A combination of water infrastructure demands, flat federal assistance, a tough municipal bond market and recession-weary residents who are opposed to rate increases continues to make funding regulatory compliance nearly impossible for local governments. However, financial options are being identified that may bring some relief.
“In addition to local matches, there has to be a greater contribution from the state and federal government for grants,” says Michael Geffrard, president and CEO of New York-based investment firm Liati Group. “It has swung too far to user fees, which are beginning to become burdensome.”
A recent report from the Washington-based U.S. Conference of Mayors (USCM) found that local governments contribute 97 percent of total annual expenditures on public water and wastewater services and infrastructure. Also, federal financial assistance to local government for public water and wastewater has been flat since the mid- to late 1980s and has declined as a proportion of total investment. The report, “Trends in Local Government Expenditures on Public Water and Wastewater Services and Infrastructure: Past, Present and Future,” concludes that, “Rather than providing leadership, Congress and the federal government have essentially abandoned providing meaningful financial assistance to local government, but have, instead, authorized and implemented a costly and increasing wave of mandates.”
Asked to do more …
With the EPA continually changing regulations to ensure compliance with the Clean Water Act, local governments in turn are constantly looking for ways to fund those alterations. For example, at the beginning of the year, the Boston Globe highlighted a proposed plan that would require 84 Massachusetts communities to meet new regulations on stormwater runoff into municipal storm drains. The article focused on local governments’ concerns over the increased costs, with estimates ranging from $20,000 to $70,000 per year. Then, there are the new nutrient control regulations, among numerous others, on the horizon.
Even meeting current regulations is not easy. Kansas City, Mo., is undertaking a $2.4 billion stormwater control plan following sewer overflows throughout the city, and its plan document acknowledges the “financial burden on every ratepayer.” Rifle, Colo., recently spent $23.3 million on a mechanical plant to meet ammonia nitrogen regulations on the Colorado River, leading the utility to double wastewater rates. Meeting the Chesapeake Bay nitrogen and phosphorus limits has led to “large rate increases and one of the highest per 1,000-gallon charges in the area,” says Karen Pallansch, general manager of the Alexandria (Va.) Sanitation Authority.
Local government spending to meet federal regulations reaches beyond infrastructure and operations and maintenance (O&M). “Each community must also enforce the regulations,” says Jeanette Brown, executive director of the Stamford (Conn.) Water Pollution Control Authority and president-elect of the Alexandria, Va.-based Water Environment Federation. If residents are not supposed to wash their cars and let water go down the drains, how do you enforce that and educate them, she asks. “You need dollars for education and to provide other options for residents.”
… in a tougher environment
Of course, some of the financial burden necessarily is passed onto ratepayers. But, with the economy still struggling, users are carefully scrutinizing rates. “The key issue that water and sewer is facing is keeping rates as affordable as possible,” Geffrard says. EPA’s guidelines generally calculate affordability as 2 percent of median disposable income. “If 5 percent of the population is paying two or three or four times what’s affordable, that’s unfortunate, but it doesn’t drive policy,” Geffrard adds. “If it’s more like 20 percent, that becomes a political problem.”
While residents may be falling further below the median income line in some communities, lowering or even keeping rates steady often is not an option. Brown says that despite having a moderate charge on average of $360 per year and having a high debt service, some members of the community still want to reduce the fees. That, however, would leave the water authority with less than it needs to operate. “When people are looking at every dollar, if you increase your charge $1, people go ballistic because they don’t understand the value of what we do,” she says.
The economy also has made the municipal bond market less accessible for some local governments. Because the bond rating agencies have been under more scrutiny recently, they are being tougher on municipalities, Geffrard says. They also are emphasizing different criteria like cash on the balance sheet. Yet, when a water authority has ample cash reserves, users are less likely to understand the need to raise rates. Local governments also now have to deal with a market that wants more transparency, says Timothy Schaefer, principal owner of Newport Beach, Calif.-based Magis Advisors. “They want crystal clear transparency, and that extends to financial exposures and the mandates local governments are under.”
