing board and through approval of tariffs. Otherwise, the utility is free to operate much
like a private sector firm, answering to its owners (governments) for performance and efficiency,
not for day-to-day actions. A further advantage is that larger, professionally managed utilities
are much better prospects for beneficial PPPs. Compared to smaller utilities embedded in local
government, the high transaction costs and political interferences associated with partnerships
are expected to be minimal.
III. BARRIERS TO PUBLIC PRIVATE PARTNERSHIPS
While PPPs are not advisable or beneficial in every situation, proponents often argue that these
arrangements are sometimes not even considered in cases where they may be helpful. The
failure to consider a PPP may be due to real or perceived barriers, leading to a belief on the part
of the public agency that no effective partnership with a private entity will be possible. Some of
the possible barriers are discussed in general terms in this section.
STATE AND FEDERAL SUBSIDIES
The Drinking Water and Clean Water State Revolving Funds (DWSRF and CWSRF) have
become important sources of debt capital to the water industry. The DWSRF makes no
distinction between government and investor ownership. However, the CWSRF does not permit
borrowings by privately-owned systems for abatement of point source pollution, except in a rare
case where private point-sources are cited in the Comprehensive Conservation & Management
Plan (CCMP) of a National Estuary Program. To the extent the that CWSRFs offer below-
market, or even zero interest rates, this policy creates a substantial subsidy for government-
owned wastewater systems.
Several states accompany their SRF programs with other programs that offer grants for specific
infrastructure improvements, such as wastewater treatment upgrades. In many cases, privately-
owned facilities are not eligible for these programs. This may be a matter of policy, or it may
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result from the use of tax-exempt bond proceeds. Whether conveyed through interest rates or
outright grants, current subsidy policy creates a significant barrier to those forms of PPP which
involve private ownership of treatment facilities.
It is believed that the reason for this provision in the CWSRF was a desire to avoid using public
funds to subsidize private enterprises. But if the wastewater utility is subject to state-level rate
regulation, this problem does not arise. Conventional rate-of-return regulation requires that
grants and interest subsidies flow through directly to rate payers. The private firm is only
permitted to earn a return on its own funds invested in the utility. Thus the prohibitions serve no
discernable purpose, while potentially making it more difficult to achieve affordability. Current
policy is particularly problematic in hardship cases, where grants intended for such cases are
denied to low-income communities because of the ownership of the wastewater utility.
LEGAL AND INSTITUTIONAL BARRIERS
Contracting
Most types of PPPs require a complex, long term contractual relationship between the public and
private partners. Competing bids for PPPs often differ in important ways, preventing evaluation
on the basis of price alone. In many cases, especially where capital investments are required,
private sector partners may require contract terms of 10, 20, or more years. The longer the
contract term, the more important it is to provide a means of renegotiating specific contract
provisions to reflect unexpected changes in costs or other parameters. These renegotiations
cannot, in most cases, be competitively bid without doing harm to the underlying contract.
Some public sector utilities are bound by state and local statutes or regulations which constrain
the contracting process in ways that are inconsistent with PPPs. In particular, there may be term
limits on contracts, prohibitions on negotiated contracts, prohibitions on take-or-pay agreements,
and no authorization for private parties to collect service fees. These constraints, where present,
may require a change in legislation or revised regulations. Some states, in the interest of
facilitating PPPs, have undertaken these changes. Many have not. No survey on this issue was
performed in connection with this report, but an earlier survey performed by EPA found that 19
states had enacted "comprehensive privatization statutes" intended to eliminate many kinds of
contracting barriers.16 The Board has learned of recent legislative changes in two states (Texas
and New Jersey) which have led directly to new PPP initiatives in both states.
Depending on the form of PPP contemplated, other legislative barriers may exist in the form of
public utility laws, partnership laws, and tax codes. The exact situation is specific to every state
and application. The Board has conducted no survey on this subject and is not aware of any
survey conducted by others.
16 U.S. EPA, "Public-Private Partnerships for Environmental Services: Anatomy, Incentives, and Impediments,"
Office of the Comptroller, Washington, DC, 1988.
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Contract Negotiation
The need to provide for the lowest cost provision of public services, and to do so while
respecting the interests of both private and public partners, results in complex contracts which
must usually be negotiated between the parties. Because of the nature of the services being
provided, the term of the contract, and the complexity of the agreement, very few government
agencies first contemplating a PPP possess in-house competence on all aspects of the contract
negotiation. This is particularly true where the PPP includes a financing role for the private
partner. In this case, it is necessary for the public partner to secure competent, experienced, and
independent advice. Accordingly, the contract negotiation process itself may appear to be a
barrier to some utilities.
Level and Size of Relevant Governments
In 2005, more than 150 million people were served by drinking water utilities in service areas
with less than 100,000 population.17 Private firms wishing to form partnerships with any utility
must face the prospect of interfacing and potentially negotiating with government agencies at the
federal, state, regional, and local level. In some places, government may be as much as five
levels deep. A PPP may require approval at several levels, may be regulated at one or more
levels, and is likely subject to often-conflicting political forces at all levels.
These facts impose significant transaction costs on the private partner, irrespective of the size of
the resulting contract. For large utilities, or for utilities serving multiple jurisdictions, the
potential benefit to the private firm may outweigh the transactions costs. But if the utility is
small and/or is situated at the lowest level of government, there may be little incentive for any
partnership more complex than simple operating or design-build contracts. Yet it is often these
small utilities that can benefit the most from the financial, technical, and operating expertise of
an experienced private firm.
Federal and State Tax Policy
Although there is a long history of investor ownership of water utilities, the tax treatment of
these entities continues to differ markedly from the tax treatment of otherwise identical
government-owned utilities. While the details differ from state to state, and sometimes from
community to community, the general situation is that investor-owned utilities pay at least some
taxes that do not apply to government-owned utilities. These include real- and personal-property
taxes, gross receipts taxes, franchise taxes, etc. The tax treatment of bond interest is a related
issue, where interest paid on government-issued bonds is exempt from federal income tax and
may be exempt from state income tax. The effect of this unequal treatment has long been
recognized as provided a significant hidden subsidy to government ownership.18
17 U.S. EPA, "Factoids: Drinking Water and Ground Water Statistics for 2005," p.2.
18 Gardner, B. Delworth, "The Efficiency of For-Pro fit Water Companies Versus Public Companies," Water
Resources Update, No. 117 (October 2000), pp.34-39.
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BARRIERS CREATED BY PAST GRANT FUNDING
Prior to 1987, many wastewater utilities received substantial grant assistance from the federal
government through the Construction Grants Program. As a result, there is an existing federal
interest in many wastewater facilities that may be candidates for transfer, through sale or long-
term lease, to a private partner. In 1992, Executive Order 12803 was issued to simplify
requirements related to such disposition. However, under the terms of that Order, whenever non-
operational revenues are received by the original federal grantee as a result of the transfer, the
PPP agreement must be reviewed and approved by EPA. The approval, which ends the federal
interest in the asset, is contingent on an approved distribution of the proceeds of the sale or lease
between grantee, state or local government, and the federal government. The federal government
receives any residual revenues, after other parties have recovered their costs.
The Board is not aware of any instance in which EPA has failed to approve a proposed
disposition of a grant-funded facility. However, the need to apply for such approval as well as
the potential requirement for distributing the proceeds from a sale or lease amounts to a
significant perceived barrier to PPPs involving grant-funded facilities.
PUBLIC AND POLITICAL OBJECTIONS TO PRIVATE SECTOR PARTICIPATION
While many advantages can be claimed for properly constructed PPPs (operating economies,
improved access to capital, increased technical competence, long-term sustainability, etc.), there
are a number of reasons to be cautious about these arrangements.19 In the case of full
privatization (where the private sector partner acquires full operating and rate-making authority),
these reasons include the loss of certain hidden subsidies to public sector operations. Examples
of these subsidies are exemptions from many taxes, access to capital through tax-exempt bonds,
and the use of costless retained earnings in place of equity capital. Other issues associated with
full privatization have to do with the opportunity for monopoly pricing, possible loss of control
over system expansion policies, and the loss of various public goods (such as providing
affordable service to low income households). These latter issues can be addressed through
regulation, but regulation itself is costly and results in higher tariff levels.
Other forms of PPPs present few, if any, such concerns. In these cases, the major issue is
whether the private sector partner can perform its assigned function(s) effectively and at a lower
cost than the former government entity. Or, in some cases, the private partner may be able to
deliver a service that the public partner cannot, such as increased access to capital. The public
partner remains in control of all major policies, including rate-making.
Still, proposals to enter into PPPs often face considerable public and political opposition. Some
of this reflects unfamiliarity with the new arrangement and skepticism regarding claimed
advantages. Some opponents distrust the reliability of private sector arrangements to deliver
services as important as drinking water and wastewater management. Others believe that it is the
duty of government to provide these services, and that private sector provision is somehow
inappropriate. Another concern has to do with the utility's labor force. One effect of most PPPs
19 Portions of this section are based on Boland, John J., "The Business of Water."
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involving operations and maintenance is that some employees are no longer needed. They may
be terminated, or the new operator may reduce staff through attrition. Either way, there is often
public and political concern about this effect.
In most cases, though, the issue is simply one of economics: some people assume that the
involvement of the private sector will result in higher rates and charges. Obviously, PPPs should
not be entertained if their only effect is to increase costs. But public concern remains.
The concern about rates and charges is particularly hard to address in circumstances where rates
are rising in any case. If the PPP produces significant efficiencies and still results in higher rates
in the future, it is hard to argue that rates would have been even higher in the absence of the PPP.
Regardless of the specific issues, the prospect of public and political opposition to a PPP appears
to many public agencies to be a significant barrier. In fact, few agencies will risk this kind of
reaction unless the cost and operational advantages are relatively large. On the other hand, some
kinds of limited PPP will produce little or no public reaction. These include most kinds of
simple outsourcing which have little impact on the required labor force. But the dilemma here is
that it is exactly the PPP proposals which promise the greatest cost savings that have the largest
impact on the labor force (cost is reduced by reducing staff).
PREVIOUSLY IDENTIFIED BARRIERS
In 1991, EFAB reviewed the status of PPPs in the water industry, identifying a number of
barriers to wider application.20 These barriers, along with EFAB's earlier recommendations, are
summarized in the following table.
20 U.S. EPA, "Private Sector Participation in the Provision of Environmental Services: Barriers and Incentives,"
advisory report by the Environmental Financial Advisory Board, November 25, 1991.
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Barriers in
1991
Perceived Obstacles to
Forming PPPs
EFAB Recommendations
Changes/Activities
Federal
policies and
regulations
Federal tax laws impact cost
of capital for construction of
facilities. Regulations on
federal grant programs
restrict profitability or
availability of financing.
State-level caps of Private
Activity Bonds (PABs) may
discourage use of private
sector capital
Demonstration programs.
Awards programs by EPA.
Funding such as federal appropriations,
corporate funding, and non-federal source
funding.
EPA assistance such as seminars,
publications, and direct consultation on
projects.
Consistent support for relaxing or lifting caps
of PABs issued for environmental or water/
wastewater purposes
3 pilot projects 1991-1995
Publications, including guidance n EO 12803
on privatization
Funding of 2 PPP seminars by National Council
for Public-Private Partnerships
EPA supports provision in President's FY08
Budget proposal which would lift PAB caps for
water/wast ewater projects
User fees
below the cost
of service
Private investors are less
likely to invest in facilities
operating at a loss. Causes
hesitation to commit long-
term and depend on annual
budget appropriation for
price subsidies.
Promote a greater public awareness of cost of
services.
EPA could endorse the practice in EPA
publications and operational guidance.
EPA could help localities implement full-cost
pricing by providing assistance to set up cost-
accounting procedures and establish volume
discounts/rebates for commercial on-site
treatment.
EPA could provide technical support for
public outreach and information programs that
explain benefits of full-cost pricing.
EPA could help guide States to review
adequacy of the fees during permit process.
"Full cost pricing" has become on of EPA's
Four Pillars of Sustainable Infrastructure
EPA endorses setting rates at the full value of
service provided in all testimony, speeches, and
presentations
EPA is working with industry partners to
develop tools and techniques to assist utilities
recover long-term, full cost of service
EPA plans workshops in 2008 on cost
allocation and rate design
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Barriers in
1991
Perceived Obstacles to
Forming PPPs
EFAB Recommendations
Changes/Activities
State and local
procurement
practices
Certain procurement
practices can limit
flexibility in design,
financing, operations or
providing services.
Procurement laws may
require selection of the
lowest cost bidder,
eliminating competition on
basis of best service or
innovative technology.
Some states prohibit local
government from entering
into long term contracts.
Limits flexibility of industry
to seek cost-effective means
of complying with
environmental quality
standards.
EPA could provide guidance to states that
consider revision of procurement laws to
adopt ABA Model Procurement Code and
Ordinance.
EPA could provide guidance to states and
localities on legislation that authorizes long-
term contracts when practical.
EPA could develop "best practice" guidance
on long term service contracts.
No significant EPA action
Some states (e.g., NJ, TX) have passed
legislation liberalizing procurement laws to
facilitate PPPs
U.S. Conference of Mayors has developed "best
practice" guide to long-term service contracts
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Barriers in
1991
Perceived Obstacles to
Forming PPPs
EFAB Recommendations
Changes/Activities
Investment
Risk
Lenders are reluctant to
invest due to potential low
return for risks involved.
Risks can include limited
availability of adequate
liability insurance,
environmental liability, and
lack of adequate
information on the true level
ofrisks.
Laws subjecting contracts to
annual re-approval and
appropriation of funds
exposes contractions to
early termination risk before
investments are amortized.
EPA could help lenders/investors evaluate real
risks by detailing information about the
different types of risk and activities from
which they derive.
EPA could provide assistance to develop "risk
ratings" from an independent organization.
EPA could reduce magnitude of liabilities,
such as risk-pooling through insurance
programs.
EPA could endorse and facilitate new
programs to offer environmental liability
insurance to capital lenders and provider of
services.
AIG could propose privately funded
alternatives to government involvement in
liability insurance.
Consider having private insurers act as third-
party regulators and police use of sites they
No significant EPA activity
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Barriers in
1991
Perceived Obstacles to
Forming PPPs
EFAB Recommendations
Changes/Activities
Federal grants
Private firms have to
consider grant repayments
for grant-funded facilities
which lead to potentially
high rate increases.
The definition of public
ownership and SRF
regulations results in
preventing public entities
who are seeking SRF loans
from combining existing
public owned portions of a
facility with privately
owned ones.
Financing options under the
Title II construction grants
are limited by restrictions in
what is used as collateral to
secure refinancing.
Evaluate case by case waivers to federal
statues and grant regulations.
EPA could permit waivers from grant
regulations to redefine public ownership.
Consider allowing the federal repayment
requirement for facilities to be reinvestment in
EPA approved WWT projects.
Redefining the period of federal interest and
the period for which plants are needed
equivalent to the design life of facility.
Define concept of acceptable encumbrance for
the facility.
EPA issued draft guidance on 2000 to guide
utilities through encumbrance of title and grant
repayment issues
EPA currently revising the draft guidance to be
less burdensome and more flexible
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The table reflects one recent activity worthy of note, under the first heading, "Federal policies
and regulations." This concerns Private Activity Bonds (PABs) which could conceivably
provide a source of low-cost capital to the water industry. PABs were authorized by the 1986
Tax Reform Act for the purpose of creating tax exempt status for certain public purpose bonds
issued by private sector firms. Unfortunately, state-level caps on the total amount of such bonds
have effectively marginalized PABs as a source of capital for the water sector. The Board has
consistently advocated, beginning in 1991, the liberalization or the lifting of these caps with
respect to environmental or water projects.21 Early in 2007, with the full support of the Board,
EPA endorsed the President's proposal for exempting PABs intended to finance water and
wastewater facilities from the unified state volume caps. As of October 2007, Congress has
taken no action on this proposal.
Another prior recommendation that has received recent attention pertains to the need for full-cost
pricing by local utilities. This is an issue that goes beyond the present PPP discussion, since it
pertains to the fiscal sustainability of the entire industry. However, full cost pricing is often cited
as a beneficial outcome of some kinds of PPPs. Since 2003, when full-cost pricing was
incorporated into EPA's Four Pillars of Sustainable Infrastructure, it has figured prominently in
EPA policy statements and initiatives.
State and local procurement policies have been another area of concern. The prior EFAB report
pointed to state and local laws and regulations that restricted DBO and DFBO arrangements and
that limited the ability of jurisdictions to enter into long-term operating contracts. The Board has
not conducted a survey of the present status of state and local policies, but we are aware of
significant changes in legislation in New Jersey and Texas, both of which led to new PPPs that
would not have been possible before the changes.
With respect to any other EPA or government action that may have been taken subsequent to the
Board's 1991 recommendations, it appears that there were some initiatives in the first ten years,
mostly directed to utility outreach and to the preparation of various kinds of guidance. There is
no indication of a comprehensive, coordinated effort to lower barriers or to facilitate PPPs.
IV. EFAB REVIEW OF SELECTED PARTNERSHIPS
2007 REVIEW
In order to assess the current industry perception of barriers to PPPs, the Board performed a
limited review of the experience of private sector firms presently active in various kinds of
partnerships. Seven firms were contacted; five were able to provide substantive responses for a
total of eleven variants of PPPs. The information provided by the companies is tabulated in an
21 Environmental Financial Advisory Board, "Incentives for Environmental Investment: Changing Behavior and
Building Capital," U.S. Environmental Protection Agency, Washington, D.C., August 9, 1991; Environmental
Financial Advisory Board, "Recommendations and Final Report on Financing Opportunities for the Clean Water
Action Plan," U.S. Environmental Protection Agency, Washington, D.C., July 1999; Environmental Financial
Advisory Board, "Private Sector Initiatives to Improve Efficiencies in Providing Public-Purpose Environmental
Services," U.S. Environmental Protection Agency, Washington, D.C., June 2001.
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Appendix to this report.
Some of the noteworthy results of this review are summarized here:
• Of the eleven examples given, three were DBO contracts and two were long-term
operating concessions. The others were various arrangements for full or partial operating
services.
• Most contracting arrangements were competitive in nature, although some were simple
sole source negotiations, or negotiations following a competitive qualification review.
• Some operators reported problems with political will or with local concern over job
security for existing employees and others noted protracted, complex negotiations. The
most significant barrier mentioned was a Texas statutory prohibition on DB contracts,
which required legislative action to overcome.
• Two factors in the success of these contracts were mentioned multiple times: (1) the
ability to arrange for comparable jobs for existing employees who would no longer be
needed and (2) the proximity of existing operations of the private sector partner. The
latter factor may be most important for PPPs in relatively small communities, where the
private partner can easily bring to bear technical and management expertise that would
normally be unavailable in a small operation.
• Nearly all of the PPPs described by the companies are claimed to provide operational
improvements, improved performance, and lower costs. Since these are existing,
successful PPPs, these results would be expected, but some of the reported cost savings
are surprisingly large (e.g., United Water reported a 30% cost reduction in Indianapolis).
In some cases, performance improvement seemed especially noteworthy (e.g., American
Water in Buffalo).
• In terms of lessons learned, there were comments about the need to maintain momentum
in the contracting process; the need to provide escalators for fuel, materials, and labor
costs in long-term contracts; the need to resolve uncertainties regarding existing
employees; and the need to go into the negotiation process with a clear understanding of
existing work rules. However, the strongest messages in this category came from United
Water and referred to their Indianapolis and Jersey City contracts. In both cases, it was
noted that the contracting process had been smooth and professional, and that these
partnerships could serve as a model for other similar situations.
It should be noted that EFAB's review was limited to the experience of the private sector
providers of utility services; it did not solicit the opinions of the communities who used those
services. But a recent study by R.W. Beck did seek the opinions of government-owned utilities
serving populations 100,000 or more.22 Of those responding (53% completed telephone
interviews), 79% had used some form of private sector service delivery, such as DB and DBO
22 R.W. Beck, "Alternative Project Delivery Survey of Water and Wastewater Utilities," 2006.
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contracts. Most important, 96% of those utilities that had used these forms of PPP reported that
they would do so again. Among the advantages cited were time savings, fewer construction
problems, innovative designs, cost savings, and increased staff competency.
CITY OF ATLANTA EXPERIENCE
In 1999, the City of Atlanta, Georgia, entered into a 20-year agreement with United Water
Services for the operation of the City's water system. Less than four years later, the Company
and the City agreed to dissolve the contract. A joint press release stated that the contract was not
"in the best interests of either party."23 Other press reports at the time indicated that both the
City and the Company had very serious claims against each other.24 This negative experience
confirms many of the lessons learned from the positive experiences summarized in the Appendix
to this report. Successful PPPs require careful planning, continuing political will, and must
clearly serve the interests of both parties.
V. RECOMMENDATIONS
FOR ACTION BY THE U.S. CONGRESS
• Eliminate the state-level caps on public-purpose PABs issued for construction of drinking
water and clean water infrastructure.
• Modify or terminate the federal interest in clean water facilities constructed with
assistance from the former EPA Construction Grant Program, so the communities are free
to consider PPPs in connection with these facilities.
• Make privately-owned, public purpose clean water facilities eligible for loans and grants
from the CWSRFs on the same footing as government-owned systems. This change
recognizes that utility regulation results in all subsidies flowing through to ratepayers.
But it should be noted that some states may continue to limit such subsidies.
FOR ACTION BY EPA
State-Level Statutory Barriers
• Conduct and publish a survey of existing state statutes which restrict or prohibit various
forms of PPPs, either through procurement policies and other means.
• Assist the States in identifying and correcting these restrictions, including the preparation
of draft model legislation, similar to the US DOT effort.
23 The joint press release can be found at .
24 For an account of the City's case, see . A
different perspective on this dispute can be found in Geoffrey Segal, "What Can We Learn From Atlanta's Water
Privatization," Georgia Public Policy Foundation, January 21, 2003
.
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• Monitor the results of this initiative.
• The Agency should examine the initiatives undertaken at the US DOT with respect to
PPPs as a possible model for federal agency activity in this arena. The Agency should
adapt/adopt those activities that would advance the use of such partnerships where
beneficial for environmental utilities.
State-Level Subsidies
• The Agency should conduct and publish a survey of state and local programs, linked to or
separate from the SRFs, that offer grants or other forms of subsidy to government-owned
drinking water or clean water agencies, but which deny such assistance to privately
owned, public purpose systems.
Tax Policy Barriers
• Conduct and publish a survey of existing state and local taxing policy with respect to
government-owned vs. investor-owned drinking water and clean water utilities. The
survey should address access to state-tax-exempt bond financing, real and personal
property taxes, inventory taxes, gross receipts taxes, etc. The purpose of the survey is to
identify cases where tax exemptions to government-owned utilities act as hidden
subsidies.
• Assist the States in identifying and correcting tax policy distinctions which discourage
consideration of some kinds of PPP.
• Monitor the results of this initiative.
Information Barriers
• Continue to disseminate information on PPPs, including case studies which document
specific situations in which these arrangements were beneficial to the community. In
particular, describe the process of tailoring a PPP to a community's needs, so that it:
o Is cost-effective
O Protects the interests of all parties
O Avoids unacceptable impacts on customers including low income households, and
O Maximizes gains to the community as a whole.
• Disseminate information on structural reform of government-owned utilities, as an
alternative or as an adjunct to PPPs. EPA should encourage state and local initiatives to
regionalize water and sewer utilities where cost reductions and operational improvements
are likely to result.
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Monitoring Progress
• EPA should consider funding an extra-governmental organization to track progress in
eliminating barriers to PPPs, at both federal and state levels, and to monitor the results of
these changes.
VI. CONCLUSION
PPPs are not the solution to every problem afflicting the delivery of drinking water and clean
water services and they are not appropriate in every community or in every situation. However,
experience has shown that PPPs can be helpful and beneficial in many cases. Despite this
experience, these arrangements are often precluded or restricted by a number of barriers
originating in law, regulation, policy, and perception.
The Board has found that the need for wider use of PPPs is well demonstrated, the mechanisms
for considering and structuring these arrangements are known, and success stories and model
applications are available. What is now required is a strong initiative by EPA to clear barriers
and to take other steps needed to facilitate PPPs where they are appropriate. Since many of the
barriers exist in legislation and at both state and federal levels, this initiative will require more
than programs, guidance, and workshops. It requires committed and sustained leadership by
EPA.
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APPENDIX
2007 EFAB REVIEW OF SELECTED PARTNERSHIPS
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
American States Water Company
All of the PPP's in which American States Water Company and its affiliates, hereinafter,
collectively referred to as AWR, have engaged have resulted in AWR being the service
provider or operator if you will. In each case, the PPP's have not involved operation of a
WTR or WWTP but rather the provision of full service O&M of water systems or partial
O&M services.
See response above.
AWR, the O&M operator, provided a wide variety of services for a number of
municipalities including meter reading, billing, customer service, or a combination of
some or all of the previous functions; as well as total O&M functions.
In each case, the PPP's listed above were open competition for all qualified participants.
In as much as AWR's involvement in PPP's has largely resulted from bids placed by a
municipality or other agency, AWR was not informed about potential or real obstacles in
the bidding-stage. However, there is significant concern relating to political will and
about the lack of full disclosure of information that made certain aspects of the process
cumbersome or, worse, incomplete.
It is fair to say that the most significant obstacle faced by AWR was the political will
(described above) to consummate a transaction. In addition, AWR could list the
following: (i) level of technical sophistication of parties; and (ii) hidden agendas; (iii)
lack of meaningful time set aside to engage in potentially beneficial negotiations.
The main factor is trust by the governmental authority in the ability of the utility to
perform the function(s) of the PPP for the price and terms negotiated.
It goes without saying - efficient provision of O&M services at a price acceptable to all
parties.
Realistically, there are a number of pointed items that AWR may have done differently.
The key item, however, is to keep the process continuous and not fall prey to diversions
or "other things that come up."
The efficient provision of full or partial O&M services at a price fair to all parties.
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Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
Connecticut Water Company - I
Middlebury Water System
Middlebury, CT, distribution system with pump station
The Town of Middlebury established a water system in the mid- 1 990 's to serve an area of
contaminated wells. The initial construction of the system was paid for by the polluter. The
distribution system was expanded through access to various state grants to serve other areas. The
source of water was an interconnection with a neighboring city. Middlebury purchased water
from the city and took on a portion of the city's debt service for construction of its water
treatment plant under an agreement between the two parties. Connecticut Water, through it's
unregulated subsidiary New England Water Utilities Services, had been providing fulltime
contract operations, customer service and billing services to Middlebury since the system's
inception.
The neighboring city became involved in a lawsuit over its water supply. In turn the
continued availability of water to Middlebury to supply its needs became uncertain. The
Connecticut Water Company (CWC) had a water system.
No bid. This was a unique situation brought about by the proximity of the water systems and the
availability of supply.
This was a complicated deal that required months of study by the Town and Middlebury and
negotiation with CWC
See previous response.
The proximity of CWC's water system with available supply and the willingness of the Town and
CWC to forge a mutually beneficial partnership.
The Connecticut Water Company was able to add several hundred customers in an area with
substantial growth potential. Much of that growth continues to be paid for through the Town's
access to grant funds. The Town of Middlebury was able to achieve its plans for growth and
provide water supply to areas of contamination or deficient supply while relieving itself of its
financial obligations to the neighboring city. The Town also avoided the customer service/meter
reading/billing/collection costs of running its own water system.
Nothing.
In this situation the Town of Middlebury was faced with creating its own water department.
Instead it was able to access the personnel, equipment and expertise of a neighboring utility
without increasing the costs to the Town or ratepayers.
-24-
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Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
Connecticut Water Company - II
Operations, Management and Maintenance Agreement between The University of Connecticut
and New England Water Utility Services. New England Water Utility Services operates,
manages and maintains the public water systems owned by the University of Connecticut.
Site Name: University of Connecticut Main Campus and Depot Campus
Location: Storrs, CT
Type of Plant: Public Water Systems including wells, disinfection and corrosion control
treatment, and distribution systems.
Operation, maintenance and management services provided by New England Water Utility
Services, Inc for water systems owner, The University of Connecticut.
Request for Qualifications, followed by Request for Technical Proposals, which included a price
proposal, from all qualifying firms. Upon selection of a firm's Proposal, that firm negotiated a
Contract with the University.
The bidding-stage was delayed approximately 3 months. We were not aware of any major
obstacles that had to be overcome.
The contract -negotiations process was somewhat slowed as five separate departments within the
University system and/or the State of Connecticut were involved in review of the contract.
The Connecticut Water Company, which is the sister company to New England Water Utility
Services, is a regulated public water utility which has operating territories close to the University
campuses and has interacted with university water system personnel over the years. In addition,
New England Water Utility Services has performed various services for the University in the
past, including the collection and processing of water quality samples, cross connections
inspections and backflow device testing. These factors have resulted in a level of trust and
cooperation between the Company and the University which continues under the contract.
Under the current contract, the University has access at a very cost-effective price to the expertise
and resources of a large public water utility, including a large staff specifically trained in the
operation, maintenance and management of a complex public water utility system.
Nothing.
Access to the expertise and resources of a neighboring professional water utility at a cost-
effective price.
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Private Sector Partner
San Jose Water Company
Role in PPP
Maintenance, installation, consulting, and other service contracts with municipal utility.
Site name, location (city,
state) and type of plant
(WTP, WWTP)
San Jose Water Company (SJWC) is an investor-owned public water supply utility, which
supplies, treats and distributes water to a population of 1 million in the Santa Clara Valley. The
company also provides utility services to other agencies.
Type of PPP and specific
PPP role of each party
SJWC has maintenance, installation and consulting contracts with San Jose Municipal Water
System (SJMWS), which is owned and operated by the City of San Jose. These include water
main and service leak repairs, water main and appurtenance installation, preventative
maintenance services (such as valve exercising) and various consulting services. In addition,
SJWC provides meter testing and repair service for eight regional water utility clients. We test,
rebuild and certify the accuracy of water meters in sizes 1" to 10" in our state-of-the-art Meter
Shop at a cost far less than replacement.
Requirements for bid
participation
The requirements are:
1. Hold a corporate General contractor's License. (An employee obtained a state contractor's
license and assigned it to SJWC.)
2. Look at the City's Internet site frequently for bid solicitations.
3. Obtain each of the City's RFPs and provide bids, when there is a good fit, competing against
several local contractors.
4. Attach a bidder's bond and proof of insurance to our submittals.
5. Awards were made for the annual general contract and several additional large jobs based on
being the lowest qualified bidder.
6. After award, submit a performance bond and sub-contractors' payment bond.
7. Also, after award, submit references to prove we are qualified (previous job of same scope and
$-magnitude).
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Obtaining the bidders bond quickly was a challenge, but our financial staff found a source.
Preparing a bid is time consuming. In lieu of customer references, we described several capital
improvement projects, which our staff constructed.
We have to bid every large City project separately against local contractors. We have to re-bid
the general installation contract annually. We may not always be price-competitive if a high
percentage of the work is delegated to our sub-contractors.
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
The City required several forms be completed to verify living-wages for field crews; since we use
subcontractors for paving and backhoe, their response delayed the contract negotiations.
Factors that helped make
this PPP a success
Proximity to SJMWS and familiarity with its service area; SJWC's expertise, staff and equipment
available for distribution system repair, installation and preventative maintenance; A long-term
working relationship with staff at SJMWS; The need by SJMWS to have a reliable contractor
who could provide rapid response to leaks.
Benefits to public and
private sectors
SJWC is able to maintain the staff size needed to deal with the cyclical nature of distribution
system repairs; SJMWS is provided with cost effective, high quality services, with fast response;
SJWC is able to leverage its economies of scale, and pass those savings onto SJMWS; As leak
repair experts, SJWC crews need less oversight by SJMWS than typical construction companies
performing similar work. In addition, SJWC's crew trucks and support equipment have been
specifically designed for fast response to leaks of all sizes. This ultimately results in faster
repairs, while minimizing service disruption to consumers.
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Private Sector Partner
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
San Jose Water Company
SJWC would have crafted
and labor.
Under the right conditions
cost to ratepayers.
the contract to better allow for actual market costs for fuel
a PPP is a way to get the high quality services needed for
, materials
the lowest
-27-
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
American Water Company - I
American Water is the prime contractor for DBO and plant operator.
Fillmore, California; New wastewater recycling plant to replace existing antiquated wastewater
treatment plant.
The procurement was structured as DBO.
• City of Fillmore: client
• Boyle Engineering: procurement advisor / program manager
• American Water: prime contractor; facility operator
• Kennedy- Jenks Consultants: design subcontractor
• WM Lyles: construction subcontractor
Client issued RFQ setting forth financial, technical and business qualifications criteria for
bidders.
None.
None.
The following factors they believe will contribute to making this a successful PPP: (i) sole
source responsibility; (ii) reduction of project duration; (iii) reduced E&O claims; (iv) integrated
and aligned DBO team; (v) early cost and schedule certainty; and (vi) promotes innovation and
creativity.
The primary benefits are the partnership's innovative open-book / contingency sharing approach
on the DB side and striking a better balance of risk allocation/ sharing, particularly in the areas of
bonding, repair and replacement and sludge disposal.
There is nothing suggested to have done differently.
PPPs provide cities that do not possess internal expertise and resources for one-time
infrastructure and O&M procurements an alternative approach that provides, among other things,
tangible, quantifiable value to the ratepayers and, specifically, access to the private sector
expertise and resources at a reasonable, cost-effective price.
-28-
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
American Water Company - II
American Water is the private contract operator providing professional management oversight of
all day-to-day operations as well as giving direction and support for more than 130 operations
and administrative staff members who are City of Buffalo/Water Board employees. There are
four American Water employees at this project led by James Campolong, American Water's
project manager.
This project includes the management of the Colonel Ward Water Pump Station and Water
Treatment Plant, the Massachusetts Avenue Pump Station and Exchange Street customer service
and billing office located in Buffalo, NY.
This is a full scope O&M project. The main parties and corresponding responsibilities are as
follows:
American Water (Contract Operator)
• Project Management— overall O&M project oversight and contract compliance,
including management oversight of city employees who carry out O&M services
• Customer Service Management— responsible for the day-to-day operations of the
customer service functions, including the call center, billing operations, and collections,
including delinquent collections program for water and sewer charges
• Assistant Business Management— responsible for management of the project purchase
order process and vendor relations, budget compliance, and staff liaison.
• Systems Administration— responsible for support of all billing system software and
development support, including field meter reading equipment and staff liaison for
computer hardware and network.
City of Buffalo/Water Board (Owner)
• Water Board sets rates, rules and regulations for the system, manages capital
improvements and otherwise provides full governance of the system.
• City of Buffalo is the employer of operations, maintenance and administrative staff
engaged in direct operation and maintenance activities of the system.
• Commissioner of Public Works— official representative of the Water Board and acts as
the primary "responsible party" representing the City of Buffalo and Water Board.
Negotiates contract terms on behalf of the Board and acts as the liaison between
American Water O&M group and the City's administration.
• Principal Water Engineer-oversees capital works projects funded by the Water Board,
primary contact with O&M manager related to technical and operations matters for the
contract.
Conestoga Rovers & Associates (CRA Engineering) (Owner's Engineer)
• CRA is the water board's consulting engineer for the O&M contract. CRA prepared the
RFP and took a lead role in evaluating respondents' proposals as well as negotiations
leading up to the Operating Agreement. CRA continues to perform contract compliance
oversight on behalf of the water board.
Bidders were required to show that they had previous experience managing projects of a similar
size and scope and the financial capacity and technical resources to support the project.
-29-
-------
Private Sector Partner
American Water Company - II
Major obstacles that
delayed the bidding-stage
process and how they
were overcome
Since this proposal for private management of public services was the first of its kind to be
suggested in western New York, the first RFP in 1997 faced initial pushback from the public
sector unions as well as the members of the City's Common Council largely over job security.
The Commissioner of Public Works appeased concerns by meeting with all parties and assured
them that labor retention would be a key component of the project and that these efforts by the
Water Board were not only an effort to avoid future significant rate increases but also an attempt
to actually reduce costs through efficiencies.
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Contract negotiations had to be held with not just one union group but four, and, as such,
concessions over work rules were required with all four public sector unions. A Memorandum of
Agreement was required which detailed management and union responsibilities and guaranteed
staff reductions only through attrition. Also, since there was no preexisting management model
in the area, the scope of service requirements were challenging to develop, since clear roles were
not well defined within the municipal management staff. As a result, the first five-year term
lacked the kind of clarity that the second five-year term provided regarding delineation of
responsibilities. During the second five-year term, the scope of services were spelled out in much
greater detail using examples and detailed definitions of roles and responsibilities.
Factors that helped make
this PPP a success
There were many standout success factors in this milestone project for western New York. In
fact, this project won the NCPPP's 2005 Public/Private Partnership award in the "service"
category and was featured on the cover of Underground Infrastructure Management's
March/April 2006 edition.
Some key successes are as follows:
• The willingness of both parties to approach the Agreement as a true partnership,
agreeing to work cooperatively to address all management issues as they arose, and the
level of trust developed which allowed both parties to work out the details related to
roles and responsibilities later.
• Clear, well-defined descriptions of scope of service deliverables that were mutually
agreed to and were reasonable, which resulted in a positive experience for both parties
and continues to this day.
• Well-defined contract compliance oversight by a neutral third party with the technical
expertise to monitor the operations contractor as well as to provide guidance to the client
with respect to interpretation of contract terms and conditions.
• Full commitment and support by American Water's O&M project team towards the
City's long-term goals and objectives for operational and financial improvements.
• A contract based on reasonable commercial risks and a risk profile that is predicated
upon which party is best able to control certain risks. For example, The Water Board
has accepted price risk, while American Water has accepted utilization risk for electric
power.
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-------
Private Sector Partner
American Water Company - II
Benefits to public and
private sectors
$4-5 million savings annually via across-the-board operating improvements and
improved financial management. These were some of the efficiencies alluded to earlier.
Initial water rate reduction of 8 percent held for five years and rate stabilization and
control in subsequent years
Huge productivity gains: an innovative labor contract utilizes city employees with no
involuntary staff reductions; work rule changes and improved deployment yielded a
sustainable 26 percent increase in productivity.
Complete automation of customer records and general operations (90,000 customer
records were previously maintained on index cards).
Collection rate increased from an 80-percent range to 97% or greater resulting in
significant positive revenue impact.
New state-of-the-art customer service center was built, with easy access to mass transit.
Conversion to metered water from flat rate, with installation of over 63,000 water
meters.
Improvement in water quality through implementation of best practices reduced
turbidity by more than 80 percent.
Responsiveness and efficiency of water- line repairs increased substantially with
implementation of a computerized maintenance and management system (CMMS).
Vehicle reliability improved via a new replacement and repair program. Average age of
fleet reduced from 14 years to 8 years.
Community involvement and support was an integral part of American Water's mission
- water education in schools, help to disadvantaged, involvement in civic improvements
and redevelopment efforts.
What, if anything, would
you have done
differently?
Better advanced insight into work rules could have accelerated the negotiations process and have
realized the multitude of successes listed above much more quickly (time to money). Although
AW participated in contract discussions and championed process change and work rule revisions,
the staff continues to be governed by the Civil Service and Public Sector Collective Bargaining
Agreements which are very restrictive and require multiple levels of participation and agreement
before change can be implemented. Perhaps an agreement which would either enlist the staff as
employees of American Water or which has a provision affording more influence over the
agreements governing the operations staff would result in accelerated improvements for all
parties; however, the current model has proven to be workable and a success by many accounts.
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
By entering into a partnership with a company like American Water, it will benefit from private-
sector discipline coupled with a strong public-service ethic. The discipline, in particular,
translates into a positive municipal cultural shift which will have heightened awareness of best
practices and which gives greater focus to efficiencies and effectiveness top to bottom. As a
result, it will save money and/or thwart higher costs, be better prepared for future "curve balls,"
and will be more easily adaptable to change, if required. The public-service ethic translates to
better access to technologies to help sustain or improve water and wastewater protection and
supply, as well as provide an ongoing high-level of customer satisfaction.
-31 -
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
American Water Company - III
Director / NJ Contracts / project manager
Liberty Water Company- City of Elizabeth water system
O&M contract 40 years-
Dee Gillespie- Project manager- oversees entire project- Operated by various departments within
American Water's NJ American Water subsidiary.( i.e. production, network, environmental, CFS,
etc..) Too many to list.
Not available.
The contract may have originally included another City but decided to drop out. No knowledge of
any other obstacles
Not aware of any obstacles.
The biggest success factors were making certain that the existing employees from the city were
offered new or related job opportunities. The other key factor was having identified the project
contact person for providing immediate service and response.
The upfront payment to the City as part of the concession deal enabling the City to stabilize
property taxes and pay down existing debt on water and sewer obligations. Also having an
experienced operator like American Water ensured the timely and cost effective implementation
of key capital and operational projects.
Nothing in my opinion. Both parties are satisfied, and the major has strongly endorsed our
partnership.
PPP provides innovative measures to solve multiple City problems. In this case the concession
model provided dollars to the City to address tax and debt issues, through services from a skilled
operator. This often reduces system costs without affection the work force.
-32-
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
American Water Company - IV
Director / NJ Contracts / project manager
Edison Water Company- Township of Edison Water system
O&M contract 20 years-
Dee Gillespie- Project manager- oversees entire project- Operated by various departments within
American Water's NJ American Water subsidiary.( i.e. production, network, environmental, CFS,
etc..) Too many to list. Same as Liberty
Bid participation required participants to verify related experience in all facets of the water
industry (i.e. repairs & maintenance, meter reading, billing and collection, customer service,
production, etc.) Also, it was the obligation of the successful participant to satisfy the existing
employees with employment or at least pay the township the employee salaries for a specific
period if they remained with the town.
The township council was not all in favor; however, as stated earlier, a brief township open
discussion was extremely effective in getting everyone on board. Edison was the first concession
contract which generated many questions from us as manager and operator of the system.
Not all council members were on board regarding the privatization. After a thorough presentation
of American Water's obligations from an American Water employee the votes were all in favor.
The process of questions and answers were belabored due to the lack of information in the RFP
(system information).
The biggest success factors were making certain that the existing employees from the city were
offered new or related job opportunities. The other key factor was having identified the project
contact person for providing immediate service and response.
Additionally, providing the capital projects to eliminate major discoloration complaints was key.
The upfront payment to the City as part of the concession deal enabling the City to stabilize
property taxes and pay down existing debt on water and sewer obligations. Also having an
experienced operator like American Water ensured the timely and cost effective implementation
of key capital and operational projects.
Edison, unlike Elizabeth, had many customer water quality complaints which were addressed and
taken into consideration for long term corrective measures.
Nothing in my opinion, each contract / municipality is unique in its own way.
PPP provides innovative measures to solve multiple City problems. In this case the concession
model provided dollars to the City to address tax and debt issues, through services from a skilled
operator. This often reduces system costs without affection the work force.
-33-
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Private Sector Partner
United Water -1
Role in PPP
Long-term O&M of the City of Indianapolis' two advanced wastewater treatment facilities; 250
MGD combined capacity
Site name, location (city,
state) and type of plant
(WTP, WWTP)
United Water Indianapolis,
Indianapolis, IN
Belmont Advanced WWT Facility
Southport Advanced WWT Facility
Indianapolis Collection System
Type of PPP and specific
PPP role of each party
The PPP is a long-term O&M of the City of Indianapolis' two advanced WWT facilities. United
Water's role as O&M manager is to treat the effluent of two advanced WWT facilities with a 250
MGD combined capacity; 193 MGD combined average daily flow collection system and Eagle
Creek Dam; laboratory services; industrial pretreatment monitoring and program management
Requirements for bid
participation
Contractor must:
• have been in the business of providing full service contract O&M and management of WWT
facilities for at least five years prior to 11/01/96 and must be currently licensed to do
business in Indiana;
• currently provide full service contract operations to at least five or more WWT facilities with
a design average flow capacity of 15 MGD;
• currently provide full service contract operation services for at least one WWTP with a
design average flow of 60 MGD.
Additional requirements include:
specific liability and property damage insurance,
an acceptable annual (renewable) Performance Bond,
an acceptable annual (renewable) Payment Bond and a requirement to accept AFSCME as the
bargaining agent for the same or similar classifications of employees as are covered by the
current contract.
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Other than the delays which resulted from the exhaustive study on asset sale, the process was
very professionally and efficiently done. The City used some outside consultants to assist in this
endeavor but it had put together a very talented and multi-disciplined in-City team which enabled
it to focus on its priorities and not be diverted by outside agendas.
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
No Answer.
-34-
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
you have done
differently?
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
United Water - II
DB management and operation of an 1 1MGD ultrafiltration surface WTP
Bexar Metropolitan Water District (BMDC)
WTP
San Antonio, Texas
The PPP is a DBO&M. Under the terms of the contract, United Water is responsible for all
aspects of designing, building, managing and operating the surface water facilities. BMDC is an
industrial development corporation formed by the water district. BMDC owns the facilities,
provided financing for the project and constructed a five-mile pipeline and the storage facility.
The project was sole sourced and therefore an RFP was not issued. The project was a DBO which
in Texas required special authorizing legislation since currently government entities cannot enact
DB's without specific approvals.
The contract was sole sourced. Montgomery Watson was contracted for the design-build and saw
an opportunity to bring in United Water. The biggest obstacle was financing. Special legislation,
mentioned previously, took time and cost for the District to enact. The project could have been
done as a BOT with private financing if sufficient Private Activity Bond financing had been
available. Lifting of the PAB bond cap would have made this option one that the District could
have seriously considered since it would have created comparable costs to muni-bond financing.
Refer to the above discussion on Texas DBO authorization
The factors that made this PPP a success were its use of innovative membrane technology, the
procurement methodology which reduced the total cost of the project to $ 1 . 1 63 per 1 ,000 gallons
produced - an estimated 30 percent reduction over traditional approaches and the assistance in
the preservation of the Edward Aquifer by saving of nearly 3.56 million gallons of water annually
through the construction of a 12.5 million gallon storage facility.
The technology and design-build principles employed in conjunction with its overall benefit to
the environment and the community, won United Water and Bexar Met the Texas Consulting
Engineering Council Engineering Excellence Award and American City and County Crown
Community Award
The ultra filtration plant treats water from the Medina River, making it the first facility in the San
Antonio area to treat surface water. For generations the Edwards Aquifer has been the sole source
of water for the residents in San Antonio and the surrounding areas. The demand of the aquifer
has steadily increased with the development of new communities and business. As a result of the
surface WTP, nearly 3.56 billion gallons of water are saved each year, decreasing the demand on
the aquifer. In addition, United Water has safely upgraded the plant's design capacity to 14.5
MGD in the summer and 10.8 MGD in the winter without additional capital investment.
The process leading up to and throughout the contract has been successful. No changes would be
made in retrospect.
Value and efficiency. A public-private partnership typically results in annual operating cost
savings of 10 to 40 percent, allowing municipalities to avoid or mitigate increases in water rates.
A sample of such partnerships realized average savings of 24 percent over the period 1992-1997
as reported in a joint publication of the Association of Metropolitan Sewerage Agencies and the
-36-
-------
Private Sector Partner
United Water - II
Association of Metropolitan Water Agencies (AMSA/AMWA). The high rate of contract
renewal indicates that service levels and environmental compliance are not compromised as a
result of these efficiencies and that the private sector is capable of adding value rather than
simply cutting costs.
-37-
-------
Private Sector Partner
Role in PPP
Site name, location (city,
state) and type of plant
(WTP, WWTP)
Type of PPP and specific
PPP role of each party
Requirements for bid
participation
Major obstacles that
delayed the bidding-
stage process and how
they were overcome
Major obstacles that
delayed the contract-
negotiations process and
how they were overcome
Factors that helped make
this PPP a success
Benefits to public and
private sectors
What, if anything, would
United Water - III
O&M and management of Hoboken's water distribution system. Customer service, billing and
emergency services are also included among the company's responsibilities
Hoboken Water Services
Hackensack, NJ
Jersey City WTP
Boonton, New Jersey
The PPP is OM&M. United Water is responsible for providing the city's water supply, as well as
all system maintenance and repairs, customer service, billing and collections, and 24-hour
emergency service.
The contract was sole sourced. United Water approached the City of Hoboken at a time when the
Mayor and council had interest in revitalization of the city. Consideration was given to creating
an Economic Development Authority with an initial investment of $5 million, which at the time
the city did not have.
This was the last project before legislation was introduced to legally develop public-private
partnerships in New Jersey
The two obstacles at the time of the birth of the relationship between United Water and the City
of Hoboken were the divide between the mayor and the council over whether this partnership was
in the best interest of the City and the expectations of the contract's value. Ultimately the Mayor
was able to convince the council members and unions who were not previously supportive of the
partnership that this was the best option for the City.
As referenced in question #5, economic obstacles were the cause of the delays in contract
negotiations. Eventually, both the City and United Water came to an agreement that was mutually
beneficial
In 1994, the city of Hoboken and United Water reached an agreement that set the standards for
municipal asset management in New Jersey. The city was faced with an annual $800,000 loss if it
continued to operate its 40-mile water distribution system. That's when they teamed up with
United Water in an innovative arrangement, the first public-private partnership for water services
in New Jersey. The partnership enabled the city to retain ownership of the infrastructure and
retain rate-setting responsibility.
United Water has made numerous capital investments (will total $15 million over the life of the
contract) including the installation of new automatic meters, new mains, new valves and new fire
hydrants. Among other things, these efforts have helped upgrade Hoboken's fire rating from the
worst to the best.
Investments in water infrastructure have improved the reliability and quality of the water service.
This has helped the city develop a thriving waterfront which now boasts new park and recreation
areas, high rise housing and commercial and retail space. United Water's role in rehabilitating
NJ Transit's historic Hoboken Train Station has also helped improve the life for city commuters.
The benefits to the private sector are reflected in the success of the contract with the City of
Hoboken as the first of its kind in New Jersey and having set the standard across the State and
country. The contract has received national recognition in the Best Practices Database of the US
Conference of Mayors.
-38-
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Private Sector Partner
United Water - III
you have done
differently?
The process leading up to and throughout the negotiations and contract thus far has been positive
and successful. There would be no changes.
What is the single, most
compelling reason you
would offer a city to
consider a PPP?
Value and efficiency. A public-private partnership typically results in annual operating cost
savings of 10 to 40 percent, allowing municipalities to avoid or mitigate increases in water rates.
A sample of such partnerships realized average savings of 24 percent over the period 1992-1997
as reported in a joint publication of the Association of Metropolitan Sewerage Agencies and the
Association of Metropolitan Water Agencies (AMSA/AMWA). The high rate of contract
renewal indicates that service levels and environmental compliance are not compromised as a
result of these efficiencies and that the private sector is capable of adding value rather than
simply cutting costs.
-39-
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'$ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
''^^^Ttf*
JUL 9 2003
OfftCE OF
Mr. A. James Harries
Professor of Public and
Environmental Affairs and
Adjunct Professor of Law
Indiana I Iniveisily
L>l> I ast 10 Street. Suite -I IS
Hloomingtori, Indiana .17406
Dear \
Thank \ou for your letter to Administrator Stephen L. Johnson datetl April 2*), 2UOS. in
which yon transmit on behalf of the Environmental Financial Advisory Hoard (1:1 AH) the report
entitled "I'uhltf I'mute Partnerships i>i //re Pi-itviMiHi t'l U'itU-r itml lli;.\/(-m;/r
privatizing facilities with a federal interest is being streamlined to encourage greater participation
by the private sector. Additionally, as your findings suggest, my staff will examine the period of
federal interest to determine potential limits, and ivcxamine the definition of public ownership
The report also brines to light a number of initiatives undertaken by the Department of
Transportation (DOT), including a website with various PI'P-relaled resources, and model
legislation for states to use in older to promote PPP transportation projects. | believe these types
of initiatives are needed not only in the transportation sector, but in the water industry as well,
and ! am directing my staff to further examine these initiatives with the hope of potentially
emulating DOT.
ird«m«l **.s' •
• PiVYI»a»lnVfig««Dl«Q*Bated Imson IUOS«*o«aoniU-wr PiciresiCnKn.na f rw OOCTCUK) P»RD>
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Once auain. thank you tor providing this valuable input. I continue to he a strong
proponent of public private partnerships in the water industry. As I am sure you know,
legislation that I strongly support, authori/iim the crealiiMi of "\\ ater Knterprisc Bonds." has
recently been introduced in Conuresv I plan to continue working with Confess and the water
industry to try to achieve many of the efficiencies hiyhliyhled in the report, Rirthennore. I
would like to continue this discussion with the Boaid at >our earliest convenience. These el Torts,
and tin's dialogue, are much needed in a time of dwindling resources.
If you have any questions or wish to speak further about this issue, please contact
James A. llanlon, Director. Office of Waslcwaler Management, at (2d2) 5M-074S.
Sincerely,
Benjamin II. (inunhles
Assistant Administrator
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes
Chair
Terry Agriss
Julie Beluga
John Botand
George Butcher
Donald Correll
Michael Curley
Rachel Denting
Pete Domenlcl
Kelly Dotmard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott Haskins
Jennifer Hernandez
Keith Hinds
Steve Mahfood
Ljngdon Marsh
Greg Mason
Lindene fatton
Cherle Rice
Helen San/
Andrew Sawyers
Jim Smith
Greg Swartz
Steven Thompson
Son/a Toledo
Jim Tozzi
Justin Wilson
John Wise
Stan Melburg
Designated
Federal Official
APR 29 2008
Mr. Brian F. Mannix
Associate Administrator for
Policy, Economics and Innovation
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Mr. Mannix:
The Environmental Financial Advisory Board (EFAB) is pleased to
enclose its observations and recommendations regarding Environmental
Management Systems and the Use of Corporate Environmental Information by
the Financial Community. The Board's work was led by its Environmental
Management Systems Project Workgroup, chaired by Ms. Rachel Deming, a
partner with Scarola Ellis LLP of New York City. In finishing this important
project, the Board would be sorely remiss if we failed to recognize the excellent
work and cooperation of two individuals from your Office, Mr. Chuck Kent and
Ms. Shana Harbour.
EPA has long recognized the potential that environmental management
systems (EMSs) have for improving environmental performance and compliance.
In the past few years, EPA's Financial Incentives for EMSs Steering Group, led
by your Office, has done important work in examining the extent to which the
financial sector values the development and implementation of corporate EMSs.
As an adjunct to the Steering Group's work, your Office asked EFAB to explore
some questions regarding EMSs and financial issues. When EFAB started
looking into these questions, it became clear that the initial request needed to be
examined in a broader context. The EFAB workgroup worked closely with your
staff to refine the questions to take into account market realities. The enclosed
report is the product of Board meetings, conference calls, member discussions and
a workshop involving experts from the equity, debt and insurance financial sub-
sectors. A detailed summary of the workshop is also enclosed for your reference.
The Board believes that the work of the Steering Group is very timely in
light of the increasing awareness of the role die environment plays is all segments
of the economy and strongly supports die continuation of the Agency's work with
Providing Advice on "How To Pay" for Environmental Protection
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Environmental Financial Advisory Board Meeting June 12, 2007, Arlington. Va.
2
the financial sector and companies to develop and promote a better understanding
of the relationship between EMSs, environmental performance and financial
value. EFAB believes that among the many areas that EPA could work, attention
should be given to developing mutually useful environmental metrics that can be
used as indicators by financial analysts, identifying all relevant environmental
information collection systems, and improving the measurement of certain
environmental impacts, starting with carbon footprints and the developing markets
relating to use of greenhouse gases.
We hope that you will find Board's more detailed observations and
recommendations constructive and useful. The members of EFAB appreciate the
opportunity to advise and assist the Agency on important environmental finance
issues. If you would like to discuss the report in more detail, we would be happy
to meet with you and/or members of your Office as you deem appropriate. EFAB
is very interested in helping to facilitate better evaluation of environmental
performance for the financial markets and remains willing to help the Agency in
any way requested consistent with its charter.
Sincerely,
A, James Bames A. Stanley Meiburg
Chair Designated Federal Official
Enclosures
cc: Stephen L. Johnson, Administrator
Marcus C. Peacock, Deputy Administrator
Lyons Gray, Chief Financial Officer
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott Haskins
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Lindene Patton
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Steve Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Environmental Management Systems
and the Use of
Corporate Environmental Information
by the Financial Community
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
April 2008
Printed on Recycled Paper
-------
EFAB EMS Project Final Draft Report
Environmental Management Systems and the Use of Corporate
Environmental Information by the Financial Community
Original Request: Financial Market Incentives for Organizations to Reduce Risk and
Improve Environmental Performance Using Tools like Environmental
Management Systems (EMSs)
Original Requester: Stephanie Daigle, Acting Associate Administrator for Policy,
Economics and Innovation
Original Questions:
1. Do EMSs yield information on financial risk that is relevant and meaningful to
investment and underwriting decisions? If yes, how?
2. What are the financial services industry's beliefs, practices, and conventions
regarding EMS?
3. What additional organizations have an interest in EMS?
Request Date: June/August 2005
Addressee: Brian Mannix, Associate Administrator for Policy, Economics and
Innovation
United States Environmental Protection Agency
cc: Honorable Stephen L. Johnson, Administrator
United States Environmental Protection Agency
Lyons Gray, Chief Financial Officer
United States Environmental Protection Agency
Subject: EFAB Findings and Recommendations on the Use of Corporate
Environmental Information Management Systems in Investment
Evaluations and Decisions Made by the Financial Services
Communities in the Equity, Commercial Banking, and Insurance
Sectors
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Background
The United States Environmental Protection Agency (EPA) has recognized the
potential for environmental management systems (EMSs) to achieve compliance and to
establish standardized systems for monitoring and enhancing environmental performance.
EPA's policy is to encourage companies to implement EMSs. In connection with this policy,
EPA created a program called Performance Track which is focused on the implementation of
EMSs by operating facilities. EPA also decided to examine ways in which the financial
markets could provide incentives for companies to implement EMSs.
A Steering Group was established by EPA to look at financial market incentives,
which is led by the Office of Policy, Economics and Innovation (OPEI). This Steering Group
conducted extensive research and prepared a Phase 1 report on its findings, entitled
"Financial Market Incentives for Environmental Management Systems"
http://www.epa.gov/ems/docs/resources/FinalFinancialIncentivesforEMS%203-07.pdf.
While this research was in progress, OPEI staff attended the August 2005 meeting of
the Environmental Financial Advisory Board (EFAB) and requested the Board's assistance in
identifying the financial advantages of EMSs. OPEI also asked the Board to provide
recommendations to EPA on ways in which the market value of EMSs could be promoted.
EFAB formed an EMS Workgroup (the Workgroup) to assist EPA.
Initially, the Workgroup had to assess whether the charge from EPA was feasible.
Very few of the EFAB members knew what an EMS was, and those that did knew there were
wide variations in EMSs. EPA itself did not establish specific requirements for EMSs, since
it wanted to allow companies the maximum flexibility to implement a management system
that worked for each company.
At the EFAB meeting in March 2006, the Workgroup considered options for
addressing OPEI's requests. The Workgroup members recognized that an EMS as a standard
suffered from definitional problems. First, in establishing a qualified EMS, each facility is
given the latitude to establish its own goals. The main benefit of the EMS is to establish a
mechanism to systematically evaluate those goals and assess the company's performance in
attaining those goals. From a market standpoint, there is no specific endpoint that can be
measured across companies or business segments. EMSs are used by the financial sector
largely as an indicator of good management. Second, EMSs do not usually exist as a stand-
alone system. A company that has an EMS will also have management systems for several
other operational areas such as health and safety and product stewardship.
The Workgroup decided to look at three financial market sectors separately, equity,
debt and insurance, and developed a couple of concepts to test in each sector: (1) what is the
importance of measurable results; and (2) whether branding a form of EMS would assist the
market sector in valuing environmental performance. In connection with the latter charge, a
representative of EPA's Energy Star program talked to the Workgroup about the
development of that program and the time it took for recognition by consumers in the
marketplace.
At the August 2006 Board meeting, the Workgroup discussed some results of
contacts with representatives of the equity and insurance markets, as well as contacts within
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companies, and the on-going review of the available literature. The Workgroup also heard a
presentation by a representative of the American Chemistry Council (ACC) on the
discussions she had with certain sustainability indices in the equity market. ACC's
Responsible Care® Program includes an EMS requirement that is consistent with EPA's
EMS criteria for Performance Track. The ACC representative stated that an EMS is one of
the factors that sustainability indices look at when evaluating the criteria for including
companies on the index. ACC was working with the FTSE4Good Index, on the London
Stock Exchange, to get recognition for its Responsible Care® Program and felt it was having
some success.
The Workgroup decided to explore the possibility of setting up a workshop to get
more formal feedback from the financial market sectors. As part of that effort, some
potential questions were developed for a workshop and presented to the Workgroup at the
March 2007 meeting. The Workgroup refined those questions and developed a format for a
workshop consisting of three panels, one for each of the market segments: equity, debt and
insurance.
In connection with preparation for the workshop, the chair of the Workgroup attended
an EPA-sponsored dialogue among financial and corporate representatives. Some important
conclusions from that dialogue are:
(1) the focus of the financial markets is on short-term performance while they
perceive environmental performance to require a long-term focus, unless it is a
sudden negative event;
(2) environmental metrics currently collected by EPA are not readily useful because
the data are facility-based and the information is backward looking;
(3) other environmental reporting frameworks like the Global Reporting Initiative
(GRI) are not as useful as they might be to mainstream investors; and
(4) this arena is changing due to climate concerns.
An excellent summary of the June 2007 workshop is attached for reference. Some of
the key points made during the workshop include:
(1) Standardized and consistent reporting has value to a number of stakeholders;
(2) independent verification of the information reported is important;
(3) several participants mentioned the need for stronger EPA enforcement;
(4) the measurement and reporting on carbon footprints is already happening and is
the kind of metric that the financial sector has found useful; and
(5) EPA should not speak for the market, but it could help to make data more
transparent and understandable.
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Further work on developing sensible metrics that can be used to measure a few leading
indicators will take more work. Continued dialogues among regulators, the regulated
community and market sector representatives would be helpful to identify metrics that add
value.
Some Observations
1. The equity market is looking for endpoints, while an EMS is focused on process. The
insurance market segment is interested in both endpoints and process. The banking
sector is generally a follower as a market sector.
2. Financial analysts are often asked to make decisions on the financial value of a
company with a significant environmental footprint in a short time span. Therefore,
standardized metrics and transparent reporting are more helpful to financial analysts
than information that requires value judgments.
