U.S. ENVIRONMENTAL PROTECTION AGENCY

ENVIRONMENTAL FINANCIAL ADVISORY BOARD
               Meeting Summary
               August 14-15, 2006

                   Hotel Niko
             San Francisco, California
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  Environmental Financial Advisory Board Meeting                                      ii
August 14-15, 2006, San Francisco, California
                             TABLE OF CONTENTS
MONDAY, AUGUST 14, 2006	3
Opening Remarks from the Designated Federal Official	3
Opening Remarks from the EFAB Chair	4
Environmental Finance Center Network Update	4
   The University of North Carolina EFC	5
   Great Lakes Environmental Finance Center, Cleveland State University	6
Workgroups Report Out	10
   Financial Assurance Workgroup	10
   Environmental Management Systems Workgroup	11
   Innovative Environmental Financing Tools Workgroup	13
   Nonpoint Source Financing Workgroup	15
TUESDAY, AUGUST 15, 2006	19
Opening Remarks	19
Workgroups Report-Out (continued)	20
   Expanding the Definition of SRF Finance	20
Potential New Projects	22
   Financial Capability Guideline Review	26
   Affordability	28
   General Discussion	31
Public Comment Period	37
ATTACHMENT 1: EFAB MEMBERS	38
ATTACHMENT 2: ENVIRONMENTAL FINANCE CENTER NETWORK	40
ATTACHMENT 3: EPA ENVIRONMENTAL FINANCE STAFF	41
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August 14-15, 2006, San Francisco, California

                              MEETING SUMMARY

EFAB members present: A. James Barnes (Chairperson), Terry Agriss, Julie Belaga, John Boland,
George Butcher, Donald Correll, Michael Curley, Rachel Deming, Sarah Diefendorf, Mary
Francoeur, Hon. Vincent Girardy, Steve Grossman, Jennifer Hernandez, Heather Himmelberger,
Keith Hinds, Jeff Hughes, Mark Lichtenstein, Stephen Mahfood, Langdon Marsh, Gregory Mason,
Dr. Peter Meyer, Dan Nees, Kevin O'Brien, Cherie Collier liice, Helen Sahi, Dr. Andrew Sawyers,
James Smith, Greg Swartz, Sonia Toledo, Dr. James Tozzi, Billy Turner, Justin Wilson, and John
Wise.

EPA staff present: A. Stanley Meiburg (Designated Federal Officer), Vanessa Bowie, Joseph
Dillon, Timothy McProuty, Vera Hannigan and Alecia Crichlow

MONDAY, AUGUST 14, 2006

Opening Remarks from the Designated Federal Official
Stan Meiburg                                                             (1:10 PM)

Mr. Meiburg convened the meeting, introducing himself as the Designated Federal Official
(DFO) for the Environmental Financial Advisory Board (EFAB) and noting the meeting's
purpose to not only hear reports from work groups, but also to plan the Board's work for the
coming year. The meeting was public and would permit public comment on the second
afternoon. He welcomed all attendees, adding that the work groups had had productive
meetings that morning, which all would hear more about later. The day's agenda involved
reports from the Environmental Finance  Center (EFC) Network, followed  by reports from the
Financial Assurance, Environmental Management Systems, and Innovative Environmental
Financing Tools work groups. The next day's agenda would focus a great  deal on water
issues through reports from the two remaining work groups and on potential new projects
that respond to the Administrator's charge to EFAB in March to focus on state revolving
funds (SRFs).

Mr. Meiburg then welcomed Mr. Rich Sustich, who represented the National Advisory
Council on Environmental Policy and Technology (NACEPT). Mr. Sustich briefly mentioned
that a NACEPT work group is looking at sustainable water infrastructure,  that is, the policy
implications and application of integrated watershed approaches to enhancing coordination
between water and wastewater.

Mr. Meiburg also extended condolences  to EFAB member Michael Curley on the death of
his son Andrew and appreciation for Mr. Curley's continued work with EFAB, despite his
loss. He also noted that EFAB had at last found a new Chair, Jim Barnes, one of the most
distinguished Americans working in environmental protection with a long and distinguished
career of service with the U.S. Environmental Protection Agency (EPA) as well as Indiana
University. Mr. Barnes has been instrumental in training a new generation of environmental
professionals and leaders through his EPA and university service and has made tremendous
contributions. He congratulated and welcomed Mr. Barnes to his new post.
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Opening Remarks from the EFAB Chair
A. James Barnes

Mr. Barnes noted his initial hesitance to accept the position as EFAB chair, wondering if it
made sense for a former senior official to head the group. Lyons Gray had done a particularly
effective job and would also be a tough act to follow. He decided to go ahead and take the
position, knowing that the real strength of the Board is its remarkably expert and experienced
members who commit a great deal of time and thought to EFAB efforts, including senior
political and career leadership. It is they who make it one of the really effective working
advisory groups.

After taking care of a few administrative issues, Mr. Meiburg then introduced Joe Dillon,
Director, Office of Enterprise Technology and Innovation, who described EPA's first
combined report on EFAB and EFC efforts. Mr. Dillon described the report as  a good
research tool for those interested in EFAB efforts and contributions to EPA and those seeking
ways to finance environmental efforts. In a way, the report also represents EPA's thank you
for EFAB member efforts. He hoped they would find it a positive representation of
EFAB/EFC work. He especially thanked Vera Hannigan for her great effort working with
EFAB to pull the report together.

Mr. Meiburg also thanked Mr. Dillon for his efforts to ensure the report was ready for the
current meeting. Copies of the report would be made for EFAB members present. Mr. Dillon
welcomed their feedback and comments  as EPA developed future reports. Mr.  Meiburg then
introduced Sam Merrill, President of the EFC Network, for an update on network activities.

Environmental Finance Center Network Update
Sam Merrill

Mr. Merrill referred EFAB members to the glossy color product provided them for a general
list of EFC projects and said he would instead focus on EFC teaching of environmental
finance: how EFCs communicate on this topic, to what audiences, and why. Three EFC
directors would present on this topic, followed by dialogue with EFAB members on how the
Board and network could collaborate. He had decided to focus  on teaching for  three reasons.
First, it gives EFAB members  a broader sense of the range of environmental finance products
and tools that EFCs produce and services they provide. Some EFC directors are also faculty
members who spend a great deal of time teaching undergraduate and graduate students. They
also  work with tribes and state and local  officials. They conduct "train the trainer" events and
work with nongovernmental officials and organizations. Second, the topic helps expand
dialogue between the network and the Board and sharing of resources, expertise, and
environmental finance "stories." Third, each of the EFAB members are experts in various
ways, that is, all practitioners of environmental finance in one form or another, and can share
some of these stories with the next generation  of practitioners.

Mr. Merrill then raised the issue of defining the boundaries of environmental finance.
Everyone present has a definition, probably representing a variety of answers. Ensuring that
all present are on the same "page of music" might be a good idea. He then introduced the two
EFC speakers: Jeff Hughes from the University of North Carolina's EFC and Kevin O'Brien


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from the Great Lakes EFC. Mr. Merrill asked EFAB members, as they listened, to think
through their own experiences in the field to share colorful vignettes that relate to the
discussion. He also wondered if a list of EFAB members willing to give guest lectures on
particular topics might also be generated for EFCs or, if there is funding, for graduate
assistants to travel to interview EFAB members to write up case studies from their
experiences. All this would help create channels for sharing information.

Mr. Merrill also hoped they would discuss how the EFC network could be of greater value to
the Board. Even though EFAB's primary audience is the Administration, much of EFAB's
work could have great juristic value for a great number of other groups. For example, he was
making Lang's watershed finance report last March's roundtable as required reading for a
course on how municipalities might evolve toward sustainability, which he will pepper with
finance sections. The question is how can the network help get some of these products out, to
whom, which products, and why? He welcomed their thoughts. Mr. Merrill then turned to
Jeff Hughes, director of the EFC at the University of North Carolina.

The University of North Carolina EFC
Jeff Hughes

University of North Carolina EFC does three types  of work: direct community assistance,
teaching, and policy analysis and applied research, which enrich each other. Working in
communities provides rich real-life experiences and, along with work at the state and Federal
levels on policy issues, can be worked into courses  and other university offerings. The
University of North Carolina has an amazing faculty in environmental management and
finance. There is also a business school and a great economics department. The EFC works
with these faculty and departments occasionally and tries not to overlap  with them. Its work
in training and university courses and with public officials is all based on applied examples:
how it has been done in the field and what obstacles people have encountered.

Referring to a three-page handout, Mr. Hughes described EFC's three main target audiences.
The largest group consists of public officials, including anyone from elected officials and
public works directors to finance directors and state officials, that is, practitioners who make
decisions. The handout listed types of programs EFC had conducted for this audience, both
one-off and annual, which have been written up in some of the EFCs'  reports. Programs can
involve anything from three hours with five people elected to run a water utility with no
finance or environmental experience to seasoned finance and public works directors who
think they do not need to know anything more, because they have worked  so long. In all our
programs, the EFC tries to partner with a group, such as the American Water Works
Association (AWWA), municipalities, and other technical assistance providers, such as the
Rural Communities Assistance Partnerships.

A second type of audience is academic. Mr. Hughes referred to a description in the handout
of a course he teaches every two years called "Applied Environmental Finance," which
attracts mostly graduate students. The course focuses on case studies of environmental
finance that have worked or not worked, but not ideas—even good ones—that have not yet
been tested. Graduates from our program are going to work in particular agencies and need
exposure to what has actually been tried in those types of agencies.


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Environmental Financial Advisory Board Meeting
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The EFC in North Carolina is always looking for guest speakers; he invited any EFAB
member willing to travel to that state later in the fall to help out with any of the topics under
discussion at the meeting, as  they are all appropriate for EFC courses in North Carolina. In
the applied environmental finance course he teaches, he uses  EFAB's famous guidebook and
readings from specific documents related to an environmental finance system, such as a state
statute, Dr. Sawyer's web site on the Chesapeake Bay Fund, that is, materials they need to
read with a critical eye. He does not use peer-reviewed research journals, as they get this kind
of reading done in other courses. He added that the bulk of his students are majoring in
public administration, but also business, environmental science and engineering, planning,
and occasionally law.

A third audience, which Mr. Hughes considered one of the most fulfilling, involves
mentoring and hands-on training. When the EFC is asked to do policy analysis work, it often
sends along a student or two from a variety of departments. Some students have worked with
the EFC for as long as two years, working half-time, and have learned a great deal through
this hands-on mentoring.

Great Lakes Environmental Finance Center, Cleveland State University
Kevin O'Brien

Mr. O'Brien focused on the Great Lakes EFC's work with the U.S. Agency for International
Development (USAID) and Croatia on a range of environmental finance and redevelopment
issues. After hundreds of years  of domination by other countries, Croatia at last attained its
independence from Yugoslavia. It is a beautiful coastal nation along the Adriatic Sea with an
average per capita income of $4,500 a year. In separating from Soviet and Yugoslavian
centralized decisionmaking, Croatia was left with few tools as government managers. The
Great Lakes EFC, along with USAID and the Urban Institute, went to Croatia to develop a
broad public administration curriculum for public managers, academics, and private
managers sent to the country to manage utilities or businesses that must interact with public
officials, especially environmental finance and environmental organizations.

They had to work at a very basic level. Public administration was brand new. People had a
very low understanding of finance in general. They had no property tax, just value-added
taxes. Although local governments were being asked to plan for and manage change in their
communities with physical assets, such as water treatment and distribution plants, the
Croatians did not understand the basics.

They were particularly interested in brownfield redevelopment. In a country with central
ownership of all property, they  understood that public ownership of real property assets was
a drag on the economy. How did one finance redevelopment of brownfields and turn them
into constructive property for economic growth? They had not yet mapped property
ownership throughout their country, including in the capital and other cities that had existed
for centuries.

It was necessary to start at the basic level of geographic information systems and computer
mapping of property, of lining up coordinates. To make progress, a five-day training on all


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this was conducted six or seven times after his first trip to Croatia in March 2005. They
discussed what environmental finance was, why it was important, and what were its goals
and tools, using in part the curriculum developed by EFAB and the EFCs at the University of
North Carolina several years ago. At the end of the five days, after focusing on very minute
detail, trainees began to see the broader picture: what can be expected to result from
investment and what would the return on investment be if brownfields were cleaned up?
Should this be done in rural areas at all; should one only  worry about them in urban areas or
only in industrial and commercial areas of bigger cities or along the Adriatic? They decided
to invest in areas with the greatest return, but also areas that the EU, which the country hopes
to join in 2009, would notice most.

