Roy Torkelson

First Vice President
Reinoso & Company, Inc.
30 Broad Street

39th Floor

New York, NY 10004

Patricia Hill

Manager

Federal Regulatory Affairs
Georgia Pacific Corporation
1875 I Street, NW Suite 775
Washington DC 20006

Construction & Engineering

Andy Mayts

SCI

38521 U.S. Highway 19 North
Palm Harbor, FL 34684

Charles Jars

Vice President

Rust International, Inc.
11240 Waples Mill Road
suite 100

Fairfax, VA 22030

Bill Stannard

Black & Veatch

8400 Ward parkway
Kansas City, MO 64114
Other

Claudia Copeland

Environmental Policy Specialist
Congressional Research Service

Library of Congress LM-423
Washington, DC 20540

Ken Murphy
Executive Director

Environment & Energy Study Institute

122 C Street, NW Suite 700
Washington DC 2004

ADDITIONAL ATTENDEES

George Ames
US EPA

James Bourne
US EPA

Richard Kuhiman
EPA

Tim McProuty
US EPA

Jason Gross
Government Finance Group

45

Paul Ameson
National Association of Water Companies

Eric Madden
Clean Water Action

Richard Kakuske

" WERF

Lee Garrigan
American Consulting Engineers Council

Dawn Kristof
Water and Wastewater Equipment Manufacturing
Association

Bill Harley

National Utility Contractors Association
Bill Hillman

National Utility Contractors Association

Steve Bugwell
Water Environment Federation


Model INI: The Voluntary State Fee Incentive Model

The third model offered combines completely voluntary State participation through capital-dedicated fees, with a Federal
monetary incentive in the form of a 33% Federal match. Under the Voluntary State Fee Incentive Model, States decide whether to
generate and dedicate fees to water-related capital formation, while the only role of the Federal government is to raise and disburse its
matching share, by Federal fees and/or general appropriations, to the SRFs.

In effect, the Federal and State governments switch roles in terms of previous intergovernmental matching programs in
which the States have matched, by the smaller percentage, Federal funds. Under the model, water quality project eligibilities expand
further, with States completely free to earmark drinking and wastewater allocations, and types of assistance, as they see fit, including,
for the Federal match.

When States participate, they may establish any fees or taxes, whether environmentally-related or not, at any rate and yield.
The 33% year-end Federal match is phased in and capped in the third year at $700 million annually (one-third of the total of the
State $2.1 billion annual revenue target). The Federal match sunsets in 10 years. The only requirement on States is to dedicate fees
to SRF drinking water and wastewater capital facilities. Box 3 describes the proposed model. Figure 6 depicts the intergoverntnental
flow of fees, and Table 3 summarizes an example of the Federal match using the hypothetical pesticides/fertilizer excise tax as the
revenue base.

Table 3
Estimation of Fertilizer and Pesticide Fee

Source Amount Units Rate Yield
Fertilizer* 31,631,800,000 Ibs $ 0.0092 $ 291,012,560
Pesticides** 2,231,000,000 Ibs $ 0.1840 $ 410,504,000

$ 701,516,560

* Nitrogen and Phosphates
** Includes Wood Preservative and Disinfectants

In order to minimize disruption and not penalize States for past capital contributions to water-related infrastructure, 8
State's initial annual fee share may include not only existing dedicated fees but also some (albeit limited) portion of general, capital-
dedicated appropriations, such as non-point sources grants. A 'snapshot” picture of State match-cligible contributions is taken in the
first year of the Voluntary State Fee Incentive Model. In addition to loans and credit enhancements, SRFs may offer principal
Subsidies to most projects, interest rate subsidized loans to privately owned public-purpose projects, and grants to small

How to raise the Federal match is a Federal decision, Federal fees may be the best and most feasible choice, particularly if
they are excise fees paid directly by the private sector producer or user to the IRS.

96


: Figure 1
1990 Aggregate Sources, Uses and Disposition of Water in the U.S

SOURCE USE DISPOSITION
i ml u U
SURFACE WATER DOMESTIC-COMMERCIAL CONSUMPTIVE USE
1 a 739) (7)
sex, am]
“| 3%]
94,000
Mead
“|
om
PUBLIC SUPPL
eos
SoZ 98.500 | 06.2%)
Freee
= rr RETURN FLOW
7
‘2.000
francs 13.2%)
75% |
/ Lad
| .
. 131,000
ves
am
an |
i
| om =
i ~
Lf j mm
H IRRIGATION-LIVE:
anpt
|
GROUND WATER j[
[se ory
‘Ta. 141,000
me vs
73,400 om om
Mages
ce on _ ten
el a,

13


Attachment 2

Alternative Funding Study
Debt Financing Strategies
October 10, 1995

EPA Region II Office
New York City

Sponsored by CIFA, Syracuse EFC and the Office of Water, U.S. EPA

State and Local Government

Terry Agriss

NY State EFC

50 Wolf Road, #547
Albany, NY 12205-2603

Alan Anders

NY Municipal Water Finance Authority

75 Park Plave, 6th Floor-NW12
New York, NY 10007

Richard Anderson
Wheelabrator Technologies Inc.

1155 Connecticut Ave., NW, Suite 800

Washington, DC 20036
Michael Gagliardo

Urban Water Institute, U.S. Conference of

Mayors
1620.1 Street, NW
Washington, DC 20006

Mark B. Jinks

Arlington County, Dept. of Mgmt. &

Finance
2100 Clarendon Blvd., Suite 501
Arlington, VA 22201

Robert Lenna
Maine Municipal Bond Bank

45 University Drive, P. O. Box 2268

Augusta, ME 04338

23

Investment Community

Martin Baker

Stroock, Stroock & Lavan
7 Hanover Square

New York, NY 10004

James Barr

American Water Works
1025 Laurel Oak Road
Voorhees, NJ 08043

Bob Bass

Lehman

3 World Financial Ctr.
20th Floor

New York, NY 10285

Tom Boast

Bear, Stearns & Co., Inc.
245 Park Avenue, 13th Floor
New York, NY 10167

Deborah Buresh

Chemical Securities, Inc.
270 Park Avenue, 7th Floor
New York, NY 10017

Ford Cooper

Ogden Yorkshire

40 Lane Road

Fairfield, NJ 07007-2615

Don L. Correll

United Water

200 Old Hook Road
Harrington Park, NJ 07640


more municipal systems to consider this alternative. EPA reported in 1989 that combined capital
and operating cost savings from private provision as compared with public provision could vary
from 5 to 40 percent.”

Overall, advocates of greater private participation in clean water infrastructure may want to
consider which approach would be most effective to bring about change. Would increasing
eligibility under the SRF program, increasing the volume cap, liberalizing the private activity
test, or a mix and match be most effectual? Or should another approach be considered?

How important is Tax-Exempt Debt for Public-Private Partnerships?

Tax-exempt financing, with its lower interest costs, is often a determining factor in the feasibility
of projects financed with public-private partnerships. For this reason, most public policymakers
seeking to encourage public-private partnerships advocate combining tax-exempt debt with
public-private partnerships. Over the last fifteen years, however, the clear direction of Federal tax
policy has been to limit severely the amount of tax-exempt debt issued for projects that benefit
private parties or have significant private involvement. These limitations have made public-
private Partnerships for infrastructure projects difficult, if not impossible, to finance on a tax-
exempt basis.” Public opinion and movements to stop “corporate welfare” have also influenced
officials’ positions.

The primary Federal tax code barrier to tax-exempt debt issuance for public-private partnerships
is found in Section 141 of the Internal Revenue Code of 1986, which outlines the circumstances
under which tax-exempt bond issues are considered to benefit private parties and, as a result, are
considered to be “private activity bonds”? Once deemed a private activity k bond, an issue is
treated as a taxable issue unless it meets a a variety of stringent requirements.”* The effort was
done to distinguish between facilities intended to benefit a large number of persons primarily
engaged in the same type of trade or business (private use) as opposed to those engaged in
different types. The 1986 Tax Act tightened restrictions by enlarging the definition of what
could be considered a private activity bond, which was then subjected to a volume cap. Before

? General Accounting Office. Environmental Infrastructure: Effects of Limits
on Certain Tax-Exempt Bonds. October 1993. p. 38
22 John W. Bates III & William J. Strickland. ‘Creating a Public/Private
Partnership.’’ The Real Estate Finance Journal. Winter 1991. :
2? Bonds that do not meet the private activity tests are considered
‘*governmental'' bonds and are considered tax-exempt.
74 Limited exceptions allow tax-exempt financing for certain ‘'qualified
private activity’’ facilities, including airports, docks & wharves, mass
commuting facilities, water supply facilities, sewage facilities, solid waste
disposal facilities, qualified residential rental projects, qualified
manufacturing facilities, and 501(c)(3) organizations. Interest on qualified
private activity bonds is generally subject to the alternative minimum tax.
In addition, except for bonds issued by 501(c) (3) organizations, and
governmental airports and solid waste facilities, the issuance of qualified
private activity bonds is subject to a statewide limitation (volume cap) on
the amount of private activity bonds that can*be issued, described earlier in
this report. a

18


ALTERNATIVE FUNDING STUDY
Part I

FEE-BASED MODELS
FOR
FUNDING WATER QUALITY INFRASTRUCTURE

September, 1996

Prepared by

Victoria S. Kennedy
The Environmental Finance Center
The Maxwell School of Citizenship and Public Affairs
Syracuse University

for the

Office of Water
United States Environmental Protection Agency


Figure 4: The Federal Fee Model (Model I)

Capitalization
Grants

i
i

Loans
‘Sumall Grants

Revenue Sources/ Fund Uses

However, a major stumbling block will be to overcome political resistance to such a model, based both on the sources of
fees and resistance by some States to rebating fees to the Federal government for redistributive purposes. As we have constructed it,
the mode! does not provide equity in terms of revenue sources, and impacts on the industrial and agricultural communities may prove
to be a negative. Cross-subsidization as between States, i.e., some States will be contributing more than they receive back, could be
considerable. The complexity and political difficulties for the Federal government in devising a new needs-based State SRF
allotment formula are very real.

Industrial effluent fees designed to raise $1 billion tend to be concentrated in several industrial groups, particularly the
chemical industry. Impacts of this fee will depend on the price elasticity of the products produced by the firms paying the fee. Thus
it is anticipated that some portion of the fee will ultimately be passed on to consumers. The fertilizer and pesticide fee designed to
generate $ 0.7 billion runs between 3.5% and 4.9% of total fertilizer and pesticide industry revenues respectively. Studies by the
Congressional Research Service (CRS 1994) suggest that the impact of this fee on the industry will in part be passed on to farmers
and final product consumers, but that the impact on agricultural cost will be less than 5% of total revenues. Finally the impact of the
municipal wastewater effluent fee designed to raise $ .8 billion would be an approximately 3% increase to water user bills on
average. .

Table 1
Fee Rates for Federal Model
Source Rate Units Base Revenue
Effluents
Industrial Toxics $ 1.3514 Ibs. 651,506,001 $ 880,445,210
Conventionals $ 0.0200 Ibs. 5,975,652,780 $ 119,513,056
Municipal $ 0.0605 1000 gallons 13,219,971,500 $ 800,000,000
Fertilizer $ 0.0132 Ibs. 31,631,800,000 $ 417,539,760
Pesticides $ 0.2623 Ibs. 2,231,000,000 $ 585,191,300
Total $ 2,802,689,325

The relationship between costs (who pays) and benefits is weak, since the major sources of fees (the private sector) and
eligible Federal and SRF recipients are distant. The only direct relationship is provided by the fact that large municipgl facilities may
92


Appendix B-2
Alternative Funding Study
Panel Discussion on Water Fees

Airlie Conference Center, Virginia, July 19, 1995
(Sponsored by Syracuse University, the Council of Infrastructure
Financing Authorities, and U.S. EPA)

Twenty panelists representing the public end private wastewater and drinking water communities assembled at the Airlie
Conference Center in Warrington, Virginia, on July 19, 1995, to respond to a background paper, "Fees for Funding Water Quality
Infrastructure," prepared by the Syracuse University Environmental Finance Center (EFC). The Syracuse EFC, located in the
Maxwell School of Citizenship and Public Affairs, has worked under a grant from EPA to conduct an Alternative Funding Study, as
requested in the Agency's FY95 appropriation.

The purpose of the forum was to stimulate thinking and debate on the many practical issues associated with the potential
use of fees to finance water quality infrastructure and related water projects in the future. Three fundamental questions posed in the
background paper and to the July 19th panelists were:

1. What are the criteria for a successful fee-based funding system, whether such a system be national, State or local
in scope?

2. What specific types of fees are viewed as the most workable and effective, and should these be national, State or
local?

3. What "delivery" mechanisms might be used to offer fee-based financial assistance to localities, such as a Federal
Trust Fund or State Revolving Funds (SRF), and with what funding goals in mind?

Expert panelists were selected by the Council of Infrastructure Financing Authorities (CIFA) and the Office of Wastewater
Management, EPA, to be representative of different constituencies of wastewater and drinking water facility financing, construction
and management, both public and private (list attached). Most participants were actual practitioners or "stakeholders", such as local
utility managers or SRF officials, as opposed to being interest group or association staff. The participants also included persons from
the industrial, agricultural and environmental communities, and two Congressional personnel.

The day-long discussion was guided by a facilitator from the Maxwell School's Center for Advanced Public Management
in Washington, D.C. The "multi-vote" technique was used to reflect the preference of the panelists for varying assumptions,
evaluative criteria for fee systems and delivery mechanisms, and different types of fees, for example, water rates, “green” product.
fees, and effluent fees. Under this technique, each of the panclists was given 10 votes to divide among alternatives. The multi-vote
method is designed to record the "revealed preference” of individuals, and will be referred to below. In general, "who" voted for
what, in terms of constituency representation, is not recorded here.

A. Assumptions and Rationale for Examining Fee-Based Funding

Although the panelists were asked to express their views on the feasibility of using fees to fund future water-related
projects, the initial discussion was far-ranging. The use of fees as an alternative financing mechanism within a Federal context did
Not receive 100% support, even within the hypothetical context of being supplemental to appropriations from general funds,e.g.,
annual Congressional wastewater SRF appropriations.

‘One principie raised repeatedly was the need to make more efficient and effective use of existing financial resources,
such as by funding pollution prevention (¢.g., source water protection), removing barriers to tax-exempt capital financing (¢.g.,
arbitrage rebate), and increasing incentives for private investment. The "efficiency" rationale received the most votes during the
opening discussion on financing assumptions. However, that new fees might provide more long-term certainty in funding levels,
compared to the use of annual general appropriations from tax revenues, was underscored.

53


finalize the Proposed Regulations after making some revisions. The IRS has not disclosed when
it will take action on the Proposed Regulations.”*

How would improved depreciation schedules for some components of water infrastructure
investment improve private participation?

Before 1986, State and local governments not only could attract private resources by supplying
matching funds through tax-exempt revenue bonds but also could provide accelerated
depreciation schedules and a 10 percent investment tax credit. All were eliminated because they
were seen as potential tax shelters for private investors.

The 1986 Tax Act made tax allowances for depreciation less attractive to investors by extending
the number of years over which plant and equipment can be depreciated. Before the 1986 Act,
private companies were allowed to depreciate the facility over a 5-year period instead of over a
period that was closer to the expected useful life of the facility. Companies could take advantage
of this “accelerated depreciation” even when they were financing the project with tax-exempt
bonds. Subsequently, the law has extended the depreciated life of properties up to fifty years,
using straight-line methods

What has the been the experience with recent changes affecting sale and disposition of
Federally Funded Property (codify Executive Order 12803)?

Recent developments have been encouraging. Previously, municipalities have been required to
repay the Federal government when they sell facilities that were originally financed by Federal
grants to private companies. This requirement has been a barrier to private investment in
wastewater treatment facilities, which were financed from Federal construction grants in the
1970s and 1980s. On April 30, 1992, the Bush Administration issued Executive Order 12803
which freed municipalities from some repayment obligation. Executive Order 12803 sought to
promote infrastructure privatization by drawing on corporate and capital market funds for
modernizing environmental and transportation facilities. On the heels of that order came the
Clinton Administration’s Executive Order 12893 which directed agencies to tell OMB how they
would remove barriers to private investment. OMB’s concerns with 12803 have been that it
allows private companies the possibility of financial gain from buying and operating municipal
assets.

An important test case gauging progress in recent changes in this area involves Wheelabrator
EOS, Inc. and the Miami Water Conservancy District (MCD) in Ohio. The private purchase of
the 4.5 million-gallon-per-day sewage treatment plant by Wheelabrator from MCD is important
not only for the size of the transaction but because it was the first test of Order 12803 on an
actual deal.

76 Joan Pryde. ‘‘Many Fear Private-Activity Rules Will Curb Assessment
Debt.’’ The Bond Buyer. 8 August 1995.
2” public works Financing. June 1994. p. 3

21




This technique, often termed "revealed preference" or "weighted preference", also has
been used in local elections when the number of candidates is high. The multi-votes at the July
19 Airlie Center and September 21 Denver meetings, along with meeting summaries of all fee
discussions, are contained in Appendix B. Additional written submissions by attendees
comprise Appendix C.

In general, we do not describe who voted for what, in terms of constituency
representation, unless such distinctions are very clear and relevant to further debate.

D. Report Outline

In the following text, we will refer frequently to the opinions and preferences of fee
panelists on three basic topics, within the context of the research findings. The first fee panelists
were asked to react to an earlier Syracuse University EFC Draft Report, "Fee-Based Models for
Funding Water Quality Infrastructure" (April 1995, revised May 1995), the executive summary
of which is contained in Appendix E. The next two panels responded to a more general
background paper, because of an interest in seeing how the participants might construct fee
systems on their own.

The three major fee questions remained the same. These issues, or design components,
form the basis of the next three chapters. These are:

1, What are the evaluative criteria for successful, fee-based funding systems for
water quality, whether such systems be national, State or local in scope? (Chapter

NY)

2. What specific types of fees are viewed as the most workable and effective, and
should these be Federal, State or local? (Chapter IIT)

3. What should be the funding policy goals, e.g., "redistributive" goals, of different
financial delivery mechanisms such a Federal Trust Fund or State Revolving Funds
(SRFs)? (Chapter IV)

While the report addresses the three basic fee questions in some depth, the reader should
be cautioned against seeking a consensus out of the panel responses, as both the sample size and
time frame of the public consultative process are limited.

Some general propositions and agreement did emerge, however. Based on these and
extensive policy research, we offer some basic programmatic models in Chapter V. These four,
generic fee-based intergovernmental funding models combine alternative sources of fees,
delivery mechanisms, and environmental financing policy objectives. They are presented for
illustrative purposes and to stimulate further policy thinking and debate.


ALTERNATIVE FUNDING STUDY

Part I

DEBT FINANCING STRATEGIES
FOR
FUNDING WATER QUALITY INFRASTRUCTURE

September, 1996

Prepared by

Jason J. Gross
John E. Petersen
The Government Finance Group, Inc.

Sor the

Syracuse University Environmental Finance Center
and the

Office of Water
United States Environmental Protection Agency


Two themes emerged early on the discussion. One was the strong interest of private
firms to invest in domestic water infrastructure. But despite having the capital and the desire, too
many legal and tax hurdles stand in the way of an adequate return on investment. The virtually
unanimous view of the participants, both public and private, held that increasing private
investment in public water infrastructure was essential. The success of public-private
partnerships in drinking water infrastructure boded well for increasing private activity in the
wastewater community.

The second theme discussed briefly was how important clean water treatment and
delivery was to society as a whole. Is it important enough to warrant subsidization of local costs
by higher levels of government? Or should costs be fully paid by individual loca! jurisdictions?
The group came to a consensus that clean water treatment is important enough to share costs
across jurisdictional lines. As mentioned earlier, a number of panelists from the private sector
suggested that a way to attract more private capital for clean water for all jurisdictions would be
to eliminate entirely the tax exemption for clean water infrastructure to level the playing field for
private participants. However, the consensus was that this proposal was neither feasible nor
desirable and instead the group coalesced behind the idea of increasing private access to tax-
exempt debt as a way to increase privaie participation in clean water infrastructure.

B. Financial and Legal Barriers to Greater Investment in Water Infrastructure

The discussion moved to identifying the barriers to greater investment in water
infrastructure. Representatives from the private sector pointed strongly to the imbalance in
access to tax-exempt debt which unfairly penalized private investment.

Thirty votes were cast for the proposal that “private ownership of a clean water facility
for public use should not disqualify it from tax-exempt status.” This proposal was in the spirit of
the study’s aim to increase overall investment in infrastructure as well as in line with Federal
initiatives such as Executive Order 12803, to remove barriers to private investment. The essence
of this proposal is if the general. public benefits from clean water infrastructure improvement,
then who actually owns the facility is unimportant. The meeting’s discussion focused on the
philosophical importance of this proposal as opposed to specific legal avenues to arrive there.

The debt financing panelists argued similarly that “conversion of water infrastructure
ownership from public to private shall allow private owners to maintain existing, outstanding
tax-exempt debt structure.” Just as a private start-up facility serving the public should be
allowed to access tax-exempt debt proceeds, a private buy-out that continues to serve the public
should not be forced to undergo the costly procedure of defeasing the tax-exempt debt and
issuing taxable debt.

The third ranked proposal, with 16 votes, targeted public investment in water quality
infrastructure. The best framework to accomplish that goal was viewed to be within the existing
State Revolving Fund structure, with some expansion and modification. Necessary
modifications to maximize SRF potential would broaden eligibility to cover all environmental
mandates, make privately-owned facilities eligible, exempt Federal capitalization from arbitrage
rebate regulations, and permit up to 30-year SRF loans.

3


Appendix B-3
Alternative Funding Study

Panel Discussion Water Fees

Denver, Colorado, September 21, 1995
U.S. EPA Region 8 Conference Center
(Sponsored by the Syracuse University Environmental Finance Center, the Council of Infrastructure Financing Authorities, and
the Office of Water, U.S. EPA)

Eighteen persons representing the public and private wastewater and drinking water communities were selected to
participate in the third expert panel discussion on the future use of "fees" to finance water-related environmental projects, on
September 21 in Denver, Colorado. As the earlier July 19 Airlie Center meeting, the purpose was to stimulate thinking and debate
on the potential use of fees, as outlined in a background paper, "Fees for Funding Water Quality Infrastructure", prepared by the
Environmental Finance Center (EFC) at Syracuse University, located in the Maxwell School of Citizenship and Public Affairs.
Denver was selected because of its western location.

‘The three fundamental questions posed in the background paper for consideration by the panelists were:

1. What are the criteria for a successful fee-based funding system, whether such a system be national, State or local in
scope?

2. What specific types of fees are viewed as the most workabie and effective, and should these be Federal, State or local?

3. What “delivery” mechanisms might be used to offer fee-based financial assistance to localities, such a Federal Trust
Fund or State Revolving Funds(SRF), and with what redistributive funding goals in mind?

The format for the Denver panel was similar to that of the July 19 Airlie Center meeting. Panelists selected by the Council
of Infrastructure Financing Authorities (CIFA) and the Office of Wastewater Management, U.S. EPA, were actual practitioners of
different aspects of water facility financing, construction and management, such as members of the Association of Metropolitan
Sewage Agencies (AMSA), American Water Works Association (AWWA), and the National Utilities Contractors Association
(NUCA), and Rural Water Association (list attached).

The panelists and additional attendees also included two local government officials, representatives from the Colorado
Municipal League, Westem Govemors Association, National Council of State Legislatures, and agricultural, engineering and
environmental groups, and the director of the University of New Mexico EFC. There were no industry representatives. In all, six
States were represented.

The panel was guided again by a facilitator from the Maxwell School's Center for Advanced Public Management, and the
"muiti-vote" technique was used to reflect the preferences of the panelists. “Voting” patterns will be reflected in the summary below.

A. Assumptions and Rationale for Examining Fee-Based Funding

When the Denver panelists were asked early on to give their opinion on whether and why new sources of financing (such
as fees) were needed for water and wastewater, responses were very similar to those on July 19.

‘There was a strong body of opinion that did not support the use of fees at this time as a new financing mechanism. Many
panelists agreed that the more critical issue was to reduce the demand for new financing in the first place through regulatory reform.
Arguments focused on the need to reexamine the basis on which Federal risk management decisions were made in the first place
(e-g., "10 to the minus six" may be too arbitrarily strict), in order to reduce regulatory burdens where local environmental risk and
financial circumstances dictated.

58


Product finishes for OEM 2851200] 4220.6 42.21) 126.62] 168.82]
|Special purpose coating (E) 2851300) 2868.8 28.69] 86.06 114.75
| Miscellaneous allied paint products (F) 2851500] 12269] 12.27 36.81 49.08}
[Synthetic dyes and pigments

Synthetic organic dyes 28652] 1341.7] 13.42] 40.25 53.67]
Synthetic organic pigments, lakes and toners 28653 1233.5 12.34 37.01 49.34)
Fertilizers and Pesticides

Nitrogenous fertilizers (G) 2873} 3588.1 35.88] 107.64} 143.52}
|Phasphoric fertilizers (H) 2874 4049.4 40.49] 121.48 161.98}
Fertilizers, mixing only 2875 1781.5} 17.82| 53.45 71.26
[Insecticidal preparations 28795 1567.1 15.67] 47.01 62.68}
|Herbicidal preparations 28796 4202.2) 42.02] 126.07] 168.09]
[Fungicidal preparations 28797] 699.6 7.00) 20.99 27.98)
Other pesticidal preparations 28798] $94.2] 5.94 17.83] 23.77]
|Household pesticidal preparations 28799) 8743) 8.74] 26.23 34.97]
Printing Inks and Water Treating Compounds

Printing ink 2893 3064 30.64 91.92 122.564
Water treating compounds (1) 28995 2117.1) 21.17 63.51 84.68}
[Plumbing Fixtures and Copper Pipe

Vitreous plumbing fixtures 3261 807.2] 8.07 24.22] 229)
|Copper and copper-base pipe and tube 33515 1534.7] 15.35] 46.04 61.3:

Photo Chemicals

Prepared photographic chemicals (J) 38618 1851.8} 18.52 55.55 74.07]
Total 698.07 2094.21 2792.28}

‘The figures are based on 1992 Census of Manufacturers (Washington D.C., May 1995) which is published by
US Department of Commerce
‘* Value of Product Shipments covers the received or receivable net selling values, f.0.b. plant (exclusive of freight and taxes), of all
products shipped.
A includes dishwashing detergents, hard surface cleaners and scouring cleaners.
B includes toilet soaps, glycerin and soap (other detergents).
C includes glass window cleaners, oven cleaners, toilet bow! cleaners, drain pipe solvents, disinfectants, dry cleaning .
spotting preparations, household laundry aids and etc.
D includes exterior solvent-type, exterior water type, interior solvent-type, interior water-type, and architectural lacquers.
E includes industrial new construction and maintenance paints, traffic marking points, marine paints, aerosol-paint concentrates .
and special purpose coatings.
F includes paint and vamish removers, thinners, pigment dispersions, and glazing compounds.
G includes synthetic ammonia, urea, fertilizer materials of organic origin and nitrogenous fertilizers.
H includes phosphoric acid, superphosphate and other phosphoric fertilizer, and mixed fertilizers.

1 includes boiler compounds, swimming pool chemical preparations, cooling tower compounds, and other non-utility water treating compounds.

J includes office copy toners, photographic chemicals, plate chemicals, and others.

Several significant issues arise immediately from Table 3. First, a national fee revenue
target of $2.8 billion annually cannot be achieved without a very wide array of products in the
fee base and, secondly, only is reached at a relatively steep rate of 4.0% of total sales.

Theoretically, it is possible to vary the fee percentage rate with the suspected toxicity of
the waste stream, assuming it ends up in water. For example, certain chemicals such as photo

20 7






Appendix B-1
Alternative Funding Study
Panel Discussion on Water Fees

Crystal City, Sheraton, April 25, 1995
(Sponsored by the U.S. EPA’s Environmental Finance Advisory Board, EFAB)

General Observations: Discussion on the fee base was considerable, with differences of opinion concerning the degree to which
"polluter pay” principles and behavioral changes should be sought, compared to those persons seeking broad-based fees ("everyone
pollutes") and maintaining some cost/benefit relationship. One major recommendation was to explore and add more types of fees,
i.e., broaden the fee base, particularly by using the product sales taxes recommended by AMSA.

The drinking water community was adamantly against Federally-mandated local user fee increases, and the agricultural
representative spoke strongly against pesticide/fertilizer fees. The majority of the attendees seemed to be more in favor of State as
opposed to Federal fees. However, there was more support for a Federal redistributive role vis-a-vis States than anticipated, and less
support for a totally voluntary model. Enhanced flexibility for SRFs was widely supported.

Attendees appeared to support ongoing public consultation regarding the use of fees, particularly if it included more industry and
discussion of other types of fees. Given the interest in a new. Model 2 modified to include elements of Models 1 and 3 (e.g., some
Federal role including a Federal match, new State fees especially "green" fees), one or two more model design and refinement
sessions would be worthwhile.

However, a handful of the attendees spoke strongly against the concept of using fees altogether (several from the drinking water

community), while other participants were very concerned that a national fee proposal would undercut Congressional willingness to

appropriate annual SRF monies (AMSA and AMWA).

Specific Comments:

1. The Fee Base

-Broaden Fee Base

-Include more specific industry fees (Nela Brown from Shell Oil, Beth Ytell from the Rural Community
Assistance Corporation, RCAP, in California, and EFAB, who mentioned timber and mining; David Zwick from
Clean Water Action)

-Include product sales "green" taxes such as toilet paper (Ken Kirk, John Schellpfeffer, and Bob Weaver from
AMSA, Bob Lenna from the Maine SRF and EFAB, and Nela Brown)

Study relies too much on earlier H.R. 2188 proposals (Nela Brown, Jack Sullivan from AWWA, Tom Van
Arsdale from the National Association of Farmers Cooperatives)

-Include Federal facilities (Sahid Kasraci from Maryland and ASDWA, Beth Ytell)

-Explore solid waste fees and include solid waste in eligibilities (Bob Lenna and Beth Ytell); distinction between
water and solid waste is artificial

-Include non-public water supply withdrawals such as direct industrial withdrawals (Jim Groff, National
Association of Water Companies, NAWC)

~Change Fee Base

-Effluent and NPDES fees are unacceptable (AMSA, Nela Brown); POTW's are not polluters (AMSA)

49


inability to secure financing at the outset increases the risk involved and therefore discourages
companies from investing in these projects.

When debt for environmental infrastructure is squeezed out of the PAB structure, the next logical
step is for this type of debt is within traditional governmental debt. GAO’s analysis suggested
that some States may have issued government bonds in place of PABs to finance environmental
projects. Substituting government bonds for PABs may become increasingly difficult, as the
competition increases for public investment to meet a variety of other infrastructure needs -- for
schools and roads and prisons. State constitutional and statutory debt limitations such as
Propositions 13 and 2% have engendered fierce competition for limited funds. It is plausible to
argue that the same political pressures which place short term, higher profile public spending
needs ahead of environmental infrastructure within the PAB structure will spill over into general
governmental bond decision-making.

Three possible options to increase environmental spending through PABs are to raise annual
volume cap, index the cap to inflation, or to exempt environmental uses from the cap. Total
amount that could be allocated under the volume cap in 1994 was about $14.7 billion, barely
rising from $14.6 billion in 1993. The Public Securities Association urged Congress to increase
the $50 per capita amount to $75. Change is needed in PSA’s eyes because, “in recent years a
number of States have begun to exhaust their annual volume caps and have been forced to
postpone or cancel investment projects involving private activity because tax-exempt financing
could not be secured.”"?

INCREASING PRIVATE INVESTMENT

Policies seeking to increase private investment would target privately owned or operated
environmental facilities. As public resources at all levels of government are being stretched,
calls grow louder to inject private sector efficiency into water treatment and to tap private sector
capital sources. Forty-six percent of the country's water systems are privately run. Of the nation's
58,000 community water systems, approximately 27,000 (or 46 percent), serving 38 million
people, are private or investor-owned. Only 410 systems serve populations greater than 10,000.
The vast majority of private and investor-owned community systems serve between 25 and 100

people.””

Outside the United States, both Great Britain and France have had long-term success in the
private-sector provision of water service. Great Britain serves nearly all of its population through
fully privatized water-supply systems. France uses the franchise concept to provide water to over
75 percent of its population. In France, municipalities own the treatment facilities, pipes, and
reservoirs and secure management through a wide range of long-term franchise agreements with
private companies. In contrast to American municipal water-supply systems, local governments
in France are required to keep separate and balanced. budgets for water and sewer departments
and to meter all households. The States could establish similar privatization policies to encourage

2° Bond Buyer. May 11, 1995

2° o'connor, Jeremiah F. Patel, Bharat C. ‘'The Water Industry Needs Reform.’’
Public Utilities Fortnightly April 1, 1994 p. 132
17


development "windfall" profit fees, agriculture chemical fees, and water and sewer hook-up fees
might be administered within watersheds.

Other candidates were nominated, but not debated, included an income tax surcharge,
although the governmental implementation context (Federal or State) was not raised. Chemical
feedstocks also attracted some multi-votes, but what the panelists appeared to have in mind was
transfer of Superfund unobligated balances to new water/wastewater accounts.

General characteristics of fees presented briefly below include State experience,
governmental implementation, and fee panel responses where appropriate. Fee rate estimates to
yield a total of $1 billion annually are offered.

1. Industrial Effluent Fees, extensively examined in the past (e.g., CRS, 1992), remain
some of the most challenging to design because of data limitations. Typically, self-reported
Toxic Release Inventory (TRI) data are used to estimate volume and toxicity. However, the TRI
includes only major industrial toxic discharges, and no standardized toxicity measures (or
weights) exist. Effluent fees currently are used in three States (Louisiana, New Jersey and
Washington) to subsidize operating budgets, at rates upwards to $100,000 for major industries.
They are also used extensively in Europe for infrastructure capital generation, as was posed in
New York in 1993 but defeated.

Effluent fees can be highly complex if a graduated fee rate structure is employed to link
discharges to environmental damage, particularly receiving water quality. Flat-rate fees are more
simple and less easily circumvented through dilution or media transfer. Flat rates of $1.3514/b.
of toxics and $0.200/1b. of conventional pollutants yield $1 billion annually (Syracuse, May
1995). However, even this approach appears to impact heavily, and disproportionately, on the
chemical and allied product industry, and secondarily on the pulp and paper industry, as well as
on a minority of States (Research Triangle, 1993).

Although the fee panelists had little interest in industrial effluent fees, some
environmental panelists still supported them in theory as market-based behavioral incentives.

2. Municipal Effluent Fees must rely on EPA's Permit Compliance System (PCS) which
measures conventional pollutants only, which for fee estimating purposes may not be sufficiently
accurate. A flat-rate fee of $.0756/1000 gallons of conventional discharge raises $1 billion
annually (Syracuse, May 1995). Local fee panel representatives strongly resisted use of these
fees on the basis of being too costly and placing a negative stigma on "permitted" discharges.

