epa funding reductions: calculating the impact

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EPA FUNDING REDUCTIONS: CALCULATING THE IMPACTAuthor(s): CHARLES K. COESource: Public Administration Quarterly, Vol. 9, No. 1 (SPRING, 1985), pp. 105-115Published by: SPAEFStable URL: http://www.jstor.org/stable/41575709 .

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RESEARCH AND DEVELOPMENT NOTES

EPA FUNDING REDUCTIONS:

CALCULATING THE IMPACT

CHARLES K. COE North Carolina State University

INTRODUCTION

With the passage of the 1972 amendments to the Water Pollution Control Act of 1948, federal funding for waste water treatment skyrocketed. The federal share of construction costs rose from 55 to 75 percent and $18 billion were authorized between 1972 and 1977. In 1977, another $25.2 billion were authorized until 1982. Effective October 1, 1983, however, funding decreased dramatically. Reagan cuts passed by Congress reduced the federal share from 75 to 55 percent and annual appropriations for fiscal years 1982-1985 fell from $4.2 to $2.4 billion annually. State and local policy-makers are concerned about the reduced funding. Local governments still must comply with federal clean water requirements but must rely more on local resources to do so.

Studies of the impact of EPA funding reductions have been conducted in West Virginia and Georgia and several other analyses are underway in other states. This article explains the methodology used in the Georgia study so that this methodology can be adapted by other states concerned with knowing the probable impact of EPA funding reductions.

Responding to the impending EPA reductions, the governor of Georgia in 1982 appointed a study commission to assess the ability of local governments to fund needed waste water treatment facilities. The Institute of Government at the University of Georgia performed the analysis for the study



(106) PAQ SPRING 1985

commission. The purposes of the research were twofold: (1) indicate what effect EPA reductions will have on rates charged for sewage treatment and (2) estimate generally the fiscal capacity of local government to fund capital needs in light of EPA funding cuts.

EFFECTS OF EPA CUTS ON SEWER COSTS

Based on calculations applying standard sampling techniques, a random sample was selected of 70 of the total 512 local governments providing water in the state of Georgia. Govern- ments with water systems were sampled because some of the state's local units have water but no sewer systems. Most of these unsewered communities, however, have applied for EPA funds to build systems. In order to ensure that the eight largest water systems were represented in the study, four randomly selected large systems were forced into the sample. As a result, large systems were intentionally overrepresented. Table 1 presents a comparative profile of the systems sampled and the total universe of systems.

As Table 1 indicates, very small systems were slightly underrepresented in the sample and very large systems were slightly overrepresented. On balance, however, the sample was a good representation of the universe.

A telephone survey was administered to public officials in these 70 systems. To ascertain existing costs, finance officers were asked the monthly amount paid by a household using 5,000 gallons per month which, according to the American Wastewater Association (1983) is a typical amount for residential usage. This monthly amount was multiplied by 12 to calculate the existing annual sewer fee paid by the typical residential user.

The second step was to calculate what the future cost will be to each of the 70 governments to comply with federal law by constructing needed wastewater treatment facilities. For this, EPA's 1982 Needs Survey was used. Annually, EPA projects by state an i by local unit the cost of constructing needed treatment facilities. Each government has been given by EPA a priority and funds are granted by EPA according to a local unit's priority



PAQ SPRING 1985 (107)

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and its needs shown in the Needs Survey. For the purpose of determining future costs, it was assumed

that the cost of needs outstanding in 1982 would be financed by borrowing for 20 years at the then prevailing interest rate of 13.5 percent for BAA revenue bonds. The analysis assumed all construction would begin in 1982. In actuality, construction will be funded by EPA over time according to a schedule of priorities set. To estimate the aggregate fiscal impact of the cuts, immediate construction was assumed.

It was calculated that the federal share of construction costs will be 55 percent. The percentage increase in sewer rates at 55 percent EPA funding was compared to the former level of 75 percent funding. A comparision was made both in total dollars and in the bill of the typical household using 5,000 gallons. To make the findings more discrete, the systems were categorized as follows:

-.^sterri Size // of # of Category Customers Systems %

1 0-499 29 41.4 2 500 - 999 10 14.3 3 1,000 - 2,999 17 24.3 4 3,000 - 19,999 11 I5.7 5 20,000 or more 3 4.3

70 100.0%

The findings are shown in Tables 2 and 3. As seen in Table 2, the effect of the drop to 55 percent

amounts to a 44 percent increase in funds needed by local units to fund their share of construction costs. Viewing Table 3, it is evident that the small-sized sewer systems with up to 500 customers will be most seriously affected by the reductions. These sized systems can expect a 378 percent increase in rates for a typical household compared to only a 96 percent increase in communities with more than 20,000 customers. This difference is accounted for by the fact that some small communities sampled have no sewage system at all and will require large amounts of capital funding to start new facilities. Table 3 also shows that the decline in funding significantly increases the size




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of the rate increases needed. The increases in the typical bills range from 51 to 168 percent more than would have occurred with 75 percent funding.

It should be pointed out that these findings are in the aggregate and not all local governments will experience the same sewage rate increases. Some systems which have already received funds both comply with the law and have sufficient treatment capacity not to require additional funding until the distant future, if at all. In contrast, other systems have immediate needs. These systems either have not received EPA funds or need further funding because of problems of obsolescence or the need to increase capacity because of growth. Public systems requiring immediate funds will generally experience much greater rate increases than the average shown in Table 3.

