Nairowin
THE
GAP
Environmental
Finance
For The 1990s
A) Printed on recycled and recyclable paper
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EFAB MEMBERSHIP
Richard Torkebon
(Chair)
Deputy Commissioner for
Administration
New York State
Department of Environmental
Conservation
Frieda ICWollison
(Vice Chair)
Partner
Jones, Day, Reavis & Pogue
Herbert Barrack
(Executive Director)
Assistant Regional Administrator
for Policy and Management
U.S. EPA, Region II
Honorable Pete V. Domenld
U.S. Senator
State of New Mexico
Honorable Beryl F. Anthony, Jr.
U.S. Representative
State of Arkansas
Honorable Anne Meagher Northup
Kentucky State Legislator
Honorable Stephen Goldsmith
Mayor
Indianapolis, Indiana
J. James Barr
Vice President and Treasurer
American Water Works Company, Inc.
Philip Beachem
Executive Vice President
New Jersey Alliance for Action, Inc.
Joseph D. Blair
Executive Director
Massachusetts Industrial Finance Agency
PeteButkus
Public Works Trust Fund
Washington Department of
Community Development
William H. Chew
Senior Vice President
Municipal Finance Department
Standard & Poor's Corporation
Michael Curley
Principal
Heartland Resources, Inc.
Roger D. Feldman, P.C
Partner
McDermott, Will & Emery
Dr. Richard Fenwick, Jr.
Vice President, Corporate Economist
CoBank National Bank for
Cooperatives
Deeohn Ferris
Director
Environmental Quality Division
National Wildlife Federation
Dr. William Fox
Associate Director
Center for Business & Economic
Research
University of Tennessee
Shockley D. "Hap" Gardner, Jr.
Executive Director
Virginia Resources Authority
Harvey Goldman
Executive Vice President and
Chief Financial Officer
Air and Water Technologies
Corporation
John Gunyou
Commissioner
Minnesota Department of Finance
William B. James, CF.A.
Managing Director
Public Finance Department
Prudential Securities Incorporated
David M. Lick, P.C
Partner
Loomis, Ewert, Ederer, Parsley,
Davis & Getting
Robert F. Mabon, Jr.
Financial Advisor
Venice, Italy
John C "Mac" McCarthy
State Director
Farmers Home Administration
U.S. Department of Agriculture
Martin LMosby, Jr.
Managing Director
Public Financial Management, Inc.
Dr. Peggy Musgrave
Professor of Public Finance
University of California at Santa Cruz
Gerald Newfanner
City Manager
Cincinnati, Ohio
George A, Raftdis
Partner
Ernst & Young
Heather L Ruth
President
Public Securities Association
Roberta H. Savage
Executive Director
Association of State & Interstate Water
Pollution Control Administrators
JohnV.Scaduto
County Treasurer
Nassau County
Warren W.Tyler
Vice President
State Savings Bank
JaneG.Wltheridge
Vice President
Waste Management, Inc,
Elizabeth Ytell
Director, Water-Wastewater Division
Rural Community Assistance
Corporation
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AProgress
Report of the
Environmental
Financial
Advisory Board
MAY
1992
The Environmental Financial Advisory Board is an
independent advisory committee to the Administrator
of the U.S. Environmental Protection Agency.
The findings and recommendations of the Board
do not necessarily represent the views of
the Environmental Protection Agency.
-------
HONORABLE WILLIAM K. REILLY
ADMINISTRATOR
U.S. ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.c. 2O46O
DEAR ADMINISTRATOR REILLY:
On behalf oftheEnvironmental Financial Advisory Board (EFAB), weare pleased
to provide you with this Progress Report on the Board's activities. The Report describes
important finance issues and risks for the 1990s, lays out 14 key findings and recom-
mendations summarized from our first four Advisory Statements, and presents EFAB's
new committee structure and agenda for 1992.
EFAB's charter is to provide advice on improving policies and programs affecting
the financing of environmental mandates. We believe that creative solutions exist to
narrow the gap between available resources and the costs of environmental protection.
To this end, we hope that the Advisories of the Board will serve the Agency as a practical
"blueprint for action".
It has been a distinct honor for us to have led EFAB to this point. We would like
to acknowledge and express our deep appreciation to the members of EFAB for their
commitment and contribution to the mission of the Board. The value of the Board's
findings and recommendations is dearly increased by the diverse backgrounds of our
members.
We are also indebted to Christian R. Holmes, Acting Assistant Administrator
of the Office of Administration and Resources Management, and Herbert Barrack,
EFAB's Executive Director, for their unwavering support and encouragement.
Our agenda for 1992 is as exciting and challenging as the original issues the Board
has addressed since its outset, and we look forward to a productive year.
Richard Torkelson
Chair
Deputy Commissioner for
Administration
NY State Department of
Environmental Conservation
Albany, New York
Frieda ICWallison
Vice Chair
Partner
Jones, Day, Reavis & Pogue
Washington, D.C
cc: F. Henry HabichtD
Deputy Administrator
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NARROWING THE GAP:
ENVIRONMENTAL. FINANCE FOR THE 199O'S
A PROGRESS REPORT OF THE
ENVIRONMENTAL FINANCIAL. ADVISORY BOARD
TABLE OF CONTENTS
EXECUTIVE OVERVIEW i
AN INTRODUCTION TO THE ENVIRONMENTAL FINANCIAL
ADVISORY BOARD .. 1
FINDINGS AND RECOMMENDATIONS OF THE BOARD 4
EFAB's AGENDA FOR 1 992 12
APPENDICES
A: FOURTEEN KEY FINDINGS AND
RECOMMENDATIONS A-i
i
B: ENVIRONMENTAL FINANCIAL ADVISORY
BOARD COMMITTEES B-i
C: ENVIRONMENTAL FINANCIAL ADVISORY
BOARD SUPPORT STAFF C-1 • {
('
D: EPA EXPERT CONSULTANTS TO i >
?
THE ENVIRONMENTAL FINANCIAL ADVISORY
BOARD D-i
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"Environmental
Improvements
must USep pace
wiln economic
growth. Tor our
prosperity is
Inextricably linked
to our nation's
environmental
health: from our
national wealth
comes the where-
withal to pay Tor
environmental
protection1."
EXECUTIVE OVERVIEW
Kh'AB was Kslablished Lo Advise the Administrator on
Environ me nla I Financing Issues
The Board, chartered in 1989 under the authority of the Federal Advisory
Committee Act, is comprised of 33 members of the public and private finance com-
munity. Through meetings and workshops, the Board develops independent analysis
and advice for the Administrator. These Advisories suggest policies to help ensure that
all Americans invest appropriately in a clean environment and a healthy economy.
KKVB Addresses the Critical Environmental Finance
Challenges or the 1990s
THE ENVIRONMENTAL. FINANCE GAP IS WIDENING
The real costs of environmental protection are growing rapidly. Yet our nation's
ability to meet these rising costs is falling behind — and the financing gap is widening.
Financial constraints threaten attainment of national environmental goals. At risk are
the health of ecosystems, human health, and community well-being — in short, the
quality of life in America.
THE BOARD OFFERS REALISTIC SOLUTIONS TO
CLOSE THE GAP
The Board believes we can close the environmental financing gap by pursuing
actions that:
4- Lower the costs of environmental protection — by removing financial and
programmatic barriers that raise costs and by improving the efficiency of
needed investments;
4 Buildstateandlocalfinancialcapacity—to carry out environmental mandates;
and
•*• Increase public and private investment — in environmental facilities and
services.
LOWER THE COSTS OF ENVIRONMENTAL PROTECTION
The Board has examined several policy options that would lower state and lo-
cal costs to finance federal environmental mandates. The Board concludes, for exam-
ple, that reclassification of all state and local environmental bonds as governmental
bonds, provided proceeds are used to finance public-purpose environmental facilities,
would directly lower state and local costs of borrowing and increase state and local
investments. The Board also recommends the use of economic incentives to promote
pollution reduction.
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD -
• PROGRESS REPORT MAY 1 002
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BUILD STATE AND LOCAL FINANCIAL CAPACITY TO
CARRY OUT ENVIRONMENTAL MANDATES
Building state and local capacity to self-finance environmental investments
constitutes a powerful investment in our nation's future. The Board has examined a
number of ways to strengthen and expand this capacity. Policymakers could examine,
for example, the feasibility of expanding the wastewater treatment State Revolving
Fund (SRF) program to finance investments in other media, or establishing new
institutions, such as federal or state trust funds to help finance investments in multiple
environmental media. The use of bond banks could also be expanded, for example, to
facilitate investments by small communities.
