Rural Water Supply and Sewer Systems: Background Information

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

November 2, 1994

94-838 ENR

SUMMARY

The Safe Drinking Water Act and the Clean Water Act impose requirements regarding drinking water supply and wastewater treatment in rural areas. Several Federal programs assist rural communities in meeting these requirements. Approximately 27 percent of the U.S. population lives in areas defined by the Census Bureau as rural. Many rural communities need to complete water and waste disposal projects to improve public health and environmental conditions of their citizens. Many of the smallest of these communities are believed to require financial assistance to meet Federal water quality and drinking water standards.

REGULATORY REQUIREMENTS

The public health and environmental requirements of two Federal laws are primarily driving plans and projects in rural, as well as non-rural, areas regarding drinking water supply and wastewater treatment. The Environmental Protection Agency (EPA) administers both laws.

For water supply, requirements of the Safe Drinking Water Act (SDWA) apply to communities which are served by public water supply systems, both government-owned and privately-owned systems. As defined in this Act, public water supply systems are those having at least 15 service connections. Public water supply systems serve approximately 243 million persons; the remainder (including 45 percent of rural communities) is served by non-community systems (such as individual wells), which are not subject to the Act or its regulations.

Numerically, water systems with service areas of less than 10,000 persons account for 94 percent of all community water systems (CWS), yet they supply water to only 20 percent of the population served by CWS. The smallest water systems (serving fewer than 1,000 persons, many serve small clusters of homes) account for 73 percent of all systems. They have the most difficulty in complying with drinking water regulations. Most very small systems have no credit history and have never raised capital in financial markets; also, most are non-public entities and thus do not have access to Federal grants and loans. Small to medium systems (serving 1,000 to 10,000 persons) are institutionally more capable than smaller systems, yet they also face financing challenges, having limited access to financial markets and credit worthiness more sensitive to local economic conditions than larger systems.

Public water supply systems currently are subject to a number of drinking water regulations issued by EPA under the SDWA. Federal regulations which limit levels of contaminants in treated water supplies are implemented by local water suppliers. These regulations require, for example, water supply system monitoring, treatment to remove certain contaminants, and reporting. A number of additional regulations are being developed that will impose additional regulatory and compliance burdens on all public water systems within the next few years; the number of regulated contaminants increased from 23 in 1986 to 84 in 1992 and is expected to reach approximately 110 by 1996.

EPA estimates that compliance with the regulations already promulgated will provide millions of people protection from numerous industrial chemicals, microbes, and other contaminants in public water supplies. However, to comply with regulations, many municipalities must invest in capital equipment, operation and maintenance, and increased staff technical capacity. Recent regulations with particularly costly implications for small towns include water filtration, lead control, inorganic and organic contaminant control, and pending radionuclide requirements. Under EPA's filtration rule, water bills paid by customers of small systems that must filter supplies could increase by $360 to $600 per year, compared with $72 per year increases for large system customers. Overall, EPA estimates that 68 percent of total compliance costs for drinking water regulations currently being implemented will fall on the 90 percent of systems that each serve fewer than 3,300 persons.

For wastewater treatment, requirements of the Clean Water Act (CWA) apply to all communities which discharge municipal sewage waste into the Nation's waters. Under that Act, all municipalities were to achieve secondary treatment of municipal sewage, equivalent to removing approximately 85 percent of wastes from the municipal wastestream, or more stringent, where that is required to meet local water quality standards, by July 1, 1988. Unlike the Safe Drinking Water Act, regulatory requirements under the CWA are not changing, or likely to change, to impose new costs. The issue for many small and large cities is continuing efforts to finance capital improvements that have been known for several years.

When the 1988 deadline arrived, EPA estimated that 87 percent of all cities achieved compliance, including 86 percent of rural systems. However, of the 2,097 cities which did not achieve compliance and are subject to EPA enforcement and/or penalties, 80 percent were "minor" facilities, defined as those serving a population of 10,000 or less.

Recently EPA reported that cities throughout the country (of all sizes) will require $127 billion over the next 20 years for wastewater facilities to meet water quality standards. EPA estimates that funding for small communities' projects represents about 15 percent of total funds needed nationwide, yet about 7,300 small towns, or more than 65 percent of all small communities, have identified project needs.

