Priming the Pump: Paying for Clean Water in the 1990s

Turn on the faucet in most towns in the United States and you can drink the water with some confidence, if not always absolute security. In much of the world -- India, China, Mexico -- that simple routine of daily life is decidedly more dangerous. For recreation as well as drinking, Americans now enjoy water that is cleaner and safer than it was just twenty years ago. Thanks to state-of-the-art sewage treatment plants and other water pollution control facilities, we have made much progress in cleaning up our lakes, rivers, and coastal waters, reclaiming waterbodies that many Americans thought were permanently contaminated. Major problems remain, but the days are gone -- for good, one hopes -- when pollution on the chemical-laden Cuyahoga was so great that the river caught on fire.

These accomplishments did not come cheap or through voluntary action by the charitably minded. They involved large public investments and major expansions of federal regulation. Unfortunately, continued progress is now in jeopardy. For while federal regulation of water standards continues and has even been extended, federal financial assistance has slowed to a trickle. To upgrade their water infrastructure -- sewage treatment plants, drinking water facilities, and other projects -- scores of communities are facing huge expenditures. Until 1989 they could draw on a substantial program of federal grants; today all that remains of federal aid is a scanty loan program whose entire fund could be consumed by pending clean water projects in just one of our major cities.

Through 1998, for example, New York City alone has to finance an estimated $10.3 billion worth of clean water projects. Three other cities confronting multi-billion dollar costs -- Los Angeles ($6-8 billion), Boston ($6-8 billion), and San Diego ($2-3 billion) -- are under court orders to come into compliance with federal water standards. Since these and literally hundreds of other communities are building treatment plants or water supply facilities according to strict court schedules or administrative decrees, they simply do not have the option of putting off the work. And because state and local general tax revenues are unlikely to cover the costs, homeowners and businesses in many communities are in for a rude shock during the 1990s: astronomical increases in water and sewer rates. Around the country, water and sewer costs loom as the natural resources cost demon of the 1990s, a worthy successor to the energy crisis of the 1970s.

The surging costs of clean water are, unhappily, a representative problem of our times. Like the many roads and bridges around the" country needing new investment, the nation's water infrastructure requires large financial commitments, not just regulatory measures that express good intentions. As in other areas like Medicaid, the federal practice of maintaining and even extending regulation without providing commensurate financial support is producing fiscal nightmares for the states and localities and increasing pressure to abandon regulatory protections. The political effect is a kind of downward pressure throughout government to reduce public resources and social and environmental standards. If that downward pressure affects America's water, it will undo environmental achievements that affect all of us.

High Water

The nation's accomplishments in dean water stem primarily from two federal initiatives: the Clean Water Act of 1972 and the Safe Drinking Water Act of 1974. The Clean Water Act regulates pollutant discharges to lakes, rivers, and coastal waters, setting as a national goal what is informally known as a "fishable and swimmable" standard. The Safe Drinking Water Act regulates public water suppliers to ensure they provide safe, high-quality drinking water. Both pieces of legislation are currently up for reauthorization, and with clean water infrastructure costs during the 1990s now figuring in the hundreds of billions of dollars, the issue of federal funding for federally required projects looms as a prominent issue.

No one doubts that the costs of clean water in the 1990s will be large, but experts disagree exactly how big they will be. Newly discovered problems seem to make most estimates obsolete by the time they are calculated. The one point on which everyone seems to agree is that if a particular figure comes from the U.S. Environmental Protection Agency (EPA), it is bound to be far too low. Nevertheless, we can compute a rough estimate by tallying three figures. First, the EPA puts the cost of work on sewage treatment plants over the next decade at $83.5 billion. Second, a group of municipalities, called the CSO Partnership, that recently banded together to work on "combined sewage overflows" into rivers, lakes, and other waterbodies estimates that it may cost over $100 billion to implement current standards for overflows. And, third, an informal estimate from the American Water Works Association puts the cost of compliance with amendments to the Safe Drinking Water Act at approximately $120 billion.

These estimates add up to just over $300 billion, and that figure is probably conservative. The nation is just now beginning to focus on a host of new water problems that may generate additional costs. A good example is the discharge into waterbodies of excessive amounts of nutrients, such as phosphates, which cause algae to flourish and depress oxygen levels below those necessary to maintain a healthy ecosystem. Some states, anticipating likely new federal standards on nutrient discharges, are taking steps on their own. New York and Connecticut recently agreed to install nutrient removal controls in their sewage treatment plants discharging into Long Island Sound, in what might be characterized as a last-ditch effort to reverse the degradation of one of the nation's most troubled waterbodies. "We don't know where the money is going to come from," says Albert Appleton, New York City's commissioner of environmental protection. The work is estimated to cost $6 billion.