INCREASE PUBLIC AND PRIVATE INVESTMENT IN
ENviRON MENTAL FACILITIES AND SERVICES
Finally, the Board investigated ways to increase state, local, and private investment
in the environment. It examined the merits of incentive programs and other options to
lower barriers to successful investment efforts. Barriers to private sector involvement
in wastewater treatment could be lowered, for example, if EPA broadened its inteY-
pretation of federal grant policies. The Board recognizes that, just as the environ-
mental protection paradigm is shifting from controlling discharges to reducing the
generation of pollutants, the financing paradigm must evolve from the concept of
spending to one of investment.
The Board's Work is Far From Finished
In the coming year, the Board will continue to investigate several options devel-
oped in 1991. We will also look at new ways to close the financing gap, including:
•» ways to pay for environmental mandates;
•* opportunities to finance environmental improvements in the interna-
tional arena;
*• initiatives to educate the public and decision makers on issues of environ-
mental finance; and
+ further work on water financing strategies.
The EFAB is pleased to serve the Administrator, Congress, and all public and
private stakeholders in our nation's environmental future. In 1991, we began a funda-
mental rethinking of the role of public and private finance in attaining national
environmental objectives. With our mission now fully aligned with EPA priorities,
EFAB looks forward to continued service and to strategies that promote healthy
natural systems and a strong economy.
"Paying for
environmental
programs presents
us with one of the
major challenges
of the 1980s.
The cost of
environmental
protection will
continue to grow
significantly In the
coming years. And
consequently, the
country needs to
make the effort. .,
• Starting now. to
look past dally
problems and
crises to develop
strategies."
ENVIRONMBNTAI. FINANCIAL. ADVISORY BOARD -
REPORT MAY 1 992
-------
The EFAB
to the forefront of
environmental
pollcymaklng the
Jssue of finance —
critical to achiev-
ing our nation's
environmental
goals.
AN INTRODUCTION TO THE ENVIRONMENTAL.
FINANCIAL. ADVISORY BOARD
Administrator William K. Reilly Established the Environmental
financial Advisory Board In 1989
The Environmental Financial Advisory Board (EFAB) is an independent advis-
ory committee authorized under the Federal Advisory Committee Act (FACA). This
is the Board's first progress report on its findings and recommendations, which have
been presented to the EPA Administrator in four separate advisory statements. This
report also previews the Board's planned 1992 activities including an agenda of issues
we intend to consider.
WHO is ON THE: BOARD?
The Board has 33 members drawn from the public and private sectors. Member-
ship is for one year subject to renewal. The members come from a wide variety of
backgrounds with a common interest in environmental finance. Board members
represent federal, state and local government, national environmental organizations
and trade associations, academia, banking and finance, and business and industry.
BOARD
COMPOSITION
1992
Flnuictal
Community
Academia
Federal Government
Richard Torkelson, Deputy Commissioner for Administration of the New York
State Department of Environmental Conservation, serves as Chair of EFAB.
Frieda K. Wallison, a Partner with Jones, Day, Reavis & Pogue, is Vice Chair. Herbert
Barrack, EPA Assistant Regional Administrator for Policy and Management in Reg-
ion II, is the Board's Executive Director and designated federal official.
EPA Deputy Administrator F. Henry Habicht II appoints the members of the
Board and the Executive Director. The Board receives general support and guidance
on issues of interest to EPA from the Office of Administration and Resources Man-
agement, headed by Acting Assistant Administrator Christian R. Holmes.
ENVIRONMENTAL. FINANCIAL. ADV1BORY BOARD — Rr»Oa»K«» RKCORT MAT
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How DOES EFAB CONDUCT ITS WORK?
Through public meetings, workgroup sessions, and field hearings, the Board
develops analysis and advice in the form of Advisory statements for the EPA Admin-
istrator. The Advisories offer independent expert views on environmental finance
issues and opportunities.
The Board meets at least twice a year, usually in Washington, D.C. EPA an-
nounces all meetings in the Federal Register as required by FACA. During its first
two years, EFAB had four standing workgroups:
4- Economic Incentives — Chaired by Frieda K. Wallison, Partner, Jones, Day,
Reavis & Pogue;
4- Small Communities Financing Strategies — Chaired by Elizabeth Ytell,
Director, Water-Wastewater Division, Rural Community Assistance
Corporation;
4- Private Sector Incentives — Chaired by Warren W. Tyler, Vice President,
State Savings Bank; and
4- Public Sector Finance Options — Chaired by George A. Raftelis, Partner,
Ernst & Young.
Workgroups meet as part of the full Board meetings and separately, as neces-
sary. For example, the Small Communities workgroup heid a field hearing in Albu-
querque, New Mexico to gather important grass roots information for its Advisory.
Senator Pete V. Domenki of New Mexico, a Board member, chaired this highly
successful meeting.
An Increasing
burden has been
placed on state
and local govern-
ments without
a concurrent
Increase In fiscal
capacity to handle
the new financial
responsibilities.
Policymakers need
to lower the costs
state and local
governments face
or build their
capacity to meet
these financing
challenges.
THREE GOALS DRIVE THE BOARD'S WORK
Since 1970, the real cost of environmental protection has grown significantly.
Neither the public's ability nor its willingness to pay for this protection has kept pace
with its cost—the gap is widening. Environmental statutes of the 1980s and 1990s sug-
gest that the gap will continue to grow well into the next century, reaching crisis pro-
portions if current policy is not changed.
In response, the Board has sought three ways to close the environmental financing
gap facing the nation. We can:
4- Lower the costs of environmental protection — by removing financial and
programmatic barriers that raise costs and by improving the efficiency of
needed investments;
4 Build state and local financial capacity to carry out environmental man-
dates; and
4 Increase public and private investment in environmental facilities and
services.
ENVIRONMENTAL. FINANCIAL. ADVISORY OOARO — PROGRESS REPORT MAY 1992
-------
Properly tolgntd.
economic incen-
'-•-* *' { i
:
L.OWER THE COSTS OF ENVIRONMENTAL. PROTECTION
The costs of maintaining a clean environment are rising rapidly. Moreover,
several financial and programmatic barriers to successful financing raise costs even
higher. Examples include:
+ Tfie 1986 Tax Reform Act — that corrected abuses but also raised financing
costs for public-purpose environmental facilities;
+ State and local procurement laws — that may prevent localities from select-
ing the most cost-efficient environmental service providers; and
•f A lack of sufficient credit history in small communities— which prevents them
from obtaining capital at reasonable costs.
Policy changes can lower many of the barriers and hence costs of financing
environmental projects.
BUILD STATE AND LOCAL FINANCIAL CAPACITY TO CARRY
OUT ENVIRONMENTAL MANDATES
Even as costs rise steadily, the growth in state and local capacity to finance
new environmental mandates falls behind. Policymakers must focus on building and
strengthening state and local governments' ability to meet the financing challenges
they face.
INCREASE PUBLIC AND PRIVATE INVESTMENT IN
ENVIRONMENTAL FACILITIES AND SERVICES
Costs can only be lowered so far. Maintaining and improving the nation's
environment ultimately will require substantial investments over the coming years.
As federal contributions decline, state and local governments, and the private sec-
tor will need to increase their investments as they shoulder a larger share of these
growing costs.
Traditional command and control methods of ensuring investment in environ-
mental facilities are insufficient. State and local governments are having difficulty in
implementing federally mandated environmental programs, or are delaying invest-
ments due to lack of funds.
Economic incentives need to be developed to encourage states, localities, and
the private sector to increase productive investments in environmental facilities. The
returns from environmental investments must be shown to yield real dividends in
health, the environment, and the economy.
BM vi MONMBNTAU FINANCIAL. AOVIOORV BOARD— PROORSSS MBPQRT MAY t993
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FINDINGS AND RECOMMENDATIONS OF THE BOARD
The Board has Addressed the Key Environmental Finance
Challenges of the 1990s
EFAB has addressed the main environmental financing problems facing state
and local governments today. Through its advisory role to the Administrator and the
EPA, the Board has drawn attention to the growing gap between the costs of environ-
mental protection and our nation's ability to meet those costs and the critical need to
make environmental financing issues a priority for EPA and Congress in the 1990s.
