Can a municipality that charges property owners an annual Sewer and Storm Water Fee use ARP funds to pay for sewer and stormwater capital projects?

Under the U.S. Department of the Treasury's (“Treasury”) Final Rule, the Coronavirus State and Local Fiscal Recovery Funds ("CSLFRF"), established by the American Rescue Plan Act of 2021 (“ARP”), includes support to municipalities for water and sewer infrastructure projects and services.[1] Treasury’s Final Rule provided increased “flexibilities and simplifications,” including for water and sewer infrastructure.[2] Treasury guidance indicates that in specific scenarios, a municipality that charges an annual sewer and stormwater fee (that is not ad valorem property tax) is permitted to utilize CSLFRF to “finance the generation and delivery of clean power to a wastewater system or a water treatment plant on a pro-rata basis.”[3]

Regarding the use of CSLFRF for sewer and stormwater capital projects, Treasury outlines the “eligible use categories for water and sewer infrastructure” in the Final Rule.[4]

The Final Rule explicitly states that it has:

aligned eligible uses of the [CSLFRF] with the wide range of types or categories of projects that would be eligible to receive financial assistance through the Clean Water State Revolving Fund (CWSRF) or Drinking Water State Revolving Fund (DWSRF) administered by the Environmental Protection Agency (EPA). By referring to these existing programs, with which many recipients are already familiar, Treasury intended to provide flexibility to recipients to respond to the needs of their communities while facilitating recipients’ identification of eligible projects.[5]

It is important to note that the Final Rule maintains the references to the CWSRF and DWSRF and reflects “a revised standard for determining a necessary water and sewer infrastructure investment for eligible water and sewer uses beyond those uses that are eligible under the DWSRF and CWSRF.”[6]

Under the Clean Water State Revolving Fund and the Final Rule, Treasury identifies a variety of eligible projects, including:

• Construction of publicly owned treatment works;
• Projects pursuant to implementation of a nonpoint source pollution management program established under the Clean Water Act (CWA);
• Decentralized wastewater treatment systems that treat municipal wastewater or domestic sewage;
• Management and treatment of stormwater or subsurface drainage water;
• Water conservation, efficiency, or reuse measures;
• Development and implementation of a conservation and management plan under the CWA;
• Watershed projects meeting the criteria set forth in the CWA;
• Energy consumption reduction for publicly owned treatment works;
• Reuse or recycling of wastewater, stormwater, or subsurface drainage water; and
• Security of publicly owned treatment works.

Treasury encourages recipients to review the EPA handbook for the CWSRF for a full list of eligibilities.[7]

In addition, under the Drinking Water State Revolving Fund and the Final Rule, Treasury identifies a variety of eligible projects such as:

• Facilities to improve drinking water quality;
• Transmission and distribution, including improvements of water pressure or prevention of contamination in infrastructure and lead service line replacements;
• New sources to replace contaminated drinking water or increase drought resilience, including aquifer storage and recovery system for water storage;
• Green infrastructure, including green roofs, rainwater harvesting collection, permeable pavement;
• Storage of drinking water, such as to prevent contaminants or equalize water demands;
• Purchase of water systems and interconnection of systems; and
• New community water systems.

Similarly, Treasury encourages recipients to review the EPA handbook for the DWSRF for a full list of eligibilities.[8]

For eligible water and sewer uses beyond those uses that are eligible under the DWSRF and CWSRF, Treasury has explicitly identified these additional eligible projects:

• Culvert repair, resizing, and removal, replacement of storm sewers, and additional types of stormwater infrastructure;
• Infrastructure to improve access to safe drinking water for individual[s] served by residential wells, including testing initiatives, and treatment/remediation strategies that address contamination;
• Dam and reservoir rehabilitation if primary purpose of dam or reservoir is for drinking water supply and project is necessary for provision of drinking water; and
• Broad set of lead remediation projects eligible under EPA grant programs authorized by the Water Infrastructure Improvements for the Nation (WIIN) Act, such as lead testing, installation of corrosion control treatment, lead service line replacement, as well as water quality testing, compliance monitoring, and remediation activities, including replacement of internal plumbing and faucets and fixtures in schools and childcare facilities.[9]

Additionally, Treasury has outlined a non-exclusive range of eligible uses for water and sewer infrastructure which include those deemed “[a] ‘necessary’ investment in infrastructure” that must be:[10]

(1) responsive to an identified need to achieve or maintain an adequate minimum level of service, which may include a reasonable projection of increased need, whether due to population growth or otherwise;

(2) a cost-effective means for meeting that need, taking into account available alternatives; and

(3) for investments in infrastructure that supply drinking water in order to meet projected population growth, projected to be sustainable over its estimated useful life.[11]

To determine if intended funding uses are permissible or deemed "a 'necessary' investment in infrastructure," a municipality should generally refer to the Clean Water State Revolving Funds Program Eligibilities for sewer and stormwater projects along with the enumerated eligible uses provided above.[12]^, [13]

Regarding the use of CSLFRF for new, energy-related projects, Treasury’s FAQs state:

The EPA's Overview of Clean Water State Revolving Fund Eligibilities describes eligible energy-related projects. This includes a "[p]ro rata share of capital costs of offsite clean energy facilities that provide power to a treatment works." Thus, State and Local Fiscal Recovery Funds may be used to finance the generation and delivery of clean power to a wastewater system or a water treatment plant on a pro-rata basis.[14]

If a municipality's annual sewer and stormwater fee covered the cost of delivering or facilitating clean power to a wastewater system or water treatment plant, or if the municipality sought to maintain or expand its clean energy systems to deliver more power to a wastewater system or water treatment plant, then as provided above, the Treasury guidance indicates that these expenses would likely be permissible uses of CSLFRF on a pro-rata basis.

A municipality should also review its State Revolving Funds ("SRFs") to help inform the municipality's strategy. Treasury states "the [Rule] does not incorporate any other requirements contained in the federal statutes governing the SRFs or any conditions or requirements that individual states may place on their use of SRFs."[15] This remains evident with the Final Rule's release, as Treasury has not explicitly stated otherwise.

A municipality that charges an annual sewer and stormwater fee that is not ad valorem property tax should also focus on the risk of potential duplication of benefits ("DOB"). DOB occurs if a person, household, business, government, or other entity receives financial assistance from multiple sources for an identical purpose, and the total aid received for that purpose, therefore, exceeds the total need for assistance. Municipalities should conduct a DOB analysis to determine which costs have not been paid from another assistance fund source to avoid duplication.

Recipients may use CSLFRF funds to cover costs incurred for eligible sewer and water-related projects that have been "planned or started prior to March 3, 2021, provided these project costs are covered by the Coronavirus State and Local Fiscal Recovery Funds and were incurred after March 3, 2021."[16] Notably, Treasury states in the Final Rule that it:

is also maintaining the deadlines by which funds must be obligated (i.e., December 31, 2024) and by which such obligations must be liquidated (i.e., December 31, 2026). The December 31, 2024 deadline by which eligible costs must be incurred is established by statute. Treasury is finalizing its interpretation of "incurred" to be equivalent to the definition of "obligation," based on the definition used for purposes of the Uniform Guidance. Treasury is also maintaining the period of performance, which will run through December 31, 2026, and provides the deadline by which recipients must expend obligated funds.[17]

Notably, Treasury is expected to issue new Frequently Asked Questions ("FAQs") specific to the Final Rule, which could provide further guidance on the subject.[18] In addition, Treasury encourages municipalities to consider the guidance issued in the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule.[19]

Last Updated: March 11, 2022