The document discusses financing options for wastewater infrastructure in the United States. It estimates that $271 billion will be needed over the next 5 years to maintain and improve wastewater systems. Current government spending has flatlined while costs are rising. Alternative options discussed include public-private partnerships, decentralized distribution systems, increased state revolving fund grants, the WIFIA loan program, and adjusting policies around private activity bonds and infrastructure trusts. The largest nutrient recovery plant in the world is highlighted at the Stickney Water Reclamation Plant in Illinois.

1. WASTEWATER
INFRASTRUCTURE FINANCING
MAY 9, 2016
JOCELYN JUNG

2. 1
Background and Scope
Water is critical for nearly all aspects of human physical, economic, and social activity. As a
result, wastewater and its treatment is an inevitable necessity in physical space management. In
January 2016 the EPA estimated that according to the Clean Watershed Needs Survey, the
United States will need $271 billion to maintain and improve wastewater infrastructure in the
next five years and nearly $600 billion by 2020 (Casey, 2016)1. Figure six and table one below
demonstrate the financing gap further, as well as recent government spending trends in
wastewater treatment capital.
1
Bluefield Research 2016 Advanced Water Treatment & Desalination Insight

3. 2
Figure six demonstrates that government spending on wastewater infrastructure flat lined
beginning in 2006. As population continues to rise coupled with changing and challenging
economic and climate changes, states and municipalities will likely need to turn innovative
technology and public-private partnerships in order to provide adequate physical structure and
supply services. Utilization of best-use practices along with sensible risk allocation, fostering
cross-sector partnerships can address water issues head-on that properly suit the region and
area the systems are used. By approaching wastewater management through multi-focal lenses,
regions can also help bolster economic advantages and generate employment. By showing the
public optionality in financing and delivery methods, perhaps more players will get involved in
the multi-sector approach.
For any governing structure, water and wastewater delivery, reclamation, and distribution
services will continue to be a necessity in the management of physical and social infrastructure
of development. This paper will briefly outline the most prevalent financing mechanisms
related to wastewater management as well as the following focal points:
 Outline of the largest nutrient recovery reclamation plant in the world, the Stickney
Plant in Cicero, IL
 Alternative de-centralized wastewater delivery options in water-strapped regions with
increased and growing populations
 The current legislative approaches taken and needed action to encourage and create
sustainable solutions that address current and future need, as well aid in diversifying
funding capital
Financing with Bonds, Grants and Loans
&
The Role of the Private Sector
Nearly all capital projects are debt-financed: 70% of U.S water utilities and treatment facilities
rely on municipal bonds for capital investments. The most common wastewater infrastructure
financing tool municipalities use are tax-exempt municipal bonds. Large capital expenditure items
can be difficult to fund on a “pay -as-you-go basis” and approaching projects as such can likely
deplete existing fund balances. As a result, utilizing debt financing through tax-exempt bonds

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allows municipalities to pay for large expenditures through the life of an asset, thus reducing its
immediate financial burden and spreading risk over time (Brennan, 2012).
Due to their tax-exempt nature, the market for such bonds represents a growing private
investment opportunity, as tax-exempt bonds are generally more liquid with relatively stable
credit that adds diversity to investment portfolios (Standish Mellon Asset Management
Company LLC, 2015). A broader market, higher liquidity, and a number of engaged investors
can reduce interest rates and an agency’s (in this case municipalities) tax-exempt borrowing
costs even further (Brennan, 2012).
Municipalities can also issue General Obligation Bonds, which are secured by ad valorem
property taxes and are collected by the issuing authority. From an investor view, they are
generally viewed as the “best” secured debt instrument and can have lower interest agency
costs in comparison to revenue bonds (Brennan, 2012). There are, however, two disadvantages
associated with GOBs. Since the property taxes levied allocate the capital cost burden of
property owners, equity concerns may arise regarding system user and those involved with
new development, and they require local voter- approval. Assessment bonds can be used as a
capital improvement financing tool, as well. Debt service created by assessment bonds are paid
from the levied “assessments” on real property and are collected by the county tax roll
(Brennan, 2012).
Another bond utilized in long-term, capital intensive infrastructure projects is the private activity
bond (PAB) which allows local governments and private entities to create partnership for public
need. PABs can catalyze and attract wastewater management capital investment because PABs
accrue interest tax free. PABs offer another alternative in spreading risk and encouraging
innovation by reducing the government’s project management burdens and do not affect a
municipality’s credit rating (The Associated General Contractors of America, 2011). Under
current law, privately owned wastewater infrastructure treatment centers are not directly
eligible for PABs assistance, however, the unit must be operated by a government unit which
then allows the private equity market investment (Copeland, 2016).
About 98% of water investment is made at the local level, but federal policy can play a crucial
role in creating incentives for private water investment. One such immediate remedy would be
to re-classify tax-exempt bonds as Private Activity Bonds. For cash-strapped regions or those