ENVIRONMENTAL. PROTECTION COSTS ARE RISING
Total public and private environmental expenditures, as a percentage of gross
national product (GNP), grew from 0.9 percent in 1972 to 2.1 percent in 1990. In that
same period, the GNP grew from $3.0 to $4.7 trillion (in 1986 dollars). By 2000,
environmental expenditures are projected to rise to 2.8 percent of GNP, estimated to be
$7.1 trillion.
ENVIRONMENTAL.
EXPENDITURE*
AC A
PKRCEMTAOE
OP CNR
1B72-2OOO
% of GNP
3JO
IS
io
is
" ti^H
— 1 1 —
P |—
a-ffc
-^^H
a as
1872 1990 2000
THE FUNDING GAP is GROWING
The gap between current resources and the investments needed to maintain
existing standards and meet new requirements is increasing. By the year 2000, total
annual environmental spending requirements (public and private) will be about $200
billion, compared to a 1988 level of $115 billion. This huge difference can be met only
through greater efficiency, expanded public and private investment, and increased state
and local capacity to implement programs.
SAP IN
NATIONAL.
I NVKVTM EKT
NEEDED
TO MEET
•••• 1988 inre»nn«it
Billions of 1486 DoUnn
220
1200
200
180
160
•.-.•-.
billion
anniul
100
In the final decade
of this century.
the nation faces
serious financial
constraints that
may prevent
attainment of
national environ-
mental goals. At
risk are the health
of ecosystems.
human health, and
community well-
being — In short.
the quality of life
in America.
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD -
-------
Local governments
will nol even be
afforded the luxury
of maintaining
environmental
expenditure as
a percentage of
real income,
The, environment's
share of the pie
will have to
shrink.
At the local level, the funding gap is even more dramatic. In the year 2000, local
governments will have to spend an extra $12.8 billion per year, or 65 percent more
than they did in 1988 just to maintain current levels of environmental quality. They
will need to spend at least another $3.6 billion per year to comply with new regulations
In all, communities may need to spend 83 percent more per year by the year 2000.
ANNUAL UOCAJ-
INVEBTMKNTB
NEEDED TO
MEET
ENVIRONMENTAL
GOAL*
1 9BB - 2000
Even if state and local governments could borrow enough to pay for capital
investments, annual cash flow requirements to repay their debts will outstrip their
financial capacity. Between now and the end of the century, local governments will
need to raise 32 percent more money to cover operating and debt service costs.
This amounts to an increase in cash requirements of over 3.5 percent per year. Yet
over the same period, U.S. GNP is estimated to grow by only 2.37 percent per year
and population to grow by only 0.66 percent per year.
IMPACTS ARE HARSHEST FOR SMALL. COMMUNITIES
The nation's smallest communities will be hit especially hard. For communities
of less than 500, the annual cost per household of environmental protection will
double, from 2.5 percent of household income in 1987 to 5.6 percent by the year
2000. At the same time, federal environmental aid to local governments is declin-
ing, leaving communities an increased share of a growing financing burden.
Historically, national debates on environmental infrastructures have paid rela-
tively little attention to "how to pay" or financing issues. Given the magnitude of
environmental funding needs, policymakers in the 1990s will inevitably have to con-
front the growing gap between future needs and currently available resources.
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD •
• PROGRESS REPORT MAY 1 992
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THE NATION NEEDS TO IMPROVE ITS ENVIRONMENTAL.
INFRASTRUCTURE FINANCING POLICIES
America's lack of a viable national strategy for financing environmental invest-
ments manifests itself in several areas:
4> Tax and Environmental Policies Should Complement Each Other— the 1986
Tax Reform Act, while promoting greater tax equity, increased the costs of
financing environmental facilities;
4- Federal Grant Policies Should be More Flexible— inflexible federal grant poli-
cies inhibit private sector participation in the financing of environmen-
tal facilities;
•*• State and Local Administrative Capacity is Eroding— federal participation in
the fiscal partnership with state and local governments is declining without
sufficient institution building at the state and local level to take its place;
•*• The Special Financing Problems of Small Communities Have Been Largely
Underestimated — small communities cannot afford or lack access to the
financial markets. Part of the problem is structural — the fixed costs of
bond issues are higher as bond issues are small; unit costs of service pro-
vision are high as small facilities cannot achieve economies of scale in op-
eration; the user base may be too small to allow full-cost pricing, and a
low credit rating (or lack thereof) discriminates against small communities
in the debt markets; and
•f The Environmental Equity of Economically Disadvantaged Communities Must
Be Resolved—many urban areas face serious environmental and public health
risks, making neighborhoods less livable and discouraging economic growth
and development
THIS EXACERBATES THE FISCAL CRISIS ALREADY
TAKING PLACE AT THE STATE AND LOCAL LEVEL
With few exceptions, governments at all levels are in fiscal crisis. The lack of a
national environmental financing policy will aggravate this already difficult situa-
tion. In 1991;
•*• Thirty-five states reported operating shortfalls or accumulated deficits;
•f One in four city governments faced budget deficits in excess of 5 percent —
more than twice as many cities as in 1990; and
+ Even states' "rainy day" funds are being depleted. State budget stabilization
funds totalling $4.15 billion in 1989 fell to approximately $1.74 billion by
the end of 1991.
The current fiscal crisis does not leave much promise for bridging the state
and local environmental funding gap in the future. In fact, these fiscal trends exacer-
bate the problem; in this climate the capital markets are growing increasingly con-
cerned over state and local credit worthiness, further limiting the ability of these
government units to issue bonds and secure loans.
The federal
government must
be a fall partner
In the near and
long term national
effort to Increase
Investment tn
public-purpose
environmental
Infrastructure.
ENVIRONMENTAL FINANCIAL. ADVISORY BOARD — PROGRESS REPORT MAY 1 992
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Everybody
loses with loss
of primacy-
states, utilities,
consumers. EPA.
I_OCAI_ GOVERNMENTS ARE FORCED TO
RAISE RATES DRAMATICALLY
The results are rate shock and an undue burden on households. Rate shock is
translating into rate resistance and the postponement or cancellation of environmen-
tal projects. The ultimate result is noncompliance with federal environmental man-
dates. Economically disadvantaged households may find they are unable to pay for
water, sewer, and solid waste management services, and hence face an increasing risk
to public health.
Inadequate public investment in environmental infrastructure is translating
into a reduction in the productivity of the private economy. Empirical evidence sug-
gests that insufficient public investment over the past two decades can account for
as much as 60 percent of the decline in the growth of private productivity during
that period. The result is a decline in our international competitiveness. At the local
level, loss of product sales may mean plant closures, loss of jobs, and loss of local tax
revenues.
Rate Shock — Between 1986 and 1991, water and sewer rates in New York City
more than doubled, although water consumption rose only 6.5 percent and infla-
tion grew only 28.5 percent. In the Boston area, average household water and sewer
rates are expected to rise from about S500 per year in 1992 to more than $1600 per
year by 2000. Rate shock can severely affect small communities as well. For example,
in Ironwood, Michigan (pop. 7741), average annual sewer rates rose 44.6 percent
per year from 1984 to 1989 to equal over $454 per household. Rates are expected to
rise sharply in many communities around the country.
Rate Burden — According to an extensive study of the effects of rising sewer
and water rates on economically disadvantaged households in Eastern Massachusetts,
inability to pay will result in an increasing incidence of service shutoffs, especially
among disadvantaged households. The combined cost of these services plus home
heating will consume 29 percent of household income for such families by 1998.
According to the Boston Water and Sewer Commission, city water and sewer bills
have risen 39 percent in the past two years, and over the same period, water shut-
offs tripled as a result of nonpayment of water bills.
A Weakened Private Economy — In the absence of public investment in ade-
quate environmental facilities, growth in the private economy is constrained. Con-
sider, for example, the benefits to the private economy of adequate public facilities.
A beverage producer using publicly supplied water from a large, central facility,
pays less per gallon of water and has greater productivity than would result from a
comparable producer self-supplying water on a smaller scale. The economy bene-
fits through higher private profits, enhanced public tax revenues, or lower prices to
the consumer. Public investments, such as enlargements of wastewater treat-
ment plants, allow private factories to operate at higher capacity with no net new
investment in capital plant. This, in turn, increases the productivity of private cap-
ital in the short run and stimulates new private investment in the long run.