3. Pesticides and Fertilizer Production Fees currently used by five States could be
based on a measurement of the production and sale of active ingredients in each, or as a
registration or licensing fee, and could be implemented by the Federal IRS or by States
depending on the assessment technique employed. Flat-rate fees of $0.2623/b. of active
ingredients in pesticides and $0.0132/b. of active ingredients in fertilizers yields $1 billion
annually with the fee burden falling most heavily on the com and wheat producing states, and on

23


Support for funding private sector public-purpose projects (Jim Groff, Beth Ytell); otherwise, there was no discussion
on the privatization aspects of the study

-Remember that behavioral changes resulting from fees may reduce the future need for fees (Patty Glick); fees for
revenue could be converted down the road to fees for behavioral change (David Zwick)

6. Support (and lack thereof) for 3 Models
MODEL I - Supported by Ken Kirk, John Schellpfeffer except use green fees (noting that Model | is similar to today)
MODEL I - Lack of support from Greg Smith (too Federally heavy-handed)
MODEL II and Il combined (a new 2.8 model, such as a Voluntary De Minimis Model - Supported by Pete Butkus, Bob
Lenna, Beth Ytell, Greg Smith; Bob Lenna supported a Federal redistributive role which might be accomplished with a
Federal match.
MODEL Il - Lack of support from Beth Ytell and Claudia Copeland) because will not yield enough revenue

MODEL II - Lack of support for Federal water withdrawal fee base (Jack Sullivan, Tom Schaffer, Jim Groff); but Model I
improved if add effluent fees from Model I (David Zwick) or if completely a State program (Jack Sullivan)

52


Appendix D-2

STATE ADMINISTRATIVE WASTEWATER DISCHARGE
PERMIT FEES (PROJECTED FY1994)
(Dedicated to Non-Capital Purposes)*

Alabama $1,200,000
Arkansas $1,592,000
California $8,426,000
Colorado $845,251
Connecticut $3,500,000
Delaware $292,700
Kansas $380,000
Kentucky $510,500
Louisiana $10,500,000
Maine $194,296
Maryland $1,138,000
Minnesota $2,400,000
Missouri $1,682,825
Nevada $574,000
New Jersey $15,306,664
‘New York $9,500,000
North Carolina $3,145,000
Ohio $5,839,800
, Oklahoma $600,000
” Oregon $2,175,900
Pennsylvania $692,000
Rhode Island $26,796
South Carolina $1,140,000
South Dakota $689,437
Tennessee $2,100,000
Texas $7,191,605
Vermont $247,500
Virginia $1,600,000
Washington $20,992,000
Wisconsin $7,452,000
Total $11,934,274

Source: Summary of State Wastewater Discharge Permit Fees (NPDES)
National Conference of State Legislatures, December 1993
* Dedicated to State environmental agency operating and programmatic budgets

80



The primarily attributes of the De Minimis Model are the simplicity of the main fee base, the public water supply
withdrawal fee, and the State flexibility permitted under the Federal "umbrella". This model also accommodates a number of
overarching values. From a national viewpoint, it might go a long way towards meeting the existing standards and goals of the Clean
Water and Safe Drinking Water Acts. It not only provides a financial means by which every State can raise its fair share, but also
accommodates existing State programs and special circumstances.

A second overarching goal is met through the suggested two main fees, water withdrawals and discharge permit fees,
which directly relate water clean-up costs to use of the medium, both as an input (water) and as an output or byproduct (wastewater).
No matter what specific rates or other fees States choose to raise their minimum share, there is a general correlation between the
user/polluter costs and the burden to be placed on the economy. Thus, the "polluter pays” principle is partially preserved and States
may choose to pursue this objective, more or less aggressively.

Model III, the Voluntary State Fee Incentive Model, is also attractive because its potentially higher political acceptability
and the Federal match incentive to States. Model I, the Federal Fee Model, may be the least attractive because it is the most heavy-
handed in terms of Federal control and a specific “polluter pays” fee base, even though some non-industrialized, non-agricultural,
smaller States will support Federal redistribution to States based on needs. Both Models I and III, however, might be substantially
improved by further mixing and matching.

For example, Model I’s Federal fee base (effluent and pesticides/fertilizer fees) might be altered to include the more
equitable and collectable De Minimis fee base. The Voluntary State Incentive Fee Model III might be improved by the addition of
some of the De Minimis total revenue requirements of Model II, but without any Federally-levied fees. Conversely, Model Ii might
be improved by reducing any Federal fee role entirely, and giving States and localities complete flexibility in selecting fees and
eligible projects, although the legality of doing this under national revenue-generating De Minimis State requirements needs further
exploration. Many variants are possible, and may involve substantial substitution or simply fine tuning over time, for example, in the
areas of eligibility and oversight requirements.

The goal of generating three generic, and complete, intergovernmental fee-based models is to emphasize the very different
approaches to fee-based financing that might be employed. Choices range from using a Federal "carrot" as opposed to a "stick", an
environmental or non-environmental related fee base, and the extent to which the innovations, creativity and knowledge of State and
local governments are relied upon. Future decision-making will depend not only on the specific environmental policies sought, but
also on institutional, financial, and other parameters considered important.

In general, we conclude that fees are a feasible means by which to raise revenue to fund water-related projects over many
years. Even though no fee system will be supported by everyone, the long-term authorization which underlies fee-based programs
may be more suitable to infrastructure development than annual, sometimes unpredictable appropriations. Fee systems are not only
self-sufficient but also may be independently administered by the States and localities according to individual project and funding
goals.

99


B. Model 2: The Federal-State Water Use/Match Model

The second model is a mixed, or partial Federal-State option, which relies on State-
imposed water use fees, both for public water supply and direct, self-supplied water withdrawal.
These State fees, here termed collectively as "water use" fees for simplification, would account
for the majority of new revenue nationwide, but the Federal government would be required to
supply a 33% match.

The Federal match would be raised by Federal green product fees. However, this fee rate
would be smaller than the 4% sales percentage described earlier. For example, a 1.0% sales
surcharge en the commodities outlined in Chapter III would yield almost $.7 billion annually. A
Federal "EPA Trust Account" could be established to receive deposits, and disburse a year-end
Federal match annually through capitalization grants to SRFs or other State trust funds. This-
model is diagrammed in Box 2.

Box 2: The Federal-State Water Use/ Match Model! (Model 2)

Federal Green Product Fees

Water Loans
Use Fees Principal Subsidies
—_

Revenue Sources / Fund Uses

The Federal-State Water Use/Match Model is less heavy-handed than the Federal-State
De Minimis Model presented in the earlier Syracuse Draft Report (May 1995), since State
participation via use of existing or new, capital-generating water use fees is voluntary. Here,
States are encouraged to use such fees, and dedicate them to water-related project financing, in
order to receive Federal matching funds.

The Federal match serves as a "carrot" as opposed to a "stick". In contrast, the earlier de
minimis model relied, in theory, on Federal imposition of public water supply withdrawal fees
on a per-State basis to generate $2.8 billion annually, which in practice it would impose and
collect only if States did not choose tc implement such fees or supersede them with other types
of fees.

32




Foods (cooking oils) Synthetic dyes, pigments

Paper (toilet paper) Fertilizers, pesticides

Soaps, detergents Printing inks

Polishes, sanitation goods water treatment compounds
Toilet preparations Plumbing fixtures, copper pipe
Painting products Photo chemicals

Fee collection would be similar to that of the gasoline tax supporting the Federal
Highway Trust Fund. Here, the Internal Revenue Service collects fees directly from gasoline
producers, who are reimbursed by the fees which everyone pays at the pump. Federal green fees
could be collected from end-product manufacturers, and are highly regressive.

Individual State green fees could be collected at the cash register or time of sale, such as
State alcohol, tobacco, automotive and luxury taxes. Unilateral State fee programs may result in
"pollution havens."

Many practical concerns about the simplicity of green fees remain. Currently, little
empirical data exist by which to document the suspected toxicity of products targeted for fees.
This results in a significant selection bias, and makes it difficult to apply graduated, more
equitable rate structures, for example, higher fees on toxic solvents.

Concerns also emerge for revenue stability. Fee rates must be adjusted periodically as
new products come on line, or are discontinued. Few data exist on the elasticity of consumer
demand, or alternative "safe" product substitutes. How to treat foreign imports and exports must
be determined.

Importantly, the hypothetical annual revenue target of $2.8 billion cannot be achieved
without a very wide array of products in the fee base and, secondly, only is reached at a relatively
steep flat fee rate of 4.0% of national sales, especially for agricultural chemicals which would
contribute $.7 billion a year.

2. Public Water Supply Withdrawal Fees

The public water supply withdrawal fee could be levied on all public and private water
utilities, and/or customers, through regular water bills, and measured in cents per 1,000 gallons
produced, "sold" or consumed. This fee is less universal than green fees, since it excludes
direct, self-supplied water, both surface and groundwater. Direct water use accounts for over
87% of all water use in this country, and is largely unpermitted.

Local collection through volume-based surcharges on residential, commercial and
industrial water bills would be fairly straight-forward. The preferred method of State collection,
which avoids unpopular local fee rebates, could be based on State assessment of drinking water
production or sales.




the Act, the definition of private activity was if more than 25 percent of a bond issue’s proceeds
were used by a private entity. The 1986 Act lowered that threshold to 10 percent.

How will proposed 1994 Tax Law Changes Affect Private Investment?

Recent uncertainty over proposed revisions to the tax regulations governing tax-exempt bonds
have further clouded the prospects of using tax-exempt debt to improve the feasibility of public-
private partnerships. In an attempt to clarify the definition of general public use, the IRS may have
unnecessarily restricted the use of tax-exempt debt for certain types of projects. Until recently,
practical implementation of the private activity rules was governed by existing Treasury
Regulations, various IRS Revenue Rulings, and finally, bond lawyers’ interpretations of these
documents. In December 1994, the IRS issued new Proposed Regulations that serve as the first
comprehensive detailed guidance in applying the private activity tests to debt-financed projects.
The Proposed Regulations establish the following two tests of which issuers must pass at least
one in order to qualify as a private activity bond and consequently, use taxable financing.

I. Private Use Test ~ An issue must pass both of the following tests in order to pass the private
use test and qualify as a private activity bond.

A. Private Business Use Test -- an issue will pass this test if more than ten percent of the
proceeds or property financed with the proceeds, are used, directly or indirectly, in the
trade or business carried on by a nongovernmental person, calculated on an annual basis.

B. Private Security or Payment Test - an issue will pass this test if the total of the present
value of the payments made by private properties for use of the financed property and the
present value of the property or payments taken into account as private security exceeds
ten percent of the present value of the debt service on the issue.

Il. Private Loan Test -- An issue will pass this test if the lesser of five percent of proceeds or $5
million are loaned to a nongovernmental person.

The recently released Proposed Regulations liberalized management contract criteria and
changed the tax treatment of debt issues in which the bond-financed project is subsequently
converted to private use. Management contracts have been one area of consistent confusion
under the private activity issue. The proposed rules would validate a management contract if:

© it does not exceed five years, and at least 50 percent of the compensation is based on a
fixed fee; or if the contract does not exceed three years and the compensation is based on
a per unit fee;

e it does not exceed ten years and 80 percent of the compensation is based on a fixed
periodic fee; or

© it does not exceed 15 years, and all the compensation is based on a fixed periodic fee.

19


Other revenue redistribution objectives resulting from Federal fees caused deep concern.
Not surprisingly, a major issue was whether new Federal fee revenue allocation formulas should
be based on traditional "needs" and population categories or something entirely different.

To summarize this conflict as mainly a difference between "large versus small" probably
is an oversimplification. While this spiit was evident, other principles also were at work.
"Equitable" fee revenue allocation implied to many that the more successful States and localities,
or those having made substantial past investment in water-related infrastructure or pollution
prevention, not be penalized. However, others favored new subsidies, including grants, for
smaller, disadvantaged communities as well as larger communities facing huge capital
investment programs.

Affordability, in the face of the growing regulatory environment, was a theme echoed at
all three fee panels. Many State and local panelists believed that local economic variability
demanded a new flexibility in financing modes which was beyond any Federal capacity to
administer.

There also was substantial interest in new funding principles based on redistribution of
funds to specific watersheds on an environmental risk basis. In Denver, one proposal called for
new, flexible Federal cost-sharing or subsidy principles, although this was not discussed in
detail.

As described earlier, most panelists did not object to adding drinking water, including
private sector facilities, to fee-based funding eligibilities. Yet the panelists spent no time
examining the balance of funds to be distributed to drinking water versus wastewater. The only
Federal issues mentioned in this context was a concern and some ambivalence on the part of the
drinking water community in dealing with Federal bureaucratic red tape, and on the part of the
investor-owned (private) water utilities not to have to compete with deep Federal subsidies to
public water utilities, such as grants.

Likewise, in seeking "delivery" flexibility, panelists agreed that States should utilize
whatever institutional delivery mechanism worked best for them, whether expanded
("environmental"), independent State Revolving Funds, other trust funds, special Treasury
accounts, the environmental agency or, in the case of drinking water, sometimes State health
departments.

There appeared to be support for States to provide fee-based funding to the water
program with the greatest need on a year-to-year basis, and permitting inter-account transfers of
funds. Many also would have added solid waste projects, such as landfills, to the list of eligible
projects.

In general, the Federal role in fees remains unresolved. New fee systems will need to be

defined more specifically in relationship to new financing policy objectives, both environmental
and subsidy-related, for the advantages of Federal fee programs to be perceived.

29




Appendix C-1
amsa

Association of Metropolitan
Sewerage Agencies

A Green Fee for Clean Water Self-Financing Federally Mandated Water Quality Infrastructure

Local government costs to meet the federally mandated requirements of the Clean Water Act ("CWA") continue to
grow, while demands on the federal General Fund, the historic source of clean water construction funding, also expand. This
paper summarizes a broad-based user fee and authority for states to adopt a companion state fee to supplement or ultimately
replace General Fund participation for moving the national clean water infrastructure program forward and funding the
availability of sound science to support appropriate regulatory decisions particularly by states.

Contents, Page
Introduction 1
A. National Interest In User Fees 1
B. Mandated Water Quality Needs Continue to Grow 2
C. The Water Quality Green Fee Option 5
Conclusion 8

A. National Interest In User Fees

Congressional interest in user fees for infrastructure ranges from the 100th Congress to 104th Congress. Support for user fees
particularly to fund infrastructure improvements was articulated by Speaker of the House Newt Gingrich on May 3, 1995, on
NBC's Meet the Press: ". . . I think that there are a lot of things Americans are willing to do that are practical and
commonsensical that are not irrational; that aren't . .. some gimmick for budget purposes. But they say, ' Look, you know, we
have got to get this government under control and we've got to find a way to have self-financing systems.” National
Broadcasting Company, Inc., 1995. During the interview, Speaker Gingrich went on to favorably cite "a brand-new toll road in
Atlanta which is going very well. ... it has just dramatically increased people going downtown by making it easier to get in. ... It's
an automatic - people are happy that they . . . saved 40 minutes, it cost them 50 cents and I've not heard any complaints about it.”

The Environmental Protection Agency study of fee-based revenue systems to finance wastewater and drinking water
infrastructure facilities was directed by the FY'9S Appropriation Act for the Departments of Veterans Affairs and Housing and
Urban Development - Independent Agencies. The assumptions of the study are: (1) fees are for the "purpose of raising revenue,
not changing behavior"; (2) "all fee revenues must be dedicated to financing water related capital construction projects"; and (3)
“options considered contemplate the funding of drinking water treatment facilities as well as wastewater and nonpoint sources”. |

A fourth assumption should be that the user fee would be low rate on broad-based sources that relate to water quality,
but must not include revenue sources on which local governments depend in financing federal mandates. A fifth assumption
would be that the national fee-based system would provide flexibility to states in adding to, and using revenues from, the broad-
based self-financing system.

Additionally, while not focused directly on infrastructure, the Omnibus Budget Reconciliation Act of 1990 ("OBRA")
in the 100th Congress, directed EPA to ~by regulation, assess and collect fees and charges for services and activities carried out
pursuant to laws administered by the Environmental Protection Agency." 5650! OBRA of 1990. The EPA Assistant
Administrator for Administration and Resources Management has established an agency-wide workgroup to study fee revenue
generation.

Review of alternative funding sources has been made more relevant by the FY'96 Congressional budget resolution
providing for reduction of the wastewater SRF program. The House VA, HUD-Independent Agencies FY'96 appropriation bill
reduces EPA spending overall by 33% from FY'95. This bill also reduces the wastewater state revolving fund ("SRF") program
from $1.235 billion in FY'95 to $1.225 billion for FY'96 (or $1.025 billion less than would be authorized in the House Clean
Water Amendments, H.R.961). Not included in the FY'96 bill is $700 million for an unauthorized drinking water SRF requested
by the Administration for FY'94, FY'95 and FY'96, and included in the FY'94 and FY'95 appropriation bills.

‘The Environmental Finance Center, the Maxwell School of Citizenship and Public Affairs at Syracuse University, “Fee-based Models for Funding Water Quality
Infrastucture,” Draft Final Report, April 1995.

64


United States Office Of Water EPA 832-R-96-001
Environmental Protection (4204) June 1996
Agency

SEPA = Alternative Funding Study:
Water Quality Fees And Debt
Financing Issues

Final Report To Congress
June 1996

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ag a a I Tg a Ta a aa
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Cee eo


Appendix D-4

MISCELLANEOUS STATE FEES AND TAXES
(generally dedicated to non-capital water programs, or dedication unknown)

Direct water use (recurrent withdrawal, diversion, appropriation) fees
Arizona, Arkansas, Connecticut, Kansas, Montana, New Jersey, Pennsylvania, South Dakota, Texas (a sub-state district),
and Utah

Public water supply withdrawal fees (production, sale or service fees based on gallons or sales percentage)
Arizona, California, Delaware, New Jersey, New Mexico, Montana, Oklahoma, Rhode Island, Texas, Virginia, Vermont

Effluent fees (municipal and industrial)
Louisiana, New Jersey, Washington

Drinking water connection fees
Massachusetts, New Jersey, Nevada

Drinking water and/or wastewater laboratory, operator and other certification fees
Alabama, California, Florida, Illinois, Kentucky, Massachusetts, Michigan, New Hampshire, New Jersey,
Pennsylvania, North Carolina, South Carolina, Tennessee and Wisconsin

Drinking water facility construction fees
Arkansas, Florida, Illinois, Missouri, New Jersey, Ohio, Pennsylvania

‘Welt-drilling license, permit and/or pump fees
Alabama, Arizona (including industrial well users), Montana, New Jersey, South Dakota, Virginia, and Wisconsin (also a
compensation fee for wells)

‘Water rights application fees
A number of Western States including California, Montana and Nevada; New Jersey has a water allocation fee

Septage fees
Virginia, North Dakota, Oregon (all subsurface disposal), and Wisconsin (haulers and private systems)

Sludge fees !
Indiana (land application), Wisconsin (sludge disposal)

Mineral severance fees (coal, oil and gas)
Maryland, Nebraska (uranium) Pennsylvania, Virginia, Wisconsin (also Wyoming and Montana discussed under State
“Water Capital" Fees)

Wetlands permit fees
‘New Hampshire, Florida, Minnesota, Oregon, West Virginia

Miscellaneous tax dedication (see also State “water capital” fees

California and Massachusetts (utility taxes); Illinois and New York (sales tax on specific products); Montana (interest on
coal severance taxes); New Jersey (special safe drinking water tax); Missouri (soil and water sales tax and percentage of
state sales tax)

Special activity or product sale fees
Real estate transfer - Tennessee and Florida (for wetlands), and Montana (loan closure); also Florida (document stamp fee)

(see Washington under “Water Capital Fees”)
Bond issuance fee (for private-activity bonds) -New York
82




FOREWORD

The Alternative Funding Study was undertaken at the request of Congress by the U.S.
Environmental Protection Agency (EPA) in 1995, and was funded through an earmarked sum in EPA's
FY95 appropriation. The project resulted from an interest in Congress to explore new financial
mechanisms to enhance the capability of governments to fund mandated environmental goais,
particularly the use of special Federal, State and local fees for water-related infrastructure. This interest
had been reflected earlier in H.R. 2188, entitled the "Polluter Pays Clean Water Financing Bill" of
1993.

The year-long study was undertaken by the Environmental Finance Center (EFC) of the
Maxwell School of Citizenship and Public Affairs at Syracuse University, under a grant from the
Office of Water, EPA. The project leaders were Victoria S. Kennedy of the Syracuse University EFC,
and James G. Home, Office of Wastewater Management, EPA. The views in this report are not
necessarily the views of the EPA.

This report consists of two parts. Part One, for which the majority of research and public
consultation was undertaken, focuses solely on the potential use of governmental water-related fees to
supplement existing investment in wastewater and drinking water facilities, as well as watershed
protection and non-point source improvements. By "fees", we mean special monetary charges for
particular activities, products or services, such as utility user fees, permit fees, effluent fees, chemical
feedstock fees, and "green" product fees.

Part Two centers on water-related debt financing issues, such as the use of tax-exempt bonds
by State Revolving Funds and the private sector, for which work occurred towards the end of the study
process as a result of interest expressed by project participants.

The study methodology is somewhat unique. Not only was extensive research undertaken on
numerous fees and debt financing topics, but the resulting ideas were reviewed and discussed in an
open arena by the many "stakeholders" who might be affected by any future fees or financing revisions.

Since EPA sought to stimulate thinking and debate within as broad a public forum as possible, four
day-long public meetings were held in the summer and fall of 1995. The three panel discussions on
fees, and a fourth meeting on debt financing issues, included almost 150 experts who sought to reach
some common ground on the topics presented to them. Summaries of these meetings are included in
the report, and many of the ideas contained in the report are a direct result of discussions at these
meetings.

The Alternative Funding Study project leaders wish to thank John E. Petersen and Jason J.
Gross of the Government Finance Group, in Washington DC, for their many substantive insights on the
fee report and for taking the lead on Part Two of this document. George F. Ames, of EPA's Office of
Administration and Resources Management, organized the first public meeting sponsored by EPA's
Environmental Finance Advisory Board (EFAB) and is the administrator of the University EFC
network. James N. Smith, Executive Director of the Council of Infrastructure Financing Authorities
(CIFA), organized the last three public meetings, and prepared meeting agendas, selected expert
panelists, and reviewed written documents. John Whitlock of the Maxwell Center of Advanced Public
Management, Syracuse University, provided professional facilitation for the last three public meetings.

In addition, we gratefully acknowledge the major analytical contributions of Professor Stuart I.
Bretschneider and Myung Jae-Moon of the Maxwell School at Syracuse University for their analytical
work in designing all quantitative fee estimates. Mr. Moon and Ronda Garlow of the Maxwell School
also provided important assistance in all phases of document preparation.


Permit registration - Alabama
State Lottery - Kansas, Minnesota, and Wisconsin (for water programs)

Income Tax check-off's, credits - Arkansas, Ohio and North Carolina (for wetland acquisition or mitigation), and
Wisconsin (NPS)

Hunting and fishing licenses - Nebraska and New Jersey (for wetlands), Maine and Maryland
Camping fees - Montana

Vehicle Title Transfer - Wisconsin and Maryland

Vanity license plates - Maryland (for Chesapeake Bay)

Postage stamps - Nebraska and New Jersey (for wetlands)

Oil spill permit - New York (for water programs)

Tidelands occupancy - Massachusetts

Governmental publications and computer data - Michigan and South Dakota (for water programs)
Consulting service fees - ‘Wisconsin

Industrial waste tax credit application fee - Oregon (for water programs)

Dam registration - Maine :

‘Stream encroachment - New Jersey

Environmental impact reviews - Wisconsin

Highway de-icing salt - Wisconsin and others (for NPS)

Development impact fees - Florida and Others

Specific Chemicais
Pesticide and fertilizer fees (see State "Water Capital” Fees, for Wisconsin , Kansas, Minnesota, Oregon and Iowa)

Perchloroethylene (dry cleaning solvent) - Florida
Soil and plant additives - Wisconsin
Petroleum product barrel import tax - Hawaii (for groundwater programs)

Note - This list does not include solid and hazardous waste fees, and air-related fees, specifically dedicated to those environmental
media.

Sources: National Conference of State Legislatures, States as Water Quality Financiers, 1993; National Govemors Association,
Evelyn Shields, Funding Environmental Programs: An Examination of Altematives, 1989; many personal telephone interviews
conducted by the Syracuse University Environmental Finance Center

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Another empirical limitation pertains to where used products initially are disposed.
Presumably, some go to solid waste landfills, are incinerated, or illegally dumped, rather than
entering the wastewater stream directly. Obvious solid waste "green" products, such as many
paper and plastic products, and disposable diapers, are not included in the list below.

Despite these limitations, it is generally agreed that there are many widely used products,
some quite costly, which can contribute to water degradation. Use of such products may enter
the wastewater stream adding to the treatment costs, or be disposed of directly in water affecting
receiving water quality and drinking water. Noting the strong selection bias involved, and
working off the original candidate list proposed by AMSA, possible products might include:

soaps, shaving creams pesticides, herbicides
shampoos, tooth paste synthetic fertilizers

; mouthwash copper plumbing pipe
special bath products plumbing fixtures
toilet paper plumbing chemicals
cleaning products dry cleaning soivents
household solvents paint products
dishwasher detergents photo process chemicals
laundry detergents synthetic dyes, inks
cooking oils domestic water treatments

The most efficient way to levy and collect green fees is at the Federal level, which has
authority because of the interstate commerce application. Unlike hypothetical Federal water
withdrawal/use fees, the legality of Federal green fees may not be seriously challenged. Federal
fees could be collected at the production or manufacturing site and, to ensure only selected
commodities are covered and avoid any double-counting, would be imposed only on
manufactured "end-products".

This method of collection would be similar to how the gasoline tax supporting the
Highway Trust Fund works. Here, the Federal Internal Revenue Service (IRS) annually collects
fees directly from gasoline producers, who then are reimbursed by the fees which everyone pays
at the pump. Although certain manufacturing States obviously pay the major share of gasoline
fees, the impact on ultimate consumers is equal. Other Federal precedents are the Federal
telephone and cosmetic excise fees.

If States sought to impose green fees, the best method might be to collect fees at the retail
cash register or time of sale, much like existing State alcohol, tobacco, automotive or luxury
taxes are handled. Individual State production or manufacturing data, however, are not readily
available. It is likely that some States produce few if any potentially taxable "green" products.
Moreover, unless States imposed similar green fees, differences among them would result in
pollution havens and competitive disadvantages.

18


True enough, there may be small systems lacking technical expertise and financial stability, and for them raising capital for costly
infrastructure can be a serious problem, But if these systeins cannot "get the job done,” the answer in terms of federal policy should not be simply
to spawn new programs to give them money; this would most likely beget only waste, inefficiency, and (especially if the money were derived
from a tax on water!) disincentives to trends in the water supply industry that can solve financial and other problems for the longer term.

‘These trends are consolidation and regionalization. If the federal government is to make a contribution to solving infrastructure problems, it
should first of all recognize that these problems affect, most importantly, consumers. Then government should recognize that consumers can best
be served by encouraging the trends already being pursued by water suppliers who do have the resources and who are eager to deploy them to
‘serve more people better. It is good in the long run that consumers in small communities or even rural areas obtain drinking water from growing,
professionally run, and well-financed water suppliers.

Accordingly, we would recommend the report before us consider a new approach that would promote and encourage consolidation
and regionalization. NAWC would be glad to help in any such effort.

‘Stated differently, NAWC urges that all who play a role in evaluating the proposals contained in this report bear in mind the need to
compare them to all available alternatives.

2 The "Federal/State De Minimis Fee Model" Fails on Grounds of Equity

In its “Federal/State De Minimis Fee Model" the report proposes to raise $2 billion with a “public water supply withdrawal fee." (At,
e.g., p. 17.) This water fee (as | shall refer to it) is of particular interest to NAWC. The report claims it is not only equitable but also "may be
among the most politically acceptable ..." fund raising mechanism. (At p. 41.) We disagree.

The report notes that public water supplies account for “only 11.3% of all water use ..." (at p. 42), and yet it calls the water fee
“broad-based” (at p. 41). Thus the report claims "[t]he term ‘equitable’ applies because the rationale ... has a broader population base which arise
[sic] from universal water consumption.” (At p. 42.) Yes, everybody drinks and otherwise uses water. But political decision-makers know that
many of the largest users of water do not get it from public supplies and they will escape their share of the water fee's burden.

Beyond that, even if it applied easily to all public water suppliers, the water fee would unfairly penalize those systems whose
communities have already paid for the facilities necéssary to ensure safe, reliable supplies of drinking water. It would be unthinkable for the
federal government to tell them, “good job, folks, now ante up for the same results in other communities.” In short, the cost-benefit match the
report claims to be seeking is seriously lacking here. Worse yet, the water fee would undermine and discourage consolidation and regionalization
~ wherein lie real prospects for infrastructure improvement. (This objection would have similar application to the wastewater discharge permit
fees.)

3. Excessive Reliance on Delivery Svstems That Will Encourage or even Force Delays in Improving Drinking Water Systems

All three models presented by this report use SRFs (state revolving funds) as the primary state-to-local financial assistance delivery
mechanism. In two of the models, fees would be collected and then disbursed to provide revenues to SRFs and to fund grants to municipal water
and wastewater treatment projects.

Grants and even the SRF process, because of time and paperwork involved, have been impediments to the timely completion of such
projects. "Waiting time" for communities to receive financial assistance has resulted in increased project costs and delays in completion of
necessary drinking water treatment facilities or in otherwise resolving water quality issues.

Over 250 public water suppliers, representing over 80 million customers, recently indicated their willingness to enter into a
partnership with EPA to undertake voluntary efforts to improve treatment processes to finished water pumped into distribution systems. Grants
are a disincentive to implementation of such efforts, for most communities would prefer to “wait and see" whether they would become eligible
for grant dollars.

4 Report Recommendations Are Not Politically Acceptable

The report virtually concedes that political objections are a likely bar to model one. However, we believe, as to model two, that
political acceptability of the public water supply withdrawal fee would never be realized, either, and not just because of the inequities noted
above, but also because of other concerns perhaps best examined in the context of the question whether this is a fee or a tax.

‘The report's brief struggle with the definitions of "fee" vs. "tax" left the authors exhausted, it seems. "For purposes of this study,” they
sighed, "we discuss fees and taxes together, using the terms somewhat interchangeably.” (At p. 2.)

But if the water fee is a “fee,” what kind of "fee" is it? A “user fee"? To say so might be taken to imply the federal government is
asserting some ownership or control of the ground and surface waters that water suppliers “withdraw,” or perhaps some other new but serious
federal interest in those waters. Else how charge a fee for its “use”? Objectors to this notion would be strong in numbers and intensity, both from
private property owners and from states with long histories of protecting their water resources.

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3 Funding For Sound Science

Additionally, in the current budget environment, funding for scientific studies necessary to assure well grounded
regulations and water quality permitting for publicly owned treatment works ("POTWs") is increasingly at risk. The reduced
federal grant commitment has placed severe constraints on the development of alternative and innovative municipal wastewater
treatment and pollution prevention technologies. A renewed commitment to these objectives should be pursued as water quality

based NPDES permitting proceeds.
4, AMSA Survey of Wastewater Construction Funding And Rates

Most wastewater construction needs will be met by local sewage rate payers resulting in progressively increasing rates.
A 1993 AMSA survey of its membership, consisting of major POTWs, revealed that these municipalities are collectively relying
on the following sources to finance wastewater construction costs to comply with the CWA: direct municipal financing at 84%;
SRF loans at 6.7%; state grants at .9%; remaining federal grants at 7.9%; and miscellaneous other sources .5%. This means that
over 90% of wastewater construction costs are being paid by these local governments in either direct local financing or loan
repayments to SRFs. 6

AMSA also reports that annual household user fees are doubling every six years and are projected to increase at a
greater rate in the future due to increased construction, operation and maintenance costs for higher treatment levels and new
mandated requirements.7 Federal drinking water requirements under the Safe Drinking Water Act which presently provides no
capital funding, are expected to result in further rate increases.

5. Infrastructure Job Generation And Long-Term Productivity Benefits

Construction of wastewater and water facilities is among the highest generators of jobs for all infrastructure categories.
Each $1 billion in sewer and water improvements generates over 57,000 direct and indirect jobs. By comparison, total job
creation by highway and road construction is estimated to be approximately 34,000, for each $1 billion. 8

In addition to public health and environmental benefits, water and wastewater facilities provide major contributions to
public and private productivity. Research indicates that public investments in these facilities improve: (1) competitiveness for
American industry, (2) private profitability, and (3) wages, which in tum yield higher tax revenues to governments.9

C. The Clean Water Green Fee Option

Expansion of federal wastewater and drinking water infrastructure funding will likely require a self-financing
mechanism tO augment, or substitute for, General Fund revenues. Continuation of federal funding for these mandated costs is
vital to moving the federal clean water and drinking water programs forward for protection of public health and the environment.
The primary example of existing dedicated revenue is the federal gasoline tax accumulated in the Highway Trust Fund: a low
based excise fee collected from producers and ultimately paid by consumers to finance construction of surface transportation
systems.

A 1993 Congressional Research Service report on clean water dedicated revenue sources focused on industrial
discharge fees and fees on pesticides and fertilizers tO support grant funding of municipal wastewater and combined sewer
overflow construction. The Maxwell School draft report focused on these sources, plus public water supply withdrawal fees,
municipal wastewater effluent fee, and NPDES permit fees, and a mix and match approach. Except for the pesticide/fertilizer fee,
such sources are either a tax on local government wastewater and drinking water enterprises or compete with these local
enterprises for the same revenue base.

1. Green Fee Option Objectives

The objectives of the Green Fee option are to develop a new (a) broad-based, (b) low-rate, (c) easily collectable, and
(d) water quality related source of revenue to augment the traditional local customer-based water and wastewater fee revenue. As
with the Maxwell School options, it not the purpose of this Green Fee Option to change behavior, but rather to generate a
relatively low amount - $3 tO $5 billion annually - from national sources for allocation to states. States would also be authorized
to add an additional incremental amount for collection and use only within their borders.

3 The 1992 Needs Survey amounts includes (a) documented, (b) modelled snd (c) separate state estimstes for Categories: I secondary treatment II advanced treatment;
and inflow correction IIIB sewer replacement and rehabilitation IVA new collector sewers; IVB new jnterceptor sewers: and V combined sewer overflow control.

4 This 1990 Needs Survey amount includes (a) documented and (b) supplemental state estimates for Categories I-V. -


FEE-BASED MODELS FOR FUNDING WATER QUALITY INFRASTRUCTURE

I. INTRODUCTION

A. Origin and Purpose of the Study

The goal of the Alternative Funding Study is to evaluate two distinct sources of revenue
to augment capital investment in local drinking water and wastewater infrastructure and related
water quality projects. First is the use of special, dedicated Federal, State and/or local "fees" to
supplement existing direct subsidies from general, appropriated funds. Second is the expanded
use of debt financing, including indirect borrower subsidies through tax-exempt bonds, and other
public and private investment incentives.

The study grew out of the deep concern to maintain environmental progress in this
country by enhancing the capability of State and local governments to finance mandated
national clean water objectives. As the EPA's Environmental Finance Advisory Board (EFAB)
reported several years ago, under current trends State and local governmental will be responsible
for the clear majority of all environmental financing by the year 2000 (EFAB, "Narrowing the

Gap", 1992).

Over the past decade, States increasingly have tumed to fee-based systems to finance
water-related programs in an effort to closely link the cost of public environmental services with
the financing mechanisms. Likewise, interest in leveraging limited revenues in order to
maximize spending impacts led to the creation of the State Revoiving Fund (SRF) loan program
for wastewater-related facilities. Recently, extending the SRF concept to drinking water and
attracting more private sector investment have been steady themes in environmental financing.

As a result, the U.S. EPA's Office of Water received an earmarked sum in its FY1994
appropriation to examine innovative financing approaches, which itself grew out of H.R. 2188 in
1993 called the "Polluter Pays Clean Water Financing Bill." Grant funds were awarded
subsequently to the Environmental Finance Center at the Maxwell School of Citizenship and
Public Affairs, Syracuse University, which over the past year has conducted the major portion of
this study.