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with high budget deficits, the re-issuance of tax -exempt bonds could be a fruitful alternative,
however, current tax codes place an annual volume cap on such bonds and states may not have
available volume (Smeltzer, 2015).
Below is a basic chart characteristic both public and private tax-exempt bonds.
Public
Tax Exempt Bonds
 Government purpose bonds: limits
private activity
 Allows localities to spread risk over
time
 Taxable bonds: unlimited use, but
higher potential all-in cost
Private
Private Activity Bonds (PABs)
 Private Equity
 Can be used with certain tax- exempt
private bonds and all taxable bonds
 Must incentivize for adequate private
capital investment
State Revolving Funds (SRFs)
The largest funding source for states and consequently municipalities are State Revolving
Funds. Established in 1987, the program dictates that the federal government provides seed
money to the states in the form of capitalization grants that are matched by the state. Although
the program is technically administered by the EPA, the states are responsible for
implementation. Below demonstrates the general flow of funds in a SRF structure.
Federal government provides
capitalization grants to SRFs
States match
funds by at
least 20%
States create low-
interest or no interest
rate loans in addition to
offering refinancing,
purchasing or
guaranteeing local debt,
and purchasing bond
insurance.
State sets
repayment
terms

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Due to their revolving nature, the initial federal capitalization investment can aid in up to four
times as many construction projects over a 20-year period versus a one-time grant (Copeland,
2016). As the SRF matures, the state ideally will be able to leverage more funds by securing
bonds and then lending the funds to SRF – eligible projects. This leveraging is currently done in
28 states, and the leveraged bonds in combination with state contributions have comprised of
nearly 52% of total SRF investment.
SRF funding, to some critics, does have its downside. SRF funding is a loan program, and
smaller communities generally have a more difficult time with the cost burden associated with a
lower tax base.
WIFIA: Water Infrastructure Financing and Innovation Act
In 2014 Congress authorized a five-year pilot program that authorized $175 million to the EPA
and Army Corps for fund administration and project delivery in approved areas and projects.
Assistance would be available for up to 49% in project costs, and the total amount federal
assistance would not exceed 80% of total projects costs. An eligible project must meet the
following criteria:
 Projects must be $20 million or more in total project costs
o Exception: The baseline credit assistance is $5 million for areas with 25,000 or less
 Project sponsors can include
o Corporations, joint partnerships/ventures, federal, state, local, or tribal entities,
or a direct state infrastructure group of projects
o Privately sponsored projects must show direct public support through written
documentation
 Projects use American- made steel iron
Although the interest on the Treasury-rated capital would be taxable, borrowing costs to the
appointed entity would likely remain low due to lower interest rates (Copeland C. , 2016).
Furthermore, all projects granted assistance have to be investment grade and deemed credit
worthy with an identified or likely stream of repayment revenue. Both financial aspects of the
structured loan program would help encourage private investment. A potential financing
“partnership” between SRFs and WIFIA is likely in some qualifying areas, with the intention

