Wastewater Infrastructure: Overview, Funding, and Legislative Developments
Released: 2018-05-22T00:00:00

Introduction

Waste discharges from municipal sewage treatment plants into inland and coastal waters are a significant source of water quality problems throughout the country. Pollutants associated with municipal discharges include nutrients (which can stimulate growth of algae that can deplete dissolved oxygen or produce harmful toxins), bacteria and other pathogens (which may impair drinking water supplies and recreation uses), and metals and toxic chemicals from industrial and commercial activities and households.

The collection and treatment of wastewater remains among the most important public health interventions in human history and has contributed to a significant decrease in waterborne diseases during the past century. Funding these systems continues to be of interest to federal, state, and local officials and the general public.

Background

The Clean Water Act (CWA) establishes performance levels to be attained by municipal sewage treatment plants in order to prevent the discharge of harmful quantities of waste into surface waters and to ensure that residual sewage sludge meets environmental quality standards. It requires secondary treatment of sewage (equivalent to removing 85% of raw wastes), or treatment more stringent than secondary, where needed to achieve water quality standards necessary for recreational and other uses of a river, stream, or lake.

Although the nation has made considerable progress in controlling and reducing certain kinds of chemical pollution of rivers since the 1972 CWA amendments, the U.S. Environmental Protection Agency (EPA) and others argue that continued infrastructure improvements are necessary to maintain and expand these achievements.

The total population served by sewage treatment plants that provide a minimum of secondary treatment increased from 85 million in 1972 to 234 million in 2012, representing 74% of the U.S. population at that time. About four million people are served by facilities that provide less than secondary treatment, but, according to EPA, these facilities have CWA conditional waivers from the secondary treatment requirement. About 21% of households are served by on-site septic systems, not by centralized municipal treatment facilities.

Despite improvements, other water quality problems related to municipalities remain to be addressed. A key concern is "wet weather" pollution: overflows from combined sewers (sewers that carry sanitary and industrial wastewater, groundwater infiltration, and stormwater runoff that may discharge untreated wastes into streams) and sanitary sewers (sewers that carry only sanitary waste). Untreated discharges from these sewers, which typically occur during rainfall events, can cause serious public health and environmental problems, yet costs to control wet weather problems are high in many cases. In addition, toxic wastes discharged from industries and households to sewage treatment plants cause water quality impairments, operational upsets, and contamination of sewage sludge.

Estimated Funding Needs

Although Congress has provided more than $104 billion in CWA assistance since 1972, funding needs for wastewater infrastructure remain high. According to the most recent estimate by EPA and the states, the nation's wastewater treatment facilities will need $271 billion over the next 20 years to meet the CWA's water quality objectives. This estimate includes

$197 billion for wastewater treatment and collection systems, which represent 73% of all needs; $48 billion for combined sewer overflow corrections; $19 billion for stormwater management; and $6 billion to build systems to distribute recycled water.

These estimates do not include potential costs, largely unknown, to upgrade physical protection of wastewater facilities against possible terrorist attacks that could threaten water infrastructure systems, an issue of significant interest since September 11, 2001.

Needs for small communities represent about 12% of the total. The largest needs in small communities are for new conveyance systems (e.g., pipes), secondary treatment, system repair, and advanced treatment. Five states—New York, Pennsylvania, Kentucky, Texas, and Alabama—accounted for 30% of the small community needs.

Funding for Wastewater Treatment Activities

In addition to prescribing municipal treatment requirements, the CWA authorizes the principal federal program to support wastewater treatment plant construction and related eligible activities. Congress established this program in the Federal Water Pollution Control Act Amendments of 1972 (P.L. 92-500), significantly enhancing what had previously been a modest grant program. Since then, Congress has appropriated approximately $104 billion to support compliance with the act and achievement of the overall objectives of the act: restoring and maintaining the chemical, physical, and biological integrity of the nation's waters.

Title II of P.L. 92-500 authorized grants to states for wastewater treatment plant construction under a program administered by EPA. Federal funds were provided through annual appropriations under a state-by-state allocation formula contained in the act. The formula (which has been modified several times since 1972) was based on states' financial needs for treatment plant construction and population. States used their allotments to make grants to cities to build or upgrade categories of wastewater treatment projects, including treatment plants, related interceptor sewers, correction of infiltration/inflow of sewer lines, and sewer rehabilitation.