3. Information currently being collected by EPA overall is not as helpful as it could be
to financial analysts to assess business value. The information collected by EPA
primarily relates to its role as a regulator rather than an assessor of environmental
performance. In addition, EPA collects data by facility and investors need
information on companies. Similarly, information from environmental reporting
organizations like GRI has not been especially helpful to the mainstream financial
community.
4. The one environmental issue that is getting traction in the financial markets is the
emission of greenhouse gases and the measurement of carbon footprints.
Recommendations
1. EPA should take a leadership role in working with the financial sector and companies
to better understand the relationship between EMSs, environmental performance and
financial value. This will assist the financial industry to better understand the
benefits of using environmental criteria in valuing individual firms and/or in
determining actual risks that can be reflected in the appropriate cost of financing such
firms.
2. EPA should work with companies and the three financial market segments already
identified in developing environmental metrics or categories of data that would be of
value to the financial markets, for both operational and legacy environmental
concerns. This would give the financial markets better information for making more
knowledgeable decisions on environmental risks and performance. The adoption of
metrics can drive implementation of management systems in order to collect the
information necessary for reporting the requested information. The reporting of such
metrics could be on a voluntary basis; it does not need to be mandatory. The greater
the interest of the financial sector in the metrics, the more likely that companies will
implement systems to collect the information to report the metrics. The development
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of key environmental metrics could provide enhanced methods of differentiating
corporate environmental performance, which to date have been evaluated primarily
on a qualitative basis.
3. If EPA decides to pursue this path, then it should make sure that the Steering Group
identifies all the relevant information collection systems within the agency, including
information that may reside in the regions, so that any new system considers all the
information available within the agency.
4. The agency should consider contacting environmental regulators and organizations in
Europe, Japan and Australia, which are geographical regions that have been identified
as more advanced in collecting environmental performance information that is of
interest to the financial markets. Examples of such information include energy use,
water use and carbon footprints.
5. EPA should coordinate on the development and use of environmental metrics with
other agencies, such as the Securities and Exchange Commission (SEC) and the
Occupational Safety and Health Administration (OSHA), and State environmental
regulators.
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U. S. Environmental Protection Agency
Environmental Financial Advisory Board
Meeting Summary
The Use of Corporate Environmental
Information in Financial Decisions
June 12, 2007 - Arlington, Virginia
Prepared by:
International Decision Strategies, Inc.
911 Duke St.
Alexandria, Va.
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Environmental Financial Advisory Board Meeting June 12, 200, Arlington, Va.
Table of Contents
Welcome and Introductions 1
Review of Questions Asked to Panels 1
Corporate Environmental Information and the Financial Community
—EPA Overview 2
Speaker: Commercial Banking/Lending 4
Panel 1: Credit Analysis and Equity Investment 7
Panel 2: Insurance 13
EFAB Workgroup/EPA Office of Policy, Economics and Innovation
Follow-up Discussion 18
Public Comment 22
Closing Comments and Next Steps 22
Participants 24
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Environmental Financial Advisory Board Meeting June 12, 2007, Arlington, Va.
United States Environmental Protection Agency
Environmental Financial Advisory Board
Meeting Summary
The Use of Corporate Environmental
Information in Financial Decisions
June 12, 2007 — Arlington, Virginia
Welcome and Introductions
• Stan Meiburg, EFAB Designated Federal Official
Stan Meiburg opened the meeting and described the Environmental Financial Advisory Board
(EFAB) and its purpose. Founded in 1989, EFAB is concerned with how to pay for
environmental protection. Its initial work focused on state revolving funds to finance water and
wastewater infrastructure, and has evolved since. Today's workshop started with an EPA
request regarding Environmental Management Systems (EMS)—how can we make EMS more
attractive to firms through financial incentives? Expanding this question, how do financial
professionals use or not use environmental information to make decisions? He added that the
EFAB is fortunate to have a distinguished panel at today's meeting.
He then introduced EFAB members in attendance. Rachel Deming has been a big help in
bringing better understanding of financial assurance issues. Jim Gebhardt is a relatively new
(two months) member, who is a Chief Financial Officer (CFO) and can help address matters
related to socially responsible investment (SRI). Lindene Patton also is a relatively new member
and can speak to insurance issues, while Helen Sahi can address the environmental banking
perspective because she is a former President of the Environmental Bankers Association. The
chair also thanked members of the EFAB Staff, Vanessa Bowie and Tim McProuty, for setting
up the meeting.
Review of Questions Asked to Panels
• Rachel Deming, EFAB Member; Partner, Scarola Ellis LLP
Rachel Deming introduced the topics and questions for the meeting. She began by describing
her own involvement with the EFAB, which started at a meeting in San Francisco at which she
heard a presentation given by Shana Harbour of EPA; Ms. Deming then volunteered to chair an
EFAB subcommittee focusing on EMS. Prior to her current employment, she worked at CIBA, a
major European-based chemical company. While there, she became well grounded in the
Responsible Care® program and developed a background in management systems.
In preparation for this meeting, she said she worked with EPA to refine the EFAB's charge, and
break it into pieces to be better understood. She suggested that financial people do not frame
their questions in the same way as EPA, and that getting all participants to fully understand one
1
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another has been a challenge. She thanked fellow EFAB members Lindene Patton and Helen
Sahi for help in recruiting participants for today's meeting.
On a more personal note, Ms. Deming said she had retired from CIBA earlier this year, and
found herself needing to better understand her retirement assets; this coincided with hearing a
presentation by Bruce Kahn (a panelist), which piqued her interest in the connections between
investing and the environment. It is not her impression that people rarely ask about SRI funds or
environmental issues, nor do others in the financial services industry generally promote or talk
about environment or environmentally screened companies.
She then described the questions that EPA would like to have addressed by meeting panelists,
and indicated that they had been refined several times. The questions are organized by topic and
are as follows:
• To what degree do you consider environmental performance or environmental
management information when assessing the financial strength of a company? Of a
sector?
• If there is no (or minimal) consideration made for environmental performance/
management in fundamental analysis, why not? Is it a perceived lack of relevance? Is
environmental performance considered not material in relation to corporate
fundamentals? Or, are the data to accurately measure the impact of environmental
performance not reliable or not readily accessible to analysts?
• Are there environmental impacts/elements that you would like to see measured?
• Would branding something as Responsible Care one or more forms of EMS help?
• What role can EPA play to promote greater understanding, increased information
exchange and generation, and use of environmental performance data that are more
relevant, consistent, timely, and meaningful to capital market participants?
Corporate Environmental Information and the Financial Community—EPA Overview
• Charles W. Kent, Director, Office of Business and Community Innovations, Office of
Policy, Economics and Innovation (OPEI)
Stanley Meiburg introduced Charles Kent, and noted that Mr. Kent had provided nearly 30 years
of service to EPA in a variety of roles.
Mr. Kent opened his remarks by thanking Mr. Meiburg, and stated that he worked with him
closely over the years and that the EFAB is fortunate to have his involvement. Mr. Kent
continued by saying EPA is trying to learn about the financial sector and the relevance of this
sector to decisions regarding environmental performance. EPA wishes to test the theory that
better information would lead to better decisions, and serve as an incentive for better behavior
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and performance. He stated that EPA's job is to find new ways to provide incentives to stimulate
this improved behavior. He expressed appreciation for panelists' willingness to help EPA staff
learn about the work of the financial markets, and to better ask questions of financial market
participants.
He then provided some background on EPA's Steering Group and its work. The Group was
formed and performed extensive research before going to the EFAB for further ideas and
guidance. EPA seeks EFAB input on the extent to which EMSs provide useful information, but
acknowledges that EMSs are not widely understood.
Mr. Kent described some of the key findings of the Group's early stage research, which include:
• There is a positive association between environmental performance and financial
performance
• Intangible assets are an increasingly important determinant of company financial
performance
• Equity markets do react to environmental events, both positive and negative
• Investors are only moderately aware of environmental issues, at best, but their interest is
growing, and
• Investors have an interest in EMS as concept, but not as a specific tool; at best the
presence or absence of an EMS serves as a proxy for effective environmental
management and, more commonly, as a surrogate for good management generally.
Mr. Kent also described several significant trends that developed as the Group was conducting
the initial phase of its work:
• Interest in environmental issues and performance is perceived by many to be increasing
both in investment firms and in the companies in which they invest
• Disclosure requirements for public corporations have been strengthened significantly
during the past two years—as a result, corporations have begun to disclose more
information on environmental issues
• Institutional shareholders are increasingly asking for management action to define
environmental/sustainability policies, actions, measurement, and reporting
• Due to concerns about climate change, major insurance companies are bringing renewed
attention to environmental and sustainability issues
• A number of companies—including some of the largest companies in the world, like GE,
are visibly seeking to turn environmental issues to their business advantage, and
• These trends will likely shape the interests and behaviors of financial sector participants
relative to EMS and environmental issues in the coming years.
The Group has prepared and issued a report describing these findings, which has been delivered
to all EFAB members. He also indicated that EPA had received some press coverage for its
work, and had been invited to a Wall Street dialog with representatives of several financial firms.
Mr. Kent then described a dialog held in April with another group of financial market
participants and corporate representatives. Findings from this dialog include:
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• There is a fundamental disconnect between the short term orientation of the financial
markets and the long term value created by most environmental investments
• Currently used environmental metrics are not useful to investors
• Major environmental reporting frameworks (e.g., Global Reporting Initiative—GRI) are
not germane to investor concerns, and
• The "game" is, however, changing due to climate concerns.
He closed by thanking all participants.
Mr. Meiburg then recognized EFAB expert witness Sarah Diefendorf, who represents one of
EPA's Environmental Finance Centers. He then asked panelists to each limit their remarks to
about ten minutes and then opened the session to dialog.
Commercial Banking/Lending
• Helen Sahi, Past President, Environmental Bankers Association
Helen Sahi began her remarks by stating that the EFAB and EPA meeting organizers were
unable to find a traditional banker to participate in today's meeting. She emphasized that today's
large banks are now financial institutions offering a variety of services (equity, insurance), and
not just "banks." She indicated that she and other EFAB members were able to find traditional
risk managers, but no one was willing to come, for several reasons. One is that bankers felt that
they did not sufficiently understand EMS to feel comfortable discussing the issue in an open
forum. Also, because loan officers often hold relationships with customers for many years,
environmental issues may be examined but generally may not be viewed as very important in
relation to other issues.
Continuing, she said larger banks now use their own internal environmental experts to evaluate
environmental issues. These experts are not risk managers or underwriters. Most of these
positions came into being following release of the FDIC bulletin in 1992 stating that banks need
to have an environmental policy appropriate to their size, and a person responsible for
environmental issues. The bulletin did not, however, include any definitions. Over time, the
internal environmental experts at a number of the larger banks founded the Environmental
Bankers Association to provide a forum to discuss issues of common interest. Ms. Sahi said she
has been involved since the early days of this organization. It remains small, with only about 60-
80 banks as members. The larger institutions (30 or so) may have a small dedicated staff, but
most other banks rely on consultants to address environmental issues.
Given the principle business and risk exposure of banks, the focus was and continues to be on
real estate transactions, with little attention paid to EMS. Most large institutions hire outside
scientists and other experts to handle (i.e., clean up and sell) foreclosed real estate. Work on
other environmental issues, when it occurs, is driven by the business lines. Many institutions
with customers in the chemical sector tend to examine company financial statements (i.e., Form
10(k)), and develop a deep understanding of their customers, their product offerings, and the
information they are providing to their customers (e.g., Responsible Care, EMS). She believes
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few banks have looked at larger issues, and those that do often use outside legal counsel to
investigate.
That said, major institutions are now saying that the environment is a major issue and are making
substantial commitments in this area (e.g., $20 billion by Bank of America). Many, however,
have not specified or may not know in what manner these funds will ultimately be spent. One
emerging area is a growing interest in Leadership in Energy and Environmental Design (LEED)
certification of buildings. This point of focus seems natural given the heavy real estate
orientation of most banks. One promising idea is to try to measure productivity changes from
green building, though this thinking is in its formative stages.
On the issue of reporting, many financial institutions use or follow the Global Reporting
Initiative, and report on their own internal processes (e.g., paper, water, energy consumption).
Some are starting to think about EMSs, for reasons of scale if nothing else. Ms. Sahi illustrated
her point by stating that Bank of America, uses the equivalent of two sheets of every ream of
paper sold in the U.S., and occupies more office space than is available in the City of Chicago.
She closed by saying that Bank of America is focusing on the costs of mail, internal operations,
and other opportunities for improvement. She believes that the banks are getting there, but will
need more time and working experience to fully understand EMS. She also feels that banks need
to complete their internal (environmental) efforts before looking at other organizations (e.g.,
prospective customers).
Ms. Patton asked whether bank lending has any parallels with insurance underwriting, and why
banks are so focused on real estate. More specifically, what are the remaining concerns if things
go bad, and what can make them go bad?
Ms. Sahi responded that real estate is often the security for the loan or the lender's last resort.
What this means at a practical level is that if a customer has one piece of property, the bank will
focus on legacy contamination using a site assessment. If, however, the borrower has a portfolio
of properties, performing environmental site assessments (ESAs) may not be feasible; this might
instead be a good point of application for an EMS. In lieu of performing site assessments on a
sizeable portfolio, a bank might examine who is responsible for environmental issues, or
establish escrows or buy insurance to mitigate risk. The key question is, "What steps or tactics
can be used to produce an informed, forward-looking assessment?"
Wilhelm Wang, a member of the public who certifies EMSs, asked about EPA support of small
and medium-sized enterprises (SMEs), stating the presumption that EPA is promoting a systems
approach when working with these businesses. He asked whether there were any signs of
operating risks being evaluated with an EMS.
Ms. Sahi responded that the burden is on the customer to show the value of a management
practice, whether it is EMS or something else. She added that legacy (contamination) issues
could be managed with an EMS, and that banks might change loan rates or terms based on its
perceived strength.
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Panelist, Paul Scian, asked whether in evaluating a single property versus a portfolio there is a
"tipping point" e.g., 12 properties, at which one would look for systems instead of performing
ESAs at all sites.
Ms. Sahi responded this varies by bank; some will do ESAs at 40-60 properties while others will
go earlier to an EMS to save time and capture a deal. Timeliness is very important because bank
lending is very competitive.
Ms. Patton noted that in the banking industry, environmental experts came into the business from
the outside in the 1980s. She asked whether people are looking at operational versus legacy
issues, and if so, what is the split between these perspectives?
Ms. Sahi responded that operational issues usually are handled internally, while consultants are
retained to handle legacy issues.
Mr. Meiburg asked whether banks offer lower rates for good environmental performers.
Ms. Sahi responded there are no established metrics to prove lower lending risk for such
companies, and that EPA could help provide these metrics.
Mr. Kent asked whether environmental performance is viewed as material; he noted that some
say it's of tertiary importance.
Another panelist, Peter Meyer, asked whether environmental performance affects the terms and
conditions attached to a loan.
Ms. Sahi responded that revised terms and conditions are being looked at, but are not used
currently. She added that activity in this area is being driven by announcements concerning
greening and a corresponding need to "walk the talk." She believes the current view of
materiality will change, and that the need for maintaining a reputation as a sound environmental
performer is growing in importance. New scrutiny being applied to lenders; stakeholders are
now focusing on who is receiving loans from whom. Bank marketing departments are now
measuring and reacting to positive and negative media coverage in this regard.
Ms. Patton concurred that in her industry, marketers also are trying to quantify these issues. And
a number of people are now quantifying the value of green offerings for consumer products,
though not much is being done concerning commercial products or services. She added that
historically, materiality always focused on the security issue, so unless an EMS can substitute for
collateral (security) it would not be considered material. Unless you can reduce costs (security),
EMS and other environmental improvements are not likely to be considered material.
Ms. Sahi, acknowledging these comments, said things are changing by the week. People are
looking more at the company level and at behavior as well as more traditional, tangible
endpoints. There seems to be a belief that doing so will enhance a bank's marketing capabilities.
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Another EFAB member, Jim Gebhardt, said that in a collateral-based (e.g., real estate) context,
financial value is the key question, and in that situation, EMS has a very marginal impact. He
added that EMS has some traction, but will not save you if your balance sheet does not hold up.
There is a continuum of relevance here, and EMS is most valuable in an equity context.
Panel 1: Credit Analysis and Equity Investment
• Kyle Loughlin, Managing Director, Corporate and Government Services, Standard &
Poors
• Bruce Kahn, Investment Management Consultant, Smith Barney
• Sonia Wildash, Senior Research Analyst, EIRIS - Ethical Investment Research Services
• Michelle Smith, Director, Environmental Health and Safety Development, Rohm and
Haas Company
Mr. Meiburg initiated this session by stating that EMS may mean different things to different
people, and that in this session we would likely hear a range of views.
The first panelist, Bruce Kahn, began by describing his role in the equity markets. He manages
the SRI practice for a variety of investors. In his work, he looks at all investments while
accounting for environmental, social and governance (ESG) issues and conducts due diligence
research on these issues. In response to a topic raised in the earlier discussion, he assumes that
these issues are material. His firm does not perform exclusionary screening of prospective
investments, but instead practices "responsible" investment.
Mr. Kahn responded to EPA's question one, by saying yes, I do look at environmental issues
when evaluating companies, as I believe that these issues are material to equity pricing.
Translating EMS to balance sheet information is, however, a big challenge and a gap that has yet
to be spanned.
His analysis involves integrating separate (i.e., project-level) analyses done by individual
analysts using a variety of techniques (e.g., ratio analysis, discounted cash flows, profit impact
relative to cost of capital, option pricing), then rolling up all of the initiatives for the company.
This is a labor-intensive approach and is very expensive.
Regarding EPA's second question, Mr. Kahn said the problem is that one cannot capture all of
the relevant facts with which to evaluate environmental management quality or performance.
The data are not that available or reliable, and there is too much required granularity across
multiple business lines.
With respect to metrics, he examines greenhouse gas (GHG) emissions and risk as well as other
fundamentals, such as waste, water use, etc. These more traditional indicators are, however,
being eclipsed by global warming concerns.
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On question 3, Mr. Kahn said he thought branding might be helpful. At present, some of the
existing extra-financial researchers look at company EMSs, though usually as a binary (yes/no)
consideration. Having a brand associated with certification is important.
Finally, he believes EPA could play a useful role by fostering EMS standards and/or processes.
EPA already has an abundance of data, and there are huge amounts of data available in journals,
dissertations and other sources. The key question is how to get this information into the capital
markets. In terms of any new data requirements, he believes there would be value in looking
first at the ultimate endpoints, i.e., the condition of the environment, and then tracking any
substandard conditions back to company behavior and its association impacts. EPA also can
reach out to other agencies and collect, organize and analyze data held by these organizations.
The next panelist, Kyle Loughlin, began by describing his function, which is to evaluate waste
management companies from the standpoint of default risk; he manages a team often people,
and collectively, they determine the debt ratings of 130 companies in the United States.
To them, the key issues are default risk and the likelihood of loss given a default. They do use
environmental information, but its importance varies. They treat environmental and asset
retirement obligations in similar fashion to debt, and look at a range of indicators. Environment
is not a key factor, except in certain cases. To develop the pertinent facts, they rely on financial
statements and accompanying notes and other Securities and Exchange Commission (SEC)
filings.
Mr. Loughlin's firm conducts approximately 100 meetings with company management teams
over the course of a typical year. These often happen during "road show" events hosted by
companies seeking additional financing. In his experience, it is a very rare company that will
talk about environmental risks or systems in the absence of questions from analysts. Finally, in
his view, existing disclosures usually are sufficient regarding liabilities and their cash flow
impacts. In cases in which they may not be or impacts are potentially significant, he and his
colleagues drill down further, asking additional, more specific questions.
Mr. Loughlin then provided a few examples of how environment can affect the ratings assigned
to a company or otherwise intersect with financial markets:
• Some notes now provide ranges of and time frames for addressing contingent liabilities;
often an environmental adjustment is notable but not a major rating factor, though
sometimes it is.
• Adjustments may be made in financial models to account for environmental liabilities,
along with many other issues; this may result in adjustments to conventional financial
ratios.
• Default risk may be affected by environmental issues, in particular by required capital
outlays, bonding/letters of credit, and other financial obligations that affect liquidity as
well as by contingent or even perceptual risks.
• Similarly, phase-out of a product, particularly an important one, can affect a company's
cash flow and, therefore, its risk of default.
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Mr. Loughlin next described how his firm addresses the risk of loss for all companies that are
rated "speculative," or below investment grade. This is done by conducting a recovery analysis,
which involves simulating a path to default, then forecasting a revised cash-flow-at-default
estimate. Debt and non-debt claims are evaluated, along with a distribution of the projected
value of the firm. The end result is a recovery rating. Environmental claims and risks must be
included in these analyses, but they rarely are important, because the typical time frame of
analysis is less than five years.
Mr. Kahn asked whether the ratings evaluation considers only legal liability and compliance
issues.
Mr. Loughlin responded it did, not least because the entire analysis is conducted within about a
two-week time frame. This is because the road shows are performed to raise capital and to make
deals quickly. Accordingly, the focus is on default risk over the intermediate term.
The next panelist, Michelle Smith, represents a major multi-national chemical company. She is
responsible for the company's EHS (environment, health and safety) & Sustainability Report,
which includes a detailed description of its EMS, among many other items.
The company serves the electronics, paint and coatings, household, personal care and industrial
segments, and has little direct exposure to consumers. Ms. Smith believes her company's
products can yield environmental benefits, an issue they will be looking at more closely in the
future. Energy, health care and water are specific new areas for potential expansion.
The company is now looking at its supply chain, especially high risk areas such as waste
management.
Regarding environmental performance, she suggested language may be an important barrier to
effectively communicating what is in a sustainability report as well as the meaning of particular
results. In her experience, investors may not be familiar with environmental issues and their
relevance to business results, so better communication will be important to raising awareness.
With respect to EPA's question on branding, she believes that in the case of the American
Chemistry Council (ACC)'s Responsible Care program, branding has been valuable.
Ms. Smith suggested that EPA play a role in defining what the important leading and lagging
indicators should be, and put some sustained scientific horsepower behind filling this need.
The final panelist of this session, Sonia Wildash, explained that she is employed by a company
that performs sustainability ratings of companies, and that she had formerly worked as a
mainstream investor. She described the typical SRI understanding of environmental issues—
there is a relatively large upfront cost associated with making environmental improvements, but
these investments lead to savings, and essentially, a sustainability "sweet spot" through creating
less volatile companies that make better long-term investments.
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In contrast, she characterized the mainstream investor perspective as: if a company is not
breaking the law, environmental issues are of no interest. More generally, she believes the
market does not put a price on environmental benefits from existing and new corporate behavior,
but does punish disappointments.
Environmental information must be easy to find or it will not be used. In cases in which such
information is found, it usually has not been independently audited, so investors may be
suspicious of its reliability. Ms. Wildash noted there is no global standard for environmental
reports, which tend to be full of photos of children and fluffy text rather than data that are of
interest to investors. In her view, lack of time is a frequent excuse of corporate representatives
for not providing more extensive environmental information. Also, meetings with corporate
management tend to be short and are not focused on the environment.
Ms. Wildash believes ESG issues and their importance must be introduced in investor training
programs early on and not left to personal interest or random chance.
As far as useful indicators are concerned, she would like to have a single number or index with
which to compare companies.
She also spoke to the perceived lack of materiality of environmental issues by saying that they
are not viewed as important until it is too late to prevent a rare but profound occurrence; because
such incidents are rare, time is better spent focused on other issues. In her view, a catalyst is
needed to break the circular logic that inhibits consideration of environmental issues by
investors. A virtuous circle could be created if the market started to differentiate between
companies on environmental issues. As an example, the position of the sell-side appears to be
changing in Europe. Sell-side analysts are influential. In the U.S. they are notably unconcerned
about environmental issues.
Regarding branding, Ms. Wildash thought such efforts would not be especially helpful; only 15
percent of companies have one-third or more of their locations certified to the ISO 14001
standard in the U.S. as opposed to 50 percent in Japan. She believes it would be much more
fruitful to focus on getting more companies to comply with existing regulatory and other
standards, rather than further "raising the bar."
As to the question of what EPA can do, Ms. Wildash suggested developing a framework for
public reporting of environmental performance and, perhaps, making it compulsory. EPA also
could define key issues and metrics, and time frames for attainment. She also suggested there be
a legal requirement for audits of publicly reported environmental information. She also called
for a means to ensure board-level responsibility for environmental performance. As partial
justification for this, she noted that American companies have had more trouble staying in the
sustainable company indices than their European counterparts.
As examples of possible approaches to consider, she said the UK government has promoted
companies displaying leadership behavior. In Japan, the Ministry of Environment has facilitated
many stakeholder consultations, leading to a number of performance improvements. For
example, 40 percent of companies now have independent environmental reviews and 80 percent
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disclose their internal environmental accounting standards. EPA could help U.S. companies
emulate these behaviors.
Ms. Wildash closed her remarks by thanking EPA for inviting her and stating that panels like this
are valuable.
Ms. Patton said there seems to be consensus that there is a lack of good indicators relating
environmental performance to financial issues, and asked where one should start in producing
standards for use by the financial markets. As an example, how do you move from proprietary
models for greenhouse gas (GHG) emission risks to generally accepted rules?
Ms. Wildash said her firm uses several management and performance indicators when evaluating
GHG and other environmental dimensions of a company. They provide the environmental
analysis for the FTSE4GOOD index. She would like all of this information to be publicly
disclosed, e.g., on company web sites and/or in Form 10(k)'s.
Mr. Kahn also responded to the question by saying that the ESG world has no standard, so EPA
has an opportunity to establish some kind of new standard or approach. He concurred that all
existing players are competing with their own individual proprietary methods. He added that all
financial analysis is an art, so evaluating ESG issues is not fundamentally different than
assessing other aspects of company performance. He said EPA should help establish a credible,
scientific standard for environmental measurement and reporting.
Ms. Wildash noted there is need for an analog to Generally Accepted Accounting Principles
(GAAP) for mainstream financial information, as analysts and investors want to spend time
analyzing information rather than finding it. Ms. Smith added that metrics across businesses can
swing considerably, and their interpretation is part of the "art" of investment analysis. She urged
EPA to be careful in crafting any standards, especially if they are rigid or uniform.
Ms. Deming asked what we might learn from the experience of Europe and Japan in this area.
Ms. Wildash said the focus currently in evaluating EMS is its presence or absence in companies.
Rather than focusing on more nuanced evaluation of EMS quality, she advocated the promotion
of more certification of EMSs in the U.S. and getting information on this out to the financial
markets.
Ms. Patton said she thought self certification of EMSs is of questionable value. Ms. Smith
responded that, in her view, EMS is best applied in concert with other improvements, but has
added value to her firm in a variety of ways.
Mr. Loughlin returned to the issue of branding, saying it is not likely to be critical; instead,
consistency in reporting is much more important. He added that anything EPA could do to bring
consistency would be helpful, as there is little uniformity in the ways that environmental risks,
management processes, methods, ranges of estimates and time frames are addressed and
described by companies, even those with EMS.
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Ms. Patton asked about the emphasis between legacy and forward-looking issues in terms of
getting new standards developed. She suggested legacy issues are very controversial in this
regard.
Mr. Kahn said an EMS is not a trivial matter, as many companies use them as a management
tool. He also questioned whether branding might be used by some companies to "game" the
system. He thought EPA needs to get the SEC involved with this. Existing regulations require
disclosure, but the government is behind the curve in understanding that companies have
appropriated environmental services while creating significant externalities and social burdens.
He believes accounting for these environmental services (externalities) will be increasingly
important in the future. EMS, he believes, can help illuminate these issues.
Mr. Meiburg saw two possible opportunities. One is for the SEC to step up and play a more
active role in promoting more full disclosure; the other is to equip financial analysts with the
background information and questions needed to conduct meaningful company level analysis of
environmental issues.
Regarding metrics, Ms. Deming said the Responsible Care program is developing new metrics
that will address many stakeholder interests, including GHG. She asked whether these will be of
value to investors.
Mr. Meyer asked whether the desired environmental reporting does or will consider secondary
impacts (e.g., employee travel), or whether that would produce an "envelope" that is too large.
Ms. Sahi responded that in the case of her company, it would indeed consider secondary impacts.
Mr. Gebhardt suggested that ecosystem services might be beyond the context or reach of EMS.
He believes that a whole new paradigm may be needed, the costs of which may be significant.
Mr. Kahn agreed, saying this conversation has gone further than the original focus of the
meeting. He would like to be able to measure impacts rather than natural conditions first, so that
he can determine the better steward of natural resources among different companies.
Ms. Diefendorf said her state government (California) seems to be very interested in greening
companies and in green chemistry and asked, to what degree should government force
environmental performance when the financial sector doesn't act?
Ms. Wildash responded that some of the large public pension funds (e.g., the California Public
Employees Retirement System (CalPERS) have been important in pushing this debate. She
believes their large size creates influence and noted that, in addition to CALPERS, the pension
funds of Connecticut, Vermont and New York also have been active.
Ms. Smith said consumers are the driver of innovation and whatever can influence them is the
shortest path.
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EPA representative, Dale Ruhter, returned to the issue of the SEC and legacy costs, asking, to
what degree has the financial community gone to the SEC with the concerns voiced here?
Mr. Loughlin responded he knew of no specific examples of lobbying for action.
Mr. Kahn said the group, Friends of the Earth, has lobbied the SEC and members of the
environmental media (e.g., CSR wire) have reported on these discussions. He also noted the
U.S. Supreme Court had very recently ruled that companies may be held responsible for climate
change risk.
Finally, Ms. Smith said she would be open to using other environmental metrics, but emphasized
that voluntary approaches are preferable to new mandates. She also noted that issues of
confidentiality may be important in certain cases, as these may limit which issues a particular
corporation can report on.
Panel 2:Insurance
• Susan M. Vetter, Vice President, Environmental Services Group,
AON Risk Services, Inc. of New York
• Laurie Rudolph, Senior Risk Engineering Consultant, Zurich NA
• Paul Scian, AIG Consultants
• Dr. Peter Meyer, Director, Center for Environmental Policy and Management, University
of Louisville
The first panelist, Susan Vetter, began her remarks by saying her firm helps clients with risk
management overall, an approach that includes not just insurance but other products and methods
that take into account a particular client's appetite for risk. She also related her own professional
experience, which began with another carrier, where she became involved in all types of
insurance. Her perspective on the environment reflects the industry's history, in which products
and services initially had a casualty focus, which then evolved to a financial-risk management
perspective. This perspective is reflected in current environmental insurance products, which
remain a "discretionary buy" for many companies.
She then described the major types of environmental insurance that currently are available:
• Site specific, e.g., pollution legal liability
• Environmental services
• Cost cap
Underwriters evaluate risks under each, based on warranted information (applications signed by
a director). Issues of interest to underwriters include reportable releases, Phase II environmental
site assessment results, and the like. In an acquisition (due diligence) context, information on
permits, consent decrees, "no further action" letters, closed UST reports and waste management
vendors all would be of interest. In addition, real estate liability underwriters now often require
spill plans and other evidence of a proactive approach to controlling site-related risks. Moreover,
typical insurance products automatically exclude known conditions, so having public
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information on site characteristics is very important. In fact, the most useful information to an
underwriter relates to site conditions.
While not required, EMSs would be embraced by underwriters, as they provide a source of
information on environmental conditions as well as some assurance that environmental risks are
being controlled. In other words, EMSs can help carriers make informed business decisions.
Underwriters would value an easily accessible way to access information on a site or operations;
in this regard, an EMS could be of interest. The effect would be an increasing level of comfort
by an underwriter with a particular site or company; greater underwriter comfort level leads to
better insurance policy rates and terms.
Ms. Vetter also stated that a partnership results once risk issues are fully identified, i.e., the
insured and insurer tend to work together on an ongoing basis to resolve and control the
identified risks. Because an EMS can serve to store and manage risk-related information and
increase an underwriter's level of comfort that relevant issues have been identified and
controlled, it could help to produce financial benefits for a company.
Despite its potential value, EMS still has yet to fully demonstrate that it provides quantifiable
risk reductions. When companies can show the long-term cost effectiveness of their EMS, they
will then be offered the best terms and conditions.
Ms. Vetter concluded by saying she would like to see an EMS requirement, and observed that
many companies are integrating other issues, such as health and safety, into their environmental
programs. She believes that insurance underwriters will increasingly want to work with such
forward-looking companies in the future.
The second panelist, Paul Scian, began his remarks by stating that he served as a consultant, or
in-house service provider to his employer, a major insurance carrier. His firm's work is mainly
transaction driven; in that context, the key question is, what could go wrong?
Mr. Scian's area of special expertise is the costs of complex environmental site remediation. In
his work, his role is to pose "impolite" questions of a prospective insured, to bring to the surface
important risk-related issues. While he does not decide to offer or not offer coverage,
unconvincing answers to his questions may result in notes to the file, which in some cases might
put future claims at risk. This would occur if the insured did not fully disclose pre-existing site
conditions, for example.
Mr. Scian stated that in a sound insurance underwriting transaction, all parties should win.
He then turned his attention to the four questions posed by EPA.
In response to the first, Mr. Scian said he evaluates environmental information every day. In
talking with prospective insured parties, he conducts telephone dialogs and completes a checklist
while doing so. The absence of a complete or convincing answer to a question raises "red flags,"
causing him to probe more deeply into the issue.
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He emphasized no insurer wants to inadvertently underwrite a known condition and so he
questions company representatives closely. On the other hand, assessment and underwriting are
usually conducted very quickly—a two-week window at most. This can result in a "war of
paper," in which it can be a struggle to find and adequately review what may be a large
assortment of site-related documentation that addresses conditions over a period of years.
Mr. Scian said risks can be segmented (e.g., legacy known vs. unknown, on-going), and can be
covered in various ways by insurance policies. Because underwriters make business decisions,
coverage may be offered even if risks are identified, though higher risks result in higher
premiums, more stringent conditions, and/or more limited scope of coverage. Because all of
these variables are in flux for any given underwriting situation, he and his peers are accustomed
to dealing with ambiguity.
With regard to the relationship of environment to corporate fundamentals, Mr. Scian asked, what
is material? This judgment is somewhat situational and arbitrary. For example, he said, a $5
million liability may be material in one situation and inconsequential in another. In practice,
insurers strike a balance among many factors.
He also commented on emerging financial accounting and reporting requirements, stating that
the Financial Accounting and Standards Board (FASB) doesn't necessarily require disclosure of
potential contamination if investigations are ongoing. Sarbanes-Oxley may change this
behavior, however. He believes that, as a result, there will be lots of "new" sites and related
liabilities announced in the future. He also felt that more data is preferable to less, but suggested
that it is important to know when to make the decision with the available data rather than
continue to seek new information.
Mr. Scian also offered an opinion on the question of branding, with respect to ISO 14001 EMSs
as well as other variants on the EMS concept. He believes that EPA should focus on getting
more attainment of well-functioning EMSs, rather than setting the bar higher.
Mr. Scian also said EPA could play a valuable role in developing/promoting some common
quantitative metrics (e.g., energy/unit) that could be used across a wide variety of companies and
industries. Teasing out some of the data currently subsumed in the balance sheet and income
statement would enable better industry-wide comparisons.
The third panelist, Laurie Rudolph, described her main responsibility as risk assessment. She
also emphasized that pollution insurance and related products are not mandatory. There is
substantial negotiation in establishing coverage and rates and considerable variability in the
terms, conditions and scope of individual policies.
She said she has not observed any direct relationship between the presence of an EMS and lower
insurance costs. In her view, interest in environmental issues and EMS varies by insurer and
depends upon individual appetite for risk.
She did suggest that in the context of her work—trying to assess what could go wrong—the
aspects analysis of an EMS could be very useful. She further thought that it would be helpful if
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EPA could in some way assist with the quantification of risk and exposures for benchmarking
and cross-company comparisons. From an insurer's perspective, EMS is most useful for its
ability to control or minimize risks and demonstrate and document that effective controls are in
place.
In Ms. Rudolph's view, EMSs are often written well, but the key is quality of implementation.
Insurers would look to a well-implemented EMS to formulate and track action on risk reduction
recommendations and might modify coverages, terms and rates accordingly.
With respect to EPA's question about branding, Ms. Rudolph does not believe that it would be
likely to be appealing. In her view, ISO 14001 certification of an EMS is not meaningful,
because registration has been market (customer) driven, rather than stimulated by a desire to
truly improve performance (e.g., risk reduction). Accordingly, it is not clear that registered
EMSs are any better than non-registered management systems. She does believe that having
some form of management system will make companies more desirable to insurance
underwriters.
The fourth panelist, Peter Meyer, began his remarks by reviewing some features of
environmental insurance policies and contrasted them with other types of insurance products.
He stressed that environmental insurance policies are "surplus" or "admitted" rather than
"admitted" insurance lines. This means that they are not standardized, and may (and do) vary
considerably from state to state. Coverage may or may not be available in a given location, as
there is no pool of insurers to guarantee access to coverage as there typically is for admitted
insurance lines (e.g., homeowners, auto insurance).
Also, insurers are not regulated at the federal level, though they may (or may not) be regulated in
individual states. He suggested the discretionary nature of environmental policies may inhibit
more extensive environmental disclosure, particularly by poorly performing companies.
He also suggested the risk appetite for underwriting may vary over time within the same
company. Indeed, such changes may occur from month to month as the characteristics of the
firm's portfolio evolve, as well as in response to more general market conditions.
Another important factor, in Mr. Meyer's view, is that the "industry" offering environmental
insurance products is narrow enough to pose problems when thinking about standardization.
Also, as these products are "surplus" or non-standardized lines, meaning each policy is
individually tailored and negotiated, there can be an important lack of clarity regarding the utility
of EMS to identify and control risks and, by extension, influence insurance policy rates and
terms. That said, he believes having an EMS may lead to some negotiating room for an insured.
For example, a company may receive fewer exclusions from policy coverage.
With regard to influencing insurance coverage for ongoing operations, Mr. Meyer said EPA
should be careful about mandating EMS requirements. He believes it is important to avoid
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creating redundant information. On the other hand, getting more information reported should
lead to self-correcting behavior and improved environmental performance.
Looking toward the future, Mr. Meyer concluded that if an EMS standard to satisfy everyone
could be developed and adopted, it might help in someday getting environmental insurance
products standardized and admitted as insurance lines. Indeed, if the relationship between EMS
and the process of risk transfer that is provided by insurance were to be fully defined, he
suggested in the long term, EMS might even take the place of insurance in some cases.
In response to this statement, Ms. Patton said that while not required now or (probably) in the
future, companies would likely continue to need environmental insurance, and offered an
analogy to automobile insurance. She also asked how EMSs or their components affect
underwriters of "core" insurance coverages (e.g., property, workers comp).
Ms. Rudolph responded that workers' compensation, property coverage and general liability
coverages may be affected by a good management system. These systems may reduce the risk of
serious illness or injury in an insured company's operations and make them more attractive to the
insurer.
Ms. Vetter said having a plan is better than not having one, even if it is not implemented
perfectly. She added that many factors do intermingle in designing coverages, e.g., employee
driving records. In that respect, the management system can help to delineate, or clarify, the
relationships between the company and the employee, as well as between the company and
insurer. In some respects, a company demonstrates that it is investing in its own future by going
through this process. In assisting a company in developing plans, underwriters often ask for
information on general liability losses; these show the effects of prior investments as well as
company cultural aspects.
Ms. Deming then asked the panelists whether the applications used by different carriers pose the
same questions.
Ms. Vetter responded they did. Because the information solicited by the form is warranted, it
tends to be the same, though carriers all have their own application form that must be completed.
In terms of differences between environmental coverages and more general business insurance
(e.g., CGL), applications for both will require a description of operations, revenues, employee
counts and the like, but as discussed previously, forms for environmental coverages also require
information on (and from) ESAs and other relevant site data.
Ms. Rudolph added that for coverages addressing ongoing operations, underwriters also will
want to know what the company has done to mitigate risks. It is important to understand,
however, that all underwriters have their own particular concerns, and that policy underwriting
remains both art and science in practice.
Ms. Deming then asked whether there were typically gaps in the information reported to the
underwriter.
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Mr. Scian said gaps always exist at a particular site.
Ms. Patten asked about legacy exposure and EMS.
Ms. Rudolph said, in her view EMS is focused on the present and future. To address legacy
issues, she generally relies on ESAs and other site-specific documentation. She added, there are
good mechanisms available to manage site assessment data.
Mr. Scian observed that EMSs have been in place for many years in some companies, and the
"history" of such systems can be important, in that reviewing the company's experience can
reveal important insights into its attitudes, behaviors and responses to new information. Ms.
Rudolph added, EMS history shows something about the culture of the host organization.
Mr. Meyer indicated that "legacy" includes current off-site disposal of wastes, so if an EMS
tracks waste disposal sites, it may provide a bridge to legacy issues.
Ms. Diefendorf said, in California there is a third-party certification program that recognizes
companies that achieve compliance and beyond, i.e., a "green company" certification. She added
that, in her view, some certified companies might invite review of their past history, but only if it
is solid. She then asked the panelists whether such a certification might serve as basis for an
insurance rate reduction.
Ms. Vetter responded it would. She said credits are available to underwriters that might be used
to account for this, and insurers are most interested in companies that can show evidence of
effective risk management.
EFAB Workgroup/EPA Office of Policy, Economics and Innovation
Follow-up Discussion
Mr. Meiburg shared a few observations and posed some questions to begin this session.
He outlined some of the differences among sectors and between the operational and legacy
perspectives when considering environmental risks. He also was struck by the degree of
commonality between EPA and financial sector with respect to the information that is of interest
in an environmental system, performance and risk context. He asked how these commonalities
could be harnessed for the mutual benefit of all.
He then asked about a prominent EPA database that is intended to provide the types of
information that should be of interest to meeting participants, the Enforcement and Compliance
History Online (ECHO) database. He asked whether anyone uses it.
He closed by saying that EFAB has focused on insurance as a financial assurance mechanism.
He has heard, however, many complaints from state regulators regarding insurance industry
behavior, and asked, somewhat facetiously, whether insurance companies ever pay on claims
made on policies used for financial assurance purposes.
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To add some perspective to the discussion, Mr. Kent reviewed some of what had been heard in
the previous dialog. He said that Paul Portney (formerly with Resources for the Future and now
with the University of Arizona) had said that most environmental information is incorporated
already into market decisions, i.e., no further action is needed. Many others, however, still
believe that new information is out there and being used for a variety of purposes. What is to be
made of it?
He added, some also believe it is not EPA's business to define what is important (or not)
regarding environmental performance. Instead, the market place should dictate what should be
measured, communicated and considered by financial analysts.
He went on to say that EPA's OPEI is looking at EPA's information management functions, and
observed that they could be improved. He asked the group, what does the Agency need to do
differently? Is the information of interest really there?
He stated that much behavior change is based upon rules changing, which is now occurring in
ways that are somewhat unclear. He believes some of the observed behavior change is occurring
not based on data, but on new social expectations for improved environmental performance, or
even sustainability, i.e., on intangibles. In such a context, environmental leadership may produce
a first mover advantage.
Another EPA representative, Shana Harbour, recounted some of the discussions that EPA
conducted with financial representatives over data. It is unclear at this point whether the data are
there but are not used in the right way(s), or are not there and are hard to get at. While there is a
lot of "buzz" around integration of environment into financial markets, it is not yet really
happening in mainstream markets.
She asked the group how we can develop forward-looking metrics, where EPA's leverage points
might be, how EPA can act as a catalyst, and what are appropriate roles for EPA and other
parties.
Mr. Scian drew an analogy to the early days of the EPA underground storage tank program. This
program started very simple, but became very complex over time. He added EPA should be
careful about what it asks companies to do, and go with simple, basic metrics and build over
time.
Ms. Smith suggested tying metrics to a goal, and asked, what are our national priorities (e.g.,
water quality, carbon footprint)? One should not have metrics for metrics' sake. She pointed out
the emerging stakeholder expectation that environmental/sustainability performance reports
should be global may pose some issues for EPA; as many will want global data that may not
correspond to EPA's needs.
She added that, ideally, the marketplace would ensure that environmental issues are integrated
into mainstream business practice and offered the analogy of the TQM/quality management
movement as an example.
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She noted that issues may evolve in the same direction on environment, with companies
achieving accelerated progress on environmental impacts, quality, cost and other key
determinants of value. She asked whether environmental performance is actually improving
over time, and whether more environmental insurance is being purchased.
Ms. Vetter said that more companies are buying environmental insurance products, or at least
looking at related issues, as well as improving their management of legacy issues. Leaders in the
more sophisticated companies also are getting more comfortable with the management of these
issues. Interestingly, chains of effect are kicking in, e.g., environmental insurance may be
required to obtain a bank loan. In this type of market environment, clients will want to
contribute to addressing risks and finding solutions.
Mr. Scian said growth in the environmental insurance business is slowing but still there;
environmental coverages are now an accepted component of risk management. The recent high
level of merger and acquisition (M&A) activity is fueling demand at present.
Ms. Patton said the environmental insurance market does not appear to be slowing down. She
added that the industry covers many activities, from real estate to services, and each may be
affected by different things. For example, there may be issues on the state level. Each
competitor has a different profile.
Mr. Meyer said there is an important distinction between a claims-made versus current policy.
This is important because the disclosure of some information can lead to a refusal to renew a
policy. On a claims-made policy, the claim must precede the expiration of the policy to be
honored by the insurer even when the insurer refuses to renew the policy. This means a bigger
risk for the insured, which often has less power in the relationship than the insurer.
With respect to suitable environmental metrics (e.g., for water, energy use), he said all
companies have data on expenses, so there would be no additional data required to report
consumption of these endpoints. He also suggested it might be most appropriate to express such
resource consumption data as a ratio of consumption to output. He asked whether such questions
might be an appropriate focus for EPA.
He added that there are extensive data in state agencies regarding permit or other regulatory
violations, and suggested perhaps EPA could form a clearinghouse in which to house and
distribute these data.
Ms. Vetter asked whether the data of interest are really there. She believes a large portion is, but
one would need to consider how much time should be invested in sifting through it. EPA has
data, but it would be helpful if access could be made simpler. She added having good data is
more important than a lot of data, so imposing additional reporting requirements may not get us
to where we would like to be quickly. As an illustration from the insurance industry, she said
environmental insurance applications are now typically two pages in length rather than seven.
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Mr. Meiburg asked Mr. Kahn whether his evaluation of a particular company is time limited.
Mr. Kahn responded that for a firm like Standard & Poors, the evaluation period is very time
limited, although in other firms and contexts it might not be similarly constrained.
He spoke further to the short-term versus long-term orientation question. He noted that many
environmental issues have a long time span (a decade or more). To address this problem, the
analyst looks at company culture and the value creators that have been important during the past
18 months. He added that environmental investments are analogous to R&D investments, which
are widely viewed as important determinants of long-term value creation potential.
Ms. Deming recounted the experience of her former (chemical) company in measuring energy
and water consumption 18 years ago, and stated that doing so was very difficult. She said,
however, that ratings firms liked metrics that went beyond the traditional ones, so her company
realized some benefit in the longer term.
She noted that the American Chemistry Council, which represents many U.S. chemicals
producers, has added some of these types of metrics to its Responsible Care program. These
enhancements make the program more consistent globally as well as more satisfying to
stakeholders.
In the current context, she suggested the group should first figure out which endpoints and
metrics are helpful to the financial community before proceeding further, as there is a lot of
variation in what is used and in what ways.
Ms. Rudolph suggested one needs to be careful to consider local climates and conditions when
looking at metrics such as energy consumption. Geography (e.g., local climate) may be
important, so it is important to not oversimplify.
Mr. Gebhardt pointed out this is a mis-assessment of the information and results in mis-pricing.
Eventually, the marketplace will sort out the issue of what information is important; he expressed
the view that EMS may be helpful in that regard.
Ms. Diefendorf said small and medium-sized enterprises (SMEs) would need help if information
requirements became more extensive.
At this point, Mr. Meiburg posed two questions for participants to consider, and asked that each
panelist respond to the one of their choice: 1) What is most important thing EPA can do to
stimulate progress? and 2) What would you most like to ask one of the other panelists?
Mr. Kahn responded to the first question by stating that EPA should act as the enforcer of
existing regulations and policies, as well as be a conduit for receiving information from other
agencies, which should then be put into a concise, accessible database. Similarly, Mr. Scian said
EPA should take the lead in developing, quantifying and enforcing key metrics.
Ms. Sahi asked whether the panelists had received much feedback on GRI and other
environmental/sustainability performance reports. Mr. Scian asked Ms. Sahi what the most
21
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useful environmental metric(s) is/are in executing a property transaction. She responded that
data found within ESAs and similar documents that speak to risks are the key metrics; her role is
to evaluate these risks and deliver her assessment to the lender, who prices the service
accordingly.
Ms. Vetter indicated that she views EPA as an enforcer, adding that it can add value by making
performance visible, as no entity wants to be non-compliant in the public eye. She expressed
support for the idea that EPA should be a conduit for information.
Ms. Rudolph said people need to talk the same language, e.g., across sectors. Topics of interest
here include defining what an EMS is, and industry-specific liability issues. She added that
having some common goals across all sectors would be helpful.
A different perspective was provided by Ms. Smith, who encouraged EPA to "do what only you
can do." She noted that a shift toward more proactive behavior over time has occurred in U.S.
corporations. She suggested that EPA's activities might be able to help address potential major
environmental and resource challenges, such as shortages of water and energy shortages. Ms.
Smith added that industry is a customer for environmental performance information just as are
financial markets. She expressed the hope that EPA could help to make these markets and
underlying processes more efficient.
Ms. Wildash took a different tack endorsing (more) vigorous enforcement of existing
regulations, as well as an expanded role for EPA in identifying key environmental metrics for
investors, promoting standardization and inclusion of these metrics in company financial (e.g.,
10(k)) reports.
Mr. Meyer emphasized that EPA can and should make state-level public data more available and
accessible to people in other states and nationally.
Mr. Kahn inquired of the EFAB members and EPA representatives whether they have SRI funds
available in their 401(k) or other retirement accounts. Mr. Kent responded that legislation has
been introduced to allow SRI funds to be included in the federal government's thrift savings
plan; this effort is being supported by EPA.
Mr. Kahn continued by stating that $2.1 trillion or one of twelve U.S. investment dollars, are
being screened in some way, and pointed out that there has been enormous growth (2001-05) in
demand for climate risk data. More assets are being placed with explicit reference to
environmental and social issues, which to him suggests that perhaps this is a "buy" signal. This
could reflect a continuing maturation of SRI as a discipline, or perhaps is simply more people
"putting their money where their mouth is."
Mr. Gebhardt responded to these comments by saying that, to him, it seemed that, behavior
increasingly is being driven by financial considerations, not traditional SRI screening criteria.
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Public Comment
Michael Joiner, of Georgia Gulf, offered his view that environmental metrics need to be
normalized, measured, and reported in real time, and as much as possible, leading rather than
lagging indicators. He also expressed some frustration with the way in which EMS is defined
and used within EPA; he said EMS is defined in at least seven different ways on EPA web sites,
and called for a common operational definition. He would like to know where companies should
invest their resources, considering that they are major consumers of environmental performance
information just as are financial market participants.
Closing Comments and Next Steps
Ms. Deming stated that there will be a meeting of the EMS subgroup in San Francisco in August
as part of a broader EFAB meeting. At this time, the subgroup will discuss options for further
activity and action. She identified two common threads that emerged during today's discussion:
• Standardizing and normalizing information is important to a variety of stakeholders, and
• The process of reaching a widely accepted standard for measuring and reporting
environmental information will be iterative.
In the near term, she would like to see the questions and criteria that are of interest to all parties
compiled so that one can determine where there is overlap. She also wondered how much of the
current "disconnect" between providers and users of environmental performance information is
due to terminology or language differences. She also endorsed the idea that EPA can serve as a
clearinghouse for state-level information.
Ms. Patton said that focusing on common threads in simple, valuable ways is a key step and
favors maximizing the information value that can be aggregated into a few leading indicators or
surrogates. She said existing indicators have limitations and their relevance varies by sector.
Mr. Gebhardt expressed the view that the market is moving in competitive mode regarding EMS,
and returned to the question of the appropriate role for EPA. He believes EPA could help make
data more transparent, and could offer useful expertise in defining and making sense of metrics
that capture the essence of EMS, as well as testing candidate metrics in the marketplace. He
emphasized, however, that EPA should not speak for the market, but rather enable market
participants to make more informed decisions.
Ms. Sahi suggested possible efforts to educate and raise awareness more broadly. This might be
done, for example, by providing training for financial analysts. She also highlighted campaigns
being conducted in some states, e.g., New Hampshire's EMS is Not Just for Big Businesses
effort, and more general outreach in schools.
Mr. Meiburg responded by stating that EMSs can work and add value to many enterprises, even
small farms.
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Mr. Kent expressed thanks to all participants, and described several new EPA information
products. These include new energy use data by sector (found at www.EPA.gov/sectors). and
the overall Sectors Program performance report. He indicated that both products provide
performance data over a ten year time period. He added that EPA also is working on a product
that would express TRI data adjusted for risk. He closed by saying that feedback on these
products would be very helpful.
Mr. Meiburg expressed thanks to the panelists, noting the day's conversations were rich and will
require time in which to reflect.
He stated that during the day the issue of legacy versus ongoing operations continued a pattern
exhibited in previous dialogs, and seemed to be a useful distinction. He added that metrics,
databases and indicators are all within the scope of the Environmental Information Exchange
Network, which has a ten year life span and participation from all 50 states. He asked whether
this network might have potential for use in the current context.
He observed further that branding did not seem to be viewed as very important by panelists, and
that the suggested role(s) for EPA focusing on enforcement and related activities was interesting.
Mr. Kent noted EPA had not endorsed a specific EMS model or construct as yet, as the concept
has room to grow. EPA wants to promote EMS as a tool, but not any particular variant. That
said, he believes EMSs will help EPA and others to analyze sustainability questions, and further
consideration of much more than traditional "within fence-line" issues and endpoints.
Mr. Meiburg closed the meeting with the comment that when the EFAB tried six years ago to
gauge the level of interest in EMS as it related to water/wastewater treatment plant financing
within the financial markets, there was little or no interest. Recent events and today's discussion
show that change is in wind. The form that this change will take, however, has yet to be defined.
The meeting adjourned at 4:30 p.m.
24
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Environmental Financial Advisory Board Meeting June 12, 2007, Arlington, Va.
Participants
EFAB Designated Federal Official
Stan Meiberg, National EPA Liaison to Centers for Disease Control and Prevention, National
Center for Environmental Health/Agency for Toxic Substances and Disease Registry
EFAB Members
Rachel Deming, Partner, Scarola Ellis LLP
Jamed Gebhardt, Chief Financial Officer, New York State Environmental Facilities
Corporation
Lindene E. Patton, Senior Vice President and Counsel, Zurich North America
Helen Sahi, Past President, Environmental Bankers Association
Business & Industry
Susan Briggum, Vice President for Federal Public Affairs, Waste Management, Inc.
Bruce Kahn, Investment Management Consultant, Smith Barney, Citigroup
Kyle Loughlin, Managing Director, Corporate and Government Services, Standard & Poors
Laurie Rudolph, Senior Risk Engineering Consultant, Zurich North America
Paul Scian, AIG Consultants
Susan M. Vetter, Vice President, Environmental Services Group, AON Risk Services, Inc. of
New York
Michael Joiner, Georgia Gulf Corporation
Robert Kerr, Managing Director, Pure Strategies, Inc.
Ray Potter, Casals & Associates
Michelle Smith, Director, Environmental Health and Safety Development, Rohm and Haas
Company
Peter Soyka, Soyka & Company, LLC
Tomaysa Sterling, American Chemistry Council
Chiara Trabucchi, Principal, Industrial Economics Incorporated
Wilhelm Wang, Lead EMS Auditor/Marketing Manager-Sustainability, BSI Management
Systems, BSI-Global
Sonia Wildash, Senior Research Analyst, Ethical Investment Research Services
Academia
Dr. Peter Meyer, Director, Center for Environmental Policy and Management, Louisville
University; EFAB Expert Consultant
Sarah Diefendorf, Director, Environmental Finance Center, Dominican University of
California; EFAB Expert Consultant
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Press
Colin Finan, Reporter, Inside EPA
U.S. Environmental Protection Agency
Nishkam Agarwal
Kathleen Bailey
Deb Berlin
Vanessa Bowie
Kevin Donovan
George Faison
Charles W. Kent
William Hansen
Shana Harbour
Richard Kashmanian
Sandra Keys
Dinah Koehler
Sarah Mazur
Timothy McProuty
Bhanna Patfl
Verena Radulovic
Dale Ruhter
Pamela Scott
Larry Zaragoza
U.S. Department of Energy
Myra Sinnott
26
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Workshop Agenda
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCIAL ADVISORY BOARD (EFAB)
WORKSHOP ON THE USE OF ENVIRONMENTAL INFORMATION IN FINANCIAL
DECISIONS
United States Environmental Protection Agency
One Potomac Yard
2777 S. Crystal Drive, 4th Floor Conference Center (S-4380)
Arlington, VA 22202-3553
AGENDA
June 12, 2007
TOPIC: The Agency and the Board seek to collect information and ideas with respect to
how professionals in the areas of credit ratings, equity investment, commercial banking/lending,
and insurance use or do not use a corporation's environmental information in their analyses.
Questions to be Addressed
(1) To what degree do you consider environmental performance or environmental
management information when assessing the financial strength of a company or a sector?
(2) If there is no (or minimal) consideration made for environmental performance or
management in fundamentals analysis, why not? Is it a perceived lack of relevance? Is
environmental performance considered not material proportionate to corporate
fundamentals? Or, are the data to accurately measure the impact of environmental
performance unreliable, or not readily accessible, to analysts?
(3) Are there environmental impacts/elements that you would like to have measured?
(4) Would branding (e.g. Responsible Care) one or more forms of EMSs help?
(5) What role can EPA play to promote greater understanding and increased generation and
use of environmental performance data that are more relevant, consistent, timely, and
meaningful to capital market participants
8:30 am REGISTRATION
27
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9:00 am Welcome and Introductions
Stan Meiburg, EFAB Designated Federal Official,
National EPA Liaison to CDC, NCEH/ATSDR
Rachel Deming, EFAB Member, Partner, Scarola Ellis LLP
9:15 am Corporate Environmental Information and the Financial Community --
EPA Overview
Charles W. Kent, Director, Office of Business and Community Innovations,
Office of Policy, Economics and Innovation (OPEI)
9:30 am Panel 1: Credit Analysis and Equity Investment
Kyle Loughlin, Managing Director, Corporate and Government Services,
Standard & Poor's
Bruce Kahn, Investment Management Consultant, Smith Barney,
Citigroup Global Capital Markets Inc.
Sonia Wildash, Senior Research Analyst, EIRIS - Ethical Investment
Research Services
Michelle Smith, Director, Environmental Health and Safety Development,
Rohm and Haas Company
10:45 am BREAK
11:00 am Speaker: Commercial Banking/Lending
Helen Sahi, Past President
Environmental Bankers Association
12:00 - LUNCH
1:30 pm
1:30 pm Panel 2: Insurance
Susan M. Vetter, Vice President Environmental Services Group,
AON Risk Services, Inc. of New York
Laurie Rudolph, Senior Risk Engineering Consultant, Zurich NA
Paul Scian, AIG Consultants
Dr. Peter Meyer, Director, Center for Environmental Policy and Management,
Louisville University
2:45 pm BREAK
3:00 pm EFAB Workgroup/EPA Office of Policy, Economics and Innovation
28
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Follow-up Discussion
4:00 pm Public Comment
4:30 pm Meeting Close: Next Steps and Adjourn
Rachel Deming, EFAB Member, Partner, Scarola Ellis LLP
Stan Meiburg, EFAB Designated Federal Official
29
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OFFICEOFOOUCY.
ECONOMICS. AND INNOVATION
Mr. A. James Barnes
Professor of Public and Environmental Affairs
Adjunct Professor of Law
Indiana University
I3I5E, IOlh Street, Suite 418
Bloonungton, Indiana 47405
Dear Mr. Dames:
Thank you for providing the Environmental Protection Agency with the Environmental
Financial Advisory Board's (EFAB) report on "Environmental Management Systems (EMSs)
and ilie Use of Corporate Environmental Information by the Financial Community," The
Administrator, Stephen L. Johnson, has asked me to respond directly to you about the Agency
response to the report's findings and recommendations.
First, 1 want to thank (he EFAB for taking on this complex and sometimes difficult
subject. The relationship between corporate environmental performance and its financial
performance is often an indirect relationship with many factors influencing corporate decision-
milking and corporate performance. We knew this was a complex task and we appreciate the
EFAB exploring it with us, EFAB deliberations provided valuable information on the direct and
indirect links between corporate environmental performance and their financial performance.
We agree that there is increasing awareness of corporate environmental information and
performance in many segments of the economy.
We accept and are taking steps to implement the recommendations in the EFAB report
The EFAB recommended that EPA take a leadership role in working with the financial sector
and companies to belter understand the relationship of EMS's, environmental performance and
financial value. Consistent with this recommendation. EPA sponsored a dialogue with the
financial community, on Thursday, June 19, 2008, to explore how to improve access to EI'A's
data bases. Over 75 people attended from the financial community. Many offered suggestions
thai arc actionable through the Office of Environmental Information's (OEI) database access
strategy which will be issued this Fall. During the Dialogue the financial community stressed
that improved access to environmental data will improve its usefulness to the financial sector as
well as to other stakeholder groups. My office will use the Agency-wide Financial Sector
Working Group to continue to exploration of these issues with OEI and Region 2.
Internet Address (URL) • hKp:,',\»w*.epo.gov
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EPA appreciates the expertise and experience that the Board brings and values the
insights it can provide, EPA looks forward to receiving the findings in response to the other
questions presented to the Board.