Croatia has a dramatically high level of public debt to growth in the economy, so they are
looking for ways to buy down the public debt. There has  been a battle across Eastern Europe
between setting up rational systems to manage real assets and the propensity to invest in
developing countries. In some cases, Croatia's political system has not matched up well with
the management system of assets, so the country has financed projects, such as highways,
through a Croatian bank when it could have found more favorable terms in open markets
elsewhere in the world.

USAID has done a great job in Croatia and is now about  to pull out of the country. The EEC
has trained academics from Croatian universities  to teach environmental finance and helped
these schools start public administration programs and create continuing education programs
for public managers, which is creating a class of public managers in general. This
environmental finance program has been crucial to Croatia's future, helping them to convert
from an old dirty industrial economy to one based more on tourism, agriculture,  and light
manufacturing.

Mr. Merrill then asked each EFAB member in turn to comment or ask questions on the three
EEC presentations. Ms. Francoeur commented that a continuing theme in EFAB financial
assurance discussions was the importance of providing information and education to state
environmental officials to perform financial assurance, evaluate financial assurance
requirements and mechanisms presented by obligated parties. This is an opportunity that
should continue to be discussed.

Mr. Grossman asked what is relevant to EFCs on funding of nonpoint source (NFS) areas and
watershed activities for a presentation he is putting together for the following Friday. He also
asked what the EFCs have done that is similar to legislation recently introduced in Ohio on
funding for septic systems and a study done in Nags Head, North Carolina. He further
wondered how many EEC staff do and do not serve on teaching faculties of their universities
and was told that some are,  some are not, and some teach on the side, even though they are
not appointed.

Mr. Wise then contributed some thoughts on EEC work.  First, he encouraged EFCs to
continue forging customer and client relationships to be of service to regional EPA offices,
which was one of the original purposes of EFCs.  Second, he encouraged all attending the
meeting to consider two particular dimensions of sustainable finance: application of scarce
capital to advance not only environmental objectives, but also protecting ecological services,


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enhancing economic productivity, and advancing social equity. Building on environmental
finance is a perfect bridge to thinking about teaching and policy analysis on a sustainable
future. Third, he urged EFAB to think more about how to make finance systems themselves
sustainable through revolving funds and creative, innovative financing techniques.

Ms. Belaga was pleased that EFCs were also doing international work, urged them to
coordinate in locations where EPA also has international activities, and wondered how to get
EPA working more collaboratively with USAID.

Ms. Toledo suggested that, rather than asking EFAB members to provide guest lectures,
which is not practical for most of them, EFCs should take their students into the real world,
for example, on-site visits to a New York trading floor or to have credit experts walk them
through how municipal credits work.

Mr. Swartz, noting his experience with Mexican officials, noted that, if you are designing a
system to finance environmental infrastructure in another country, the U.S. system would not
be a good model, as there are a myriad of different entities involved in different places;
perhaps the fewer chefs in the kitchen, the better?

Complimenting the work of the National Water and Wastewater Leadership Center, in which
Mr. Dorfman is involved, Mr. Turner suggested that someone needs to do work in the area of
security financing, which has received a great deal of funding since 9/11; however, it is
difficult to discuss security in a public setting, so it is difficult to get the money to do the job.
Implementation of security programs in this kind of environment is a difficult issue.

Mr. Mahfood made several comments. First, the sustainable finance issue is an overarching
EFAB view that had culminated in a past EFAB paper called Environmental SRFs, which he
urged be gotten back out in circulation. Second, the SRF financing should be linked to
environmental restoration, habitat protection, watersheds, and NPS, but often land resource
organizations and public land and other local land trusts know nothing about SRFs. Third, he
noted that many environmental decisionmakers at higher government levels are still not
aware of the EFCs, even when their staff work closely with EFCs. The U.S. Department of
Agriculture, Fish and Wildlife Service, Geological Survey are all looking for partners from a
financial standpoint to accomplish many of the same things as EFAB and the EFCs. Fourth,
the Governmental Advisory Commission to the North American Free Trade Agreement
(NAFTA) also had virtually no knowledge about the good work of EFCs.

Dr. Sawyers suggested that the EFCs find ways, such as through EFC partnering with MBA
programs, to help develop greater leadership and management skills in university students.

Following up on comments on finding an intersection between sustainability issues and
industry, Ms. Deming said that one of the greatest new challenges for industry are
retrospective liabilities associated with watersheds. The joint and several liabilities under the
Superfund Statute make industry wary in approaching these remediation and natural resource
damage issues. She wanted to see work done to integrate the retrospective issues into a
future, as it is now being addressed by a number of separate entities.
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Mr. Barnes reinforced the merits of students taking theory and tools and skills courses,
looking at how they have been applied in historical problems and case studies, as well as
their application to current issues. Students will often find that the problems do not break
down as cleanly into the topics presented in their courses and that one must find new tools
and approaches to use.

Mr. Meiburg, while recognizing the amazing returns from the investment in EFCs, noted that
EFCs face a challenge in reaching out to individual communities beyond the centers'
immediate range, including in other states.

Mr. Mason thanked the group for their comments, urging them to continue the dialogue with
EFCs after the meeting. EFCs need to take a prominent role in getting at the issue of paying
for sustainable water infrastructure. Partnerships and relationships are critical. He also asked
for their input on, for example, comparative analysis on organizational structure.

Mayor Girardy urged the EFCs to use elected officials from municipal to state levels, who
can be of assistance from both a financial and knowledge standpoint.

Ms. Rice applauded efforts to tie university student work to community applications as
helpful to both students and communities. She also urged EFCs to do more interactive
webcasts to cut down on travel required by students to get real-world experience.

Regarding EFC work in other countries, such as Croatia, Mr. Correll remarked that U.S.
elected officials might also learn from such experience overseas. In seeking public/private
solutions here, U.S. officials might want to consider what Eastern European folks are dealing
with.

Ms. Agriss remarked on the local nature of EFC work with officials and urged EFCs to  also
work with environmental officials at the state level, because many of them do not understand
financing very well. She noted that, in terms of public/private partnership and privatization
issues, EFCs could help many EFAB members out with work that EFCs have done on rates.

Mr. Hines urged EFCs to expand, move into states, and get state-level schools involved; EFC
should get its last region completed so its network is a true EPA national network. Although
EFCs' natural audience is public managers, EFCs should also pay attention to the people who
run the cities and waste water systems at the local level, including those owned and operated
by the private sector. He noted that Tim McProuty had compiled a great deal of useful
information and resources  on privatization and public/private partnerships. A book had been
published based on a series of workshops in each of the regions on these topics. Two other
resource persons are Charles Grizzle and George Raftelis, who was a former EFAB member.

Remembering a lunch with George Ames, when he first spawned the idea of an
environmental finance center, Mr. Curley reminded the group that seldom does someone
come up with a good idea that is, first, adopted by government, second, survives for 15  years,
and, third, does what is was originally intended to do  and does it well. EFCs  are imparting
the basics of environmental finance—including knowledge, tools, and resources—to people
and states in each of the regions needing it. EFCs are  an incredible success story. Wherever


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they can, they should develop more resources to develop more and better of these services for
people in their regions.

Mr. Boland reiterated the importance of the professional education mission of EFCs. A great
deal of environmental finance is done in small towns and cities as well as not-so-small cities
and states by people who may not even know they are doing environmental finance, much
less how to do it.

Mr. Smith cautioned the group not to underestimate the lack of familiarity  of the public
works engineering community with financial mechanisms. In addition, great distrust, fear,
and lack of understanding and any desire to get involved in innovations or  anything new and
different permeate the system. The more EFCs can counter this, the greater a public service
they provide.

Mr. Merrill thanked EFAB members for the wealth of ideas and information they had
provided that morning, whereupon Mr. Meiburg suggested a five-minute break.

(break)

Workgroups Report Out
Stan Meiburg

Mr. Meiburg introduced Mary Francoeur, who would give the first of three reports from the
various workgroups.

Financial Assurance Workgroup
Mary Francoeur

Ms. Francoeur first thanked Terry Agriss, Cherie Rice, and EFAB staff, for helping to pull
together a workshop in June in New York on regulating captive insurers. The workshop
brought together people from the financial community, environmental insurance area, and
state regulators. They came away with an understanding that captive insurers are not treated
differently from a regulatory or rating standpoint than other commercial insurers. The
workgroup drafted a letter for the Administrator with two recommendations: (a) provide
guidance to states on differences in regulating captive insurance and other insurance and (b)
use a rating for captive insurers that do not pass the financial test. The next step for the
workgroup on financial assurance evaluation is to review commercial insurance as a financial
assurance mechanism, no matter how broad a subject that is.

She expects comments on the draft letter from workgroup members by mid-September,
followed by a conference call in early October through which they would reach agreement on
a final draft to bring to the full Board for consideration, before it is finalized for signature and
sent to the Administrator. She concluded  her report by noting that the guidance provided and
some kind of educational mechanism will be an important outcome of the workgroup. She
also noted additional questions raised by the workgroup: What exactly is the nature of the
policy associated with financial assurance? Does insurance remain a viable and useful
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mechanism for providing financial assurance? She then invited comments from other
members of the workgroup.

Mr. Meiburg first noted that EFAB members had received a copy of Ms. Rice's draft letter,
which they were welcome to comment on; however, the workgroup is not ready to present
the letter to the Board for official review. A workgroup conference call in October will help
assimilate a round of comments that morning from workgroup members into a more final
letter for the entire Board to review. He went on to thank everyone involved in setting up the
workshop, especially Ms. Rice, who had taken the lead in drafting a letter that the workgroup
could work through that day. He also noted that a copy of the workshop summary had been
sent to workgroup members. Ms. Francoeur recommended that EFAB members read it after
workgroup members go through it to make corrections.

Mr. Meiburg concluded the session by saying that the workgroup meetings continue to be a
good forum for the exchange of information among Board members as well as with the
Agency, state and local governments, and other interested individuals. He reiterated that once
work on captive insurance is completed, the workgroup will move ahead to the topic of
insurance in general, because many of the questions are the same. Education and competence
issues are very important. People's lack of understanding manifests as fear, which ends up
driving policy decisions. The more understanding promoted, the less the fear, which is an
impediment to more efficient and  economic functioning in the environmental arena.

Environmental Management Systems Workgroup
Rachel Deming

Ms. Deming first noted a request given the Board at last year's meeting to find connections
between financial performance and environmental management systems (EMSs) to identify
opportunities in the financial sector to promote EMS use within companies and by all
organizations. This is challenging, because little exists on the financial side that has actually
measured these systems at all. So the questions have become: what are the metrics, what can
be measured,  and what can be done to measure performance? The workgroup mapped out a
course of action that, for a variety of reasons, it did not take, that is, interview a number of
people in equity markets, financing or bond markets, and the insurance sector. The
workgroup did, however, hear a presentation (included in EFAB member packets) from
someone from the American Chemistry Council (ACC), who has been active in discussing
the value of these systems with certain segments of the financial sector. The presentation
highlighted (a) experiences in instituting a particular EMS or program embodying an EMS,
that is, the ACC's Responsible Care Code, and (b) ways to find overlap with other financial
and government programs to leverage the value of that system, which ACC has tried going
well beyond regulation to be proactive.

She noted that the workgroup has  decided to move on to where a potentially quantifiable
benefit appears to exist: the insurance sector, particularly in use of EMSs and how they
interface with risk assessment. The workgroup is putting together a workshop to address
specific insurance issues, using information and resources provided by Sarah Diefendorf,
Dr. Meyer, and others. Ms. Diefendorf is drafting a list of questions for the workshop to
address. Issues of timing and financing for the workshop will be discussed with the EFAB


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leadership. EPA's Office of Policy Economics and Innovation (OPEI) has offered to sponsor
the workshop, which may be associated with the March 2007 EFAB meeting.

