Council of Infrastructure Financing Authorities
May 12, 2006
Washington, DC
“Four Pillars and Beyond”
Remarks of Benjamin H. Grumbles
Good morning. Thank you for the invitation to speak here today. It is an honor to be joined by Lyons Gray, EPA’s Chief Financial Officer. We welcome the opportunity to talk about the actions we are taking to help ensure clean and safe water throughout the country. Clean and safe water are key ingredients to keeping people healthy and our economy strong. To deliver that clean and safe tap water to the public ---we need sustainable infrastructure.
The Bush Administration is committed to putting into place the programs and partnerships to meet our nation’s water infrastructure needs. Safe drinking water requires investments—and----sanitary sewers are essential to protecting both public health and water quality. Some of these public health protections require complex analysis and the development of new technologies. We know how to protect our waters and our health. We know how to build the infrastructure and now we need to find the means for financing.
Sustainable Infrastructure
As a nation, we have spent billions of dollars building a nationwide network of water infrastructure. Today, our water infrastructure is aging and we can no longer disregard the need for rehabilitation and replacement that we will face in the next several decades. To do so would put the achievements of the last thirty to forty years and our nation's waters at risk.
As you know, EPA's Drinking Water Infrastructure Needs Survey estimates more than $277 billion in capital investment is needed over the next twenty years for infrastructure improvements. Almost two-thirds, $184 billion, are for transmission and distribution. Federal funding alone will not meet these needs. However, actions and technology innovations are necessary to reduce the needs.
Recent figures also reveal that the federal government and the states have invested almost $53 billion in the Clean Water State Revolving Fund (CWSRF) program to rebuild and refurbish the nation's wastewater infrastructure over the last 18 years. These figures are published in our recently released "Clean Water State Revolving Fund Programs: 2005 Annual Report." The report highlights the innovative ideas of state CWSRF programs and includes an update on the financial performance of this program.
The CWSRF has made almost 17,000 loans since the program's inception in 1988. Annual CWSRF assistance has averaged about $4.5 billion. Borrowers save an average of 21 percent on financing costs over the life of the loan.
The CWSRF is evolving as it is revolving. We like what we see and the progress we are making. In 2005, states began submitting information to track environmental benefits. Each project is linked to a river, lake, or stream and to beneficial uses of that body of water such as fishing and swimming. More than 60 percent of the total funding reported goes to projects that protect drinking water, preserve fish habitat, and provide for water recreation.
EPA is committed to helping our partners sustain progress and increase opportunities for state revolving funds through financial stewardship, innovation, and collaboration. This CWSRF program demonstrates the power of partnerships to leverage, innovate, and excel to meet wastewater infrastructure, watershed protection, and community health needs.
Sustainable Infrastructure Initiative
We are continuing to implement and make concrete advances on the Office of Water’s priority - The Four Pillars of Sustainable Infrastructure ----which I am pleased to report, is also a priority for the Administrator. Recently, he had the opportunity to tout it with Senate leaders and Chinese leaders—seizing both occasions.
The first pillar -- Better Management – is based on an understanding that improving utility management will be critical to improving performance and efficiency.
In terms of infrastructure management, we are committed to working in collaboration with utility leaders to promote more effective utility management in many different areas. Over the last year we have been meeting with leading managers from drinking water utilities to better understand what attributes are critical to their success. We plan to outline a series of steps to take over the next year to examine ways in which we can all promote greater adoption of sustainable management practices and programs across the entire industry.
On May 3, we signed a groundbreaking utility management partnership agreement with six major Associations to improve utility performance. These improvements can be accomplished through the application of effective management tools, performance measurement, and other techniques including:
Enhancing utility decision-making through public awareness and customer confidence; and
Developing a long-term strategy to identify, encourage, and recognize excellence in water and wastewater utility management.
The formal partnership will focus on improved water and wastewater utility performance through education, management tools and performance measures. The Associations involved are: Water Environment Federation; National Association of Clean Water Agencies; American Water Works Association; Association of Metropolitan Water Agencies; American Public Works Association; and the National Association of Water Companies.
