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October 7, 1999


Good morning Mr. Chairman and Members of the Committee. I am Chuck Fox, Assistant Administrator for Water at the U.S. Environmental Protection Agency (EPA). I welcome this opportunity to discuss the Nation's investment in facilities to reduce water pollution and protect the environment and human health. I will also comment on several legislative proposals addressing clean water infrastructure.

Looking back over the past quarter century, we can all be proud of our stewardship of Federal water infrastructure resources and of the environmental benefits that this investment has provided. Today, the Nation's sewage treatment facilities remove about 7.5 million metric tons -- that is over 16 billion pounds -- of oxygen-depleting chemicals from wastewater each year.

We at EPA look forward to working with you and State and local governments in shepherding a range of important financial assistance programs and initiatives -- including the Clean Water State Revolving Funds (SRFs) -- into the twenty-first century.


A National Pollution Control Success Story

For much of the last century the Nation's basic wastewater facilities were constructed primarily through local initiative, and at local expense. Federal financial assistance for the construction of wastewater infrastructure began during the 1950's and 1960's and increased dramatically with the enactment of the 1972 Clean Water Act (CWA). Since 1972, EPA has contributed almost $70 billion to wastewater infrastructure programs through the CWA construction grants program, the Clean Water SRF program, and other financial assistance programs.

Two basic statistics document this success [see Chart I]. First, the number of people served by secondary or advanced wastewater treatment doubled between 1972, when the CWA was first authorized, and 1996, rising from about 85 million to 173 million. Second, during that same time, pollutant loads from municipal treatment facilities have fallen about 40%. This environmental improvement is significant, especially in view of the 30% increase in population over the same period.

Our investment in the Nation's water-quality infrastructure has a positive influence on society -- economically, socially, and environmentally. The quality-of-life improvements made possible by our investment in wastewater infrastructure are enormous. Besides the obvious health benefits of eliminating the discharge of raw sewage into water bodies, Federal infrastructure programs contribute to the protection of ecosystems and watersheds, and improve habitats for wildlife, birds, and fish.

The economic and social benefits of water infrastructure projects can be seen in cities such as Boston, Cleveland, St. Petersburg, and Baltimore. In each of these communities, cleaning up the water has resulted in more aesthetically pleasing waterfronts, as well as economically vibrant, water-focused urban environments. Improving a community's water infrastructure can lead to increased tourism, as well as greater attractiveness to industry and other potential investors.

EPA estimates that at the national level every billion dollars invested in these waste water infrastructure projects generates between 16,000 to 22,000 jobs in construction and related activities. The 1999 investment from the Clean Water SRF of close to $3 billion in new loans will thus result in between 48,000 and 66,000 jobs nationally.

In short, this dramatic improvement in sewage treatment over the past quarter century is a national success story and a compelling example of the environmental and economic good that can come from cooperative efforts of Federal, State, and local governments.

Clean Water State Revolving Loan Fund -- A Sound Concept

Over ten years ago, Congress amended the Clean Water Act to create the Clean Water SRF program to replace the wastewater construction grants program. The SRF program was designed to provide a national financial resource for clean water infrastructure to help implement the Clean Water Act that would be managed by States and would provide funding in "perpetuity." These important goals have been met.

Under the SRF program, EPA makes grants to States to capitalize their "State revolving loan funds." States provide a 20% match to the Federal capitalization payment. Local governments get loans for up to 100% of the project costs at below market rates. After completion of the project, the community repays the loan and these loan repayments are used to make new loans on a perpetual basis.

Because of the revolving nature of the funds, funds invested in the SRFs provide about four times the purchasing power over twenty years compared to what would occur if the funds were distributed as grants [see Chart II/A].

In addition, low interest SRF loans provide local communities with dramatic savings compared to loans with higher, market interest rates. An SRF loan at the interest rate of 3% has the same value to a community as a grant for 20% of project costs because of interest savings over 20 years (assuming an alternative market rate of 5.6%). If the State chooses to offer a zero interest loan, the loan would be equivalent to a grant for 40% of project costs [see Chart II/B].

