Order Code RL31116
CRS Report for Congress
Received through the CRS Web
Water Infrastructure Needs and Investment:
Review and Analysis of Key Issues
Updated May 5, 2005
Claudia Copeland
Specialist in Resources and Environmental Policy
Resources, Science, and Industry Division
Mary Tiemann
Specialist in Environmental Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Water Infrastructure Needs and Investment:
Review and Analysis of Key Issues
Summary
Policymakers are giving increased attention to issues associated with financing
and investing in the nation’s drinking water and wastewater systems, which take in
water, treat it, and distribute it to households and other customers, and later collect,
treat, and discharge water after use. The renewed attention is due to a combination
of factors. These include financial impacts on communities of meeting existing and
anticipated regulatory requirements, the need to repair and replace existing
infrastructure, and concerns about paying for security-related projects.
The federal government has a lengthy history of involvement with wastewater
and drinking water systems, with the Environmental Protection Agency (EPA)
having the most significant role, both in terms of regulation and funding. The U.S.
Department of Agriculture also plays an important role in rural communities through
its water and wastewater loan and grant programs. These programs have been
popular; however, states, local communities, and others have noted various program
gaps and limitations that may be diminishing their potential effectiveness. They also
point to the emergence of new infrastructure needs and issues.
A number of interest groups and coalitions have issued reports on infrastructure
funding needs and related policy issues, as have EPA and the Congressional Budget
Office (CBO). They present a range of estimates and scenarios of future investment
costs and gaps between current spending and future costs. EPA and CBO, in
particular, caution that projections of future costs are highly uncertain, and that
funding gaps are not inevitable. Increased investment, sought by many stakeholders,
is one way to shrink the spending gaps, but so, too, are other strategies such as asset
management, more efficient pricing, and better technology.
Congressional interest in these issues has grown for some time and continues
in the 109th Congress, partly in response to urgings of stakeholder groups. In both the
107th and 108th Congresses, House and Senate committees acted on comprehensive
legislation to reauthorize and modify infrastructure financing programs in the Clean
Water Act and Safe Drinking Water Act, but no bills were enacted. The Bush
Administration has addressed water infrastructure in a number of general ways, but
has not offered legislative proposals of its own. EPA’s principal initiative has been
to support strategies intended to ensure that infrastructure investment needs are met
in an efficient, timely, and equitable manner.

This report identifies a number of issues that have received attention in
connection with water infrastructure investment. It begins with a review of federal
involvement, describes the debate about needs, and then examines key issues,
including what is the nature of the problems to be solved; who will pay, and what is
the federal role; and questions about mechanisms for delivering federal support,
including state-by-state allotment of federal funds. It will be updated as warranted.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background: History of Federal Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Wastewater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Drinking Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USDA Assistance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Context for the Water Infrastructure Debate: Investment Needs . . . . . . . . . . . . . . 9
EPA Needs Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CBO’s Report on Future Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EPA’s Gap Analysis Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Priorities: What Are the Problems to Be Solved? . . . . . . . . . . . . . . . . . . . . 15
Infrastructure Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Funding Other Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Federal Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Delivering Federal Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administrative Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Type of Assistance Provided: Grants and Loans . . . . . . . . . . . . . 23
Federal Funds for Private Infrastructure Systems . . . . . . . . . . . . . . . . 24
Other Federal Tax Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Federal Cross-Cutting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Set-Asides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Allotment of Funds and Congressional Earmarks . . . . . . . . . . . . . . . . 27
Research on New Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Congressional and Administration Activity . . . . . . . . . . . . . . . . . . . . . . . . . 30
Conclusions: Paying for the Federal Share . . . . . . . . . . . . . . . . . . . . . . . . . 33
List of Tables
Table 1. Estimated Costs for Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . 14

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Water Infrastructure Needs and Investment:
Review and Analysis of Key Issues
Introduction
Drinking water and wastewater treatment systems treat and safeguard the
nation’s water resources. Drinking water utilities have the task of supplying safe
potable water to customers in both the proper quantity and quality. Wastewater
utilities operate facilities that clean the flow of used water from a community. The
federal government has had significant involvement with these systems for many
years, both through setting standards to protect public health and the environment and
through funding to assist them in meeting standards. While funding of water
infrastructure programs has been addressed annually through the congressional
appropriations process, authorizing legislation affecting policy and program issues
was last enacted in 1996 (for drinking water infrastructure) and 1987 (for wastewater
infrastructure).1 However, water infrastructure issues have begun to receive
increased attention by policymakers and legislators. The renewed attention is due to
a combination of several factors.
! Meeting Regulatory Requirements. Financial impacts of meeting
regulatory requirements — some new, some long-standing — are a
continuing issue for many communities. In the case of drinking
water systems, the most pressing rules are new, either recently issued
or pending, as the result of standard-setting by the Environmental
Protection Agency (EPA) to implement the Safe Drinking Water Act
Amendments of 1996. (Many of these rules were initiated under the
1986 Amendments.) These rules impose new or stricter drinking
water limits on numerous contaminants, including arsenic,
microbials and disinfection byproducts, radioactive contaminants,
and radon, among others. For wastewater systems, principal
regulatory requirements mandated by the Clean Water Act have not
changed since 1972, and the majority of communities have achieved
or are in the process of achieving compliance. The newer issue for
wastewater systems is the cost of controls and practices to manage
what are termed wet weather pollution problems, such as urban
stormwater runoff and overflows from municipal sewers. These
requirements are old in the sense that most wastewater utilities have
1 This report focuses on drinking water systems that take in water, treat it, monitor it, and
distribute it to households and other customers, and wastewater systems that collect, treat,
and typically discharge water after use. It does not address infrastructure related to water
supply systems that generally are part of larger multi-purpose projects for irrigation, flood
control, power supply and recreation that typically are built or assisted by the Bureau of
Reclamation and U.S. Army Corps of Engineers.

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CRS-2
not addressed long-standing wet weather problems, but they also are
new because in many communities, specific measures are only now
being identified.
! Financing Infrastructure Repair or Replacement. A more recent
focus by stakeholders is on the need to repair and replace
infrastructure that has been in place for decades and will soon fail,
many believe. According to the American Water Works Association
(AWWA), “We stand at the dawn of the replacement era ...
replacement needs are large and on the way. There will be a
growing conflict between the need to replace worn-out infrastructure
and the need to invest in compliance with new regulatory
standards.”2 Over the long term, these stakeholders say, a higher
level of investment than is occurring today is required. For both
wastewater and drinking water systems, a key concern is that EPA’s
funding programs, the largest sources of federal assistance, do not,
in the main, support repair and replacement; their focus is upgrades
and new construction needed to achieve wastewater and drinking
water standards.
! Security. Beyond the traditional infrastructure needs related to
regulatory compliance and system repair and expansion, the terrorist
attacks of 2001 generated new investment needs for drinking water
and wastewater systems. The national costs of addressing water and
wastewater security needs have not been quantified; however, the
AWWA has estimated that municipal water systems will have to
spend more than $1.6 billion just to ensure control of access to
critical water system assets.3 This estimate does not include the
capital costs of upgrades to address vulnerabilities that water system
managers have identified in vulnerability assessments, or the costs
facing wastewater systems and smaller drinking water systems.
Although EPA has identified a range of security measures that are
eligible for funding through the clean water and drinking water state
revolving fund programs, competition already is severe for these
funds, which are primarily used for projects needed to meet
regulatory requirements.
! Problems That Do Not Fit Existing Solutions. For some, an
interest in water infrastructure legislation derives from concern that
traditional federal programs and financing approaches do not fit well
with some current types of needs.4 Points at issue vary, but the
2 American Water Works Association. Dawn of the Replacement Era, Reinvesting in
Drinking Water Infrastructure. May 2001. p. 5. (Hereafter, AWWA Report.)
3 American Water Works Association. Protecting Our Water: Drinking Water Security in
American After 9/11. Executive summary. 2003.
4 For background, see CRS Report RL30478, Federally Supported Water Supply and
Wastewater Treatment Programs.

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CRS-3
common thread is that certain needs are not being well met by
programmatic solutions that now exist. In some cases (metropolitan
drinking water systems, for example), there is a perception that
EPA’s programs are more geared to aiding small systems than large
ones. In other cases, the concern is how to fund types of projects
that include mixed elements — e.g., developing new community
water supplies and treating that water, especially in rural areas —
that do not meet traditional program definitions, or are seemingly
spread across jurisdictions of multiple federal agencies. Still others
believe that expanding program eligibility to include water
conservation projects could reduce overall needs for capital
investment. Another concern arises in small, dispersed communities
where on-site treatment systems may be preferable to centralized
facilities; however on-site treatment generally is not eligible for
federal aid. At issue for Congress is whether to modify existing
programs to address such needs, or to address them in legislation
individually and case-by-case.
! Recent Legislative Models and Activity. Legislative approaches
for other types of infrastructure have suggested a possible model for
water infrastructure funding. The Transportation Equity Act for the
21st Century (TEA-21, P.L. 105-178) authorized federal highway,
highway safety, and mass transit aid programs through FY2003 (the
109th Congress is considering legislation to reauthorize TEA-21
through FY2009, H.R. 3 and S. 732) and established new budgetary
treatment for core programs. Likewise, the Aviation and Investment
Reform Act for the 21st Century (AIR21, P.L. 106-181) authorized
programs which provide grants to airports for capital improvements.
It was extended in the Century of Aviation Reauthorization Act,
called Vision 100 (P.L. 108-176), in 2004. Supporters of the
highway and aviation laws have sought to assure funding at fully
authorized levels and to ensure to a greater degree than in the past
that trust fund revenues from fees and taxes which support these
programs would be fully spent on authorized activities. Some
proponents of water infrastructure spending, concerned about a gap
between needs and available funds, believe that a Water21-type
initiative based on a federal water trust fund would conceptually be
a logical follow-on to TEA-21 and AIR21. According to that view,
passage of those measures could give momentum to enacting new
budget authority for water infrastructure spending, as well. Still,
differences are apparent, especially the fact that, unlike for surface
transportation and aviation, there is no comparable dedicated trust
fund for water infrastructure. While TEA-21 and AIR21 may offer
momentum, they also may be imperfect models for water, unless
dedicated revenue sources for a water trust fund can be identified.
! Changed Dynamics at the Federal Level about “Who Should
and Can Pay.” For many years, a focus on federal deficit reduction
constrained the federal government from making major new
investments in water infrastructure or other new programs.

