Paul Pinault Testimony

TESTIMONY OF THE
ASSOCIATION OF METROPOLITAN SEWERAGE AGENCIES (AMSA)
October 31, 2001

Presented by
PAUL PINAULT
Executive Director
Narragansett Bay Commission
Providence, Rhode Island

Submitted to
the
SUBCOMMITTEE ON FISHERIES, WILDLIFE AND WATER
SENATE ENVIRONMENT AND PUBLIC WORKS COMMITTEE

WASHINGTON, DC

1816 Jefferson Place, NW
Washington, DC 20036-2505
202.833.AMSA
202.833.4657 Fax
info@amsa-cleanwater.org

Testimony of Paul Pinault
Executive Director, Narragansett Bay Commission
on behalf of the
Association of Metropolitan Sewerage Agencies

Introduction
Good morning Chairman Graham, Senator Crapo and members of the Subcommittee, my name is Paul Pinault. I am Executive Director of the Narragansett Bay Commission ("the Commission") in Providence, Rhode Island and Vice President of the Association of Metropolitan Sewerage Agencies (AMSA). AMSA represents the interests of more than 260 publicly owned treatment works (POTWs) across the country. AMSA's members treat 18 billion gallons of wastewater every day and provide service to the majority of the United States' sewered population. On behalf of AMSA and the Commission, I thank you for this opportunity to address your Subcommittee.

Adequate financial resources to states, cities, and communities like mine are the most essential element to maintaining our nation’s water and wastewater infrastructure. The Clean Water Act (CWA) amendments of 1987 created a new phase of clean water funding by replacing the federal Construction Grants Program with the Clean Water State Revolving Fund Loan Programs (SRF). Since 1980, according to studies by both the U.S. Environmental Protection Agency (EPA) and the private sector, federal contributions have declined by 75 percent in real terms and today represent only about 10 percent of total capital outlays for water and wastewater infrastructure and less than 5 percent of total water and wastewater outlays. Local governments currently assume more than 90 percent of water infrastructure construction costs in the form of expensive bond issuances – municipal debt – and increased water and sewer bills.

This hearing addresses what wastewater utilities, and state and local governments are doing to maximize limited federal funding for water and wastewater infrastructure improvements and what role the federal government should play in ensuring the nation’s infrastructure. I assure you that wastewater utilities must be, and are being, extremely innovative in order to get the most out of the limited dollars available. This testimony will address both what the Commission is doing, what AMSA and wastewater utilities are doing nationwide, and what the federal government can do to ensure that funding levels are sufficient to meet infrastructure needs.

The Narragansett Bay Commission’s Experience
The Narragansett Bay Commission has had a positive experience with its state loan program and has made significant use of the monies Congress has appropriated to the SRF. The Commission owns the two largest wastewater treatment facilities in Rhode Island. Field's Point was originally built in 1901, and Bucklin Point in 1952. The Commission assumed ownership and operations of both facilities by order of the Rhode Island General Assembly in 1982 and 1992 respectively.

The Commission has borrowed approximately $72.3 million from the SRF since the Commission's inception in 1980, enabling us to fund a significant portion of our sewer system projects. The Commission is the largest borrower from the Rhode Island Clean Water Finance Agency, which administers the SRF. Field's Point required over $100 million in upgrades, a majority of which was funded by statewide general obligation bonds.

In 1986, the Commission's debt service as a percentage of total operating budget was 19 percent; in 2002, it will be 22 percent, and in 2006, it is projected to be 54 percent as a result of $350 million in planned capital projects over the next five years, including construction start-up costs on the first phase of our three-phase federally mandated combined sewer overflow (CSO) project. Phase I is estimated at $250 million and the total project budgeted at $550 million over next 20 years. While it is daunting to think that 54 cents of every dollar the Commission receives will go for debt service rather than operations, without the SRF, that number would be much higher.

The Commission has used the SRF to partially fund projects including septage receiving facilities, pump station rehabilitation and repairs, facilities planning, and solids handling facilities. Future projects that will require federal funds include a $60 million upgrade at the Bucklin Point Wastewater Treatment Facility to improve capability for nutrient removal/reduction and the $250 million Phase I for CSO controls.

I should fully clarify that these capital funding needs are driven by the dual forces of aging infrastructure and increasingly stringent environmental regulations, not operational costs. The Commission and its fellow AMSA members around the country have a six-year documented record of reducing operational costs. However, no amount of operational streamlining or belt-tightening can offset the cost of replacing critical clean water infrastructure.

