What Funds are Available?
Different types of water systems will have access to different types of funds. Funding for gray infrastructure comes from a fairly well defined list of funders and funding options but green infrastructure expands those possibilities by providing an avenue for co‐funding or other revenue streams from outside parties willing to partner with a system. A variety of funding types are described below. Systems should discuss what types of funds they want to use, what the advantages and disadvantages are, and invite funders to join the conversation. Typically, funding organizations and agencies are willing to provide information when requested and are usually very willing to help.
There are also several resources available that compile funding sources for systems. The EFCNEnvironmental Finance Center Network provides updated funding tables every year for each state. The tables include the funding organization, purpose or use of funds, how to apply, and contact information. To review these funding tables, click here. Once you reach the site, click on the state for a listing of funding sources within that state.
Another great resource is the State Revolving Fund Switchboard created by the SW EFCSouthwest Environmental Finance Center. It is an online repository of documentation and tools related to State Revolving Funds. The State Revolving Funds were created by the EPAEnvironmental Protection Agency to disburse funds allocated by Congress for the use of states to improve water and wastewater system. The switchboard provides details on the administrators of the fund in each state and provides state specific resources. To view the State Revolving Fund Switchboard, click here.
A rate structure is simply an allocation of the costs of operating and maintaining the system to the customers. Many systems struggle with rate-setting and with gaining public acceptance for rates. Rates are often determined by a political process that is not based on business reality. Such rates will inevitably lead to underinvestment in infrastructure and perhaps even an inability to meet current operating expenses. Political expediency often results in a “willingness to charge” problem in which officials and managers become over-sensitized to their customers’ desires to keep rates low or general unwillingness to pay for services. However, willingness to pay is not the same as ability to pay. For this reason, it is important for systems to assess their customers actual ability to pay. In order to set an effective rate structure, a system should adopt a full-cost pricing strategy. Full-cost pricing seeks to cover all current and future costs that are not covered by external sources of revenue (grants, loans, bonds, etc.). A good rate analysis must start with good data on costs and future plans. It is therefore imperative that the system have a budget and a good record-keeping system for tracking costs. Without good information about your current costs, you will not be able to project future costs with any confidence.
10 suggested steps for an effective rate-setting process
Listed here are 10 suggested steps for an effective rate-setting process. These steps are not meant to be definitive, but rather suggest issues that need to be considered and data that needs to be gathered.
1. Determine your costs. Your budget and record-keeping system should track costs in meaningful categories. It is helpful to separate operations costs into fixed (those costs that don’t change with the amount of water produced or treated) and variable (those costs that go up when you produce more water or treat more wastewater.) It should be noted that some costs are a bit of both. In those cases, the percentage of costs can be assigned as either fixed or variable (e.g., $150,000 salary cost that is considered 90% fixed, 10% variable, would allocate $135,000 to fixed costs and the remaining $15,000 to variable.)
2. Determine your revenues. It is helpful to understand how much of your revenue comes from usage charges versus other revenues.
3. Determine your reserve needs. You will consult your capital improvement plan, your repair and replacement schedule, your emergency needs, and your debt obligations for this information.
4. Determine your current financial position. Do you have a deficit? If you have not met expenses in the past, you will have to correct for this in your new rates.
5. Determine revenue required for the next 5 years. This will be based on your past costs, but do not forget to take into account future growth and inflation.
6. Gather information about your customers. This information is at the heart of any rate-setting process. Knowing how many customers fall into various usage categories will make it possible for you to set a rate/fee structure that maximizes your revenue, while making sure that the cost is spread equitably among the customers.
7. Gather information about production and use. These data will tell you whether you are “losing” water due to leakage or theft. Or you may simply be providing water to community buildings without charge. In any case, this water costs money to produce and must be paid for by your customers. If your system does not have meters, you cannot set a meaningful rate.
8. Design a rate/fee structure. There are as many different structures as there are people with imagination designing them. However, an effective rate will cover all costs; will spread the cost of operations equitably across all classes of customers; will encourage conservation; and consider the goals of the utility underlying the rate structure. It is important that the utility understand its goals for the rate structure and clearly articulate them.