ENVIRONMENTAL, finAMCIAL. ADVISOHV BOARD — PROORBOD REPORT MAY 1992
-------
STATES ARE HAVING DIFFICULTY IMPLEMENTING
FEDERALLY MANDATED PROGRAMS
States environmental programs are caught in a vise between more costly
requirements and insufficient resources. The situation appears to be worsening. Some
states are seriously considering the return of federally mandated programs to the
federal government. Others are resisting taking on new programs without additional
federal funding. Many have sought to develop dependable alternative funding
sources, primarily via increased use of fees. However, such funding sources are them-
selves at best supplementary and often meet stiff resistance.
The reluctance or inability of states to run federally mandated programs
themselves not only has an impact on the federal government but also affects local
compliance as states cut their enforcement activities. It encourages local noncom-
pliance as an environmental investment option.
EFAB Has Delivered Four Advisories to Date
In response to the growing crisis in environmental financing, the Board has
spent considerable time developing viable components of a national environmental
financing strategy. Its proposals provide a starting point for a national debate. That
such a debate takes place is critical, for in the absence of a credible and workable na-
tional environmental financing strategy, our nation risks losing many of the air,
land, and water quality gains that have been achieved over the past 20 years. EFAB
has delivered four Advisories for the Administrator's consideration:
•f Incentives for Environmental Investment: Changing Behavior and Building
Capital — which looks at tax and other economic incentives to lower the
public costs of environmental investments as well as at ways to improve
EPA's environmental financing capabilities;
•*• Small Community Financing Strategies for Environmental Facilities — which
focuses on the special problems of small communities and suggests actions
to increase their access to affordable capital;
4- Private Sector Participation in the Provision of Environmental Services: Bar-
riers and Incentives— which considers federal, state and local opportunities
to ease restrictions on private sector participation in the financing of en-
vironmental investments; and
•*• Public Sector Options to Finance Environmental Facilities — which exa-
mines ways to increase the knowledge base of EPA and Congress regarding
the costs of environmental protection as well as institutional changes and
initiatives that would speed investments in environmental facilities.
ENVIRONMENTAL. FINANCIAL. ABVIBORV BOARD — PROGRESS REPORT MAY 1 992
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The Board Is
changing the
perception of
environmental
spending from
dollars spent with
few returns to
Investments
yielding dividends
In health, the
environment, and
our nation's
economy.
Taxexempt
municipal ;bonds
are ;ifie;ba8lp tool
imediby states*
cities, counties,
and towns to pay
Tor needed public
faculties and ser-
vices. This ability
to sell debt with
Interest exempt
from.'federal
Inconje,taxes Is;
crlHcali to state
andilQcal
In addition to the Advisories, in May 1991, the Small Community Financing
Strategies Workgroup held a field hearing in Albuquerque, New Mexico. The New
Mexico Environment Department hosted the Meld hearing and Senator Domenici
was the honorary chair. The Workgroup heard local officials discuss a range of small
community environmental infrastructure financing issues. Other speakers dis-
cussed additional small community financing issues during an open session. The
Workgroup and the speakers found the field hearing a useful forum for exchanging
ideas about small community financing problems.
Sound, Viable Alternatives are Available to Meet
the Financing Challenges Ahead
Through its Advisories, the Board has focused on three ways to close the envi-
ronmental financing gap. Hie Advisories offer practical policy initiatives that would
help:
•$• Lower the costs of environmental protection — by removing financial and
programmatic barriers that raise costs and by improving the efficiency of
needed investments;
4- Build state and local financial capacity to implement environmental pro-
grams; and
•$• Increase public and private investment in environmental facilities and
services.
LOWER THE COSTS OF- ENVIRONMENTAL. PROTECTION
The Board investigated a number of opportunities for lowering the costs of
environmental protection:
•fr Reclassijy all state and local environmental bonds as governmental bonds
provided proceeds are used to finance public-purpose environmental facilities.
This rectification would lower the costs of borrowing for state and local
governments;
<> Broaden the use of economic incentives to prevent pollution. Tltese incentives
could include a change in depreciation schedules in the tax code, the imposition
of waste taxes, or the provision of tax credits for environmental investment.
Such incentives would lower investment costs and encourage pollution
reduction; and
•4- Improve coordination among federal small community financial assistance
programs to maximize flexibility and efficiency in developing financing strate-
gies for small communities. This coordination would help small communi-
ties pursue the least-cost solution to their environmental investment needs.
ENVIRONMENTAL. FINANCIAL. AOVISIORY BOARD — PROGRESS REPORT MAY 1992
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BUILD STATE AND LOCAL FINANCIAL. CAPACITY
TO CARRY OUT ENVIRONMENTAL. MANDATES
The Board examined several policy initiatives that would help build and
strengthen state and local financing capacity, enabling states and localities to success-
fully meet the financing challenges they face. The Board developed six options that (1)
recognize the need to institutionalize, at the federal level, the critical role financing
plays in the achievement of environmental goals, and (2) provide initiatives to facili-
tate state and local financing efforts. The Board recommends that policymakers:
4 Strengthen the role of financial analysis in EPA's planning, budgeting, and
regulatory processes. This would augment the Agency's capacity to provide
administrators, legislators, and state and local officials with advice on envi-
ronmental finance;
4 Take regular inventories of the costs and impacts of complying with national
environmental mandates. Regular inventories would expand Congress' un-
derstanding of the financing challenges faced by state and local govern-
ments and help Congress select appropriate environmental goals. It also
would help state and local governments allocate limited funds to com-
peting environmental priorities;
4- Improve the effectiveness of the SRF program in financing wastewater treat-
ment through both administrative and legislative changes to the Title VI SRF
program. This would result in the targeting of funds to small and econom-
ically disadvantaged communities, facilitating investment by these com-
munities and helping them overcome the financing barriers they face;
4- Evaluate the feasibility of establishing new mechanisms for the disbursement
of financial assistance, including expansion of the SRF to other media and
establishment of a national trust fund or state Trust funds. Expanding the SRF
program would help local governments overcome capital constraints they
currently face in these media by providing low-cost loans. A national trust
fund or state trust funds could provide assistance by offering grants to
economically disadvantaged communities and additional capital to state
and local infrastructure financing agencies. In both capacities, this kind of
institution would increase the availability of capital to local governments
for environmental investment;
4 Increase the use of bond banks to improve access to the bond market for
small communities. This would help small communities overcome the
special barriers they face in trying to issue debt. Technical assistance could
be provided to states without bond banks to assist them in developing this
type of institution. Alternatively, EPA could investigate opportunities
for creating regional or multi-state bond banks. The development of eith-
er state or regional bond banks would facilitate small community issu-
ance of tax-exempt bonds for environmental purposes; and
To mitigate the
impending crisis
in environmental
financing, the
federal govern-
ment can add lo Its
roles of regulation
and enforcement
that of being a
catalyst to effec-
tive transition
management.
Congress needs
to understand the
consequences of
its policy actions
— the costs of a
command and
control regulatory
process are high
indeed.
ENVIRONMENTAL. FINANCIAL. ADVISORY- BOARD— PROGRESS REPORT MAY 1 992
-------
When banks learn
to more effectively
underwrite and
manage the risk
associated with
environmental
protection, every-
one benefits.
: -
•*• Use fee systems to raise revenues for environmental investments. This would
directly encourage and stimulate environmental investments.
INCREASE PUBUIC AND PRIVATE INVESTMENT IN
ENVIRONMENTAL. FACILITIES AND SERVICES
Once the costs of environmental protection have been lowered and the finan-
cial capacity of state and local governments bolstered, our nation is still left with a
need to increase our investment in the environment in order to achieve national
environmental goals. Such investment must come from state and local govern-
ments and the private sector.