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However, at the beginning of 2001, a more favorable projection of
the budgetary situation (especially a 10-year surplus projected by the
Congressional Budget Office (CBO) in January 2001 to be $5.6
trillion) encouraged a variety of interests to advocate increasing the
federal commitment to water infrastructure. Still, many
acknowledged that, even in the best of budgetary circumstances,
there would be competition among different interests, including
Medicare and Social Security spending, education, national defense,
and other priorities. CBO’s estimate of the 10-year surplus declined
later in 2001 to $3.4 trillion, as the economy appeared to be slowing
and Congress enacted a $1.35 trillion tax cut law (P.L. 107-16).
Following the terrorist attacks of September 11, which placed new
demands — including fiscal — on the nation’s resources, the overall
economic and budgetary outlook changed dramatically. Compared
with forecasts of surpluses before September 11, the nation’s
heightened priorities of defense and homeland security contributed
to changing the budgetary forecast to one of large federal deficits.
In March 2005, CBO estimated that under current policies, the
FY2005 deficit would be $394 billion, the FY2006 deficit would be
$370 billion, and the cumulative deficit for 2006-2015 would be
$980 billion. CBO estimated that the President’s FY2006 budget
proposals would increase the total deficit over baseline projections
for the same 10-year period to $2.6 trillion.5 In such a fiscal
environment, proponents of greater federal involvement in water
infrastructure face enormous challenges to make the case for large
expenditures to policymakers.
This report identifies a number of issues receiving attention in connection with
water infrastructure. It begins with a brief review of federal involvement, describes
the debate about funding needs, and then examines key issues, including what is the
nature of the problems to be solved; who will pay, and what is the federal role; and
questions about mechanisms for delivering federal support, including state-by-state
allotment.
Background: History of Federal Involvement
The federal government has a lengthy history of involvement with wastewater
and drinking water systems. The history of financial assistance is longer for
wastewater than for drinking water, however. EPA has the most significant role,
both in terms of regulation and funding.
Wastewater
The Water Pollution Control Act of 1948 (P.L. 80-845) was the first
comprehensive statement of federal interest in clean water programs. While it
5 U.S. Congressional Budget Office. Analysis of the President’s Budgetary Proposals for
Fiscal Year 2006. March 2005. 62 p.

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contained no federally required goals, limits, or even guidelines, it started the trickle
of federal aid to municipal wastewater treatment authorities that grew in subsequent
years. It established a grant program to assist localities with planning and design
work, and authorized loans for treatment plant construction, capped at $250,000 or
one-third of construction costs, whichever was less. With each successive statute in
the 1950s and 1960s, federal assistance to municipal treatment agencies increased.
A construction grant program replaced the loan program; the amount of authorized
funding went up; the percentage of total costs covered by federal funds was raised;
and the types of project costs deemed grant-eligible were expanded.
In the Federal Water Pollution Control Act Amendments of 1972 (P.L. 92-500,
popularly known as the Clean Water Act, 33 U.S.C. 1251 et seq.), Congress totally
revised the existing federal clean water law, including with regard to wastewater
systems. At the time, there was widespread recognition of water quality problems
nationwide and frustration over the slow pace of industrial and municipal cleanup
efforts under existing programs. In the 1972 law, Congress strengthened the federal
role in clean water and established national standards for treatment, mandating that
all publicly owned treatment works achieve a minimum of secondary treatment
(defined in regulations by EPA as removing 85% of incoming wastes), or more
stringent treatment where necessary to meet local water quality standards, and set a
July 1, 1977, deadline for meeting secondary treatment. A number of new conditions
were attached to projects constructed with grants. In exchange, federal funds
increased dramatically. The federal share was raised from 55% to 75%, and annual
authorizations were $5 billion in FY1973, $6 billion in FY1974, and $7 billion in
FY1975.
The grant program was reauthorized through FY1982; annual authorizations
were $5 billion for each of the last four years covered by that act (P.L. 95-217).
Some restrictions were imposed, including requirements that states set aside a portion
of funds for innovative and alternative technology projects and for projects in rural
areas. In addition, the types of eligible projects were limited in order to focus use of
federal funds on projects with environmental benefits in preference to projects aiding
community growth. When the program was again reauthorized in 1981 (P.L. 97-
117), Congress and the Administration agreed to significant restrictions, out of
concern that the program’s wide scope was not properly focused on key goals.
Budgetary pressures and a desire to reduce federal spending also were concerns.
Annual authorizations under this act were $2.4 billion, the federal share was reduced
to 55%, and project eligibilities were limited further.
The 1972 law required a “needs survey” every two years to adjust the statutory
allotment formula by which grant funds were divided among the states. In this
survey, EPA compiles state data to estimate capital costs for water quality projects
and other activities eligible for support under the Clean Water Act. From an initial
estimate of $63 billion in 1973, the survey figure went to a high of $342 billion in
1974, dropped to $96 billion in 1976, rose to $106 billion in 1978, $120 billion in
1980, declined to $80 billion in 1990, was assessed at $139.5 billion in 1996, and
rose to $181.2 billion in 2000, the most recent survey. Inconsistencies and variations
have been ascribed to several factors, including the lack of precision with which
needs for some project categories could be assessed (especially in the early years) and
the desire of state estimators to use the needs survey as a way of keeping their share

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of the federal allotment as high as possible.6 However, EPA believes that recent
surveys produce credible data, because of the requirement that needs must be
justified by project-specific documentation.
By the mid-1980s there was considerable policy debate between Congress and
the Administration over the future of the construction grants program and, in
particular, the appropriate federal role. Through FY1984, Congress had appropriated
nearly $41 billion under this program, representing the largest nonmilitary public
works programs since the Interstate Highway System. The grants program was a
target of the Reagan Administration’s budget cutters, who sought to redirect budget
priorities and sort out the appropriate governmental roles in a number of domestic
policy areas, including water pollution control. Thus, for budgetary reasons and the
belief that the backlog of wastewater projects identified in 1972 had largely been
completed, the Reagan Administration sought a phase-out of the Act’s construction
grants program by 1990. Many states and localities, which continued to support the
Act’s water quality goals and programs, did support the idea of phasing out the grants
program, since many were critical of what they viewed as burdensome rules and
regulations that accompanied the receipt of federal grant money. However, they
sought a longer transition and ample flexibility to set up long-term financing to
promote state and local self-sufficiency.
Congress’ response to this debate was contained in 1987 amendments to the Act
(P.L. 100-4). It authorized $18 billion over nine years for sewage treatment plant
construction, through a combination of the traditional grant program and a new State
Water Pollution Control Revolving Funds (SRF) program. Under the new program,
federal capitalization grants would be provided as seed money for state-administered
loans to build sewage treatment plants and, eventually, other water quality projects.
Cities, in turn, would repay loans to the state, enabling a phaseout of federal
involvement while the state built up a source of capital for future investments. Under
the amendments, the SRF program was phased in beginning in FY1989 and entirely
replaced the previous grant program in FY1991. The intention was that states would
have greater flexibility to set priorities and administer funding, while federal aid
would end after FY1994.
Municipalities have made substantial progress towards meeting the goals and
requirements of the Act, yet state water quality reports continue to indicate that
discharges from wastewater treatment plants are a significant source of water quality
impairments nationwide. In the 2000 National Water Quality Inventory report, states
reported that municipal point sources (wastewater treatment plants) contribute to
water quality impairments of rivers, streams and lakes and are the most widespread
source of pollution affecting estuarine waters. The authorizations provided in the
1987 amendments expired in FY1994, but pressure to extend federal funding has
continued, in part because estimated needs remain so high. Thus, Congress has
continued to appropriate funds, and the anticipated shift to full state responsibility
has not yet occurred. Through FY2005, Congress appropriated $75.6 billion in Clean
Water Act assistance, including $23.7 billion in SRF capitalization grants.
6 For discussion of several of these factors, see Water Pollution Control Federation (now,
the Water Environment Federation). The Clean Water Act with Amendments. 1982. p. 14.

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Drinking Water
Public drinking water supplies are regulated under the federal Safe Drinking
Water Act (SDWA) of 1974 (P.L. 93-523), as amended (42 U.S.C. 300f-300j).
Congress enacted this law after nationwide studies of community water systems
revealed widespread water quality problems and health risks resulting from poor
operating procedures, inadequate facilities, and uneven management of public water
supplies in communities of all sizes. The 1974 law gave EPA substantial
discretionary authority to regulate drinking water contaminants, and gave states the
lead role in implementation and enforcement.
In contrast to the 40-plus years of federal support for financing municipal
wastewater treatment facilities, Congress only relatively recently, in 1996,
established a program under SDWA to help finance projects needed to comply with
federal drinking water regulations. Funding support for drinking water only occurred
more recently for several reasons. First, until the 1980s, the number of drinking
water regulations was fairly small, and public water systems often did not need to
make large investments in treatment technologies to meet those regulations. Second
and relatedly, good quality drinking water traditionally had been available to many
communities at relatively low cost. By comparison, essentially all communities have
had to construct or upgrade sewage treatment facilities to meet the requirements of
the 1972 Clean Water Act.
Over time, drinking water circumstances have changed as communities have
grown and commercial, industrial, agricultural, and residential land-uses have
become more concentrated, thus resulting in more contaminants reaching drinking
water sources. Moreover, as the number of federal drinking water standards has
increased, many communities have found that their water may not be as good as once
thought, and that additional treatment technologies are required to meet the new
standards and protect public health. Between 1986 and 1996, for example, the
number of regulated drinking water contaminants grew from 23 to 83, and EPA and
the states expressed concern that many of the nation’s 52,000 small community water
systems were likely to lack the financial capacity to meet the rising costs of
complying with the Safe Drinking Water Act.
Congress responded to these concerns by enacting the 1996 SDWA
Amendments (P.L. 104-182), authorizing a drinking water state revolving loan fund
(DWSRF) program to help systems finance projects needed to comply with SDWA
regulations and to protect public health. This program, fashioned after the Clean
Water Act SRF, authorizes EPA to make grants to states to capitalize DWSRFs
which states then use to make loans to public water systems. States are required to
match 20% of their federal capitalization grant, and must make available 15% of their
grant for loan assistance to small systems. Appropriations for the program were
authorized at $599 million for FY1994, and $1 billion annually for FY1995 through
FY2003. Although the funding authority for the DWSRF program has expired,
Congress continues to appropriate funds. Since FY1997, Congress provided roughly
$7.7 billion for this program, including $843.2 million for FY2005.
Congress added several new features to the DWSRF program to reflect
experience gained under the Clean Water Act program and differences between the

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drinking water and wastewater industries. A key difference in the DWSRF is that
privately owned as well as publicly owned systems are eligible for funding. Another
distinction is that states may use up to 30% of their DWSRF grant to provide
additional assistance, such as forgiveness of loan principal or negative interest rate
loans, to help economically disadvantaged communities.7
Paralleling the Clean Water Act (CWA), the SDWA requires EPA to assess the
capital improvement needs of eligible public water systems. Needs surveys must be
prepared every four years. In contrast to the CWA, which includes an allotment
formula, EPA must distribute DWSRF funds among the states based on the results
of the latest survey. Eligible systems include roughly 55,000 public and private
community water systems and 21,400 not-for-profit noncommunity water systems.
In February 2001, EPA issued the second needs survey, which indicated that
public water systems need to invest $158 billion over 20 years. This amount is up
from the first needs survey (in 1997) which estimated that systems needed to invest
$138 billion over 20 years. Part of the increase is attributable to the promulgation of
new regulations. However, EPA estimated that the largest needs category in the
current survey — installation and rehabilitation of transmission and distribution
systems — accounts for $87 billion (more than half) of total 20-year needs. With the
number of regulated drinking water contaminants now exceeding 90, and with more
rules pending, these needs are expected to continue to grow. Consequently,
stakeholders continue to urge Congress to increase appropriations for this program.
USDA Assistance Programs
While EPA administers the largest federal water infrastructure assistance
programs, the U.S. Department of Agriculture (USDA) also provides funding. It
administers grant and loan programs available to communities with populations of
10,000 or less, thus benefitting small communities, many of which have had
problems obtaining assistance through the CWA and SDWA loan programs. Many
small towns have limited financial, technical and legal resources, and have
encountered difficulties in qualifying for and repaying loans. They often lack
opportunities for economies of scale or an industrial tax base, and thus face the
prospect of high per capita user fees to repay a loan for the full cost of a sewage
treatment or drinking water project.
USDA’s grant and loan programs were authorized by the Rural Development
Act of 1972 (P.L. 92-419, 7 U.S.C. 1926). The purpose of these programs is to
provide basic amenities, alleviate health hazards, and promote the orderly growth of
the nation’s rural areas by meeting the need for new and improved rural water and
waste disposal facilities. Loans and grants are made for projects needed to meet
health or sanitary standards, including clean water standards and Safe Drinking Water
Act requirements. In recent years, USDA officials have increased their coordination
with state clean water and drinking water officials in administering their programs.
They have done this both to better meet health and environmental goals and to
7 For more information, see CRS Report RS22037, Drinking Water State Revolving Fund:
Program Overview and Issues, by Mary Tiemann.

