The New Face of Water Financing

The New Face of Water Financing

Unique Clean Water SRF Programs Address Non-Point Sources and Other 21st Century Challenges

By Michael Curley

For the last two centuries, when people thought of water and wastewater they thought of pipes — miles and miles of pipes — and large buildings with treatment works. They thought of monthly or quarterly bills that either came from their local government or from the local water or sewer authority. They paid those bills religiously. It would have been a callous judge who ruled in favor of shutting off water to a home, especially a poor home. But few ever wanted to test the issue.

Now, as we’re getting well into the 21st century, it’s not miles and miles of pipes that need to come to mind. It’s just miles and miles of land — land with lakes and streams and ponds. All over the country, vast areas have one thing in common. They all depend on the same water — some for drinking, some for recreation, some for work and transportation. These common water areas are called watersheds. They are the new reality. The old, simple systems are gone. The challenges of today are vastly more intricate, more complicated and more difficult — especially to finance.

When I was a little boy growing up in Buffalo, New York, on the shores of Lake Erie, I could walk into the water up to my neck and look down and see my toes. A few years later, when I was in law school, I would walk into the water up to my neck and look down and could barely see my shoulders. Now, I can see my toes again.

When I was a little boy, it was municipal sewage that was fouling the Great Lakes. Cities and towns all along the shore were dumping untreated or poorly treated sewer water into the lakes.

On Oct. 17, 1972, President Richard Nixon vetoed the Clean Water Act. That afternoon, the United States Senate voted to override the president’s veto. The following day the House of Representatives did too.

Congress had finally caught on to the sewage treatment problem and — after much hand wringing and debate — finally passed the Act.

What saved the Great Lakes was the construction grants program embedded in the Act. This provided massive grants to sewage treatment utilities all across the country. So now, Chicago, Milwaukee, Detroit, Cleveland, Buffalo, Rochester and many other cities got billions of dollars to finance upgrades of their sewage treatment plants. By the time the construction grant program was repealed in 1987, during President Ronald Reagan’s administration, it had given out more than $70 billion in grants.  State and local governments had matched much of this money to the tune of probably another $30 billion. About $100 billion in 15 years.

Reagan wasn’t a fan of government grants, but he could live with loans. So, Congress replaced the construction grant program with the Clean Water State Revolving Loan Fund (CWSRF).

The reason Congress called it a “revolving” loan fund is that, as the individual loans are repaid, the money “revolves” back into the state CWSRF and stays in this fund. It does not go back into state treasuries. Furthermore, as a condition of accepting the federal “capitalization grant” each year, the States must promise to keep the SRFs financially intact and whole. They cannot raid the SRFs for money when the state tax coffers get low. This means that when SRF loans are repaid, these funds are available to make more water pollution control loans.

In addition, all states except Vermont charge interest on their loans. None of them charge market rates. They all offer subsidized interest rates. But charging low interest rates is better than charging no interest rates.


All over the country, vast areas have one thing in common. They all depend on the same water — some for drinking, some for recreation, some for work and transportation. These common water areas are called watersheds. They are the new reality. The old, simple systems are gone. The challenges of today are vastly more intricate, more complicated and more difficult — especially to finance.


 

The point is that as these CWSRF loans are repaid and both the principal and the interest go back into the fund. Since 1987, the federal government has contributed more than $40 billion to the CWSRF. States have contributed another $10 billion. But, because of the “revolving” nature of the program, the CWSRF has been able to provide more than $115 billion of financial assistance since 1987. So, for every $1 the Congress contributed, they got about $2.80 of projects.

Fine. So what’s different about the 21st century? Remember my Lake Erie story? The $100 billion from the construction grant program and the $115 billion from the CWSRF have done their job. That’s why I can see my toes again. 100 percent of the construction grants program funds went to sewage treatment projects. And, more than 96 percent of the CWSRF funds have also gone for sewage treatment facilities. They won the battle.

Sewage is no longer the No. 1 source of water pollution in the United States. These devils are largely gone. Now we face a more a more insidious gang of pollution villains.

Now, the No. 1 polluters in the United States are non-point sources.

And that is why the 21st century will be much different for those in the water business, especially the water pollution control business. Non-point source pollution projects are many orders of magnitude more difficult to finance.

With its $115 billion, the CWSRF provided financial assistance to more than 36,000 projects.  That’s about $3 million per project. The 51 CWSRFs around the country are very good at making $3 million loans to sewage treatment plants. But that was then. Now is different. Now it’s a $15,000 loan to a farmer for planting trees on the edge of his fields that border streams. Or, fencing off the streams so the livestock can’t get into them.
Now, it is making a $50,000 loan to a church to replace the impermeable pavement in its parking lot with porous asphalt. Or, now, it’s a $20,000 loan to a homeowner for insulation in his attic. Wait! Insulation in the attic with money from the Clean Water Act? What does insulation have to do with clean water?

In 2014, Congress noticed this disconnect. To address it, they added some new eligibility for CWSRF funding in the Water Resources Reform and Development Act (WRRDA) of 2014. The important additions are for: 1) measures to manage, reduce, treat or recapture stormwater or subsurface drainage water; 2) government agencies to reduce demand on publically-owned treatment works (POTWs) through conservation, efficiency or water reuse; and, 3) reuse or recycling of wastewater, stormwater or subsurface drainage water.


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Sewage discharge into waterways is no longer the No. 1 source of water pollution in the United States. Now, the No. 1 polluters are non-point sources, which are are many orders of magnitude more difficult to finance.


Amidst the growing discontent with how the CWSRF was addressing the new generation of pollution control problems, an event in 2013 rocked the clean water establishment.

