Americans rely on wastewater systems to protect public health and the environment. These systems are composed of a network of pipes and pumps that collect wastewater from homes, businesses, and industries and transport it to treatment facilities where it is treated prior to being discharged to surface waters. Historically, wastewater systems in the United States have been owned and operated by public agencies at the municipal level. In fact there are about 16,000 publicly owned wastewater treatment plants in the United States, which serve about 97 percent of U.S. residents served by sewers. The remaining 3 percent are served by privately owned wastewater treatment facilities. Laws and regulations applying to wastewater treatment and the financing of wastewater infrastructure often differ based on whether a treatment facility is publicly or privately owned. EPA sets standards for the quality of wastewater that can be discharged under the Clean Water Act. Under this law, the National Pollutant Discharge Elimination System (NPDES) program limits the types and amounts of pollutants that industrial and municipal wastewater treatment facilities may discharge into the nation’s surface waters. Both public and private wastewater treatment facilities discharging into U.S. waters are required to have NPDES permits authorizing their discharges. Generally speaking, municipal wastewater treatment facilities are designed to treat typical household wastes and certain pollutants in commercial and industrial wastes, primarily those identified in the Clean Water Act as conventional pollutants. Municipal facilities, however, may not be designed to treat toxic pollutants, such as heavy metals, which more typically occur in industrial waste streams. The Clean Water Act authorized EPA to develop pretreatment standards—implemented as the National Pretreatment Program—to prevent certain pollutants, such as toxics discharged by industries into sewers, from passing through municipal wastewater facilities and into surface waters, or from interfering with the facilities’ treatment processes. The National Pretreatment Program regulations require publicly owned wastewater facilities treating more than 5 million gallons of wastewater per day, and receiving certain pollutants from industrial users, to develop pretreatment programs. It further requires that municipalities possess adequate authority to require industrial users to pretreat their wastewater before discharging it into sewers. The pretreatment standards do not, however, apply to industrial discharges into privately owned wastewater facilities. Without such standards or a municipal pretreatment program, privately owned wastewater facilities may use alternative mechanisms to ensure that nonconventional waste is properly treated before it enters the sewer system, which according to EPA may be more costly and difficult. The Clean Water Act also authorized significant federal construction grants to help municipalities build eligible wastewater treatment facilities. In the 1980s, concerns about the federal deficit, among other factors, led to a transition from these grants to the CWSRF program, which was established in 1987. Under this program, the federal government provides capitalization grants to states, which in turn must match at least 20 percent of the federal grants. The states then use the money to provide generally low-interest loans to fund a variety of water quality projects at the municipal level, and loan repayments are cycled back into the fund to be loaned out for other projects. In 2008, states provided CWSRF loans totaling about $5.8 billion to municipalities and other recipients. States can loan CWSRF funds to publicly owned wastewater treatment facilities, but privately owned facilities are generally not eligible for CWSRF loans. The federal government also helps finance wastewater infrastructure by subsidizing municipalities’ use of the bond markets through the tax code. Municipalities sell bonds to investors to gain an up-front sum to use for infrastructure or other purposes; the investors are then paid back over time, with interest. The federal government subsidizes municipalities’ bond issuances by exempting the interest investors earn on these bonds from federal income tax, thus lowering borrowing costs for municipalities. The Congressional Budget Office estimated that the federal subsidy of municipal bonds for all types of infrastructure amounted to $26 billion in foregone tax revenue annually between 2008 and 2012. The federal government restricts the level of private involvement in projects financed by tax-exempt municipal bonds, limiting the extent to which private companies can benefit from the federal subsidy. There are several types of bonds that municipalities can issue to finance publicly owned wastewater infrastructure, including general obligation bonds and revenue bonds. General obligation bonds are backed by the full faith and credit of the issuing municipality, meaning that the municipality pledges to use revenue from taxes to pay back the bond. Municipalities’ capacity to issue general obligation bonds is often limited by state law. In contrast, revenue bonds are backed by the revenue from the facility being constructed with bond proceeds—in the case of wastewater, revenue bonds are usually backed by revenue from sewer rates. In cases where a private company’s involvement in a wastewater facility exceeds thresholds for issuing municipal bonds, the municipality may still be able to issue another type of tax-exempt bond called a qualified private activity bond. The Department of the Treasury limits the volume of private activity bonds that can be issued in each state in a given year; the national limit for calendar year 2010 was $30.86 billion. In order to issue qualified private activity bonds for a wastewater project, a municipality must receive an allocation of private activity bonds from their state, which can be difficult because wastewater projects generally must compete against projects in other sectors, which may include affordable housing, education, and health care. Although the federal government contributes significant funds to wastewater infrastructure through the CWSRF and tax code, municipalities have primary responsibility for financing wastewater infrastructure. According to U.S. Census Bureau estimates, in fiscal year 2007 municipalities spent about $43 billion on wastewater operations and capital projects, while states spent about $1.4 billion. Most municipalities pay for wastewater infrastructure improvements with sewer rate revenues and by issuing municipal bonds. A 2005 National Association of Clean Water Agencies survey of 141 utilities serving more than 81 million people asked respondents which sources of revenue they used to pay for capital improvements to wastewater systems. The 75 utilities responding to this question said that 49 percent of revenues supporting capital improvements came from municipal bonds (both revenue bonds and general obligation bonds) and other types of debt, 16 percent from CWSRF loans, 16 percent from user charges such as sewer rates, and 19 percent from other sources. In addition to obtaining funding for new infrastructure, municipalities are also generally responsible for overseeing the planning, design, and construction of wastewater facilities. Conventionally, wastewater projects follow a design-bid-build approach in which the municipality contracts with separate entities for the discrete functions of a project, generally keeping much of the project responsibility and risk with the public sector. To meet the continuing need for wastewater infrastructure, some municipalities have used alternatives to this design-bid-build procurement approach, including a variety of types of PPPs, which are described in figure 1. In the last 30 years, hundreds of municipalities have entered into PPPs for the operations and maintenance of their wastewater facilities. In addition, some communities have entered into PPPs—often called design- build-operate agreements—in which the private sector designs, constructs, and then operates new wastewater infrastructure for a period of time. PPPs can also be developed to include private financing, which can serve as an alternative to traditional wastewater infrastructure funding sources. Policymakers and wastewater groups have proposed numerous approaches to bridge the potential gap between current levels of federal, state, and local spending and future infrastructure needs. Two such approaches build on traditional ways of financing wastewater infrastructure: increasing funding for the CWSRF and implementing EPA’s Sustainable Water Infrastructure Initiative. The CWSRF has seen an increase in funding in recent years, from $689 million in fiscal year 2009 to $2.1 billion in fiscal year 2010. In addition, $4 billion was appropriated to the CWSRF as part of the American Recovery and Reinvestment Act of 2009. EPA’s Sustainable Water Infrastructure Initiative encourages wastewater and drinking water utilities to improve the management of their systems, to plan ahead for infrastructure needs, and to charge the full cost of their services—including the costs of building, maintaining, and operating a wastewater system over the long term. In its 2002 report about the clean water infrastructure gap, EPA noted that if wastewater utilities implemented annual rate increases of 3 percent over inflation over a 20- year period, the infrastructure gap would disappear. In addition, wastewater stakeholders and policymakers have also proposed a number of alternative approaches that could be used to bridge the wastewater infrastructure financing gap. For example, one option would be for Congress to create a federal clean water trust fund. We have previously examined design issues that would need to be addressed in establishing such a fund, including how a trust fund should be administered and used; what type of financial assistance should be provided; and what activities should be eligible to receive funding from a trust fund. In addition, a clean water trust fund would require a source of revenue. We found that, while a number of options have been proposed to generate revenue for a clean water trust fund—including excise taxes, a corporate income tax, and a water use tax—several obstacles would have to be overcome in implementing these options, including defining the products or activities to be taxed, establishing a collection and enforcement framework, and obtaining stakeholder support. Policymakers and wastewater stakeholders have also suggested that Congress create an NIB to finance many types of infrastructure, including wastewater facilities. Since 2007, three bills have been introduced that outline different visions for an NIB or similar entity that would finance wastewater infrastructure: The National Infrastructure Development Bank Act of 2009 (H.R. 2521) proposed establishing a government corporation to finance infrastructure projects across sectors, prioritizing those that contribute to economic growth, lead to job creation, and are of regional or national significance. It would have the authority to issue loans, bonds, and debt securities, as well as to provide loan guarantees. The National Infrastructure Bank Act of 2007 (S.1926 and H.R. 3401) proposed creating an independent federal entity to finance infrastructure projects that have “regional and national significance” with a public sponsor and a potential federal investment of at least $75 million.