Environmental Finance Center

DEVELOPED LAND

Nutrient controls for developed land will play a major part in meeting the goals of Maryland's Tributary Strategies. These controls include continuation and enhancement of existing programs for stormwater management and erosion and sediment control, retrofiting on land that was developed prior to the 1984 requirement for stormwater management, provision of public sewer to failing septic areas, and enhancement of education efforts to increase regular maintenance of septic systems. The Blue Ribbon Panel has focused on only those control measures that have significant funding shortfalls. These measures and others, that did not warrant attention by the Blue Ribbon Panel, are described in appendices to the draft Tributary Strategies.

The Blue Ribbon Panel discussed funding the stormwater management, retrofit and erosion and sediment control practices which help reduce nutrient loads. Maryland is generally recognized as being a leader in these areas; however, there is room for improvement in design and implementation. This can be accomplished by strengthening local and state involvement in the implementation process. However, local and state resources are currently drawn away from this task by competing needs. The Panel's recommendations build on this insight and suggest funding mechanisms that are dedicated exclusively to stormwater management, retrofit and erosion and sediment control practices, and promote fiscal self-sufficiency.
The Maryland Department of Environment and local governments currently make efforts to extend public sewer to failing septic areas, primarily for the purpose of eliminating the risks to public health. Because septic connections have the additional benefit of reducing nutrient discharges, the Tributary Strategies call for acceleration of these activities. However, the traditional source of funding for this option, the Federal Construction Grants Program, has been phased out and replaced by the State Revolving Fund (SRF). Even though this program offers below market rates and has adequate loan capacity, many local governments are not willing or able to take on the additional costs of a loan. Under existing laws, SRF is not available to finance private sector capital projects.
The Panel discussions centered on four general concepts. First, the panel members worked under the assumption that new funding mechanisms should be fair and place the cost of pollution controls on the source of the problem and the beneficiaries. These ideas, which include annual fees for the depletion/degradation of the aquifer, establishment of special assessment districts, creation of stormwater utilities, full cost pricing of service fees, tax increment financing, etc., have the potential of accomplishing this task.
The second concept included the idea of creating watershed authorities or districts and a new "Environmental Fund" which would, on a broader watershed level, more efficiently manage programs and funds which are necessary to implement the Tributary Strategies.
The third concept considered broader use of exiting sources of funding such as SRF and the Community Development Block Grant (CDBG) program. These ideas include the use of the SRF to finance private sector capital projects, and expansion of the SRF scope to finance stormwater management, retrofit/conversions and public sewer connections to failing septic areas.
Finally, the panel considered innovative ideas such as private sector purchase of municipal utility assets which would help to raise funds to finance essential capital improvement projects; and the use of banks and other private financial institutions to minimize the state's cost and exposure to losses.
Additional Considerations
Within the context of proposing funding alternatives, described later in this section, the Panel considered the following alternatives that do not specifically raise funds, yet help achieve the Tributary Strategy goal.

The Panel strongly encourages local governments to take ownership of stormwater management structures traditionally turned over to homeowner associations. If homeowner associations are to continue ownership, the Panel encourages that 1) full disclosure of financial liability be made to individual homeowners at the time of purchase, and 2) an escrow account be maintained to pay for routine and major maintenance.
The Panel endorses an incentive system (tax credits or utility fee credits) to encourage businesses and individuals to install landscaping designed to reduce stormwater runoff and curtail fertilizer use. The Panel endorses as one option the use of a lawn and garden fertilizer surcharge to offset the cost of this incentive system.

IDEA: Stormwater Management Utility

Revenue Generated/Redirected: $500,000 to $10 million per year per county. $70 million statewide per year. Assumes $20 per year per residential unit, and no charges for undeveloped, tax exempt, and agricultural lands.

Description: A utility is an enterprise that performs a service and has the authority to charge fees for that service. For stormwater management, landowners are assessed a fee that is based on their parcel size and degree to which their land is developed. Typically, residential parcels are grouped into size classes with a common fee within each class. Commercial parcels are assessed individually and charged a site-specific fee. Fees are most commonly collected via existing water bill systems or as a line item on property tax statements. The revenues are usually held in a separate fund dedicated to stormwater management activities. The utility could address stormwater retrofit costs and a portion of erosion and sediment control program costs. These utilities could be established within a municipality, a county, or encompass a whole watershed.

Mechanism: Bond, Fee, Private Initiative/Incentive, Surcharge.

