Rural Development: USDA's Approach to Funding Water and Sewer Projects
(Chapter Report, 09/22/95, GAO/RCED-95-258).
Pursuant to a congressional request, GAO reviewed the Department of
Agriculture's (USDA) process for allocating and distributing loan and
grant funds for water and sewer projects, focusing on: (1) funding
levels for the Water and Waste Disposal Program; (2) the formula used to
allocate funds among USDA state offices; and (3) the approach that USDA
state offices use to distribute funds within states.
GAO held that: (1) the USDA water and sewer program has provided loan
and grant support totalling about $28 billion, supporting almost 17,000
projects, and assisting over 12,500 communities throughout the United
States; (2) the three factors that USDA considers in its allocation
formula for water and sewer funds are rural population, rural poverty,
and rural unemployment; (3) no state may receive more than 5 percent of
the total available funds in the initial allocation; (4) the allocation
formula may partially reflect states' needs and ability to pay, but it
does not reflect cost differences between states; and (5) although USDA
state and district offices have considerable flexibility in determining
the amount of grant assistance for individual projects under the current
approach, this flexibility can result in differing funding decisions for
similar communities.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-95-258
TITLE: Rural Development: USDA's Approach to Funding Water and
Sewer Projects
DATE: 09/22/95
SUBJECT: Sewage disposal
Community development
Grant administration
Funds management
Federal/state relations
Grants to states
Formula grants
Wastewater treatment
Economically depressed areas
IDENTIFIER: RDA Water and Waste Disposal Systems for Rural Communities
Program
FHwA Highway Bridge Replacement and Rehabilitation Program
Alcohol, Drug Abuse, and Mental Health Block Grant
Texas
North Carolina
Ohio
Pennsylvania
Mississippi
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Cover
================================================================ COVER
Report to the Honorable
William F. Clinger, Jr.,
House of Representatives
September 1995
RURAL DEVELOPMENT - USDA'S
APPROACH TO FUNDING WATER AND
SEWER PROJECTS
GAO/RCED-95-258
USDA's Funding of Water and Sewer Projects
(150416)
Abbreviations
=============================================================== ABBREV
EPA - Environmental Protection Agency
GAO - General Accounting Office
MHI - median household income
USDA - U.S. Department of Agriculture
Letter
=============================================================== LETTER
B-262161
September 22, 1995
The Honorable William F. Clinger, Jr.
House of Representatives
Dear Mr. Clinger:
This report responds to your request that we review the U.S.
Department of Agriculture's process for allocating and distributing
loan and grant funds for water and sewer projects. We examined (1)
funding levels for the program and the projects supported, (2) the
formula that the Department uses to allocate loan and grant funds
among its state offices, and (3) the approach that the Department's
state and district offices use to distribute funds within states.
We are sending copies of this report to interested congressional
committees; the Secretary of Agriculture; the Director, Office of
Management and Budget; and other interested parties. Copies are
available to others upon request.
Please contact me at (202) 512-5138 if you or your staff have any
questions. Major contributors to this report are listed in appendix
III.
Sincerely yours,
John W. Harman
Director, Food and
Agriculture Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
Many of the 62 million people living in over 2,300 rural counties in
the United States still lack access to a supply of clean water and
sanitary waste disposal facilities. Continuing a long-standing
effort, the U.S. Department of Agriculture's (USDA) Water and Waste
Disposal Program provides funding for water and sewer projects to
rural communities. The program is now the major source of federal
funds targeted to water and sewer projects in rural areas. In fiscal
year 1994, USDA provided about $1.3 billion for the program.
Representative William F. Clinger, Jr., asked GAO to review USDA's
process for allocating loan and grant funds for water and sewer
projects. This report provides information on (1) funding levels for
the program and the projects supported, (2) the formula that USDA
uses to allocate loan and grant funds among its state offices, and
(3) the approach that USDA state and district offices use to
distribute funds within states.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
USDA administers the Water and Waste Disposal Program by allocating
grant and loan funds to its state offices. Each state's allocation
is determined by a formula established by USDA regulation. The state
offices then make the funds available to their district offices to
support rural water and sewer projects proposed by local communities.
All 50 states, Puerto Rico, the U.S. Virgin Islands, and the Western
Pacific territories receive funds. Before the initial allocation,
USDA sets aside about 10 percent of both loan and grant funds as a
reserve for emergencies, cost overruns, and other unforeseen
problems. In addition, state offices must return unobligated funds
to USDA headquarters twice a year. USDA makes set-aside and
unobligated funds available to the states for specific projects.
The type of assistance (either loan funds or a combination of loan
and grant funds) provided is governed by each community's financial
situation. USDA's program regulations stipulate that grant funds are
to be provided for projects serving financially needy communities to
reduce user charges to a reasonable level. USDA headquarters
officials consider a "reasonable" user charge to be one that the
community can afford. The loans are repaid to the U.S. Treasury,
not to USDA.
USDA state and district offices determine affordability on the basis
of the (1) community's median household income or (2) user charges
for similar systems in the area. USDA has the discretion to decide
which approach will be used to determine the amount of grant funds
provided. With respect to the median household income criterion,
USDA assumes that a community can pay no more than 1 percent of the
median household income for servicing the debt on the USDA loan, as
well as other outstanding debt owed to USDA. If the community's
payment based on median household income cannot support the project
and outstanding debt, USDA supplements its assistance with a grant.
With respect to the second criterion, USDA examines the average user
charges paid by residents of comparable communities for similar water
and/or sewer services and determines a similar, affordable user
charge for the project under consideration. This user charge in turn
determines the mix of grants and loans awarded for the project.
Communities may also supplement USDA water and sewer funds with their
own funds and funds from other federal, state, or private sources.
GAO visited USDA state and district offices in four
states--Mississippi, North Carolina, Ohio, and Pennsylvania--to
examine the distribution of water and sewer funds within each state.
These states were four of the five largest recipients of water and
sewer program funds over the past 30 years. GAO reviewed a total of
120 projects in these states.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Since fiscal year 1965, USDA's water and sewer program has provided
loan and grant support totaling about $28 billion (in fiscal year
1994 dollars) through June 1995. These funds have supported almost
17,000 projects that assisted over 12,500 communities throughout the
United States and its territories.
USDA's allocation formula for water and sewer funds considers three
weighted factors--rural population (50 percent), rural poverty (25
percent), and rural unemployment (25 percent). USDA's formula is
easy to administer and is based primarily on readily available data
from the Bureau of the Census and the Bureau of Labor Statistics. No
state can receive more than 5 percent of the total available funds in
the initial allocation. The formula may partially reflect states'
needs and ability to pay; it does not reflect cost differences
between states.
Under the current approach used to distribute funds within states,
USDA state and district offices have considerable flexibility in
determining the amount of grant assistance, if any, for individual
projects. In some instances, this flexibility results in differing
funding decisions for similar communities. We identified these
differences in funding decisions between and within the four states
we visited.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
WATER AND SEWER PROGRAM HAS
PROVIDED ASSISTANCE FOR
THOUSANDS OF PROJECTS
-------------------------------------------------------- Chapter 0:4.1
Almost 17,000 projects serving over 12,500 communities have received
USDA funds for water, sewer, and combined projects since fiscal year
1965. Over this time, the water and sewer program has provided more
than $20.4 billion in loans and about $7.3 billion in grants for
these projects (in fiscal year 1994 dollars).
The number and costs of projects funded vary by state. For example,
USDA's Mississippi office funded, on average, 28 projects annually
from fiscal year 1965 through June 1995, while USDA's Ohio office
funded an average of 13 projects annually over the same period.