As we plan for the future, we believe that the Rhode Island Clean Water Finance Agency will need more money and a greater array of financing mechanisms to meet the Commission's needs, as well as the needs of the other 17 wastewater treatment facilities in the state – the three largest of which face very expensive nutrient removal projects – and the state's drinking water projects. If the SRF is underfunded and unreformed, the Commission will be forced to borrow at daunting market rates to accomplish these important projects.

An important part of the funding equation is the cost that users pay for services. I want to stress to the Committee that The Commission's ratepayers have been paying their fair share of the cost of the services provided. However, it is becoming increasingly clear that our ratepayers cannot sustain additional, substantial rate increases. Twenty-two percent of households in the Commission service area fall under the federal poverty line; 15 percent of the Commission's service area population are over 65 years of age and, most likely, on a fixed income; and 65 percent of children at or below the poverty line in Rhode Island live our service area.

In January of this year, the Commission raised its rates by 25 percent. This rate increase was driven primarily by the Commission's need to increase its debt capacity to pay for the CSO project. We will have to apply to the Rhode Island Public Utilities Commission again shortly for additional rate increases to meet growing debt capacity needs. For our demographic group, these increases represent substantial financial hardship—well in excess of the 2 percent median household income affordability levels set by the U.S. Environmental Protection Agency (EPA).

I want to reiterate that the Narragansett Bay Commission has been fortunate in that it has been able to access Rhode Island's state loan fund to help us finance our water infrastructure needs. Unfortunately, impediments such as cumbersome program administration requirements and limited leveraging of state monies to maximize the capacity of the program have prevented many wastewater utilities from having similar experiences. It is clear that based on current and future infrastructure needs, the SRF program is not–and will not be–adequate to ensure continued compliance with our nation's water quality goals.

The National Perspective
Again, municipal debt comprises 90 percent of water infrastructure construction costs, which includes compliance with federal regulations. Debt management offers a case-in-point of the innovations that wastewater treatment plants employ, as public officials rise to meet the funding challenge. To make municipal bonds as effective a source for generating income as possible, municipalities are increasingly involved in "pooled borrowing." Pooled borrowing is a bond issuance mechanism in which several municipalities join together and, instead of issuing bonds individually, issue a single bond. By doing so, these municipalities can ensure both a slightly better interest rate and, more importantly, a significant reduction in issuing costs. These activities can result in both short-term and long-term savings.

Additionally, many local utilities structure and restructure their debt to achieve low cost, low risk debt and to minimize debt service costs over the long-term. This often involves a delicate balancing act between reducing an agency’s debt reduction in the near term for somewhat increased debt service costs in the future. This must be done while ensuring that ratepayers’ costs remain stable and the environment fully protected. Some local governments have moved to longer term – 30 and 40 year – debt plans that help reduce annual payments.

Public Agency Management Innovations: Minimize Costs / Maximize Performance
Utility managers over the past decade have become better business operators. Publicly-owned wastewater treatment plant operators have worked diligently to be more competitive to meet the demands of the ratepayer, protect the public’s investment, and meet the nation’s water quality goals. Environmental management systems (EMSs) and asset management are becoming essential tools nationwide.

EMSs and more narrowly targeted management programs, like asset management, can and should be implemented in a complementary fashion. EMSs can provide the overall framework for implementing these other management programs. AMSA, in cooperation with EPA and the Water Environment Federation, is currently engaged in a joint project to develop comprehensive EMS guidance for wastewater utilities that will provide a key tool to ensure a more integrated, cost-effective management approach for wastewater utilities in the near future. Such a system gives a utility the tools to identify and more efficiently manage its capital assets, address a full range of environmental impacts, focus on improving environmental performance beyond the levels required by regulations, and do so through an open and transparent process that addresses the needs of communities, regulators and other stakeholders.

At the same time, AMSA is collaborating with EPA on developing a nationwide asset management program for wastewater utilities, scheduled for implementation in early 2002. Historically, capital investments in the form of water and wastewater infrastructure have been placed into service and considered candidates for rehabilitation and replacement only when the system faces critical levels of age or deterioration. Current physical, economic, social, financial, and institutional factors have rendered such an approach no longer viable. AMSA’s view is that public utilities must be able to plan and optimize the maintenance and replacement cost cycles for their infrastructure assets in order to minimize costs and maximize performance.

An added incentive for this shift to a more measured planning approach can be found in the June 1999 changes to financial accounting and reporting standards issued by the Governmental Accounting Standards Board for State and Local Governments (known as GASB 34). These sweeping changes require governments to report depreciation of assets or to implement an asset management system. Under the standards, any asset management system utilized by a government must result in an up-to-date inventory of infrastructure assets, the undertaking of condition assessments of assets, the development of annual estimates of the funds necessary to maintain the assets and documentation that assets are being maintained.

