A dedicated revenue source can increase certainty in annual program planning and budgeting and help the community secure other financing sources to run a robust municipal stormwater program. However, as of 2018, less than one-third of MS4 communities across the country have established dedicated revenue sources, such as stormwater utility fees. An important component when setting up a dedicated revenue source is to work out the revenue needed to support the program. Without sufficient, dedicated revenue sources, community stormwater programs will likely face perennial difficulties in meeting public and regulatory demands over time.
Gaining customer buy-in
To establish a dedicated revenue source, first talk with the community—your customers—to gain their insights and buy-in. Continue this outreach at all stages of the process to build the brand for your stormwater program. Make sure your customers know what they are buying and the benefits they will receive over time.
Based on customer input, establish your program goals, identify and address challenges, and develop a program plan. You will need to have a well-thought-out and designed stormwater management program, ideally based on a solid asset management planning system. You will also need a robust public outreach program with effective messaging that explains what a stormwater fee is, what it will be used for, and why it is necessary. Refer to link to Communication and Outreach for more information.
Figure 1. Map of U.S. communities with stormwater utilities. (Image source: Western Kentucky University Stormwater Utility Survey)
Understanding the difference between fees and taxes
| Fees | Taxes |
|---|---|
|
A “fee” is money collected for a specific purpose, such as providing stormwater services or building and maintaining stormwater infrastructure. |
A tax is a compulsory contribution to public revenue streams (local, state, federal government) that is typically levied on worker incomes or property values or added to the costs of services and goods. Taxes are used to provide a wide range of civic services. |
| The money collected to satisfy the fee must be commensurate with the cost of the services provided. Unlike taxes, excess funds from a fee cannot be diverted and used for other purposes. |
Unlike fees, taxes do not necessarily need to be commensurate with the cost of the services provided. Taxes can also often be routed to support various functions. |
| Legal requirements vary across the country, but fee authority must be approved by governing councils or the property owners who must pay the fees. | A new tax must generally receive approval through a legislative action or public vote. |
Most communities have the legal authority to collect fees, but many do not have the direct authority to collect taxes. Thus, stormwater utility fees are more common across the country than stormwater taxes. The table above describes key differences between fees and taxes.
Many utilities that have instituted fees have been challenged in court due to claims that the fee constitutes a new tax that the city or county cannot legally levy without public approval. Stormwater utilities must carefully design a fee initiative to link the funds to services, thereby reducing their chance of being challenged as a hidden tax. Refer to the report Legal Considerations for Enacting, Implementing, and Funding Stormwater Programs for information on legal issues that can impact stormwater funding programs.
Additional considerations for selecting a tax or a fee include:
- Tax-exempt properties: Unlike a stormwater tax, a stormwater utility fee can apply to tax-exempt properties, which typically own large impervious surfaces such as buildings and parking lots. However, these property types can lead to public relations issues.
- Permission to opt out of the service: For a charge to qualify as a fee, some states require that it be voluntary—meaning property owners can opt out of the charge by limiting their use of the stormwater management service. This presents an issue for stormwater utilities, because a property typically cannot control the use of service and the fee is not waived in months without rain.
- Opportunities to reduce fees: One alternative to opt-out options is to allow the ratepayer to take on some of the stormwater management responsibilities by retaining runoff on their own properties, thereby reducing the burden on public infrastructure. Options for runoff control include installing rain barrels for smaller properties and constructing an onsite stormwater management facility for larger businesses and industrial sites. In these cases, you can design the program to provide fee offsets or credits for property owners that implement onsite stormwater controls.
Are Fees or Taxes Viable Under Your State Law?
Knowing your state and local laws is important for determining whether a stormwater fee or tax is legally viable in your locality. You should also stay informed of these laws, as they are subject to change.
In legal challenges to local stormwater utilities, issues generally fall into two categories:
- The authority to enact, implement, and fund the program.