This collaboration will help more and more utilities find cost-effective, innovative solutions to managing their infrastructure and operations so that citizens can continue to enjoy high levels of water quality in the future.
Over the next 12 months, EPA and the associations will work with utilities to identify the key attributes of sustainable management. They also will develop measures to use in gauging utility effectiveness, and develop a strategy to promote widespread adoption of sustainable management practices across the water sector. We are also committed to providing information to utilities to help them make the most cost effective decisions on infrastructure technology.
The second pillar--- Full Cost Pricing. Because of way we price water, the public believes that water is readily available and cheap. Our thinking needs to shift if we are going to meet essential infrastructure needs. We’re particularly interested in identifying the range of approaches used to set rate structures based on full-cost pricing and collecting “lessons learned” from utilities implementing those structures to share more widely.
We are committed to educating utilities and the public on the importance of implementing pricing approaches that provide economically efficient and environmentally sound service over the long-term that also promotes efficient water use.
We will do this through outreach to utilities, public education and technical guidance. Finally, we are focused on a Watershed Approach that will help utilities, communities and states make infrastructure decisions within a watershed in a manner that protects and enhances water quality and public health.
This pillar also takes into account source water protection. One of my desired outcomes for this pillar is to see that programs from the Clean Water Act are used to protect drinking water sources--- Clean Water Act tools for Safe Drinking Water Act goals.
EPA’s will also work with various partners to identify potential barriers that currently inhibit the ability of local communities to effectively employ watershed-based approaches to infrastructure decision making and cost-effective ways to overcome these barriers.
We will soon begin work with the National Advisory Committee on Environmental Programs and Technology (NACEPT) to examine these potential barriers over the next one to two years.
NACEPT will undertake a variety of analyses and provide an initial set of recommendations to EPA in approximately one year.
Ensuring that our Nation's water and wastewater infrastructure is sustainable in the future is one of EPA's highest priorities. Your leadership is both critical and greatly appreciated.
The third pillar - Water Efficiency – emphasizes the need to use water wisely. I have spoken in the past about a program we are developing to bring water efficiency to the market place. Water efficiency simply makes good economic and environmental sense. To this end, EPA is supporting the establishment of a national Alliance for Water Efficiency in the City of Chicago. The Alliance will serve as a national clearinghouse and advocate for water efficiency research, evaluation, and education.
Water Efficiency
I want to emphasize Water Efficiency, an issue that has become increasingly important with our stakeholders. Our goal is to help the public value water as a limited resource. In addition, that efficiency will be a key consideration in water use and in the selection of products and services that use water.
To accomplish this, we are developing an innovative market enhancement program modeled after EPA’s Energy Star program, to promote non-agricultural water efficiency by promoting use of water-efficient products and services.
In our effort to foster a nationwide ethic of water efficiency, we have developed the Water Efficiency Leaders (WEL) Program. The program will recognize those organizations and individuals who are providing leadership and innovation in water efficient products and practices. It will also enable EPA to document “best practices,” share information, encourage an ethic of water efficiency, and create a network of Water Efficiency Leaders.
Finally, The Fourth Pillar-- Watershed Approach will help utilities, communities and states make infrastructure decisions within a watershed in a manner that protects and enhances water quality and public health. The long-term viability our water infrastructure will be enhanced as utilities use watershed-based approaches for making the right infrastructure decisions in order to meet overall watershed goals.
Gulf Coast
Our work in the devastated Gulf Coast region should serve as a model for implementing our Sustainable Infrastructure goals. We continue to aid the region in long-term recovery for communities that were affected by last fall’s hurricanes. And, our Sustainable Infrastructure initiative is part of the approach for rebuilding in the region. Sustainability principles are being incorporated in the planning and construction of new water and wastewater infrastructure, as well as in the responses to enforcement actions.
Our work there highlights the importance of the SRFs and the continued need to educate the states and local utilities. To that end, EPA organized a funding workshop earlier this year for state and local planners in Baton Rouge. We developed a funding brochure that helped identify funding sources for infrastructure rebuilding including the SRFs. Prior to these actions, many utilities and state and local officials were unaware about the flexibility of SFR funding—especially for rebuilding after the hurricanes.