The goal of the accounting requirements of the GASB is to add value to decision makers nationwide. Advances in geographic information systems, combined with effective relational database management, improved data collection technologies and increased analytic computer capacity provide a unique and challenging opportunity to improve management decisions and reduce cost.

Improved asset management practices and programs at public wastewater utilities protect the public’s investment in a vital local service. Sound management practices enable communities to control and potentially reduce the costs of assets required to meet service objectives. Some estimates suggest that the potential exists for a 20 percent savings when the current capital investment approach is abandoned and an asset management approach is implemented.

Local utility management teams currently explore new ways to stretch available funding including environmental management systems, asset management, bond issuances and debt management, and are stretching their dollars to the greatest extent possible. Publicly-owned wastewater treatment plants have a distinct mission for which innovation must be complimented by critical changes to the State Revolving Fund (SRF) as well as increased federal funding.

There is ample precedent for, and clear economic principal for supporting, a strong federal role in funding water infrastructure. Despite increasing federal mandates for cleaner water, shifts in population that strand wastewater plants in urban core cities with few ways to pay for needed improvements, and the nearly universal need to replace billions of dollars in aging and failing water distribution and wastewater collection systems, current federal funding policies and mechanisms to meet the country's water infrastructure needs are woefully inadequate. As is true of America’s highway and airport infrastructure, there is a compelling need and rationale for a long-term, sustainable, and reliable source of federal funding for clean and safe water.

Evolve the SRF into a Comprehensive Financing Program
Every day, the agencies that comprise AMSA ensure that waste is removed from millions of American businesses and households and that the environment is clean and safe. For decades, AMSA has been a partner with federal, state and local stakeholders to make environmental progress through the improvement of municipal wastewater services. The importance of wastewater infrastructure was well understood in the late 1960s as the nation watched the quality of its waters decline precipitously and chose, in the 1972 Clean Water Act, to spend federal tax dollars to reverse this trend. A large number of publicly-owned treatment works (POTWs) have built their secondary and advanced treatment capabilities as a result of the EPA's Construction Grants Program. According to EPA's 2000 report entitled Progress in Water Quality, a total of $61.1 billion ($96.5 billion as constant 1995 dollars) was distributed to municipalities through construction grants from 1970 to 1995. State SRFs have received about $16 billion for the eleven-year period between 1988 and 1999. The wastewater treatment infrastructure funded with this grant and loan money is coming to the end of its useful life. And the SRF, as currently structured and funded, is becoming an out-dated financing mechanism.

As the broad national benefits of improved water services accrue, the number of people served by POTWs is rising, regulatory mandates are skyrocketing, ratepayers' bills are continually increasing, and infrastructure is aging. During this same time, available funding options have been narrowed —to loans only—while program eligibilities have been greatly expanded. Local communities need a full range of funding options from an improved EPA water infrastructure financing program. The current state revolving fund program needs to modernized. As we increasingly approach our water quality challenges on a watershed basis, our financing mechanisms must be consolidated, streamlined and updated to accommodate the most effective and efficient approaches to funding environmental protection.

Some public wastewater treatment agencies, like the Narragansett Bay Commission, have been able to take advantage of the funds to help offset the tremendous costs of upgrading, rehabilitating and replacing their wastewater treatment facilities. Other communities, however, simply cannot afford to pay back a loan. These communities should be afforded a full range of funding options — including grants — to meet their infrastructure needs. AMSA member agencies report different levels of success in dealing with their state-run loan programs.

The Needs Are Greater than the SRF
The needs of hundreds of communities across the nation are not being met by EPA's current wastewater loan program. We face financial challenges in the water infrastructure sector today that far exceed historical investment patterns. In addition, communities must plan to reach multiple environmental programmatic goals simultaneously. We're upgrading and replacing our plants, controlling sewer overflows, protecting wetlands, managing coastal areas, controlling stormwater, upgrading and replacing pipe, dealing with nonpoint sources and taking on the challenges represented by a whole host of other water quality duties. With the limited amount of funds available, we must make certain that our dollars are spent in the most efficient and effective manner possible. In short, Congress must modernize the SRF.

AMSA supports the recommendation contained in the recent WINow report by the Water Infrastructure Network that calls for the next generation of the SRF – state water and wastewater infrastructure financing institutions. In order to effectively manage all of the water quality programs and challenges previously mentioned, communities should not have to deal with more than one SRF. As you are aware, this is not a new idea. Already, 30 states have combined their wastewater and drinking water SRFs. By creating one centralized financing program states can eliminate duplication, streamline government, save money, and gain other efficiencies. By taking this common-sense approach, states will have more money to help fund their communities' needs. The expanded SRFs should have all the necessary financial tools needed by local governments to efficiently and effectively meet their needs. Federal EPA funds should be administered through flexible statewide water and wastewater financing institutions that would use appropriate combinations of grants, loans, loan subsidies and other types of financial assistance instruments.

