POINT SOURCE

Point source pollution of the Chesapeake Bay is the easiest type of pollution to identify, and its control may be the most cost-effective type to implement. The point sources of nitrogen and phosphorus pollution targeted for reduction by the Tributary Strategies are primarily the wastewater treatment plants (WWTP) that discharge into the Chesapeake Bay, its rivers and streams. Maryland's Tributary Strategies concentrate on biological processes (most cost effective across the widest spectrum of treatment plants) to reduce nutrients from wastewater treatment plant discharges. The Strategies target those plants with current flows over one half million gallons per day (0.5 mad). In addition, if smaller treatment plants (under 0.5 mad) expand to over one half million gallons per day capacity, the expectation is that Biological Nutrient Removal (BNR) for nitrogen and chemical phosphorus removal (CPR) will be implemented at the time of expansion. Currently, the state's Biological Nutrient Removal Program, initiated by the Maryland General Assembly and Maryland Department of the Environment (MDE), uses the proceeds from state general obligation bonds to help fund the upgrade of wastewater treatment plants. Under this program, state funding covers 50% of the cost for equipping existing facilities with BNR, including feasibility studies, design and construction. Facility owners, on the other hand, provide the other 50% of the funding, as well as costs associated with any facility expansion to accommodate future growth. In terms of sources of revenue, funding from local governments can come from loans, local bond proceeds or pay-go sources. To date, the state has authorized $66.2 million for this program. However, at least $6.0 million per year, in addition to funds already being spent, will be needed by the state to fully implement the point source Tributary Strategy Option by the year 2000. The Panel assumes, as is commonly the case, that funding for local government's share of the program will be paid by ratepayers, and those funds will be available as needed. However, it is clear to the Panel that additional sources of funding are needed in order to achieve the objectives of the Tributary Strategies. A range of options were developed, which include: Extending the State Revolving Loan Fund to facilitate private investment in wastewater treatment plant upgrades. Tax-exempt lease arrangement by a public/private partnership for wastewater treatment plant upgrades. Private-sector purchase of municipal utility assets to raise funds for capital improvement projects. Pooling of communities' debt for credit enhancement and bond banks. Extension of the maturity of state revenue bonds to coincide with the service life of financed facilities to reduce annual debt service payments. Additional Considerations In addition, the Blue Ribbon Panel raised several other issues that went beyond the implementation of the BNR Program and addressed possible enhancements to the existing program: additional funding for BNR beyond the current treatment capacity projected for planned growth, additional funding for phosphorus removal at WWTP's as part of the Tributary Strategies, the value of expanding the current program to include BNR at wastewater treatment plants below 0.5 mgd, and allowing funding for alternative nutrient removal options such as land application. The Panel realizes that the additional capital costs associated with implementing any of the above mentioned enhancements to the current program would increase the current $36 million, six-year shortfall. To maintain the state's debt affordability ceiling, there is need for other sources of capital funds.

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

Revenue Generated/Redirected: Total federal allocation to Maryland is $218 million. Through a 20% state match and the use of tax-exempt revenue bonds, the SRF has the potential to make up to $600 million in loans to local governments, of which $400 million has been dedicated. The unallocated leverage capacity of $200 million (federal funds-$69 million; state-$13.8 million; tax-exempt revenue bonds-$117 million) remains available.

Description: The SRF was established through the Water Quality Act of 1987 to replace the U.S. EPA Construction Grants Program for wastewater treatment facilities. The objective of the program is to improve water quality. Grant funds are appropriated by Congress to states, who then make loans to communities. Maryland leverages its federal grant and its state match funds to increase the amount of money available for loans through the sale of tax-exempt revenue bonds. Loans to communities are made at or below market interest rates for up to 20 years. Repaid principal and interest are then used for new loans.

The idea is to extend the SRF program to the private sector so that private and public/private partnerships can use and leverage the federal and state funds to engage in such activities as the upgrade of wastewater treatment facilities, repair/connection of failing septic systems, stormwater management, agricultural best management practices and stream restoration (see page 34 for Developed Land ideas, page 42 for Agricultural Lands ideas, and page 54 for Resource Protection ideas).