Mr. Meiburg then began fielding comments and questions from the group. In response to a
question on the direction of the study and whether firms with better environmental records
have preferred insurance status or better premiums, Ms. Deming said insurance companies
are reluctant to share details on who gets better deals. If EFAB convened an EPA panel to
bring in the insurance industry, they might have a better dialogue that avoids being company
specific and be able to figure out the interface between risk assessment that is part of EMSs
and insurance a company might provide for different risks. A firm with an EMS with
different divisions or operations should be able to identify risk better, so could have lower
premiums. The risk assessment piece has  broader applicability than just insurance, because it
also helps inform companies' financials. It is very difficult, however, to relate a company's
EMS to any kind of financial metric benefit, because it cannot be isolated from a range of
environmental components (of which EMSs are only one), as well as health  and safety social
responsibility.

To a question on whether the workgroup was thinking about ISO 14000 and similar
standards, Ms. Deming responded that ISO 14000 is not universally accepted as the best
EMS. The Responsible Care System goes far beyond the ISO 14001 system, even on
environmental metrics. The ISO system is certainly a baseline. By not limiting it to ISO
14001, one allows for more sophisticated  EMSs.

Ms. Sahi commented that finding out which components of EMSs are weighted more heavily
than others permits assessment of what are the best components. She thought dialogue with
insurance companies would be useful in this respect. Ms. Deming responded that EMSs are
not well-defined identifiable concepts and figuring out baseline components that are the most
important pieces  for certain market areas on which to give advice is important.

Ms. Diefendorf mentioned two useful data points in California: a beyond-compliance
certification program of the Sustainable Wine Growers Association in which certified wine
growers are offered a 15 percent discount on insurance rates  and a dry cleaner who switched
from perchloroethylene to CO2 to negotiate his rates down.

Mr. Wise said insurance was a very large  subject. EFAB is intersecting with the insurance
industry at many levels. EFAB needs to keep an eye on the larger picture as  it works on
individual pieces. Insurance may become  a significant driving force, and part of EFAB's task
is to understand the dynamics.

Mr. Meiburg concluded the session by thanking Ms. Deming and other members of the
workgroup. Insurance issues present a bit of a challenge, he said, in terms of what focus to
take. The benefits of having the workshop, as Ms. Sahi noted, was to engage the industry
itself to help frame the questions better. The Agency does believe that the environment will
benefit from more widespread adoption of EMSs; to help make the case for EMSs, many
people would like to see an association, even if not cause and effect, with something that
affects the financial bottom line. Mr. Kent and Ms. Rice both expressed gratitude for the
comments from the group on the workgroup's efforts.


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Innovative Environmental Financing Tools Workgroup
Michael Curley

Mr. Curley described the workgroup's current focus—as requested by the EPA Office of Air
and Radiation (OAR)—on the Smartway Program, which combines several unrelated
elements to reduce emissions from diesel trucks. The workgroup first asked OAR whether
sufficient funds were on the table for emissions credits, which were possibly gainable by
installing Smartway devices, to offset the cost of one of the more expensive elements of the
Smartway kit; this piece produced no fuel savings at all and was, therefore, the least desirable
part of the kit. The value of the credits, however, in terms of the cost of the Smartway kit is
23-28 percent, a significant amount over five years.

Two impediments to credits could form the basis of recommendations to the Administrator:
(a) enabling national tradability and (b) identifying an exact amount. On the first, defining
the value of credits, for example, for NOX, is air shed specific and, therefore, not definable.
The Agency might want to work with industry to agree  on a tradable value of emissions if a
cross-country vehicle installs the Smartway kit. The second impediment is how to come up
with an exact amount, that is, a mileage standard for particular criteria—age and type of
engine, and so on—acceptable to the Agency and industry, as well as politically.

Mr. Curley then described what the workgroup will study in the next few months: The first
will be the impact of stationary sources of mobile emissions, for example, ports and truck
stops. Ports present the possibility of tax-exempt financing. In addition, a port in a severe
nonattainment area could simply forbid entrance of trucks that do not have a particulate
matter scrubber installed. A second item for discussion  will be aggregation systems for
credits, that is, moving the administration and financing of a program of credits to users of
credits, for example, a utility company, as opposed to the user of the trucks. Such a body
could aggregate credits to be more saleable and send  out checks to the individuals who own
trucks. Another area of study for the workgroup will be, again, the national tradeability and
calibration of emissions credits.

He concluded his report by listing next steps for the workgroup: to gather more information
on the three study topics and issue a memo on tradeability and calibration for further
discussion, supplemented by additional information on  stationary sources of mobile
pollution. By the middle of the fall, he hoped this would shape up into a draft report for
comment by the workgroup and, eventually, by the Board in time for the March 2007
meeting. Mr. Meiburg then opened the floor to questions and comments.

Ms. Sipes pointed out that she had worked for the Smartway Transport Partnership and just
started working for the Region 9; they are facing the same challenges with the upgrade kits
being discussed. Apportioning emission reductions gotten only in Oregon and attributable to
Oregon's money is difficult. Global positioning system (GPS) trackers might be useful in
solving the problem. Oregon's great reporting system on attainment and nonattainment areas
can help. It is a challenge in major transportation corridors like Oregon and Washington to
require every truck owner or company to have a global  positioning system (GPS) and track
all their travel. The stationary source issue is interesting. Truck stop electrification avoids
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truck idling and is easier to calibrate. The Office of Transportation and Air Quality had a
guidance document on the Smartway web site on getting credits for truck stop electrification.

Mr. Meiburg added that the regional administrator, Wayne Nastri, has been pushing on the
ports, such as the Ports  of Los Angeles and Long Beach, which may be a coincidence, but a
great deal of interest exists nonetheless. Mr. Nastri has been talking to other regional
administrators on expanding this concept beyond California to address the comparative
advantage issue, particularly regarding ships. Ms. Sipes added that the Port of Long Beach's
web site includes a Clean Air Action Plan on cleaning up the port, including a large section
on trucking at the ports.

Dr. Sawyers noted that  a lot of states are shying away from adopting truck stop electrification
and diesel retrofit, perhaps for financial reasons. Maintenance costs were the reason that
people did not want to retrofit school buses, despite a Maryland program to encourage this.
Before discussing financing tools, it might be better to discuss the benefits and encourage
more states to get involved. Mr. Curley agreed that an education program must go along with
any retrofit efforts.

Mr. O'Brien described Region V's Clean Diesel Emissions Program as one of their priorities
for the next few years. The Great Lakes EFC partnered with them to facilitate discussions
with industry and trucking companies to determine their interest in doing something. Because
the pollution is mobile, the problem is that pollution is created in states where the trucks are
not registered; traditional state use of financing sources is not applicable. It is also difficult to
convince trucking companies to do something that does not increase productivity for them.
Their EFC is holding a  conference on September 23 in Chicago for investment banks,
insurance companies, trucking companies, and others to discuss financial capacity or
capabilities to move this further down the road, including trading of credits.

Mr. Wise commented that if a financial hook could be found that could help existing truck
owners and companies in interstate commerce capitalize on their investments and get some
payback, it would be a huge victory. Mr. Meiburg added that the FY 2007 budget before
Congress has provisions for grants for diesel retrofits of somewhere between $25 and $27
million. Because of this, the Agency may ask EFAB how to allocate that money to produce
the "biggest bang for the buck." He suggested that, when Mr. Wise talks with Mitch
Greenberg that he raise that as  a possible extension to OAR's charge to EFAB.

Ms. Himmelberger then mentioned that Mexican truckers have been going through
substantial hoops raised by the U.S. government at great expense in order to get across the
border more quickly. These hoops are much stricter than those placed on U.S. companies.
Perhaps they would spend more money if there were other incentives.

Ms. Diefendorf wondered if looking into building better technology for retrofitting trucks
might also be a good idea, as particulate filters can cost $6,000 per truck, which may need as
many as two or three during its life. Perhaps it could be part of some kind of design
challenge. Ms. Sipes thought the price would go down drastically, as the device requires
ultra-low sulfur diesel (ULSD) to work properly and EPA has mandated ULSD use by 2006.
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There is still not much of an incentive to use the filters, however, because it does not
translate into fuel savings.

Mr. Meiburg thanked the workgroup for struggling with these issues. One of the greatest
difficulties is how to get a substantial amount of pollution reduction in small increments of
time. The group then agreed, because there was still time, to move into Langdon Marsh's
report, scheduled for the next day, from the NFS Workgroup.

Nonpoint Source Financing Workgroup
Langdon Marsh

Mr. Marsh began by noting that, for several years, the Nonpoint Source Workgroup has
considered how localities can finance the portion of watershed plans and projects and so on
that is not financed by Federal grants and loans or private foundation contributions. The
proportion can vary from 10 to 70 percent depending on availability of grants and eligibility.
The workgroup has  focused on nonpoint source (NFS) pollution because it  has received less
attention on financing questions. Given tremendous flexibility in SRFs to pay for various
kinds of NFS programs, the issue is really lack of adequate funding to cover all the work that
needs to be done.

On March 9, the workgroup held an excellent roundtable of experts from a  cross-section of
government, industry, local authorities, and nonprofits, including several EFAB members.
These experts were  asked what should  be included in a sustainable finance  initiative that
EPA might assist in some way.

He took a minute to thank Alecia Crichlow, Vanessa Bowie, Tim McProuty, and Tim Jones,
as well as staff of the Office of Water;  Office of Wetlands, Oceans, and Watersheds
(including the Targeted Watershed Grant Program); and the Sustainable Finance Team and
for their organizational help on the roundtable.

Mr. Marsh then summarized the results of the roundtable, as presented in a  report in EFAB
member packets, noting that some of the points could apply equally to financing the non-
Federal, non-state share of infrastructure. He is also interested in the Board's thoughts on
whether the roundtable results can be applied to the "hardware" side of things.

The roundtable's focus was so important because total maximum daily load allocations  are
increasingly driving the need to address issues on a watershed basis. EPA and/or the states
have moved toward watershed permitting, and the policy for sustainable infrastructure
certainly includes the notion of taking a watershed  approach. Traditional sources of funding
just cannot do it all, so local governments within watersheds and watershed organizations
that care about improving the situation are more or less on their own to find financing. This
has always been true; much financing for infrastructure has come from the local level.

The report  covers several areas addressed by the roundtable. First, presentations by George
Ames and Stephanie von  Feck on state revolving funds and on drinking water reiterated the
flexibility inherent in SRFs. More work can be done to  find opportunities for leveraging of
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funds, that is, how investments through SRF programs can be associated with other
investments, which is particularly possible for NPSs.

Second, John Boland (Johns Hopkins University) and Josh Farley (University of Vermont)
discussed principles for allocating costs to meet a variety of tests, for example, simplicity,
fairness, equity, efficiency, and so on. There are many ways to finance things—taxes, fees,
charges, and so on—and none of them are easy. To make the case for additional fees, taxes,
or whatever politically achievable, one should craft something simple enough to be
understood, as well as fair and  equitable to be acceptable.

Third, the roundtable looked at several models of collaborative governance: how to bring
government, business, nonprofits, and citizens who represent the relevant financial and
economic interests together to think about the most effective ways to raise revenues locally
for an entire watershed. If such a group has an appropriate convener, is adequately
sponsored,  and has a neutral forum, it has a better than average chance to come up with an
agreement that can be implemented by the various jurisdictions in the watershed. A
wonderful presentation by Maryland folks on just such an initiative suggested keeping such
efforts simple and transparent,  sharing financing costs as broadly as possible, assuring
accountability, making revenue sources sustainable, and seeking broad political acceptability.

Fourth, they looked at a variety of innovative financing and market methods. Existing efforts
include special purpose financing, special district financing, surcharges on water fees
(including the New York City watershed case), different kinds of watershed assessments,
transfer of development rights, tax increment financing,  and some very interesting market-
based programs.  Karl Morgenstern presented the case of the Eugene, Oregon, Water and
Energy Board, which used fees and Federal grants to finance an effective economic
development scheme to connect organic farmers upstream on  the McKenzie River to
consumers  and customers in Eugene,  while reducing impacts and loadings to the river. The
goal has been to  become a self-sustaining and -financing market system with associated
water quality benefits.

