OMB CIRCULAR A-76
OMB Circular A-76 provides a time-tested, objective methodology for achieving government savings through public-private competition. GAO, OMB, and other parties have documented significant savings from Circular A-76.

Limitations of the program, however, have been:

• Federal agency reluctance to initiate A-76 studies; and
• A perceived lack of objectivity to the study process, which limits private sector participation.

Ways in which the process could be improved include:

• Create both positive and negative incentives to agency participation in the A-76 process, such as:
1. Positive. The DoD currently has the ability to retain savings generated through the A-76 process and apply them to infrastructure and equipment modernization. No similar incentive exists for civilian agencies. With such an incentive, civilian agencies could apply A-76-generated savings to offset capital investment and other requirements
2. Negative. President Reagan established, by Executive Order, agency goals for conduct of A-76 studies. OMB utilized the budgetary process to "encourage" agencies to meet these goals, with potential financial or FTE allocation consequences for failure to achieve the desired study level.
   
   
• Strengthen the A-76 Independent Review process to improve study objectivity. OMB Circular A-76 requires that an Independent Review (audit) of the study documents be conducted to ensure that they are properly prepared, prior to comparison of public and private sector costs. A-76 should be modified to strengthen the Independent Reviewer's role to include:
1. Validation of Governmental-in-Nature decisions
2. Verification that decisions made internal to the study products do not create unfair advantages for public (or private) sector bidders
3. Validation of performance-based service specifications.
   
   
• Emphasize completion of A-76 studies in a reasonable time frame. Establish standard internal milestones for major steps of the A-76 process. Have agencies report to OMB on the percent of studies being completed in compliance with study milestones.

• Tax Codes:
  Private Activity Bond Restrictions -- Subjecting private activity bonds for public-purpose projects to state volume caps prevents cities from developing the most efficient possible systems. Solution is to amend the tax code to remove private activity bonds for public-purpose projects from state volume caps in order to allow innovative and more cost-effective projects.

• Labor Policies:
1. Public Pension Fund Flexibility/Portability -- Prohibiting public-sector employees from maintaining their position in public employee pension funds if they transfer to a private-sector firm under a partnership creates significant unnecessary opposition to partnerships. The solution is to change restrictive provisions of tax and labor law and/or regulations to permit such employees to remain in public pension funds and for their new private employers to make pension contributions to these funds
2. Section 13C of the Federal Transit Act - This statue provides that if a member of a bargaining unit of a transit authority loses his/her job due to the provision of a federal grant (such as a requirement for contracting out of service), that individual is entitled to up to six years of full salary. This places an impediment to contracting or even considering contracting of such services. Equally difficult is that applications for Federal Transit Administration grants are reviewed both by U.S. DOT and DOL, with national labor unions (through a "review" policy) having the ability to effectively stop the approval process.
   
   
• Grant/Loan Policies
  Federal grant and loan assistance programs for municipal drinking water and wastewater capital investment typically severely restrict or prohibit significant private-sector participation in these projects. All federal grant and loan funds policy and regulations should be structured to allow for the use of such funds in the many forms of public-private partnerships as long as ownership remains in the public domain. Federal agencies and states will need to work with the private sector and other non-profit groups to accomplish this.
  

However, the scoring may be spread out over several years under two exceptions: first, for multi-year procurements, outlays will be spread over the time it takes for a contractor to construct, manufacture, or purchase an asset; and second, where the private sector retains "substantial risk", outlays will be spread across the lease term. However, decision makers who control the A-11 process historically have not been sympathetic to public-private partnership transactions, and have not worked to find ways to advance this approach to meeting public needs. In many cases, the rules that are applied need to be better publicized and clarified - some interpretations are in themselves not "rules" in the context of the Administrative Procedure Act (APA) but rather, are merely articulation of OMB "policy" and therefore subject to change. As they are now applied, the rules are perceived to be administered unevenly and in a process that is not fully open to public scrutiny.

When a particular program calls for substantial capital contribution from the private sector, the OMB should work with all parties - public as well as private - to inform them of what rules may affect the way the program will be conducted. Moreover, if there are alterations to OMB policy that would be beneficial to the program's overall success, there should be a process available to all parties to resolve scoring issues early enough in the process to be meaningful for the project's outcome.

The OMB should designate an official to work with private-sector groups interested in privatization matters, to examine the existing rules, how the rules are now being applied, how to publicize the rules to the private sector, and how to structure a process for airing issues relative to scoring.

1. Remove the Cap on Private Activity Bonds: Provide legislation to exempt all private activity tax bonds for water and wastewater infrastructure, whether involving privately or publicly owned infrastructure, from the current volume cap limitation, provided the infrastructure serves a public purpose. These bonds could be used in conjunction with any of the possible methods of funding (i.e. SRF programs, grants, etc.)
   
2. Private Sector Access to SRF Program: If the State Revolving Fund (SRF) Program is expanded provisions need to be considered that would make these funds available to private entities, as well as public, in all states throughout the United States.
   
