WASHINGTON -- Bond issuance in the Clean Water Act state revolving fund program has increased significantly in recent years, with bond proceeds now accounting for 37% of the $24.1 billion available for water pollution control projects through 1999, the Environmental Protection Agency says in a new study.

And with only a quarter of all states now leveraging their federal and state grants with bonds, even more issuance may be on the way.

"Many of the states with straightforward loan programs are exploring leveraging and other more sophisticated financing techniques for possible modification of their programs in future years," the report says.

But while bond issuance, at $9 billion, has become the largest single source of funds for the program, the report found that it also significantly increases the cost of running the program, raising an obstacle often cited by state officials as preventing them from issuing more bonds.

The report said more than half the states with leveraging programs found their administrative costs exceeded the law's 4% limit on the amount of federal grants that can be used to administer the funds.

EPA administrator William Reilly late last week sent the report to Congress where, as the agency's first comprehensive survey of the 51 state revolving fund programs since they were authorized under the 1987 Clean Water Act, it is expected to influence the debate over reauthorization of the program.

In particular, the report may help counter the criticism of some in Congress that the program has not been running smoothly or accomplishing the goals Congress set for it five years ago.

"We've encountered a lot of apprehension in Congress, a lack of good information, and a lack of authoritative reports on how the program is working," said James Smith, executive director of the Council of Infrastructure Financing Authorities.

The EPA's report -- which "affirms that the program is working well" -- will "serve a very positive purpose," he said.

Linda Eichmiller of the Association of State and Interstate Water Pollution Control Administrators, agreed that the report shows "the program has been a premier success."

Since one of the law's goals was to encourage states to leverage their federal grants several times over with bond issuances, the report's finding that bonds now account for the largest share of funds could be particularly helpful in clearing the program's name in Congress, Mr. Smith said.

The $9 billion of funds contributed by bond proceeds through 1999 is expected to outpace the federal government's $7.74 billion of capitalization grants for the revolving funds and the states' own $4 billion contribution, according to the report.

Mr. Smith said the EPA figures are by and large "accurate," but the 37% figure -- which is an aggregate total of bond proceeds nationwide -- may mistakenly give the appearance that all the states are leveraging significantly. A large part of the total is due to aggressive bonding programs in several large states, particularly New York, he said.

The EPA's clean bill of health for the program is particularly important, the state officials said, in view of the fact that a major proposal is pending in Congress that would relegate the program, with its unique bonding capacities, to only a minor role in water pollution control in the future.

Leaders of the Senate Environment and Public Works Committee proposed in their clean water reauthorization bill this year to convert the program largely into a grant program, even though the committee originally envisioned the revolving fund program as a self-perpertuating source of funding for water projects of all kind for years to come.

"I think the Senate has good intentions, but the question is whether we're going to start moving down the slippery slope to pork barrel politics again" or continue to allow state and local governments to be largely responsible for funding and managing the program, Ms. Eichmiller said.

The state officials noted that another survey of the revolving funds, which is due out soon from the General Accounting Office, is expected to be more critical -- though less comprehensive -- than the EPA in assessing state and local management of the funds and may bolster congressional criticisms.

Another important point made in the report, Ms. Eichmiller said, is that the amount of funds available for water cleanup projects -- $28.7 billion through 1999 -- falls far short of the amount needed to comply with all the requirements of the clean water law.

The EPA estimates that it would take $83 billion to comply with the law's municipal wastewater treatment requirements alone. Beyond that the cost of funding projects to eliminate water toxics, clean up runoff from urban streets and agricultural fields, and protect marine estuaries, among others, could run up the tab another $50 billion to $100 billion, officials said.

"The report recognizes that the revolving funds are undercapitalized" and that Congress is going to have to provide further funding to help municipalities comply with the huge new caseload of federal regulations, Ms. Eichmiller said.

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