B. Assumptions and Definitions

This document, "Fee-Based Models for Funding Water Quality Infrastructure", is Part I
of the Alternative Funding Study. It focuses solely on the use of fees, where most of the research
and public consultation was undertaken. The Syracuse University Environmental Finance Center
(EFC) was assisted in this effort by the Government Finance Group and Council of Infrastructure
Financing Authorities, and EFAB staff.


Appendix A

Alternative Funding Study
Three Water Fee Meetings

List of Panelists and Attendees

A-1 April 25, 1995 Crystal City Sheraton
Arlington, Virginia

A-2 July 19, 1995 Airlie Conference Center
Warrington, Virginia

A-3 September 21,1995 EPA Region 8 Conference Center
Denver, Colorado

41


Appendix C-4

SYRACUSE NOTES

Introduction 1

Good afternoon. My name is Clarence Barnett, Mayor Pro Tem, City of Yakima, Washington.

I want to thank you for the chance to offer a few comments regarding alternative funding sources for water and wastewater. My
remarks are primarily based on the fee models as presented to the EPA by the Environmental Finance Center, Syracuse
University in the April 1995 draft report.

You have been given a Statement and Position of the City of Yakima.

The Yakima region is a desert plateau with minimal rainfall, — and is dependent on large withdrawals of water from rivers to
support its agricultural economic base. Yakima is designated as Economically Distressed.

Introduction 2

Federal Fee Model

The wastewater effluent fee in the Federal Fee Model would increase City of Yakima sewer rates 3.5 percent. This is very close
to the 3 percent increase in the Syracuse report.

However, the fee used in the background paper by Victoria Kennedy would require a city 4.1 percent sewer rate increase.

The fees on the production of fertilizers and pesticides are viewed by local industry as an attempt to keep the " "Studs" type
proposed legislation alive .( H.R. 2199, 103rd Congress).

(Fee: Syracuse $0.0605/1,000 gallons
Kennedy $0.0756/1,000 gallons)

Federal/State de Minimis Model
We have serious concerns on the impact of Federally-assessed water withdrawal and discharge permit fees.
Introduction 3

Our rate increases differ dramatically from those presented in the Syracuse report. We compute the average Yakima household
would have an overall 62 percent rate increase as compared to the 8 percent range in the Report.

It is also noted that the discharge fee ( NPDES ) incre ased from $ 8 7 ,000 to $96, 8 13 for major wastewater facilities.

Syracuse A-1

The City of Yakima has two separate public water supply systems, — one for potable water, —- and another for only irrigation
water. Both systems withdraw water from the Naches river.

Irrigation water is an integral part of our public water supply for residential uses.

The City has water rights for potable water; and, separate water rights for irrigation purposes.

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Local affordability to meet national standards received firm emphasis in Denver. In particular, the burden on local utilities
which had to upgrade to meet new water-related standards, such as drinking water filtration, combined sewer and stormwater
overflow, at the same time as meeting ongoing operations and maintenance requirements, was addressed.

The Denver participants likewise reiterated a deep motivation for greater flexibility at both the State and local levels in
meeting clean water goals. Local flexibility in reordering regulatory priorities and time schedules for compliance were repeatedly
stressed, along with the importance for States to have “primacy” in setting water-related funding goals.

The top-voted financing principle at Airlie Center, i.e, the need to make more efficient and effective use of existing
financial resources, also drew strong support in Denver. The rationale of making the best use of existing resources before the
imposition of new fee programs was presented in Denver as a practical first step. As one panelist stated, the need for new financing
programs first must be demonstrated before any new fees would be supported. Another panelist argued that localities were against
any and all new fees, which should be "market-tested" before further consideration by policymakers.

In summary, the five major financing principles, assumptions and rationale in Denver were:

1. The fundamental issues of affordability (19 votes), and the basis for environmental risk standards-
setting (also 19 votes), need to be revisited

2. States should have primacy (13 votes), and localities greater flexibility in timing to meet
environmental mandates (also 13 votes); also, the need for new fees must be demonstrated (13 votes)

Note that "changes in regulations can reduce costs" received an additional 7 votes, and the importance
of “evidence and interest in fee-based alternatives that may look like new taxes” received 11 votes

3. The Federal government should continue to contribute financial resources for localities to meet
environmental mandates (12 votes)

4. Voluntary, site-specific financing options, on a Federal/State/local cost share basis, should be
considered as a major option (11 votes)

B. Evaluative Criteria for Fee Systems

The highest ranked criteria in Denver addressed the importance of local control over fee collection and fee use, with a
limited State and sharply curtailed Federal role. However, depending on the type (if any) of fees selected, the Denver panelists did
envision a Federal and/or State fee collection role if greater administrative efficiencies were to prevail. Those panelists favoring a
purely local system argued for local definition of who should pay, and how much.

On equity grounds, a large body of opinion supported a fee-based financial delivery or redistribution system which was
weighted in favor of States and/or localities which had already invested heavily in water and wastewater treatment facilities, if the
Federal government were to collect fees. The current SRF capitalization grant allocation formula was criticized for being biased in
favor of outstanding wastewater "needs".

Similar to the Airlie meeting, the Denver panelists clearly supported a close relationship between the source and use of
fees, or a close cost/benefit relationship. They firmly rejected the use of non-environmentally related fees (¢.g., “sin' taxes), arguing
that it is the relationship of fees to the water-related services provided (e.g., laboratory testing) which distinguished "fees" from
“taxes” in the first place. Colorada panelists mentioned that a cigarette tax recently had been disapproved by the voters.

Ambivalence about the Federal fee role persisted. Local officials in particular argued for a continued Federal financing
Tole, discussed subsequently, whether from direct appropriations or from new fees. However, they emphasized that the local share
had to be determined flexibly on an affordability basis.

The fifth ranked criterion for fee-based funding systems pertained to public support. The Denver panelists asserted more
strongly than the Airlie panelists the need for new fees to be understood by those who paid, both in terms of costs‘and benefits. They
termed this fee transparency, as opposed to a "hidden" or less visible type of fee, ¢.g., an add-on to existing fees.

in summary, the five criteria drawing the largest number of votes on September 21 were:

59


individual fruit and vegetable growers (Syracuse, May 1995). Although agricultural panelists
strongly resisted imposition of such fees, they were included in the more popular green estimates.

4. NPDES Permit Fees, for both industry and municipalities, currently are used in at
least 30 States to support State program budgets. EPA has supported imposition of
administrative permit fees in all States, as was required for air emissions under the CAA of 1990
($25 per ton of regulated pollutants). State NPDES permit fees typically distinguish between
major and minor, and industrial and municipal, categories with the median annual charge per
major industrial permit being $9000 (counting the three with much higher effluent fees)
(Syracuse, May 1995).

NPDES fees could be collected through the permit mechanism, but under most
hypothetical capital-generating fee scenarios would have to be very expensive for large facilities
in order to offset much lower rates for smaller facilities. EPA's PCS classifies 6,880 out of
73,666 permitted facilities to be "majors". Following this, one annual permit fee estimate is
$96,813 for majors and $5,000 for minors yields $1 billion (Syracuse, May 1995). Permit fees
are considered most useful as State budgetary support.

5. Direct Water Use drawn from surface and groundwater by industry and mining,
hydroelectric companies, agriculture and some households represents the majority of water use.
However, self-supplied water is extremely difficult to estimate on a State-by-State basis because
of the nature of the water allocation and regulation systems (or lack thereof) adopted by States.
Moreover, the amount of water returned to the water table, and the degree to which it is
"polluted", varies considerably.

While many States regulating the consumptive use of water impose a one-time permit
application or water rights registration fee, as of 1992 seven States -- Arizona (with the most
comprehensive system), Arkansas, Connecticut, Kansas, New Jersey, North Dakota, and South
Dakota and at least one sub-State district (in Texas) -- impose a recurrent direct water use fee
(University of Florida, 1992).

In the western "prior appropriation" States of Arizona, Kansas, South Dakota and Texas,
the fee varies with the volume or rate of diversion, appropriation or withdrawal, from $0.25/1000
gal. to $ 0.015/1000 gal. or $5.00 per acre foot. The eastern riparian or reasonable use States of
Arkansas and Connecticut charge a single flat fee of $10.00 and $500 per year regardiess of
volume, as did a recently repealed law in Wisconsin, while New Jersey's rate is graduated.

In one study, a total annual revenue yield of $1 billion from an industrial use fee of
$.0195/1,000 was estimated (CRS, 1992). Withdrawals below certain amounts are generally
exempted. Also, two States exempt agricultural uses, and in others direct use fees have been
challenged by the power industry on the basis of temporary "non-depletive" or "unpolluted"
usage (Florida, 1992). In the five States with graduated rate structures, as well as in Florida
(proposed), fee-based revenues are sufficient to be dedicated to capital accounts for water supply
development, conservation and treatment.

24


Secondly, local affordability concerns, especially in rural areas, might be best addressed
by flexible cost-sharing or subsidies by either the State or Federal government. Such monies
could be disbursed directly to watershed regions. If watershed ecology necessitated multi-State
programs, some Federal financial commitment might provide an incentive for States or localities
to cooperate.

A third demand is enhanced local involvement and control. Since most new fees are
viewed as "mandates" by localities, and wealthier localities vigorously resist rebating and/or
redistributing new fees elsewhere, regionalization may help address these concerns.

Other benefits pertain to public support. By attaching fees to specific, identifiable
watersheds or water bodies, public support may increase along with the recognition that pollution
prevention may be less costly than capital construction. Regionalization of small systems may
also be encouraged. A final benefit is that suburban units which do not use public water and
Sewer systems, may support conservation goals by paying new fees, such as recreational fees or
special assessment district fees.

Of course, any type of fee could be used to fund watershed protection, Federal, State or
local. For the purposes of argument, we identify below fees which are considered "surrogates"
for watershed protection fees and/or direct water use, such as examined in Chapter III. (See also
“Financing Alternatives for Maryland's Tributary Strategies", 1995). These include:

-direct water use fees in sub-State districts;

-well drilling licenses, pumping fees, water rights application, and aquifer depletion fees;
-fees on new septic fields and tanks, and commercial pumping, hauling and disposal;
-water/sewer facility construction and connection fees;

-ascending block water utility fees;

-mineral severance and timber cutting fees;

-wetlands and dam permit and mitigation fees;

-groundwater certification fees ;

-recreational fees, "conservation" stamps and license plates;

-non-beneficial sludge and ash disposal fees;

-special district development impact and "profit" fees;

-real estate transaction fees;

-local capital bond transaction fees;

-tax increment financing, property tax or tax "check-offs";

-special stormwater district management fees.

The administrative and institutional aspects of the Watershed Fee Model need to be
considered carefully, since watershed "districts" and some special assessment districts are novel,
and many such fees may be difficult to design and collect. It is conceivable that regional trust
funds might be created both to safeguard and invest fee funds, and also to imitate highly
leveraged financing concepts such as SRFs.

35


3. The third major model is The Voluntary State Fee Incentive Mode! with 33% Federal match, and the roles of the
Federal and State governments are reversed. Here, States are completely free to participate or not, and may design whatever fee
structures they wish as long as fees are dedicated to capital water-related facilities. The Federal match may be raised by general
appropriations or Federal fees, is capped at $700 million annually and sunsets in 10 years.

The three funding models are described in some detail below, and evaluated in relationship to the six criteria.
Model I: The Federal Fee Model

The basic elements of this model are the creation of a new Federal Clean Water Trust Fund, reliance on Federally-assessed
fees, Federal fee revenue allocation to individual SRFs for both drinking water and wastewater construction projects, and Federal
grants to large municipal wastewater projects. This model is fashioned to be somewhat similar to H.R.2199 (the Studds bill), except
that drinking water treatment facilities are also eligible for SRF loans. In addition, while there is a SRF small community grant set-
aside (10%), there are no non-point source set-asides and the Trust Fund may offer direct wastewater treatment project grants to
municipalities. Box 1 and Figure 4 following describe model implementation and intergovernmental flow of funds.

We have constructed this model with the Federal government assessing two main types of fees nationwide: (1) industrial
and municipal effluent fees, and (2) fees on the production of pesticides and fertilizers. States conceivably could collect all of the
former on behalf of, and rebating fees to, the Federal government. States could be reimbursed for collecting Federal effluent fees, but
in some cases the Federal government might have to collect effluent fees itself. Pesticides/fertilizer fees could be paid by private
sector producers directly to the Federal Internal Revenue Service (IRS).

All fees would be deposited immediately in the newly created Federal Clean Water Trust Fund, which then would allocate
fee revenues back to the SRFs to specific drinking water and wastewater capital accounts, with no State match required. While the
Trust Fund could reserve a specific portion of fee revenues annually for grants to large municipal wastewater treatment projects, no
specific set-aside is mandated. Trust Fund investment earnings would be used first to cover Federal administrative costs (not to
exceed 4% of fee revenues annually). Note that existing CWA Title VI SRF capitalization grants would be preserved, with existing
requirements (¢.g., the State match), in separate SRF accounts.

Using the Federal Fee Model has some advantages in terms of the six evaluative criteria. Historically, the Highway Trust
Fund and to some extent Superfund have had considerable success in generating large and stable fee-based revenues over time.
Because of the long-term Federal fee authorization, these Trust Funds do not rely on annual appropriations. If fees are properly
estimated and collected, the Federal Clean Water Trust Fund may produce similar good results.

90


U.S. Environmental Protection Agency, July 1985, The Effluent Charge System in the Federal
Republic of Germany.

Vroomen, Harry and Taylor, Harold, U.S. Department of Agriculture, January 1993, Fertilizer
Trade Statistics, 1970-91.

Water Environment Federation, 1992, A National Water Agenda for the 21st Centry: Water Quality
2000 (Phase III Report).

40


Others defended compiling the list of financing barriers as a necessary and positive step.
Particularly, some members of the investor-owned water facility community stressed that they
could demonstrate that accelerated depreciation and private management contract reform would
increase private investment. These panelists believed that the climate in Washington continues
to change and efforts such as this list can continue to exert pressure for change.

Addressing specifically of the question raised of why unanimity within the finance and
infrastructure community has not produced change came the proposal which headed the action
item ballot with 24 votes. This proposal called for “leadership to spearhead tax law change for
environmental regulations.” Groups such as Renew America, GFOA, the National Council on
Public Private Partnerships, the Council of Mayors, and others, needed to coordinate their
message and lobbying efforts to produce change. No specifics on how this coordination would
take shape emerged, but members who sat on the boards of these organizations were urged to
raise this and help develop a dialogue which would lead to a greater spearheaded effort.

The second rated strategy involved working within the Environmental Protection Agency
for change and received 12 votes. Under the banner “EPA should work more closely with
States”, proponents urged the Agency to take full advantage of existing rules to encourage
maximum investment. While some regional offices have worked well with States to encourage
them to innovate, others have made innovation difficult. Washington and the regional offices
must help foster State innovation, particularly in promoting greater private investment.

Much of the talk in the strategy session involved the switch in focus from Washington to
the States. Virtually tied for third place were proposals to move the focus of expanding
infrastructure to governors (11 votes) and mayors (10 votes). Others said that mayors simply
lacked the resources to invest in water infrastructure and needed more funds, whether they come
from Federal or State sources (10 votes).

A few panelists raised the importance of enlisting the environmental community to bring
about change. But only four votes were cast for this initiative in part due to many panelists’
experience that the environmental community has expressed little interest in financial issues, and
will continue to stay focused on only environmental policy.

One proposal stemmed from a desire to support only those initiatives that had a good
chance of becoming reality. The budget-scoring attractiveness of forgiveness of Federal grants
attracted four votes for the water infrastructure community to support this proposal. Support for
the proposal was qualified in order to prevent localities from engaging in short term “fire sales”
of infrastructure at the expense of long-term interests.


While States and localities already use many of these fees, the fee base and rates may
need to be adjusted to increase the revenue potential, avoid the proliferation of many small fees,
and account for the effects of desirable behavioral changes. Likewise, affordability criteria based
on the cumulative cost of regulatory mandates and fees need to be devised, so that any flexible
cost-sharing or subsidy can be determined.

E. Preserving the Status-Quo

In the absence of new Federal legislation on fees, there is every reason to believe that
States and localities will continue to innovate. Over the past decade, the number of State fee
programs has increased, both administrative service and capital-generating fees. There is every
reason to believe that fee revenues will continue to grow, however modestly.

Several observations may be offered. In recent years, fees, particularly administrative
service fees, may have proliferated to the extent that some backlash in public and legislative
support may exist, and the use of dedicated fee funds for other purposes at all levels of
government is disturbing.

States may need to structure capital-generating fee programs more carefully, using some

of the evaluative criteria outlined in this study.. The growing interest in local or regional water-
related fees should be accommodated as well.

36


Distrust of the Federal role was high. The panelists argued that Federal credibility has been damaged by restrictions on
Highway Trust Fund and Superfund annual outlays, in order to write-down the Federal deficit as well as provide a ready market for
purchase of Treasury Department bonds. Many stated that States could do just as well if not better in protecting new, dedicated fee-
based trust funds. However, since the green fee proposal is based on Federal collection, some role for the Federal government in
ongoing oversight was envisioned.

State Revolving Funds (SRFs) and bond banks were the preferred alternative at the State level for the delivery of fee-based
assistance to localities. SRFs could also make project-by-project decisions on the subsidy level offered to localities.

In summary, the top-ranked financial delivery institutions on September 21 were:

1, State flexibility to determine Federal financial cost-share for local projects, with a two-thirds
percentage as the threshold (23 votes) on a project-by-project basis (14 votes)

2. SRFs for drinking water and wastewater, and State bond banks (18 votes)
3. A mix-and-match of Federal/State/local institutions (9 votes)

4. State health agencies for water (4 votes) and/or State environmental agencies for wastewater and
non-point source (also 4 votes)

5. State Treasury Departments (7 votes)

62


Appendix C-2

National Association
of
Water Companies

STATEMENT BY
MR. JAMES B. GROFF
EXECUTIVE DIRECTOR

BEFORE
THE ALTERNATIVE FINANCING WORKGROUP

OF THE

ENVIRONMENTAL FINANCIAL ADVISORY BOARD,
U.S. ENVIRONMENTAL PROTECTION AGENCY
. APRIL 25. 1995

INTRODUCTION

L National Association of Water Companies

‘The NAWC is the national trade association that exclusively represents the private and investor-owned water utility industry. Its
membership — over 380 companies in 41 states — provides safe, reliable drinking water to over 22 million Americans. Indianapolis, IN and San
Jose, CA are but two examples of large metropolitan areas with water provided by NAWC's members. NAWC serves as the ambassador for this
$3 billion industry that employs 15,000 people.

2 Position

Presented herein are the NAWC's comments on Fee-Based Models for Funding Water Quality Infrastructure, the April 1995 draft
final report to EPA's Office of Drinking Water prepared by the Environmental Finance Center of Syracuse Universi 's Maxwell School of
Citizenship and Public Affairs.

We find this report disappointing as a basis for policies to help come to grips with the tremendous financial implications of
rehabilitating and growing our nation’s infrastructure. Our principal concems follow:

NAWC's POSITION
LR Fee Models Are Disincentives to Consolidation and Regionalization, Positive Trends Already Benefiting Consumers

NAWC believes that the guiding thrust of the report is just wrong.

‘The private, investor-owned member companies of NAWC are active in the financial marketplace virtually every day raising the
capital needed to ensure abundant supplies of safe water at reasonable prices, and these efforts will continue. Our data indicate NAWC members
plan to raise and spend approximately $600 million per year, to about $3 billion by the year 2000, in order to be able to continue providing good,
affordable water to their customers.

Numerous other municipal water supplier members of the American Water Works Association and the American Metropolitan Water
Association are doing likewise.

In short, responsible water suppliers serving the vast majority of American consumers arrange capital financing without secking or
promoting goverment financial assistance, save for tax-exempt bond financing which is and should be available to investor-owned and
municipal systems alike.

Fee-Based Models overiooks other altematives, including proven taxexempt bond programs in such states as West Virginia, Missouri,

and elsewhere. Examination of these highly successful programs would have shown there is little need for fee-based systems, and that their
establishment might indeed discourage further expansion of these bond programs for water and wastewater projects.

In that light, any proposal — new and creative or not — for grants or subsidies at the federal level is simply inconsistent with today's
reality.

69


V. FEE-BASED INTERGOVERNMENTAL FUNDING MODELS

Presented below are four alternative intergovernmental funding models based on fees.
These models are designed as generic examples of how different fees, financial delivery
mechanisms, and environmental goals might be mixed. Of course, any number of models are
possible. These four are illustrative only, and should stimulate further policy discussion.

The models are based on the fees and institutions addressed within the context of this
study and its public consultative process. They move on a continuum from the most Federally-
controlled to the most flexible, and ultimately voluntary, State and local fee-based systems.
Federal matching funds are used as incentives in the second and third models, and may be used
to accommodate affordability concerns in the fourth. We have labeled these prototypes as: (1)
The Federal Green Fee Model; (2) The Federal-State Water Use/ Match Model; (3) The
Voluntary State Fee Incentive Model; and (4) The Watershed Fee Model. A fifth option,
preserving the Status-Quo, is discussed.

Appendix E, the Executive Summary of the earlier Syracuse Environmental Finance
Center Draft Report (May 1995) elaborates on details of revenue allocation, eligibilities, forms of
assistance, and oversight. However, the fees differ here.

A. Model 1: The Federal Green Fee Model

This model is based on new Federal, water-related green product fees, but in other
respects is a very traditional funding system. Federally-legislated green fees would be collected
by the IRS and deposited in a new Federal Clean Water Trust Fund, or "Account", managed by
EPA and Treasury Department officials. The Fund would allocate revenues, in the form of
capitalization "block" grants, to SRFs or similar State institutions, which in turn would offer
financial assistance to water-related projects. Box 1 diagrams this model.

30




Six evaluative criteria systematically were used. The criteria are:

(1) political acceptability by different governmental levels and fee sources

(2) total revenue size and predictability

(3) equity between, and impacts on the sources of fees

(4) feasibility of collection (collectability)

(5) relationship between costs and benefits, or "who pays versus who benefits", and

(© environmental goals, including efficiency in funding drinking and wastewater infrastructure and State capacity-building

Three Fee-Based Intergovernmental Models

From these building blocks we developed three “strawman” models which move on a continuum from the most Federally
controlled fee-based system to the most flexible, and ultimately voluntary State systems with Federal matching funds. All three
models use SRFs as the primary State-to-local financial assistance delivery mechanism, and all fees are dedicated to water-related
capital projects. Likewise, project eligibilities and types of financial assistance are gradually expanded, and Federal oversight
gradually decreased. This movement is depicted in Figure 2 and 3.

1, The first model, The Federal Fee Model, creates a Federal Clean Water Trust Fund supported by Federally-imposed
effluent and pesticide/fertilizer production fees. The new Fund primarily makes capitalization grants to SRFs, with the possibility of
direct project grants.

2. The second model is a mixed Federal/State fee-based system, which we have termed The Federal/State De Minimis
Fee Model. Here, the Federal government levies fees on two main sources, public water supply withdrawal and wastewater
discharge permits fees, at a minimum level per State, which States are encouraged to adopt and implement themselves. States also
may partially substitute other water-related fees for the two main fees.

86


Figure 5: Federal/ State De Minimis Model (Model II)

| Loan; va Loess
Principal Subsidies Principal Subsidies

SST
Revenue Sources/ Fund Uses Revenue Sources/ Fund Uses

When State Administers When State does not Administer

The De Minimis Models has a number of very practical advantages which pertain primarily to the simplicity and
collectability of the two main fees, the relative stability of revenue yield, and flexibility for States in substitution fees and making
most specific SRF funding chooses.

‘The fact that each State is allocated a minimal contribution, which State-by-State adds up to a desired total, provides a
measure of predictability in revenue generation. The public supply withdrawal fee focuses less on one particular sector compared to
other fees and is relatively low cost to individual households and businesses, even though no user fee increase is easy to pass.

To the extent the two main fees are used, the De Minimis model provides some measures of equality and reduces impacts,
and a solid relationship between costs and benefits, i.¢., who pays and who benefits. Because fees collected never leave the States
even if the Federal government ends up administering the program in some States, SRF financial efficiencies from revolving,
leveraging, pre-financing and, under this model, principal subsidies, are sustained. Thus, the likelihood of States meeting
environmental funding goals is very high.

There are some potential downsides of the De Minimis model. Political acceptability is diminished by the imposition of
Federal fees. The two main fees might be more acceptable if implemented by States in the first place, but then the De Minimis
characteristics are sacrificed. A second problem arises if the Federal government has to implement the program itself in a large
number of States, since this will cost administrative time and money.

In contrast, if States readily adopt the program but widely substitute new or existing State fees dedicated to water quality
capital projects, such fees may prove to be less equitable, less collectable, and distort the relationship between costs and benefits
established by reliance of the two main fees.

Table 2
Public Supply Water Withdrawal and Wastewater Permitting Fees Designed to Generate $2.8 Billion Annually
Source Base Units Rate Yield
Water withdrawal 14,107,250,000 1000gal. $ .1418 $2,000,408,050
NPDES Majors 6880 Facilities $87,000 $ 598,560,000
Minors 66786 Facilities $ 3,000 $ 200,358,000
Total $2,799,326,050

95




Critics of the current restrictions believe these modifications are a step in the right direction, but
more flexibility could promote more private competition in water provision and inject more
private capital into water infrastructure. David Haarmeyer, an economist with the Reason
Foundation, issued a 1992 report citing cost savings to municipalities of 20 percent to 50 percent
at the 300 water treatment plants operated by private contractors in the United States.”>
Changing Federal and State tax laws to permit operating contracts to run 15 to 20 years could
make private risk assumption more feasible and introduce the greater efficiency into a larger
number of plants. Evidence from other countries that Haarmeyer cited indicates that long term
competitive franchise contracts can encourage technical innovation and greater capital
investment than in typical U.S. water monopolies. Typical of European private providers, the
French company Lyonnaise des Eaux-Dumez spent $33 million on research and development in
1991, an amount equivalent to 5.5 percent of sales.

Impact of IRS's new Proposed Regulations

The public comment period on the IRS’s new Proposed Regulations ended on May 1, 1995.
Reaction to the Proposed Regulations by the issuer and bond counsel community has been
largely negative. While tax-exempt bond advocates support the liberalization of management
contracts, many bond lawyers and issuers have complained that the private use restrictions are
unworkable and may deter even the most straightforward infrastructure financings. In addition,
many have complained that the detailed nature of the Proposed Regulations reduces any
flexibility in interpreting the applicability of regulations to individual projects. The private use
test may curtail the use of tax-exempt financing for water infrastructure that serve specific
developments, stadiums, airports, and other similar entities.

These rules extend allowable contract items for private management contracts for services,
however, the rules do not permit private companies to earn a return on funds invested in the
facility upfront or during the term of a service contract. This limitation could offset the incentive
created for the private sector to invest private capital to expand or upgrade municipal assets. In
addition, the proposed rules would apply only to the financing an operation of new facilities, not
to existing plants. This also limits the opportunity to privatize existing municipal assets by State
and local governments, particularly in the water and wastewater industry. The rules also prohibit
any renewal options in a service agreement that automatically renews the contract if they are not
explicitly canceled by either party, again, acting to offset the primary incentive created.

The proposed rules on mixed use facilities could severely limit the ability to use tax-exenipt
financing for public infrastructure facilities or to enter into public-private partnerships for use of
the facility. In addition, the rules could add multiple layers of complexity in determining the
scope of use of facilities. Several groups have proposed that the rule should revert to the prior
practice of determining private use based on a percentage allocation or apportionment basis to
total use. The substantial concern and comment on the Proposed Regulations have made it
unclear whether the IRS will entirely rewrite new regulations for comment or whether it will

?5 public Works Financing. November 1992. p. 24 we
20


Robert Dailey Martin Lobo

J. P. Morgan US GAO
60 Wall Street, 33rd Floor Rom 575
New York, NY 10260 T. O’Neil Federal Bldg
10 Causeway Street
Swep Davis Boston, MA
Tyone Parters Ed Markus
33 Witherspoon Street Black & Veatch
Suite 200 1211 Avenue of the Americas, 42nd Floor
Princeton NJ New York, NY 10036
James C. DeLaura Marlin Mosby
Montgomery Watson Public Finance Management, Inc.
299 Market Street 530 Oak Court Drive, Suite 145
Saddle Brook, NJ Memphis, TN 38117
Raymond A. DiPrinzio Mark Paul ;
Credit Suisse Wheelabrator Technologies Inc.
12 East 49th Street Liberty Lane
New York, NY 10017 Hampton, NH 03842
. Heather Ruth
Bob Gill Public Securities Association
US EPA 40 Broad Street, 12th Floor
290 Broadway New York, NY 10004
New York, NY
Ron Grosser Sonia Toledo
Hawkins, Delafield & Wood Merrill Lynch & Co.
67 Wall Street World Financial Center, 250 Vesey St.,
New York, NY 10005 North Tower, 9th Floor
New York, NY 10281-1309
Douglas Herbst
PSG
Roy Torkelson
14950 Heathrow Forest Pkwy Reinoso & Co.
Houston, TX 77032 30 Broad St.
Keith Hinds New York, NY 10004
. Interwest Management, Inc. Walter Winrow
110 2nd St., S.W., Suite 304 G. E. Capital Investment
Albuquerque, NM 87102 1600 Summer Street
Stamford, CT 06927
Eileen Kaufmann or
NYC DEP : Marion Yuen
59-17 Junction Blvd 268 Berkeley Place
Corona, NY 11368 Brooklyn NY 11217

24




‘Would proposals to enlarge or modify tax-exempt eligibility add to investment?

Two proposals would change the tax exempt status of certain infrastructure bonds in order to
enlarge investment in infrastructure. One would involve targeting the pension fund market. The
second would exempt infrastructure bonds from some Internal Revenue Service requirements.
Whether these proposals would add to investment is difficult to determine. Those who believe
that market demand for tax exempt bonds is already strong may be skeptical about the effect of
these proposals.

One approach to enlarging tax-exempt eligibility would be to tailor the tax status of
environmental infrastructure bonds for the resources of the pension fund market. An alteration of
Section 72 of the Revenue Code could permit an eligible pension fund investor that purchased a
qualified Environmental Bond to receive any interest earned on that investment as a tax free
distribution upon retirement. The Commission to Promote Investment in America’s

Infrastructure asserted in 1993 that “Such a tax-free pass-through from a fund to its participants
would produce a competitive after-tax market rate of return for the retirement fund participants,
yet allow a project to obtain funding at levels commensurate with municipal bonds.”'° This
would bring environmental bonds into line with the fiduciary responsibility of pension funds to
provide participants with maximum return commensurate with safety and liquidity.

With approximately 18 percent (or approximately $800 billion) of the $4.5 trillion in pension
fund assets in defined contribution plans, even moderate participation in environmental bonds
could stimulate increased demand, providing additional liquidity to issuers of tax-exempt debt
which in turn could stimulate issuance and investment activity. By lowering the cost of capital to
localities to fund environmental infrastructure, these specially designated bonds could provide
flexibility to spend on financing new investments.

A just released GAO report Private Pension Plans: Efforts to Encourage Infrastructure
Investment "' encapsulated some of the doubt about this proposal. “We found strong
reservations among economists and market participants about the need for new Federal entities
and subsidies to encourage a reallocation of pension capital.” The report “questioned whether
specific incentives to attract pension plans are the best way to spur infrastructure investment”
because bonds and State Revolving Funds provided ample methods to entice investment.

Another approach has been advanced by the Government Finance Officers Association. This
group supports designating certain tax exempt bonds as mandated infrastructure facility bonds
(MIF bonds) to provide more flexibility to governmental entities for the construction, renovation,
rehabilitation of infrastructure facilities. This would be accomplished for governmentally
owned infrastructure facilities though the easing of restrictions in laws governing tax-exempt
financing and through targeting the use of mandated infrastructure facility bonds that are
mandated by Federal law or Federal regulations.

»° Financing the Future. Report of the Commission to Promote Investment in

America’s Infrastructure. February 1993.
4 September 25, 1995. .
14


Appendix D-3
STATE ADMINISTRATIVE DRINKING WATER FEES IN FY 1993 (Dedicated to Non-Capital Purposes)*

Alabama 238,000
Alaska 10,000
Arizona 0
Arkansas 2,400,000
California 5,970,000
Colorado t)
Connecticut 150,000
Delaware 0
Florida 725,000
Georgia 2,430,000
Hawaii )
Idaho 950,000
Mlinois 2,067,300
Indiana 40,000
Towa 16,000
Kansas 0
Kentucky 65,856
Louisiana o
Maine 6,000
Maryland 0
Massachusetts 0
Michigan 0
Minnesota 0

issisgioos 900,000
Missouri 300,000
Montana 587,000
Nebraska 100,000
Nevada 396,267
New Hampshire 177,900
New Jersey 3,400,000
New Mexico 10,000
‘New York 0
North Carolina 462,000
North Dakota t)
Ohio °
Oklshoma 1,100,000
Oregon 443,407
Pennsylvania 1,000,000
Rhode Island 0
South Carolina 950,000
South Dakota 238,000
Tennessee 1,360,000
Texas 1,630,000
Unh 58,000
Vermont 180,248
Virginia 1,722,000
‘Washington 1,170,000
West Virginia o
Wisconsin )
‘Wyoming 0
TOTAL: $ 31,219,978

Source: Alternative Funding Mechanisms for State Drinking Water Programs, July 1993. National Conference of State Legislatures *
Dedicated to State drinking water operational and programmatic budgets

81


-Don't overlayer SRF with too many eligibilities such as some aspects of drinking water and solid waste (Ken Kirk)
4, Eligibilities

-Include non-structural improvements (Greg Smith from ASWIPCA, Tom Van Arsdale from NCFC, Beth Ytell from
EFAB, David Zwick from CWA, Tom Schaffer from AMWA, and Jack Sullivan from AWWA)

-Non-structural solutions include NPS (BMPs) and source-water protection

-Include Federal/State technical assistance (drinking water systems viability, use of low-cost technologies by small
communities, Tom Schaffer from AMWA and Beth Ytell)

Include solid waste (Bob Lenna, Beth Ytell, and Pete Butkus)
-Encourage drinking water regionalization and consolidation (Jim Groff from NAWC)
5. General Comments
-Federal match sounds like a new Federal entitlement under Model 3 (Claudia Copeland, CRS)

-Beware of unanticipated outcomes, e.g., fee-based models might be seen by Congress as a substitute for direct SRF
appropriations (Ken Kirk from AMSA, Tom Schaffer from AMWA)

-Congress will never support our fee proposals and the report would do damage to the cause of funding water
infrastructure (Jack Sullivan from AWWA, Jim Groff from NAWC, Tom Van Arsdale from Farmers Coop,)

Gaining State legislative support a huge problem (Beth Ytell from EFAB, Nela Brown from Shell, Jack Sullivan from
AWWA, Bob Lenna from EFAB)

-Getting local commitment to fees is essential (Nela Brown)
-Value-added fees very unpopular (David Zwick from CWA) and always regressive (Nela Brown)

-Legislating local user fee increases very difficult (John Schellpfeffer from AMSA, Tom Schaffer, Jim Groff, Jack
Sullivan) and user fees increases under Models | and 2 are too steep

-What's wrong with using general revenues instead of new fees (Nela Brown and Beth Ytell)?