Mr. Marsh  then concluded his report by reviewing the report's six recommendations to the
Administrator:

•  Use its Targeted Watershed Grant Program or other programs to develop a demonstration
   project  in one or two watersheds to demonstrate collaborative governance and sustainable
   finance techniques to see if the Agency can actually help make it happen in a watershed.
   He noted that lack of data for nonpoint source impacts is often lacking, but a critical part
   of any innovative financing scheme.
•  Promote collaborative approaches at the local level. Consider helping establish
   collaborative approaches to addressing complex and politically touchy issues without
   advocating that locals raise their taxes.
•  Improve, update, and disseminate a list of tools that draws on EFAB's past work. The
   EFCs could play an enormously important role in doing this.
•  Encourage an ecosystem services  approach by investing in work with universities and
   other Federal agencies, particularly the Forest Service, to develop ideas on incorporating
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    such values into market schemes and revenue-raising systems to address water quality
    problems.
•   Look for ways to leverage existing financing tools. This should really be a cooperative
    effort between the Agency and states and local governments and watershed groups.
•   Develop a compendium or list of potential entities—utilities, special districts, or
    whatever—to implement watershed approaches and pros and cons associated with each.

Mr. Marsh said the report was a draft that awaited EFAB member reactions. The next step
will be to incorporate their comments into another draft, pass it around the workgroup, and
come up with a final report, together with a proposed letter to the Administrator to be
circulated for EFAB approval.

Mr. Meiburg opened the floor to comments and questions. When asked if there has been
interaction with the Natural Resource Damage Assessment Trustees on how they value
ecosystems, Mr.  Marsh said he did not know, but they want to develop information on it;
some agencies, including Agriculture, are working on it. Mr. Boland said that the techniques
to do natural resource damage valuations under the Comprehensive Environmental Response,
Compensation, and Liability  Act (CERCLA) would be similar to those they would use, but
more narrow due to  a history of litigation.  It is supposed to begin with an objective
assessment of damages, and the methods are supposed to be comparable. Ms. Deming noted
that using the same terminology in two contexts can be confusing, but there is value in
having consistency,  because it opens the possibility of credits in natural resource damage
situations. The more this is considered in terms of moving forward, the greater the
availability of funds.

Mr. Sawyer commended the workgroup on its draft and presentations. He noted the real
opportunities for some entities now working separately in Maryland on different issues to
step up and borrow the  money. Mr. Marsh responded that if one tries to work on a truly
watershed basis,  an entity has to have authority throughout the watershed; for example, in
Washington State they are called public utility districts. In many states, it is not  so clear how
easy it would be  to create a special district that would cross town, village, county, and/or
even state lines. That is more the issue than the ability of the entity to issue finance. Dr.
Sawyers cited the Restoration Fund as an example of a multistate effort, but they have not
been successful.  Unfortunately, some of these efforts must  start at a county level and may
eventually work together across the watershed.

Responding to the point that New York City's efforts cannot be easily be replicated
elsewhere as the  city owns a great deal of land in the watershed, Mr. Marsh noted that the
New York City case was a landmark agreement because private land owners were paid for
implementing best practices on farms and forestlands by those city customers who benefited.

Ms. Agriss suggested that EFC could productively focus on collaborative governance,
because it is difficult for EPA to encourage various political jurisdictions to work together on
watersheds. Perhaps EFAB should discuss the concept of beneficiary pays more, she added.
A great deal of interesting work is being done on this on electric transmission lines, both
siting and financing.
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Ms. Belaga thought EFCs had a unique opportunity to get involved more aggressively
because states will need some real hands-on help in these areas. EFCs could not only help
states, but take a regional look, helping neighboring states in dealing with these issues.

Mr. Zaragoza returned to the natural resource damage assessment (NRDA) issue. Regarding
CERCLA actions, NRDA claims are typically based on whatever is left. Superfund cleanups
deal with the bulk of the claims, which is why claims are not greater. Two ongoing activities
are addressing the harmonization issue now: The National Oceanic and Atmospheric
Administration (NOAA)  is having a series of workshops that include industry,  states, various
other Federal agencies, and the public  to try to harmonize things, and the Department of the
Interior (DOT) has brought people in to look at the whole FACA, Federal Advisory
Committee Act process. States have also set up their own harmonization processes for doing
certain things. The DOT rules cover CERCLA NRDA, and the NOAA rules cover OPA, Oil
Pollution Act NRDA.

Ms. Deming said that CERCLA has not addressed many watershed issues. The CERCLA and
NRDA processes and watershed issues should be integrated, which provides the opportunity
to go outside the usual paradigm. Point sources or a specific facility can be taken care of by
the CERCLA cleanup, and the residual is negotiated as a natural resource damage claim.
Watershed opportunities, however, are evolving to a point where there may be  some
opportunities for using available funds better.

Mr. Hughes suggested that EFCs' experience was that there may be many great ideas but the
implementing entity issue must be addressed first. Across states, what is legal can be very
different. EPA has generated guidebooks that may be able to help,  but one could perhaps
develop criteria for a potential entity, and then each state could decide what kind of entity it
would mean.

Mr. Wise thought the roundtable last March was excellent, especially the papers by Mr.
Boland and Mr. Farley, which contained good solid information on financing some of these
matters. The papers set the right tone, that is, that the job can get done.

Mr. Turner noted that the Ohio River Valley National Sanitary Commission is doing things
on a watershed basis and has gathered  a lot of data. Some environmental groups think highly
of the Delaware River Basin Commission as a good watershed-based organization. Mr.
Correll added to the list the New Jersey Water Supply Authority, which is a statewide agency
that leverages money from the Department of Environmental Protection (DEP), charges its
users, and is acquiring a lot of watershed land,

Mr. Meiburg noted an interesting disconnect between promoting innovative forms of finance
and the need for education on conventional finance. Regarding promoting collaborative
government approaches, he wondered  what exactly EPA could do. EPA could be a convener,
but how to promote these approaches can be challenging, particularly given the role of states,
as EPA needs to be careful not to overstep its role. He suggested that the Department of
Transportation's Ecosystem Enhancement Programs to identify mitigation for some large-
scale highway projects in advance based on ecosystem principles may be a good model. He
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added that actual implementation of ideas in the roundtable paper is very sensitive to local
circumstances and conditions.

The group agreed to defer discussion on EFAB's role in advancing the recommendation,
once EFAB has delivered it.

First Day Summary
Stanley Meiburg

Mr. Meiburg took a few minutes to summarize his impressions of the afternoon's reports. He
noted that Sam Merrill had received considerable feedback from the Board that will take a bit
of synthesis and work to mine all the "nuggets" provided, but was a fertile exercise.

Ms. Francoeur's report on financial assurance had laid out a clear schedule of next steps.
EFAB member feedback on captive insurance led to additional ideas for insurance in general,
but the timetable for comments on the draft letter to the Administrator is well defined.

Ms. Deming's presentation on EMSs outlined the progress the workgroup had made that
morning in focusing on producing information on some of the potential financial benefits of
EMSs for use in looking at companies that are wavering about moving ahead with such
systems.

Mr. Curley provoked a wide-ranging discussion on innovative financing tools that touched
on the Smartway program as well as other areas, so there is good follow-up work to be done.

Mr. Marsh had addressed the need for people to develop an intellectual framework on  what
can be done on sustainable financing of watersheds and principles to follow in applying
them. One must be  ever mindful, however, that on-the-ground application will vary a great
deal from place to place.

Mr. Meiburg then adjourned the meeting for the day.

Adjournment                                                             (4:52 pm)
TUESDAY, AUGUST 15, 2006

Opening Remarks
Stan Meiburg                                                             (9:00 am)

Mr. Meiburg convened the second day of the EFAB meeting, taking a minute to thank Alecia
Crichlow and Vanessa Bowie and others responsible for the previous evening's EFAB
dinner. He also welcomed EFAB member Jennifer Hernandez, who could not attend the
previous afternoon, as well as Steve Hanna from the Office of the Inspector General, who did
some of the Inspector General work on financial assurance and addressed EFAB at the New
York workshop on captive insurance. Referring to that day's speakers, he also welcomed Jim
Hanlon of the Office of Water and Wastewater Management and Cynthia Dougherty of the

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Office of Ground Water and Drinking Water. Discussion later that day on future EFAB work,
especially on SRFs, would benefit tremendously from their participation.

Workgroups Report-Out (continued)
Stanley Meiburg

Mr. Meiburg then introduced George Butcher, who spoke on expanding the definition of SRF
finance.
Expanding the Definition of SRF Finance
George Butcher

Mr. Butcher referred EFAB members to a draft concept paper in their packets on the topic,
which describes an alternative approach to achieving arbitrage relief to make SRFs more
efficient. Getting the Internal Revenue Service to make an exception to generally applicable
arbitrage rules have been unsuccessful. Expanding the definition of permitted SRF financial
assistance to include operating and capital assistance would permit state SRFs to give
financial assistance without triggering application of generally applicable arbitrage rules. The
perpetuity rule would still apply. This would make additional dollars available in the SRFs
for additional assistance. The workgroup has discussed whether this could be accomplished
through a regulatory change, avoiding a statutory change. The workgroup could not identify
a workable way to accomplish this through regulation, so a statutory change would be
necessary. Additional work is needed before submitting the paper to the Board:

First, EPA has historically been reluctant to give operating assistance. From an economic
perspective, EFAB's discussion uses the same dollars for the same projects in a way that is
more efficient for the program, but nevertheless recognizes that sensitivity. The nexus in the
paper between eligible projects and provision of operating assistance needs strengthening,
probably by permitting operating assistance only if the bar receives a loan or loan guaranty.

Second, area of emphasis is one he had just mentioned: emphasize the potential impact on
this proposal in terms of the ability to grow the SRF or to provide assistance to more projects.
And although EFAB has done some diligence with tax lawyers, they will go through an
additional diligence process to get more comfortable that this idea should accomplish its
objectives by circumventing the application of the arbitrage rule.

The plan is to get comments from  the workgroup by September 15 and then circulate a
revised draft to the workgroup by early October, resulting in a final product for consideration
by the Board. The Board should consider the form of its consideration.

Mr. Meiburg then opened the floor for comments and questions. Ms. Agriss reiterated the
Administrator's charge to EFAB to come up with innovative financing to accomplish more
than would otherwise be achievable in the face of reduced capitalization grants for SRFs. She
thought the workgroup had definitely come up with  something that meets that challenge.
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In answer to a number of questions from Dr. Tozzi, Mr. Butcher explained that there is a cost
to the workgroup's proposal. Because the government is not benefiting from the restriction of
the yield, there should not be a cost; however, if this proposal were passed, programs that do
not currently leverage and those that leverage without investing their equity would be
expected to switch to a model allowing them to invest. The theoretical cost to Treasury
would be, if more tax-exempt debt is issued, that the government would forego more benefit;
however, the government is not issuing those bonds now, so it depends on the way one looks
at it. The concept would be very specific to SRFs. The amendments implemented would be
an addition to EPA, not an amendment to the Tax Code. The list of permitted financial
assistance would be modified.

Mr. Hinds suggested tweaking the proposal to gear it more toward communities.  This led to a
general discussion on whether to gear it toward the affordability issue, because if more
subsidy is offered, the cost of environmental protection for smaller and other communities
would decrease, because they can  subsidize the cost of borrowing. Although these funds
could be useful to states on affordability issues, an argument can be made to work to simply
get more money overall into the funds and leave it to  the states to make the determination on
guiding money to one goal or another. Because the states would administer the additional
capital on the basis of the individual state SRFs, individual communities will, in any case, not
have a say on how the monies are  administered. Perhaps EFAB should be going more in the
direction of flexibility in making determinations?

Mr. Butcher then addressed a number of questions on the perpetuity requirement, which
means that equity contributed to the SRF must continue to exist in perpetuity. Any operating
subsidy can be taken away at the end of the length of the loan. The SRFs functionally provide
subsidies from earnings on the equity contributed to the fund. This equity must be
maintained; the perpetuity earnings provide the funds that actually go into subsidies, whether
an interest or operating subsidy. There is no difference in the functioning of the fund from an
economic perspective, other than the ability to garner additional earnings, which  would then
be available to provide additional subsidies or to make additional loans.

