Research & Policy

Using State Revolving Funds to Protect Watersheds: An Ounce of Prevention versus A Pound of Cure

The science is clear: maintaining forested watersheds in a healthy condition (with a high percentage of forest cover) reduces drinking water treatment costs. As many cities have realized, making modest investments in protecting forests upstream can be far more cost-effective than letting watersheds deteriorate and having to undertake expensive construction and maintenance of water treatment facilities downstream.

Despite this growing consensus, conservation funds to protect upstream watersheds have proven to be inadequate and inconsistent with policymakers, instead, often focusing on expensive construction and maintenance of water treatment facilities downstream.

One of the largest sources of federal funding to protect water quality is the Clean Water State Revolving Funds (CWSRF) that have allowed states to make nearly $100 billion in low-interest loans for projects to protect water quality. All 50 states and Puerto Rico operate CWSRFs. The program provides the states with significant flexibility to fund projects ranging from waste water treatment upgrades to reducing nonpoint sources of pollution. But the lion’s share of these funds (96 percent) has supported “grey infrastructure” projects, such as waste water treatment plants, even though conservation of watersheds, via easements, is an eligible expense.

That may be changing. Several states have begun experimenting with novel approaches to funding land protection. Because the funds must revolve, the loans must be repaid (though states have allowed a certain amount of subsidy to lower interest rates, or sometimes forgive loans). That process is straightforward for waste treatment plants that generate revenues but much more difficult for land conservation projects, which more often than not do not generate a financial return. To support land conservation projects, some states have identified other sources of repayment, including revenue from recreation leases, carbon credits, and timber harvesting. Consider some recent examples:

  • In Pennsylvania, PennVest, the state’s revolving fund, made two loans in 2017 totaling $50M to Lyme Timber to buy 67,500 acres of forestland in the state’s northwest center to protect and restore water quality, facilitate public access and hiking, and create 50 timber-based jobs. Lyme, which will repay the loans with revenues from timber harvesting, has donated a conservation easement on 9,400 acres and will make available another 51,000 acres for easement purchase by the Commonwealth over the next seven years.  
  • In Georgia, the state’s revolving fund made a $5.7M loan to the City of Brookhaven to acquire a 33-acre tract that is one of the last remaining urban forests in metropolitan Atlanta and will protect the watershed of Peachtree Creek. The city will use its stormwater fund to repay the 20-year loan, which carries an interest rate of 0.89 percent, a highly discounted rate that amounts to a $500,000 subsidy or grant toward the land acquisition.
  • In California, the Yurok Tribe received a $11.8M zero interest loan from the state’s revolving fund to purchase 22,240 acres of land along the lower Klamath River that is important for water quality. The Tribe will sustainablely manage the land and repay the loan over 25 years with revenues from the sale of carbon credits.
Other states are utilizing creative partnerships to pair investments in “grey” and “green” solutions.

Ohio led the way with its now nearly two-decade old “sponsorship program” in which the state provides very low interest rates on loans for wastewater treatment plant upgrades if the community also sponsors a project that protects or restores water resources.

The program works like this: a “sponsor” takes out a loan for an amount more than is needed for a traditional project at a lower interest rate than is usually charged. The sponsor provides the additional amount to a partner for a nontraditional project without incurring any additional interest costs. For example, a borrower with an $800,000 project instead borrows $1,000,000 at a reduced interest rate for 30 years to sponsor a $200,000 land acquisition project. If the usual rate for a CWSRF loan is 2%, the annual amortized cost of the loan for $800,000 would be $35,484. Increasing the loan to $1,000,000 and lowering the rate to 0.4% results in an annual cost of $35,376.

Ohio has provided $185M for sponsorship projects, which have protected 5,200 acres of wetlands and 90 miles of streams. The program has worked with land trusts and local park districts. Last year, the program provided $15 million, split equally between land protection and restoration.

While more states are seeing land protection as important for water quality, they still are in the minority. Most states are still just funding traditional grey infrastructure. But leadership by Ohio and other states seems to be inspiring more to follow suit, and some observers suggest that state revolving funds could play a much more important role in watershed protection in the future.

“More and more states realize that it’s in the public’s best interest to invest in forests and healthy watersheds to help keep drinking water supplies safe and affordable,” observes Peter Stangel, Chief Operating Officer at the U.S. Endowment for Forestry and Communities, which works with water utilities and others to find practical ways to tap into revolving funds for watershed protection across the country. “States are finding creative ways to use revolving funds for watershed protection because it makes good economic sense.”

For more information on Clean Water State Revolving Funds, please see EPA’s recently published report:  Funding Land Conservation Projects with the Clean Water State Revolving Fund”  detailing the eligibility requirements, assistance options and financial benefits of CWSRF funding for land conservation projects.

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