Estimated 5-year funding requirements for drinking water and wastewater
Estimated 5-year funding requirements for drinking water and wastewater

Baltimore is sinking. But it's not the ground that's doing the swallowing. Virtually all water mains have been in service for 65 years without regular inspections. More than half of storm drains were installed before 1950. Capital improvements and maintenance are leapfrogging the water utility's current maximum debt load of $1.017 billion for water and $1.11 billion for wastewater. Rates for both services have tripled since 1996 and, says Mayor Stephanie Rawlings-Blake, “we can't keep raising debt ceilings without thought to our ratepayers.”

Indianapolis water rates are going up on Jan. 1, 2013, with more increases to come, reports Sarah Holsapple of Citizens Energy Group, the city's Department of Public Utilities. Having signed a consent decree to lower combined-sewer overflows, the city needs $1.8 billion to build a 25-mile deep tunnel system.

Communities across the country face similar financial demands accruing to similar water infrastructure imperatives; some the result of consent decrees, some not. The gap between how much water and wastewater utilities have and how much they need is at least $500 billion (see chart below).

To close the gap, many communities compete for low-interest loans through the state revolving fund (SRF) programs in the Clean Water Act and Safe Drinking Water Act. But congressional appropriations have been declining, and will continue to shrink. Likewise the White House; President Obama's 2013 budget proposal, for example, requests:

$850 million for drinking water, 7.4% less than this year's $918 million

  • $1.18 billion for wastewater, 19.8% less than the $1.47 billion enacted for 2012

There are two other federal programs — one through the Agriculture Department, one through Housing and Urban Development — but they're tiny and targeted at a narrow slice of localities.

With current federal resources clearly inadequate to prevent a national “water Waterloo,” communities through their professional and trade associations have come up with potential supplements that have landed on congressional desktops around the Capital.

Two ‘old' ideas get new twists

Both of the following sources would supplement, not replace, the revolving loan programs.

Innovative financing fund. Baltimore's Rawlings-Blake was one of the co-sponsors of a resolution adopted by the U.S. Conference of Mayors' Water Councilyfvdfdzdrbywwacuw last summer to create a Water Infrastructure Financing Innovations Authority similar to the one in existence for roads through the Transportation Infrastructure Finance and Innovations Act.

Since 1998, the law's enabled the Federal Highway Administration (FHWA) to provide loans, loan guarantees, and standby lines of credit to regionally and nationally significant projects. Rep. Bob Gibbs (R-Ohio), chair of the Water Resources and Environment Subcommittee in the House Transportation and Infrastructure Committee, held two hearings this spring on a draft bill, but hasn't formally introduced the legislation.

Trust fund. Rep. Timothy Bishop (D-N.Y.) introduced legislation (H.R. 3145) that would create a similar investment fund as well as a Clean Water Trust Fund.

A third potential supplement was also discussed at Gibbs' hearings and is closest to realization: providing an exemption from state caps for private activity bonds (PABs) issued for water and wastewater improvements.

Third (and newest) option: private partners

PABs are exempt from federal tax so states and local governments can borrow money at lower interest rates. But states are limited in how much they can loan annually. Some infrastructure, such as airports and solid waste disposal facilities, is already exempt from the cap. Removing this restriction could increase the level of low-interest financing available to utilities.

Indianapolis Mayor Gregory Ballard says the bonds are very important. “They allow local government to harness private capital and expertise in building and operating water and wastewater systems while retaining public ownership,” he says.

Both houses of Congress introduced bills (H.R. 1802/S. 939) to achieve this goal, but the Senate included the provision in its version of the surface transportation reauthorization and the House did not. The two packages are being reconciled in conference committee.

Water Environment Federation Senior Government Affairs Director Tim Williams says some amendments in the House highway bill, such as approval of the Keystone oil pipeline between Canada and the United States, may not be acceptable to the Senate. If so, the conference committee could pass an alternative “simple reauthorization” — shorn of all new proposals — and the bond provision would be dropped. If the committee does succeed in reconciling differences, Williams believes there's a good chance the bonds will be included.

Both the bond and trust fund ideas have been kicked around in previous Congresses. There are federal highway and airport trust funds, but over the past half decade a parallel fund for water hasn't made legislative headway.

In 2009, the Government Accountability Office looked at “taxable” sources ostensibly related to the creation of wastewater — beverages, fertilizers and pesticides, flushable products, pharmaceuticals, water appliances, and plumbing fixtures — that could be hit up for $10 billion but concluded that raising that amount “may be difficult because of the small size of the tax bases of many of these options.”

Bishop's proposal leaves it up to the Congressional Budget Office, EPA, and the U.S. Treasury Department to come up with a funding source. Rep. Earl Blumenauer (D-Ore.) was expected to introduce a trust fund bill by early summer specifying new taxes on pharmaceutical, flushable, and beverage products. It would have little chance of passage.

Why water's a safer bet than roads for the feds

The innovative financing concept, on the other hand, would lend U.S. Treasury money to cities and counties for important regional projects likely to cost more than $20 million. The beauty of this approach is that Congress only has to appropriate enough to cover the program's administrative costs.

Water and wastewater utilities charge their customers for the services they provide, so there's also a dedicated revenue source to repay the Treasury Department. Less than 7% of road projects have the financing profile (the ability to collect tolls and fees) to qualify for innovative financing. More than 90% of water projects, however, do.

“A Water Infrastructure Finance Innovations Authority — because it involves loans that are repaid with interest — involves minimal risks and minimal long-term costs to the federal government,” says Aurel Arndt, general manager of the Lehigh County Authority in Allentown, Pa.

Thus, $40 million in federal appropriations could conceivably support $1 billion in loans. Interest rates could be a tad higher than a state revolving loan's, but that's OK because the program's target is different: large regional projects as opposed to small- and medium-sized projects.

The main roadblock is finding a federal program (or programs) to cut to offset administrative costs.

So innovative financing looks like the fattest water infrastructure funding pitch Congress has looked at in years. But legislators won't be making contact this year. It's too close to the November elections. The best that can be hoped for is a couple of practice cuts once Gibbs tosses the ball toward the plate.

— Barlas is a Washington, D.C.-based freelance writer who covers regulatory issues, with a special emphasis on EPA.