These subsidies are called operating subsidies, because they cannot be debt service subsidies,
as there must be an associated cost. Two examples of cost are the capital paying for a portion
of the project cost or operating assistance related to the project during which financing would
otherwise occur. It is not operating assistance in perpetuity. The intention is to avoid
characterization of the subsidies as debt service assistance and have something that is clear,
understandable, and relates to the project. The operating  subsidy does not have to go back
into the specific operation; the money would simply be in the hands of the operator, such  as a
utility, much like savings from lower debt service. Ms. Agriss thought this point  should be
considered in revising the workgroup's paper.

At some point in the future, Mr. Wise said, the Federal capitalization grants will cease to
flow into the system. At that point, all kinds of cross-cutting requirements vanish. This is  a
generally applicable rule that applies whenever taxes  and bonds are issued while  monies are
invested, replied Mr. Butcher. Debt service is being traded for operating assistance,
potentially dollar for dollar. Mr. Wise thought EPA was ambivalent about whether or not
Federal requirements dissolve when Federal capitalization quits coming in. Mr. Butcher's


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understanding was that all requirements are attached to grants and state matches. When a
state match expires or no capitalization exists, those grant requirements disappear. The
perpetuity requirements are obviously continued, but many cross-cutting grant requirements
only attach to grant dollars. Even today, a third of the loans made from clean water SRFs are
repaid dollars or interest-earning dollars. Arbitrage requirements, however, attach to earnings
from tax-free debt and so are different in this respect. Mr. Dorfman added that the
requirements of the SRF program itself of Title VI will continue as long as each SRF
program exists, because that was part of the establishment of the SRF program. The cross-
cutting requirements attached to grants from the Federal government will cease to exist and
often expire now.

Mr. Butcher noted that  the next steps for the workgroup included getting a final revised draft
of the proposal to the Board in  early November. Mr. Meiburg thanked the workgroup for
their well-thought-out proposal, a good example of a creative idea to work around arbitrage
requirements that are not amenable to frontal assault.

Potential New Projects
Stanley Meiburg

Mr. Meiburg then introduced Greg Mason of the Georgia Environmental Facility Authority
(GEFA) and Jordan Dorfman, who reported on a conference planned for Atlanta next spring
on paying for sustainable water infrastructure.

Paying for Sustainable Water Infrastructure Conference

Comments by Greg Mason

The genesis of the conference was last March's EFAB meeting, when Deputy Administrator
Marcus Peacock challenged EFAB to crack the problem of water infrastructure financing.
GEFA was asked to cosponsor  a national conference to address this question, which involves
some initiatives in which EFAB has been greatly engaged. The date has  been set March 21-
23. The title is "Paying for Sustainable Water Infrastructure in the 21st Century." It will take
place at the Atlanta Hilton after the March EFAB and before the May CIFA, Council of
Infrastructure Financing Authority meeting. Attendance is estimated at between 300 and 500.
The audience sought will be a broad spectrum of key public and private  senior policy and
decisionmakers, obviously from state and local levels, the public finance field, and  water
professionals within the industry and environmental sector. The Administrator and  Ben
Grumbles very much have these conference plans on their radar screen.

Goals include raising the profile and awareness of EPA's  sustainable infrastructure initiative,
including the four pillars; creating a national forum to advance the Administrator's  priority;
exchange ideas on state and local financing innovations; learn about revenue financing
innovations in other countries;  and recognize 20 years of the Clean Water and  10 years of the
Drinking Water Program.

The conference will have four tracks: sustainable infrastructure and the four pillars; the SRF
and Federal assistance,  that is, lessons learned and how to integrate activities with Federal
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programs; the Federal role after Federal funding ceases (led by George Ames and Peter
Shanahan); and state and local innovations (led by Michael Deane).

Mr. Mason referred to specific expected deliverables in one of four slides he presented,
saying that the intention was to have meaningful dialogue that will move the audience to
action and successful measures. Invitations have gone out to key government and
nongovernmental officials to participate. He invited EFAB members to suggest how they
might get involved, whether as speakers or even by holding an EFAB public hearing. The
intention is to report back on the meeting to the Administrator. A website, "Paying for
Water" will be operational within a week.

Comments by Jordan Dorfman

Mr. Dorfman said that Mr. Mason had covered much of what he had wanted to say, but
added that logistical questions could be directed to George Ames or Kelly Kunert. He had
spoken with Sam Merrill on the EFC Network cosponsoring the conference. EFAB  could
hold a meeting on the last day, but they were open to any other ideas the Board had. At this
point, Mr. Mason asked EFAB members if they had any suggestions for speakers, if they
wanted to reserve a session, or if they would literally like to take ownership of a session with
a kind of town meeting or public hearing.

Mr. Meiburg further clarified the feedback being sought from EFAB members. Their
participation in the conference would be a new type of activity for EFAB than in the past.
The Board could take a number of roles, ranging from participation by individual members;
sessions sponsored by Board members within the individual tracks laid out, for example, on
expanding the definition of SRF assistance; creation of EFAB's own track to cover  all that
the Board has been working; some form of cosponsorship by EFAB, although it could not be
financial due to limited EFAB funds; to the concept of a public EFAB meeting.

EFAB members then had a lengthy discussion on various aspects of the Atlanta conference,
including desired audience and speakers; EFAB's role, especially whether to sponsor the
conference; encouraging audience participation and generation of new ideas; specific topics
to cover; and logistics, especially whether to combine the spring EFAB meeting in some way
with the conference.

EFAB members mentioned a great range of individuals as part of the desired audience,
including people who run SRF programs, high-level state environmental agency officials, as
well as nontraditional invitees, such as from the Farm Bureau, USDA, and others managing
money for watershed improvements. Individuals involved in municipal leagues and county
commissioners are dealing directly with questions EFAB members have raised, such as
affordability, and should be invited. EFAB members should also feel free to send out
personal invitations to individuals in their particular industries.

A great deal of time  was spent discussing how EFAB should get involved in the conference.
Regarding cosponsorship by EFAB, Mr. Meiburg did not see it as a problem, because EFAB
is a Federal advisory board chartered by EPA with sufficient independent status. In  addition,
sponsorship of the conference would simply entail use of EFAB's network to help distribute


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information on the conference and participation by its members. It was agreed that Vanessa
Bowie should, in any case, check with the Office of Cooperative Environmental Management
to see if sponsorship would break any FACA rules.

Invitations for other cosponsors have resulted in positive replies from the Water Environment
Federation, National Association of Clean Water Agencies, American Water Works
Association, Association of State Drinking Water Authorities, and CEFA. The
Environmental Council of the  States (ECOS) is considering sponsorship, as are four or five
other entities. Mr. Sustich planned to speak with John Howard about sponsorship by
NACEPT.

Mr. Smith raised the question  on how EFAB could most efficiently benefit from the
conference. Would this be an opportunity for EFAB members to harvest innovative ideas or
to test fledgling ideas with a range of individuals? Mr. Meiburg thought that getting EFAB
out into the marketplace of ideas was certainly respectful of the role of the Board as a source
of recommendations for the Administrator. Mr. Marsh pointed out that EFAB had in  essence
sponsored the roundtable last March with the Office of Water, Wetlands, Oceans, and
Watersheds. Dr. Sawyers noted that EFAB also has a wealth of its own ideas; even though
EPA is its prime audience, it was time for the Board to take some  of these ideas beyond EPA
to gain support for them.

The discussion generated a number of ideas on structuring the conference to encourage
interaction and generation of innovative ideas. Mr. Merrill expressed concern on whether
four tracks with 28 speakers might turn the conference into just another set of "talking
heads," albeit fascinating and engaging. Perhaps some EFAB members could end each day
by facilitating an hour and a half hash session to brainstorm a list of barriers and develop
problem-solving action steps. EFAB members could offer consultative advice on whether
one or another innovation that has been case studied or profiled might have  transferability
and how it could be integrated into other systems. Such critiques could give an audience of
policymakers perspective on the potential of ideas and encourage  action steps. Another idea
was having break-out sessions of 10 to  12 attendees who would focus  on a specific case
study to generate ideas.

Mr. Wise suggested showcasing and distributing EFAB's very well-done document to all
conference participants. He also noted that it was important to seize the high ground on
issues of sustainability, fresh perspectives, and innovations. The conference could otherwise
easily degenerate into a complaining session on cross-cutting requirements and lack of
money and Federal grants.

Mr. Mahfood emphasized the need to look at nontraditional organizations that are currently
funneling money to issues, for example, on agricultural water quality,  and to have real results
from the conference. Related to this were comments from Dr. Tozzi and Mr. Sustich  on
inviting speakers on specific projects, like George Butcher project. NACEPT is currently
working on 18 to 20 real-world watershed case studies.  EFAB could supply questions to be
answered in these studies that  could contribute to the conference discussion. Ms. Francoeur
suggested looking at work by seemingly unrelated agencies, such  as the Federal Highway
Administration in the Department of Transportation, which is pursuing public/private


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partnerships and ways to modify Federal legislation and requirements to encourage similar
kinds of innovations.

As part of discussion on watersheds, Mr. Turner said the conference should analyze the
figure of $400 billion needed for water infrastructure in the next 20 years, questioning
whether the dollar figure was correct. The conference should also discuss the part of the
program dealing with total maximum daily loads. Mr. Miller added that the other end of the
equation was the perceived value of a utility, that is, what it is worth to the user.

As an aside, Mr. Curley mentioned that he would like to invite the head of the Global
Environment Facility to join other invited "heavy hitters" to contribute to international
discussions at the conference.

The group spent a great deal of time discussing how to coordinate next spring's EFAB
meeting with the Atlanta conference. A number of ideas were discussed to make attendance
at both meetings more convenient for EFAB members; siting the EFAB meeting in Atlanta
either before, after, or during the Atlanta conference would help and even contribute to
outcomes of both meetings. A concurrent, albeit abbreviated, EFAB meeting would thereby
become an open public session and give EFAB additional visibility and opportunities to hear
new ideas and test out EFAB ideas. The Atlanta EPA office would be happy to handle
logistics of holding both meetings at or near the same time. The drawback would be that
EFAB members would miss the annual opportunity to meet more easily with Washington
EPA officials; however, it raised the possibility of meeting more conveniently with regional
EPA staff. One logistical detail was the possible conflict of holding an EFAB meeting, which
is public, as a conference track when conference attendees had paid fees. One suggestion was
that a short EFAB meeting be held on the Tuesday before the conference, which would allow
for discussion of some of EFAB's other topics and  specific sessions at the conference
relating specifically to conference-related EFAB activities, especially on Wednesday, to
make it more convenient for EFAB members.

Mr. Smith cautioned the group to be careful not to take over the conference planning process;
Mr. Meiburg agreed that EFAB should seek only to find ways to get economy of operations
and would work with the Office of Water and Greg Mason.

Ms. Himmelberger then noted that state and Federal legislators  and what they do impact
anything that is done on SRF funding or innovations.  In her state, legislators grant a great
deal of money without strings attached, which affects the ability of systems to work together
in a consolidated way and the ability of the SRF program to advance sustainability. The same
thing happens at the Federal level. The legislative level really impacts the ability to do
different innovations or undercuts innovations that are tried. If a lot of strings are placed on
SRFs and state money comes without strings, ability to make progress is undercut. If this
cannot be addressed in the conference,  it is something that EFAB should keep in mind.
Perhaps some legislators can be invited to the conference or be  briefed afterwards? Mr.
Meiburg then quoted a comment by Deputy Administrator Linda Fischer, who said
"Congress is  educable." He added that  money with no strings attached usually had strings
attached that  were not apparent. He also noted that earmarks themselves have shrunk and
would probably continue to shrink. The same forces that are affecting capitalization grants


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are at work on earmarks. Mr. Meiburg finished by announcing a short break.

(break)

Mr. Meiburg reconvened the meeting and welcomed and thanked again James Hanlon,
Director of the Office of Waste Water Management, and Cynthia Dougherty, Director of the
Office of Ground Water and Drinking Water, for participating in the EFAB meeting. They
would discuss financial capability guideline review and affordability, respectively, for EFAB
members.