Amendments enacted in 1987 ( P.L. 100-4 ) initiated a new program to support, or capitalize, Clean Water State Revolving Funds (CWSRFs). States continue to receive federal grants, but now they provide a 20% match and use the combined funds to make loans to communities. Monies used for construction are repaid to states to create a "revolving" source of assistance for other communities.

In FY1989 and FY1990, Congress provided appropriations for both the Title II and Title VI programs. The CWSRF program fully replaced the Title II program in FY1991. However, during the transition from Title II to Title VI, Congress began to provide earmarked water infrastructure grants to individual communities and regions. In subsequent years, the earmarked funds accounted for a significant amount of the total appropriation. General opposition to congressional earmarking stopped the practice in FY2011. Special project appropriations since that time have supported Alaska Native Village and U.S.-Mexico Border projects.

Federal contributions to CWSRFs were intended to assist a transition to full state and local financing by FY1995. CWSRFs were to be sustained through repayment of loans made from the fund after that date. The intention was that states would have greater flexibility to set priorities and administer funding in exchange for an end to federal aid after 1994, when the original CWA authorizations expired. However, although most states believe that the CWSRF is working well today, early funding and administrative problems plus remaining funding needs (discussed below) delayed the anticipated shift to full state responsibility. Congress has continued to appropriate funds to assist wastewater construction activities.

Figure 1 illustrates the history of EPA wastewater infrastructure appropriations in both nominal dollars and constant (2018) dollars. The increase in FY2009 is due to a $4.0 billion increase in supplemental funds under the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ). As the figure indicates, the funding level remained relatively stable during the past seven fiscal years. In both FY2016 and FY2017, Congress provided $1.394 billion for the CWSRF program. However, funding for the CWSRF program increased by about 22% in FY2018. The Consolidated Appropriations Act, 2018 ( P.L. 115-141 ), provided $1.694 billion to the CWSRF program.

Clean Water State Revolving Fund Program

The CWSRF program represented a major shift in how the nation finances wastewater treatment needs. In contrast to the Title II construction grants program, which provided grants directly to localities, CWSRFs are loan programs. States use their CWSRFs to provide several types of financial assistance to communities, including project construction loans made at or below market interest rates, refinancing of local debt obligations, providing loan guarantees, and purchasing insurance. States may also provide additional loan subsidies (including forgiveness of principal and negative interest loans) in certain instances. Loans are to be repaid to the CWSRF within 30 years beginning within one year after project completion, and the locality must dedicate a revenue stream (from user fees or other sources) to repay the loan to the state.

States must agree to use CWSRF monies first to ensure that wastewater treatment facilities are in compliance with deadlines, goals, and requirements of the act. After meeting this "first use" requirement, states may also use the funds to support other types of water quality programs specified in the law, such as those dealing with nonpoint source pollution and protection of estuaries. The CWA identifies a number of types of projects and activities as eligible for CWSRF assistance. The Water Resources Reform and Development Act of 2014 (WRRDA, P.L. 113-121 ) amended the list by adding several projects and activities.

The current list includes

wastewater treatment plant construction, stormwater treatment and management, replacement of decentralized treatment systems (e.g., septic tanks), energy-efficiency improvements at treatment works, reuse and recycling of wastewater or stormwater, and security improvements at treatment works.

States must also agree to ensure that communities meet several specifications (such as requiring that locally prevailing wages be paid for wastewater treatment plant construction pursuant to the Davis-Bacon Act). In addition, WRRDA amended the CWA to require that CWSRF recipients must use American-made iron and steel products in their projects.

As under the previous Title II program, decisions on which projects will receive assistance are made by states using a priority ranking system that typically considers the severity of local water pollution problems, among other factors. States also evaluate financial considerations of the loan agreement (interest rate, repayment schedule, the recipient's dedicated source of repayment) under the CWSRF program.