-Remember, the study is not a financing study, e.g. which would focus on issues such as arbitrage rebate
restrictions on SRFs (Bob Lenna)

-Pay more attention to pollution prevention (Jack Sullivan and Patty Glick from Sierra Club)

-Tax-exempt bonds are still the best way to go (Jim Groff); we may wish to explore such issues as expanded volume
caps for private-activity tax-exempt bonds

~Grants are inefficient (Jim Groff) and loans too costly and time-consuming (Jack Sullivan)
~Federal and State environmental mandates are the real problem (Tom Van Arsdale)

-Need a ceiling and sunset on fees (Nela Brown); also need to look at effects on international markets (Nela was the only
panelist who specifically mentioned the need for more analysis on the economic impacts of fees)

-How did we derive our toxic vs. conventional fee rates under Model | ? (Nela Brown)
-Need to include more industry in discussion (Nela Brown, Beth Ytell, Sahid Kasraci)

sl


Taylor, Harold, U.S. Department of Agriculture, September 1994, Fertilizer Use and Price
Statistics, 1960-93.

The Sierra Club (Glick, Patricia and Halik, Heide), January 1995, In The Green: A Guide to
Paying for Environmental Programs.

University of Florida Law School, February 1992, Nationwide Survey of State Water Use
Legislation.

U.S. Department of Agriculture, October 1993, Agricultural Resources Inputs: Situation and
Outlook Report.

U.S. Department of Transportation, Federal Highway Administration, May 1992, Financing
Federal-Aid Highways.

U.S. Department of Transportation, Federal Highway Administration, December 1994,
Rebuilding America: Partnership for Investment.

U.S. Environmental Protection Agency, Office of Water, September 1993, 1992 Needs Survey
Report to Congress.

U.S. Environmental Protection Agency, 1992, Permit Compliance System.

U.S. Environmental Protection Agency, June 1994, Prevention, Pesticides and Toxic Substances,
Pesticides Industry Sales and Usage:_1992 and 1993 Market Estimates.

U.S. Environmental Protection Agency, Office of Administration and Resources Management,
May 1990, A Preliminary Analysis of the Public Costs of Environmental Protection: 1981-2000.

U.S. Environmental Protection Agency, Office of Policy, Planning, and Evaluation, March 1991,
Economic Incentives: Options for Environmental Protection.

U.S. Environmental Protection Agency, Office of Wastewater Enforcement and Compliance,
October 1991, State Revolving Fund (SRF) Final Report to Congress.

U.S. Environmental Protection Agency, Office of Water, May 1992, An Overview of Existing
State Alternative Financing Programs: Financing Drinking Water System Capital Needs in the
1990’s.

U.S. Environmental Protection Agency, Office of Toxic Substances, 1994. Toxic Release
Inventory.

U.S. Environmental Protection Agency, August 7, 1992, Alternative Financing Mechanisms for
Environmental Programs.

39




3. Prototype Fee Rates

We have used a flat rate fee on public water supply withdrawals for estimating purposes.
In 1990, total public withdrawal of treated water was 38,650 million gallons per day or a total of
14.1 trillion gallons per year. By setting a national revenue target of $2.8 billion annually, we
can define the flat rate as:

1990 Rate = $2.8 Billion/14.1 Trillion = $.198/1000 gallons

This rate is about 5 cents greater that the approximately 14 cent rate employed in earlier studies
designed to generate only $2 billion annually (Apogee 1990, Syracuse 1995).

A 1 cent lower rate could be predicted for 1995, based on increased consumption at an annual
compounding growth rate of about 1.3%, assuming that public water use grew at the same rate as
between 1985 and 1990. Thus, the lower, current rate could be estimated as:

1995 Rate = $2.8 Billion/15.01 Trillion = §.185/1000 gallons

4. Impacts

The impacts of the public water supply withdrawal fee on water bills, under a $2.8 billion
annual revenue target, are not minimal when one accounts for ongoing facility expansion,
upgrades and operations and maintenance demands.

One study estimates the average individual uses between 104 and 140 per day, or 38,000
and 51,000 gallons of water per year or between 3000 and 4000 gallons per month (EFAB,
"Public Sector", 1992). Thus, the cost to the typical consumer is between .$587 and $.792 per
month, or $7.04 to $9.50 per year. Table 1 below provides a similar analysis of impact for the
typical family in 1995. Table 2 examines the impacts by State, based on the 1990 estimates of
water use by State.

[Table 1. Effects of Public Supply Water Withdrawal Fee on a Typical Household

}Assumptions:

|Average Family consists of 2.64 people
[Average Person Consumes 104 to 140 Gallons of Water/Day

Rate: 0.1856 per 1000 gallons
Monthly Monthly Annually Annually
Low High [Low High :
(Consumption * 8351.00 11242.00) 100214.00 134904.00}
ee $ 1,55} $ 2.09] $ 18.60] $ 25.04]
verage Bill $ 14.47) $ 19.01] $ 173.64} $ 228.12
‘ee/Bill 10.71% 10.98% 10.71% 10.98%

[eu creas vibaawal

14



IH. SOURCES OF FEES

The list of potential fees evaluated in detail during the research phase of this study was
limited primarily to those related to the use of water, either directly or indirectly. Water-related
fees generally fall into five categories: (1) effluent or discharge fees (based on volume and/or
toxicity); (2) water use (both public water supply withdrawal and direct, self-supplied water
withdrawal) and other "severance" fees; (3) permit or related administrative service fees; (4)
feedstock and excise fees on chemical use or production; and (5) "green" product fees (based on
manufacutured product sales). Some fees, such as pesticides fees, may be designed either as
feedstock or green product fees.

Another strong research consideration is the extent to which specific fees already were
utilized by States and localities. This information has been extensively documented and is
presented throughout the text and in Appendix D. Presumably, wide State use of certain fees
implies that such fees are workable and, to some extent, acceptable as financing mechanisms.

Third, the preferences and opinions of the over 100 expert fee panelists and attendees are
taken into account in the subsequent sections on "Potential Acceptability".

The summary below centers on two types of broad-based, relatively low level, water-
related fees which, out of a wide array of fees, received the most potential support as indicated by
the panel multi-voting: (1) public water supply withdrawal fees, and (2) "green" product
fees. The public water withdrawal fee, moreover, is the third most extensively used by States,
following NPDES permit and drinking water operator, laboratory and certification fees.

For each of these hypothetical fees, we provide a general description of the rationale, fee
base and rate, a prototype revenue estimate, and implementation and acceptability issues. Some
data on economic impacts are presented.

Other potential fees are summarized briefly at the end of this chapter as well as the
Syracuse Environmental Finance Center Draft Report Executive Summary (Appendix E). This
draft report contained current estimates on industrial and municipal effluent fees, pesticides and
fertilizer production fees, and NPDES wastewater permit fees, none of which received much
support as capital-generating fees during the public consultative phase.

The potential acceptance of any fee, however, should be put within the context of the
preference of many fee panelists to solve financial shortfalls through different approaches, both
policy and financial, at the present time. Support may also be termed "comparative", since it
occurred within the context of alternative fees.

A. Public Water Supply Withdrawal Fees

The public water supply withdrawal fee is discussed first, because it was included in the
original research, although slightly more support was evidenced for green fees at fee panel
discussions. Public withdrawal water fees have been proposed in the recent past (Apogee 1990,

10




5. Potential Acceptability

Green product fees did not generate as much resistance on cultural and legal grounds as
did public water supply fees, although opposition on economic grounds has yet to surface. Total
multi-voting was slightly higher for green fees than for public water withdrawal fees (98
compared to 73 multi-votes). In part this is because some green fees votes in Denver included
solid waste and air fees, and plumbing fixtures were added later at the Airlie meeting.

Support for the green fee alternative appeared to be based primarily on the very wide
industrial, commercial and consumer revenue base, which was viewed as preferable to the
smaller public water suppiy customer base. Federal green fees were seen as working parallel
with continuing Federal capitalization grants to SRFs.

"Green" products, moreover, contribute significantly to water pollution. While
acknowledging the pitfalls of documenting the damage and cost of clean-up on a product-by-
product basis, proponents argued that some relationship was obvious and that drawing attention
to the causes of water pollution was important. In Denver, the argument was also made that, if
green fees ever were accepted, it would be best to implement them on a "full-spectrum" (i.e.,
multi-media) basis including solid waste and possibly air. Common sense underscores the
rationale that the cross-media implications of green products are large and an across-the-board
program might be more justifiable on the basis of economic fairness and public support.

At Airlie Center when green fees were first discussed, they were strongly opposed by
industry representatives for reasons of economic competitiveness, although at Crystal City one
panelist subject to Superfund fees could see the justification for new green fees. No industry
participants were present in Denver.

Additional dissent was based on the potentially large administrative costs and
complexities of Federal or State programs. Of particular concern was how to compare a
specifically taxed "harmful" product with what might be considered "safe". The panelists
reluctantly agreed that certification and labeling of environmentally friendly products, such as
practiced in Germany, would be too administratively and politically difficult in this country.

C. Other Fee Candidates

The fee panelists struggled with generating a list of other possible fees, as described
below. One fee mentioned was the State direct water withdrawal fee, as contrasted (and
sometimes confused) with public water supply withdrawal fees. Almost as many States currently
charge for direct water withdrawals on a recurrent basis as States using public water withdrawal
fees, although there is an equal history of States decidedly rejecting proposed direct use fees
(University of Florida, 1992). Direct water use fees might be supported by some drinking water
utilities on the grounds of being a fair and consistent approach to water use.

Interestingly, at both Airlie and Denver, fee panelists attempted briefly to develop a
concept for what may be termed "watershed" protection fees, whereby development impact or

22


Figure 2: Depiction of Expanding Water-Related Eligibilities under
Three Models

[TI The Federal Fee Model

Federal government WWT project grants; SRF loans
and SRF small community grants,

for DW & WWT.

IV The Federal’ State De Minimis Fee Model

SRF loans and principal subsidies for DW & WWT and infrastructure;
SRF loans to private “public-purpose” DW & WWT projects

II. The Voluntary State Fee Incentive Model
SRF loans and principal subsidies for DW & WWT and infrastructure; SRF small
community grants; SRF interest-subsidized private “public-purpose” loans

“Degree of Water-Related Eligibilities

*DW" is Drinking Water
“WWT” is Wastewater Treatment

8B


had been raised often over the years with little response from Treasury or Office of Management
and Budget officials.

Finishing seventh on the list was a proposition to lengthen allowable term of private
management contracts. A proposed method to accomplish this would be to transfer 20-year safe
harbor language from solid waste regulations to water infrastructure rules.

Support for the Government Finance Officer Association’s Mandated Infrastructure Bond
proposal ranked eighth on the list with only four votes. This idea is closely related to the first
proposal and SRF reform designed to enlarge eligibility for tax-exempt debt. More flexibility to
governmental entities for the construction, renovation, and rehabilitation of infrastructure
facilities would be accomplished for governmentally-owned infrastructure facilities though the
easing of restrictions in laws governing tax-exempt financing, and through targeting the use of
mandated infrastructure facility bonds to finance facilities mandated by Federal law or Federal
regulations.

Expanding bank deductibility for tax-exempt debt got three votes. One panelist strongly
insisted that the 1986 Tax Act elimination of bank deductibility costs for carrying tax-exempt for
issues greater than $10 million has undercut financing of infrastructure. This particularly affects
pooled issues of small localities, whose individual issuances are less than $10 million, but whose
total exceeds $10 million. This proposal would extend bank deductibility for pooled issues when
no individual issue exceeds $10 million. The panelist estimated that the new law costs his
institution 10 basis points when issuing tax-exempt debt.

‘A move to reform the private bond activity volume cap got only one vote, not because the
idea was unpopular but because other more sweeping proposals would accomplish the same
thing. In fact, a number of panelists explicitly supported volume cap reform as important if the
proposal to define tax-exempt status by use (and not ownership) were unsuccessful.

Some panelists questioned the significance of State volume caps. One panelist said he
had not heard of any water infrastructure financing proposals that specifically were rejected
because of a lack of room under volume cap. However, others responded that such deals would
never get to the point of official rejection. Issuers knew ahead of time whether a project would
get funding, and would not get involved if rejection were likely. They insisted that a number of
projects did not go ahead because private activity bond funding seemed unlikely.


Appendix A-2

Alternative Funding Study
Water Fee Meeting.
July 19, 1995

Airlie Conference Center
Warrington, VA

Sponsored by CIFA, Syracuse EFC and the Office of Water, U.S. EPA

Meeting Panelists and Attendees

State Government

Paul Marchetti

Executive Director
PENNVEST

22 South 3rd Street
Keystone Building, 4th Floor
Harrisburg, PA 17101

Greg Smith

Chief, DEFA

Ohio EPA

1600 Watermark Drive

PO Box 163669
Columbus, OH 43216-3669

Tom Gray

VA Division of Water Supply Engineering
1500 East Main Street, Room 109
Richmond, VA 23219

Brian Jeans

MA Department of Environmental Protection
One Winter Street

Boston, MA 02108

Local Government

Bob Weaver

General Counsel

AMSA

1000 Connecticut Avenue, NW,
Suite 410

Washington, DC 20036

Paul Bringewatt

Executive Director

Monroe County Water Authority
475 Norris Drive

Rochester, NY 14610

Mike Ralph
Director of Public Affairs

MA Water Resources Authority
100 First Avenue

Boston, MA 02129

Agriculture

Mark Jenner

American Farm Bureau Federation

925 Touhy Avenue
Park Ridge, IL 60068

Tom Van Arsdall (absent)

National Council of Farm Cooperatives

50 F Street, NW
Washington, DC 20001

Jason Gray

Manager

Environmental Programs
VA Water Project

PO Box 2868

Roanoke, VA 24001

Environment

Joanne Freund Lesher

3601 Connecticut Avenue NW
Apt 610

Washington DC 20008

Velma Smith

Executive Director
Friends of the Earth
1025 Vermont Ave, NW
Suite 300

Washington DC 20005

Business and Industry

Ford West

Vice President for Government Affairs

Fertilizer Institute
501 2nd Street, NE
Washington, DC 20002

Mike Ruszezyk

Manager, Surface Water Issues
Health, Safety & Environment
Eastman Kodak Company
Rochester NY 14652-6263

44


Appendix E
Executive Summary of the Draft Report

Origins of the Study

This study is the result of a growing interest, nationwide, in the use of fee-based systems to raise revenues to finance
drinking and wastewater infrastructure facilities. In 1994, the U.S. Environmental Protection Agency (EPA) was awarded moneys to
conduct a study of alternative revenue sources for clean water project funding. This earmarked amount in EPA's FY9S appropriation
had its origins in a bill originally sponsored by Gerry Studds (D, Mass), called the "Polluter Pays Bill" (H.R. 2199 in 1993). This
report, prepared by the Environmental Finance Center at Syracuse University, was conducted under a grant from the Office of Water,
U.S. EPA.

Assumptions

In evaluating alternative sources of fees, a target level of $2-3 billion annually was established by EPA, recognizing that
this sum was not based on total needs. The fees examined here are designed for the purpose of raising revenue, not changing
behavior. Another assumption is that all fee revenues must be dedicated primarily to financing water-related capital
construction projects and revenues from fees are meant to be supplementary to existing annual appropriations such as Clean Water
Act Title VI State Revolving Fund (SRF) capitalization grants. The options considered in this study contemplate the funding of
drinking water facilities as well as wastewater and non-point sources. Some non-structural solutions such as best management
Practices and watershed protection also could be included.

In considering funding systems, we looked more broadly than primarily Federal systems. We were interested in fee
Programs that were nationwide in scope, but not necessarily or mainly “Federal” in terms of fee program design, collection,
administration, and disbursement. We placed special emphasis on fee systems that involved State governments and State Revolving
Funds (SRFs), sometimes as the major decision-makers. Here, local governments are discussed primarily as the recipients, or
beneficiaries of fee-based financial assistance.

The Building Blocks: Fee Sources, Institutional Mechanisms, and Evaluative Criteria

The goal of this study is to generate several self-sufficient, intergovernmental fee-based funding models for financing
water quality infrastructure, which can serve as the basis for further discussion and evaluation. While past fee studies often have
focused mainly on revenue sources, we have concentrated on designing complete funding packages. The models are structured to be
self-sufficient, in that they do not rely on other sources of funding, and indeed provide moneys to support their own administrative
costs. The models are generic and designed to generate additional discussion. Policy-makers may mix-and-match the elements of
cach model depending on future policy decisions.

The basic elements of each model, i.e., the role of various governmental levels, the fee base (revenue sources), institutional
delivery mechanisms, collection and administration, and specific water-related eligibilities and oversight, result from a mix-and-
match of the fees and intergovernmental delivery mechanisms examined. Delivery mechanisms are those that disburse financial
support to States and/or localities.

Figure 1 (on the following page) depicts the building blocks which were used to generate three combined
intergovernmental models, described below. From a wide number of revenue sources examined, we selected five as the most
feasible for in-depth analysis and estimation, including: Industrial Effluent Fees, Pesticides and Fertilizer Production Fees, Public
Supply Water Withdrawal Fees, Municipal Wastewater Effluent Fees, and NPDES Permit Fees.

Likewise, four institutional delivery systems were examined and two, a new Federal Clean Water Trust Fund and
expanded State Revolving Funds (SRFs), were selected for the generic models. State programs are described throughout the report
and in Appendices. -

85


1. Fees should be subject to local control (19 votes), and States should be treated equitably in fee
allocation (if the Federal government collected fees) (also 19 votes)

2. The source of fees should be “rationally” related to their use (close cost/benefit relationship) (18
votes)

3. Federal financing should supplement State/local fees (14 votes)
5. Affordability should be determined at the local level (13 votes)

6. Fees should be understandable in terms of costs and benefits (11 votes)

C. Types of Fees

If fees were supported at all, the Denver panelists confirmed the preference for a broad-based, low level, water-related fee
voiced at the Airlie Center meeting. More "particularized” and costly fees such as effluent fees and pesticides production fees were
not mentioned at all.

1, Green Product Fees

In Denver, adding the multi-votes for water “green” product fees and other environmental green fees, the green fee concept
received more support than use of local utility water and wastewater user fees. "Multi-media" environmental green fees drew the
Most votes, i.e. fees for solid waste and air pollution products in addition to more water-related product fees. The idea behind what
several panelists termed multi-media, or "full spectrum” green fees is that, if new fees for project financing were to be implemented at
all, an administratively effective and equitable option might be to use such fees across the board.

Implicit in this policy preference was the notion that multi-media fees not only might be better understood and accepted,
but also that new financing options should conform with the trend towards environmental program integration, particularly at the
State level. While few States and localities currently use water-related "green" product fees, more States have successfully
implemented solid waste disposal fees such as for used oil, tires, and household hazardous wastes.

Green fees on household and commercial products affecting water quality, such as paper goods, detergents, and paints and
solvents, drew an almost equal number of votes as full-spectrum green fees, and are reflected in the AMSA proposal presented at the
April 25 and July 19 open meetings.

The apparent preference for green‘fees implied to many panelists, some of whom acknowledged reluctantly, that the
Federal government would be the collecting agent. AMSA's green fee proposal notes thai such fees should be collected by the
Intemal Revenue Service (IRS) because of the interstate commerce application.

Green fees representing a direct sales tax surcharge, or value-added tax, might be collected directly from the private sector
producer (and then reimbursed through the sales tax mechanism, such as the gasoline tax supporting the Federal Highway Trust Fund
works). In debating the merits and efficiencies of Federal versus State collection, several panelists affirmed that States could be (and
had been) highly efficient as fee and tax collectors, with lower administrative costs than the Federal government.

The green fee concept drew less detractors in Denver than at the Airlie Center meeting, perhaps in part because no industry
groups were represented on September 21. However, at both panels an interesting discussion on "green labelling" pursued. The
‘approach used in Germany of certification by a public/private board of “environmentally friendly” products, for which producers pay
a fee, was mentioned. Panelists argued that green labeling probably would not work here, in part because the environmental effects
of particular products, such as household detergents, could not be documented adequately.

2. Water and Wastewater User Fees
The second highest ranked fee was the broad-based, low level public water supply withdrawal fee, which theoretically
could be implemented in conjunction with increases to wastewater user fees. Similar to the Airlie panel, support for this was based

on the concept of paying the true costs of services through the rate or user fee structure. As one panelist noted, such fees currently
existed in a number of States to support State operating budgets (¢.g., permit writing).

60


Unfortunately, the impacts on smaller communities requiring extensive drinking water
treatment sometimes are upwards to two and one-half times higher. (EPA, 1990). Moreover,
since water utility companies represent a high volume/low margin industry, most rate increases
probably would be passed on to the consumer unless, in the case of investor-owned (private)
utilities, rate increases were denied by State Public Service Commissions.

Several factors could work to reduce aggregate public water use. One is increased
conservation associated with changing perceptions of resource scarcity and importance
independent of economic prices, and another is short-term emergency situations such as
droughts. Since both are difficult to predict, responses to price changes are best understood in
terms of price elasticity. Existing research suggests that individual household responses to prices
changes for water are small, as are estimates of commercial or industrial price elasticity for water
which run between 5% and 8% (Apogee 1990). In 1990, industrial use consisted of about 13:5%
of public system use. Thus, for an 8% increase in water rates due to the protoptypical fee,
industrial use would shift away from public sources by approximately 6% generating an overall
reduction in total public use of less than 1%.

5. Potential Acceptability

Those fee panelists supporting wider use of a public water supply withdrawal fee,
compared to other fees, advanced some cogent arguments. Water reportedly represents the
cheapest of all utilities at present (e.g., gas, electric and telephone) and is substantially
underpriced in many parts of the country. In the past, water sometimes even subsidized general
municipal budgets. Increased rates, when accompanied by improved communication about real
treatment needs, might be supported over time. Moreover, strengthening the service user fee
approach to water financing was a sound principle on which to base new revenue generation.

At the Airlie Center open meeting, several panelists termed water rate increases as
"infrastructure renewal" fees, to emphasize the importance of full-cost pricing. One panelist
summed up the problem of reaching full-cost pricing goals -- if everyone would "cheerfully" pay
all water costs, new financing would not be an issue in the first place.

Opposing positions also were very strong. Localities, and water and wastewater utility
participants argued vigorously that government indirectly regulated the price of drinking water
through regulatory mandates and, in the case of privately-owned water utilities, water rates were
directly regulated. To subject customers to additional rate increases at this time could be
damaging to public support for enhanced treatment, particularly if local fees collected were
redistributed to other communities. Current water rates already were insufficiently flexible to
address real affordability concerns, and in the case of wastewater were doubled every six years.

Panelists at all three fee meetings had trouble with the notion of a Federally-imposed
public water supply rate increase, both from a cultural and legal standpoint. Others who
supported the fee concept in principle somewhat reluctantly supported State-levied rate increases,
but preferred implementation on a purely local level.

16


. Thave enclosed a copy of the paper recently presented by Richard E. Warren, P.E. at an International
‘Symposium on Public Works and the Human Environment. Mr Warren's paper tied-in nicely with the work
reviewed at our April 25 meeting.

ce: George Ames Victoria Kennedy Beth Ytell Richard Warren, P.E.

74


Since better data exist for regulated water consumption than green fees, the
regressiveness of flat fees might be avoided by offering lower rates to certain customers, for
example the poor and elderly, or higher rates for industrial/commercial users requiring very clean
water like manufacturers of computer chips and bottled drinks. Ascending block rates could be
used for water conservation, and declining block rates for economic development objectives.

By setting a national revenue target of $2.8 billion annually, and calculating based on
1990 U.S. Geological Service public water supply withdrawal estimates, we can define a flat rate
as: :

1995 Rate: $2.8 billion/15.01 Trillion = $.185/1000 gallons

This translates into an average individual cost of $7.04 to $9.50 per year, based on average use of
104-140 gallons per day. Thus, annual household water bills would increase by slightly over
10% for an average family of 2.64 persons.

Supporters of the public water supply withdrawal fee noted that drinking water is the
cheapest of all utilities, is still underpriced in many communities, and should reflect the "true
cost of service."

Opposing positions were very strong. Rate increases could undermine public support for
new treatment, particularly if local fees must be redistributed. Affordability concerns were high.
Water rates already were indirectly regulated through Federal mandates and, for investor-owned
utilities, directly regulated by State Public Service Commissions. There was little support for
Federally-imposed water withdrawal fees.

3. Other Fees

Other fee candidates are presented briefly in this report, but attracted few votes at the fee
meetings.

One exception is fees which might be administered within individual, sub-State
watersheds. "Surrogates" for watershed protection fees are many, including agricultural-related
fees, water and sewer construction and hook-up fees, and development impact fees. In addition
to raising revenue, such fees might help contro! non-point sources, encourage small system
regionalization, and discourage development which negatively impacts watershed ecology.

Another candidate is the direct, self-supplied water use fee, currently in place or being
considered in many States. Although the direct water use fee was not widely understood or
discussed, coupling State direct use fees with State public water supply fees appears to be a fair
and equitable approach to enlarging the fee base and reducing individual fee burdens.

C. The Future Federal Role in Fee-Based Funding

The study cites the advantages of using fees to supplement water quality financing. The
typical long-term legislative authorization of fee programs lends certainty to infrastructure

vi


‘That the Federal government already was “regulating” the price of water through drinking water standards-setting, was
noted. However, localities still decided how and who should pay, and could offer subsidies for low-income rate payers. Privately-
owned local utilities also are regulated by State Public Service Commissions, and this presents a special problem.

Using the local rate structures to raise State revenue for project financing might also highlight the need for greater water
conservation, watershed protection, and wastewater quality. Fees less related to the use of water as an important national resource
would be more invisible, and less likely to bring about behavioral modification and policy change.

Again, the local government and utility panelists strongly resisted any externally-mandated user fee increases, with water
and waterwaster already being a high volume/low margain industry. There was especially strong opposition to a Federally-levied
public water supply withdrawal fee on the grounds that water was ainherent "right" not a taxable product, and opposition to the basic
concept of localities collecting fees and rebating them to a higher level of government for “delivery” in other localities. The legality
of a Federal water fee was questioned.

Clouding the debate to some extent is remaining confusion about public water supply versus direct water withdrawal. The
latter, which accounts for most water use in this country, is drawn directly from surface and groundwater by industry, mining,
hydroelectric, and agricultural activity, in contrast to treated water processed by local public or private utilities. Possible fees on
direct water withdrawal received no support in Denver.

3. Other Fees

The Denver panelists searched for other possible fees, none of which drew significant support. Candidates included a
public investment "windfall" profits surcharge, a value-added tax on water used in manufacturing (¢.g., computer chips which relied
‘on high quality water), a surcharge on water/sewer hook-ups in new developments (already used in a number of States), and a
watershed protection fee on entitites within individual watersheds. Using no fees at all, but instead redirecting Federal spending
Priorities to the environment, was an attractive alternative (11 votes, with an additional 3 votes for “none of the above").

In summary, the fees receiving the highest number of multi-votes in Denver were:

1. "Full-spectrum" green product fees ((24 votes) and strictly water-related green product fees (23
votes)

2. Local utility water and wastewater user fees (27 votes)
3. Redirection of Federal general funds (11 votes)
4. Public investment windfall profits surcharge (termed an “unearned increment” tax) (8 votes)

5. Water/wastewater development hook-up fee (7 votes) and watershed protection fee (also with 7
votes)

D. Institutional Delivery Mechanisms

Discussion on institutional delivery mechanisms, or those Federal, State or local entities offering fee-based financial
assistance, centered on the future Federal role in general. Here, ambivalence about Federal invelvement runs deep. Many panelists
favored a return of the traditional Federal capital financing role on a cost-share basis, possibly using nationally collected green fees as
the revenue source. However, as a whole, the panel disfavored a strong Federal redistribution, described as mainly “political”, in
making State-by-State allocation and allotment decisions. As the panelists appeared to sum up: "The Feds should be cheerleaders —
‘but don't let them on the field.”

What was novel in Denver was a concem for a flexible Federal cost-share percentage depending on the economic
condition of localities to meet Federal mandates. Many supported a stronger role for States in determining the percentage of Federal
financial participation on a project-by-project basis, and States were concemed that Federal fee-based allocation decisions woud
penalize those States which had already invested heavily in water and wastewater projects. Balance between the twin goals of
rewarding States having made good progress, and subsidizing States or localities with greater "needs", remained unresolved.

61


B. Mandated Water Quality Needs Continue to Grow

The enforceable requirements of the CWA and the Safe Drinking Water Act, are the most frequently cited federal mandates
affecting local governments. Wastewater construction needs resulting from CWA requirements continue to expand for secondary
treatment; compliance with water quality standards; control of combined sewer overflows ("CSOs") and sanitary sewer
overflows ("SSO") during wet weather events; wastewater reclamation and reuse; and control of stormwater and nonpoint
sources. Needs to bring local drinking water systems into compliance are uncounted to date, but significant. Additionally, as
Proposals to require use of sound science and risk assessment in water quality decisions increase, new sources of funding for
developing necessary scientific information on which to base appropriate regulatory decisions becomes critical.

The wastewater construction grants program was a key element of the Federal Water Pollution Control Act of 1972.
That Act established secondary treatment as a federal effluent limit for sewage treatment plants; a system of water quality
standards promulgated by states or the Environmental Protection Agency ("EPA") in absence of state action; and the National
Pollutant Discharge Elimination System ("NPDES") permit program. The federal funding commitment was established to soften
the impact of compliance costs on sewer rates and to discourage industrial forum shopping.

Since the 1987 CWA Amendments, funding for the clean water mandate has been provided through the state revolving
fund ("SRF") loan program and, except for FY'91, targeted grants primarily for secondary treatment construction and some
combined sewer overflow control. Appropriations through the EPA Water Infrastructure Account have provided only modest
increases for wastewater construction while needs have continued to grow.

1. EPA Needs Surveys

The 1992 EPA Needs Survey2 of wastewater construction costs reported a significant increase in municipal
construction needs over those reported in 1990 to meet CWA requirements. Construction needs for Categories I-V were reported
for 1992 at $145.7 billion3, compared with $110 billion in the 1990 Needs Survey4, or an increase of $35 billion in two years.
EPA documented secondary treatment construction needs alone increased from $26 billion in 1990 to $31.3 billion in the 1992
Survey

Documented and modelled CSO control needs were put at $42 billion in the 1992 report compared with documented
CSO control needs of $20 billion in 1990. Uncertainty, however, remains as to the actual level of CSO control needs which have
been estimated to range from $100 billion to $200 billion and beyond depending on actual implementation of the EPA CSO
Control Policy, state water quality standards, NPDES permit requirements, and future statutory changes.

Costs to comply with federal storm water NPDES permit requirements are in addition to wastewater construction
needs. Additionally, these needs do not: (a) include separate needs for water reclamation and reuse, nonpoint source, ground
water, estuaries or wetlands; (b) contemplate the cost of meeting any new EPA policy on sanitary sewer overflows ("SSOs") now
under development; (c) fully reflect water quality permitting requirements; or (d) reflect future amendments to the Act. Also not
included are repair, rehabilitation and replacement costs for previously constructed facilities.

EPA construction needs data for compliance with the federal Safe Drinking Water Act are not currently available. In
1994, EPA elected to prepare a survey of drinking water needs in lieu of wastewater needs.

2. National Financing Shortfall

Apogee Research Inc. has reported a capital shortfall of $65.7 billion for wastewater facilities construction, plus $18.2
billion for drinking water, during the 1993-2000 period not counting CSO, SSO and stormwater control needs.5 EPA's
Environmental Financial Advisory Board has reported that:

The cost of maintaining a clean environment is growing rapidly... Annual public expenditures in drinking water, water
quality, and solid waste management must increase by.17% between now and the end of the century .... From a public finance
perspective, it is questionable whether state and local ability to borrow can keep pace with the rising expenditures anticipated
under current policy. In particular, environmental investments may be increasingly delayed, as small and economically
disadvantaged communities often cannot get access to or afford the cost of capital.

2 EPA 1992 Needs Survey Report to Congress: “Assessment of Needs for Publicly Owned Wastewater Treatment Facilities Correction of Combined Sewer Overflows
‘and Management of Storm Water and Nonpoint Source Pollution in the United States".

65


Public Consultative Process

Since EPA's Office of Water sought to stimulate thinking and debate within as broad and
open an arena as possible, four day-long open meetings were noticed in the Federal Register and
held between April and October, 1995. These sessions served as "reality checks" on interim
Syracuse University research products, and as forums to provide input from the constituencies or
"stakeholders" affected by any future fees.

The three panel discussions on alternative fees were held in Crystal City, Virginia on
April 25, at the Airlie Center in Warrington, Virginia on July 19, and in Denver, Colorado on
September 21, 1995. A fourth was held in New York City on October 10, 1995, on debt
financing issues. All four meetings were facilitated and panel votes were taken at the last three.

In all, over 100 persons attended the three fee meetings either as selected "expert"
panelists or as interested parties, and a total of 20 States and many more localities were
represented. The opinions voiced are referred to frequently throughout the text of the report.
Thirty-two persons were present at the debt financing meeting, representing eight States.

In addition, extensive data were collected on existing State and local fee programs, to
help verify which types of fees might be most workable and acceptable.

Fee Topics and Concerns
Three major questions, or design components, form the basis of this report. These are:

1. What criteria should be used to evaluate the potential effectiveness of water
quality fee-based funding systems?

2. What specific types of fees are workable and acceptable?

3. What water quality ‘policy fee-based funding goals, especially redistributive goals,
should be pursued?

Several important caveats are noted. Many fee meeting participants preferred other
investment approaches, such as the traditional appropriation process, new Federal-State cost
sharing mechanisms, and expanded use of tax-exempt debt. Others did not support increased
reliance on fees at present, or within any context that was "Federal". Support for increased State
and local flexibility, affordability-based programs, regulatory reform, and pollution prevention
was very high. Many participants also sought to include solid waste eligibilities.

A. Fee Evaluative Criteria
Among the most important criteria to use in selecting fees and delivery mechanisms are:

a. Public Support or opposition influencing potential legislative adoption of fees;

ii








Appendix C-3

STATE OF WASHINGTON

DEPARTMENT OF COMMUNITY, TRADE AND ECONOMIC DEVELOPMENT

906 Columbia St. SW + PO Box 48300 + Olympia, Washington 98504-8300 « (360j 753-2200
May 3, 1995

TO: Deborah Photiad, EFAB
FROM: Pete Butkus

You requested that I provide a synopsis of my comments from the meeting, which focused on the financing options paper
prepared by the Environmental Finance Center at Syracuse University. Further, you asked me to note salient points made by
others, and finally, to consider implications of this meeting on future EFAB activities.

Part One: Meeting Comments

L

ml.

Opening remarks. I speak today from my background as manager of several infrastructure and environmental
infrastructure finance programs. In Washington State, I am responsible for the Public Works Trust Fund, a multi-
purpose state infrastructure bank; the state's non-entitlement area Community Development Block Grant (CDBG);
another infrastructure loan program designated for economic development infrastructure; and, the Bond Cap
Allocation process.

Fee models. I will not comment on the suggested fee models, but limit my remarks to the three alternatives for delivery
of whatever revenue is obtained to the states for financing environmental infrastructure.

Model designation. 1 propose that the best of models two and three be combined into what | call model two-point-eight
(2.8), a model which would provide financing to states for local environmental infrastructure with the following goals:
+ minimal oversight

+ minimal regulation

+ maximum state/local flexibility

A new mindset. In order to implement this model a new and different mindset would need to be established in the
enabling language by Congress. The federal government, consistent with the goals in III, above, would provide areas
or topics to be addressed by each of the states. Instead of mandating a certain practice, the language would simply
require the state, in conjunction with its local governments, to address each of these points in the design and operation
of the state's program financed by this act.