Financial  Capability Guideline Review
James Hanlon

Mr. Hanlon thanked EFAB for the invitation to attend what would be his first EFAB
meeting. He first announced Ben Grumbles' appointment of a former EFAB member,
Michael Deane, to Mr. Grumble's immediate office in the Office of Water to work on a range
of municipal finance issues. Mr. Hanlon also thanked EFAB for its March 2006 report on
affordability;  Mr. Grumbles had responded positively to the recommendation to develop a
handbook  for  local drinking water and waste water utilities on dealing with challenges of
local affordability.

Mr. Hanlon then turned to the timely topic of financial capability. As background, he noted
the Agency's  1994 completion of the combined sewer overflow (CSO) policy, which set
forth the Agency's approach to compliance requirements with respect to the Clean Water Act
for municipalities with combined sewers; all permits to the CSO community must conform to
the CSO policy. Some of the 730 cities with such sewers have moved forward on this; others
have not. The policy was later codified by Congress as part of the 2000 Wet Weather Water
Quality Act. After policy issuance, the Agency followed up with five to six guidance
documents. A key one from 1997 was the "CSO Guidance for Financial Capability
Assessment and Scheduled Development," which provided the Agency's approach to how
the CSO community's financial capability should be assessed as they proceed through the
long-term  control plan development and implementation process. This  document was
important, because EPA's Enforcement Office refers to it as they review capital
improvement  plans proposed by municipalities: what the financial capability of that utility is
to implement  a long-term control plan and what time considerations should go into the plan.

Mr. Hanlon also noted his responsibility, not only for clean water SRFs, but for the Clean
Water Permitting Program, which issues  NPDES, National Pollutant Discharge Elimination
System permits to 87,000 point sources of waste water across the country. The financial
capability  guidance for the permit program is important to the NPDES  program and used by
EPA's compliance program as well.

To date, 76 percent of long-term control plans have been completed, and nearly 50 percent
have been  approved, either by state or regional offices, as part of the permitting process.
More work is  needed, including some of the most challenging work. Again, the financial
capability  guidance has broader impacts than just CSOs across EPA's clean water programs.
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His office recently received a white paper from the National Association of Clean Water
Agencies (NACWA), which represents the largest municipal waste water utilities in the
country, suggesting updates to the financial capability guidance. Mr. Grumbles recently
announced the Agency would review the guidance, which includes a two-phased process,
first, looking at residential indicators (costs per household compared with median household
income values) and then more broadly at financial indicators of the permittee or community.
NACWA is so excited about EPA's review of the guidance, the association is redoing its
white paper and is willing to help.

Although the guidance has worked well, it is  10 years old. EPA would like to ask the Board,
if willing, to assess the guidance in a fairly crisp fashion—sort of a 100-day review. EPA
would send EFAB all background documents by September 1. One question is whether tools,
techniques, or approaches have evolved enough in the past 10 years that EPA should address
them in the guidance? Mr. Hanlon then asked for EFAB member comments and questions.

In response to a number of questions related to the EPA request for EFAB assistance, Mr.
Hanlon said that the requirement to achieve certain levels of water quality is driven by state
adoption of water quality standards, which trigger numerical requirements that all permits
must achieve as part of the state-run water quality standards process. The financial capability
guidance often deals not with the scale of a project, but the pace at which utilities need to
comply. The process for either a variance or downgrade of water quality standards includes a
"widespread social and economic harm" component; if a water quality objective is not
attainable for whatever reason, the "off-ramp" is through the water quality standards process
and the factor would be the widespread social and economic climate. States and the public
are very reluctant to give up water quality objectives, but often there is a delay in schedules
for meeting these objectives through the variance process. The target date is deferred for
meeting the objectives, which adds more time to the process, but it does not change the
underlying objective.

He did not think that total maximum daily loads have impacted wet weather capital planning
processes that much, because the key pollutants in dealing with CSOs are pathogens. The
greater issue within individual watersheds in terms  of CSO policy implementation has been
assessment of water quality standards. EPA authorizes the states to implement the process.
Some states set very high standards in the 1970; in the 1990s, it was easy, therefore, in
implementing CSO policy to violate these high standards to the point that no overflows were
allowed in these states. Combined sewer  systems are designed to allow for as many as 70 to
75 overflows a year. The CSO policy recognized this issue and encouraged, as part of the
long-term control planning process, the permittee to work with the state to review water
quality standards to look at the attainability issue, where most of the opportunities lie; what
the end points are and dealing with them  in terms of driving the local infrastructure needs of
waste water utilities. The CSO policy relies on, but does not affect, the requirement of the
Clean Water Act to meet water quality standards. Utilities can choose one of two tracks:

•  A presumptive track, in which a utility reasonably presumes that getting overflows down
   from 70 to 6 a year will meet water quality standards; after it proceeds to do so, it must
   re-evaluate to see whether the standards were indeed met or go through the standards
   review process with the state.


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•  A demonstration track, in which a utility conducts an engineering analysis to determine
   what level of control is needed to meet the standards applied to receiving waters and then
   demonstrates that the design will meet water quality standards.

Mr. Hinds then asked Mr. Hanlon to give EFAB members a brief primer on combined sewer
overflow issues. Most are in the east in EPA Regions I, II, III, and V; some are in Region IV.
Some are undersized when built and overflow up to 100 times a year; others were designed to
move most storm water out of the city at strategic overflow points in order to be able to move
day-to-day waste water to the treatment plant.

So, the options on handling CSOs depend on with what one  starts. A not so trivial number of
municipalities have decided to separate their sewers, but this is  not an option for some cities,
such as  San Francisco. Sophisticated engineering designs have a capture rate, based on
historical weather patterns, that take most of the need for overflow to adjoining water bodies
away from the city. The system then must have  a combined  storage capacity, pumping
capacity, and treatment ability, so the overflow can be treated before the next storm. Designs
that include subsurface tunnels have significant  construction implications. Surface storage is
cheaper, but not available to all municipalities.

New technologies, called ballasted flocculation  treatment units, have emerged in the past five
or six years that can start up very quickly and provide almost secondary treatment.

The larger sewer districts, usually with older central areas—Chicago, Milwaukee, Chicago,
and others—are combined sewers; many of the newer suburbs have separate sewers, but they
all essentially go to the same treatment plant. Optimizing the flow of separate sewage to get
it all to the treatment plan, so that any overflow  is the most dilute of the waste water is  a very
sophisticated engineering design issue in these systems.

The group then focused discussion on EPA's desire that the  Board respond to its request
within 100 days and whether this was reasonable. Mr. Hanlon explained that they needed
Board input quickly, because the Agency was expecting a revised NAWCA white paper
within 30 to 60 days and also had some contract assistants looking at many of the same
issues. He did not want to get into the position of having some of these inputs on the table
and be several months away from Board input. Mr. Hughes pointed out that, in contrast to
other EPA requests, the Board was only being asked for direct member input, rather than the
more time-consuming gathering of information  and opinions from other experts. Mr.
Meiburg suggested that Dr. Sawyers sit down with Mr. Hanlon  very soon to lay out a
reasonable schedule and then asked Board members interested in joining this workgroup to
identify themselves.

Affordability
Cynthia Dougherty

Ms. Dougherty wanted first to review what  EPA is doing on affordability and then address
larger issues of affordability. The Safe Drinking Water Act requires EPA to determine if any
new regulations will be affordable for small systems. If they are not, EPA must identify
variance technology that is affordable for those  sized systems. People with those systems can

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then apply for an individual system state variance, which requires installation of the variance
technology. Ten years ago, EPA issued criteria for making that determination, which looked
at the cumulative cost of regulations to drinking water systems. In the past 10 years, EPA
never found any standards that were unaffordable for small systems. In 2002, Congress
required EPA to review these criteria. EPA asked the National Drinking Water Advisory
Council (NDWAC) and Science Advisory Board (SAB) to look at EPA's methodology, and
both said EPA should  take a different approach, particularly by looking at the incremental
cost of treatment. Looking at the cumulative cost, the data was spread out nationally, so the
unaffordability approach was never triggered. NDWAC recommended that EPA use 1
percent as the incremental number. In March 2006, EPA asked for public comments on
redoing the affordability criteria to apply to future regulations. So the Agency is dealing with
whether there should be variances available for systems to meet a different number than the
standard. The state revolving funds, under the Safe Drinking Water Act, have authorities to
require states to provide a certain percentage of the SRF loans to small systems and to do
disadvantaged community loans that include principle forgiveness, which makes them almost
grants. There also set-asides on the SRF that provide technical assistance.

There are broader issues to discuss in  affordability. The scope of the drinking water universe
is much greater than that of the clean water universe; the 171,000 public water systems are
largely skewed by the 54,000 community water systems, which are very, very small. Ms.
Dougherty then asked EFAB if they could take a look at the issue of a continuum or
spectrum of restructuring options, not to consolidate to get to fewer systems, but what can be
done to gain efficiencies by system partnering or even total restructuring.  The continuum
contains many approaches to getting smaller systems to think not just about affordability, that
is, how can one get out of a standard,  and to  help people more efficiently meet the standards
so people are affordably provided safe water.

Mr. Meiburg opened the floor to questions and comments. He first expressed his interest in
how the difference between this utility sector and other sectors creates unique problems. Mr.
Boland remarked on the complexity of the affordability issue, which is typically treated
simplistically and unsatisfactorily. It does not mean that the  problem  does not exist, but
applying criteria does  not uncover it. A recent Board paper pointed out that a lot of
affordability is within  the power of the utility itself to mitigate. If they have not done it or
done a bad job of it, there may be modest unaffordability with fairly significant investment
requirements imposed by EPA; whereas if they have done a good job, it may be affordable
with fairly significant  investment requirements by EPA. So, these kind of tests just do not
work; what tests could be used instead is an interesting subject.

Ms Dougherty responded that what she wanted EFAB to address was what other things EPA
could build on, that is, what EFAB did in the report in terms of household affordability.
NDWAC has already come back with a set of recommendations in line with what EFAB has
generated, that is,  the issue is not just  unaffordability for a small system, but for certain
households within those systems, as well as within larger systems. Someone should be
looking at that.

Asked if the charge from EPA was more of a management than financial issue, Ms.
Dougherty said she was not giving EFAB a specific charge,  but understood the Board was


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interested in public/private partnerships, and she was suggesting that drinking water systems
might be good to look at, one of the things along the continuum in terms of restructuring.
How can EPA look differently at the way water utilities are structured or find ways to gain
efficiencies in terms of costs or ways to provide safe drinking water with infrastructure that
will be sustainable over time? Mr. Meiburg clarified that Ms. Dougherty was there to provide
context for EFAB' consideration of future projects, not to request EFAB assistance.

Ms. Hernandez said that water rights law was one of the extremely challenging parts of the
water utility world; all source water is not created equal. Consolidation is a complicated
issue, given huge variability among states, unless one creates huge joint powers authorities
(JPAs), in which jurisdictions maintain their authorities within the larger entity. She
suggested borrowing from other types of utilities the notion of universal access, that is,
protecting the rates of the lowest 10-20 percent of median income. Ms. Dougherty added that
JPAs do provide efficiencies in operating costs for small, but not large systems. Ms.
Hernandez suggested looking at the Fort Ord example, which has critical and complicated
land-use, utility, and water supply issues, but whose water system is working all right now.

Responding to whether a test is needed for consolidation, Ms. Dougherty agreed, saying that
before you get an SRF loan, an exemption, or a variance, demonstration that restructuring has
been studied for possible efficiencies is required. Dr. Sawyers agreed that consolidation was
very difficult to encourage, citing examples from Maryland; yet consolidation and
partnership are key. Mr.  Mahfood described how Missouri law  forces a continued designated
authority in cooperation  with the state regulatory agency and public utility commission. Any
time a facility is built, for example, for a small subdivision, that facility must be given to the
continuing authority; however, there is usually strong resistance from such entities as county
associations  and municipal leagues. Mr. Mahfood added that Missouri is becoming
dominated by privately owned sewage companies, because no public initiative exists.

Ms. Himmelberger echoed Mr. Boland's point on the complexity of affordability, which is
added to by the fact that  systems do not always agree with the standards. She cited examples
from Texas of communities that resisted adding nitrate and arsenic treatment, in one case,
preferring to import bottled water for households with babies. The State of Texas is trying to
cut through what is affordable and what is not, but it is very complex to do so.