3. More Innovative Use of Funding: State programs should allow flexibility in the use of funds assistance with public private partnerships, i.e. funds could be used in many creative and innovative ways (some of which are known and some yet to be developed) so long as the public entity owns the asset (i.e. in lieu of loan/grant to fund capital needs, let an annuity be set up of loan/grant funds to pay service fee component related to capital needs). This would take advantage of the time value of money to gain leverage of limited governmental funding).
   
4. Remove Impediments to Alternate Resources: States should be encouraged to review existing state law and remove all impediments to allowing municipal government at all levels from pursing alternative service delivery arrangements (design/build, design/build/operate, etc.). This will increase the options available for government when evaluating and selecting the best service delivery arrangement, whether traditional or alternative (new and emerging).
   

B. INCENTIVES FOR INNOVATION

1. Flexibility in Delivery Methods: States should have program flexibility for alternate delivery methods, i.e. relaxation on rules for automation, process modifications, staff reductions, etc., so long as these are backed with guarantees for performance from an entity proposing alternative methods.
   
2. Allow New Technologies: Use of new technologies should be permitted, as long as the private partner guarantees performance (if not fix it or replace it), with public funds paying for it only once.
   
3. Performance Metrics: States should determine the metrics for performance, to provide incentives of increased financial assistance for performance above, and penalties for below.
   
4. Promote Environmental Improvements: Incentives should be established for compliance with Section 6002(e) of RCRA, which requires use of "recovered material" and Executive Order on Acquisition Planning Section 401 which deals with use of recycled or recovered materials.
   

C. INCENTIVES FOR PROMOTION OF GOOD MANAGEMENT

1. Funding on the Basis of Need: Government assistance should be linked to affordability standards based on economic indicators and metrics readily available at various state, county and local agencies. This will tend to leverage governmental funds and allow a greater number of needed projects to receive funding assistance.
   
2. Promote Self-Sustainability: All assistance programs should support the long-term goal of water/wastewater utilities becoming self-sustaining through their rate structure (i.e. full cost-of-service rates). Rate subsidies, funded by federal assistance programs, are recommended for lower income customers of those water/wastewater utilities following this rate structure.
   
3. Establish Repair and Replacement Funds: State programs should ensure that each community in the State has proper repair and replacement funds and funded at proper levels tied to a CIP plan to ensure minimization of future assistance (i.e. "carry full cost."). Municipalities would be required to make an annual certification to the State that funding is in existence, that required amounts have been deposited, annual review performed and adjustments made accordingly, and certify begin and end year balances and withdrawals of which are only permitted withdrawals. A state would annually audit randomly selected subsets, to assure a truly objective (non-political) evaluation of compliance.
   
4. Proper Maintenance Funding: State programs should ensure that each community has proper maintenance funding, using a methodology similar to that for repair/replacement funding.
   
5. Compliance with Partnership for Safe Water Program: Any Federal Programs that are created or expanded need to require compliance with the US EPA Partnership for Safe Water Program which is a voluntary initiative for enhancing water treatment to provide higher quality drinking water.
   

Additional information on the recommendations

1. Removing the Cap on PABs: Provide legislation to exempt all private activity bonds for water and wastewater infrastructure, whether involving privately or publicly owned projects, from the current volume cap limitation. Currently, tax-exempt private financing can be done if the project is able to secure an allocation from the state's so called "volume cap". This is the maximum amount of "private activity bonds" that can be issued annually in the state, under the Internal Revenue Code. Private Water bonds compete with other private bond uses such as housing and student loans. This legislation would be similar to that enacted in the mid 1980's that provided a volume cap exemption for solid-waste-to-energy projects.
   
2. Expand the State Revolving Fund (SRF) Program: Provisions need to be considered that would make these funds available to private entities, as well as public, in all states throughout the United States. Currently, there are several states that do not allow a private entity to utilize funds from the SRF Program. Since the SRF funds are provided by the US Environmental Protection Agency, it is recommended that all states be required to provide equal access to these funds regardless of ownership. This Program, or similar programs that may be developed, must be designed in a manner that provides benefits to ALL customers.
   
3. Affordability Criteria: Government funding assistance should be linked to affordability criteria. A sliding scale of loans interest rates should be adopted so as to provide poorer recipients with lower loan rates (down to zero percent) and richer recipients higher loan rates up to a point of not being eligible for funding assistance as affordability criteria show a loan rate that approximates the recipients own municipal borrowing rate. For very poor recipients, a combination grant and loan would be given, with a grant percentage and loan interest rate also being on a sliding scale. Linked to this would be provisions to allow for a subsidy to be given for low income families to account for "pockets of need" within recipients' legal boundaries. The affordability criteria and resultant funding assistance should be set as levels that will prove the impetus for recipients to want to go further and explore alternative service delivery options in an effort to increase efficiencies, reduce costs, allocate risk (since risk has economic consequences). Such options would include contract operations, design/build, design/build/operate, design/build/finance/operate right to private ownership options. Also included would be concepts as managed competition and re-engineering, the long term merits of which are still under scrutiny with long term results/benefits still questionable.
   
