services varies by size for municipalities sampled in the study. The lower portion of the figure shows the dollar expenditures for these same services. The differences between the two presentations is attributable to several factors. For example, the percent of household income spent for drinking water and wastewater treatment services tends to fall as municipality size increases, but dollars expended for these services remains constant or rises with population. Smaller communities tend to have lower average household incomes than do larger communities. Therefore, households in smaller municipalities must spend a larger proportion of their income than households in larger communities in order to expend equivalent dollar amounts. For many environmental services, the ability of larger communities to take advantage of scale economies will allow them to enjoy lower unit costs for services than consumers living in smaller communities. The numbers in Figure 2-2 do not show a large decline in expenditures as population size rises. These lower unit costs are partially offset by greater consumption of these services, so the total user fees paid by households in larger municipalities can be comparable, on average, to fees paid by households in smaller communities. Grants and loans to communities have also helped to lower household costs for drinking water and wastewater treatment services, but it is not clear that the distribution of assistance has been weighted in favor of small versus large communities. An additional factor contributing to the similarity in costs across municipality sizes is the more advanced average level of services provided in larger municipalities. Larger communities have invested in more advanced and costly treatment technologies, which can offset the advantages of scale economies for comparable levels of services. The net result is that households in smaller communities generally spend a larger portion of their available resources-when measured as a percent of household income to obtain drinking water and wastewater treatment services than do households in larger communities. Likewise, although scale economies may also occur in solid waste treatment, the costs in Figure 2-2 do not reflect this. The higher relative household costs of solid waste disposal for larger municipalities are primarily due to the limited number of requirements currently affecting smaller communities, and the reliance of some larger communities on more sophisticated and costly disposal techniques. When improved environmental services are supplied by municipalities, the additional costs of raising capital to begin construction of facilities can be funded through different revenue-raising mechanisms. Current revenues, or "pay-as-you-go" financing, uses a proportion of revenues to support a capital reserve account. The revenues may come from taxes or usage fees. This method has often failed to provide for adequate reserve funds capable of financing large capital investments. Smaller communities are more likely to use this mechanism, given the amount of capital they require is often small. They are also likely to use this mechanism because they lack sufficient expertise and fiscal capacity to raise funds through bond markets. Debt service financing involves the issuance of bonds to finance construction of large-scale projects. General obligation (g.o.) bonds are repaid with revenues raised from property or income taxes. They are best applied in situations where the general public benefits from the project, such as with public education or transportation systems. Revenue bonds are supported by the user charges assessed to customers directly benefiting from the project. Since revenue bonds rely on customer payments and g.o. bonds rely on the taxing authority of the local government, the revenue bonds are perceived as more risky to investors and, therefore, require a higher rate of return on the amount invested. Revenue bonds can be a more accessible financing instrument than g.o. bonds, since local governments may be constrained by federal and state statutes as to the amount of debt the community can issue, or the amount it can increase tax rates. Revenue bonds are now the preferred choice of local municipalities to finance drinking water and wastewater treatment projects. There is also increasing interest in their potential use for solid waste treatment projects. The declining availability of federal grants has contributed to the greater interest in alternative financing mechanisms. A substantial proportion of the capital investment in wastewater treatment since passage of environmental legislation in the early 1970s has been financed with federal and state grants. Grants were once a major source of capital financing for many public infrastructure programs. These programs have been reduced in favor of federal, state, and local government loan or debt financing programs. Although federal and state grants will continue into the next decade, funding levels will decline, so alternative financing mechanisms will be adopted to meet increasing demands for resources. STUDY METHODOLOGY AND LIMITATIONS This study examines the impacts of recent and forthcoming environmental regulations upon user charges and finances in municipalities. The outputs of the study include projections of the cumulative costs to communities of upcoming actions, the proportion of communities expected to face potential difficulties meeting the household user charge increases necessary to pay for additional requirements, and the proportion of communities that may have financial difficulties meeting the requirements given their present financial conditions. In addition to having to use a relatively small sample of communities, the study had to rely upon a number of simplifying assumptions, including the omission of several important environmental regulations for which estimated costs are not yet available and the use of economic indicators to assess household burdens and financial capabilities of municipalities to fund improvements in environmental services. Methodology This study used EPA's MUNFIN model of municipal finances to calculate the effect of adding the estimated aggregate costs of environmental regulations to the current user charges and financial statistics of 270 sampled municipalities. As indicators of potential financial difficulties, the study examined several measures of the predicted increases in user fees and municipal debt. The environmental regulations considered in the sector study are listed in Table 2-1. The overall methodology is summarized below. The study estimated the cost and the incidence rate of each environmental regulation for municipalities in each size category in order to produce "probabilities of occurrence" and the relevant associated capital, maintenance, and administrative The probabilities and cost figures were used to determine the weighted average costs of each new requirement, and cumulative totals of weighted average costs. Regulations Omitted from the Cost Analysis (due to insufficient data) A. Drinking Water 1. Wellhead Protection Plan 2. Pesticides in Groundwater 3. Disinfection By-Products B. Wastewater Treatment 1. National Estuary Program 2. Wetlands Protection Program - 404(c) Permits 3. Nonpoint Source Regulations/Guidance/Mgmt. Plans 4. Section 304(1) Toxics in Water Bodies C. Solid Waste Disposal 1. National Contingency Plan - Superfund Program 2. Low-Level Radiation Waste Standards 3. Toxicity Characteristics of Solid and D. Miscellaneous Regulations 2. Gasoline Marketing 3. Diesel Fuel Standards 4. Revisions to National Ambient Air Quality Standards (Ozone, Carbon Monoxide, Particulate 5. Asbestos in Public Buildings In Development In Development In Development In Development Promulgated May Be Required |