FINDINGS

Overview

From the outset, the Panel focused on creative thinking, identifying options in all areas of finance, including public-private partnerships, unconventional loans, user fees, appropriate surcharges, securitization and other mechanisms not always considered for funding environmental projects. The Panel spent about equal time discussing specific funding tools on the one hand, and policy approaches that would affect the way we finance projects on the other. Some of these policy changes may, of course, require legislative action.

Because of the urgency of the issue, the Panel worked quickly. This means that rather than explore all steps necessary for implementation, the Panel identified a variety of options, listing basic information about each mechanism so that interested parties especially local governments-will be able to consider and fully develop the tools that best suit their local needs.

The ideas considered by the Panel vary widely. Many can be implemented without much difficulty. Others will require new legislation or regulation, policy changes or considerable political support before implementation would be possible. Accordingly, some ideas can be used immediately, while others will be discussed and debated, over time, as tools for financing the true cost of restoring streams, rivers and, finally, the Chesapeake Bay.

The Panel is aware that a number of actions listed in this report could have certain repercussions and deliberated these at considerable length. Those deliberations appear in much abbreviated form as "issues to consider" listed under each funding idea, and are touched upon briefly in several of the introductory sections. The Panel hopes that the ideas which need additional discussion will become part of Maryland's ongoing efforts to restore the Chesapeake Bay.

Finally, the Panel hopes that its work will be of use to anyone interested in the issue of financing environmental protection and restoration, and that this report becomes part of a continuing discussion about funding programs in the interest of the common good.

General Findings

The financing mechanisms listed in the following pages provide a "menu" of options which federal, state, and local partners in the Bay restoration effort will want to consider as they begin to implement the Tributary Strategies. In addition to this menu of funding ideas, the Panel finds:

Implementing the Tributary Strategies represents keeping a long-term commitment made in 1987 and does not represent a new mandate.

The Tributary Strategies that will get us to our year 2000 goal are based on proven management practices that get results. Significant progress towards achieving the 40% nitrogen and phosphorus reductions has been made with a 38% reduction of phosphorus and a 23% reduction of nitrogen loadings.

The success of achieving the nutrient reduction goal of the Chesapeake Bay Agreement by the year 2000 rests upon rapidly implementing aggressive funding strategies.

New and amended Federal, State and local legislation may be required in order to implement the funding options recommended by the Blue Ribbon Panel.

The wide range of activities identified in the Tributary Strategies clearly shows that meeting the nutrient reduction goal will require everyone in Maryland to share in the costs.

If funding efforts fall short and Maryland fails to implement the Tributary Strategies, we will face larger costs in the form of degraded resources, decreased commercial fishing, declining tourism, and more costly clean-up efforts.

Many of the Tributary Strategy activities address technical issues, such as nonpoint runoff from farms and developed lands, not commonly recognized as problems by most people. It is therefore natural that these same people do not fully appreciate the true costs associated with the restoration effort. The key to achieving adequate funding depends on gaining public support, by communicating a clear understanding of both problems and solutions.

The Panel believes that people are more willing to provide financial support to worthwhile goals if they know where their money is going and that everyone is paying their fair share. Given this basis for gaining public support, the Panel has sought to identify funding mechanisms that provide incentives and distribute costs among both beneficiaries of programs and sources of problems. Such mechanisms typically dedicate the funds to specific limited activities, providing additional accountability to the public.

Agriculture represents one of the most challenging areas for creative funding approaches. Agricultural nonpoint source controls are vital to the success of the Tributary Strategies and in many cases are the most cost-effective control measures available. Development and implementation of creative financing mechanisms for these controls should receive high priority.

Point-source nutrient reduction at wastewater treatment plants will continue to play a major role in meeting the goal of the Bay Agreement. Since federal grants for this segment are no longer available, the investigations begun by the Panel into unconventional funding mechanisms should be taken up by decisionmakers at all levels of government.

