James Laughlin, Editor
Federal support for water-system investment can have unintended - and often negative - consequences, according to a recent Congressional Budget Office report on water infrastructure funding needs.
An analysis of the federal wastewater construction grants program under the Clean Water Act concluded that it reduced other contributions to wastewater capital spending by 67 cents on the dollar, CBO researchers found. The researchers concluded that federal support does not necessarily increase investment in water infrastructure and may prompt cuts in state and local spending, or its diversion to other uses.
Federal funding can also cause construction costs to spiral upward, and lead to poor management decisions regarding preventive maintenance, construction methods, treatment technologies, pipe materials, and excess capacity, authors of the CBO report concluded. The resulting losses can be significant, particularly if subsidies are large.
A statistical analysis done for a 1985 CBO study of the wastewater construction grants program indicated that the original federal cost share of 75 percent led to higher costs for plant construction. In particular, the study projected that a cut in the federal share of investment funding from 75 percent to 55 percent (which occurred later under the program) would reduce average capital costs by 30 percent.
That assumption was based on the premise that system managers would exercise more care in choosing treatment technologies, reserve capacity and in monitoring the pace of construction.
According to CBO, one way to reduce the distorting effects of federal subsidies might be to target increased aid to fewer systems - those judged most deserving, whether because of high costs associated with declining customer bases, federal regulations, or simply high levels of anticipated investment in general.
CBO researchers warned that it might be difficult to define the target group in a way that does not reward systems for poor management and past underinvestment. Targeting could even undermine cost-effective action if it encouraged system managers to let infrastructure deteriorate in hopes of qualifying for aid in the future, they said.
CBO suggested that federal grant, loan subsidy, and credit assistance programs should be designed to require a significant reliance on private funds, which could help keep costs down by subjecting water systems to more market discipline from lenders and ratepayers.
Another approach to help system and state authorities make cost-effective choices would be to allow them more flexibility in using the SRFs, according to CBO. That strategy might include eliminating floors and ceilings on funding for eligible activities in the drinking water program, easing restrictions on transferring federal money between drinking water and wastewater revolving funds, and broadening the funds' range of uses to address issues such as nonpoint source pollution.
As an alternative to direct funding, the federal government could also use tax preferences to aid medium and larger water systems. While public water systems and the interest paid on municipal bonds are generally exempt from federal taxes, Congress could relax the requirement that issuers rebate arbitrage profits (earned by investing the proceeds from a bond at a rate above the bond's own yield) to the Treasury and eliminate the partial taxation of interest earned on municipal bonds held by corporations that pay the alternative minimum tax, CBO said.
You can read the full CBO Letter on the Future Investment in Drinking Water and Wastewater Infrastructure on the Internet at www.cbo.gov.
