By HUMBERTO SANCHEZ
Nov. 3, 2000 (Thomson Financial)—More than two years ago, Congress passed the landmark Transportation Equity Act for the 21st Century — the so-called TEA-21.
Then earlier this year, it enacted the Aviation Investment and Reform Act for the 21st Century, or AIR-21, that is designed to improve the financing of airports.
Next year the goal of many in Congress is to pass Water-21, the working title of proposed legislation designed to reform and expand the financing of the nation's drinking water and sewage-treatment programs.
But the campaign to develop that legislation has been slowly taking shape for several months.
At a House subcommittee hearing in September on the global need for access to safe drinking water, Adrianna Quintero, project attorney for the Natural Resource Defense Council, a nonprofit public interest organization, testified that in the United States, "while thankfully our water generally is safer than that in many developing nations, much of the nation's drinking water infrastructure is also aging and outdated and many of our drinking water sources are contaminated."
Similar criticisms were leveled in a report released in April by the Water Infrastructure Network, or WIN, a coalition of public and private sector groups that are calling on the federal government to significantly enhance its role in financing the nation's drinking water and sewer infrastructure.
The report, "Clean & Safe Drinking Water for the 21st Century," contends that water and wastewater facilities face an estimated funding gap of $23 billion a year between current investment in infrastructure and the investments that will be needed annually over the next 20 years to replace aging and failing pipes and meet mandates of the Clean Water Act and Safe Drinking Water Act.
That call has been answered in part by the formation of the Water Infrastructure Caucus, co-chaired by Reps. Sherwood Boehlert, R-N.Y., Michael Bilirakis, R-Fla., Robert Borski, D-Pa., and Sherrod Brown, D-Ohio. The caucus sees itself as the vehicle to educate fellow policymakers on the status and future of the nation's water and sewer systems.
"We are laying the groundwork for Water-21," Boehlert said in September, referring to what the caucus fancies will become a comprehensive water inf rastructure funding package in the next Congress. "This time next year I plan to be discussing how we are going to move Water-21 to the House floor," the chairman of the House Transportation and Infrastructure Committee's subcommittee on water resources and environment continued.
"Though critical to the lives of every American, our nation's water infrastructure and the challenges facing those who provide the country with clean and safe water go largely unnoticed," Borski noted at the announcement of the caucus in April.
"It is crucial that the federal government finds ways to provide funding to water infrastructure now and not pass these costs directly on to the consumer," continued Borski, the ranking Democrat on the water resources subcommittee.
EARLY IN PROCESS
Caucus members are looking to build on the type of bipartisan support that led to the passage of the $215 billion highway bill in 1998 and the $40 billion airport improvement bill in April.
But it is early in the push for a remake of the federal water infrastructure financing system. Policymakers and water-infrastructure advocates, the other part of the equation, are currently reluctant to speculate regarding details of ideas being examined to meet such a daunting funding gap.
"The particulars of how its going to work — whether its going to be grants, or how the money will be distributed and who gets the money — all has to be worked out next year," said Jim Philipps, spokesman for Boehlert.
According Carol Kocheisen, counsel for the National League of Cities, an organization representing municipal governments and a WIN affiliate, the WIN coalition is conducting a facilitated dialogue in three different sessions to attempt to come to an agreement on what the basis for any water-infrastructure funding should be.
"I'm assuming that we're going to see some continuation of the state revolving loan fund, and very clearly the local governments are very interested in direct grants, in addition to refundable repayable loans," Kocheisen said. "How we work the details of something like that out has not yet been resolved."
SRFs ARE EFFECTIVE
State revolving funds, which are initially funded with federal grants, are vehicles for states to provide low-interest rate loans to municipalities for the construction of waste and drinking water treatment facilities — as well as for storage, transmission, and distribution systems.
In order to receive the grants, each state has to provide matching funds, which come from the municipalities, equal to 20% of the federal contribution. The grants are awarded by the Environmental Protection Agency and come out of its overall budget, which totals $7.8 billion for fiscal 2001, up from last year's $7.56 billion funding level. The EPA's fiscal 2001 budget includes $825 million for the drinking water SRF and $1.35 billion for the clean water SRF.
"The state revolving fund program and the leveraging of it through the issuance of debt has been an effective way to provide funding," said Mary Francoeur, a senior vice president with Moody's Investors Service.
According to Kocheisen, gauging the success of the SRF programs depends on whom you ask. The program "has its good points, but by and large nowhere near meets the needs and, secondly, telling me that the federal government is going to lend me money in order to finance these activities is a little bit like telling me that the bank paid for my house," Kocheisen said. "It did, but they want every dime back three times over."
"There are significant needs and there are many communities that have raised their water and sewer rates more than 6.5% a year, and there are a number of citizens that are getting to the point where their water and sewer bills are 4% or 5% of their income. Then you begin to get to the point where people can't afford their water and sewer bills anymore," Kocheisen warned.
The EPA is of the opinion that, although the SRF program has been a successful one and should play a central role in meeting any water-infrastructure funding gap, other possibilities should be investigated.
" In looking to close the gap, I think we have to look beyond just the SRF program, although clearly the SRF program should be a focal point, we have to look beyond the SRF program to other means," said Richard Kuhlman, director of the EPA's Municipal Support Division. "It's such a huge issue, no one thing in and of itself is going to solve the problem."
NOT JUST GRANTS
"Not all communities can afford just straight low-interest loans as are offered by the clean water SRF to meet the huge amount of needs that are out there," Kuhlman said. "We have identified the concern of disadvantaged communities and we would like to work with Congress to add provisions to the clean water SRF program similar to those that are in the drinking water program that allow principal forgiveness or some sort of assistance like that, which would help communities that are disadvantaged."