A Wave of Noncompliance

Although the clean water costs of our large urban areas have captured what little publicity has been generated on the issue, the nation's smaller cities and towns face problems that are, if anything, more staggering. An expensive clean water project spread over a small per-capita base spells real trouble. New Bedford, Massachusetts (population: 99,992), has about $500 million worth of clean water projects to undertake in the next five to six years. As New Bedford's mayor, John Bullard, recently put it, "You can't build a sewer treatment plant with 1,000 points of light. You need cash." In the absence of significant federal or state funding assistance, the San Diegos of the country can turn (albeit reluctantly) to the bond market, raise the capital needed to undertake a clean water project, and pass the cost of bond issues on to water or sewer ratepayers. Because many small communities lack financial clout, they cannot gain access to the private markets that are the only source of capital finance when the higher levels of government leave the localities to sink or swim.

With a little prompting, the EPA's Office of Water Enforcement and Permits will admit that while it has energetically pursued compliance by large cities, the nation has between one to two thousand small communities still violating wastewater treatment standards. The EPA is reluctant to take enforcement action against these communities because the agency regards it as an exercise in futility. Compliance with the Clean Water Act would literally bankrupt many of them. Under the Safe Drinking Water Act, the picture is no better. The 1986 amendments call for rigorous new standards to take effect in the early 1990s, and public water suppliers who fail to meet them may have to build water filtration plants or covers for their water supplies. The costs are enormous -- up to $7 billion alone for the EPA's recently announced plan to reduce the amount of lead in the nation's drinking water. Without federal help, there may be a "wave of conscious noncompliance" by small communities over the next few years, according to Jack Sullivan, deputy executive director of the American Water Works Association, which represents public water suppliers. Some suppliers might simply stop functioning, leaving people in those communities with no source of water except unregulated private wells.

How the Federal Well Went Dry

States and municipalities have only recently been left to fend for themselves for financing to comply with the Clean Water Act. From 1972 to 1989, the Clean Water Act contained a generous program of construction grants. Over two decades, the federal government spent about $55-60 billion on sewage treatment plants and other dean water projects, often paying up to 70 percent of the costs. States often contributed another 20 percent, limiting the cost borne by the locality -- and its water and sewer ratepayers -- to only 10 percent. And while the Safe Drinking Water Act never provided any financing to localities, it did not impose enormous costs upon public water suppliers -- that is, until the 1986 amendments. In short, the localities were hit doubly in the late 1980s. Just when financing to support programs under the Clean Water Act ended, the financial costs of the Safe Drinking Water Act began to soar.

Congress deleted the construction grants program from the Clean Water Act in 1987 at the insistence of the Reagan administration. On a memorable day in 1987, President Reagan vetoed the Clean Water Act for the second time and jokingly made motions to toss the bill in a trash can. To override the President, supporters had to alter the aspect of the act most objectionable to fiscal conservatives in Congress -- its funding mechanism -- despite the benefits it had produced through the years.

At the time the construction grants program ended, policy experts and elected officials knew that billions of dollars remained to be spent on clean water. Under Reagan's new federalism, however, there was supposed to be a tradeoff: while the states would accept greater fiscal responsibilities, they would get certain revenue streams, such as taxes on cigarettes and alcohol. But although the federal government unloaded the burden of clean water costs, it never did turn over the revenue streams. Nor will it do so anytime soon. And given the scale of the federal deficit, the Bush administration's hostility to financing clean water, and the wariness that even environmental and public works champions in Congress ha ve of the "big spender" label, there is virtually no chance now of resurrecting a full-fledged construction grants program.

In place of construction grants, Congress established what has turned out to be a poor second cousin, a state revolving loan fund, which is supposed to provide $8.4 billion through 1994 for the states to establish low- and no-interest loan programs for dean water projects. The loan fund has been sharply criticized even by the people and organizations that initially supported it. In view of the almost $200 billion in water pollution control costs the nation faces over the next two decades, the fund has been pitifully undercapitalized. Adding insult to injury, the Bush administration has failed over the past few years to spend even, the modest annual amounts authorized for the loan program. In many respects, the program was poorly designed and got off to a shaky start. Some states took years to devise an adequate loan system and come up with their share of the money, and several have made it relatively expensive for communities needing funds to borrow money. In these states, large cities are relying on less expensive private sources of capital, while small communities lacking any other options turn to the loan program.