Sincerely,
Susan Parker Bodine
Assistant Administrator
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes
Chair
TerryAgiiss
Julie Beluga
Jo/in So/and
George Butcher
Donald Com/I
Michael Curley
Rachel Dealing
Pete Domenici
Kelly Damuml
Haiy Fiaacoeur
James Gebhardt
Steve Grossman
Scott Hasldns
Jennifer Hernandez
Keith Hinds
Steve Nonfood
Langdon Harsh
Greg Mason
Undone ration
Cherle Rice
Helen Saul
Andrew Sawyers
Jim Smith
QregSmutz
Steven Thompson
Sonla Toledo
JlmTozzi
Justin Wilson
NOV 1 2007
Stan Helburg
Designated
Federal Official
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board (EFAB) was asked by the
Office of Air and Radiation to review the Smart Way Transport program to
determine if there were any innovative finance mechanisms that could be devised
to make the program more attractive. This report is our response to this request.
We have realized that the SmartWay Transport program is only the
beginning of the opportunities for financing small-source emissions reductions.
There are millions of small stationary or mobile diesel engines which are either
owned by small businesses or private individuals, and which could be either
retrofitted or replaced in order to reduce emissions. Furthermore, we found that
among the states there were almost no finance programs to deal with these
matters.
We, therefore, recommend that the Agency embark on a major effort to
encourage the states to create Air Quality Finance Agencies (AQFAs). We would
like to make two observations about this recommendation.
First, the Agency is home to two of the most innovative environmental
finance programs hi the world: the almost $60 billion Clean Water State
Revolving Fund and the $11+ billion Safe Drinking Water State Revolving Fund
(the "SRFs"). These, however, are in the water sector. Apart from the limited
application of CWSRF dollars to fund mitigation of atmospheric deposition that
impacts water quality, there is nothing comparable in the air sector or in any
individual state. We believe such programs could address a great need.
Second, because of the inherent nature of the financial transactions
themselves, such programs should not be onerous at the state level. The State of
Maryland, for example, estimates that the average annual borrowing from its
SRFs is in the $8 million range. The average annual borrowing from a state
AQFA is likely to be in the $40,000 range - an immense difference. Furthermore*
Providing Advice on "How To Pay" for Environmental Protection
-------
Honorable Stephen L. Johnson
Page2 of 2 pages
SRF borrowers are public; state AQFA borrowers will be private. This means that the
capitalization requirements for state AQFAs will be relatively modest. There are resources
within state governments, such as state departments of economic development, which are
experienced in private sector lending.
For these reasons the Board does not believe that implementation of AQFAs would
prove overly burdensome to the states. On this point, the Agency should consider discussing,
with the Department of Transportation, whether allocations of a small portion of its private
activity bonding authority to state AQFAs could be undertaken in compliance with the Safe,
Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users ("SAFETEA-
LU") to enhance the value of such programs.
This recommendation offers an opportunity to use an innovative set of tools to address
our nation's air pollution problems. The creation of state AQFAs would be a landmark
beginning to such efforts; and we commend this concept to you and the Agency.
It is a pleasure to offer this recommendation to you. As always, if the Board may provide
further information or assist on this or any other matter, we would be delighted to do so.
Sincerely,
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal Official
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Jennifer Hermandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
John McCarthy
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Steven Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Report on Innovative Finance Programs for
Air Pollution Reduction
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
November 2007
Printed on Recycled Paper
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United States Environmental Protection Agency
Environmental Financial Advisory Board
Report on Innovative Finance Programs
for Air Pollution Reduction
SUMMARY
The Environmental Financial Advisory Board (the "Board") was originally asked by the Office
of Air and Radiation (OAR) to review the SmartWay retrofit program to determine if any
innovative financing programs could be developed to spur sales of SmartWay kits and thus
reduce the emissions of various oxides of nitrogen (collectively "NOx"), carbon dioxide (COi),
and particulates that attend the various products comprising the kits.
The Board has identified several major innovations that will create significant market incentives
not only for SmartWay Kits, but also for other programs that reduce air emissions from mobile
sources and even other small, stationary sources. The Board recommends that these innovations
be implemented at the State level. There are presently a few states that offer the odd, one-off
grant, loan, or other incentive for these purposes ; but none do so on the order of magnitude or
with the concerted effort that we recommend here. To this end, we propose a major effort by the
Agency to encourage States to create Air Quality Finance Authorities with the power to
introduce these financial innovations. This would be the first major air emission reduction
finance program anywhere in the world that we know of. In short, we recommend:
• States should create Air Quality Finance Authorities (AQFAs), or empower existing
environmental finance authorities to finance certain types of air emission reduction
equipment; or, at least, create a state-wide or regional air emission reduction financing
program.
• State AQFAs should offer long-term, low-rate financing to small private owners of
polluting equipment to upgrade their equipment or, if applicable, to retrofit it to reduce
emissions.
• State AQFAs should be the nominal purchasers of such pollution reduction equipment for
the purpose of achieving volume discounts which can be passed on to end-users. The
equipment can be resold, or leased, to end-users.
• State AQFAs should negotiate fleet fuel discounts on behalf of those companies who use
their programs.
1 Grants: CA, PA, WI and TX. Loans: AR, MN. Other: OR.
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EFAB Air Pollution Reduction Incentives Report
Page 2 of 10
• State AQFAs should acquire the rights to the emission reduction credit on each
transaction and use or sell those emission credits to further reduce the cost of the
program.
• EPA should review all of its funding programs which have a nexus to air emissions with
a view to, wherever possible, using them as an incentive to encourage states to take the
above actions.
BACKGROUND AND FINDINGS
The Board has determined that several innovative financing techniques can be used to promote
the SmartWay program. Moreover, we have also determined that the same techniques may be
applicable to a wide variety of other small, stationary emission sources.
The Board's investigations into the SmartWay program found that the real need for innovative
finance lay in dealing with the tens of thousands of small trucking firms that lacked capital and
did not enjoy superior credit ratings. Most of these truckers are locked into a financial regime
with terms so short (3-5 years) and interest rates so high (-14%), that the cost of financing the
kits was only marginally offset by the fuel savings - and only so for extremely long-haul carriers
(125,000+ miles per year). For example, the cost of a SmartWay kit is estimated at $20,100. To
finance this amount for three years at 14% would require an annual payment of $8,657.
Estimated fuel savings of 3,500 gallons per year per tractor (based on a 14% savings on 125,000
miles at 5 miles per gallon) at a cost of $2.50 per gallon would result in fuel cost savings of
$8,750 per year. Thus, a trucker who drove 125,000 miles would save only $92.30 per year.
This means that if the trucker erred on his actual mileage by only 200 miles (0.16%), he would
lose money. This problem is exacerbated when shorter-haul trucks are considered, some of
which drive only 20,000 miles per year. In addition, professional truckers are at least as
skeptical as the average motorist when it comes to believing claims of fuel efficiency. So, the
SmartWay retrofit program has not taken off, as it should have.
(It should be noted that the SmartWay program has pioneered two loan programs. The first, the
SmartWay Loan program, takes advantage of the U.S. Small Business Administration's Business
Express Loan program, offering 12% loans to firms that are 51% owned by women, veterans,
minorities or firms located in certain distressed areas. It has generated about 100 loans to date,
nationwide. The second is the SmartWay Plus Loan program which is offered through
community development banks in Norfolk, Virginia, and New York City.)
The Board then learned of the activities of Cascade Sierra Solutions (CSS), aNon Governmental
Organization (NGO) operating on the West Coast, which, we understand, was created by a grant
from the SmartWay program, and which is "dedicated to saving fuel and reducing emissions
from heavy-duty diesel engines". CSS has developed a program that exploits two additional cost
saving factors. CSS, acting as an agent for the kit manufacturers, sells SmartWay kits directly to
truckers. By aggregating these sales, they are able to achieve volume discounts of 6% on their
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purchases of SmartWay kits2. This volume discount could be passed on to end users to further
enhance the attractiveness of the program. In addition, although their "clients" had no legal
relationships among themselves, their "client" relationship with CSS was sufficient for CSS to
negotiate a fleet fuel discount of 6%. For a 125,000 mile carrier, this results in additional
savings of $3,150 per year (with a SmartWay kit).
It soon became clear to the Board that the genius of CSS's innovation lay in their ability to
synthetically aggregate hundreds of small truckers to avail them of volume discounts.
We then began to further consider the question of the "synthetic aggregation" of small trucking
companies and began to look at ports, where tens of thousands of trucks congregate daily .
Many ports are run by port authorities, which are units of state or local government.
There are four important conclusions we drew from our investigations of ports. First, port
authorities have the ability to issue bonds. Second, ports, as large stationary sources of air
pollution, have need to reduce emissions not only from their own equipment, but also from
equipment owned by others, such as trucking companies, which are naturally drawn to, and use,
port facilities. Third, because of this overarching interest in reducing air emissions, port
authorities could afford to be less sensitive to credit concerns than are commercial bankers who
have clear fiduciary responsibility for their depositors' and shareholders' funds. For this reason,
port authorities should be more willing to extend the tenor of loans to terms commensurate with
the service lives of air emission reduction facilities financed with their bonds.
Fourth, as a result of this need to reduce emissions in situ, port authorities need emissions
credits. It would, therefore, be very beneficial for ports to assist their trucking clientele to reduce
emissions if the ports themselves could, in turn, get credit for the reductions.
At this stage of our investigations, two other important considerations occurred to us. First, there
are other "non-port" areas (such as truck stops) where the intervention of a government agency
could provide the same benefits. Thus we began to think of new, statewide agencies with
financing authority for air pollution reduction.
Our second, and most important, consideration is that there is a wide universe of air polluters -
both mobile and stationary - who share the same economic profile as do the truckers in the
SmartWay program. These types of entities typically own various kinds of diesel powered
vehicles - stationery equipment, such as cranes, powered by diesel engines; diesel powered
construction equipment, and the like. The characteristics they share are as follows:
1) They are small source polluters.
2) There are literally millions of these small source polluters.
2 CSS does not pass this savings on to their customers, but rather uses it to cover their administrative costs. In this
report, we will recommend that these savings be passed along to SmartWay kit purchasers.
3 The Port of Baltimore, which is 13th in size in the United States, estimates that 2,500 trucks visit their facilities
daily.
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3) They are almost all owned by small private businesses or private owners.
4) They do not have superior credit and, therefore, have limited access to capital.
Our conclusion, in one sentence, is that these small polluters need to be synthetically aggregated
and offered favorable financing terms by State AQFAs as an incentive either to install pollution
reduction equipment, such as SmartWay kits, other air emission reduction equipment, or to
purchase new state-of-the-art low emission engines.
From all of the above investigations, we conclude that a major finance program to advance the
use of SmartWay kits and other air pollution reduction devices could be developed through State
AQFAs or other governmental entities such as port authorities. Specifically, we believe:
l)That State AQFAs and other governmental entities with bonding authority should be
able to issue bonds at favorable rates to finance the acquisition of SmartWay kits or
other mobile-source pollution reduction devices, which can be sold or leased to
trucking companies.
2) That the terms of such bonds can be commensurate with the service lives of the
equipment so financed. In this case, term could be extended from 3 to as much as 10
years, with accompanying dramatic reductions in financing costs4.
3) That such agencies can negotiate volume discounts from the manufacturers of the
components of the kits, and pass along this savings to SmartWay kit purchasers.
4) That such agencies can have their SmartWay kit purchasers collectively designated as
a fleet for the purpose of obtaining fleet discounts for diesel fuel.
5) That such agencies should be allowed to keep for their own account, or trade, the
emission credits attributable to all of the emission reductions from the trucks in their
respective SmartWay fleets.
Below are a few examples of what could be done through State AQFAs.
Example #1 — New low emission trucks
Instead of just a SmartWay kit, let us consider brand new low-emission diesel tractor. Let us say
that the average new, fuel-efficient, environmentally friendly tractor costs $100,000. At
conventional rates for small truckers paying full price for the tractor, it would cost them some
$29,128 per year. If they bought the same truck through a State AQFA with a volume discount,
it would cost the same trucker only $11,096 per year. Add in a fleet fuel discount card and the
cost is lowered even further. The result is a very strong financial incentive for truckers to
modernize their fleets with more fuel efficient models that pollute less.
4 A 10% loan of $1,000 with a three-year term requires an annual payment of $402.11. The same loan, with a 10-
year term, only requires an annual payment of $162.75. A 60% reduction!
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Example #2 — Truck Stops
The characteristic emission problem with truck stops arises from idling. Trucks idle at such
facilities, with their engines on, for as much as 10 hours per day. Each hour they idle consumes
one gallon of fuel.
The alternative to idling is to have an Auxiliary Power Unit (APU) which supplies power to the
cab while the driver sleeps or rests or to use Truck Stop Electrification (TSE). Both APUs and
TSE significantly reduce idling emissions.
Truck stops are largely privately owned. The installation of APUs or TSE depends solely on
whether the manufacturers of these devices can convince truck stop owners to install them. The
manufacturers want to get paid in full as soon as possible. The truck stop owner, if he invests in
APUs or TSE, wants to recover his investment as soon as possible. However, as the fees for
using an on-site APUs or TSE approach the cost of burning fuel for the same period of time
($2.50 per hour), the incentive for drivers to use them disappears.
If, however, a State AQFA were to acquire a non-possessor easement interest in the air rights
over the truck stop from the truck stop owner (for which it would pay the truck stop owner an
annual fee), then the state agency could purchase the APUs or TSE from the manufacturers, and
finance them with low-cost, long-term, bonds and have the manufacturers install and, if
necessary, maintain them. The manufacturer would get paid in full up front. The truck stop
owner would receive additional risk-free annual income from the state. And the State AQFA
would be able to set user fees at substantially lower rates because of the low cost of the
underlying long-term financing.
For example, a truck stop owner would likely want to recover his investment in three years on a
cash-on-cash basis. For every $1,000 of investment he would need to recover $333 per year in
net fees. But with 10-year, taxable bonds at 5%, a state agency would only have to recover $130
per year. Thus there would be much more room to offer truckers savings sufficiently substantial
to induce them to use the APU and avoid the polluting emissions.
Depending on state law, the same result might be achieved by the creation of Air Quality
Improvement Districts; much like the Neighborhood Improvement Districts used in brownfields
reclamations. An Air Quality Improvement District could be created at a truck stop, which
might allow the issuance of bonds to finance the installation of APUs at that site. This could be
done at truck stops all over the State. If there were 10 truck stops in a State that could
accommodate 50 trucks each, the daily fuel savings would be 5,000 gallons or over 1,750,000
gallons per year with commensurate reductions in NOX and COi-
Example #3 - "Drayage Yards"
The second stationary source of mobile emissions that we considered are what might be called -
for lack of a better term - "drayage yards". Drayage, the Board came to learn, has a very
specific meaning in port-related terminology. It refers to trucks that remove containers from
ports and deliver them to marshaling yards a few miles from the port from whence they are
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further disbursed. They also do the reverse, i.e. deliver containers from the yard to the port.
These drayage yards are privately owned and, like ports, are magnets for trucks.
There are two issues regarding drayage yards that need consideration. The first is that, like truck
stops and ports, much idling occurs there. However, there are differences between the idling that
occurs at truck stops and that which occurs at drayage yards. At truck stops, there are a
relatively small number of trucks that idle for long periods of time. These can be dealt with
effectively by stationary APUs that are affixed to each truck parking space. At drayage yards,
the characteristic idling is the converse, i.e., many trucks idling for relatively short periods of
time. This type of idling can best be dealt with by replacing older trucks with newer, cleaner
models. Privately owned drayage yards, however, have no capability of offering the owners of
their older user-trucks any financial incentives to replace them. States, however, could intervene
and create such incentives through AQFAs.
It would certainly be in the interest of a State to reduce such emissions by creating a program to
finance cleaner trucks that use such facilities.5 In this regard, the concepts of an Air Quality
Improvement Easement or an Air Quality Improvement District would be very useful in bringing
the financial power of long-term, bond financing to bear on this problem.
The second issue involving drayage yards deals directly with emission credits.
As previously noted, drayage yards reside only a few miles from the port they serve. Thus, they
will virtually always be in the same airshed as is the port itself. So, too, will be the dray trucks.
They will always be driving and polluting within the same airshed where the port is located.
Ways and means, therefore, need to be developed where a stationary source of mobile emissions,
such as a port (public) or a drayage yard (private), can legally obtain emissions credits from the
owners of the mobile sources whose emission reductions they finance. Ports and State AQFAs
should be able to acquire the emissions credits from the truckers whom they induce to buy
SmartWay kits; newer, cleaner trucks and other pollution reduction devices.
We understand that the Agency has already dealt with this issue at least once in San Diego,
California, where an electric generating utility in need of emission credits purchased a fleet of
sanitation trucks that used natural gas/propane for a privately-owned company that handled solid
waste disposal for the county government. The utility was able to acquire and use the Mobile
source Emission Reduction Credits (MERCs) effected by the new engines. These sanitation
trucks always remained within the county which, in turn, was within the same non-attainment
area as the power plant. In this case, the Agency was able to satisfy itself that such reductions
were "real, quantifiable, federally enforceable, permanent and surplus" within the meaning of the
Clean Air Act. This precedent must be expanded to encourage lower vehicle emissions which
will benefit more non-attainment areas.
5 We understand the SmartWay program is already cooperating with the ports of Norfolk and New York/New Jersey
on a pilot program similar hereto.
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ADDITIONAL CONSIDERATIONS
Before concluding, we would like to offer some observations on two related matters: the
possible use of tax-exempt bonds and the implementation of the recommendations contained
herein
Tax-exempt Bonds
Tax-exempt bonds are the mainstays of finance programs in the water and wastewater sectors.
This is not the case in the air sector. The reason for this is that most drinking water providers
and wastewater treatment system operators are public entities that can readily issue tax-exempt
bonds for capital projects. Most air polluters, on the other hand, are private, where the issuance
of tax-exempt bonds is awkward and problematic. Tax-exempt bonds issued for the benefit of
private entities are called Private Activity Bonds (PABs).
The discussions above regarding the possible issuance of tax-exempt bonds raise the following
questions: Under what circumstances, if any, could a government agency such as a port
authority, or State AQFA, issue tax-exempt bonds to purchase mobile source air pollution
abatement equipment for sale or lease to private entities?
Based on informal discussions with bond counsel, we believe that tax-exempt PABs cannot be
issued to finance air pollution control devices for private users. There are, however, two small
exceptions. The first is what might be called a de minimis exception: if the PAB is a part of a
larger bond issue and constitutes less that 5% of such issue and is less than $15 million. Thus,
bonds issued for the purposes described herein could be issued as a small part of a larger tax-
exempt bond financing issued for other purposes as long as the amount was below those two
stated thresholds. The large capital programs of ports may avail them of the opportunity to
aggregate air emission financing as part of larger tax-exempt financings while remaining
compliant with these de minimis thresholds.
The second exception appears to be of even more limited applicability. It was created by the
passage of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for
Users, or "SAFETEA-LU", (Pub. L. No. 109-59), which was enacted in 2005. Section 11143 of
this Act added sections 142(a)(15) and 142(m) to the Internal Revenue Code, which authorize up
to $15,000,000,000 of tax-exempt private activity bonds to be issued by State or local
governments for a new type of exempt facility, i.e. "qualified highway or surface freight transfer
facilities". The relevant part of the definition of this term for our purposes is "any surface
transportation project that receives Federal assistance under title 23, United States Code". So, if
one of the programs described above is part of a larger transportation program that is receiving
grants from the U.S. Department of Transportation under title 23 of the U.S. Code, then bonds
issued for that program are eligible for this exception. Included under title 23 (section 149(b))
are qualified highway or surface freight transfer projects that have air quality benefits. These
are projects that are, determined by the Transportation Secretary, after consultation with the EPA
Administrator, "likely to contribute to the attainment of a national ambient air quality standard,
whether through reductions in vehicle miles traveled, fuel consumption, or through other
factors."
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It is apparent that this matter is quite complicated. States should be aware of these exceptions
and seek competent bond counsel to advise them.
In the final analysis, however, if all avenues to tax-exempt bond financing fail, States should be
prepared to issue taxable bonds for the programs described herein. In the current interest rate
environment, a tax-exempt, 10-year bond would yield about 4%; while its taxable counterpart
would yield about 5%. The difference in payment between these two bonds is $123 vs. $130 per
year (per $1,000 financed). This is minimal; whereas the difference between these and the
conventional financing available to most small truckers ($430.73) is many times larger. In
addition, if State AQFAs chose to lease the emission reduction equipment to end-users, they
would be able to aggregate and sell the depreciation benefits of the equipment for tax purposes,
and use the proceeds of such sales to further reduce the cost of the program to the end users. So,
State AQFAs should pursue taxable financing when all else fails.
Implementation
In the course of our investigations, we had informal conversations with officials at two major
ports. When the subject of establishing financing programs for the truckers who use their
facilities came up, it became abundantly clear that the port officials did not see themselves in the
banking business and were very uncomfortable with the thought of entering it, even on a limited
basis. The same sentiment is probably true of state air pollution control agencies that see
themselves as regulators, and certainly not lenders.
That said, the Board believes there are two points to consider. The first is that there are ample
skills in most state governments for mounting private sector lending programs. They are not in
any department that deals with the environment; rather they are in the department of economic
development. Even most large counties have private sector lending programs associated with
their economic development programs. This is a very important point because there will most
certainly be some defaults and delinquencies in any lending program for truckers or other such
small businesses. The agencies that run the State Revolving Fund programs deal largely with
municipal borrowers or public authorities where defaults and delinquencies are very rare. But
the economic developers have appropriate analytical skills to minimize initial credit risks as well
as the skills to manage defaults, foreclosure, repossession and the resale of physical assets.
The second point is that there are alternative strategies for implementing such lending programs.
CSS is a good example. Instead of having a state, or port authority, directly manage an air
quality financing program, they could contract with a NGO such as CSS to manage it for them.
Or, in the final analysis, states could set up linked deposit programs or issue limited loan
guaranties to qualified commercial banks and let them manage these types of lending programs.
Setting up state sponsored programs will require capital commitments. Seed money can be
provided from a number of state sources such as general, economic development or
environmental funds from taxes or fee income. Existing federal programs may also provide a
complement of capitalization dollars to support state efforts.
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EFAB Air Pollution Reduction Incentives Report
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RECOMMENDATIONS
Bearing in mind the above considerations, the Board now recommends:
l)That the Agency adopt a series of formal policies to encourage States to form
AQFAs, or empower existing state environmental finance authorities to finance air
pollution reduction equipment; or, at least, create a state-wide or regional air pollution
reduction financing program.
2) That the Agency encourage the States to offer long-term, low-rate financing to small
private owners of polluting equipment to upgrade their equipment or, if applicable, to
retrofit it to reduce emissions.
3) That the Agency encourage States to take advantage of volume discounts in the
purchasing of such equipment.
4) That the Agency encourage States to negotiate fleet fuel discounts on behalf of those
who use their programs.
5) That the Agency work with the States to permit them to acquire the rights to the
emission reduction credits on each transaction and sell those credits to further reduce
the cost of their programs.
6) EPA should review all of its funding programs which have a nexus to air emissions
with a view to, wherever possible, using them as an incentive to encourage states to
take the above actions.
The Board further recommends:
7) That the Agency approach DOT regarding the use of a portion of the untapped $15
billion in private activity bonds to underwrite mobile source air emissions reduction
efforts if this can be done on terms consistent with title 23 of the US Code.
8) That, bearing in mind differences in State laws and differences in State priorities with
respect to air emission reductions, the Agency form Regional Task Forces in each
EPA region to facilitate the dialogue with the States on these matters.
9) That the Agency consider:
a) undertaking the development of new rules which would permit the trading of
MERCs generated through financing programs such as those described herein,
b) obtain advice on generic questions such as bond counsels' opinions on the
questions of tax-exempt bond issuance that are raised above,
c) coordinate the work of the respective Regional Task Forces, and
d) disseminate information about advances made in developing innovative
financing programs among them.
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CONCLUSION
In the water and wastewater sectors, the Agency is home to some of the most innovative
financing programs in the world. Similar innovations have been used to support "brownfields"
redevelopment. However, because the world of air polluters is populated with small, private
entities that are difficult to finance - instead of large public ones that are easy to finance - little
has been done to create financial incentives in this field. This need not continue.
The Agency now has a unique opportunity to launch a major initiative to reduce air pollution
throughout the country by working with the States to create financial incentives for low emission
equipment of all types.
Such programs need not be costly. Most can be accomplished with financial guaranties. As such
they can be initially capitalized with modest loans from State governments and supported on an
ongoing basis by reasonable guaranty fees. Ultimately the initial capitalization loans could even
be repaid to State treasuries.
In summary, the creation of State AQFAs which provide a combination of long-term, low-cost
financing; trading of emissions credits; and the utilization of volume discounts can form a
powerful innovative financing program that, we believe, can significantly reduce air pollution
throughout the United States. We commend these methods to the Agency.
Finally, we note that "air quality finance" is almost an entirely new field with some entirely new
concepts. The Board will be happy to continue to work with the Agency to expand this field in
the interests of improving air quality for all Americans.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
DEC 2 12007
OFFICE OF
AIR AND RADIATION
Mr. A. Stan Meiburg
National EPA Liaison to CDC NCH/ATSDR
1600 Clifton Road, N.E.
MSE-28
Atlanta, Georgia 30333
Dear Mr. Meiburg:
Thank you for your letter of November 1, 2007, to Administrator Stephen L. Johnson
regarding the Environmental Financial Advisory Board's Innovative Finance for Air Pollution
Reduction report, I appreciate EFAB's efforts to review the Smart Way Transport Partnership
and identify finance mechanisms to help deploy technologies that reduce mobile-source and
other air emissions.
The board's primary recommendation is for EPA to encourage states to create Air
Quality Finance Authorities to provide low-cost financing and other market incentives for
emission reductions in the mobile-source and other sectors. We agree that state authorities could
provide low-cost financing and have initiated internal and external discussions to identify
possible options for creating and implementing AQFAs. As mentioned in the report, EPA
currently hosts two environmental finance programs, the $60 billion Clean Water State
Revolving Fund and the $ 11 billion Safe Drinking Water State Revolving Fund. AQFAs could
provide a similar function for the Clean Air Act, and they would be operated with capita) from
lax-free bonding authority.
Regarding EFAB's other recommendations, we agree that state AQFAs should consider
the purchase of certain pollution-reduction equipment "in bulk" to achieve volume discounts,
which can be passed on to end-users. Bulk purchases of standardized devices like auxiliary
power units and diesel filters would be one example. While state authorities might not be able to
directly purchase and stock technologies, our Office of Transportation and Air Quality would be
able to work with state AQFAs to assist them with high-volume discount strategies.
Another EFAB recommendation suggests that EPA encourage states to negotiate fleet
fuel discounts. While negotiating such discounts is a common practice in the trucking industry,
each state would need to decide the appropriate role of the AQFAs for such purposes. In
addition, EFAB's recommendation that EPA should review its funding programs that have a
nexus to air emissions, possibly using them as an incentive for states to create AQFAs, will
require further review. Our office is already taking steps to include the creation of AQFAs as an
eligible activity under the diesel emissions reduction provisions of the Energy Policy Act of
2005. EFAB also recommends that the Agency approach the Department of Transportation on
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the use of their private activity bonding authority. EPA has initiated a dialogue with DOT and
will continue to pursue the use of this bonding authority to finance diesel retrofits.
Thank you for EFAB's valuable input and efforts to recommend innovative finance
mechanisms to facilitate the deployment of fuel-saving and emission-control devices for the air
sector. If you have any questions or wish to speak further about this report, please contact
Mitchell Greenberg, SmartWay program manager in the Office of Transportation and Air
Quality, at (202)-343-9269.
Sincerely,
Robert J. Meyers
Principal Deputy Assistant Administrator
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
APR 29
OFFICE OF
AIR AND RADIATION
Mr. A. James Barnes
Chair, Environmental Financial Advisory Board
Indiana University School of Law
211 South Indiana Avenue
Bloomington, Indiana 47405-7001
Dear Mr. Barnes:
On behalf of the Office of Transportation and Air Quality (OTAQ), I would like to thank
the Environmental Financial Advisory Board (the "Board") for your "Report on Innovative
Finance Programs for Air Pollution Reduction" (Nov. 1,2007). This report provides excellent
recommendations for us to consider as we develop and implement innovative finance projects to
reduce dicsel emissions.
For fiscal year 2008, Congress appropriated funds for the first rime under the Energy Policy
Act (2005) to help reduce harmful emissions from heavy duty diesel engines. We have issued a $3.4
million grant solicitation, as part of the SmartWay Clean Diesel Finance Program, to establish
innovative finance projects (see www.epa.gov/air/grants/08-04.pdf for the Request for Proposals).
In addition, our EPA Regions may also offer grants to establish innovative loan programs (see
www.epa.eov/diesen. We have incorporated concepts from your report in our Requests for
Proposals, and we hope to award projects that are consistent with your recommendations. For
example, we share a common interest in empowering states to create air quality finance centers
throughout the country that can issue bonds to create low cost loan programs that will provide
incentives to companies and individuals to purchase cleaner, more fuel efficient diesel vehicles and
equipment. OTAQ has also entered into a cooperative agreement with the Great Lakes
Environmental Finance Center to conduct demonstration projects on the issuance of bonds, financial
and tax incentives, and other financial mechanisms to support clean diesel projects.
We look forward to continuing to work with the Board to find new and innovative
financial approaches to reducing diesel emissions and conserving fuel.
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Again, I want to thank you for your efforts to assist our program with financial methods
to deploy cleaner and more fuel efficient vehicles.
Sincerely,
Margq/Tsirigotis
^Director
Office of Transportation and Air Quality
cc: Robert Meyers
Robert Brenner
Stan Meiburg
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A, James Barnes
TenyAgriss
Julie BeJaga
John Roland
George Butcher
Donald Corr&l
Michael Carte?
Rachel Denting
Pete DomenlcJ
Kelly Dotmard
flary Francoear
James Gebhann
Steve Grossman
Scott Hasklns
Jennifer Hernandez
Keith Binds
Steve nonfood
Langdoa Hank
QregHaaou
Undene Fatten
CherieKlce
fteJea Sahi
Andrew Sawyers
Jim Smith
QregStoirtx
Son/a Toledo
JlmTozzi
Justin Hi/son
John Wise
Stan MeUnog
Designated
Federal Official
WAIT 3 1 2007
Mr, Ben Grumbles
Assistant Administrator, Office of Water
U.S. Environmental Protection Agency
Ariel Rios Building
1200 Pennsylvania Avenue, N.W.
Washington, DC 20460
Dear Ben:
The Environmental Financial Advisory Board (EFAB) is pleased to submit
the enclosed report, "EFAB Comments on EPA Document: Combined Sewer
Overflows—Guidance for Financial Capability Assessment and Schedule
Development" The report summarizes EFAB's review of this guidance and
provides EPA with our comments. Dr. Andrew Sawyers, Program Administrator,
Maryland Water Quality Financing Administration, and Jeff Hughes, Director,
University of North Carolina (Chapel Hill) Environmental Finance Center, were
instrumental in the development of this report. In keeping with EPA's request, the
report is limited to examining the existing components of the Financial Capability
Assessment (FCA) methodology and does not address policy issues related to
implementing EPA's Combined Sewer Overflows (CSO) regulatory approach.
The FCA Guidance has been used since 1997 as a tool to assist EPA in
assessing a permittee's financial capability to meet the terms of EPA's CSO Policy.
The Guidance outlines a two-part test in determining financial capability, with one
element addressing household impact and the second element addressing system-
wide financial capability. EFAB in this report recognizes the merits of the two-part
test. However, the Board believes that the current residential and the system
financial capability indicators used in the two part test have some significant
limitations. EFAB believes that EPA will be better able to assess a permittee's
financial capability by updating both of these indicators.
For example, the residential indicator now used to measure the impact on
individual households does not fully consider the breadth of factors that impact
household finances, particularly in communities with a high proportion of
disadvantaged households. The reliance on median household income only may
disguise the impact of income distribution and poverty rate for many utilities. In
revising the FCA Guidance, EFAB recommends that EPA develop a residential
indicator which considers actual household expenditures based on average water
use, using the rate structures expected to be in effect after the CSO improvements
are implemented, rather than assume that the entire cost of controls is spread evenly
across households. This would also allow consideration of the effect which lifeline
rates or low-income assistance programs could have on mitigating impacts.
Providing Advice on "How To Pay" for Environmental Protection
-------
In looking at costs to systems, the FCA Guidance relies on a limited definition of cost that
excludes the impact of certain management strategies such as asset management, proactive cash
flow planning and rate setting strategies, and does not fully consider factors such as investment
timing, population growth, and investment options/terms. Finally, reliance solely on household
cost comparisons may neglect the effect of costs on commercial or industrial customers who in
some instances may be essential to utility financial health.
The FCA guidance currently considers the cumulative impacts of existing wastewater
treatment and proposed CSO control initiatives. EFAB understands the reasons behind this
approach, including the value of considering the impact of CSO implementation in the context of
other water pollution control costs being borne by the community. However, the Board also
recognizes the value of incremental costs in providing more immediate and specific indicators of
financial stress. EFAB therefore recommends that EPA consider both the cumulative impact of
pollution control services as well as the incremental impact of CSO control initiatives.
Finally, the Board urges EPA to revisit the portions of the FCA guidance which discuss
system financial capability and include additional management indicators to better reflect advances
since the document was written in 1997. Areas outlined by the Board for improvements include
debt indicators, bond ratings, socio-economic indicators, and financial management indicators. For
example, unlike operating ratio, property tax collections do not adequately illustrate the ability of
utilities to incur debt and meet future costs.
The Board is prepared to discuss its findings and recommendations with you, answer any
questions you may have, and take any follow-up actions you would like to pursue consistent with
the Board's charter. We greatly appreciate the continuing opportunity to serve the Agency.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
cc: James A. Hanion
Director, Office of Wastewater Management
Cynthia C. Dougherty
Director, Office of Ground Water and Drinking Water
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Jennifer Hermandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
John McCarthy
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Steven Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Report on Innovative Finance Programs for
Air Pollution Reduction
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
November 2007
Printed on Recycled Paper
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United States Environmental Protection Agency
Environmental Financial Advisory Board
Report on Innovative Finance Programs
for Air Pollution Reduction
SUMMARY
The Environmental Financial Advisory Board (the "Board") was originally asked by the Office
of Air and Radiation (OAR) to review the SmartWay retrofit program to determine if any
innovative financing programs could be developed to spur sales of SmartWay kits and thus
reduce the emissions of various oxides of nitrogen (collectively "NOx"), carbon dioxide (COi),
and particulates that attend the various products comprising the kits.
The Board has identified several major innovations that will create significant market incentives
not only for SmartWay Kits, but also for other programs that reduce air emissions from mobile
sources and even other small, stationary sources. The Board recommends that these innovations
be implemented at the State level. There are presently a few states that offer the odd, one-off
grant, loan, or other incentive for these purposes1; but none do so on the order of magnitude or
with the concerted effort that we recommend here. To this end, we propose a major effort by the
Agency to encourage States to create Air Quality Finance Authorities with the power to
introduce these financial innovations. This would be the first major air emission reduction
finance program anywhere in the world that we know of. In short, we recommend:
• States should create Air Quality Finance Authorities (AQFAs), or empower existing
environmental finance authorities to finance certain types of air emission reduction
equipment; or, at least, create a state-wide or regional air emission reduction financing
program.
• State AQFAs should offer long-term, low-rate financing to small private owners of
polluting equipment to upgrade their equipment or, if applicable, to retrofit it to reduce
emissions.
• State AQFAs should be the nominal purchasers of such pollution reduction equipment for
the purpose of achieving volume discounts which can be passed on to end-users. The
equipment can be resold, or leased, to end-users.
• State AQFAs should negotiate fleet fuel discounts on behalf of those companies who use
their programs.
' Grants: CA, PA, WI and TX. Loans: AR, MN. Other: OR.
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EFAB Air Pollution Reduction Incentives Report
Page 2 of 10
• State AQFAs should acquire the rights to the emission reduction credit on each
transaction and use or sell those emission credits to further reduce the cost of the
program.
• EPA should review all of its funding programs which have a nexus to air emissions with
a view to, wherever possible, using them as an incentive to encourage states to take the
above actions.
BACKGROUND AND FINDINGS
The Board has determined that several innovative financing techniques can be used to promote
the SmartWay program. Moreover, we have also determined that the same techniques may be
applicable to a wide variety of other small, stationary emission sources.
The Board's investigations into the SmartWay program found that the real need for innovative
finance lay in dealing with the tens of thousands of small trucking firms that lacked capital and
did not enjoy superior credit ratings. Most of these truckers are locked into a financial regime
with terms so short (3-5 years) and interest rates so high (-14%), that the cost of financing the
kits was only marginally offset by the fuel savings - and only so for extremely long-haul carriers
(125,000+ miles per year). For example, the cost of a SmartWay kit is estimated at $20,100. To
finance this amount for three years at 14% would require an annual payment of $8,657.
Estimated fuel savings of 3,500 gallons per year per tractor (based on a 14% savings on 125,000
miles at 5 miles per gallon) at a cost of $2.50 per gallon would result in fuel cost savings of
$8,750 per year. Thus, a trucker who drove 125,000 miles would save only $92.30 per year.
This means that if the trucker erred on his actual mileage by only 200 miles (0.16%), he would
lose money. This problem is exacerbated when shorter-haul trucks are considered, some of
which drive only 20,000 miles per year. In addition, professional truckers are at least as
skeptical as the average motorist when it comes to believing claims of fuel efficiency. So, the
SmartWay retrofit program has not taken off, as it should have.
(It should be noted that the SmartWay program has pioneered two loan programs. The first, the
SmartWay Loan program, takes advantage of the U.S. Small Business Administration's Business
Express Loan program, offering 12% loans to firms that are 51% owned by women, veterans,
minorities or firms located in certain distressed areas. It has generated about 100 loans to date,
nationwide. The second is the SmartWay Plus Loan program which is offered through
community development banks in Norfolk, Virginia, and New York City.)
The Board then learned of the activities of Cascade Sierra Solutions (CSS), aNon Governmental
Organization (NGO) operating on the West Coast, which, we understand, was created by a grant
from the SmartWay program, and which is "dedicated to saving fuel and reducing emissions
from heavy-duty diesel engines". CSS has developed a program that exploits two additional cost
saving factors. CSS, acting as an agent for the kit manufacturers, sells SmartWay kits directly to
truckers. By aggregating these sales, they are able to achieve volume discounts of 6% on their
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EFAB Air Pollution Reduction Incentives Report
Page 3 of 10
purchases of SmartWay kits2. This volume discount could be passed on to end users to further
enhance the attractiveness of the program. In addition, although their "clients" had no legal
relationships among themselves, their "client" relationship with CSS was sufficient for CSS to
negotiate a fleet fuel discount of 6%. For a 125,000 mile carrier, this results in additional
savings of $3,150 per year (with a SmartWay kit).
It soon became clear to the Board that the genius of CSS's innovation lay in their ability to
synthetically aggregate hundreds of small truckers to avail them of volume discounts.
We then began to further consider the question of the "synthetic aggregation" of small trucking
companies and began to look at ports, where tens of thousands of trucks congregate daily3.
Many ports are run by port authorities, which are units of state or local government.
There are four important conclusions we drew from our investigations of ports. First, port
authorities have the ability to issue bonds. Second, ports, as large stationary sources of air
pollution, have need to reduce emissions not only from their own equipment, but also from
equipment owned by others, such as trucking companies, which are naturally drawn to, and use,
port facilities. Third, because of this overarching interest in reducing air emissions, port
authorities could afford to be less sensitive to credit concerns than are commercial bankers who
have clear fiduciary responsibility for their depositors' and shareholders' funds. For this reason,
port authorities should be more willing to extend the tenor of loans to terms commensurate with
the service lives of air emission reduction facilities financed with their bonds.
Fourth, as a result of this need to reduce emissions in situ, port authorities need emissions
credits. It would, therefore, be very beneficial for ports to assist their trucking clientele to reduce
emissions if the ports themselves could, in turn, get credit for the reductions.
At this stage of our investigations, two other important considerations occurred to us. First, there
are other "non-port" areas (such as truck stops) where the intervention of a government agency
could provide the same benefits. Thus we began to think of new, statewide agencies with
financing authority for air pollution reduction.
Our second, and most important, consideration is that there is a wide universe of air polluters -
both mobile and stationary - who share the same economic profile as do the truckers in the
SmartWay program. These types of entities typically own various kinds of diesel powered
vehicles - stationery equipment, such as cranes, powered by diesel engines; diesel powered
construction equipment, and the like. The characteristics they share are as follows:
1) They are small source polluters.
2) There are literally millions of these small source polluters.
2 CSS does not pass this savings on to their customers, but rather uses it to cover their administrative costs. In this
report, we will recommend that these savings be passed along to SmartWay kit purchasers.
3 The Port of Baltimore, which is 13th in size in the United States, estimates that 2,500 trucks visit their facilities
daily.
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EFAB Air Pollution Reduction Incentives Report
Page 4 of 10
3) They are almost all owned by small private businesses or private owners.
4) They do not have superior credit and, therefore, have limited access to capital.
Our conclusion, in one sentence, is that these small polluters need to be synthetically aggregated
and offered favorable financing terms by State AQFAs as an incentive either to install pollution
reduction equipment, such as SmartWay kits, other air emission reduction equipment, or to
purchase new state-of-the-art low emission engines.
From all of the above investigations, we conclude that a major finance program to advance the
use of SmartWay kits and other air pollution reduction devices could be developed through State
AQFAs or other governmental entities such as port authorities. Specifically, we believe:
l)That State AQFAs and other governmental entities with bonding authority should be
able to issue bonds at favorable rates to finance the acquisition of SmartWay kits or
other mobile-source pollution reduction devices, which can be sold or leased to
trucking companies.
2) That the terms of such bonds can be commensurate with the service lives of the
equipment so financed. In this case, term could be extended from 3 to as much as 10
years, with accompanying dramatic reductions in financing costs4.
3) That such agencies can negotiate volume discounts from the manufacturers of the
components of the kits, and pass along this savings to SmartWay kit purchasers.
4) That such agencies can have their SmartWay kit purchasers collectively designated as
a fleet for the purpose of obtaining fleet discounts for diesel fuel.
5) That such agencies should be allowed to keep for their own account, or trade, the
emission credits attributable to all of the emission reductions from the trucks in their
respective SmartWay fleets.
Below are a few examples of what could be done through State AQFAs.
Example #1 — New low emission trucks
Instead of just a SmartWay kit, let us consider brand new low-emission diesel tractor. Let us say
that the average new, fuel-efficient, environmentally friendly tractor costs $100,000. At
conventional rates for small truckers paying full price for the tractor, it would cost them some
$29,128 per year. If they bought the same truck through a State AQFA with a volume discount,
it would cost the same trucker only $11,096 per year. Add in a fleet fuel discount card and the
cost is lowered even further. The result is a very strong financial incentive for truckers to
modernize their fleets with more fuel efficient models that pollute less.
4 A 10% loan of $1,000 with a three-year term requires an annual payment of $402.11. The same loan, with a 10-
year term, only requires an annual payment of $162.75. A 60% reduction!
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EFAB Air Pollution Reduction Incentives Report
Page 5 of 10
Example #2 — Truck Stops
The characteristic emission problem with truck stops arises from idling. Trucks idle at such
facilities, with their engines on, for as much as 10 hours per day. Each hour they idle consumes
one gallon of fuel.
The alternative to idling is to have an Auxiliary Power Unit (APU) which supplies power to the
cab while the driver sleeps or rests or to use Truck Stop Electrification (TSE). Both APUs and
TSE significantly reduce idling emissions.
Truck stops are largely privately owned. The installation of APUs or TSE depends solely on
whether the manufacturers of these devices can convince truck stop owners to install them. The
manufacturers want to get paid in full as soon as possible. The truck stop owner, if he invests in
APUs or TSE, wants to recover his investment as soon as possible. However, as the fees for
using an on-site APUs or TSE approach the cost of burning fuel for the same period of time
($2.50 per hour), the incentive for drivers to use them disappears.
If, however, a State AQFA were to acquire a non-possessor easement interest in the air rights
over the truck stop from the truck stop owner (for which it would pay the truck stop owner an
annual fee), then the state agency could purchase the APUs or TSE from the manufacturers, and
finance them with low-cost, long-term, bonds and have the manufacturers install and, if
necessary, maintain them. The manufacturer would get paid in full up front. The truck stop
owner would receive additional risk-free annual income from the state. And the State AQFA
would be able to set user fees at substantially lower rates because of the low cost of the
underlying long-term financing.
For example, a truck stop owner would likely want to recover his investment in three years on a
cash-on-cash basis. For every $1,000 of investment he would need to recover $333 per year in
net fees. But with 10-year, taxable bonds at 5%, a state agency would only have to recover $130
per year. Thus there would be much more room to offer truckers savings sufficiently substantial
to induce them to use the APU and avoid the polluting emissions.
Depending on state law, the same result might be achieved by the creation of Air Quality
Improvement Districts; much like the Neighborhood Improvement Districts used in brownfields
reclamations. An Air Quality Improvement District could be created at a truck stop, which
might allow the issuance of bonds to finance the installation of APUs at that site. This could be
done at truck stops all over the State. If there were 10 truck stops in a State that could
accommodate 50 trucks each, the daily fuel savings would be 5,000 gallons or over 1,750,000
gallons per year with commensurate reductions in NOX and COi-
Example #3 - "Drayage Yards"
The second stationary source of mobile emissions that we considered are what might be called -
for lack of a better term - "drayage yards". Drayage, the Board came to learn, has a very
specific meaning in port-related terminology. It refers to trucks that remove containers from
ports and deliver them to marshaling yards a few miles from the port from whence they are
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EFAB Air Pollution Reduction Incentives Report
Page 6 of 10
further disbursed. They also do the reverse, i.e. deliver containers from the yard to the port.
These drayage yards are privately owned and, like ports, are magnets for trucks.
There are two issues regarding drayage yards that need consideration. The first is that, like truck
stops and ports, much idling occurs there. However, there are differences between the idling that
occurs at truck stops and that which occurs at drayage yards. At truck stops, there are a
relatively small number of trucks that idle for long periods of time. These can be dealt with
effectively by stationary APUs that are affixed to each truck parking space. At drayage yards,
the characteristic idling is the converse, i.e., many trucks idling for relatively short periods of
time. This type of idling can best be dealt with by replacing older trucks with newer, cleaner
models. Privately owned drayage yards, however, have no capability of offering the owners of
their older user-trucks any financial incentives to replace them. States, however, could intervene
and create such incentives through AQFAs.
It would certainly be in the interest of a State to reduce such emissions by creating a program to
finance cleaner trucks that use such facilities.5 In this regard, the concepts of an Air Quality
Improvement Easement or an Air Quality Improvement District would be very useful in bringing
the financial power of long-term, bond financing to bear on this problem.
The second issue involving drayage yards deals directly with emission credits.
As previously noted, drayage yards reside only a few miles from the port they serve. Thus, they
will virtually always be in the same airshed as is the port itself. So, too, will be the dray trucks.
They will always be driving and polluting within the same airshed where the port is located.
Ways and means, therefore, need to be developed where a stationary source of mobile emissions,
such as a port (public) or a drayage yard (private), can legally obtain emissions credits from the
owners of the mobile sources whose emission reductions they finance. Ports and State AQFAs
should be able to acquire the emissions credits from the truckers whom they induce to buy
SmartWay kits; newer, cleaner trucks and other pollution reduction devices.
We understand that the Agency has already dealt with this issue at least once in San Diego,
California, where an electric generating utility in need of emission credits purchased a fleet of
sanitation trucks that used natural gas/propane for a privately-owned company that handled solid
waste disposal for the county government. The utility was able to acquire and use the Mobile
source Emission Reduction Credits (MERCs) effected by the new engines. These sanitation
trucks always remained within the county which, in turn, was within the same non-attainment
area as the power plant. In this case, the Agency was able to satisfy itself that such reductions
were "real, quantifiable, federally enforceable, permanent and surplus" within the meaning of the
Clean Air Act. This precedent must be expanded to encourage lower vehicle emissions which
will benefit more non-attainment areas.
We understand the SmartWay program is already cooperating with the ports of Norfolk and New York/New Jersey
on a pilot program similar hereto.
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EFAB Air Pollution Reduction Incentives Report
Page 7 of 10
ADDITIONAL CONSIDERATIONS
Before concluding, we would like to offer some observations on two related matters: the
possible use of tax-exempt bonds and the implementation of the recommendations contained
herein
Tax-exempt Bonds
Tax-exempt bonds are the mainstays of finance programs in the water and wastewater sectors.
This is not the case in the air sector. The reason for this is that most drinking water providers
and wastewater treatment system operators are public entities that can readily issue tax-exempt
bonds for capital projects. Most air polluters, on the other hand, are private, where the issuance
of tax-exempt bonds is awkward and problematic. Tax-exempt bonds issued for the benefit of
private entities are called Private Activity Bonds (PABs).
The discussions above regarding the possible issuance of tax-exempt bonds raise the following
questions: Under what circumstances, if any, could a government agency such as a port
authority, or State AQFA, issue tax-exempt bonds to purchase mobile source air pollution
abatement equipment for sale or lease to private entities?
Based on informal discussions with bond counsel, we believe that tax-exempt PABs cannot be
issued to finance air pollution control devices for private users. There are, however, two small
exceptions. The first is what might be called a de minimis exception: if the PAB is a part of a
larger bond issue and constitutes less that 5% of such issue and is less than $15 million. Thus,
bonds issued for the purposes described herein could be issued as a small part of a larger tax-
exempt bond financing issued for other purposes as long as the amount was below those two
stated thresholds. The large capital programs of ports may avail them of the opportunity to
aggregate air emission financing as part of larger tax-exempt financings while remaining
compliant with these de minimis thresholds.
The second exception appears to be of even more limited applicability. It was created by the
passage of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for
Users, or "SAFETEA-LU", (Pub. L. No. 109-59), which was enacted in 2005. Section 11143 of
this Act added sections 142(a)(15) and 142(m) to the Internal Revenue Code, which authorize up
to $15,000,000,000 of tax-exempt private activity bonds to be issued by State or local
governments for a new type of exempt facility, i.e. "qualified highway or surface freight transfer
facilities". The relevant part of the definition of this term for our purposes is "any surface
transportation project that receives Federal assistance under title 23, United States Code". So, if
one of the programs described above is part of a larger transportation program that is receiving
grants from the U.S. Department of Transportation under title 23 of the U.S. Code, then bonds
issued for that program are eligible for this exception. Included under title 23 (section 149(b))
are qualified highway or surface freight transfer projects that have air quality benefits. These
are projects that are, determined by the Transportation Secretary, after consultation with the EPA
Administrator, "likely to contribute to the attainment of a national ambient air quality standard,
whether through reductions in vehicle miles traveled, fuel consumption, or through other
factors."
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z
^
%
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D,C. 20460
JUL 2 3 2007
OFFICE OF
WATER
MEMORANDUM
SUBJECT: Receipt of EFAB's Review of EPA Document: Combined Sewer
Overflows—Guidance for Financial Capability Assessment and Schedule
Development (1997)
FROM: Benjamin H. Grumbles
Assistant Administrate
TO:
Lyons Gray
Chief Financial Officer
I am writing today to acknowledge receipt of your report summarizing the
Environmental Financial Advisory Board's (EFAB) review of, and comments on, the
above-referenced EPA guidance document.
I would like to thank you and the members of EFAB for your thoughtful review
and analysis of the guidance document. As you know, we are undergoing an assessment
of the guidance, and are considering revising it. Your thoughtful comments and
recommendations will be taken into consideration as part of this assessment.
If you have any questions or comments regarding this guidance, please contact me
or have your staff contact Don Brady at 564-0642.
Internet Address (URL) • httpi//www.epa gov
Recycled/Recyclable • Pnnted with Vegetable Oil Based Irks on 100% Postconsumer. Process Chlonne Free Recycled Paper
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes, Chair
TenyAgriss
Julie Be/aga
John Boland
George Butcher
Donald Cotrell
Michael Cuiiey
Rachel Denting
Pete Domenld
Kelly Dotmard
Haiy Francoeur
Vincent Glrardy
Steve Grossman
Jennifer Hernandez
Keith Binds
Steve Hahfood
Langdon Matsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
Jim Smith
Greg Swam
Sonia Toledo
Jim Tozzi
Billy Turner
Justin W/tlson
APR 17 2007
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
There is a long history of concern over the large shortfalls in infrastructure
investment in the drinking water and clean water sectors. A 2002 EPA report
estimated capital needs of $602 billion over a twenty-year period ending in 2019.'
While this amount may be modest by comparison to the overall U.S. capital
market, it has proven beyond the means of many local government providers of
water services. The same EPA report found that current rates of capital spending
in these sectors would fall short of infrastructure needs by some $224 billion over
the twenty-year period.
The 1986 Tax Reform Act created a new category of bond—the private
activity bond (PAB) - which would be eligible, under certain conditions, for tax
exempt status. The PAB category replaced an earlier provision for similar bonds,
usually known as industrial development bonds (IDBs). The Act also set a
substantially more restrictive limit, or cap, on the total volume of PABs which can
be issued in a given State each year.
In its first-ever Advisory Statement to the Administrator2, this Board
argued that the unified State volume caps were constraining tax-exempt financing
in a way that was limiting the supply and/or increasing the cost of investment
funds for environmental facilities. Accordingly, the Board recommended that
bonds for environmental purposes be either (1) reclassified as government bonds
or (2) specifically exempted from the State volume caps.
This recommendation was repeated several times in various forms during
the following 16 years. In 1999, the Board advocated reclassifying all public-
purpose bonds for water and wastewater projects as tax-exempt government
John Wise
StanMetburg
Designated
Federal Official
\ U.S. Environmental Protection Agency, "The Clean Water and Drinking Water
Infrastructure Gap Analysis," Washington, D.C., September 2002.
2 Environmental Financial Advisory Board, "Incentives for Environmental Investment:
Changing Behavior and Building Capital," U.S. Environmental Protection Agency,
Washington, B.C., August 9,1991.
3 Ibid., pp. 15-16.
Providing Advice on "How To Pay" for Environmental Protection
-------
bonds.4 That same report also recommended a State volume cap exemption for
watershed restoration bonds. In 2001, while addressing the need for increased
participation by the private sector in providing environmental services, the Board
identified the State volume cap on PABs as one of three major barriers.5 At that
time, the Board stated that:
"EPA should support the exemption of private activity bonds from state volume caps,
whose proceeds finance public-purpose drinking water and wastewater facilities."6
It has now come to the attention of the Board that the President's budget for Fiscal Year
2008 includes a proposal that is virtually identical to the Board's 2001 recommendation. If
adopted, the effect would be to exempt, from the unified State volume cap, qualified private
activity bonds (PABs) used to finance the "furnishing of water" and/or "sewage facilities."
The Board continues to support the work of the Clean Water and Drinking Water State
Revolving Funds, believing that they have already made, and will continue to make, a large
contribution to closing the investment gap. However, much more needs to be done.
After reviewing the President's proposal, the Board concludes that its adoption will be
another important step in the effort to finance needed water supply and wastewater infrastructure.
We believe that the proposed exemption will increase the supply of capital for these purposes as
well as lower the cost of capital to many of those communities already making use of private
investment.
The Board expresses its full support for this proposed change in the tax law and is prepared
to assist EPA in any way in its efforts to achieve this.
Sincerely,
A. James Barnes 4/o4/o-i A. StanleyMeiburg
Chair Designated Federal Official
cc: Benjamin Grumbles
Assistant Administrator for Water
Environmental Financial Advisory Board, "Recommendations and Final Report on Financing Opportunities
for the Clean Water Action Plan," U.S. Environmental Protection Agency, Washington, D.C., July 1999, p.
12.
Environmental Financial Advisory Board, "Private Sector Initiatives to Improve Efficiencies in Providing
Public-Purpose Environmental Services," U.S. Environmental Protection Agency, Washington, D.C., June
2001, pp. 6-8.
Ibid., p. 9.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
A. Jane* Butties, Cbair
TezryAgrisa
JoSle Belaga
John Salami
George Butcher
Donald Correil
Michael Cartey
Rachel Demlag
feta Deuaea/d
HeOy Downard
Nftjr Fnacaenr
Stere Grossman
HeiUt Binds
Sta>c HtUifood
Laagdoa Marsh
Ongflasoa
(State Rice
tteieaSahi
AndnsvSavyen
JlmSmttJi
Qngswatx
Santa Toledo
JlatTazzi
Bllty Turner
JasOa OBsoa
John Wise
Stan MeOuay
Designated
Federal Official
MAR 20 2007
Honorable Stephen L. Johnson, Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Re: EFAB Report on the Use of Captive Insurance as Financial Assurance Tool in
Office of Solid Waste and Emergency Response Programs
Dear Administrator Johnson:
At the request of the Agency, the Environmental Financial Advisory
Board (EFAB) has convened a workgroup to address questions concerning the
financial assurance requirements for Office of Solid Waste and Emergency
Response (OSWER) programs. These requirements address closure, post-closure,
corrective action and other aspects of the Resource Conservation and Recovery
Act (RCRA) Subtitle C, D and I programs and also are viewed as guidance with
regard to Superfund response action. On January 11,2006, EFAB submitted to
the Agency its initial findings concerning use of the financial test and corporate
guarantees. We were pleased to receive on February 21,2006, a letter from the
Assistant Administrator of OSWER thanking EFAB for its work and highlighting
elements of our analysis that were of particular assistance. We are grateful for
this prompt and substantive response, which we have taken into account in
approaching the use of captive insurance for financial assurance.
As we noted in our letter of January 11,2006, the financial assurance
requirements and the issues concerning them are complex and multi-faceted. For
this reason, the Board, working with the Agency and other interested
stakeholders, is addressing financial assurance mechanisms in discrete and
manageable pieces, and focusing sequentially on them. The enclosed report on
captive insurance represents a second step in our efforts. We recognize that many
of the issues associated with policies issued by captive insurers are also issues
posed by commercial insurance. While we acknowledge that there could be
benefits in assessing both at the same time, we also found some unique issues
associated with captive insurance that warranted a separate review. In fact, we
found some commonalities with our earlier analysis of the financial test. In
effect, the methods by which a party complies with its financial assurance
requirements fall within a continuum of inherent financial capacity to fulfill
guaranties by unrelated third parties. We expect that commercial insurance will
be the next area of focus. As we complete our review of other aspects of financial
assurance, we will apprise you of our responses to the questions posed by the
Agency along with our findings.
Providing Advice on "Row To Pay" for Environmental Protection
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The Board was charged with addressing three questions regarding captive insurance: (1)
Should there be minimum capitalization requirements for captive or other insurers who provide
policies for financial assurance and, if so, what requirements would best assure funds are
available for protection of the environment, including closure, post-closure, corrective action and
other environmental clean-up?; (2) Should policies written by captives and commercial insurers
be treated as equally acceptable mechanisms?; and (3) Should the language of policies written by
captives differ in any way from those issued by commercial insurers?
In June 2004, EFAB conducted a workshop in New York City which began to explore the
issues raised by the use of several financial assurance mechanisms, including captive insurance.
On June 27,2006, we convened a second workshop in New York City focused exclusively on
captive insurance in which we heard from governmental and financial community
representatives overseeing and evaluating the captive insurance industry, users of captive
insurance, a representative of the EPA Office of the Inspector General, and State government
representatives familiar with the use of captive insurance for RCRA financial assurance. We
received public comment at the meeting, and subsequently have received additional written
comments from business interests and State solid waste management officials.
Our work has been informed throughout by the expertise of government officials willing
to share their extensive knowledge of environmental insurance. In particular, we appreciate the
insights provided by EPA staff in both OSWER and OECA, and State regulators familiar with
the details of both RCRA and Superfund financial assurance requirements and the structure and
operations of the captive insurance industry. The active participation of expert EPA staff and
representatives of five States in extended discussions at the New York City workshop and in
deliberations both before and after the workshop assisted the Board in understanding the nature
of and regulatory structure for captive insurance.
The Board appreciates EPA's continuing support and participation in the development of
this report and the findings contained herein. If the Agency decides to go forward with the
informational materials recommended by the Board, we would be pleased to work with the
Agency or its designees on that effort. Meanwhile, we will continue to gather and analyze
information on additional topics involving financial assurance in order to respond to the full
range of questions EPA has posed to the Board.
We would be pleased to respond to any questions that you may have with regard to
today's report or any other aspect of our on-going deliberations.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
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cc: Susan Parker Bodine, Assistant Administrator, Office of Solid Waste and Emergency
Response
Grant Nakayama, Assistant Administrator, Office of Enforcement and Compliance
Assistance
-------
Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Jennifer Hermandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
John McCarthy
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Steven Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Report on Innovative Finance Programs for
Air Pollution Reduction
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
November 2007
Printed on Recycled Paper
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United States Environmental Protection Agency
Environmental Financial Advisory Board
Report on Innovative Finance Programs
for Air Pollution Reduction
SUMMARY
The Environmental Financial Advisory Board (the "Board") was originally asked by the Office
of Air and Radiation (OAR) to review the SmartWay retrofit program to determine if any
innovative financing programs could be developed to spur sales of SmartWay kits and thus
reduce the emissions of various oxides of nitrogen (collectively "NOx"), carbon dioxide (COi),
and particulates that attend the various products comprising the kits.
The Board has identified several major innovations that will create significant market incentives
not only for SmartWay Kits, but also for other programs that reduce air emissions from mobile
sources and even other small, stationary sources. The Board recommends that these innovations
be implemented at the State level. There are presently a few states that offer the odd, one-off
grant, loan, or other incentive for these purposes1; but none do so on the order of magnitude or
with the concerted effort that we recommend here. To this end, we propose a major effort by the
Agency to encourage States to create Air Quality Finance Authorities with the power to
introduce these financial innovations. This would be the first major air emission reduction
finance program anywhere in the world that we know of. In short, we recommend:
• States should create Air Quality Finance Authorities (AQFAs), or empower existing
environmental finance authorities to finance certain types of air emission reduction
equipment; or, at least, create a state-wide or regional air emission reduction financing
program.
• State AQFAs should offer long-term, low-rate financing to small private owners of
polluting equipment to upgrade their equipment or, if applicable, to retrofit it to reduce
emissions.
• State AQFAs should be the nominal purchasers of such pollution reduction equipment for
the purpose of achieving volume discounts which can be passed on to end-users. The
equipment can be resold, or leased, to end-users.
• State AQFAs should negotiate fleet fuel discounts on behalf of those companies who use
their programs.
' Grants: CA, PA, WI and TX. Loans: AR, MN. Other: OR.