FISCAL CAPACITY TO FUND CAPITAL COSTS

The second aim of the research was to indicate how capable local governments are of funding capital construction. Since 1976, EPA has been wrestling with how to measure fiscal capacity. (Spain and Brown, 1982) Among the various criteria suggested by EPA, one in particular has been used since 1976 and seems to be considered by EPA to be the most important. EPA has developed indices that measure the annual sewer bill of a community as a percent of the median household income in the local government. The EPA official who developed this measure states that there is intuitive validity to it but readily admits there is no empirical validity and cautions that other measures (particularly outstanding debt) be used by states in determining whether local units should receive EPA funding. (Dearth, 1982) Given this qualification, the ranges below are used as indications of possible financial burden. (Spain and Brown, 1982:41)

1. If Average Median Household Income (MHI) is less than $10,000, the Excessive Annual Charge will be over 1 percent of MHI.

2. If MHI if from $10,000 to $17,000, the Excessive Annual




Charge will be over 1.5 percent of MHI. 3. If MHI is greater than $17,000, the Excessive Annual

Charge will be over 1.75 percent of MHI.

Using these indicators, it appears that, despite high percentage increases in sewer rates, communities in Georgia generally have considerable excess capacity to furnish sewage treatment capital needs. Table 4 shows that sewage systems with 500 or more customers have an excess capacity ranging from $43 to $136 in the larger systems with over 20,000 customers. In contrast, communities with up to 499 customers will experience an annual bill that is $119 per household greater than the EPA standard - again because a number of communities in this grouping have no existing treatment capacity but nevertheless need one.

IMPLICATIONS FOR OTHER RESEARCH

The Georgia findings were consistent with the results of a study of 16 cities in Tennessee conducted by the Municipal Finance Officers Association (MFOA). That analysis also found that prospective rate increases will be very great, however, when the EPA excess fiscal capacity index is applied, all but the very small systems have sufficient financial capacity to fund improvements. (Petersen and Watt, 1981)

An outstanding research question is to what degree the findings in Georgia and Tennesee are generalizable? One hypothesis is that the aging facilities in the east and midwest require more capital funding than those generally found in sunbelt and western states whose industrialization and development are a relatively recent phenomenon. If this is the case, sunbelt states with their newer facilities require less maintenance and replacement. In which case, rates for service are less than in the east and midwest. Other research may well find that, while the percentage increase in sewage rates will not be as high in eastern and midwestern local governments, there is considerably less - if any - excess financial capacity because of already high sewage rates.

This hypothesis will be answered as additional studies are




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conducted. Several are underway and EPA will make a national survey. States undertaking impact studies similar to the one described here should remember two basic limitations of this methodology. The first centers on EPA's fiscal capacity index. As stated earlier, this index - though in wide use - has no empirical basis. A second limitation is that the rate increases faced by the typical residential customer are overstated to the degree there is commercial and industrial disposal. To determine the actual impact on the residential user, the survey (whether mailed or by phone) should try to determine how much revenue comes from residential, commercial, and industrial sewage treatment. Such data were not available in Georgia, however, and probably will not be in other states.

A second research question centers on how individual communities will be affected by the EPA cuts. The Georgia findings aggregate local governments. As each community is examined, some will not be affected by the reductions because they have modern facilities with considerable excess treatment capacity. At the other extreme, some local jurisdictions face such massive cost increases that it may prove impossible for them to comply with federal water pollution laws. This may especially occur in unsewered communities which are nevertheless still legally bound to install facilities.

Help may come from the states. As of 1980, 37 states provided funding assistance to local governments for sewage construction. The problem facing these small communities in great need of supplemental assistance is that other policy considerations may precede the pollution control issue. This was the case in Georgia. The state legislature recently created a bond assistance program which generally only larger communities will be able to use. The aim of the program is not so much as to control pollution as it is to make Georgia's larger local governments industrially competitive with other southeastern states which are funding pollution control. (Whorton, 1983)

Notwithstanding the methodological limitations of the Georgia study, the approach does offer an easy and quick way of estimating the fiscal effect of EPA reductions. For particular local units to determine the effect, they are advised to use the methodology developed by the Municipal Finance Officers




Association (Spain and Brown, 1982). The response of states to EPA reductions remains an area for further research.

REFERENCES

American Wastewater Association (1983). Telephone conversation, July 14. Dearth, John, Administrator in the EPA (1982). Telephone conversation, November

8. Spain, Catherine and Hamilton Brown (1982). Financial Capacity Guidebook. Wash-

ington, D.C.: Municipal Finance Officers Association. Petersen, John and John Watt (1981). Fiscal Impact of Municipal Wastewater

Treatment Facilities in Tennessee. Washington, D.C.: Municipal Finance Officers Association.

U.S. Environmental Protection Agency (EPA) (1980). "Draft Economic Guidance for Water Quality Standard Downgrading." Memorandum to Regional Water Division Directors.

Whorton, Joseph (1983). "Change and Goal Displacement: A Case Study of the Administrative Response to Implementing New Federalism in Georgia." Paper delivered at the Annual Conference of the Georgia Political Science Association, Atlanta, February 10.



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