Funding Source Water Protection

Bob Morgan, PhD

December 16, 2018

Source water protection (SWP) is a system of procedures, processes,and tools designed to take action to maintain or improve the quality and quantityof a drinking water source (both surface and groundwater) and protect publichealth for current and future generations. The process includes characterizingthe source of water, setting goals and objectives for that water source,developing an action plan to protect the source, implementing that plan,monitoring effectiveness and evaluating results. In Arkansas the Department ofHealth provides utilities with a source water characterization includingdelineation of the protection area and identification of potential sources ofcontamination (PSOCs) of the water source. The Rural Water Association will, onrequest, provide a SWP plan. Implementing the plan is however left up to thelocal utility. Implementing a SWP plan obviously requires some effort andexpenditure on the part of the utility. So how does the utility raise theresources and funds to implement SWP.

I divide the SWP program into two main components, program and project. Program is the ongoing day to day activities such as keeping up with the PSOCs, preparing for emergencies, building networks with stakeholders and partners, public outreach, attending public meetings, grant writing etc. etc. Some one or ones at the utility need to be responsible for the ongoing program. The only really sustainable source of funds for this program component is the utility itself. Some utilities make the SWP program a line item in their annual budget. Others, such as Beaver Water District in NW Arkansas allocate a certain portion of their revenue to SWP, i.e. $0.04 per thousand gallons sold. Then some utilities add a SWP fee onto their monthly bills. Central Arkansas Water has taken the last approach. One way or another, the utility needs to come up with the resources for this component.

The other component of SWP is implementation of projects outlined in the action plan. These projects may include public awareness, education and training, technical assistance, financial assistance, monitoring effectiveness, evaluating success, and possibly land acquisition among others. These projects may be financed by the utility itself. But frequently the cost of implementing projects is beyond the capacity of all but the largest utilities. Also, the utility likely does not have the appropriate expertise for all that has to be done. Luckily, there are a number of alternative financing mechanisms. These alternatives include: government grants, foundation grants, government assistance programs, and increasingly private financing schemes. All of these alternatives have their place.

Government grants relevant to SWP come mostly from the US Environmental Protection Agency (EPA) or the US Department of Agriculture (USDA). Government grants, such as the EPA’s section 319(h) nonpoint source pollution management grants are likely the most frequently used programs to finance SWP projects. Proposals for government grants have to be in line with the granting agencies goals for the program. The grants can be fairly large and comprehensive. However, the grants are competitive so you cannot count on them for sustainably funding projects over time. Foundation grants may be available from local, regional, or national philanthropic organizations. Foundation grants vary from a few hundred to hundreds of thousands of dollars. These grants may be more flexible than government grants. Foundations likely also have fewer restrictions on grant activities than the government grants. The key is finding a foundation whose mission is closely aligned with your SWP program. Then you need to convince the foundation that you are a good recipient of their funds. Foundation grants may be a sustainable source of funds, but usually they are better suited to individual projects.

Government assistance programs differ from grants in that in these programs, the government provides their expertise or funding directly to the consumer. For instance, the USDA’s Environmental Quality Assistance Program provides technical and financial assistance to farmers wishing to implement practices on their land that protect water quality. The United States Geological Survey has a joint funding program where they provide scientific expertise for public projects and share the cost with a local entity. The United States Corps of Engineers also works with local and state entities through providing assistance on planning of water projects. These assistance programs are often better funded than grant programs and they are more dependable year after year. The recently passed Farm Bill directs USDA conservation programs to allocate at least 10% of their funds to projects that protect sources of drinking water. Utilities can tap into these funds by cooperating with their local Conservation Districts and the National Resources Conservation Service.

Another source of government funding for SWP is from the Clean Water State Revolving Fund and the Safe Drinking Water State Revolving fund. These two funds were established by the EPA to help states implements the requirements of the Clean Water Act and the Safe Drinking Water Act respectively. The Clean Water Act deals with waste water and ambient water quality. The Safe Drinking Water Act is targeted at public water supplies. State revolving funds are capitalized by the federal government. The State then invests the funds by making loans to local government entities needing to construct new water facilities. The local government entity pays the loan off over time. Hence the fund revolves back to the State. Interest rates on State Revolving Fund loans may be very competitive. Both the Clean Water and the Safe Drinking Water Revolving Funds may be used for SWP or “Green Infrastructure” projects. States may incentivize SWP projects by giving a lower interest rate to projects with a SWP
 component. The downside is that these are still loans.

The use of private capital to fund SWP projects is a new concept. Two approaches to private capital are now in use. Green bonds are a financial instrument that provides a reduced interest rate on construction project I green infrastructure elements are included in the project. Green infrastructure may be conservation of critical tracts of land or incorporating ‘soft engineering’ such as rain gardens, green roofs, etc. These green elements help to protect water quality. A bonding company may issue ‘Green Bonds’ for the public relations value, they may see reduced risk because of the green infrastructure, or they might see opportunity to sell the bonds to conservation minded investors. Another approach to using private capital is the Forest Resilience Bond. Forest Resiliency Bonds can be used to fund large reforestation or forest restoration projects. These projects tend to be expensive and need to be done quickly. But most utilities and other entities do not have the capital to take the projects on in a reasonable time frame. In a Forest Resiliency Bond, a third party builds a collaborative of two or more entities who have stake in the restoration project and have a source of sustainable funds. Those funds could be used to pay off a bond over several years. The third entity then sells bonds to investors and provides funds to accomplish the project quickly. Investors are attracted because of the low risk of the ongoing funding for the partners.

The science of SWP will continue to advance, but basically,we know what needs to be done. The hard part is actually getting on the groundand implementing effective action plans. As you can see, resources do exist,but putting together a long-term financial plan will require thinking outsidethe box. By effectively using multiple source, sustainability can beaccomplished.

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