A 1988 EPA report examined the overall impact of environmental regulations on municipalities, including drinking water and wastewater treatment. (1) This report observed that the smallest and largest of communities (those under 2,500 persons and those over 250,000) will experience the biggest increases in costs from additional regulations, both in terms of dollars per household and percent of household income. EPA estimated that the smallest cities would experience the largest overall percentage increases in user charges and fees, as a result. User fees in one-fifth of the smallest cities may rise more than 100 percent above 1988 levels by 1996, according to this EPA report.

FEDERAL ASSISTANCE PROGRAMS

The Federal Government operates several programs that assist the Nation's rural communities in developing water supply and wastewater/sewer systems. Agencies include the U.S. Department of Housing and Urban Development (HUD); Appalachian Regional Commission (ARC); Economic Development Administration (EDA), within the Department of Commerce; EPA; and the U.S. Department of Agriculture (USDA).

EIUD administers assistance primarily under the Community Development Block Grant (CDBG) program, under title I of the Housing and Community Development Act of 1974, as amended. FY 1995 appropriations are $4.6 billion. CDBG funds are used by localities for a broad range of activities intended to result in decent housing in a suitable living environment. Water and waste disposal needs compete with many other public activities for this assistance and are estimated to account for 10 to 20 percent of CDBG obligations. Program policy requires that at least 70 percent of funds must benefit low/moderate-income persons. Sixty-five percent of CDBG funds are distributed as entitlement grants to metropolitan cities; about 30 percent is for project grants to nonentitlement, smaller cities.

The ARC assists with programs and projects to provide basic facilities essential to economic growth in Appalachia. Investments are concentrated in areas with significant potential for future growth as well as in areas that suffer the greatest distress. States, acting through the ARC, are responsible for recommending local and State projects for assistance. In FY 1995 the ARC is funded at a level of $187 million; approximately $45.5 million of this amount is budgeted for local community development assistance which may include water and sewer system projects, along with other public works, housing, and local government assistance.

EDA provides project grants for construction of public facilities, including water and sewer systems, to alleviate unemployment and underemployment in economically distressed areas. Development grants provide for infrastructure projects that foster industries and commercial businesses that provide long-term employment and are part of approved overall economic development programs in areas of lagging economic growth. In recent years, funds have totaled about $130 million annually; amounts used for water and sewer projects are not known.

In historic terms, the largest Federal assistance program for wastewater treatment assistance is administered by EPA under the Clean Water Act. (2) Since 1973 Congress has appropriated $65 billion under this program. Total FY 1995 funding is $2.2 billion. Funds are distributed to States under a statutory allocation formula and are used to assist qualified projects on a priority list that is determined by individual States. Prior to 1989, States used their allotments to make grants to cities and other localities. Now, however, Federal funds are used to capitalize State loan programs (State Revolving Funds, or SRFs), and project loans are made according to criteria in the CWA. Over the long term the State loan programs are intended to be sustained through repayment of loans, thus creating a continuing source of assistance for other communities. Rural and non-rural cities compete for a portion of the State's funding; rural areas have no special priority, nor are States required to reserve any specific percentage for projects in rural areas.

Small communities and States with large rural populations have had the largest share of problems with the newer CWA loan 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 loans. These communities often lack an industrial tax base or opportunities for economies of scale 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.

USDA WATER AND WASTE DISPOSAL PROGRAMS

The U.S. Department of Agriculture operates grant and loan programs to assist development of water supply and waste disposal facilities in rural areas, defined as any area in a city or town which has a population of not more than 10,000 persons. Communities must be denied credit through normal commercial channels to be eligible for assistance. USDA prefers making loans to finance such systems; grants are made only when necessary to reduce average annual user charges to a reasonable level. Historically, the USDA programs provided less assistance than EPA's program under the CWA (appropriations for USDA grants and loans averaged $500 million per year during the 1980s, compared with an annual average of $2.3 billion for the EPA program during that period). Since 1990 Congress has increased appropriations for USDA grants and loans to the FY 1995 total of $1.4 billion (see Figure 1).

In recent years, water supply projects have accounted for about 50 percent of loans and 55 percent of grants under the USDA programs. The remainder has been for waste disposal projects, with about 4 percent of total funds for combined projects.