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minimize program redundancies and/or inconsistencies. For FY2005, Congress
appropriated $598 million for USDA’s water and waste disposal grant and loan
programs. (For additional information, see CRS Report RL30478, Federally
Supported Water Supply and Wastewater Treatment Programs.)8
Context for the Water Infrastructure Debate:
Investment Needs

Some of the factors that have led to increased attention to water infrastructure
reflect long-standing concerns (for example, how cities will meet regulatory
requirements), while others are recent (such as, new analyses of broader funding
needs, including maintenance and repair of older systems). A number of interest
groups — many with long-standing involvement, as well as new groups and
coalitions — have assisted in bringing attention to these issues. Among them are
the Water Infrastructure Network (WIN), a coalition of 29 state, municipal,
environmental, professional, and labor groups organized in 1999, and the H O
2
Coalition, organized in 2001, consisting of the National Association of Water
Companies, the Water and Wastewater Equipment Manufacturers Association, and
the National Council for Public-Private Partnerships. Two WIN reports on funding
needs and policy have received considerable attention, and the H O Coalition has
2
responded to some issues in the WIN reports. In April 2000, WIN issued a report
estimating a $24.7 billion average annual investment gap for the next 20 years for
municipal wastewater and drinking water systems to address new problems and
system deterioration.9 Over the 20-year period, according to WIN’s analysis, $940
billion is required for wastewater and drinking water investments, and more than $1
trillion in O&M spending is required. A second WIN report, issued in 2001,
recommends a multibillion dollar investment program in water infrastructure.10
EPA Needs Surveys. EPA’s contribution to the debate over needs is
primarily its wastewater and drinking water needs surveys. The Safe Drinking Water
Act requires EPA to assess the capital improvement needs of eligible public water
systems every four years thereafter. Concurrently, and in consultation with the Indian
Health Service and Indian tribes, EPA must assess needs for drinking water treatment
facilities to serve Indian tribes. The most recent drinking water needs survey,
conducted in 1999 and issued in February 2001, covers the period from 1999 through
2018. As noted above, the survey estimates that drinking water systems will need
8 In addition to providing support through these EPA and USDA programs, Congress is
increasingly being asked to provide direct authorizations for individual projects developed
by the Department of the Interior’s Bureau of Reclamation and the U.S. Army Corps of
Engineers. A key practical difference between these projects and EPA and USDA programs
is that with individual project authorizations, there is no predictable assistance, or assurance
of funding once a project is authorized. (See CRS Report RL30478 for more discussion.)
9 Water Infrastructure Network. Clean & Safe Water for the 21st Century, A Renewed
National Commitment to Water and Wastewater Infrastructure. April 2000. (Published
estimates used in this CRS report were adjusted by CRS to 2001 dollars)
10 Water Infrastructure Network. Recommendations for Clean and Safe Water in the 21st
Century. February 2001. (Hereafter, WIN Recommendations)

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CRS-10
$157.9 billion for infrastructure work over this 20-year period (in 2001 dollars). Of
the total, $32.4 billion is required for compliance with current and pending
regulations. Approximately $50 billion of the total need is reported as future needs
(projects for routine rehabilitation), while $108 billion is needed now to protect
public health and maintain existing systems.11 The survey indicates that the needs
for small systems (serving 3,300 or fewer persons) account for 22% of the total,
while American Indian and Alaska Native village water systems represent 1.5% of
the total national need.12
The most recent wastewater survey, issued in 2003, estimates that $185.5 billion
is needed over the next 20 years for projects and activities eligible for Clean Water
Act assistance, consisting of $171.4 billion for wastewater treatment projects and
$14.1 billion for other eligible water quality projects (principally nonpoint source
pollution control projects).13 The total is 21% larger than needs reported in the
previous survey, four years earlier. The change reflects, in part, improvements
needed to meet increasingly stringent water quality standards, urban wet weather
correction projects, and upkeep of existing infrastructure. Needs for small
communities (under 10,000 population) represented about 9% of the total.
The clean water needs survey does not separately identify needs for Alaskan
Native villages, and only a few states report needs for Indian tribes. More
comprehensive estimates are made by the Indian Health Service (IHS) of the U.S.
Department of Health and Human Services, which operates a Sanitation Facilities
Construction program pursuant to the Indian Sanitation Facilities Act (P.L. 86-121).
IHS estimated that, as of the end of FY2004, more than150,000 American Indian and
Alaska Native (AI/AN) homes needed sanitation facilities, including over 36,000
homes that needed potable water. The total needing safe water improvements is
about 12% of all AI/AN homes, compared with about 1% of all U.S. homes,
according to IHS. The backlog of documented Indian sanitation facility projects as
of the end of FY2004 totaled $1.9 billion, with those projects considered
economically feasible totaling $915 million.14
11 U.S. Environmental Protection Agency. Drinking Water Infrastructure Needs Survey,
Second Report to Congress. February 2001. EPA 816-R-01-004. 85 p. (Published
estimates in this report were adjusted by CRS to 2001 dollars)
12 Although the percentage need for American Indian and Alaska Native Village water
systems is relatively small, the per-household costs average roughly $6,800 for American
Indian systems and $53,886 for Alaska Native Village systems. EPA explains that these
high costs are attributable to the expense of transporting materials to remote areas, the lack
of economies of scale for small systems, and the limited construction period in some
regions. Similarly, the average 20-year per-household costs for small systems ($3,139) is
nearly four times higher than the cost for large systems ($827).
13 U.S. Environmental Protection Agency. Clean Watersheds Needs Survey 2000 Report
to Congress. August 2003. EPA 832-03-001. 1 vol. (Estimates in this report were adjusted
by CRS to 2001 dollars for purposes of comparison.)
14 U.S. Department of Health and Human Services. Indian Health Service. “ FY2006 Budget
Requests, Justification of Estimates for Appropriations Committees; Sanitation Facilities
Construction.” February 2005. pp. IHF-9-IHF-10.

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CRS-11
Expressed as average annual costs, the EPA needs surveys estimate $7.9 billion
for drinking water systems and $9.3 billion for wastewater systems. EPA
acknowledges that these estimates are conservatively biased. First, all reported needs
in both surveys must be documented with project-specific information. Second,
needs that are ineligible for SRF funding are not reflected; thus, in the drinking water
survey, needs for fire flow, dams, and untreated reservoirs are omitted. Neither EPA
survey explicitly accounts for infrastructure needs due to population increases, since
growth-related projects are not eligible for EPA funding. Further, EPA believes that
there is significant under-reporting of drinking water needs, in part because many
water systems typically use short-term planning documents that cannot identify full
20-years needs, and in part because of gaps in EPA’s initial approach to surveying
non-pipe costs (i.e., for water sources, treatment, and storage) for medium and large
water utilities. In fact, in a subsequent re-analysis to account for under-reporting,
EPA adjusted its drinking water needs estimate from $157.9 billion to $218 billion
(in 2001 dollars). Finally, neither survey accounts for financing costs associated with
utility borrowing to pay for capital investment.
CBO’s Report on Future Investment. A 2002 report by the Congressional
Budget Office (CBO) also contributes to the discussion about investment needs.15
In that report, CBO presented two scenarios of future needs for capital investment
and O&M costs, a low-cost case and a high-cost case. The two scenarios span the
most likely possibilities that could occur, according to CBO, and present a range of
estimates for each, reflecting the limited information available about existing water
infrastructure. For example, CBO said, there is no accessible inventory of the age
and condition of pipes (which account for the majority of both drinking water and
wastewater systems’ assets). As such, a shortage of data compounds the general
analytic problem of making 20-year estimates of what would happen under current
and currently anticipated trends.
CBO estimated that for the years 2000 to 2019, annual costs for investment will
range between $11.6 billion and $20.1 billion for drinking water systems, and
between $13.0 billion and $20.9 billion for wastewater systems, or between $24.6
billion and $41.0 billion for water and wastewater combined (in 2001 dollars).
Additionally, CBO estimated that annual costs over the period for O&M, which are
not eligible for federal aid, will range between $25.7 billion and $31.8 billion for
drinking water and $20.3 billion to $25.2 billion for wastewater systems, or between
$46.0 and $57.0 billion for water and wastewater.
The principal differences in costs under CBO’s two scenarios reflect different
assumptions about several factors: (1) the rate at which drinking water pipes will be
replaced, (2) savings that may be associated with improved efficiency (e.g., demand
management to reduce peak usage, consolidation of systems to achieve economies
of scale, labor productivity), (3) the costs to wastewater utilities for controlling
combined sewer overflows, and (4) the repayment period on borrowed funds.16
15 U.S. Congressional Budget Office. Future Investment in Drinking Water and Wastewater
Infrastructure. November 2002. 58 p. (Hereafter, CBO 2002)
16 Ibid., pp. 18-22.

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CRS-12
CBO estimated that, for both types of systems, the difference between current
capital spending (approximately $22 billion by all levels of government in 1999) and
future costs — what some call an investment funding gap — would be $3.0 billion
annually in the low-cost scenario and $19.4 billion in the high-cost case. Together,
the future costs under the low-cost scenario (which CBO believes is reasonable,
given the uncertainty about the condition of existing infrastructure, prospects for
improved efficiency, and assumptions about borrowing) represent growth of 14%
from 1999 levels, while under the high-cost case, the estimated increases represent
growth of about 90%.
CBO also examined estimates in WIN’s 2000 report, because of the public
attention that it has received. It shows approximately an $18.6 billion difference
between current spending and WIN’s estimate of future annual costs, and is thus
close to CBO’s high-cost case. Investing at either the level in WIN’s report or the
CBO high-cost scenario would require nearly a doubling of current annual spending
levels. WIN’s single point estimate of annual investment needs for drinking water
and wastewater ($40 billion) is similar to CBO’s high-cost case estimate. In contrast,
CBO’s low-cost case estimate is $15.7 billion less than that in the WIN report (see
Table 1), because of differences in assumptions concerning the timeline for replacing
drinking water pipes, savings from efficiency, and borrowing terms.
Overall, in examining the 2000 WIN report, CBO was critical of a number of
analytic aspects. In particular, while WIN includes financing costs in its analysis,
WIN’s estimates of total capital investment needs do not reflect costs as financed.
Costs as financed conveys the full costs of investments made out of funds on hand
during the period analyzed and the debt service (principal and interest) paid in those
years on new and prior investments that were financed through borrowing. Costs as
financed are a kind of moving average that smooths out year-to-year changes in
investment volume. In contrast, WIN’s 2000 report includes total debt service on
new investments from 2000 to 2019, regardless of when those payments occur, rather
than the debt service actually paid during the period (on both pre-2000 and new
investments). The difference is important, according to CBO, because utilities’ past
investments financed from 1980 to 1999 and still being paid off from 2000 to 2019
are smaller than the investments projected to be financed during the latter period.
WIN’s approach to estimating investment needs (capital plus financing) results in
approximately a 20% over-estimate, according to CBO.17
EPA’s Gap Analysis Report. In addition to the needs surveys, in 2002
EPA issued a study, called the Gap Analysis, assessing the difference between
current spending and total funding needs for drinking water and wastewater
infrastructure.18 Using data from the needs surveys and updated information, the Gap
Analysis estimated total needs for drinking water and clean water (capital investment
plus financing costs, and operation and maintenance (O&M)) from 2000-2019, as
well as the projected gap between current spending and needs. This report examined
a range of estimates, based on two scenarios: a low-end estimate assuming a 3%
17 Ibid., p. 19.
18 U.S. Environmental Protection Agency. The Clean Water and Drinking Water
Infrastructure Gap Analysis. September 2002. EPA 816-R-02-020. 50 p.