To overcome some of those hurdles, Schaefer says that water authorities need to sell themselves to lenders while also working with local policy makers to develop and commit to more transparent and robust reserve and debt management policies. That shows lenders that they are taking long-term action.
To enter the municipal bond market, the Alexandria Sanitation Authority has hired a financial management firm to help set appropriate policies. It also has engaged a firm to develop a 10-year rate model to help with decision-making and to create “what if” scenarios, Pallansch says. While until now the authority has been able to fund its capital projects through State Revolving Fund grants (SRFs), Pallansch is concerned that the funding source is about to become very competitive and more limited. “We will have to try the municipal bond market, which may be very costly and cause us to have to defer projects,” she says.
Finding ways to continue accessing the municipal bond market is important for local governments, as it continues to be one of the best options, Geffrard says. While SRFs have the lowest interest rates, municipal bonds have the lowest capital costs. Also, the final maturity on SRFs tends to be shorter than the useful life of the assets being financed, placing a higher burden on current ratepayers and less of a burden on later ones. If the federal government would allow the funds to be spread out longer, the financial burden could be distributed more equitably over ratepayers and provide some relief in the near term, he adds.
Richard Wolff, chairman of the North Hudson (N.J.) Sewerage Authority, says that states should use their credit worthiness as leverage to help finance water projects. “States should put bond pools together that locals can access to get better rates — and make those loans available through revolving funds,” he says. “They also should turn to commercial banks for funding.”
Turning to the feds
Not surprisingly, most local governments and their advocates continue to focus on receiving more financial support from the federal government — and there is pending legislation that could expand funding options. For instance, in April, Sen. Robert Menendez, D-N.J., introduced the Sustainable Water Infrastructure Investment Act of 2010 (S 3262). The bill would amend the Internal Revenue Code to remove the volume caps on private activity bonds for water and sewage facilities, which would encourage more public-private partnerships. The House has passed the companion bill HR 537 introduced by Rep. Bill Pascrell, D-N.J.
The Water Infrastructure Financing Act, sponsored by Sen. Benjamin Cardin, D-Md., would authorize Congress to make greater contributions to the SRFs and expand grant programs. Of the $39 billion it would authorize over the next five years, $20 billion would go toward Clean Water SRFs, $14.7 billion toward Safe Drinking Water SRFs and $1.8 billion for sewer overflow grants, with the remainder divided among smaller grant programs. The nearly $35 billion in SRF grants, averaging $7 billion per year, is an increase over the $1.5 billion appropriated for SRF programs in 2009, according to the Congressional Budget Office.
However, those amounts then have to be appropriated, meaning passage of the bill does not guarantee the money will get spent. The bill also would allow states to extend the repayment period for a Clean Water Act SRF loan from 20 years to 30 years or the design life of the project to be financed with the proceeds.
On a much smaller scale, also under consideration is the Green Infrastructure for Clean Water Act (HR 4202), introduced by Rep. Donna Edwards, D-Md. It would set aside federal grant money for green infrastructure projects, with a focus on communities that are considered low-income or that have combined storm and sanitary sewers. The bill also would create a green infrastructure program within the EPA to promote such projects and provide regional assistance in implementing them.
The USCM report notes that 60 percent of local government money goes toward O&M vs. capital investments. In 1956, 37.5 percent of $861 million in total spending was on O&M vs. the 62.5 percent or $1.43 billion dedicated to capital spending. That changed in the mid-1980s as physical assets increased along with the cost of treating more water to higher levels.
Because of today’s O&M expenditure levels, Brown recommends that agencies using SRFs to build a plant should be able to use the same mechanism to fund related maintenance costs. Some states already fund the first two years of O&M costs to get the community on its feet. “Communities are paying the debt service, and then they’re faced with higher operation and maintenance because there’s more equipment,” Brown says. “If even a portion were covered, that would help.”
Looking in other directions
In addition to user fees, municipal bonds and SRFs, smaller communities should consider such options as the USDA rural communities assistance programs. “These small jurisdictions often need the most help, and they’re the ones with the hardest time gaining access to the markets,” Schaefer says. “It’s widely overlooked because it’s intimidating at first glance.”