9. Implement the rate. Do not underestimate the importance of “selling” the new rate/fee structure to your customers. If you have already involved your customers in your Level of Service process, it is a natural step to let them know what the services will cost
10. Review your rates regularly. Rates should be reviewed annually.
These resources may also prove helpful:
- Water Utility Financial Analysis – https://swefc.unm.edu/home/resource/wufa-water-utility-financial-analysis/
- Online Water Rate Checkup Tool – https://efcnetwork.org/tool/online-water-rate-checkup-tool/
- Water and Wastewater Rates Analysis Model – https://efcnetwork.org/tool/water-sewer-rates-analysis-version-2-0/
Per EPA’s Guidebook of Financial Tools, “A tax is defined as a financial charge or other levy imposed on an individual or legal entity by a state or a functional equivalent of a state, such as a tribe. General taxes are levied on a very broad section of the general public, such as wage earners or property owners. Selective sales taxes are levied on the sale of particular commodities and services. Revenues from taxes typically go into the general funds for state and local governments.”
There are any number of taxes a government may use to generate revenue. A water system is more likely to use the following types of taxes (definitions from EPA’s Guidebook of Financial Tools):
- Ecological Taxation is a fiscal policy that introduces taxes designed to promote environmentally sustainable activities via economic incentives.
- Litter Taxes are imposed on businesses that produce, distribute, or sell consumer products that contribute to litter problems
- Gross Receipts Taxes are levied on the gross amount of money or other compensation, such as barter, that a business receives for its transactions in a given state
- Local Sales Taxes are often add-ons to state general sales and use taxes
- Property Taxes
- Tangible property taxes are levied on the estimated or assessed value of items of personal property, such as automobiles and boats, but not land
- Real property taxes, also called ad valorem taxes, are charged to property owners as a percentage of the assessed value of real estate or personal property.
Johnson County Kansas
Johnson County Kansas has 18 watersheds that drain to three major river basins. It is the most populous county in Kansas with a population of approximately 590,000 in 20 cities and in unincorporated areas. The unincorporated areas are roughly 40% of the county land mass by area. The state passed a piece of legislation that enabled counties to adopt a 1/10th of one cent stormwater sales tax which enabled Johnson County to create a Stormwater Management Program. The program ranks projects and funds those with the highest cost benefit first. To hold cities accountable for the projects they chose, the program now requires a match of 25% and the cities have to administer and manage the project themselves.
The Village of Ruidoso, NM
The Village of Ruidoso, New Mexico: In addition to user fees, Ruidoso has an additional mechanism of funding the utility, a supplemental gross receipts tax (SGRT). This supplement was passed, approved, and adopted by the Village of Ruidoso on July 6th, 1982. It was voted in by a vote of 560 to 288. The supplement is 1% of the amount of GRT reported or required to be reported by people who are subject to the New Mexico Gross Receipts and Compensating Tax Act. All of the supplemental GRT is to be dedicated to the purpose of constructing, equipping, acquiring, enlarging, improving, and extending the Ruidoso municipal water supply system. This supplemental funding, above and beyond the rate revenue received from customers, helps to ensure that the water system is financially sustainable over the long term. This funding can be used for both day to day and capital expenditures.
Source: January 2019 Financial Report
Per EPA’s Guidebook of Financial Tools, “A fee is defined as the price one pays as remuneration for services, such as government administrative services and utility services. Fees are also defined as financial charges for activities undertaken, including polluting activities such as solid waste disposal. Revenues from fees are often deposited into special funds related to the product or service upon which the fees are levied.”
Examples of fees that water systems may charge or benefit from include:
- Stormwater fees are modeled after the way municipalities have historically billed residents for other utility services like water and sewer. Stormwater fees provide local governments with a stable source of revenue to pay for their growing stormwater management costs.
- Impervious surface fees – The amount of impervious surface on a property is the single most important factor affecting the amount of water flowing off a property, how quickly that water flows off a property, and the amount of pollution picked up by the water from that property. Because of this, basing stormwater utility fees on the impervious area on a property is one of the methods used to determine stormwater utility fees. An impervious surface is a hard surface that does not let water soak into the ground or greatly reduces the amount of water that soaks into the ground.
