Who's going to pick up the tab and how? Stormwater funding options

Lamont "Bud" Curtis, P.E., DEE, Senior Engineering Manager, Parsons Brinckerhoff Quade & Douglas, Inc., Norfolk, Virginia; Chair, APWA Water Resources Management Committee
John F. Damico, President, and Al C. Damico, Vice President, Environmental Rate Consultants, Inc., Union, Kentucky
Presenters, 2004 APWA Congress

This paper summarizes the conference workshop to be held at the 2004 APWA Congress in Atlanta, Georgia, on Saturday, September 11, 9:00 a.m. - 12:00 p.m.

Introduction
A constant and continuing question among public works leaders is how to pay for the necessary stormwater facilities and the ever-expanding unfunded mandates by the government regulations. The stormwater management facilities necessary to control runoff are for the most part structural facilities. Many of the stormwater programs to satisfy the regulations are nonstructural programs such as pollution prevention, public involvement and education, and operations and maintenance practices. Nevertheless, they require funding and most of these programs require ongoing funding. The question of "Who" is going to pay is basic: you and I, the public. The question of "How" is more complex.

There are many options to fund stormwater programs. The utility option is being used increasingly because of its advantage of providing a stable and dedicated revenue source.

The purpose of this workshop is to point out and convey many of the "landmines" and "pitfalls" you, as a community and a staff member, will most certainly encounter when attempting to create and implement a stormwater utility program. More importantly, we will provide a process and approach that will help to minimize or eliminate certain landmines and provide a plan to counteract these landmines in order to successfully create and implement your stormwater utility. Correspondingly, critical aspects such as creating a definition for "success" for your community will be discussed. You will need to ask yourself these questions: Will implementing a residential ERU (Equivalent Residential Unit) rate of $4.00 per month be considered a success for your community, or will your community's approach be to implement "any rate we can get"; and will you be content with the resulting residential rate of $1.00 per ERU per month, and will that be considered a success for your community?

Financing Options
To begin answering the question "Who's going to pick up the tab and how?" requires that your community begin the process of developing an overall "Stormwater Financing Strategy" designed specifically for your community's stormwater needs and requirements.

The initial step in developing your community's Stormwater Financing Strategy entails selecting from a variety of financing options available to best serve your community's needs. Financing options range from temporary revenue sources that are used to pay for program startup and implementation costs, or existing sources of revenue that support current operations and maintenance costs, to methods that could be employed in the future to fund specific functions or specific types of capital expenditures. Most communities will ultimately use several sources of revenue in combination to achieve an overall Stormwater Financing Strategy.

Funding options are typically geared toward recovery of costs from three expenditure categories shown below. An argument can be made that several of the funding options will recover costs from more than one expenditure category, and that is true. However, to simplify the discussion, each funding option appears only once and in its most common or traditional use.

Funding Options

A. Funding Capital Expenditures

1. Drainage (Special) District Fees
2. Property Taxes
3. Sales Taxes
4. Income Taxes
5. Special Assessments
6. General Obligation Bonds
7. Revenue Bonds
8. Federal/State Grants and Loans

B. Funding New Development Expenditures

9. Plan Review Fees
10. Inspection Fees
11. Impact Fees

C. Annual Operating Expenditures

12. Inter-Fund Loans
13. General Fund
14. Temporary Utility Service Charge
15. Stormwater Utility Service Charge

Analyzing these fifteen funding options through a quantitative comparison and selection process will in all likelihood result in the stormwater utility service charge being rated near the top as the most appropriate and primary funding source for your stormwater program and financing strategy.

The "Stormwater Utility Service Charge" approach generates revenue through a "user fee" system in which the ratepayers of the stormwater system are charged proportionately for the service received based on their contribution to runoff. This benefit or service provided by your community follows the same rationale that is used by the potable water utility and sanitary sewer utility systems. Moreover, creating and implementing a stormwater utility program funded by a utility service charge provides a legal framework for organizing, managing and addressing stormwater management using a dedicated and reliable source of funding that:

  • Meets the fair and equitable test;
  • Provides a stable revenue source on an annual basis;
  • Provides sufficient revenue to adequately maintain and upgrade the system;
  • Establishes fees that are directly related to the costs incurred in providing services;
  • Is based on a property's contribution to runoff; and is
  • A proven approach that is currently used by more than 500 communities throughout the country.

Although equity is the foremost criterion used in determining user fee rates, absolute precision is not required nor is it the primary goal of obtaining "equal treatment" for all users. Furthermore, the judicial branch of government has historically been reluctant to interfere with the ratemaking authority of local legislative bodies like cities/counties for that reason. In the event of a lawsuit, user fee rates are usually sustained unless the plaintiff can demonstrate that:

  • The fees and charges are illegally discriminatory, or
  • The decisions were made arbitrarily or without basis, or
  • The process used to develop the program and rates was somehow flawed.

This burden of proof imposed on a plaintiff will rarely be satisfied when a thoughtful and reasonable cost-based level of service, cost of service analysis, and corresponding rate study analysis have been prepared. Lastly, applying a financing method or approach that has withstood legal challenges and has been upheld in state supreme courts across the country is further argument and evidence against a plaintiff's potential claim.