Differences in the number of projects funded are due in part to the
types of projects funded. In Mississippi, more funding went to water
projects, which are generally less costly to fund than the sewer
projects funded in Ohio.
CURRENT ALLOCATION FORMULA
TO DETERMINE STATE FUNDING
IS EASY TO ADMINISTER AND
MAY PARTIALLY REFLECT NEED
AND ABILITY TO PAY
-------------------------------------------------------- Chapter 0:4.2
USDA's current allocation formula used to determine the amount of
funds provided to the states has the advantage of being easy to
administer because it is based on readily available data and is easy
to understand. In addition, the data (on rural population, rural
poverty, and rural unemployment) are specifically directed toward
rural areas. Experts in public finance generally agree that certain
other criteria are important in formulas for allocating federal
funds. These criteria include (1) communities' needs for services,
(2) a state's ability to pay for such services without federal aid,
and (3) variations in project costs such as labor or construction
costs among states.
USDA's current formula may partially reflect states' needs and
ability to pay; it does not reflect cost differences among states.
Data are available to more fully address these criteria, but any
change to the formula could alter the amounts of loan and grant funds
that states receive. GAO did not analyze how potential changes would
affect individual states.
AWARD DETERMINATION APPROACH
PROVIDES FLEXIBILITY WHILE
RESULTING IN DIFFERING
FUNDING DECISIONS FOR
SIMILAR COMMUNITIES
-------------------------------------------------------- Chapter 0:4.3
Under USDA guidelines, state and district offices have the authority
to vary the amount of grant and loan funds that they award to
communities eligible to receive funding for water and sewer projects.
Officials may base their funding decisions on an applicant
community's median household income or on the user charges for
similar water and sewer systems in the area. According to USDA
officials, most decisions are based on the user charges for similar
systems. The flexibility permitted by USDA guidance allows the
Department to vary the mix of funds among competing projects. This
flexibility results in differing funding decisions for similar
communities.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
GAO is making no recommendations in this report.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
GAO provided copies of a draft of this report to USDA's Rural
Utilities Service for its comments. GAO met with several agency
officials, including the Deputy Administrator and the Director of the
Water and Waste Disposal Division, who agreed that the information
presented in the report is accurate. They provided new or clarifying
information that GAO incorporated as appropriate.
INTRODUCTION
============================================================ Chapter 1
Many of the 62 million people living in over 2,300 rural counties in
the United States lack access to a supply of clean water and sanitary
waste disposal facilities. In 1937, the Congress created a program
that provided low-cost loans to ranchers, farmers, and rural
residents of 17 arid and semiarid western states for water storage
projects. Since that time, the Congress has changed the program to
also fund water distribution systems and waste disposal facilities
and to provide grant funds in addition to loans. Currently, the
program, known as the Water and Waste Disposal Program, offers grants
and loans to construct or modify water and/or sewer systems in rural
communities that cannot obtain funding from other sources.\1
Administered by the U.S. Department of Agriculture (USDA), this
program is now the major federal program providing such loan and
grant funds to rural America.
--------------------
\1 In 1990, the Congress also made solid waste disposal facilities
eligible for assistance. This report only addresses assistance for
water and/or sewer facilities.
USDA ALLOCATES LOAN AND GRANT
FUNDS TO STATE OFFICES THROUGH
A FORMULA
---------------------------------------------------------- Chapter 1:1
USDA administers the Water and Waste Disposal Program--referred to in
this report as the water and sewer program--through its Rural
Utilities Service.\2 To be eligible for this program, a rural
community must have a population of 10,000 or less and be financially
needy, meeting low-income criteria.
USDA headquarters allocates both loan and grant funds to its state
offices through an allocation formula that it established through
regulations.\3 The formula consists of three weighted factors: rural
population (50 percent), rural poverty (25 percent), and rural
unemployment (25 percent). No state may receive more than 5 percent
of the total loan and grant funds initially allocated. About 10
percent of both loan and grant funds are set aside in a reserve pool
for emergencies, cost overruns, and other unforeseen problems.
Furthermore, twice a year, USDA headquarters withdraws to its reserve
pool a portion of the unobligated loan and grant funds that may
remain in a state's accounts. State offices can request pooled funds
and receive funding above a state's initial allocation; USDA
headquarters determines how pooled funds will be distributed.
Generally, these pooled funds are used to provide supplemental
funding for projects that are ready to be approved. In the following
fiscal year, the states receive their allocations on the basis of the
formula, not on whether they spent the prior year's allocation. In
fiscal year 1995, USDA headquarters withdrew about $60 million in
loan and grant funds as a result of the pooling process.
The water and sewer program has been funded at an average of $1
billion per year for the last 6 fiscal years; funding in fiscal year
1994 was about $1.3 billion.
--------------------
\2 Among other functions, the Rural Utilities Service administers one
of several programs that were under USDA's Rural Development
Administration. These programs, in large part, originated under
USDA's Farmers Home Administration. Both of these agencies were
abolished under the Department's recent reorganization, and their
functions were transferred to newly created agencies.
\3 Before allocating funds to the 50 states, Puerto Rico, the U.S.
Virgin Islands, and the Western Pacific territories, USDA
headquarters sets aside funds as directed by the Congress for
communities with specific water and sewer needs. Examples of such
communities include the Colonias--generally referred to as rural
communities along the U.S.-Mexican border that have substandard
living conditions, including water and sewer facilities. Usually,
more grant funds than loan funds are set aside.
USDA ADMINISTERS THE WATER AND
SEWER PROGRAM THROUGH STATE AND
DISTRICT OFFICES
---------------------------------------------------------- Chapter 1:2
USDA administers the water and sewer program through a network of
state and district offices. USDA headquarters allocates the
program's funds to the state offices, which are responsible for
general oversight of the program, including approval of district
offices' project and funding recommendations. District offices
administer the loan and grant program at the local level and serve as
the point of contact for communities seeking assistance. Through a
preapplication process, a district office obtains preliminary
information to determine a community's eligibility for assistance and
the proposed project's feasibility. If the community meets these
requirements and funds are available, the district office asks the
community to prepare a full application package.
The district office provides the state office with data on the
project, including the application package and the district office's
recommendation for approval. Most state offices have approval
authority for loans of up to about $3 million; they can approve
grants of any dollar amount. Under certain conditions, state offices
must obtain final approval through USDA headquarters.
USDA OFFICES BASE LOANS AND
GRANTS ON THE ESTIMATED
AMOUNT A COMMUNITY CAN
AFFORD TO PAY
-------------------------------------------------------- Chapter 1:2.1
Generally, USDA finances water and sewer projects through a
combination of loans and grants. In addition, other funds--such as
those from federal or state agencies or the applicant community--may
be combined with financing from USDA.
USDA state and district offices determine the applicant's eligibility
and the project's feasibility, including the reasonableness of user
charges, which USDA headquarters officials interpret as an affordable
charge. USDA state and district offices determine the community's
ability to repay a loan, including consideration of the community's
outstanding debt to USDA. These offices initially attempt to finance
the project through a loan. Since USDA expects its loans to be fully
repaid,\4 district and state offices estimate what the average
monthly user charges for the water and/or sewer services would have
to be in order to sufficiently cover anticipated costs and avoid
defaulting on the loan.\5 Typically, a community repays its loan
through monthly charges collected from the residents who use these
services.