- The legality of the financing mechanism and methodology involved.
The legal authority to implement stormwater utilities generally comes from an enabling statute or the state’s constitution or charter. In some states, the grant of authority is still ambiguous or questionable. In these situations, the locality should consider requesting a state attorney general’s opinion and/or working with the state legislature to make the grant of authority more explicit.
Choosing your rate structure
Most stormwater utilities base their fees at least in part on the percentage of impervious cover on parcels of developed land within the community. One way to set stormwater fees is to charge property owners based on the exact amount of impervious surface on each parcel, determined using aerial imagery and GIS. However, this method is typically time-prohibitive and too expensive to establish fees for individual residential properties. Instead, most utilities set up tiered rate structures that are less complicated and easier to implement.
You can use several methods to calculate service fees. You may modify these approaches slightly to meet your unique billing requirements. Impervious area is the most important factor influencing stormwater runoff and is therefore a major element in each method. These methods include the following:
- Equivalent residential unit (ERU): a basis for comparison against the average runoff generated by a single-family home, or the average impervious area of a single-family home.
- Flat fee: all users pay the same amount, regardless of property size and zoning.
- Tiered fee: users are charged according to where their property falls into a set of pre-established categories, usually based on property size or impervious area.
- Dual fee system: different categories of users (e.g., commercial, residential) are charged according to separate rate structures.
- Residential equivalence factor (REF): a rate structure that takes into account the hydrologic characteristics of various soil types and land uses in determining how much runoff each parcel will generate.
- Intensity development: a measure of the degree of development on a given property that theoretically correlates to the amount of runoff generated.
If you were to use stormwater user fees to fund your entire stormwater management program, customer billing rates/user fee charges would be high and likely exceed what customers are comfortable paying. Therefore, communities typically combine primary and secondary funding sources (including a dedicated revenue source) in a portfolio to support their stormwater program and activities. Some refer to this as a blended funding approach.
Examples of Primary and Secondary Funding Sources
Primary funding sources include stormwater user fees (stormwater utility) as well as general fund taxes and appropriations.
Secondary funding sources include:
- Site plan review fees collected for development projects.
- Special assessments.
- Special service fees.
- Revenue bonds or loans for capital improvements.
- In-lieu-of construction fees.
- System development charges.
- Impact fees.
- Developer extension/latecomer fees.
- Fees collected by other departments (e.g., solid waste management fees used for trash management).
- Special purpose local option sales tax.
- Federal and state grant funding or loans.
Case Study: Durham, North Carolina
Durham implements a tiered stormwater fee system and generate about $11 million in annual revenue. The tiered fees for residential properties escalate based on amount of impervious cover on each property.
- Less than 2,000 square feet of impervious area = $39.12 annual fee.
- Between 2,000 to 4,000 square feet of impervious area = $81 annual fee.
- More than 4,000 square feet of impervious area = $162.24 annual fee.
Fees for commercial or non-residential properties are determined using the ERU method.
Case Study: Newton, Massachusetts
Newton’s stormwater drain fees are based on a flat rate, with different fees for residential and commercial properties. Residential properties are assessed a fee of $6.25 per quarter, and all other properties are assessed a fee of $37.50 per quarter. The Board of Aldermen determined that the program’s operating costs would triple if the city were to determine rates based on individual lot sizes rather than using flat fees.
Planning your funding structure
Plan your funding structure and process by following these steps:
- Identify and collect the datasets you need to implement a dedicated revenue system. The complexity of the datasets may depend on the type of fee you pursue (e.g., flat rate, ERU-based). User and parcel area data (such as ownership and impervious area for each parcel) can be critical to developing and administering your system.
- Develop a notification process to inform ratepayers of pending changes. The process should inform ratepayers of upcoming changes so they are not surprised by the stormwater-related charges on future bills. Ratepayers often lack awareness of stormwater impacts and community services; a lack of proper engagement and notification can amplify this confusion when charging new fees. Start your outreach program as early as possible during the process of assessing and establishing your stormwater utility. Consider establishing a way (e.g., via phone number, email address, and/or online tool) for customers to ask questions as the stormwater fee is being developed or enacted.
