Securing financing for clients’ wastewater projects can set your firm apart.

By Chuck Boehm, P.E.; Donald F. Roecker, P.E.; and Ralph B. "Rusty" Schroedel, Jr., P.E., DEE

Today’s engineering firms are charged with assisting their clients with much more than just design services. Securing funding for projects has become increasingly difficult and owners are looking to partner with engineering firms that have creative ideas for how to secure funding for their wastewater projects. Several creative financing strategies exist to combat funding challenges and help increase the affordability of the project. Understanding the various methods for obtaining funding for projects can help set your firm apart from the competition and make you an invaluable asset to the owner.

The most commonly used funding source for wastewater projects is the Clean Water Act State Revolving Fund (SRF) loan. Since its creation in 1987, the SRF has been a primary source of low-interest federal loans for wastewater construction projects nationwide. But in the last few years, its budget has been reduced somewhat from $1.35 billion in fiscal year (FY) 2004 to about $1.083 billion in FY2007. Although recently approved legislation would provide $14 billion over fiscal years 2008-2011, requirements to address aging infrastructure, more stringent treatment requirements, combined sewer overflows (CSOs) and sanitary sewer overflows (SSOs), will require use of diverse funding sources to meet the growing need for capital projects.

The city of Watertown, S.D., received a $13 million grant to solve technical problems at its wastewater treatment facility.

Given this recent trend, wastewater utility managers should consider other methods to fund projects and maintain reasonable user costs. The following funding alternatives may be able to bring critical dollars that can make a project affordable.

Local funding alternatives
Local funding sources for municipal infrastructure operations, maintenance, and construction are varied and can often be used together. Different infrastructure services often have different primary funding sources (typically either tax revenues or fee-based revenues). Some funding sources are often excluded from use in either operational or capital expenditures.

The following provides a description of various local funding sources available to finance municipal infrastructure services and program elements.

General fund—The major income source for the general fund is ad valorem (property) taxes, which are placed into a "bank" from which municipal projects can be funded. Property tax amounts are based upon the assessed valuation of property within the community and the status of the property owner. The general fund has been used for many years and is a readily understood and accepted method of program funding. The major disadvantage of using the general fund is that income loses identity once it is placed within it. Additional concerns with general fund dollars include the rising cost of healthcare and tax levy limits in several states that can restrict a municipality’s ability to increase the tax levy appropriately without risk to losing state funds.

Special assessment districts—Income collected from a special assessment district is dedicated to that district. That is, the area that is designated as "special," for whatever reason, would pay an increased ad valorem tax assessment or fee to partially pay for improvements that serve the district. Special assessment districts can be used to finance local maintenance and capital improvements.

The advantage of special assessments is that the funds for facilities or operation and maintenance are used in the area where the money is collected. This reduces the burden on the remainder of the municipality or service area. The assessment could be based on property value, front footage, lot size, or other methods that quantify the relative benefit to the property owner. Disadvantages are that the districts are typically applied to only a portion of the community, a district may not be capable of generating adequate revenues, and revenues generated can only be spent in the jurisdiction where collected, which may not necessarily be where the funds are most needed.

Local option sales tax—The simplicity and perceived fairness of sales taxes have made the local option sales tax a popular method for financing needed capital projects for municipalities that can use this method of financing. The development of this taxing authority varies by state. A special purpose local option sales tax (SPLOST) must be approved by the voting public. SPLOST law typically restricts the types of projects that can be funded with SPLOST money and usually does not allow regular maintenance projects because it is not reliable as a long-term funding source.

Fees, licenses, permits, penalties, and fines—Income from these sources is generally limited to paying for the cost of administration and enforcement of requirements. Revenue is generated from the entity that requires the services, so the burden of those costs is not placed on the rest of the community. However, communities often do not set fees high enough to cover the true cost of the services provided and taxpayers end up subsidizing the cost of the activity.

Subdivision exactions—Many municipalities require subdivision developers to construct facilities and dedicate the newly built facilities to the municipality upon completion. These developers may also be required to donate easements or other types of partial rights to the municipality. Thus, the developer would be responsible for funding the capital program while the municipality is typically responsible for funding the future operation and maintenance of facilities unless other agreements are put in place.

Developer incentives—Incentives may be offered to motivate developers to use desired planning or construction techniques. Such incentives could include waiving maximum allowable development densities or setback limits if land is dedicated to the municipality, thereby reducing the ultimate cost to the municipality.

Fee-in-lieu-of—A fee-in-lieu-of is a technique to generate the funding needed for capital improvements. It is an alternative to requiring developers to construct on-site facilities or set aside smaller parcels of green space, for example. Instead, developers pay an initial front-end charge for the capital improvements ultimately needed to serve their developments or are assessed a fee for facilities already constructed that serve the area. Construction of small-scale systems such as stormwater facilities is not always advisable, particularly because of the problems associated with the lack of adequate operation and maintenance. The fee represents the developer’s share of a regional facility.