If USDA state and district offices conclude that the loan amount
would result in an onerous user charge, they consider replacing a
portion of the loan with a grant to bring the user charge down to a
more manageable level. In addition, officials in some states
encourage the local community to obtain funding from other sources,
such as state and/or other federal agencies, to reduce the amount of
the USDA loan and grant funds needed. The grant amount that USDA
state and district offices provide for a specific project can vary
for several reasons--for example, the amount of grant funds on hand,
the urgency for the project, and competing demands for grant funds
within the district and across the state.
There are two principal limits on the grant provided for a particular
project. First, legislation limits the amount of the grant to 75
percent of the project development costs\6
and provides for higher grants for projects in communities that have
lower population and income levels. By regulation, USDA limits some
communities having a somewhat higher median household income to a
maximum grant of 55 percent of the project development costs.
Second, under USDA regulations, grants cannot be so large that they
cause average monthly user charges to be lower than those prevailing
in the area. A state office may also fund a project at less than the
allowable amount if its grant allocations are not sufficient to
provide maximum grant funds for that project.
To determine the yearly user charge for a project, USDA state and
district offices consider costs in four categories: debt service,
operations and maintenance, reserve fund, and other costs. These
offices add the yearly debt service calculation--including
outstanding USDA debt--to the yearly costs for operations and
maintenance to arrive at the total yearly cost. When applicable,
these offices also add the cost of maintaining a reserve fund
(generally 10 percent of debt service), which is used to replace
certain types of equipment that have a relatively short useful life.
This reserve fund should not be large enough to build a substantial
surplus. Ordinarily, the total reserve will be equal to one average
annual loan installment, accumulating at a rate of one-tenth of the
total each year. In addition, USDA state and district offices may
consider other costs, such as funded depreciation and delinquent
accounts. To arrive at the total grant amount, these offices
determine how much debt service a community can afford. They then
factor in amortization over a period of time, usually 40 years.
--------------------
\4 Loans are repaid to the U.S. Treasury, not to USDA.
\5 According to USDA headquarters officials, the program has a very
low default and delinquency rate. USDA reported that only 0.1
percent of the total principal loaned had been lost to default since
the program's inception. The delinquency rate is less than 2 percent
of the total loans made.
\6 Development costs include costs for constructing, expanding,
extending, or otherwise improving water or waste disposal facilities.
ESTIMATED USER CHARGES CAN
BE ADJUSTED ON THE BASIS OF
COMPARISONS WITH SIMILAR
COMMUNITIES
-------------------------------------------------------- Chapter 1:2.2
In deciding on the mix of loan and grant funds to award for water and
sewer projects, USDA state and district officials estimate the
maximum size of the grant on the basis of a comparison of a
community's median household income with the state's poverty level.\7
A community may not receive the maximum grant if further calculations
of the debt service amount that the community can afford reveal that
the grant should be less. A key factor in estimating affordability
is determining how much the average customer can pay for water and/or
sewer service on the basis of a community's median household income.
USDA officials may override this affordability measure and increase
or decrease the grant amount to bring the user charge in line with
the average charges paid by comparable communities for similar
systems.\8 However, officials may not change the grant amount if the
change will result in user charges that are lower than those charged
to customers in nearby communities.
--------------------
\7 State and district offices consider providing a grant when the
debt service portion of the average annual user charge exceeds
certain percentages of the median household income. These
percentages are 0.5 percent when the median household income of the
service area is below the poverty level or below 80 percent
(whichever is higher) of the statewide nonmetropolitan median
household income and 1 percent when it exceeds 80 percent but is not
more than 100 percent of the statewide nonmetropolitan household
income.
\8 USDA regulations define similar system charges as "the cost of a
community having similar economic conditions, being served by the
same type of established system, constructed at similar cost per
user. Similar system cost shall include all charges, taxes, and
assessments attributable to the system."
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:3
Representative William F. Clinger, Jr., asked us to review certain
aspects of USDA's Water and Waste Disposal Program. This report
provides information on (1) funding levels for the program and the
projects supported, (2) the formula that USDA uses to allocate loan
and grant funds among its state offices, and (3) the approach that
USDA state and district offices use to distribute funds within
states.
To address the first objective, we obtained access to the USDA
database that contains information on the water and sewer program
since its inception in the 1930s. We analyzed data for projects
begun from fiscal year 1965 through June 1995--the period during
which USDA was authorized to provide both grants and loans for water
and sewer projects. We excluded (1) about 4,000 projects (with a
value of about $1.3 billion in nominal dollars) from our analysis
because USDA's database did not provide the year in which the
projects were begun and (2) about 3,000 additional projects because
the database did not provide the dollar amounts for these loans
and/or grants. We summarized, by state, information on USDA's loans
and grants and on other sources of funding. We converted amounts in
the database to constant fiscal year 1994 dollars. We did not
perform a reliability assessment of USDA's database.
To respond to the second objective, we reviewed the literature on
allocation formulas used for distributing federal funds and spoke
with experts in other federal and private agencies. We identified
generally accepted criteria for the factors that should go into an
allocation formula and compared these factors with those used for the
current water and sewer allocation formula. We also analyzed
allocation formulas used to distribute funding for other federal
programs.
To address the third objective, we reviewed files at USDA
headquarters for a random sample of 120 projects receiving funding
from fiscal year 1992 through fiscal year 1994. We selected 30 cases
each from four of the five states that are the largest recipients of
loan and grant funds (Mississippi, North Carolina, Ohio, and
Pennsylvania). We analyzed the approach used to distribute funds
within the states and identified variations in funding decisions. We
visited these four states and talked with USDA water and sewer
officials at the state level and with officials in 12 of USDA's
districts. We also talked with nine borrowers who had received
grants or loans from USDA for water or sewer projects in two of these
states.
We performed our work from September 1994 through August 1995 in
accordance with generally accepted government auditing standards.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 1:4
We provided copies of a draft of this report to USDA's Rural
Utilities Service for its comments. We met with several agency
officials, including the Deputy Administrator of the Rural Utilities
Service and the Director of the Water and Waste Disposal Division.
These officials agreed that the information presented in the report
is accurate. They provided new or clarifying information that we
incorporated as appropriate.
USDA HAS HELPED TO FUND THOUSANDS
OF WATER AND SEWER PROJECTS FOR
RURAL COMMUNITIES
============================================================ Chapter 2
From fiscal year 1965 through June 1995, USDA supported the
development of water and sewer projects in thousands of rural
communities. The expenditures, number of projects, and average costs
varied by state. On average, the water and sewer program provided
about 70 percent of the funds for the projects that it supported.
The remainder of the funds came from other sources such as the
Environmental Protection Agency (EPA), states, and counties.
EXPENDITURES, NUMBER OF
PROJECTS, AND AVERAGE COSTS
VARIED BY STATE
---------------------------------------------------------- Chapter 2:1
Since fiscal year 1965, USDA has provided financial assistance to
over 12,500 rural communities and almost 17,000 water and sewer
projects. The number of projects supported and the amount of loan
and grant funds provided varied, ranging from a low of two projects
and about $5.6 million in the Western Pacific Territories to a high
of more than 1,100 projects and $1.8 billion in expenditures in
Texas. Furthermore, the average expenditure per project varied
widely among the states.
Table 2.1 shows the top five states in total expenditures and the
average expenditure for each project in those states since fiscal
year 1965.
Table 2.1
Top Five States Receiving Funding,
Fiscal Year 1965 Through June 1995
Average
Total expenditur
e per Average
Number expenditures project annual
of (in (in number of
State projects billions) millions) projects
---------------------- -------- ------------ ---------- ----------
Texas 1,116 $1.9 $1.7 36
North Carolina 562 1.4 2.5 18
Ohio 390 1.1 2.9 13
Pennsylvania 439 1.1 2.5 14
Mississippi 879 1.0 1.2 28
----------------------------------------------------------------------
Source: USDA's data.