Suggested areas include:

. ‘States may manage this program through one or more state agencies.(This would permit utilization of
existing state management structures or permit a state to modify existing practices — it would be the state's
choice. For example, in Washington state, the Water Quality SRF is managed by the Department of Ecology,
the proposed future Drinking Water SRF will be jointly managed by the Department of Health (TA and
regulation) and the Public Works Board (capital facility finance). If solid waste were to be added, another
agency could conceivably be utilized. States should be able to target financing to the locally-determined

greatest need.

+ There could be a cap on the percentage of funds expended for program management. This amount should be
the lowest reasonable amount necessary to manage a non-bureaucratic revolving loan program. If states wish
to exceed this amount, it may be done with state funds.

. States should examine needs and determine mechanisms, if any, to fairly allocate financial assistance to
specific population groups. Native Americans/colonias, small communities, economically disadvantaged
(urban and rural) are some that come to mind. Again, there would not be a mandate for specific
allocations or programmatic activities, the states would be charged with addressing each as best fits its needs,
in consultation with local and other governments.

+ States should develop and document efforts to ensure sustainability of this environmental finance
mechanism.

72


Appendix A-3

Alternative Funding Study
Water Fee Meeting
September 21, 1995

EPA Region 8 Conference Center
Denver, Colorado

Sponsored by CIFA, Syracuse EFC and the Office of Water, U.S. EPA

Meeting Panelists and Attendees
University

Norm Falk, Director

Technical Service Division
University of New Mexico
Engineering Research Institute

1001 University Boulevard, Suite 101
Albuquerque, NM 87106

Local Government

Barbara Biggs

Governmental Legislation Liaison
Metro Wastewater Reclamation District
6450 York Street

Denver, CO 80229-7499

George Brinsko, Director (absent)
Pima Co. Wastewater Management
210 N. Stone, 8th Floor

Tuscon, AZ 85701

Jon DeBoer

American Water Works Association
1025 Laurel Oak Road

Voorhees, NJ 08043

Mike DiTullio, Chairman (absent)
Water Utility Council

Fort Collins-Loveland Water District
4700 S. College Avenue

Fort Collins, CO 80525

Steve Smithers

Colorado Municipal League
1660 Lincoln Street, Suite 2100
Denver, CO 80264

Art Sweacy

Director

Arkins Water Association
PO Box 26

Masonville, CO 80541

Richard Zais

City Manager

129 N. 2nd Street
Yakima, WA 98902

46

Agriculture

Ray Christensen
Colorado Farm Bureau
2211 W. 27th Avenue
PO Box 5647

Denver CO 80217

Engineering

David Stewart

President

Stewart Environmental Consultants, Inc.
P.O. Box 2285

Fort Collins, CO 80522

Jim Stutler

Tierdae! Construction Co.

1751 East 58th Avenue, Suite A
Denver, CO 80216

Environment

Dan Luecke

Environmental Defense Fund
1405 Arapahoe Avenue
Boulder CO 80308

State Government

Gary Bechtol

TX Water Development Board
PO Box 13231 Capitol Station
Austin, TX 78711-3231

Julia Doermann

Western Governors’ Association
600 17th Street, #1705 South
Denver, CO 80202

Daniel L. Law

Executive Director

CO Water Resource & Power
Development Authority

1580 Logan Street, Suite 620
Denver, CO 80203


Appendix A-1

Alternative Funding Study
Water Fee Meeting
April 25, 1995

Crystal City Sheraton, Virginia

Sponsored by the EPA’s Environmental Finance Advisory Board (EFAB)

Meeting Panclists and Attendees
DISCUSSION PANEL

Deborah Photiades (EFAB Moderator)
Executive Director

Governor’s Advisory Council on
Privatization, Maryland

State Government

Pete Butkus
Department of Community Development
State of Washington

Sacid Kasrei

Chief, Project Manager Division
Maryland Environmental Department
(Association of State and Interstate
Water Pollution Control Administrators)

Robert C. Lenna
Executive Director
Maine Municipal Bond Bank

Greg Smith

Ohio Water Pollution Control Agency
(Municipal Assistance Task Force
Association of State and Interstate
Water Pollution Control Agencies)

Elizabeth Ytell

Director

Environmental Services Division
Rural Environmental Community
Assistance Corporation

Environment

David Zwick
President.
Clean Water Action

Congressional Staff

Claudia Copeland
Environmental Policy Specialist
Congressional Research Service
Library of Congress

42

Local Government

Jon W. Schellpfeffer

Assistant Director

Madison Metropolitan Sewerage District
(Association of Metropolitan Sewerage Agencies)

Ken Kirk

Executive Director

Association of Metropolitan Sewerage
Agencies

Thomas Schaeffer
Association of Metropolitan Water
Agencies

Industry

Nela Brown
Shell Oil Company

Agriculture

Tom Van Arsdali
National Council of Farmer Cooperatives

DESIGNATED FEDERAL OFFICIAL

George Ames
Office of the Comptroller
U.S. EPA

EPA PRINCIPALS

Mike Cook
Office of Wastewater Management
U.S. EPA

Jim Home
Office of Wastewater Management
U.S. EPA


II. EVALUATING FEE SYSTEMS

This chapter addresses the evaluation criteria that might be used to determine the benefits
and concerns associated with various fee programs, which was the first question posed to the fee
panelists. These criteria may be applicable to any revenue-generating fee program, inchiding
capital formation fees, at any governmental level, but are different from those aimed at
evaluating economic (market) incentive fee programs.

A. Revenue-Generating Fee Criteria

Listed below are the original six evaluative criteria developed by the earlier Syracuse
University EFC Draft Report (April 1995, revised May 1995). The opinion, additions and
modifications made by the fee panelists in several critical areas are described subsequently.

These six initial evaluative criteria include:

1. Public Support - the amount of support and/or opposition to new fee proposals, which
will influence the possibility of legislative passage of fee proposals at different levels of
government.

2. Size and Predictability of Revenue Stream - the likelihood that a predetermined
annual fee revenue target, e.g., $2.8 billion, can be reasonably estimated, administered
and audited over time, and whether this revenue will remain dedicated to its intended use
over the long term.

3. Equity and Impacts - equity and impacts generally relate to those "who pay" fees and
address issues of fairness and economic impacts, although an in-depth analysis of
economic impacts was beyond the scope of this study; equity may also refer to fee
revenue allocation or redistribution decisions.

4. Relationship between Costs and Benefits - the cost/benefit relationship refers to the
linkage between "who pays" and "who benefits" by receiving fee-based financial
assistance; a close relationship may result in greater acceptability of fees.

5. Collectability - the ease and simplicity of fee collection systems; administrative
systems which build onto those already in place save time and expense, and close
proximity of the collection mechanism to the financial delivery institution is most
efficient.

6. Meeting Environmental Goals - the ability to meet stated environmental objectives
using financial delivery mechanisms which effectively stretch limited fee revenues and
are flexible enough to address a range of environmental risk and affordability issues
would, of course, be the goal of new fees in the first place; new fees generally imply that
some new "redistributive" objectives will be sought.


Under the Voluntary State Fee Incentive Model, States may choose to establish any fees
or taxes, whether environmentally-related or not, at any rate and yield. For example, States
could use general sales tax set-asides, "sin" taxes, severance fees, or the like. To be eligible for
the Federal 50% match, however, such fees must be dedicated to State water-related project
financing accounts. The Federal match is generated by general appropriations or fees, and
Federal capitalization grants to States are not earmarked to specific eligibilities.

The advantages of this model are maximum flexibility for States which, depending on
how fees are viewed in individual States, may be crucial in getting fees off the ground in the first
place. However, there is no assurance that any new fee legislation and subsequent fee dedication
will occur. Moreover, if the Federal government relies on annual appropriations to match States
fees, this represents either an open-ended contingent liability for it or, in the worst case,
undercuts certainty to States that the year-end match will be forthcoming.

D. Model 4: The Watershed Fee Model

The Watershed Model is the most innovative since fee funds are directed to specific
regional watersheds, either sub-State or multi-State. Moreover, although some State or Federal
funds may be used, the role of both governments is minimal. For example, fee revenues to be
disbursed to specific watersheds could be imposed by States, and be State-wide, or could be
generated and spent solely within individual watersheds. Or, general or fee-based Federal or
State funds could be used to "buy down" the cost of watershed protection projects according to
local affordability criteria. This model is described in Box 4.

Box 4: The Watershed Fee Model (Model 4)

Halnierpid 5
¢
State Fees “ NY Federal
and for , Flexible
Flexible Match Match
Watershed
Revenue Sources / Fund Uses

The Watershed Fee Model appears to be responsive to several new kinds of funding
demands. First is the perceived need to pursue watershed protection through pollution
prevention. However, the kind of projects this implies, such as agricultural best management
practices, are not easily fundable on a more traditional loan or user fee basis.

34


Lee, Martin R., January 14, 1993, Summaries of Environmental Laws Administered by the
Environmental Protection Agency, CRS Report.

National Conference of State Legislatures (Aurturo Perez), April 1995 (3rd Edition), Earmarking
State Taxes.

National Conference of State Legislatures, May 1991, States as Water Quality Financers.

National Conference of State Legislatures, December 1993, Summary of State Wastewater
Discharge Permit Fees (NPDES)

National Conference of State Legislatures, July 1993, Alternative Funding Mechanisms for State
Drinking Water Programs.

National Governor’s Association, (Shields, Evelyn), 1989, Funding Environmental Programs:
An Examination of Alternatives, NGA Report.

New Jersey Department of Environmental Protection, New Jersey Pollutant Discharge
Environmental System: 1989-1990 Annual Fee Report.

New York State Environmental Facilities Corporation Memo, February 19,1993, SRF Loans V.
Grants.

New York State Memo, April 16, 1993, Small Community SRF Program Benefits.

Report from the Governor’s Blue Ribbon Panel, August 1995, Financing Alternatives for
Maryland’s Tributary Strategies, “Innovative Financing Ideas for Restoring the Chesapeake
Bay”.

Research Triangle Institute, February, 1993, Effluent Discharge Fees and Water Quality: A
Preliminary Assessment, U.S. Environmental Protection Agency Office of Water.

Solley, Wayne B., Pierce, Robert R., and Perlman, Howard A., U.S. Department of the Interior,
1993,. Estimated Use of Water in the United States in 1990.

Subcommittee on Environment and National Resources, March 15, 1992, Hearing on “Polluter
Pays Clean Water Funding Act”.

Syracuse University Environmental Finance Center, July 1995, (Kennedy, Victoria S. and Moon,
Myung-Jae), Fees for Funding Water Quality Infrastructure: Background Paper.

Syracuse University Environmental Finance Center Draft Report, May 1995 (Kennedy et.al.)
“Fee-Based Models for Funding Water Quality Infrastructure”.

38


C-1

C-2

C-3

Appendix C

Written Comments by
Water Fee Meeting Attendees

April 25, 1995 Crystal City Sheraton
Arlington, Virginia

July 19, 1995 Airlie Conference Center
Warrington, Virginia

September 21,1995 EPA Region 8 Conference Center
Denver, Colorado

Note that comments on Syracuse University EFC reports, comments on fee
meeting summaries, and oral statements made at fee meetings are available upon
request from the Syracuse University EFC

63


potential to be recycled into successive generations of projects and leveraged in the credit
markets to increase the amount of capital. Together this investment has produced 2,519 loans
totaling $11.8 billion through July 1994.4 The loan programs help instill financial discipline in
all parties involved. When localities were simply the recipients of grants, there were few
incentives to contain project costs. Accepting loans that must be paid back provides strong
inducement to prioritize projects and control the scale of projects and building costs.

Capitalization funds from the Federal government, State matches, and a stream of loan
repayment from local communities create an asset base that permits States to leverage SRF funds
in the credit markets to create further loans. Through the sale of bonds, SRF programs can
immediately make additional funds available for wastewater projects. Eighteen States have to
date leveraged their SRFs, providing $5.2 billion in net bond proceeds to their State loan funds.

Ways to Maximize SRF Investment

Increase leveraging -- Leveraged revolving fund structures offer the greatest potential for
generating a higher volume of loans. In the SRF context, leveraging is defined as using Federal
and State capital grants, in conjunction with loan repayments, as security to borrow additional
funds in the public bond market to increase the pool of available funds for project lending. As of
July 1994, 32 of the 50 States had chosen not to leverage their State Revolving Funds. As the
table below indicates, the 18 States which leverage have originated almost twice the loan dollar
volume as the 32 States which have not leveraged (see table below).

SRF LEVERAGING ACTIVITY
Dollar Total Federal RatioofSRF Dollar Amount
Amountof — Capitalization Loansto added toSRF
SRF Loans Funds for SRF Federal loan pool by
Capitalization leveraging
18 States which have $7,333,181 $4,136,624 177.3% $5.2 billion
leveraged
32 States which have not $4,446,173 $4,429,948 100.4% $0
leveraged

Source: CIFA. State Revolving Loan Fund Survey, 1994. March 1995.

States which have not leveraged have billions of dollars in wastewater infrastructure needs
identified in a 1992 EPA needs survey, but these long-term needs have not necessarily translated
into project-ready initiatives at the local level.

A reason why many States have not leveraged may be institutional. Some SRFs may be managed
by staff who are neither comfortable with nor interested in bonds and debt. Anecdotal evidence
suggests that the process of borrowing, especially disclosure and arbitrage rebate requirements, is

‘ CIFA. State Revolving Loan Fund Survey, 1994. March 1995. Totals are

through July 1, 1994. Additional capitalization, leveraging and lending have
continued since that date.
11


The last change would require amendment to the Clean Water Act itself. The 20-year
loan cap in the Federal tax code has been criticized for not taking into account the debt schedule
of a treatment facility and the long term nature of, for example, underground pipe. Arbitrage
rebate restrictions are seen as complicated, duplicative, and counter-productive. The results of the
restrictions are increased administrative compliance costs and the inability to boister reserve
funds, preventing additional loans from funding additional infrastructure.

Some on the panel asked whether there was excess SRF loan capacity in some States.
Representatives from New York maintained that widening the recipient pool and liberalizing
some rules was precisely the incentive for more States to lend out to capacity. New York
recently made an SRF loan for acquisition of a food processing operation’s wastewater treatment
facility by a local governmental authority. The acquisition allowed low-cost SRF financing to be
used for a facility upgrade, and although now publicly owned, the facility will continue to be
operated by the privately owned food processing company. Underscoring the continuing
potential for the SRF framework was a report on Kentucky. There, after an intense marketing
campaign with localities, the State had increased loan participation to a point where leveraging
the SRF was being considered. The Kentucky effort did not involve coercion or stronger
environmental standards, the panelist noted.

Another important change which was widely supported by the private sector panelists
was to accelerate the number of years over which plant and equipment can be depreciated. Before
the 1986 Tax Act, private companies were allowed to depreciate the facility over a faster, five
year period instead of over a period that was closer to the expected useful life of the facility.
Subsequently, the law has extended the depreciated life of properties up to fifty years, using
straight-line methods.

The panelists also supported “forgiveness” of Federal construction grants provided earlier
to build wastewater infrastructure (10 votes), thus easing the transfer of assets between localities
and private buyers. The local public owner would be reimbursed for the fair market value of the
asset, but no intragovernmental reimbursement to Washington would need to occur. Requiring
such reimbursement can drive up the fair selling price for a locality beyond what a private
concern would find attractive. However, caution should be exercised in those cases where
municipalities are seeking windfall profits by selling to the private sector. Because this proposal
does not have future implications for the Federal deficit, it might find support within the Office
of Management and Budget and the Treasury Department.

Ending up sixth on the list with eight votes: involved the budget scoring process
mentioned above in the context of Federal grant forgiveness. Panelists complained that the
chances for all of the reforms on the list to be enacted were lessened because of a Federal budget
scoring system that they believe stifles reform by only scoring proposals by the impact of tax
revenue loss and ignoring concurrent increases in tax revenue. The proposal became known as
change to a system of dynamic scoring of policy effects on the Federal budget. But just as the
Federal forgiveness proposal was praised for its feasibility to become enacted, this dynamic
scoring proposal was rated as having much bleaker prospects. Some panelists remarked that it

4


A companion document, Part II: "Debt Financing Strategies for Funding Water Quality
Infrastructure", centers primarily on expanded use of tax-exempt bonds and other avenues to
increase both public and private capital investment, and was prepared primarily by the
Government Finance Group with the assistance of the above-mentioned groups.

A third funding innovation, to reduce the demand for water-related project financing in
the first place through regulatory modifications and pollution prevention, is not addressed
specifically in this report, although the need for these was raised repeatedly during the open
meetings described subsequently.

A working assumption of this study has been to examine fees designed primarily to raise
revenue, at a national target level of $2-3 billion annually. For fee rate estimating purposes, we
have used a revenue yield of $2.8 billion annually. Only secondarily, if at all, would such fees
serve as market incentives to reduce polluting behavior.

Another assumption is that all fee revenues must be dedicated to financing water-related
capital construction facilities, both drinking water and wastewater, although non-structural
solutions such as non-point source and watershed protection also are included. Such fees are
termed "capital-generating" or capital formation fees in this study. A final assumption is that
fee-based revenue would supplement existing or new annual appropriations such as Clean Water
Act (CWA) Title VI SRF capitalization grants.

In considering fee-based funding programs, we looked more broadly than primarily
Federal systems. We were interested in fee programs that might be nationwide in scope, but not
necessarily or mainly "Federal" in terms of fee program design, administration and collection,
and the allocation or "redistribution" of fee revenues to local projects. Governmental institutions
disbursing fee-based funds are termed "delivery mechanisms" in this report. In this, States and
localities are included as major decisionmakers.

By "fees", we mean those financial charges for a particular activity, product or the
rendering of specific services, linking the demand for services with the cost for providing them
as much as possible. For water, an example is the public and private utility company charges, or
rates, billed to all customers. Likewise, various State administrative permit fees now finance the
costs of preparing permits, and States use an increasing number of other fees, such as laboratory
testing and licensing fees, and drinking water sales fees, to subsidize State operating budgets. A
number of States use direct, self-supplied water fees, and levy coal, oil and gas "severance" fees.

Recent State use of fees has been well documented and continues. However, only a
modest amount of revenue has been raised for capital formation, as opposed to operating
budgetary support, currently under $200 million annually (See Appendix D).

At the Federal level, Superfund fees on chemical feedstocks and imported chemical
derivatives, and the recent Federal fee on chlorofluorocarbons, are good examples. In 1990, the
Clean Air Act Amendments became the first Federal environmental statute to require States to
charge fees to recover the full cost of preparing air permits (CAA, Title V, Section 502).

2


Below is a summary table of the results of the multi-vote:

Panel Votes on Barriers to Greater Investment in Clean Water Infrastructure

Proposal . Votes
use of water infrastructure (not public or private ownership) should determine tax- 30
exempt status

conversion of water infrastructure ownership from public to private shall allow 17
private owners to maintain existing, outstanding tax-exempt debt structure

expand SRF eligibility to cover all environmental mandates, make private interests 16

eligible, exempt federal capitalization from arbitrage rebate regulations, allow 30
year SRF loans

allow accelerated depreciation of assets 13
federal forgiveness of grants issued to build water infrastructure — transfer of assets 10
only between localities and private groups

change to a system of dynamic scoring of policy effects on the federal budgets ~- 8
look at benefits of changes, not simply costs

lengthen allowable term of private management contracts (transfer 20 year safe 6
harbor language from solid waste regulations to water infrastructure)

support GFOA proposal for Mandated Infrastructure Finance Bonds 4

reauthorize bank deductibility of costs for carrying tax-exempt debt 3

change volume cap, exempt environmental projects from cap, inflate cap, or allow 1

transfer of cap volume between states

C. Strategies to Focus Attention on the Need for Change

While participants praised the consensus on ranking the barriers to increased water
infrastructure investment, others warned that this consensus within the finance community has
existed for some time, but little progress has been made. Some panelists said that similar lists
they had compiled after the 1986 Tax Reform Act resembled closely the list of barriers that
emerged from this session. All of the discussion begged the question: If there was virtual
unanimity on what needed to be done, why has nothing been done? How could the discussion be
moved to the forefront of political debate?

One of the first responses to that question looked to the nature of clean water itself.
Unlike more obvious infrastructure problems, transportation traffic jams or solid waste for
example, clean water does not represent the same immediate, clear threat to public safety. There
are no mountains of burning tires associated with clean water infrastructure, one participant
noted.

Another suggested that EPA’s infrastructure needs surveys were too massive for
policymakers to handle. For example, over $130 billion in wastewater “needs” might seem
unrealistically high for some, a “pie-in-the sky” figure which gives some an excuse to continue
ignoring the problem. .

6





Executive Summary

Chapter

Chapter

Chapter

Chapter

TABLE OF CONTENTS

I. INTRODUCTION

Il.

A. Origins and Purpose of the Study
B. Assumptions and Definitions

C. Public Consultative Process

D. Report Outline

E. Outstanding Issues

EVALUATING FEE SYSTEMS

A. Revenue-Generating Fee Criteria
B. Additional Evaluative Concerns

Ill. SOURCES OF FEES

A. Public Water Supply Withdrawal Fees
B. Green Product Fees

C. Other Fee Candidates

D. Fee Comparison

IV. THE FUTURE FEDERAL ROLE IN FEE-BASED FUNDING

A. Fee Implementation Functions
B. Fee Collection and Rebate
C. Fee Revenue Redistribution

Chapter V. FEE-BASED INTERGOVERNMENTAL FUNDING MODELS

A. The Federal Green Fee Model

B. The Federal-State Water Use/Match Model
C. The Voluntary State Fee Incentive Model
D. The Watershed Fee Model

E. Preserving the Status-Quo

URW

n

a

10

10
17
22
25

27

27
28
28

30

30
32
33
34
36


D. Delivery Mechanisms

Delivery mechanisms are those institutions which might distribute (and redistribute) fee-based financial assistance among
local projects, in either a Federal-to-State, Federal-to-local, State-to-local, or even a local-to-local delivery configuration. Although
“delivery” institutions are not necessarily the same ones that might design and collect fees, it is important to note that the Airlie
panelists appeared to support linking fee collection and delivery at the same governmental level.

Although time constraints resulted in no voting on delivery mechanisms, the panelists readily supported a variety of
alternative institutions depending on the type of fee used, and where it was collected. In particular, the current State institutional
variation existing for wastewater SRF administration was favored. Altemative delivery mechanisms proposed included:

1. State level

State environmental protection agencies (for collection and/or delivery of new fees for wastewater and NPS.
projects, possibly through the SRF mechanism)

State health agencies (for collection and/or delivery of fees for drinking water projects, and home of a future
drinking water SRF)

-Combined/Environmental SRF (independent financing authorities or bond banks) for State environmental
funds (primarily for delivery)

State Treasury departments (for collection, and for complex SRF-related transactions)

-New trust funds (primarily for delivery of new fees)

2. Federal level

-New Federal Clean Water Trust Fund (primarily for fee delivery, and preferably "off-budget")
-New Federal Treasury Department dedicated "account" (primarily for delivery)

Internal Revenue Service (primarily for collection) :

-U.S. EPA (could collect and deliver fees)

-Fanny Mae model (quasi-private, which borrows funds to be distributed; not widely supported on July 19)

3. Local level
~Investor and publicly-owned water and sewer agencies or authorities (for collection and delivery)
4, Mix-and-Match of above

An important implication for selecting delivery and collection institutions, and fees, emerged. Many panelists explicitly or
implicitly rejected the notion of a lower level of government collecting fees (e.g., local utility companies) and then rebating them to a
higher level of government (i.¢., State or Federal) for redistribution back to local projects.

Rebating fees for redistribution raises the “donor” government or “cross-subsidization" issue which plagues the Federal
Highway Trust Fund, which distributes gasoline tax revenues back to States. Under many fee proposals, cross-subsidization among
States and localities is inevitable, since any one unit of goverment probably will contribute substantially more in fees than it
receives back, or vice-versa.

Ifa national redistribution of fee revenues is ultimately favored because of the Federal government's ability to address the
largest number of State/local differences (¢.g., small versus large, urban versus rural), then fees should be designed to be collected
and delivered (i.¢., redistributed) at the Federal level. Those fees which might be collected by the IRS then appear preferable. In
contrast, maximum State flexibility in addressing local needs argues for purely State-imposed and collected fees, even though
inequities among States may arise.

57


Table 2. Public Supply Water Withdrawal Fee by States Based on 1990 Withdrawal Rates

15

1990 1990 1990 1990 1995
Ground Surface Total Total
Water Water Total Annual Annual 1990
PUBLIC PUBLIC PUBLIC Withdrawals Withdrawals Fee
State SUPPLY SUPPL SUPPLY Gallons Gallons Allocation Allocatior
224 483 707 $ 258,055,000,000 $s 275,860,795,000 $51,218,756 $51,220,729
34 58 92 s 33,580,000,000 $s 35,897,020,000 $6,664,958 $6,665,21
401 305 706 s 257,690,000,000 s 275,470,610,000 $51,146,311 $51,148,28!
9 190 309 s 112,785,000,000 s 120,567,165,000 $22,385,567 $22,386,429
3260 2560 5820 s 2,124,300,000,000 Ss 2,270,876,700,000  $421,631,064 — $421,647,30
3 567 650 s 237,250,000,000 Ss 253,620,250,000 $47,089,380 $47,091,19
3 301 374 $s 136,510,000,000 s 145,929,190,000 $27,094,505 $27,095,54!
33 32 8s $s 31,025,000,000 s 33,165,725,000 $6,157,842 $6,158,079
0 0 0 s : s - $0
1700 226 1926 s 702,990,000,000 s 751,496,310,000  $139,529,455  $139,534,824
234 730 564 Ss 351,860,000,000 s 376,138,340,000 $69,837,173 $69,839,86;
221 17 238 s 86,870,000,000 $s 92,864,030,000 $17,241,958 $17,242,6
173 28 201 s 73,365,000,000 $s 78,427,185,000 $14,561,485 $14,562,044
444 1420 1864 s 680,360,000,000 s 727,304,840,000 — $135,037,853 — $135,043,05:
274 330 604 $s 220,460,000,000 s 235,671,740,000 $43,756,901 $43,758,581
234 88 322 s 117,530,000,000 BY 125,639,570,000 $23,327,354 $23,328,25:
176 197 373 s 136,145,000,000 s 145,539,005,000 $27,022,060 $27,023,100
55 372 427 s 155,855,000,000 s 166,608,995,000 $30,934,100 $30,935,2
275 344 619 s 225,935,000,000 s 241,524,515,000 $44,843,579 $44,845,304
21 86 107 s 39,055,000,000 s 41,749,795,000 $7,751,636 $7,751,93:
76 722 798 s 291,270,000,000 s 311,367,630,000 $57,811,270 $57,813,
179 535 4 s 260,610,000,000 s 278,592,090,000 $51,725,873 $51,727,86:
261 1140 1401 s 511,365,000,000 $s 546,649,185,000 .  $101,495,725 — $101,499,63
290 225 51S s 187,975,000,000 s 200,945,275,000 $37,309,278 $37,310,719
282 38 320 s 116,800,000,000 s 124,859,200,000 $23,182,464 $23,183,35'
185 493 678 s 247,470,000,000 s 264,545,430,000 $49,117,846 $49,119,73'
51 83 134 s 48,910,000,000 s 52,284,790,000 $9,707,657 ‘$9,708,03
235 66 301 s 109,865,000,000 s 117,445,685,000 $21,806,005 $21,806,84:
104 281 385 s 140,525,000,000 $s 150,221,225,000 $27,891,402 $27,892,474
34 61 95 $s 34,675,000,000 s 37,067,575,000 $6,882,294 $6,882,559
396 643 1039 s 379,235,000,000 $ 405,402,215,000 $75,270,563 $75,273,46
241 32 273 s 99,645,000,000 s 106,520,505,000 $19,777,540 $19,778,304
550 ©2360 2910 s 1,062,150,000,000 s 1,135,438,350,000 — $210,815,532 — $210,823,65:
137 668 805 s 293,825,000,000 s 314,098,925,000 $58,318,386 $58,320,63:
32 45 7 s 28,105,000,000 s 30,044,245,000 $5,578,280 ‘$5,578,495
396 904 1300 s 474,500,000,000 s 507,240,500,000 $94,178,760 $94,182,38°
80 435 515 s 187,975,000,000 s 200,945,275,000 $37,309,278 $37,310,71.
105 365 470 $s 171,550,000,000 $s 183,386,950,000 $34,049,244 $34,050,55:
427 1300 1727 $ 630,355,000,000 s 673,849,495,000 $125,112,860  $125,117,679
13 88 101 s 36,865,000,000 s 39,408,685,000 $7,316,965 $7,317,264"
9 273 352 s 128,480,000,000 s 137,345,120,000 $25,500,710 $25,501,69:
52 24 76 s 27,740,000,000 s 29,654,060,000 $5,505,835 $5,506,04°
269 426 695 s 253,675,000,000 s 271,178,575,000 $50,349,414 $50,351,353:
1270 1830 3100 s 1,131,500,000,000 s 1,209,573,500,000  $224,580,120  $224,588,76
305 203 508 s 185,420,000,000 s 198,213,980,000 $36,802,162 $36,803,579
19 19 38 s 13,870,000,000 s 14,827,030,000 $2,752,918 $2,753,02¢
69 640 709 s 258,785,000,000 s 276,641,165,000 $51,363,647 $51,365,62:
434 441 875 s 319,375,000,000 $s 341,411,875,000 $63,389,550 $63,391,99)
43 118 161 s 58,765,000,000 $ 62,819,785,000 $11,663,677 $11,664, 12¢
294 301 595 $ 217,175,000,000 s 232,160,075,000 $43,104,894 $43,106,55¢
41 47 88 s 32,120,000,000 s 34,336,280,000 $6,375,178 $6,375,4:
80 325 405 s 147,825,000,000 s 158,024,925,000 $29,340,306 $29,341,434
10 54 15.4 s 5,621,000,000 s 6,008,849,000 $1,115,656 $1,115,


It is interesting that while fees resulting in behavioral changes (thus reducing pollution) were not rejected, and continue to
be supported by many environmental groups, the majority at the July 19 forum considered behavioral goals to be supplementary to
revenue-generating goals. Several panelists also agreed that fees should be “sold” on the basis of their revenue potential, as
opposed to their behavioral modification potential, on the grounds that the latter was too controversial and some fee avoidance
(through pollution reduction) would result in any event.

In summary, the top five criteria with which to evaluate alternative fee systems voted by the July 19 Airlie Center panelists

1. Ability to attract public support (23 votes)

2. Ability to support State flexibility (21 votes)

3. Preservation of a relationship between costs and benefits (19 votes)
4. Ability to safeguard fees for dedicated uses over time (18 votes)

5. Fees that result in a stable and predictable revenue stream, and fees that are simple, and easy to administer and
collect (both with 17 votes)

C. Types of Fees

‘The afternoon discussion on July 19 was devoted to coming to a tentative closure on preferred fees and, to a lesser extent,
governmental delivery mechanisms. Two different kinds of broad-based (i.¢., relatively universal and non-particularized), low-level
(ic., typically measured per unit in cents, not dollars), and water-related fees appeared to generate the most support, although the
reader should be cautioned that describing this support as “consensus’ may be premature.

‘These two fees are: (1) local public water supply withdrawal fees, with an apparent preference for such water fees being
implemented within a non-Federal context; and (2) "green" product fees, such as fees on toilet paper and detergents, generally
favored by the local government and utility panelists over the public water supply withdrawal fee. Again, the caveat should be made
that some participants did not support the use of capital-generating fees, as opposed to fees to support operating budgets, within any
context other than purely local.

1. The public water supply withdrawal fee, receiving the most votes, could be based on the volume of water consumed
by individual households, businesses and industry (drawing water from a public utility), as reflected in regular water bills. It might
also be a flat fee per type of customer. In either case thie fee would be a surcharge or add-on to existing water charges.

One panelist labeled the water fee "an infrastructure renewal tax" reflecting the resulting use to finance both drinking water
and wastewater facility rehabilitation, upgrades, and new standards. Another referred to the current practices of 11 States imposing
special water withdrawal, production, sale or use fees ranging from $.0! to .07 per 1,000 gallons, to support State program budgets
(see “background” appendices).

A strong body of opinion supported a new public water supply withdrawal fee because of its solid cost/benefit relationship,
and relationship to wastewater pollution. Several discussants argued strongly that a new fee might underscore the importance of
charging for "the true cost of water’, still very cheap in this country compared to residential billings for electricity, cable television,
and the like.

The political hurdles in gaining local approval of water rate increases, and the requirement (under most proposals) to rebate
fees routinely collected by local water utilities to the State level for redistributive delivery purposes, were not, however, small.
Moreover, whether a new water surcharge could be considered less "particularized" and more "invisible" than a sector-oriented new
fee such as effluent fees, was questioned seriously by local utility panelists who argued that current rates already were escalating
rapidly.

In contrast to municipal "treated" water delivered to households and businesses, direct water use, i.c., water drawn
directly from surface or ground water by individual industries, mining facilities, electric utilities and agricultural operations, received
little support as a source of fees. Although direct water withdrawal accounts for over 85% of all water use in this country, such uses
typically are not “permitted” by riparian rights States (predominantly non-Westem States). The panelists agreed that estimating and

55


The MIF proposal includes:

1. exempting interest earned on certain MIF Bonds from the individual and corporate alternative
minimum tax

2. permitting financial institutions to deduct 80 percent of the cost of purchasing and carrying
MIF Bonds

3. substantially changing the arbitrage requirements

4. exempting certain MIF Bonds from the Statewide volume caps

5. increasing the private business use and security or payments test to 25 percent

The volume cap and private use tests are discussed below.

Is the Volume Cap on private activity bonds hindering environmental infrastructure
investment?

The answer to the question of whether the volume cap hinders environmental investment is yes
and no. While overall room within the volume cap exists nationally, a number of States have
completely exhausted their cap limit or have little room for maneuver left. Although the overall
national volume cap is not being exhausted, more than half of the States are close to the limit and
four completely exhausted the cap in 1994.

The background on the Volume Cap issue is complicated. Congress allowed States to issue tax-
exempt bonds virtually without limits until the late 1960s. But after becoming concerned about
potential revenue loss, Congress restricted tax-exempt bond use for private activity to certain
purposes, including wastewater treatment. Tax-exempt bonds issued for privately owned
environmental facilities were primarily industrial development bonds. Generally, these bonds
were used when more than 25 percent of bond proceeds were used by a single private company.
State and local issuance of long-term, tax-exempt bonds for private activities (industrial
development, student loans, mortgage revenue, and Pollution control) increased sevenfold from
1975 to 1985 -- from $21 billion to over $144 billion.'? Because bond holders were not subject to
tax on the interest income, revenue losses to the Federal Treasury also increased. Congressional
revisions to tax-exempt laws continued to 1984, when Congress first imposed a cap on the
volume of tax-exempt bonds a State could issue for industrial development and student loans.

The volume cap on Private Activity Bonds (PABs) for each State was set in 1988 at $50 per
capita or $150 million, which ever was larger. Previous tax policy had the effect of favoring
public-private cooperation. By the mid-eighties, tax exempt financing for non-traditional uses
involving non-governmental entities had reached over 50 percent of long term issues. After the
1986 Act, the supply of private activity bonds plummeted to 20 percent of all bond sales by the
end of the decade.'* A study conducted for the National Bureau of Economic Research (NEBR)
found evidence that as a result of the volume cap, the total volume of PABs issued in the States

2 General Accounting Office Environmental Infrastructure: Effects of Limits

on Certain Tax-Exempt Bonds. October 1993. p. 11.
? Petersen, John E. Local Government Finance: Concepts and Practices.
Chicago: Government Finance Officers Association, 1991. p. 295.