4. Repair and Replacement Funds: It is not a foreign concept to attaching loan conditions to address items like repair and replacement fund and proper maintenance monies set asides being part of the rate structures. The concept was well established in the Construction Grants Program with the concept of grant conditions. In fact, the grant condition dealing with User Charge Systems had the framework for the recommendation contained herein, but the follow through fell short of what it could have been given the framework that the Clean Water Act provided with regard to this. Other conditions such as establishing a time frame under which the recipient would transition to a full cost of service rate structure could be implemented. The penalty for non-compliance with the time table established in the loan agreement would for example be an increase in the loan interest rat. In a like manner if the attainment is achieved sooner or other milestones/objectives are attained incentives like a lowering of the interest could be implemented.
   
5. Self-Sustaining Finances: All assistance programs should support the long-term goal that water/wastewater utilities be self-sustaining through their rate structure (i.e. full cost-of-service rates). Funding assistance should have loan conditions attached that within a set number of years the rate structure should reflect the full cost-of-service. Rate subsidies, funded by federal assistance programs, are recommended for lower income customers of those water/wastewater utilities following this rate structure.
   
   Before this issue can be addressed in any detail, we must first determine whether we want our water/wastewater utilities to be self-sufficient or subsidized. Do we want water/wastewater utilities to be run as self-sustaining enterprises where services are paid for by the revenues the utility receives from its customers (full cost-of-service rates) or should utilities receive government subsidies that allow customer rate relief in the form of government funded financial assistance. Selecting the first option and operating water/wastewater utilities as self-sustaining enterprises does not rule out certain types of long-term government assistance, such as lifeline rate subsidy programs for low-income households. It does not provide an across the board subsidy to all customers, just to those that cannot afford the full cost-of-service rates. It is a much more efficient use of limited federal financial assistance funds.
   
   Assuming we want to take the enterprise path, existing federal government financial assistance must be used as an incentive to move the entire water industry in this direction. To ensure success it is recommended that pilot programs be developed in large cities to show that a dramatic switch to an enterprise model can work. This would include setting the utility up as a separate business entity with its own board, separate budget, separate accounting systems and operations designed around best business practices. This new entity could be either privately owned or wholly owned by the municipality. As a condition for getting significant financial assistance, the city participating in the pilot would agree to completely convert their operations to mimic the enterprise model. Unfortunately, these pilots are likely to be expensive and take many years to demonstrate conclusive results. Political pressure resisting this approach will be greatest in the larger cities and financial incentives may be needed in sufficient depth and breadth to counteract such resistance.
   
   Something must also be done to assist the vast number of small systems that cannot provide competent water at affordable rates to their customers. To correct this problem we need to improve the economies of scale of water service by adopting regional approaches (e.g. the British and Australian models) through various forms of consolidation, both physical and managerial. It is recommended that all water and sewer services be converted to a regional entity operated as an enterprise as discussed above. It may, again, be appropriate to fund a number of pilots to demonstrate the benefits of simultaneous regionalization and adoption of the enterprise model.
   
   Clearly, the federal assistance provided for any pilot program would constitute as a gift. The larger the gift, the more reform the recipient may be asked to agree to. The final terms of agreement would be documented and failure to implement the reform would be grounds for requiring full repayment of the gift.
   
   Other reforms that should be required for obtaining assistance include:
• Adoption of full cost accounting practices.
• Adoption of financial planning practices that will accurately identify future capital needs for infrastructure and treatment as well as O&M, and the tradeoffs available to management.
• Charging, by a particular date, full cost-of-service rates to customers.
• Taking concrete steps to regionalize water service or consolidate a number of small utilities.
• Adoption of proper record keeping systems.
  
  
6. Assistance for Low Income Customers: Lifeline rate support program for lower income customers like Low Income Home Energy assistance Program (LIHEAP) funded through Health and Human Services block grants to states. It provides heating and cooling assistance to almost 5 million low-income households. The local program administrators make payments directly to an eligible low-income household or, on behalf of such household, to an energy supplier to assist in meeting the cost of home energy. Typically a household is eligible if its income does not exceed 150% of the poverty level or 60% of the state median income. The average benefit received by eligible households in recent years has been about $200 per year. For the last few years the federal government has been appropriating about $1 billion per year for this program. The program is administered at the state and county level by governmental agencies and implemented primarily at the local level by community action programs (CAPS), local welfare agencies, and area agencies on aging. LIHEAP funds are supplemented to a limited extent by additional state appropriations, programs from energy suppliers and utilities, and religious and other charitable organizations.
• In Pennsylvania there are programs, similar to the energy programs for water customers. The funds for these programs come from the water utility and voluntary donations from the water utilities' customers.
• A support program patterned after these would be most appropriate for water utilities with lower income customers that cannot afford full cost-of-service rates. Because it only provides subsidies to those who need them, it is better than a construction subsidy, which subsidizes all customers' rates, even the rates of customers that are not lower income and do not need help.
• This lifeline rate support program for lower income customers addresses the issue brought up in the WIN Report regarding why would low-income families face economic hardships.
  

In summary, by demonstrating that Federal funds will be used where needed and with new guidelines and enhancements, leveraged by private funds and directed to provide truly cost effective environmental solutions, we believe the probabilities of the WIN Coalition success in Congress will be enhanced.