Investment can be increased by focusing efforts to encourage traditional play-
ers to invest, or by providing attractive opportunities for new entrants in environ-
mental investment — in particular — by inviting the participation of the private sec-
tor. The Board investigated a number of options for encouraging both increased
activity on the part of state and local governments, and new activity on the part of
the private sector. The Board recommends that we:
•*• Interpret federal grant policies more flexibly to lower the barriers to private sec-
tor investments in publicly owned treatment works. A more flexible interpre-
tation of federal grant policies is critical to make the provision of waste-
water treatment more attractive to private parties;
•*• Promote full-cost pricing of environmental services to reflect the true costs
of providing those services. Full-cost recovery would remove a fundamen-
tal barrier to private sector participation;
+ Provide information and technical assistance to reduce the real and perceived
risks associated with private investment in public environmental facilities. This
would encourage greater private lending for environmental projects;
•f Expand EPA's demonstration projects for public-private partnerships involving
the financing of environmental facilities or services, technical assistance to local
governments in forming partnerships, and possibly funding to help over-come
start-up costs associated with public-private partnerships in environmental
services. This option is essentially educational, and would provide guidance
for public and private partners looking to work together to provide envi-
ronmental services; and
•*• Encourage states and localities to modify laws that are disincentives to pri-
vate sector participation. This too would foster private sector participation in
the provision of environmental services.
Each of the Board's 14 recommendations are presented in greater detail in
Appendix A. Each recommendation is structured to help increase the capacity to
finance needed environmental investments that will preserve and protect the quality
of life in America.
ENVIRONMENTAL FINANCIAL ADVISORY BOARD— PROGRESS REPORT MAV
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EFAB'S AGENDA FOR 1992
EFAB's work is far from finished. In the coming year, the EFAB intends to ex-
pand on the policy options it introduced in 1991. It will also consider new options for
meeting the environmental financing challenges facing EPA and our nation as a
whole. EFAB will have three committees in 1992, each charged with two or more
objectives. These committees will concentrate on:
PAYING FOR ENVIRONMENTAL MANDATES
+• Small and Economically Disadvantaged Communities — Develop effective
near-term actions to improve financial assistance programs directed to small
and economically disadvantaged communities.
•*• State and Local Capacity — Support the work being undertaken by EPA's
State and Local Capacity Task Force and identify feasible sources of funds,
financial institutions, and mechanisms that will help build state and local
capacity. The committee will serve as a forum for review of the report cur-
rently being produced by the Alternative Financing Mechanisms team of
the Task Force.
Issues like the
greenhouse effect.
acid rain, Uie
thinning of the
ozone layer, toxic
wastes, and water
quality have moved
from the I'JS. lo
the international
arena. The United
States is now
playing a key
role fn fostering
International
cooperation on
global environ-
mental concerns.
INTERNATIONAL ISSUES
*• Border Communities — Increase the availability of environmental facilities
in communities on either side of the U.SVMexican border by identifying
ways to improve environmental financing to these communities.
4- East European Trade Show and Conference— Develop a strategy to market
U.S. expertise in environmental finance and U.S. knowledge of financial
institutions at a trade show and conference planned for Eastern Europe in
1993.
EDUCATION AND COMMUNICATION
4- Costs of Environmental Mandates — Examine ways to expand state, local,
and regional knowledge of the costs and effects of environmental mandates.
•f Capital Providers and Community Leaders — Educate capital providers and
community leaders about the regulatory process to increase the former's
willingness to lend for environmental investments, and to inform the latter
of the benefits of investing in environmental facilities.
•* Environmental Finance Centers— In concert with the work involving ways
to build state and local capacity, the committee will help develop plans to
establish environmental finance centers in EPA regions, affiliated with
land-grant universities.
ENVIRONMENTAL. FINANCIAL. ADVIBORV BOARD -
-PROCREB* REPORT MAY 1B02
-------
"Reimlgorating
our environmental
Infrastructure will
require an unpre-
cedented degree of
communication
and cooperation
among all levels
of government,
the private sector.
conservation
groups, and
citizens. The job Is
big, new money is
bard to flnd. And,
thus, It has never
been more Impor-
tant to challenge
the creativity and
dynamism of all
these parties to
contribute new,
vitally needed
Ideas and energy
to solve America's
environmental
problems."
—miliam K. Keffly
OTHER BOARD ACTIVITIES
EFAB also will support work currently being undertaken by the Clean Air
Act Advisory Board's Subcommittee on Federal/State Relations in coordination with
the Office of Air. The Board will provide advice on the financing of state air programs
in response to new requirements mandated by the 1990 amendments to the Clean
Air Act.
The Environmental Financial Advisory Board is pleased to serve EPA, Con-
gress, and state and local governments. Through its advisory role it can help bring
issues of environmental finance to the forefront of environmental policy. Attention
to these issues is crucial to ensure that our nation's environmental standards are
maintained for generations to come.
ENVIRONMENTAL FINANCIAL ADVISORY BOARD — pnoonnoa REPORT MAV 1992
-------
-------
APPENDIX A: FOURTEEN KEY FINDINGS
AND RECOMMENDATIONS
The Board's 14 recommendations are presented in greater detail below. Each recom-
mendation will help dose the environmental financing gap facing the nation by lowering the
costs of investment, building state and local capacity, or by increasing state and local invest-
ment in environmental facilities. In short, each wfll help to preserve and protect the quality of
life in America.
RECL.ASSIFY AL.L. STATE AND LOCAL.
ENVIRONMENTAL. BONDS AS GOVERNMENTAL.
Current Policy
The 1986 Tax Reform Act, while promoting greater tax equity and ending abuses within
the tax systenii had the unintended effect of increasing the cost of financing public-purpose
environmental facilities. The Act:
+ Required state and localities to offer higher tax-exempt interest rates on some types
of bonds;
+ Narrowed the market for tax-exempt bonds by eliminating certain types of large-
volume institutional buyers; and
+ Limited the volume of private-activity, tax-exempt bonds that states can issue each
year, which resulted in delayed financing for environmental projects or forced states
and localities to issue public-purpose bonds as taxable bonds, accompanied by
higher rates.
The Board's Alternative
EPA could urge Congress to redassify all state and local environmental bonds as tax-
exempt governmental bonds, if the proceeds of the bonds are used exclusively to finance the
provision of public-purpose environmental services.
The Result
Redassifying public-purpose bonds for environmental projects would:
+ Save state and local governments billions in financing costs;
+ Increase investment as it would increase the volume of environmental bonds issued;
and
•f Yield a net gain in federal tax revenues by the year 2000—Losses would be offset by
private sector productivity (and hence profitability) gains resulting from increased
investment in environmental infrastructure.
ENVIRONMENTAL. FINANCIAL ADVISORY BOARD PROOMBBS REPORT MAV 1 993
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BROADEN THE USE OF ECONOMIC INCENTIVES AND
MARKET ALTERNATIVES TO PREVENT POLLUTION
Current Policy
Few economic incentives exist to encourage pollution prevention. The US. tax code
treatment of depreciation schedules, for example, actually favors "end-of-pipe" treatment
over pollution prevention and may be biased against investments in pollution reduction
equipment The code's treatment of deduction eligibility for plant and equipment allows
deductions for equipment that discharges wastes in violation of permitted levels, as well
as expenses arising from payment of punitive damages in connection with environmen-
tal malfeasance. Accelerated depreciation allowances are limited to equipment that con-
trols rather than reduces or prevents pollution. Finally, the code's depreciation methods for
extracted raw materials encourages the use of toxic raw materials at the expense of less
toxic substitutes.
There are few direct incentive programs either. There is no federal and few state
hazardous waste tax programs, and the use of credits to encourage the purchase of pollution
reduction or conservation equipment by homeowners or businesses is almost nonexistent
The Board's Alternative
There are several policies that could reduce pollution or prevent its generation, ranging
from information transfer and technical assistance, to regulatory mandates, to economic
incentives. The Board endorses both voluntary and compulsory pollution prevention
policies, including:
+ Imposing economic penalties, such as effluent fees or hazardous waste taxes, to
reduce the volume or toxicity of discharges—Taxes or fees could be levied on inputs,
such as feedstock taxes, or outputs, at either the point of generation or disposal;
4- Offering tax or other credits for investment in waste-reducing technologies or
activities—Credits could be offered for the purchase of pollution reduction equip-
ment or for research and development efforts into pollution reduction technologies
and methods; and
+ Removing biases in the US. tax code that inhibit waste reduction.