15




3. Broad-Based, Low Impact Fees

Interestingly, the majority of fee panelists appeared to adopt the approach that “everyone
should pay a little." Debate on the implications of the equity and impact criterion resulted in a
seemingly clear preference for fees that are broad-based and low-level (not too costly), compared
to higher cost, "particularized" fees aimed at one economic sector, such as the industrial effluent
fees or pesticides/fertilizer production fees earlier proposed in the 1993 H.R. 2199 "Polluter
Pays" bill.

4. Water-Related Fees

Strong agreement was evidenced for the preservation of a close cost/benefit relationship
in terms of who pays and who benefits from fees. Fee panelists had little interest in the use of
taxes, such as "sin" taxes, real estate transactions fees, or lotteries, that bore no relationship to
environmental damage. If fees were unrelated to the sources of water pollution, many panelists
seemed to prefer use of general appropriation funds in the first place. This conclusion is
interesting, since a handful of States successfully have imposed the above-mentioned fees for a
number of years. Panelists also opposed the use of pollution fines and penalties, lest they
encourage "bounty hunting".

For some fees, such as the public water supply withdrawal fee discussed subsequently,
raising public awareness as to the "true cost of service" or causes of water degradation resulting
from the use of certain highly toxic products, was viewed as a decided advantage.

In terms of public acceptance, the majority of panelists ultimately preferred those who
paid fees be aware of how fees were to be spent, termed "transparent" as opposed to "invisible"
fees by the panelists. Some argued that fees should be dedicated, initially, to specific
regional/local bodies of water or watersheds, such as are some current fees in the Chesapeake
Bay and Puget Sound.

5. Fee Collection

The panelists appeared less concerned with efficient administration and collection of fees
than with other criteria. Basically, many agreed that, if fees were ever agreed upon at all, States
and localities could collect fees as effectively as the Federal government (NCSL, "State
Earmarking", 1994).

What was not always made explicit, however, was that some kinds of fees implied
collection by a specific level of government, whether local, State or Federal, raising the
possibilities of fee "rebate" to a higher level and "redistribution" back down. Thus, the
relationship between the collection and the financial delivery system, e.g., those institutions
awarding financial assistance to local projects, remains an important design consideration which
will be addressed in Chapter IV.


6. Surrogate Fees for Direct Water Use are used in a number of States to support
operating budgets, including seven States which use well-drilling license, permit and/or pump
fees, five western States with rather steep water rights application fees, and five States with
septage fees (on septic tanks, disposal or haulers).

7. Surrogate Fees for Watershed Protection are used by a number States, but also
could be implemented on a watershed basis. Typical fee "surrogates" include drinking water
construction fees in five States, drinking water connection fees in three States, mining severance
fees in five States (with Wyoming and Montana generating almost $50 million annually),
wetlands permit fees and groundwater certification fees in five States, development impact fees
in Florida and many others, hunting, fishing and camping fees, and dam registration and stream
encroachment fees. Most of these fees remain dedicated to State operating budgets, and annual
revenue yield remains modest.

8. Feedstock Chemicals and Wastewater Treatment Sludge are hypothetical fee
candidates on which no research has been conducted. Potential candidates are chlorine for
drinking water treatment, and chlorinated solvents for industry. Fees on any wastewater sludge
with no beneficial use might be considered. One State, Indiana, already places a fee on industrial
wastewater sludge. Although data on sludge are available, there are limited data on water
treatment chemicals and feedstocks. Moreover, both fees should be approached cautiously
because the regulatory policy implications (i.e., necessary chlorine usage for bacterial reduction
and pre-treatment regulated toxics in sludge), and the possibility of double-counting under other
fee proposals. These fees were not discussed at the three fee meetings.

D. Fee Comparison

Table 4 below portrays how the alternative fees discussed in this chapter compare to one
another, using the six evaluative criteria proposed earlier. Although the fee panelists suggested
that not all criteria were equal, the unweighted "scores" below demonstrate some of the benefits
and concerns attached to different sources of fees. The "public support" score depicted is drawn
from the opinions voiced at the three fee meetings. Other scores are based on study research and
current State experience with one or another fee, as well as comments by the fee panelists.

A rating of "+" means that some advantages or benefits accrue to a fee, while a rating of
"." indicates strong disadvantages, concerns or negatives. A score of "0" means that either the
practical outcome is unpredictable, or that the potential advantages and disadvantages cancel out
one another. The multi-votes cast for the public water supply withdrawal and green fees are
recorded, but the other fees received only a few (if any) votes.

25


ATTENDEE SPEAKERS

John Sullivan
American Waterworks Association

James Groff
Executive Director
National Association of Water Companies

Patricia Glick
Economist
Sierra Club

OTHER ATTENDEES

Pam Barr
Office of Management and Budget

Zach Church
Office of Management and Budget

Jason Gross
Analyst
Government Finance Group, Inc.

Tom Guay
ECA

Jane Messmer
Association of Metropolitan Water Agencies

Eileen O’Brien
Chief Legal Assistant
Congressman Gerry Studds

John E. Petersen
President
Government Finance Group, Inc.

Dan Schechter
‘Water Environment Federation

Paul Schartz
Clean Water Action

John Staunton
Inside EPA

Ralph Sullivan
Senior Environmental Advisor/ International Trade
Advisor

Robert Weaver
Attorney
Association of Metropolitan Sewerage Agencies

Jamie Bourne
Office of Ground Water and Drinking Water
U.S. EPA .

Michael Deane
Office of Wastewater Management
U.S. EPA

43

Richard Kuhiman
Office of Wastewater Management
U.S. EPA

Vera Hannigan
Office of the Comptroller
U.S. EPA


H.R. 2188 Hearings, 1994), and within the context of alternative fees presented by this study
drew some clear support and very strong opposition.

1. Rationale

The public water supply withdrawal fee can be categorized as broad-based, since in most
cases it would represent an add-on or surcharge to local residential, commercial and industrial
water utility rates regularly paid by water customers. It is water-related, since it is in the
domestic and commercial use of water the bulk of treated drinking water and municipal
wastewater treatment occurs. The concept could be extended to include surcharges on
wastewater user fees as well, which was mentioned at the third fee panel discussion in Denver. It
can be considered relatively low cost, for example, since it is typically structured in cents/per
1,000 gallons of water. Whether this is low impact as well depends on the national annual
revenue target.

2. Fee Base and Implementation

The public water supply withdrawal fee benefits from its essential simplicity. Levied as a
flat rate in cents/1,000 gallons, it would fall equally on all utility (both public and privately-
owned utilities) customers within a State or whatever governmental context selected. It relies on
a long history of successful rate-setting practices, typically ascertained through metered water
use or similar estimates. If collected locally, administration would be relatively straight-forward,
with local water utilities collecting the volume-based fee "surcharge" through periodic regular
billings, whether bimonthly, quarterly or annually.

Unless imposed by a higher level of government, local rate increases would be approved
by local voters or, in the case of privately-owned companies, State Public Service Commissions.
The political obstacles accompanying either process, however, should not be minimized.

The regressiveness of flat fees might be avoided by offering different rates to different
classes of customers (e.g., the poor and elderly). Other volume-based rate structures could be
based on ascending block rates (to encourage water conservation), or declining block rates (to
encourage economic development). However, flat fees, as opposed to graduated rate structures,
always are easier to administer.

The Denver fee panelists also suggested charging some industrial users a much higher
fee than residential and commercial users, particuarly those requiring very clean water for
manufacturing processes (e.g., bottled drinks, computer chips).

If administered and collected by States, public water supply withdrawal fees could be
levied on a different basis entirely. For example, fees could be based on a percent of utility water
sales, or percentage of treated water production volume, and would be paid directly by utilities.
Although such fees probably would be passed on to customers, utilities might be required to
exempt certain classes of consumers from rate increases.

11


administrative costs which are capped by Clean Water Act regulations. Some have argued that
these tax rules, designed only to apply to the permitted investment yields on bond proceeds,
should not extend to SRF borrowing programs meeting Federal environmental mandates and
funded with Federal and State grants.” SRF programs are already subject to a great amount of
scrutiny under the Clean Water Act. A joint agreement between the States and the EPA requires
approval of the States’ intended use plan for project spending. In addition, a certain amount of
funds in an SRF come from State sources and previous SRF bond issue proceeds -- not direct
Federal funding. Therefore, the argument goes, arbitrage rules for SRFs unnecessarily and
unfairly restrict additional investment required to be turned back into environmental
infrastructure in any event.

Exempting SRFs from arbitrage restrictions could have a strong impact on environmental
investment, particularly in States with leveraging SRFs. For example, States using an SRF
“bond reserve” model maintain an oversized bond reserve of between 33 percent and 50 percent
of bond proceeds. Allowing them to strengthen their reserve fund by investing fund monies at
rates higher than currently allowed would strengthen subsequent SRF bond issues in the eyes of
investors. Stronger bond issues lower interest rates and bond insurance costs, reducing SRF
borrowing costs This could, in turn, lower future interest rates the SRF charges on its loans to
localities. With lower interest charges, economically disadvantaged localities may be able to
afford loans to finance clean water infrastructure.

Grant SRFs greater flexibility - Three modifications to SRF rules which might create more
investment or accelerate investment in the short term would be to enlarge eligibility to private
facilities, allow loan maturities of greater than 20 years, and expedite Federal funds delivery to
SRFs.

Private wastewater facilities are currently ineligible to participate in the SRF program. This
limitation appears to contradict the direction of recent Executive branch and Congressional
initiatives to encourage public-private partnerships. It is important to note, for drinking water as
opposed to wastewater, that thinking is evolving in this direction because recently proposed
Congressional legislation authorizing drinking water revolving funds would make private
facilities eligible for funding. With forty-six percent of water facilities privately owned, the
chance of increasing infrastructure financing by enlarging eligibility seems high. However,
private sector wastewater treatment demand is undocumented.

Current rules under Title VI of the Clean Water Act allow SRF loan maturities to last no longer
than 20 years. Many have argued for a change to permit loan maturities of the lesser of 30 years
or the useful life of the project. The effect of this would be assist smaller jurisdictions in
affording large and expensive compliance projects by spreading out the term of repayment. Pipe
replacement projects, which particularly lend themselves to 30 year periods, might see a strong
increase.

° See for example: Alan Anders, Treasurer, New York City Municipal Water

Finance Authority in April 1995 Government Finance Review. Pp 38
13


How about a "cost for services" fee? Quoting EPA, the report (at p. 2) intones that "Fees for public services are often intended to
establish a direct link between the service provided and the cost of providing that service."

However, this does not easily apply to water suppliers paying water fees because many of them will have no expectation of benefiting
from the financial assistance program they are to support. And if the “service” to be covered by the fees is simply allowing the water to be
withdrawn, objection again arises that it is usually not the federal government's water. What service is the report hinting at? And what is its cost?

If the water "fee" is really a "tax" (a conclusion fortified by the report's references, ¢.g., at p. xi, to IRS), implications just in terms of
congressional committee jurisdiction are serious. Tax issues go to committees with concems for infrastructure having no greater claim for
attention than scores of other worthy causes. Probably the chief concem of these committees is the generic “revenue neutrality,” how to pay for
myriad pending amendments to the intemal Revenue Code. Do the proponents of a water tax want to take a risk against alien lobbyist raiders on
water-tax revenues? We don't!

Moreover, NAWC is dubious that Congress would be willing to assess any water fee/tax on municipal water systems. And it may well
be beyond congressional authority to exact them from units of state or local government, such as the municipal suppliers who would probably
stand in line at the courthouse door to bar collection, Lawsuits raising this constitutional issue could take years to resolve, and the report's
proponents should not bet heavily on the outcome. Collectability is seriously in question.

If municipal water supplier litigators got themseives beyond reach of the water fee/tax, the entire $2 billion it was supposed to raise
could scarcely be expected from private or investor-owned suppliers, for that sum is roughly their aggregate annual gross! (Total investor-owner
industry revenues in 1993 were about $2.4 billion.) To seek even a significant part of $2 billion from them would quickly necessitate rate
increases forcing private companies into take-overs » municipal systems who along with their customers would be both free of the fee/tax and
potentially recipients of program benefits.

Besides, it is hardly certain that private or investor-owned water suppliers will be eligible for program benefits. At some points (e g.,
p. xiv) the report suggests yes. But elsewhere (e.g., pp. 5, 29) it says that the issue is one that has been and again should be addressed. And
presumably it would be addressed, not just by the authors of the report but also by EPA, its Environmental Financial Advisory Board, and
ultimately the Congress and the President ~ and then by state officials who will exercise discretion as to who among supplicants will get
Program benefits. While NAWC does not support the recommendations of the report, we would insist on inclusion of private and investor-owned
‘water suppliers in the benefits of any of them, especially since it is clear we are to pay for those benefits.

Evaluation of political acceptability should take account that current congressional leaders might well categorize the water tax as a
“sales tax" because of the method of collection suggested by the report (at pp. 42-49). And since at least some of these leaders hope soon to
explore sales-type taxes for general revenue purposes, they may well not want to see a part of their new "general tax base" dedicated for a
“particular” purpose, even one as important as infrastructure financing.

Finally, two other points of possible congressional interest. One reason the report says it supports the proposed water fee/tax is that “it
is generally recognized that water is a scarce resource which is typically under priced resulting in over use." (At p. 15.) Committees other than
those dealing with taxes and the environment might well have something to say about that proposition and its implications for federal policy.
Again, this would be at least a complicating factor that bears on political acceptability of the water tax/fee. Finally, the report emphasizes that its

“models are structured to be self-sufficient ... [with] moneys to support their own administrative costs." Congressional appropriators may raise
eyebrows at what could sound to them like an effort to build a fiefdom unaccountable to them.

‘We believe that, mindful of these and other considerations, Congress would find the withdrawal fee overly complex and wholly
unpalatable.

The report's authors reached their conclusion thinking water rates would be driven up only modestly by the water tax, and ratepayers
are too numerous and diffuse to mount effective political objections. Also, given relatively inelastic demand, water suppliers would not suffer 2
reduction in demand sufficient to generate strong opposition. (See pp. 17-19.) That analysis is simply incomplete.

CONCLUSION

Most importantly, we fault this report because it proposes new federal money programs that hinder rather than facilitate long-term solutions to
infrastructure problems facing some water suppliers. As outlined above, we believe that any federal efforts should seek to promote consolidation
and regionalization. Again, NAWC would be glad to help in any such efforts.

‘The report's recommendations are objectionable even on their internal merits because they rely on delivery systems that would likely be
counterproductive, and because they are inequitable particularly for those that have already made the necessary investments.

{As to political acceptability, the NAWC agrees with the report's authors when they concluded that political objections are e likely bar
to model one, but we believe the same is true for model two, and we outline the political objections to two that we foresee. Model three suggests
hybrids of one and two, and it sounds like a new entitlement (nearly anathema to Congress), so we are highly skeptical of its viability, too. Thus,
we doubt the author's recommendations could succeed in Congress.

71


Box 1: The Federal Green Fees Model (Model 1)

Federal Clean Water Trust Fund

Capitalization
Grants Gi
Product
SRF Fees
Drinking Water &
Wastewater Treatment

Loans
Small Grants

Revenue Sources/Fund Uses

The Federal Clean Water Trust Fund also would invest temporarily in taxable U.S.
Treasury securities, the earnings from which could be used to cover Federal administrative costs
(not to exceed 4% of green fee revenues annually.) The Trust Fund would be, preferably, off-
budget.

The Federal Green Fee Model may be a solid mechanism by which to address existing
and new national environmental goals. It supports State environmental financing objectives,
particularly use of the SRF concept as a major State-to-local delivery mechanism, and jumpstarts
drinking water funding.

However, major stumbling blocks include industry opposition to green fees, resistance on
the part of "donor" States, and the administrative complexities of green fee programs. The
Federal government must seek a difficult consensus on an equitable allocation, or redistribution,
formula to States. This formula should strike a balance between wastewater and drinking water
investment, both past and ongoing, and address local affordability and environmental risks, as
well as traditional "needs" and population criteria.

New Federal redistributive goals which might prescribe the use of Federal and/or State
set-asides for project grants (as opposed to loans) may complicate this debate, since the use of
grants diminishes the monies available for SRF revolving loans, both direct and bond-leveraged
loans, and interest rate subsidies. For example, grants and/or "principal subsidies" for small,
disadvantaged communities, as well as for larger cities, are supported by many but also are seen
to undercut equity and leveraging principles.

31


2. Source A User Fee On Products Affecting Water Quality

The Green Fee self-financing option would provide for a low-rate user fee on consumer, commercial, and industrial
products (a) that contribute to water pollution, including those that present a treatment/ processing problem for publicly owned
treatment works ("POTWs"); (b) that otherwise are contributed to POTWs by residential, commercial, and industrial users; or (c)
that affect drinking water supplies.

Revenue would be raised from a low-rate fee imposed at the point of manufacture (or sale) and ultimately paid by
consumers purchasing, using and disposing of a broad range of products. The Maxwell School draft report identifies these
characteristics in discussing equity and impacts: "[A] fee which is broad-based and small . . . may be more acceptable than fees
targeting limited sectors, particularly when the benefits are widespread." "° States would be authorized to add an incremental
amount to the fee implemented within their borders.

The following products can be considered for a federal " Green Fee" under the contribution-to-waterpollution or treatment
approach, the total revenue from which could be targeted at $3 to $5 billion depending on revenue estimates:

pesticides, herbicides household, commercial, industrial solvents
synthetic fertilizers plumbing chemicals

copper plumbing pipe dry cleaning chemicals

soaps, shampoos, conditioners photo processing chemicals

tooth paste, mouth wash disposable diapers

household, commercial and industrial condoms, tampons, related products
cleaning fluids toilet paper, paper towels

detergents, dish washing soap cooking oils and related products

paint turpentine, and related products
Additional products can be identified.

Single product fee analogies for this Green Fee option would be the federal telephone and cosmetic excise fees, as well
as the gasoline user tax. Since the listed products provide some contribution to water pollution often by disposal in sewer
systems or affect drinking water supplies, a low level user fee would also provide some sense of consumer contribution to water
quality protection and such products could be authorized to use a “Green Fee" labeling notice of this contribution at the
producers option.

3. Clean Water Trust Fund Operations

Revenue genetated by this self-financing system would be collected at the point of products manufacture or sale and
deposited to a dedicated clean water trust fund or account in the U.S. Treasury. The amount to be collected would be established
by law to coincide with an amount likely to be appropriated annually by the Congress from the trust fund or account in order to
avoid unused balances from one fiscal year to the next. The objective would be to maintain a low fee on a wide range of products
for purposes of funding wastewater and drinking water facilities rather than to change behavior through a fee that noticeably
impacts consumers. Revenue generated for a state's incremental amount would be paid directly tO the state as collected by the
Treasury.

5 America s Environmental Infrastructure: A Water And Wastewater Investment Studv Apogee Research nc. for tbe Clean Waur Cotmeil December 1990.
6 Association of Metropolitan Sewerage Agencies 1993 Municipal Wasteater Treatment Agency Financial Survev to be published Spring 1994.

7 “The Cost of Clean, “The Association of Metropolitan Sewerage Agencies, June 1992.
8“A Report On Clean Water investment And Job Creation”. prepared by the National Utility Contractors Association by Apogee Research, Inc., March 30,1992.
9 Apogee Research Inc. for the Clean Water Council, December 1990.

67


B-1

B-2

B-3

Appendix B

Summaries of Three Water Fee Meetings

April 25, 1995 Crystal City Sheraton
Arlington, Virginia

July 19, 1995 Airlie Conference Center
Warrington, Virginia

September 21,1995 EPA Region 8 Conference Center
Denver, Colorado

48


4. Flexible State Use and Management

Revenue in the Treasury's clean water trust fund would be allocated to the states in the form of capital grants for: (a)
construction of wastewater facilities (secondary treatment, treatment to meet water quality requirements, CSO control,
wastewater reuse, sanitary overflow control) (60%); (b) construction of drinking water facilities (25%); (3) implementation of
nonpoint source management practices and watershed management which benefits water quality or drinking water sources
(13%); and (c) development of sound science on which to base regulatory and, by implication, facility construction decisions
(2%). These percentage allocations could be adjusted following completion of EPA's drinking water needs survey.

States would fund wastewater control, drinking water, and nonpoint source projects, and watershed management based
on a priority system or systems managed by the states to meet enforceable requirements of the CWA and SDWA. The amount
allocated for sound science would be used by states or local governments to develop general or site-specific water quality
standards and waste load allocations.

States would deposit their formula-based allocations from the trust fund including state generated incremental amounts
to existing SRFs. State generated incremental amounts could be used to satisfy the SRF state match requirement. States would be
provided maximum flexibility in managing their SRFs. Funding would be provided to local governments through loans;
municipal financing or insurance payments; or grants to high priority projects at the state's option limited to no more than 50%
of a state's federal capital grant and state contribution.

“° Maxwell School, April 1994, page 5 (examples omitted).

SRF grant-equivalent features currently under discussion such as negative interest rates or principal forgiveness,
reduce the corpus and purchasing power of cach SRF. Separate state SRF loan and grant authority would allow nonloan
assistance without the administrative and financial costs associated with negotiating a loan with grant-equivalent features and
preserves the long-term, revolving integrity of SRFs as municipalities begin rehabilitation and replacement of wastewater
facilities.

A state-managed, combined loan and grant program worked well during the period immediately following the 1987
CWA amendments when states and EPA administered both under state project priority and project certification procedures.
Additionally, the Department of Agriculture has administered a combined grant and loan program for many years.

Conclusion
The Green Fee self-financing system would generate a predictable level of funding from a low-level fee on a broad
range of products that contribute to water pollution or require treatment by wastewater or drinking water facilities. This new

Tevenue would be dedicated to sustaining flexible SRFs for funding compliance with mandated clean water and drinking
requirements. Stakeholder consideration of this option at the next EPA alternative revenue meeting is urged.

68


Box 2: Federal/State De Minimis Fee Model

Revenue Source: The Federal government would assess flat-rate public water supply]
withdrawal fees for residential, commercial and industrial users, and flat-rate fees on|
major and minor municipal/industrial wastewater discharge permits. Estimated
revenues from these two fees form the baseline of the State De Minimis sum and also
the Federal legal rationale to "require" States to set fees (similar to the 1990 CAA).
States may partially substitute any other State fees, but must include some of the above-
mentioned two fees in the base. State fees must be dedicated to water-related capita!
projects to count towards their share.

Collection and Administration: The Federal government (as a default mechanism)
and/or the States (which elect to accept fee program "delegation") administer the fee
system, although localities initially collect all public water supply withdrawal fee:
through regular water rate charge systems. If the Federal government retains the!
program, it may retain a small percentage of fees (e.g., not to exceed 4%) for]
administrative costs. Otherwise, States may fund their administrative costs out of De
Minimis amounts. ,

Delivery Mechanism: Expanded SRFs fund all local projects. Even the major!
Federally-administered fees would be immediately credited to State accounts. To the
extent that States administer the program, no new Federal bureaucracy will be needed.

Eligibilities and Oversight Expanded eligibilities would include both drinking water
treatment and infrastructure (collection and distribution systems). If the Federal}
government runs the program, all water withdrawal fees go to SRF Drinking Water] .
Accounts, and all discharge permit fees to Wastewater Accounts, with inter-account
borrowing permitted. If States administer the program, no such restrictions apply.
SRFs may offer loans to any public-purpose project (including privately-owned|
wastewater facilities), credit enhancements, and principal subsidies for communities off
any size.

State fee programs and collections are reviewed (i.e., audited) annually to assure that]
De Minimis requirements are being met.

Our design presents a more complete program than earlier precedents. We have designed two flat rate, Federally-
implementable, fees for this model, which are readily estimated and allocated on a per-State basis: (1) uniform (nationwide) public
water supply withdrawal fees, and (2) two-tiered wastewater discharge permit fees. This Federal “umbrella” thus provides a baseline
of available funds nationwide, and to each State. By the same token both partners are assured that all States are doing their share
without any competitive advantages, even though State fee programs may differ somewhat.

Importantly, States not only may decide to adopt the Federal program by implementing these two fees themselves; they
also may choose to substitute partially any existing State capital-generating fee, or new water-related fees, to generate annually a
revenue stream equal to that which would result from their share of Federally-assessed water withdrawal and discharge
permit fees. Thus, States are given great latitude and other State fee programs are minimally distorted, or undercut.

The basic description of the Federal/State Model is characterized in Box 2, with Figure 5 portraying the intergovernmental
flow of funds. Table 2. portrays an example of how the two Federal/State fees might be assessed. The reader will see that public
water supply withdrawals fees will bear the bulk of the $2.8 billion annual revenue yield selected, because under any rate scenario
NPDES discharge permit fees are comparatively steep (i.¢., costly).

94


Figure 6: Voluntary State Fee Incentive Model (Model IIT)

Ss,
\s

“—

Revenue Sources/ Fund Uses

To receive the match, States "bill" the Federal government annually, and must certify periodically "baseline maintenance
of progress" in the dedication of initial fees and non-fee capital contributions to water quality projects. It should be noted that in
some years, States may receive less than a 33% Federal match because it is annually capped to limit Federal contingent liability.

The benefits of this model, in terms of its "voluntary" and “incentive” characteristics, may be considerable. From the State
and local perspective, this is probably the most politically appealing of all three models. The creation of a Federal match to States
may be viewed as a novelty, and an argument made for a higher percentage Federal match.

Box 3 :Voluntary State Fee Incentive Model

Description: States may choose to establish fees and fee rates for whatever they
wish, but all match-eligible fees must be dedicated to water-related capital projects.
The Federal match is 33%, capped at $700 million annually for most years. (not
counting investment funds), and ends after 10 years. Existing State fees, and some}
(limited) portion of general appropriations, dedicated to non-SRF projects under]
current CWA and SDWA enforceable requirements, count towards the Federal]
match. CWA Title VI SRF bonded debt and 20% State match, and State monies to|
meet stricter State standards, do not count.

Revenue Source: Any type of capital-generating State fee or tax, environmental
or otherwise, dedicated to water-related projects (with some existing non-fee}
capital investment counting). The year-end Federal match may be generated by}
new Federal fees, direct appropriations, and/or investment earnings. The Federal
match is phased in and capped, respectively, at $300 and $500 million annually in|
the first two years.

Collection and Administration: States, and possibly localities on behalf of States,
for some fees. States may use a portion of fees to cover administrative costs. The]
Federal government must collect its fees, and may use a portion (not to exceed 4}

97


Presently, State use of water-related green product fees is not widespread. At least four
midwestern States place fees on pesticides and fertilizers, including Wisconsin, Kansas,
Minnesota, and Iowa, as well as Oregon. Two States, Florida and Connecticut, have fees on
professional dry cleaning solvents, and Florida has been considering a $.01 fee on each toilet
paper roll. Maryland places a fee on boat sales and New York on motor boat fuels, and a number
of States impose fees on highway de-icing salts.

3. Prototype Fee Rates

Estimating national green fees rates is relatively straightforward, but the reader will see
that fee administration poses several significant problems. U.S. Commerce Department sales
data based on standard industrial codes (SICs) are published and updated every five years.
Under flat rates, the method of assessment is to prescribe a fixed percentage of total national
sales of selected commodities to meet the desired revenue target.

Table 3 below offers some hypothetical candidates at a fee percentage of 1%, 3%, and 4.0% of
national gross sales receipts, with the latter percentage yielding the targeted revenue stream of
$2.8 billion annually. In most cases, industrial, commercial and domestic use is counted.

19

Table 3. Examples of Estimation of Green Fee (Special Sales Tax)

(Unit: $ Million)

Revenue Estimations

Products sic Product Shipment" | 1% Sales Tax [3% Sales Tax [4% Sales Tax
[Foods
Vegetable oil mills 2076 745.5] 7.46 22.37 29.82]
Paper Products
Toilet tissues(rolls and ovals) 267645/47] 2600.6} 26.01 78.02 104.02)
[Soap and Other Detergents
|Soaps and detergents (commercial, industrial) 28411 2149.1 21.49) 64.47] 85.96)
Alkaline detergents (household) (A) 28412] 1062} 10.62 31.86 42.48}
| Household laundry detergents(dry) : 28412} 2796.7] 27.97] 83.90 111.87]
|Household laundry detergents(liquid) 28412] 2038.9] 20.39} 61.17 81.56]
|Presoaks and others 284120061] 132.3 132 3.97] 5.29
|Soaps (household) (B) 28413 1965 19.65 58.95| neal
Glycerin 28414 138.3] 1.38 4.15 5.53
|Soap and other detergents 28410] TMm<9| 12 23.16 30.88}
Polishes and Sanitation Goods
|Household bleaches 28422 941.7 9.42| 28.25} 37.67]
Specialty cleaning and sanitation products (C) 28423} 3599.7| 36.00 107.99} 143.99}
Polishing preparations and related products 28424] 1087.4 10.57 31.72| 42.30)
Toilet Preparations
|Shaving Soaps and cream 2844149) 270.4] a 8.11 10.82}
Hair Preparations (shampoo, tonics, perms, e1c) 29443] 4606.9] 46.07 138.21) 184.28
Dentifrices, mouthwashes, gargles 28444 1706.9} 17.07 51.21 68.28)
|Bath salts, tablets, oils, and bubble baths 2844771) 275.8| 2.76 8.27 11.03
Paint Products
Architectural coating (D) 2851100 5325.2 53.25] 159.76 213.01



Locating fee collection and institutional delivery mechanisms at the same level of
government is desirable. Caution should be exercised in selecting fees which are to be collected
by lower level of government but then must be rebated to a higher level for subsequent
redistribution.

B. Sources of Fees

Water-related fees fall into five categories: (1) effluent or discharge fees; (2) water use
and other resource "severance" fees; (3) permit and other administrative service fees; (4)
chemical feedstock fees; and (5) "green" product sales fees on products adversely affecting
water.

The most widely used State water-related fees are permit and other administrative service
fees now used by most States. Next are public water supply withdrawal fees (at least 11 States)
and direct water use fees (at least 7 States). State use of water-related green product fees
compared to solid waste green fees is not widespread. At least five States use pesticide and
fertilizer fees, and three levy steep industrial and municipal effluent fees. Presently, no States
use chemical feedstock fees. Both effluent fees and green fees are used extensively in Europe.

The amount of State "capital-generating" revenue raised is still very modest, currently
under $200 million annually. Most fees are used to offset State environmental agency operating
budgets. Most mineral severance fees support general State budgets. Almost one-half of the
$200 million comes from alcohol and tobacco taxes in three States, general sales tax set-asides in
two States, and real estate transaction fees in one State.

Within the limited context of all water-related fees examined, two fees received the most
support, as demonstrated by the "multi-vote" or "revealed preference" technique used at Airlie
and Denver. Strong opposition also was voiced. These are: (1) public water supply
withdrawal fees, and (2) green" product fees. Both are broad-based, water-related, and
comparatively low cost (depending on the revenue target), since they are applied to a wide
population base and relate to the use or degradation of water. Both represent add-ons or
“surcharges” to existing fees or taxes, and could use flat, simple rates.

1. Green Product Fees

Slightly more support was evidenced for green fees (i.e., 98 multi votes) than for public
water supply withdrawal fees (73 multi-votes), in part because some votes included solid waste
green fees. It should be noted that industry was less well-represented at the fee meetings
compared to local utility representatives, all of who strongly opposed the latter fees.

Green product fees are most efficiently designed and collected at the Federal level.
Federal precedents are the gasoline tax, telephone and cosmetic excise fees. Using U. S.
Commerce Department sales data based on Standard Industrial Codes (SICs) published every
five years, a flat percentage fee rate of 4.0% of gross national sales receipts on the following
hypothetical fee base by SIC yields $2.8 billion annually:

iv


Proposals to Bring Attention to Clean Water Infrastructure Investment Barriers

Proposal: Votes:
need leadership to spearhead tax law change for environmental regulations | 24
EPA should work closer with State SRFs 12
governors make more noise 11
mayors make more noise 10
mayors need cash 10
duplicate dynamic of ‘86 Solid Waste Influence 5
more clarification from EPA and OMB 5
tapping environmental community 4
get behind complete forgiveness of federal grants 4
SRF participating in 12803 process 3
demand more grants to demonstrate needs 0

D. Conclusions

Many of the proposals that emerged from the debt financing report and public meeting
involve giving State and local governments greater leeway and flexibility when it comes to
making decisions about closing clean water infrastructure financing shortfalls. They are
consistent with the trend of devolving policy and funding responsibility to the States. As many
panelists argued, the goal is for localities to explore who is best suited to own and operate clean

water infrastructure: public providers, private providers or a combination.

What may have been lacking from the panelists’ perspective was a dose of political |
reality. Discussion about the political feasibility of the proposed reforms entered into the
discourse, but rarely dominated the debate. The day’s session provided a list of ideal reforms,
ones which many panelists strongly believed would make a difference in increasing investment
in clean water infrastructure. Future policy makers will need to focus more attention on the

feasibility of reforms discussed‘in the report.



that used 80 percent of more of their annual allocation (24 in 1990) was less than it would have
been without the cap.’

For a short period in the early nineties, Congressional action mandated that mortgage revenue
bonds and small issue industrial development bonds (IDB) were no longer eligible for tax-
exempt status under the volume cap. This gave tax-exempt facilities (such as wastewater.
treatment facilities) less competition under the cap and increased PABs for environmental
purposes. When the mortgage/IDB policy was reversed in 1994, their popularity returned to
historical levels. Growing strains in the volume cap in 1994 were evident in a number of States
where officials reported having to adjust their allocation plans or develop a plan for the first time
to meet unprecedented demand. Bonds for exempt facilities (including wastewater treatment
plants) totaled $2.2 billion in 32 States, a 40 percent drop from $3.6 billion in 1993."

Exempt facilities, in particular, have usually had trouble in many states obtaining
volume cap allocations. For one thing, they often must compete with mortgage
bond and IDB programs. In addition, exempt facilities projects tend to be
extremely large, and just a few could soak up most of a state’s volume cap
authority."

Developing a formula for allocating PABs is a political process at the State level and has often
resulted in a relatively small volume being allocated to environmental projects. Officials in
several States told the General Accounting Office that it is more politically attractive to allocate
funds to highly visible projects that directly benefit their constituents, such as student loans and
housing, as opposed to environmental facilities that no one wants “in their backyards.” In 1989,
housing bonds accounted for 45.4 it of all PABs issued while environmental facilities
accounted for around 15 percent. As the General Accounting Office noted in 1992, “States
decide how to apportion their allocation among various authorized uses; most give low priority
to environmental projects, typically choosing to support housing and industrial development
projects instead.”"* California officials revealed that the State directs 85 percent of its allocation
to housing.