The evolution to a more modern EPA water infrastructure financing program would also create an opportunity for federal and state government officials to streamline their funding programs. Areas of focus should include federal and/or state paperwork requirements associated with federal funding assistance, simplification of the application processes, reduction of oversight and reporting requirements where they no longer serve the federal or state interests, and flexibility in meeting requirements that do serve federal and state interests.

AMSA's agencies know that change does not come easily, nor is it without some cost. For years, publicly-owned treatment works have been changing the way they do business. By becoming more competitive, we have cut costs and become more effective and more efficient. As States take the next step in streamlining their operations, AMSA supports additional funding for the States to combine and modernize their water infrastructure financing programs.

Solving the Problem through a Fiscal Partnership
EPA's clean water SRF cannot satisfy our current financial and regulatory needs. Both our systems and our watersheds are at a critical juncture in their life cycles. A combination of reduced federal spending and increased federal mandates to meet treatment requirements is taking its toll. The collective aging of our pipes and systems further compounds our ability to meet the objectives of the Clean Water Act. Any additional deferral of the needed investments to repair and renew our systems will lead to greater increases in the costs associated with providing clean and safe water services, threats to public health, and environmental degradation.

The challenge of closing the water infrastructure financing gap can be met, but not without a substantial and concerted effort by the federal government to join with states, local communities and consumers in a fiscal partnership. To bridge the investment gap, the federal government should meet localities halfway by authorizing an average of $11.5 billion per year in capitalization funds over the next five years. States would receive the funds and, in turn, offer grants and loans to local agencies. AMSA further supports the following recommendations in the WINow report to reform this country's water and wastewater infrastructure financing program:

• Create a long-term, sustainable, and reliable source of federal funding for clean and safe water;
• Authorize capitalization of the next generation of state financing authorities to distribute funds in fiscally responsible and flexible ways, including grants, loans, loan subsidies, and credit assistance;
• Focus on critical "core" water and wastewater infrastructure needs and nonpoint source pollution;
• Streamline federal administration of the funding program and encourage continuous improvement in program administration at both the federal and state levels;
• Adequately finance strong state programs to implement the Clean Water Act and the Safe Drinking Water Act;
• Establish a new program for clean and safe water technology and management innovation to reduce infrastructure costs, prolong the life of America’s water and wastewater assets, and improve the productivity of utility enterprises; and
• Provide expanded, targeted technical assistance to communities most in need.

AMSA and other stakeholders recognize that no single solution addresses the full range of water and wastewater infrastructure funding needs. All levels of government and the private sector must share responsibility for effective, efficient, and fair solutions.

Conclusion
Significant progress has been made in financing the clean up of our nation’s waters over the past 30 years through the Construction Grants Program and the SRF. However, much remains to be done. The fundamental challenge for Congress today is to fund a comprehensive financing program for the 21st century that will allow state and local governments to meet their water and wastewater infrastructure needs without putting unnecessary stresses onto the nation's ratepayers.

The critical role of our nation’s water infrastructure has become clearer as a consequence of the tragic events of September 11. Obviously, dollars will have to be stretched even further now not only to ensure that utilities are protected from internal threats such as aging pipes, but also from external threats. AMSA has played a leading role in organizing a Wastewater Infrastructure Security Task Force and AMSA members have already earmarked significant funds towards efforts to ensure that these security challenges are met.

AMSA and the 40 organizations in the Water Infrastructure Network support the inclusion of water infrastructure in an economic stimulus package. We propose that $5 billion in grants should be made available to water and wastewater utilities for construction projects that are ready to go. This would serve both as an immediate job creation program and would also demonstrate a strong commitment to the long-term, sustainable and reliable source of funding of water and wastewater infrastructure upgrades and repair, and the environmental well-being and public health of our nation.

AMSA, and the Water Infrastructure Network, have supported a five year, $57 billion plan for new Congressional authorizations and funding to capitalize state-administered grant and loan programs for water and wastewater infrastructure. AMSA also understands the need to consider other potential long-term options beyond this five-year period, and looks forward to discussing this further with this Subcommittee and other members of Congress.

Chairman Graham, Senator Crapo and Members of the Committee, we look forward to working with you to develop the right solutions to fund our national water infrastructure needs. I will be happy to answer any questions.