The Result
The imposition of financial penalties for pollution would raise revenues and discourage
pollution, as the charge could be designed to reflect true production costs, which include the
disposal costs of pollutants generated. Tax credits directly lower the cost of investing in
pollution reduction equipment. Finally, revision of the tax code's treatment of deduction
eligibilities, accelerated depreciation for plant and equipment, and its use of raw materials
depletion allowances for extracted toxic materials would lower financial barriers to investment
in pollution reduction equipment and encourage substitution of less toxic raw materials.
ENVIRONMENTAL FINANCIAL ADVISORY BOARD PROORBOO REPORT MAY 1 993
-------
IMPROVE COORDINATION AMONG FEDERAL. SMALL.
COMMUNITY FINANCIAL. ASSISTANCE PROGRAMS
Current Policy
While there are a myriad of federal financial assistance programs to assist small com-
munities in financing their environmental programs, no network connects these programs
to one another. As a result, small communities may not be able to access or use effectively,
assistance delivered in a fragmented fashion. Within EPA, for example, small community
activities traditionally have been carried out separately by the various environmental media
offices.
The Board's Alternative
The Board examined several existing programs to determine potential coordination
opportunities. It determined that EPA should take a lead role in marshalling multiple funding
sources for small community environmental facilities, including:
+ Developing a catalogue highlighting the financial services and programs available
to small communities in complying with environmental mandates;
+• Convening a roundtable of representatives of small community financial assistance
programs to discuss and develop small community initiatives; and
• Improving coordination between the SRF program and the Farmers Home Admin-
istration Water and Waste Disposal Loan and Grant program at the state level and
providing the latter with specific information on small community needs.
The Result
Improving the exchange and availability of information on small community financial
assistance programs, among federal agencies and within EPA itself, would help small com-
munities develop cost-effective financing strategies. It would facilitate their use of the most
appropriate funding sources and help them leverage available funds.
A-3 BNVIROMMCNVAI. FINANCIAL. ADVISORY BOARD PROORBQS REPORT MAY 1992
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STRENGTHEN THE ROLE OF FINANCIAL ANALYSIS
IN EPA's PLANNING, BUDGETING, AND REGULATORY
PROCESSES
Current Policy
The EPA Administrator has articulated a series of themes intended to guide the
Agency's environmental programs. The implementation of these priorities and the realization
of benefits from these initiatives will require major investments by all levels of government.
EPA must strengthen its own capacity to provide a financial perspective on environmental
goals for the Agency to remain a leader among federal agencies, the Congress, states, localities,
and the private sector in developing the capacity to finance environmental services.
The Board's Alternative
The Agency could improve awareness of the importance of environmental finance
in all media and increase its interaction with decision makers and legislators on issues of
financial capacity by.
*• Adding environmental finance to its list of priorities, thus building its capability to
contribute to administrative and legislative debates on financing environmental
public works;
+ Strengthening and expanding its role of financial analysis in rulemaking by amend-
ing Regulatory Impact Analyses and Regulatory Flexibility Analyses to include
analyses of affordability of new rules and the development of fiscal plans to assure
that compliance is not impeded by questions of ability to pay, and
4 Strengthening EPA's capacity to provide advice on environmental finance to
administrators and legislators.
The Result
Institutionalizing environmental finance by integrating an environmental finance
ethic in EPA's day-to-day activities would send a strong message to all senior managers
about the importance of ensuring that adequate financing for environmental investments is
available. It would ensure that those concerned with fiscal and tax policies fully understand
the effects that their proposals may have on seemingly unrelated areas of environmental
policy, and it would allow EPA to effectively assist state and local governments trying to
finance environmental investments with limited resources.
. FINANCIAL ADVISORY mot
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TAKE REGULAR INVENTORIES OF THE COSTS
AND IMPACTS or COMPLYING WITH NATIONAL
ENVIRONMENTAL MANDATES
Current Policy
The joint EPA/State biennial Needs Survey provides information about the cost of
complying with federal mandates for wastewater treatment. Comparable information is not
required by statute and is unavailable for drinking water or solid waste programs. Policy-
makers are thus generally unaware of the costs they impose on state and local governments
in complying with federal mandates.
The Board's Alternative
The Board identified several ways of communicating the costs of complying with
federal environmental mandates including:
* Expanding the biennial Needs Survey to include estimates of related water quality
needs such as stormwater runoff controls, nonpoint source programs, and estuary
management activities. In addition, EPA could initiate separate but similar needs
surveys for community water supply and municipal solid waste management facili-
ties; and
•*• Annualizing EPA's report Environmental Investments: The Cost of a Clean Environ-
ment (the Cost of Clean Report), which covers all media and projects capital as well
as operating and maintenance costs over a 10-year period for several compliance
scenarios.
The Result
Taking regular multi-media inventories of the costs and impacts of complying with
national environmental mandates would inform Congress of the financial consequences of its
policy actions. It would also provide a basis from which to measure progress in achieving
environmental goals. In addition, it would help states administer various geographic initia-
tives, including, for example, the Great Lakes Initiative, the Gulf of Mexico Program, the
Chesapeake Bay and Puget Sound Programs, and the Long Island Sound Program.
CNVIRONMENTAL FINANCIAL. ADVIBORY BOARD ^ PROOREBB REPORT MAY 1 992
-------
IMPROVE THE EFFECTIVENESS OF THE SRR PROGRAM
IN FINANCING WASTE WATER TREATMENT
Current Policy
Overall, the SRF program has proven a successful model for financing wastewater
treatment. However, not all wastewater treatment needs are being met, especially in the
case of small and economically disadvantaged communities. This is due in part to the structure
of the SRF in terms of project rankings, federal requirements, requirements on the part of
potential loan recipients, and the need to ensure the financial integrity of the funds.
The Board's Alternative
The Board examined several administrative and legislative changes that could be made
to the SRF program to improve its effectiveness in reaching more communities, especially
those that are small or economically disadvantaged, including:
+ Seeking flexibility in the 4-percent restriction on use of funds, to allow states to
use some portion of overall fund assets for program administration after 1994, as
several states could otherwise face temporary deficits in their budgets for admin-
istration;
+• Allowing the SRF to support public-private partnerships for wastewater services;
• Funding the SRF program at the authorized levels for FY 1993-94 and appro-
priating the difference between those amounts authorized under Title II and Title
VI, and those actually appropriated to date; and
•f Seeking legislative changes under the Title VI SRF program — This could include
creating special set-asides for particular loan recipient groups, extending the SRF
loan term beyond 20 years where recipients may have difficulty in paying back the
loan, or creating a separate revolving fund for small and economically disadvan-
taged communities in water quality, drinking water, and solid waste management
The Result
The administrative changes in the SRF program would facilitate lending to all com-
munities for wastewater treatment. The legislative changes to the program would target
small and economically disadvantaged communities for assistance and help ensure that they
do not lag behind other communities in protecting their environment.
ENVIRONMENTAL. RINANCIAL. ADVISORY BOARD— PROORIZSS REPORT MAV 1992
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EVALUATE THE FEASIBILITY OF ESTABLISHING
NEW MECHANISMS FOR THE DISBURSEMENT OF
FINANCIAL ASSISTANCE
Current Policy
While the SRF program provides low-cost loans for financing wastewater treatment
programs, capital assistance is needed in other media as well, such as drinking water and solid
waste management programs. This is especially the case in small and economically disad-
vantaged communities. Further, while state infrastructure authorities, including SRFs, pro-
vide financial assistance for a myriad of programs, the speed with which we reach our envi-
ronmental goals would be enhanced if their capacity to offer financial assistance were
expanded.
The Board's Alternative
The Board examined several options to expand and improve our nation's institutional
capacity to provide financial assistance for environmental programs. Two alternatives could
be implemented in conjunction with one another or individually. The Board recommends
EPA evaluate:
4- Expanding the eligibilities of the SRF program for economically disadvantaged
communities. This could be extended to other media, contingent on continued
federal funding beyond the current authorization period; and
* Development of a national trust fund or state trust funds. These could provide
financial assistance to state and local environmental programs and to regional
environmental planning and regulatory commissions, as well as provide liquidity
to state environmental facility financing authorities, including the SRF.