Technology, Innovation, and Collaboration
Sustainable infrastructure and watershed stewardship, through our “four pillars” program is at the top of the water agenda for 2006 and beyond. I will look to build upon this foundation with the three tools of technology, innovation, and collaboration.
As I mentioned earlier, we have a unique opportunity to accelerate water efficiency as never before and I intend to integrate an ethic of cooperative water conservation into our Clean Water and Drinking Water programs. All levels of government and the private sector must share a long-term commitment to finding effective, efficient, and fair solutions for sustaining our water infrastructure.
Monitoring
I am continuing to emphasize monitoring which is critical to ensure water is clean, safe, and secure. High-quality data must support every decision we make at the federal, state and local level - whether it is about surface water or drinking water. We have an important monitoring initiative to help states and tribes build and sustain better water quality monitoring programs.
In FY 2006 we provided $18.5 million in funding to help states implement improved monitoring programs and to collaborate in statistically- valid surveys of coastal waters, streams and rivers, lakes, and wetlands.
Finally, to ensure the security of drinking water, the President's FY 2007 budget requested $38 million for WaterSentinel to continue research to develop and test a prototype for an early warning contaminant detection system that drinking water systems could adopt. We have worked to support industry's improvements in water security and are also working with ASDWA and other stakeholders to develop and support a wide array of tools to make drinking water infrastructure more secure.
Inventory of State and Local Financing Innovations
Today’s water infrastructure challenge requires a multi-faceted approach to managing and sustaining our infrastructure assets—one that embraces a variety of market-based approaches that will affect both the demand for new infrastructure and the financial resources needed to pay for it.
We have begun compiling an inventory of innovative financing options at the state and local levels. Some are already operational while others are still under consideration or in planning and design. We will complete case studies on those that appear to be the most promising.
In addition, we have been working closely with the Environmental Financial Advisory Board on several issues affecting the financing of water infrastructure, including useful life financing, addressing affordability concerns, watershed financing tools and techniques, and the leveraging potential of financial guaranties.
Some examples of innovative financing options at the state and local levels to be explored include:
Lifting the caps on Private Activity Bonds – PABs provide a tax-exempt financing vehicle for private entities. Tax-exempt PABs are those that are normally issued by a State or local government but whose proceeds are used by a private party. EFAB recommends that the Agency support this as a key private sector incentive for improving efficiencies in providing public environmental services. Benefits the State and potential borrowers by lowering the cost of capital.
Lifting IRS Arbitrage Restrictions on SRF Equity Funded Reserves to Permit Arbitrage Investment in SRFs. Leveraged SRFs are bound to IRS rules, which require equity reserve funds not capitalized by bonds, to be treated as though they are bond proceeds. The interpretation of the IRS arbitrage limitations requires the yield on invested reserves to be no greater than the bond maturity rate.
In some states the reserve funds may equal as much as 50 percent of the bond proceeds. Placing the reserve funds outside the arbitrage restriction will increase investment earnings on reserves by 20 to 50 percent.
This benefits both the State and potential borrowers: earnings that would otherwise be rebated to Treasury would provide additional funds to recycle into new SRF infrastructure loans. The State will have greater ability to meet demand and flexibility to solve a variety of water quality problems. And, borrowers will have greater access to SRF funds.
- Expanding the use of loan guaranties by SRFs or initiate a Federal guaranty program. Loan guaranties can be used in combination with other Federal, State and local funding sources tailored to the project sponsor’s needs. Used to supplement other funding programs, the loan guaranty might satisfy a matching requirement or make other assistance more affordable.
SRFs currently have authority to offer communities loan guaranties. However, their use is rare since direct SRF financial assistance provides greater cost savings.
A Federal guaranty would require changing Federal tax law to allow for Federal guaranty of tax-exempt debt. In June 2005, EPA charged EFAB to study ways in which loan guaranties might be used as part of a mix of infrastructure funding tools. The study is underway. This would benefit both State and potential borrower by stretching available funding and reducing the cost of commercial financing.