Ms. Agriss asked to bring financing back into the discussion. She thought that privately
owned and publicly owned  systems have different dynamics. In New York, small private
systems had no access to financing, and finding ways to help finance them had been very
helpful. EFAB could be  helpful in finding some pooled financing constructs to address that,
as well as how to give very small privately owned companies incentives to look at combined
management or cooperative programs.

Mayor Girardy pointed out that "home rule" was often an obstacle, because people are afraid
that if they consolidate their public works with a neighboring municipality, they will next
lose their police department. Giving statistics on how much they might save does not
necessarily convince them. Ms. Dougherty agreed, saying that it will be difficult to get very
small systems to consolidate, but other approaches may exist that can help them—for
example, shared management or operation—while keeping them independent. Ms. Francoeur


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cited a personal example from Pennsylvania that illustrated that economics becomes a
compelling argument. In her case, Pen Vest wanted to provide the best bang for the buck and
so sought consolidation instead of lending to her local homeowner's association to improve
its groundwater system; Pen Vest was also not convinced the community could repay the
loan.

(Lunch)

General Discussion
Stan Meiburg

Mr. Meiburg introduced the agenda for the afternoon session: to complete work on timing of
projects for next year. Not yet covered were two topics: leveraging and public/private
partnerships, which Mr. Grumbles had raised with him as good issues for EFAB to examine.
He passed out an analysis for the Clean Water State Revolving Loan Fund, which ranked
states on the ratio of assistance provided to the amount they have received in capitalization
grants, which suggested some interesting points for discussion that afternoon.

First, however, he reviewed the status of existing workgroups: The Financial Assurance
Workgroup was finishing work on captive insurance and moving on to more general issues.
The Innovative Financing Tools Workgroup still has work to do that it will pursue with the
Office of Air in the next six months, which will be reviewed at the March EFAB meeting.
The EMS Workgroup is continuing to make progress, with prospects of a workshop, which
would probably have to be  scheduled, Ms. Deming said, in Washington in May or June 2007.
She also noted a new workgroup member, Mayor Girardy. The Nonpoint Source Workgroup,
according to Mr. Marsh, would, it was hoped, get approval from the Board for the report and
letter with recommendations to the Administrator and would follow up on any response as
well as keep track for awhile of EPA implementation of any of the recommendations. He
added that more work was needed to refine the recommendation exploring the utility concept
of how to implement some  things agreed to by a watershed governance process. The
workgroup would like to stay in operation until after the next EFAB meeting and then revisit
its future role. Mr. Grossman added that EFAB  should look at what assistance it could give
Tim Jones from OWOW on several areas that he had mentioned. Rich Sustich was also
interested in some potential areas of collaboration on watershed activities and NACEPT.
The workgroup on expanding the definition of SRFs has nearly completed the paper and will
move on to other areas.  Mr. Mason asked the Board if something could be circulated to the
Board  for comment prior to its next meeting, to which the Board agreed. The workgroup
would probably disband by the time of the March meeting.

Mr. Meiburg then started a discussion on future work, especially in the two  areas of potential
collaboration with EPA discussed with Mr. Grumbles. On  leveraging, the data suggest that
the programs that have leveraged their funds have provided greater assistance as a percentage
of their capitalization grants than those that have not been leveraging. At a time that budget
constraints will continue to limit additions to capitalization grants, money already provided
must be put to work as much as possible. Mr. Grumbles, Mr. Hanlon, and Ms. Dougherty
have all expressed interest and support for EFAB exploring this issue. Mr. Meiburg
suggested creating a new workgroup on encouraging leveraging by programs not now


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leveraging and increasing the efficiency of programs that are leveraging. Mr. Grossman
expressed interest in the issue, but thought the workgroup would need staff support to delve
into certain of the states. Mr. Wise and Mr. Swartz also expressed interest in the workgroup.
Mr. Curley asked about political constraints on such a workgroup, to which Mr. Meiburg
replied that EFAB members were seasoned enough to make prudent, feasible
recommendations; the Board also has a strategic advantage in being able to say things to
EPA that the Agency cannot say to itself. Mr. Swartz noted the workgroup might also
provide the opportunity to present its conclusions to certain key states, such as Hawaii, for
example, that they have a golden opportunity to make some profound investments in
infrastructure.

The group proceeded to discuss some of the challenges of the workgroup's  topic. First, Mr.
Hughes noted that the handout did not cover the terms for SFR programs issuing loans to
communities. States such as West Virginia, North Carolina, and Alabama handle them
differently. On drinking water, people that have disadvantaged community programs are
automatically much lower on the list. So, it is important to be careful about using the handout
data as a metric. Mr. Swartz agreed,  saying that these data show up each year on the National
Information Management System Report, but there is no correlation between interest rates
and program efficiency at originating loans. Mr. Butcher thought an important part of the
task then was to articulate a rationale for EPA on whether leveraging should be encouraged.
Quite a few people are interested in the topic, he noted. Ms. Hernandez asked if it was true
that a consulting group single-handedly stopped EPA from pursuing leveraging a while ago.
They apparently had put together discouraging data on the economic efficiencies of the
leveraging process, which planted a bias at EPA that no longer exists there, Mr. Smith said.
Dr. Sawyers noted that Maryland saw a direct correlation between decrease in interest rates
from 3.5 to 1 percent and an increase in the number of loans. Nonetheless, some states will
be concerned about interest rates going up, which must be addressed. Ms. Agriss said that
this only supports the need to look at the whole picture; this is only one metric and others
need to be considered.

Mr. Meiburg then summarized the discussion, saying that he heard great enthusiasm for the
Board setting up a workgroup on this topic. The frame for the issue is how to give useful
advice to the Agency on the topic and how to make existing dollars in this area work as hard
as possible. He  asked for a show of hands from those willing to serve on the workgroup and
recorded their names. He would speak with Mr. Grumbles about a timeframe for a response
from the workgroup. Mr. Smith noted that a critical factor would be getting the most current
data on the actual SRF operations, which come in at the end of August, and that the
workgroup would need analytical assistance from EPA on these data.

The group then  turned to discussion  on public/private partnerships. Interest in the topic, Mr.
Meiburg said, derives from (a) the ability of the public sector to raise capital to use for other
purposes by selling certain assets,  (b) opportunities to look for efficiencies in operations, (c)
opportunities to take advantage of historic patterns of alignment, for example,  on ownership
of infrastructure assets. If one needs  to figure out if one has the means to meet needs  for
waste and drinking water, such partnerships are a tool that bears further exploration. People
have learned from earlier less successful partnership efforts, and interest in  them is growing
again.
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The Board has actually done a fair amount of work on this over the years, but it is worth
reviewing. Mr. Meiburg proposed establishing a workgroup on the topic, specifically how
those partnerships can help address or meet infrastructure needs in waste and drinking water
in the next five to ten years. The group then discussed whether the workgroup should
broaden this to include other topics, such as air, and it was agreed that whatever resulted
would certainly be relevant across a range of media; the water program, however, was now
very interested in the topic and water was an  area where one might get the most "bang for the
buck." The group also discussed alternative terms to public/private partnerships, but
ultimately decided to keep the term and stay away from using "privatization." Ms. Francoeur
reiterated that those working on transportation had done a lot of work related to the topic that
was worth looking at. She also noted that such partnerships were a timely topic, as a lot of
private equity and a willingness to invest it infrastructure existed.

Ms. Agriss said that the heart of the matter was how one ensures that organizations or
structures exist that can fund the projects that need to  be done. She liked the idea of the
workgroup not just looking at the privatization side, but also structures that  can be used to
achieve the same ends, citing the example of the New York City watershed  authority,
described earlier in the meeting. It would be hard to ignore  certain governmental  or quasi-
governmental that could be similarly effective. The definition of a public/private  partnership
can be anything from a long-term concession of existing assets or a project on a design to
build financial basis for a metropolitan water district,  such as in Chicago. She thought the
only consistent part of a definition for such partnerships is that some private entity is
involved.

Dr. Tozzi pointed out that discussion on public/private partnerships was often simply a nice
way of saying more money was needed. There are many aspects to public/private
partnerships that one might look at that would not bring in money. He thought it was
important to differentiate the work of the workgroup from the many other studies EFAB has
done. Mr. Hinds disagreed with Mr. Tozzi's initial point, saying that one never meets a Fed
who does not want more money. The private sector can fill some of the gap that the public
sector is now willing to for one reason or other, which has been successful.  EFAB should not
waste its time trying to change legislation or financing rules, which the IRS  would almost
certainly turn down, but should focus on what is being done and whether it can be pushed
forward somehow. Mr. Boland asked if EPA's interest was in finding ways  to get utilities out
from under political influence and finding more capital for them; would EPA want to look at
that too, or does EPA want to restrict it to things that involve private sector  participants? Mr.
Meiburg thought EPA was truly interested in the most efficient ways to meet the  Agency's
overall goals, which in this case relates to whatever instrumentalities that efficiently
contribute to provision of clean water and safe drinking water.

Mr. Wise then reminded the group to not lose sight of EFAB work on affordability. One
possible outcome could be that public/private partnerships yield major efficiencies in
providing environmental services and thus a better rate structure and speak directly to the
affordability issue. It is just as plausible that engaging the private sector would mean rate
adjustments to accommodate private profitability and  worsen affordability.
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Mr. Butcher expressed strong intellectual interest in the topic. Public/private partnerships
represent an easily identifiable  spectrum, and it will be easy to focus on the benefits, costs,
and risks of the portion of the spectrum that can potentially contribute to funding capital
needs, compared with existing alternatives. He thought the workgroup should answer the
question: what do public/private partnerships offer relative to current practice and what
alternatives, even though not yet functional, can achieve some, all, or even more than
public/private partnerships can achieve? The workgroup should start by looking at existing
technologies in the private sector to see what they contribute and then focus on alternatives.

Ms. Hernandez encouraged the workgroup to look at a couple other programs as examples of
where early money has tremendous value: the EPA brownfields grant program, which is all
about site characterization and giving a little money to get people to figure things out, and the
Habitat Conservation Plan Planning Agreement, with early infusions of funding to groups of
local agencies that need to cooperate to get technical support and facilitation to get people
into a working relationship.

Mr. Meiburg also hoped the workgroup would focus on what EPA should do in  regard to
public/private partnerships. He then asked for and received a show of hands from those
willing to serve on the new workgroup. Those members would receive relevant Board and
possibly EPA documents to review. Mr. Smith thought it would be helpful for workgroup
members to receive a summary of the long history of argument, rule changes, and
interpretive shifts in policies, often by General Counsel on how much involvement a private
entity participating as part of a public facility can have.

Mr. Wise suggested collaborating with NACEPT, as it has done some work on these
partnerships. Ms. Himmelberger mentioned it might be worth looking at case studies that
came out of the Cost-Effective Environmental Management Workgroup and seeing what has
happened in those cases since they were written. Mr. Meiburg thought one of the first tasks
of the workgroup would be to compile information on work  that has been done to date  and
what has changed. He noted that it might be difficult for the  workgroup to break up its  task
into manageable  chunks, as they did for financial assurance.

Ms. Dougherty said good contacts in her office would be Peter Shanahan.  She agreed that
the workgroup should review what EFAB has done before in order not to duplicate it and
reiterated that EPA wanted to know what financial tools water and waste water systems could
use to ensure they are sustainable in the long term, not just in terms of capital improvements,
but daily operation.

Mr. Hanlon added another question: what is EPA's interest in drinking water/waste water
infrastructure other than fiduciary responsibilities  in terms of perpetuity aspects  of SRFs and
compliance responsibilities in terms of meeting Maximum Contaminant Levels  (MCL) and
National Pollutant Discharge Elimination Systems (NPDES) permit loans? EPA had engaged
the industry through an interesting project with six professional associations—the Water
Environment Federation, National Association of Clean Water Agencies, American Water
Works Association, Association of Metropolitan Water Authorities, National Association of
Water Companies, and National Public Works Association, representing utility managers.
EPA asked them what a well-managed water utility is, outside of a regulatory context,


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dealing with the principles of financial management, asset management, EMSs, and so on.
EPA suggested these six associations had an interest in bringing their leaderships together on
this question. They responded positively by signing a statement of intent with EPA in early
May to identify principles or practices across their memberships that will provide direction
on how to manage municipal water utilities prospectively. How can these associations with
EPA's participation work toward improving the management of infrastructure that is critical
not only to the environment, but the economic future of the country?