Charlie Stevens, utility director for Rifle, Colo., has experienced that firsthand. “We’ve tried to secure USDA funding before because they distribute grants to communities under 10,000, but the red tape is a nightmare,” he says. Stevens would like to see the funds rolled into the SRFs and streamline the process by having one agency handle the applications and funding.
Other options are the Build America Bonds offered as part of the stimulus plan. The taxable bonds typically have a higher interest rate, but the federal government covers 35 percent of the interest.
Tapping into private capital also can be a viable source of new funds. For instance, a developer that wants to build a subdivision may help fund an expansion of the wastewater treatment plant to handle the additional volume. Private activity bonds also can encourage private involvement by allowing a local government to raise money for a private company. Typically, private activity bonds are not tax-exempt like municipal bonds, but they can be if the project is shown to be publicly beneficial.
Finding ways to increase revenues also can help. Stamford runs a lab where, in addition to testing its own water, the authority can test for other treatment plants and charge a fee. Brown also recommends looking at a treatment plant with excess capacity in solids treatment and taking on additional solids.
Alternative funding options, ongoing conversations with lawmakers, ratepayer education, efficiency efforts and financial responsibility are helping water authorities keep up with ever-changing regulations. While there clearly is not one solution, one common thread among nearly every member of the water community is a frustration with others — from ratepayers all the way up to the federal government — not understanding what they do, how much it costs and exactly how much of the bill local governments are footing.
With estimated spending from 2009 to 2028 on public water and wastewater systems ranging from $2.5 to $4.8 trillion, it is time, as Pallansch says, to gain “the support to be able to charge what it really costs to clean people’s dirty water.”
- Learn how several governments took on their compliance challenges.
Jennifer Grzeskowiak is a Laguna Beach, Calif.-based freelance writer.
Rifle, Colo., Utility Department
Compliance challenge: Ammonia nitrogen discharge regulations on the middle Colorado River
Recent project: Completed a $23.3 million, 6-million-gallon-per-day wastewater treatment plant last year to address the issue
Funding: More than doubled wastewater rates to $30.88 per month for the first 4,000 gallons, received $2.5 million in grants, borrowed $18.6 million from the Colorado SRF, cash reserves
Director insight: “We’ve been fortunate receiving funding through the SRF,” says Utility Director Charlie Stevens. “When we first talked to the state in 2007 about borrowing the $18.6 million, they weren’t sure they’d have the money available, but some other projects fell through. Some of the problem is that the capitalization grants from the federal government have decreased 50 percent since 2005. We hope that the president and Congress will increase those capitalization funds that come to the states for SRFs.”
Johnson County (Kan.) Wastewater
Compliance challenge: Wet weather flow treatment, understanding the latest EPA interpretation of regulations for wet weather facilities with separate weather treatment and discharge
Funding: Typically use bonds, occasionally use SRF loans. “We don’t compete well [for SRF loans] with other communities that have major problems,” says John Metzler, chief engineer. “And, because we are AA rated, the low interest program doesn’t reduce the cost very much for us.” For capital costs, more than 90 percent comes from user charges.
Engineer insight: “For communities with a growth component, they should be looking at sewer impact fees,” Metzler says. “We had a lot of development before the economic slowdown, averaging about 3,500 sewer hook-ups per year from the mid-80s. That was a substantial portion of revenue, and we used it to expand plants and sewer lines.”
Alexandria (Va.) Sanitation Authority
Compliance challenge: Meeting nitrogen and phosphorus limits for the Chesapeake Bay Program
Funding: Have been able to fund all capital projects through SRF and a robust rate model to help set effective rates that cover bond repayments in the future while maintaining funds for repair and replacement. Concerned about increased competition for SRFs, the sanitation authority is working with a financial management firm to access the municipal bond market.
Manager insight: “There is technology, costly however, that we believe will allow us to meet state-of-the-art nitrogen and phosphorus removal options,” says General Manager Karen Pallansch. “We question, though, whether it can be done under all conditions on a continual basis. There is nothing that is cost effective that would fit on our very constrained site that would work if we have to go lower.”