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EFAB Air Pollution Reduction Incentives Report
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• State AQFAs should acquire the rights to the emission reduction credit on each
transaction and use or sell those emission credits to further reduce the cost of the
program.
• EPA should review all of its funding programs which have a nexus to air emissions with
a view to, wherever possible, using them as an incentive to encourage states to take the
above actions.
BACKGROUND AND FINDINGS
The Board has determined that several innovative financing techniques can be used to promote
the SmartWay program. Moreover, we have also determined that the same techniques may be
applicable to a wide variety of other small, stationary emission sources.
The Board's investigations into the SmartWay program found that the real need for innovative
finance lay in dealing with the tens of thousands of small trucking firms that lacked capital and
did not enjoy superior credit ratings. Most of these truckers are locked into a financial regime
with terms so short (3-5 years) and interest rates so high (-14%), that the cost of financing the
kits was only marginally offset by the fuel savings - and only so for extremely long-haul carriers
(125,000+ miles per year). For example, the cost of a SmartWay kit is estimated at $20,100. To
finance this amount for three years at 14% would require an annual payment of $8,657.
Estimated fuel savings of 3,500 gallons per year per tractor (based on a 14% savings on 125,000
miles at 5 miles per gallon) at a cost of $2.50 per gallon would result in fuel cost savings of
$8,750 per year. Thus, a trucker who drove 125,000 miles would save only $92.30 per year.
This means that if the trucker erred on his actual mileage by only 200 miles (0.16%), he would
lose money. This problem is exacerbated when shorter-haul trucks are considered, some of
which drive only 20,000 miles per year. In addition, professional truckers are at least as
skeptical as the average motorist when it comes to believing claims of fuel efficiency. So, the
SmartWay retrofit program has not taken off, as it should have.
(It should be noted that the SmartWay program has pioneered two loan programs. The first, the
SmartWay Loan program, takes advantage of the U.S. Small Business Administration's Business
Express Loan program, offering 12% loans to firms that are 51% owned by women, veterans,
minorities or firms located in certain distressed areas. It has generated about 100 loans to date,
nationwide. The second is the SmartWay Plus Loan program which is offered through
community development banks in Norfolk, Virginia, and New York City.)
The Board then learned of the activities of Cascade Sierra Solutions (CSS), a Non Governmental
Organization (NGO) operating on the West Coast, which, we understand, was created by a grant
from the SmartWay program, and which is "dedicated to saving fuel and reducing emissions
from heavy-duty diesel engines". CSS has developed a program that exploits two additional cost
saving factors. CSS, acting as an agent for the kit manufacturers, sells SmartWay kits directly to
truckers. By aggregating these sales, they are able to achieve volume discounts of 6% on their
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EFAB Air Pollution Reduction Incentives Report
Page 3 of 10
purchases of SmartWay kits2. This volume discount could be passed on to end users to further
enhance the attractiveness of the program. In addition, although their "clients" had no legal
relationships among themselves, their "client" relationship with CSS was sufficient for CSS to
negotiate a fleet fuel discount of 6%. For a 125,000 mile carrier, this results in additional
savings of $3,150 per year (with a SmartWay kit).
It soon became clear to the Board that the genius of CSS's innovation lay in their ability to
synthetically aggregate hundreds of small truckers to avail them of volume discounts.
We then began to further consider the question of the "synthetic aggregation" of small trucking
companies and began to look at ports, where tens of thousands of trucks congregate daily .
Many ports are run by port authorities, which are units of state or local government.
There are four important conclusions we drew from our investigations of ports. First, port
authorities have the ability to issue bonds. Second, ports, as large stationary sources of air
pollution, have need to reduce emissions not only from their own equipment, but also from
equipment owned by others, such as trucking companies, which are naturally drawn to, and use,
port facilities. Third, because of this overarching interest in reducing air emissions, port
authorities could afford to be less sensitive to credit concerns than are commercial bankers who
have clear fiduciary responsibility for their depositors' and shareholders' funds. For this reason,
port authorities should be more willing to extend the tenor of loans to terms commensurate with
the service lives of air emission reduction facilities financed with their bonds.
Fourth, as a result of this need to reduce emissions in situ, port authorities need emissions
credits. It would, therefore, be very beneficial for ports to assist their trucking clientele to reduce
emissions if the ports themselves could, in turn, get credit for the reductions.
At this stage of our investigations, two other important considerations occurred to us. First, there
are other "non-port" areas (such as truck stops) where the intervention of a government agency
could provide the same benefits. Thus we began to think of new, statewide agencies with
financing authority for air pollution reduction.
Our second, and most important, consideration is that there is a wide universe of air polluters -
both mobile and stationary - who share the same economic profile as do the truckers in the
SmartWay program. These types of entities typically own various kinds of diesel powered
vehicles - stationery equipment, such as cranes, powered by diesel engines; diesel powered
construction equipment, and the like. The characteristics they share are as follows:
1) They are small source polluters.
2) There are literally millions of these small source polluters.
2 CSS does not pass this savings on to their customers, but rather uses it to cover their administrative costs. In this
report, we will recommend that these savings be passed along to SmartWay kit purchasers.
3 The Port of Baltimore, which is 13th in size in the United States, estimates that 2,500 trucks visit their facilities
daily.
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EFAB Air Pollution Reduction Incentives Report
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3) They are almost all owned by small private businesses or private owners.
4) They do not have superior credit and, therefore, have limited access to capital.
Our conclusion, in one sentence, is that these small polluters need to be synthetically aggregated
and offered favorable financing terms by State AQFAs as an incentive either to install pollution
reduction equipment, such as SmartWay kits, other air emission reduction equipment, or to
purchase new state-of-the-art low emission engines.
From all of the above investigations, we conclude that a major finance program to advance the
use of SmartWay kits and other air pollution reduction devices could be developed through State
AQFAs or other governmental entities such as port authorities. Specifically, we believe:
l)That State AQFAs and other governmental entities with bonding authority should be
able to issue bonds at favorable rates to finance the acquisition of SmartWay kits or
other mobile-source pollution reduction devices, which can be sold or leased to
trucking companies.
2) That the terms of such bonds can be commensurate with the service lives of the
equipment so financed. In this case, term could be extended from 3 to as much as 10
years, with accompanying dramatic reductions in financing costs4.
3) That such agencies can negotiate volume discounts from the manufacturers of the
components of the kits, and pass along this savings to SmartWay kit purchasers.
4) That such agencies can have their SmartWay kit purchasers collectively designated as
a fleet for the purpose of obtaining fleet discounts for diesel fuel.
5) That such agencies should be allowed to keep for their own account, or trade, the
emission credits attributable to all of the emission reductions from the trucks in their
respective SmartWay fleets.
Below are a few examples of what could be done through State AQFAs.
Example #1 — New low emission trucks
Instead of just a SmartWay kit, let us consider brand new low-emission diesel tractor. Let us say
that the average new, fuel-efficient, environmentally friendly tractor costs $100,000. At
conventional rates for small truckers paying full price for the tractor, it would cost them some
$29,128 per year. If they bought the same truck through a State AQFA with a volume discount,
it would cost the same trucker only $ 11,096 per year. Add in a fleet fuel discount card and the
cost is lowered even further. The result is a very strong financial incentive for truckers to
modernize their fleets with more fuel efficient models that pollute less.
4 A 10% loan of $1,000 with a three-year term requires an annual payment of $402.11. The same loan, with a 10-
year term, only requires an annual payment of $162.75. A 60% reduction!
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EFAB Air Pollution Reduction Incentives Report
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Example #2 — Truck Stops
The characteristic emission problem with truck stops arises from idling. Trucks idle at such
facilities, with their engines on, for as much as 10 hours per day. Each hour they idle consumes
one gallon of fuel.
The alternative to idling is to have an Auxiliary Power Unit (APU) which supplies power to the
cab while the driver sleeps or rests or to use Truck Stop Electrification (TSE). Both APUs and
TSE significantly reduce idling emissions.
Truck stops are largely privately owned. The installation of APUs or TSE depends solely on
whether the manufacturers of these devices can convince truck stop owners to install them. The
manufacturers want to get paid in full as soon as possible. The truck stop owner, if he invests in
APUs or TSE, wants to recover his investment as soon as possible. However, as the fees for
using an on-site APUs or TSE approach the cost of burning fuel for the same period of time
($2.50 per hour), the incentive for drivers to use them disappears.
If, however, a State AQFA were to acquire a non-possessor easement interest in the air rights
over the truck stop from the truck stop owner (for which it would pay the truck stop owner an
annual fee), then the state agency could purchase the APUs or TSE from the manufacturers, and
finance them with low-cost, long-term, bonds and have the manufacturers install and, if
necessary, maintain them. The manufacturer would get paid in full up front. The truck stop
owner would receive additional risk-free annual income from the state. And the State AQFA
would be able to set user fees at substantially lower rates because of the low cost of the
underlying long-term financing.
For example, a truck stop owner would likely want to recover his investment in three years on a
cash-on-cash basis. For every $1,000 of investment he would need to recover $333 per year in
net fees. But with 10-year, taxable bonds at 5%, a state agency would only have to recover $130
per year. Thus there would be much more room to offer truckers savings sufficiently substantial
to induce them to use the APU and avoid the polluting emissions.
Depending on state law, the same result might be achieved by the creation of Air Quality
Improvement Districts; much like the Neighborhood Improvement Districts used in brownfields
reclamations. An Air Quality Improvement District could be created at a truck stop, which
might allow the issuance of bonds to finance the installation of APUs at that site. This could be
done at truck stops all over the State. If there were 10 truck stops in a State that could
accommodate 50 trucks each, the daily fuel savings would be 5,000 gallons or over 1,750,000
gallons per year with commensurate reductions in NOX and COi-
Example #3 - "Drayage Yards"
The second stationary source of mobile emissions that we considered are what might be called -
for lack of a better term - "drayage yards". Drayage, the Board came to learn, has a very
specific meaning in port-related terminology. It refers to trucks that remove containers from
ports and deliver them to marshaling yards a few miles from the port from whence they are
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EFAB Air Pollution Reduction Incentives Report
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further disbursed. They also do the reverse, i.e. deliver containers from the yard to the port.
These drayage yards are privately owned and, like ports, are magnets for trucks.
There are two issues regarding drayage yards that need consideration. The first is that, like truck
stops and ports, much idling occurs there. However, there are differences between the idling that
occurs at truck stops and that which occurs at drayage yards. At truck stops, there are a
relatively small number of trucks that idle for long periods of time. These can be dealt with
effectively by stationary APUs that are affixed to each truck parking space. At drayage yards,
the characteristic idling is the converse, i.e., many trucks idling for relatively short periods of
time. This type of idling can best be dealt with by replacing older trucks with newer, cleaner
models. Privately owned drayage yards, however, have no capability of offering the owners of
their older user-trucks any financial incentives to replace them. States, however, could intervene
and create such incentives through AQFAs.
It would certainly be in the interest of a State to reduce such emissions by creating a program to
finance cleaner trucks that use such facilities.5 In this regard, the concepts of an Air Quality
Improvement Easement or an Air Quality Improvement District would be very useful in bringing
the financial power of long-term, bond financing to bear on this problem.
The second issue involving drayage yards deals directly with emission credits.
As previously noted, drayage yards reside only a few miles from the port they serve. Thus, they
will virtually always be in the same airshed as is the port itself. So, too, will be the dray trucks.
They will always be driving and polluting within the same airshed where the port is located.
Ways and means, therefore, need to be developed where a stationary source of mobile emissions,
such as a port (public) or a drayage yard (private), can legally obtain emissions credits from the
owners of the mobile sources whose emission reductions they finance. Ports and State AQFAs
should be able to acquire the emissions credits from the truckers whom they induce to buy
SmartWay kits; newer, cleaner trucks and other pollution reduction devices.
We understand that the Agency has already dealt with this issue at least once in San Diego,
California, where an electric generating utility in need of emission credits purchased a fleet of
sanitation trucks that used natural gas/propane for a privately-owned company that handled solid
waste disposal for the county government. The utility was able to acquire and use the Mobile
source Emission Reduction Credits (MERCs) effected by the new engines. These sanitation
trucks always remained within the county which, in turn, was within the same non-attainment
area as the power plant. In this case, the Agency was able to satisfy itself that such reductions
were "real, quantifiable, federally enforceable, permanent and surplus" within the meaning of the
Clean Air Act. This precedent must be expanded to encourage lower vehicle emissions which
will benefit more non-attainment areas.
We understand the SmartWay program is already cooperating with the ports of Norfolk and New York/New Jersey
on a pilot program similar hereto.
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EFAB Air Pollution Reduction Incentives Report
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ADDITIONAL CONSIDERATIONS
Before concluding, we would like to offer some observations on two related matters: the
possible use of tax-exempt bonds and the implementation of the recommendations contained
herein
Tax-exempt Bonds
Tax-exempt bonds are the mainstays of finance programs in the water and wastewater sectors.
This is not the case in the air sector. The reason for this is that most drinking water providers
and wastewater treatment system operators are public entities that can readily issue tax-exempt
bonds for capital projects. Most air polluters, on the other hand, are private, where the issuance
of tax-exempt bonds is awkward and problematic. Tax-exempt bonds issued for the benefit of
private entities are called Private Activity Bonds (PABs).
The discussions above regarding the possible issuance of tax-exempt bonds raise the following
questions: Under what circumstances, if any, could a government agency such as a port
authority, or State AQFA, issue tax-exempt bonds to purchase mobile source air pollution
abatement equipment for sale or lease to private entities?
Based on informal discussions with bond counsel, we believe that tax-exempt PABs cannot be
issued to finance air pollution control devices for private users. There are, however, two small
exceptions. The first is what might be called a de minimis exception: if the PAB is a part of a
larger bond issue and constitutes less that 5% of such issue and is less than $15 million. Thus,
bonds issued for the purposes described herein could be issued as a small part of a larger tax-
exempt bond financing issued for other purposes as long as the amount was below those two
stated thresholds. The large capital programs of ports may avail them of the opportunity to
aggregate air emission financing as part of larger tax-exempt financings while remaining
compliant with these de minimis thresholds.
The second exception appears to be of even more limited applicability. It was created by the
passage of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for
Users, or "SAFETEA-LU", (Pub. L. No. 109-59), which was enacted in 2005. Section 11143 of
this Act added sections 142(a)(15) and 142(m) to the Internal Revenue Code, which authorize up
to $15,000,000,000 of tax-exempt private activity bonds to be issued by State or local
governments for a new type of exempt facility, i.e. "qualified highway or surface freight transfer
facilities". The relevant part of the definition of this term for our purposes is "any surface
transportation project that receives Federal assistance under title 23, United States Code". So, if
one of the programs described above is part of a larger transportation program that is receiving
grants from the U.S. Department of Transportation under title 23 of the U.S. Code, then bonds
issued for that program are eligible for this exception. Included under title 23 (section 149(b))
are qualified highway or surface freight transfer projects that have air quality benefits. These
are projects that are, determined by the Transportation Secretary, after consultation with the EPA
Administrator, "likely to contribute to the attainment of a national ambient air quality standard,
whether through reductions in vehicle miles traveled, fuel consumption, or through other
factors."
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EFAB Air Pollution Reduction Incentives Report
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It is apparent that this matter is quite complicated. States should be aware of these exceptions
and seek competent bond counsel to advise them.
In the final analysis, however, if all avenues to tax-exempt bond financing fail, States should be
prepared to issue taxable bonds for the programs described herein. In the current interest rate
environment, a tax-exempt, 10-year bond would yield about 4%; while its taxable counterpart
would yield about 5%. The difference in payment between these two bonds is $123 vs. $130 per
year (per $1,000 financed). This is minimal; whereas the difference between these and the
conventional financing available to most small truckers ($430.73) is many times larger. In
addition, if State AQFAs chose to lease the emission reduction equipment to end-users, they
would be able to aggregate and sell the depreciation benefits of the equipment for tax purposes,
and use the proceeds of such sales to further reduce the cost of the program to the end users. So,
State AQFAs should pursue taxable financing when all else fails.
Implementation
In the course of our investigations, we had informal conversations with officials at two major
ports. When the subject of establishing financing programs for the truckers who use their
facilities came up, it became abundantly clear that the port officials did not see themselves in the
banking business and were very uncomfortable with the thought of entering it, even on a limited
basis. The same sentiment is probably true of state air pollution control agencies that see
themselves as regulators, and certainly not lenders.
That said, the Board believes there are two points to consider. The first is that there are ample
skills in most state governments for mounting private sector lending programs. They are not in
any department that deals with the environment; rather they are in the department of economic
development. Even most large counties have private sector lending programs associated with
their economic development programs. This is a very important point because there will most
certainly be some defaults and delinquencies in any lending program for truckers or other such
small businesses. The agencies that run the State Revolving Fund programs deal largely with
municipal borrowers or public authorities where defaults and delinquencies are very rare. But
the economic developers have appropriate analytical skills to minimize initial credit risks as well
as the skills to manage defaults, foreclosure, repossession and the resale of physical assets.
The second point is that there are alternative strategies for implementing such lending programs.
CSS is a good example. Instead of having a state, or port authority, directly manage an air
quality financing program, they could contract with a NGO such as CSS to manage it for them.
Or, in the final analysis, states could set up linked deposit programs or issue limited loan
guaranties to qualified commercial banks and let them manage these types of lending programs.
Setting up state sponsored programs will require capital commitments. Seed money can be
provided from a number of state sources such as general, economic development or
environmental funds from taxes or fee income. Existing federal programs may also provide a
complement of capitalization dollars to support state efforts.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
25 2007
OFFICE OF
SOUD WASTE AND
EMERQEMCY RESPONSE
Mr. A. James Barnes
Chair, Environmental Financial Advisory Board
United States Environmental Protection Agency
1200 Pennsylvania Avenue NW
Washington, D.C. 20460
Dear Mr. Barnes:
Thank you for your letter of March 20,2007, to Administrator Johnson on the
Environmental Financial Advisory Board's report that explores the use of captive insurance as a
financial assurance tool in the Agency's waste and remediation programs. My staff and I
appreciate all of the work the Board has done on this important topic, and recognize the Board's
consultation with a broad range of interested parties. EPA greatly appreciates the Board's
inclusion of State and EPA staff in many of its meetings on this topic. We find that the Board's
input on captive insurance, as well as other issues, is extremely valuable as we consider moving
forward with improvements to the RCRA financial assurance requirements.
In response to its charge, the Board presented several important findings and
recommendations on captive insurance that the Agency will take under advisement. Consistent
with the Board's findings with regard to the use of the financial test for financial assurance
purposes, the Board found that the use of independent credit analysis is a cost-effective
mechanism for demonstrating the financial strength of a captive insurer. We note that the Board
will also examine the issue of ratings as it looks at commercial insurers.
With respect to the Board's earlier recommendations on the financial test, 1 recently
directed my staff to initiate the Agency's Action Development Process (ADP) to more fully
analyze possible regulatory options concerning the RCRA Subtitle C financial test. By entering
into the ADP, EPA is acknowledging that the current financial test does present a number of
issues that need to be explored. One of the options that will be analyzed through this process is
the recommendation from the Board that EPA include an independent ratings requirement to
Alternative I of the current financial test. Although initiating the ADP is the first step in
pursuing regulatory alternatives, a possible outcome of the process could be to address these
concerns through implementation assistance rather than pursuing regulatory changes.
Internet Address (URL) • http://www.epa.QOV
RaeyclwMfacycMil* • Pnnled w»th Vegetable Oil Based Inks on 100% Poslcoosumer. Process Chlorine Free Recycled Paper
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EPA appreciates the expertise and experience that the Board brings and values the
insights it can provide. EPA looks forward to receiving the findings in response to the other
questions presented to the Board.
Sincerely,
Susan Parker Bodine
Assistant Administrator
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes, Chair
Terry Agrlss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curtey
Rachel Denting
Pete Domenici
Kelly Downard
Mary Francoeur
Vincent Glrardy
Steve Grossman
Jennifer Hernandez
Keith Hinds
Steve Mahfood
Langdon Marsh
Grog Mason
Cherle Rice
Helen Sahl
Andrew Sawyers
Jim Smith
GregSwartz
Sonla Toledo
Jim Tozzl
Billy Turner
Justin Wilson
John Wise
Stan Melburg
Designated
Federal Offlc/a/
JAN 5 2007
Hon. StephenL. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board is pleased to submit the
enclosed report, "Expanding the Definition of SRF Financial Assistance" for
the Agency's consideration and use. This report supports authorizing SRFs to
provide a form of financial assistance to eligible projects that would not
require that invested program equity be yield restricted under IRS arbitrage
regulations. Without the restrictions, SRF programs could earn more interest
and use that money for projects. The perpetuity requirement applicable to
SRFs would remain unchanged.
Under EPA's current SRF regulations, a subsidy can be given to a
borrower in order to provide a below market interest rate on a loan either
made or local debt obligation purchased by the SRF, However, the use of
SRF equity to provide a debt service subsidy triggers the federal arbitrage
restrictions on the investment of SRF program equity. Efforts to obtain relief
from the arbitrage regulations by exempting SRFs from application of the
generally applicable arbitrage rules have not been successful thus far.
The proposed alternative is to permit SRF assistance to eligible
projects for capital or operating costs. Project eligibility would be determined
under the same set of rules as presently exist, so that the kinds of projects
eligible for assistance would not change under this new program. For
example, an SRF could provide assistance (in an amount equivalent to what
would currently be provided as a debt service subsidy) either by funding
construction costs or funding an annual operating subsidy for a project that
receives a market rate SRF financing. The SRF would still have to be
maintained in perpetuity. The effect of the perpetuity requirement is that
whatever the form of the financial assistance (i.e., for debt service, capital or
operating cost of an eligible project), it would have to be provided from
accumulated, current or future earnings on SRF equity.
Providinn Artvir.fi nn "How To Paw" for Environmental Protsction
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By combining a guaranty of borrower debt (or a market rate loan from the SRF to
the borrower or a purchased local debt obligation) with the provision of capital or
operating assistance, there would be no basis under the arbitrage regulations for any yield
restriction of SRF money relating to the provision of that assistance. While the
Department of the Treasury may have some concerns with this approach, we believe this
idea derived from a guaranty approach, creates the possibility of realizing the benefit of
arbitrage relief without the need to change existing IRS regulations.
Rather than requiring a change in or exception to IRS regulations, this approach
allows SRF assistance to be structured in a way that does not trigger the application of the
IRS arbitrage rules. Amendments to Clean Water SRF and Drinking Water SRF
regulations that could be made to implement this concept (with complementary statutory
authority) are offered in this paper.
No significant change in the administration or supervision of the state SRFs
would be required under this approach. Also, this would not change the SRF program
into a traditional "grant" program since the SRF would still be maintained in perpetuity.
However, small communities, in particular, that may have previously been reluctant to
take advantage of the SRF program because of lack of understanding of the benefits of
reduced interest rates may be attracted to the idea of operating subsidies (even though the
net financial impact would be the same). Thus, this programmatic change may have the
collateral benefit of attracting new participants to the SRF program. This would be
especially beneficial because a community that participates in the SRF program is subject
to conditions that move the community toward improved financial management and full-
cost pricing.
The Board appreciates the continuing opportunity to provide financial advisory
assistance to the Agency on issues of national importance.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Executive Director
Enclosure
Ben Grumbles, Assistant Administrator for Water
Lyons Gray, Chief Financial Officer
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Jennifer Hermandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
John McCarthy
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
James Smith
Greg Swartz
Steven Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Report on Innovative Finance Programs for
Air Pollution Reduction
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency; and hence, the views and opinions expressed in the report do
not necessarily represent those of the Agency or any other agencies in the Federal
Government.
November 2007
Printed on Recycled Paper
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Expanding the Definition of SRF Financial Assistance
The goal of the concept discussed herein is to permit SRFs to be managed more
efficiently and provide more funding for SRF-eligible projects. The proposed mechanism
for allowing more efficient operation is to authorize SRFs to provide a form of financial
assistance to eligible projects that would not require that invested program equity be yield
restricted under IRS arbitrage regulations. Without the restrictions, SRF programs could
earn more interest and use that money for projects. The perpetuity requirement
applicable to SRFs would remain unchanged.
Under EPA's current SRF regulations, a subsidy can be given to a borrower in order to
provide a below market interest rate on a loan either made or local debt obligation
purchased by the SRF. However, the use of SRF equity to provide a debt service subsidy
triggers the federal arbitrage restrictions on the investment of SRF program equity.
Efforts to obtain relief from the arbitrage regulations by exempting SRFs from
application of the generally applicable arbitrage rules have not been successful thus far.
The proposed alternative is to permit SRF assistance to eligible projects for capital or
operating costs. Project eligibility would be determined under the same set of rules as
presently exist, so that the kinds of projects eligible for assistance would not change
under this new program. For example, an SRF could provide assistance (in an amount
equivalent to what would currently be provided as a debt service subsidy) either by
funding construction costs or funding an annual operating subsidy for a project that
receives a market rate SRF financing. The SRF would still have to be maintained in
perpetuity. The effect of the perpetuity requirement is that whatever the form of the
financial assistance (i.e., for debt service, capital or operating cost of an eligible project),
it would have to be provided from accumulated, current or future earnings on SRF equity.
By combining a guaranty of borrower debt (or a market rate loan from the SRF to the
borrower or a purchased local debt obligation) with the provision of capital or operating
assistance, there would be no basis under the arbitrage regulations for any yield
restriction of SRF money relating to the provision of that assistance. While the
Department of the Treasury may have some concerns with this approach, we believe this
idea derived from a guaranty approach, creates the possibility of realizing the benefit of
arbitrage relief without the need to change existing IRS regulations.
Rather than requiring a change in or exception to IRS regulations, this approach allows
SRF assistance to be structured in a way that does not trigger the application of the IRS
arbitrage rules. Amendments to CWF and DWF regulations that could be made to
implement this concept (with complementary statutory authority) are attached
hereto.
No significant change in the administration or supervision of the state SRFs would be
required under this approach (although a modest change of interpretation described below
would maximize the benefits of the new approach). Also, this would not change the SRF
program into a traditional "grant" program since the SRF would still be maintained in
Expanding Definition of SRF Financial Assistance
-------
perpetuity. However, small communities, in particular, that may have previously been
reluctant to take advantage of the SRF program because of lack of understanding of the
benefits of reduced interest rates may be attracted to the idea of operating subsidies (even
though the net financial impact would be the same). Thus, this programmatic change
may have the collateral benefit of attracting new participants to the SRF program. This
would be especially beneficial because a community that participates in the SRF program
is subject to conditions that move the community toward improved financial management
and full-cost pricing.
Currently SRFs are permitted to provide assistance in an amount (the "Maximum
Assistance Amount" or "MAA") up to the cumulative retained earnings available at any
time. (In the case of direct loans, the SRF forgoes earnings by making below-market
investments in the form of borrower loans). The decision as to how much of the MAA to
apply currently to provide assistance is made by each state. Each state certifies on an
annual basis that it has not provided assistance in excess of that amount - i.e., that it is in
compliance with the perpetuity requirement. Currently, the portion of the MAA applied
to provide assistance is applied to provide an interest subsidy either:
• By paying down a portion of the interest on bonds used to fund a loan to or
purchase a debt obligation from the borrower or
• By providing financing to the borrower from SRF equity at a below-market
interest rate.
Under the proposed approach, each state SRF would also have the option of applying its
accumulated earnings to fund construction or operating costs rather than to provide an
interest subsidy. The provision of capital assistance would reduce the amount of SRF
financing that the borrower would need for the project. The SRF would also make or
guarantee the market-rate SRF financing (a loan or purchased debt obligation) for the
balance of the borrower's construction costs. In the case of operating assistance, the SRF
would also make or guarantee financing for the construction costs of the project.
The reason that only 40% to 60% of the benefit of arbitrage relief would be obtained
from the provision of capital assistance is that to provide an equivalent amount of capital
assistance, at the outset the SRF would need to pay to the borrower an amount equal to
the present value of the interest subsidy that is currently being provided. If the present
value of the assistance were 40% of the amount of equity allocable to provide the
subsidy, then only 60% of the equity would remain to be invested on an unrestricted
basis. Hence, only 60% of the benefit of arbitrage relief would be achieved.
The payment of up-front capital assistance could raise a potential question of
interpretation of the perpetuity rule. No question is raised to the extent that the capital
assistance is funded from previously accumulated earnings. However, to the extent that
future earnings on the SRF's invested capital will be needed to maintain perpetuity, the
current application of the rule (which looks only at earnings in hand) may limit the use of
this more beneficial approach. This issue could be eliminated by interpreting the
perpetuity requirement to allow SRFs to take into account of:
Expanding Definition of SRF Financial Assistance
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• Expected earnings on existing investments:
K Since the SRF had credit exposure to the investment provider for both
principal and interest, there is no reason to only consider investment
earnings that have already been "earned".
• Projected earnings on invested equity based on reasonable assumptions made by
the SRF:
K To maximize its investment earnings, an SRF may want to adopt a more
innovative investment strategy than locking up its investments for the full
period that it would otherwise have funded loans or purchased
obligations. This should be encouraged by authorizing SRFs to make
reasonable projections of future earnings on reinvestments of its existing
equity.
K Under this approach, the projections would be over the entire period for
which the SRF has outstanding financial assistance in the form of loans,
purchased local debt obligations or guarantees.
Providing operating assistance payable annually for a period equal to what the term of an
SRF financing would be, has the benefit of allowing 100% of the SRF's equity to be
invested on an unrestricted basis. So, the full benefit of arbitrage relief would be
achieved. Also, the current interpretation of the perpetuity rule would not pose any
problem to implementation of this approach. The attached diagrams contrast the cash
flows for an SRF providing operating assistance to the cash flows of an SRF that uses the
reserve model.
For SRFs that currently use the Reserve Fund approach, there would likely be no federal
budgetary impact of the proposal. The amount of borrowing by such SRFs would not
change. Also, while they are currently required to invest at a restricted yield, they have
not complied with such restriction by investing in SLGS (which benefit the US Treasury)
but by investing in other lower yielding investments (from which the US Treasury
derives no benefit). Those programs would modify their structures to look more like the
General Revenue Bond approach adopted by Connecticut or the Subordinate Bonds
approach utilized by New York which would permit unrestricted investment of program
equity if financial assistance were provide for either capital costs of operating expenses.
However, if capital assistance or operating assistance were permitted, SRFs in states (a)
that have to date made only direct loans (i.e., funded from program equity) or (b) that use
a combination of direct financing and bond-funded financing (referred to as the Cash
Flow approach), would be likely to convert to an approach in which SRF financing is
provided from bond proceeds rather than from equity. This could significantly increase
the amount of funding available for clean water and drinking water projects in those
states, but it would also increase the amount of their tax-exempt borrowing. So, there
Expanding Definition of SRF Financial Assistance
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would be budgetary impact relating to the SRFs that use direct loans or the Cash Flow
approach. The budgetary impact would be the same as if arbitrage relief were granted.
Expanding Definition of SRF Financial Assistance
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Proposed Language for CWF and DWF Regulation Amendments
35.3115 Eligible activities of the SRF.
Funds in the SRF shall not be used to provide grants. SRF balances must be available in
perpetuity and must be used solely to provide loans and other authorized forms of financial
assistance:
(a) to municipalities, intermunicipal, interstate, or State agencies for the construction of
publicly owned wastewater treatment works as these are defined in section 212 of the Act and
that appear on the State's priority list developed pursuant to section 216 of the Act; and
(b) for implementation of a nonpoint source pollution control management program
under section 319 of the Act; and
(c) for development and implementation of an estuary conservation and management plan
under section 320 of the Act.
§ 35.3120 Authorized types of assistance.
The SRF may provide seven general types of financial assistance.
(a) Loans. The SRF may award loans at or below market interest rates, or for zero
interest.
(1) Loans may be awarded only if:
(i) all principal and interest payments on loans are credited directly to the SRF;
(ii) the annual repayment of principal and payment of interest begins not later than one
year after project completion;
(iii) the loan is fully amortized not later than twenty years after project completion; and
(iv) each loan recipient establishes one or more dedicated sources of revenue for
repayment of the loan.
(2) Where construction of a treatment works has been phased or segmented, loan
repayment requirements apply to the completion of individual phases or segments.
(b) Refinancing existing debt obligations. The SRF may buy or refinance local debt
obligations at or below market rates, where the initial debt was incurred after March 7,1985, and
building began after that date.
(1) Projects otherwise eligible for refinancing under this section on which building began:
(i) before January 28, 1988 (the effective date of the Initial Guidance for State Revolving
Funds) must meet the requirements of title VI to be fully eligible.
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Proposed Language for CWF and DWF Regulation Amendments
(ii) after January 28, 1988, but before the effective date of this rule, must meet the
requirements of title VI and of the Initial Guidance for State Revolving Funds to be fully
eligible.
(iii) after (effective date of the rule) must meet the requirements of this rule to be fully
eligible.
(2) Where the original debt for a project was in the form of a multi-purpose bond incurred
for purposes in addition to wastewater treatment facility construction, an SRF may provide
refinancing only for eligible purposes, and not for the entire debt.
(c) Guarantee or purchase insurance for local debt obligations. The SRF may guarantee
local debt obligations where such action would improve credit market access or reduce interest
rates. The SRF may also purchase or provide bond insurance to guarantee debt service payment.
(d) Guarantee SRF debt obligations. The SRF may be used as security or as a source of
revenue for the payment of principal and interest on revenue or general obligation bonds issued
by the State provided that the net proceeds of the sale of such bonds are deposited in the SRF.
(e) Loan guarantees for "sub-State revolving funds." The SRF may provide loan
guarantees for similar revolving funds established by municipal or intermunicipal agencies, to
finance activities eligible under title VI.
(f) Earn interest on fund accounts. The SRF may earn interest on Fund accounts. Interest
earned on Fund accounts may be used to provide financial assistance for debt service, capital
expenditures, operations, treatment facilities or be retained to grow SRF balances. Such
assistance may only be provided to support eligible activities, identified in §35.3115, and may
be provided pursuant to or in connection with one of the seven general types of financial
assistance.
(g) SRF administrative expenses.
(1) Money in the SRF may be used for the reasonable costs of administering the SRF,
provided that the amount does not exceed 4 percent of all grant awards received by the SRF.
Expenses of the SRF in excess of the amount permitted under this section must be paid for from
sources outside the SRF.
(2) Allowable administrative costs include all reasonable costs incurred for management
of the SRF program and for management of projects receiving financial assistance from the SRF.
Reasonable costs unique to the SRF, such as costs of servicing loans and issuing debt, SRF
program start-up costs, financial, management, and legal consulting fees, and reimbursement
costs for support services from other State agencies are also allowable.
(3) Unallowable administrative costs include the costs of administering the construction
grant program under section 205(g), permit programs under sections 402 and 404 and Statewide
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Proposed Language for CWF and DWF Regulation Amendments
wastewater management planning programs under section 208(b)(4).
(4) Expenses incurred issuing bonds guaranteed by the SRF, including the costs of
insuring the issue, may be absorbed by the proceeds of the bonds, and need not be charged
against the 4 percent administrative costs ceiling. The net proceeds of those issues must be
deposited in the Fund.
§ 35.3125 Limitations on SRF assistance.
(a) Prevention of double benefit. If the SRF makes a loan in part to finance the
cost of facility planning and preparation of plans, specifications, and estimates for the building of
treatment works and the recipient subsequently receives a grant under section 201(g) for the
building of treatment works and an allowance under section 201(1)(1), the SRF shall ensure that
the recipient will promptly repay the loan to the extent of the allowance.
(b) Assistance for the non-Federal share.
(1) The SRF shall not provide a loan for the non-Federal share of the cost of a treatment
works project for which the recipient is receiving assistance from the EPA under any other
authority.
(2) The SRF may provide authorized financial assistance other than a loan for the
non-Federal share of a treatment works project receiving EPA assistance if the Governor or the
Governor's designee determines that such assistance is necessary to allow the project to proceed.
(3) The SRF may provide loans for subsequent phases, segments, or stages of wastewater
treatment works that previously received grant assistance for earlier phases, segments, or stages
of the same treatment works.
(4) A community that receives a title II construction grant after the community has begun
building with its own financing, may receive SRF assistance to refinance the pre-grant work, in
accordance with the requirements for refinancing set forth under § 35.3120(b) of this part.
(c) Publicly owned portions. The SRF may provide assistance for only the publicly
owned portion of the treatment works.
(d) Private operation. Contractual arrangements for the private operation of a publicly
owned treatment works will not affect the eligibility of the treatment works for SRF financing.
(e) Water quality management planning. The SRF may provide assistance only to
projects that are consistent with any plans developed under sections 205(j), 208, 303(e), 319 and
320 of the Act.
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Proposed Language for CWF and DWF Regulation Amendments
48302 Federal Register / Vol. 65, No. 152 /
Monday, August 7, 2000 / Rules and
Regulations
installation or replacement of transmission and
distribution pipes to improve water pressure to
safe levels or to prevent contamination caused
by leaks or breaks in the pipes.
(iii) Source. Examples of projects include
rehabilitation of wells or development of
eligible sources to replace contaminated
sources.
(iv) Storage. Examples of projects include
installation or upgrade of eligible storage
facilities, including finished water reservoirs, to
prevent microbiological contaminants from
entering a public water system.
(v) Consolidation. Eligible projects are those
needed to consolidate water supplies where, for
example, a supply has become contaminated or
a system is unable to maintain compliance for
technical, financial, or managerial reasons.
(vi) Creation of new systems. Eligible projects
are those that, upon completion, will create a
community water system to address existing
public health problems with serious risks
caused by unsafe drinking water provided by
individual wells or surface water sources.
Eligible projects are also those that create a new
regional community water system by
consolidating existing systems that have
technical, financial, or managerial difficulties.
Projects to address existing public health
problems associated with individual wells or
surface water sources must be limited in scope
to the specific geographic area affected by
contamination. Projects that create new
regional community water systems by
consolidating existing systems must be limited
in scope to the service area of the systems being
consolidated. A project must be a cost-effective
solution to addressing the problem. A State
must ensure that the applicant has given
sufficient public notice to potentially affected
parties and has considered alternative solutions
to addressing the problem. Capacity to serve
future population growth cannot be a substantial
portion of a project.
(c) Eligible project-related costs. In addition to
costs needed for the project itself, the following
project-related costs are eligible for assistance
from the Fund:
(1) Costs for planning and design and
associated pre-project costs. A State that makes
a loan for only planning and design is not
required to provide assistance for completion of
the project.
(2) Costs for the acquisition of land only if
needed for the purposes of locating eligible
project components. The land must be acquired
from a willing seller.
(3) Costs for restructuring systems that are in
significant noncompliance with any national
primary drinking water regulation or variance or
that lack the technical, financial, and managerial
capability to ensure compliance with the
requirements of the Act, unless the systems are
ineligible under paragraph (d)(2) or (d)(3) of
this section.
(d) Ineligible systems. Assistance from the Fund
may not be provided to:
(1) Federally-owned public water systems and
for-pro fit noncommunity water systems.
(2) Systems that lack the technical, financial,
and managerial capability to ensure compliance
with the requirements of the Act, unless the
assistance will ensure compliance and the
owners or operators of the systems agree to
undertake feasible and appropriate changes in
operations to ensure compliance over the long-
term.
(3) Systems that are in significant
noncompliance with any national primary
drinking water regulation or variance, unless:
(i) The purpose of the assistance is to address
the cause of the significant noncompliance and
will ensure that the systems return to
compliance; or
(ii) The purpose of the assistance is unrelated to
the cause of the significant noncompliance and
the systems are on enforcement schedules (for
maximum contaminant level and treatment
technique violations) or have compliance plans
(for monitoring and reporting violations) to
return to compliance.
(e) Ineligible projects. The following projects
are ineligible for assistance from the Fund:
(1) Dams or rehabilitation of dams.
(2) Water rights, except if the water rights are
owned by a system that is being purchased
through consolidation as part of a capacity
development strategy.
(3) Reservoirs or rehabilitation of reservoirs,
except for finished water reservoirs and those
reservoirs that are part of the treatment process
and are on the property where the treatment
facility is located.
(4) Projects needed primarily for fire protection.
(5) Projects needed primarily to serve future
population growth. Projects must be sized only
to accommodate a reasonable amount of
population growth expected to occur over the
useful life of the facility.
(6) Projects that have received assistance from
the national se t-aside for Indian Tribes and
Alaska Native Villages under section 1452(i) of
the Act.
(f) Ineligible project-related costs. The
following project-related costs are ineligible for
assistance from the Fund:
(1) Laboratory fees for routine compliance
monitoring.
(2) Operation and maintenance expenses.
§ 35.3525 Authorized types of assistance
from the Fund.
A State may only provide the following types of
assistance from the Fund:
(a) Loans. (1) A State may make loans at or
below the market interest rate, including zero
interest rate loans. Loans may be awarded only
if:
(i) An assistance recipient begins annual
repayment of principal and interest no later than
one year after project completion. A project is
completed when operations are initiated or are
capable of being initiated.
(ii) A recipient completes loan repayment no
later than 20 years after project completion
except as provided in paragraph (b)(3) of this
section.
(iii) A recipient establishes a dedicated source
of revenue for repayment of the loan which is
consistent with local ordinances and State laws
or, for privately-owned systems, a recipient
demonstrates that there is adequate security to
assure repayment of the loan.
(2) A State may include eligible project
reimbursement costs within loans if:
(i) A system received approval, authorization to
proceed, or any similar action by a State prior to
initiation of project construction and the
construction costs were incurred after such State
action; and
(ii) The project met all of the requirements of
this subpart and was on the State's fundable list,
developed using a priority system approved by
EPA. A project on the comprehensive list which
is funded when a project on the fundable list is
bypassed using the State's bypass procedures in
accordance with § 35.3555(c)(2)(ii) may be
eligible for reimbursement of costs incurred
after the system has been informed that it will
receive funding.
(3) A State may include eligible planning and
design and other associated pre-project costs
within loans regardless of when the costs were
incurred.
(4) All payments of principal and interest on
each loan must be credited to the Fund.
(5) Of the total amount available for assistance
from the Fund each year, a State must make at
least 15 percent available solely for providing
loan assistance to small systems, to the extent
such funds can be obligated for eligible
projects. A State that provides assistance in an
amount that is greater than 15 percent of the
available funds in one year may credit the
excess toward the 15 percent requirement in
future years.
(6) A State may provide incremental assistance
for a project (e.g., for a particularly large,
expensive project) over a period of years.
(b) Assistance to disadvantaged
communities. (1) A State may provide loan
subsidies (e.g., loans which include principal
forgiveness, negative interest rate loans) to
benefit communities meeting the State's
definition of "disadvantaged" or which the
State expects to become "disadvantaged" as a
result of the project. Loan subsidies in the form
of reduced interest rate loans that are at or
above zero percent do not fall under the 30
percent allowance described in paragraph (b)(2)
of this section.
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Proposed
(2) A State may take an amount equal to no
more than 30 percent of the amount of a
particular fiscal year's capitalization grant to
provide loan subsidies to disadvantaged
communities. If a State does not take the entire
30 percent allowance associated with a
particular fiscal year's capitalization grant, it
cannot reserve the authority to take the
remaining balance of the allowance from future
capitalization grants. In addition, a State must:
(i) Indicate in the Intended Use Plan (IUP) the
amount of the allowance it is taking for loan
subsidies;
(ii) Commit capitalization grant and required
State match dollars taken for loan subsidies in
accordance with the binding commitment
requirements in § 35.3550(e); and
(iii) Commit any other dollars (e.g., principal
and interest repayments, investment earnings)
taken for loan subsidies to projects over the
same time period during which binding
commitments are made for the capitalization
grant from which the allowance was taken.
(3) A State may extend the term for a loan to a
disadvantaged community, provided that a
recipient completes loan repayment no later
than 30 years after project completion and the
term of the loan does not exceed the expected
design life of the project.
(c) Refinance or purchase of local debt
obligations.—(1) General. A State may buy or
refinance local debt obligations of municipal,
intermunicipal, or interstate agencies where the
debt obligation was incurred and the project was
initiated after July 1, 1993. Projects must have
met the eligibility requirements under section
1452 of the Act and this subpart to be eligible
for refinancing. Privately-owned systems are
not eligible for refinancing.
(2) Multi-purpose debt. If the original debt for a
project was in the form of a multi-purpose bond
incurred for purposes in addition to eligible
purposes under section 1452 of the Act and this
subpart, a State may provide refinancing only
for the eligible portion of the debt, not the entire
debt.
(3) Refinancing and State match. If a State has
credited repayments of loans made under a pre-
existing State loan program as part of its State
match, the State cannot also refinance the
projects under the DWSRF program. If the State
has already counted certain projects toward its
State match which it now wants to refinance,
the State must provide replacement funds for
the amounts previously credited as match.
(d) Purchase insurance or guarantee for local
debt obligations. A State may provide
assistance by purchasing insurance or
guaranteeing a local debt obligation to improve
credit market access or to reduce interest rates.
Assistance of this type is limited to local debt
obligations that are undertaken to finance
projects eligible for assistance under section
1452 of the Act and this subpart.
(e) Revenue or security for Fund debt
obligations (leveraging). A State may use Fund
assets as a source of revenue or security for the
payment of principal and interest on revenue or
general obligation bonds issued by the State in
order to increase the total amount of funds
available for providing assistance. The net
proceeds of the sale of the bonds must be
deposited into the Fund and must be used for
Language for CWF and DWF Regulation Amendments
providing loans and other assistance to finance
projects eligible under section 1452 of the Act
and this subpart.
(T) Application of interest earned on fund
accounts. Interest earned on fund accounts may
be used to provide financial assistance for debt
service, capital expenditures, operations.
treatment facilities or be retained to grow SRF
balances. Such assistance may only be provided
to support eligible systems, projects and costs
identified in §35.3520 and may be provided
pursuant to or in connection with one of the
eligible types of financial assistance identified
in this Part.
§ 35.3530 Limitations on uses of the Fund.
(a) Earn interest. A State may earn interest on
monies deposited into the Fund prior to
disbursement of assistance (e.g., on reserve
accounts used as security or guarantees).
Monies deposited must not remain in the Fund
primarily to earn interest. Amounts not required
for current obligation or expenditure must be
invested in interest bearing obligations.
(b) Program administration. A State may not
use monies deposited into the Fund to cover its
program administration costs. In addition to
using the funds available from the
administration and technical assistance set-aside
under § 35.3535(b), a State may use the
following methods to cover its program
administration and other program costs.
(1) A State may use the proceeds of bonds
guaranteed by the Fund to absorb expenses
incurred issuing the bonds. The net proceeds of
the bonds must be deposited into the Fund.
(2) A State may assess fees on an assistance
recipient which are paid directly by the recipient
and are not included as principal in a loan as
allowed in paragraph (b)(3) of this section.
These fees, which include interest earned on
fees, must be deposited into the Fund or into an
account outside of the Fund. If the fees are
deposited into the Fund, they are subject to the
authorized uses of the Fund. If the fees are
deposited into an account outside of the Fund,
they must be used for program administration,
other purposes for which capitalization grants
can be awarded under section 1452, State match
under sections 1452(e) and (g)(2) of the Act, or
combined financial administration of the
DWSRF program and CWSRF program Funds
where the programs are administered by the
same State agency.
(3) A State may assess fees on an assistance
recipient which are included as principal in a
loan. These fees, which include interest earned
on fees, must be deposited into the Fund or into
an account outside of the Fund. If the fees are
deposited into the Fund, they are subject to the
authorized uses of the Fund. If the fees are
deposited into an account outside of the Fund,
they must be used for program administration or
other purposes for which capitalization grants
can be awarded under section 1452. Fees
included as principal in a loan cannot be used
for State match under sections 1452(e) and
(g)(2) of the Act or combined financial
administration of the DWSRF program and
CWSRF program Funds. Additionally, fees
included as principal in a loan:
(i) Cannot be assessed on a disadvantaged
community which receives a loan subsidy
provided from the 30 percent allowance in
§ 35.3525(b)(2);
(ii) Cannot cause the effective rate of a loan
(which includes both interest and fees) to
exceed the market rate; and
(iii) Cannot be assessed if the effective
rate of a loan could reasonably be expected to
cause a system to fail to meet the technical,
financial, and managerial capability
requirements under section 1452 of the Act.
(c) Transfers. The Governor of a State, or a
State official acting pursuant to authorization
from the Governor, may transfer an amount
equal to 33 percent of a fiscal year's DWSRF
program capitalization grant to the CWSRF
program or an equivalent amount from the
CWSRF program to the DWSRF program. The
following conditions apply:
(1) When a State initially decides to transfer
funds:
(i) The State's Attorney General, or someone
designated by the AttorneyGeneral, must sign
or concur in a certification for the DWSRF
program and the CWSRF program that State
law permits the State to transfer funds; and
(ii) The Operating Agreements or other parts of
the capitalization grant agreements for the
DWSRF program and the CWSRF program
must be amended to detail the method the State
will use to transfer funds.
(2) A State may not use the transfer provision to
acquire State match for either program or use
transferred funds to secure or repay State match
bonds.
(3) Funds may be transferred after one year has
elapsed since a State established its Fund (i.e.,
one year after the State has received its first
DWSRF program capitalization grant for
projects), and may include an amount equal to
the allowance associated with its fiscal year
1997 capitalization grant.
(4) A State may reserve the authority to transfer
funds in future years.
(5) Funds may be transferred on a net basis
between the DWSRF program and CWSRF
program, provided that the 33 percent transfer
allowance associated with DWSRF program
capitalization grants received is not exceeded.
(6) Funds may not be transferred or reserved
after September 30, 2001.
(d) Cross-collateralization. A State may
combine the Fund assets of the DWSRF
program and CWSRF program as security for
bond issues to enhance the lending capacity of
one or both of the programs. The following
conditions apply:
(1) When a State initially decides to cross-
collateralize:
(i) The State's Attorney General, or someone
designated by the Attorney General, must sign
or concur in a certification for the DWSRF
program and the CWSRF program that State
law permits the State to cross-collateralize
the Fund assets of the DWSRF program
and CWSRF program; and
(ii) The Operating Agreements or other parts of
the capitalization grant agreements for the
DWSRF program and the CWSRF program
must be amended to detail the method the State
will use to cross-collateralize.
(2) The proceeds generated by the issuance of
bonds must be allocated to the purposes of the
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Proposed Language for CWF and DWF Regulation Amendments
DWSRF program and CWSRF program in the
same proportion as the assets from the Funds
that are used as security for the bonds. A State
must demonstrate at the time of bond issuance
that the proportionality requirements have been
or will be met. If a default should occur, and the
Fund assets from one program are used for
debt service in the other program to cure
the default, the security would no longer need to
be proportional.
(3) A State may not combine the Fund assets of
the DWSRF program and the CWSRF program
as security for bond issues to acquire State
match for either program or use the assets of
one program to secure match bonds for the
other program.
(4) The debt service reserves for the DWSRF
program and the CWSRF program must be
accounted for separately.
(5) Loan repayments must be made to the
respective program from which the loan was
made.
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Cash Flows Under Reserve Fund Model
SRF Borrower:
$100 Loan Par
State SRF
7
$50 of Equity De-
Allocated Pro-Rata
as Loan is Repaid
Bond Interest
Allocable to
Borrower Loan: 4%
on Outstanding
Loan Amount
Interest Rate Subsidy
Equal to 2% on
Outstanding Loan
Amount
SRF Equity Equal to
50% of Outstanding
Loan Amount
Invested in DSRF at
4% Bond Yield
-------
Cash Flows Under Revised Model
SRF Borrower:
$100 Loan Par
Gross Interest
Paid by Borrower:
4% on
Outstanding Loan
Amount
Bond Interest
Allocable to
Borrower Loan: 4%
on Outstanding
Loan Amount
\
State SRF
\
\
$50 of Equity
Dedicated to
Funding Operating
Subsidy
Operating Subsidy
Equal to 2% on
Amount
\
/
\
\
\
S
i
\
\
\
f
Net Earnings
on Equity:
0.5% on 50%
of Loan
Balance =
$50*0 5% for
avg life of 12
years
\
S
= $3
$50 of Equity De-
Allocated Pro-Rata
as Loan is Repaid
/
1
1
/
SRF Equity Equal to
50% of Outstanding
Loan Amount
Invested at
Unrestricted Yield o1
4.5%
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
25 2007
OFFICE OF
SOUD WASTE AND
EMERGENCY RESPONSE
Mr. A. James Barnes
Chair, Environmental Financial Advisory Board
United States Environmental Protection Agency
1200 Pennsylvania Avenue NW
Washington, D.C. 20460
Dear Mr. Barnes:
Thank you for your letter of March 20, 2007, to Administrator Johnson on the
Environmental Financial Advisory Board's report that explores the use of captive insurance as a
financial assurance tool in the Agency's waste and remediation programs. My staff and I
appreciate all of the work the Board has done on this important topic, and recognize the Board's
consultation with a broad range of interested parlies. EPA greatly appreciates the Board's
inclusion of State and EPA staff in many of its meetings on this topic. We find that the Board's
input on captive insurance, as well as other issues, is extremely valuable as we consider moving
forward with improvements to the RCRA financial assurance requirements.
fa response to its charge, the Board presented several important findings and
recommendations on captive insurance that the Agency will take under advisement. Consistent
with the Board's findings with regard to the use of the financial test for financial assurance
purposes, the Board found that the use of independent credit analysis is a cost-effective
mechanism for demonstrating the financial strength of a captive insurer. We note that the Board
will also examine the issue of ratings as it looks at commercial insurers.
With respect to the Board's earlier recommendations on the financial test, 1 recently
directed my staff to initiate the Agency's Action Development Process (ADP) to more fully
analyze possible regulatory options concerning the RCRA Subtitle C financial test. By entering
into the ADP, EPA is acknowledging that the current financial test does present a number of
issues that need to be explored. One of the options that will be analyzed through this process is
the recommendation from the Board thai EPA include an independent ratings requirement to
Alternative I of the current financial test. Although initiating the ADP is the first step in
pursuing regulatory alternatives, a possible outcome of the process could be to address these
concerns through implementation assistance rather than pursuing regulatory changes.
Internet Address (URL) • http://wwwepa.gov
Racycled/Ttocyclibto • Pnnlad with Vegetaolo Oil Based Inks on 100% Poslconsvmer. Process CWonne Free Recycled Paper
-------
EPA appreciates the expertise and experience that the Board brings and values the
insights it can provide. EPA looks forward to receiving the findings in response to the other
questions presented to the Board.
Sincerely,
Susan Parker Bodine
Assistant Administrator
-------
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes, Chair
Terry Agriss
Julie Belaga
John Roland
George Butcher
Donald CorreU
Michael Cnriey
Rachel Deming
Pete Dow enid
Kelty Dotenard
Mary Fran coeur
Vincent Oirardy
Steve Grossiuan
Jennifer Hernandez
Keith Binds
Steve Mahfood
Langdon Harsh
Greg Mason
CherieKlce
Helen Sahi
Andrew Sawyers
Jim Smith
GregSwartz
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
Stan fteiburg
Designated
Federal Official
JAN 5 2007
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Ave., N.W.
Washington, D.C. 20460
Dear Administrator Johnson:
The Environmental Financial Advisory Board (EFAB) has created a
workgroup on Non-Point Source to address issues concerning the local capacity to
finance projects and actions needed to implement watershed plans, including
Total Maximum Daily Loads (TMDLs), especially where Federal or State funding
is not available. The workgroup held a roundtable on a variety of issues on
March 9, 2006 in Washington, D.C., funded by EPA's Office of the Chief
Financial Officers and the Office of Wetlands, Oceans and Watersheds. Enclosed
is EFAB's report summarizing the roundtable and providing recommendations for
enhancing sustainable watershed finance.
Commendably, EPA has taken a watershed approach to many of its
programs including planning, infrastructure and public education and information.
It has assisted thousands of watershed groups to develop plans and Implement
projects. It has created programs such as the Targeted Watershed Grants program
to demonstrate important watershed-wide tools such as water quality trading. It
has made the watershed approach one of the pillars of its Sustainable Finance
initiative.
EFAB believes that it also makes sense to address financing issues on a
watershed basis, to take advantage of trading and other opportunities and to focus
on the most important priorities to achieve improved water quality, whether
through traditional infrastructure or improvements to address stormwater or other
nonpoint sources.
Most watersheds that have undertaken planning to meet water quality,
habitat, and other goals face daunting challenges in financing both infrastructure
and other projects and actions needed to achieve goals in a reasonable time frame.
Federal, State, and traditional local funds are usually adequate to cover only the
most urgent priorities and sometimes not even all of those.
Providing Advice on "How To Pay" for Environmental Protection
-------
The report takes that view that, while there are no easy choices, there are a number of current and
developing innovative finance tools that may be used to help fill the gap that watersheds face.
Some of the tools are well established, such water and sewer rate increases and special districts
for flood control and management of septic tanks and stormwater. Others are innovations such
as special purpose financing as in Maryland's Bay Restoration Fund and transfer of development
rights. Potential future tools include payments for and markets in ecosystem and other
intergenerational services.
Critical to the success of any whole watershed financing mechanism will be the choice of
the right collaborative governance approach to reach agreement across multiple jurisdictions and
among government, business, utility, nonprofit and citizen organizations on the best mix of
finance tools to implement the watershed plan or other needed projects. The report recommends
that EPA strongly encourage the use of collaborative approaches to achieving sustainable
watershed finance and educate potential participants in their use.
The recommendations contained in the report urge EPA to further knowledge and
development of whole watershed sustainable finance approaches. In particular, the report urges
EPA to assist in the development and dissemination of innovative finance mechanisms,
collaborative governance approaches, ecosystem services markets and appropriate watershed-
wide implementing entities. To demonstrate some of these recommendations, we recommend
that EPA assist in funding one or more demonstration projects that use a collaborative
governance approach to implement one or more innovative financing mechanisms.
We thank you for the opportunity to present these recommendations and look forward to
your response. We will be glad to answer questions or do further work as you may request.
.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosure
cc: Ben Grumbles, Assistant Administrator for Water
Lyons Gray, Chief Financial Officer
-------
Environmental Financial
Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
Hon. Vincent Girardy
Steve Grossman
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Justin Wilson
John Wise
Sustainable Watershed Finance
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
January 2007
Printed on Recycled Paper
-------
EFAB Sustainable Watershed Finance Report
Executive Summary
The goal of clean water for every use, human and environmental, is a firm and long-standing national
priority. Substantial progress has been made through implementing the Clean Water Act and other
authorities, but much remains to be done. Over 40% of assessed waters do not meet water quality
standards. The causes include failing or inadequate wastewater and septic systems, runoff from
streets, parking lots, factories, lawns, farms, forests and emissions from power plants and vehicles.
Among the obstacles to clean water is the enormous cost of cleaning up existing discharges, restoring
damaged ecosystems and preventing current and future pollution from reaching the nation's waters.
Federal and State grant and loan programs, especially the Clean Water and Safe Drinking Water
Revolving Funds and the various programs under the Farm Bill, coupled with state, local, and private
funding, have gone a long way toward achieving the goal and will play a considerable part in making
future progress. But there is a significant gap between the capacity of those programs and the needs
identified for both wastewater facilities construction and improvement and actions needed to
eliminate or prevent nonpoint sources (NPS) of pollution. It is unlikely that federal or state funding will
fill this gap in an acceptable timeframe, so it will be incumbent on the residents, governments and
businesses in each basin and watershed to finance a significant portion of the costs of necessary actions,
as they have to a considerable extent in the past.
The United States Environmental Protection Agency's (EPA) policies for sustainable infrastructure
finance include full cost pricing and a watershed approach. Many of the challenges to meet water
quality goals, including Total Maximum Daily Load (TMDL) requirements, are best approached from a
watershed perspective, so the analysis of finance needs should incorporate that perspective.
To illuminate the challenging financing issues watershed managers and groups face in closing the
watershed finance gap, a roundtable on Sustainable Watershed Finance was co-hosted by the
Environmental Financial Advisory Board (EFAB) and the Office of Wetlands, Oceans, and
Watersheds (OWOW) in Washington, D.C. on March 9, 2006. The purpose of the roundtable was to
explore some of the key questions that will affect the success of innovative methods for financing
watershed protection and restoration.
Speakers and participants shared perspectives on a variety of issues related to increasing local
capacity to finance needed improvements.
1. Uses of State Revolving Funds and other Federal Programs
The presentations by EPA officials made several points clear:
• Many Federal funding programs support watershed protection;
• The Clean Water State Revolving Fund (SRF) Program and other Federal programs ;
already financing a wide variety of NPS solutions;
are
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There is enormous flexibility in both Clean and Drinking Water SRF's to finance almost any
needed improvements, both point and non-point; but,
There is little likelihood that the SRF's will be capitalized at a high enough level for them to
finance more than the highest priority waste treatment and some non-point infrastructure; and
TMDL allocations under the Clean Water Act will be a strong driver for watersheds to meet water
quality requirements, making financing an increasingly critical need in the coming years.
2. Principles for allocating the costs of watershed improvements among users and
beneficiaries
If there is interest at the local level in raising revenue to finance the costs of. watershed
improvements, there are many complex challenges in fairly and equitably allocating these costs among
the various users and beneficiaries and across jurisdictions, but there are also some sound principles
under which watersheds could raise money through taxes, fees, or other charges in ways that would be
politically acceptable.
Among the principle sources of potential revenue, user fees are generally preferred, because they are
perceived as avoidable, fair, equitable, and efficient. User fees enjoy these advantages, however, only
where there are cost-effective means for excluding non-payers from using the service. Tax options,
including sales, income and ad valorem taxes, benefit assessments and entrance fees all present their
own difficulties.
Sustainable financing of watershed improvements should strive to be fair and equitable, produce
adequate funds, be politically acceptable, provide incentives for efficient fund use and for efficient use of
environmental services and avoid free riders.
Another challenge is finding fairness in determining who should pay, the beneficiaries of better water
quality, those whose activities cause degradation, those who can afford pay, or the general public.
The provision of ecosystem services by watersheds, including clean and sufficient water, waste
absorption capacity, flood control and habitat for native plants and animals can be a basis for
determining the allocation of costs and burdens. Some are more fairly protected by broad based
government programs, while others can be the subject of market or other payments.
Future generations have an intense interest in how we manage watershed resources and ways should be
explored to create a forward market for intergenerational services that would have the lowest life cycle
costs. As a first step, a number of entities are exploring emerging markets for ecosystem services to
serve multiple, environmental, habitat and resource conservation needs. It is likely that
-------
interest in markets and other ways of paying for ecosystem services will increase significantly in the next
few years.