- Develop a billing system to collect the funds. Use one of two processes to collect funds: bill alongside existing water-related services, or bill stormwater fees separately.
- Develop a system to distribute collected fees through the budgeting process. Determine whether the fees will be commingled with your community’s general fund, directed to an enterprise fund, or collected through a special revenue fund. This decision has significant implications; commingling funds with a general fund can reduce clarity in the budgeting process, decrease opportunities to access other financing options, and inhibit your ability to form creative partnerships.
You may need to identify or collect the following parcel-specific information:
- Parcel identification number and size
- Address information
- Ownership
- Land use type/property type/classification (residential, commercial, etc.)
- Land use data
- Aerial photography
- Pervious and impervious surface area
Notifying ratepayers of expected changes may be best accomplished using several tools and mechanisms, such as public meetings and forums, pamphlets explaining the stormwater fee, sample bills, and information on the community’s website.
Developing ordinances and rules
Consider the following actions when developing rules and ordinances:
- Become familiar with legal framework considerations and the constraints of fees/taxes.
- Include credit and offset provisions in the stormwater program.
- Create a process to review and adjust fees.
- Define the utility structure if you are forming a separate utility to manage the program and collect fees.
Deploying your program
It’s go time! At this stage, put all of your planning efforts to work as you secure a dedicated revenue source for your stormwater program. Engage in significant communications efforts and continue to clarify and explain the program to decision-makers and the public.
Your main steps are to:
- Gather input and formally propose the dedicated funding program to the community.
- Engage in continued public outreach and involvement to build awareness and address concerns.
- Go through the approval process. Be prepared to explain that stormwater management is a regulatory requirement and is essential to protecting local water resources.
- Notify ratepayers of pending changes through your established notification process.
- Have customer service staff ready to address questions; concerns; and requests for review, offsets, or credits.
Resources
Refer to the following additional resources for more guidance on funding your municipal stormwater program. You should also consider familiarizing yourself with EPA’s Environmental Financial Advisory Board (EFAB) and Environmental Finance Centers.
| Article Description | Categories | categories_hfilter |
|---|---|---|
Western Kentucky University Stormwater Utility Survey 2019Author: Western Kentucky University | Developed/Updated on Date: June 2019 Web Link: https://digitalcommons.wku.edu/cgi/viewcontent.cgi?article=1000&context=seas_faculty_pubs The main goal of this survey is to identify as many U.S. Stormwater Utilities (SWUs) as possible. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Funding Stormwater ProgramsAuthor: EPA Region III | Developed/Updated on Date: January 2008 Web Link: https://www3.epa.gov/npdes/pubs/region3_factsheet_funding.pdf This document is intended to assist local stormwater managers understand the alternatives available to fund their stormwater program. The most stable source of funding is generally the stormwater utility, so this document briefly lists the various funding alternatives then describes in more detail the three different types of stormwater utility rate structures and the basic steps involved in creating a stormwater utility. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Water Finance Clearinghouse: StormwaterAuthor: U.S. EPA | Developed/Updated on Date: February 8, 2017 Web Link: https://ofmpub.epa.gov/apex/wfc/f?p=165:1:10944264319320 The Water Finance Clearinghouse is an easily navigable web‐based portal to help communities locate information and resources that will assist them in making informed decisions for their drinking water, wastewater, and stormwater infrastructure needs. The Water Finance Clearinghouse includes two searchable databases: one contains available funding sources for water infrastructure, and the second contains resources, such as reports, weblinks, webinars, etc. on financing mechanisms and approaches that can help communities access capital to meet their water infrastructure needs. The Water Finance Clearinghouse was developed by EPA’s Water Infrastructure Finance and Resiliency Center, an information and assistance center identifying water infrastructure financing approaches that help communities reach their public health and environmental goals. