Eliminate Federal Grants for Wastewater and Drinking Water Infrastructure

To protect the quality of the nation's waters and the safety of its drinking water, the Environmental Protection Agency (EPA) administers provisions of the Clean Water Act of 1972 (CWA) and the Safe Drinking Water Act of 1974 (SDWA). Both laws authorize the federal government to provide grants that capitalize state revolving funds (SRFs). SRFs, in turn, offer financial assistance-- market-rate and subsidized loans, loan or bond guarantees, and bond purchases, for example--to communities building or replacing wastewater and drinking water systems to meet or maintain federal standards. For 2010, EPA received an appropriation of about $3.6 billion for such grants, including $2.1 million for clean-water SRFs, $1.3 billion for drinking water SRFs, and $200 million for grants to specific communities and locales. This option would phase out EPA's grants to SRFs over three years, reducing federal outlays by $6 billion through 2016 and by $25 billion over 10 years.

In 1987, amendments to the CWA phased out a program of direct construction grants for wastewater treatment facilities and replaced it with SRFs. States match federal contributions to the SRFs at a rate of 20 cents on the dollar and operate them within broad limits, defining eligible projects, choosing the terms of assistance, and setting priorities. In 2009, 78 percent of the loans--23 percent of total funding from clean-water SRFs--went to communities with populations under 10,000. Authorization for the SRF program under the CWA has expired, but the Congress continues to provide annual appropriations for grants, allocating them to states according to the shares specified in the 1987 amendments.

Amendments to the SDWA in 1996 authorized EPA to make grants to capitalize SRFs for drinking water systems. Although generally modeled on the wastewater program, the SDWA program allocates funding using a formula based on the results of EPA's quadrennial "Drinking Water Infrastructure Needs Survey." States must establish a priority-setting system that focuses on reducing the greatest health risks and achieving compliance with SDWA standards, taking into account the financial needs of local water systems.

One justification for this option is that the grants could encourage inefficient decisions about water infrastructure because they allow states to lend money at below-market interest rates, which in turn reduces incentives for local governments to find the least costly ways to control water pollution and provide safe drinking water. Another rationale is that responsibility for water systems properly lies with state and local governments. Federal contributions to wastewater SRFs originally were viewed as a temporary step on the way to full state and local financing. Moreover, those contributions may not increase total investment in water systems if they merely replace funding that state and local sources would have provided otherwise.

An argument against such cuts is that the need to replace aging infrastructure, improve the safety of the drinking water, and protect the nation's waters is so great that federal aid should be increased, not reduced. In particular, given the budgetary pressures on states, water systems in many small or economically disadvantaged communities could not maintain the quality of their service and comply with the CWA's and the SDWA's new and forth-have lower costs because of economies of scale, to charge coming requirements without federal funding. Another rates that would pose significant hardships for low- and argument against this option is that eliminating the fed-moderate-income households. eral grants would force even large systems, which tend to