WASHINGTON -- Congress will require municipalities to pay for billions of dollars more of environmental cleanup projects next year as it tries to stretch scarce federal funds, and it may look to the bond market more than ever before for help, congressional aides say.

"We want to get the most bang for the buck," since the ever-growing federal deficit will prevent Congress from putting significantly more money into water cleanup programs, said John Doyle, chief of staff of the House Public Works and Transportation Committee, at a clean water conference last month.

That means that as the committee drafts its bill to reauthorize the Clean Water Act next year, it will look for ways to "build on" the grant and bond leveraging programs already established under the act, he said, and may consider creating new "economic incentives" for pollution control -- which could include a wider use of tax-exempt bonds.

Next year's search for new ways to pay for a cleaner environment may prove similar to the hunt for innovative financing mechanisms that spawned the establishment of the act's state revolving loan program in 1987. The 51 state funds, seeded with federal and state capitalization grants, so far have sponsored more than $9 billionof state and municipal bonds offerings, according to the Environmental Protection Agency.

But while the bond and grant proceeds in the funds will contribute $29 billion toward pollution control by the end of the century, that still falls far short of paying for an $83 billion backlog of wastewater treatment projects needed to comply with the law, the study said.

And it does not even begin to put a dent in the billions of dollars more of farm and urban runoff controlk projects and marine estuary cleanup projects that the funds were supposed to help finance under the 1987 law. Officials estimate the cost of those projects at between $50 billion and $100 billion.

State groups hope to convince Congress to authorize funding for the program beyond its scheduled expiration date in 1994, so they can continue whittling away at the backlog of sewer projects and start to address the law's many other mandates and new requirements likely to be authorized by Congress.

Negative Image

The Association of State and Interstate Water Pollution Control Administrators is calling for funding at $2 billion a year through fiscal 1999 -- a level it says is the minimum needed to address the pollution control requirements already in law.

Others say Congress should provide even more, especially if next year's reauthorization bill includes any new mandates. Mr. Doyle said new requirements are likely in such areas as wetlands protection and rain runoff control.

Despite the need to stretch federal dollars, the revolving fund program earlier this year suffered from a negative image among key members of Congress. Mr. Doyle and others said the program got off to a slow start and had not accomplished the goals originally set for it -- including generating $2 to $3 in bond offerings for each $1 contributed by the federal government.

But state officials responded that the program is just getting off the ground because of the many bureaucratic hurdles that had to be cleared to set up the funds, and because they never received the level of funding originally promised by Congress -- $18 billion over six years.

Last month, the argument that the program is a success received a substantial boost with the publication of the Environmental Protection Agency's first comprehensive survey of the funds in 50 states and the District of Columbia. That survey concluded that the program has, over all, run smoothly without any "fundamental flaws" or "significant impediments."

While Mr. Doyle had noted the program's shortcomings earlier this year, at the conference last month he said the committee was likely to continue relying on it as a major financing mechanism.

Robert Bergman, deputy minority counsel of the committee, at the same conference said most committee members in the next two years want to make up for the gap in funding the program caused by congressional appropriations since 1987 "lagging behind" the authorized levels.

But he said "it will be tough" to provide additional funding beyond 1994 because of the federal government's budgetary problems, even though he acknowledge that the environmental cleanup bill facing states and municipalities is getting "very expensive."

While the House committee is still deliberating over the future of the leveraging program, leaders of the Senate Environment and Public Works Committee introduced a reauthorization bill this spring that proposed to continue the program, but at the cost of losing many of its unique bonding and loan characteristics.

The Senate bill would provide $15.3 billion to the program in the next six years, but it would require states to use $10.9 billion of that to make direct grants to polluters, rather than make loans and back bond offerings, as they currently do, according to Linda Eichmiller, an official at the state association.

In addition, the two-thirds of the funds devoted to providing direct grants would be put to all kinds of uses except financing the municipal wastewater treatment projects that have been the program's mainstay since it was created in 1987, she said.

The state group came out forcefully against the Senate bill's attempt to convert the revolving funds back into grant programs in a September position paper on reauthorization issues. "Grants undermine the integrity of the program," the group contended.

"Even a remote possibility of grants encourages towns to wait" and not take advantage of the loans and pooled bond offerings available through the revolving funds, the group said. "It also sends a poor message to those trying to meet the law -- reinforcing the appearance that if a community puts off selving their problems, the federal government will come to the rescue."

Legislative Options

State officials say they are optimistic that the authors of the Senate bill, after hearing the arguments of the states and communities involved with the program, will reconsider and end up strengthening the program.

Mr. Bergman said the growing trend toward diverting scarce funds away from the leveraging program and back into grants will be an important issue next year in the House as well as the Senate.

An interagency work group led by the Environmental Protection Agency is also studying the possibility of continuing funding at $2 billion a year -- or even expanding it to finance a new generation of water cleanup controls.

Charles Grizzle, a former assistant administrator of the agency, said he thinks the key to winning administration support for reauthorization is to tie continued funding to the growing list of projects and priorities. But he and other agency officials said the administration -- particularly the Office of Management and Budget -- still favors phasing the program out, as scheduled, in 1994.

Also under consideration by the administration work group is a proposal opposed by the states that would attempt to encourage state contributions to the revolving funds by raising the state matching share from 20% to between 35% and 50%, according to an agency options paper.

This proposal is reminiscent of the administration's highway reauthorization proposals this year, which sought to promote state and local leveraging of federal dollars by increasing their share of transportation project financing.

William Reilly, administrator of the Environmental Protection Agency, could also take a whole new tack in the reauthorization debate if he follows the recommendations of the agency's Environmental Financial Advisory Board.

That group not only is recommending an expansion of the revolving fund program, but is advocating a major change in the tax status of municipal bonds that are issued to finance pollution control projects mandated by federal law.

In a report currently under review by Mr. Reilly's staff, the group recommends treating so-called environmental bonds as governmental bonds, regardless of whether the bonds benefit private parties. That would eliminate current tax provisions restricting such bonds, such as private-activity tests and the alternative minimum tax.

The group's bond recommendations are included in a broader report urging "economic incentives" to promote pollution control -- an idea that Mr. Doyle said the committee will explore as it drafts legislation next year.

The bond proposals, which Mr. Doyle did not specifically discuss, would have to be approved by the congressional tax committees and, because of that, would be unlikely to be included in any clean water bill drafted by the public works committee.

State officials say they are, nevertheless, optimistic that Congress will become more aware of the need for bond reforms as it wades into the clean water debate and that Mr. Reilly will decide to champion the bond proposals the next time tax legislation pertaining to bonds goes through Congress.

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