Earmarks harm 1/2 of states' water infrastructure financing

Reprinting from a shared analysis with Katy Hansen:

The omnibus appropriations bill for fiscal year 2023 includes hundreds of earmarks that cut into the water infrastructure financing programs, mostly on behalf of a handful of states. Our analysis shows these earmarks will result in a direct net loss of $388 million to 27 states this year.?

Typically, the EPA divides the amount that Congress appropriates for the State Revolving Funds (SRF) to each state according to a formula. This apportionment is called a “capitalization grant.” States have significant discretion and well-staffed programs to allocate the funds.?

In a dramatic change, over half of the FY 2023 SRF funds that would otherwise be allocated by a formula is being taken to pay for earmarks. Federal lawmakers directed $1.47 billion dollars of the total $2.76 billion SRF appropriation to 715 projects. This leaves only $1.29 billion for states to allocate.?

A large number of states will lose water funding that would have otherwise financed crucial infrastructure projects. Why? Because of the way that formula-based programs work, the earmarks are subtracted from the total amount appropriated before the EPA allocates the funds to states. So every state that does not have substantial earmarks loses.??

To estimate which states will lose funds in FY23, we compared the amount that the state should have received according to the formula-based allocation without earmarks to the amount that state will receive with earmarks. The data on the formula-based allocation are from the FY22 Clean Water SRF appropriation and Drinking Water SRF appropriation. The earmarked projects are listed as Interior and Environment Community Project Funding for the House and Congressionally-Directed Spending Projects for the Senate (pg. 1-66). The chart below shows which states will lose funds based on our estimates.??

Earmarks in the omnibus bill harm 27 states. Tennessee will lose the most water funding–an estimated $48.9 million–in FY23 funding due to other states’ earmarks. Arkansas, Indiana, Idaho, Maryland, and North Dakota run close behind. Montana has no earmarks through the SRFs in the omnibus bill.? Because other states’ earmarks drain the total amount available through EPA’s allocation formula, there will be an estimated $10.4 million decline in what Montanan cities, towns, and water utilities would have otherwise received. States like California and Alaska are taking millions off the top before the allotment of the SRF appropriation is made.??

Earmarks create four very serious threats to water infrastructure financing programs.

• First, directed spending reduces the funds available for water infrastructure over the long-term because earmarks are grants rather than loans. Most SRF awards are issued as loans. As borrowers repay the loans, states issue new loans with the repaid capital. Single allotments from appropriations therefore have a long lifetime of being reissued again and again. But the earmarks allocated as grants will not revolve back into SRF funds. The consequences of earmarks perpetuate over time. We estimate the 10-year cost of these earmarks is an additional $458 million for all states.
• Second, earmarks hinder the opportunities to advance equity. Grants should be provided to low-resource communities who would struggle to repay loans. The Infrastructure Investment and Jobs Act (IIJA) calls for historically underinvested communities to receive grants. But the earmarks provide grants regardless of the level of resources in the community. Some of the earmarks will benefit disadvantaged communities. The City of Santa Rosa, New Mexico, which has a median household income of $20,578, will receive $800,000 to improve their water system. Santa Rosa would likely struggle to finance water infrastructure without federal financial assistance. But many earmarks are slated for wealthy towns that could take loans to finance projects. For example, the town? of? Sharon, Massachusetts, which has a median household income of $139,385, will receive a $3.5 million grant for their water treatment plant. Providing grants to communities that can afford to pay for projects reduces the amount of funds available for communities with greater needs.??
• Third, earmarks also bypass the process through which states select which projects to finance. State agencies that administer the SRF programs must solicit public comments about their intended use of the funds. Earmarks are not included in this crucial part of procedural justice.
• Fourth, earmarks make implementation more difficult. Earmarks require the EPA to administer projects instead of the state, providing NEPA and other review functions. State agencies have staff with time and expertise to administer the SRF programs. The EPA likely does not have sufficient capacity to do so. EPA assistant administrator Radhika Fox said the “time- and labor-intensive work amounts to “setting up a new program” at EPA.”

It is likely too late for Congress to do anything other than approve these earmarks before the holiday and expiration of past continuing appropriations, however, the country’s water infrastructure financing programs will be less healthy and less equitable because of it.