Posted on March 09, 2011 12:53 PM
Water and Money -- How the State Revolving Loan Funds Can Shape Water and Land Use Policy
Decisions about where to upgrade or expand water infrastructure have wider impacts beyond the obvious need for supplying clean water. Water use is also highly reflective of land use considerations and effective utility operations.
State Revolving Loan Funds (SRF) provide temporary federal funding to water utilities for the construction, expansion, and upgrade of facilities and transmissions systems. Illinois, like other states, has separate SRFs for drinking water and clean water. The Illinois Public Water Supply Loan Program (PWSLP) provides financing for infrastructure directly related to drinking water supplies, while the goal of the Illinois Water Pollution Control Loan Program (WPCLP) is to protect, maintain, and improve water quality, with emphasis on funding wastewater treatment systems. Funds for both programs come from the U.S. Environmental Protection Agency (U.S. EPA) based on a provision of the Clean Water Act, which established loan programs for states to promote better water quality.
While the Illinois SRFs focus on water infrastructure on the basis of specific evaluation criteria (Tables 1 and 2), the program can be used more comprehensively to guide growth and utility operations towards more sustainable water use. The current Illinois Environmental Protection Agency (IEPA) program places great emphasis on correction of violations – a reactive approach in which utilities that demonstrate the most severe operational conditions will likely rank higher than others and therefore may be in a better position to receive funding. The IEPA recently completed a review of the state’sSRF process to incorporate sustainability factors in their evaluation criteria and has enlisted the expertise of CMAP and other organizations to serve on a statewide advisory committee. While the recently-released draft recommendations place an increased emphasis on the use of best management practices for better water quality, they could be strengthened by highlighting the link between water quality, land use policies and the importance of proper utility operation. Other states have used their SRF programs to influence better water and land use policy, and there is an opportunity for the IEPA’s revisions to work toward a similar end.
Recent research commissioned by CMAP for Water 2050, the northeastern Illinois regional water supply/demand plan, supports the need for more sustainable water use in an 11-county planning area. The population of these counties – the CMAP region of Cook, DuPage, Kane, Kendall, Lake, McHenry, and Will, along with Boone, DeKalb, Grundy, and Kankakee counties -- is estimated to increase by 38 percent, with corresponding water demand increasing from 36 percent to 64 percent if no actions are taken for water use demand management. Coupled with significant budgetary requirements for repair and maintenance of water infrastructure, urgent action is needed from local, regional, and state governments to plan for efficiencies and optimization of existing water resources and systems.
Planning for Sustainable Water Use
SRFs can be influential in guiding growth toward more sustainable water use. Some states have found creative ways to use their SRFs to achieve better land use decisions that conserve natural and water supply resources while fulfilling water utility operational requirements. New York is among the states that have taken advanced steps in using the SRF programs to influence local and regional growth. Initially, New York’s SRF programs came under scrutiny as a response to a $36.2 billion cost estimate for repairing, replacing and updating New York’s wastewater infrastructure over the next 20 years -- reductions in federal funding to support such infrastructure made this estimate all the more alarming. In 2008, then-Governor David Paterson formed the Clean Water Collaborative to raise awareness on water infrastructure needs and examine how SRF programs could be modified to promote energy efficiency and smart growth. The advisory group provided the state with many recommendations -- most notably, the promotion of Smart Growth principles through the SRF program. Recommendations included the acquisition of open space for water quality protection; the provision of guidance on the links between community development, land use patterns and water quality; and the establishment of funding to repair and replace existing infrastructure rather than build new systems. The guidelines emphasized the support for innovative approaches such as green infrastructure to replace existing infrastructure, as well as the coordination of land use planning and water quality. Communities that demonstrated their adoption of such approaches were to receive higher consideration for funding and subsidies through the state’s SRFs.
The Clean Water Collaborative also addressed the importance of proper asset management -- the act of managing infrastructure capital assets to minimize the total cost of owning and operating facilities while maintaining a desired level of service. Proper asset management improves operational, environmental, and financial performance, and may also include increased efficiencies in demand for supply sources, as well as optimal pricing to recover full cost of service. Recommendations to this effect included making asset management planning, and the inclusion of smart growth in asset management planning, requirements to receive funding from the SRF programs. Municipalities that failed to maintain their infrastructure were to receive less-attractive funding, such as higher interest rates.
Lessons from the New York process should inform the IEPA in its review process for revisions to the project ranking scoring system in SRF programs. In Water 2050, CMAP recommends that program funds be used for brownfield remediation, purchase of conservation easements, and land acquisition for the protection of natural and water supply resources. Furthermore, communities that have conservation policies and programs and that show compliance with existing comprehensive plans in their loan applications may receive lower or zero interest rates. Communities that do not have comprehensive plans should be eligible for technical assistance funds to incorporate smart growth principles in plans.
In addition to land use practices, pricing and demand management are important indicators for IEPA to consider for project evaluation criteria. Utilities that are seeking to improve performance through federal and state funding should also develop metrics to demonstrate commitment to full cost recovery and water use conservation, as proposed in Tables 3 and 4. The “Operating Ratio” shows the ability of operating revenues to cover operating expenses, while the “Debt Service Coverage Ratio” is a measure for cash available to a utility to cover debt service. The “Current Annual Real Losses” from Table 3 refers to the volume of water derived from an audit. By contrast, the “Unavoidable Annual Real Losses” represents the theoretical low-limit of leakage that would exist in a water distribution system. A guidance report that further details these metrics was released by the American Water Works Association on January 2010.
By using these metrics, utilities can ensure their operational independence, long-term utility, and resource sustainability. Furthermore, consistency with comprehensive land use plans and population projections are critical standards for utilities that emphasize the links between land use and water resources. These recommendations from CMAP, along with others from organizations such as the American Council of Engineering Companies, the Center for Neighborhood Technology, the Illinois Association of Wastewater Agencies, the Metropolitan Planning Council, Openlands, and others who were part of the statewide advisory committee, aimed to offer guidance to IEPA during the SRF review process, which concluded on December 2010. The agency plans to amend rules based on their draft recommendations to be effective for federal fiscal year 2013.
In Summary . . .
IEPA is taking the right approach in reviewing and potentially changing the SRF project ranking scoring system to be more sustainable. While the current draft recommendations from IEPA do not specifically address land use policy, some degree of success may be achieved by providing training, incentives, and demonstrations for utilities to undertake proper asset management using the above metrics. In doing so, IEPA will play an essential role in guiding Illinois towards improved management of water infrastructure and independence from the increasing reliance on federal funds to support an aging infrastructure and inefficient operations.