Clean Water:  America’s Great Unfinished Agenda

Sixty years ago, kids swimming in the Great Lakes could be up to their necks in water, look down, and see their toes.  Thirty years ago, they could do the same thing, but couldn’t even see their shoulders.  Now they can see their toes again.

This spectacular achievement was made possible by the Clean Water Act (CWA).  From 1972 till 1987, the CWA contained a generous construction grant program for sewer systems.  In 1987, this was converted to a low-cost loan program that has provided over $100 billion of additional financial assistance.

But things have changed…..

Sewage treatment plants are no longer the #1 source of water pollution.  In the Chesapeake Bay, about 60% of the pollution today comes from agricultural runoff.  What’s more, about 30% of the nitrogen in the Bay now comes from air deposition – when it rains the nitrogen pumped into the air from fossil fuel power plants gets washed out of the air and into the Bay.

The low-cost loan program that has provided the $100 billion of pollution control assistance is called the Clean Water State Revolving Fund, or SRF.  The SRF is, by any fair standard, the most successful environmental finance program in the history of the planet earth!  There are 51 SRFs in the country.  One in each State and also Puerto Rico.

The financial capacity of programs like the SRF are measured exactly like the regulators measure the financial capacity of commercial banks.  A bank’s financial capacity is measured by the amount of loans it can make.  Banks have two sources of funds.  They have their shareholders money from the sale of stock.  And they have deposits from people like us.  Some of the banks’ loans will default; they won’t be repaid.  Regulators want to be sure that if a bank loses money on a bad loan that it is not our money.  They don’t want the depositors to lose; that’s what shareholders are for.  So, regulators set limits on the amount of loans a bank can make that are directly proportional to the amount of stock, or equity, the banks have.  These are called “capitalization ratios” or “leverage ratios.”  Commercial banks make loans to small businesses and to dubious individuals like writers with bad credit ratings.  Typical leverage ratios for commercial banks are in the 8-12:1 range.  This means that they have to have $1 of equity for every $8-12 of loans on their books.

SRF’s don’t have deposits; but they don’t need them.  Instead of making loans, they can guaranty them (just like a bank Letter of Credit).  The loans can then be funded through the bond market at the lowest rates and the longest terms.

The SRFs’ loans/guaranties are much safer than commercial banks’.  International credit rating agencies measure financial capacity for programs like the SRF based on their “net assets” (since they don’t have stock or shareholders).  For a typical SRF, a minimum 25:1 leverage ratio would be expected.  One of the major rating agencies has published a standard of 75:1.

The combined net assets of the 51 SRFs are about $50 billion.  At a 25:1 ratio, this means that the SRFs have the financial capacity to make $1.25 trillion of loan guaranties!  If the 75:1 ratio were used, the SRFs could make about $3.75 trillion of guaranties.  This is enough money to deal with all of the water pollution problems on this planet and most of the rest of the galaxy.

So, we’ve got the money.  What’s the problem?

Together, the 51 SRFs have made over 33,000 loans in the last 25 years.  That means about $3 million each.  96% of these loans have gone to sewer systems.  The SRFs have small staffs that make a small number of large loans to highly credit-worthy borrowers, like public sewer authorities.

So, what kind of a reception do you think Farmer Jones will get when he shows up at the SRF asking to borrow $15,000 to plant a stream buffer of trees on his land to reduce runoff?  Exactly what you think.

What about when Harry Homeowner wants to borrow $20,000 to insulate his house to reduce the energy he uses from the fossil fuel plants that pump nitrogen into the air that winds up in the local lake?  Will the SRF help Harry?  Nope.  Not today anyway.  The people who run the state energy efficiency programs don’t speak to the people who run the SRF, and vice versa.

What reception will the Village Mayor get when he shows up wanting to borrow $45,000 to buy 15 acres of forest land to protect the village watershed from the runoff that comes from development?  Will he get help from the SRF?  Very unlikely.  More likely he will be buried under a bureaucratic avalanche of forms and regulations.

How about a responsible developer who wants to borrow $150,000 to put a retention pond and permeable pavement in at his new shopping mall?  These would certainly reduce the pollution from storm water runoff.  Nope.  How about some green infrastructure like “roof gardens” on the mall buildings?  They’d reduce storm water runoff too.  Nope.

How about a small beachfront community needs money to build a series of wave baffles, populated with oysters, mussels and all kinds of aquatic plants and animals, so that they can provide habitat for these creatures (whose presence enhances water quality) while protecting their homes and livelihoods from the ravages of Hurricane Sandys.  Not likely.


As fabulous as it is, the SRF has a 20th century structure trying to grapple with 21st century problems.  They aren’t geared up to deal with watershed protection, energy efficiency, estuaries, green infrastructure, stormwater surges, or – above all – agricultural runoff.

Nor does Farmer Jones nor Harry Homeowner nor the Village Mayor, nor any of our other would-be borrowers even have a clue that the SRFs exist and that they have a few trillion dollars in their coffers.

We have lenders who don’t know, and are unprepared to deal with, these new classes of borrowers.  And we have borrowers who don’t know the lenders even exist.

Most societal problems cry out for massive doses of money.  Not this one.  The money’s here.  What is needed is a single, unified campaign to bring these people and government agencies together and to restructure the SRFs to deal with these 21st century clean water problems.  If the SRFs learn to deal with the 21st century problems as well as they dealt with the 20th century’s problems, clean water will no longer be America’s unfinished agenda.