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CRS-13
annual real growth in revenues (an increase in user rates and equivalent increase in
customer growth) and a high-end estimate assuming no growth in water utility
systems’ revenues.19
Using these two scenarios, the Gap Analysis estimates a 20-year investment gap
between current spending levels and capital investment needs for wastewater and
drinking water combined between $66 billion and $224 billion (in 2001 dollars). In
addition, it estimates a 20-year gap in spending for O&M between $10 billion and
$409 billion. Under EPA’s analysis, the estimated average annual gap between
current spending and investment needs is between $1.6 billion and $23.1 billion, and
the average annual O&M gap is between $0.3 billion and $36.3 billion, depending
on the scenario. Compared with estimates of baseline expenditures, EPA’s
projections imply an average annual increase in costs over the 20-year period that
ranges from 2.8% to 85.8% for investment and O&M combined.
A January 2003 CBO report examined estimates in the 2002 CBO report and in
EPA’s Gap Analysis.20 As shown in Table 1, the differences between EPA’s and
CBO’s projections of total investment costs are not especially significant: both
EPA’s and CBO’s high-end estimates ($46.5 billion and $41 billion, respectively)
reflect a near doubling of baseline investment costs through 2019. WIN’s 2000
estimate ($40 billion) has a similar implication. EPA’s and CBO’s low-end
investment estimates ($25 and $24.6 billion, respectively) reflect less than a 15%
increase in costs through 2019. Differences between EPA’s and CBO’s investment
estimates are explained by differences in assumptions, such as the potential for
efficiency savings and different time profiles for replacement of drinking water pipes.
For most factors, CBO believes that a strong case cannot be made for the choice of
one agency’s estimates over the other, so long as the differences are recognized.
Greater differences are apparent between CBO’s and EPA’s high-end scenario
estimates for O&M ($57 billion and $82 billion, respectively). According to CBO,
that difference stems from EPA’s adopting the unrealistic assumption that drinking
water infrastructure is replaced in large quantities early in the 20-year period, rather
than being replaced more evenly throughout the span, with high O&M costs
throughout the period as a by-product of the early increase in capital stock. In WIN’s
report, O&M annual cost estimates are closer to CBO’s high-end scenario than to
EPA’s.
Table 1 summarizes estimates from the 2000 WIN report, the 2002 CBO report,
and EPA’s Gap Analysis on average annual costs for water infrastructure (wastewater
and drinking water combined) and the potential average annual increase above
current spending levels that would be required to achieve such expenditures.
19 For each scenario in the Gap Analysis, EPA presents a range of estimates and a point
estimate within each range. For simplification, CRS refers to these point estimates, but
readers should consult the EPA report for full discussion.
20 U.S. Congressional Budget Agency. Future Spending on Water Infrastructure: A
Comparison of Estimates from the Congressional Budget Office and the Environmental
Protection Agency. Letter report. January 2003. 14 p.

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CRS-14
Table 1. Estimated Costs for Water Infrastructure
(billions of dollars)
WIN
CBO2002
EPA Gap Analysis
Low-end
High-end
Low-end
High-end
Average annual cost from 2000-2019
Investment
40.3*
24.6
41.0
25.0
46.5
O&M
52.6
46.1
57.0
46.1
82.0
Average annual cost
above baseline spending (gap)
from 2000-2019
Investment
18.6*
3.0
19.4
1.6
23.1
O&M
11.8
7.1
18.1
0.3
36.3
*The $40.3 billion and $18.3 billion in this table reflect CBO’s re-estimate of investment
needs in the WIN 2000 report. CBO re-estimated the WIN information to reflect
investment costs as financed, in order to gave comparability with CBO’s and EPA’s
analyses.

Issues
While estimates of funding needs have become a focal point for discussion,
some argue that trying to focus on precise needs estimates is not as important as
recognizing the general need. For example, CBO’s reports and EPA’s Gap Analysis
caution that projections of future costs associated with water infrastructure are highly
uncertain and could lie outside of the ranges that they present. Different assumptions
could increase or decrease the results. CBO explained this point in its 2003 report.21
Because available data are limited, the agencies must use many assumptions to
develop their projections, and the 20-year projection window provides ample
opportunity for unforeseen developments to influence costs. Data limitations
make it impossible for the agencies to know even baseline investment costs with
certainty.
As is evident from their analyses of various investment scenarios, CBO and
EPA believe that funding gaps are not inevitable, if other steps are taken. Both
emphasize that funding gaps occur only if capital and O&M spending remains
unchanged from present levels. Future spending and other measures that systems
could adopt to reduce both types of costs, such as asset management processes,22
could significantly alter estimates of future needs. How a gap would be filled raises
a number of other issues. Whether water infrastructure needs over the next 20 years
are $200 billion or $1 trillion, they are potentially very large, and the federal
government is unlikely to provide 100% of the amount. At issue are, what is the
21 Ibid., p. 1.
22 Asset management is a planning approach for conducting integrated assessments of future
capital and operating needs to ensure that investments are made efficiently.

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CRS-15
precise problem to be solved; who will pay, and what is the federal role in that
process; and how to deliver federal support.
Priorities: What Are the Problems to Be Solved?
Defining the scope of the water infrastructure problem is a key issue. As
described previously, traditionally the CWA and SDWA have assisted projects
needed to upgrade and improve wastewater and drinking water systems for
compliance with federal standards. There still are significant needs for those core
projects: for example, EPA estimates that one-fifth of the $158 billion needed for
drinking water systems is required for compliance with specific regulatory standards,
and the number of standards that systems must meet is growing. Likewise, the 2003
clean water needs survey reports that more than one-half of the $171 billion in total
treatment needs are for projects to correct overflows from municipal sewers,
particularly sanitary sewer overflows (SSOs). (SSOs are releases of raw sewage from
sanitary sewer collections systems before the wastewater reaches the treatment plant.
These discharges are a major type of wet weather pollution.)
Infrastructure Replacement. While not disregarding needs for compliance-
related projects, stakeholders now are focusing on the problem of projects that have
not traditionally been eligible under federal aid programs — major repair and
replacement of existing systems. Currently, federal funds may be used for projects
that involve minor system repairs (such as correcting leaky pipes that allow
infiltration or inflow of groundwater into sewer lines) but may not be used for major
rehabilitation, or extensive repair of existing sewers that are collapsing or are
structurally unsound. In many cities, systems that currently meet standards and
provide adequate service are, according to advocacy groups, reaching the end of their
service-life and will require substantial investment in the near future. The American
Water Works Association’s 2001 report focused solely on the need to reinvest in
aging drinking water infrastructure. It estimates that nationally over the next 30
years, $250 billion may be required to replace worn out facilities and systems.
The replacement problem is occurring not because of neglect or failure to do
routine maintenance, AWWA and others say, but because water infrastructure
facilities and pipes installed decades ago are now wearing out. Most pipes were
installed and paid for by past generations in response to population growth and
economic development booms of the 1890s, World War I, 1920s, and post-World
War II. The oldest cast iron pipes, dating from the late 1800s, have an average useful
life of about 120 years, while pipes installed after World War II have an average life
of 75 years. The useful life of pipe varies considerably, based on such factors as soil
conditions, materials used, and character of the water flowing through it. Also, pipe
deteriorates more rapidly later in the life cycle than initially. AWWA says,
“Replacement of pipes installed from the late 1800s to the 1950s is now hard upon
us, and replacement of pipes installed in the latter half of the 20th Century will
dominate the remainder of the 21st century.”23 Treatment plant assets are more short-
lived than pipes, with typical service lives of 15 to 50 years. Thus, many that were
23 AWWA Report, p. 11.

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CRS-16
built in response to environmental standards in the 1970s and 1980s also will begin
to be due for replacement in a few years.
This concern over infrastructure deterioration recalls an earlier period when
infrastructure was a hotly debated topic. Two decades ago there was much debate
among policymakers about an infrastructure funding gap and the need for federal
solutions to the perceived problem that America’s public facilities were wearing out
faster than they were being replaced. Some said that, because of declining public
investment, America’s infrastructure was in ruins. Analysts proposed strategies for
planning, financing, and managing investments to address decay of the nation’s
public works infrastructure.24 After a period of publicity and attention, debate about
an “infrastructure crisis” waned. Congress did not enact legislation creating
substantially new federal approaches to infrastructure but did reauthorize funding for
several existing programs, including wastewater.
Today, analysts may differ over whether an infrastructure crisis did, in fact, exist
then and whether local officials made choices sufficient to defer the issue for a later
day. In the end, this earlier infrastructure debate resulted in little obvious action and
without the breakdowns some had warned of. However, the current concerns may
reflect a new situation: AWWA says that the replacement problem being debated
today is not that utilities are faced with making up for a historical gap in the level of
replacement funding. Rather, it is that utilities must ramp up budgets to prevent a
replacement gap from developing in the near future, i.e., to avoid getting behind.
Security. None of the investment needs reports discussed previously (WIN
report, or those by CBO and EPA) accounts for increased security-related needs that
utilities have begun to identify. In its 2002 report, CBO said:
Because water systems are still developing estimates of the costs for increasing
security in the wake of the September 11 attacks, the estimates do not include
those expenses — but preliminary reports suggest that security costs will be
relatively small compared with the other costs for investment in infrastructure.25
One partial estimate for wastewater systems reported that, among large wastewater
utilities, operators identified $135 million in security-related needs for 2002-2006,
with approximately one-quarter of those reporting saying that their needs exceed $1
million.26
Although poorly quantified and potentially small relative to overall
infrastructure needs, the costs of addressing security concerns for drinking water
systems are expected to be significant. The Bioterrorism Preparedness Act of 2002
24 See, for example, Choate, Pat and Susan Walter. America in Ruins. Council of State
Planning Agencies. 1981. 97 p., and Vaughan, Roger J. and Robert Pollard. Rebuilding
America, Planning and Managing Public Works in the 1980s. Council of State Planning
Agencies. 1984. Vol. 1. 182 p.
25 CBO 2002, p. x.
26 Association of Metropolitan Sewerage Agencies. The AMSA 2002 Financial Survey.
2003. p. 79.

