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Compliance

Financing for Environmental Compliance

In the next twenty years cities, counties and tribes will need to spend billions of dollars to improve capital assets and remain in compliance with federal environmental laws. New technologies and asset management techniques may help local governments create a plan to finance major capital assets, ensure compliance with environmental statutes and regulations and minimize health and environmental risks.

Below is a step-by-step financial planning process that can help your community determine capital asset technical and financial needs and find available air, waste and water resources to meet your compliance goals.

  • Step 1: Assemble a Team
    A good team is essential to the overall success of the project. Team members will:
    • Determine the equipment needs
    • Complete a cost analysis
    • Develop a financing plan
    • Help the community understand how the capital asset improvements will benefit the entire community.

    Contracting support may be necessary if current municipal or Tribal employees cannot fill these roles.

    Your team can use the following steps to develop a financing plan and present their findings to the community and local government officials.

    Successful financing of environmental capital assets requires the buy-in of the local political approving entity and community stakeholders. Briefings and public meetings during each stage will increase the likelihood of success. Reaching agreement among various groups is one of the most difficult aspects of public financing. Transparency and involvement can help a community reach agreement.

    Your team should include, at a minimum, members with the following skill sets:
    • Knowledge of the technical requirements and capabilities of the utility asset. An understanding of past problems and ability to devise the ultimate technical solution are critical to achieve success.
    • The ability to locate and understand the various funding options and devise an overall financing plan. In addition, this person must be able to clearly articulate the benefits of each financing plan option to team members and municipal officials.
    • The ability to gain the support of municipal officials at the beginning of the planning process. A key skill is the ability to deliver clear presentations that describe the project goals, costs, and technical and financial options and to answer general questions or concerns.*
    • The ability to discuss the project vision and goals (including costs and benefits) with community members and bring community input back to the other team members. Community outreach should start as soon as the team has the support for the project from the municipal or Tribal.*
    • The ability to provide external liaison activities.  This person should be able to explain the project goals, costs and benefits to the general public, media, and other government entities.*

    * These jobs may be completed by one person if that person has the skill set to do both tasks.

  • Step 2: Conduct a Needs Analysis
    An inventory of current system costs, future capital asset needs, and associated costs is critical to the creation of a credible financing plan. Without reasonably accurate data the financing plan is meaningless. Questions to resolve include:
    • How much does it cost to operate and monitor the current capital asset?
    • Will the system need to be upgraded to meet future local, state and federal requirements? EPA maintains a database of proposed regulations.
    • What work will need to be done?
    • What technology is currently available?
    • What is the estimated construction or implementation period?
    • Will additional staff be necessary to operate the new/upgraded asset?
    • How much will it cost to complete the project?
    • What financial resources are available? Is there a funding gap?
    • When will the money be needed?
    • How will the work, when completed, meet regulatory requirements and maintain compliance?
  • Step 3: Define Project Goals

    Accurately defining the project goals and objectives is critical to the success of the project. When the end result and steps needed to get to that end result are clearly articulated, it is much more likely that the project will succeed.

    Write down the project goals and objectives and be specific. With clearly defined project goals, the team can better communicate their vision to municipal and Tribal officials and community stakeholders. 

    The team may want to create one or more of the following documents:
    • Policy statement – This document sets out the specific goals and objectives for the project. This document can be used to brief municipal officials, community stakeholders and new team members.
    • Financial plan including budget – Creating a financial plan and budget allows team members to track the financial progress of the project. Funding flow and rate can be monitored during the course of the project. Again, this document can be used to brief project stakeholders.
    • Operations guide – This technical resource shows how the project will be implemented. It can be used to track various project stages and sub-activities.
    • Public Relations/Communication guide - This guide should define who the project stakeholders are (i.e. community organizations; local organizations; businesses; political entities such as the mayor’s office, congressman’s office; media, etc.) and how information will be distributed to the various stakeholders.

    The team should also monitor community events and resources. The project goals may need to be adjusted to respond to unforeseen circumstances, population changes or demographic shifts. A community feedback mechanism may provide new information to improve the project.