Many of the Tributary Strategy activities have additional benefits that are inseparable from the nutrient reduction benefits. These include the correction of health hazards associated with failing septic systems, the control of toxic compounds in urban runoff, for example the protection of wildlife habitat, and the cultural and economic values associated with maintaining viable agriculture. These other benefits should be considered when setting funding priorities, or considering the impact of new incentives, fees, taxes or other funding mechanisms.

Finally, and most importantly, the Panel feels strongly that funding and implementation of nutrient-reduction programs should take place on a watershed basis. The Panel therefore recommends that action be taken by the Governor's Office to develop a plan for creating watershed districts to expedite the funding of nutrient-reduction activities throughout the state's watersheds.

Categorical Changes: A Watershed Approach

The Panel discussed both specific funding tools presented in the "menu" section of this report-and categorical changes that would affect the way we fund environmental projects. The primary "categorical" change recommended is the shift to a greater focus on funding and implementing programs on a watershed basis.

The Panel felt strongly that mechanisms for funding the Tributary Strategies would be aided by watershed districts of some kind. Varying types of watershed districts could be envisioned, depending on the nature of their fiscal authority and the types of activities that would fall under their jurisdiction. A watershed district could, at a basic level, make recommendations only (having no fiscal authority); or it could, beyond this, have authority over a budget which is controlled by member counties and municipalities; or, finally, it could have authority to issue bonds and collect revenues.

Similarly, the range of activities that could fall under the jurisdiction of a watershed district might include any combination of nutrient removal activities addressed by the Panel, such as: wastewater treatment, stormwater management, agricultural practices, resource protection activities with nutrient reduction benefits, and septic system connections to sewers. Clearly, many combinations of fiscal authority across jurisdictions are conceivable.

For example, suppose that a given tributary had the potential for garnering funds-through the State Revolving Fund, for instance to improve a small town sewage treatment plant, allowing the removal of additional nitrogen. But suppose further that studies have shown repeatedly that the largest input of nitrogen to this particular tributary derives from agricultural practices, including inadequate storage facilities for animal waste. A watershed district could, if properly structured, use the sewage treatment funds to deal with the animal waste problem, thereby having a greater impact on nutrient reduction.

In short, watershed districts can offer greater flexibility for the fund ing of environmental programs specific to each watershed, and help to increase efficiency through economies of scale. Perhaps in the future individual watershed districts could even combine or cooperate, creating larger authorities and commanding better rates and more attractive financial instruments.

In conclusion, the Panel endorses moving in the direction of "water shed districts" and recommends that those involved in implementing the Tributary Strategies investigate workable institutional structures over the next year. Specifically, the Panel recommends that the Governor's Office establish a commission to investigate the practical implementation of watershed districts in Maryland.

Why Explore Financing Alternatives?

Traditionally, federal, state and local governments have used taxes to fund projects which benefit large numbers of citizens. From highways, to bridges, to sewage treatment plants, tax-supported programs have made a high standard of living possible in this country. Certainly the Chesapeake Bay Program, with its federal and multi-state partnership, would not be possible without taxes. Nevertheless, it has become clear that conventional taxes simply cannot support every project we need to undertake to protect the environment and to ensure a continued high quality of life as we enter the next century.

The question debated by the Panel, then, was not so much "taxes or no taxes," but rather, "How can we pay for what we need to do?" Taxes have been and will continue to be a part of funding the Tributary Strategies, but the Panel examined other options as well, which we could divide into three areas: savings and transfers, loans, and revenues.

Savings and Transfers

The more one looks into the financing of environmental projects, the more one realizes the truth that what we save we earn. Often when considering how to raise funds necessary to pay for expensive clean-up projects, one realizes that with some change in behavior, the expense could be much less.

For example, the laying of expensive sewer pipe would cost less if we planned and clustered development more carefully. If septic tanks were well maintained, we would not be facing such an expensive cleanup of nutrients in many parts of the watershed. If farmers, homeowners and businesses can be more efficient with their use of fertilizer, they would save themselves money and reduce the potential for nutrients reaching the tributaries. Specifically, there are potential savings in fertilizer costs for farmers, especially for those using animal waste as a source of crop nutrients.

Clearly, if we used less electricity and drove our cars less, we would put less nitrogen in the air from electric power plants and car exhausts.