3. Collaborative Governance
The best chance of enacting new or increased charges, taxes or fees is where there is agreement
among the various groups of payers across multiple jurisdictions, sectors and interests. All to be
charged must be represented so they have a chance to negotiate the burdens that will fall on their
constituency. There are examples of collaborative governance approaches that show promise for how
agreements might be reached and implemented. The lessons learned can readily be incorporated into
collaborative approaches needed for sustainable watershed finance. Important components of a
collaborative governance approach are (1) a respected convener to bring people together, (2) a neutral
forum, such as a university center to provide expert assistance to the convener and members of the
collaborative team and (3) a sponsor such as a governor, agency, or alliance of organizations to call for
and support the process.
Some of the practical political considerations that need to be addressed for any successful process are:
Keep it simple and transparent;
Connect the actions needed and their costs to the beneficiaries and those responsible;
Share the financing costs among the broadest possible group of payers;
Incorporate clear lines of accountability;
Seek sources of revenue that are the most sustainable; and
Make sure any new financing mechanism is embraced by key advocacy groups.
4. Innovative Finance and Market Methods
There is a broad and growing variety of innovative finance or market tools that a collaborative local team
may choose among. They include:
Leveraging the funds available through innovative use of SRF's;
Special purpose financing like Maryland's Bay Restoration Fund;
Special district financing, such as septic tank management partnerships and ecosystem service
districts;
Water or wastewater rate increases, like New York City's financing for improving in its reservoirs'
watersheds, and the local utility financing of streamside planting to reduce temperatures in the
Tualatin river in Oregon.
Watershed assessments, allocated on the basis of relative benefits and contributions;
Tax base sharing;
Transfer of development rights, as in the Cuyahoga and Deschutes watersheds;
Tax increment financing, to help pay for land protection programs that benefit watershed health and
increase property values on properties within the watershed;
-------
Integrated services financing, through long term bonds issued by a watershed based utility
to finance infrastructure and other services via the integrated design of a full range of
environmental and other services needed by both present and future generations;
Market based programs, to put together consumers of agricultural and forest products or
ecosystem and restoration services with producers of those products and services; and
Supplemental environmental projects, where in lieu of fine or penalty for an environmental
violation a source could pay into a revolving fund or other mechanism.
See the list of Innovative Finance and Market Methods in Section 5 of the Discussion of Issues
for fuller descriptions of these tools.
5. Potential Implementing Entities
Once there is agreement on who will pay and what type of traditional or innovative finance
mechanism will be used, an entity to issue bonds, collect and distribute revenues, leverage
other sources of funds and accounting to all stakeholders must be designated or established.
Potential entities include water, wastewater or other public utilities, public authorities,
redevelopment districts, special service districts and multi-jurisdictional entities created by
intergovernmental agreements. Selection of the appropriate entity will depend on the functions
that are to be assigned to it. Some of these may be the responsibility of a decision-making, multi-
jurisdictional governance entity and others of an implementing entity.
Recommendations
Expand Knowledge and Foster Use of Collaborative Governance Approaches. EPA should foster
use of collaborative governance approaches for achieving sustainable finance in all watersheds,
using the many forums that EPA hosts or participates in. EPA should disseminate success
stories that demonstrate the use of collaborative governance principles and techniques in
achieving successful financing outcomes.
Disseminate innovative finance tools. EPA should designate an environmental finance center
to maintain a directory of innovative finance and market techniques. EPA and the environmental
finance centers should disseminate information about these successes and model techniques.
Encourage ecosystem services markets. EPA should partner with nn i varsity research centers and
others to determine whether and to what extent ecosystem service values can be used to make
local taxing, fee or other revenue raising systems more equitable, fair and acceptable to payers.
EPA should work with the Department of agriculture and other organizations which are
exploring how to pay for and make markets in ecosystem services to determine how loans and
grants from both agencies can be used to leverage payments for markets in these services.
Leverage existing finance tools. EPA should continue to review its existing superb financing tools under
the Clean and Safe Drinking Water Acts to determine how they might be leveraged with local efforts to
obtain additional funds and markets to help close the funding gap.
-------
Track sustainable finance implementing entities. EPA should, with the assistance of the EFCs and
EFAB, develop a compendium of the potential entities that would be appropriate to implement whole
watershed finance strategies agreed upon.
Initiate demonstration projects. EPA should fund or otherwise assist several watershed scale
demonstration projects that incorporate sustainable finance techniques, and that use collaborative
governance approaches.
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Background
Implementation of the Clean Water Act (CWA) has made tremendous progress since 1972 in
removing billions of tons of pollution, but the nation has a long way to go to meet the CWA's goals. Forty
percent of assessed rivers and streams, 45 percent of assessed lakes and 51% of assessed estuary
square miles do not meet basic water quality standards.
The U.S. Environmental Protection Agency (EPA) and other Federal agencies provide substantial funding
and financing. Safe Drinking Water Act (SDWA) and CWA capital grants for state revolving loan
programs (SRFs) are important sources for local drinking and wastewater infrastructure. Other programs
include the Farm Bill, Section 319 grants for nonpoint source (NPS) pollution and smaller programs, such
as targeted watershed grants. Despite this commitment of Federal dollars and matching or
complementary state contributions, the gap between what funding is available and the overall need is huge
and the cost of addressing polluted runoff and achieving ecological watershed goals is daunting.
According to EPA, NPS pollution remains the nation's largest source of water quality problems and the
main reason that so many of our surveyed rivers, lakes, and estuaries are not clean enough to meet basic
uses such as fishing or swimming. Nevertheless, most of the funding for water quality improvement has
gone to address point sources, given the large capital expenditures needed for treating sewage and
industrial wastes. Since adoption of the Clean Water Act, Congress has appropriated about $70 billion
for investment in clean water infrastructure. State and local governments has invested many billions of
dollars more. Still, it is estimated that, over the next two decades, the United States needs to spend
hundreds of billions of dollars to replace or improve existing wastewater infrastructure systems. While
there is no agreed estimate on the cost of addressing nonpoint sources, it is certain that many additional
billions will also be needed, and, in many watersheds, addressing NPS will be the major cost of restoring
water quality.
Total Maximum Daily Load (TMDL) allocations required for all water bodies not meeting water quality
standards, will be an increasing driver for reducing pollution from both point and nonpoint sources.
Implementation plans devised to meet these allocations will highlight the work remaining to be done to
achieve the nation's water quality goals. These plans have led and will lead to increasing public
expectations that pollution sources be abated and that funding or financing be provided where past
actions, on-going prevention, redesign of systems causing pollution and other avoidance and restoration
activities fail short. It should be noted that there are funding and financing issues related to the collection and
analysis of data for the completion of TMDL allocations. To the extent data is unavailable, it becomes
harder to identify the precise problem that needs financing to solve. Paying for data is traditionally the
role of government, permittees, responsible parties, universities and volunteers. A robust watershed
financing approach will need to include payments for collecting and analyzing data.
At the same time, available funding through EPA for both point and nonpoint sources is in decline. While
the Farm Bill is likely to continue to pay for beneficial improvements to address agricultural nonpoint
sources, Federal and state programs for other nonpoint sources are unlikely to make up the shortfalls.
While a variety of measures have been successful in improving water quality, the
-------
financing gap is a significant barrier to the continued work necessary to maintain and improve our
waterways.
These conclusions are reflected at a regional scale. In the draft report entitled A Strategy to Restore and
Protect the Great Lakes, the President's Great Lakes Regional Collaboration (GLRC) identified over $20
billion in investments necessary to begin work on high priority restoration opportunities in the next five
years, with 85% of the funds dedicated to capital costs. Green infrastructure capital costs, to address non-
point sources and ecosystem restoration, were identified at $1.75 billion and traditional infrastructure capital
costs were identified at $ 18.25 billion. The Great Lakes Protection Fund has found that innovative financing
methods will be required to enable these investments to be made, even assuming that the Federal
Government will contribute as much as $11 billion of the total. The potential needs at the state and local
level total some $9 billion dollars.
Most efforts of watershed managers and groups have been expended on seeking outside grants, loans and other
forms of public and private assistance to pay for the substantial cots of projects needed to achieve watershed
health. These efforts are worthwhile and need to be pursued to the fullest extent, in order to reduce the
burden on local residents.
But even with every state, federal and private funding option employed, it is clear that those responsible
for meeting watershed health goals will need to finance a significant portion of the cost of needed
improvements on their own. With the general public largely resistant to increased taxation, there is a need
to develop innovative market and financing mechanisms that will generate the funds to finance the actions
necessary to improve water quality while maintaining the necessary political support for this effort.
EPA has adopted as one of the four pillars of sustainable water quality infrastructure the idea of full cost
pricing, meaning that local resources will ultimately have to be depended upon to finance needed water
quality improvements, principally through fees and charges. While EPA's policy does not apply to nonpoint
sources, the same logic would dictate that local resources need to be mobilized to pay for or make the
improvements required to meet TMDL's and other watershed health goals.
EFAB Roundtable
To illuminate the challenging financing issues watershed managers and groups face, a roundtable was co-
hosted by the Environmental Financial Advisory Board (EFAB) and the Office of Wetlands, Oceans, and
Watersheds in Washington, D.C. on March 9,2006. The jpurpose of the roundtable was to explore some of the
key questions that will affect the success of innovative methods for financing watershed protection and
restoration.
Among the questions posed to the participants of the Roundtable were:
• What types of new fees and charges or new markets for avoiding polluting activities
are acceptable to the public?
-2-
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• How far can charges like water and sewer fees be raised to pay for more than
traditional/infrastructure investments?
Can charges or markets be effectively and fairly linked to sources and benefits?
Summary of Roundtable
Charge
Diane Regas, Director of EPA's Office of Wetlands, Oceans, and Watersheds (OWOW), charged
the participants to think about how to move forward on implementing watershed plans and
commitments to achieve Clean Water Act and community water quality goals. Financial
mechanisms should be realistic and based on collaboration among stakeholders. What are models
of governance that maximize leveraging at the watershed level? What market-oriented solutions lead
to sustainable approaches? What goods and services can be built into markets to achieve sustainable
financing of watershed goals? How can one build capacity and sustainability into watershed efforts?
She urged participants to maintain the dialogue among all stakeholders; everyone has an interest in
doing this well.
OWOW considers three components essential to sustainable watershed funding: (a) hydrological
focus, (b) collaboration, and (c) a strategic or scientific approach using.a geographic framework for
rational plans and mechanisms to assess progress and adjust actions.
Ms. Regas and James Hanlon, Director of the Office of Wastewater Management, pointed out that
the watershed approach is one of the four pillars of sustainable water infrastructure. Being based on
cooperation among all stakeholders, it allows efficiency and effectiveness not otherwise available
and affords opportunities to both provide critical water services and protect watersheds.
Discussion of Issues
1. Uses of State Revolving Funds and other Federal Programs
The presentations by EPA officials made several points clear:
• Many Federal funding programs support watershed protection;
The Clean Water SRF Program and other Federal programs are already financing
NFS efforts to a significant extent;
There is enormous flexibility in both Clean and Drinking Water Revolving Funds to
finance almost any needed improvements, both point and nonpoint; but,
There is little likelihood that the SRFs will be capitalized at a level for them to
finance more than the highest priority waste treatment and some nonpoint
infrastructure.
-3-
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Georg Ames emphasized that a "community quilt" approach to watershed finance, patching together a variety
of national, state, local and private sources, is likely to be the most successful way to make progress. This
approach allows for the most efficiency in finance as well. Fore example, where an SRF makes a loan to a
municipality that has done a thorough analysis of sources of pollution, it may be far cheaper to achieve
needed load reductions by negotiating with land owners to use best management practices upstream. The
municipality could off-lend to those owners, which will be more cost-effective than upgrading the facility.
This kind of thing is possible through the SRF, but has rarely been done to date.
The SRFs can be used to make investments that leverage additional financing from local sources. For
example, the Safe Drinking Water SRF is capable of providing start up funds for some innovative
watershed market and financing programs in watersheds, through the Source Water Protection Program
Peter Shanaghan, Director, Office of Groundwater and Drinking Water, pointed out that these can be applied
to a variety of activities, including (a) loans to water systems for land/conservation easements to protect
drinking water sources, (b) implementing voluntary, incentive-based source water protection measures, (c)
development of own-source water protection programs to build capacity to implement and oversee
these programs.
He gave examples in Des Moines, Iowa, where a company that runs a drinking water utility collaborates
with agricultural users upstream on controls to lower levels of nitrates in water bodies, and in Illinois, where
a drinking water investor-owned utility had a project with the State to trade upstream sediment control to
allow discharge of solids downstream that reduces twice as much discharges of solids.
Mr. Ames and Stephanie vonFeck of the Office of Wastewater Management stressed TMDL allocations
under the Clean Water Act will be a strong driver for watersheds to meet water quality requirements,
making financing an increasingly critical need in the coming years. TMDLs are accompanied by
implementation plans, which, while not technically required to be implemented, provide a pathway toward
meeting water quality standards and the other goals of the Act There is a compelling role for the use of
financial or market incentives that produce innovative, cost effective approaches to achieving these goals.
2. Principles for allocating the costs of watershed improvements
The presentations of John Boland, Johns Hopkins University; and Josh Farley, Gund Institute for
Ecological Economics, are summarized extensively below both because they point out many of the complex
challenges in fairly and equitably allocating the costs of watershed improvements among the various users
and beneficiaries and across jurisdictions, but also because they suggest some sound principles under
which watersheds could raise money through taxes, fees or other means that would be politically
acceptable.
Mr. Boland pointed out that watershed-level programs are some of the most straightforward, effective,
and efficient means of accomplish ecosystem protection. But they present the most
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complex and challenging means of raising funds needed for ecosystems protection. What is good about
watershed programs also makes them challenging to finance. Watersheds only rarely match political
boundaries; most regulatory and financial institutional arrangements are at the wrong scale or in the wrong
place. Watershed pollution sources are diffuse; responsibility for them cannot easily be established. Free
riders-nonpayers-cannot be excluded from the benefits. Effective ecosystem protection measures may
also conflict with private property rights.
Mr. Boland stated that the objectives of a financing strategy include (s) sufficient resources to carry out the
program, (b) sustainability (current financing strategy should not jeopardize ability to raise enough funds in
the future), (c) efficiency (the financing strategy should promote economic efficiency, (d) equity (equals
are treated equally), (e) fairness (financing method should be regarded as fair by most affected persons), (f)
political acceptability (sufficient political support at all levels to assure implementation), and (g) lack of
perverse incentives (should not encourage free riding and counterproductive action, inefficient uses of
resources, etc.).
Mr. Boland then reviewed several sources: taxes, user fees, and voluntary contributions of money, property,
and services. In general, people like user fees, which are perceived as avoidable; fair, because they are
tied to services rendered; equitable, because they fall only on service receivers; and efficient, because
properly configured they can provide an appropriate incentive for use of the service.
User fees enjoy these advantages, however, only where the associated service is excludable, that is, there are
cost-effective means for excluding nonpayers from using the service. In the absence of excludability, the
user fee becomes a voluntary payment, inviting free riders and eliminating many advantages (efficiency,
equity, and fairness) of this funding source. This is a challenging problem.
Another issue is distinguishing between sources and instruments. "Financing instrument" refers to the
means used to connect monetary sources (the ultimate payers) to sinks (project costs). Financing instruments
can reallocate costs and associated risks over space and time; for example, borrowing reallocates costs
overtime, and broadly based taxes reallocate costs over space. "Financing source" refers to the identity of
the ultimate payers of the cost. Identification of financing source and the choice of a financing instrument
are related decisions, but not identical.
Some tax and fee options:
Broadly based taxes (e.g., sales and income taxes) are inequitable for watershed problems, because
the financing source is different from the beneficiaries, raising resistance and diminishing
incentives for efficient use of funds.
Ad valorem taxes (e.g., special watershed taxing district) require benefit measures for equity and
fairness, but not all benefits accrue to locals, raising resistance and moderately reducing incentives
for efficient use of funds.
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• Benefit assessments'require benefit measures and may correlate well with local benefits, but
not all benefits accrue to locals. The process of setting such an assessment is often
transparent and improves the incentive for efficiency.
• Entrance fees/license fees for recreational services correlate well with benefits, provided
they are limited to recreational services. Funding of other benefits is inequitable and may
be seen as unfair and create pressure to skew improvements to recreation services.
Voluntary options include:
• Cash contributions and property contributions are usually not sufficients sustainable as a
funding source and may be targeted, restricting the scope of improvements.
• In-kind contributions are not sufficient as a funding source, but may build community
support helping sustainability; however, they have limited applicability.
In summary, sustainable financing of watershed improvements must:
• Be fair and equitable (e.g., user fees and voluntary contributions)
• Produce adequate funds (e.g., taxes)
• Be politically acceptable (e.g. user fees and voluntary contributions)
• Provide incentives for efficient funds use (sometimes user fees and Voluntary contributions)
• Provide incentives for efficient use of environmental services (sometimes user fees)
• Avoid free riders (taxes and sometimes user fees)
Josh Farley presented further insights on equitable financing of watershed projects. Approaches
include beneficiary pays, polluter pays, those who can afford pay, and government pays for public
goods, but fairness in these approaches is difficult to determine.
Environmental services often have a wide geographic distribution from local to global. Determining
who benefits according to receipts is very complicated. One example of beneficiaries paying is the
nine million paying customers of the New York City water utility, who are paying for watershed
protection measures by upstream farmers and others. Another is payments by the Costa Rican
government of $70 a year per hectare to certain farmers to protect upstream forests or to allow forests
to regroup. In Colombia, the Colombia-Cauca irrigation cooperative pays upstream landowners to
preserve the watershed.
How much should beneficiaries pay? On the supply side, they should pay as much as they need to
continue supply of those services or the lower limit of upstream landowners' opportunity costs, On
the demand side, the most that beneficiaries are willing to pay is the upper limit of what the benefits
are worth to them. Nature provides services regardless of income; yet, economists try to decide the
value of ecosystem services only in terms of income. One could base it on a democratic principle
of one person, one vote, but most economists use a plutocratic approach of one dollar, one vote.
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The spatial distribution of impacts on watersheds is also broad: impacts may come from afar (e.g., mercury
and acid rain emissions) or locally or regionally (e.g., phosphorous and nitrogen emissions or deforestation).
Direct damage may be caused by such activities as channelization of water bodies or direct point source
emissions. It is difficult, therefore, to implement the "polluter pays" solution. A first step might be to get rid
of perverse subsidies-such as massive subsidies for agricultural production and logging in national forests
and on royalties on fossil fuel extraction-but that is not going to happen very soon.
One example of the polluter pays model is "cap and trade": giving polluters permits to pollute, which they can
trade. On the supply side, price is determined by supply and, therefore, by democratic processes. The
equitability of "cap and trade" raises issues of the equity of revoking property rights and/or privileges. It is
easier to regulate waste absorption capacity, but it is also harder to monitor.
Markets require excludability, and prices require feedback loops. Most ecosystem services, however, are
inherently non-excludable, making direct markets impossible, and have no feedback loops, making
pricing difficult.
Some ecosystems services (e.g., recreation; waste absorption, for which there are an abundance of cap and
trade emission schemes; and structural elements of ecosystems, such as water use rights and tradable
development permits) can be made excludable. It is easier to make unowned waste absorption capacity
excludable than to revoke/change existing property rights.
The less excludable a resource, the more transaction costs and free riding occur. The more transaction
costs, the greater is the efficiency of government intervention. Examples in which natural resources have
been made excludable are all cap and trade schemes (e.g., carbon dioxide markets in Europe) and
charging for use of a resource (e.g., flood control; clean water for non-consumptive uses; recreation,
although congestion can occur; and waste absorption capacity).
Mr. Farley summarized his points on excludability of resources as follows:
• Excludable rival resources (rival resources are exhausted by use) include market goods (e.g.,
irrigation and drinking water, waste absorption capacity of forests and lands) and constitute a
natural area for non-governmental financing.
Non-excludable rival resources include open access regimes (tragedy of the commons), such as waste
absorption capacity (requires governmental regulations to create markets by making the resource
excludable).
Excludable non-rival resources include recreation and patented information, for example, on
pollution control technology (requires government financing).
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Non-excludable non-rival resources include pure public goods, such as information, most
ecosystem services (flood control, clean water for non-consumptive uses) and require
government financing.
Mr. Boland and Mr. Farley also talked about delivering resource to future generations. The challenge in
business is to create a "forward market" for intergenerational services. In addition, there are designs with zero
cost, for example, facing a school to the south to capture solar heat.
Mr. Farley noted that intergenerational financing is difficult How much will future generations pay for long-
term debts incurred today? In addition, all we know about what future generations will want is what we want
now. All we can do is rule out the worst and look at the best possibilities. The only way future generations
will pay is through debt financing, which is perfectly reasonable, when benefits occur over multiple
generations.
Hank Patton of World Steward responded that a powerful way to bring science to answer the question of
what future generations, will want is to use life cycle assessment to assist in determining the full costs of the
things we want today and give bond trustees the ability to determine that future generations would want
those investments that have the lowest life cycle costs.
1. Ecosystem Services Valuation
It was an assumption made in planning the workshop that ecosystem services valuation might play a
significant part in sustainable watershed finance, by helping to adjust feels, charges or taxes to take account of
the differing contributions to problems or benefits received by different stakeholders in the watershed,
especially landowners. While it appears that making these adjustments is theoretically possible and
perhaps could contribute to making needed increases in revenues more palatable to stakeholders, the
complexities arid uncertainties involved at this stage of development of the science make it challenging.
Further research is needed.
Mr. Farley said that, if something is non-excludable like ecosystem services, it might be possible to put a
vlaue on those benefits and create some kind of mechanism to pay for them that is fair and equitable. The
elements of ecosystem structure that create those services are rival and excludable, which allows the
possibility for creating those mechanisms. Many of the benefits are easy to measure. For example, if one
deforests a watershed, new infrastructure costs (e.g., storm water management) will be phenomenal. It is
easy to estimate a huge tax to create that storm water control. Ecosystems tend to provide many services cost-
effectively, there is no constant flow of new money going in.
A number of entities are exploring emerging markets for ecosystem services to serve multiple
environmental, habitat and resource conservation needs. These include universities, private businesses,
nonprofit organizations, and governmental agencies, here and abroad, including the U.S. Department of
Agriculture. The U.S. Forest Service, within that Department, has been especially active in looking for
opportunities for private forest landowners to be paid for conservation activities
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that benefit watersheds while providing income in addition to sustainable tree harvesting. Forest Trends, a
non-profit organization, publishes extensively on the issues and opportunities for markets in ecosystem
services. Projects in Colombia, Costa Rica and elsewhere have brought together municipal water
suppliers, businesses that rely on clean water and forest landowners, who receive payments to protect their
forests rather than exploiting them in ways that damage water quality or availability. In New York, farmers,
forest landowners and municipalities in the upstate watersheds of the City of New York's reservoirs are
receiving payments, investments, and assurances, mostly paid for by the users of the City's water supply
system, in order to protect the water quality of the streams flowing into the reservoirs.
It seems likely that interest in markets and other ways of paying for ecosystem services will increase
significantly in the next few years. EPA, with its long experience in encouraging trading for water quality
improvements and in measuring water quality values through its monitoring and TMDL programs, is
well positioned to participate in both the development and implementation of these markets. The
flexibility afforded by the SRFs and the farm programs provides an enormous opportunity for the Federal
government to leverage markets in ecosystem services, providing avenues for more efficient and effective
means of producing water quality (with significant air quality, habitat and soils benefits), at a great savings to
taxpayers and rate payers, compared to the costs of providing these services through engineered
solutions.
2. Collaborative Governance
One of the hardest aspects about local financing is the difficulty of reaching agreement among the various
groups of payers. Transparency and accountability are very important. There needs to be a sense that the
money to be raised is needed and will be efficiently used to address the highest priorities. Adding to the
challenge is the need to achieve agreement across multiple jurisdictions, sectors, and interests.
The best chance of enacting new or increased charges, taxes or fees is where democracy works best,
that is: all to be charged are represented, have a chance to negotiate the burdens that will fall on their
constituency, have a say in how, when and where any new charges will be implemented, and will not
be surprised by any changes after they have agreed.
Achieving agreement on these issues is hard to do in our fractionated world, but there are some examples
of collaborative governance approaches that show promise for how agreements might be reached and
implemented to assess new or increased charges to pay the financing costs of watershed an related
community improvements.
Greg Wolf, National Policy Consensus Center, talked about how collaborative governance attempts to solve
problems at regional and community levels, such as a watershed, by multiple governmental bodies (Federal,
state, county, city, district, etc.) And non-governmental entities and citizens. A collaborative governance
network consists of a sponsor (leader, agency, community group, business, etc.); a convener (e.g., governor,
legislator, mayor, civic leader, etc.); and a neutral forum (e.g.
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university, civic organization, etc.). Through collaborative governance, sponsors identity and raise an
issue or opportunity and assess which sectors should participate. Leaders convene all stakeholders,
who adopt the collaborative governance system as a working framework for action. Conveners and
participants frame or reframe the issue for further deliberation. The neutral forum designs and conducts a
quality process for participants to negotiate their interests and integrate resources. A written agreement
among all parties establishes accountability and spells out individual and collective actions.
This process is based on transparency and accountability, equity and inclusiveness, effectiveness and
efficiency, responsiveness, forum neutrality, and consensus processes. Not following these
principles could derail the process later. At the regional level, this system creates and determines the
objectives, policies, and kinds of investments needed to solve the problem across jurisdictional and other
lines. At the community level, public, private, nonprofit, and citizen groups leverage resources and
implement the agreed actions as community-based projects.
Mr. Wolf described the example of the Lower Columbia Solutions Group, which was sponsored by the
governors of Oregon and Washington and the Director of the Council on Environmental Quality for
collaborative decision making on sustainable dredge material disposal in the lower Columbia River area,
a source of contention between environmental and industry groups in the two states. A collaborative team
was organized using a respected state legislator as the convener. The effort led to high-level regional
agreements that produced a charter and collaborative governance system to address the issue. Individual
teams reached agreements on specific alternative disposal solutions.
Jeff Edelstein, a Maine facilitator, described the Casco Bay/Sayco Bay Interlocal Stormwater Working
Group, listing the factors for success of the group, including taking a problem based approach, using a
respected convener, providing neutral facilitation, process management, research and technical expertise,
involving all appropriate parties, avoiding excess formality and obtaining adequate seed funding for
the process*
Panelist and participants emphasized that collaborative approaches must be used to solve the
conundrum of having to raise local revenues for needed and often well accepted projects and actions, through
means, like taxes, fees and assessments that are generally politically unpopular. Successful adoption and
implementation of new financing measures are more likely with consensus-based agreements that are
worked out by all affected interests and jurisdictions and implemented fairly and equitably.
Charles Evans, Special Assistant to the Secretary in the Maryland Department of Natural Resources
provided a useful list of some of the practical political considerations that must be satisfied for
adoption of innovative financing at the state level and will have resonance at the local level as well:
• Keep it simple;
Connect the actions needed and their costs to the beneficiaries and those responsible;
• Share the financing costs among the broadest possible group of payers;
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• Seek sources of revenue that are the most sustainable; and,
• Make sure the new financing mechanism is embraced by the environmental and other key
advocacy groups that have the ability to defeat proposed financing measures.
5. Innovative Finance and Market Methods
A collaborative governance team or other entity or group that can make politically achievable
recommendations for raising money to finance watershed improvements or for making markets in
watershed services, has a broad variety of innovative finance or market tools to choose among. And
the listing is growing longer. Following are brief descriptions of some of the more interesting ones
that were discussed at the Roundtable or uncovered by subsequent research.
Leveraging the funds available through innovative use of SRFs
Stephanie vonFeck listed some innovative financing ideas, including:
• A Watershed Revolving Fund (EFABs proposal for an Environmental Revolving Fund could
find application in the watershed context);
• Conduit lending (municipal borrowers from SRF lend to individuals or nonprofits to
undertake projects);
• Sponsorship (user fees for NFS);
Matching SRF loans with other Federal programs (e.g., Clean Water Act 319 nonpoint
source funding and various Farm bill programs);
• State financial management (e.g., very creative arbitrage rebate rules in New York); many
other innovations are "bubbling up" from the states, particularly in Ohio;
• Portfolio financing (funding in stages, phases, and segments); and
• Septic tank management partnerships
Special purpose financing: Maryland's Bay Restoration Fund
Dan Nees, Maryland Environmental Finance Center; Bob Summers, Director for Water Management
AdministrationAin the Maryland DNR, and Charlie Evans described development of Maryland's
"flush fee" as an innovative approach to funding the State's Chesapeake Bay Restoration Fund. A
2000 agreement among the states of Pennsylvania, Maryland, Virginia and the District of Columbia
and later included New York, Delaware, and West Virginia was the original impetus; each state had
agreed to cap load allocations for nitrogen and phosphorus at certain levels. In Maryland, however,
it had not been possible to get a line item in the State's budget for wastewater treatment plants, so
an alternate source of funding was needed.
Funding had to come directly and indirectly from those who contributed to the problem and those
who loved and benefitted from the Bay. An innovative and complicated "flush fee" system was
developed in which Maryland households are charged $2.50/month on sewer bills and each
commercial and industrial user pays an equivalent dwelling unit charge based on wastewater flow.
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Users of septic systems, holding tanks, or other on-site sewage disposal systems pay $30/year, of which
part covered planting of cover crops and upgrades to failing septic systems, providing direct benefits to rural
areas. Funded in this way, the Bay Restoration Fund will allow Maryland to achieve more than one-third of
the necessary additional nutrient reductions by upgrading wastewater treatment plans with enhanced
nutrient removal and on-site sewage disposal systems within 1,000 feet of tidal areas and planting cover
crops on agricultural land.
A key element in eventual acceptance of the flush fee was the large percentage of citizens willing to pay
for perceived services and benefits. Political acceptability Was also gained because the tax was simple,
connected directly to benefits, involved a broad base for collection, and was embraced by the environmental
community, which c6mmunicated the viability of the program to the public.
The Maryland flush fee is unique because it was based on a cooperative, multi-state scientific evaluation
of the water quality benefit and nutrient reduction requirements for the Bay. The enabling legislation received
broad, bi-partisan support; all nutrient-rich wastewater generators are paying the fee, including homeowners;
and it included for the first time a fee paid by owners of on-site sewage disposal systems. A key byproduct of
the process was collaborated created among all State agencies to get the Governor's approval.
The other states who signed the 2000 agreement are not setting up similar fees, because it appeared politically
impossible. These state view Maryland's "flush fee" as a tax they are reluctant to impose and are focusing
on existing programs to reach their agreed goals.
Special district financing. On a watershed level, septic tank management partnerships can be created to
establish a special district that takes over maintenance of decentralized on-site systems so they fail at a
lower rate. James White, Executive Director, Cuyahoga River Remedial Action Plan, proposed that the
Great Lakes and other nationally supported watershed strategies call for mandatory or highly
incentivized, sequential formation of watershed-based stewardship organizations (e.g., watershed
conservancy districts) with authority and capabilities to raise funds. This mechanism would provide equitable
regional benefits on a watershed basis and a non-regulatory structure. There would be an incentive-based
sliding scale for Federal/local matching ratios to increase the motivation to create a local conservancy
district Fund-raising authority would be based on a standard drainage unit for single-family households and
multiples thereof. He termed it the "pizza equivalency", that is, households would pay the equivalent of a
pizza for the family every quarter. This could raise as much as $20 billion in 20 years.
Similarly, Geoffrey Heal of Columbia University and others have proposed to create ecosystem service
districts to improve the efficient provision of watershed services necessary for human welfare, financed
by government programs or local taxes.
A more complex, but perhaps more equitable means of raising money for watershed financing might be a
watershed assessment on all beneficiaries and pollution sources, allocated on the basis of relative benefits
and contributions. The assessment might be increased if there were clear evidence
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of runoff or excess volume of water use attributable to the property or increases in property value
from benefits of upstream improvements, It might be decreased by the value of allocable ecosystem
services or by improvements made from restoration projects and best management practices. The
assessment could be allocated via the property tax or a universal water fee.
Water fees for watershed protection. Several speakers indicated that water fees were among the
most logical sources of new financing for watershed improvements. New York City's landmark
agreement to preserve the ability of the watersheds of its Catskill mountain reservoirs in order to
protect their water quality and avoid multibillion dollar filtration costs was financed by a rate
increase on the nine million users of the City's water system. The increased revenue paid for
improvements in public infrastructure, acquisition of land from willing sellers, and implementing
best practices by farmers and working forest landowners.
Mr. Shanaghan pointed out that if watersheds include drinking water utilities, the utilities will
become strong advocates for watershed protection. Karl Morgenstern described how the Eugene
Water and Electric Board (EWEB) increased water rates to leverage partner contributions and grant
funding for specific projects to address the contributions of agricultural and forest activities,
especially pesticides, and septic systems to water quality degradation in the watershed.
In the Tualatin River watershed in the Willamette Basin, the Oregon Department of Environmental
Quality made water quality trading a part of the local water quality agency, Clean Water
Services'watershed-based NPDES permit to meet temperature standards through paying upstream
owners for stream bank vegetation restoration and other measures that will reduce river temperatures.
The fees for sewage treatment were used for watershed improvements that were more cost effective
than other treatment options.
Tax base sharing. Some form of tax base sharing among neighboring municipalities responsible
for improving water quality of shared watersheds may encourage collaborative planning and
coordinated action. Tax base sharing has the potential to reduce the fiscaf burden that each
municipality must pay for water quality protection, while creating a regional funding stream that may
be more effective in addressing watershed issues. • Noted examples of tax base sharing include the
Twin Cities region in Minnesota and Hackensack Meadows District in New Jersey.
Transfer of Development Rights (TDR). A method of exchange between landowners in designated
areas for development rights and development restrictions, TDR programs create a market for
environmental protection by restricting development in "receiving areas" and requiring that
development rights be purchased from "sending areas". Used often to guide growth away from
sensitive environmental or aesthetic resources, TDRs are in wide use throughout the United States.
Adaptability to the local context is one of the greatest strengths of a TDR program. In Deschutes
County, Oregon, a Transfer of Development Credits program was established with the goal of
reducing the number of septic systems in the sending area and transferring potential development
to a Neighborhood Planning Area. After generating enough credits, a planned subdivision has been
constructed. The program is noted as a success for preventing groundwater pollution, and
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consequent pollution of the Deschutes River. Other ecosystem benefits include protection of wildlife habitat,
lower threat of wildfire and air quality improvements.
Tax Increment Financing (T1F). Often used in Urban Renewal Areas, TIP funds are captured from
increasing property tax values in a specific area and often used to finance public investment. TIP funds
have been used for brownfield remediation projects, sometimes with significant water quality benefits. TEF
has also been used to capture the value created on nearby properties by the public acquisition of open
space for water protection and other ecological purposes. TIP might be used to help pay for land protection
programs that benefit watershed health and increase property values on properties within the watershed.
Integrated services financing. Hank Patton described a new concept for regional or watershed based
financing that would rely on issuing long term bonds through a watershed based utility to finance
infrastructure and other services via the integrated design of a full range of environmental and other services
needed by both present and future generations. Investments contracted for by the utility using the bond
proceeds would be measured by life cycle assessment based standards adopted by the state to assure that the
services are fully sustainable over the long term. Teams of bidders would compete to come up with an
integrated set of services that best fit the standards and the particular needs of the watershed or region.
Debt service and profit for the winning team would come from fees paid by the recipients of the services
provided. Experts and government officials in several states are actively looking at the concept.
Market based programs. Mr. Morgenstem described EWEBs market-based approach on regional
agricultural buyers and processors, where demand exceeds supply. It has established a system that provides
growers easy access to regional markets (increasing efficiency) and support to transition to meet demands.
It seeks to change behaviors through markets to reduce chemical use and protect drinking water. He said
they were developing four marketplaces: food, water, restoration or ecological, and temperature (driven
by TMDLs). For restoration, priority areas are identified in the watershed and restoration early fully funded
for growers in that area. For water and temperature marketplaces, a grower who puts in a more efficient
irrigation system can reap benefits by trading their water right to someone else or by leasing it or, if they
need more water, by trading or paying for someone else or by leasing it or, if they need more water, by trading
or paying for someone else's water right EWEB is looking at trading credits with farmers to develop
riparian habitat and lower temperature in exchange for their discharge.
In the longer term, transactions in these marketplaces could generate small fees that could help pay for the
financing of other watershed improvements.
Supplemental environmental projects. Federal, state and local governments have access to
miscellaneous funds, which in some circumstances can be bleneded with other funds to help finance or write
down the cost of projects. An example is the supplemental environmental project (SEP), a project or
payment for an environmental improvement, in partial reduction of a fine or penalty for an environmental
violation. Instead of going into the Federal, state or municipal treasury, the fluids
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are kept in the community where the violation occurred. There is an increasing interest in using SEPs to
help solve a variety of problems, ranging from environmental justice to renewable energy. While these are
occasional sources, there are many that relate to water quality and could become part of the community quilt
of financing that watersheds need to sew. At present, only between 6% and 15% of environmental
violations lead to SEPs.
6. Potential Implementing Entities
While the structure and powers of watershed implementing entities is crucial to the success of watershed
finance, there was not time for much discussion at the Roundtable. Potential entities include public
authorities, public utility or redevelopment districts, special service districts, intergovernmental
agreements, etc. There will be one or more mechanisms that can be adapted to do the functions that might
be agreed upon by the watershed jurisdictions and interests. Among the functions any entity might have
are the following:
Adopting and updating the watershed plan so that it meets Federal and state
requirements;
• Prioritizing the projects, activities and other steps in the plan;
Identifying and obtaining all available Federal, state and private grants, loans and other
resources to meet the plan's objectives;
• Leveraging or integrating government resources with other investments in the watershed,
for example transportation, housing, economic development, and other infrastructure
investments, and business, volunteer and government activities that affect or can
improve the watershed;
• Identifying the gaps in resources available;
• Agreeing on additional sources of revenues;
• Collecting revenues, issuing financial obligations such as bonds, disbursing or lending
bond receipts, paying bond obligations, etc; and,
• Accounting for and reporting to revenue payers, community at large, and investors.
Some of these maybe the responsibility of a decision making, cross jurisdictional governance entity; others are
more appropriate for an implementing entity and some, like integration of investments, are responsibilities
of both. The governance group could become the board of the implementing entity or could stay separate.
Watershed managers and groups attempting to create a sustainable finance system would benefit from a
detailed analysis of the pros and cons of the different entities with respect to each of these functions.
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Recommendations
1. Expand Knowledge and Foster Use of Collaborative Governance Methods
While recognizing that partnerships must be formed at the watershed level, EPA should foster use
of collaborative governance approaches for achieving sustainable finance in all watershed in the
many forums that EPA hosts or participates in, such as the Watershed Academy, the Environmental
Finance Centers, and other outreach and training programs hosted by others. These tested
approaches are suitable for all financing needs in the watershed, including both wastewater
treatment, stormwater and other nonpoint sources. Knowledge sharing should build on existing
collaborative approaches being used successfully in many watersheds to build agreements on
problems, plans, priorities and projects, adding those elements crucial for success in using local
resources to finance projects or use markets to eliminate problems or substitute good practices.
Existing watershed groups should be encouraged to add parties and use robust governance
approaches to identify to create the financing and marketing techniques appropriate to filling the
funding gap. EPA should collect and disseminate success stories that demonstrate the use of
collaborative governance principles and techniques in achieving successful financing outcomes.
EPA and the Environmental Finance Centers should use outreach and training programs to bring
together parties with normally opposing viewpoints, such as watershed groups and utilities and
encourage them to work together on sustainable finance methods. EPA and its sister Federal
agencies should identify and support neutral forums at universities and elsewhere that will design
and conduct a quality collaborative governance processes for watersheds wishing to use a
collaborative governance approach.
2. Disseminate Innovative Finance Tools
EPA should designate an environmental finance center to maintain a directory of innovative finance
and market techniques that have been successfully employed in watersheds and other contexts or
which have been developed but not actually implemented because of local or other factors. It should
at a minimum include the list of tools from section 5 above. EPA and the environmental finance
centers should disseminate information about these successes and model techniques through the
Academy, a sustainable watershed finance summit, workshops, EFAB Guidbook and tool box,
websites, state-EPA agreements, publications and presentations.
3. Encourage Ecosystem Services Markets
EPA and other Federal agencies should partner with university research centers and NGOs working
on valuing and making markets in ecosystem services to determine whether and to what extent
ecosystem service values can be used to assist in sustainable watershed financing, for example, by
making local revenue raising systems more equitable, fair and acceptable to payers. EPA should
work with the Department of Agriculture and other organizations which are exploring how to pay
for and make markets in ecosystem services to determine how loans and grants from both agencies
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can be used to create payments for and markets in these services. EPA should disseminate
successful examples and promising approaches as suggested in Recommendation 2.
4. Leverage Existing Finance Tools '
EPA should continue to review its existing superb financing tools under the Clean and Safe Drinking
Water Acts to determine how they might be leverage with local efforts to obtain additional funds and
markets to help close the funding gap. Further, it should explore how funding available through
programs such as the Source Water Protection program and the National Estuary Program can be
used to assist the local collaborative efforts needed to develop financing and marketing strategies.
Agreements with other agencies, especially the Department of Agriculture, should be expanded
toward the same end.
5. Identify Sustainable Finance Implementing Entities
EPA should, with the assistance of the EFCs and EFAB, develop a compendium of the potential
entities that would be appropriate to implement the finance strategies agreed upon by the watershed
collaborative governance teams, including factors to evaluate in choosing one or the other. Utilities
that encompass one or more watersheds should be encouraged to develop capacity to finance local
projects to supplement loans and grants available from other sources.
6. Initiate Demonstration Projects
EPA should fund or otherwise assist several watershed scale demonstration proj ects that incorporate
sustainable finance techniques, such as those described in Innovative Finance and Market Methods
above, and that use collaborative methods such as those described in Collaborative Governance,
above. Some existing innovative grant programs, such as Section 319, Brownfields and Targeted
Watershed Grants might be drawn on for this purpose.
While no single model will fit all situations, one or more of the projects might employ the following
model:
• The grantee would use a collaborative governance approach (see Recommendation
#2) to work with existing watershed and other groups and with regional and basin-
wide interests to identify appropriate sponsors, conveners and participants for a team
approach to address the financing and implementation of priority projects in the
watershed. The team would include representatives from existing watershed groups,
utilities the finance sector, business, municipal governments, nonprofit organizations
(e.g., habitat restoration groups, land trusts), state and federal agencies, and
organizations from outside the watershed, as appropriate.
• The grantee would work with political leadership at the State, Federal and local
levels to sponsor the process and appoint a local convener.
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The grantee would assist the convener to appoint members of the team and to hold
meetings to reach agreement on the priority projects to be financed, the innovative finance
tools to be used, the precise geographic areas to be covered and the methods and
implementing entities, public and private to be employed.
The team would also develop agreements on how to leverage their own and outside
resources to create maximum benefit
The project would employ financing information tools like Ptan2Fund™ and the
Directory of Watershed Resources, developed by the EFC at Boise State and modified
for the particular geographic areas as part of the grant
With those tools and others, the grantee would identify all the possible sources of existing
funding and financing to accomplish projects identified in watershed plans and the gap
needing to be filled by innovative, watershed based financing strategies.
The grantee and the collaborative team would attempt to reach agreement on the most
appropriate innovative finance tools to be employed to close the gap (see the partial list in
issue #5, above).
The team would stay in place for as long as needed to assist in implementation of the
agreement, make mid-course corrections, solve implementation problems and oversee
the evaluation of the project.
Reports at each stage and progress conferences with all the grantees and others pursuing
similar strategies would foster learning and develop best practices.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
a WASHINGTON, D.C. 20460
g
*"*** MAR 1 2007
OFFICE OF
WATER
Mr. A. Stanley Meiburg
National EPA Liaison
Centers for Disease Control and Prevention
1800 Clifton Road, N.E. - MS E-28
Atlanta, GA 30333
Dear M
Mgibtlrg:
Thank you for your letter of January 5, 2007, to the Environmental Protection
Agency (EPA). Your letter included the Environmental Finance Advisory Board's
(EFAB) report, "Sustainable Watershed Finance," that summarized its Sustainable
Watershed Finance Roundtable held in March 2006. One of the central questions that the
Agency faces is how to finance watershed protection and restoration efforts. Your work
has brought together some of the best minds to help advance our thinking on innovative
watershed finance solutions.
Before turning to your recommendations to EPA included in the report, I want to
express EPA's continued commitment to developing innovative mechanisms to fund
watershed protection and restoration. EPA continues its investment in the Clean Water
and Drinking Water State Revolving Funds. In recent years, the Clean Water State
Revolving Fund (CWSRF) program has provided about four billion dollars annually to
fund water quality protection projects for wastewater treatment, non-point source
pollution control, and watershed management. The Office of the Chief Financial
Officer's (OCFO) Environmental Finance Program, the Environmental Finance Center
Network (EFC), and the Office of Wetlands, Oceans, and Watersheds' (OWOW)
Sustainable Finance Team have conducted finance workshops, developed funding
databases, and produced finance planning tools to build the capacity of State, Tribal, and
other watershed organizations to develop innovative finance mechanisms.
In 2007, several activities are planned that will disseminate watershed finance
tools to key stakeholders. EPA will sponsor "Paying for Sustainable Water
Infrastructure," an unprecedented meeting that will bring together stakeholders from all
levels of government and the private sector to explore creative methods to finance
sustainable water infrastructure. EPA, along with the University of Maryland
Environmental Finance Center, will conduct a national web cast on innovative finance
tools to educate State/Tribal and Local governments about available resources to reduce
Internet Address (URL) • WIp^Awww.epa gov
Recycla
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stormwater runoff and implement other watershed protection and restoration measures.
EPA will also launch "Developing a Sustainable Fundraising Plan," an Internet-based
tool to teach watershed groups successful finance planning methods. Finally, EPA will
produce an on-line prioritization tool that will help public and private watershed
organizations decide what activities are in the greatest need of funding.
With regard to the specific recommendations contained in the EFAB report, my
responses follow.
• EFAB Recommendation #J: Expand Knowledge and Foster Use of Collaborative
Governance Approaches. EPA should foster the use of collaborative governance
approaches for achieving sustainable finance in all watersheds, using the many
forums that EPA hosts or participates in. EPA should disseminate success stories
that demonstrate the use of collaborative governance principles and techniques in
achieving successful financing outcomes.
EPA Response: Through its National Estuary Program, Targeted Watershed
Grants, and other programs, EPA has fostered collaborative governance as an
approach to environmental protection and restoration. The flexible and
collaborative nature of these programs has allowed them to develop many
innovative approaches to complex problems. EPA will promote cooperative
approaches to watershed finance at its forums, such as the upcoming Paying for
Sustainable Waters Infrastructure conference.
• EFAB Recommendation #2; Disseminate Innovative Finance tools. EPA should
designate an environmental finance center to maintain a directory of innovative
finance and market techniques. EPA and the environmental finance centers
should disseminate information about these successes and model techniques.
EPA Response: EPA agrees that providing a single repository of accessible
information on innovative watershed finance and market techniques makes sense.
EPA will explore this idea, including where such a repository of information
should be located. As you know, the OCFO Environmental Finance Program
already has a website with a compendium of environmental finance tools. This
website could be enhanced to include new collaborative watershed finance tools.
• Recommendation #3: Encourage Ecosystem Services Markets. EPA should
partner with university research centers and others to determine whether and to
what extent ecosystem service values can be used to make local taxing, fee or
other revenue raising systems more equitable, fair and acceptable to payers. EPA
should work with the Department of Agriculture and other organizations which
are exploring how to pay for and make markets in ecosystem services to
determine how loans and grants from both agencies can be used to leverage
payments for markets in these services.
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EPA Response: EPA agrees that ecosystem markets should be explored as a
means to achieving cost-effective solutions to water pollution challenges. For
example, EPA's Clean Water State Revolving Loan Fund and National Estuary
Programs worked together to help the City of Port Townsend, Washington meet
its storm water management objectives by purchasing wetlands that protect a
natural storm water management system as well as a wildlife refuge. EPA will
explore partnering with universities and federal agencies to further advance
ecosystem services markets in the future.
• Recommendation #4: Leverage Existing Finance Tools. EPA should continue to
review its existing superb financing tools under the Clean and Safe Drinking
Water Acts to determine how they might be leveraged with local efforts to obtain
additional funds and markets to help close the funding gap.
EPA Response: EPA will continue promoting innovative uses of its State
Revolving Loan Funds (SRFs) to extend fund resources to achieve the greatest
possible environmental results. New approaches to leveraging the SRFs will be
disseminated through conferences and other venues, as well as OWOW's finance
website. For example, EPA recognizes Clean Water SRF innovations that advance
EPA goals of performance and water quality protection through its annual
Performance and Innovation in the SRF Creating Environmental Success
(PISCES) Awards. The PISCES Awards acknowledge and promote innovative
projects that increase the sustainability of wastewater infrastructure across the
nation. Likewise, EPA's Drinking Water SRF provides awards for sustainable
public health protection. These awards recognize innovative uses of the fund that
have resulted in source water protection and system capacity building.
• Recommendation #5: Track Sustainable Finance Implementing Entities. EPA
should, with the assistance of the EFC's and EFAB, develop a compendium of the
potential entities that would be appropriate to implement whole watershed finance
strategies agreed upon.
EPA Response: EPA will explore working with EFAB and the EFCs to develop a
compendium of entities which would be appropriate to implement watershed
finance strategies.
• Recommendation #6: Initiate Demonstration Projects. EPA should fund or
otherwise assist several watershed-scale demonstration projects that incorporate
sustainable finance techniques, and that use collaborative governance approaches.
EPA Response: As it develops its workplans and grant RFPs in the future,
EPA will consider how the Agency can fund or otherwise support watershed-scale
demonstration projects that incorporate sustainable finance techniques and that
use collaborative governance approaches.
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I appreciate EFAB's Non-Point Source Financing Workgroup's efforts to foster
innovative watershed finance solutions. I welcome any additional thoughts about my
responses to your recommendations or liPA's role in fostering sustainable watershed
financing. If you have any questions, please contact me or have your staff call
Craig Hooks, Director, Office of Wetlands, Oceans and Watersheds, at (202) 566-1146.
Sincerely,
Benjamin H. Grumbles
Assistant Administrator
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ENVIRONMENTAL FINANCE CENTER NETWORK
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NEW ENGLAND ENVIRONMENTAL FINANCE CENTER
AT THE UNIVERSITY OF SOUTHERN MAINE
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
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BACKGROUND & SUMMARY
England
Environmental
Finance Center
The New England Environmental Finance Center at
the University of Southern Maine (New England
EFC) primarily serves the six states of the U.S.
Environmental Protection Agency's (EPA's) Region 1: Maine,
New Hampshire, Vermont, Massachusetts, Rhode Island, and
Connecticut. The purpose of the New England EFC is to fur-
ther the joint goals of EPA and the Muskie School of extend-
ing creative approaches to environmental protection and
management, especially respecting the associated "how-to-pay"
questions. In particular, the center works to advance the under-
standing and practice of smart growth throughout New
England; to build local capacity to handle related issues; and to
develop and apply techniques that go beyond compliance with
government regulations. Recent programs of the center are
additionally focusing on local approaches to mitigating and
adapting to the challenges of global climate change.
Through 2007, the New England EFC accomplished the
following:
Developed new products about water infrastructure forecast-
ing, low-impact development, futures scenarios, smart
growth leadership, and other areas.
Completed work with the Maine Governor's Steering
Committee to Implement Recommendations on Maine's
Natural Resource-Based Industries. Oversaw significant
progress in implementation of more than 95 percent of the
recommendations for action.
Completed the first phase of work in chairing the Maine
Governor's Council on Maine's quality of place, including
release of a new Action Plan to Promote Sustainable Prosperity
and Quality Places.
Completed the launch of new initiatives to help local com-
munities mitigate and adapt to global climate change.
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Completed Projects & Initiatives
Low-Impact Development Assistance
The center completed several low-impact development (LID)-
related programs in 2007, with a focus on overcoming financial
and other barriers to widespread use of the approach. For exam-
ple, an LID fact sheet, Promoting Low Impact Development in
Your Community, is now available, aimed at promoting basic
understanding of the approach and overcoming local barriers to
implementation. It includes a short introduction to the approach,
and two "Top 5" lists for promoting LID in communities: one
focused on general efforts and one focused on revising local land
use regulations. A compendium of Selected LID Projects in New
England is also available.
Water Infrastructure Forecasting
At the request of the state of New Hampshire, the New England
EFC conducted a detailed evaluation of water infrastructure
forecasting methods and needs, tailored to New Hampshire's
specific financial context. The New England EFC conducted lit-
erature reviews and customized financial analysis for top-down
and bottom-up methods of water infrastructure forecasting. The
New England EFC provided recommendations about options
available to state officials, including sets of pros and cons for var-
ious approaches they might take, and immediate next steps.
Futures Scenarios
Scenario planning has been described as the art of storytelling
applied to the future. It is a method for learning about the
future by understanding the nature and impact of the most
uncertain and important driving forces affecting the future. It is
usually a group process that encourages exchanging knowledge
and developing mutual understanding of the central issues
important to the future of a town, region, or business. The
approach involves crafting a number of diverging stories by
extrapolating uncertain and heavily influencing driving forces.
THROUGH 2OO7,THE NEW ENGLAND
EFC...
Completed three new case studies on Smart
Growth Leadership.
Produced six new publications on a range of
topic areas.
* Oversaw implementation of more than 70
recommendations for the state of Maine to
preserve its natural resource-based industries.
The stories have the dual purpose of increasing knowledge and
widening the observers' perceptions of possible future events.
In 2007, the New England EFC produced a report evaluating
whether scenario planning with film would be helpful in New
England. For parties that might raise or contribute funds to sup-
port this type of initiative, the paper takes some necessary first
steps of considering 1) possible approaches to structuring the
first several scenarios, 2) possible content, 3) appropriate geo-
graphic scale(s) to be represented, 4) potential audiences, and 5)
likely costs and administration.
Members of the New England EFC discussing steps needed to address a
New England policy matter.
NEW ENGLAND EFC AT THE UNIVERSITY OF SOUTHERN MAINE
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ACTIVITIES & ACCOMPLISHMENTS
Sam Merrill,
Director of the New
England EFC.
Smart Growth Leadership
In 2007, the New England EFC complet-
ed three new case studies documenting
smart growth efforts in Portland, Maine;
South Burlington, Vermont; and
Westwood, Massachusetts, These products
contribute to a growing library of such
studies, all of which focus on types of
leadership that are necessary to make
smart growth developments a reality. In
2008, the New England EFC will assem-
ble the collection of these efforts into a
train-the-trainer manual on the topic
Maine's Natural Resource-Based Industries
In 2007, the New England EFC completed work chairing the
Governor of Maine's Steering Committee to Implement the
Recommendations of the 2003 Elaine House Conference on
Maine's Natural Resource-Based Industries. The Steering
Committee reported to Governor John E. Baldacci that it had made
significant progress in implementing more than 95 percent of the
recommendations for action at the Elaine House Conference; the
New England EFC's work on this project is complete.
Maine's Quality of Place
The Brookings Institution asserted that Maine's "quality of
place" is not just an economic asset of increasing value for
Maine, but it is Maine's chief asset. In 2007, New England EFC
staff began chairing and staffing the governor's new initiative to
protect Maine's quality of place. After many public meetings and
much research, the Maine State Planning Office, under the lead-
ership of the New England EFC, released an initial report,
People, Place, and Prosperity, which describes this work and pro-
vides a set of recommendations for the state of Maine to protect
and build on its quality of place.
Environmental Finance for Affordable Housing
In spring 2007, New England EFC staff published an article in
the magazine of the Federal Reserve Bank of Boston on relation-
ships between environmental finance and affordable housing.
The article provided case studies of innovative public/private
partnerships and creative use of conservation land acquisition to
leverage funds for affordable housing and made recommenda-
tions on ways that additional communities in New England
could provide more affordable housing.
Presentations
New England EFC staff gave numerous presentations in 2007;
one such presentation was a talk about how to identify funding
sources for urban river revitalization projects, at an Urban Rivers
Conference hosted by EPA, and another was a talk about
"Systems Thinking and Sustainability" delivered to senior man-
agers at the Maine Department of Transportation.
Ongoing Projects & Initiatives
Next Communities Initiative
Next Communities Initiative
From model ordinances to financial instruments, a wide vari-
ety of smart growth tools are now available to local land use
decision-makers and stakeholders. The piece of smart growth
that the Next Communities Initiative (NCI) addresses is the
effective use and implementation of these tools at the local
government level. NCI is training motivated community
leaders and lay planners to make smart growth-oriented
change happen in their cities and towns. The first step
involved developing a three-day workshop series for citizen
leaders to: 1) learn that change toward more sustainable land
use is both desirable and possible; 2) gain an understanding
of the intricacies and subtleties of local government and poli-
tics; and 3) explore obstacles to smart growth and how they
can be overcome at the local level. The workshop has been
delivered many times at venues around New England, and
delivery continues into 2008.
The curriculum now exists as three eight-hour, highly inter-
active and experiential sessions:
Session 1: Participants come to understand sprawl not as a
technical problem, but as (in Maine terms) a "wicked"
problem: one that is ill-defined, features a lack of consen-
sus on its causes, and lacks obvious solutions that involve
challenging trade-offs and often fierce, value-based opposi-
tion. Participants gain insights to become informed leaders
in the discussion of sprawl and advocates of solutions that
seek a wider public good without undue injury to private
interests and concerns. Participants leave the session with a
mindset that smart growth is an objective worthy of pur-
suit, and they are ready to explore how to navigate change
through the local political system.
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ACTIVITIES & ACCOMPLISHMENTS
Session 2: This session educates individuals about local
government processes, both formal and informal. It helps
those interested in changing local land use policies
understand the twists and turns of local government,
what motivates and constrains it, how to mobilize and
support a town's opinion leaders and citizens, and how to
navigate the system to effect change.
Session 3: Conflict often comes with change. This ses-
sion teaches community leaders basic skills to deal con-
structively with conflict over both basic values and
perceived interests. It prepares them to treat both person-
al and social conflict in the community setting. It also
includes a final capstone game where the skills, ideas,
and information learned in the previous sessions are
applied to a practical case.
Watershed Finance Directory Updates
The New England RFC continued its support of an online
Directory a/Watershed Resources. The tool has been expand-
ed to include hundreds of federal, state, and private fund-
ing sources specific to New England. Program focus areas,
URLs, due dates, and contact information for these fund-
ing sources are updated on an ongoing basis.
New Projects & Initiatives
Growing Together
Building on the success of the Center's DVD on Consensus
Building, Growing Together, a new project is underway to create
a concise but detailed guidance document to help communities
move from acknowledging the need for a consensus-building
process around smart-growth issues to actually implementing
the process. The document will be more directive than the
DVD. It will also be more prescriptive and training-oriented
than other sources not at the local level by laypersons. The guid-
ance document will be disseminated to smart-growth relevant
organizations/agencies in all New England states.
Climate Change
Because of the societal imperative to reduce carbon emissions, in
2007 the New England EFC began developing programs that
will help local communities respond to these challenges. The
first of these efforts was a publication called Greenhouse Gas
Allowances Through RGGI: How to Use the Revenue? that evaluat-
ed how the New England states should move forward with the
Regional Greenhouse Gas Initiative. The document analyzes fis-
cal benefits of several policy alternatives and makes recommen-
dations about how new funds from a carbon cap and trade
auction should be used at the state level.
Moving forward, work is underway on two new documents:
• Readiness for Sea-Level Rise: A Planner's Prescription. This
paper examines what exactly towns in coastal New England
must do to start planning for rises in sea level. It will identi-
fy standard parts of a comprehensive plan and provide a
wide range of fiscal implications for new berms, dikes, or
other structures that may be called for; replacement costs for
inundation damage; and types of relocation the town might
consider. It will also walk through actions towns might take
now to make adequate financial resources available for these
processes once they begin.
• Sizing Up the (Dry for Now) Terrain: Economic
Implications of Climate Change in Coastal New England.
Changing sea levels will collide with other changes in the
forms and function of economic activities along the New
England coast. The intersection between changing socioeco-
nomic uses of the coast and changing sea levels and geomor-
phologies is being explored in a foundational report that uses
detailed economic data on coastal regions developed by New
England EFC Faculty Associates for the National Oceanic
and Atmospheric Administration (NOAA). The report will
set the stage for further research and outreach to address the
issues identified.
Contact Information
Sam Merrill, Director
Phone: 207-228-8596
E-mail: smerrill@usm.maine.edu
Jack Kartez, Associate Director
Phone: 207-780-5389
E-mail: kartez@usm.maine.edu
Richard Barringer, Senior Fellow
Phone: 207-780-4418
E-mail: barringr@usm.maine.edu
Barbi Ives, Administrative Assistant
Phone: 207-228-8594
E-mail: barringr@usm.maine.edu
NEW ENGLAND EFC AT THE UNIVERSITY OF SOUTHERN MAINE
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PERFORMANCE MEASURES
A
s a result of the ongoing activities and accomplish-
ments of the New England RFC, outcomes have
included the following:
In support of the New England EFC's work on Maine's
quality of place, in late 2007 the Governor of Maine offered
these remarks about the council, of which the New England
EFC is Chair: "When I appointed the council last spring, I
knew Maine's quality of place was important to our future
... Thank you Dick, members of the council, and staff —
your work offers a blueprint to make economic develop-
ment more effective and efficient, preserve the quality of life
in Maine, and present opportunity to Maine people."
Professor Richard Barringer, of the New England EFC
University of Southern Maine's Muskie School of Public
Service was named the 2007 recipient of the national Elmer
B. Staats Public Service Career Award. The Staats Award,
presented by the National Association of Schools of Public
Affairs and Administration, is considered to be among the
most prestigious teaching honors in the public administration
discipline. It is awarded to a faculty member whose career
exemplifies a commitment to inspiring students to pursue
public service careers. Much of Professor Barringer s work in
the six years leading up to the award has been to advance
the interests of the New England EFC.