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CRS-17
(P.L. 107-188) required all community water systems serving more than 3,300
persons to assess their vulnerabilities to terrorist attack or other intentional acts to
disrupt the provision of safe and reliable drinking water supplies. Having done so,
many of these systems now are taking, or planning to take, steps to improve the
security of their facilities and to protect sources of drinking water. The AWWA has
estimated that the roughly 8,400 community water systems covered by the
Bioterrorism Act would have to spend more than $1.6 billion just to implement the
most basic steps needed to improve security (such as better controlling access to
facilities with fences, locks, perimeter lights, and alarms at critical locations). This
estimate does not include the capital costs of upgrades to address vulnerabilities
identified in vulnerability assessments, such as hardening pumping stations, chemical
storage buildings, transmission mains, adding redundant infrastructure, or relocating
pipelines of facilities. Efforts to estimate costs have been hampered by the fact that
the security measures needed for utilities are very site-specific. However, the
AWWA estimates that, nationwide, community water systems will need to invest
billions of dollars to address identified vulnerabilities.27
Some water utilities have imposed rate increases or reallocated existing
resources to cover the costs of making security improvements; however, many others
have been increasing rates to pay for projects needed to comply with new regulations,
but had not contemplated the need for additional resources to address security
concerns. Asserting that homeland security is primarily a federal responsibility, and
that the needs are large, some individual communities and water associations have
approached Congress in search of assistance.28 In the Bioterrorism Preparedness Act,
Congress authorized funding for FY2002 through FY2005 for EPA to provide
financial assistance to drinking water systems for several purposes, including making
basic security enhancements, but no funding was provided. EPA has identified
numerous security improvements that are eligible for funding through the drinking
water and clean water state revolving fund programs, and infrastructure bills reported
in the 108th Congress specified that projects to improve security were eligible for
assistance under the clean water and drinking water state revolving funds. However,
these funds are used primarily to comply with Safe Drinking Water Act and Clean
Water Act requirements, and it is uncertain how readily these funds might become
available for security measures.29
Funding Other Priorities. Wastewater SRF funding is used for construction
of publicly owned municipal wastewater treatment plants, implementing state
nonpoint pollution management programs, and developing and implementing
27 Neukrug, Howard. Statement on behalf of the American Water Works Association, in:
U.S. House. Committee on Transportation and Infrastructure. Subcommittee on Water
Resources and the Environment. Aging Water Supply Infrastructure. Hearing, 108th
Congress, 2nd session. Apr. 28, 2004. (108-63) p. 61.
28 Ibid.
29 For more information on drinking water security issues and funding, see CRS Report
RL31294, Safeguarding the Nation’s Drinking Water: EPA and Congressional Actions, by
Mary Tiemann.

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CRS-18
management plans under the National Estuary Program (CWA, Section 320).30
Drinking water SRFs may provide assistance for expenditures that will facilitate
compliance with national drinking water regulations or that will “significantly further
the health protection objectives” of the Safe Drinking Water Act. There are many
proposals for expanding the scope of activities eligible for SRF funding, in addition
to meeting major replacement and security-related needs, raising numerous tradeoff
questions for policymakers.
Legislation in the 108th Congress (such as S. 2550 and H.R. 1560) would have
added a number of new types of projects to those already eligible for SRF assistance:
water conservation; water reuse, reclamation, or recycling; measures to increase
facility security; and implementation of source water protection plans, for example.
The rationale for using federal assistance is that investments in some of these
approaches could reduce overall needs for capital investment. All, arguably, could
benefit water quality protection and improvement, as do traditional infrastructure
investments, and supporting them through the popular mechanism of SRFs would
help ensure comparatively secure funding. But expanding the scope of eligibility also
arguably dilutes the current focus of these programs, at a time when traditional needs
remain high. This tension already exists with the wide range of set-asides authorized
under the drinking water SRF, where, in addition to funding infrastructure projects,
states may reserve up to 31% of their federal capitalization grant for a range of other
purposes. For example, states may use up to 10% of their grant to implement
wellhead protection programs and another 10% to fund local source water protection
initiatives. (See discussion below of set-asides, under “Delivering Federal Support”).
Many argue that greater investment in managing nonpoint sources of water
pollution would especially benefit public health and water quality. According to state
data compiled by EPA, polluted runoff is the major source of water quality problems
in the United States. Water quality survey data indicate that 40% of surveyed U.S.
waterbodies are impaired by pollution (meaning that waters fail to meet applicable
standards) and that surface runoff from diffuse areas such as farm and ranch land,
construction sites, and mining and timber operations is the chief cause of
impairments, while municipal point sources contribute a much smaller percentage of
water quality impairments to most waters.31 The possible cost of practices and
measures to address the nonpoint pollution problems has not been comprehensively
documented. Nevertheless, it is conceivable that investments in nonpoint pollution
abatement (e.g., grants for nonpoint pollution management projects under the Clean
Water Act, technical and financial assistance to farmers through USDA, Safe
Drinking Water Act grants to protect sources of drinking water) could have equal or
greater environmental benefit than investments in water infrastructure. For example,
New York City is funding an extensive watershed protection program, including
areas far from the metropolitan area, in an effort to avoid the need to build a filtration
plant that would cost the city several billion dollars.
30 According to EPA, 36 clean water SRF programs have funded nonpoint source pollution
control and estuary protection projects, providing $1.84 billion in SRF funding since 1990.
31 U.S. Environmental Protection Agency. Office of Water. National Water Quality
Inventory, 2000 Report. August 2002. EPA 841-R-02-001. 207 p.

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Growing populations in many areas of the country are placing increasing
demands on water supplies and wastewater treatment facilities. Yet, even without
new growth, many people in existing small and rural communities do not have access
to public sewers or water supply and, thus, are using alternative systems to help them
comply with environmental laws and to solve public health problems. Local officials
face a challenge of striking a balance between ensuring that water and wastewater
services are affordable, but also providing sufficient revenue for system needs. To
deliver these services, they often face challenges arising from economic, geographic,
and technological impediments. Outside of EPA’s and USDA’s traditional programs,
it appears that Congress is increasingly being asked to authorize direct financial and
technical assistance for developing or treating water, including rural water supply
projects to be built and largely funded by the Bureau of Reclamation of the
Department of the Interior, water recycling projects built and partially funded by the
Bureau, and pilot programs for water supply and wastewater treatment projects
funded by the U.S. Army Corps of Engineers. To yet another group of stakeholders,
these, too, reflect priority problems in need of legislative attention and federal
solutions.
Policymakers face decisions about priorities and tradeoffs, since spending
decisions often are essentially a zero-sum game: that is, what priority should be given
to traditional infrastructure projects needed to comply with standards, versus the
emerging problem of infrastructure replacement, versus nonpoint pollution
management or other competing activities also having environmental benefits? Since
not all can be supported, do some have greater priority than others? What should the
federal government support? Should eligibility for SRF funding be expanded to
include less traditional activities? Is there clearly a federal role for some or all
activities, or a larger federal role for some than for others?
The Federal Role
Many stakeholders are seeking substantially increased federal spending on water
infrastructure for reasons described in this report. Among groups involved in water
infrastructure (states, cities, equipment manufacturers, the construction industry), a
long-standing issue is the gap between funding needs and available resources from
federal, state, and local sources.
Data compiled by EPA demonstrate that federal capitalization grants are the
largest, but not the only, source of monies in the SRFs. For example, cumulatively
from 1996 through 2004, drinking water SRFs have had $9.6 billion in funds
available for projects. Of the total, $5.7 billion was provided by capitalization grants,
while the remainder — nearly $4 billion — came from state match contributions,
leveraged bonds, principal repayments, and interest earnings. Likewise, cumulatively
from 1988 through 2004, clean water SRFs have had $52 billion in funds available.
Slightly less than half ($22 billion) has come from federal capitalization grants, while
the remainder similarly derived from state matching funds, leveraged bonds, principal
repayments, and interest earnings. In addition, state assistance outside of the SRF
programs is an important source of total funds available for water infrastructure. For
example, from FY1991 through FY2000, states made about $13.5 billion available

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for drinking water and wastewater projects under state-sponsored grant and loan
programs and by selling general obligation and revenue bonds.32
Local government officials estimate that, on average, ratepayers currently pay
about 90% of the total cost to build their drinking water and wastewater systems
(through direct local financing or loan repayments to SRFs); federal funds provide
the remainder.33 (Small rural systems depend more on government aid than do large
systems.) According to the National League of Cities, these capital costs, plus
operations and maintenance for which localities also are responsible, total about $60
billion annually for drinking water and wastewater systems.34 Cities also say that
they have been raising water and sewer rates to accommodate increases in operating
and maintenance costs, which are rising at 6% above inflation annually.35 Municipal
officials contend that increased local fees and taxes alone cannot solve all funding
problems. This is true, they say, both with respect to costs of meeting future needs
(e.g., new treatment requirements) and costs of reinvesting in aging infrastructure.
Water and wastewater officials acknowledge that they will continue to cover the
majority of water infrastructure needs, but believe that doing so presents a significant
challenge in keeping water affordable. This is especially true in small cities, rural
areas, and cities with shrinking populations and/or local economies where a possible
doubling or tripling of water and sewer rates to meet all needs could be required. If
some such cities are unable to finance replacement or improvement of their water
infrastructure, declining service levels, violations of water quality requirements, and
threats to public health and the environment could occur, officials say.36
Assertions about financial impacts and affordability are at the heart of many
stakeholders’ efforts seeking greater federal support. The Water Infrastructure
Network, for example, says that local sources alone cannot be expected to meet the
challenge of large water and sewer needs, and that the benefits of federal help accrue
to the nation as a whole, since water moves across political boundaries. Moreover,
WIN argues that clean and safe water is no less a national priority than are national
defense, an adequate system of interstate highways, or a safe and efficient aviation
system. Highways and aviation currently “enjoy sustainable, long-term federal grant
32 U.S. General Accountability Office. Water Infrastructure: Information on Federal and
State Financial Assistance. November 2001. GAO-02-134. p. 18. (formerly the General
Accounting Office)
33 U.S. House. Committee on Transportation and Infrastructure. Subcommittee on Water
Resources and Environment. Meeting Clean Water and Drinking Water Infrastructure
Needs. Hearing, 105th Congress, 1st session. Apr. 23, 1997. (105-18) p. 307.
34 Tobey, Bruce. Statement on behalf of the National League of Cities on Water and
Wastewater Infrastructure Needs in: U.S. House. Committee on Transportation and
Infrastructure. Subcommittee on Water Resources and the Environment. Water
Infrastructure Needs. Hearing, 107th Congress, 1st session. Mar. 28, 2001. (107-8) p. 131.
35 Ibid., p. 132.
36 Water Infrastructure Network. “Commonly Asked Questions and Answers about the
WIN Report Water Infrastructure Now.” May 5, 2001. p. 5 (Hereafter, WIN Questions
and Answers)