The Volume Cap also introduces elements of uncertainty into long term infrastructure financing,
which can be devastating to environmental facility projects. Private companies are reluctant to
consider undertaking an environmental project that depends on tax-exempt financing. Often, the
annual total is allocated on a first come first served basis among projects that apply, making
multiyear financing very difficult and risky to obtain. Other States determine annual allocations
under the Cap by a lottery process. Company officials and bond counsels have asserted that the

“ Kenyon, Daphne. ‘‘Effects of Federal Volume Caps on State and Local

Borrowing,’' National Tax Journal, December 1991. p 81-92.
** Bond Buyer. May 11, 1995.
*© Bond Buyer. July 6, 1993.
*” GAO Environmental Infrastructure: Effects of Limits on Certain Tax-Exempt
Bonds. October 1993. p. 25.
*® GAO Environmental Infrastructure: Effects of Limits on Certain Tax-Exempt
Bonds. :
October 1993. p. 29 _
16


. As part of the transaction, Wheelabrator paid the three towns composing the MCD $6.8 million,
which is the full market value of the plant built 22 years ago with a $1.75 million Federal grant.
Some of that $6.8 million will be directed toward defeasing $5.9 million in outstanding tax-
exempt debt issued by State authority for upgrading the plant. As a further incentive, the three
municipalities got $1.5 million up-front of the deal. The public benefited from a 20 year service
contract that guaranteed a constant user fee lower than previous rates. Municipal user fees
dropped from $1.69 per 1,000 gallons to $1.45, a 14 percent reduction. Municipally approved
expansions and upgrades will be internally financed by Wheelabrator, built under competitive
bid rules and only factored into the rate base when fully operational. This approach follows the
user pays principle and taps into private capital sources as opposed to stretching limited public
capital funds. The 20 year rate lock ensures a transition period for the public to adapt from
publicly set rates to privately set ones. “It’s hard to say we’re not getting a bang for our buck,”
said James Rozelle, general manager and chief engineer for the Miami Water Conservancy
District.” The transaction was approved by all parties including the White House and the Office
of Management and budget in July 1995. Importantly, the Wheelabrator / MCD collaboration
proves that process spawned by Executive Order 12803 can work.

A strong precedent has been established for future deals to follow. However, the applicability of
the Wheelabrator / MCD transaction to future policy replications has some limits. First, the
purchase price was raised solely by private cash from Wheelabrator. Because of the relatively
small purchase price, no tax-exempt financing was sought under private activity bonds. Larger
transaction prices would be more likely to require help from tax-exempt financing via private
activity bonds. As described elsewhere in this report, the volume cap on PABs and competition
with other financing demands may hinder access to tax-exempt financing. In addition,
Wheelabrator already operated the plant, avoiding complicated issues involving public unions
and employees and private owners.

2° public Works Financing. June 1994. p. 3 7
22


Reliance on water use fees is prescribed in this model because it supports and extends the
user fee concept, and because many States already impose them, although such fees are rarely
used as capital-generating fees, Including a direct water use fee enhances the fairness and equity
of this approach, and reduces the individual fee burden. Consideration could be given to
including new wastewater user fee surcharges, or effluent fees, in the match-eligible fee base.

Here, States have more flexibility in funding whatever local projects they see fit, and the
Federal match is unrestricted in terms of specific categories (e.g., drinking versus wastewater) or
types of assistance (e.g., loans versus grants).

Use of the Federal match is novel, since previous intergovernmental funding models
require States to match Federal funds (EFAB, "Public Sector", 1992). This switch in roles
conforms to the principle of devolution to States, and may be attractive to them. The downside is
that there is no assurance that a national revenue target for new infrastructure funding will be
met, with the exception of that provided by Federal green fees. Moreover, localities may
continue to oppose State imposition of water use fees on affordability grounds.

C. Model 3: The Voluntary State Fee Incentive Model
This model is similar to the above-described alternative with three exceptions. State fees

are unrestricted in terms of the types of fees selected. Likewise, the source of the Federal match
is not prescribed, and the match itself is increased to 50%. This model is outlined in Box 3.

Box 3: Voluntary State Fee Incentive Model (Model 3)

__ SRF << | Participating
Drinking Water & State
Wastewater Treatment &

50%

Federal

Revenue Sources / Fund Uses

33


b. Revenue Size and Predictability in estimating and auditing fees to meet the desired
revenue target, and ensuring fee dedication to originally intended uses;

c. Equity and Impacts, or fairness and minimal economic impacts on those who pay
fees; equity may also refer to fee revenue allocation systems;

d. Close Cost/Benefit Linkage or relationship between "who pays" and "who benefits"
from fees;

e. Collectability, or the administrative ease, time, and cost of fee collection systems;

f. Meeting Environmental Goals using financial delivery institutions and techniques
which address criteria for prompt, leveraged, affordable and flexible funding, and result
in consensus on redistributive funding objectives.

The study concludes that long-term fee dedication remains a serious, practical issue.
Although Federal experience with fee-based funds such as the Highway and Superfund Trust
Funds has been mostly positive, subjecting such accounts to periodic outlay restrictions for
deficit reduction is a grave concern. State experience has been more uncertain, with dedicated
funds actually used for non-dedicated purposes on occasion. While Federal authorization of
State programs, such as SRFs, may help safeguard funds, this must be weighed against the
apparent greater acceptance of State-initiated fees.

Fees clearly may result in positive behavioral modification, such as greater water
conservation, effluent reduction, or product substitution. While many environmental groups
support the fees mainly as market-based incentives to reduce pollution, most stakeholders argued
that substantial behavioral changes will undercut revenue goals. Thus, capital-generating fees
should be structured and promoted primarily for their revenue potential.

The majority of fee panelists agreed that "everyone should pay a little." Fees that are
broad-based and low level (not too costly) are preferred over more "particularized" economic
sector fees, such as certain industrial fees. Reliance on a strict "polluter pays" principle for
capital-generating fees, although sometimes more equitable, was not widely supported.

Strong agreement was evidenced for use of water-related fees, as opposed to non-
environmental fees such as "sin" taxes, lotteries, or general sales set-aides. Dedication of
pollution fines and penalties was not supported lest it encourage "bounty hunting" to meet
revenue targets. Permit fees should remain dedicated to State operating budgets, not to capital
formation.

Fees should be designed so that those who pay them clearly understand the environmental

uses to which they are put. Fees could be dedicated specifically to regional water bodies or
watersheds, such as current fees in the Chesapeake Bay area.

iii


IV. THE FUTURE FEDERAL ROLE IN FEE-BASED FUNDING

The Federal role in any new fee-based funding system is presented separately here
because of the substantial debate which surfaced at the three fee panel discussions. Although
Federal involvement stimulated a great deal of thinking and deep skepticism, no clear consensus
emerged. Below we attempt to frame the most significant issues affecting fee implementation,
future fee revenue allocations, and the Federal role.

A. Implementation Functions

Fee implementation involves a number of separate tasks, some of which are highly
complementary. Responsibilities include: (1) fee design; (2) soliciting public support; (3)
authorizing legislation; (4) collection; (5) revenue fee allocation and "delivery"; and (6)
administrative oversight.

One of the advantages of fee-based funding systems is that all these functions can be
implemented by, and administered within, any single level of government, or within certain
geographical/political boundaries. Fee programs could be Federal, but they could also be
established solely as State, regional, or local programs. On the other hand, some functions can
be shared between different governmental agencies or even different levels of government. For
example, fees could be Federally-designed but State-collected.

Another hallmark of fee programs is their self-sufficiency. Fee systems typically depend
on a long-term legislative authorization, often five or more years, sometimes under a fixed
revenue target. The longer term nature of fee programs can provide predictability in funding
infrastructure projects, which themselves depend on multi-year contracts and construction.

Fees can provide for their own internal administrative costs, and offer investment
opportunities for unobligated funds or to cover unanticipated shortfalls or windfalls in fee
collection. While fees at all levels of government at times have been subject to annual
authorizations to outlay or obligate monies, fee collection need not be approved every year.
Moreover, while fee revenues may be subject to spending limitations, it is unlikely that fees
established within one governmental jurisdiction would be tapped by another, higher jurisdiction.

Fee systems are flexible by operating on a pay-as-you-go basis, with monies coilected
being matched to monies obligated. Although periodic fee rate adjustments may be made,
contingent liability is not an issue.

The apparent self-sufficiency and flexibility of fee programs have been recognized by
States. Thus, the question of future Federal involvement depends on whether States, localities
and the private sector believe that the Federal government can collect fees more efficiently than,
for example, States can do, and whether Federal "delivery" mechanisms will pursue
redistributive, or allocation, policy goals which States and localities can support.

27


Pay effluent fees, and are eligible for grants and loans. A return of a wastewater treatment construction grant program will be
heralded by many cities, but this support may be offset by the decrease in the availability of SRF loans to potential borrowers,
including for drinking water.

Model II: The Federal/State De Minimis Fee Model

The second model developed is a partial Federal system, or a mix of Federal/State fee-based systems, whereby Federal law
sets a baseline option and broad parameters, but States may administer the fee program and keep the money. We have labeled this
option the Federal/State De Minimis Fee Model, since it depends on a fixed, minimum amount of water-related fees being raised in
each State, under Federal requirements, so as to come up with the revenue target of $2.8 billion annually used for this scenario.

The major role of the Federal government is to design a De Minimis set of fees, on a per-State basis, which it administers
only if a State decides not to implement them or supersede them with its own fee package. Funding eligibilities continue to expand
to include drinking water collection and distribution in addition to treatment facilities, principal subsidies in addition to loans and
credit enhancements, ard loans to private sector, public-purpose projects. When States administer the De Minimis Model, SRFs
make all project funding choices.

The De Minimis approach to fee-based water infrastructure funding is imitative of the approach outlined in the 1990 Clean
Air Act Amendments (CAA), and several other Federal programs such as the FAA’s airport Passenger Facility Charge program. The
CAA Title V, Section 502, requires States to enact air permit fees to recover all State permit program operating costs, at a minimum
amount of $25 per ton of regulated pollutant emissions. Because the Federal government cannot direct States to raise taxes, air
Permit fees are basically a Federal program which the States might choose to adopt, or receive "primacy" or "delegation" similar to
water programs, or "default" to the Federal government.

93


B. Additional Evaluation Concerns

The panelists offered some significant comments on these six criteria, with public support
and other concerns in mind.

1. Fee Dedication

There was substantial discussion on ensuring that fee revenues remained dedicated to
intended uses over time. Historically, the Federal experience with trust funds has been mostly
positive, with several caveats. Even though Federal trust funds typically are included in the
budget (as opposed to being "off-budget"), they have not yet been spent for non-dedicated
purposes. However, funds such as the Highway and Superfund Trust Funds periodically have
been subject to outlay restrictions, and used to offset the deficit as well as provide ready purchase
of U.S. Treasury bonds. Current Highway Trust Fund unspent balances are $31 billion, and
Superfund accounts are at $5 billion. These concerns have led to repeated initiatives to move
one or another trust fund off-budget.

Recent State experience has demonstrated that governors or legislatures feel relatively
free to use fee-based funds similarly. Since State and local political representation changes
frequently, it sometimes has proven difficult to mandate long-term dedication. Indeed, many
State and local fees have never been specifically dedicated, but rather are viewed more as a
general revenue source. Other dedicated State fees are subject to annual gubernatorial review, or
legislative allocation, such as in New York.

Some Crystal City and Airlie panelists noted that the best way to protect State fee funds
was to establish them under Federal iegislative authorization, subject to ongoing Federal
oversight, such as with the current wastewater SRF program, or to move them off-budget. The
Denver panelists argued the reverse. Since Federal credibility was greatly diminished, States,
with encouragement, could do as good a job of oversight.

2. Behavioral Modification

Another issue for fee revenue size and predictability pertains to possible behavioral
responses to fee imposition. Avoidance of fees depends both on the elasticity of demand and
supply, and in some cases on tax policy. Some behavioral modification will result from most fee
programs, and indeed is appropriate in areas such as water conservation or purchase of highly
"polluting" products for which substitutes exist. But sizeable changes will affect revenue stream
substantially.

Environmental representatives argued strongly for the use of fees that do provoke
significant reductions in "polluting" behavior, and in some cases the use of fees for market-based
incentives. Most fee panelists, however, believed that behavioral goals should be secondary and
supplemental to revenue-generating objectives. Some cautioned, moreover, that fees should be
promoted mainly on the basis of their revenue Potential thus avoiding the political pitfalls of a
heated debate on market-incentive fees.


"Taxes" generally may be distinguished from fees in that they are typically charged
against sales, income, property or a specific activity, with less of a direct relationship to the
environment and eligible uses. Several States currently earmark taxes to water quality project
financing, such as "sin" taxes on tobacco and alcohol and real estate transaction taxes. Two
States earmark a portion of general sales taxes to water financing. The relationship, or lack
thereof, between specific sources and uses of fees (i.e., who pays and who benefits), is termed the
"cost/benefit" relationship in this report.

C. Public Consultative Process

The process utilized for study is somewhat unique. Since the EPA's Office of Water
sought to stimulate thinking and debate within as open a process as possible, and also to evaluate
the University's research products at various stages, four day-long open public meetings were
noticed in the Federal Register and held between April and October, 1995.

The first three meetings -- April 25 in Crystal City, Virginia, July 19 at the Airlie
Conference Center in Warrington, Virginia, and September 21 in Denver, Colorado -- focused on
fee programs and are covered in this report. The last meeting, on October 10, 1995 in New York
City, centered on debt financing issues and is discussed in the Part II companion document.

The April 25 meeting in Crystal City was sponsored by EPA's Environmental Finance
Advisory Board (EFAB). The Syracuse University Environmental Finance Center (EFC) and the
Council of Infrastructure Financing Authorities (CIFA) sponsored the remainder.

The format for each of the meetings was similar and, in a reiterative process, each panel
discussion benefitted from the debate and opinions offered in the previous ones. Expert
panelists, numbering about 20 for each meeting, were selected to be representative of various
public and private "stakeholder" groups. They included drinking water and wastewater utility
participants, State and local government officials, environmental, industry, engineering and
agriculture representatives, and persons from the financial and privatization communities.

To the extent possible, participants were actual practitioners of some aspect of water-
related facility financing, construction or management, as opposed to non-profit association staff.
In addition, comments and statements from other attendees (e.g., observers and interested parties)
were made in the afternoon of each day. A complete list of panelists and attendees for the three
fee meetings is contained in Appendix A, totalling over 100 persons. In all, 20 States and many
more localities were represented at the three fee meetings.

The second and third fee meetings facilitated by the Maxwell School of Citizenship and
Public Affairs utilized a "multi-vote" technique to record and weight the preferences of each
panelist on varying topics. This technique allowed each participant a total of typically 10 votes,
which could be divided among different alternatives. For example, a panelist might dedicate all
votes to just one (strongly preferred) option, or spread out votes among different options.


Bibliography

Appendices

Tables

Table 1

Table 2

Table 3

Table 4

Figures

Figure 1

Boxes
Box 1
Box 2
Box 3

Box 4

A. List of Fee Panelists and Attendees

B. Summaries of Three Fee Panel Meetings

C. Statements of Meeting Attendees

D. Current State Fee Programs

E. Executive Summary of the Syracuse Environmental
Finance Center Draft Report (May, 1995)

Effects of Public Supply Water Withdrawal Fee on a Typical
Household

Public Supply Water Withdrawal Fee by States Based on 1990
Withdrawals

Examples of Estimation of Green Fee (Special Sales Tax)

Fee Comparison (for Capital Generation)

1990 Aggregate Sources, Uses and Disposition of Water
in the U.S.

The Federal Green Fee Model (Model 1)
The Federal-State Water Use/Match Model (Model (II)
The Voluntary State Fee Incentive Model (Model IIT)

The Watershed Fee Model (Model IV)

37
41
48
63
78

85

14

15

19

26

13

31

32

33

34


ALTERNATIVE FUNDING STUDY

PART II, DEBT FINANCING STRATEGIES TO
FUND WATER QUALITY INFRASTRUCTURE

Summary of Panel Discussion on Debt Financing Issues

Note: The views in this report reflect the views of the meeting participants and not necessarily
those of the EPA.

America’s immense clean water infrastructure needs are estimated by the Environmental
Protection Agency to be $137 billion for wastewater treatment alone over the next 20 years. The
Alternative Funding Study has explored two ways to increase investment in water quality
infrastructure, for both wastewater treatment and drinking water. One is the greater use of fees
and user charges to increase the investment base, and the second is to allow greater flexibility
and liberalize rules to access more private and public capital. Part One of this study focused on
the first option, while Part Two addresses the second.

The rationale for examination of debt financing issues resulted from the previous three
public fee options meetings, where a widely supported option was to “make more efficient and
effective use of existing financial resources”. The attached background paper and subsequent
October 10, 1995 panel discussion in New York City were used to define and sharpen what
“more efficient and effective use of resources” should be.

Twenty-six people representing the public and private water infrastructure financing
communities gathered at EPA Region II Office in New York City on October 10, 1995 to
respond to the background paper, “Debt Financing Strategies for Funding Water Quality
Infrastructure,” prepared by the Government Finance Group (GFG). GFG has been collaborating
with the Syracuse University Environmental Finance Center, under a grant from EPA to conduct
an Alternative Funding Study, as requested in the Agency’s FY95 appropriation. New York City
was chosen because of its concentration of financial expertise. Unlike the past three meetings,
this discussion focused on increased investment in water infrastructure through lowering the cost
of public borrowing and encouraging larger private sector participation.

The forum’s purpose was to stimulate thinking about what debt financial strategies could
be followed to increase investment in environmental infrastructure. Three fundamental themes
emerged from the background paper and formed the center of the panel’s discussion:

1. Identify the financial and legal barriers to greater investment in water infrastructure,
particularly from private sources of capital.

2. Rank the relative importance of these barriers.

3. Discuss strategies to move discussion of reducing or eliminating barriers to the forefront of
political discourse.


Appendix E
Executive Summary of the Draft Report

“Fee-Based Models for Funding Water Quality Infrastructure”, Syracuse
University Environmental Finance Center (April 1995, Revised May, 1995)

84


Another issue raised was the need to improve scientific risk communication at the local level, to enhance local support
for paying for wastewater and drinking water treatment. That both water supply and wastewater treatment are undervalued, and often
underpriced, was seen to highlight the imperative to communicate better to local citizens the public health and environmental benefits
of clean water in understandable, scientific terms. As one panelist summed it up: If "everyone would cheerfully pay the full cost" of
water and wastewater treatment in the first place, including saving for further needs, we would not be debating new financing
mechanisms today.

A number of panelists emphasized that regulatory reform might also reduce the need for new financing. "Pruning the
regulatory bush” to take account of local differences both in environmental risk and ability to pay was briefly addressed, although the
panelists understood that this topic was not part of the day's agenda. The excessive costs resulting from "one size fits all" regulations
placed enormous burdens on smaller communities. Enhanced State flexibility was underscored as one means to accommodate local
differences.

In summary, the top five rationale (also termed principles or assumptions) voted in the July 19, Airlie Center opening
discussion on fee systems were:

1. Make more effective and efficient use of existing financial resources (26 votes)

2. Generate more revenue through use of dedicated fees (21 votes)

3. Fees to generate revenue might also result in some positive behavioral change (17 votes)
4. Fees preferably should be applied to a broad base and have low rates (15 votes)

5. Funding systems need to be flexible to accommodate local variability in financing water-related “needs” (10
votes)

B. Evaluative Criteria for Fee Systems

Six criteria by which to evaluate fee systems were outlined in the Syracuse University study. The panelists were asked to
make additions, modify, and rank these in order of importance. The initial six criteria were: public support, revenue size and
predictability, equity and impacts, collectability, relationship between costs and benefits, and environmental goals.

While endorsing these, the panelists offered some significant observations and additions. Again, there appeared to be a
strong preference for more State flexibility, particularly in determining eligible projects and distribution of funds among localities,
than currently exists, for example, in wastewater SRF funding. However, some panelists cautioned that continued Federal oversight
vis-a-vis States might be needed.

Second, there was a strong consensus on preserving a relationship between costs and benefits (i.c., who pays fees and
who receives fee-based financing). While this relationship will never be exact because the redistribution of revenues implied by new
funding systems, the majority of panelists supported maintaining this equation. In particular, the cost/benefit relationship was viewed
as an important means by which to emphasize the real costs of pollution control. The panelists then endorsed the use of fees which
were simple and easy to administer, broad-based and low level, and bore some relationship to water use and/or damage
(discussed below under "Types of Fees").

Another criterion was the long-term dedication of fees, particularly by State governments. The imperative of
safeguarding fee revenues over time for originally intended uses, in dedicated "trust" accounts, has been an issue for all levels of
government. Federal trust funds such as the Highway and Superfund Trust Funds have repeatedly been subject to outlay restrictions
measured in billions of dollars. Local drinking water budgets have also been used to support general funds.

However, the State experience in protecting dedicated environmental fee-based funds has been the most worrisome.
Several panelists representing State governments referred to special water-related fee accounts which had recently been "raided" by
either State legislatures or governors, such as in New York and Virginia. Using the Federal "umbrella" or Federal oversight, i.¢.,
having a Federally-authorized State program such as the current SRF program, was considered by several as the only certain means
by which to keep State fees permanently dedicated.

54


If used within a State context, the thorny issue of local fee rebate to State government, for
redistribution among different localities, is avoided. However, many State constitutions restrict
the taxing power of States, such as was mentioned in Colorado.

Eleven States already have imposed public water supply withdrawal fees in the form of
drinking water production, sales or service fees, ranging from $.03 - $.07 per 1,000 gallons.
These include Arizona, California, Delaware, New Jersey, New Mexico, Montana, Oklahoma,
Rhode Island, Texas, Vermont and Virginia. A similar fee was defeated recently in New York,
and currently is being considered in Pennsylvania and Florida. Typically, these fees support State
operating budgets, for example, to offset laboratory testing costs, as opposed to generating new
capital.

There are severe limitations to the broad base of the public water supply withdrawal fee,
however. This is because the publicly supplied, treated water withdrawal, as opposed to
direct or self-supplied withdrawals by the vast majority of industry, mining, hydroelectric
facilities, and agriculture, represents only a very siim portion (about 12%) of all water use
in this country. Also excluded are private wells. The reader should note, as confusion still
exists as to the terms, that "public water supply withdrawal" as termed in this report, differs
dramatically from "direct water use" or "self-supplied water" which is not supplied by utilities.

Figure 1 below, the U.S. Geological Survey "Estimated Use of Water in the United States
in 1990" (Solley, Pierce, and Perlman) demonstrates this key difference. Although the
hypothetical public water supply withdrawal fee would cover 85.2% of all domestic (residential!)
and commercial use in this country, it includes only 18.7 % of all industrial use, and almost no
thermoelectric and agricultural use. Moreover, while some direct withdrawal is measured and
subject to registration by States, most is not.

12


often seen as prohibitively complex and time-consuming. A trend noted by GAO in 1992 still to
an extent holds true today: “...we found that the mix of skills was heavily weighted toward
engineering; about half of the staff responsible for the SRF Program are engineers. Other SRF
staff generally include accountants, grant administrators, and program analysts. However,
according to regional officials, only 2 of the EPA’s 10 regions have a staff member with
experience in lending and bond markets.”° Another problem may be legal. One state, Florida,
prohibits by law the SRF from participating in the bond market. Finally, one must take the
recent recession into account when assessing SRF demand and leveraging.

The most active SRFs have profited from the synergy between aggressive State officials who
“market” the importance and inevitability of the revolving fund concept and forward-looking
local officials who see wastewater needs as too important to postpone in hopes that someday a
grant system will be revived. Another reason which helps explain varying degrees of leveraging
is differing aggressiveness of enforcement among States. Stricter enforcement of clean water
standards would give localities deadlines to meet and discourage procrastination.

CIFA estimates that additional Federal capital grants of $2 billion per year for 12 more years
combined with a continued 20 percent State match and a conservative leveraging factor of 2:1 on
60 percent of the funds would create a loan pool capable of financing $133 billion in projects
over the next 25 years.°

Exempt SRFs from Arbitrage Restrictions — Interest on a municipal bond is normally exempt
from Federal income tax, unless the bonds are arbitrage bonds. Although the Internal Revenue
Code definition of “arbitrage bonds” is complex, its simple purpose is to prevent municipalities
from turning a profit with their tax exempt status. “At its most basic level, arbitrage is profit
from buying something in one market and selling it in another. In the world of municipal bonds,
arbitrage is a municipality’s profit from borrowing funds in the tax exempt market and investing
them in the taxable market.”" Before the reforms in the 1986 Tax Act, abuse with arbitrage
profits was possible. To give a simplified example, a city or State could issue tax exempt bonds
at five percent and then take the proceeds and invest them in U.S. Treasuries bearing an eight
percent return. The excess three percent was then used to fund general government operations or
plug gaps in budgets. This use of state and local obligations was not what Congress had in mind
when it granted tax exempt status for municipal bonds to fund infrastructure.®

The 1986 Tax Act requires that money raised through issuance of tax-exempt bonds not be
invested to earn more than 0.125 percent above interest rate at which the bonds were issued.

. These provisions apply to State Revolving Funds and restrict additional interest which could be
invested in infrastructure. The complexity in tracking arbitrage compliance adds to

5 General Accounting Office. Water Pollution. State Revolving Funds
Insufficient to Meet Wastewater Treatment Needs. January 1992.
* cIFA, Leveraged SRF Programs, A Comparative Review. August 1994. p.2.
’ Ballard, Frederic. ABCs of Arbitrage. Chicago: American Bar Association,
1994.
° The U.S. Supreme Court Case, South Carolina v. Baker (1988) established that
tax-exemption was a matter of Congressional policy and not Constitutionally
protected. od

12


funding. Fees provide for internal administrative costs, offer investment opportunities, and result
in little contingent liability. Fees can be administered within most single governmental units, or
fee functions can be shared intergovernmentally. Potential delivery mechanisms are many, such
as the periodically proposed Federal Clean Water Trust Fund, or expanded SRFs.

This apparent self-sufficiency and flexibility is recognized by States and localities. Thus,
the question of a future Federal role rests on the perception of whether the Federal government
can initiate, collect and safeguard fee funds better than States and localities can, and whether it
can gain consensus on fee revenue allocation, i.e., redistribution policy goals.

Presently, little consensus exists. While green product fees are best structured as Federal
fees, and some smaller States may seek a Federal "umbrella", much ambivalence remains. Many
fees are viewed as more within the purview of States and localities on political, cultural and legal
grounds.

Moreover, fee revenue allocation attracts strong and pervasive disagreement. Allocation
of fee revenues is particularly contentious because of the significant, and very noticeable,
"donor" or "cross subsidization" concerns -- i.e., under most fee programs, some States and
localities will be contributing substantially more in revenues than they will receive back.
Historically, this has been true for the Federal Highway Trust Fund fee program.

To characterize this debate as "large versus small" is an oversimplification. As the fee
meetings demonstrated, "equitable" redistribution of fee revenues also means that States and
localities having invested heavily in the past should not be penalized by redistribution policies
favoring others.

Moreover, environmental financing today not only must address who pays, but also how
much and why. Affordability, is a strong theme and demands a flexibility in financial delivery
modes which many panelists considered beyond any Federal capacity to administer. There is
also a demand for revenue allocation which is linked to real environmental "risks", often within
watersheds, bearing little relationship to the traditional State "needs" and population approach to
current Federal formulas.

D. Fee-Based Intergovernmental Funding Models

The last chapter offers four generic models to illustrate how different fees, delivery
mechanisms, and environmental financing policy goals might be combined. These models are
designed to stimulate further policy discussion on fees, and include:

1. The Federal Green Fee Model which relies on new Federal green product fees
collected by the IRS, and deposited in a new Federal Clean Water Trust Fund. The Fund
would make capitalization grants to SRFs or other State funds for financing local water-
related projects.

2. The Federal-State Water Use/Match Fee Model which combines State "water use"
fees (both public supply and direct withdrawals) with a new 33% Federal match derived

vii


depreciation schedules and investment tax credits is analyzed. Finally, the section concludes
with an outline of how Executive Order 12803 has affected public-private partnerships.

INCREASING PUBLIC INVESTMENT

Increasing public investment refers to expanding funds for facilities operated and owned by local
governments. Shifts in program responsibility from the Federal level to State and local
governments have produced greater spending requirements for localities.

Federal funding cuts and increasing water quality mandates have put local
governments in a bind. For many, the treatment plants they built with federal
grants during the 1970s need to be expanded, upgraded, or replaced. Full local
funding of that work often is political suicide due to the inevitable rate shock. Yet
the lack of treatment capacity ... is constraining economic growth in many
communities.

At the State and local level, environmental infrastructure must compete with a myriad of budget
items including public safety, education, and health care. Further complicating matters has been
a continuing taxpayer revolt at all levels, which has made raising funds by traditional general
revenues extremely difficult.

Out of this environment has emerged a reinvigoration of the principle of self-supporting public
policies through user charge and fee-based methods of public finance. Equitable, efficient, and
enforceable user charges provide a foundation for securing the revenue base and attracting
private capital to upgrade water treatment and delivery. As the National Council on Public
Works asserted in 1988, “Linking financing to use can produce a steady and predictable revenue
stream, encouraging better maintenance, rehabilitation, and replacement.”

How can the benefits of the State Revolving Fund Program be maximized?

There are three ways to continue and maximize benefits of State Revolving Fund Program. One
is to increase the amount of SRF leveraging in the credit markets. Another is to exempt SRFs
from existing arbitrage restrictions. A third is to liberalize other various rules which may be
impeding SRF loans.

The State Revolving Fund program has bolstered public investment in environmental
infrastructure by shifting more public funding into a self-supporting basis through loans and
associated issuance of tax-exempt debt. The Title VI amendments to the Clean Water Act of
1987 dramatically altered the financing of wastewater treatment facilities by phasing out the
Federal construction grants program and replacing it with the State Revolving Loan Fund
Program. Eight and a half billion dollars in Federal capitalization grants and converted Title II
grants since 1988 have translated into a potential loan pool of $15 billion for environmental
infrastructure projects. Unlike $8.5 billion in direct grants, this capitalization amount has the

? public Works Financing. June 1994.
> us Advisory Council on Intergovernmental Relations. High Performance Public
Works. September 1994. p. 579. ”

10


The biggest stumbling block to State public water withdrawal fees was the cross-
subsidization and redistribution of fee-based revenues between localities, which State
intervention implies -- i.e., some communities with successful water programs would become
“donors” in that they would pay more to the fee fund than they received back for "infrastructure
renewal".

B. Green Product Fees

The second type of broad-based, water-related fee which drew support from fee panelists
is the "green" product fee. Green fees would be broadly based, since they would most likely
represent, ultimately, an increase to the existing price of selected retail products. They could be
water-related by the selection of products primarily disposed of in water. Hence the term
"green", which in this study implies not that the products are free of pollutants, but the reverse.
The extent to which such fees are low level or low cost, however, depends on the price of the
product and the national revenue target.

1. Rationale

Green product fees have been suggested frequently in the past, although the literature is
not nearly as extensive as that for other fees, and primarily exists for green fees utilized as
market-based incentives as an alternative to direct regulation. Green fees are used more
extensively in Europe than in this country, with the exception of solid waste fees. Here, State
and local charges for the disposal of particularly toxic or large wastes are fairly well-established,
for example, for used oil, lead acid batteries, tires, household hazardous wastes, and the like
(NGA, 1989). Sometimes fees are used at the front end, for example, fees on new tires and
bottles.

The Federal green fee concept was proposed by the Association of Metropolitan
Sewerage Agencies (AMSA) at the April 25 Crystal City meeting and was offered as an option at
the subsequent two fee panels. : The AMSA paper is included in Appendix C.

Green product fees are, in fact, more "universal" and broadly based than public water
supply withdrawal fees, because of the latter's exclusion of direct water use. Green fees would
fall on virtually every manufacturer of the "taxed" product and/or consumers.

2. Fee Base and Implementation

The target base for water-related green fees could be quite extensive, with one significant
caveat. Currently, little empirical data exist by which to document the volume and toxicity of
most potential fee targets. This limitation, which research might address over time, results in a
significant selection bias when products are selected for their link to water poilution. It also
makes it difficult to justify the use of graduated, more "equitable" rate structures, for example,
levying higher fees on toxic solvents compared to biodegradable toilet paper.

17


Based on my discussions, this is an important issue for political acceptability. -

Syracuse D-1

A question raised on several occasions is: "How do these proceedings tie into the intent of the Unfunded Mandates Reform Act
of 19952"

It would seem that before Congress considers the outcome of these public meetings; -- the study charged by Congress under the
Unfunded Mandates Act to review existing federal mandates should be completed. Some existing mandates may be modified,
‘suspended or terminated.

On the assumption that the Unfunded Mandates study will reduce costs, --- then the proposals now under consideration might be
more palatable to the general public.

Syracuse E-1

‘Water quality is a stated national priority. Therefore, congress should set different priorities for federal spending to provide
adequate funding for environmental water quality infrastructure improvements.

The people do not support new fees without having local public input.
Most important, the people do not support federally driven fees.
However, they want clean water.

Therefore, we offer a voluntary program with a combination of federal, state and local funding. It is located on the last two pages
of our Statement and Position. -

The cost-share formula is similar to phases 3 and 4 of the Yakima River Basin Water Enhancement Project legislation. (H.R.
1690)

Syracuse E-2
The cost-share formula received grass roots support when the Yakima Basin legislation was developed.

The proposal has the following features: -
. Congress must be willing to set different priorities for federal

spending.

. Only localities requiring clean water
project funding would be affected.

. The proposal is not federally driven.

77


Attachment I

BACKGROUND PAPER
Debt Financing Strategies to Fund Water Quality Infrastructure

INTRODUCTION

In the Crystal City (4/25/95), Airlie Center (7/19), and Denver (9/21) meetings designed to
collect public input on fee options, a widely supported option was to “make more efficient and
effective use of existing financial resources”. While these earlier meetings focused on increasing
fees to augment public spending on clean water infrastructure, this paper seeks to advance
discussion of efficiently using existing financial resources to enlarge investment.

As EPA’s Environmental Finance Advisory Board (EFAB) outlined several years ago, the cost of
maintaining a clean environment is daunting. Annual public expenditures for drinking water,
water quality, and solid waste management must increase over 17 percent between now and the
end of the century simply to maintain current standards. State and local government investment
alone is expected to rise by almost a third over the same period. Moreover, State and local
governments will be responsible for an increasing share of total public expenditures -- their share
will rise to over 95% of total expenditures required simply to maintain current standards by the
year 2000.

As the nation confronts those environmental needs, it faces twin challenges of infrastructure and
Federal budget deficits. Tension between the two requires a difficult balancing act. Therefore,
any greater State flexibility to issue tax exempt debt which could reduce short term tax revenue
must be justified with strong, positive impacts on environmental infrastructure. This report looks
at the effectiveness of current financing practices and how removing some barriers could expand
the financing pool for environmental infrastructure. Exploring financial issues to increase
investment in environmental infrastructure breaks down into two basic categories:

1. increasing public investment through greater use of tax exempt bonds
2. increasing private investment and private ownership of facilities.

In the public investment section, the paper first looks at ways to increase investment within the
existing (or expanded) State Revolving Fund system. Increasing leveraging within the existing
SRF regulations as well as lifting restrictions on SRFs, particularly arbitrage rules, are explored.
Next, the potential of proposals to expand and adjust tax-exempt eligibility are examined. The
section concludes with an analysis of the effect of the private bond activity volume cap on
environmental infrastructure investment.

The private investment section picks up where the public section left off by investigating how
changing the definition of private activity bonds could increase public private partnerships.
Current rules and proposed IRS rule changes are examined. The effect of changes in




from Federal green fees. States choose whether to participate, with the Federal match
incentive offered through year-end State capitalization grants, and all fees being
dedicated to water-related project financing.

3. The Voluntary State Fee Incentive Model is similar to Model 2 with three
exceptions -- States may select any capital-generating fee they see fit (water-related or
not), the Federal government may use fees or appropriations for its match, and the match
is increased to 50%.

4. The Watershed Fee Model directs financing to specific watersheds and/or water
bodies, sub-State or multi-State, and relies on watershed protection-type fees, State or
local, such as special assessment district fees, development impact fees, facility
construction, certification, and hook-up fees, well and septage fees, and others designed
with protection needs in minds. Federal and/or State flexible cost-sharing subsidies may
be offered.