The Result
Expansion of the SRF program would establish, in each state that so chooses, a multi-
media environmental financing authority capable of directing assistance to the most critical
state environmental priorities. A federal trust fund, or state trust funds, would help close the
financing gap in two ways. It could provide grants (or other kinds of assistance — including
loans, credit enhancement, or even technical assistance) to economically disadvantaged
communities for investment in water quality, drinking water, and solid waste management
facilities. In addition, trusts would improve the liquidity of state environmental facility
financing authorities including SRFs by:
•*• Having the statutory authority to issue environmental revenue bonds exempt from
federal taxation, which would lower the cost of financing;
+ Making loans to state environmental facility financing authorities;
+ Purchasing debt instruments, including short-term notes, and pooling issues;
+• Providing guarantees or issuing letters of credit backing debt instruments; and
4- Acting as a secondary market by purchasing state loan portfolios.
A-7 ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD — PROORESS REPORT MAY 1992
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INCREASE THE USE OF BOND BANKS TO
IMPROVE ACCESS TO THE BOND MARKET
FOR SMALL. COMMUNITIES
Current Policy
Small communities that need to borrow money for environmental projects often are
unable to do so in the national bond market because of poor credit ratings, little financial
expertise, and relatively small capital needs. Where access to the national bond market is
available, interest rates are often very high.
The Board's Alternative
Bond banks could bring more debt financing opportunities within the reach of small
communities and help reduce the dependence of such communities on subsidized assistance.
The Board recommends that EPA:
+ Provide technical assistance on the establishment and use of bond banks. This could
include identifying their advantages and pitfalls, clarifying bond bank operational
structures, and explaining how a bond bank could be used to meet small com-
munity environmental facility needs in their state. Such assistance could be delivered
through publications, workshops, or conferences;
+ Identify barriers to effective bond bank operations and develop strategies to over-
come those barriers, such as working with existing bond banks to exchange informa-
tion about how they have handled these barriers; and •
4- Explore the financial, legal, and administrative feasibility of creating regional or
multi-state bond banks to facilitate issuance of tax-exempt bonds by small commu-
nities. This could offer greater savings as issues would be pooled over an even larger
number of small issues.
The Result
Helping states that have not yet created bond banks establish new bond banks and
helping states that already have bond banks improve the effectiveness of these financial
institutions would build financing capacity in small communities. In particular, it would
help small communities gain access to the municipal bond market at lower interest rates
and with lower issuance costs.
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD— PROGRESS REPORT MAY 1992
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FEE SYSTEMS TO RAISE REVENUES
FOR ENVIRONMENTAL. INVESTMENTS
Current Policy
Even with aggressive capitalization of the SRF program, states may still face funding
shortfalls in their water quality programs. Moreover, there is currently no self-sustaining
source of funds available for drinking water and solid waste management programs.
The Board's Alternative
Dedicated fee systems could help raise funds needed to finance investments in these
media and could finance program costs, or cover debt service on capital costs. Fees (and taxes)
can be designed to raise revenues and/or act as an incentive to reduce pollution generated
The Board concluded specific opportunities exist to impose fees or taxes on water use, effluent
discharge, and solid waste disposal or generation. While several issues would have to be re-
solved in developing and implementing a fee or tax program, the Board determined that the
issues are not insurmountable.
The Result
The Board estimates that states could realize significant revenues from modest fees on
water supply, water treatment, and solid waste services. These revenues would be affected by
several factors, including fee design, reduction in service use from fee imposition, and the
ability to avoid/enforce fee payment. Potential revenues are listed below:
AnnualRevenueSlreams \\ailable. 1993—2000 ($ billions)
Water supply fee
(public supply only)
Wastewater charge
Solid Waste charge
Total
Low Projection High Projection
S6.3 $23.1—525.1
•-X3
1.
$12.2—$13.1
$19.6—$21,3
$7.4
$50.0—$53,8
Dedicated tax and fee programs would directly assist state and local governments
in financing environmental investments and could also result in a reduction in pollution
generated.
ENVIRONMENTAL. FINANCIAL- ADVIBORv BOARD — PRQ
-------
REINTERPRET FEDERAL GRANT POLICY
Current Policy
Current interpretation of federal grant policy found in OMB Circular A-102 has
effectively eliminated private financing of federally grant-funded wastewater treatment facili-
ties. Under the policy, any recipient of a federal grant to fund a capital facility must hold tide
to the grant-funded property.
If the property is privatized, the federal government must be reimbursed for its share of
the funding for the property, based on the fair market value of the property at that time.
The compensation requirement limits the ability of a private owner to leverage the value of
the facility because a portion of the capital raised upon refinancing must be used to repay
the federal government. This displaces capital that could otherwise increase the value of
the facility or its capacity to provide service. This can result in increased user fees without an
offsetting increase in services provided or improved water quality.
The Board's Alternative
There are several actions that can be taken to promote private financing of wastewater
treatment facilities that have been funded by federal grants. We can:
+ Accept private reinvestment in the grant-funded facility as partial or full compen-
sation for the federal share — displacement of capital would not take place;
+ Redefine the period of federal interest — let it coincide with the design life of the
facility;
+ Redefine public ownership of such facilities — allow private equity participation
thus permitting public-private partnerships to participate in federally funded SRF
programs restricted by statute to publicly owned treatment works (POTWs);
and
+ Permit encumbrance of such facilities (that is, offering of the facility as collateral) —
securing debt financing from a private source may require that the POTW owner
offer the facility as collateral. Permitting encumbrance would therefore increase
debt financing opportunities.
The Result
The elimination or modification of grant repayment requirements has significant
potential to increase net capital investment in wastewater treatment facilities. Some $100
billion invested in POTWs would leverage significant amounts of private investment and
result in a potential reduction in the cost of capital improvements. In addition, compliance
would increase as financing opportunities expanded.
ENVIRONMENTAL. FINANCIAL ADVISORY BOARD PROOREOO RUPORT MAY 1992
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PROMOTE FULL-COST PRICING OF ENVIRONMENTAL.
SERVICES TO REFLECT THE TRUE COSTS OF
PROVIDING THOSE SERVICES
Current Policy
Local governments finance their environmental facilities and services with general
revenues, dedicated taxes, federal and state grants and loans, and user fees for the services
provided. Historically, many communities have not relied on user fees to cover the full costs
of providing services. Rather, they have subsidized service provision from one or more of the
other possible sources of revenue. Aside from distorting the true costs of providing these
services, subsidizing environmental services acts as a disincentive to private sector participa-
tion, as the private sector would not view public subsidies of a private venture as stable
revenues and would base investment decisions on user fee revenues only.
The Board's Alternative
Full-cost pricing of environmental services would ensure that consumers' demand for
services is proportionate to the cost of providing them. It could also encourage private
investment as an alternative to public financing of local environmental facilities. To promote
full-cost pricing, EPA could:
Endorse the practice in EPA publications as a matter of public policy and as a
necessity for financial and operational efficiency, and provide technical assistance
to localities in implementing full-cost pricing. Assistance could include helping
localities set up effective cost-accounting procedures and estimating techniques to
'determine (1) capital and operating costs per unit of service delivered and (2)
appropriate discounts. It could also include providing support for public outreach
and information programs to explain the benefits of full-cost pricing; and
Encourage states to consider the adequacy of fees in programs seeking new or re-
newal of permits. EPA could provide guidance to states on how to best incorporate
a review of the adequacy of user fees in their permitting process.
The Result
Full-cost pricing would promote efficient resource allocation and would act as a direct
incentive to the private sector to increase its involvement in the provision of environmental
services. It would also free public funds currently being used to subsidize environmental
services.
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD — PROORKOO REPORT MAY 1992
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PROVIDE INFORMATION AND TECHNICAL. ASSISTANCE
TO REDUCE THE RISKS ASSOCIATED WITH PRIVATE
INVESTMENT IN PUBLIC ENVIRONMENTAL. FACILITIES
Current Policy
Lack of adequate information on the real financial risks associated with environmental
investments as well as insufficient or reasonably priced insurance for these investments has
resulted in the perception that investments in environmental facilities are highly risky. This
perception discourages private lending for many types of environmental projects. Where
investments are made on the basis of inflated perceived risks rather than much lower actual
risks, communities will pay too much to finance their environmental projects.
The Board's Alternative
EPA could reduce the perceived risks of investment by providing detailed information
on the probability of activities occurring for which investors would be liable, along with
suggested measures to minimize the risks of these events. It could also provide technical
assistance to independent agencies so that they could assign "risk ratings", not unlike Moody's
or Standard and Poors, to environmental investments.
EPA could reduce the real risks associated with environmental investments by promot-
ing and facilitating private sector insurance efforts that offered insurance to either the capital
investor or the insured facility.