As table 2.1 shows, while total expenditures were comparable for
three of the five states, the average expenditure per project and the
average annual number of projects varied considerably. For example,
the average expenditure per project in Ohio was about 2-1/2 times the
expenditure in Mississippi. This occurs in part because the USDA
office in Mississippi funded more water projects than did the USDA
office in Ohio, which funded more sewer projects. In general, water
projects are less costly than sewer projects. (App. I provides
information on projects and expenditures by state.)
PROJECTS ALSO RECEIVED FUNDING
FROM OTHER SOURCES
---------------------------------------------------------- Chapter 2:2
Many projects that the water and sewer program supported also
received funding from sources other than USDA, including the
community itself, the state and county, and other federal sources,
such as EPA. Figure 2.1 shows the amount and percentage of support
provided by these sources and USDA.
Figure 2.1: Sources of Support
for Water and Sewer Projects,
Fiscal Year 1965 Through June
1995
(See figure in printed
edition.)
Note: Some funds provided by the community, state and county, and
other categories may have originated from federal sources that
provide funds to localities for multiple purposes.
Source: USDA's data.
The $27.7 billion provided by USDA's water and sewer program
represents about 70 percent of the total expenditures on these
projects from fiscal year 1965 through June 1995. The extent of all
other funding sources varied widely by state--from 8 percent in New
Jersey to 62 percent in Vermont. According to USDA officials in one
of the four states we visited, they encouraged and aided applicants
for the projects in soliciting funds outside of the USDA program.
Projects in that state and in two others that we visited averaged
over 30 percent in all other sources of funding. Conversely, the
fourth state we visited relied more heavily on USDA's water and sewer
funds, obtaining only 15 percent of funding from all other sources.
(See app. I for sources of funding by state.)
CURRENT ALLOCATION FORMULA IS EASY
TO ADMINISTER AND MAY PARTIALLY
REFLECT STATES' NEEDS AND ABILITY
TO PAY
============================================================ Chapter 3
The current water and sewer formula--which is based on rural
population, poverty, and unemployment--is easy to administer and
draws on data that are readily available and directed toward rural
areas. As we have reported on a number of previous occasions,\9
experts in public finance have identified three criteria--need,
ability to pay, and differences in cost--that are commonly considered
in allocation formulas aimed at producing an equitable distribution
of funds among states. USDA's current formula may partially satisfy
the first two criteria but does not address the third. Data on need,
on the ability to pay, and on certain cost differences are available
from the Bureau of the Census, EPA, the Department of the Treasury,
and the Bureau of Labor Statistics.
--------------------
\9 See Maternal and Child Health: Block Grant Funds Should Be
Distributed More Equitably (GAO/HRD-92-5, Apr. 2, 1992), Older
Americans Act: Funding Formula Could Better Reflect State Needs
(GAO/HEHS-94-41, May 12, 1994), and Federal Aid: Revising Poverty
Statistics Affects Fairness of Allocation Formulas (GAO/HEHS-94-165,
May 20, 1994).
THE WATER AND SEWER FORMULA IS
EASY TO ADMINISTER AND DRAWS ON
READILY AVAILABLE DATA
---------------------------------------------------------- Chapter 3:1
USDA's water and sewer formula is easy to administer because of its
simplicity and its use of factors that are based on readily available
data. It consists of three weighted factors for each state: rural
population (50 percent), rural poverty (25 percent), and rural
unemployment (25 percent). Rural population is measured by a state's
rural share of population as a percentage of the national rural
population. Rural poverty is measured by the state's rural
population below the poverty level as a percentage of the national
rural population below the poverty level. Rural unemployment is
measured by the state's nonmetropolitan unemployed population as a
percentage of the national nonmetropolitan unemployed population.
USDA officials informed us that they use rural population, poverty,
and unemployment in the allocation formula because the data are
readily available from the Bureau of the Census and Bureau of Labor
Statistics and do not require any further alterations. (For
population and poverty levels, data are collected every 10 years; for
unemployment rates, data are collected annually.) In addition, the
data are directed toward rural areas.
NEED, ABILITY TO PAY, AND COST
DIFFERENCES ARE RECOGNIZED
ALLOCATION CRITERIA
---------------------------------------------------------- Chapter 3:2
Public finance experts have identified three criteria that are
commonly considered in allocation formulas aimed at producing an
equitable distribution of funds among states. These criteria are the
(1) need for services or projects, (2) ability of states to fund
projects from their own resources, and (3) differences between the
states in the cost of providing these services. Some federal
allocation formulas consider one or more of these criteria in
distributing program funding to the states, as discussed below.
NEED FOR SERVICES
-------------------------------------------------------- Chapter 3:2.1
The Advisory Commission on Intergovernmental Relations,\10
reported that the "need for services" is the most common criterion
used to allocate federal funds.\11 Some formulas use direct
indicators of this need. For example, the formula for the Highway
Bridge Replacement and Rehabilitation Program is based on the number
of a state's bridges that are eligible for replacement or
rehabilitation. Similarly, the formula for the Hazardous Waste
Management State Program is based in part on a direct indicator of
need--the number of hazardous waste management facilities in the
state. This program assists states in transporting, treating,
storing, and disposing of hazardous wastes.
Indirect indicators of need, or proxies, may be used when direct
factors are not available. For example, the Highway Planning and
Construction, Interstate 4R Program formula contains a factor for
vehicle miles traveled on interstate routes in a calendar year. This
factor serves as a proxy for those interstate highways that are in
the greatest need of repair. Indirect indicators of need often have
the advantage of objectivity and prevent any perverse incentive
effects that may result from the formula itself. However, when
direct indicators of need are available, their use may more precisely
target funds.
--------------------
\10 The Congress created the Commission in 1959 to monitor the
operation of the federal system and to recommend improvements. The
Commission is an independent, bipartisan commission with 26
members--9 representing the federal government; 14, state and local
government; and 3, the general public.
\11 Categorical Grants: Their Role and Design, Advisory Commission
on Intergovernmental Relations, A-52 (Washington, D.C.: May 1977).
ABILITY TO PAY
-------------------------------------------------------- Chapter 3:2.2
A state's ability to raise revenues from its own resources--its
fiscal capacity--is also an important factor found in many federal
allocation formulas. The rationale for including an ability-to-pay
factor is that a greater share of funds should go to recipients who
are least able to finance their needs from their own resources. Many
federal and state grant programs over the past decade have included a
measure of ability to pay in their formulas.
Because it is readily available information, per capita income is the
factor used almost exclusively to account for ability to pay.
However, according to economists and other analysts, per capita
income is not a comprehensive measure of ability to pay because it
does not include other sources of income, such as corporate income
and taxes paid by nonresidents (e.g., hotel and sales taxes).
Therefore, using an indicator such as per capita income may
understate states' ability to pay.
Several other factors could be used to develop a more comprehensive
indicator of ability to pay, such as total taxable resources.\12 This
indicator, developed by the Department of the Treasury, is an average
of per capita income and per capita gross state product.\13 By
averaging gross state product with personal income, total taxable
resources covers more types of income than does personal income
alone, including income received by nonresidents. This measure is
used in the formula specified in the 1987 reauthorization of the
block grant for the Alcohol, Drug Abuse, and Mental Health Program.
--------------------
\12 Other such indicators of ability to pay include the
Representative Tax System and the Representative Revenue System, both
developed by the Advisory Commission on Intergovernmental Relations.