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Rainfall to Results: The Future of StormwaterAuthor: Water Environment Federation | Developed/Updated on Date: September 2015 Web Link: https://wefstormwaterinstitute.org/wp-content/uploads/2015/09/Rainfall-to-Results.pdf Rainfall to Results: The Future of Stormwater, published by the WEF Stormwater Institute, sets a vision for the future of sustainable stormwater management. Based on input from stormwater professionals, this report charts a path forward for the sector with broad objectives and more specific actions for achieving a healthier water environment and more vibrant communities. This report marks the beginning of an ongoing dialogue and a series of future meetings that will record new successes and challenges while refining the path forward. | Funding: Dedicated Revenue Source, Program Goals and Management: Vision and Goals | dedicated-revenue-source vision-and-goals |
Navigating Litigation Floodwaters: Legal Considerations for Enacting, Implementing, & Funding Stormwater ProgramsAuthor: National Association of Clean Water Agencies | Developed/Updated on Date: 2016 This publication provides a brief overview of current legal issues associated with user fee-funded municipal separate storm sewer systems (MS4s) stormwater programs and a summary of selected legal decisions and pending cases. There are numerous technical publications about the structure and funding of stormwater utilities and programs (see Resources). Many of these sources touch on the fact that legal barriers exist. The purpose of this publication is to provide greater analysis on the types of legal issues impacting stormwater funding programs—and provide an overview of trends that are emerging based on the outcomes of key cases—to inform and prepare utilities that are creating, implementing, or defending a stormwater program, utility, or fee. It is not intended to provide an exhaustive review of all litigation and legal barriers associated with stormwater. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Local Government Stormwater Financing Manual: A Process for Program ReformAuthor: University of Maryland Environmental Finance Center | Developed/Updated on Date: January 2014 Web Link: https://efc.umd.edu/assets/stormwater_projects/2 This manual was inspired by and written for local government leaders. Though effectively managing urban stormwater runoff requires leadership and bold decision-making at all levels of government, it is at the local level where the most significant and substantive stormwater investments will be made. It is also at the local level where the most innovative, effective, and transformative financing programs are being developed and implemented. Our goal with this manual is to provide local leaders with the foundation for establishing and growing effective stormwater management programs that maximize the value and impact of every dollar invested in their communities. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Lancaster County Municipal Management Financing Feasibility StudyAuthor: Environmental Finance Center | Developed/Updated on Date: October 2013 This report presents findings from a financing feasibility study conducted in Pennsylvania. With support from the National Fish and Wildlife Foundation (NFWF), the Environmental Finance Center (EFC) worked directly with six Pennsylvania municipalities over the course of a year. The objective of this effort was to identify the current level of stormwater service, determine the future level of service needed to deliver a comprehensive stormwater management program, and highlight any and all opportunities to work collaboratively across the collective municipalities. While the goal of the stormwater management financing study was to enhance each municipality’s existing program and help them meet state and federal requirements more thoroughly, it was equally important that community water quality priorities were also properly addressed as all prepared for increased future nutrient reduction expectations. The EFC’s approach included conducting in-depth interviews, data collection, and analysis of stormwater-related activities and expenses for each of the participating municipalities. The project also included a collection of outreach activities that helped to educate, inform, and engage citizens, businesses, and elected officials about the need to properly manage stormwater locally. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Guidance Manual for Stormwater FundingAuthor: National Association of Flood and Stormwater Management Agencies | Developed/Updated on Date: January 2006 Web Link: https://www.epa.gov/sites/production/files/2015-10/documents/guidance-manual-version-2x-2_0.pdf The focus of this guidance is to provide a resource to local governments as they address contemporary stormwater program financing challenges. The guidance includes procedural, legal, and financial considerations in developing viable funding approaches. The guidance examines a range of possible approaches to paying for stormwater management, but the focus is on guidelines for developing service/user/utility fees to support these programs. The terms service fee, user fee, and utility fee may be used interchangeably in this guidance. Chapter 2 addresses various sources of funding. Chapter 3 covers legal considerations, and implementation of stormwater funding programs is discussed in Chapter 4. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Funding Stormwater ProgramsAuthor: U.S. EPA Region 1 | Developed/Updated on Date: April 2009 Web Link: https://www3.epa.gov/region1/npdes/stormwater/assets/pdfs/FundingStormwater.pdf This document is intended to assist local stormwater managers in alleviating the significant expense of construction, operation, and maintenance of a municipal separate storm sewer system (MS4). The costs of stormwater programs, increased by regulatory requirements (stormwater Phase I or Phase II), flooding concerns, water quality issues (including total maximum daily loads, or TMDLs), and population growth, may be subsidized through a stormwater utility or various other methods detailed in this document. | Funding: Dedicated Revenue Source | dedicated-revenue-source |
Evaluation of the Role of Public Outreach and Stakeholder Engagement in Stormwater Funding Decisions in New England: Lessons from CommunitiesAuthor: U.S. EPA | Developed/Updated on Date: June 2013 Web Link: https://www.epa.gov/sites/production/files/2015-09/documents/eval-sw-funding-new-england.pdf This evaluation report describes lessons about the role and design of public outreach and stakeholder engagement strategies related to community stormwater funding decisions. The evaluation is based on the experiences of eleven small and medium-sized communities, primarily—but not exclusively—in New England. The evaluation has two complementary goals: first, to evaluate whether and how public outreach and stakeholder engagement efforts (including the use of consensus-building protocols) influenced the adoption of stormwater funding mechanisms; and second, to draw on the communities’ experiences to identify lessons for other MS4 communities considering stormwater program funding solutions. | Funding: Dedicated Revenue Source, Funding: Establishing a Plan, Public Education and Outreach, Public Participation | dedicated-revenue-source establishing-a-plan public-education-and-outreach public-participation |
Community-Based Public-Private Partnerships (CBP3s) and Alternative Market-Based Tools for Integrated Green Stormwater InfrastructureAuthor: U.S. EPA | Developed/Updated on Date: April 2015 Public-private partnerships (P3s) have the potential to help many communities optimize their limited resources through agreements with private parties to help build and maintain their public infrastructure. P3s have successfully designed, built, and maintained many types of public infrastructure, such as roads and drinking water/wastewater utilities across the United States. Until recently, there have been no P3s specifically developed for stormwater management or Clean Water Act requirements. The U.S. Environmental Protection Agency (EPA) Region 3 Water Protection Division (WPD) has been researching, benchmarking, and evaluating P3s for their potential adaptation and use in the Chesapeake Bay region. On December 6, 2012, the EPA Region 3 WPD hosted a P3 Experts Roundtable in Philadelphia, Pennsylvania (U.S. EPA, 2013a). The goal of the P3 roundtable was to provide a forum for a targeted group of private-sector representatives to discuss in detail the feasibility, practicality, and benefits of using P3s to assist jurisdictions in the finance, design, construction, and operation and maintenance of an urban stormwater retrofit program. The results of this roundtable are the foundation and approach for applying a stormwater P3 model across the Chesapeake Bay watershed. This guide provides communities with an opportunity to review the capacity and potential to develop a P3 program to help “close the gap” between current resources and the funding that will be required to meet stormwater regulatory commitments and community stormwater management needs. In addition, this guide and the tools presented are a continuing effort, commitment, and partnership between EPA Region 3 and communities in the Chesapeake Bay region. The authors of the guide believe it will help to raise the bar and further advance the restoration goals and objectives for the Chesapeake Bay. | Funding: Dedicated Revenue Source, Funding: Private Sector Opportunities | dedicated-revenue-source private-sector-opportunities |