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that the approach would allow SRFs to reach borrowers and projects that may not otherwise
happen.
Stickney Water Plant: Wastewater Reclamation and Reuse
The need for innovative, economically and ecologically sustainable solutions that are both
financial feasible and socially acceptable will likely be met by a combination of players and
cross-sector partnerships. Water equipment and engineering service providers, such as Black
and Veatch can combine with municipalities to create and provide efficient, financially-feasible
entities that can serve thousands of users.
In 2013, the Greater Water Reclamation District of Greater Chicago selected Black and Veatch
and Ostara Nutrient Recovery Technologies to design and build a nutrient recovery system at
its existing Stickney Water Plant in Cicero, IL. The plant covers over 260 square miles and filters
around 1.5 billion gallons of wastewater daily (Veatch, 2013). The plant’s addition was financed
primarily through tax-exempt municipal bonds in addition to IL SRF funds.
Currently the largest fully-functional operating system of its kind in the world, the plant
improves water quality in local watershed sources in addition to removing phosphorous from
the incoming water flows and turns the extracted, non-renewable nutrients into commercial
grade fertilizer, Crystal Green. The funds raised from the distribution and sell of the final
fertilized product will help offset the operating and maintenance costs of the constructed facility
(Veatch, 2013).
The other private entity involved in the partnership, Ostara Nutrient Recovery Technologies,
has contracted with the water reclamation district to purchase the fertilizer at $20.00 a ton and
markets/sells it to agriculture and ornamental distributors. The University of Illinois also
reportedly purchases high quantities for research purposes.

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Although the Chicago region has one of the largest fresh-water sources in the world in addition
to a very strong population number, these types of monetized partnerships can help
municipalities meet both their structural and wastewater delivery needs and serve as a model
for other metropolitan areas.
Alternative Delivery Methods: Distributed Wastewater Delivery Systems
Historically, the current U.S. water systems were built in response to the notion that urban
precipitation was considered waste. Federal, state, and local agencies worked together to build
the vast, now aging network of dams, canals, pipelines, pumping stations, and treatment plants
that provided adequate drinking water and treatment services (Ceres, 2014). With surging
populations and unpredictable weather patterns, the 21st century brings new, water-straining
system challenges that cannot be adequately addressed with old approaches, in particular in
water-stressed, financially restricted regions.
Many large U.S cities, regions, and municipalities utilize traditional, centralized water treatment
facilities (the previous image of the Stickney Plant shows a physical demonstration of this.)
While this works for some areas, de-centralized, distributed treatment networks offer a viable
alternative in the new physical, economic and political environments. Distributed water
infrastructure focuses on integrated water management at the site scale, both to neighborhoods
and small sites, as well as to entire regions and watersheds (Foundation, 2014)The figure below,
from (Foundation, 2014) also demonstrates various physical shapes of wastewater treatment
facilities.

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In many cases, distributed water management systems inherently and efficiently address a
region’s triple bottom line of environmental, social, and economic considerations (Foundation,
2014). For smaller communities in particular, distributed water management can offer several
benefits including:
 Offer the ability to obtain and create sustainable infrastructure on smaller land lots
 Can help preserve a community’s “identity” by limiting physical growth
 Can help preserve fiscal independence by providing the option to not connect to another
area’s sewer system, and perhaps the most important aspect, avoiding the large upfront
capital costs and debt associated of constructing centralized distribution systems
(Foundation, 2014).
Economically, traditional infrastructure projects usually have large sunk costs and debt
service that is inherent with bond financing (Foundation, 2014). Instead of relying on large-
scale, perhaps uniform design approaches, distributed water management systems allows
for the development of systems built to community standards, installed and built in phases
that allow for a pay-as you-go approach generally not available with centralized systems
that are financed with large amounts of debt. Design-build-operate (DBO) provides a
variety of innovative partnerships both in the public and private sector that can help
implement these smaller, decentralized projects.
Of course, for regions serving large populations looking to utilize the de-centralized model,
unfortunately will still likely have to turn to some sort of debt financing to meet the large-scale
use needs. Enterprise revenue debt is currently and will continue to be the most likely debt-
financing tool associated with distributed wastewater infrastructure.
Adjusting for the Future: Financing and Policy Adjustments
In order to help bridge the financing and perception gap in the wastewater treatment world, an
array of policy and financial approaches likely need to be addressed. Public-private
partnerships can be daunting for both the players involved and the general public, and
transparent practices are key in alleviating confusion and public fear of private ownership of
“life-influencing” physical assets. These cross-sector arrangements present the opportunity for
new capital infusions into much needed infrastructure improvements nationwide. Establishing