The Representative Tax System is an alternative to per capita income
and measures the potential ability of states to raise taxes from
their own sources. The Representative Revenue System, a parallel
measure to the Representative Tax System, includes the capacity to
collect nontax revenues, such as user charges, in addition to tax
revenues. For both of these measures, an index is calculated that
measures the potential revenue-raising ability of each state in
relation to a national average of 100. However, neither of these
indicators is collected on a regular basis--they were last measured
in 1991. Currently, they are not used in the United States in grant
formulas. However, Canada has used the Representative Tax System in
its program of federal-provincial equalization assistance.
\13 Gross State Product measures all income produced within a state,
whether received by residents or nonresidents or retained by business
corporations.
GEOGRAPHIC COST DIFFERENCES
-------------------------------------------------------- Chapter 3:2.3
Many allocation formulas include an adjustment for cost disparities
across states. Ideally, for these formulas to reflect cost
differences fairly, they must incorporate factors that reflect
differences between states in costs that are beyond the states'
direct control. One formula that includes an indicator to adjust for
costs is the formula for the Highway Bridge Replacement and
Rehabilitation Program. This formula considers the costs of
replacing or improving bridges in different states.
USDA'S WATER AND SEWER FORMULA
MAY PARTIALLY SATISFY
ALLOCATION CRITERIA
---------------------------------------------------------- Chapter 3:3
The current formula may partially reflect the need for services and
the ability to pay for such services, but it does not reflect cost
differences between the states. First, to the extent that a state's
relative need for services is proportional to rural population and
poverty, the population and poverty factors may serve as a proxy for
need. But the formula's reliance on poverty data can result in more
funding to a state that has more resources to help itself than its
poverty data would indicate. Such a state may have both a relatively
high average income and a high level of poverty. Also, poverty data
are not adjusted for cost-of-living differences across states.
Second, the formula partially provides a means for measuring a
state's ability to pay for needed water or sewer services. The
current formula's unemployment factor provides an indirect measure of
a state's financial capacity but does not directly address a state's
ability to pay for services. In addition, the use of the
unemployment rate as a targeting mechanism cannot be expected to
reflect the economic conditions of rural areas. According to USDA,
rural workers are more likely to rely on two or more part-time jobs
rather than one full-time job. These part-time jobs do not show up
in unemployment statistics. Also, the unemployment rate may not be
representative of the economic condition of self-employed farmers,
whose employment status is unlikely to change in good or bad times.
On the other hand, the current formula does not adjust for cost
differences. It does not recognize that the costs for building and
maintaining water and sewer projects differ from one state to
another. These costs can differ because of state-to-state
differences in labor costs or other inputs as well as the amount of
resources needed to accomplish the project. For example, costs may
be higher because of a harsh winter climate or the topography of
certain states, making it necessary to bury water or sewer pipes more
deeply or to drill through rocky terrain.
DATA ON NEED, ABILITY TO PAY,
AND COST DIFFERENCES ARE
GENERALLY AVAILABLE
---------------------------------------------------------- Chapter 3:4
Most data that could be incorporated into a formula that addresses a
community's need, ability to pay, and cost differences are currently
available. Appendix II provides details on the availability of such
data. Any changes that would incorporate such data, however, could
alter the amounts of loan and grant funds that states receive.
Depending on the factors selected and their respective assigned
weights, changes could be significant. The ultimate results of any
changes would depend upon assumptions about the relative importance
of factors. We did not analyze how potential changes would affect
individual states.
AWARD DETERMINATION APPROACH
PROVIDES FLEXIBILITY WHILE
RESULTING IN DIFFERING FUNDING
DECISIONS FOR SIMILAR COMMUNITIES
============================================================ Chapter 4
USDA state and district officials have the authority to vary the
amount of grant and loan funds that they award to communities
eligible to receive funding for water and sewer projects. The
officials may base their decisions on either the applicant
communities' median household income (MHI) or the user rates for
similar systems. This flexibility in funding decisions has the
advantage of allowing state and district offices to vary the mix of
grant and loan funds among competing projects. This same flexibility
results in different funding decisions for similar communities.
AWARD DETERMINATION APPROACH
ALLOWS OFFICIALS TO ADJUST
MIXTURE OF GRANT AND LOAN
FUNDING AMONG COMPETING
PROJECTS
---------------------------------------------------------- Chapter 4:1
USDA state and district officials decide on whether to provide only a
loan or a mix of loan and grant funds for water and sewer projects by
determining what constitutes an affordable payment or average user
charge. As discussed in chapter 1, if a loan by itself would result
in a user charge that is too high, officials can reduce the loan's
amount by providing grant funds. The amount of the grant is
ultimately determined by considering a community's MHI or the results
of a comparison between the proposed system and other similar
systems. USDA officials advised us that most funding decisions are
based on user charges for similar systems in the area, rather than on
the community's MHI.
According to a number of USDA state and district officials with whom
we spoke, the option of comparing similar communities and systems
provides them with latitude in distributing funds within the state.
This option allows them to provide more or less funds to projects,
depending on the number and cost of projects competing for funds.
Accordingly, these states could either fund multiple projects at
reduced grant levels or fewer projects at higher levels.
USDA offices in all four states chose the latter--assisting a larger
number of projects with relatively lower amounts of grants. For
example, USDA officials in one state told us that they had a 4- to
5-year backlog of projects totaling about $220 million. In this
state, when choosing similar systems for comparison, officials were
more likely to pick systems with higher user charges, thus
establishing a lower grant amount for the project under consideration
and spreading grant funds among competing projects.
According to USDA headquarters, state, and district officials,
selecting comparable communities and user charges is inherently
judgmental. Water and sewer systems and user charges can differ
because of such factors as the type and age of the system and the
size and density of the population served.
FLEXIBILITY IN CHOOSING SIMILAR
SYSTEMS RESULTS IN DIFFERING
FUNDING DECISIONS FOR SIMILAR
COMMUNITIES
---------------------------------------------------------- Chapter 4:2
While the flexibility for selecting similar systems provides latitude
in determining the amount of a grant that a particular project will
receive, it also means that differing funding decisions may be made
for similar communities. We identified variations in funding
decisions both between and within the four states we visited.
VARIATIONS IN FUNDING
DECISIONS BETWEEN THE FOUR
STATES
-------------------------------------------------------- Chapter 4:2.1
Table 4.1 provides information on four communities--one from each of
the four states we visited. The district and state offices in each
of the states based their funding decisions for these communities on
the user charges for similar water and/or sewer systems in comparable
communities within their respective states. The table presents
project development costs, the community's MHI, the community's
maximum grant eligibility, the grant's amount based on MHI, the
amount of the grant awarded, the annual user charges, and the
community's user charges used for comparison.
Table 4.1
Variations in Funding Decisions for
Water or Sewer Systems in Four States
Bo
rr
ow
er Grant User
co estimate Actual Annu charges
mm Project Maximum based on grant al in
un development allowable MHI award user similar
it cost (in grant \a (in (in (in char communit
y millions) MHI millions) millions) millions) ge ies
-- ------------ ------ ------------ ------------ ------------ ---- --------
St $6.2 $17,62 $3.4 $ 0 $3.4 $147 $114
a 7 127
t 146
e
1
St 7.6 17,738 5.5 2.1 0 376 360
a 365
t 396
e
2
St 3.8 15,000 2.8 1.1 2.4 182 222
a 258
t 82
e
3
St 2.0 19,654 1.5 0 0.4 204 240
a 215
t 228
e
4
----------------------------------------------------------------------------------
\a The maximum allowable grant is based on a community's MHI as
compared with the state's poverty level.
Source: USDA's data.