- Detroit Drainage Fee: https://detroitmi.gov/departments/water-and-sewerage-department/dwsd-customer-care/drainage-charge
- DC Water Impervious Area Charge: https://www.dcwater.com/impervious-area-charge
- Detroit Drainage Fee: https://detroitmi.gov/departments/water-and-sewerage-department/dwsd-customer-care/drainage-charge
- Standby fee means a charge, other than a tax, imposed on undeveloped property for the availability of potable water, sanitary sewer, or drainage facilities and services.
- Late fees – If full payment is not received by the due date, the account is assessed a late payment fee
- Reconnect fees are charged when reconnecting utility services to any account due to non-payment
- Water and Sewer Capacity Credits, also called access rights, are charged on a onetime basis to new users requesting access, and old users requiring increases in capacity, to water and sewer facilities.
- Bond Issuance Fees above and beyond the standard bond “cost of issuance” fees could be imposed by governments and special authorities on environmental protection related municipal bonds such as infrastructure construction bonds.
- Septic System Inspection Fees are the charges for inspections of septic systems carried out by states and counties.
- Hunting and Fishing License Fees – Many states in the United States charge fees for the initial awarding and the renewal of hunting and fishing licenses. The revenues from these fees are often used for environmental programs geared towards protecting fish and wild game habitat and for regulation of hunting and fishing.
- Aquifer Protection Area Fees are charged for withdrawals of subterranean water and on-site sewage disposal within Aquifer Protection Areas.
- Water and Wastewater Utility User Fees are the charges to industrial, commercial and residential customers for the use of water and wastewater utility services.
- Impact Fees are frequently assessed on new construction to cover the costs of infrastructure necessary to support the new construction.
Reserves include money that is set aside every year in a reserve account to help fund various specific purposes, such as debt service, asset repair, rehabilitation, and replacement, capital improvements, and emergencies. Funding agencies, with whom the utility has loans or grants, may have requirements for specific amounts of money that must be put into the debt service reserve or other reserves. Otherwise the reserve amounts are up to the utility. Some example amounts are shown below.
PLUS an additional ten percent (10%) of that figure
PLUS the current cost of the most expensive capital item that you don’t have in your spare parts inventory
PLUS an additional five percent (5%) of that figure
OR the current cost of the most expensive capital item that you don’t have in your spare parts inventory, whichever is greater
OR reserve an amount equal to three months of operating expenses
- Some private financing options include: Environmental Impact Bonds, Quantified Ventures, publicly issued bonds, taxable bonds, private capital, concession agreement, philanthropy, ordinances requiring green infrastructure, Brownfield remediation money
- Public-private partnerships involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects. Public-private partnerships typically have contract periods of 25 to 30 years or longer. Financing comes partly from the private sector but requires payments from the public sector and/or users over the project’s lifetime. The private partner participates in designing, completing, implementing, and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives. Risks are distributed between the public and private partners through a process of negotiation, ideally though not always according to the ability of each to assess, control, and cope with them.
- ALCOSAN GROW Program (at the WEF conference) (Pittsburgh PA) – http://www.alcosan.org/
- Prairie Village, KS – https://www.pvkansas.com/departments/projects/meadowbrook-redevelopment
- Public Public Partnerships allow two or more public water utilities or non-governmental organizations to join forces and leverage their shared capacities. These partnerships allow multiple public utilities to pool resources, buying power and technical expertise. The benefits of scale and shared resources can deliver higher public efficiencies and lower costs. These public partnerships, whether domestic or international, improve and promote public delivery of water through sharing best practices.
Mutual aid agreement partnership – Larry Covington, President, Picacho Mutual Domestic Water Association, Las Cruces, NM
Working together to apply for a grant – Larry Covington, President, Picacho Mutual Domestic Water Association, Las Cruces, NM
To encourage conservation, stormwater control, pollution prevention and other programs, governments, utilities, and other organizations offer financial incentives to make partnering more feasible for homes and businesses. Financial incentives can include rebates, bill reductions, fee reductions or, in some cases, tax incentives or loans. Incentives allow a system to communicate its goals and objectives through financial means. For example, if conservation is desired, incentives can be created to encourage consumers to conserve water.