More than $16 billion in Federal capitalization grant funds have been made available through FY 1999. With the addition of the State match, bond proceeds, and loan repayments, the total assets of the SRFs (i.e. funds in the "bank") were more than $30 billion as of June 30, 1999. We expect the States to make about $3 billion in loans in 1999, for a cumulative loan total of $26 billion (i.e. total loans made by the "bank") [see Chart III]. Since 1988, States have made over 8,000 individual loans.

National Clean Water Infrastructure Needs

EPA works with States to develop a "Clean Water Needs Survey" to identify needed clean water infrastructure investments in each State eligible for SRF funding. Besides providing a gauge of current and future needs, the Needs Surveys provide a common reference point for all parties in planning for capital spending and in making other management decisions. EPA's latest Needs Survey was completed in 1996 and the next Needs Survey is scheduled to be released in February 2002.

The 1996 survey estimated wastewater needs of $128 billion, including $26.5 billion for secondary treatment projects, $17.5 billion for advanced treatment, and $73.4 billion for various types of sewage conveyance projects, including collectors, interceptors, combined sewers, and storm water. Because some of these capital costs are documented by 10-year project plans and specifications, they generally reflect needs for facilities for 10 years into the future. Most facilities are designed for a 20-year useful life.

The 1996 Needs Survey estimated $10.3 billion in the replacement / rehabilitation and inflow infiltration categories. EPA is working with States and others to frame a comprehensive program to address sanitary sewer overflows (SSOs) and we are undertaking an effort to model SSO costs. EPA's preliminary model considers costs incurred in addressing SSOs by sixty communities that have completed planning and design work.

Our preliminary estimate for SSO costs is approximately $81.9 billion. Although we believe that the Needs Survey substantially underestimates SSO costs, we are not sure of the magnitude of the overlap of the two estimates.

Because the next Needs Survey is more than a year away and the program is evolving in areas such as SSOs, we have commenced an effort to refine needs estimates and to approximate the "funding gap" for wastewater infrastructure.

We are aware of other estimates concerning the costs of wastewater. For example, the recent estimate for "The Cost of Clean" issued by the Association of Metropolitan Sewerage Agencies and the Water Environment Federation is about $330 billion for wastewater costs. In basic terms, these cost assessments tend to differ primarily because the basis for costs differ. For example, EPA requires that costs included in the estimates be established by planning or design documentation. "The Cost of Clean" starts with the EPA needs estimates and then adds a model estimate to account for replacement investments that are not captured in the Needs Survey as a documented need.

We estimate that spending for sewage treatment in general was around $11 billion annually as of 1994. This estimate includes wastewater capital infrastructure investment from all sources, including: local spending; State spending, including the SRF programs; and, other Federal investments (e.g. EPA assistance to needy communities, the Rural Utility Service, the Community Development Block Grant program). Although more recent data on total spending is not readily available, there is some indication that the spending patterns for wastewater have been, at best flat, and some information suggest that annual capital spending may even be declining. Finally, we know based on recent work by the Congressional Budget Office, that O&M spending has been increasing at a consistent level of more than 5 percent annually. In 1994, O&M spending represented 63% of the total spending on wastewater. This is a significant change from the 70's and 80's where the bulk of the sending was for capital investments.

Clean Water SRF Investments

Although the authorization for SRF funding in the CWA expired in 1994, the President's FY 2000 budget proposes to maintain Federal capitalization of SRFs into the next century. Historically, the Administration's goal has been to capitalize the SRF programs so that they can provide at least $2 billion in financial assistance annually over the next several decades [see Chart IV]. To reach this capitalization goal, the Administration proposes federal capitalization grants of $800 million in each of fiscal years 2000 to 2005. Because of the revolving nature of the SRFs, this annual capitalization amount will allow the Clean Water SRF programs to provide about $3 billion in total annual assistance available over the next few years.

The proposed $800 million annual investment is consistent with the Administration's Deficit Reduction Plan. Additionally, the Administration's $2 billion goal is consistent with historical levels of Federal assistance for wastewater treatment. It will provide a substantial and sustained contribution to meeting the overall annual need. At the same time, our understanding of wastewater needs is evolving, and the Administration would like to encourage a constructive dialogue on the appropriate and affordable long-term funding level for the SRF program.