  • Step 4: Devise a Technical Solution

    Defining the technical problem and devising a long-term solution can make or break an environmental capital asset project. The underlying problem must be resolved at the end of the construction project to avoid wasting valuable time and financial resources. Proper planning can help avoid cost over-runs and adequately identify and resolve any underlying problems. Cities, counties and Tribes can hire a private contractor to help define the ultimate solution.

    The following planning steps can ensure that the team members, municipal or Tribal officials, community stakeholders and contractor all agree on the best solution, including realistic estimated costs and construction schedules:
    • Draft a project solution – Discuss the underlying problem and create a draft project solution.
    • Review technology options – EPA and other government agencies can provide information on technologies that have been verified and tested technology.
    • Revise draft project plan as necessary - New technical or community information may require changes to the original plan. It is less costly to revise the project parameters before construction than to change them during construction.
    • Assess schedules and costs - Obtain written construction phases and schedules and project costs.
    • Obtain approvals - Obtain approvals during this process as necessary.
    EPA and other organizations offer technical assistance resources for:
  • Step 5: Conduct a Rate Analysis

    The cost to provide service changes over time. A rate analysis should be conducted periodically to ensure that rates cover the full cost of providing a service. The rate analysis should determine whether the current rate structure is covering current costs and whether the rate will need to be changed to meet future costs.

    Some state agencies have published state-specific rate studies. Please contact your state environmental quality agency to obtain available state air, waste and water rate information.

    Water

    The 2014 American Water Works Association/Raftelis Financial Consultants Water and Wastewater Rate Survey states that the average monthly water and wastewater rates for US customers1 are: 
    Water Rate Survey Results
    Population Served Average Consumption (gallons) Average Bill
    All 7,359 $33.76
    < 10,000 6,222 $49.96
    10,001 to 90,000 7,784 $36.86
    90,001 to 425,000 7,060 $30.31
    > 425,000 7,572 $30.60
    Wastewater Rate Survey Results
    Population Served Average Consumption (gallons) Average Bill
    All 6,357 $35.77
    < 10,000 5,768 $42.15
    10,001 to 90,000 5,525 $37.27
    90,001 to 425,000 7,060 $35.10
    > 425,000 5,865 $33.42
     

    1273 water utilities and 184 wastewater utilities responded to the data request

    Setting Small Drinking Water System Rates for a Sustainable Future
    EPA created this rate setting guide to help small drinking water systems bring in enough money to cover the full costs of doing business now and in the future. This guide is designed to help owners, operators, and managers of community water systems (CWSs) serving 3,300 or fewer persons understand the full costs of providing a safe and adequate supply of drinking water to their customers and how to set water rates that reflect those costs.

    Waste

    EPA provides a broader discussion of full-cost accounting in a municipal solid waste.

  • Step 6: Complete a Community-Wide Financial Analysis
    Once the team has determined the capital asset requirements and calculated the corresponding costs of the project, that information should be analyzed in relation to the community’s overall projects and financial commitments. Questions that might be helpful include:
    • What are the community's revenue sources?
    • What is the community's debt capacity?
    • What other projects does the community need to fund in the near term?
    • Are there policies that aid or impede the project?
    • Can multiple projects be done at the same time to reduce the overall cost of all projects?
    There are three main municipal credit-rating agencies:
    • Standard & Poor's
    • Moody's
    • Fitch

    These agencies conduct a financial risk analysis by reviewing a city's financial documents. The ratings are then used by potential investors to estimate the credit worthiness of a specific city or city sector. The lower the rating the higher the cost of borrowing. The 2002 article from Standard & Poor's details this further "Top 10 Ways to Improve or Maintain a Municipal Credit Rating."

    Once the team and municipal officials understand the project costs, benefits and municipal impacts, the team can review alternative finance mechanisms to fill the funding gap.

  • Step 7: Select Financial Options
    The four main financing options are:

    System privatization is another option available to communities.

    Municipal Revenue-Generating Authority

    Communities can generate revenue through the assessment of taxes fees, special charges and fines. Information about each of these revenue-generating tools can be obtained. The municipal authority Web page explains several ways a community can raise capital.