Suggested methods for making the SRF available to a broader audience include placing deposits in financial institutions to provide loan subsidies. The financial institutions could then leverage the funds, perhaps increasing the pool by two or three times its current size. The financial institutions could also administer the loans, which is an efficient use of their resources since they are in the business of credit evaluation and loan administration. Using financial institutions could also minimize the state's costs and exposure to loan losses.

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 private loans for point source projects.

Issues to Consider: Funds would be available at below market interest rates to private parties. Loans bear only interest on funds drawn during the construction period.

Repayment period is shorter than many local governments or private investors would like. Projects must meet all the Federal requirements to qualify for the loans. Vouchers and support documentation must be submitted to support payment request. Loans to private parties may create competition for funds with public government.

Case Example: pages 92, 93

IDEA: Pooling of communities' debt for credit enhancement/ small community bond bank

Revenue Generated/Redirected: Estimate not known.

Description: A bond bank is an institution that pools together offerings of individual bonds. To assist smaller communities and communities without a credit rating, bond banks would be formed to pool bond offerings into a single bond issue that can then be issued at a lower interest rate than any single community's issue could command.

Mechanism: Bond.

Action Needed: Would require change in state law. May require a limited state guaranty to provide credit backing. May require state authority to manage the bond bank.

Issues to Consider: Provides small communities with access to national bond markets, and with credit enhancement from either insurance or a guaranty from the state, may allow for lower interest rates. Pooled offerings reduce issuance costs for each participant.

Not as useful to larger communities and small communities with good ratings, who can usually command lower interest rates on their own. If the state's credit rating is used in the form of a state guaranty, part of the state's credit capacity must be used for these projects-capacity to finance other state projects may be impaired.

IDEA: Extension of maturity of state revenue bonds to coincide with the service life of financed facilities to reduce annual debt service payments

Revenue Generated/Redirected: $5.0 million.

Description: The term of state revenue bonds sold for the Biological Nutrient Removal (BNR) program would be extended from 20 to 30 years for the years 1996-2000, thereby raising the debt affordability ceiling and allowing the state to fund the additional costs of this Tributary Strategy option.

Mechanism: Bond.

Action Needed: Legislative approval.

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: Public-private partnership for financing wastewater treatment plant upgrades

Revenue Generated/Redirected: Estimate not known.

Description: Under a tax-exempt lease arrangement, a public partner finances capital assets or facilities by borrowing funds from an investor or financial institution. The private partner generally acquires title to the asset, but transfers it to the public partner either at the end or at the beginning of the lease term. The portion of the lease payment that is used to pay interest on the capital investment is tax-exempt under state and federal laws. Tax-exempt leases are a method of capital financing that could be applied to any environmental facility. Since the lease arrangements do not count against local debt limits, they may be a particularly useful tool for communities whose debt capacity is nearly exhausted.

Mechanism: Public/Private Partnership.

Action Needed: Local law changes are needed to allow a municipality or public partner to enter into a tax-exempt lease agreement with private parties.

Issues to Consider: A primary advantage of a tax-exempt lease is that the public partner can acquire capital from the private sector without issuing a bond. The public partner can use a tax-exempt lease to acquire private capital at discounted rates. The private partner gains the benefit of tax-exempt income from the interest portion of the lease payments.

Since some lease arrangements are long-term, the public partner will need to have the power to enter into long-term contracts.

Case Example: pages 94, 95, 96

IDEA: Grant Processing or Handling Fee

Revenue Generated/Redirected: $100,000 (1% of a $10 million allocation).

Description: To allow state programs that provide grants to local entities the authority to charge fees for processing and administering the grant. These fees would be limited to the state's cost to administer the grant and could be capped at 2.5% of the allocation. The cost of administering state grant programs is not provided for in the enabling legislation, thus administrative and personnel costs must come out of existing state operating budgets. The operating budgets of agencies have continued to shrink while new mandates have been imposed on the agencies. The imposition of a processing fee on a grantee is insignificant in relation to the overall project cost and would be similar to the permit fees they already pay.

Mechanism: Fee.

Action Needed: Legislative approval.

Issues to Consider: The imposition of another fee for doing business with the State. This fee would be independent of the normal funding formula for determining eligibility for State funding and could not be partially funded through the State's share.