Mr. Chairman, you asked that I comment on legislation introduced in the House of Representatives to reauthorize the Clean Water SRF program (H.R. 2720). I am pleased to say that many of the provisions of H.R. 2720 are generally consistent with recommendations that the Administration has made in the past, including President Clinton's 1994 "Clean Water Initiative."

For example, the Administration generally supports expanding the range of financial assistance mechanisms available to small and disadvantaged communities, and applying Davis Bacon requirements to the Clean Water SRFs. Furthermore, given the growing evidence that unplanned development or "sprawl" can contribute to significant water quality and environmental problems and reduce the livability of communities, we support use of section 211 of the CWA to minimize the use of SRF loans for new sewer collection systems.

EPA stands ready to provide technical assistance in addressing minor issues related to drafting of these provisions. For example, proposed language making a project eligible for SRF assistance when water quality is a "principal benefit" of the project may be overly broad, and several newly created eligibilities should be more narrowly defined. Conversely, the language constraining loan eligibility to projects affecting "navigable waters" could be limiting.

In addition, we would be happy to work with the Committee to address a number of other needed adjustments or clarifications to the SRF program. For example, in reauthorizing the Safe Drinking Water Act (SDWA), Congress provided Governors with discretion to use specified amounts of SRF funds to support key State drinking water programs and projects. Our experience with this provision of the SDWA has been positive, and a comparable provision should be considered for the Clean Water SRF program.

The Administration also supports an extension of section 1452 of the Safe Drinking Water Act, which currently allows transfers of funds between Clean Water SRFs and Drinking Water SRFs through September 30, 2001. This financial tool, coupled with the cross-collateralization provisions, has allowed the new Drinking Water SRFs to utilize the financial strength of the proven Clean Water SRFs and obtain the highest bond ratings with credit rating agencies.

Furthermore, the President's FY2000 Budget included a proposal to amend the CWA to give Governors the discretion to use up to 20% of their annual Clean Water SRF capitalization funds to make grants, rather than loans, for projects to implement plans developed under section 319 to reduce pollution from nonpoint sources of the CWA and to under CWA section 320 to protect and restore estuaries. Many States have a critical need for these nonpoint and estuary projects and have not been able to finance this work with loans alone.

Finally, Mr. Chairman, I note that the proposed authorization level for the SRF in this proposed legislation is $3 billion in fiscal years 2000-2004. As I indicated earlier, the Administration would like to encourage a constructive dialogue on the appropriate and affordable long-term funding level for the SRF program. Funding at the proposed level clearly would make a large contribution to the significant needs for wastewater treatment. I am sure that this proposed authorization represents the aspirations of the bill sponsors and will be applauded by witnesses later in the hearing. At the same time, it is not clear how these funds can be appropriated in the next several fiscal years in light of the deficit reduction agreement and the constraints faced by appropriations subcommittees.


The Committee asked that I comment on two additional bills:

Alternative Water Source Grants

S. 968 would authorize the EPA to make grants to state agencies and other water supply authorities for projects to develop new sources of water for municipal, industrial, and agricultural uses in areas with critical water supply needs.

Current sources of drinking water are increasingly threatened by regional population growth, economic development, and urban sprawl, and the costs of assuring the quality of these existing sources is substantial. EPA's 1997 Drinking Water Needs Survey estimated that drinking water suppliers will need about $138 billion to install, upgrade, or replace infrastructure necessary to continue to ensure the provision of safe drinking water to their customers.

In the 1996 amendments to the Safe Drinking Water Act, Congress and the President created the Drinking Water State Revolving Fund Program to address current public health threats and drinking water quality needs. Eligible projects include expenditures: to improve compliance with drinking water standards; to upgrade or replace existing drinking water distribution or storage facilities; for planning and design; and, for system consolidation. States are prohibited from providing loans to finance growth, dams, and most reservoirs and water rights. States determine which projects are funded by using a priority system that ranks projects primarily based on three criteria: the risk to human health, the necessity of the project to ensure compliance with the SDWA, and the economic need of the system.