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programs,” supported by trust fund revenues, while water infrastructure does not.37
In its 2001 report, WIN recommended a five-year, $57 billion authorization above
current funding for loans, grants, loan subsidies and credit assistance to capitalize
state-administered grant and loan programs which it believes would cover about one-
half of the estimated five-year capital funding shortfall. WIN estimated that, even
with that additional investment, average household water and sewer rates would
increase over the next 20 years, but in WIN’s projections, average rate increases
would be 100%, compared with 123% without such a boost in federal support.38
Some analysts dispute the view that federal funding solutions are essential to
meeting future investment needs. According to this view, funding problems are in
many cases due to the failure of local communities to assign a high priority to water
and wastewater services and result in failure to set local water rates and other user
charges at levels that cover capital and operating expenditures. This is especially true
in the case of municipally or publicly owned utility systems which, unlike investor-
owned systems, often do not support the full cost of service through rates. Publicly
owned systems predominate in the wastewater industry (constituting more than 95%).
In the drinking water industry, approximately 33% of public water systems are
privately owned; however, most of these systems are small, serving roughly 15% of
the U.S. population. The H O Coalition, another group in the water infrastructure
2
debate, believes that it is not possible to state with any confidence what is
unaffordable to customers and therefore what the magnitude of government support
should be, because few utilities have done detailed long-term needs projections and
analyzed ways of addressing these needs through rates.39 “Rate shocks” which result
from large rate increases can be managed to a degree, analysts say, by financing,
ratemaking, and conservation strategies. They argue that if water services continue
to be subsidized by federal funds, subsidies should not reward utilities’ inefficiency,
but should be used strategically and equitably.40 Some advocate using needs-based
subsidies to help low-income households by providing direct payment assistance or
funding a lifeline rate.
CBO has repeatedly argued that federal spending programs to support water
infrastructure (direct project grants and SRF capitalization grants, as well as credit
subsidies in the form of loans, loan guarantees, and tax preferences) can have a
number of unintended consequences. In a February 2005 report (one of a regular
series) on the budgetary implications of policy choices, one of the policy options that
CBO presents is a phaseout of federal capitalization grants for SRFs over a three-year
transition period. CBO cites several economic rationales for doing so. For example,
grants may encourage inefficient decisions about water infrastructure by allowing
states to lend money at below-market interest rates, in turn reducing incentives for
37 WIN Recommendations, p. 3.
38 WIN Questions and Answers, p. 3.
39 “Comparison of Recommendations of the WIN and the H O Coalition.” Feb. 16, 2001.
2
See [http://www.nawc.org/side.pdf].
40 Beecher, Janice. Statement on behalf of the National Association of Water Companies,
in: U.S. House. Committee on Transportation and Infrastructure. Subcommittee on Water
Resources and the Environment. Water Infrastructure Needs. Hearing, 107th Congress, 1st
session. Mar. 28, 2001. (107-8) p. 55.

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local governments to find less costly ways to control water pollution and provide safe
drinking water. Also, federal contributions may not result in increased total
investment if they are merely replacing funding that state and local sources would
otherwise have provided.41
In its 2001 report, WIN recommended initially doubling federal support for
water infrastructure, and increasing it by 500% after five years. Others, including the
H O Coalition, doubt that increased federal support of that magnitude is necessary or
2
appropriate. Even if policymakers agree that there is a federal role, questions remain
about defining that role and agreeing on priorities, as discussed above.
Delivering Federal Support
The question of how federal financial support is delivered to water infrastructure
projects involves several issues, including the state-level mechanism for
administering funding, composition of aid (loans and grants), and assistance for
private as well as public entities. Related issues are impacts of other federal
requirements, use of set-asides, and how funds are allotted to states.
Administrative Entity. Financial aid provided through the clean water and
drinking water SRFs is administered by state-level agencies designated in agreements
signed by EPA and individual states. Many evolved from the agencies that
previously administered the Clean Water Act construction grant program that
preceded the SRF program. In many states, SRFs are managed by the state
environmental agency or branches of that agency responsible for implementing the
CWA and the SDWA. In other states, they are managed by separate financing
authorities or offices. About 30 states currently administer the two SRF programs
jointly; the remainder administer parallel SRF programs. State officials say that,
where administration of the two is not joined, there are good reasons for maintaining
the separation. Section 302 of the 1996 SDWA amendments included a provision
allowing states to transfer a portion (up to 33%) of a capitalization grant between the
two programs to give states funding flexibility. That original authority expired in
FY2001,but Congress has continued to extend it through annual appropriations acts
since FY2002. Since 1999, 13 states and Puerto Rico have used this provision to
transfer funds between their clean water and drinking water SRF programs.
In its 2001 report, WIN recommended that the SRF concept be replaced with an
alternative mechanism called State Water and Wastewater Infrastructure Financing
Authorities which would work with state clean water and drinking water programs
but would handle the infrastructure banking aspects for both. WIN says that this
would be highly efficient, enabling a single state agency to determine priorities and
appropriate financial assistance instruments. Most state officials now involved with
the two SRF programs object to this proposal, believing that it would de-construct
what exists and is working well now. It would also substitute a new organizational
entity for that which individual states have determined works best for them, including
the 20 states that prefer separate SRF programs. Also, by giving decisionmaking
authority to a new entity, the WIN concept would shift authority from existing state
41 U.S. Congressional Budget Office. Budget Options. February 2005. p. 104.

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agencies. WIN supporters believe that differences between their proposal and the
views of state program officials are not vast, but those state officials disagree.
The Type of Assistance Provided: Grants and Loans. One issue that
divides the stakeholder groups is whether to provide assistance through grants, as
well as loans, with cities and the WIN group favoring a significant place for grants,
and most states and the H O Coalition favoring loans in preference to grants.
2
Both SRF programs authorize states to make loans at or below market interest
rates, including zero interest loans. However, for several years, both small and large
cities have urged Congress to explicitly authorize water infrastructure grants, in
addition to loans, to provide flexible assistance best suited for particular community
and state needs. Thus, the drinking water SRF, enacted nine years after the clean
water SRF program, allows up to 30% of capitalization grants to be used to provide
loan subsidies to disadvantaged communities. Grants that do not require repayment
obviously are preferred by communities. For example, some small communities that
lack an industrial tax base or means to benefit from economies of scale find it
difficult to repay a loan for 100% of the cost of water infrastructure projects. Some
larger cities also seek grants, on the basis that water infrastructure is just one of
numerous costly capital needs that they must meet, and a partial subsidy in the form
of a grant would help make those costs affordable for ratepayers.
Small and disadvantaged communities’ financing problems also have been
addressed by permitting a longer loan repayment period. By spreading out
repayment, communities can reduce the amounts due on an annual basis, thus
lessening the amount of rate increases needed to finance the repayment (although
total financing costs over the life of the loan may be higher). Under both SRF
programs, annual principal and interest repayments begin one year after project
completion and are to be fully amortized 20 years after project completion. Under
the drinking water SRF, however, states may allow economically disadvantaged
communities up to 30 years to repay loans. The Clean Water Act does not currently
permit 30-year repayments, but House Appropriations Committee report language
accompanying EPA’s FY1998 appropriations bill (P.L. 105-175) encouraged EPA
to allow states to issue bonds allowing for clean water SRFs with repayment terms
of greater than 20 years. A few states (e.g., Massachusetts, West Virginia, Maryland)
now are issuing 30-year clean water SRF loans.
Many state officials are reluctant to use a portion of the SRF to award grants,
principally because, to the extent that part of the SRF is used for making grants, the
corpus of the loan fund and its ability to be a self-sustained long-term source of
funding are diminished. States acknowledge that a loan “buy down,” in the form of
granting forgiveness of a portion of the SRF loan principal, can be a useful option for
dealing with disadvantaged communities. However, many states prefer to limit the
use of grants as much as possible and would oppose being obliged to make grants.
State water quality officials who previously administered the Clean Water Act’s
construction grant program and others (including CBO) believe that grants can
undermine efficient investments by leading to substitution of federal funds for state
and local funds, rather than augmenting state and local investment, and distort
decisions about preventive maintenance, treatment technology, and excess capacity.
According to EPA, states are being conservative in using the principal forgiveness

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CRS-24
authority under the drinking water SRF: since 1996, only 16 states have done so, and
assistance provided with principal forgiveness has totaled less than 3% of all drinking
water SRF assistance since that time.
Members of the H O Coalition favor limited and targeted federal assistance, so
2
that utilities are encouraged to attain and maintain business-like operations. If federal
assistance is provided, the Coalition, like many state officials, advocates that it
should be primarily in the form of low-interest or zero-interest loans. The Coalition
supports assistance for low-income families to supplement their water and sewer
bills, where necessary, either paid to the low-income families or directly to the utility.
Some loan forgiveness (as under the drinking water SRF) or grants (with at least 50%
local cost share) are options that the Coalition supports in rare cases, and only so long
as assistance produces long-term solutions and ensures that federal monies are used
cost-effectively. Except in cases where virtually all of a utility’s customers are
impoverished, assistance for low-income households should be favored over grants,
this group says. According to the Coalition, grants or loans with substantial
forgiveness subsidize all customers’ rates, even those that are able to afford the full
cost of service, and therefore are not an efficient use of scarce federal assistance.42
Federal Funds for Private Infrastructure Systems. Currently under the
drinking water SRF program, eligible loan recipients include community water
systems, both publicly and privately owned, and not-for-profit noncommunity water
systems (e.g., schools with their own water supply). Eligible loan recipients for
wastewater SRFs are any municipality, intermunicipal, interstate or state agency, but
not privately owned utilities. A number of stakeholders advocate that SRF funds be
made available to privately owned wastewater systems, as well. This would “level
the playing field” between the two programs, it is argued, and also would encourage
public-private partnerships and privatization.
Another issue involving the private sector concerns the Internal Revenue Code.
Under federal tax law, certain activities financed by the issuance of state and local
bonds have a special status because the interest earned is exempt from federal income
taxation. Tax-exempt financing enables state and local governments to borrow at a
lower interest rate than either private business or the federal government must pay
on taxable debt. In general, tax-exempt status applies to activities broadly defined
as having public purpose. Some specific activities considered to have both public
and private purposes are eligible for tax-exempt financing. However, these
public/private activities are subject to a cap that limits the volume of private activity
bonds (PABs) state and local governments may issue annually. PABs for water
infrastructure are subject to the volume cap, and tax-exempt financing can be done
if the project is able to secure an allocation from the volume cap.
Because private water bonds compete under this cap with other private bond
uses such as housing, industrial development, and student loans, some groups favor
legislation that would exempt all PABs for water and sewage facilities from the
volume cap. A bill to authorize such a change has been introduced in the 109th
42 H O Coalition. “What is the Water Infrastructure Problem and What are the Solutions?”
2
Issue Paper. Feb. 26, 2001. pp. 7-11.