Action Needed: Local ordinances, state legislation (if watershed-based), ratepayer databases and billing systems, public education.

Issues to Consider: The Blue Ribbon Panel recommends creating utilities delineated by watershed boundaries. Tributary Strategy goals within each watershed would guide rate structures and the allocation of funds. Fees could be collected by a single watershed authority or by each county and municipality. The former has the advantage of reducing duplication of effort, whereas, the latter may be able to take advantage of existing billing systems. Each jurisdiction would provide the stormwater services within their portion of the watershed.

Utilities can generate substantial revenues and represent a new source of funds. Utility revenues would exceed the statewide shortfall for stormwater management, allowing general funds to be released for other uses. Utility's dedicated funds are viewed as being more accountable by the general public. The rate system is more equitable since it is based on pollution contribution rather than property value (a tax). Utilities can generate capital funds (revenue bonds) secured by the utility's revenue stream. Implementing stormwater utilities on a watershed basis would help ensure secure statewide funding.

One detraction of the utility concept is that the administrative overhead tends to be greater than simply creating a dedicated property tax system for stormwater management. Another potential issue is that uneven rates across watersheds may lead to an impression of inequity among ratepayers in the same county. This should not pose a problem, however, because a precedent for uneven rates already has been set by water and sewer utilities.

Case Example: pages 97, 98, 99,100, 101

IDEA: Extend State Revolving Fund (SRF) to include a broader borrowing base (the private sector) and wider application to nonpoint source pollution controls

Description: The extension of the SRF to finance private sector capital projects and nonpoint source pollution control projects would make funds available to the private sector for activities such as enhanced stormwater management, erosion and sediment controls, public sewer extensions to failing septic areas and more (see page 26 for full description).

Mechanism: Loan and Redirection of Existing Program.

Action Needed: Amend the Maryland Water Quality Financing Administration Act to permit loans to the private sector. In addition, changes must be made in the federal Clean Water Act to allow for loans to the private sector.

Issues to Consider: The public sector would now compete with private and public/private borrowers for available SRF funds, unless a portion of the SRF program was dedicated only to public sector borrowers. Loans to private parties would reduce the amount of federal and state funds available to be leveraged with tax-exempt bonds.

Case Example: pages 92, 93

IDEA: Special Assessment District (e.g. retrofit/conversion, stormwater management, septic connections to sewer)

Revenue Generated/Redirected: Recovery of cost of improvements.

Description: A special assessment district is an independent government entity formed to finance governmental services for a specific geographic area. Residents of special districts pay taxes to finance the improvements that will benefit them. At a local level, special districts, such as sewer districts, stormwater management districts, retrofit/conversion districts, etc., have been formed to finance specific improvements. Special districts may issue revenue bonds to finance capital facilities independently, relieving the burden on general debt capacity.

Mechanism: Bond, Fee, Surcharge.

Action Needed: Enabling legislation. Designation of special district. Issuance of revenue bonds by local government. Local authority to levy special tax increase in an improved area.

Issues to Consider: Ability of district to recover costs of retrofits/conversions. Costs are borne only by the taxpayers of the special assessment district.

IDEA: Tax Increment Financing (Value Capture)

Revenue Generated/Redirected: Revenue potential is very case-specific.

Description: This technique requires the creation of a special district when a government-financed enhancement is made that benefits the residents of the special district. From that time on, two sets of tax records are maintained for the district-one that reflects the value of assets up to the time of the enhancement, and a second that reflects any growth in assessed property value in the district after the enhancement. The second, incremental portion of tax revenues are diverted to pay for the cost of the government financed project in the special district. In some cases, governments issue tax increment bonds for revitalization projects, with the bonds being backed, in part, by the anticipated increase in property values resulting from the investment (value capture). Pure tax increment financing differs from a special assessment in that property tax rates are not increased. Special assessments, on the other hand, increase the tax rate to raise additional revenues from an area that has received special benefits not provided to everyone (see Special Assessment District).

Mechanism: Surcharge.

Action Needed: Local ordinance to designate a special fund and create a special district. Issuance of revenue bonds by local government. Timely property value assessments.

Issues to Consider: Such approaches are considered more equitable because the beneficiaries pay for the benefits. If others also benefit, say from reduced nutrient loads that enhance downstream waters, it may be reasonable to supplement the project cost with some general revenues. Local governments should prepare contingencies in case anticipated increases in property values fall short of what is needed to repay the investment. It should be noted that many areas of failing septic systems are low income neighborhoods and residents may not look favorably on having the value of their property, and thus the amount of property taxes, increased. In extreme cases, residents may be unable to pay, and would feel pressure to relocate.