EPA's primary drinking water mission is to protect public health. The limited federal resources available through EPA to address drinking water infrastructure needs are best used by the existing State Drinking Water SRFs to protect and restore current sources of drinking water. Because enactment of the proposed legislation would likely divert scarce resources from public health related projects, the Administration opposes this legislation.

Combined Sewer Overflow Policy and Grants -- Draft Bill

The draft bill related to CSOs that the Committee has asked me to comment on would amend the CWA to provide that requirements for control of CSOs be consistent with the CSO Policy and would authorize grants for CSO projects.

Since the passage of the original CWA in 1972, EPA and States have worked effectively together to address the environmental challenge presented by large point source dischargers, such as sewage treatment plants and industrial facilities. More recently, attention has focused on discharges of polluted runoff in urban areas such as discharges of contaminated storm water, overflows from sanitary sewers (SSOs), and overflows from combined sewers (CSOs). Collectively, these wet weather sources pose serious threats to public health and the health of our Nation's waters.

In 1994, EPA took a major step forward in efforts to address these wet weather problems by publishing the CSO Policy. This Policy was the result of a cooperative process that included Federal, State, and local governments, environmental organizations, and other interested parties. It represents a consensus among all interested parties on how to best address the CSO problem.

The CSO Policy calls on communities to promptly implement nine minimum controls over CSOs, including activities such as: proper operation and maintenance; maximization of flow to the publicly owned treatment works for treatment; prohibition of CSOs during dry weather, and, public notification of CSO occurrences.

Communities with CSOs are also to develop a long-term CSO control plan that provides for attainment of water quality standards. Long-term plans typically include characterization, monitoring, and modeling of the combined sewer system, as well as public participation and cost/performance considerations.

The flexibility in the CSO Policy enables States and communities to manage their CSOs in the manner that best suits their unique circumstances. This flexibility is evident in the different approaches that States and communities are taking to control CSO discharges, including separating combined sewer systems, implementing the nine minimum measures and developing and implementing long-term CSO control plans in their regulatory framework, and/or reviewing the designated uses at the impacted water bodies.

Communities are making good progress in implementing the CSO Policy. Today, 83% of all combined sewer systems are either implementing the nine minimum controls or are under an enforceable requirement to put the measures in place. In addition, 74% of combined sewer systems have their long-term controls in place, are required to put them in place, or are under an enforceable requirement to develop long-term CSO control plans.

The CSO Policy is working -- it is the best road map to achieve our goal of protecting public health and the environment in areas impacted by CSO discharges. The Administration is not opposed to Congress, in amendments to the CWA, endorsing the CSO Policy and its principles. However, there are some serious problems with the bill language, and the Administration stands ready to work with Congress on an appropriate legislative approach.

The legislation also includes authority for a new Federal grant program for CSO project implementation with a total authorization of $1.5 billion. The Administration is opposed to creating a new grant program to fund implementation of CSO or other wet weather projects. As I noted earlier, the SRF program is a solid and proven financial tool that is operated by the States and available to address these wet weather needs. Should the Congress determine that additional Federal funds are needed for wet weather projects, these additional funds would be better used to provide additional capitalization for the SRFs in each State.

Given these concerns, the Administration is opposed to the draft bill. Finally, I want to note, Mr. Chairman, that the Administration is strongly opposed to several of the provisions in the related legislation introduced in the House of Representatives. These bills would slow or undo the progress we now are making toward reducing wet weather pollution. Should those provisions be added to the pending bill at a later stage in the legislative process, the Administration would strongly oppose enactment of the amended bill.


Thank you, Mr. Chairman and members of the Subcommittee for this opportunity to testify on the Clean Water SRFs. EPA stands ready to provide additional technical assistance on issues related to these bills. And, we look forward to working with you to both improve the operations of the SRFs and to define the appropriate level of long-term capitalization of this valuable resource.

I will be happy to answer any questions.

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