CRS Report: 98-323 - Wastewater Treatment: Overview and Background

Claudia Copeland
Specialist in Environmental Policy
Environment and Natural Resources Policy Division

Summary

The Clean Water Act prescribes performance levels to be attained by municipal sewage treatment plants in order to prevent the discharge of harmful wastes into surface waters. The Act also provides financial assistance so that cities can construct treatment facilities in compliance with the law. The availability of funding for this purpose continues to be a major concern of cities and states. This report provides background on municipal wastewater treatment issues, federal treatment requirements and funding, and the most recent legislative activity, in the 104th Congress. Meeting the nation's wastewater infrastructure needs efficiently and effectively is likely to remain an issue of considerable congressional interest, especially during Clean Water Act reauthorization. However, prospects for legislative activity in the 106th Congress are uncertain. For information, see CR5 Report 98-946, Clean Water Act Issues in the 106th Congress. This report will be updated as developments warrant.

Waste discharges from municipal sewage treatment plants are a significant source of water quality problems throughout the country. States report that municipal discharges are the second leading source of water quality impairment in all of the nation's waters (rivers and streams, lakes, and estuaries and coastal waters). Pollutants associated with municipal discharges include nutrients (which can stimulate growth of algae that deplete dissolved oxygen which is essential for aquatic ecosystems, since most fish and other aquatic organisms "breathe" oxygen dissolved in the water column), bacteria and other pathogens (which may impair drinking water supplies and recreation uses), as well as metals and toxic chemicals from industrial and commercial activities and households.

The Clean Water Act (CWA) prescribes performance levels to be attained by municipal sewage treatment plants in order to prevent the discharge of harmful quantities of waste into surface waters and to ensure that residual sewage sludge meets environmental quality standards. It requires secondary treatment of sewage (equivalent to removing 85% of raw wastes), or treatment more stringent than secondary where needed to achieve water quality standards and desired use of a river, stream, or lake.

In addition to prescribing municipal treatment requirements, the CWA authorizes the principal federal program to aid wastewater treatment plant construction. Congress established this program, essentially in its current form, in the Federal Water Pollution Control Act Amendments of 1972 (P.L. 92-500). Since then Congress has appropriated $69.5 billion to assist cities in complying with the Act (see Table 1). These provisions were intended to help achieve the overall objectives of the Act: restoring and maintaining the chemical, physical, and biological integrity of the nation's waters.

Title II of P.L. 92-500 authorized grants to states for wastewater treatment plant construction under a program administered by the Environmental Protection Agency (EPA). Federal funds are provided through annual appropriations under a state-by-state allocation formula contained in the Act; the formula (which has been modified several times since 1972) is based on states' financial need for treatment plant construction and population. States used their allotments to make grants to cities to build or upgrade categories of wastewater treatment projects including treatment plants, related interceptor sewers, correction of infiltration/inflow of sewer lines, and sewer rehabilitation. Amendments enacted in 1982 (P.L. 97-117) restricted the types of projects eligible for federal funds, eliminated funds to aid growth (in order to focus funding on priority water pollution problems), and reduced the federal share of projects costs from 75% to 55%.

Amendments enacted in 1987 P.L. 1004), initiated a new grants program to support State Water Pollution Control Revolving Funds (SRFs). States continue to receive federal grants, but now they provide a 20% match and use the combined funds for making loans to communities. This program, authorized in new Title VI of the Act, was phased in beginning in FY 1989 and entirely replaced the previous Title II program in FY 1991. Monies used for construction will be repaid to states to create a "revolving" source of assistance for other communities. Federal contributions to SRFs were intended to assist in making a transition to full state and local financing by FY1995; SRFs were to be sustained through repayment of loans made from the fund after that date. The intention was that states would have greater flexibility to set priorities and administer funding in exchange for an end to federal aid after 1994, when CWA authorizations expired.

How the SRF works. The SRF program represents a major shift in how the nation finances wastewater treatment needs. In contrast to the Title II construction grants program, which provided grants directly to localities, SRFs are loan programs. States use their SRFs to provide a range of loan assistance to communities, including project construction loans made at or below market rates (interest-free loans are permitted by the Act), refinancing of local debt obligations, and providing loan guarantees or purchasing of insurance. Loans are to be repaid to the SRF within 20 years, beginning within one year after project completion, and the locality must dedicate a revenue stream (from user fees or other sources) to repay the loan.

States must agree to use SRF monies first to ensure that wastewater treatment facilities are in compliance with deadlines, goals, and requirements of the Act. After meeting this "first use" requirement, states may also use the funds to support other types of water quality programs, such as those dealing with nonpoint source pollution and protection of estuaries.