Such changes in behavior-whether new development patterns, more careful farm practices, or a more frugal use of fossil fuels-generally won't cost the taxpayer money.

In addition to savings, the Panel also discussed transfers-shifting funds from one program or area to another, without necessarily creating a net increase. Funds could be, for example, shifted from an area needing less emphasis to a program which would more directly result in decreased nutrient loadings into the Bay.

Loans

While everyone realizes the importance, both to the environment and to human health, of careful waste treatment practices, modern treatment facilities are expensive to build and maintain. The federal government has made a substantial commitment over the years to aiding states with the construction of waste treatment plants, but with the increase in the federal deficit, continued subsidies became difficult. One solution to this dilemma has been the State Revolving Loan Fund (SRF). This fund represents a constructive compromise. Instead of withdrawing federal support altogether, the SRF provides states with funds to loan to municipalities for the construction of waste treatment plants. The loans carry very low interest rates, and therefore help the municipalities in their attempts to finance these facilities, which serve the public interest. Once the loans are repaid, the funds again become available to assist other communities.

The lesson here is that loans can provide a middle ground between total subsidy on the one hand and complete lack of support on the other. The Blue Ribbon Panel discussed ways in which the SRF might be employed to good use in additional areas as well, such as in controlling nonpoint sources of nutrients.

The Blue Ribbon Panel also discussed ways in which the SRF might be employed to provide loans not only to public but to private entities for controlling nonpoint sources of nutrients. Currently such loans are allowed by the U.S. Environmental Protection Agency (EPA) but barred by State law. Many options are available for originating and securing private loans and the combination of these options could be implemented through banks and other financial institutions to support the Tributary Strategies, State and Federal laws permitting.

In addition to the SRF, there may be other creative ways of using loans to help either individuals (such as farmers) or communities (such as small towns or unincorporated areas) bridge the funding gap. This could become more feasible if these groups joined together in cooperatives or in new associations, such as "watershed districts."

Revenues

As some of the finance experts on the Blue Ribbon Panel pointed out, we do not always remember that state and local communities have considerable assets. For example, consider how much underground pipe exists in Maryland. In one sense, that pipe is an asset. Could it be sold to a private concern, who could then claim a substantial depreciation for that pipe on their taxes? Are there other assets owned by state and local communities which could be privatized or used to generate income?

The Blue Ribbon Panel investigated a number of case studies, including the recent purchase in Ohio of a waste treatment plant by a private company. Such a purchase was made possible by a federal executive order which allows the sale of facilities built with public money to private concerns. There are still legal and other questions about such sales, but privatization remains an area which will continue to deserve scrutiny as we enter the next century, and the Panel recommends continued investigation into this area.

The state has many other assets which are of great value, not the least of which is the Chesapeake Bay. Undoubtedly the Bay generates considerable revenue for the state, as fishermen, sailors, tourists, business owners and others flock to the area to enjoy the nation's largest estuary. Are there new ways of capturing a small part of that revenue for the restoration of the Bay itself? The Bay license plate has been very successful in Maryland. Could there also be a Bay stamp or other items the State could sell?

The Blue Ribbon Panel began an exploration into this area which should be continued well into the future by other citizens and entrepreneurs.

Finally, great sums of money could potentially be either saved or raised through the formation of cooperatives or other joint ventures. One panelist, for example, has been exploring ways of joining small companies together to allow them to improve their debt capacity. The panelist estimates that by joining small water companies and creating a "common bond," the debt service on their current finances could be immediately reduced by 25%. Again, such innovations would cost the taxpayer nothing.

Other cooperatives-comprised of farmers, for example-could also benefit from improved financing. Farmers and other citizens in a given tributary or region could join together to finance the building of expensive structures, such as animal waste containment systems.

Such ideas may seem "experimental," but then mortgaged-backed securities were rare a decade or so ago; now they account for literally billions of dollars of investment funds.

In short, the Panel urges the continued exploration into all these areas as possible means to augment funds available for nutrient-reduction programs, while realizing that the state's responsibility, supported primarily through taxes and fees, will remain crucial.