Christopher Mauro of Merrill Lynch & Co. and Alice Tsang of MBIA Corp. tied for top honors in the Water & Sewer Revenue Bond sector.

In the event of a tie, second team honors are combined with first team honors.

Standard & Poor's Corp. won the category on a team basis, with John Costaglia, Philip Edwards and Mark Ryan all scoring well.

Raphael Costas from the Franklin Group of Funds also amassed a sizable vote total.

Clean Water

and Safe Drinking Water Acts

"Now, the focus is on the reauthorization of the Clean Water and Safe Drinking Water Acts later this year or next year, especially, if changes or new provisions are introduced," Mauro said.

Critical issues surround the federal funds allocated via state revolving funds, which were created in 1987 to replace the Federal grants program with loans.

"There are many projects that need to financed but were delayed to due to shortfalls in funding," Mauro said.

He added, "questions surround whether to allocate more federal funds to the revolving fund or revert back to federal grants."

Mauro believes it may be possible to structure a mix of grants and loans, with grants being earmarked for smaller water and sewer systems.

"The funding questions are significant because they relate to state and locate commitments to maintain the integrity of construcion programs," Mauro said.

A "whole grab bag" of new provisions will be considered, Mauro said, that range from wetlands to combined overflow problems in many coastal communities.

The passage of new provisions would add to the mandates of state and local governments and could produce severe financial stress.

However, adding new provisions means it will take longer to enact the legislation.

The needs of states and local governments are so staggering that municipal bonds will be a major part of financings, no matter what happens at the federal level, Mauro said.

Mauro predicts that the state revolving fund method, which is used to exclusively fund wastewater treatment, will be duplicated to cover drinking water and storm water.

"Revolving funds are effective in leveraging what little federal funds are available," Mauro said.

Combined Sewer Overflows

Combined sewer overflows (CSOs) describe situations when heavy raifall forces so much water through a sewer system that the effluence surges through the facilities without being fully treated.

Mauro believes CSO is an issue that is not going away because it is too visible in the media. CSO is a major problem in coastal communities, but also is a concern in some inland communities, he added.

The West Coast drought situation continues to be a major issue that Mauro closely follows.

He believes that "it's more of a political problem, filled with political nuances that need to be tackled."

The plitical problems can be divided into two broad groups: upstate versus downstate and agricultural versus urban communities.

While Mauro declined to discuss any specific credits in the sector, he recommends "selectively" buying water and sewer reenue bonds that have met maintenance requirements, assessing the quality of the utility management and being "very careful."

MBIA's Tsand agreed that passage of clean water and safe drinking water provisions is unlikely by the end of the year.

In ranking the spending priorities, Tsang felt that CSO was more important than the wetlands provisions. "However, there are state where wetlands need to be addressed," she said.

Overall, Tsand believes the par volume in the water and sewer revenue bond sector will remain constant. But she is seeing a lot more smaller issuers tapping the state revolving funds.

From a credit perspective, she finds it hard to generalize.

Large, well-known water and sewer systems continue their ongoing capital programs and some are addressing old problems, Tsang said.

Historically, water and sewer revenue bonds are considered close to general obligation bond in terms of creditworthiness because they are essential services and the technology is proven.

But Tsang noted there are isolated cases where water and sewer bond issuers have tapped the market for funds to improve their systems, but upon closer inspection she has found little being done.

"Suddenly, they wake up and realize they face stiff penalties," she said.

Additionally, some systems have not raised rates enough to maintain their systems, much less their capital programs.

The problems at some water and sewer systems are complicated by managements that lack the political will to raise rates to high enough levels.

"The message is that even water and sewer bonds can get into trouble," she said.

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