The community in State 1 was eligible for a grant of up to 55 percent
of its project development costs, on the basis of its median
household income when compared with the state's median household
income. As table 4.1 shows, USDA provided this community with the
maximum grant, about $3.4 million. USDA arrived at an annual user
charge of $147, which was comparable with the annual charges of three
other communities. In contrast, the community in State 2 was
eligible for a 75-percent grant but received no grant funds even
though it had a median household income similar to that of the first
community. Without a grant, the community in State 2 projected a
user charge of $376 annually, which was 2-1/2 times higher than the
user charge for the first community. However, this user charge was
comparable with the three communities that the district office had
selected for comparison in that state. USDA made differing funding
decisions for these two communities. While the community in State 2
was eligible for a larger grant than the community in State 1, it
received no grant at all.
Similarly, the communities in the other two states were each eligible
for a grant of 75 percent, but the grant amounts differed. One
community's annual user charge of $182 was close to an average of the
three communities selected for comparison, while the other community
received a grant amount that resulted in an annual user charge lower
than that of any of the three systems identified as similar.
VARIATIONS IN FUNDING
DECISIONS WITHIN ONE STATE
-------------------------------------------------------- Chapter 4:2.2
We also found variations in the approaches used within individual
states to determine how much grant funding, if any, USDA would
provide to a particular community. Table 4.2 presents information
similar to that in table 4.1 for four communities within the same
state. For these communities, USDA based its decisions on user
charges in similar communities.
Table 4.2
Variations in Funding Decisions for
Borrowers Having Similar Water or Sewer
Systems in One State
Bo
rr
ow
er User
co Grant Actual Annu charges
mm Project Maximum estimate grant al in
un development allowable based on MHI award user similar
it cost (in grant \a (in (in (in char communit
y millions) MHI millions) millions) millions) ge ies
-- ------------ ------ ------------ ------------ ------------ ---- --------
Co $3.3 $27,20 $1.8 $0.5 $0.6 $396 $384
m 2 384
m 360
u
n
i
t
y
A
Co 7.6 17,738 5.5 2.1 0 376 360
m 365
m 396
u
n
i
t
y
B
Co 3.3 17,818 2.4 2.8 2.3 353 300
m 288
m 334
u
n
i
t
y
C
Co 0.9 24,038 0.7 0.4 0.3 348 241
m 264
m 288
u
n
i
t
y
D
----------------------------------------------------------------------------------
\a The maximum allowable grant is based on a community's MHI compared
with the state's poverty level.
Source: USDA's data.
On the basis of its MHI, Community A was eligible for a grant of up
to 55 percent of its project development costs and received a grant
of $572,000. In contrast, Community B was eligible for a 75-percent
grant but received no grant funds. For Community A, the annual user
charge was $396, which was higher than the annual user charges for
the three communities used for comparison. For Community B, the
annual user charge was $376, which was higher than two of the
communities used for comparison. USDA made differing funding
decisions for Communities A and B. Community A, which had a higher
MHI than Community B, received a grant, while Community B received no
grant.
Our analysis also showed that Communities B, C, and D were eligible
for grants up to 75 percent ($5.5 million, $2.4 million, and
$657,000, respectively). While USDA compared similar communities to
arrive at projected user charges for these three applicants, it
provided no grant to Community B, almost the maximum grant to
Community C ($2.3 million), and less than half the maximum grant to
Community D ($300,000).
Several USDA district officials in this state told us that they
regularly choose systems for comparison that support a $30 to $35
monthly charge because they believe that user charges in this range
are necessary to get the state office's approval for the project.
However, USDA state officials disagreed with the district officials'
views that a $30 to $35 monthly charge was expected. Nonetheless, in
another state, USDA state and district officials told us that they
emphasize having a consistent outcome for user charges in their
state. They informed us that they expected the awards to projects to
result in monthly user charges of about $30 for water projects and
about $35 for sewer projects.
Also, within each of the four states visited, USDA's rationale for
making grant determination decisions was often not documented in the
files. For example, files on the projects frequently showed that the
similar systems approach was used but the communities and user
charges selected for comparison were not identified.
NUMBER OF WATER AND SEWER PROJECTS
AND DOLLAR VALUE OF LOANS AND
GRANTS FUNDED BY USDA AND OTHER
SOURCES
=========================================================== Appendix I
Table I.1
Number of Water and Sewer Projects and
USDA Loan/Grant Totals by State for
Projects Started From Fiscal Year 1965
Through June 1995
(Dollars in millions)
Number Loan and Average
of Loan Grant grant cost per
States and territories projects amount amount amount project
------------------------ -------- ------ ------ -------- --------
Alabama 321 $450.9 $179.0 $629.9 $2.0
Alaska 74 54.6 36.2 90.7 1.2
Arizona 160 172.7 52.1 224.8 1.4
Arkansas 707 580.6 285.2 865.8 1.2
California 423 513.5 219.1 732.7 1.7
Colorado 239 181.3 96.2 277.5 1.2
Connecticut 80 149.8 38.9 188.7 2.4
Delaware 35 89.6 15.7 105.2 3.0
Florida 280 706.5 206.5 913.0 3.3
Georgia 516 612.6 269.4 882.0 1.7
Hawaii 7 8.7 10.2 18.9 2.7
Idaho 255 113.8 62.0 175.8 0.7
Illinois 729 586.6 240.3 826.9 1.1
Indiana 401 537.4 179.0 716.4 1.8
Iowa 676 764.3 195.6 960.0 1.4
Kansas 369 362.0 142.8 504.8 1.4
Kentucky 415 724.9 287.7 1,012.5 2.4
Louisiana 544 550.1 181.4 731.6 1.3
Maine 224 305.5 120.3 425.8 1.9
Maryland 161 180.2 79.5 259.6 1.6
Massachusetts 168 309.6 70.5 380.2 2.3
Michigan 407 691.9 232.4 924.3 2.3
Minnesota 466 344.6 155.3 499.8 1.1
Mississippi 879 806.4 212.4 1,018.8 1.2
Missouri 452 433.3 200.8 634.1 1.4
Montana 100 50.6 24.6 75.2 0.8
Nebraska 205 106.6 57.9 164.5 0.8
Nevada 63 42.9 15.4 58.3 0.9
New Hampshire 105 132.2 49.3 181.5 1.7
New Jersey 80 263.7 62.8 326.5 4.1
New Mexico 174 83.6 43.6 127.2 0.7
New York 525 560.5 182.1 742.6 1.4
North Carolina 562 1,035. 346.1 1,381.3 2.5
3
North Dakota 176 194.2 77.6 271.8 1.5
Ohio 390 879.4 267.8 1,147.2 2.9
Oklahoma 560 442.7 172.8 615.5 1.1
Oregon 231 211.1 100.4 311.6 1.3
Pennsylvania 439 777.1 302.3 1,079.4 2.5
Puerto Rico 330 432.2 219.7 651.9 2.0
Rhode Island 25 63.9 9.0 73.0 2.9
South Carolina 285 663.3 159.1 822.5 2.9
South Dakota 247 260.8 115.6 376.4 1.5
Tennessee 449 703.5 181.2 884.7 2.0
Texas 1,116 1,459. 415.1 1,874.7 1.7
6
Utah 206 133.8 45.3 179.1 0.9
Vermont 170 132.4 43.9 176.3 1.0
U.S. Virgin Islands 2 5.8 0.4 6.3 3.1
Virginia 349 551.5 216.6 768.1 2.2
Washington 353 215.3 88.8 304.0 0.9
West Virginia 345 502.9 183.5 686.5 2.0
Western Pacific 2 1.4 4.2 5.6 2.8
Territories
Wisconsin 300 207.0 134.9 341.9 1.1
Wyoming 132 57.2 58.4 115.5 0.9
Total 16,909 $20,40 $7,347 $27,748. $1.6
1.9 .0 8
----------------------------------------------------------------------
Notes: All dollar amounts are expressed in fiscal year 1994 dollars.