In addition, states must agree to ensure that communities meet a range of requirements that applied to the Title II grants program (such as requiring the applicant to study innovative and alternative treatment technologies in project design and requiring that locally prevailing wages be paid for wastewater treatment plant construction, pursuant to the Davis-Bacon Act). In addition, states must comply with "cross-cutting" federal requirements associated with receipt of federal grants, such as promotion of equal employment opportunities and participation by minority-owned businesses. These requirements, which promote a variety of national policy goals, also applied under the Title II program.

As under the previous Title II program, decisions on which projects will receive assistance are made by states using a priority ranking system that considers the severity of local water pollution problems. Financial considerations of the loan agreement (interest rate, repayment schedule, the recipient's dedicated source of repayment) are additional key factors evaluated under the SRF program.

All states have established the legal and procedural mechanisms to administer the loan program and are eligible to receive SRF capitalization grants. Some with prior experience using similar financing programs moved quickly, while others had difficulty in making a transition from the previous grants program to one that requires greater financial management expertise for all concerned. More than one-half of the states currently leverage their funds by using federal capital grants and state matching funds as collateral to borrow in the public bond market for purposes of increasing the pool of available funds for project lending. Leveraging has enabled these states to add $8.8 billion to funds available to borrowers.

Small communities and states with large rural populations have had the largest problems with the SRF program. Many small towns did not participate in the previous grants program and are more likely to require major projects to achieve compliance with the law. Yet many have limited financial, technical, and legal resources and have encountered difficulties in qualifying for and repaying SRF loans. These communities often lack an industrial tax base and thus face the prospect of very high per capita user fees to repay a loan for the full capital cost of sewage treatment projects. Compared with larger cities, many are unable to benefit from economies of scale which can affect project costs.

Other federal assistance. While the Clean Water Act is the principal federal program of this type, some other assistance is available. The Department of Agriculture (USDA) operates grant and loan programs for water supply and wastewater facilities in rural areas, defined as areas of not more than 10,000 persons. In recent years, wastewater projects have accounted for about 35% of loans and 43% of grants. USDA prefers making loans to finance such systems; grants are made only when necessary to reduce average annual user charges to a reasonable level. Appropriations of FYl998 funds for grants and loans totaled $577 million, sufficient to support $1.28 billion in program activity (counting both appropriations and repaid loan monies still available); FY1999 grant and loan appropriations total $645 million. (For additional information, see Rural Water Supply and Sewer Systems: Background Information, CRS Report 98-64.) Two other programs are:

How localities pay for construction costs. Local governments have primary responsibility for wastewater treatment; they own and operate 16,000 treatment plants nationwide. Construction of these facilities has historically been financed with revenues from federal grants, state grants to supplement federal aid, and broad-based local taxes (property tax, retail sales tax, or in some cases, local income tax). More recently, cities and counties have turned to fees or charges levied on users of public services to cover all or a portion of local capital costs.

Shifting the Clean Water Act aid program from categorical grants to the SRF loan program has had the practical effect of making localities ultimately responsible for 100% of project costs, rather than less than 50% of costs. This has occurred concurrently with other financing challenges; the need to fund other environmental services, such as drinking water and solid waste management; and increased operating costs (new facilities with more complex treatment processes are more costly to operate). Options that localities face, if intergovernmental aid is not available, include raising additional local funds (through increased user fees, developer charges, general or dedicated taxes), reallocating funds from other local programs, or failing to comply with federal standards. Each option carries with it certain practical, legal, and political problems.

Water quality improvements. Over the past 25 years, the nation has made considerable progress in controlling and reducing certain kinds of chemical pollution of rivers, lakes, and streams. Between 1972 and 1992, biological oxygen demand (BOD) pollutant loadings discharged from sewage treatment plants declined by 36%, despite increased industrial activity and a 30% population growth during that period.

The total population served by sewage treatment plants that provide a minimum of secondary treatment increased from 85 million in 1972 to 173 million in 1996, representing 66% of the U.S. population. However, about 17 million people are served by facilities that provide less than secondary treatment, which federal law requires. About 30 million people are served by well functioning on-site septic systems and do not need centralized municipal treatment.

Despite improvements, other water quality problems related to municipalities remain to be addressed. Combined sewer overflows (from sewers that carry sanitary wastewater and stormwater runoff and may discharge untreated wastes into streams) and separate stormwater sewers (runoff from streets, paved areas, lawns, etc., that enters a sewer before discharge) transport toxic and conventional pollutants to many waterways. Moreover, toxins discharged from industries and households to sewage treatment plants cause water quality impairments, operational upsets, and contamination of sewage sludge. EPA reported in 1997 that industrial and commercial firms lawfully discharged 240 million pounds of wastes with hazardous constituents to municipal treatment plants.