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Congress (H.R. 1708). Similar legislation has been introduced in the past, but has
not been enacted (e.g., H.R. 3042 in the 108th Congress). Current law provides such
an exemption for government-owned and operated solid waste disposal facilities.
Opponents argue that restrictions on tax-exempt financing should be maintained,
because of the costs to the federal government, in terms of income tax revenues
foregone. Similarly, some opponents say that the bonds represent an inefficient
allocation of capital, favoring some projects over others, and increase the cost of
financing traditional governmental activities. In the 109th Congress, S. 157 has been
introduced to permit interest on federally guaranteed USDA water, wastewater, and
essential community facilities loans to be tax exempt. (For more information, see
CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire.)
Other Federal Tax Issues. A second federal tax issue related to the Internal
Revenue Code concerns arbitrage. If proceeds of tax-exempt bonds issued by state
and local governments in connection with SRF programs are invested in securities
that pay a higher yield than the yield on the bonds, the earnings are termed arbitrage
profits. Unchecked, state and local governments could substitute arbitrage earnings
for a substantial portion of their own citizens’ tax effort. Thus, Congress has decided
that such arbitrage should be limited, and that tax-exempt bond proceeds must be
used quickly to pay contractors for the construction of the capital facilities for which
the bonds were issued. Federal tax law requires that bond proceeds be spent out
during a specified period; if not, the arbitrage earnings must be rebated to the U.S.
Treasury. (For information, see CRS Report RL30638, Tax-Exempt Bonds: A
Description of State and Local Government Debt, by Steven Maguire.)
Many states urge that amounts used as reserves to secure bonds for SRF projects
be exempted from the arbitrage rebate rules so that any interest earnings could be
used for additional investment in water infrastructure projects. By some estimates,
if arbitrage restrictions were lifted, SRFs could earn an additional $100 to $200
million annually on their funds. If these earnings were used as reserves to secure
additional bonds, they could provide an additional $200 to $400 million annual
investment in infrastructure projects. However, others respond that without the
existing arbitrage rule, state and local governments could issue tax-exempt bonds
solely for the purpose of gaining arbitrage profits, at the expense of greater revenue
losses to the federal government and ultimately higher interest rates on bonds whose
proceeds actually are used for the acquisition or construction of capital facilities.43
Federal Cross-Cutting Requirements. Under both SRF programs, a
number of federal authorities, executive orders, and government-wide policies apply
to projects and activities receiving federal financial assistance, independent of
program-specific statutory requirements, and many stakeholders favor repealing their
applicability to water infrastructure projects. These include environmental laws (e.g.,
Clean Air Act, Endangered Species Act), social legislation (e.g., Age Discrimination
Act, Civil Rights Act), and economic and miscellaneous laws (Davis-Bacon Act,
Uniform Relocation and Real Property Acquisition Policy Act of 1970, and
procurement prohibitions under environmental laws and Executive Order 11738).
43 U.S. Environmental Protection Agency. The Drinking Water State Revolving Fund
Program, Report to Congress. EPA 918-R-03-009. May 2003. p. 95.

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These federal cross-cutting requirements apply only to projects funded directly by the
federal capitalization grants, but not to SRF activity made from loan repayments,
interest earned, or other state monies contained in the SRF.
In addition, the clean water SRF attaches 16 specific statutory requirements to
activities funded directly by federal capitalization grants that are carryover
(“equivalency”) requirements from the prior construction grant program (e.g.,
specific project evaluation requirements).
Under both SRF programs, projects financed with funds directly made available
by federal capitalization grants are subject to Environmental Impact Statement
requirements of the National Environmental Policy Act. Projects funded by other
monies in the SRF also must undergo an environmental review; however, a state may
select its own method for conducting environmental reviews, if approved by EPA.
Many stakeholders believe that these other federal cross-cutting requirements
are burdensome and costly and, in many cases, only ancillary to benefits of water
infrastructure projects. One particularly contentious issue is compliance with the
Davis-Bacon Act which requires, among other things, that not less than the locally
prevailing wage be paid to workers employed, under contract, on federal construction
work “to which the United States or the District of Columbia is a party.” Critics of
Davis-Bacon say that it unnecessarily increases public construction costs and
hampers competition (with respect to small and minority-owned businesses).
Supporters say that the law helps stabilize the local construction industry by
preventing competition from firms that could undercut local wages and working
conditions and thus compete unfairly with local contractors. Congress has added
Davis-Bacon prevailing wage provisions to more than 50 separate program statutes,
including the Clean Water Act and the Safe Drinking Water Act. (For information,
see CRS Report RL31491, Davis-Bacon Act Coverage and the State Revolving Fund
Program Under the Clean Water Act, by Edward Rappaport.) Inclusion of its
requirements in the CWA and SDWA SRF programs has been controversial, and that
controversy was a prominent reason that no water infrastructure financing legislation
was enacted in the 107th or 108th Congresses.
Set-Asides. The utility of set-asides that allow for using a portion of SRF
capitalization grants for program purposes other than directly constructing
infrastructure is likely to be debated. Under the clean water SRF, a state must reserve
the greater of 1% of its capitalization grant or $100,000 each year to carry out
specified planning requirements under the CWA. Under the drinking water SRF, a
state may use up to 31% of its capitalization grant for specified SDWA programs
including supervision of public water systems, operator certification, compliance
capacity development, and state and local source water protection initiatives (some
uses require a 50% state match).
Reserving a large amount of funds, even for related implementation activities,
necessarily limits the funds available to the state for assisting infrastructure projects.
Also, several of the set-aside activities have their own funding authority; thus, a
concern for states is that Congress may rely on the SRF to fund other SDWA
requirements instead of providing the authorized appropriations, and the overall
funding for drinking water activities may be diminished. Drinking water program

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CRS-27
officials acknowledge this problem, but many believe that set-asides are a useful
means of ensuring that monies will be available for activities that might otherwise
not have a secure source of funds. Because states have some flexibility, in fact, few
are using the full amount that could be reserved under the set-asides. According to
EPA, only four states are using the full 31% that the law allows, and the average
amount reserved by all states since 1996 is 16%.

Many state clean water program officials have a different view of mandatory set-
asides, based on experience administering the previous construction grant program
which for a time required states to reserve a portion of federal funds for specified
types of projects. Because of problems in spending those set-aside funds (e.g.,
finding beneficial projects on which to spend all the required reserved funds) and
extensive oversight by EPA, many of them now oppose the reservation of core funds
(especially mandatory set-asides), except for covering SRF administrative costs.
A separate issue relates to set-asides for administration. Under both the CWA
and SDWA programs, states may reserve up to 4% of their federal capitalization
grants annually for the reasonable costs of administering the SRF. As the SRFs have
developed and loan portfolios have grown, many states argue that an amount equal
to 4% of the allotment is insufficient for administering the program. This problem
is exacerbated by the fact that congressional appropriations of capitalization grants
have remained steady (and for the clean water SRF in FY2005, actually decreased by
nearly 20% from the FY2004 funding level). Many states are imposing fees on
borrowers, which has the effect of increasing costs for the borrower. Thus, an issue
of concern to many is increasing the amount that states are allowed to reserve for
administrative purposes.
Allotment of Funds and Congressional Earmarks. Another issue of
interest is how federal funds are allocated among the states. Capitalization grants for
clean water SRFs are allotted according to a state-by-state formula in the Clean
Water Act. It is a complex formulation consisting basically of two elements, state
population and capital needs for wastewater projects. Because the allocation formula
has not been revised since 1987, yet needs and population have changed, the issue
of state-by-state distribution of federal funds is likely to be an important topic when
legislation is considered. In contrast, capitalization grants for drinking water SRFs
are allotted by EPA based on the proportional share of each state’s needs identified
in the most recent national drinking water needs survey, not according to a statutory
allotment formula. (For information, see CRS Report RL31073, Allocation of
Wastewater Treatment Assistance: Formula and Other Changes, by Claudia
Copeland.) Among the questions likely to be discussed are, should a single formula
apply to both programs? Should allocation follow from a statutory or administrative
formula? Do EPA’s needs surveys provide an accurate basis for state-by-state
distribution? If programs are expanded to include eligibility for new activities, such
as pollution prevention and watershed protection, how should they be reflected in
state-by-state allocations? Crafting an allotment formula has been one of the most
controversial issues debated during past reauthorizations of the Clean Water Act.
The dollars involved are significant, and considerations of “winner” and “loser”
states bear heavily on discussions of alternative formulations.

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A related issue is whether a portion of federal water infrastructure funds will
continue to be allocated on the basis of earmarked appropriations, which have
become increasingly prominent. In recent years, congressional appropriators have
dedicated a significant portion of annual water infrastructure assistance as grants
earmarked for specific communities, both small and large. The federal share of costs
under these grants is 55%. For example, for FY2005 (P.L. 108-447), Congress
appropriated $1.1 billion for clean water SRF capitalization grants, $843 million for
drinking water SRF grants, and $402 million in earmarked grants for 669 listed
projects. Appropriations earmarked for identified projects enable legislators to assist
communities otherwise unable to fully qualify for state-administered programs, or
those seeking a grant rather than a loan that must be repaid. State officials that
administer the SRF programs oppose earmarked grants because such congressional
actions deny states the ability to determine priority for project funding. (For
information, see CRS Report RL32201, Water Infrastructure Project Earmarks in
EPA Appropriations: Trends and Policy Implications, by Claudia Copeland.)
Research on New Technologies
While there have been advances in technology to meet recent drinking water
mandates, the basic technologies used by communities to meet wastewater and
drinking water needs have changed little for several decades, in part because utility
officials often favor using conventional, familiar systems and technologies. This is
particularly the case in the wastewater sector where regulatory requirements have
been relatively static for years. Although this has long been true in the drinking
water sector as well, the situation is changing as recent and pending regulations are
requiring many public water systems to apply new technologies.
EPA’s revised drinking water standard for arsenic has drawn particular attention
to the need for research on treatment technologies that are affordable and suitable for
small water systems. In the conference report for the Consolidated Appropriations
Act for FY2005 (P.L. 108-447), Congress expressed concern that many small
communities, especially rural communities in the West, will not be able to afford to
comply the arsenic rule and that it could pose a large financial hardship on these
communities.44 For the third consecutive fiscal year, Congress has provided funding
for research on cost-effective arsenic removal technologies for small systems
(Congress provided $8.3 million for FY2005, and $5 million for each of FY2004 and
FY2003).
However, overall federal support for research and development (R&D) of new
drinking water and wastewater technologies is limited. In the 1996 SDWA
Amendments, Congress noted the need for more research to support drinking water
regulations and authorized additional funding for drinking water research over seven
years. While much of EPA’s drinking water research is focused on health effects
studies, the identification of feasible treatment technologies is a central component
of EPA’s drinking water standard setting process, and technology research has
received support. However, EPA’s water research budget often has fallen short of
44 House Report 108-972, to accompany H.R. 4818. p. 1567.

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its regulatory needs, and consequently, competition for available funding has been
considerable.45
According to the Water Infrastructure Network, technology R&D is supported
at the federal level mainly by programs of EPA’s Office of Research and
Development and EPA’s Environmental Technology Verification (ETV) Program.
Also, Congress has directed that EPA provide appropriated funds to nonprofit
research foundations including the Water Environment Research Foundation ($3.9
million in FY2005) and the American Water Works Association Research
Foundation ($4.9 million in FY2005). The ETV Program began in 1995 to verify the
performance of innovative technology developed by the private sector and to
accelerate the entrance of new technologies in all media. In the water and drinking
water areas, technologies have been verified for a number of packaged drinking water
systems especially needed for small community water supplies. Pilots also are
underway to evaluate source water protection technologies and urban wet weather
flow control technologies. In its 2001 report, WIN recommended that Congress
authorize $250 million annually for a new Institute of Technology and Management
Excellence to support the development and use of innovative technologies that would
reduce the cost of meeting drinking water and clean water requirements and replacing
water infrastructure.46
The CBO also has noted that one option to increase federal support for water
infrastructure would be increased federal spending on R&D that could reduce water
systems’ costs and improve efficiency, such as technical R&D into new pipe
materials, construction and maintenance methods, and treatment technologies.
Economic principles suggest that federal involvement may be appropriate to increase
cost-effectiveness when other entities, such as private firms and state governments
that may fund R&D for water systems, do not have adequate incentive to consider the
spillover benefits that would accrue from a national perspective as a result of research
investments. Increased federal support of technical R&D could take the form of
additional research projects managed by EPA, larger federal grants to private
organizations, or both.47
In the past, Congress has attempted to advance new and innovative technologies
in other ways, in addition to R&D activities. Beginning with the 1977 amendments
to the Clean Water Act, Congress authorized specific incentives for such
technologies, in particular by increasing the federal share under the construction grant
program for innovative and alternative technology projects that reuse or recycle
wastewater and sludge, reduce costs, or save energy consumption. The Act also
provided for 100% modification or replacement of innovative or alternative systems
in the event of technological failure or significantly increased operating costs, as a
safety measure to reduce the potential uncertainty of using risky or unproven
wastewater treatment technologies.
45 See, for example, the GAO report, Drinking Water Research: Better Planning Needed
to Link Needs and Resources. GAO/RCED-99-273. September 1999. 30 p.
46 Water Infrastructure Network. Recommendations for Clean and Safe Water in the 21st
Century, pp. 11-12.
47 CBO 2002, pp. 33-34.