When asked why EPA as a regulatory agency is involved at all, Mr. Hanlon noted that the
Administrator definitely has sustainable infrastructure on his priority list. Mr. Sustich said he
had been watching and dealing with the issue of trying to develop new water technologies to
deal with the infrastructure gap, that is, how to find leading edge research, materials, and
technology that can move the processes forward in terms of current efficiency as well as
responding to loss of good quality source water in the distant future, which may not be so
distant, for example, for Chicago. Do we switch much of the Midwest, where freshwater
aquifers are being depleted? How do we fund water research, knowing that most of the
customers are going to be public utilities, not private entities with the pockets? Addressing
current needs gets in the way of supporting long-term research.

Mr. Wise followed up on comments he made the previous day, proposing for a variety of
reasons that EFAB do a policy paper on the notion of sustainable finance. First, this is an
emerging direction at EPA, which just published a seminal piece entitled "Everyday
Choices" on EPA's role in advancing stewardship and sustainability. Second, the Office of
Research and Development is formulating a five-year research strategy to advance
sustainable technologies, inviting the Science Advisory Board for comment. Third, The
Innovative Action Council has just issued a letter to the Assistant and Regional
Administrators  asking for an inventory of all local activities and efforts to advance the cause
of sustainability within their offices and regions. Fourth, Mr. Wise himself is helping develop
a course called "Sustainability in EPA." For all these reasons,  he thought it was timely for the
Board to articulate the whole idea of sustainable finance. Such a paper would benefit from a
workgroup exploration of the issue, which would involve the idea that EPA should begin
investing its scarce capital and resources to produce sustainable outcomes. It should address
how to make financing sustainable over time without a constant infusion of new money.
There is an audience for such a paper, and the timing is appropriate. Mr. Wise proposed the
paper as a new EFAB project, well aware that he was also nominating himself to lead a  small
workgroup to put a five- to six-page paper together. It would not make specific
recommendations to EPA, except perhaps that EPA embrace the concept of sustainable
finance and begin to plan its budgets and activities around the  idea.  Dr. Meyer suggested that
the Office of Solid Waste and Emergency Response (OSWER) would be interested in such a
paper, due to its great interest in financing long-term stewardship.

Ms. Deming asked whether the U.S.  Securities and Exchange Commission (SEC) had asked
for any guidance from or had interacted with EPA on financial triggers for closure of a
facility, to which Ms. Sahi replied that  SEC had not asked for EPA's advice. Ms. Sahi added
that Mr. Wise's idea was an excellent one and should encompass the whole concept of
sustainability. It even relates to EMSs—what insurance companies are studying, what indices
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look at—not just EMSs, but sustainability management systems. She then volunteered to
serve on the workgroup for the policy paper.

Mr. Butcher wondered whether EFAB should undertake an effort to describe the gap in a
way relevant to understanding the potential financing solutions. The cost should be
articulated in a way that is relevant to the ultimate cost of funding it. It is difficult to discuss
raising rates as a way to address funding needs, in all or part, without describing the gap in a
way that is conducive to identifying what the rate impact would be or addressing it directly.
He also wondered whether EFAB should articulate the gap in a way that is conducive to
financial analysis and then talk about the impact on the  ultimate payers, whether user fees or
taxes, in a way that allows assessing the impact of addressing that cost over time.

Mr. Meiburg suggested that EFAB set up an opportunity for further discussion on these
points at a future meeting, instead of setting up a workgroup. He wondered if Mr. Butcher
was looking for a better understanding of the term gap and how it is used. Mr. Hanlon noted
that both his and Ms. Dougherty's office had participated in the EPA gap analysis, released
in the fall of 2002 and the primary authors are  still  at EPA, so a briefing could certainly be
arranged, although the data are a bit dated. The Congressional Budget Office followed up
with another analysis that came up with similar numbers on the scale of the issue, which
might be helpful. They could get EFAB this report too and do a briefing or even a web cast.

Mr. Marsh suggested that someone look at whether the  problem EFAB is defining is still the
same problem, which in the past has been defined largely by traditional engineering
solutions. The emphasis on sustainability concerns ways to deal with water quality problems
or clean water supply that do not rely exclusively on these traditional solutions, but the
possibility of other actions, either through different programs or developing markets.

Mr. Hughes noted that looking at the problem in the aggregate clouds the picture. Many
systems do not need help, and many need help far beyond the policy prescriptions in the gap
report. The gap disappears when rates are raised to 3 percent, but there are thousands of
systems for which 3 percent does nothing to close the gap. It would be good to look at
implementation issues on the ground, but the big picture policy numbers have not been useful
in getting at what specific communities need to do.

Mr. Tozzi added that the gap analysis had some categories that might not be of concern. If
the Board looks at closing the gap, the Board should not look at fine-tuning the numbers, but
rather which of those categories should be fulfilled. Mr. Wise noted that one is doing a
disservice to describe the  problem as $400 billion, as if  it needs to come out of pocket
tomorrow. These things are financed over time, and it is well within the financial capacity of
the country to do it. It depends on how you define the problem. The overall gap of $400
billion over 20 years means an average of $20  billion a  year, and  that sounds more feasible to
generate that much capital a year within the financial markets of the United States. So, Mr.
Tozzi added that the prescription drug program, which is a little more than a trillion dollars
and came out of nowhere, also provides perspective on  how much can be raised by the
government. Mr. Butcher agreed that EFAB should address quantifying the costs of making
progress in an understandable way. Mr. Turner also suggested involving Ken Rubin, one of
EFAB's original members, to review ways that different estimates have been put together.


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Ms. Agriss wondered how fruitful it was to spend time looking at numbers used for policy
reasons; the pertinent issue to focus on is that communities need to be able to do more than
they are doing now. Ms. Himmelberger thought it important to break the numbers down by
the size of the system, because it makes a big difference in accessing financial markets.
Bigger systems have more access to capital; this raises the questions of privatization and
collaboration in terms of bringing small systems together to become larger systems, for
example, forming some kind of umbrella group that can buy bonds for them. Mr. Hanlon
thought the gap report did not break the numbers down into large and small systems, but
started with need surveys, but these do not capture estimated costs that utilities will recognize
over the next 20 years and beyond for repairing in-place underground infrastructure. Most of
this was put in between the 1940s and 1960s as part of the post-war building boom. Some of
the tools EPA has worked on—asset management and so on—encourage utilities to do those
in-place assessments; most of that buried infrastructure is large.

From a practical standpoint, Mr.  Grossman noted, EFAB had in essence created four new
workgroups and also has Mr. Mason's conference coming up, which Mr. Meiburg
acknowledged. EFAB certainly had a lot on the table. He summarized EFAB response to  Mr.
Butcher's points as great interest in responding, but uncertainty on how to frame the task.
Perhaps, rather than taking  on a specific project now, EFAB should explore a somewhat
more structured discussion  for March, developing a list of questions and/or bringing in a
speaker and then deciding how to proceed. Ms. Hernandez thought EFAB should break the
gap into different categories of needs and different types of public/private partnership
solutions, as more than enough models exist to solve for most categories. The aggregate
number is not quite as important  as having sustainable solutions for categories.

Responding to concern that the Atlanta conference discussions could degenerate into a
discussion of what the gap is about, Mr. Meiburg thought Mr. Mason, Mr. Dorfman, and
conference organizers were certainly aware  about what they will have to grapple with. Mr.
Hughes offered to send everyone a three- to four-page summary of all the different needs  and
gaps; he said it was not possible to do per system numbers on the gap, but EPA does have
two needs surveys with more recent data than the gap report that break need down by private
system compared with public systems, by size of system, and so on.

Mr. Hinds said he would scout around among insurance executives in his office for any
interest in joining the Board as members. Mr. Meiburg also noted that some existing
members were coming up for renewal and asked them to please let him know if any of them
decided they could no longer devote time to the Board, as that would be useful information.
EPA is very aware that members serve for free, for which the Agency is grateful, and does
not want to abuse member willingness. He also took the opportunity to mention that former
member Lyons Gray had just awarded the Environmental Finance staff a bronze medal, a
significant reward within EPA's  system of recognition, for the work they have done in
support of the EFCs and EFAB over the years.

Public Comment Period
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Mr. Meiburg then opened the floor for public comments. Hearing none, he thanked EFAB
members for their time and energy, reiterated that the next EFAB meeting would take place
in Atlanta in March, and in the meanwhile the workgroups would be active, especially in
getting the two new workgroups organized and off the ground. He expected to be touch with
members over the next several months. With that he adjourned the meeting.

Adjournment                                                            (3:32 pm)

ATTACHMENT 1: EFAB MEMBERS

Designated Federal Officer:
A. Stanley Meiburg, DFO, EPA

Congressional:
Honorable Pete V. Domenici, United States Senate

State and Local:
Kelly Downard, Chairman Louisville Metro City Council
Honorable Vincent A. Girardy, Mayor, Peapack & Gladstone, New Jersey
Steve Grossman, Executive Director, Ohio Water Development Authority
Gregory R. Mason, As st. Executive Director, Georgia Environmental Facilities Authority
Dr. Andrew Sawyers, Program Administrator, Maryland Water Quality Financing, Maryland
Department of the Environment
Billy Turner, President, Columbus Water Works

Business and Industry:
Terry Agriss, Vice President, Energy Management, ConEdison
Donald Correll, President and CEO, American Water
Rachel Deming, Associate General Counsel, Ciba Specialty Chemicals Corporation
Stephen Mahfood, President Mahfood Associates
Cherie Collier Rice, Treasurer and Vice President of Finance, Waste Management
Dr. Jim J. Tozzi, Multinational Business Services

Banking, Financial, and Legal:
George Butcher, Managing Director, Municipal Finance, Goldman, Sachs, & Co.
Michael Curley, Executive Directory, The International Center for Environmental Finance,
Towson University
Mary Francoeur, Director, Financial Guaranty Insurance Co.
Jennifer Hernandez, Partner/Co-Chair, National Environmental Team, Holland and Knight
Keith Hinds, Merrill Lynch & Co.
Helen Sahi, Director, Environmental Services Department, Bank of America
Greg Swartz, Vice President, Piper Jaffray & Co.
Sonia Toledo, Merrill Lynch
Justin Wilson, Waller Lansden

Associations,  Organizations, Academia, and Public Interest Groups
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A. James Barnes, Professor of Public and Environmental Affairs, Adjunct Professor of Law,
Indiana University
Julie Belaga, Co-Chair, Connecticut League of Conservation Voters
John Boland, Professor Emeritus, Department of Geography and Environmental Engineering,
The Johns Hopkins University
Langdon Marsh, Fellow, National Policy Consensus Center, Portland State University

Environmental Finance/Independent Consultants
James Smith, Bozeman, Montana
John C. Wise, Hidden Valley Lake, California
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ATTACHMENT 2: ENVIRONMENTAL FINANCE CENTER NETWORK

Dr. Richard Barringer, Director, Environmental Finance Center, University of Southern
Maine
Mark Lichtenstein, Director, Environmental Finance Center, Syracuse University
Dr. Sam Merrill, Projects Director, Environmental Finance Center, University of Southern
Maine
Dan Nees, Director, Director, Environmental Finance Center, University of Maryland
Jeff Hughes, Director, Environmental Finance Center, University of North Carolina
Peter Meyer, PhD, Director, Environmental Finance Center, University of Louisville
Kevin O 'Brien, Executive Director, Great Lakes Environmental Finance Center, Cleveland
State University
Heather Himmelberger, Director, Environmental Finance Center, New Mexico Institute of
Mining and Technology
Sarah Diefendorf, Director, Environmental Finance Center, California State University at
East Bay
William Jarocki, Director, Environmental Finance Center, Boise State University
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ATTACHMENT 3: EPA ENVIRONMENTAL FINANCE STAFF

Vanessa Bowie, Director
Vera Hannigan, Senior Program Analyst
Timothy McProuty, Senior Program Analyst
Alecia Crichlow, Program Analyst
Susan Emerson, Program Analyst
Sandra Keys, Administrative Assistant
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