In August of that year, the New York State Environmental Facilities Corporation (NYSEFC), the state agency that manages the CWSRF, set an astonishing legal precedent by guaranteeing $23.4 million of bonds issued by a sister agency, the New York State Energy Research and Development Authority (NYSERDA). The bonds financed “energy efficiency and renewable energy projects for homes and small businesses throughout New York.”

Energy efficiency under the Clean Water Act? Yes, indeed, the NYSEFC pledged their CWSRF assets to guarantee the NYSERDA bonds. They did so under the theory that reducing the demand for energy has the concomitant effect of reducing the amount of nitrogen emitted by power plants producing the energy. That nitrogen winds up in the state’s water bodies. So, projects to reduce the “air deposition of nitrogen” are eligible for funding by state CWSRFs.

Here is another example of a radical and highly innovative program initiated by a CWSRF. In 2014, the sewer system in Sioux City, Iowa, applied to the CWSRF to borrow $14.4 million to modernize some of their facilities. At the same time, Sioux City was vexed by the water quality of a stream that ran right through town. It seems that the stream bed was very steep and unstable. Every time it rained, there was a torrent of muddy water pushing its way through town. The state estimated that it would cost $1.4 million to stabilize the banks and get rid of the problem. But who would undertake the project? How would it be paid for? Nobody knew.

But then the Iowa CWSRF borrowed an idea, called a Sponsorship Program, from its CWSRF cousins in Ohio. Here’s what happened. The state went to Sioux City and told them that they could get a 2 percent (subsidized) loan for $14.4 million for 20 years, which would cost them $880,657 per year. Or, they could agree to “sponsor” (undertake) the stream bed project too, in which case the SRF would give them a $15.8 million loan for 20 years at 1.03 percent, which would cost them $878,209! Totally ingenious.

Another example — this time hypothetical, but very real. Let’s say that a city downstream is awash with upstream water polluted by nitrogen. Let’s say that it will cost the city a lot of money, say $100,000 to build a pre-treatment facility. Let’s say that it would cost an upstream farmer $50,000 to take two acres out of production and build a constructed wetland which would remove more nutrients than the pre-treatment plant. Can the city force the farmer to build the wetlands? No. Is the farmer going to do it on his own and pay for it out of his own pocket? No.

The constructed wetlands problem can be solved by a sponsorship program. It can also be solved if the state has a robust nutrient trading program. In this case — very much like the sponsorship example, the farmer would construct the wetland thereby earning nutrient reduction credits, and then he would then sell those credits to the city. A win-win situation if there ever was one.

Let’s take a couple green infrastructure examples with porous pavement. What is your local government going to tell the pastor of the church with a 2-acre parking lot of impermeable pavement? Are they going to tell him he has to repave with a porous surface? Are they going to tell him his congregation has to pay for it?

What if the 1-acre parking lot were on an upscale shopping center owned by a wealthy developer? What would the government say then?

 


The problem here is that EPA cannot tell the individual SRFs how to run their programs. They cannot force them to innovate. EPA can say what’s eligible and what’s not, but they can’t compel the states to do anything.


 

Congress wasn’t the only organization to notice the disconnect between what had happened in the past and what needed to happen now with the CWSRF. The U.S. Environmental Protection Agency (EPA) leadership addressed the problem in January 2015 by creating a program called the Water Infrastructure and Resiliency Finance Center. This center works with the individual state CWSRFs and local governments to encourage them to undertake innovative initiatives to improve water quality. The problem here is that EPA cannot tell the individual SRFs how to run their programs. They cannot force them to innovate. EPA can say what’s eligible and what’s not, but they can’t compel the states to do anything.

The White House noticed the problem too, and tried to mobilize the Department of Energy to work with EPA to get states to replicate what New York had done: providing long-term, low-interest rate financing for residential and commercial energy efficiency and renewable energy projects for homes and businesses through the use of their CWSRF guarantee authority. It didn’t happen.

Just thinking about this problem for a few minutes can tell you why. The CWSRFs in the individual states are good at making $3 million loans to POTWs, but they aren’t good at making a $15,000 loan for home insulation or new, energy efficient doors and windows. And, on the other side of the coin, most individual state energy offices have never heard of the CWSRF.

This is too bad. If a homeowner went to his local bank for a home improvement loan or second mortgage, he might get a seven-year loan at a 7 percent rate of interest, which would cost $2,783 per year for his $15,000 worth of doors, windows and insulation. If the CWSRF were to guarantee the financing, the term could be 30 years and the interest rate would be about 3.5 percent, resulting in an $816 annual payment. It’s pretty obvious that we are going to save a lot more energy and have a lot cleaner water if the cost is $816 than if the cost is $2,783.

The axiomatic principle of environmental finance is that we must bring the greatest amount of environmental benefit to the largest number of people at the lowest possible cost. In the 21st century in the water game, this won’t be easy.

Non-point sources. Agricultural runoff. Stormwater. Green infrastructure. Resiliency. These are the new buzzwords in the water business, and they’re going to require every ounce of ingenuity and innovation we can muster to finance them.


Michael CurleyMichael Curley is a lawyer and visiting scholar with the Environmental Law Institute. He has spent the majority of his career in project finance and the last 25 years in energy and environmental finance. He is the author of Finance Policy for Renewable Energy and a Sustainable Environment, published by Taylor & Francis in 2014. In 1990, Curley was appointed to the Environmental Financial Advisory Board at U.S. EPA, where he served for 21 years under four presidents. Over the past 20 years, he has taught environmental and energy finance and law courses at the Johns Hopkins University and George Washington University as well as Vermont Law School. He founded the Environmental Finance Centers at the University of Maryland, Syracuse University and Cleveland State University.

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