Assembling the Armada

A broad array of combatants is gathering to do battle on the issue of clean water funding: associations representing states, counties, cities, and towns, trade organizations, water and sewer service providers, environmental engineers and consultants, environmental, labor, business, and citizens groups. Should these varied interests work together in favor of federal funding, they could wield considerable clout.

Yet consensus seems unlikely. Privately owned water supply companies, which probably would not qualify for government grants, are predictably not to be found among the supporters of federal financing. These companies heavily influence the American Water Works Association, whose members include both governmental and profit-making suppliers of water to the public.

Perhaps more surprisingly, some environmental organizations have not backed federal funding. By making water "pay its own way," they hope to usher in an era that forces water conservation upon a wasteful country, making us realize the true value of water as a resource. Environmentalists are also hesitant because of the use of dean water grants for what they regard as unjustified subsidies for land development. They object that construction grants financed sewer lines for rapidly growing suburbs rather than sewage treatment plants and other pollution control projects. This criticism undoubtedly contributed to the program's demise. However, while construction grants were spent too loosely during the grant program's early years, the requirements for federal assistance became increasingly stringent.

Pushing the hardest to date for water funding is the National Utilities Contractors Association, an organization representing the industries that build sewage treatment plants and drinking water facilities. But the interest group with the best chance of winning support for federal funding has not even been formed yet -- a group representing the entire spectrum of water and sewer ratepayers. Considering that business, institutional, and homeowner ratepayers are in line to pay hundreds of billions of dollars in increased water and sewer rates, they are likely candidates for involvement in the clean water funding debate.

There is appeal to the notion of a grassroots water and sewer ratepayers' voice entering the fray. Rather than having their sewer rates go up 23 percent annually for the next five years (the prediction for Los Angeles) or rise 300 to 400 percent over the course of the decade (the prediction for Boston), thousands of homeowners in those and other cities should be demanding that some of their federal tax dollars support the federally required sewage treatment plants and water supply facilities being built in their communities. Obviously, not every local capital project should be nationally financed. But by imposing the entire financial burden on some local governments -- just at the time new regulations have increased that burden to unprecedented size -- we are concentrating costs to such an extent that they may seriously cripple the economic vitality of those communities.

A pall will hang over the upcoming clean water funding debate no matter what direction it takes. We are now squarely facing one of the legacies of the Reagan years: unmet needs for .publics investment at a time of huge federal deficits reflecting the savings-and-loan bailout and other excesses of the 1980s. The 1990 deficit reduction package compounds the problem. Although it contains some money for expanding domestic programs, it bars any large shift of government spending for three years.

Under these circumstances, one possible approach to funding clean water is a national effluent tax or user-fee system that would at least spread the costs of clean water projects more evenly over the economy. The Bush administration, however, will not support such a measure. EPA Administrator William Reilly recently stated that the time "has passed" for major federal spending on clean water projects. Another approach -- indeed the most likely one -- is simply to fortify the existing revolving loan fund. To function successfully, the loan fund requires several changes, including larger annual federal contributions and a rollback in the current 1994 cutoff date for new federal money. In addition, states should be allowed to make grants, not just loans, to communities that are financially strapped and to those already spending above a set percentage of the community's per-capita income on environmental protection.

Since federal funding is desperately needed for projects required by the Safe Drinking Water Act, the optimal approach might be to expand the loan program substantially and allow states to draw on the same fund to make loans (and grants in appropriate circumstances) under both the Clean Water and Safe Drinking Water acts. A unified clean water funding system would end the byzantine, fragmented approach the federal government historically has taken to financing the clean water infrastructure. But at a time of federal retreat from fiscal responsibilities, the likelihood of such comprehensive planning is dim.

Perhaps the most ominous aspect of the current financial crunch is its potential impact on clean water standards, some of which have stood for decades. Calls for weakened standards have already emerged, driven by neither health nor environmental concerns, but by fiscal pressures. Without adequate public investment, we may abandon some of the nation's goals for clean water and even see our recent achievements begin to erode. Bottled water is now a fashionable taste. We must not allow it to become a necessity.