The New England EFC's program expanded its reach in 2007
through actively distributing its products and fostering their
use via the Internet. For example, the New England EFC dis-
tributed more than 700 copies of the award-winning DVD
Growing Together to interested constituent groups. The DVD
is mailed with guidelines for hosting public discussion groups
about the video's content as it relates to local development
issues. The New England EFC is aware of dozens of towns in
New England that, in an effort to provide alternatives to
sprawl, have used the video to initiate public conversations of
this type.
Traffic on the New England EFC Web site increased rough-
ly 20 percent per quarter during the year, tracked as number
of sessions, page visits, and downloads of all types.
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ENVIRONMENTAL FINANCE CENTER
AT SYRACUSE UNIVERSITY
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
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BACKGROUND & SUMMARY
The Environmental Finance Center at Syracuse
University (Syracuse RFC), located at the Syracuse
Center of Excellence in Environmental and Energy
Systems in Syracuse, New York, generally serves the two states
and two territories of EPA's Region 2: New York, New Jersey,
Puerto Rico, and the U.S. Virgin Islands. The primary purpose
of the Syracuse EFC is to enhance the administrative and finan-
cial capacities of state and local government officials and the
nonprofit and private sectors as they endeavor to improve envi-
ronmental quality and enhance environmental infrastructure.
The Syracuse EFC continues to establish working collabora-
tions with government officials and other local decision-
makers, as well as nonprofit and private sector programs that
provide technical assistance. These collaborations fall into three
main categories: the Public Management and Finance Program
(PMFP), Building Sustainable Communities, and a partnership
with the Syracuse Center of Excellence in Environmental and
Energy Systems.
The primary functions of the PMFP continue to be facilitating
partnerships within the technical assistance community, provid-
ing public outreach and education related to environmental
improvements, and offering training to local government offi-
cials and technical assistance providers. Areas of application
include asset management, capital improvement planning, col-
laborative governance/leadership, conflict resolution, problem
solving, solid waste, source water protection, water and waste-
water, and other environmental improvements.
New Syracuse EFC headquarters (USGBC LEED Platinum building).
A Syracuse EFC training event (Mark Lichtenstein, EFC Director, and
Robert A. McNary, Empire State Economic Development Corporation).
Other functional, programmatic services provided by the
Syracuse EFC during 2006 and 2007 included extensive work in
the broader arena of Building Sustainable Communities, includ-
ing sustainable approaches to environmental stewardship, social
equity, and economic development, with a focus on cost con-
tainment. The intent of the Building Sustainable Communities
Program is to offer process facilitation, public outreach, policy
research, engagement, training, education programs, and direct
and indirect technical assistance. This entails more intensive col-
laboration with Syracuse University's Maxwell School faculty and
with other institutions and organizations, such as: the EFC
Network (EFCN); GreeningUSA, Inc.; the National Recycling
Coalition, Inc.; the New York State Association for Reduction,
Reuse and Recycling, Inc.; the State University of New York
(SUNY) College of Environmental Science and Forestry; The
Syracuse Center of Excellence in Environmental and Energy
Systems; Syracuse EnSPIRE Program (Office of Environment
and Society); other Syracuse University departments and schools;
and the U.S. Green Building Council, Inc.
The third major area of involvement has been developing a sub-
stantial partnership with the Syracuse Center of Excellence in
Environmental and Energy Systems, created by the state of New
York and funded by the state, EPA, the U.S. Department of
Energy, and private sector sponsors. This partnership has been
particularly useful for enhancing the strength of the Syracuse
EFC in the areas of water resources, green building, and sustain-
able community design.
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BACKGROUND & SUMMARY
Through 2007, the Syracuse RFC realized a number of major
program successes, including the following:
• Began outreach and education efforts specifically focused on
sustainable infrastructure improvements and water quality
issues as they affect New York State's Lake Ontario near-
shore areas.
• Became more involved with sustainability planning for the
city of Syracuse and Onondaga County, New York, through
involvement as members of the Syracuse Sustainable Design
Assessment Team (SDAT) task force. SDAT projects in the
works in the coming year include a low-income/affordable
green housing summit that the Syracuse RFC is taking a
lead in developing.
• Rxpanded the RFC's reach by beginning a project focused
on sustainable energy in a private community in the U.S.
Virgin Islands. The intent is to replicate the project in other
communities in Region 2 and elsewhere.
• Initiated development of a comprehensive Infrastructure
and Asset Management Academic Program.
Continued to promote green building.
Assisted with the launch of a major neighborhood redevel-
opment project in Syracuse — the Near Westside Initiative,
focused on sustainability in some of the poorest urban cen-
sus tracts in America.
Developed community handbooks on financing green
building projects and managing wastewater.
Worked with four groups of graduate students on practical
capstone projects.
Began work, in collaboration with researchers at Cornell
and Syracuse universities, on a project to quantify carbon
sources and to develop user-friendly tools to help munici-
palities, counties, and states make carbon-based decisions.
Broadened the RFC's capabilities for providing technical
assistance and training and became better known through-
out the region, through the relationship with the Syracuse
Center of Rxcellence, thus expanding the opportunities for
building relationships in communities.
SYRACUSE UNIVERSITY EFC
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects
Syracuse Center of Excellence in Environmental
and Energy Systems Partnership
In August 2006, the Syracuse RFC changed its formal and his-
toric alignment from the Maxwell School of Syracuse
University to the Syracuse Center of Excellence in
Environmental and Energy Systems (CoE), hosted by Syracuse
University. While the Maxwell School is still a key partner of
the Syracuse EFC, this new collaborative relationship with the
Syracuse CoE will assist the EFC with its intent to more
aggressively promote sustainable development and expose the
EFC's service partners (e.g., local governments and others) to
leading developments in clean and renewable energy, indoor
environmental quality, and water resources.
The Syracuse CoE is actually a federation of more than 170
partners, including businesses, community groups, economic
development agencies, research organizations, and the state and
federal government. Most importantly, 11 other academic
institutions are equal members of the federation.
In total, more than $190 million in private and public funds
have been committed to the Syracuse CoE enterprise. This
includes a New York State commitment of more than $44 mil-
lion and more than $96 million in private and foundation
investments. It also includes more than $30 million in federal
resources secured by Congressman James Walsh. Collaboration
between the Syracuse EFC and the Syracuse CoE will further
maximize and leverage the impact of the existing funds for
each organization.
"Capstone" Projects
In collaboration with the Maxwell School's Center of
Environmental Policy and Administration, the Syracuse EFC
engaged Syracuse University's Maxwell School Master of Public
Administration student teams (27 students) in four four-week
intensive research and development capstone projects:
• Emergency Preparedness in Rural Communities: As part of
the team, prepared miniature case studies comparing and
contrasting two communities during two different natural
disasters. This project was co-sponsored with New York
State U.S. Department of Agriculture (USDA) Rural
Development (RD) office and was intended to better
THROUGH 2OO7, THE SYRACUSE EFC...
4 Worked with 27 students in Syracuse
University's Master of Public Administration
program on capstone projects.
4 Provided technical assistance to nine communities.
4 Collaborated with other organizations to pro-
duce eight events.
4 Gave nine domestic and international
presentations.
Led or designed 11 trainings or events.
4 Engaged in four green building projects.
inform USDA RD of the steps that municipalities should
take to improve their disaster response plans.
• Leadership in Energy and Environmental Design (LEED)
in Upstate New York: An Exploration of Barriers,
Resources and Strategies: Focused on identifying barriers
(including perceived financial ones) and strategies to assist
localities with building green capital projects. This Syracuse
EFC-conceptualized project also involved the U.S. Green
Building Council's (USGBC's) upstate New York chapter.
The project resulted in the production of a user-friendly
Green Building Field Guide for local governments and other
New York State organizations interested in developing green
and sustainable buildings that could qualify for USGBC's
LEED Green Building Rating System.
• Rural Water and Wastewater Infrastructure Management:
Moving Small Communities Forward: Worked with USDA
RD to evaluate the current state of asset management among
rural communities. The team evaluated the real and perceived
challenges of implementing an asset management system,
evaluated asset management software, and made policy rec-
ommendations for multiple layers of government.
Community Assistance
* Chenango County, New York, Source Water Project: Assisted
with the Source Water Protection Project in Chenango
County, which took a watershed management approach and
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ACTIVITIES & ACCOMPLISHMENTS
was based on the notion that communities working proac-
tively to protect their health and resources will prevent con-
tamination of their drinking water sources. The RFC created
a booklet on source water protection in cooperation with the
Chenango County Health Department to be distributed to
citizens and municipalities in the county. The RFC sponsored
and facilitated public meetings and Water Operators Council
meetings in Chenango County.
• Oswego County, New York, Solid Waste Management
Financial Systems: Worked with Oswego County to help
facilitate public input into a yearlong process of evaluating
alternative management and financing models for its inte-
grated solid waste management system. Some options
included moving toward a public-private partnership, full
privatization, enterprise accounting, and other management
and/or financing models. The county chose enterprise
accounting and consolidation.
• Town of Cortlandville, New York: Consulted with repre-
sentative of Citizens for Aquifer Protection and the
Rconomy regarding a local dispute over aquifer protection
and economic development.
• New Jersey: Consulted with U.S. Senator Menendez's office
staff regarding funding options, technical assistance availabili-
ty, and other resources regarding the testing of municipal and
private wells in a New Jersey county in his district.
• Village of Holly, New York: Initiated meetings with the vil-
lage of Holly following a request for assistance. Similar to
other rural communities in upstate New York, local leaders
were, and continue to be, faced with deteriorating
infrastructure and economic diversity. Following a review of
available — although dated — engineering reports, the
RFC, along with community stakeholders, developed a
point specific strategy to address immediate infrastructure
inventory needs and engage regional potential partners in
both economic recovery, and infrastructure strategies.
Collaboration and Program Development
• Adirondack Ecological Center: Participated in a meeting
intended to explore potential project collaborations in the
sustainable development area for the Adirondack Mountain
region of New York State.
Energy Fair: Assisted with an energy fair at the Museum of
Science and Technology in Syracuse, attracting hundreds of
attendees.
EPA Sustainable Infrastructure Conference: Joined with
RFCs from Regions 4, 6, and 10 to host an RFCN exhibit
at this 2007 event in Denver.
Great Lakes Protection Fund: Led a collaboration of RFCs,
including Regions 1, 5, and 10, along with the National
Policy Consensus Center at Portland State University, to
develop an extensive proposal for the Great Lakes Protection
Fund to fund the development of innovative financing and
planning tools for communities in the Great Lakes Basin,
particularly in the water and wastewater area. The proposal
was not funded, but the process created potential for other
collaborative projects.
"I Live NY" Event: Attended this invitation-only event host-
ed by the New York Governor's wife, focused on making
New York State a more desirable place to live and addressing
the problem of the "brain-drain" of young people in the
state. The Syracuse RFC was invited to have a presence at
the event and represent the U.S. Green Building Council
because of its involvement in green building and its expert-
ise in creating sustainable communities.
Creative Core
Syracuse EFC Associate Director Sara J. Pesek at "I Live NY
Event," Cortland, NY.
• International/National Organizations: Met with numerous
international/national organizations with the intent of
developing collaborative projects. Some examples include
the Grass Roots Recycling Network, and the National
Recycling Coalition with a new Zero Waste training
program; the Jane Goodall Institute, with potentially new
education programs; and the U.S. Green Building Council
on a number of joint projects as detailed in this report.
SYRACUSE UNIVERSITY EFC
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ACTIVITIES & ACCOMPLISHMENTS
"Journey to Jobs" Workforce Development Event:
Participated in this event, promoting sustainable workforce
development in the upstate New York region. Additionally,
the Syracuse RFC has been actively involved in a number of
working groups focused on workforce development.
"Mayfest": Supported a major presence at Syracuse
University's Mayfest. Hundreds of central New York region
high school students toured exhibits hosted by local sustain-
ability groups.
New Jersey Organizations: Worked with the mayor of the
towns of Peapack and Gladstone, New Jersey, who helped the
Syracuse RFC establish contacts in the region. This connec-
tion resulted in meetings with the New Jersey State League of
Municipalities, the New Jersey Department of Rnvironmental
Protection Commissioner, the New Jersey Rnvironmental
Infrastructure Financing Program, and the New Jersey
Highlands Commission, where the Syracuse RFC presented
an overview of the RFCN and the Syracuse RFC's capacities.
State Revolving Fund National Conference: Attended and
hosted a small exhibit at this 2007 event in Denver.
Upstate New York Organizations: Met with numerous local
organizations such as the Central New York Small Business
Technology Development Office, Cornell Cooperative
Rxtension, FOCUS Greater Syracuse, SUNY College of
Rnvironmental Science and Forestry, and many others to
develop programs like Link CNY, Accelerate 2007 and
2008, the Sustainable Design Assessment Team, and others.
USDA Technology Assistance and Training Grant:
Developed a comprehensive and successful grant proposal in
conjunction with the Lake Ontario Coastal Initiative. The
focus was to get "boots on the ground" in various commu-
nities along the Lake Ontario coast to help with implement-
ing components of RPAs sustainable infrastructure strategy,
with a particular emphasis on the near-shore water quality
issues facing Lake Ontario coastal communities. Also com-
pleted another similar grant application for the 2008-2009
fiscal year.
Water/Wastewater Energy Efficiency Grant: Worked with
Red Oak Consulting on a successfully awarded New York
State Rnergy Research and Development Authority grant
proposal that will provide education and outreach to
• }&-
Lake Ontario Coastal Zone communities targeted by Syracuse EFC
for technology assistance and training
communities regarding energy efficiency and conservation in
water and wastewater systems. The Syracuse RFC will collab-
orate with Red Oak in implementing this project by provid-
ing training and outreach activities to utilities/municipalities
across New York State, including helping to host energy
specialty conferences around the state.
Facilitation
' Citizen's Campaign for the Environment Survey: Connected
this organization with experts for the purpose of performing a
survey on fish consumption from Onondaga Lake, New York.
• Climate Change Panel Discussion: Facilitated a major discus-
sion on climate change with three noted faculty members
from Syracuse University and the SUNY College of
Rnvironmental Science and Forestry; more than 30 students
and community members attended.
• Climate Change "Teach-in": Co-sponsored the local showing
of a national event, "The 2010 Teach-in." This event explored
the potential technical, financial, and economic implications
of climate change; approximately 50 people attended.
• Community Workforce Portal Development: Participated as
a member of an interdisciplinary team designing a communi-
ty Internet portal for the purposes of workforce development.
The Syracuse RFC brought the perspective of technical and
financial expertise needed in a sustainable community.
• Electronics Recycling Consortium: Participated on a steering
committee with members from IBM, the International Assoc-
iation of Electronics Recyclers, and businesses involved in
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ACTIVITIES & ACCOMPLISHMENTS
electronics recycling, with the intent to develop a grant pro-
posal to New York State to promote cost-effective electronics
recycling.
• EPA "Four Pillars" Briefing: Prepared a short briefing paper
for EPA Region 2 officials regarding the Syracuse EFC's
activities and the region's needs relating to the four pillars of
sustainable infrastructure (Better Management, Full-Cost
Pricing, Efficient Water Use, and Watershed Approaches to
Protection).
• New York Conference of Mayors and Municipal Officials
(NYCOM): Participated on the planning committee for the
NYCOM Public Works School.
• Onondaga Nation Land Rights Collaborative Education
Series: Participated as a member of a committee planning a
series of yearlong events exploring the issue of Native
American land rights, specifically focusing on environmen-
tal stewardship issues (the Onondaga Indian Nation Land
Rights Collaborative Education Series). This work culminat-
ed in an event with more than 60 people in attendance.
• Sustainable Intermodal Transportation Facility Planning
Focus Group: Developed and facilitated this public brain-
storming forum for the Syracuse CoE, with more than 100
people in attendance to discuss the potential development of
an Intermodal transportation center in downtown Syracuse.
Green and Sustainable Building Projects
The Syracuse EFC has taken a proactive role in the area of
green building education, including health and ecological ben-
efits and the financial costs and benefits of green construction.
• New York State Association for Reduction, Reuse, and
Recycling Annual Conference: Helped sponsor, design, and
facilitate a workshop track focused on green buildings and
related finance and cost-savings issues and gave the opening
remarks at this fall 2006 event, at which more than 150 peo-
ple attended, including local government officials. The
Syracuse EFC continues its partnership with this
Student Sustainable Exhibit Design Project: Facilitated a
group of six students from Syracuse University's Industrial
Design department as they designed a "sustainable exhibit"
for the 2007 U.S. Green Building Council's "Greenbuild"
Sustainable exhibit at Greenbuild Chicago (2007).
conference in Chicago. Syracuse EFC staff worked with the
students to develop construction and material guidelines for
the design and guided them as they discovered how to incor-
porate sustainability into their studies. The exhibit was a dis-
play of how the exhibit industry can reduce its carbon
footprint by reducing materials used for exhibit construction,
reducing freight costs, and making intentional decisions with
regards to material use and production techniques. This proj-
ect will be expanded on for "Greenbuild 2008" in Boston.
International Presentations
' Presented programs on human resource management, asset
management, and sustainable infrastructure management to
two separate large contingents of Chinese municipal officials
and facilitated a meeting with the New York State Depart-
ment of Environmental Conservation in Albany for one of
those groups.
• Developed and presented a program on sustainable infra-
structure management to a group of Indian federal and
regional officials hosted by the New York State
Environmental Facilities Corporation.
Syracuse University Industrial Design students and their sustainable
exhibit at Greenbuild Chicago (2007).
SYRACUSE UNIVERSITY EFC
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ACTIVITIES & ACCOMPLISHMENTS
• Designed and presented a program on solid waste manage-
ment for Vietnamese federal officials.
Domestic Presentations
' Annual Joint Water Resources Symposium: Gave the keynote
address ("How Do We Fund Our Projects? Financial
Planning to Provide Essential Services Consistently, Reliably,
and Cost Effectively") at this event of the New York State
chapter of American Water Works Association and New York
Water Environment Association; more than 250 attendees
attended the two-day technical conference.
• The Creative Core's GreenTeam: Building a Sustainable
Central New York: Gave a presentation at a FOCUS Greater
Syracuse Core Group meeting in 2007 with 40 attendees.
• Joint EPA Regions 1 and 2 Conference on Sustainable
Water/Wastewater Infrastructure: Collaborated with EPA
Regions 1 and 2 to develop this first of five national
Sustainable Infrastructure Conferences. The Syracuse EFC
director presented at this Groton, Connecticut, event. A
major focus was on the merging of clean and renewable ener-
gy innovations with sustainable water and wastewater projects
at the local level ("Connecting the 'Watts to Drops'"). About
150 local government and other participants attended. The
Syracuse EFC also helped by facilitating a focus group in New
York State to assist the EPA with planning the event, creating
the agenda, and selecting speakers.
• Incentives to Promote Development of "Green-Collar" Jobs:
Invited to participate on a 2007 panel hosted by the New
York State Assembly. More than 40 people were in
attendance.
• New Jersey State League of Municipalities: Gave a presenta-
tion at this organization's annual conference in Atlantic City.
• New York Conference of Mayors Public Works School:
Presented a session on asset management in 2006 and
sustainable infrastructure in 2007; more than 80 local gov-
ernment officials attended.
• Positive Transformation Now!: Gave a presentation at a
FOCUS Greater Syracuse Core Group meeting in 2006
with 45 attendees.
• Southern Tier Flooding Public Meeting: Presented at this
public meeting hosted by USDA RD Community Assistance
representatives in Tioga County, New York. This workshop
was designed to educate community leaders in the southern
tier of New York State who had experienced the effects of the
devastating floods of June 2006 (a federal disaster area).
Representatives from the New York State Environmental
Facilities Corporation, the New York Rural Water Association,
RCAP Solutions, and the Syracuse EFC provided information
regarding respective services in an effort to help these leaders
make decisions regarding the repair and maintenance of their
water and wastewater systems.
• Syracuse Post Standard Editorial Board Meeting: Discussed
Syracuse EFC activities and sustainable community
principles.
Training
' Sustainable Infrastructure: Provided training at a multi-day
event in 2006 in Syracuse, including tours of water and
wastewater facilities. The training featured the four pillars of
sustainable infrastructure, the Water Environment
Federation's "Water is Life" and "Infrastructure Makes it
Happen," and Pennsylvania State University's "Liquid Assets"
programs.
• Managing Infrastructure for Sustainable Economic
Development: Directed and hosted a day-long training
event in Syracuse in 2007, focusing on how closely
infrastructure is related to economic development in com-
munities. The training concentrated on providing practical
tools to understand community assets, manage infrastruc-
ture, and continue to address the needs and wants of com-
munities. The event featured presentations by the EPA
Region 2 sustainable infrastructure liaison, an executive of
New York State's Economic Development agency, and the
director of the Boise State EFC, located in Region 10.
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ACTIVITIES & ACCOMPLISHMENTS
USDA RD and Sustainable Infrastructure: Developed,
hosted, and facilitated a one-day event in 2006 in Syracuse
for New York's USDA RD program; more than 50 people
attended.
Collaborative Environmental Dispute Resolution: Designed
and conducted a three-day environmental dispute program
for Syracuse University's Program on the Analysis and
Resolution of Conflicts. This project included a major simu-
lation regarding locating a low-level radioactive waste disposal
site and attracted 32 attendees. A shortened version of the
program was also presented to more than 100 students.
Economics of Climate Change Technology Workshop:
Received a grant to host a major one-day technical workshop
for about 30 federal economists from EPA, the U.S.
Department of Energy, USDA, the Food and Drug
Administration, and other organizations in Washington, D.C.
that are leading in the area of climate change modeling.
National League of Cities Training Event: Helped organize
this training event at Syracuse University and presented to
more than 50 city officials from across the country (from
communities ranging from 8,000 to 2.8 million people) on
strategic management and planning, sustainable infrastruc-
ture management, and building sustainable communities.
Sustainability Summits: Helped lead a collaborative effort
to promote the building of sustainable communities in New
York State through two major events held in Syracuse:
- New York State Sustainability Summit/LinkCNY: Co-
sponsored New York State's first exposition/conference
on Sustainability, held at the Onondaga County conven-
tion center in 2006, which attracted more than 1,000
people. Technical workshops and plenaries covered top-
ics such as green buildings, energy conservation, energy
pricing, greening of schools, and technological innova-
tions. The Syracuse EFC moderated and helped develop
the structure for the event, which was showcased
through a number of television, radio, and newspaper
media outlets.
- Accelerate 2007: Assisted in the development of the pro-
gram, co-facilitated the steering committee, and co-
sponsored the event with four other community
partners, which attracted approximately 1,200 attendees.
The Syracuse EFC also helped secure the very popular
"Toyota Hybrid Experience" exhibition and successfully
targeted high school and college students for volunteer
work and attendance at this event. Media outlets such as
the New York Times were in attendance. Plans are under-
way for next year's follow-up event, Accelerate 2008, for
which the Syracuse EFC will take an even larger role by
co-chairing two educational program tracks.
e/erat€2OO7
L N?w Idea* in Technology, Manufacturing,
En trgy & the En vironmtnt
Environmental and Energy Systems Symposia:
- Design With Nature: Assisted the Syracuse CoE with
design and implementation of this 2006 event, featuring
Congressman James Walsh and internationally known
speakers, such as renowned author L. Hunter Lovins
from the Rocky Mountain Institute.
— Building Innovations for Climate Change: Assisted the
Syracuse CoE with design and implementation of this
2007 event, which surveyed the latest ideas and advance-
ments in the growing field of sustainable design. Topics
covered by internationally recognized speakers included
high-performance buildings and environmental and
energy systems research and development. A highlight of
the event was a talk by the Honorable Susan Roaf, from
the Oxford City Council (England), addressing climate
change through innovative urban master planning.
- Developing Sustainable Practices: Strategic Planning,
Operations, & Management: Facilitated this half-day work-
shop targeted toward businesses and attended by 30 people.
SYRACUSE UNIVERSITY EFC
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ACTIVITIES & ACCOMPLISHMENTS
Honorable Susan Roaf, Oxford City Council (UK), Environmental and
Energy Systems Symposium (2007).
Ongoing Projects & Initiatives
Clean and Renewable Energy
* Energy Master Plan, Town of Fabius: In conjunction with
the Central New York Regional Planning and Development
Board and Syracuse CoE, the Syracuse EFC is helping this
Onondaga County, New York, town develop an Energy
Master Plan.
• Syracuse Green Power Facility: The Syracuse EFC director
was appointed to a Local Development Corporation (LDC)
and will be involved with planning a new renewable power
plant to be built in Syracuse. The director chairs the finance
committee of the LDC.
• U.S. Department of Energy Solar Initiative Grant: The EFC
is helping the city of Syracuse and the Clean Communities
Program of Onondaga County write two grant proposals to
foster growth of solar energy research and companies in
upstate New York.
Green and Sustainable Building Projects
The Syracuse EFC has taken a proactive role in the area of
green building education, including health and ecological ben-
efits and the financial costs and benefits of green construction.
• Green & Sustainable Schools and Green Building
Conferences: Assisting with major events promoting sus-
tainability in schools and green buildings generally, such as
two events held in 2007 that highlighted research showing
increased productivity of students and staff and the econom-
ic case for building green schools.
• Fulton Companies: Actively helping this central New York-
based international company plan to develop sustainably,
including building new, green facilities, by facilitating a
number of meetings with state and local economic develop-
ment and elected officials, green building technical assis-
tance providers, and researchers (in the carbon sequestration
field), and assisting the company hire student interns.
Community Assistance
' Saddle River Region, New York: Working with residents of
the Saddle River region who are experiencing well-water
contamination issues.
• Town of Fort Covington, New York: Began an asset man-
agement approach to encourage incremental improvements
in Fort Covington's water system, in cooperation with the
New York State Health Department.
• Town of Wayne, New York: Facilitating discussions with
municipal leaders and technical assistance providers as they
consider wastewater treatment options. The municipal lead-
ers are currently in the process of surveying town residents
to determine current sentiment and knowledge of such sys-
tems. Upon completion of this survey, municipal leaders,
technical assistance providers, and the Syracuse EFC will
conduct an engineering feasibility study.
Town of Wayne, NY (depicting density of
development around lakes).
• Villages of Saranac Lake and Lake Placid, New York:
Working with the Central Upstate New York GreenTeam to
help these Adirondack communities base their economic and
business development strategies on sustainable principles.
Collaboration and Program Development
• Advisory Board: Created a PMFP Advisory Board consist-
ing of technical assistance providers and state and local gov-
ernment officials. The board is actively working to develop
the PMFP's programs and training events, such as an EPA
Region 1 and 2 Joint Sustainable Infrastructure Conference,
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Technical Assistance Partnership Forums and a multi-day
training program.
Asset Management Workshop Series: Began discussions to
develop this workshop series based on dialogue and experi-
ence with local representatives and technical assistance
providers. For example, the RFC facilitated a planning
meeting involving the New York Associations of Towns, the
New York Conference of Mayors and Municipal Officials,
the New York Rural Water Association, the New York State
Environmental Facilities Corporation, the New York Water
Environment Association, and USDA, to discuss the need
and support for an asset management workshop series.
Creative Core "GreenTeam": Helped form, and currently co-
facilitate, this business attraction group as part of a larger
regional branding effort: "NY's Creative Core. Real. Smart.
Green." It is a task force representing business, government,
economic development, academic, and nonprofit leaders from
a regional swath stretching from New York's southern border
near Binghamton up through New York's Canadian border in
the north. The objective of the group is to promote and
encourage sustainable and smart economic growth throughout
this region, focusing and building on new and existing green
innovations and technology. The Syracuse EFC is working
with this team on a number of current efforts, including:
- Business Attraction Study: A study to provide a marketing
analysis of three core technology sectors (healthy buildings/
sustainable design, energy, and water quality), and multiple
sub-sectors. For each sub-sector, the team will complete an
integrated search of international businesses/market leaders,
suppliers, expansion/relocation considerations for business,
an analysis of the central upstate New York region's asset
inventory, and an identification of competition facing the
region. The study will also include an analysis of strengths,
weaknesses, opportunities, and threats.
- Inventory of Tech Assets: Development of a preliminary
map to plot and categorize the region's "clean/green"
tech assets, with ongoing additions.
- Clean and Renewable Energy Regional "Parks": Promotion
oy o
of four current regional development target areas:
Onondaga County Carrier location, Cortland County,
Oswego County's Riverview Business Park, and Seneca
County's Seneca Army Depot. Three recent announce-
ments indirectly reflect the work of the GreenTeam:
a $ 14-million to $ 17-million biofuels plant locating in
Cortlandville; a National Grid grant to Riverview for fur-
ther energy development; and a $38-million green Hope
Lake Lodge Resort and Indoor Water Park at Greek Peak
in Cortland County. The Syracuse EFC also participated
in a focus group to brainstorm the incorporation of cut-
ting-edge renewable energy concepts in the Riverview
Business Park.
Environmental Management Systems (EMSs): Developing
knowledge capacity of EMSs in general with the intent to
promote their use as a finance tool for a variety of
organizations.
New \brk Governor's Regional Office: Collaborating with
the governor's regional office regarding regional sustainability
issues and helped incorporate the office onto the GreenTeam.
Infrastructure Management Academic Program: Researched
educational programs in the United States and around the
world that teach sustainable infrastructure management and
beginning to develop a center based on best practices. An
effective educational program would incorporate civil engi-
neering principles, public management, policy analysis, and
public financial management. Not only do managers need
these skills, but they must also have excellent communication
and interpersonal skills to successfully interact with everyone,
from municipal policy-makers to contractors working on cap-
ital projects. The Syracuse EFC is working on developing the
following activities, which could be generated and supported
by the educational program/center:
- Providing training to local government representatives in
strategic management to demonstrate how watershed/
ecosystem approaches, regionalization/consolidation/
intermunicipal cooperation, and conservation produce
long-term benefits when approached collaboratively.
SYRACUSE UNIVERSITY EFC
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ACTIVITIES & ACCOMPLISHMENTS
- Providing training in capital improvement planning
(focusing on asset management practices) coupled with
public relations skills to build community capacity to suc-
cessfully implement full-cost pricing. This training would
include hands-on work in asset management, rate analysis,
and other sustainable infrastructure focused software.
- Implementing widespread public outreach on the value
of water, true costs of services (such as wastewater), and
the realities in current/future cost structures to continue
to affect a cultural shift. This outreach could be
accomplished through presentations (at professional con-
ferences, public meetings, and other appropriate venues),
articles (submitted to trade journals, newspapers, maga-
zines), televised media, and focused educational pro-
grams targeted to specific audiences.
- Providing direct community assistance to implement
asset management practices, including providing soft-
ware-based analyses in asset plans and rate structures,
developing and implementing customized public rela-
tions campaigns, and providing ongoing community
technical support.
- Working with technical assistance partners to develop
alternative state-specific solutions to the growing prob-
lem of household affordability concerns.
- Convening forums involving key decision-makers to dis-
cuss viable policy changes (building on the work of the
EFAB workgroup in the area of affordability).
Infrastructure and Asset Management Academic Program:
Initiated the development of an academic program focused
on sustainable infrastructure management principles.
Researched existing programs and moving forward with the
design of the academic course plan.
Local Economic Development Support: Actively support
local economic development organizations, such as being
involved with the Accelerate 2007 event, Journey-2-Jobs
workforce development efforts, and the Green & Sustainable
Schools event. Additional joint activities are being planned.
Listserv: Distributing PMFPTalk, a listserv providing local
government leaders and technical assistance providers (TAPs)
a means to submit questions or disseminate information. It
is primarily promoted and utilized as a tool for community
members to obtain answers to questions they have about
issues of water rates, water systems, wastewater treatment,
finance programs, and technology.
• New York State Water/Wastewater Infrastructure Co-
Funding Workshops: Participated in the planning for these
events, and the RFC associate director served as a panel
member and speaker at different events throughout the
state, discussing asset management. The program will be
continued in 2008.
• University Sustainability Efforts: Increased involvement in
related endeavors including helping lead the coordination of
other key organizations at Syracuse University and the SUNY
College of Environmental Science and Forestry to build a
cohesive and synergistic program on sustainability that is
transferable to other organizations in the region. This project
includes issues such as transportation, socially responsible
investment policies, waste reduction and reuse, curriculum
development, energy, and green building. Syracuse University
made a major commitment to sustainability, including purs-
ing the U.S. Green Building Council's LEED certification for
all new major construction projects, and changing its invest-
ment strategies. This project also includes creating new work-
ing partnerships within varied disciplines such as industrial
design and environmental systems engineering. These rela-
tionships allow for a greater degree of collaboration on com-
munity projects that require additional expertise and offer
students more opportunities for engagement.
Facilitation
• FOCUS Greater Syracuse: Helping this central New York
nonprofit group that focuses on sustainable communities to
promote 82 goals related to environmental stewardship,
social equity, and economic development.
• Greenhouse Gas Committee, Onondaga County Resource
Recovery Agency (OCRRA): Joined with other local experts
on a special advisory board assisting OCRRA with regional
climate neutrality strategies.
• Onondaga Community College Sustainability Task Force:
Appointed by the college president to a position on a task
force to help plan for regional sustainability initiatives.
• Sustainable Design Assessment Team Project (SDAT):
Currently helping to facilitate an interdisciplinary group in
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ACTIVITIES & ACCOMPLISHMENTS
Sustainable Design Assessment Team Project.
central New York, which designed a unique program to
evaluate sustainable indicators. Helped conceptualize a suc-
cessful American Institute of Architects grant proposal, tar-
geted toward building a sustainable Syracuse region. The
Syracuse RFC now sits on the local steering committee and
was active in a series of charrettes, focus group meetings,
and a town hall meeting, which included hundreds of par-
ticipants. SDAT projects in the works in the coming year
include a low-income/affordable green housing summit that
the RFC is taking a lead in developing.
Syracuse University Sustainability Steering Committee:
Advising this group, which was charged by the Syracuse
University president with developing a plan for Syracuse
University's compliance with the University President's
Climate Commitment initiative.
University Sustainability Action Coalition: Participating as
a co-founding member and helping to facilitate this group,
which is active with over 50 students, faculty, staff, and
community members from the central New York area.
Among a number of other efforts, members of the group are
helping two SUNY campuses and Syracuse University with
their climate change commitments.
"Water is Life" Program: Serve as chairperson of the "Water
Is Life" and "Infrastructure Makes It Happen" joint educa-
tion program in New York State and will speak at
panels about educational outreach material available to
communities for water/wastewater infrastructure concerns.
Water and Wastewater Education and Outreach
Committee: Assisting with implementing a statewide out-
reach campaign focusing on drawing high school students
into the water industry. Investigated options for creation of
the "Straight from the Tap" campaign and solicited poten-
tial corporate sponsors on behalf of the committee.
Promoting Green and Sustainable Building
Projects
The Syracuse RFC is helping the Syracuse CoR take the lead
on promoting green buildings through a number of initiatives.
The USGBC, based in Washington, D.C., is recognized as
leading the green building movement in the United States.
The USGBC's president resides in Syracuse and has developed
a very strong personal and professional relationship with the
Syracuse RFC and the Syracuse CoR (sitting as a CoR Board
member). The Syracuse RFC's interest is in the cost-effective
nature of building green. The intent for the Syracuse RFC is to
develop models and programs that can be replicated with other
organizations and in local communities focused on educating
about the financial benefits of sustainable construction and
design.
• Central New York Peace Council: Helping this nonprofit
organization renovate an old building based on USGBC
green building standards, particularly assisting with financial
options.
• Emerging Green Builders (EGB): Assisted the USGBC
Upstate Chapter form the first RGB group in New York
State, which now includes 60 students. The Syracuse RFC
continues to facilitate the group.
• General Green Building Promotion: Assisting the Syracuse
CoR in facilitating a major exhibit at the USGBC's annual
conventions: Denver 2006 (approximately 14,000 attendees)
and Chicago 2007 (approximately 23,000 attendees).
Syracuse RFC staff will continue to participate in future
Greenbuild events (Boston 2008) as well as local and regional
green building conferences such as the SUNY College of
Rnvironmental Science and Forestry's annual Green Building
conference.
• Green Building Financing: Actively researching and pro-
moting financing options for green building through the
work of research assistants. The Syracuse RFC is publishing
a green building field guide for distribution around New
York State as a resource for communities.
• LEED-New Construction (NC) Training: Training staff in
the USGBC's LRRD NC building certification program.
• LEED-Neighborhood Development (ND) Review
Committee: Participating as members of a national review
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ACTIVITIES & ACCOMPLISHMENTS
panel for the new beta version of the LEED ND certifica-
tion program.
• Sustainable Syracuse City Schools Project: Engaging with a
number of facets of the nearly $l-billion, 10-year school
capital project in the city of Syracuse, which will result in
LEED-certified city schools.
Training
• Technical Assistance Partnership (TAP) Forums: Organized
six forums covering various water and wastewater technical
topics. These forums were targeted toward local government
officials and TAPs, with an average of 20 to 30 attendees.
Additional forums are being planned.
• Wastewater Panels: Participating in a unique series of train-
ing events, the "Panels on Wastewater for Local
Representatives," which were developed in collaboration
with the New York State Department of Environmental
Conservation (NYSDEC), the New York Rural Water
Association, and the New York Water Environment
Association (NYWEA). Participated in planning meetings
for the four sessions in the fall of 2006 and presented at ses-
sions from 2006 to 2007- As a follow-up to this successful
program, NYSDEC, NYWEA, and the Syracuse EFC pub-
lished a Handbook on Wastewater Management for Local
Representatives in February 2007-
Expansion
' New Jersey Outreach: Accelerated efforts to develop activities
in New Jersey and will continue to build on these efforts and
to identify potential partners and projects in New Jersey.
• Puerto Rico Water Projects: Researching environmental
challenges and opportunities for developing projects in
Puerto Rico.
• U.S. Virgin Islands Wind Energy Project: Working with a
private resort in the U.S. Virgin Islands that is interested in
developing more sustainable practices and helping facilitate
the involvement of a local public utilities authority, a U.S.
Department of Energy-supported energy efficiency program,
the Syracuse CoE, and the University of the Virgin Islands.
The intent is to evaluate energy efficiency measures and the
use of renewable (decentralized) energy generation to mitigate
energy disruptions as a result of tropical storms, which cause
sewage overflows into the Atlantic Ocean. This project also
includes working with the local water/electricity utility (gov-
ernment authority) to develop concepts such as distributive
energy. The Syracuse EFC would like to use findings from
this project to replicate it elsewhere.
New Projects & Initiatives
Clean & Renewable Energy
• Clean and Renewable Energy Financing: Planning to
acquire the services of a graduate assistant who can research
innovative financing options to assist organizations and
communities with developing and encouraging growth of
new businesses in the alternative energy field.
Collaboration & Program Development
• Carbon Calculator: In collaboration with researchers at both
Cornell and Syracuse universities, helping lay the groundwork
for a project to quantify carbon sources and to develop user-
friendly tools to help municipalities, counties, and states make
carbon-based decisions. The intent is that these tools will
result in the development of public policy to reduce net car-
bon dioxide emissions and address economic and financial
efficiencies in the process.
• Near Westside Initiative: Assisting in the launch of a major
neighborhood redevelopment project in Syracuse. The Near
Westside Initiative is a collaborative effort to restore the Near
Westside area of Syracuse, which includes some of the poorest
census tracts in America, into a neighborhood of choice for
residents of all incomes. The Syracuse CoE will lead efforts to
incorporate green technologies in the project. As part of this
effort, the project will be used to evaluate the LEED-ND
rating system proposed by USGBC. This LEED-ND project
in Syracuse is one of only a few projects of its kind in the
country.
• SUNY Oswego Sustainability Efforts: Exploring and embark-
ing on collaborations with SUNY Oswego. One project is
assisting the school with meeting its recent climate change
commitment. The Syracuse EFC director was the keynote
speaker at SUNY Oswego's kick-off Sustainability Summit.
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
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PERFORMANCE MEASURES
A;
s a result of the ongoing activities and accomplishments
of the Syracuse RFC, outcomes have included the fol-
owing benefits to communities and individuals:
Stakeholder Outreach and Education
The Syracuse EFC's public outreach process has developed a rep-
utation for enhancing the public's understanding of sustainable
infrastructure and development projects. Technical assistance
providers, municipal officials, and other community leaders have
found that involving the Syracuse RFC as a neutral third party
to facilitate a discussion is a positive method to disseminate
accurate information and address legitimate stakeholder con-
cerns. For the 2006-2007 period, this added value is exemplified
by the many requests that have been received from communities
and other technical assistance organizations to provide facilita-
tion and outreach on subjects ranging from public finance to
building sustainable communities.
Another illustration of the effectiveness of the outreach program
is the increase in the number of requests for Syracuse RFC staff
to participate on invitation-only committees and taskforces.
Program Evaluations
Consistently, community representatives and technical assistance
providers highly rate the Syracuse RFC training events and facili-
tations in terms of both format and content. One method we
use to evaluate our efficacy is through pre- and post-surveys
around training events. We have also received input regarding
the value of the training through the PMFP Talk listserv.
A local nonprofit, Greening USA, presented the RFC director
with an award that read:
"In Recognition of Your Outstanding- Effort in Organizing and
o J o JJ o o
Starting the Process for the Syracuse Sustainable Assessment
Team Facilitated by the American Institute of Architect."
"The session was relevant to my community because you took
the time to listen to concerns of the participants and were
interested in learning more about current projects we have
going on in the area of water and wastewater, I appreciate
that you are taking the time to hear what is happening "on the
ground" so that you can adapt training and outreach activities
in the next year to be focused on areas of particular need and
interest to the Lake Ontario communities".
Bill McVea, Mayor,
Village of Fairhaven, NY
"The program was very interesting and the presenters made
themselves available for personal interaction. These smaller
interactive group sessions really allow conference attendees to
ask questions specific to their locale and get a professional
answer. This is not a format that I have seen at other confer-
ences, and I find it really adds to the learning experience."
Merrit Ackles, Conservation Board,
Town of Hamlin, NY
Contact Information
Mark Lichtenstein, Director
Phone:315-443-5678
R-mail: mlichtenstein@syracusecoe.org
SYRACUSE UNIVERSITY EFC
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ENVIRONMENTAL FINANCE CENTER
AT THE UNIVERSITY OF MARYLAND
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
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BACKGROUND & SUMMARY
The Environmental Finance Center at the University of
Maryland (Maryland EFC), located at the National
Center for Smart Growth Research and Education,
chiefly serves the five states of EPA's Region 3: Maryland,
Virginia, Delaware, Pennsylvania, and West Virginia, as well as
the District of Columbia. The primary purpose of the
Maryland EFC is to assist communities in identifying innova-
tive and equitable means of paying for environmental protec-
tion efforts.
In particular, the center promotes ways to manage the cost of
environmental activities through technical assistance, training
and curriculum development, and outreach activities such as
workshops, charrettes, and conferences.
Through 2007, the Maryland EFC accomplished the following:
• Started the successful Web site, Foodtrader. org to connect
local farmers with local buyers.
• Continued to deliver training and information on water-
shed-based financing.
• Investigated new and innovative uses of funding sources and
emerging markets.
• Assisted communities, local governments, and watershed
organizations with capacity development.
Developed efficient and effective outreach and education
tools for reaching a broad clientele with information about
innovative, sustainable environmental finance approaches.
Expanded our reach through our work with state and federal
agencies operating in the region, as well as nongovernmental
partners.
Strengthened the connection to departments at the University
of Maryland that are essential to program expansion and
wider recognition of the EFC's mission, including the
Institute for Governmental Service, the College of Agriculture
and Natural Resources, the School for Public Policy, and the
National Center for Smart Growth Research and Education.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
Community Financing for Local Land and
Water Protection
In Virginia, the Maryland RFC worked with the Shenandoah
Resource Conservation and Development Council (RC&D)
on an innovative project designed to assist Shenandoah Valley
communities in developing financing strategies for natural
resource protection. The RFC held leadership dialogues with
local officials in the counties of Augusta, Rockingham, Page,
Shenandoah, Frederick, Warren, and Clarke and the munici-
palities of Harrisonburg, Waynesboro, Staunton, and
Winchester to identify each jurisdiction's primary natural
resource financing challenges. From these dialogues, three criti-
cal areas of concern emerged: stormwater management, rural
land conservation, and greenways.
The Maryland RFC planned and completed three financing
charrettes around each of the key topics identified. All three
events were well attended, and feedback from evaluations indi-
cated that the information received at the events was extremely
helpful to all communities. Although efforts in stormwater man-
agement are already underway in the region following the char-
rette, there were two specific areas where additional assistance
was requested — specifically, in land preservation and greenway
efforts.
The RFC identified pilot communities within the Shenandoah
Valley toward which it will direct additional assistance, working
further with Augusta and Shenandoah counties on land conser-
vation financing and with the city of Staunton on greenway
issues.
Supervisors in Virginia's Augusta and Shenandoah counties in
April 2007- The purpose of these meetings was to assist pilot
communities in prioritizing conservation goals and developing a
sustainable financing strategy for a purchase-of-development-
rights program. As a result of these efforts, these communities
were able to 1) set a target number of farms/acres to preserve, 2)
estimate the cost per acre of acquiring development rights and
how those prices would be set, 3) determine the administrative
needs of the potential program and a realistic goal of how many
transactions could be closed annually, and 4) identify the fiscal
needs of the potential program and possible revenue streams.
Due to the direct assistance received from the Maryland RFC,
these counties have all the information necessary to proceed as
greater local support is garnered.
In the area of financing land conservation, the Maryland RFC
met with administrative staff and members of the Board of
THROUGH 2OO7, THE MARYLAND EFC...
4 Provided technical assistance to nearly two
dozen counties, municipalities, and watershed
organizations.
4 Provided natural resource policy analysis at the
state level in Delaware and Maryland.
Gave a dozen presentations throughout the
region on financing as it relates to issues such
as stormwater management, green infrastruc-
ture, and natural resource protection.
4 Offered a national webcast on watershed
financing, reaching more than 200 participants.
4 Hosted four charrettes, each attended by
approximately 50 participants.
4 Attended 15 events regarding subjects such as
low-impact development, urban greening and
forestry, green building, and nutrient trading.
4 Produced four documents on topics including
capacity development, decentralized stormwater
controls, and financing the Chesapeake Bay
restoration effort.
Offered 17 training sessions on wastewater and
drinking-water systems management to more
than 150 attendees.
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ACTIVITIES & ACCOMPLISHMENTS
Based on continued community interest following the greenways
charrette, the Virginia city of Staunton's Frontier Trail was select-
ed as a pilot project. In addition, a Greenway Action Plan, focus-
ing on available financing options, is currently under
development. The information gathered as a part of the research
process for the action plan will be leveraged through a Greenway
Resource Center, a clearinghouse of greenway information that
has been added to the existing Maryland RFC Web site, offering
this information and assistance to a wider audience. Existing
program partners, such as the Shenandoah RC&D, the Valley
Conservation Council, and local governments, will link to this
resource and further increase the reach of this information.
Stormwater Financing Initiative
The Maryland RFC Stormwater Financing Initiative sought
to help communities gauge their capacity to implement wet-
weather management strategies. This program convened a team
of experts to work with local officials to develop a framework for
financing extensive Stormwater management programs as part of
the state permitting processes. This initiative is designed to pro-
vide communities with the tools and resources they need to
effectively finance and implement their wet-weather manage-
ment programs.
The initiative targeted two communities, the Wissahickon
watershed in southeastern Pennsylvania and Anne Arundel
County, Maryland. For each project, the technical assistance and
outreach program comprised four primary tools or components.
The first was a series of leadership dialogues with community
leaders and water resource managers. The purpose of these dis-
cussions was to develop a detailed understanding of the
Stormwater management issues facing pilot communities related
to Stormwater management. The second component included
capacity surveys to better gauge the resource needs necessary to
implement wet-weather management programs. Using the
results of the information gathered, the Maryland RFC project
team, in partnership with community leaders, organized and
conducted Stormwater financing forums, which formed the basis
for the comprehensive, interactive event that will provide the
foundation for community decision-makers and managers as
they work toward advancing their Stormwater programs. Finally,
the RFC project team will use the results of the forum, the sur-
veys, and the dialogue sessions to provide recommendations on
how these communities can develop and implement sustainable
financing programs to support their wet-weather management
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
priorities. These recommendations are included in the formal
final reports presented to the pilot communities.
Financing Septic Upgrades in Delaware's
Inland Bays
The Maryland RFC, working in partnership with the Delaware
Department of Natural Resources and Rnvironmental Control
(DNRRC), completed a project designed to generate creative
financing options to support low- and moderate-income owners
of septic system in complying with proposed septic regulations
designed to improve operations and maintenance of septic sys-
tems as well as support nutrient reduction goals for the Inland
Bays watershed.
The proposed regulations include two primary components: 1)
inspection and pump-out requirements for all systems and 2)
performance requirements for all new and replacement systems,
effective 2015- Costs faced by septic owners include an estimat-
ed $325 to $600 every three years to meet pump out and
inspection requirements. Inspections are also expected to trigger
repair and replacement of malfunctioning systems at a cost of
$10,000 on average. Replacement of substandard systems with
new nutrient reducing technologies will cost homeowners an
additional $3,500 to $6,000. These units will require service
contracts to provide routine maintenance that will add an esti-
mated $200 to $500 annually to the overall cost. With an esti-
mated 19,000 septic systems in the watershed (up to 8 percent
of which are owned by low-income populations, and up to 67
percent of which are owned by moderate income populations),
financing assistance is a significant concern.
Potential solutions to reduce costs and offer assistance discussed
at a statewide forum hosted by the Maryland RFC in October
included developing a septic utility district, developing
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ACTIVITIES & ACCOMPLISHMENTS
low-interest loan programs working through private banks and
credit unions, and expanding subsidy programs to assist with
inspection and maintenance costs. The Maryland RFC present-
ed a white paper report outlining results of the project and rec-
ommending next steps for implementation and financing to
DNREC in December 2007-
Financing Chesapeake Bay Tributary Strategies
The Maryland RFC conducted a study on behalf of the state
of Maryland that developed a framework for a sustainable
financing strategy for the implementation of the state's nutri-
ent reduction commitments under the Chesapeake Bay 2000
Agreement. Accounting for existing programs and initiatives in
place in 2006, the state will need approximately $5-3 billion of
additional revenue to reach these goals. This study was
designed to provide state officials with recommendations for
organizing and structuring future bay restoration financing
efforts and serves as a follow-up to the Chesapeake Bay
Watershed Blue Ribbon Finance Panel that was charged under
Directive 03-02 with identifying funding sources to imple-
ment the tributary strategies.
Undertaking this project consisted of a number of core tasks:
developing an analysis template; conducting research, with a
focus on leadership interviews; analyzing findings; and publish-
ing a final white paper report featuring key recommendations
related to financing the tributary strategies. The tributary strate-
gies divide the challenge of meeting nutrient reduction require-
ments into specific industries or sectors that impact the bay
watershed. The core program areas identified are wastewater,
urban runoff, agriculture, and air deposition.
The Maryland RFC developed a research and analysis template
to ensure a thorough and consistent assessment of each of the
four areas. This template directed team members to investigate
the scale of the problem, existing sources of program funding,
the current regulatory framework, and the present institutional
capacity. Next, the Maryland RFC conducted a thorough liter-
ature review related to the costs associated with implementing
the tributary strategies and the corresponding Chesapeake
2000 nutrient and sediment reduction agreements. This infor-
mation served as the foundation for an ongoing series of infor-
mational leadership interviews. The Maryland RFC then
analyzed the four core areas in terms of identifying the scale of
the problem, including current funding and financing efforts;
identifying and leveraging new revenue sources; the role of fed-
eral, state, and local regulatory programs; and developing and
building institutions.
The Maryland RFC developed a series of finance strategy rec-
ommendations for full implementation of the tributary strate-
gies based on this analysis. These recommendations included
opportunities for leveraging new and existing revenue sources,
clarifying regulatory and policy framework, expanding institu-
tional capacities, and investing in performance, as well as case
studies from other communities across the country that have
successfully implemented similar programs. All of the analysis
and recommendations developed as a result of this study have
been provided to Maryland state officials, as well as the
Chesapeake Rxecutive Committee, in the form of a white paper
report entitled Chesapeake Bay Financing Strategy. The Maryland
RFC delivered this report to the Maryland Department of
Natural Resources in September 2007, and a protocol for fur-
ther dissemination of the report is under development.
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ACTIVITIES & ACCOMPLISHMENTS
Learning From Successful Watershed Organizations: The
Maryland RFC sought to meet the watershed financing needs of
community leaders and local officials on a broader scale as well,
and thus developed a base curriculum on watershed financing
geared for this audience in 2007- The RFC produced a focus
piece on six successful watershed organizations, showcasing how
these organizations have achieved success in expanding budgets,
membership, and influence on local decision-making. The mate-
rials also include a description of financial tools, as well as a col-
lection of case study examples on how various finance tools are
applied by nonprofits and local and state governments to sup-
port watershed protection activities. The materials served as the
core of a watershed finance training in fall 2007-
Ongoing Projects & Initiatives
Financing Source Water Protection
The Maryland RFC, in partnership with leaders from others in
the RFC national network, has been participating in a new RPA-
lead collaborative effort to facilitate source water protection
across the country. The work of this coalition of organizations is
focused on the protection of the quality and quantity of drink-
ing-water sources such as lakes, streams, rivers, and aquifers, as
well as on the land needed to recharge those bodies of water.
The collaborative works to bring together its collective expertise
to develop useful recommendations about what is needed to
protect sources of drinking water. Partner organizations work
together to package and disseminate source water protection rec-
ommendations in ways that are useful to those in land use plan-
ning or management.
Maryland's RFC is leading the collaborative's work on develop-
ing a Web-based source water protection financing clearing-
house. This clearinghouse will be designed to provide
information on developing strategies for financing resource pro-
tection efforts as well as case studies of how plans have been
implemented successfully. The ultimate goal will be to incorpo-
rate an interactive calculator tool that will enable communities
to assess the costs, benefits, and cost savings of a variety of source
water protection activities. An advisory committee of collabora-
tive members has been assembled to guide this process. To date,
the Maryland RFC has developed a framework document for
the financing information and potential case studies to be
included in the Web-based resource. Ultimately, the work of this
group will help integrate drinking-water protection into a broad
range of community decision-making processes related to land-
use planning; road, sewer, and water projects; farming and
industry; development; and waste disposal.
Capacity Development for Communities and
Watershed Organizations
The RFC continues its efforts to reach local decision-makers
regarding the benefits of sound environmental management by
providing general technical assistance to local governments,
resource protection organizations, and others interested in find-
ing new and innovative ways to pay for environmental restora-
tion and protection activities in their watersheds.
Cacapon Watershed, West Virginia: The Maryland RFC initially
began work with the Cacapon and Lost Pvivers Land Trust in
2005 as a part of an RPA-funded program designed to help
communities and organizations in Region 3 overcome barriers to
implementing and financing their watershed protection efforts.
At that time, the Maryland RFC hosted a financing charrette for
the trust designed to help identify a sustainable financing strate-
gy for preserving lands identified a conservation priorities. One
of the core next steps identified in the charrette process was the
need for the trust to develop a strategic plan that would function
as a set of organizational priorities guiding the efforts of the trust
over the next several years. The plan would also answer questions
regarding the identity of the trust, its goals, and its criteria for
success, as well as address its role in the community and identify
potential partners. In 2007, the Maryland RFC followed up on
these efforts, working with the trust and colleagues with the
National Park Service's Chesapeake Watershed Assistance
Program to conduct a strategic planning retreat. The resulting
strategic plan for the organization is under development.
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
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ACTIVITIES & ACCOMPLISHMENTS
New River Valley, Virginia: Faced with concerns about impend-
ing growth and the urban-rural interface issues that accompany
it, the communities of Virginia's New River Valley came togeth-
er to work collaboratively to introduce and promote the concept
of green infrastructure planning, assist communities in the
region in incorporating these techniques, and coordinate these
activities across the region to create implementation efficiencies
and work effectively in conjunction with one another. This
effort is being led by the New River Valley Planning District
Commission and the Conservation Fund. As part of its ongoing
participation with these communities, the Maryland RFC has
been invited to participate as a part of the project's advisory
committee, guiding the group's activities, providing input on
project direction, and presenting information to the group on
green infrastructure financing considerations. As a green infra-
structure plan for the region becomes formalized, the Maryland
RFC will assist in the development of a financing strategy for its
implementation.
Wastewater and Drinking-Water Systems Management: Water
utility systems managers are routinely faced with a number of
challenging decisions. They must set rates, develop budgets, and
manage assets in a manner that considers immediate operational
requirements and long-range systemic improvements, as well as
consumer needs, expectations, and attitudes. Avoiding capital
improvements to save money or making choices based on what
is most politically expedient can be tempting but often threatens
the long-term sustainability of a system. A variety of financial
training sessions have been offered by the Maryland RFC train-
ing manager through the Financial Management and Capacity
Training program. These sessions are intended to help systems
managers successfully navigate this decision-making process and
develop financing strategies designed to ensure the sustainability
of their systems. The 17 sessions offered in 2007 focused on
subjects such as asset management, budgeting, and capital
improvement planning.
New Projects & Initiatives
The Environmental Leadership Program
On February 1, 2007, the RFC made great strides in its efforts
to broaden and strengthen its position at the university with its
move to the National Center for Smart Growth Research and
Rducation (NCSG). NCSG, which was created in 2000 as an
affiliation of four schools and colleges at the University of
Maryland1 conducts a broad range of land use research and edu-
cation, locally, statewide, nationally, and internationally. The
RFC will remain an independent operating unit within NCSG,
but the merger will enable both centers to offer a much wider
range of services and allow the two centers to work collabora-
tively on issues such as land use planning, natural resource
preservation, and urban growth issues.
The Maryland RFC is leveraging the resources of the university
and its new relationship with NCSG, as well as the expertise
and experience of similar institutions and organizations across
the region, even further with the development of a program
designed to foster the development of effective, inspired
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ACTIVITIES & ACCOMPLISHMENTS
leadership on a variety of environmental issues. The essence of
leadership is to move people from ideas to action, and the
Maryland EFC's Environmental Leadership Program will pro-
vide leaders from a variety of disciplines and professions with the
resources they need to affect change in their community.
The Environmental Leadership Program will be implemented as
part of NCSG's existing leadership program, and will build on
NCSG's successful education and outreach efforts. In partner-
ship with the University of Maryland's Office of Professional
Studies, the Maryland EFC will be developing education pro-
grams that focus on the key issues related to environmental
finance, including the capacity of communities, institutions, and
leaders to develop sustainable environmental initiatives. The pro-
gram will initially focus on four core areas: 1) environmental
finance, 2) nonprofit leadership and administration, 3) social
marketing, and 4) water and wastewater systems fiscal manage-
ment. The EFC will offer certificate programs consisting of both
credit and non-credit courses and will leverage cutting-edge edu-
cational design and implementation strategies.
Web-Based Tool to Promote Locally Grown Produce
Presently, consumers who wish to buy locally grown food often
have a hard time locating a steady source; at the same time,
small farms that want to sell to residents have limited access to
potential buyers, especially at the exact time of harvest. To rectify
this situation, the University of Maryland EFC created a central
hub on the Internet to connect buyers and sellers.
Launched in May 2008, the Web site, called Foodtrader.org, lists
all locally grown food and specialty items available from small
farms in Maryland and Delaware. It allows consumers a wide
selection of nutritious and fresh food, easily, on a regular basis,
and at reasonable prices. Farmers have seen a steady increase in
demand for their products because of the new consumers found
at Foodtrader.org, the Web site attracted nearly 500 members in
just a few months of operation. One of the first purchases was
for 82,000 peaches, distributed for the first day of school in the
city of Baltimore.
Foodtrader.orgbuilds on the previous success ofAgtrader.org,
which was created to buy, sell, and trade livestock, hay, compost,
manure, and commodities. Also launched in May 2008, it has
enlisted more than 150 farms.
The EFC Network is now working with the Maryland EFC to
develop similar Web sites for New York, Maine, Kentucky,
North Carolina, and New Mexico. Each state will have a Web
site exclusively for their state, but these sites will connect to
each other on a shared harvest network. The EFC Network is
expecting to host a conference in 2009 that will promote locally
grown foods.
Contact Information
Joanne Throwe, Assistant Director
Phone: 301-405-5036
E-mail: jthrowe@umd.edu
1 The NCSG is an affiliation of the School of Architecture, Planning and Preservation; the School of Public Affairs; the College of
Engineering; and the College of Agriculture and Natural Resources at the University of Maryland.
ENVIRONMENTAL FINANCE PROGRAM: 2OO7-2OO8 REPORT
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PERFORMANCE MEASURES
A
s a result of the ongoing activities and accomplish-
ments of the Maryland RFC, outcomes have included
the following benefits to communities and individuals:
The seven counties and four municipalities in Virginia's
Shenandoah Valley that gained access to technical assistance
on the issues of stormwater management, land preservation,
and greenway planning now have a better understanding of
the components of successful natural resource protection
implementation and financing programs as they prepare to
move forward with their local plans, as well as a heightened
awareness of the regional impacts of their local efforts. In
addition, the city of Staunton has committed to making
implementation of their Greenway Action Plan a priority,
and the research conducted and materials assembled for the
development of that plan is available on a significantly larg-
er scale as a part of a greenway clearinghouse on the
Maryland RFC Web site.
The recommendations developed as a part of the
Stormwater Initiative will enable the two pilot communities
to develop sustainable financing strategies that support their
wet-weather priorities. In addition, the stormwater financ-
ing forums held provided decision-makers and stormwater
managers from other communities with a solid foundation
on which to advance stormwater programs in their own
localities.
The white paper outlining financing options for the pro-
posed septic legislation in Delaware will help the state and
its three counties to develop programs that improve water
quality while addressing the needs of impoverished commu-
nities in the state. These financing options will be of rele-
vance for disenfranchised communities throughout the
region facing similar challenges.
The state of Maryland is considering the policy implications
of the finance strategy recommendations that will enable
full implementation of the tributary strategies. These recom-
mendations include opportunities for leveraging new and
existing revenue sources, clarifying regulatory and policy
framework, expanding institutional capacities, and investing
in performance, as well as case studies from other commu-
nities across the country that have successfully implemented
similar programs.
The source water financing Web site under development at
the Maryland RFC will provide users with guidance on
developing an appropriate financing strategy for source
water protection activities in their communities, as well as
examples of successful efforts from across the country.
Working on source water issues in conjunction with the
Source Water Collaborative enables the Maryland RFC to
draw on the expertise of other participating agencies and
organizations, as well as expand the reach of our efforts to
include their constituencies.