All states have established the legal and procedural mechanisms to administer the loan program and are eligible to receive CWSRF capitalization grants. Some with prior experience using similar financing programs moved quickly. Others had difficulty in making a transition from the previous grants program to one that requires greater financial management expertise for all concerned. More than half of the states currently leverage their funds by using federal capital grants and state matching funds as collateral to borrow in the public bond market for purposes of increasing the pool of available funds for project lending. Cumulatively since 1988, leveraged bonds have comprised about 34% of total CWSRF funds available for projects.

Small communities and states with large rural populations have had challenges with the CWSRF funding programs. Many of these communities have limited financial, technical, and legal resources and may encounter difficulties in qualifying for and repaying CWSRF loans. These communities often lack an industrial tax base and thus face the prospect of very high per capita user fees to repay a loan for the full capital cost of sewage treatment projects. Compared with larger cities, many are unable to benefit from economies of scale, which can affect project costs. However, since 1989, 67% of all loans and other assistance (comprising 22% of total funds loaned) have gone to assist towns and cities with populations of less than 10,000.

Water Infrastructure Finance and Innovation Act program

The Water Infrastructure Finance and Innovation Act of 2014 (WIFIA) program provides another source of financial assistance for water infrastructure. Congress established the WIFIA program in WRRDA. The act, among other provisions, authorizes EPA to provide credit assistance (e.g., secured/direct loans or loan guarantees) for a range of wastewater and drinking water projects. Project costs must be $20 million or larger to be eligible for credit assistance. In rural areas (defined as populations of 25,000 or less), project costs must be $5 million or more. To fund this five-year pilot program, Congress authorized to be appropriated a total of $1.75 billion from FY2015 through FY2019.

In 2016, Congress appropriated the first funds to cover the subsidy cost of the program, providing $20 million to EPA to begin making loans, and allowed the agency to use up to $3 million of the total for administrative purposes. In May 2017, Congress provided an additional $8 million for EPA to apply toward loan subsidy costs and an additional $2 million for EPA's administrative expenses.

EPA began accepting loan applications for its WIFIA program in January 2017. EPA received 43 letters of interest from prospective borrowers in the agency's first round of funding solicitation. In aggregate, the prospective borrowers requested $6 billion in WIFIA loans. In July 2017, EPA selected 12 projects to continue the application process. The loan amounts requested for the projects ranged from $22 million to $625 million for a total of $2.3 billion.

For FY2018, the Consolidated Appropriations Act, 2018 ( P.L. 115-141 ), provided $63 million for the WIFIA program (including $8 million for administrative costs). EPA announced a second round of WIFIA funding on April 4, 2018. EPA estimated that its budget authority ($55 million) would provide approximately $5.5 billion in credit assistance.

Other Federal Assistance Programs27

In addition to the water infrastructure assistance programs discussed above, which are administered by EPA, other federal agencies implement broader programs that may provide assistance for wastewater infrastructure projects.

Department of Agriculture

The U.S. Department of Agriculture (USDA) operates grant and loan programs for drinking water supply and wastewater facilities in rural areas, defined as areas of not more than 10,000 persons. For FY2018, Congress appropriated $895 million for USDA's rural water and waste disposal grant program and approximately $1.2 billion for direct loan authority.

Department of Housing and Urban Development

The Department of Housing and Urban Development administers the Community Development Block Grant (CDBG) program. For FY2018, Congress provided $3.3 billion for these funds. Water and waste disposal projects compete with many other CDBG-funded public activities and have accounted for approximately 10% of total grant disbursements in recent years.

Department of Commerce

The Department of Commerce's Economic Development Administration (EDA) provides project grants for construction of public facilities—including, but not limited to, water and sewer systems—as part of approved overall economic development programs in areas of lagging economic growth. For FY2018, the public works and economic development program is funded at $118 million.