Remaining needs. The Clean Water Act's deadline for cities to achieve secondary treatment of sewage was originally mid-1977. Congress later extended that deadline to mid-1988. According to EPA, 87% of all communities complied with the 1988 deadline, but 80% of those that missed the deadline were small cities (defined as those with less than 10,000 population). Cities that missed the 1988 deadline were put under judicial or administrative orders to comply as soon as possible.

Funding needs for communities that have not yet achieved secondary treatment or must upgrade existing facilities remain very high: $126 billion nationwide is required between now and 2016, according to the most recent estimate by EPA. The largest need, $45 billion, is for projects to control combined sewer overflows. The second largest category of needs, at $27 billion, is for new or improved secondary treatment (the basic statutory requirement of the CWA). Total needs decreased by $15.5 billion in constant dollars between 1992 and 1996, reflecting, in part, progress made in meeting the nation's water quality infrastructure needs and improved quality of the data reported by states. In addition to costs documented by EPA, states estimate an additional $34 billion in wastewater treatment needs for projects that do not meet EPA documentation criteria but, nevertheless, represent a potential demand on state resources. About 11% of total needs are required for small communities. The largest needs in small communities are for improved secondary treatment and new collector sewers (nearly one-half of the total funding needs in small communities).

Authorizations for SRF capitalization grants expired in FY 1994, making it a likely subject for debate in connection with reauthorizing the Act as a whole, perhaps in the 106th Congress. In the 104th Congress, the House passed a comprehensive reauthorization bill (H.R. 961) which included SRF and related provisions. However, no legislation was enacted, because controversies over other provisions in the bill proved to be politically and substantively too difficult to resolve. The SRF and wastewater treatment provisions of the bill did not contribute to those controversies, and it is likely that similar issues and proposals will be considered in the future.

Meeting the nation's wastewater infrastructure needs efficiently and effectively is likely to remain an issue of considerable congressional interest, especially during CWA reauthorization in the future Issues debated in connection with H.R. 961 in the 104th Congress are likely to recur. These include extending SRF assistance to help states and cities meet the estimated $126 billion in funding needs; modifying the program to assist small and economically disadvantaged communities; and enhancing the SRF program to address a number of water quality priorities beyond traditional treatment plant construction, particularly watershed protection efforts and managing pollutant runoff from urban and rural areas, which is the leading cause of stream and lake impairment nationally.

H.R. 961 would have extended funding for SRF grants through FY2000 and made a number of changes to address problems that have arisen since 1987. H.R. 961 provided $11.45 billion in SRF funding through FY2000. The Clinton Administration had endorsed continued SRF funding and in the 103th Congress had recommended SRF reauthorization through FY2003 at a total funding level of $13.25 billion to provide for long-term financial health of the program. The House-passed bill also provided a new state-by-state allotment formula based on population and recently estimated funding needs.

H.R. 961 contained several provisions to assist small and disadvantaged communities. It directed EPA to establish simplified procedures for small communities (serving a population of 20,000 or less) to obtain assistance under the SRF. Further, in the case of disadvantaged communities, it would have extended the SRF loan repayment period from 20 years to 40 years. States were authorized to make SRF loans to disadvantaged communities at negative interest rates. H.R 961 also authorized CWA Title II grant funds to assist small communities with construction of wastewater treatment works and to assist economically disadvantaged or hardship coastal cities.

H.R. 961 proposed to expand projects and activities which are eligible for SRF assistance to include stormwater management, watershed management, acquisition of property rights for restoration or protection of riparian areas, implementation of water use efficiency measures, and implementation of plans to prevent water pollution.

Finally, the House-passed legislation eliminated the requirement that loan recipients comply with a number of cross-cutting CWA and other federal requirements currently specified in the law. These include requiring consideration of alternative technologies, limiting use of funds for CSO projects, and approximately a dozen others. States and others contend that, while these limitations may have been appropriate under the old construction grants program, they inappropriately restrict loans made from State Revolving Funds. Requirements for compliance with the Davis-Bacon Act were not eliminated.

Prospects for reauthorization of the Clean Water Act in the 106th Congress are uncertain. While the SRF provisions have recently not been highly controversial, others (such as reform of the Act's wetlands permit program) have been contentious and are not, for the most part, easily amenable to straight-forward, consensus solutions. Congressional committees did not initiate legislative activity on clean water issues in the l05th Congress, and it is unclear whether they will do so in the l06th Congress. (For further information, see CRS Report 98-946, Clean Water Act Issues in the 106th Congress.)

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