Examining New Payment Methods to Address Agricultural Nutrient Runoff

polluted river


By Michael Curley

Water quality is a major problem throughout the United States. But it’s not nearly as bad as it used to be. In 1969, the Cuyahoga River in Cleveland was so polluted that it actually caught fire! That made headlines all across the country and galvanized the U.S. Congress into passing the Clean Water Act (CWA) in 1972 over the veto of President Richard Nixon. The CWA contained a funding provision called the construction grant program to be administered by the U.S. Environmental Protection Agency (EPA). Over the next 15 years, EPA handed out over $70 billion of funds to local governments or authorities for sewer projects. The construction grant program required a local match. So, between the federal grants and the local matching funds, the United States spent well over $100 billion controlling urban water pollution between 1972 and 1987.

By 1987, EPA had tired of watching abuses in its grant program and Ronald Reagan, who was no friend of grants to begin with, was president. So, the CWA was amended to replace the construction grant program with a loan program called the Clean Water State Revolving Fund (CWSRF).

In 1972, when the CWA was first passed, urban sewage was the No. 1 source of water pollution. Like its predecessor construction grant program, the CWSRF was created, and ideally suited for funding sewage treatment projects at Publicly Owned Treatment Works (POTWs). These local agencies could borrow millions of dollars for terms on 20-30 years at interest rates that were generally 50 percent below the going interest rates of comparable municipal bonds.

Since 1987, the CWSRF has provided more than $135 billion of financial assistance for almost 40,000 clean water projects. Although there is legal authority in the CWA to fund non-point source (NPS) projects, in fact, the 51 CWSRFs have spent some 96 percent of their funds on point-source problems, i.e. urban sewage projects.

Between the $100 billion construction grant program and the $135 billion spent by the CWSRF and the hundreds of billions of dollars more that has come from the municipal bond market, we have pretty much won the war on urban sewage. It is no longer the No. 1 water pollution problem.

Now the No. 1 source of water pollution in the United States is agricultural runoff. But in terms of attacking this problem, we have an “equipment” issue. The “equipment” is the payment method. Both the municipal bond market and the CWSRF – the two major sources of funds for water pollution abatement – are ill suited to making, say, a $50,000 loan to a farmer for a Best Management Practice (BMP) that would reduce agricultural runoff. The people who manage the CWSRFs are used to coming to work and writing $3 million-plus checks to local POTWs. And, a $50,000 municipal bond is definitely a non-starter. The legal and other costs to issue such a bond would – alone – exceed $50,000.

There is a second problem, which is worse: who pays? When the CWSRFs lend money to wastewater authorities, these agencies usually have tens of thousands of ratepayers over whom they can spread the cost. An upgrade to their treatment plant might cost $10 million. But they could borrow 100 percent of this money from their CWSRF at say, a 4 percent interest rate, for a term of 30 years. This would result in an annual payment of about $600,000. Now if the authority had 100,000 ratepayers, it would cost each one of them about $6 per year or $0.50 per month.

Contrast this with a farmer who can build a constructed wetland on 2 acres of his land that he doesn’t need for crops. This would certainly make a major reduction in the runoff from his farm. The wetland might cost $100,000. The farmer could also borrow from the CWSRF under the same terms and conditions as the POTW. His annual payment would be about $6,000, which is $500 a month. But the only person he can spread this cost over is himself. How many farmers are going to pay $6,000 per year to reduce water pollution out of the kindness of their hearts?

There is no legal authority in the CWA to require the farmer to do anything. He can simply go on polluting. This sounds like an ugly choice: keep polluting, or pay $6,000 a year for the next 30 years. But, in fact, that’s the way things are.

Fortunately, as the CWSRFs have evolved, two partial solutions to these problems have emerged. The first program started in Ohio in 1997. Since then, although marvelously successful, it has unfortunately only been adopted by four other states. This program has come to be called “sponsorship.”

Sponsorship

A sponsorship program looks very much like a grant program. But it isn’t. It is actually a loan to a sponsor who adds it on to one of its own projects and pays off the loan for both projects at a much lower rate of interest that actually saves the sponsor a little money. Here is a good example of a sponsorship project from the State of Iowa.

