On March 6th, House Transportation and Infrastructure Committee Chair Peter DeFazio introduced the Water Quality Protection and Job Creation Act of 2019 (H.R. 1497), which would reauthorize the Clean Water State Revolving Fund (CWSRF) program.
The following day, the Transportation and Infrastructure Committee’s Water Subcommittee discussed CWSRF reauthorization in a hearing titled “The Clean Water State Revolving Fund: How Federal Infrastructure Investment Can Help Communities Modernize Water Infrastructure and Address Affordability Challenges.”
Recent actions and statements by members of Congress on both sides of the aisle indicate an interest in both moving an infrastructure package forward and including water infrastructure in that package. This reopening of discussion on CWSRF reauthorization prompts a review of the current state of the CWSRF and the potential opportunities and challenges presented by reauthorization.
CWSRF Background
The CWSRF dates to 1987 when Congress amended the Clean Water Act (CWA) creating a capitalization grant program to finance infrastructure for sewage treatment and water quality improvement. Prior to 1987, Congress funded public wastewater infrastructure using a direct grant program that would cover 55% and 75% of construction costs for qualifying public projects.
The CWSRF program was developed with the intention of transitioning to a system in which state and local governments would cover 100% of wastewater infrastructure financing. Congress set the target date of this transition as fiscal year (FY) 1995 – a date coinciding with the expiration of the CWA’s original authorizations in 1994 – and authorized the program for $18 billion to be distributed between fiscal years 1987 to 1995.
Unresolved funding needs and administrative challenges prevented the realization of a complete transition to state and local funding as the program reached the end of its authorization in FY 1995. While the CWSRF has not been reauthorized since then, Congress has continued appropriating funds for the program. Annual appropriations amounts through FY 2018 can be seen in the table below.
Table 1: Clean Water Appropriations FY 1987 – FY 2019
Source: CRS Funding for EPA Water Infrastructure: A Fact Sheet
How Does the CWSRF Work?
All 50 states as well as Puerto Rico currently participate in the CWSRF program. The EPA provides capitalization grants that serve as seed funding the each state’s revolving fund. States then use their funds to issue loans, buy local debt, and issue guarantees.
The primary benefit of CWSRF loans is the below-market interest rates that they provide to states. In 2017, the average interest rate of CWSRF loans was 1.4%, significantly lower than the market rate of 3.5%.
More information on the program with details on loan issuance and leveraging can be found in the EPA’s SRF Fund Management Handbook.
Repayments and interest earned from outstanding loans return to the states revolving funds and are then used to develop new loans. States are also able to increase financing capacity by leveraging their funds and issuing fund-backed bonds. The figure below shows how leveraging has increased the impact of federal dollars provided to the program.
Figure 1: Leveraging of Federal Capitalization Grants
Source: EPA CWSRF 2017 Annual Report
Proposed Reauthorization Legislation
The bill introduced on March 6th, the Water Quality Protection and Job Creation Act of 2019 (H.R. 1497), would authorize $23.5 billion in wastewater infrastructure investment over the next five years, with $20 billion dedicated to capitalization of the CWSRF. Under this authorization, Congress would be able to appropriate up to $4 billion per year for the program. This would be more than double recent CWSRF appropriations, which totaled $1.39 billion in FY 2017 and $1.64 billion in FY 2018.
CWSRF reauthorization legislation has been introduced before, but has never passed. The most recent effort was made during the 115th Congress with the Water Quality Protection and Job Creation Act of 2017 (H.R. 2510). Compared to previous years, H.R. 1497 has an increased chance of passage as both Congress and the Administration have identified infrastructure as a priority for the 116th Congress and indicated an interest in developing bipartisan legislation on the subject.
Funding Challenges for the CWSRF
Funding the CWSRF program presents a significant challenge for lawmakers. While other infrastructure domains like surface transportation benefit from user-driven revenue streams like the federal gas tax, an equivalent has not yet been identified for water infrastructure.
One recently proposed bill would increase the corporate income tax rate from 21% to 24.5%, sending $35 billion a year to a water trust fund that would be used to fund the CWSRF. Another proposal, introduced during the 115th Congress, would create a water trust fund by allowing businesses that produce bottled products to voluntarily pay a $0.03 per unit fee in exchange for the right to place a label on their products indicating their commitment to clean water resources protection.
Despite consensus that water infrastructure investment needs to be increased, all reauthorization proposals that require increased spending of general funds are likely to cause disagreement among lawmakers. Consequently, the identification of other sources of revenue would increase the chance of successful passage of a CWSRF reauthorization.
Reauthorization Potential in 2019
There are indications that CWSRF reauthorization legislation may gain traction as a part of the broad effort to develop infrastructure legislation during the 116th Congress. Recent congressional hearings and comments by House leadership and the Administration show that support exists on both sides of the aisle for moving infrastructure legislation forward and funding water projects.
Uncertainty remains, however, and this uncertainty is encapsulated well by the Administration’s recently released FY 2020 budget which cuts the CWSRF program budget by $600 million, while also providing a $200 billion placeholder for “additional infrastructure investments” that would likely include water infrastructure investment.