Create a stormwater implementation action plan that allows time in your schedule to achieve consensus and funds the process to "do it right the first time"
The following seven steps are critical to establishing the foundation for developing your community's stormwater utility program. These seven steps, if followed and combined with an extensive and comprehensive public education and involvement program, will dramatically increase your program implementation success rate.

A. Strategic (Business) Plan and Implementation. The first step in creating a stormwater utility program is to develop a strategic (business) plan that addresses all aspects of your community's short-term and long-term stormwater management needs. Two key elements of the overall strategic plan include:

  • Developing a short and meaningful stormwater program Mission Statement.
  • Developing a list of meaningful and useful stormwater program Goal Statements for each of the following elements:

- Water Quantity 
- Water Quality
- Watershed Management
- Administrative/Management
- Financial
- Public Involvement

B. Select an appropriate Rate Structure Method. Although the Impervious Area Method is slightly more expensive to implement, this method is much more fair and equitable as compared to the other methods, and will increase the usefulness of your GIS system particularly for master plan modeling in the future. The Intensity of Development Method generally is considered to be more arbitrary, inaccurate and inappropriate for most communities because this method only "estimates" the amount of impervious area coverage.

C. Level of Service and Cost of Service Analysis. The cost of service analysis reflects the program elements, the service levels and the costs needed to carry out the daily functions of a stormwater program. The cost of service is the basis for developing your long-term business (action) plan and is the foundation for your legally defensible rate system.

D. Rate Study and Cash Flow Analysis. The program level of service and cost of service analysis process will determine the rate per Equivalent Residential Unit (ERU) per month and should be integrated into a flexible, easy-to-understand-and-use, five-year rate model referred to a cash flow analysis.

E. Billing System Development. A comprehensive billing system development and implementation plan, that may include hiring of temporary university co-op students to assist in the process, should be considered. For most communities, the current water and sewer utility billing system must be modified to accommodate the newly-created stormwater-billing file. System database changes will need to be made as well as creating and adding a new impervious area layer to the existing or new GIS.

F. Geographic Information System (GIS) Program Development and Implementation. At a minimum, a system will need to be designed to store and maintain the impervious area polygons created, as the legal representation of charges for all nonresidential property owners.

G. Credits Program. A well-thought-out credits program that offers a variety of water quantity and water quality credits should be considered. The credits program should be designed and implemented primarily for the nonresidential property owners that perform various cost-of-service-type activities on their property and that reduces the burden on the overall stormwater system.

A Comprehensive and Affordable Public Education and Public Involvement Program
This section describes the four required ingredients and an approach for implementing your community's public education and public involvement program. This proven approach includes a very comprehensive program that is effective and affordable and is the most critical aspect of assuring your successful stormwater management program implementation. Without a public education and public involvement program, your community will most likely be unsuccessful in your attempt to implement a stormwater utility program.

A. The first ingredient that will assure a successful stormwater utility program implementation is to thoroughly "Educate and Involve City Staff." Many times this obvious step is overlooked. If staff does not feel comfortable with and completely understand and support the approach that the consultants are trying to accomplish, this will result in a certain doom for program implementation. This process is accomplished though consensus building and interactive process committee meetings with members of city council, key city staff and the consultant team. This group is typically referred to as a Technical Advisory Committee (TAC).

B. The second ingredient is to identify an "Elected Official Champion" or Champions that will support the utility implementation process at the very end, and especially when potential opposition may attempt to derail implementation.

C. The third ingredient is to organize a key stakeholder advisory committee typically referred to as a Storm Water Advisory Committee (SWAC). The SWAC should be comprised of members representing key community stakeholder groups. This group will review and/or revise those policies and decisions made by the TAC.

D. The fourth ingredient to assure success includes educating the general public through a wide variety of media outlets and through the techniques outlined below.

1. Community Telephone Survey
2. Stormwater Video
3. Stormwater Brochure
4. Comparison Survey
5. Frequently Asked Questions (FAQs)
6. Community Outreach
7. Special Chamber of Commerce Meetings
8. Billing Mailers
9. Billing Stuffers
10. Utilize Local Media
11. Miscellaneous Outreach

Summary
Certainly a single half-day workshop cannot provide all of the information necessary to create and implement a successful stormwater utility. Hopefully, this paper and the workshop can introduce the concept and point out and convey many of the necessary elements that are required. Stormwater utilities are being created across the United States, and the approach has been proven legally sound and publicly acceptable. When successfully implemented, it answers the question of "HOW."

The three authors will present the "Who's Going to Pick Up the Tab? Stormwater Funding Options" pre-Congress Workshop on Saturday, September 11, at 9:00 a.m.-12:00 noon. Bud Curtis can be reached at (757) 466-9656 or at curtisl@pbworld.com; John Damico can be reached at (859) 384-7283 or at jdamico@ercerc.com; and Al Damico can be reached at (859) 384-7283 or at adamico@ercerc.com.