    Grants

    Grants are transfers of money to a specific legal entity that does not need to be repaid. Cities can apply for grants with federal, state, corporate and non-profit organizations by submitting proposals or funding requests. EPA provides grant information to help communities fund air, waste and water environmental assets.

    Loans

    A loan is the temporary transfer of a specific amount of money that must be repaid in a set amount time, typically with specified interest rate. It is helpful to evaluate loan options as loan terms can vary by rate, time and reporting requirements. If the project costs will be less than $5 million dollars it is usually financial prudent to use loans rather than bonds.

    There are several types of loans including:

    Government – These loans have consistently lower than market interest rates but may require significant application procedures and requirements.  Some examples of government environmental loan programs include the EPA Clean Water State Revolving Fund and EPA Safe Drinking Water State Revolving Funds (SRF). Communities who have entered into a binding enforcement agreement have priority for SRF funding.

    EPA’s Brownfields Program provides direct funding for brownfields assessment, cleanup, revolving loans, and environmental job training.

    Commercial – These loans usually have higher interest rates but may have more flexible terms.

    Bonds

    A bond is a written promise to repay borrowed money on a definite schedule and usually at a fixed rate of interest for the life of the bond. It is the largest source of environmental infrastructure financing. It is also the most complex and expensive way to acquire funds but money is available for immediate capital needs. Legal and administrative fees can be costly and voter approval may be required. This tool is usually more cost effective for projects costing more than $5 million because the fees are the same for large or small bond issue.

    The bond market matches governments and corporations that need to borrow money with investors who have funds to lend. Bond dealers at securities firms and banks act as intermediaries, buying from issuers and selling to investors in the primary market.

    The following sections provide information about the types of available bonds and the roles and responsibilities of firms usually involved in the bond transaction.

  • Step 8: Create and Communicate the Financing Plan

    By completing the prior steps, all the information necessary to create a project financing plan has been collected. A written financing plan will help team members define the project goals, allow the various tasks to be monitored during the course of the project, and help the team members communicate the plan to and obtain buy-in from all project stakeholders.

    The financing plan should be kept as simple as possible. This will reduce the opportunity for confusion and encourage stakeholder support. Federal and State government financing contacts are available to discuss and help evaluate the financing plan as necessary.

    The project financing plan should include, at a minimum, the following information:

    1. Project Goals and Objectives
    • Financial goals
    • Relevant policies
    2. Technical Solution and Scope
    • Project description
    • Construction schedule
    • Total cost
    3. Funding Information
    • Debt capacity
    • Current and expected rate plans
    • Other committed municipal financial resources
    • External funding sources – Grants, Loans, Bonds, SEPs
    • Debt repayment plan
    4. Project Approvals
    • Construction approvals and contracts
    • Funding contracts, bond approvals
    • Additional legal requirements

    The team should strongly consider providing periodic updates to community members during the course of the project. Town meetings can be convened to provide project updates and to ask for feedback. Project support can be increased by providing examples of specific financing challenges and the strategies designed to address those challenges.

EPA's Office of Compliance also provides direct assistance to local government officials through the LGEAN Assistance Center Exit

EPA promotes improved environmental compliance among small communities and small local governments by allowing penalty reductions (when appropriate) for small local governments that achieve comprehensive compliance or implement an Environmental Management System (EMS).

Local governments can find further assistance through the Small Local Governments Compliance Assistance Policy which provides:

  • An overview of environmental responsibilities
  • Information necessary to correct violations
  • A framework for correcting violations in the context of achieving and sustaining comprehensive compliance.

Municipal Authority

Below is a brief explanation of several ways a community can raise capital. Please refer to the Guidebook of Financial Tools for a detailed description of 340 financial tools available to raise capital or generate revenue.