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The federal funding bonus and the potential for full replacement if a system
failed were seen by states and cities as significant incentives for using technologies
other than conventional wastewater treatment systems. However, these incentives
were funded as set-asides from construction grants, which was not universally
popular among state officials at the time, and they were not extended when the clean
water SRF program was created. In 1989, EPA estimated that, compared with
conventional treatment processes, for every dollar invested in designing and
constructing an innovative project, 40 cents was saved over the life of the facility.
Many now believe, however, that under the clean water SRF program, without the
incentive of bonus funds or 100% replacement grants, few communities are
constructing projects that utilize unproven or unfamiliar technology.
The Safe Drinking Water Act has no such incentives, but regulatory pressures
and population growth are forcing both water and wastewater utilities to assess the
potential of alternative treatment technologies. In this regard, issues for congressional
consideration could include possible financial incentives or regulatory incentives
(such as allowing some additional compliance flexibility) for use of innovative
technology, as well as increased federal support for technology R&D.
Congressional and Administration Activity
Momentum in the 109th Congress to consider the issues discussed in this report
has grown since the 107th Congress, partly in response to urgings of stakeholder
groups. House and Senate committees held oversight hearings on water
infrastructure financing issues during the first session of the 107th Congress, and in
the second session, the House Transportation and Infrastructure Committee approved
H.R. 3930, a bill authorizing $20 billion in clean water SRF assistance for five years.
No committee report was filed. The Senate Environment and Public Works
Committee reported legislation authorizing $35 billion in funding over five years for
both the clean water and drinking water SRF programs (S. 1961, S.Rept. 107-228).
No further action occurred on either bill, in large part due to controversies over
provisions in both bills to apply requirements of the Davis-Bacon Act to SRF-funded
water infrastructure projects and also over CWA grant allocation formulas in the two
measures.
Attention to these issues resumed in the 108th Congress. First, in July 2003, the
House Transportation and Infrastructure Subcommittee on Water Resources and
Environment approved H.R. 1560, legislation similar to H.R. 3930, the bill approved
by that committee in 2002. H.R. 1560 would have authorized $20 billion for the
clean water SRF program for FY2004-FY2008. It included several provisions
intended to benefit economically disadvantaged and small communities, such as
allowing extended loan repayments (30 years, rather than 20) and additional
subsidies, including principal forgiveness and negative interest loans, for
communities that meet a state’s affordability criteria. It also included provisions to
require communities to plan for capital replacement needs and to develop and
implement an asset management plan for the repair and maintenance of infrastructure
that is being financed. The Water Resources and Environment Subcommittee

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continued to examine infrastructure issues and, in April 2004, held a hearing on
aging water supply infrastructure.48
In October 2004, the Senate Environment and Public Works Committee
reported S. 2550 (S.Rept. 108-386), authorizing $41.25 billion over five years,
including $20 billion for the clean water SRF program and $15 billion for the
drinking water SRF program. The bill included a new formula for state-by-state
allocation of clean water SRF grants, and expansion of the types of projects and
activities eligible for clean water SRF grants. It would have directed states to reserve
a portion of their annual clean water and drinking water SRF capitalization grants for
making grants to eligible communities, and further would have required EPA to
establish a grant program to help small water systems comply with drinking water
regulations. (For discussion, see CRS Report RL32503, Water Infrastructure
Financing Legislation: Comparison of S. 2550 and H.R. 1560, by Claudia Copeland
and Mary Tiemann.) No further action occurred on either bill. Once again, the issue
of the applicability of the prevailing wage requirements of the Davis-Bacon Act to
SRF-funded projects affected consideration of the legislation, but criticism also
included objection by some states to funding allocation formulas in the bills and
opposition by the Administration to funding levels.
Throughout this period, the Bush Administration has addressed water
infrastructure in a number of general ways, but has not offered legislative proposals
of its own. The Administration opposed the SRF authorization levels proposed in
bills in the 107th and 108th Congresses, saying that those levels exceed the
Administration’s targets for federal investment in water infrastructure and do not
support the President’s priorities of defense and homeland security. The debate has
been joined in the presentation of the President’s annual budget request, where the
Administration has identified a federal capitalization target of $6.8 billion for the
clean water SRF program for 2004 through 2011, supported by annual appropriations
of $730 million. The Administration also has said that it supports annual
appropriations of $850 for the drinking water SRF program through FY2018.49 That
amount of total funding, EPA officials have said, combined with state matching, loan
repayments, and other resources, would enable the clean water SRF to eventually
revolve at $3.4 billion annually and the drinking water SRF to revolve at $1.2 billion
annually and be self-sustaining in the long run.50
48 U.S. House. Committee on Transportation and Infrastructure. Subcommittee on Water
Resources and the Environment. Aging Water Supply Infrastructure. Hearing, 108th
Congress, 2nd session. Apr. 28, 2004. (108-63) p. 78.
49 In FY2004, the President requested $850 million each for clean water and drinking water
SRF capitalization grants; Congress appropriated $1.34 billion and $844 million,
respectively. In FY2005, the President’s budget request was identical to the previous year’s;
Congress appropriated $1.1 billion and $843 million for the two programs, respectively. For
additional information, see CRS Report 96-647, Water Infrastructure Financing: History
of EPA Appropriations, by Claudia Copeland.
50 U.S. Environmental Protection Agency. FY2006 Justification of Appropriations,
Estimates for the Committee on Appropriations. February 2005. p. STAG-68; FY2004
Justification of Appropriations. February 2003. p. SA-37.

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The Bush Administration has argued that funding needs are not solely the
responsibility of the federal government, and that actions on the part of local
governments are also required to help close the gap. Stakeholder groups concur, at
least to the extent of agreeing that the problem is not solely the responsibility of any
single level of government or entity, and that all must act to find solutions. But many
strongly disagree that the level of federal investment endorsed by the Administration
is sufficient to maintain investment levels in water infrastructure that are needed to
achieve the nation’s goals for safe and healthy water.
While saying that federal and state funding can help water utilities meet future
needs, EPA’s principal water infrastructure initiative has been to support other types
of responses to help ensure that investment needs are met in an efficient, timely, and
equitable manner. In particular, since 2003 EPA has promoted strategies that it terms
the Four Pillars of Sustainable Infrastructure.51 The Four Pillars are:
! Better Management. EPA believes that better management practices
like asset management, environmental management systems,
consolidation, and public-private partnerships can offer significant
savings for water utilities. Asset management is an inventory-based
approach to planning, based on condition and risk, to assess future
capital and operating needs. Regionalization or consolidation can in
some cases enable utilities to achieve savings (and compliance) by
combining physical and institutional assets and/or managerial and
technical support.
! Full-Cost Pricing. Ensuring that sufficient revenues are in place to
support the costs of doing business is key to constructing, operating,
and maintaining infrastructure and can encourage efficient water use.
! Efficient Water Use. The need for costly infrastructure can be
reduced by better managing uses of water. Options include
metering, water reuse, water-saving appliances, water-saving
landscaping techniques, and public education.
! Watershed Approaches to Protection. This pillar centers on the
concept that, in addressing infrastructure needs for water supply and
water quality, it is important to look more broadly at water resources
in a coordinated way, to ensure that actions achieve the greatest
benefit on a watershed-wide basis.
Supported with a small amount of funding ($2.5 million in FY2005), EPA is
pursuing a Sustainable Infrastructure Leadership Initiative in partnership with water
utilities to promote the Four Pillars. This initiative intends to identify new and better
ways of doing business in the water and wastewater industries and promote them
widely, and thus ensure sustainability of water systems. For example, EPA will work
to encourage rate structures that lead to full cost pricing and will support water
metering and other conservation measures.
51 U.S. Environmental Protection Agency. Sustainable Water Infrastructure for the 21st
Century. See [http://www.epa.gov/water/infrastructure/index.htm].

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Conclusions: Paying for the Federal Share
The preceding discussion identifies a number of issues that Congress, the
Administration, and stakeholders have begun to debate regarding water infrastructure
needs and concerns. Many of them already are the subject of advocates’
recommendations and policy positions. Only recently, however, have some begun
to address the long term challenge of actually paying for the larger financial
commitment that many of them seek and, in particular, of identifying alternatives to
finance a larger, sustained federal role. Some may wish to fund a larger amount of
federal spending for water infrastructure entirely out of general revenues in the U.S.
Treasury, but that faces substantial hurdles and competition with many other
government priorities. Thus, several questions arise: if a substantial financing gap
exists that cannot be met by improved efficiencies or local revenue enhancement, and
if a larger federal financial role is determined to be appropriate, where will that
money come from? Are there alternative revenue sources that could be identified to
support increased federal involvement?
Some analytic work has already been done on these questions, including
research by academics and interest groups.52 EPA also has contributed analysis in the
form of a study requested by Congress in the mid-1990s that examined financial
mechanisms to enhance the capability of governments to fund mandated
environmental goals.53 Environmental advocates generally are less engaged in
debates about water infrastructure than groups representing states, cities, and those
involved in building facilities. However, some now argue that increased federal
investment is needed to fix water quality problems caused by discharges of untreated
and inadequately treated sewage and that “the federal government should greatly
increase its contribution to water infrastructure needs through a clean water trust
fund,” which they call the best long-term source of sewage treatment funding.54
Among the options beginning to be explored are various types of water-related
fees that could be dedicated to water infrastructure and other water quality projects,
including one based on water withdrawals or use, permit fees, effluent fees, chemical
feedstock fees, and environmentally “green” product fees. A draft proposal by a
group of municipal wastewater utility officials envisions a five-year, $45 billion
water trust fund providing grants and loans for drinking water and wastewater
projects, with revenues for the trust fund coming from appropriations and a fee or tax
on bottled beverages. Each such option has economic and equity impacts, spillover
effects, and questions about administration that need thorough assessment. Increased
public/private partnerships are advocated by some, and other options also may merit
exploration. As difficult as it may be for policymakers to resolve the many issues
discussed in this report, resolving how to pay for water infrastructure is no less a
challenge.
52 For example, Clean Water Council. America’s Environmental Infrastructure: A Water
and Wastewater Investment Study. 1990. 46 p.
53 U.S. Environmental Protection Agency. Alternative Funding Study: Water Quality Fees
and Debt Financing Issues, Final Report to Congress. June 1996. 99 p.
54 Natural Resources Defense Council and Environmental Integrity Project. Swimming in
Sewage. February 2004. pp. 57-58.

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