IDEA: Sale of Municipal Utility Assets to Private Sector

Revenue Generated/Redirected: Estimate not known.

Description: Local governments could tap an additional source of capital if they sold such municipal utility assets as water mains and pumping stations to private investors interested in reducing their tax obligations. Private companies like AT&T and BGE depreciate their assets, such as telephone and electric power lines, over the period of the assets' useful life (30 years or more). If municipal utility assets were purchased by the private sector (profitable corporations, businesses or wealthy individuals), investors could take advantage of this depreciation schedule and enjoy several years of reduced tax obligations. The maintenance of the asset would remain with the municipality and ownership of the utility asset would revert to the municipality at the end of the depreciation schedule.

Mechanism: Public/Private Partnership.

Action Needed: Enabling legislation; marketing of concept.

Issues to Consider: New source of capital not previously tapped-does not affect state's debt capacity.

IDEA: Use of federal or state housing grants to finance public sewer extensions to areas with failing septic systems

Revenue Generated/Redirected: Approximately $4 million per year.

Description: The Maryland Small Cities Community Development Block Grant Program (CDBG) is a federally funded program designed to assist local government with neighborhood revitalization, housing, economic development and improved public facilities and services. The state's program has been designed so that at least 70% of allocated funds will be used to principally benefit low and moderate income (LMI) persons.

Maryland's program provides public funds for activities which meet one of the national objectives: "Gives maximum feasible priority to activities which will benefit LMI persons and households having an income equal to or less than the low income limits established by HUD; Aids in prevention or elimination of slums or blight; Meets community needs of an urgent nature or that are an immediate threat to community health and welfare."

Eligible activities include loans and grants to public or private nonprofit entities for the installation of public facilities, site improvements and utilities and payment of non-federal share required in connection with a federal grant-in-aid program.

Mechanism: Redirection of existing program.

Action Needed: Request under Community Development or Special Projects programs. Qualification for one of the national objectives.

Issues to Consider: Grants are very competitive. Projects are selected from annual project needs list as well as a list of emergency projects. Involves restrictions. Only projects in already developed areas qualify. Only LMI persons qualify. Additional source of funding for correcting/eliminating failing septic systems. This grant depends on the community's ability to fund the project through other sources. Could also be used for other wastewater, stormwater management and retrofits/conversion projects as well as water related projects. Stretches state and local funding if federal dollars are added. Sewer extensions may lead to unintended growth and development in adjacent areas.

IDEA: Annual user fee for the depletion/degradation of aquifer

Revenue Generated/Redirected: Approximately $12 million per year.

Description: The concept is for a state, local government, or watershed district to charge an annual "aquifer impact fee" of $36.00 per septic system owner. An analogous "aquifer withdrawal fee," managed by drinking water agencies, could be charged to owners of on-site wells. These represent charges for the use (depletion and degradation) of the aquifer. The fees would be directed to funds dedicated to remediation of problems caused by failing septic systems and the protection of drinking water sources. Fee rates could differ for residential and business users.

Mechanism: Fee.

Action Needed: Enabling legislation.

Issues to Consider: Generates new revenues. Captures revenue from households and businesses which are not connected to municipal sewers, but have an impact on water quality via effluent treatment or as a result of septic system failures. Provides a fund pool similar to insurance to pay for correction of failures. Could expand the septic service business sector. May encounter local government and citizen opposition. May be difficult to identify and track owners of wells and septic systems.

IDEA: Full-Cost Pricing of Service Fees

Revenue Generated/Redirected: $75,000 per year per service personnel.

Description: Modify existing fee systems associated with construction oversight to cover more or all of the cost. The fee system should ensure that staff, equipment and overhead costs associated with plan reviews and inspections are covered by fees. The fee system could be a formula based on project complexity or an hourly rate for service time devoted to a project. Time not spent directly on a project would have to be covered by another funding source (see e.g., Stormwater Management Utility Fee, or General Funds).

"Full-Cost" pricing refers to two concepts. First, as an economic concept, it refers to internalizing environmental costs within the market, thus attempting to capture the "full-cost" of development. Second, in a more common sense manner, it refers to covering the full-cost associated with public sector reviews of regulated activities.

Mechanism: Fee.