  • Tax - This tool usually generates significant revenue because it is imposed on a large population.
    • General – This tax often requires legislative approval and funds may be lost unless directly placed in a reserve account for specific environmental projects. Examples include income taxes and property taxes. 
    • Selective – This is a tax on a specific class of products. Funds may be lost unless directly placed in a reserve account for specific environmental projects. This tool generally raises less revenue than a general tax unless the tax rate is significantly higher. Examples include a tax on motor fuels, fertilizer, or marine fuel or vehicles.
  • Fee - This revenue stream is created by charging for governmental services including administrative, activity, or utility fees. The type of tool generally raises less revenue than taxes (excepting utility fees) because it is imposed on a smaller population and are periodic in nature. Full-cost pricing may help set utility rates to allow recovery of all associated costs. Examples include laboratory services, connection fees, permitting fees, tolls, and waste disposal.
  • Special Charge - These fees are assessed based on polluting behavior. The revenue stream can be significant and stable depending on the taxed entity. Examples include effluent discharge fees and direct water use charges. 
  • Fine or Penalty - This revenue stream is unpredictable but directed payments could aid in payment of capital costs.

Types of Bonds

A bond is a written promise to repay borrowed money on a definite schedule and usually at a fixed rate of interest for the life of the bond. It is the largest source of environmental infrastructure capital/financing. It is also the most complex and expensive way to acquire funds but money is available for immediate capital needs. Legal and administrative fees can be costly and voter approval may be required. This tool is usually more cost effective for large capital projects because the fees are the same for large or small bond issue. For a full analysis of various types of bonds and related uses please reference the Guidebook of Financial Tools

  • Anticipation Note  - These are short term bonds issued in anticipation of a future revenue source. The interest rates on these bridge bonds are usually higher than longer-term bond instruments.
  • General Obligation - This type of bond usually requires voter approval. The revenue does not come from a dedicated source but rather general receipts acquired by the community.
  • Certificates of Participation - These financial instruments use the leasing of real property or physical assets as collateral for the loan.
  • Mini/Baby - These bonds are used when there are smaller capital requirements, generally less than $1,000 per instrument. Administrative fees are a larger percentage of the instrument due to the small face value.
  • Revenue - The debt service is paid by revenue generated by the project being financed or other non-property tax source. This is the vast majority of bonds issued for municipal infrastructure.

Roles and Responsibilities of Unusual Firms Involved in a Municipal Bond Transaction

A team of professionals is required to obtain municipal financing via the bond process. The Bond Buyer's Municipal Marketplace, commonly known as "The Red Book", is a source of current and accurate information of municipal bond professionals. A copy of The Red Book can usually be obtained at the municipal or local university library.

The following is descriptions of the roles and responsibilities of the usual professionals involved in the bonding process.

  • Financial Advisor - The role of an independent financial advisor is to serve as an advocate for the issuer and provide the issuer with the information necessary to make intelligent, informed decisions. This person should know how to structure the financing to get the best rate for the community. They review and give advice on the bond underwriter’s proposals and reviews documents from underwriter, underwriter’s counsel and bond counsel. They coordinate the bond issuance process. A financial advisory should be an independent and objective bond market expert with no financial ties to underwriting or investment management industry. Usually receives a flat fee rather than a percentage of the bond issue
  • Municipal Counsel - Municipal counsel represents the community’s interest. Together the bond counsel and municipal counsel work on matters such as federal and state law and tax approvals, ensuring that proper legal procedures are being followed.
  • Paying Agent - The paying agent plays an important practical role in the bond issue: it sees that funds are properly distributed according to the intended purpose of the bond issue. For example, the paying agent applies the balance of the bonds' proceeds to the construction project's accounts, or it applies the proceeds to debt holders if the bond issue is meant to refund prior debt.
  • Bond Underwriter - A Bond Underwriter is a financial institution (investment bank or commercial bank) which purchases a new issue of municipal securities for resale. The underwriter may acquire the bonds either by negotiation with the issuer or by award on the basis of a competitive bidding.
  • Underwriter's Counsel - The Underwriter's Counsel is a firm of municipal bond attorneys hired by the underwriter to prepare the official statement in a negotiated underwriting and review all documents.
  • Bond Counsel - Bond counsel's role is that of an independent expert who provides an objective legal opinion on the validity (a state law issue) and tax exemption (usually both a federal and state law issue, but primarily a federal tax law issue). Bonds cannot be sold without the opinion of a recognized bond counsel.