- Public/private partnerships. Remove barriers to privatization of wastewater treatment plants. Privatization is the establishment of a partnership between a public entity and a private entity for the economic benefit of both entities. This can lower wastewater treatment costs for the users, lower construction costs for new treatment facilities, and improve compliance with discharge permits.
Essentially, there are three forms of privatization:
- Contract operation. A private entity takes on some portion of the management and operation and management of the facility while the municipality maintains ownership.
- The municipality may benefit from better environmental compliance from capital investments and efficient operations, use of innovative operation and maintenance methods, and reduced costs through streamlined procurement and construction. Lease arrangements are private entities either providing a capital investment in the facility or transferring funds to the community.
- Sale of the treatment works. This is rarely employed because of discharge permit and tax issues. The system that is sold must obtain its own NPDES permit. A private system is not eligible to administer and enforce pretreatment programs, this making it vulnerable to enforcement in the event the plant cannot handle a customer’s discharges.
Impediments include: Privately-owned treatment systems do not qualify for domestic sewage exclusion and are, thus, subject to RCRA requirements for handling hazardous waste. EPA must approve disposition agreements if Federal funds helped build the plant. Private facilities are not eligible for tax-exempt financing.
- The remaining 30 percent of these are homeowners associations or other forms of private ownership. Mobile home parks and homeowners associations are generally weak institutions for drinking water system management. Mobile home parks and homeowners associations may wish form a partnership with a strong public or private entity for drinking water system operation and management.
- Application of a Fannie Mae-like Institution to Water Infrastructure Financing. A national bank chartered by the federal government that would be authorized to buy SRF loans and debt issues, lend to the SRFs, and sells its own debt, presumably at favorable rates because of its Government Sponsored Enterprise status. These authorities would help SRFs to re-liquefy their portfolios at a faster pace than would be the case holding their outstanding loans to maturity. It would benefits the State and potential borrowers by increasing the availability of funds.
Sale of SRF Loans. The loans would be priced at a discount, i.e., at their present worth. The proceeds would be invested and/or used to make new loans. This would benefit both the State and potential borrowers: the state would have greater ability to meet demand and flexibility to solve a variety of water quality problems. In addition, borrowers would have greater access to SRF funds.
Allowing Interstate Lending Among the SRFs. This is one way to put idle cash to environmental use. Instead of being invested in other securities, these funds would finance SRF loans in another State. It would address instances where a State's highest priority is caused by a problem in an adjoining state that views the problem as a lower priority.
Allowing investments in projects that cross state lines will gain important environmental and health benefits sooner. This helps both the state and potential borrowers. The state has greater ability to meet water quality standards by addressing concerns that are across state lines and, borrowers have access to available funds across State lines.
- Allowing Principal Forgiveness of CWSRF Loans. This is currently allowed under SDWA for DWSRF loans to disadvantaged communities. Volume is limited to an amount up to 30 percent of capitalization grants. However, it would require a legislative change for the CWSRF. An alternative is to link the volume allowed to the percent of disadvantaged households in communities. It would require legislative change for DW and CWSRFs. It benefits the State and potential borrowers by expanding the customer base by making loans affordable.
- Establishing a Small Set-Aside under the CWSRF (0.5 percent for example) to Fund Planning and Design. The set-aside could be used to promote better management and environmental management systems. It would accelerate project start for communities without funds for project planning and design. For example, Michigan allocated $40 million from a recent bond issue for planning and design grants after determining that the lack of such funding was a major factor in delaying construction. It benefits the State and potential borrowers by lowering the cost of getting projects underway, which in turn accelerates project construction.
These represent a few of the innovative financing ideas on which the Office of Water will be focusing in 2006.
In closing, I know that you are keenly aware of the direct relationship between clean, safe water and healthy people. I am proud of the work we do at the EPA to help advance that relationship. Our work puts in action our commitment to finding effective, efficient, and fair solutions for sustaining our water infrastructure. However, we cannot do it alone. All levels of government and the private sector must share in this commitment…and I thank you for yours.
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