User fees—Stormwater, wastewater, water, garbage, recycling, and even transportation-based utilities are user fee systems that allocate costs incurred by the utility back to property owners based on their use of the services provided. Most water and wastewater systems are funded through user fees as they were driven to make major system improvements through past Clean Water and Safe Drinking Water Acts. The use of fees for stormwater continues to grow nationwide for much the same reason.

The acceptance of these types of fees varies but often depends on the perceived fairness and equity of the service charge. Many stormwater utilities use impervious area as the main measurement for system use. The correlation between the amount of impervious area and the quantity of stormwater runoff is reasonable and often cited. Oftentimes, a variety of factors are evaluated and included. The general approach is that the more factors and variables applied, the more exact the allocation of fees. This also can have a direct impact on the initial and long-term cost of maintaining the billing system.

Advantages of a stormwater utility program are often cited to include:

• dedicated funding for all elements of the stormwater management program;
• ability to collect revenues from tax-exempt entities;
• stable funding source;
• funds are typically easily and frequently collected, often using existing billing mechanisms;
• users of the service pay based on contribution rather than property value;
• fees reflect the cost of services being provided; and
• freed tax revenue can either be used to fund other services or reduce property taxes.

Disadvantages of a stormwater utility program are often cited to include:

• impact of shifting more of the cost of services to business or industry;
• perceived impact to competitiveness to attract or retain new businesses; and
• impact on churches, schools, and other tax-exempt property not currently paying for stormwater management services.

Bonds—Governments normally pay for large capital improvement programs using general obligation, revenue, or special assessment bonds. Repayment of the bond is normally through the general fund (i.e., ad valorem tax income); however, special assessment district, and stormwater utility revenues, can be used to pay off the debt service. Bonds allow large-scale capital improvement programs to be initiated when the facilities are needed rather than waiting for the funds to be accumulated. Bonds provide a large source of funds for construction that would otherwise take several years to accumulate under other financing alternatives. The disadvantage associated with selling bonds is the long-term commitment of annual revenues to pay for the debt service.

Keys to federal and state funding
Communities that are undertaking a water or wastewater infrastructure project may also qualify for federal or state agency funding. However, municipalities should understand these agencies’ objectives and use appropriate mechanisms to obtain funding.

Seek grants and loans—Grants can be used to supplement construction, planning, design, and other types of municipal projects. Grant funding can come from a number of sources including federal, state, and private granting agencies. Most grant funds require a matching amount from the municipality. Grant programs are becoming increasingly competitive because of the limited sources and amount of monies available. Grants are not guaranteed to be available year after year, so are not a reliable continued funding source and limited to very specific projects.

Loans are also competitive, limited in application and availability, and need to be paid back similar to bonds but often with a lower or zero interest rate.

Focus on the funding agency’s program objectives—While the municipality may be imagining wastewater treatment or conveyance facilities, federal and state program managers may be intent on reducing sewer overflows, protecting waterways or wildlife, stimulating economic development, or eliminating a treatment plant expansion. The facility owner needs to engage in ongoing discussions with the agencies to make sure a project meets the agencies’ stated goals. This includes using key words and statements that mirror their stated goals and objectives.

Develop the project’s uniqueness during planning—To expand a project’s eligibility for capital funding, the facility owner should highlight the project’s unique characteristics and include technical evaluations and financial information to emphasize affordability. The key is to expand the project objectives to include unique features that meet the funding agency’s objectives.

Also, the owner should consider highlighting all the potential benefits of a particular wastewater infrastructure project in hopes of attracting additional public agency funding and some unique or underutilized sources of alternative capital funding.

Persevere—Perseverance is a key to obtaining funding. If the answer is "no," keep working with an agency until the answer is "maybe." One criterion that many agencies use in approving funding is whether they have a precedent in funding that particular type of project. Continued work with an agency demonstrates that the owner’s need for capital funding is greater than the need to use precedent. With diligence, the owner will likely find someone willing to fund the project. A particular project’s size, scope, and complexity may need creative funding answers instead of those based on precedent.

Once capital funding is found, others will follow—As dialogue continues with local agencies, the owner should view each discussion as an opportunity to uncover additional funding vehicles. While securing funding from multiple agencies can lead to bureaucratic entanglements, basic funding approvals do transfer. In recent years, projects that have met multiple agency objectives have been able to secure outside capital funding from each agency. The key is to meet as many agency objectives as possible to maximize the funding potential. Single projects being funded from as many as four agencies are not uncommon.

Get to know elected representatives—The owner should work with congressional delegates to increase the chances of funding approval. These delegates represent the owner’s and local service agencies’ service areas, and their overall objectives are to divert federal monies back to their states or districts. When a particular wastewater infrastructure project is too costly for state funding programs, the U.S. Congress may be the only viable source available. The key to winning congressional funding is getting to know the representatives and using the techniques discussed in the next section.

Legislative funding strategies
One of the newer alternative capital funding techniques is the use of direct congressional earmarks of site-specific wastewater projects. Since 1992, the U.S. Congress has provided more than $6.4 billion for water-related infrastructure projects. Most of this funding went to wastewater projects in the form of nearly 3,000 U.S. Environmental Protection Agency (EPA) grants to more than 1,800 communities.