The Result
Adequate information on the risks associated with particular environmental invest-
ments accompanied by independent risk ratings of these investments would help correct
perceptions of the actual risks of such investments. It would encourage more private sector
participation in low-risk environmental projects. It would also encourage the setting of user
fees that more accurately reflect the actual risks posed by a given project.
An increase in privately available liability insurance for environmental projects would
help lower the real risks of such investments. It would promote private sector participation
and would encourage banks and other lending institutions to offer private loans for environ-
mental facilities.
ENVIRONMENTAL, FINANCIAL, ADVISORY BOARD PROORBOO REPORT MAY 1 992
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EXPAND ERA'S DEMONSTRATION PROJECTS
FOR PUBLIC-PRIVATE PARTNERSHIPS
Current Policy
State and local governments are increasingly constrained in their ability to pay for
environmental investments. Traditional sources of revenue are becoming insufficient to allow
states and localities to comply with environmental mandates in a timely manner.
The Board's Alternative
Greater private sector involvement in the provision of environmental services would
assist state and local governments in meeting the financing challenge they face. In particular,
public-private partnerships have proven a successful model in the provision of public services.
The Board recommends that EPA:
4 Expand its demonstration program for public-private partnerships involving the
development and implementation of partnerships for financing environmental
facilities or services. It should also include a project evaluation component to
assist the future development and implementation of independent public-private
partnerships;
• Investigate the establishment of an independent authority to make low-interest loans
or grants to finance key stages of the formation of public-private partnerships;
and
+ Provide assistance to local governments that are interested in establishing public-
private partnerships. This assistance could include seminars, publications, and
direct consultation on specific projects.
The Result
Private sector involvement can reduce the costs of providing environmental services.
It would also free public funds for use in other areas. (Indeed, when public financial resources
are inadequate or nonexistent, or when municipal debt has already reached its limit under
current law, private investment may effectively be the only source of funds for expanding
the capacity of environmental services.) Public-private partnerships would also find creative
ways to leverage available resources to achieve environmental quality goals. Action by EPA to
promote these partnerships would facilitate their use and success.
A-la BNVIHOHMEMTAi. FINANCIAL. ADVISORY BOARD RROORBOO REPORT MAV 1992
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ENCOURAGE STATES AND LOCALITIES TO MODIFY
LAWS THAT ARE DISINCENTIVES TO PRIVATE
SECTOR PARTICIPATION
Current Policy
Some state and local government practices, such as those aimed at ensuring account-
ability and public control over decision-making, indirectly discourage private involvement
in the provision of environmental services.
The Board's Alternative
To encourage private sector involvement, the Board recommends that EPA:
+ Provide guidance to states that are considering revision of their procurement laws
to enable local governments to adopt the American Bar Association (ABA) Model
Procurement Code and Ordinance. EPA could also provide guidance to local
governments on facilitating private sector participation through the use of the
ABA Code. The Code provides voluntary standards that states and local governments
can use to revise their procurement statutes to allow greater sophistication and
flexibility, including the option of using a competitive negotiation process whereby
contract awards are not limited to the lowest cost bidder, and
4- Establish guidance on effective privatization legislation. This would authorize long-
term contracts between local governments and the private sector where feasible,
practical, and desirable.
The Result
Increased flexibility in procurement laws would allow local governments to hire the
private sector firms that, while not the lowest bidder, would provide the best overall pack-
age in terms of service provision and cost-effectiveness. Use of long-term contracts would
attract private sector investment since it would allow private firms to lower the fees they
charge by spreading amortization costs over a longer period and would reduce the premium
on risk included in user fees. Both actions would foster increased private sector involvement
in the provision of environmental services.
BN VI ROM MB NT A L. FINANCIAL. ADVISORY BOARD — PROORBSS REPORT MAY 1992 A-14
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APPENDIX B: ENVIRONMENTAL. FINANGIAL. ADVISORY
BOARD COMMITTEES
Paying For Environmental Mandates
Chain Mr. Joseph D. Blair
Ms. Frieda ICWallison
Honorable Beryl F. Anthony, Jr.
Honorable Pete V. Domenici
Mr.). James Ban-
Mr. Philip Beachem
Mr.PeteButkus
Mr. Richard Femvick, Jr.
Ms. Deeohn Ferris
Mr. Shockley D. "Hap" Gardner, Jr.
Honorable Stephen Goldsmith
Mr. John Gunyou
Mr. William B. James
Dr. Peggy Musgrave
Mr. Gerald Newfarmer
Mr.JohnV.Scaduto
International
Chair: Mr. Michael Cnrley
Mr. William H. Chew
Mr. Roger D. Feldman
Dr. William Fox
Mr. Harvey Goldman
Mr. Robert F. Mabon, Jr.
Ms. Heather L Ruth
Mr. Richard Torkelson
Ms.JaneG.Witheridge
Education & Communication
Chain Honorable Anne Meagher Northup
Mr. David M.Uck
Mr. John C "Mac" McCarthy
Mr. Marlin L Mosby, Jr.
Mr. George A. Raftelis
Ms. Roberta H. Savage
Mr. Warren W.Tyler
Ms. Elizabeth YteU
ENVIRONMENTAL. FINANCIAL ADVISORY BOARD — PROORBSS RCPORT MAY 1992
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APPENDIX C: ENVIRONMENTAL. FINANCIAL. ADVISORY
BOARD SUPPORT AND ADVISORY STAFF
U.S. Environmental Protection Agency
Christian R. Holmes
Assistant Administrator
Office of Administration and Resources Management
Herbert Barrack
Assistant Regional Administrator for Policy and Management
U.S. EPA, Region II
David P. Ryan
Comptroller
John J. Sandy
Director
Resource Management Division
David E. Ostennan
Deputy Director *
Resource Management Division
George F.Ames
Acting Chief
Resource Planning and Analysis Branch
Alice Jenlk
Chief
Policy and Program Integration Branch
U.S. EPA, Region II
Staffc Leah B. Benedict
Margaret S. Binney
Vanessa Y. Bowie
Alecia F. Crichlow
Vera S. Hannigan
Joanne M. Lynch
Timothy P. McProuty
Ellen Fancy Pidano
Eugene E. Pontillo
Yvette M.Sanders
Kim Y. Thomas
Ann M. Watt
ENVIRONMENTAL. FINANCIAL ADVISORY BOARD — PROORBOS REPORT MAY 1 9Z»2
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APPENDIX D: EPA EXPERT CONSULTANTS TO THI
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD
Mr. Alan M. Fox
Associate Assistant
Administrator for Water
Office of Water
Mr. Iliomas C Kieman
Deputy Assistant Administrator
Office of Air and Radiation
Mr. Harvey G. Pippen, Jr.
Director
Grants Administration Division
Ms.AbbyJ.Pirnie
Director
Office of Cooperative
Environmental Management
Ms. Christina S. Parker
Deputy Director
Office of Program Management Operations
Office of Air and Radiation
Mr. Stephen AUbee
Chief
Municipal Assistance Branch
Office of Wastewater Enforcement
and Compliance
Ms. Marian Cody
Analyst
Grants Administration Branch
Office of Administration
and Resources Management
Ms. Ann Cole
Small Community Coordinator
Office of Regional Operations
and State/Local Relations
Mr. Michael Deane
Environmental Protection Specialist
Office of Wastewater Enforcement
and Compliance
Ms. Ellen Hafia
Analyst
Grants Administration Branch
Office of Administration and
Resources Management
Mr. James Home
Special Assistant
Office of Wastewater Enforcement
and Compliance
Mr. A.W. Marks
SeniorAdvisor
Enforcement and Program
Implementation Division
Office of Ground Water and
Drinking Water
Ms. Kitty Miller
Environmental Protection Specialist
Office of Water
Mr. Donald Hugh (deceased)
Analyst
Office of Wastewater Enforcement
and Compliance
Mr. Peter Shanaghan
Mobilization Manager
Office of Ground Water and
Drinking Water
Mr. Ronald Stotkin
Analyst
Office of Research and Development
Mr. Brett Snyder
Economist
Economic Analysis and Research Branch
Office of Policy, Planning & Evaluation
ENVIRONMENTAL. FINANCIAL. ADVISORY BOARD -
• PROORBSO RBPORT MAY 1992
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