How Localities Pay for Wastewater Infrastructure

The federal government directly funds only a small portion of the nation's annual wastewater treatment capital investment. State and local governments provide the majority of needed funds. Local governments have primary responsibility for wastewater treatment: They own and operate approximately 15,000 treatment plants nationwide. Construction of these facilities has historically been financed with federal grants, state grants to supplement federal aid, and revenue from broad-based local taxes (property tax, retail sales tax, or, in some cases, local income tax). Where grants are unavailable—and especially since CWSRFs were established—local governments often seek financing by issuing bonds and then levying fees or charges on users of public services to repay the bonds in order to cover all or a portion of local capital costs. Almost all such projects are debt-financed (not financed on a pay-as-you-go basis from ongoing revenues to the utility). The principal financing tool that local governments use is issuance of tax-exempt municipal bonds. The vast majority of U.S. water utilities rely on municipal bonds and other debt to some degree to finance capital investments.

Shifting the CWA aid program from categorical grants to the CWSRF loan program in 1990 had the practical effect of making localities ultimately responsible for nearly 100% of project costs rather than less than 50% of costs. This has occurred concurrently with other financing challenges—including the need to fund other environmental services, such as drinking water and solid waste management—and increased operating costs. (New facilities with more complex treatment processes are more costly to operate.) Options that localities face, if intergovernmental aid is not available, include raising additional local funds (through bond issuance, increased user fees, developer charges, or general or dedicated taxes), reallocating funds from other local programs, or failing to comply with federal standards. Each option carries with it certain practical, legal, and political problems.

Legislative Activity

Historical Activity

Authorizations of appropriations for CWSRF capitalization grants expired in FY1994, making this an issue of congressional interest. Appropriations have continued, as shown in Figure 1 . In the 104 th Congress, the House passed a comprehensive reauthorization bill ( H.R. 961 ), which included CWSRF provisions to address problems that have arisen since 1987, including assistance for small and disadvantaged communities and expansion of projects and activities eligible for CWSRF assistance. However, no legislation was enacted because of controversies over other parts of the bill.

One ongoing focus has been on projects needed to control wet weather water pollution (i.e., overflows from combined and separate stormwater sewer systems). The 106 th Congress authorized $1.5 billion of CWA grant funding specifically for wet weather sewerage projects (in P.L. 106-554 ), because under the CWSRF program, wet weather projects compete with other types of eligible projects for available funds. However, authorization for these wet weather project grants expired in FY2003 and has not been renewed. No funds were appropriated.

In several Congresses since the 107 th , House and Senate committees have approved bills to extend the act's CWSRF program and increase authorization of appropriations for CWSRF capitalization grants, but no legislation has been enacted until recently. Issues debated in connection with these bills included extending CWSRF assistance to help states and cities meet the estimated funding needs, modifying the program to assist small and economically disadvantaged communities, and enhancing the CWSRF program to address a number of water quality priorities beyond traditional treatment plant construction—particularly the management of wet weather pollutant runoff from numerous sources, which is the leading cause of stream and lake impairment nationally.

The 113 th Congress enacted considerable changes to the CWSRF provisions in 2014 ( P.L. 113-121 ). These amendments addressed several issues, including extending loan repayment terms from 20 years to 30 years, expanding the list of CWSRF-eligible projects, increasing assistance to Indian tribes, and imposing "Buy America" (iron and steel) requirements on CWSRF recipients. The act also added a new provision that allows CWSRF grants to be used for "forgiveness of principal" and "negative interest loans" under certain conditions.

The 2014 amendments did not address other long-standing or controversial issues, such as authorization of appropriations for CWSRF capitalization grants (which expired in FY1994), state-by-state allocation of capitalization grants, and applicability of prevailing wage requirements under the Davis-Bacon Act (which currently apply to use of CWSRF monies).

As discussed above, the 2014 legislation also included provisions authorizing the WIFIA program.

In the 114 th Congress, the Senate passed the Water Resources Development Act ( S. 2848 ), which included several provisions involving wastewater funding. For the most part, these provisions were not included in the final version of this legislation, which Congress enacted in December 2016 (Water Infrastructure and Improvements for the Nation Act, P.L. 114-322 ).

Legislative Proposals in the 115th Congress

Although interest in meeting the nation's water infrastructure needs is strong and likely to continue, proposals to provide financial assistance to local communities will compete with other objectives, including deficit reduction. It is uncertain how infrastructure programs will fare in these debates.

Legislative proposals introduced in the 115 th Congress that include wastewater infrastructure related provisions are identified in Table 1 below.