- City of Philadelphia Incentive program –https://www.phila.gov/water/wu/stormwater/Pages/Grants.aspx
- City of Philadelphia’s green roof tax credit: https://www.phila.gov/services/payments-assistance-taxes/tax-credits/green-roof-tax-credit/
- RiverSmart Homes (DC) – https://doee.dc.gov/service/riversmart-homes-overview and https://doee.dc.gov/node/1284081
- Catching Rain Fort Wayne (Indiana) – http://www.catchingrainfw.org/
- RainWise (Seattle) – https://www.700milliongallons.org/rainwise/
- Examples of Incentives – https://gitoolkit.njfuture.org/plan/#offer-incentives
Grants are awarded for specifically designated purposes and do not require repayment. Although systems may regard grants as a more desirable option than loans, these funds may be very competitive, and their availability is diminishing. Many grants also require a loan in addition to the grant in order to fund an entire project. Each state and federal grant program has specific application procedures, eligibility requirements, and deadlines. It is also important to know that grants are not “free money.” The funds are coming from local, state, or federal tax revenues or from profits of private businesses or funds from non-profit organizations.
These links provide additional resources:
Loans entail repayments of principal and interest, although interest rates may be governmentally subsidized. Government loans typically involve relatively low transaction costs, and interest rates may be subsidized, particularly for small communities. Each state and federal loan program has specific application procedures, eligibility requirements, and deadlines. Commercial loans are more flexible than government loans but are typically more expensive for public and private borrowers. Commercial loans may be one of the few available options for privately-owned utilities, although in some states, some private borrowers are eligible for state revolving loan funds. State and Federal Loans include U.S. Department of Agriculture, U.S Environmental Protection Agency, State Revolving Loan Funds administered by the states, North American Development Bank, along with other state specific sources.
- For example, the US Department of Agriculture (USDA) provides funding through its Conservation Reserve Program, which has funded $35 billion worth of investment over the past 20 years to incentivize private landowners to remove sensitive lands from agricultural production and plant environmentally suitable plant species that will meet watershed management goals, including improving water quality. The recent United States Farm Bill, signed into law in 2018, expands the level of federal fiscal and technical support considerably for source water protection efforts through agricultural conservation efforts.
In its simplest form, 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. Some types of bonds are tax exempt to the purchaser of the bond, making them somewhat more attractive. Bonds can represent a large source of capital for a utility, but the utility must have the authority to issue bonds. It can be a complex way to borrow money due to legal and other fees and administrative time and expenses. In some cases, voter approval is required. A Revenue bond is a bond on which the debt service is payable from revenue generated through the utility. These bonds may be issued by state and local governments, or an authority or special district for the purpose of facility construction. General obligation bonds require that the entity has taxing authority and do not require voter approval. Utility revenues are obligated to cover the debt payment. There are many other types of bonds.
The resources listed here may also help the system identify ways to fund infrastructure.
- EPA’s Guidebook of Financial Tools
- What are my Financing Options?” section – https://tapin.waternow.org/toolkit/
- CREATING NEW FINANCING OPTIONS WITH GREEN INFRASTRUCTURE – https://files.wri.org/s3fs-public/integrating-green-gray_0.pdf
- “WRF’s report provides an in-depth look at six types of GI incentive programs: stormwater fee discounts, rebates and cost-share programs, grant programs, development and redevelopment incentives, awards and recognition programs, and stormwater credit trading programs.”. https://www.waterrf.org/resource/incentives-green-infrastructure-implementation-private-property-lessons-learned-0
- Funding Sources by State or Territory – https://efcnetwork.org/funding-sources-by-state/
- Forests to Faucets – This project connects downstream users to conservation actions that may be needed to improve the source of their water. In this respect, the data indicates where a payment for watershed services (PWS) project may be an option for financing management of forest lands. The National Forests to Faucets data identifies areas that 1) supply surface drinking water, 2) have consumer demand for this water, and 3) are facing significant threats—all important criteria for successful PWS initiatives.