Figures may not total because of rounding.
Table I.2
Funding for Water and Sewer Projects
From USDA and Other Sources, by State,
Fiscal Year 1965 Through June 1995
(Dollars in millions)
States
and
territor State/ Total non-
ies Community County EPA Other USDA USDA
-------- ---------- ---------- ---------- ---------- ---------- ----------
Alabama $11.1 $8.5 $52.3 $58.7 $130.5 $629.9
Alaska 4.8 54.6 63.8 22.8 146.0 90.7
Arizona 27.3 0.6 58.1 39.1 125.0 224.8
Arkansas 13.6 118.0 98.6 90.1 320.2 865.8
Californ 21.9 91.5 239.1 69.7 422.1 732.7
ia
Colorado 34.7 30.6 20.2 23.9 109.4 277.5
Connecti 5.8 34.1 104.7 10.4 154.9 188.7
cut
Delaware 3.3 32.9 85.5 24.5 146.1 105.2
Florida 24.7 70.2 72.9 35.1 202.9 913.0
Georgia 8.7 10.1 45.9 72.1 136.8 882.0
Hawaii 1.1 3.7 6.1 0.0 10.9 18.9
Idaho 13.2 30.6 36.3 28.4 108.5 175.8
Illinois 45.9 2.1 283.3 85.3 416.6 826.9
Indiana 23.7 43.2 257.9 21.6 346.4 716.4
Iowa 31.0 21.2 76.1 48.4 176.8 960.0
Kansas 40.5 22.5 13.2 13.7 90.0 504.8
Kentucky 43.3 22.7 189.6 232.0 487.5 1,012.5
Louisian 13.5 6.5 112.8 23.7 156.4 731.6
a
Maine 9.3 85.3 224.3 26.4 345.2 425.8
Maryland 9.4 71.9 157.2 47.4 285.9 259.6
Massachu 29.0 97.6 241.9 11.2 379.6 380.2
setts
Michigan 13.0 36.0 526.9 60.3 636.3 924.3
Minnesot 6.6 24.7 71.0 28.3 130.5 499.8
a
Mississi 9.9 17.0 103.1 54.0 184.0 1,018.8
ppi
Missouri 27.4 78.1 54.9 37.5 197.9 634.1
Montana 2.1 3.9 16.6 5.2 27.8 75.2
Nebraska 8.9 4.8 3.3 16.8 33.8 164.5
Nevada 3.9 3.1 26.4 7.8 41.2 58.3
New 3.7 49.2 109.2 24.6 186.6 181.5
Hampshi
re
New 3.1 7.5 13.2 5.8 29.6 326.5
Jersey
New 12.4 20.7 19.2 20.2 72.5 127.2
Mexico
New York 10.4 56.6 509.0 71.1 647.2 742.6
North 40.9 204.7 260.5 106.2 612.4 1,381.3
Carolina
North 9.1 30.8 17.8 19.9 77.7 271.8
Dakota
Ohio 56.5 24.7 371.0 84.5 536.7 1,147.2
Oklahoma 13.5 10.1 65.8 44.0 133.4 615.5
Oregon 29.2 10.2 66.0 41.6 147.0 311.6
Pennsylv 86.9 57.1 475.3 65.4 684.5 1,079.4
ania
Puerto 69.7 43.9 18.3 65.4 197.3 651.9
Rico
Rhode 10.4 8.1 24.9 0.4 43.7 73.0
Island
South 32.8 7.5 254.4 50.9 345.6 822.5
Carolina
South 17.5 20.2 32.6 54.3 124.7 376.4
Dakota
Tennesse 34.0 30.9 63.7 127.9 256.6 884.7
e
Texas 69.4 60.5 59.9 47.1 236.8 1,874.7
Utah 15.1 36.4 54.1 39.5 145.1 179.1
Vermont 2.0 116.4 157.1 17.1 292.7 176.3
U.S. 0.0 0.0 0.0 1.8 1.8 6.3
Virgin
Islands
Virginia 25.3 25.5 109.5 113.5 273.9 768.1
Washingt 14.7 88.4 106.6 29.8 239.5 304.0
on
West 9.5 52.0 269.0 174.2 504.7 686.5
Virginia
Western 0.0 0.0 0.0 1.5 1.5 5.6
Pacific
Territo
ries
Wisconsi 41.6 108.3 29.2 39.6 218.8 341.9
n
Wyoming 14.4 88.5 19.7 65.7 188.3 115.5
Total $1,109.8 $2,184.0 $6,347.5 $2,506.6 $12,147.9 $27,748.8
--------------------------------------------------------------------------------
Notes: All figures are expressed in fiscal year 1994 dollars.
Figures may not total because of rounding.
AVAILABILITY OF DATA ON STATES'
NEEDS FOR WATER AND SEWER
SERVICES, ABILITY TO PAY, AND COST
INDICES
========================================================== Appendix II
This appendix presents information on the data that are available on
need, ability to pay, and cost differences across states.
AVAILABILITY OF DATA ON NEED
-------------------------------------------------------- Appendix II:1
A direct measure of need for the water and sewer program could be the
number of rural households or other units that either do not have
water and sewer facilities or need system modifications.
Considerable information on states' needs for water and sewer systems
is now or will soon be available.
Both the Bureau of the Census and the Environmental Protection Agency
(EPA) collect data that reflect the need for rural water and sewer
systems. The Bureau's decennial "Census of Population and Housing"
reports on households that lack public water and sewer systems at the
county level. As shown in table II.1, an average of 9 percent of
households in communities with populations under 10,000 lacked public
or private water systems in 1990 and an average of 20 percent lacked
public sewer systems.
Table II.1
Percentage of Households With Population
Under 10,000 Lacking Water and Sewer
Systems in 1990, by State
Percent lacking Percent lacking
public or private public sewer
State water system system
------------------------------ ------------------ ------------------
Alabama 4 43
Alaska 40 50
Arizona 11 41
Arkansas 3 20
California 6 22
Colorado 4 8
Connecticut 19 31
Delaware 13 12
Florida 11 31
Georgia 5 24
Hawaii 4 43
Idaho 5 11
Illinois 7 14
Indiana 12 15
Iowa 4 7
Kansas 3 4
Kentucky 2 15
Louisiana 4 20
Maine 12 21
Maryland 14 15
Massachusetts 7 55
Michigan 14 12
Minnesota 16 15
Mississippi 5 14
Missouri 4 12
Montana 12 15
Nebraska 3 4
Nevada 16 25
New Hampshire 9 18
New Jersey 9 10
New Mexico 16 31
New York 11 31
North Carolina 13 34
North Dakota 6 5
Ohio 8 15
Oklahoma 6 16
Oregon 6 13
Pennsylvania 6 10
Rhode Island 12 39
South Carolina 6 23
South Dakota 4 7
Tennessee 4 32
Texas 5 18
Utah 2 20
Vermont 6 12
Virginia 7 17
Washington 7 30
West Virginia 4 14
Wisconsin 16 9
Wyoming 6 8
Average 9 20
----------------------------------------------------------------------
Source: GAO's analysis of data from the Bureau of the Census' 1990
Census of Population and Housing.