As a result of the change of control of the U.S. Congress in the November 2006 national elections, some new dynamics have emerged in this funding area. The old Congress failed to complete last year’s domestic funding work and the new Congress refused to provide any new domestic spending in their year-long funding of this year’s programs. In addition, the new Congress passed earmark funding reforms. While this may be viewed as an end of direct congressional funding of wastewater projects, it appears that it’s just the beginning of a new phase.

This past spring, both the new House and new Senate requested members of Congress to supply worthy wastewater projects for earmark funding consideration. The appropriations chairmen have published documents saying that congressional earmarks will continue; however, each project will be linked to the member making the request and the listings of funded projects will be available to the Congress ahead of the appropriations bill vote.

Those facility owners continuing to use this funding source are optimistic about continued congressional support and are working hard to demonstrate that their projects meet these updated national funding objectives. They continue to model their presentations to elected officials on past successful projects.

The current list of key areas to address includes the following:

• how the proposed project meets or exceeds the new congressional earmark reform criteria;
• how existing agency funding programs are insufficient for an affordable project;
• how the project’s features distinguish it from other projects;
• how the project meets an important "new" issue (such as an innovative technique or a demonstration); and
• how the funding will win favor with large population areas, correct an actual or perceived public policy injustice, or correct an injustice related to issues that were beyond an owner’s control.

Special attention to current issues and fairness often leads to success in the legislative arena. If the owner works with state and federal programs and the project is still truly unaffordable, or if it has some unique feature that distinguishes it from other projects attempting to accomplish the same objectives, elected officials can help.

Case Study: Racine, Wis.
The city of Racine, Wis., is a largely urbanized community with a population of about 80,000. It has a comprehensive stormwater management program with a broad focus that includes timely operation and maintenance activities and targeted quantity and quality capital projects. The city has used several funding sources to pay for the increasing costs of its stormwater management program. The bulk of funding came from the general fund, but a portion came from other sources, such as erosion control inspection and other permit fees, tax incremental financing districts, and assessments for portions of capital projects. State grants have been and continue to be used when possible to fund specific planning, design, or construction projects. However, new program requirements resulting from additional stormwater regulations and permitting from the state of Wisconsin as an outgrowth of the Federal National Pollutant Discharge Elimination System (NPDES) regulations prompted an evaluation of how to best pay for increasing costs.

The city conducted a financing feasibility study in 2002, focusing on the potential to create a stormwater utility. The study concluded that the city’s stormwater management program was likely to double in size from approximately $1.5 to $3.0 million, and a stormwater utility was the most equitable way to distribute the costs of the city’s stormwater services and establish a dedicated funding source. The utility would be the cornerstone of stormwater funding and cover the majority of the program elements, including program management; regular annual stormwater maintenance; stormwater permit compliance activities; and water quantity and quality studies, designs, and capital projects identified in Racine’s Stormwater Management Plan and as required by its stormwater permit.

Following an aggressive public education and information campaign, the city implemented the stormwater utility, shifting revenue from the general tax structure to a user fee while maintaining existing fees to pay for some of the more specific services provided. Additionally, some new permits for parking lot expansions and other impervious area changes were implemented to allow better tracking of new and redeveloping areas.

Case Study: Watertown, S.D.
In 1988, the city of Watertown, S.D., had to make significant adjustments to its innovative wastewater process. By the early 1990s, Watertown was experiencing major problems with its wastewater treatment facilities. As a result, it had been issued EPA administrative orders in 1988, 1989, 1991, and 1993 to address effluent violations, the lack of an industrial pretreatment program, and inadequate plant maintenance. An Earth Tech team worked as a program manager to identify all necessary requirements and define a program for addressing them. The team members reviewed 26 documents and identified 113 independent tasks to be completed to achieve full compliance.

Funding enabled construction of necessary new facilities in Watertown, S.D., such as these for solids handling and associated systems.

Faced with the threat of a multimillion-dollar fine, the city began to look for ways to fund the necessary, costly new programs and plant upgrades. With fewer than 20,000 residents, the municipality’s resources for multiple, costly new programs and plant upgrades were very limited. Yet, with assistance from consultants, the city identified and pursued multiple funding sources.

The focused program management included an effort to identify all available funding sources. A $1 million state grant was obtained as part of a program for watershed improvements. Most significantly, a congressional line-item grant was pursued to address the inequity of the city’s implementation of an innovative/alternative (I/A) treatment technology that had failed. The original construction grants program promised replacement funding for failed I/A systems, but that program and funding were no longer available. Through the diligent efforts of city staff, especially the mayor, and consultant support, the city received a $13 million grant to remedy the inequity created by the failed I/A process.

Chuck Boehm, P.E., is a senior water resources engineer in the Milwaukee office of Earth Tech. Donald F. Roecker, P.E., is a governmental-liaison consultant in Plymouth, Wis. Ralph B. ("Rusty") Schroedel, Jr., P.E. DEE, is a senior program director in Earth Tech’s Sheboygan, Wis. office. They can be contacted at chuck.boehm@earthtech.com, roecker@dotnet.com, and rusty.schroedel@earthtech.com, respectively.