Action Needed: Changes in local ordinances, public education, coordination with other funding mechanisms (stormwater utility fees, general fund allocations).

Issues to Consider: One major issue is, "who pays?" The full-cost pricing approach shifts a larger portion of the cost from the general tax payer to those who benefit from development and new construction. The remaining portion of the cost would be shared by the general public who benefit from a healthy environment.

Because of seasonal and economic fluctuations in development activities, funding dependent solely upon service fees is likely to fluctuate, thereby affecting staff levels. To minimize these fluctuations in staffing levels, it may be necessary to diversify funding sources. Another implementation issue is "acceptability" among the development industry. It is likely that the shift in funding from the general taxpayer to the development industry would only be accepted if it were phased in over time.

Recent comparisons of public versus private methods of "doing business" have been critical of government approaches to setting fees. They note the obvious: setting fees below the cost of services results in revenue streams that are inadequate to cover costs. This has resulted in the need to subsidize the service with general tax revenues. In addition, service fees set below costs encourage greater demands on the service than would fullcost pricing. Such increased demands, in turn, artificially increase the need for the service and waste natural resources.

IDEA: Lawn and Garden Fertilizer Surcharge

Revenue Generated/Redirected: 2% surcharge would likely generate $13 million per year.

Description: Retail (non-farm) sales of fertilizer are currently included in Maryland's general sales tax. An environmental surcharge on retail fertilizer products, based on the nitrogen and phosphorus content, could generate revenues for needed Tributary Strategy activities and also serve as a disincentive for over-application of fertilizer on lawns and gardens. Mechanism: Surcharge.

Action Needed: Legislative changes to sales tax laws.

Issues to Consider: Fertilizer surcharges are consistent with the notion of fairness in that they target those that benefit from nutrient use and, sometimes, overuse. However, current public and political sentiment does not favor any additional surcharges.

IDEA: One-time septic system installation impact fee

Revenue Generated/Redirected: $1 million to $1.5 million per year. Assumes $100 fee per system, and 10,000 to 15,000 systems installed each year.

Description: The concept is to charge a one-time "aquifer impact fee" for the installation of a new on-site sewerage system. A similar one-time "aquifer withdrawal fee" could be charged for the installation of on-site wells. These represent charges for the use (depletion and degradation) of the aquifer. The fees would be directed to funds dedicated to remediation of problems caused by failing septic systems and the protection of drinking water sources.

Mechanism: Fee.

Action Needed: Local ordinances, State legislation (if the funds are governed by watershed authorities).

Issues to Consider: This system of charges is based on direct impacts and benefits of the aquifer and watershed resources. The system generates new revenues and provides a fund pool, similar to an insurance fund, to pay for correcting failures. The linkage of the fee to a specific aquifer and watershed raises awareness of the direct cause and effect of individual actions. It is fair because those served by public sewer indirectly pay similar fees via their sewer bills. It also provides a vehicle for education to improve awareness of the need to regularly maintain septic systems, which saves money in the long run. This, in turn, could help expand the septic service business sector. Public education of the need and benefits would be necessary to overcome potential opposition.

IDEA: Apply Community Re-investment Act requirements for local investment to environmental projects such as tree planting, stream restoration, stormwater retrofits, etc.

Revenue Generated/Redirected: Estimate not known.

Description: The Community Re-investment Act (CRA) was passed by Congress in 1977 in response to the poor record of many banks in making loans and providing services in low income neighborhoods. The CRA requires banks to be rated annually to ensure that minimum community re-investment standards are met. However, although 89% of banks pass these ratings, Congress still feels that banks continue to fall short in providing services to the community. Current federal CRA requirements are very general, but the State could pass legislation with more specific guidelines about activities that are eligible under the CRA. These guidelines could include environmental projects, such as redevelopment and in-fill development to encourage concentrated growth; urban forestry; stream restoration; agricultural best management practices; etc.

Mechanism: Public/Private Partnership.

Action Needed: State legislation.

Issues to Consider: The Community Reinvestment Act represents a new, previously untapped source of potential funds for environmental projects. Using banks for this purpose could potentially divert funds from other community needs, such as low-income housing. However, if environmental activities are offered as one of several eligible areas for CRA investment, banks could choose which activities they prefer to focus on.

New York State proposed its own CRA, which includes a checklist of eligible activities (NY's does not focus on environmental investment). An alternative to a checklist would be to require banks to develop an Environmental Re-investment Program, whose activities would be reviewed by an existing or specially appointed Commission.