The development work the Maryland RFC has conducted
with watershed organizations improves the institutional
capacity and sustainability of these organizations, as well as
expands the impact of their resource conservation efforts in
their watersheds. The capacity training offered to local gov-
ernments improves the overall management and efficiency
of wastewater and drinking-water systems, while still pro-
tecting water quality and human health.
UNIVERSITY OF MARYLAND EFC
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ENVIRONMENTAL FINANCE CENTER
AT THE UNIVERSITY OF NORTH CAROLINA
In This Report
Background & Summary 292
Activities & Accomplishments 293
Performance Measures.. ..300
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BACKGROUND & SUMMARY
The Environmental Finance Center at the University of
North Carolina at Chapel Hill (UNC RFC), located
within the School of Government, operates across the
country but mostly serves the eight states of EPA's Region 4:
North Carolina, Georgia, Kentucky, Tennessee, South
Carolina, Alabama, Mississippi, and Florida. The primary pur-
pose of the UNC RFC is to enhance the ability of govern-
ments to provide environmental programs and services in fair,
effective, and financially sustainable ways. The UNC RFC pro-
vides a bridge between students and faculty in the university
who work principally on environmental financing, manage-
ment, and planning tools, and the governments whose job is to
use these tools for the public interest.
In particular, the center works to assist communities; provide
training and policy analysis services; and disseminate tools and
resources on topics such as environmental cost accounting, rate
setting, and developing sustainable cost recovery and institu-
tional management systems.
One of the UNC RFC's major roles is increasing the capacity
of other organizations to address the financial aspects of envi-
ronmental protection. For this reason, and to support the
leveraging of resources, the UNC RFC does most of its train-
ing in a collaborative manner, partnering with established
organizations that have environmental, but not necessarily
financial, expertise.
Through 2007, the UNC RFC accomplished the following:
• Completed more than 75 training events.
• Developed several new financial tools for local government
water managers.
• Worked toward enhancing cooperation among funding
organizations within two states.
• Surveyed more than 90 percent of water utilities in two
states.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
Paying far Sustainable Water Infrastructure
Conference
This national conference, held in Atlanta, Georgia, on March
21-23, 2007, brought together 650 professionals from across
the United States and abroad to discuss innovative ways to
finance water infrastructure. The RFC played a major support-
ing role before and during the conference. Jeff Hughes, the
RFC director, led one of the four conference tracks, designing
sessions and moderating events for the "State and Local
Innovations" track. During the several months following the
conference, Hughes also met with a national group to focus on
policy implications that arose from the conference proceedings.
Stacey Isaac Berahzer, the RFC project director, helped with
planning, coordinating exhibits/posters, and securing con-
tributing sponsors.
Jeff Hughes serving on the conference panel as the lead for the
"State and Local Innovations " track.
Water and Sewer Needs and Capital Finance
Strategies in Appalachia
The Appalachian Regional Commission (ARC) contracted with
UNC RFC to carry out a water and wastewater infrastructure
needs and gap assessment in the 410-county Appalachian
region. The main purpose of the project was to provide policy-
makers and local officials with detailed information on future
water and sewer investment requirements and financial strategies
to meet those needs given the fiscal capacity of individual com-
munities. In 2006, the UNC RFC presented the final report to
the ARC, as well as across the country at various environmental
events.
In addition, the UNC RFC participated in the U.S.
Rnvironment and Public Works Senate Committee Field
THROUGH 2OO7, THE UNC EFC...
4 Reached more than 1,000 people through its
first newsletter.
Attracted more than 500 people to a new
stormwater listserv.
4 Delivered more than 75 presentations at vari-
ous training events.
+ Co-sponsored or assisted in organizing more
than 25 training events.
4 Organized and hosted more than 15 training
events on funding for local governments.
+ Provided technical assistance to more than 40
communities.
+ Trained more than 6,500 people.
* Taught more than 230 hours.
Hearing in Marietta, Ohio, on April 20, 2006. RFC Director
Jeff Hughes served on a panel reporting on infrastructure
finance issues in Appalachia to Senator Voinovich. Forty-five
individuals provided written comments on the issue.
Stormwater Implementation Group Workshops
The purpose of these seminars was to improve the implementa-
tion of stormwater programs in North Carolina. Attendees con-
sisted of local and state government officials and other key
stakeholders involved in stormwater implementation.
Approximately 40 individuals from 20 counties attended these
monthly work sessions. The sessions addressed many questions
facing North Carolina communities about Phase II and other
state stormwater programs. The RFC coordinated these meet-
ings and conducted many of the presentations for the partici-
pants. For example, the RFC taught on areas such as financing
for stormwater projects and implementation of the statewide
model stormwater ordinance (a document written by the RFC).
Water Operator Recognition and Retention
The purpose of this project was to identify successful methods
of retaining water operators and marketing these best practices
in the form of case studies to other systems to improve operator
UNIVERSITY OF NORTH CAROLINA EFC
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ACTIVITIES & ACCOMPLISHMENTS
retention. In an attempt to gauge water operator job satisfaction,
the UNC RFC and the North Carolina Rural Water Association
conducted a survey of more than 300 water operators, receiving
a response rate of approximately 40 percent. Survey questions
addressed satisfaction with the operator's current position and
his/her ideas of how operator recognition and rewards could be
improved. The operators' comments were shared with other util-
ities in the form of board training events at several communities,
including the city of Porterdale, Georgia.
Stormwater Management Symposium
The RFC assisted DeKalb County, Georgia, with its first annual
symposium on Stormwater. The event was geared toward county
residents and how their activities affect Stormwater. As a co-
sponsor, the center served on the planning committee and pro-
vided input on the content of the symposium. The center also
taught a session on the costs involved in maintaining and repair-
ing individual septic tanks, as well as the finances involved in
building and maintaining Stormwater best management practices
at the subdivision level.
Economic Subcommittee of the Environmentally
Superior Hog Waste Technology Determination
Advisory Committee
From July 1, 2005, to March 1, 2006, UNC Professor Richard
Whisnant, past director of the UNC RFC, facilitated a subcom-
mittee that developed potential criteria for determining the eco-
nomic feasibility of new technologies for addressing hog waste
pollution in North Carolina.
2007 Annual Southeast Watershed Roundtable
The UNC RFC sat on the planning committee of this round-
table, called "Sustaining Our Water Infrastructure Through
Watershed-Based Approaches," held in Georgia in fall 2007-
The UNC RFC also presented a half-day workshop on fund-
ing resources as a pre-conference event. Though held in
Georgia, this southeastern event was attended by professionals
from more than 10 states.
Applied Environmental Finance Course
In fall 2006, UNC RFC's Jeff Hughes taught this half-semester
course to 14 Masters of Public Administration students at UNC.
The curriculum covered many areas of environmental finance.
Water Capital Finance Course
Rach January, the UNC RFC holds a two-day Water Capital
Finance Course for utility staff, consultants, and state officials,
covering a range of water and sewer capital planning issues.
Approximately 65 people attended the course in the last two
years. During the 2007 workshop, attendees were surveyed
about the financial management challenges facing their utilities
and the financial management policies that have been adopted
by their systems. Participants used hand-held keypads to answer
the survey questions, and their answers were instantly compiled
and projected on screen to stimulate discussion, which added a
very interactive component to the workshop.
Two-day Water Capital Finance Course held in January.
Stormwater Finance and Management Course
Rach June, the RFC holds an annual Stormwater training. The
goal of the course is to provide local government managers,
finance directors, planners, and public works officials with an
in-depth introduction to planning and funding Stormwater
programs and utilities. About 50 people attend the two-day
class each year.
South Carolina Stormwater Forum: Finance Sessions
In 2007, the RFC assisted in the planning of the first South
Carolina Stormwater Forum event. The University of South
Carolina's Institute for Public Service and Policy Research hosted
the forum to bring together key partners to learn more about the
Phase II National Pollutant Discharge Rlimination System
(NPDRS) permit requirements and to explore best practices in
financing and minimum control measures. The RFC provided
guidance on the planning of the event and presented sessions on
funding of Stormwater projects.
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ACTIVITIES & ACCOMPLISHMENTS
Water Rates and Revenue 201 Course
About 45 utility officials and consultants attended a day-long
water rates course, co-sponsored by the UNC RFC. Jeff Hughes
delivered a presentation on rate structures and sat on a panel dis-
cussion. The RFC also assisted by preparing the agenda and
advertising the course. Afterward, the UNC RFC made the
PowerPoint presentations of the various speakers available on the
RFC Web site.
National Capacity Development Program
Workshop
The UNC RFC led a panel discussion on "Asset Management
Application for Small Systems" at RPA's national workshop in
Denver in 2007- This session involved presenting the audience
of technical assistance providers with several case studies on asset
management needs at various communities, and then guiding
the discussions on how these case study communities could ben-
efit from and apply asset management. The RFC was also able
to provide information on operator recognition and retention
practices from the center's research in Georgia and North
Carolina.
Annual Georgia Environmental Conference
This is a new conference that Georgia's Chamber of
Commerce introduced two years ago. An estimated 450 pro-
fessionals representing a mix of state and local government
professionals and the state's business sector have attended. The
RFC has been very involved in the first two years that the con-
ference was offered. During the first conference, the center
coordinated and taught a panel session on the financing of
local government water and sewer projects. The panel was fol-
lowed by a discussion between water suppliers and their com-
mercial/industrial customers on how water and sewer rates are
designed. During the second conference, the RFC was part of
a panel session that covered various financing options for water
quality improvements at the watershed level.
Urban Water Consortium Web Conference
A team of RFC staff held an online conference of 11 members
of the statewide North Carolina Urban Water Consortium,
focusing on water rates and financial information analyses. The
RFC also created a password-protected Web page exclusively
for members of the consortium. The Web page contained sev-
eral tools that involved RFC analysis of the rates of this select
group of utilities. The RFC analyzed rate information for these
larger utilities and compared this information to the center's
statewide survey. For example, the "Historical Residential
Rates Comparisons Tool" available on the Web page is an
interactive tool that the utilities were able to use to examine
how their residential water and sewer rates have changed since
1986. Rate changes for any bill from selected years to 2007 are
compared to rate changes from other utilities, inflation, the
Consumer Price Index, and the Construction Cost Index.
Asset Management Conference
The RFC organized a two-day asset management conference,
co-sponsored by the RPA Headquarters Wastewater Program.
Forty-eight participants from North Carolina and Virginia
attended this high-profile event.
Other Conferences
The UNC RFC acted as a co-sponsor or helped organize several
other events in the last two years:
• Southeast Stormwater Association (SRSWA) — Stormwater
Utilities and National Pollutant Discharge Rlimination
System (NPDRS) Permitting Seminar
• Rnvironmental Conflict Resolution Conference
• Water Sessions — Municipal/County Administration
• Rnvironmental Finance Overview for Community Developers
• Safe Drinking Water — Where Science Meets Policy
• Financial Leadership for Utility
• Rssentials of Municipal Government
• Water Resources Research Institute Annual Conference
• National Water Leadership
• Small Systems Management Workshop
• Water Resources for Local Government
• School of Government Annual Budgeting Course
• State Revolving Fund/Council of Infrastructure Financing
Authorities
• Utility Management Policy Workshop
UNIVERSITY OF NORTH CAROLINA EFC
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ACTIVITIES & ACCOMPLISHMENTS
• Georgia Water Resources Conference
• Capital Planning, Budgeting, and Finance Workshop
• Municipal and County Administration Course: Section 2
• Financial Leadership for Utility Managers
• North Carolina Rural Water Association Conference and
Exhibition
• National Capacity Development Workshop
• Community Development Academy
In addition, the UNC RFC presented at 35 additional events.
Direct Technical Assistance to Communities
In 2006 and 2007, the UNC RFC provided direct technical
assistance to approximately 46 communities. The following are a
few examples of the types of assistance provided:
• Corinth, Mississippi: In light of the major damage caused in
Region 4 by Hurricane Katrina, the RFC sent a team of two
staff members to Mississippi to assist in the redevelopment of
water resources. The RFC assisted the Corinth Gas and Water
Department (CGWD) in assessing a plan to replace its
ground water source with water from the Tennessee-
Tombigbee Waterway. More specifically, CGWD asked the
RFC to gauge the perceptions of the five nearby utilities
regarding the surface water project and to study some project
impacts. Accordingly, the RFC staff met with various repre-
sentatives and stakeholders from these utilities to discuss the
project. RFC also conducted an analysis of utility expenditure
and ground water usage to determine potential impacts for
the utilities if they choose to purchase surface water. The RFC
also prepared a spreadsheet model that allows Corinth to set
rates according to different financing scenarios for the project.
• Yadkin Valley Sewer Authority, North Carolina: In January
2006, the UNC RFC met with officials from the Rlkin,
Jonesville, and Ronda municipalities to provide support to
the new regional Yadkin Valley Water and Sewer Authority.
Based on this meeting, the RFC began to play an ongoing
role in this authority. RFC involvement began with a review
of the authority's bylaws. The RFC met with the town man-
agers to help create a peer group for future policy survey
questions and compared and recommended customer
service policies for the new sewer authority. The center
worked with the authority to compare salaries in 2005 and
2006 with the number of customer connections. It also
assisted the authority with publicity by creating a Web page
on the RFC Web site that is dedicated to the authority.
More recently, the UNC RFC provided guidance to the
authority on how to serve customers outside municipal
boundaries based on laws and other communities' policies
and helped to draft the authority's mission statement.
Southeast Rural Community Assistance Partnership
(RCAP): The UNC RFC assisted the Southeast RCAP by
providing a summary of the legal/statutory framework for
setting impact fees in South Carolina.
Roanoke Rapid, North Carolina: The RFC assisted the
CRO of Roanoke Rapids Sanitary District, North Carolina,
in evaluating the formula it uses to calculate water/sewer
impact fees compared to their peers in the state.
Onslow County Water and Sewer Authority (ONWASA),
North Carolina: The RFC provided the executive director of
ONWASA with a list of comparably sized utilities based on
number of connections, distribution system pipe mileage,
data pulled from a rate survey, and the "Water 2030" study.
RFC staff members also conducted a three-hour water lead-
ership retreat/work session for elected officials from govern-
ments throughout Onslow County, North Carolina. The
session involved 30 participants and took place in
Jacksonville, North Carolina. Later, the RFC worked with
the utilities planning manager for ONWASA to explore
options for developer participation policies.
Porterdale, Georgia: In April, 2007, UNC RFC staff
attended the council meeting of the small city of Porterdale,
Georgia, to provide the council with background informa-
tion on stormwater utilities and how they function.
Pine Knoll Shores, North Carolina: On April 27, 2006,
RFC staff visited the community of Pine Knoll Shores,
North Carolina, and delivered a two-and-a-half hour work
session to 35 attendees. The session focused on issues related
to working with private water systems. The RFC also pre-
sented an Rxcel model that the community can use in its
ongoing negotiations.
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ACTIVITIES & ACCOMPLISHMENTS
North Carolina Department of Environment and Natural
Resources (DENR), Division of Water Quality: The RFC
assisted the division by matching communities with
stormwater utilities, based on a variety of different sources,
with their NPDES permit status.
Mount Shores Community, Murrayville, Georgia: The
EFC worked with the water operator for the Mount Shores
community near Gainesville on exploring the community's
options for funding a project to dig a second well and
obtain a new storage tank. The EFC provided a spreadsheet
with information on various funding options in Georgia.
Belmont, North Carolina: The EFC worked with the town
manager of Belmont regarding the city's impact fee formula
in context of the law and its peers' practices.
Starke, Florida: The EFC conducted a rate analysis for this
town, in collaboration with the Southeast RCAP.
Fifth District of North Carolina: The EFC provided advice
on water and wastewater funding to city and county man-
agers in the Fifth District of North Carolina.
Pink Hill, North Carolina-Board Training: EFC staff trav-
eled to the town of Pink Hill to train nine members of the
town's staff and board. The three-hour session was part of
UNC EFC's Water Leadership Program.
Troutman, North Carolina: The EFC assisted the finance
director of the town of Troutman by compiling examples of
fire protection capacity fees.
Henderson, North Carolina: The EFC assisted town offi-
cials by analyzing the rate structure and customer service
policies to deal with bill delinquency and affordability for
water and sewer service.
Jacksonville, North Carolina: EFC staff helped the plant
operator at the facility compare county public utilities direc-
tors' salaries in 2005 and 2006 to salaries at other utilities
according to utility size, as measured by the number of cus-
tomer connections.
Marshall, North Carolina: The EFC assisted the mayor in
analyzing the town's rate structure for affordability and
other issues, as well as providing guidance on customer
deposit policies.
• Elk Park, North Carolina: The EFC assisted this communi-
ty and the Region D Council of Governments by collecting
and summarizing municipal ordinances for serving "outside"
customers. EFC staff also provided guidance on discrimina-
tion in rate making.
• Orange County, North Carolina: EFC staff worked with
the county attorney and stormwater manager to produce a
memo that outlines the community's options in setting up
solid waste franchises.
Ongoing Projects & Initiatives
North Carolina Landfill Status
The UNC EFC has been working with the North Carolina
DENR Division of Waste Management by providing policy and
data analyses related to the state's landfills. This work includes
quantitative analysis, spatial analysis using Geographic
Information Systems (GIS) and Google Maps, and training to
ensure that DENR staff has the ability to update all resulting
models and tools for future analysis. The quantitative work
involves evaluating population projections and real estate trends
surrounding landfills and calculating capacities for the landfills
within North Carolina. GIS helps identify watersheds and
wasteflows, which, when combined with landfill capacity maps,
provides a mechanism for developing creative ways of visualizing
the status of North Carolina's landfills. This process is helpful to
policymakers.
Rates Dashboard Tools
The UNC EFC designed several interactive Rates Dashboard
tools to help utility managers and local officials analyze resi-
dential water and sewer rates of North Carolina and Georgia
utilities against multiple characteristics, including utility
finances, system characteristics, customer base socioeconomic
conditions, geography, and history. Rates data are collected
from more than 350 local governments and nonprofit utilities
in an annual rates survey.
Georgia Stormwater Committee and Conference
The EFC has been actively involved in monthly meetings of
the stormwater committee of the Georgia Association of Water
Professionals. The committee discusses current stormwater
issues, including legislation and best management practices.
UNC EFC staff provides the perspective of financial
UNIVERSITY OF NORTH CAROLINA EFC
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ACTIVITIES & ACCOMPLISHMENTS
-* * "^ -ST. - - _ -^j
«ti*3ti « o'ven b,!.
^4 screen shot of one of the new interactive water and sewer rates
dashboard tools.
management at regular meetings. The center also assisted in
the planning of a one-day stormwater water and watershed
management workshop, and will lead a session of the funding
of stormwater projects during this workshop.
Drought Management Resources
With the severe drought that affected the southeast part of the
country in 2007, the UNC RFC has been involved in several
regional drought meetings hosted by the North Carolina
League of Municipalities and Department of Pollution
Prevention and Environmental Assistance. The RFC has pre-
sented strategies for encouraging conservation, while preparing
for the potential consequent financial impacts.
Georgia Utility Finance and Management Taskforce
The RFC was invited to be part of this taskforce, which was
formed under the Georgia Association of Water Professionals.
The group is examining ways to assist water and sewer utilities
across Georgia with their financial management. The RFC
shares various financial research and tools with the group, such
the RFC-created Rates Dashboard, as well as asset management
tools, including RPA-generated tools such as the Check-up
Program for Small Systems (CUPSS).
New Projects & Initiatives
Southeast Regional Water Quality Assistance
Network
Under the Targeted Watersheds Grants Program, the UNC
RFC spearheaded a proposal that included the Southeast
Watershed Forum, SRSWA, the Stormwater Rngineering
Group, and the Stream Restoration Institute at North Carolina
Statue University (NCSU), along with Auburn University in
Alabama, to work with other local and state organizations to
build a Southeast Regional Water Quality Assistance Network
to help local watershed organizations and communities protect,
maintain, and restore water quality in a 10-state region. The
proposal was selected as one of six awardees from a pool of
more than 100 applicants nationwide.
Financially Sustainable Water Infrastructure
Initiative
The purpose of this initiative is to equip system managers, oper-
ators, and staff with the tools to evaluate system financial health,
to educate the utility board and the public, and to overcome
political barriers to making the system financially sustainable.
During 2006, the UNC RFC made progress in identifying
demonstration communities in two different southeastern states.
Work has begun with these communities in North Carolina and
Mississippi. The center also conducted a statewide water and
wastewater rate survey for the state of Georgia as a subset of this
project. The overall initiative is a collaborative effort with Boise
State University in RPA Region 10.
Funders Forums
The UNC RFC started a North Carolina Funders Forum group
in 2006, organizing and facilitating quarterly meetings of differ-
ent funding organizations in the state. The concept was
embraced, and the participants exchanged valuable information
about their individual programs. In 2007, the RFC initiated a
Funders Forum in the state of Georgia as well. Again, partici-
pants were very enthusiastic and plan to meet on a quarterly
basis. These meetings present a great opportunity for the RFC to
facilitate some level of coordination among funders in each state,
as well as to share information regarding models from other
states' programs.
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ACTIVITIES & ACCOMPLISHMENTS
Monroe County, Florida — Subcommittee on
Innovative Financing
The UNC RFC has begun work on funding options for waste-
water improvements to the Subcommittee on Innovative
Financing, which is charged with studying financial options for
improving the Florida Keys' water quality.
Boiling Spring Lakes, North Carolina — Red-
Cockaded Woodpecker Protection
The Red-Cockaded Woodpecker is a priority species on the
National Endangered Species List, as well as in the North
Carolina Wildlife Action Plan, which is designed for the conser-
vation of the state's most endangered resources. Currently, resi-
dents of Boiling Spring Lakes must engage in a lengthy process
with the Fish and Wildlife Service (FWS) to obtain a building
permit if their property is located within a nesting cluster of the
woodpeckers. UNC RFC staff is helping the city and the FWS
develop a mitigation plan for the woodpeckers that will be most
cost-efficient for both the city and its residents.
Georgia Water Rates Survey
During 2006, the UNC RFC worked with the Georgia
Environmental Facilities Authority to outline a statewide water
rates survey for Georgia. The two organizations were able to
obtain buy-in and support from several of the state's leading
water interests groups, resulting in a very high response rate of
78 percent. The UNC EFC has been asked to do a similar
survey in 2008.
Stormwater Listserv and Water Operators Listserv
In 2006, the UNC EFC created the Stormwater Listserv for
stormwater professionals throughout the region. The listserv has
about 530 members and has been very active.
The UNC EFC's Andrew Westbrook with a poster showing the
results and analysis of the 2007 Georgia Rates Survey, in
Athens, GA.
Stacey Isaac Berahzer explains results of Georgia's water and sewer
rates survey to community representatives in Augusta, GA.
Contact Information
Jeff Hughes, Director
Phone: 919-843-4956
E-mail: jhughes@sog.unc.edu
UNIVERSITY OF NORTH CAROLINA EFC
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PERFROMANCE MEASURES
A
s a result of the ongoing activities and accomplishments
of the UNC RFC, outcomes have included the
following:
Awards. The UNC RFC spearheaded a proposal that was
awarded one of the six nationally competed capacity-build-
ing Targeted Watersheds Grants, out of a pool of more than
one-hundred applicants.
- The UNC RFC's Project Director, Stacey Isaac Berahzer,
was presented with an award for "Commitment to
Rxcellence" for the assistance that she and the UNC RFC
have provided to the "Paying for Water Conference" that
took place in Atlanta in March 2007-
Stacey Isaac Berahzer receives award for the UNC EFC's efforts for
the Paying for Water Conference.
• Feedback. Users of the North Carolina Rates Dashboard tool
sent e-mails to the RFC that included the following:
" This is a great visual tool.. .1 immediately had a link to it
placed on our new website so that anyone (especially Board
pare."
"It is a great tool and fun to use!"
"...let me commend you and your staff on the rates
dashboard. I think that is a great tool and allows us to
provide great information to our elected boards. "
"Very informative and will be extremely useful for our
community"
"You did an outstanding job putting together the Water
Ct J £ O O
and Sewer Infrastructure Funding Strategies seminar!
We all learned a lot. It was really interesting"
"I just wanted to let you know that I truly enjoyed the
Water/Wastewater Leadership class. The classes were so
lively. They truly consisted of dialogue, not;
Participants of "Managing and Funding Local Government
Stormwater Rnterprises," the 2006 and 2007 Stormwater
Management Course, provided remarks, including the
following:
" Good course and content of information. "
"Excellent coverage. Enlightening about various topics.
O O O £
Nice open floor approach. Jeff has great amount of
enthusiasm for subject matter. "
" Great workshop! Everything was very organized, nice.
"It is easy to understand the concept ofERUS and
billing but it is very useful to hear about the practical
applications: i.e., unexpected problems and related
solutions"
" This was a very good course — it covered the topics
that I was interested in."
" Very good program for all Phase II applications."
"Overall, very pleased with the course and would rec-
ommend attendance to anyone new to Stormwater
utilities or considering a utility"
"... Presenters prepared useful information and were
well informed on topic."
One new user of the North Carolina Water Listserv gave feed-
Attendees of the 2006 Water and Sewer Infrastructure Funding back about the resource, including the following:
Strategies sessions provided feedback that included the following:
" Very good class. Got several ideas for addressing
rate increases.
' '1appreciate your prompt responses to my questions.
I'm glad to have found this listserv. I think it is a
great resource."
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PERFROMANCE MEASURES
After UNC RFC trained nine members of the town of Pink
Hill's staff and board, the following message was received from
a board member:
"... the Board was thoroughly impressed and they felt
that it was very beneficial. ... the Town solved a prob-
lem that they were having with a customer by refer-
ring to the manual and the training that they
received."
After presenting at the Small Systems Management training,
someone sent the following comment to the center:
"I attended the Water System Management training
yesterday in Louisburg. That was one, if not the best,
training seminars I have ever attended. The speakers
were EXCELLENT!... I learned that I've got a
bunch to get caught up on!!! Keep up the good work!
Thanks!"
Participants from "Finding the Money to Turn Great Ideas
Into Real Community Projects" at the Southeast Watershed
Roundtable provided the following comments provided via the
evaluation forms:
" Good overview of potential funding sources"
"'Good explanation of how different funding works;
case studies by presenters'
Program Expansion. The UNC RFC has been able to
expand its network in the state of Georgia, working more
closely with state agencies such as the Georgia
Environmental Facilities Authority and the Environmental
Protection Division, as well as individual small communities
in the mountains of northern Georgia.
The UNC EFC is also increasing its breadth of training
events to include more stormwater topics. The targeted
watershed grant will allow the center to delve even deeper
into stormwater issues, because a holistic watershed-wide
approach will be the focus of this project.
The center has also increased its ability to present data in
simple, yet interactive and appealing ways via the dashboard
tools. Use of such tools adds to the impact of the center's
various data collection and analysis efforts.
UNIVERSITY OF NORTH CAROLINA EFC
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ENVIRONMENTAL FINANCE CENTER
AT THE UNIVERSITY OF LOUISVILLE
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
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.305
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BACKGROUND & SUMMARY
The University of Louisville Environmental Finance
Center (Louisville RFC), located within the Center
for Environmental Policy and Management in the
Department of Urban and Public Affairs, principally serves the
eight states of EPA's Region 4: Kentucky, Tennessee, North
Carolina, South Carolina, Georgia, Alabama, Mississippi, and
Florida. The primary purpose of the Louisville EFC is to pro-
vide technical assistance and training to communities in how
to avoid or otherwise manage, potential economic vs. environ-
ment conflicts and in financing efforts to maintain or improve
environmental conditions.
In particular, the center works to develop more environmental-
ly and economically sustainable alternatives to uncontrolled
and unfocused spatial expansion of human settlements and to
improve the efficiency of environmental infrastructure service
delivery. The EFC's efforts incorporate issues regarding civic
participation in environmental decision-making and environ-
mental justice. The Web site, http://cepm.louisville.edu, serves
as host to the majority of the EFC's publications and technical
assistance documents.
This report covers activities and accomplishments from January
2006 through December 2007- During these 24 months, the
Louisville EFC staff accomplished the following:
• Created and published numerous practice guides, articles,
reports, and working papers.
• Gave presentations at diverse conferences and workshops.
• Co-sponsored a regional conference.
• Conducted many interactive workshops.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
Reports
The Louisville RFC completed the following reports, which
were funded under grants and contracts outside of the core
RFC grant funding:
• Heberle, L. (2006). Connecting Smart Growth and
Brownfield Redevelopment.
• Norton, C. (Forthcoming, in print). Jeffersonville (Indiana)
Main Street: Clark County, Indiana Land Use Survey.
• Norton, C. (2006). Planning and Zoning in Louisville
Metro and Its Effect on Affordable Housing. State of
Metropolitan Housing Report 2006.
• Norton, C. (2007). The Impacts of Transportation Policy
on Affordable Housing. State of Metropolitan Housing
Report 2007-
Practice Guides
The Louisville RFC completed the following practice guides:
• #14. Do You Want Utilities With That? Avoiding the
Unintended Economic Consequences of Poorly Planned Growth
on the Provision of Water and Sewer Service.
• #15- Military Base Sustainable Best Practices: Energy
Conservation Systems That Save Municipalities Money.
• #16. Farmland Preservation: The Benefits of Saving Our
Agricultural Land and Resources.
#17- Development Impact Fees ,
Generators.
Tools and Revenue
* #18. Sustainable Hazards Mitigation.
' #19- Green Conferences.
Publications
The Louisville RFC completed the following publications;
those indicated with an asterisk (*) were funded under grants
and contracts outside of the core RFC grant funding:
THROUGH 2OO7, THE LOUISVILLE EFC...
4 Posted six new practice guides.
4 Published five articles, four reports, and four work-
ing papers.
4 Gave 22 presentations at 13 conferences and
workshops.
4 Co-sponsored a regional conference in coopera-
tion with EPA Regions 4 and 5 reaching over
190 individuals.
4 Conducted 26 interactive workshops ranging
from 50 to 150 in attendance.
Cairns, K. and Lacy, P. (2006). What We Need Is Here:
Land Conservation in Kentucky. Sustain: A Journal of
Rnvironmental and Sustainability Issues. (14) 50-60.
Heberle, L. and Wernstedt, K. (2006). The Mythology of
Sustainable Brownfields Regeneration. Local Rnvironment:
Special Rdition Sustainability and Brownfields. Vol. 11, No. 5-*
Lambert, T L. and PB. Meyer. (2006). Rx-Urban Sprawl As
a Factor in Traffic Fatalities and RMS Response Times in
the Southeastern United States. Journal of Rconomic Issues,
Vol XL, No. 4.
Wernstedt, K.R., Meyer, PB., Alberini, A. and Heberle, L.
(2006). Incentives for Private Residential Brownfields
Development in the U.S. Urban Areas. Journal of
Rnvironmental Policy and Management. XXXXIX (1).*
Wernstedt, K.R., Alberini, A., and Meyer, PB. (2006).
Attracting Private Investment to Contaminated Properties:
The Value of Public Interventions. Journal of Policy
Analysis and Management. XXV (2).*
Flyover shot of Clark County Land Use. Photo credit: Keith Mountain.
UNIVERSITY OF LOUISVILLE EFC
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ACTIVITIES & ACCOMPLISHMENTS
Working Papers
The Louisville RFC completed the following publications:
• Heberle, L.C., Bates, D.C., Coffin, S.L. (2007). Plots
Against the American Dream? The Social Construction of
Sprawl as an Environmental Problem and Smart Growth As
a Solution!
• Houlihan, A. (2007)- The Impacts of Zoning on the
Provision of Affordable Housing.
• Cairns, K. (2006). Ecological Economics and Community
Participation: Priceless!
• Lambert, T.L. and Meyer, PB. (2006). Fringe Residential
Development and Emergency Medical Services Response
Times in the United States.
Technical Services
The Louisville EFC completed technical service to Louisville's
Air Pollution Control District's Fine Particle Task Force and
served on Health and Final Report subcommittees. The report
was issued January 2008.
Conferences
The Louisville EFC co-sponsored and was invited to assist in
the planning and implementation of the EPA Region 4 and 5
collaborative conference, Sustainable Redevelopment in the
Ohio River Valley, held in Louisville, Kentucky, October 1-3,
2007- This conference dovetailed with courses taught by faculty
at four institutions, including the University of Louisville,
regarding planning, design, environmental policy, and environ-
mental engineering. The EFC will host the proceedings of the
conference.
Ongoing Projects & Initiatives
Brownfields Institute
This thee-year project, funded under grants and contracts out-
side of the core EFC grant funding, began in October 2005
and is designed to increase community participation in brown-
fields redevelopment in distressed neighborhoods. The area
selected for this grant is the Park Hill Corridor in Louisville,
Kentucky. During this time, the Louisville EFC hosted 24
workshops (average attendance was 40), helped the city of
Sustainable Redevelopment in the Ohio River Valley. Photo credit:
Lauren Heberle.
Louisville leverage additional brownfields funds and economic
development funds through grants from EPA and other federal
agencies (close to $2 million), and began assisting the city in
establishing a community participation plan for the city-driven
master planning process of the Park Hill Corridor. A Web site
of the project can be visited at: www.redefiningbrownfields.org.
This project will continue to build our capacity to address
environmental justice and community participation in envi-
ronmental decision-making issues and develop techniques that
will assist community agencies and organizations in these areas.
Mobility and transportation questions, January 2006. Photo credit:
Liz Dumbaugh Martin.
EPA's Environmentally Responsible Redevelopment
and Reuse Initiative
The Louisville EFC continues to work with EPA's
Environmentally Responsible Redevelopment and Reuse
Initiative (ER3). The Louisville EFC and ER3 now have a
Memorandum of Cooperation. In Washington, D.C.,
Louisville EFC director Lauren C. Heberle met with the ER3
network to plan participation in a pilot project in Muskegon
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ACTIVITIES & ACCOMPLISHMENTS
Mobility and transportation questions, January 2006. Photo credit:
Liz Dumbaugh Martin.
Continuing planning and public participation, March 2006. Photo
credit: Liz Dumbaugh Martin.
Heights, Michigan. She presented information on EFCN
resources available for the pilot. Dr. Muskegon participates in
monthly or bimonthly conference calls to assist in the pilot
projects ER3 has selected. Her assistance is focused on suggest-
ing funding resources and strategies for redevelopment and
sustainable development models.
Market Barriers to Green Development
The Louisville RFC is participating in EPA Region 5's series of
workshops and working subcommittees, including the Private
Financing Subcommittee and the Communications
Subcommittee, charged to identify the barriers to green devel-
opment and evaluate and suggest methods to overcome those
barriers. The working groups expect to produce databases of
information and written reports based on evaluative findings.
Sustainable City Workshop Series
This series, co-sponsored along with the Urban Design Studio,
is designed to raise local communities' awareness of sustainable
practices. With the ultimate goal of providing a catalyst to move
Louisville and the region toward a sustainable model for the
nation, each forum in the series focuses on different aspects of
sustainable practice and has different audiences. The first two
forums were targeted to a general audience, and covered sustain-
able gardening and landscaping, as well as designing a sustain-
able home. Other forums slated for the spring and early summer
of 2008 aim to enlighten professionals in areas of architecture,
planning, development, banking, and other sectors.
Louisville Climate Change Committee
Louisville RFC Director Lauren Heberle serves as a committee
member on Louisville's Climate Change Committee, part of
the Green Cities Partnership. The committee and subcommit-
tees are charged with establishing a list of proposed recommen-
dations of broad actions and policies to the city and
community that can allow Louisville and the region to engage
in addressing climate change due to greenhouse gasses. The
work on this committee is expected to expand as they decide
what resources the RFC might offer in terms of technical assis-
tance and education.
American Sociological Association: Greening
the Meeting
The Louisville RFC has been asked to assist the American
Sociological Association on an ongoing basis in developing
green practices at both the organizational level and at its
national and regional meetings. This project involves develop-
ing a practice guide for greening academic conferences as well
as conducting phone consultations with event planners and
organizational leaders. This technical assistance activity will
allow us to develop materials that can be used by conference
organizers in other settings as well.
EPA/German Bilateral Working Group on
Redevelopment of Contaminated Sites
The Louisville RFC continues to serve on the U.S. Regional
and Local Land Revitalization Planning Team, part of Phase 4
of RPA's U.S. and German Bilateral Working Group on
Redevelopment of Contaminated Sites.
Louisville Green City Partnership
The Louisville RFC continues to provide support for the
Louisville Green City Partnership (GCP) Initiative. This is a col-
laboration between Metro Louisville, the University of
Louisville, and the Jefferson County Public Schools to engage in
UNIVERSITY OF LOUISVILLE EFC
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ACTIVITIES & ACCOMPLISHMENTS
joint efforts toward greening institutional practices. The RFC
staff serves to provide expert advice on a variety of issues, from
recycling to energy efficiency, depending on the partnership's
focus. Currently the RFC is assisting on the Climate Change
Committee and the University Green Budget Committee. The
RFC has also made itself available to the new director of the
GCP to help connect with other "green" initiatives in the region.
SMARTe (Funded Outside the Core Grant)
The Louisville RFC continues to support SMARTe, the new
brownfields electronic information system being developed by
the RPA Cincinnati lab and the Interstate Technology and
Regulatory Council (ITRC), which has been working on the
regulation of land and the impact on (re-)development. One
facet of the lab's work, paralleling its ITRC involvement, has
been a bilateral agreement with the German Rnvironment
Agency (UBA) on the revitalization of contaminated lands of
all sorts. SMARTe is a computer software to guide reclamation
and redevelopment decision-making that was developed as one
facet of the bilateral project (with comparable software in
Germany). The RFC staff has worked with the lab team on the
activities of the bilateral working group, contributing primarily
to valuation of redevelopment options, developing a logic for
calculating development costs and another for valuing the
community-wide benefits of regeneration. The staff has regu-
larly participated in meetings of the bilateral group.
Regeneration Technical Assistance
The Louisville RFC continues ongoing technical assistance on
area-wide approaches to urban regeneration, working with envi-
ronmental and economic development offices and nonprofit
development organizations in the metropolitan areas of
Louisville, Kentucky; Cincinnati, Ohio; Indianapolis, Indiana;
Worchester, Massachusetts; Burlington, Vermont; Pittsburgh,
Pennsylvania; New York, New York; and Charlotte, North
Carolina, all of which contacted the RFC for consulting services.
In addition, the staff continues to reach out to local and
regional communities, agencies, and organizations to provide
information about sustainable development, environmental
finance, environmental justice, community involvement, and
land use assessments.
New Projects & Initiatives
Sustainable Campuses
The Louisville RFC is exploring opportunities to help regional
university and college campuses assess and implement sustain-
able practices in several areas: operations, purchasing (con-
sumption), building and design, waste management, energy
consumption, and wastewater and stormwater management.
New Practice Guides
The Louisville RFC is examining a number of topics to devel-
op new practice guides, including:
• Cost-saving energy efficiency incentives in the
Commonwealth of Kentucky that could be easily imple-
mented throughout the state, with implications for other
southeastern states in Region 4.
• Organizational and financial integration approaches and
structures that municipal governments can use to remove
barriers to public sector support of sustainable development
practices.
• Financial mechanisms for funding green projects, including
what financing currently exists and what creative new uses
are currently in practice that local and state governments
can use; will possibly include private financing options.
• Options to help business office property management
companies engage in greener operations, focusing on
environmentally sustainable practices as well as incentives
and funding mechanisms.
• Smart Growth tools across the nation, including how effec-
tive these growth tools are in deterring urban sprawl, the
cost of implementing such methods, and the current politi-
cal environment in Region 4 states.
Contact Information
Dr. Lauren C. Heberle, EFC Director
Phone: 502-852-4749
R-mail: lauren.heberle@louisville.edu
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PERFORMANCE MEASURES
A
s a result of the ongoing activities and accomplish-
ments of Louisville RFC, outcomes have included the
following benefits to communities and individuals:
Leveraged core grant funding and received more than
$350,000 in additional grants and contracts.
Increased use and downloads of our practice guides, reach-
ing a broad national and international audience.
Helped the city of Louisville leverage our collaborative
efforts in the Park Hill Corridor community participation
project to more than $2 million in additional grants and
loans for that area of the city.
Continued to receive calls from the local and regional press
requesting our assistance regarding environmental policy
issues.
Continued to receive requests for staff at speaking engage-
ments for local organizations.
UNIVERSITY OF LOUISVILLE EFC
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GREAT LAKES ENVIRONMENTAL FINANCE CENTER
AT CLEVELAND STATE UNIVERSITY
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
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.313
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BACKGROUND & SUMMARY
The Great Lakes Environmental Finance Center
(GLEFC), based in the Maxine Goodman Levin
College of Urban Affairs at Cleveland State University,
mostly serves the six states of EPA's Region 5: Ohio, Michigan,
Indiana, Illinois, Wisconsin, and Minnesota. The primary pur-
pose of the GLEFC is to assist communities and states in
developing innovative, cost-effective, and high-quality financ-
ing strategies for environmental improvement and sustainable
economic development.
In particular, in its 11 years of operation, the GLEFC has pro-
vided technical assistance, outreach services, and training in a
broad array of issues in environmental finance, including urban
redevelopment in environmentally challenged neighborhoods;
water quality and distribution; sanitary and stormwater manage-
ment; capital budgeting and finance; air quality, such as clean
diesel emissions efforts; and sustainable environmental systems.
The GLEFC draws on Levin College research staff experts and
faculty members in the fields of public management and
finance, capital planning and finance, economic development,
environmental planning, public administration, real estate, and
city and regional planning. The leadership and staffing of the
GLEFC is shared with Levin College's Center for Public
Management. The GLEFC has initiated partnerships with Levin
College faculty members to broaden the EFC's base of expertise
and expand its capacity. These GLEFC faculty fellows have been
successful in adding value to the staff and project teams. The
GLEFC also utilizes specialists from outside the university,
including private consultants, experts from the nine university-
based EFCs in the network, and other specialists.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
Nuts and Bolts of Urban Redevelopment for Local
Communities Training
The GLEFC, in collaboration with EPA Region 5, the U.S.
Department of Housing and Urban Development, and the
Northeast-Midwest Institute, sponsored a week-long training
session for local development professionals on financing the
redevelopment of areas containing environmentally contami-
nated properties. The session attracted more than 50 partici-
pants.
Ohio Department of Development, Clean Ohio
Revitalization Fund (CORF) Focus Groups
The GLEFC conducted focus groups in each of Ohio's econom-
ic regions to revisit the CORF program administrative/grant
application rules and grant dissemination rules, following the
fourth round of grant making. The focus groups attracted more
than 350 participants and examined the perceptions of program
participants on the mission, the administrative and application
process, and grant decision rules. The GLEFC analyzed the
results of the focus groups to redesign the CORF application,
rules for allotting points for priority ranking of applications, and
the decision rules for grant funding allocation.
East Cleveland Lead Ordinance
The GLEFC assisted the city of East Cleveland in developing a
model ordinance for inspecting for the presence of lead in resi-
dential units in the city. The ordinance allows for multimedia
inspections by city employees in different departments (e.g., sep-
arate inspections by health, fire, police, building departments) in
units with a profile (e.g., age of building, condition, degrada-
tion) that would suggest potential lead contamination.
NPDES Phase II Annual Reporting
The GLEFC staff provided technical assistance in preparing
the annual report for the city of Amherst, Ohio, and the vil-
lage of Sheffield, Ohio, to address compliance with Section 4.3
of its NPDES stormwater discharge permit for small munici-
pal separate storm sewer systems. The annual reports com-
pared the annual actual outcomes of the city's and village's
stormwater management program (SWMP) against the level of
activities projected prior to the start of the year. Based on this
analysis, The GLEFC staff prepared an annual report for each
THROUGH 2OO7, THE GLEFC...
* Attracted nearly 700 people to training/forum
sessions.
4 Gave 15 presentations at meetings and
conferences.
+ Hosted five training sessions on stormwater
regulations.
+ Produced videos on NPDES-related training.
4 Provided technical assistance to 15 communities
about environmental and economic development
finance.
4 Published an academic journal article on the
design of environmental public policy programs.
community that described progress made toward achieving
measurable SWMP goals during the current reporting cycle
and activities the city and village would undertake in the
upcoming permit year. This type project occurs each year for a
series of cities/villages.
Northeast Ohio Regional Sewer District (NEORSD)
Rate Base Capacity Analysis
The GLEFC conducted an analysis of economic and demo-
graphic trends to determine the ability of the NEORSD's rate
base to pay future rate increases anticipated for the operating
and capital needs of the sewer district in greater Cleveland.
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ACTIVITIES & ACCOMPLISHMENTS
Journal Publication
The GLEFC published an article in Environmental Practice
Journal called "The Use of Focus Groups for Design and
Implementation of Collaborative Environmental Programs."
The article describes the use of focus groups as stakeholders
participating in collaborative program development in the
design of state level public policy programs. The article is based
on projects conducted for the National Oceanic and
Atmospheric Administration and CORF.
International Relations
The GLEFC made a presentation to a group of Council of
World Affairs visitors to Cleveland from Chile, India, Jordan,
Nigeria, Serbia, Turkey, and Zambia. The presentation covered
environmental policies and regulations affecting local govern-
ments, environmental awareness in education, marketing and
city planning, and approaches to solving urban environmental
problems.
Urban Redevelopment Forum
The GLEFC convened three Urban Redevelopment Forums to
share successful experiences in the remediation of environmen-
tally contaminated properties in Ohio in partnership with the
Ohio Brownfield Finance Partnership. The forum brought
together developers, environmental engineers, lawyers, com-
mercial bankers, environmental insurance executives, public
development officials, and public finance professionals to
review pending projects.
Infrastructure Special Assessment Reallocations
The GLEFC staff assisted several cities in determining how to
reallocate water or sewer utility special assessments placed on
parcels that have been split, combined, or platted. The balance
due by the parcel owner is distributed among newly created
child or platted parcels based on proportional benefit. Staff
completed 20 special assessment reallocations.
Ongoing Projects & Initiatives
Market Barriers to Sustainable Development
The GLEFC participates in the ongoing Chicago (EPA Region
5)-based program Market Barriers to Sustainable Development
to explore the barriers to green residential and commercial
development. The GLEFC's role has been to explore the public
finance implications of, and the market influence on, credit
quality. In addition, the GLEFC is proposing to develop a
series of white papers to support the continuing dialogue of the
regional Market Barriers to Green Development Committee.
The white papers will provide applied research and best prac-
tice data and information to guide committee members in
identifying and reviewing viable market-driven alternatives in
sustainable development. The topics of the white papers will be
drawn from the dialogue of committee meetings and confer-
ence calls, as well as from interviews with members of the
committee and focus-group-type sessions. The interviews/focus
group sessions will focus on drawing out information and data
needs of the committee but will also evaluate the needs of a
national audience for sustainable development.
Media Relations
The GLEFC is in a continuing dialogue with Tom Ott of the
Cleveland Plain Dealer on the concept of regional government
and governance. The dialogue over 18 months has resulted in a
series of articles exploring the impact of service consolidation
on increasing the efficiency of local government.
New Projects & Initiatives
Clean Ohio Small Communities
CORF is among the most successful environmental remedia-
tion grant funding programs in the United States. Participation
in CORF has been limited to Ohio's larger and medium-sized
cities, due to the volume of the application and the technical
requirements for CORF. While the large and medium cities are
the central component of the market for brownfields grants,
many small cities in Ohio have significant needs in environ-
mental remediation. The GLEFC is assisting the Ohio
Department of Development/CORF in the development of a
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ACTIVITIES & ACCOMPLISHMENTS
strategy for engaging Ohio's smaller communities in a dialogue
to address their environmentally challenged properties. The
GLEFC efforts with the CORF project for small communities
will include:
• Facilitating the development of a strategic plan for commu-
nicating with and increasing the participation of small
communities in the CORF program.
• Identifying small communities with environmentally
challenged commercial and industrial properties.
• Identifying best practices in small community environmental
remediation.
• Engaging Ohio's small communities in a dialogue on
environmental assessment.
• Designing a technical assistance approach to engage Ohio's
small communities in the CORF program.
Training Consortium
In spring 2007, the GLEFC convened regional stormwater
training providers to collaborate on training needs and
resources for the northeast Ohio region. Since the initial meet-
ing, this group has agreed to meet regularly to coordinate
training efforts. The outcome of the initial series of meetings
was a six-month training calendar. As a result, the training
consortium has begun to develop a training curriculum and
schedule and provide training for locally elected and appointed
officials. The training consortium will provide:
• High-quality training.
• High-priority training at a frequency that meets local
demand.
• Training that allows local officials to understand and meet
environmental reporting requirements.
Contact Information
4 Kevin E. O'Brien, Executive Director
Phone: 216-687-2188
E-mail: k.e.obrien@csuohio.edu
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PERFORMANCE MEASURES
A
;> a result of the ongoing activities and accomplishments
af the GLEFC, outcomes have included the following:
110 Google alerts citing the work and staff of the GLEFC.
The GLEFC monitors how other organizations cite and use
its work in the conduct of their programs.
Repeat clients for local government technical assistance.
Repeat high-level work with the Ohio Department of
Development/CORF, including program evaluation and
program analysis.
Recommendations from CORF that its applicants use the
GLEFC for technical assistance.
Publication of the fourth in a series of academic publications
on the design of public policy programs through the use of
focus groups.
Implementation of the land bank strategy, developed by the
GLEFC, in the city of Cleveland and Cuyahoga County,
Ohio.
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ENVIRONMENTAL FINANCE CENTER
AT THE NEW MEXICO INSTITUTE FOR
MINING AND TECHNOLOGY
In This Report
Background & Summary
Activities & Accomplishments
Performance Measures..
.318
.319
.327
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mfHc ~' -• '
BACKGROUND & SUMMARY
The Environmental Finance Center at New Mexico
(NM RFC), located at the Institute for Mining and
Technology largely serves the five states of EPA's
Region 6: Arkansas, Louisiana, New Mexico, Oklahoma, and
Texas. The primary purpose of the NM RFC is to assist state,
local, and tribal governments in meeting environmental infra-
structure needs and achieving regulatory compliance through
state and local capacity building and technical information
transfer. Capacity building includes enhancing technical, man-
agerial, and financial capabilities to achieve consistent and sus-
tainable regulatory compliance and to promote and develop
sustainable infrastructure.
In particular, the center works to:
• Examine alternatives or innovative approaches to meet regula-
tory compliance and achieve sustainable infrastructure.
• Empower communities to act as the "drivers" and decision-
makers for their own projects.
• Present funding alternatives for various types of projects.
• Act as a bridge between federal, state, local, and tribal
Analyze issues or projects as a neutral entity.
• Gather stakeholder input.
• Encourage examination of state or federal programs that
inhibit sustainable infrastructure, and offer suggestions of pos-
sible approaches that have been used elsewhere.
Through 2007, the NM EFC accomplished the following:
• Developed tools to assist small communities, including an
asset management guide, a guide on cost estimating for capi-
tal projects, and a resource guide for complying with the
arsenic standard.
• Analyzed leak detection technologies for use by water systems.
• Assisted the New Mexico Environment Department in quali-
fying communities for drinking-water loan funding.
• Promoted asset management concepts at the national, region-
al, state, and local level.
• Worked toward improved compliance and increased protec-
tion of public health in tribal drinking-water systems.
• Worked with state and local communities to increase water
system technical, managerial, and financial capacity.
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ACTIVITIES & ACCOMPLISHMENTS
THROUGH 2OO7, THE NM EFC...
+ Performed 194 capacity assessments for New
Mexico water systems.
4 Developed an MSAccess database of all leaks
occurring in the Albuquerque Bernalillo County
Water Utility Authority distribution system over
the past nine years.
Held 20 training events for community water sys-
tems in New Mexico, attracting more than 400
participants representing 111 community water
systems, seven state agencies, 19 tribes, and three
private companies in New Mexico.
4 Distributed more than 300 Construction Cost
Estimating Guides.
4 Distributed more than 400 Asset Management
Guides.
* Developed three asset management inventory
databases for New Mexico communities.
+ Completed more than 20 CIS maps for New
Mexico communities in support of asset manage-
ment and capacity development.
Assisted more than 35 communities with exam-
ining options for compliance with the new
Arsenic Rule.
Performed 50 capacity assessments for Texas
water systems.
Held eight training events for tribal water opera-
tors and managers, attracting more than 175 par-
ticipants, including representatives from water
systems from 20 of the 21 tribes in New Mexico,
one tribe in Texas, and 11 California tribes.
Assisted 46 tribal water systems in the prepara-
tion of consumer confidence reports.
Administered 10 tribal operator certification exams.
Assisted in the collection of chemical and
radionuclides compliance samples for more than
40 tribal water systems.
Mailed more than 300 tribal training calendars
to tribal water operators.
Performed 10 multiple barrier evaluations (similar
to sanitary surveys).
Gave one or more presentations at 16 conferences,
with a total audience of more 1,000 participants.
Completed Projects & Initiatives
Evaluating Technology
In 2007, the NM EFC completed the Independent Analysis of
Fluid Conservation System Leak Detection Technology for
Albuquerque Bernalillo County Water Utility Authority. The
three-part report covered a historical analysis of main water
line breaks throughout the distribution system, an evaluation
of passive leak detection technology in the field, and an analy-
sis of a head-to-head comparison of passive and active leak
detection methods.
The historical analysis of main line water breaks (Phase 1)
identified areas in the water distribution system that were sus-
ceptible to a high frequency of leaks. This information helped
the authority identity areas in which to focus its leak detection
efforts, improve leak repair response times, and prioritize main
line replacement programs. Phase 2 of the report, the leak
detection technology evaluation, helped the authority decide
how best to deploy this technology in the field to maximize its
capabilities. Phase 3 was a comparison of passive and active
leak detection technologies deployed in the field. The results of
this report provided the costs, benefits, and success rates asso-
ciated with each leak detection technology. Overall, the find-
ings in these reports will help the authority design a leak
detection strategy based on achievable goals and effective tech-
nology. To review the reports please visit:
http://nmefc.nmt.edu/LeakDetection.php.
Training Tribal Managers
The NM EFC developed and presented a three-day training in
California for tribal utility managers for the Indian Health
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Service. The training covered asset management, capital plan-
ning and budgeting, utility rate setting, and integrating utility
management with economic development. The NM RFC has
been asked to present the training again in 2008.
Promoting Better Water Management
In 2006, the New Mexico Water Infrastructure Investment Team
tasked the NM RFC with conducting a pilot study for three
New Mexico communities. The purpose of the pilot study was
to develop a process that could be used to assist New Mexico's
drinking-water and wastewater systems in implementing new
administrative and management procedures to adapt to the regu-
latory water quality and water quantity challenges of the future.
The three activities selected for the pilot study were asset man-
agement, water audits, and financial planning. The goal of the
project was to direct systems toward long-term sustainability.
The NM RFC worked with three communities to pilot the
approach. The RFC completed the pilot study in April 2007,
presented the case studies at conferences throughout New
Mexico, and then developed an asset management manual for
water and wastewater systems, with a focus on the needs of
smaller systems.
In addition, the NM RFC subcontracted with the New Mexico
Rural Water Association and the Rural Community Assistance
Corporation to complete water audits and five-year financial
plans for the three communities. With the help of the NM
RFC, these organizations also developed manuals for water
auditing and financial planning.
Aiding Water and Sanitation District Organization
Forming a Water and Sanitation District (W&SD) in New
Mexico can be a lengthy, complex, and expensive process. The
NM RFC developed a manual to help communities, engineers,
attorneys, and technical assistance providers to better under-
stand the steps involved and make thoughtful and informed
decisions about the need for a district. The manual is not
intended to replace legal advice, but rather to help communi-
ties gain an overall understanding of the process. In fact, legal
counsel is required in the later phases of forming a W&SD.
The manual includes a flow chart, which was developed to
help illustrate the process.
Assisting Arsenic Compliance
In partnership with Sandia National Laboratory and the
University of New Mexico, the NM RFC completed a project
providing direct assistance to water systems in New Mexico that
are potentially affected by the Arsenic Rule. Approximately 90
public drinking-water systems in New Mexico have arsenic levels
that are expected to exceed the standard of 10 ppb. The project
provided free water sample testing by Sandia National
Laboratories, assistance in identifying compliance alternatives,
and assistance in determining potential funding sources for the
project. The project team prepared a report, Summary of
Resources Available to Small Water Systems for Meeting the 10 ppb
Arsenic Drinking Water Limit, which it distributed in paper and
CD format to all potentially affected systems.
In order to assist communities with understanding the various
arsenic compliance options, the NM RFC analyzed RPAs
Arsenic Removal Technology Demonstration Program's
Published Reports for the Round 1 Arsenic Removal
Technology Demonstrations (http://epa.gov/nrmrl/wswrd/dw/
arsenic/index.html). Rach report's information regarding treat-
ment technology, arsenic removal success, problems encoun-
tered during the demonstration, and overall costs for the
treatment was tabulated for easy comparison.
Under separate funding, the NM RFC will summarize the
Round 2 Arsenic Removal Technology Demonstrations
Reports in the same manner. Ultimately, the RFC will develop
a searchable database to allow users to compare water systems'
water quality and quantity data to the technologies that were
tested to find potential treatment technologies for any system.
Identifying Alternatives for Small Public Water
Systems in Texas
The NM RFC, under a subcontract from Parsons Corporation,
an engineering company, worked as part of a team to identify
and analyze alternatives for small public drinking-water sys-
tems that were not in compliance with drinking-water regula-
tions. The project team included Parsons and the University of
Texas Bureau of Rconomic Geology and was funded by the
Texas Commission on Rnvironmental Quality. The NM RFC
conducted capacity assessments of water systems in central
Texas in 2006 and the area surrounding Lubbock, Texas, in
2007- These assessments evaluated the ability of the water sys-
tems to implement compliance alternatives. This project built
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on previous efforts in 2004 and 2005- The RFC conducted
approximately 50 assessments and also identified systems to
receive additional technical assistance.
Ongoing Projects & Initiatives
Supporting Tribal Water Systems
Currently, EPA Region 6 has oversight responsibility for 82 pub-
lic water systems representing 30 Native American tribes. The
NM RFC has been working with these systems in the areas of
managerial, financial, and technical capacity development since
1996. In the period 2006-2007, the NM RFC continued its
efforts to assist tribal water systems in providing safe drinking
water and in improving public health protection. The NM RFC
continued to focus assistance on maximizing the use of each of
the barriers to prevent contamination (source, treatment, and
distribution). The NM RFC performs a wide variety of activities
under the tribal water system assistance program. Some of the
major activities are highlighted below.
Compliance Monitoring and Technical Assistance
' The NM RFC provides technical assistance regarding a vari-
ety of compliance-related issues via phone, e-mail, fax, and
scheduled onsite visits. Types of assistance include coordi-
nating sample collection activities as required by Safe
Drinking Water Act (SDWA) regulations, working with
operators in collecting compliance monitoring samples and
in using proper sample collection procedures, and helping
resolve drinking-water quality problems.
• The NM RFC performs Multiple Barrier Rvaluations,
which are similar to Sanitary Surveys, on ground water sys-
tems to identify potential health and safety concerns with
tribal water systems.
• The NM RFC designs and implements special studies to
assist water systems in identifying water quality problems,
including testing free and total residual chlorine and collect-
ing bacteriological samples at locations representative of the
three barriers (source, treatment, and distribution).
• The NM RFC works with water operators who are interest-
ed in conducting their own "in-house" analyses of water
samples for nonregulatory purposes through equipment
loans, training, and guidance.
Preparing for sampling and analysis.
Managerial and Financial Capacity Building
The NM RFC assists tribal utility departments with setting
utility rates, drafting by-laws, developing appropriate utility
ordinances, and creating utility budgets.
Public Education and Outreach
The NM RFC provides assistance to tribal water systems in
developing and implementing public awareness/education
campaigns through displays and presentations, educational
brochures, and participation in environmental, health, and
water fairs.
Voluntary Plan Review
The NM RFC offers a voluntary plan review service for new or
upgraded tribal water systems prior to construction. This serv-
ice is an independent review of the plans from an operational
and regulatory perspective.
Information Management Activities
To help in ensuring adequate clean water and safe drinking
water, the NM RFC assists RPA Region 6 in identifying and
surveying new water systems, new sources, new treatment sys-
tems, and changes in population or system classification. In
addition, the NM RFC assists RPA Region 6 in maintaining
the Safe Drinking Water Information System database, ensur-
ing that each water system is inventoried accurately in terms of
contacts, facilities, and monitoring schedules.
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Training
The NM RFC provides trainings on a variety of water-system-
related topics that are not provided by other agencies and for
which managers and operators have expressed a need. Training is
done one on one or in a small group setting, and the NM RFC
strives to make the classes interactive and fun, including the use
of multimedia to engage the participants. All trainings are
approved for continuing education units and are designed to
increase tribal operator competency as well as to increase the
number of certified operators at tribal drinking-water systems.
Training topics include multiple barrier evaluation, SDWA regu-
lations, disinfection, Consumer Confidence Reports, and the
Total Coliform Rule.
Certifying Water Operators
The NM RFC administers the Tribal Water Operator
Certification Program in RPA Region 6 with guidance from the
Tribal Utility Advisory Committee. The NM RFC processes
applications for certification, reciprocity, and certificate
renewals, and administers the examinations. The NM RFC
developed a database to track this information. The certification
examinations are given quarterly, and information concerning
deadlines for applications is in the tribal calendar, produced
annually under this program. The NM RFC also provides oper-
ators access to training materials and a computer to prepare for
the examination.
Building Water System Capacity
Building water system capacity (technical, managerial, and
financial capabilities) has been a major focus of the NM RFC
since the capacity development requirements were added to the
SDWA in 1996. This effort involves four major activities: 1)
technical information gathering and transfer, 2) asset manage-
ment, 3) capacity development assistance to states and local
governments, and 4) assistance to and participation in the RFC
Network. This program has offered many activities and showed
many accomplishments over the past two years, including five
specific activities, described as follows:
Minimum Standards for Water System Planning
Documents
While interviewing drinking-water systems for capacity assess-
ments and in subsequent capacity data analysis, the NM RFC
staff noted that water systems of all sizes lacked management
and planning documents, particularly long-range plans. NM
RFC staff were concerned that existing guidance documents
and templates could deter small, volunteer-run water systems
from creating their own management and planning documents
due to general unfamiliarity with terminology and utility busi-
ness practices.