EPA surveys small communities (with populations of under 10,000)
biennially to determine whether their publicly owned wastewater
treatment facilities need to be replaced or upgraded to meet the
requirements of the Clean Water Act. As shown in table II.2, EPA
found that of the 21,834 communities surveyed in 1992, about 7,258
had documented needs for sewer facilities--an average of 34 percent
within each state.\14 This average can be misleading, however, in
assessing needs and costs. For example, while only 33 percent of
Pennsylvania's small communities have documented needs, the absolute
number of communities needing funding in Pennsylvania is the second
largest in the nation--539 communities. In contrast, while Tennessee
had a much higher percentage of communities with documented needs--69
percent--this percentage translated to only 170 communities.
EPA is also collecting information on water needs. These data are
expected to be available in 1996.
Table II.2
Small Communities' Needs for Sewer
Facilities, by State, 1992
Number of Percent of
Number of small small
sewer communities communities
facilities in with with
small documented documented
State communities needs needs
-------------------------- -------------- ------------ ------------
Alabama 458 241 53
Alaska 46 11 24
Arizona 309 37 12
Arkansas 694 166 24
California 543 175 32
Colorado 295 72 24
Connecticut 120 43 36
Delaware 31 10 32
Florida 120 35 29
Georgia 615 120 20
Hawaii 16 11 69
Idaho 209 33 16
Illinois 840 375 45
Indiana 391 283 72
Iowa 895 18 2
Kansas 565 108 19
Kentucky 411 238 58
Louisiana 448 211 47
Maine 210 60 29
Maryland 359 149 42
Massachusetts 96 51 53
Michigan 538 180 33
Minnesota 626 117 19
Mississippi 622 222 36
Missouri 752 174 23
Montana 192 19 10
Nebraska 487 34 7
Nevada 63 21 33
New Hampshire 92 58 63
New Jersey 379 208 55
New Mexico 79 15 19
New York 1,005 403 40
North Carolina 566 343 61
North Dakota 372 14 4
Ohio 1,033 336 33
Oklahoma 453 91 20
Oregon 185 44 24
Pennsylvania 1,636 539 33
Rhode Island 7 2 29
South Carolina 198 98 49
South Dakota 344 124 36
Tennessee 246 170 69
Texas 1,549 592 38
Utah 371 18 5
Vermont 90 26 29
Virginia 386 207 54
Washington 260 84 32
West Virginia 743 341 46
Wisconsin 770 323 42
Wyoming 119 8 7
Total 21,834 7,258 34
----------------------------------------------------------------------
Source: GAO's analysis of EPA data in 1992 Needs Survey Report to
Congress.
--------------------
\14 Documented needs consist of facilities and activities, including
the conveyance, storage, treatment, recycling, and reclamation of
municipal wastewater in which a water quality or public health
problem exists.
AVAILABILITY OF DATA ON STATES'
ABILITY TO PAY
-------------------------------------------------------- Appendix II:2
Data are also available that could be used to address a state's
ability to pay for water and sewer projects. For example, the total
taxable resources indicator provides a complete picture of a state's
ability to pay and is readily available on an annual basis from the
Department of the Treasury. This indicator is more comprehensive
than the other leading measure of ability to pay--per capita income.
While these indicators yield different results for a state's ability
to pay, either one could result in the receipt of proportionately
more funding by states with lower fiscal capacities from the water
and sewer program than they currently receive. Each of these
indicators looks at an individual state's ability to pay in
relationship to a national average index of 100. For example, as
shown in table II.3, total taxable resources ranges from 70 for
Mississippi to 156 for Alaska, while per capita income ranges from 72
in Mississippi to 140 in Connecticut. States that are resource rich,
such as Alaska and Wyoming, score higher on the total taxable
resource index than the per capita income index.
Table II.3
Ability to Pay Indicators, by State,
1991-93 Average
Total taxable
State resources Per capita income
------------------------------ ------------------ ------------------
Alabama 81 85
Alaska 156 115
Arizona 84 90
Arkansas 76 79
California 109 111
Colorado 101 107
Connecticut 133 140
Delaware 122 109
Florida 92 103
Georgia 94 95
Hawaii 116 116
Idaho 82 86
Illinois 108 112
Indiana 91 94
Iowa 89 92
Kansas 95 99
Kentucky 82 84
Louisiana 90 82
Maine 87 94
Maryland 109 120
Massachusetts 117 122
Michigan 94 102
Minnesota 102 105
Mississippi 70 72
Missouri 93 98
Montana 81 86
Nebraska 97 98
Nevada 110 113
New Hampshire 103 112
New Jersey 125 134
New Mexico 82 80
New York 119 124
North Carolina 93 92
North Dakota 84 86
Ohio 93 98
Oklahoma 81 85
Oregon 91 96
Pennsylvania 99 106
Rhode Island 97 105
South Carolina 82 84
South Dakota 86 89
Tennessee 89 91
Texas 96 95
Utah 79 80
Vermont 91 97
Virginia 103 108
Washington 105 109
West Virginia 74 80
Wisconsin 93 98
Wyoming 110 98
----------------------------------------------------------------------
Source: GAO's analysis of Department of the Treasury data.
AVAILABILITY OF DATA ON COST
DIFFERENCES
-------------------------------------------------------- Appendix II:3
Some data are available to account for differences in construction
costs across states. For example, state-by-state labor cost data for
constructing water, sewer, and utility projects are available on an
annual basis from the Bureau of Labor Statistics. As shown in table
II.4, these data show significant state-by-state differences in
relationship to a national average index of 100. Arkansas and
Mississippi had the lowest labor costs, with indexes of 68, while
Alaska had the highest, with an index of 219. These data could be
used, in conjunction with other cost data, to develop an overall cost
index for water and sewer projects.
Several studies have shown that although state-by-state data on
capital costs are extremely limited, capital costs closely follow
labor cost data, which are widely available. In the context of water
and sewer capital costs, however, this connection may not hold. In
addition, the unit cost of labor or capital does not take into
account the other cost aspect mentioned previously--the
state-by-state differences in costs resulting from the amount of
resources needed to accomplish these projects because of such factors
as climate or topography. Therefore, data on both capital costs and
costs representing resource use are currently not available and could
only be obtained by directly surveying states to ascertain what these
cost differences are.
Table II.4
Labor Cost Differences for Constructing
Water and Sewer Facilities, by State
Labor cost
State index
------------------------------------------------------ --------------
Alabama 75
Alaska 219
Arizona 84
Arkansas 68
California 125
Colorado 98
Connecticut 130
Delaware 93
Florida 81
Georgia 77
Hawaii 149
Idaho 118
Illinois 142
Indiana 96
Iowa 95
Kansas 89
Kentucky 82
Louisiana 88
Maine \a
Maryland 94
Massachusetts 126
Michigan 123
Minnesota 116
Mississippi 68
Missouri 94
Montana 113
Nebraska 93
Nevada 109
New Hampshire 90
New Jersey 156
New Mexico 73
New York 143
North Carolina 76
North Dakota \a
Ohio 106
Oklahoma 82
Oregon 127
Pennsylvania 108
Rhode Island 133
South Carolina 70
South Dakota 86
Tennessee 72
Texas 88
Utah 82
Vermont 78
Virginia 82
Washington 110
West Virginia 89
Wisconsin 122
Wyoming 83
----------------------------------------------------------------------
\a Not available.
Source: GAO's analysis of Bureau of Labor Statistics data.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
Robert C. Summers, Assistant Director
Clifford J. Diehl, Project Leader
Barbara J. El-Osta
J. Kenzel Goodmiller
Hector Rojas
Carol Herrnstadt Shulman
Robert C. Sommer