Even without new fee funding systems involving the Federal government, there is every

reason to believe that States will continue to innovate in establishing capital-generating fees,
perhaps seeking greater revenue dedication than in the past.

viii


Should fees be imposed for public water withdrawals of irrigation water for residential uses, —- then, the City position is that the
use of fee revenues should be expanded to include the repair and rehabilitation of residential irrigation water supply systems.
The disbursement of these funds should not be limited to potable water, wastewater and nonpoint pollution purposes.

Syracuse A-2
The same expanded use of the funds should apply if fees are attached to water withdrawal for agricultural purposes.

The repair and rehabilitation of irrigation water delivery systems will dramatically reduce leakage, and will have a direct
reduction of excessive water withdrawals from rivers. .

This will allow more water to remain in rivers for fish flows and agricultural purposes during years of drought.
Yakima experienced three consecutive years of reduced river flows. Water for fish and adequate water for agriculture are
important and sensitive local issues.

This proposal goes beyond the scope of funding for wastewater and safe drinking water

However, an expanded use of revenue raised from either Public Water Supply Withdrawals or Direct Water use from rivers
would provide an opportunity toward resolution of several water-related issues at the same time.

Syracuse B-1

The City of Yakima's position is that before new fees or taxes are imposed, careful consideration must be given to the fact that
local expenditures have increased dramatically merely to comply with existing environmental regulations and to maintain current
standards.

Existing regulations have been responsible for nearly 90 percent of the increases in our utility rates. Twenty-three percent of our
water and wastewater operating budget is obligated to service the debt of federally mandated water quality facilities.

Yakima is an Economically Distressed area. Yakima has the highest percentage of residents living below the poverty level in the
State of Washington.

The gap between the cost of basic utility services, — and the ability to pay, - has caused many low-income families, disabled and
elderly to choose between heat or food in winter.

Syracuse B-2
This has led to many families living together in over-crowded conditions, ~ posing an immediate threat to health.
As an elected official, I see and talk to these people and must consider their plight. They will not understand fees on water
withdrawal —- a basic necessity of life.

‘Some of the materials I have read preceding this meeting uses terminology such as "water is typically under-priced",
"comparatively low cost fee" and "very small fee". Many of our citizens are simply too poor and unable to pay for new fees or
taxes despite the risks involved.

Syracuse C-1

A major concern expressed by my constituents is: — once the fees are imposed, what assurance is there that any of the revenues
collected will ever return to Yakima to help finance our water-related capital improvement projects?

From a Federal point of view, — de Minimis may provide an equitable distribution of impacts and a close relationship between
costs and benefits, —- because the fees collected do not leave the State.

However, at the local level, there is no assurance that provisions will be made to guarantee an equitable distribution of funds
between cities within the State.

76


Appendix D-1

STATES WITH CAPITAL-GENERATING FEES DEDICATED
TO WATER QUALITY INFRASTRUCTURE IN 1994

Washington $34,000,000 Cigarette & Tobacco tax for Wastewater Treatment and NPS
$23,298,000 Real Estate tax & State tax on Water, Sewer, and Garbage Utilities for
‘Wastewater Infrastructure
Idaho $4,800,000 Sales tax for Wastewater Treatment
$2,800,000 Cigarette & Tobacco tax for Wastewater Treatment
Towa $16,273,000 Pesticides Dealer License and Registration Fees, Fertilizer Sales Taxes
for Water and NPS
Kansas $2,523,000 Fertilizer Use, Pesticides Sales, and Stock Water Uses for Water
Infrastructure and NPS
Maryland $14,000,000 Boat Sales and Boat Excise Taxes
Minnesota $16,000,000 Cigarette Tax for Wastewater Treatment
$4,100,000 Pesticides and Fertilizer Registration and Sales Fees for Groundwater
Missouri $18,843,000 One tenth of 1% of Sales Tax dedicated to NPS Projects
Montana $1,000,000 Interest on Coal Severance Tax
New Jersey $5,000,000 ° Safe Drinking Water Use Tax for Drinking Water Infrastructure
New York $29,000,000 Bottle Returns, Motor Boat Fuels, and miscellaneous fees for NPS
(landfill closure)
Wisconsin $20,000,000 Pesticide Tax, Vehicle Title Transfers, Highway Salt, Lottery

(proposed) for Water and NPS Projects for Groundwater

Wyomin; $5,000,000 Coal, Oil, and Gas Severance Tax (not all dedicated)
y ig

Total $196,436,000__

Sources: National Conference of State Legislatures, National Governor’s Association, Telephone Interviews, U.S.
Environmental Protection Agency, Office of Water, An Overview of Existing State Alternative Financing Programs:
Financing Drinking Water System Capital Needs in the 1990’s. May, 1992.

79


Box 1: The Federal Fee Model

Revenue Source: Federal fees are assessed, as flat rates, on toxic and conventional pollutant]
effluent, which include industrial direct and indirect discharges and municipal wastewater
treatment effluent, and also on a per pound/active ingredient basis on the production off
pesticides and fertilizers. No State match for new fee-based SRF capitalization grants is
required. The new Federal Clean Water Trust Fund would also earn money on the investment
of undisbursed fee accounts.

Collection and Administration: State environmental agencies could collect all effluent fees}
on an installment basis through NPDES permits functions, including 13 non-delegated|
NPDES States if they so wish. Otherwise, the Federal government would collect.
Pesticide/fertilizer production fees could be paid annually to the Federal IRS by private sector
production and manufacturing companies.

Delivery Mechanism: The Federal Clean Water Trust Fund allocates fee revenues annually
to SRFs upon EPA acceptance of new SRF Intended Use Plans (IUPs), submitted annually at}
the same time as Title VI SRF TUPs. The Fund also may make direct grants to large}
municipal wastewater projects. New Federal bureaucracy needed to administer the Fund may
use up to 4% of fees collected for administrative costs.

Eligibilities and Oversight: The Federal government makes most "redistributive" decisions!
by allocating drinking water and wastewater moneys to separate SRF accounts, with inter-|
account borrowing permitted, and also by making annual direct project grant decisions for]
wastewater. To do this, EPA will incorporate new Drinking Water Needs Survey data into]
the existing Wastewater Treatment Needs Survey database to form a Unified Clean Water
Needs Survey, and a new SRF allotment system (which also must take account of ongoing]
CWA Title VI SRF capitalization grants).

Fee-based SRF eligibilities would be expanded to include EPA 1994 CWA reauthorization!
initiatives, e.g., non-point source, watershed protection, and wetlands mitigation banking!
and 1994 proposed SDWA SRF eligibilities, e.g., loans for drinking water treatment facilities
including land acquisition, water conservation, source water protection and Privately-owned,
public-purpose projects.

SRFs must make a minimum of 10% in drinking/wastewater grants to small communities.
Otherwise, no Federal restrictions or set-asides apply to new fee-based SRF capitalizatios
grants, or Federal direct project grants, except for National Environmental Policy Act revi
(NEPA) and civil rights rules. (Note that Federal wastewater project grants are not restri
to CWA Title II eligibilities, and may be combined with an SRF wastewater loan project.)

The Federal Fee Model is also a excellent mechanism by which to address existing and new Federal
environmental goals, and accommodate change of these over time. A major goal fulfilled under our approach is jump-
starting the SRF drinking water treatment program nationwide. By ultimately relying on SRFs to deliver State-to-local
financial assistance, the financial efficiencies of SRFs through the revolving loan concept, bond leveraging, credit
enhancement, and pre-financing functions are maintained, except for those cases in which the Trust Fund makes direct

Project grants.

1 These so-called "greenbook"’ initiatives are contained in "President Clinton’s Clean Water Strategy”, 1994.

91


-Federal public water supply withdrawal fees are unacceptable but similar State fees O.K. (Jack Sullivan,
AWWA)

-Pesticide/fertilizer production fees unacceptable (Tom Arsdale, National Association of Farmers Cooperatives)

-Support "polluter pays" principle and set rates to produce behavioral change (the two environmental groups, Clean
Water Action and Sierra Club, and Ken Kirk, AMSA to some extent) .

-Against tight linkage between costs/benefits and strict adherence to "polluter pays” (Bob Lenna and Beth Ytell, EFAB),
but preserve principles to some extent (Greg Smith from Ohio and ASWIPCA), Nela Brown argues that those who pay
fees should see some ‘benefits unlike Superfund experience; everyone is a polluter (Ken Kirk, Patty Glick from Sierra
Club)

2. Evaluation Criteria

-Most fees are unacceptable but that should not be the main issue (environmental groups, CWA and Sierra, Greg Smith
from ASWIPCA)

-Eliminate or modify cost/benefit criterion (David Zwick from CWA, Bob Lenna from EFAB, Tom Schaffer from
AMWA)

-There are subtle difference here between those who believe “polluters” should pay even if they don't benefit
(CWA and Sierra), those who favor State cross-subsidization and redistribution, and those arguing that everyone
pollutes and fee base should be broad

Eliminate or modify equity criterion (David Zwick and Tom Schaffer from AMWA)

-Some cross-subsidization between States is necessary particularly for small States such as Maine (Bob Lenna, Beth
Ytell from EFAB, Claudia Copeland from CRS, David Zwick, and Jack Sullivan from AWWA)

-Assured State control over revenue source more important than revenue size and predictability (Bob Lenna)

-Ease of collectability is given too much emphasis in the study (Bob Lenna, and Sahid Kasaeri from ASIWPCA; both
argued that States may want Feds to collect fees, even if this adds time and administrative costs to collection process)

-Annual $2.8 billion revenue stream too small (Ken Kirk, Jack Sullivan)
-Add behavioral changes to environmental goals, with more graduated as opposed to flat fee rates (David Zwick and
Patty Glick)
3. Delivery Mechanisms
~All three models are biased in favor of existing institutions and ways of doing business
Support for the Federal Trust Fund (Ken Kirk, and Bob Lenna who at least wants some Federal redistributive role)

-Federal Trust Fund activities need clarification (Claudia Copeland, CRS, in terms of administration, operations and
grants) and Federal match concept needs more work

Strongly support SRF flexibility (Greg Smith from ASIWPCA, Pete Butkus from Washington State and EFAB, Ken
Kirk, and Bob Lenna)

-Need more SRF assurances under all models (¢.g., Bob Lenna and Pete Butkus who argued that fees must be dedicated
to SRFs in perpetuity with no State legislative review, Federal administrative cost should be capped, and SRF reporting
requirements reduced) .

50


collecting direct water use fees from such disparate sources, especially agriculture, would be administratively difficult and politically
unpalatable. Although at least eight States currently have in place recurring fees for some direct water uses, as many proposals have
been rejected in other States (see “background” appendices).

2. "Green" product fees placed second in the multi-vote process, but if “plumbing fixtures” are included would be first.
Green product fees, proposed at the earlier April 25, 1995 open meeting by the Association of Metropolitan Sewerage Agencies
(AMSA), could be levied as a surcharge to existing sales taxes. Candidates for green fees are many, including toilet paper and paper
towels, diapers and tampax, household detergents, paints, solvents and pesticides, or products used or sold by commercial enterprises
such as dry cleaning solvents (perchloroethylene), agricultural pesticides and fertilizers, and even copper pipe and plumbing fixtures
(the latter of which was not really discussed but subsequently drew many votes).

Again, green product fees represent a type of broad-based, low-level, and relatively simple and easy to administer through
the existing sales tax structure. The above-mentioned products are considered "green" because they bear some relationship to water
degradation. They could be collected by either States or the Federal government, although the original AMSA proposal supported
Federal collection as the most efficient and equitable.

The use of green fees, however, drew some sharp criticism. Opponents noted the difficulties in handling foreign imported
products, and the extreme regressiveness of such fees. That a proliferation of many small fees could easily backfire was emphasized
—i.e., the increasing use of fees in recent years, especially by States, has resulted in some bad experiences. Green fees, others noted,
were really “taxes”.

Controlling the size of the green fee revenue stream might also pose major problems. Green fees might result in too much
monies being collected, which also might backfire politically, and subject fee funds to outside budgetary "raids." Another problem
was that the amount of environmental damage resulting from the use of specific products is not readily documentable. Currently,
only a few States use green product fees, such as Florida, although five States levy special pesticides and fertilizer sales taxes.

3. Brainstorming generated some new ideas, for example, the possible use of an income tax surcharge, and the chemical
production "feedstock" fees currently underpinning Superfund. While use of the $5 billion of “idle” monies in Superfund was not
discussed at length, a number of panelists voted for transferring such funds to water accounts. Lastly, the use of speculative
“development” fees on real estate profits was a close sixth in the multi-vote.

Noteworthy are the types of fees which the Airlie Center experts gave five or less votes. These included NPDES permit
fees (viewed as too costly for capital formation and better utilized for State operating budget support), tax burden shifts (¢.g., through
elimination of the lead depletion allowance), a voluntary IRS check-off, industrial effluent fees, direct water use fees (discussed
above), block grant redistribution, and a national lottery (one vote). A pesticides/fertilizer production fee was not presented.

Two fees received no votes, i.¢., earmarking fines and penalties, and “sin” taxes such as on alcohol and tobacco. The
former was rejected on the grounds that it might lead to a "bounty hunter" system. The latter was rejected seemingly on the basis of
violation to the cost/benefit relationship. The unpopularity of "sin" taxes is interesting, since three States have successfully used
them for water project capital generation for a number of years. If such fees were State, not Federal, more support might have been
forthcoming.

In summary, the top five fees voted by the July 19 expert panelists were:
1. Public water supply withdrawal fee (“infrastructure renewal tax") based on volume (46 votes)
2. "Green" product fees (supplemental to existing sales taxes) (32 votes)
3. Plumbing fixtures (19 votes)
4. Income tax surcharge (14 votes)
5. Chemical production fees (i.e., transfer of Superfund fees to water projects) (14 votes)

56


E. Outstanding Issues

All the fee panelists addressed, broadly, the rationale for new fee programs in the first
place. Clearly, there were many panelists who preferred other methods of funding drinking
water and wastewater projects, such as annual appropriations by Congress from general funds.
Others did not support new fee programs within any context other than purely local, with
possibly some State but no Federal involvement.

A number of panelists argued that other issues might be more critical to address first, in
and of themselves and also to lay the groundwork for increased acceptance of fee programs in the
future. For example, "making more efficient and effective use of existing financial resources"
received the highest number of multi-votes at the July 19 Airlie panel. By this, the panelists
meant that more pollution prevention, water conservation, non-point source controls, and facility
system regionalization might be undertaken, along with preventative maintenance and other cost-
savings measures at treatment facilities.

Within this context, panelists also argued for removal of barriers to existing tax-exempt
financing and increasing private sector participation. In fact, it was concern that the latter topics
be addressed, initially expressed the April 25 Crystal City meeting, that lead to inclusion of debt
financing issues as part of the Alternative Funding Study.

Two other issues are noteworthy. First was the desire for regulatory reform and local risk
Prioritizing, as part of the "unfunded mandates" debate. Second was the expressed concem for
improved scientific risk communication at the local level, to promote greater understanding of
the need for many regulations in the first place. Although pollution prevention, regulatory
alternatives and risk communication are outside the scope of this study, such issues were very
much on the mind of panelists as they turned their attention to fees.




6. Meeting Environmental Goals

Deliberations on this criterion are characterized as much by what the panelists did not
examine, as by what concerned them. The initial Syracuse University Draft Report (May 1995)
included an evaluation of two important design components: (1) financial delivery institutions
and (2) specific water-related eligibilities, including types of financial assistance (e.g., grants
versus loans), and possible private sector eligibilities.

The majority of fee panelists agreed that drinking water projects should be eligible in
addition to wastewater, and that non-structural solutions should be emphasized along with new
capital needs. Constructing something new, as opposed to pollution prevention, improved
operations and maintenance, and other low cost approaches, was not always the best answer.
Moreover, many panelists argued that continued separation of water and solid waste program
lines was artificial.

Likewise, functions of alternative delivery institutions examined in the earlier draft
report, for example, a new Federal Clean Water Trust Fund, Federal Infrastructure Bank, and
"Environmental SRFs", generated little dialogue.

For these reasons, an evaluation of specific water-related project eligibilities and delivery
mechanisms does not reappear as separate subjects in this document.

Instead, the fee panelists assumed a more philosophical approach to the questions of the
future Federal role in providing additional environmental financing. Here, disagreement
emerged as to whether, and how, the Federal government might make future allocations, or
"redistribution" decisions, with new fee-based capital funds.


BIBLIOGRAPHY

American Petroleum Institute, Effluent Fees: Present Practice and Future Potential, Discussion
Paper #075, December, 1993.

Carlin, Alan, et. al, December, 1990, Environmental Investments: The Cost of a Clean
Environment. U.S. Environmental Protection Agency Office of Policy, Planning and Evaluation.

Carr, A. Barry, March 11, 1994, An Assessment of the Agricultural Impacts of H.R. 2199. CRS
Report to Congress. .

Clean Water Council (Apogee Research, Inc.), December 1990, America’s Environmental
Infrastructure: A water and Wastewater Investment Study.

Congressional Research Service (Copeland, Claudia), July 10, 1992, Funding Water Quality
Programs: Revenues for a National Water Investment Corporation.

Council of Infrastructure Financing Authorities (CIFA), (Irvin, Daniel), March 1993, State
Municipal Bond Banks.

Council of Infrastructure Financing Authorities (CIFA), (Ladd, Paul), August 1994, Leveraged
SRF Programs: A Comparative Review.

Environmental Financial Advisory Board (EFAB), May 1992, Narrowing The Gap:
Environmental Finance For The 1990s.

Environmental Financial Advisory Board (EFAB), March 13, 1992, Public Sector Options to
Finance Environmental Facilities.

Emst & Young, 1992, Water & Wastewater: 1992 Rate Survey.

Foster, Richard, July 13,1994, Statement of Richard L. Foster before the Subcommittee on
Investigations and Oversight Committee on Public Works and Transportation.

Friends of the Earth, April 1995, “Dirty Little Secrets”.

GAO, February, 1993, Environmental Protection: Implication of Using Pollution Taxes to
Supplement Regulation.

Grossman, Steven, November 14, 1994, 1994 Annual SRF Survey.
Hearings on H.R. 2188, House Committee on Public Works and Transportation, Subcommittee

on Investigations and Oversight, statements by Carole Browner, U.S. EPA, and Richard Foster,
National Utility Contractors Association, July 1994.

37




processing chemicals, printing inks, some components of agricultural chemicals, and other
candidates may be highly toxic. A graduated fee rate, for example, was applied in the first
Syracuse Draft Report (May 1995) to toxic versus conventional effluent, and the active
ingredients in pesticides versus fertilizers. Toxicity amounts might be approximated by placing
weights on Toxic Release Inventory (TRI) data, such as was done in earlier effluent studies
(CRS, 1992).

It also would be possible to differentiate between "major" and “minor" products, in terms
of gross sales amounts, such as has been done for NPDES permit fees. However, highly
complex fee structures not only are more difficult to administer, but also must rely on empirical
water pollution data, which in this case are deficient. Steeply graduated fee rates may begin to
promote behavioral modifications as well as cheating.

Concerns also emerge for the stability and predictability of the revenue stream. Since
new products will be continually coming on line, and some discontinued, it will be necessary for
the Federal government to adjust fee rates periodically. Also, there are no data on elasticity of
consumer demand. Both issues are complicated by the wide number of green products
potentially subject to new fees, and by the fact that it would be costly to audit and adjust fee rates
annually. Thus, in some years, the revenue stream most likely would be higher or perhaps lower
than anticipated. Literature on revenue fees suggests that such unpredictability can undercut fee

acceptability.

Third, issues are presented by the export and/or import of certain products subject to
green fees. In our case, it may be more likely that export issues will arise. Foreign trading needs
to be carefully measured and thought through from a policy perspective.

4. Impacts

The gross economic impact on domestic manufacturing is represented by the percentage
of sales fee rate selected. Measuring green fee impacts on individual manufacturers or producers
is very difficult, however, since profit data on a company-by-company basis have not been
collected. Conceivably, the impacts could vary widely across manufacturers depending on their
own economic efficiencies, transportation costs, and wholesaling and retailing opportunities.
Thus, smaller companies might be put at a comparative disadvantage.

It should be noted that the pesticides/fertilizer green fee at 4.0% of gross receipts
accounts approaches the $700,000 mark as depicted in Table 3. This amount thus is close to the
$1 billion annual revenue stream estimated by two earlier studies basing the fee on
volume/toxicity (CRS 1992, Syracuse May 1995).

21


Expert panelists were selected by the Council of Infrastructure Financing Authorities
(CIFA) and the Office of Wastewater Management, EPA, to be representative of different
financing constituencies of water infrastructure, both public and private (list attached). Most
participants were direct practitioners of environmental finance: fund managers, capital investors,
underwriters and finance and credit analysts. Finance directors, engineering consultants, and
attorneys specializing in privatization also attended. The majority of participants were from the
private sector, which influenced discussion during the meeting and the conclusions which
followed.

The day-long discussion was guided by a facilitator from the Maxwell School’s Center
for Advanced Public Management in Washington DC, and the multi-vote technique was
employed to determine the preferences of the panelists.

What emerged from the October 10 debt financing meeting included the following:

e the eagerness of the private sector to become involved in clean water infrastructure
investment; and

e the importance of permitting privately-owned or operated facilities similar access to tax
exempt debt as the public sector, the absence of which was argued to be one of the
prime factors preventing the increase of private capital into water quality projects.

While some panelists asserted that this inequality might be rectified through the
elimination of tax exemptions and SRF loan subsidies altogether, this step appeared unrealistic to
the majority of panelists. Instead, panelists’ concerns with the financing inequality produced the
recommendation with the most votes of the panel meeting: “private ownership of a clean water
facility for public use should not disqualify it from tax-exempt status.” By adopting this
recommendation, most panelists believed the Federal government could move closer to the goal
of increasing investment in clean water infrastructure.

Understandably, Federal budget scorers have long been concerned about the budget
implications of permitting greater use of tax-exempt debt. But policymakers should consider
exploring all ramifications of defining tax-exempt status by public-purpose use and not
ownership. Increased tax-exemption could be counterbalanced by increased tax revenues from
privately owned facilities, by the sale price of the facility to the public sector and by reduced
operating deficits (if any) by State and local governments. Those counterbalancing effects do not
include the value of better infrastructure and improved water quality. These issues are explored
in further detail in the remainder of this meeting summary.

A. Assumptions and Rationale for Discussion

The rationale for this meeting grew from the results of the previous three. In the Crystal
City (4/25/95), Airlie Center (7/19), and Denver (9/21) meetings designed to collect public input
on fee options, a widely supported option was to “make more efficient and effective use of
existing financial resources”.




Langdon Marsh

Director

Oregon Dept of Environmental Quality
811 S.W., 6th Ave

Portland, OR 97204

Arturo Perez

‘National Conference of State Legislators
1560 Broadway, Suite 700

Denver, CO 80202

Other

Hester (Tess) McNaulty (absent)
1070 Miami Way

Boulder, CO 80303
ATTENDEES

Clarance Barnett

Mayor Pro-Tem

City of Yakima

Wendy Clevenger
Montgomery Watson

Jack Rycheclay
EPA Region 8

Marian Law

HDR Engineering

Martin Loring

Oregon Dept. of Environmental Quality

Ted Boogs
Vorys, Safer, Seymour & Pease

Edward Blundon
City of Phoenix

James C. DeLaura
Montgomery Watson

47


TABLE OF CONTENTS

Summary of Panel Discussion on Debt Financing Issues

A. Assumptions and Rationale for Discussion

B. Financial and Legal Bariers to Greater Investment in
Water Infrastructure

Cc. Strategies to Focus Attention on the Need for Change

Attachment 1: “Background Paper: Debt Financing Strategies for
Funding Water Quality Infrastructure”
Attachment 2: List of October 10, 1995 Panelists and Attendees,

New York City

24


Figure 1: Alternative Fee-Based Funding Models

Revenue Sources Delivery Mechanisms
1. Industrial Effluent Fees luative Criteria 1. Federal Clean Water Trust Fund
2. Pesticide/Fertilizer Use Fees a. Political Acceptability
3. Public Water Supply Withdrawal Fees b. Revenue Size and Predictability 2. Federal Water Investment Bank
4. Municipal Wastewater Effluent Fees c. Equity and Impacts
5. NPDES Permit Fees d. Collectability 3. Existing and Expanded State Revolving Funds
6. Mix and Match e. Relationship of Costs and Benefits
f. Environmental Goals 4. Regional Funds

(Efficiency and State Capacity Building)

Combined Intergovernmental Models
1. The Federal Fee Model (Federal Fees and Trust Fund)

2. The Federal/State De Minimis Fee Program (Federal or State Fee Systems)
3. The Voluntary State Fee Incentive Program (State Fee Systems and 33% Federal Match)

87


Figure 3 : Depiction of Increasing State Flexibility(Decreasing Federal Oversight)
for SRF Eligibilities under Three Models

Includes:
a) Type of Water Project
b) Type of Financial Aid

State Reporting Requirement

1. SRF Annual IUP .
(Start of year) T. The Federal Fee Model

Federal government allocates amounts for DW and

WWT SRF “capitalization” grants; also , large direct

WWT grants and small DW & WWTegrant set-aside.

2. If State administers,
it submits year-end The Federal/ State De Minimis Fee Model

reports (audit) to EPA. + IfFederal government administers, Federal government
allocates DW and WWT amount.

+ If State administers, “Environmental” SRF makes all
DW and WWT decisions plus type of financing.

3. State submits annual bill
for Federal match to EPA, for } | 111. The Voluntary State Fee Incentive Model
next year funding, plus periodic, “Environmental” SRFs make all DW and WWT decisions plus
“baseline” certification. type of financing, including for Federal match.

Degree of State Flexibility

“TUP” is Intended Use Pian
“DW” is Drinking Water
“WWT” is Wastewater Treatment

89


FEE-BASED MODELS FOR FUNDING WATER QUALITY INFRASTRUCTURE
EXECUTIVE SUMMARY

The Alternative Funding Study has been prepared by the Environmental Finance Center
at the Maxwell School of Citizenship and Public Affairs, Syracuse University, under a grant from
the Office of Water, U.S. EPA.

The Study evaluates two distinct sources of revenue to augment capital investment in
local wastewater and drinking water projects. First, and primarily, is the use of special,
dedicated, Federal, State and/or local "fees" to supplement existing direct subsidies from general
funds. A secondary focus is on the expanded use of debt financing, including indirect borrower
subsidies through tax-exempt bonds, and greater private investment.

This document is Part I, "Fee-Based Models For Funding Water Quality Infrastructure",
and focuses solely on fees, where most of the work of overall study was undertaken. A
companion document, Part II, "Debt Financing Strategies for Funding Water Quality
Infrastructure", centers on other financing topics. A third alternative, to reduce the demand for
project financing in the first place through regulatory changes and pollution prevention, was not
addressed specifically, notwithstanding the substantial interest in such reforms.

By "fees", we mean those financial charges for a particular activity, product or service,
such as water utility customer user fees, environmental permit fees, effluent fees, chemical
feedstock fees, and "green" product fees. Other fees or taxes such as "sin" taxes, with no direct
relationship to environmental services or damage, are mentioned briefly.

Assumptions

Four assumptions guided this project. First, all fees are designed primarily to raise
revenue, at a national target level of $2-3 billion annually, as opposed to changing polluting
behavior. Second, all fee revenues must be dedicated solely to financing water-related
infrastructure, both drinking water and wastewater, as well as non-structural improvements such
as non-point source controls. We term such fees "capital-generating" fees. Third, new fees
would supplement ongoing Federal appropriations such as State Revolving Fund (SRF)
capitalization grants.

The fourth assumption is that fee-based funding programs, while possibly national in
scope, need not be primarily "Federal" in program initiation, collection, and "delivery
redistribution" decisions. By "delivery", we mean the disbursement of fee revenues to local
projects. "Redistribution" refers to revenue allocation policies, or "who" receives funding, as
distinct from "what" is eligible for funding.


vi.

Vil.

Xi.

. States should provide for capacity building of local governments to finance environmental infrastructure and
to provide cost-effective solutions in financing and capital facility design as necessary.

+ Interlocal, bi-state, and interstate/regional cooperation is encouraged.

+ Public private partnerships are encouraged, consistent with each state's constitutional or statutory
enactments.

+ States are encouraged to promote linkages with other financial assistance programs, CDBG (HUD) and

FmHA (USDA) linkages are specifically encouraged.

Standard federal protections Given the propensity of state legislatures to shift funds, some standard federal projections
are also suggested:

+ Perpetuity of fund purpose
+ Protection on investment earnings - must be used for environmental finance
+ States may not utilize legislative review and approval as the final step before fund disbursement.

‘What this gives (us). The above goals (III) and mindset (IV) provide for the opportunity to have up to 50 different state
models created that stand the best chance of meeting the unique needs of each state and its people. To the extent that
territories and trust lands are included, the number of unique models would be expanded.

Report back. Congress should include in the authorization the requirement for each state to report back to Congress via
EPA on the implementation, successes, and needs for modification or ciarification of the program. It is suggested that
a four-year period of state activity be reported. With the many models for program management in place, Congress
will have a wealth of information to review and make modifications, if any in the program based on picking out the
“best” parts from all of the models.

Closing comments. I ended by pointing out the we have never had or will have enough resources to do the job we are
expected to do, so we should "quit chipping our teeth” and get on with the job of providing the financial assistance to
the good environmental managers.

Part Two: Points by Others

+ Other speakers identified the desire to consider solid waste as an “equal” with water and water quality.
Specifically, go towards an environmental SRF concept. I agree.

+ Several speakers gave the message of “don't tax or charge me a fee, tax or fee charge the other person." A
much more positive side of this was the view expressed by Beth Ytell when she noted the need to think in
terms of: “the true cost of delivering service" as the real finance base line. I agree. To implement Beth's
thoughts, it may be useful to separate the basic cost of service as that by naturally occurring events being
charged to the customer. Events that raise the cost of delivering service (the additional cost caused by outside
influences) shouid be charged to the person, firm, or part of society that causes the additional cost. An
example of the latter would be charging the cost of water treatment due to military fuel spills to the federal
government directly.

+ Several panel members wanted to consider poliution prevention activities (to include education activities) in
addition to capital structure finance. - I agree, a modest amount of the total program should be so designated.
Asa Start for discussion, maybe an amount not to exceed 10% could be considered .

+ Given the rapid turnover of people aligned with legislative and environmental fiance issues, it may be

helpful to include in legislative language a full statement of intent and statements of values that are expected
to be carried out.

73


Table 4. Fee Comparison (for Capital Generation)

(Criteria/ Public [Revenue Size
1 Fee |Support Predictability

Equity
Impacts

Costs/
Benefit

ICollectability

[Financing Envi-
ronmental Goals

i. Public Water
Withdrawal 0 +
(73 Multi-votes)

2. Green Product
(98 Multi-votes) 0 0

3. Industrial/
Municipal - -
Effluent

H4. Pesticides/
Fertilizer - +
Production

5. NPDES - 0
Permit

6. Direct Water 0 0
Use

7. Watershed + -
Protection

"+" is Advantageous

"." is Disadvantageous

"0" is unpredictable and neutral
-

—

26



%) of fees to cover its administrative costs. Federal bureaucratic demands are|
minimal after the first several years, depending on the success of its match]

program.
Delivery Mechanism: Expanded SRFs fund all local projects.

Eligibilities_ and Oversight SRF loans, credit enhancements or principal
subsidies for any water-related capital project, but interest-subsidized loans only to
the private sector. Also, SRF may offer grants to small communities. SRFs|
earmark categories annually as they see fit.

The only Federal oversight is a year-end review of State “bills" for the Federal
match and review of State periodic certification of "baseline maintenance of
progress" in initial match-eligible capital contributions.

However, the voluntary aspects of this mode] may backfire, because there are no guarantees of a steady revenue stream,
equitable programs, and a close cost/benefit relationship. Thus, environmental progress is not assured as readily as under the first
two models.

Presumably, collectability is a strong point because all governmental levels will have an incentive to collect fees. Still,
from the Federal government's perspective, a long-term match may be regarded as another entitlement program, which would
increases the long-term Federal exposure.

Findings and Conclusions

Table 4 below portrays how the three models compare to one another, using the six evaluative criteria. Considering all
criteria as equal and "0" as neutral or unpredictable, the “scores” below demonstrate that Model II, the Federal/State De Minimis Fee
Model carries the least (none) disadvantages or negatives.

Table 4
Comparison of Three Models

Criteria/ Political Revenue | Equity/ | Collectability| Costs/ | Environmental

Model Acceptability Impacts Benefits Goals
1, Federal Fee 0 + : 0 - +

. Federal/State

iDe Minimis * 0 + 0 0 0 +
3. Voluntary
State Fee + - - + 0 0
Incentive
"+" is Advantageous
"." is Disadvantageous
0” is Unpredictable or neutral
* Evaluating the De Minimis model depends on whether States adopt the program or not, and
ithe extent to which they substitute fees. Thus, the equity, collectability and costs/ benefits are
a

98


D-1

D-2

D-3

Appendix D

Current State Water Fee Programs

States with Capital-Generating Fees Dedicated to Water Quality Infrastructure in 1994
State Administrative Wastewater Discharge Permit Fees (Projected FY 1994)
State Administrative Drinking Water Fees in FY 1993

Miscellaneous State Fees and Taxes

78


B. Fee Collection and Rebate

Although addressed earlier, fee collection is presented here because, to some extent, it
clouded the more significant debate over Federal fee revenue allocation or redistribution policy
goals. Also, fee collection issues sometimes raised the possibility of fee rebate to a higher level
of government.

Some smaller State panelists seemed to prefer Federal collection of many fees, to avoid
administrative costs and use the Federal "umbrella" over the onerous nature of fees. Some fees,
such as green fees, are collected most efficiently at the Federal level.

In this context, the concept of a new Federal Clean Water Infrastructure Trust Fund
advanced with the green fee program, and repeatedly proposed over the last decade, was not
antithetical to the fee panelists if the Federal redistributive objectives addressed below could be
resolved.

Other fees, such as water withdrawal fees, can be collected efficiently by either States or
localities. Such fees are most acceptable if unpopular fee rebates to a higher level of
government, for redistribution, is avoided. Thus, locating the collection and delivery
mechanisms within the same governmental level is desirable.

C. Fee Revenue Redistribution

The subject of fee redistribution drew strong opinion. Of the many factors which
emerged over the course of this study, "who" should receive the benefits of fee-based financial
assistance remained a pervasive question.

All governmental funding programs imply that policy decisions will be made on revenue
allocation. What makes this issue particularly obvious and contentious for environmental fee
systems is that such systems ar¢ comparatively new, and because significant State and local
"cross-subsidization" and "donor" issues emerge mainly when fees are considered in a Federal
implementation context. Some States, in other words, conceivably will contribute substantially
more in fee payments than they will receive back. Historically, this has been demonstrated in the
case of annual Federal revenue-sharing, and for fee-based programs such as the Highway Trust
Fund which recently has attempted to match State receipts with Federal outlays to States as
closely as possible (ISTEA, 1990).

While the time frame for this study did not permit an analysis of the magnitude of the
donor State factor under alternative fee proposals and, vice-versa, the extent of inter-State
subsidy, such analysis is needed for further evaluation of different fee scenarios. Because cross-
subsidization among States under Federal fee systems probably will be substantial, debate over
redistribution formulas is likely to be more intense than that for existing and future SRF
capitalization grant formulas.

28