In response, the NM RFC developed a handbook designed to
help drinking-water systems, regulators, and technical assistance
providers gain a greater understanding of the many
management issues and plans applicable to water systems, and
outline the elements to include in such plans. The handbook
provides suggestions for policies and procedures such as
employee development, bookkeeping, and customer cut-off, as
well as plans such as drought contingency and emergency water
supply. In total, the handbook provides basic information and
recommended elements for 37 management issues and plan-
ning documents, including a chapter on asset management
planning.
The working title of the handbook is Minimum Standards for
Water System Planning Documents. The NM RFC distributed a
draft to federal and state agencies, as well as a handful of water
systems for review. Comments on the review draft were received
in December 2007, and a final document is expected soon.
Revision of Arkansas Department of Health's
Guidelines for Preparing a Long Range Plan
In 2007, the Arkansas Department of Health (DoH) requested
that the NM RFC revise the Guidelines for Preparing a Long
Range Plan. The plan is a requirement for water systems under
Arkansas law; however, the requirement has not been strictly
enforced. The Arkansas DoH wanted to better enforce the
requirement while also making the document more useful to the
systems. Therefore, the Arkansas DoH requested that the NM
RFC revamp the guidelines so that they would include a focus
on asset management and sustainability, as well as be easy to fol-
low for the water systems. The NM RFC reviewed the existing
document and revised it for DoH to incorporate into its system.
Cost Estimating Guide
The NM RFC developed a guide for estimating the cost of
water, wastewater, roads, and building capital projects.
Communities in New Mexico are required to prepare an
Infrastructure Capital Improvement Plan, submitted annually
to the Local Government Division of the state. The plan must
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ACTIVITIES & ACCOMPLISHMENTS
include estimated costs for proposed infrastructure projects.
The guide was designed to provide information on estimating
cost of capital projects to communities that do not have the
expertise or resources available. The NM RFC developed the
guide in 2000 and updated the costs in 2006 and 2007- The
NM RFC presented interactive workshops across the state to
assist communities in estimating capital projects.
Community Development Block Grants (CDBGs)
Asset Management and Rate-Setting Training
The NM RFC presented workshops on developing asset man-
agement plans and utility rate setting for communities prepar-
ing applications for CDBGs throughout New Mexico.
Regulations adopted by the board include an additional 10
points for communities that develop an asset management
plan and include a review of utility rates based on that plan.
The workshops are interactive, with the participants working
on various aspects of asset management during the training.
These trainings will continue in the future as more systems
become interested in asset management.
Asset Management Activities
' The NM RFC sponsored a visit to New Mexico by Peter
Hebden who works for the New Plymouth Council of New
Zealand. Mr. Hebden is the asset manager for the water and
wastewater utilities in New Plymouth and has been working
in the area of asset management for more than 10 years. He
is extremely knowledgeable regarding on-the-ground tech-
niques to make asset management successful. New
Plymouth Council has an extremely advanced asset manage-
ment program. During his visit, Mr. Hedben met with the
Albuquerque Bernalillo County Water Utility Authority and
the city of Los Alamos. He also spent considerable time
with the NM RFC staff discussing asset management tech-
niques used in New Plymouth.
• The NM RFC attended the RPA Advanced Asset
Management Training held in Albuquerque, New Mexico, on
March 14 and 15, 2007- This training was presented by Steve
Allbee, Duncan Rose, and Doug Stewart. The NM RFC also
assisted the Rocky Mountain Section of the American Water
Works Association in promoting the workshop and inviting
attendees. The workshop drew approximately 45 attendees.
The RFC assisted the Department of Finance and
Administration in developing language for the CDBG
applications, including points for developing asset manage-
ment plans and generating a rate based on the plan.
The NM RFC director was asked to make a presentation at
the Institute of Public Works Rngineering International
Conference in Cairns, Australia. The presentation discussed
activities underway in New Mexico in asset management.
The conference was an excellent opportunity to meet asset
managers from all over the world and discuss their successes,
challenges, and advice for systems as they begin asset
• The NM RFC is participating in RPA's Check Up Program
for Small Systems (CUPSS) workgroup. This program will
assist small communities in creating an asset management
plan. It is a tool they can use for inventory purposes as well
as guiding them through the five core questions of asset
management. The NM RFC will assist in the beta testing of
CUPSS on two systems in New Mexico.
Assessing Water System Capacity
The NM RFC continues to work with the New Mexico
Rnvironment Department-Drinking Water Bureau (NMRD-
DWB) to refine the New Mexico capacity assessment ques-
tionnaire and perform assessments. During the period
2006-2007, the NM RFC completed 67 capacity assessments
and 15 assessment updates on drinking-water systems in New
Mexico for the purposes of the Drinking Water State
Revolving Fund and technical assistance evaluation. Over the
course of the project since 2005, NM RFC completed 194
capacity assessments and updates throughout New Mexico.
Valle Grande
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The NM RFC analyzed selected quantitative and qualitative
data from the capacity assessments in the autumn of 2006.
From this analysis, the NM RFC recommended new and
enhanced technical assistance approaches for NMRD-DWB to
consider. Because of this analysis, the NM RFC developed and
delivered training on utility rate-setting based on an asset man-
agement program. The analysis also revealed a lack of water
system management plans (such as long-term water supply,
source water protection, preventative maintenance, and emer-
gency response).
Facilitating Water Project Funding
During the period 2006-2007, the NM RFC reviewed envi-
ronmental documents for three water utility projects for the
New Mexico Finance Authority's (NMFA) State Drinking
Water Revolving Loan Fund (DWRLF) to determine if the
projects were in compliance with the State Rnvironmental
Review Process. Based on the reviews, the NM RFC drafted two
Rnvironmental Assessments and one Categorical Rxclusion doc-
ument for the projects, which enabled the NMFA to approve
funding. The NM RFC also worked with the NMFA to draft
guidelines to assist the NMFA with spending Tier Two funding
generated by the DWRLF. The NM RFC will continue to work
with NMFA in 2008 and beyond on this type of work.
Developing Self-Assessment Manuals
In 2007, and continuing into 2008, the Iowa Department of
Natural Resources contracted with the NM RFC to review the
existing Self-Assessment Manual for Iowa Water System Viability.
The NM RFC is developing and producing revised versions of
the manual that will ultimately comprise six unique docu-
ments, one of each of the following for both existing water sys-
tems and new water systems: Community Water Systems,
Non-Community Non-Transient Systems, and Transient Non-
Community Systems. The NM RFC will test the new forms to
ensure the water systems are able to understand and interpret
the questions as intended by visiting with water systems in
Iowa and reviewing the manuals with them.
Implementing Asset Management for the
Albuquerque Bernalillo County Water Utility
Authority
The Albuquerque Bernalillo County Water Utility Authority
(ABCWUA) is in the process of developing and implementing
an asset management program. The authority owns and
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operates the water and wastewater treatment facilities that serve
the city of Albuquerque and the surrounding county. After the
authority's board passed a resolution to undertake asset manage-
ment, the board designated asset managers and formed a steering
committee to guide the process. The NM RFC has been work-
ing with the authority to provide assistance and advice as it
moves forward with the asset management program.
New Projects & Initiatives
Asset Management for Communities
Rspanola and Las Vegas are two medium-sized communities in
northern New Mexico. Both communities received funding
from NMRD's Clean Water State Revolving Loan Fund
Program for construction activities related to their wastewater
treatment facilities. As part of the loan agreements, the NMRD
included language requiring each of these communities to devel-
op an asset management program. To meet the NMRD require-
ments, the NM RFC was asked to assist these communities in
the preparation of their plans. One of the key attributes of a suc-
cessful asset management plan is the direct involvement of the
utility itself in the process; if the process of asset management is
owned by the utility, it is much more likely that asset manage-
ment will be implemented. These entities will be doing asset
management plans for both water and wastewater systems,
through a series of meetings and workshops facilitated by the
NM RFC.
Strategic Leak Detection
The NM RFC is proposing to work with the Albuquerque
Bernalillo County Water Utility Authority on an initiative to
develop a strategic leak detection program on the distribution
system. Several approaches will be employed, including fixed-
based metering with integral leak detection, passive leak
detection, active leak detection, and an assessment of fire
hydrant leakage. Part of the effort will involve an investigation
of the Rconomic Lower Level of Leakage for the authority so
that the amount of potential water savings can be determined.
The effort will also involve developing a guidance document
that can be used by systems throughout the state to determine
the various techniques that might be most appropriate for that
type of system.
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Water Loss Analysis for New Mexico
In 2008, the NM RFC will be working on a project to evaluate
water loss and potential water savings throughout New Mexico.
The report will compile and evaluate estimated water loss from
the water distribution systems throughout New Mexico. It will
also outline the potential savings a water system could ulti-
mately achieve through leak detection and water loss manage-
ment. The paper will complement and be based on prior work
the NM RFC has completed in capacity assessment, leak detec-
tion analysis, and asset management. The paper will bring
together the concepts of asset management and leak detection
strategies as well as cost/benefit analysis of leak detection and
water loss. Quantifying and comparing water loss data for
water systems throughout the state could help decision-makers
determine how best to utilize funding to minimize water loss
in drinking-water utilities.
Utility Rate-Setting Guide
A number of studies have indicated that water user rates in
small communities are not adequate to meet the financial
needs of the system. For several years, the NM RFC has been
conducting rate-setting workshops using the Show Me Rate-
Maker software developed by the Missouri Department of
Natural Resources. Rxperience with these workshops indicates
that many small systems are lacking the specific knowledge and
expertise to set adequate user rates. Rmerging regulations
requiring systems to prove the adequacy of their rates and to
incorporate asset management into the process to be eligible
for funding has brought this issue to the fore. In the coming
year, the NM RFC will develop a Water Rate-Setting Guide
similar to the Asset Management Guide and Cost Estimating
Guide. The intent of this guide will be to provide background
information on financial issues relevant to rate-setting (e.g.,
guidelines on operating expenses, reserves, coverage ratios, and
operating ratios) as well as step-by-step instructions for setting
a water rate that meets the financial needs of the system and a
resource list for other publications, tools, and assistance.
Technical Assistance to Brownfields Communities
The RFC in Louisville, Kentucky, submitted a proposal to RPA
for a grant to provide technical assistance to brownfields com-
munities. The NM RFC was one of the Louisville RFC's sub-
contractors on this project. The proposal focused on
community involvement and brownfields finance, though
activities would also touch on public health and economic
development simply as a result of the nature of brownfields.
If the proposal is awarded, the RFCs will be able to offer a wide
array of services to governmental entities, nonprofit organiza-
tions, and brownfields stakeholders. These services could include
community outreach; development of a brownfields inventory;
assistance to communities in understanding the brownfields
cleanup process; assistance in marketing properties; and assis-
tance in working with lenders, investors, developers, and insurers
to form partnerships to fund brownfields cleanup.
Water System Mapping
The NM RFC is proposing to work with the New Mexico
Department of Finance and Administration on a project to
provide basic mapping information to water systems within the
state. This effort would be the first step toward an asset inven-
tory, which is the first step in asset management. This mapping
effort would also provide valuable information to the NM
Rnvironment Department in coordination with its sampling
and sanitary survey programs and could prove very important
in the event of an emergency. This effort will be coordinated
with the seven Councils of Government in the state. These
entities might be able to provide support to the water systems
that receive mapping assistance so that the maps can be updat-
ed in the future.
Sustainability Initiative
At the headquarters and regional level, RPA has been heavily
focused on the need for long-term sustainability in our envi-
ronmental infrastructure, particularly water and wastewater
infrastructure. To kick off this initiative, the RPA sponsored a
conference on Paying for Water Infrastructure in Atlanta,
Georgia. The NM RFC presented a workshop at the confer-
ence and has been an active participant in the follow-up meet-
ings to discuss the results of the conference and next steps.
At the regional level, the NM RFC has been working within
RPA Region 6 in the development of the regional sustainability
efforts. Regions 6 and 8 will be working together to organize a
conference on sustainability. In addition, the NM RFC was
involved with Region 5 and 7's sustainability workshop. The
NM RFC presented a workshop on asset management and par-
ticipated in the Asset Management/Rnvironmental
Management Systems track throughout the conference.
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Within New Mexico, the NM RFC has been leading a steering
committee to develop a series of workshops on sustainability.
The workshops will include discussions on funding issues,
small systems, and barriers to sustainability. The intent is to
have very focused workshops that conclude with action steps.
The NM RFC expects sustainability to be a major focus area
for the coming years.
Contact Information
Heather Himmelberger, Director
Phone: 505-272-7357
R-mail: heatherh@efc.nmt.edu
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s a result of the ongoing activities and accomplishments
of the NM RFC, outcomes have included the following
enefits to communities and individuals:
The training provided to water system personnel has had
many positive benefits, including increased compliance with
drinking-water regulations and increased knowledge.
Specific feedback from trainings includes the following:
- "Excellent. Enjoyed the training. Walking out with more
knowledge than when I came in! Feel confident after this
training." (April 2007 Consumer Confidence Report
Training)
- "Everything was very informative. It will provide many use-
ful tools to implement with my utility when I return. All
speakers were professional and educated in all topics."
(August 2007 Utility Management Training)
- "You all did a great job in your presentations, not,
and great classroom involvement-interaction." (August
2007 Utility Management Training)
- "The whole training was very informative and valuable."
(February 2007 Total Coliform Rule Training)
- "I thought the training was excellent. I like the combination
of lecture and activities." (February 2007 Total Coliform
Rule Training)
Based on the work of the NM RFC, many communities
were able to make positive changes related to improved
operations, improved compliance, or improved manage-
ment. Three specific examples are highlighted below:
- Asset Management: The NM RFC assisted three small
communities in developing asset management plans.
The three communities achieved different successes
depending on their specific situation. The communities
provided the following feedback regarding the asset
management process.
• "It's been very helpful. It's opened our eyes to things that
are taken for granted or overlooked. The inventory will
be very useful to the village overall. It will help with
presenting information to funding agencies. The process
was useful to the village and most importantly to our
customers."
• "Having a single map of the system and an inventory
database allowed the board members, who were volun-
teers and did not have the time to search through histor-
ical records, to easily locate existing water lines and plan
for new lines in the future."
— Albuquerque Bernalillo County Water Utility Authority
(ABCWUA) Leak Information and Leak Detection:
The ABCWUA has been able to use the database of
information provided by the NM RFC regarding leaks
within the authority's system to prioritize pipes for
replacement. This information is aiding in the overall
asset management program and in the capital improve-
ments program. The ABCWUA has also been able to
use the leak detection efforts to develop a strategic leak
detection approach for the authority. The work in that
project allowed the authority to determine which tech-
niques best suit the system and where, when, and how
they should be deployed.
- Arsenic Outreach: Based on the work of the NM RFC,
some communities were able to determine that the best
compliance option was to connect with a larger system
and cease to operate as an independent system. This
consolidation will assist the system and its customers by
eliminating the need to install expensive equipment that
will require a much higher-level operator to run. This
consolidation has taken place already in some cases and
is in progress in other cases. The NM RFC was able to
assist some communities in receiving exemptions for the
arsenic rule. These exemptions will allow the systems
additional time to comply with the rule. The purpose of
the additional time is not to delay the process, but rather
to allow the systems to use more recent data regarding
treatment systems, their costs, and effectiveness in the
investigation of which option will be the best for them.
The NM RFC has continued to expand the services it pro-
vides beyond the "usual" clients and activities. For example,
the NM RFC has been working with the state of Iowa on
EFC AT THE NEW MEXICO INSTITUTE FOR MINING & TECHNOLOGY
"It's been great. It was a very helpful process and we can
now use the Preliminary Engineering Report to plan
replacement and loop lines. The discussions on criticality
• our point of view."
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PERFORMANCE MEASURES
its capacity assessment self-evaluation documents and has
begun discussions with the state of Kansas on developing
asset management training materials. The NM RFC has also
expanded its program to EPA Region 8. This new effort will
allow the NM RFC to bring its expertise to six additional
states. The NM RFC has been working with the
Albuquerque Area Office of the Indian Health Service for
several years, but recently expanded to serving areas outside
of Albuquerque. The NM RFC assisted the national training
program by presenting a three-day water system manage-
ment course in California. The NM RFC has been asked to
conduct the course again in another area of the country. In
terms of new work efforts, the NM RFC teamed up with
the Louisville RFC in Region 4 to propose work on assis-
tance to brownfields communities. This effort allowed the
NM RFC to expand its efforts beyond local officials. The
NM RFC has also expanded its reach by responding to
requests to assist others outside the region on asset manage-
ment. The NM RFC has distributed many of its asset man-
agement guides to states and local governments outside
Region 6. The NM RFC has also presented several work-
shops and conference presentations to states and local gov-
ernments outside Region 6.
The most notable area in which the NM RFC's work has
had a direct impact on the actions of others is in the area of
asset management. The NM RFC has been actively promot-
ing asset management and its potential benefits within the
state of New Mexico for several years. These efforts included
presentations to NM legislative committees, presentations
and discussions with state agencies, participation in the
Water Infrastructure Investment Technical Team, training
for water systems in conjunction with the CDBG Program,
and presentations to groups, such as the Governor
Financing Officers Association. During the 2006 to 2007
timeframe, the results of these efforts have started to become
apparent. The CDBG program has included criteria to give
10 points to communities that are actively engaged in asset
management and who use asset management to set their
rates. Given the competitive nature of CDBG applications,
the 10 points is a strong incentive for communities to con-
sider developing an asset management plan.
The NMRD has begun to put requirements within its Clean
Water State Revolving Fund (CWSRF) awards for asset
management. These requirements are some of the first, if
not the first, in the nation. The NM RFC is working with
NMRD and two communities in developing the asset man-
agement plans required as a condition of the CWSRF loans.
These two communities, along with others in the state who
are currently involved in asset management activities, will
form the nucleus of an asset management "users group" in
New Mexico.
Several state agencies and the New Mexico Legislature are
working on funding criteria that would apply to all state
funding programs for water and wastewater infrastructure.
One of the criteria being investigated is asset management.
This investigation lead to the pilot project that the NM
RFC completed on three communities in New Mexico to
demonstrate the effectiveness of asset management for small-
er communities. Currently, there is a committee of state
agencies working on criteria for funding that is likely to
include asset management as criteria.
New Mexico is quickly becoming recognized as a leader in
the promotion of asset management for water and waste-
water infrastructure. New Mexico has been discussed at the
national CDBG meetings and at national water meetings,
such as the Council of Infrastructure Financing Authorities,
where it was mentioned by one of the keynote speakers.
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ENVIRONMENTAL FINANCE CENTER
AT DOMINICAN UNIVERSITY OF CALIFORNIA
In This Report
Background & Summary 330
Activities & Accomplishments 331
Performance Measures.. ..338
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BACKGROUND & SUMMARY
The Environmental Finance Center at Dominican
University of California (Dominican RFC), located at
the School of Business and Leadership, mainly serves
the four states and two territories of EPA's Region 9:
California, Nevada, Arizona, Hawaii, and the Tribal Lands and
the Trust Territories of Guam and American Samoa. The pri-
mary purpose of the RFC is to promote sustainable communi-
ties through cleaner business, by advancing pollution
prevention, source reduction, and energy conservation. The
Dominican RFC works with the private and public sectors to:
1) encourage industry to implement sustainable business prac-
tices, 2) educate and encourage consumers to choose green
business products and services, and 3) help communities and
government promote sustainable business.
The Dominican RFC pursues its mission through numerous
tools including:
• Green business development
• Business incubation
• Finance programs
• Facilitation and mediation
• Local economic development
• Symposia and workshops
• Research publications and reports
• Hands-on assistance to small business
Through 2007, the Dominican RFC accomplished the
following:
• Completed the new move to Dominican University.
• Attended numerous meetings and conferences.
• Worked with several counties to help them develop green
business programs.
• Worked with the Torres Martinez Tribal Solid Waste
Collaborative to eliminate green waste dumping.
• Placed a number of environmentally favorable posters in
several TV shows encourage environmentally friendly prod-
ucts on TV.
• Organized the first-ever Biodiesel Roundtable.
• Held two successful African American Hair Care
Roundtables.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
EFCRelocation
In May 2007, the EFC moved from California State University
to its new home at Dominican University of California.
Dominican University is an independent university of Catholic
heritage located 12 miles north of the Golden Gate Bridge in
Marin County, California. At Dominican, the EFC works close-
ly with the faculty and students of the "Green MBA" program.
Green MBA graduates receive a Master of Business Administra-
tion degree in Sustainable Enterprise. Scholars and students seek
solutions that promote financial viability, ecological sustainabili-
ty, corporate social responsibility and social justice.
Biodiesel Roundtable
According to EPA, reducing emissions from diesel engines is one
of the most important air quality challenges facing the country.
Even with more stringent heavy-duty highway and nonroad
engine standards set to take effect over the next decade, millions
of diesel engines already in use will continue to emit large
amounts of nitrogen oxides, paniculate matter, and air toxics,
which contribute to serious public health problems.
Biodiesel is an EPA-approved alternative fuel touted for its
environmental benefits, including reducing emissions. Diesel
vehicles require little, if any, retrofitting to burn biodiesel. A
2006 study conducted by the U.S. Department of Energy's
National Renewable Energy Laboratory found that for large
vehicles, burning a mixture of 20 percent biodiesel to 80 per-
cent petroleum diesel, known as B-20, reduced emissions of
paniculate matter by 16.4 percent, carbon monoxide by 17-1
percent, and total hydrocarbons by 11.6 percent.
THROUGH 2OO7, THE DOMINICAN EFC...
4 Attended three meetings for the Western
Regional Pollution Prevention Network.
4 Attended 15 meetings for green business pro-
grams throughout California.
4 Hosted three all-day roundtables, one for
biodiesel, two for African American Hair Care.
4 Attended 14 pollution prevention meetings.
4 Attended seven pre-biodiesel roundtable meeting
with EPA and other stakeholders.
4 Provided technical assistance to seven
communities.
4 Developed new facilitation tools for stakeholder
roundtables.
4 Attended six conferences on recycling, green
business, and conservation.
4 Developed a science summary and ingredient
analysis report of African American hair care
products.
4 Attended 15 nail salon meetings.
Participants at the Biodiesel Roundtable.
On January 16, 2008, the Dominican EFC organized the first
ever Biodiesel Roundtable, bringing together more than 50
representatives from industry (including haulers, producers,
distributors, and users), regulators, public agencies, and com-
munity-based organizations. The mission of the roundtable
was to identify and resolve obstacles for California communi-
ties to produce and use biodiesel derived from waste grease
(used cooking oil). The roundtable also included 15 Green
MBA students, who helped facilitate and record their individ-
ual workgroups.
Using and producing biodiesel from waste grease in California
is a complex issue. The goal of this working roundtable was to
engage all participants in a series of interactive exercises, to
share their expert and experiential knowledge of the issue, to
integrate these perspectives of the issues, and then to identify
original and practical ways to resolve the obstacles that
EFC AT DOMINICAN UNIVERSITY OF CALIFORNIA
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ACTIVITIES & ACCOMPLISHMENTS
Africa IA,
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April 26th, 2007
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currently impede production and use of biodiesel derived from
cooking oil. Ultimately, attendees generated nearly 70 sugges-
tions, which gained broad buy-in and support from partici-
pants and can serve as a basis for seeking additional resources
for promoting biodiesel in the state.
African American Hair Care Roundtable
Recent studies have found that chemicals in hair care products
can adversely affect human health and the environment. To
address this concern, the California State Legislature passed the
Safe Cosmetic Act (SB484) in
2005- This act requires cos-
metic manufacturers to dis-
close to the Department of
Health Services (DHS) ingre-
dients in their products
known by the state to cause
cancer or birth defects. It also
authorizes DHS to investigate the health impacts of chemicals
in cosmetics that are linked to cancer or birth defects.
The same year the act was passed, EPA Region 9 asked the
Dominican RFC to undertake the Pollution Prevention and
African American Hair Salon Project to determine how to
reduce exposure to and use of toxic chemicals by African
American hair salon owners, employees, and clients in
California. The $9 billion California cosmetology industry
constitutes the largest professional licensee population in the
nation; it includes more than 200,000 cosmetologists.
The project focused on three product areas: relaxers, hair dyes,
and conditioners with estrogenic hormones. The health issues
identified included precocious puberty in children, increased
rates of breast cancer, increased risk of bladder cancer, and per-
manent hair loss. The project found that information on ingre-
dients for salon formulations was difficult to obtain and that
scientific research data on the health impacts of relevant ingre-
dients, while limited for cosmetic ingredients in general, were
virtually nonexistent for African American hair products.
As part of this project, the RFC conducted informational inter-
views with stylists and salon owners, collected information on
salon products and practices, analyzed products and processes,
identified key stakeholders, and convened an African American
Hair Salon Roundtable in 2007-The purpose of the roundtable
was to discuss concerns raised within the health and environ-
mental communities about ingredients found in ethnic hair
care products and to review the science behind the potential
impacts and current policy. The event provided an excellent
opportunity for salon owners, workers, health and environ-
mental advocates, policymakers and regulators, and product
manufacturers to share and exchange information addressing
these concerns and to work collaboratively.
After the roundtable, the RFC prepared a science summary
and ingredient analysis of African American hair care products,
set up a listserv to share information, invited additional partici-
pants to join the network, and now continues to maintain and
moderate the listserv. With assistance from the Bayview
Hunters Point Health & Rnvironmental Assessment Taskforce
and RPA Region 9, the Dominican RFC convened a follow-up
meeting to the roundtable with the stakeholders. In addition,
the RFC oversaw development of fact sheets and talking points
for the stakeholder community.
Ultimately, the project recommends immediate action to pub-
licize the hazard of current products and to promote less haz-
ardous hair treatments and procedures to the African-American
population. This outreach should be done in partnership with
the State Board of Cosmetology, the California Department of
Health Services, the Black Owned Beauty Supply Association
(BOBSA) and knowledgeable salon owners to maximize the
effectiveness of the health message.
Web Site Update
The Dominican RFC updated its Web site to ensure that all
reports and available information were current throughout
2007 and 2008. For example, the RFC updated information
on Green Business Certification Programs to assist states and
counties in developing their own programs. In addition, the
RFC redesigned the Web site "look" and structure to allow
users to better access the RFC's material and projects.
Presentations/Conferences
The RFC's staff attended and participated in a wide variety of
meetings and conferences, including the following:
• RFC directors' meeting in San Francisco (August 2007).
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ACTIVITIES & ACCOMPLISHMENTS
RFC directors' meeting in Washington, D.C. (March 2008).
Annual Western Regional Pollution Prevention Network
(WRPPN) conference in San Diego in October 2007 (as
steering committee member).
Golden Gate Pollution Prevention Committee (as co-chair)
throughout the San Francisco Bay Area.
California Resource Recovery Association's Annual Meeting
in San Pedro, California.
Northern California Recycling Association's Annual
Meeting in San Jose, California.
San Francisco Green Festival in conjunction with the Green
MBA program from Dominican University (speaker and
attendee) in San Francisco.
California Healthy Nail Salon Collaborative Quarterly
meetings throughout the San Francisco Bay Area.
California Healthy Nail Salon Collaborative, Policy
Subcommittee meetings, and conference calls throughout
the San Francisco Bay Area.
Hand-in-Hand Hair Show in Oakland, California.
Torres Martinez Solid Waste Collaborative bi-annual meet-
ings in Riverside County, California.
Coachella Valley Association of Governments Solid Waste
Collaborative in Riverside County, California.
City of Los Angeles, Green Business Program Development
meetings in Los Angeles.
Bay Area Green Business Program meetings (monthly) in
Oakland, California.
Greening Dominican University Taskforce in San Rafael,
California.
U.S. Composting Council Annual Conference in San Jose,
California.
Ongoing Projects & Initiatives
WRPPN Conference Session Development
The Dominican RFC continued to work with WRPPN,
headquartered in Reno, Nevada. WRPPN is a strategic
alliance involving local, state, federal, and tribal pollution
prevention programs throughout RPA Region 9 to improve
communication and information dissemination among net-
work members to maximize efficiency of pollution preven-
tion implementation. As a member of the WRPPN Steering
Committee, the RFC helps determine the network's annual
direction and develops and facilitates several sessions at the
annual conference. The RFC's staff attends two WRPPN
planning meetings annually to help develop the annual pollu-
tion prevention conference, help assess WRPPN's perform-
ance, and promote the organization to the pollution
prevention community of Region 9-
For the October 2007 WRPPN Conference, the RFC devel-
oped and led sessions on global climate change and California
chemical policy and arranged for a speaker on green business
development. In addition, the RFC arranged for four students
from the Dominican University of California's "Green MBA"
program to attend the conference. WRPPN serves as the
Region 9 hub of the pollution prevention community.
California Green Business Program Coordination
The Dominican RFC continued its role as the Western
Regional Green Business Program Coordinator to promote,
develop, and institutionalize multimedia pollution prevention
and resource conservation in
Region 9 businesses while ensur-
ing consistent growth and conti-
nuity for regional green business
programs (GBPs). In partnership
with the Bay Area GBP other
GBPs located outside the Bay
Area, and the California RPA, the
Dominican RFC:
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ACTIVITIES & ACCOMPLISHMENTS
• Helped the California GBP Coordinator at the California
Department of Toxic Substances Control develop presentation
materials on GBPs for interested agencies and organizations.
• Continued to host a GBP resource Web site.
• Assessed the feasibility of using Bay Area universities in the
certification and re-certification process.
• Arranged for Dominican University Green MBA interns to
assist with GBPs as needed.
• Attended regular meetings of the Bay Area GBP coordinators.
In addition, the RFC is working closely with the city of Los
Angeles as it develops its GBP. The RFC has participated in
three meetings in Los Angeles, one meeting in San Francisco,
and three conference calls to provide consultation with the
Rnvironmental Affairs Department, the City Council, the
Rnvironmental Affairs Commission, and the Mayor's Office on
the development and direction of the program. The proposed
program is currently under review by the city of Los Angeles
Office of the Budget and is expected to be launched in the
next fiscal year.
The county of Santa Barbara is moving ahead on developing
its GBP. Santa Barbara has set up a steering committee, is
meeting with potential program partners, and is drafting
Memoranda of Understanding between partner agencies, with
the RFC available for consultation.
Working with the Green MBA program at Dominican
University, the RFC helped set up a program where students
would work with the San Francisco GBP to assist restaurants
that were interested in green business certification. This pro-
gram was launched in part because of the extraordinary success
of the San Francisco GBP which currently has a backlog of
more than 300 businesses. As a result of this initiative, the
RFC is also working with GreenLA (a consortium of Los
Angeles area environmental organizations), Rnvironmental
Defense, and Los Angeles Trade Tech (a local community col-
lege), to explore how Trade Tech students can be used for green
business certification in Los Angeles.
California Nail Salons Initiative
A consortium of health and environmental nonprofit organiza-
tions formed the California Healthy Nail Salon Collaborative in
2005 out of growing concern for the health and safety of nail
salon and cosmetology workers, owners, students, and clients in
California. Composed of public health and environmental advo-
cates, nail salon workers and owners, and community-based
groups, this statewide collaborative seeks to proactively address
the environmental health issues facing the nail salon community
through an integrated approach employing policy advocacy,
research, and outreach and education strategies.
The Dominican RFC continued to serve as a member of the
California Healthy Nail Salon Collaborative, exploring oppor-
tunities for nail salon owners to undertake source reduction,
pollution prevention, and energy conservation. In addition, the
RFC continued to serve as a member of the National Nail
Salon Network. The RFC shared the results of its hair salon
initiative with collaborative participants and exchanged infor-
mation on new initiatives and best practices. As a result, the
RFC set up "Building Bridges," a task force of the collaborative
focusing on reaching out to multi-ethnic communities and the
hair care sector.
In addition to attending regular Nail Salon Collaborative meet-
ings, the Dominican RFC staff served on the Research and
Policy Subcommittees and participated in subcommittee con-
ference calls in preparation for full collaborative meetings as
well as a meeting with an industry representative. The RFC
helped plan a legislative hearing held by State Senator Carol
Migden, focusing on nail salon issues. Dominican RFC staff
also participated in conference calls of the Healthy Nail Salon
National Alliance on November 19, 2007-
The RFC helped set up a program to train biology and nursing
students at Dominican University of California to work with
nail salon owners and workers to improve worker health and
safety. The program relies on staff and materials from the Asian
Law Caucus, which developed a six-module program covering
chemicals and ventilation, preventing aches and pains, infec-
tion protection, and workers' rights. Ten students participated
in the first training, held on February 15, 2008. This is an
ongoing effort and will enable the students to do outreach in
their communities.
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ACTIVITIES & ACCOMPLISHMENTS
Tribal Waste Reduction
The Torres Martinez Reservation in California's Riverside
County has been the dumping ground for large amounts of
illegal waste. With increased development in the Coachella
Valley, where the reservation is located, the volume of solid
waste illegally dumped on the reservation has been growing,
particularly construction and demolition debris and green
waste from off-reservation sources. The illegal dumps have
resulted in serious problems with toxic run-off into waterways
and spontaneous fires spewing dioxin and other carcinogenic
toxins and contaminants into the air.
At the request of EPA staff and with the encouragement of the
Torres Martinez Solid Waste Collaborative, the Dominican
RFC conducted an assessment of the problem regarding illegal
dumping of golf course green waste on the reservation. The
EFC identified 130 golf courses in the region and contacted
each one to determine how they managed their green waste.
Through this process, the EFC helped the collaborative publi-
cize their "No Dumping" campaign to golf course superin-
tendents. In addition, the EFC conducted outreach to the
Golf Course Superintendent Association and identified at least
one hauler engaged in illegal dumping practices.
Currently, EPA is allocating considerable resources throughout
Riverside County to publicize the penalties, impacts, and con-
sequences of illegal dumping. Accordingly, the EFC noted that
the business community could use help identifying waste
haulers engaged in legal disposal practices. Toward that end,
the Dominican EFC has begun to work with the collaborative,
EPA, and the Riverside County Illegal Dumping Task Force to
explore the feasibility of developing a certification program for
legal waste haulers that are interested in adopting more envi-
ronmentally sound practices.
Dominican EFC staff attended two meetings of the Torres
Martinez Solid Waste Collaborative and participated in a
videoconference with the Coachella Valley Association of
Governments Solid Waste Collaborative.
Following this initiative, the EFC will continue to work with the
Torres Martinez Tribe to evaluate the feasibility of establishing
facilities for processing green waste into fertilizer and renewable
energy, and processing construction and demolition debris into
reusable building material. The project goal is to provide the
information necessary for the tribe to decide whether to develop
a small pilot project that could be scaled up in the future.
STOP ILLEGAL DUMPING
Keep our Reservation Beautiful
Four Dominican University Green MBA student interns are
working with the EFC on this project to design and implement
a technology feasibility study. Using the critical thinking
methodology taught at the Green MBA program, they will
design a research plan and timeline. Part of this process will
include furthering the students' understanding of the higher
purpose of the tribe and assessing needs as a way to frame
appropriate technology/enterprise opportunities. Working with
the EFC, the students will identify available waste streams, tech-
nologies that can process the waste streams, and potential barri-
ers and opportunities. The EFC will then make
recommendations as to which technologies are suited to the
tribe's needs.
STUDIO SECTOR TECHNICAL
ASSISTANCE
This project continues efforts to "green" the television industry
by promoting environmentally friendly behavior and products
in television shows. In the period 2004-2005, the EFC pro-
posed to adopt the private sector concept of "product place-
ment" to place environmentally beneficial behavior (in
television shows). Examples included having actors bring cloth
bags to the grocery store, recycle soda cans, use worm bins,
and consider how to properly dispose of a computer monitor
and other electronic waste accumulating in their closets.
Since that time, the EFC has been working to penetrate the
television industry and develop relationships to promote prod-
uct placement for the environment in mainstream shows. In
EFC AT DOMINICAN UNIVERSITY OF CALIFORNIA
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ACTIVITIES & ACCOMPLISHMENTS
the period 2006-2007, the Dominican RFC attended a num-
ber of meetings with various industry stakeholders and, as a
result, developed a partnership with a professional product
placement firm. The RFC has also developed a partnership
with a set-decorating business in Los Angeles, which provides
set props and graphic materials to all major hospital shows on
the three major networks: ABC, NBC, and CBS. In 2007, the
RFC placed a number of environmentally favorable posters in
several TV shows such as Scrubs, Grey's Anatomy, and RR.
The RFC is also providing general guidance and interview sub-
jects for a documentary filmmaker who is currently shooting a
film on green business and helping a local filmmaker green her
production, which will be shot in Oakland, California, and
other Bay Area locations.
The RFC attended the "Hollywood Goes Green" conference in
December 2007, which served as an opportunity to network and
publicize the RFC's efforts. Building on contacts made at that
conference, the RFC met with the executive director of
ReelGreen Media to review partnership opportunities. In addi-
tion, the RFC advised a Green MBA student who is developing
a business plan to help green the television and movie industry.
Greening Dominican University
The Dominican RFC began work-
ing with the Greener Dominican
Task Force (GDTF) to develop a
plan to green the Dominican
University campus. The GDTF
includes faculty from the Business and Rnvironmental Studies
programs, as well as faculty from other departments, staff,
administrators, and students interested in exploring the poten-
tial for green opportunities and programs at Dominican. After
participating in several task force meetings, the group recog-
nized the value of the RFC's participation and appointed RFC
Director Sarah Diefendorf to the position of co-chair.
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UNIVERSITY
o/CALIFORNIA
With assistance from the Dominican RFC as well as students
and faculty in the Green MBA program, the GDTF prepared a
green statement, laying out the guiding principles of the GDTF.
The task force also developed a list of sustainability goals and
objectives for the university, a template for its strategic develop-
ment, and short-, medium-, and long-term goals providing
clear steps for incorporating these changes to implement the
university's commitment to environmental sustainability.
GDTF is a recognized subcommittee of the University's
Campus Utilization Policy Committee (CUPC). It has one
voting member on the CUPC. To solicit support and input
from the campus community for the task force efforts, the
Dominican RFC, with assistance from Green MBA students
and faculty, prepared a presentation to the CPUC explaining
the goals and objectives of the GDTF. The RFC will present
the GDTF plan to other campus bodies, such as the Board of
Trustees, the Alumni Association, and the Faculty Council, to
build support for greening the university.
The RFC anticipates that as the effort builds, the task force
will achieve additional outcomes, such as incorporating inte-
grated pest management into university landscaping practices,
improving campus recycling, reducing energy use, and adopt-
ing a broad environmental management system-type environ-
mental policy approach. The campus's green statement and
sustainability plan outline can be found on the university Web
site: www.dominican.edu.
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ACTIVITIES & ACCOMPLISHMENTS
New Projects & Initiatives
African American Hair Salon Initiative
In 2008, the Dominican RFC hopes to develop a Healthy
Hair Show that would showcase natural, healthier approaches
to African American hair care, as well as nail and other person-
al care. The hair show will be held in partnership with the
California Healthy Nail Salon Collaborative.
Biodiesel Clearinghouse Web Site
Based on the outcome of the Biodiesel Roundtable, the RFC
plans to develop a biodiesel clearinghouse Web site as part of
the new Center for Sustainability at Dominican University.
The clearinghouse will be an open and unbiased system of
electronic information sharing among researchers, producers,
fleet managers, regulators. In addition, following the RFC's
successful roundtable, a Senator from Guam who is interested
in developing a biodiesel program for the island contacted the
Dominican RFC, which the RFC will pursue.
International Projects
Working with Dominican University Green MBA faculty, the
RFC helped establish the Center for Sustainability in 2007- In
2008, the RFC's executive director will take a leadership role
within the center, which will include being responsible for vet-
ting all university Sustainability projects. Two of the internation-
al projects the center will pursue in 2008 include the following:
Lubumbashi, Congo - Urban Sustainability: The center has
been invited by partners in Lubumbashi to send RFC staff,
Green MBA students, and key faculty to support the
development of capacity building for urban Sustainability in
Lubumbashi, the twelfth fastest growing city in the world.
Copper mining is driving rapid urbanization without infra-
structure or Sustainability planning.
Capetown, South Africa: Teach With Africa: RFC staff and
the Center for Sustainability will work with the organization
Teach With Africa to bring RFC staff, Green MBA students,
and faculty to support this innovative program for AIDS
orphans, adding Sustainability to the curriculum and helping
students develop projects in urban Sustainability.
Contact Information
Sarah Diefendorf, Director
Phone:415-346-3323
R-mail: sdief@aol.com
EFC AT DOMINICAN UNIVERSITY OF CALIFORNIA
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PERFORMANCE MEASURES
Growing Green Business Programs: In 2000, when
EPA Region 9 asked the Dominican RFC to act as the
West Coast regional coordinator for green business
programs so that as the concept spread, the individual pro-
grams would remain consistent with each other and that the
standards and requirements would remain rigorous and mean-
ingful. Since then, the RFC has helped grow green business
programs in the states of Arizona and Hawaii and within the
counties of San Francisco, Sacramento and San Diego,
California.
Receiving Requests for Follow-on Work: As a result of the
RFC's work in California on the Los Angeles Green Business
Program, the mayor's office asked the RFC to consult on
attracting green technology to Los Angeles. Likewise, because
of the Dominican RFC's long-term reputation with developing
green business programs throughout the region, the RFC is
routinely asked to assist in creating new programs. Thus, the
RFC is beginning discussions with Fresno County and has
received another request from Humboldt County. In addition,
Trade Tech, a Los Angeles community college, asked the
Dominican RFC to explore the development of curriculum
that would train culinary and auto shop students in green busi-
ness practices. And as a result of the RFC's work with the
Torres Martinez Tribe, the RFC was asked to explore other
opportunities for green business in the Riverside area and will
also explore other potential land uses for the tribe, including a
solar farm. Finally, since the biodiesel roundtable, the RFC has
received multiple requests for follow-up roundtables. In
response, the RFC is exploring the feasibility of separate stake-
holder meetings that would focus on various topics identified
by the initial roundtable and would bring together specific reg-
ulators to discuss barriers to biodiesel production.
Making a Difference With Diverse Audiences: From the Los
Angeles mayor's office to a small African American Hair Salon
in Oakland, the RFC has worked to disseminate information
on green business practices to diverse audiences. Salon workers
have expressed their gratitude for this effort. As a frequently
overlooked segment of the population, they are excited at the
prospect that they are at the beginning of a movement that can
promote better worker health and safety and provide a positive
impact on the environment and their community. In addition,
the RFC has also been asked to assist a small African American
hair care product manufacturer in developing a less toxic prod-
uct line. The product manufacturer had attended the roundta-
bles and was deeply affected by the information that was
presented.
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ENVIRONMENTAL FINANCE CENTER
AT BOISE STATE UNIVERSITY
In This Report
Background & Summary
Activities & Accomplishments
.340
.341
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•••. .
BACKGROUND & SUMMARY
The Environmental Finance Center at Boise State
University (Boise State RFC), located within the
Department of Public Policy and Administration in
the College of Social Science and Public Affairs, primarily
serves the four states of EPA's Region 10: Alaska, Idaho,
Oregon, and Washington. The primary purpose of the Boise
State RFC is to build financial analysis tools that apply to both
macro- and micro-environmental finance challenges, and that
help decision-makers understand environmental compliance
issues. The RFC has developed software in response to com-
munity demand for user-friendly tools for generating empirical
information for improved decision-making. In addition, the
RFC offers training and technical assistance on the use of these
tools.
In particular, the center works to build management and finan-
cial capacity within the regulated community for the purpose
of establishing and maintaining sustainable environmental sys-
tems. Drinking water systems, wastewater treatment systems,
and watershed management and restoration systems are essen-
tial to public health and environmental protection, as well as
community economic success and enhancing the quality of
life. Building the capacity of communities to handle "how to
pay" issues has a transformational effect that improves deci-
sion-making, leading to sustainable environmental quality. The
goal of the Boise State RFC is to help communities provide the
best environmental services to the most people at the least cost
for the long term.
The Boise State RFC provides the following services:
• Develops and delivers educational programs including work-
shops, conferences, training seminars, and formal education
programs to expand the capacity and ability of public sector
leaders and managers to address and resolve environmental
finance dilemmas.
• Prepares and disseminates practical guides, handbooks, and
reports on finance and management issues relative to the
public sector and environmental system needs.
• Helps local and tribal governments and other public water
and wastewater systems to increase their use of alternate
approaches to environmental financing, particularly those
that provide alternatives to traditional taxation methods.
• Continues its initiatives in becoming a leading regional cen-
ter in developing improved public management and innova-
tive environmental finance techniques.
• Conducts analysis on key issues relative to environmental
finance and environmental policy in Region 10.
Through 2007, the Boise State RFC accomplished the following:
• Developed the Web-based Plan2Fund™-OPT (Objective
Prioritization Tool) decision-making model.
• Renovated the center's Web site to improve information
transfer to our national and regional clients.
• Introduced RFC Training on Demand, a new approach to
delivering training, designed to offer advantages for reaching
small community officials and reducing the carbon footprint
associated with training.
• Conducted a fact-finding tour of Idaho communities for
RPAs Local Government Advisory Board.
• Launched a new satellite RFC in RPA Region 7-
• Moved closer to the release of a breakthrough financial man-
agement and analysis tool — the Financial Dashboard for
Sustainable Infrastructure.
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ACTIVITIES & ACCOMPLISHMENTS
Completed Projects & Initiatives
Plan2Fund-OPT
In working with watershed restoration stakeholders, the RFC
discovered the need to develop a computer-based tool that
groups could use to determine priorities for implementation
plans. Plan2Fund-OPT provides a sound methodology for pri-
oritizing objectives in an implementation plan. OPT is a
breakthrough for the RFC because it uses the DotNetNuke
Internet framework, which allows the model and the user's
data to be secured in a password-protected file on the RFC's
Internet server. OPT encourages stakeholders to achieve con-
sensus on the decision rules they will use in evaluating compet-
ing objectives of a plan, the system of assigning scores based
on the decision rules, and the relative importance of the deci-
sion rules in ranking objectives. RPA's Office of Wetlands,
Oceans, and Watersheds (OWOW) funded the development
of OPT as a Web-based computer model, following the suc-
cessful test of an Rxcel spreadsheet methodology with the
Chehalis Basin Watershed Council (Washington). This new
tool represents the third computer-based model developed by
the RFC for financial implementation of strategic plans, after
Plan2Fund and the Directory of Watershed Resources. All
three are designed to minimize the time and energy of stake-
holder groups on their journey from planning to implementa-
tion of strategic nonpoint pollution control and capital
improvement plans. Plan2Fund-OPT was released at the 2007
National River Rally in Stevenson, Washington. RFC Director
Bill Jarocki conducted a "hands-on" workshop on Plan2Fund-
OPT in Washington, D.C., for local watershed organizations
as part of a full-day conference on watershed planning hosted
by OWOW.
Renovated EFC Web Site
The RFC's renovated Web site (http://efc.boisestate.edu) bene-
fits those seeking information about environmental finance
and puts the control of content and design in the hands of the
RFC staff rather than university Internet technology staff.
With this improved Web site, the RFC staff is well positioned
to meet the demands of the next generation of Internet users,
who are accustomed to more dynamic Internet environments.
The DotNetNuke design allows RFC staff to create informa-
tion presentation components as needed rather than waiting
for third-party assistance. The Web site now incorporates video
and other multi-media presentations. The RFC's monthly
THROUGH 2OO7, THE BOISE STATE
EFC...
4 Expanded to include a satellite office in Kansas
City to provide direct service to the Region 7
states of Kansas, Iowa, Nebraska, and Missouri.
Logged 38,000 air miles in providing EFC
training, technical assistance, and presentations
in 2007.
4 Attracted 1,946 people as registered users to
the EFC Web site, representing 52 states and
territories, and 18 foreign countries.
Rnvironmental Finance News can now be composed and sent
directly to registered users of the Web site. Casual visitors are
encouraged to register in order to receive access to the RFC's
computer-based financial analysis tools and other services.
Registration information offers details about RFC customers
— geographic as well as professional. Most importantly, the
renovated Web site provides a platform for the development
and use of Web-based software tools. Over the next few years,
the RFC will be modifying its various environmental finance
tools for Web-based use.
EFC Training on Demand
Over the past 10 years, the RFC has learned that for those
responsible for environmental systems — water and waste-
water operations and pollution control activities — receiving
training on how to finance and manage multi-million-dollar
investments is a necessity. But, finding the time to attend
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training events is often difficult for officials and operators, or,
the training needed is not available at the time they need it.
Another problem is the expense of traveling long distances to
get to the training they need. In response to these problems, in
2007 the RFC created Training on Demand, found at:
http://efc.boisestate.edu/efc/EFCTraining/tabid/l40/Default.asp
x. Training on Demand gives anyone using the EFC's Web site
the ability to receive training on environmental finance and
management when they want it. Users can pick a topic, a time,
and a date (daytime, evening, or even Saturday workshop) for
an Internet web conference workshop. Along with the benefit
of convenience, the computer-to-computer workshops will
reduce the energy expended in traveling to training sites, reduc-
ing the EFC's carbon footprint. Training workshops on water-
shed finance, rate setting, asset replacement financing, capital
project funding, and other topics related to environmental
finance and management are available through the Training on
Demand program. Once a workshop is presented, it is posted
on the EFC Web site. This will give users the opportunity to
review the presentation or, if they missed the event, they will
have more flexibility to receive training based on their schedule.
Either way, with the "live" Training on Demand or the recorded
Training on Demand, EFC clients have the option to fit train-
ing workshops into their busy schedules.
EPA Local Government Advisory Committee Tour of
South-Central Idaho Communities
In September 2007, the EPA's Local Government Advisory
Committee (LGAC) convened its meeting in conjunction with
the Environmental Council of the States (ECOS) in Sun
Valley, Idaho. In addition to presenting information to LGAC
and ECOS, the EFC was invited to organize and facilitate a
tour of several small communities and environmental facilities
in southern Idaho. The purpose of the tour was to provide an
Castleford Mayor Rita Ruffing presenting to LGAC.
City of Dietrich presentation for LGAC tour.
opportunity for committee members, federal and state agency
officials, and small community officials to interact and to dis-
cuss challenges of regulatory compliance. Marc Longley, system
operator for Idaho's Hulen Meadows and Cold Springs subdi-
visions, led a discussion of the burdens faced by nonmunicipal
public water systems with part-time homeowner association
board members. At every location, local officials discussed the
specific actions taken to meet regulatory requirements, the
importance of these actions to the health of the community
and the environment, and the relationship of the jurisdiction
(or business) with state and federal agencies. One of the key
outcomes of the meetings and the tour was the recognition of
the need for the network of EFCs and the assistance they can
provide to small communities. The EFC will produce a final
report of the tour event for the LGAC in 2008.
Satellite EFC in EPA Region 7
In 2007, Boise State University launched the first satellite
office. The satellite brings the services and tools of the Boise
State EFC to the states of Iowa, Kansas, Missouri, and
Nebraska. This innovative approach to providing the capabili-
ties of the EFC Network was developed by senior managers of
EPA Region 7 and the Boise State EFC. The EFC had a track
record of providing service to the states in the region through a
variety of contracts and grants. The goal of the satellite EFC is
to continue the work of the Boise State EFC and to eventually
replicate permanent services through a local university in
Region 7- The satellite EFC has assisted the Water Partnership
of Northwest Missouri in its efforts to create and finance an
11-county water system. The satellite has also begun work with
the Iowa Department of Natural Resources to add Iowa fund-
ing programs to the Directory of Watershed Resources. Boise
State EFC Director Bill Jarocki facilitated a track of the Region
5 and 7 Sustainable Infrastructure Summit in St. Louis. The
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RFC Web site was expanded to provide outreach, service,
tools, and information to communities in Region 7- Taking
advantage of the EFC's direct linkage with the satellite opera-
tion, Training on Demand workshops have been ordered by
Region 7 states in early 2008.
EFC Director Bill Jarocki presents to the water partnership of north-
west Missouri.
Idaho Rural Water Association Statewide Finance
and Grant Writing Workshop Series
The Boise State EFC traveled the state of Idaho once again in
2007 in partnership with the Idaho Rural Water Association to
offer regional training workshops on the topics of utility finan-
cial management and grant writing. The workshop series took
the training team to the Idaho cities of Orofino, Coeur
d'Alene, Boise, Twin Falls, Chubbuck, and Moscow. These
full-day sessions focused on EFC computer tools and how they
could be used to implement financial management principles.
The Idaho State Board of Operator Licensing approved the
class series for system operator continuing education unit
requirements.
Conferences and Speaking Engagements
The Boise State EFC participated in conferences and other
engagements in the following capacities:
• Offered the keynote address at the Seventh CECIA-IAU
(Centre de Educacion, Conservacion e Interpretacion
Ambiental — Universidad Interamericana de Puerto Rico)
Biennial Symposium on Potable Water Issues in Puerto
Rico: Science, Technology and Regulation — Asset
Management and the Water Distribution System.
Assisted the Syracuse EFC by presenting the workshop
"Reinvesting in the Public's Investment" at the Managing
Infrastructure for Sustainable Economic Development
Conference at East Syracuse, New York.
Introduced the EFC Network to environmental justice prac-
titioners at the "2007 Environmental Justice and Air
Pollution Workshop" in San Francisco, California.
Served as the featured speaker at the 2007 Washington State
Lake Protection Association, providing information about
the EFC's software tools for macro-environmental finance.
Served as the moderator for the small communities track of
the 2007 Sustainable Infrastructure Forum in St. Louis,
Missouri.
Provided training to city clerks, financial officers and treas-
urers at the 2007 Idaho City Clerks Treasurers and Finance
Officers Association (ICCTFOA) Conference in Boise.
Presented two workshops at the Northwest Community
Development Institute in Boise: "Infrastructure and
Community Development," and "Public Finance
Strategies."
Presented the workshop: "The Financial Dashboard: A
Better Way to Understand Financial Capacity" at the
national conference of the Rural Community Assistance
Partnership in Long Beach, California.
Assisted the city of Heyburn, Idaho, in developing a user-fee
structure for the drinking water system.
Delivered a training workshop on macro-environmental
finance tools—Plan2Fund, Plan2Fund-OPT, and the
Directory of Watershed Resources—to Idaho and Montana
watershed protection professionals at the EPA-sponsored
"Watershed Planning for Action" workshop in Bozeman,
Montana.
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ACTIVITIES & ACCOMPLISHMENTS
Ongoing Projects & Initiatives
Sustainable Infrastructure Financial Dashboard
Technology
The Boise State RFC has developed software tools for determin-
ing the financial management capacity of environmental sys-
tems. Beginning with RatioS, then through the use of Capacity
Tracker, and more recently, the Financial Analysis Calculator for
Exemptions, the RFC has endeavored to translate financial and
management data in ways that assist decision-makers in provid-
ing the best environmental services at the least cost. In 2005,
the EFCs at the University of North Carolina, the University of
Maryland, and Cleveland State University joined the Boise State
RFC in a project to develop improved methods for fostering
sustainable infrastructure. The EFC's role in this project is to
produce a new tool for recognizing the effect of financial and
management capacity changes. This work is leading to the
development of a Financial Dashboard, which is expected to be
completed in the summer of 2008 for national distribution.
Essentially, the Dashboard is designed to give decision-makers
rapid feedback regarding the effect of their decisions (or indeci-
sion) on environmental facilities. The indicators will be
dashboard-type displays of gauges (similar to instrument panels
in automobiles) where current and projected conditions can be
easily interpreted. The RFC expects to develop three dashboard
panels: one for financial indicators, a second for operational
indicators, and a third for strategic indicators. The overall goal
of the project is to produce a user-friendly Web-based interface
for "what if" scenarios.
Alaska State Revolving Fund Financial and
Management Capacity Analysis
Since 2001, the RFC has worked with the state of Alaska
Department of Environmental Conservation to offer third-party
finance and management capacity reviews of applicants. The
RFC performed capacity reviews for both the Alaska Clean
Water Fund and the Alaska Drinking Water Revolving Fund. In
2007 the variation on the theme was the move toward using a
computer-based analysis tool similar to that developed by the
RFC for the Washington Department of Rcology. The new
Alaska State Revolving Funds analysis model interprets user
input data to detect trends in financial indicators. The model
also provides a summary report for RFC staff to use when con-
sidering whether to recommend loan conditions that the state of
Alaska might impose that increase the probability of repayment
and improve finance and management capacity.
Newman Lake and Chehalis Basin Watersheds —
Stakeholder Group Assistance
RFC Director Bill Jarocki provided direct assistance to two
watershed restoration organizations in the state of Washington.
Newman Lake, in northeastern Washington near Spokane, is
one of the most popular recreational lakes in the region.
Natural resource extraction, along with the cumulative effects
of land development, has led to an increased loading of nutri-
ents in the lake and resulting algae growth. In 2007, the com-
munity participated in developing a Total Maximum Daily
Load draft implementation strategy. At the request of the
Washington Department of Rcology, the RFC facilitated multi-
ple stakeholder meetings and led the community through a
sometimes contentious public hearing process. The RFC will
continue to work with the stakeholders in 2008 to create a self-
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ACTIVITIES & ACCOMPLISHMENTS
Newman Lake stakeholders meeting.
sufficient organization capable of developing a strategic
implementation program designed to improve the greater
Newman Lake watershed.
The RFC also provided assistance to the Chehalis Watershed
Basin in northwestern Washington. This watershed basin —
composed of three large counties — has challenged the stake-
holders to creatively apply techniques for strategic plan devel-
opment and implementation finance. Since 2005, the Chehalis
Basin stakeholders and the RFC have enjoyed a close working
relationship. This partnership has created a laboratory for the
development of Plan2Fund OPT and practical advice on how
to improve the RFC's Plan2Fund strategic planning and imple-
mentation finance computer model. At the end of 2007, the
RFC provided the basin with a methodology for determining
the optimal organization structure for implementation success.
The RFC expects to be involved in the design of implementa-
tion finance strategies for both groups using the suite of tools
developed for that purpose: Plan2Fund, Pland2Fund OPT,
and the Directory of Watershed Resources.
Rich Subdivision Community Water System
Where does a small nonmunicipal community water system
turn when it has a uranium contamination problem and a lack
of customer willingness to address the challenge? The Rich
Subdivision in Canyon County, Idaho, turned to the RFC for
help after signing a consent order with the Department of
Rnvironmental Quality (DRQ) to deal with the issue. The
RFC met with community members, the consulting engineer,
DRQ regional office staff, neighboring systems, and technology
vendors to move the system to an affordable solution. RFC
staff also examined the system's bylaws and financial records to
determine short-term actions that would improve management
and financial capacity. At the beginning of 2008, the RFC will
facilitate the Rich Subdivision's annual business meeting to
assist the Board of Directors in convincing community mem-
bers that investing in uranium removal technology is their top
priority. To the DRQ, this project has underscored the value of
the RFC in providing an unbiased approach that maximizes
EFC staff meets with the board of directors of the Rich Subdivision
Water System.
the potential for problem resolution without the strong-hand-
ed intervention of the regulatory agency.
Environmental Finance E-Newsletter
Since 2004, the RFC has provided a quarterly environmental
financing newsletter that includes information on micro-
finance issues, such as utility finance and rate setting, and
macro- financing issues, such as watershed finance issues. The
newsletter includes information on upcoming events, success
stories, grant deadlines, specific resources, and agency pro-
grams, and provides information to a broad range of stake-
holders interested in protecting the watershed.
In 2007, the center began to produce the Environmental
Finance News newsletter on a monthly basis, rather than quar-
terly. The RFC will continue to e-mail the newsletter to target
groups including past workshop attendees, watershed groups,
and local governments; currently the e-mail database contains
more than 2,000 addresses. The newsletter will also be avail-
able on the center's Web site.
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ACTIVITIES & ACCOMPLISHMENTS
New Projects & Initiatives
Washington WIRA Implementation Planning
Assistance
As more and more Water Resource Inventory Areas (WRIAs)
in Washington State complete watershed assessments, their
focus is shifting from identifying water quality problems to
debating solutions. But many watershed organizations are find-
ing that with reduced budgets and shrinking resources, meet-
ing the needs of the watersheds is becoming more difficult.
With limited resources, the need to coordinate efforts and
leverage funding sources is increasing. Many watershed organi-
zations lack the capacity, however, to successfully identify and
leverage various funding programs.
The RFC will work with the Washington Department of
Ecology to provide assistance and training to WRIAs in
Washington that have completed their watershed plan and are
moving to Phase Four implementation of plan watershed
improvements. WRIAs for Washington State were formalized
under WAC 173-500-040 and authorized under the Water
Resources Act of 1971, RCW 90.54. The Washington
Department of Ecology was given the responsibility for the
development and management of these administrative and plan-
ning boundaries. These boundaries represent the administrative
underpinning of this agency's business activities. The original
WRIA boundary agreements and judgments were reached joint-
ly by Washington's natural resource agencies (Ecology, Natural
Resources, Fish and Wildlife) in 1970. The center will work
directly with WRIAs identified by the Department of Ecology
and provide training on the tools and resources available from
the EFC, including advanced assistance where needed.
Plan2Fund Enhancements
The Boise State EFC has developed tools to assist watershed
groups in developing a funding strategy for watershed restora-
tion activities. One of these tools, Plan2Fund, assists watershed
groups in identifying the funding needed for implementation
of watershed restoration activities. Plan2Fund walks users
through estimating the costs of the tasks in their plan, assessing
any local match, and determining the additional funding need-
ed to meet the watershed goals.
Last year, with funding from EPA's Sustainable Finance Team,
the EFC developed a run-time version of Plan2Fund and made
several enhancements, which included improvements to the
report and budget functions, as well as the addition of a grant
tracking function. In the process of working with watershed
groups that were using Plan2Fund, the EFC received feedback
and suggestions. To address these issues and to improve the
functionality of Plan2Fund, the EFC will make additional
enhancements and improvements to Plan2Fund. Some of these
enhancements include:
• Simplifying and improving flexibility of the budget sheets.
• Linking task program page to budget pages for easy navigation.
• Providing links for easy navigation through data.
• Changing priority section to integrate new prioritization
function.
• Adding performance reporting section to record and track
results.
• Adjusting reports to include more useful information and
change layout to matrix to reduce the length of the reports.
In FY 2008, the center will convert Plan2Fund to a Web-based
model, which will allow it to completely dovetail with
Plan2Fund OPT.
Contact Information
Bill Jarocki, Director
Phone: 208-426-4293
E-mail: bjarock@boisestate.edu
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