In 2014, the Sioux City sewer system applied to the Iowa 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. The problem dealt with the eroding banks of the Ravine Park waterway that polluted the water before it entered the City of Sioux City proper. Ravine Park was “characterized by steep, eroded gullies.” What was needed was a project to shore up these gullies and stream banks to prevent the erosion, which would reduce the pollution coming downstream into Sioux City. Every time it rained, there was a torrent of muddy water pushing its way through town. The state did some engineering work and 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.

The state went to the Sioux City sewer system. They 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” (pay for) the stream-bed project too, in which case the CWSRF would give them a $15.8 million loan for 20 years at 1.03 percent, which would cost them $878,209! Two projects for the price of one! Actually, a modest savings!

The reduced interest rate serves as an incentive for the wastewater utility to “sponsor” the upstream project. The cost of the watershed project is paid through savings realized from the reduced loan interest rate. The result is that two beneficial wastewater management projects with triple bottom line benefits get done for about the same cost as one traditional wastewater project alone.

Adoption

The second source of payments for agricultural nutrient reduction projects is – same as in the sponsorship program – a downstream wastewater treatment utility. But in this case, just being a good soldier or saving a few dollars is not the motive. In this case, relief from the utility’s National Pollution Discharge Elimination System (NPDES) permit requirements is the driving force – relief from very expensive permit requirements. For lack of better terminology, we call this process “adoption.”
How do ratepayers 20 miles downstream wind up paying for the farmer to build a constructed wetland? Let us say that, when the state regulators review the NPDES permit of a sewer agency, they determine that the POTW must remove another X-pounds of nutrients. The POTW’s engineers then determine that the required equipment upgrades to meet this stricter standard will cost $1 million. Let us say that our farmer, a few paragraphs above, could build a two-acre constructed wetland on a piece of his land that he doesn’t till, and that this wetland would remove the same X-pounds of nutrients. The farmer’s cost would be $100,000. So, in this case, instead of doing the equipment upgrade, the POTW goes to the farmer and the state regulators and gets everyone to agree: 1) that the POTW will pay for the project, 2) that the farmer will build the project, and 3) that the regulators will give the POTW credit on its NPDES permit for the nutrient reduction produced by the farmer’s project. So, the POTW “adopts” the upstream project.

This business of having downstream ratepayers fund upstream agricultural runoff projects is rare today. A major reason for this is numbers. How do you count the nutrients? How do you actually know that the constructed wetlands project will remove 2X of nutrients?
Estimating nutrient reduction from farmland is to a large degree, subjective. For this reason, many regulators loathe putting precise numbers on the amount of nutrients removed. But the day is coming…slowly.

Regulators in Iowa have certified an “adoption” project. The same is true in Illinois. But that’s about all. What we need is to: 1) get the farmers talking to the water regulators, 2) get the water regulators talking to both the farmers and the POTWs, and 3) get the farmers, the POTWs and the water regulators – all talking to the CWSRF people with the money. The Farm Bureau, the National Association or Clean Water Agencies (NACWA) and other interested NGOs all have major roles to play in getting these programs rolling.

So, since nutrient runoff is now our No. 1 water pollution problem, our agenda is clear. We need to get the other 45 states actively involved in sponsorship financing and the other 48 states interested in adoption projects. Then we might start making some real progress on our new No. 1 source of water pollution: agricultural nutrient runoff.


Michael Curley, Esq., is a lawyer who has spent the majority of his career in project finance and the last 25 years in energy and environmental finance. In 1990, Curley was appointed to the Environmental Financial Advisory Board at the U.S. EPA, where he served for 21 years under four presidents. He joined the Environmental Law Institute as a visiting scholar in 2013. Curley is the author of several book on the topic of water finance including “Paying for Tomorrow: Maintaining Our Quality of Life,” “Fundamentals of Water Finance,” and “Finance Policy for Renewable Energy and a Sustainable Environment,” each published by Taylor & Francis.

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