"Not only just funding is necessary to help communities meet the demands that are identified by the gap analysis, but we also have to find better ways for treatment, less costly alternatives for treatment, other things that can be done and not just by grants and low-cost loans," Kuhlman said.
"We're also beginning to identify some tax policies that may be appropriate to try and consider," he said.
Paying close attention to what is happening on Capitol Hill with the schools program, Kuhlman confessed to be intrigued how legislators are looking at expanding the use of tax-exempt debt for schools and trying to create a taxable tax-credit school-construction bond program, as well as discussions concerning arbitrage issues that related to tax-exempt school financing.
"I think we'd like to be able to consider some of those opportunities as well." Kuhlman said.
Congress is currently sitting on a tax bill that contains several significant tax-exempt bond provisions. They include a measure to relax arbitrage rules for school-construction bonds, creation of a new category of private-activity bonds for school construction, and the authorization of two new taxable tax-credit bond programs: $15 billion for school construction and $10 billion for Amtrak.
The relaxed arbitrage rules would ease the spend-down rules for school-construction bonds to four years from two and raise the small-issuer exemption from the rebate rules to $15 million from $10 million provided that $10 million is used for school construction. Looser arbitrage rules, therefore, would allow cities to make schools' construction dollars go farther.
COOL TO TAX CREDITS
But tax-credit bonds are quite controversial. Under the proposal, municipalities would issue bonds maturing in 15 years for school construction or high-speed rail infrastructure construction and bondholders, rather than receiving interest payments, would receive a federal tax credit.
Rep. Bill Archer, R-Tex., chairman of the House Ways and Means Committee, has been a staunch opponent to the tax-credit approach because he contends it makes the tax code more complicated and uses the code to make social policy. But Archer's opposition may be moot since he is retiring at the end of the year.
Also, investors have not shown much interest in tax credits. If the potential bondholder is a company, for example, it may not need a tax-credit every year over a 15-year period.
Kuhlman acknowledged that direct grants to localities are necessary to close the funding gap. He also specified that the administration's position consists of some sort of principal forgiveness. Under congressional mandates, cities must match the EPA grant with at least 45% of the project's cost, which is sometimes raised by selling debt. When a municipality demonstrates that it cannot afford a 45% match, then the EPA reduces the size of the match, Kuhlman said.
"I would not like to see and I think the administration would not like to see a totally separate grant program that would compete with the SRF program," Kuhlman said. "We need to set up programs that complement one another."
Currently, congressional mandates dictate that an SRF loan cannot be used to match a grant from EPA.
"We are working to try and revisit those decisions that have been made in the past, hopefully within the next few months we'll be able to move some of those issues out," Kuhlman said. "A combination of grants and loans is probably the best mechanism to deliver the assistance to communities. Give them enough grants to make the loan affordable.
"There is such a limited amount of funds that are available that it's difficult for all states to give principal forgiveness without having a major impact on the fund itself. The idea would be to give enough money to capitalize the fund so that they can not only continue to manage, long term, a level of loans that they need, but have sufficient additional funds to be able to provide principal forgiveness. To me, that's the concept. I don't think we can afford to go back to a day when all we do is give grants.
"One of the things that this administration has continually said to Congress was that we need to sit down and have a dialogue and figure out what's the appropriate responsibility between the federal, state, and local governments. Localities shouldn't pay for all of it, the federal government shouldn't pay for all of it, and the states shouldn't pay for all of it. We've got to figure out the right balance."
TRUST FUND NEXT?
Originally, water-infrastructure advocates viewed the dedicated trust funds established by TEA-21 and AIR-21 as a financing mechanism that they could apply to financing water and sewer projects, but they have since cooled to the notion.
"That was what we were looking at initially; could we come up with a similar construct for water infrastructure," the NLC's Kocheisen said.
The highway bill and airport-improvement measure created dedicated highway and aviation trust funds financed from the revenues received from gasoline taxes and airport user fees tacked on to airfares. The guiding principle was to take that money, which people are already paying as they drive on the highways and use airports, and require that it be reinvested in roads, bridges, runways and other infrastructure, and not be used for other programs or to help balance the budget. Lawmakers refer to this fiscal design as creating a "firewall" around the trust funds.
The difference in the case of water infrastructure is that TEA-21 and AIR-21 have a dedicated source of funding—the gas tax and passenger-facility charges. There currently is no water tax, and water infrastructure advocates are leery of the likelihood of Congress passing such a tax.
One possible revenue source for a water-infrastructure trust fund could come from designating a percentage of income tax for a trust fund, "but you can imagine how popular that idea would be," Kocheisen lamented.
"I'm not sure we're going to be able to figure out a trust fund," Kocheisen said. "I'm not sure that we could ever agree how to raise money for a trust fund. There are lots of ways a trust fund could work, but when you pick a potential source of revenue, you're also picking someone's ox to gore and depending on whose ox is being gored determines how loud the bellow is and how effective."
"We may just have to be talking about using the surplus" as a source for closing the funding gap, Kocheisen predicted.
"The idea of a trust fund is not yet, and may not be, the vehicle to do this," concurred Albert E. Warburton, director of legislative affairs for the American Water Works Association, a nonprofit organization dedicated to the improvement of drinking water quality and supply.
"It is one of many things that is being considered," he said. "Right now AWWA and the Water Infrastructure Network have been working to determine what kind of legislation we'd like introduced and support in the coming Congress to address wastewater and drinking water infrastructure."
AWWA is planning to announce what kind of legislation it will pursue in Congress "probably early next month," Warburton said.
"WIN will probably be coming out with a legislative agenda shortly after AWWA puts its recommendations out," he said.
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