These programs were previously administered by the Farmers Home Administration, but their operation was transferred to the newer Rural Development Administration in 1992. Under legislation enacted in 1994 to reorganize the USDA (P.L. 103-354), administration of the water and sewer assistance programs will be consolidated with telephone and electric programs of the Rural Electrification Administration in the Rural Utilities Service by early 1995.

Water and Waste Disposal Grants

Section 306 of the Consolidated Farm and Rural Development Act, as amended, authorizes grants for the development costs of water supply and waste disposal projects in rural areas. Only communities with poverty and intermediate rate incomes qualify for USDA grants. An eligible project must serve a rural area which is not likely to decline in population below that for which the project was designed, and it must be designed and constructed so that adequate capacity will or can be made available to serve the reasonably foreseeable growth needs of the area.

Grants may not exceed 75 percent of the development cost of a project. Grants may be used to supplement other funds borrowed or furnished by applicants for project costs and may be combined with loans when the applicant is able to repay part, but not all, of the project costs. Eligible applicants may include municipalities, authorities, districts, certain Indian tribes, and similar organizations. Grants also can be made to private nonprofit organizations that have experience in providing technical assistance in areas such as evaluating alternative solutions to water and waste disposal problems or improving operation and maintenance practices at existing facilities. Funds for the grants program totaled $500 million annually in FY 1994 and FY 1995 (see Figure 1).

Water and Waste Disposal Loans

The Rural Development Act of 1972 authorized establishment of the Rural Development Insurance Fund under section 309(a) of the Consolidated Farm and Rural Development Act. Among other activities, this fund is used for loans to develop storage, treatment, purification, or distribution of water or collection, treatment, or disposal of waste in low-income rural areas.

Loans are made to public bodies, not-for-profit organizations, Indian tribes on Federal and State reservations, and other federally recognized tribes for projects needed to meet health or sanitary standards, including clean water standards and requirements under the Safe Drinking Water Act. Loans are repayable in not more than 40 years or the useful life of the facility, whichever is less.

Loan interest rates are based on the community's economic and health environment and are designated poverty or intermediate. The poverty interest rate is 4.5 percent, and such loans are made in areas where the median household income (MHI) falls below the higher of 80 percent of the statewide nonurban MHI or the poverty level and the project is needed to meet health or sanitary standards. The intermediate rate is the poverty rate plus one-half the difference between the poverty rate and the market rate for municipal bonds, not to exceed 7 percent. This rate applies when requirements for the poverty line rate are not met and the MHI of the service area does not exceed the statewide nonurban MHI.

Funds for water and waste disposal loans were $869 million in FY 1994 and $905.5 million in FY 1995 (see Figure 1). Since inception of the water and waste disposal loan program in 1937, more than $12.5 billion in loan funds have been obligated to more than 16,000 rural areas and communities. Losses on these loans have been minimal, according to USDA.

insert picture here (Figure 1)

CURRENT ISSUES

For much of the 1980s the Administration sought decreases in the assistance programs described above, arguing that adequate private credit sources were available to finance needed facilities and that benefiting projects primarily meet local (not national) needs and should be the responsibility of State and local governments. More recently the Administration requested and Congress appropriated higher funding levels (especially for the USDA programs), in recognition of the financing and compliance problems widely faced by small and rural communities.

To make more assistance available, the Clinton Administration proposed that a State Revolving Fund be established for drinking water projects, parallel to the SRF for wastewater projects under the CWA. The 103rd Congress considered but did not enact legislation, S. 2019/H.R. 3392, which would have authorized $1 billion per year for State loans programs and provided some special assistance for economically disadvantaged towns (i.e., loan subsidies or grants). Clean water legislation in the 103rd Congress also included small community provisions for wastewater projects (i.e., loan subsidies, partial restoration of a grants program), but no clean water bill was enacted either.

More broadly, there is the issue of compliance with environmental rules and whether the requirements or deadlines should be modified for small systems, focused to a large degree on drinking water rules and standards that represent the newest environmental mandates. Some of the drinking water legislation in the 103rd Congress contained provisions to waive certain monitoring requirements, modify technology requirements applicable to small systems, provide for technology variances and exemptions, and make more technical assistance available. Similar proposals are likely in the 104th Congress.

Endnotes

1. U.S. Environmental Protection Agency. Municipalities, Small Business, and Agriculture: The Challenge of Meeting Environmental Responsibilities. Washington, D.C., 1988. 1 vol.

2. EPA does not administer a similar program for water supply or treatment.