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industry frameworks will allow states and municipalities to leverage both federal sources as
well as private equity to adopt new technologies (Forer, 2013). In addition, the policy options
below outline what municipalities and voting constituencies can focus on a national level to
help remove the barriers in wastewater treatment and management in the public-private
partnership world that impact daily life in a very real, local way. According to the legislative
options paper released by the Congressional Research Service in April 2016, the following can
help bridge the policy and financing gaps.
1. Increase funding for the State Revolving Fund programs (SRF)
Due to the ability of certain states to leverage the federal capitalization dollars as
discussed earlier, increased seed money can add to the funding pools available to states
for money-matching purposes. One thing to note, however, is that currently SRF
assistance is limited to government bodies which limits private utility program entrance.
2. Create and Authorize the WIFIA Act
Although funding is authorized through the fiscal year 2019, full inclusion and
implementation of the act into Congressional legislature can insure project funding
delivery for generations to come. By financing only investment-grade level wastewater
projects, government exposure to risk can be minimized and states can potentially meet
their wastewater infrastructure needs in ways they may not otherwise be able to.
3. Create a Federal Water Infrastructure Trust Fund
Existing trust funds could serve as a model for this (such as the airport and highways
trust fund) and would need to be supported by “dedicated” revenues. In fact, the stream
of revenue receipts is the most crucial question surrounding the establishment of such a
fund. Past conversations have discussed possible excise taxes or fees on industrial
discharge.
4. Create a National Infrastructure Bank
In this context, a government – established entity would provide credit assistance to
sponsors of water infrastructure projects. Such a “bank” would likely create additional
attractive financial products, such as low interest rates and long maturities on bonds and

11. 10
loans. The strongest criticism against a national infrastructure bank involves the fear of
political and favoritism and geographic equity.
5. Remove the cap on Private Activity Bonds (PABs)
The use of PABs opens up tax-exempt financing to private investors. The 2016 volume
cap for states is $302.88 million. By removing the cap, estimations predict that capital
investment in wastewater infrastructure could increase up to $5 billion annually. Cap
removal would allow state and local governments to utilize more leverage in the private
sector to meet their water infrastructure needs.
6. Reinstate Authority for Issuance of Build America Bonds (BABs)
BABs were a produce of the 2009 American Recovery and Reinvestment Act, and unlike
PABs, were not subject to a volume cap. In theory, they could be issued for any purpose
other than those that utilize PABs. In addition, the tax-exempt bond market typically has
a narrow market of investors (individuals and mutual funds). When is use, BABs offered
credits equal to 35% of the interest rate between the buyer and the issuer, and can be
attractive to institutional pension funds.
Conclusion
In order for states and municipalities to adequately address the financing gap for wastewater in
years to come they will likely need to turn to creative, cross-sector partnerships that utilize
sustainable design practices in addition to innovative financing ideas, either through bonds,
grants and loans, or private equity sources. More than likely, the large capital investments
needed will have to be a combination of all of the financing sources above. In addition, it is also
likely inevitable that states and local elected officials will have to be involved in the political
financing processes associated with bond and grand structuring, in particular if the private
equity sector does not or cannot be openly invested in the market without government blocks.

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References
Brennan, S. A. (2012). Water and Wastewater Projects: Financing with Tax-Exempt Bonds. San Franciso,
CA: Orrick.
Casey, E. B. (2016). Advanced Water Treatment & Desalination Insight. Boston, MA: Bluefield Research
LLC.
Ceres, S. L. (2014). Bond Financing Distribured Water Systems. Austin, Texas: Ceres.
Copeland, C. (2016). Water Infrastructure Financing: The Water Infrastructure Finance and Innovation
Act. Washington D.C.: Congression Research Service.
Copeland, C. M. (2016). Legislative Options for Financing Water Infrastructure . Washington D.C:
Congressional Research Service.
Forer, G. (2013). The US Water Sector on the Verge of Transformation. N/A: Global Cleantech Center.
Foundation, W. E. (2014, N/A N/A). Distributed Water Infrastructure for Sustainable Communities.
Retrieved from WERF:
http://www.werf.org/i/c/Decentralizedproject/When_to_Consider_Dis.aspx
Smeltzer, P. (2015). Water Infrastructure Funding. Washington D.C.: NAWC -National Association of
Water Companies.
Standish Mellon Asset Management Company LLC. (2015). Aging US Infrastructure Drives Opportunity
for Muni Bond Investors. New York, NY: BNY Mellon - Dreyfus.
The Associated General Contractors of America. (2011). Private Activity Bond Volume Cap. N/A: AGC of
America.
Veatch, B. &. (2013, September 12). Black and Veatch - Stickney Plant. Retrieved from Black and Veatch:
bv.com