Paying for Nutrient Reduction and Management in Jordan Lake Summary of Second Year Research

Source: jordanlakeobservatory.unc.edu

Erin Riggs, Jeff Hughes, and Evan Kirk1 August 2018

1 All of the authors are from the Environmental Finance Center at UNC, which, as one of its main roles, works with decision makers to assess the effectiveness of environmental finance policies at a regional or state level, and to improve those policies as a way of supporting local efforts.

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Table of Contents

I. Summary of Second Year ResearchII. Key Maps, Findings and Figures

i. Overview of Existing Revenue Sourcesii. Maps

iii. Jordan Lake Revenueshed ModelIII. How the Research Informs Management Decisions and Existing RegulationsIV. Building Upon the Research in the Coming Year

I. Summary of Second Year Research:

The first year of our research heavily focused on identifying the entities in the Jordan Lake watershed currently contributing to nutrient management, and how they were paying. Specifically, we asked if regulated local governments were using general rate revenue only, or supplementing with other sources such as water and stormwater utility fees. We analyzed how local governments obtained capital funds such as their use of grants or loans, and also identified whether they shared costs across sectoral or jurisdictional boundaries. Additionally, we looked for costs associated with nutrient management initiatives and where there was data available, did some simple cost-effectiveness estimates. Based on the information gathered during the first year, we came away with several key findings that have driven our research in the second year.

1. Local governments are taking a cautionary approach in spending on nutrient managementbecause of concerns related to nutrient reduction credits under the current regulatoryframework, and because of anticipated future needs;

2. Fragmentation in the watershed and the limited cross-sector communication is continuingto create challenges to a holistic approach to effective nutrient management; and,

3. Perceived ambiguities in the current Jordan Lake Nutrient Management Strategy have led tomissed opportunities or delays in enacting nutrient management initiatives.

Recognizing these limitations, in the second year of our research, we started by asking:

1. If the system remains fragmented, what existing approaches may be used to raise revenuefor more effective (and likely costly) nutrient management?; and

2. What additional revenue raising tools and/or institutions could the state or localgovernments use to manage nutrients in Jordan Lake?

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Utilizing the concept of a water quality revenueshed, we put together interactive financial tools to use to show, local government by local government, how much revenue could be generated for nutrient management through existing mechanisms. We collected water/wastewater/stormwater rates and

property/sales tax data for the entities currently regulated by the Jordan Lake rules, and for the Jordan Lake water allocation holders. We then created maps to compare the water quality revenueshed (what we have termed as the “watershed drainage basin revenueshed”) and the water supply revenueshed, so as to represent how much more revenue could be generated by bringing in additional revenue from Jordan Lake beneficiaries, and not just those contributing to nutrients. Additionally, we explored and left open the possibility of drawing the boundary around the revenueshed to be even wider (as an example including recreation users of the lake). The tools and maps associated with this research are included and explained in greater detail in section II of this report.

As part of our second year of research, we also taught a capstone course at UNC-Chapel Hill. The capstone

students took on the following questions:

1. What is currently happening in the Jordan Lake watershed with respect to nutrientmanagement?

2. Who are the different players and how do you define their roles?3. Can you identify all the initiatives aimed at nutrient management?4. What do those initiatives cost, who is funding them, and are they cost effective?

The students created an interactive map during the course of the semester and tracked all of the nutrient management initiatives they could find. They looked for what sorts of projects were most cost-effective, and whether there were opportunities for collaboration that were not occurring. They tried to understand what was driving local governments to take on nutrient management initiatives (environmental regulations or something else). Finally, they tried to find ways to link all of the initiatives to the concept of One Water, to help decision makers identify some potential opportunities for more

collaboration across the watershed. At the end of the semester, the students created a website to house their maps and report, and presented their findings to their clients, the Jordan Lake One Water

Our defined concept of a WATER QUALITY REVENUESHED identifies the area within which revenue is generated for watershed protection. This framework can be used for multiple purposes including:

a. To cultivate Accountabilityb. To generate discussions among

local governmentsc. To develop interactive financial

tools to assist in policy-making

For more, see: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1752-1688.2012.00655.x; and https://efc.sog.unc.edu/project/healthywatersheds

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Association, and representatives from the North Carolina Division of Water Resources. The website can be found here: https://jordanlakecapstone.wixsite.com/inventory.

II. Key Maps, Findings, and Figures

i. Overview of Existing Revenue Sources

For our mapping analysis to compare the watershed drainage basin and water supply revenuesheds in Jordan Lake, we calculated stormwater fees, general rate revenue, property tax, and sales tax. However, there are other revenue generating mechanisms that are available for individual local governments to use for watershed protection. Below is a nonexclusive list of some of the mechanisms that we are exploring more in our third year.

Stormwater Fees. There are 11 jurisdictions in the Jordan Lake watershed that currently have stormwater utilities in place.2 The fees collected by those utilities can be used for initiatives aimed at compliance with water quality regulations, as well as initiatives which will generally address stormwater quantity or quality issues.

Existing Property Taxes. Jurisdictions in the Jordan Lake watershed have authority to use revenue from property taxes to cover nutrient management initiatives. The maps below depict the existing property tax revenue values by jurisdiction for the potential revenueshed scenarios.

Sales Tax. Jurisdictions in the Jordan Lake watershed have the ability to utilize a portion of sales tax revenues for nutrient management. They cannot, however, increase sales tax to generate additional revenue for nutrient management.

New Municipal Service Stormwater District Tax. Municipalities within the Jordan Lake watershed have the authority to create special service districts within their boundaries that are assessed specific district property tax rates based on services provided in the district, which could include stormwater infrastructure projects.

Business Improvement District Tax. Another variation of municipal service districts, municipalities also have the authority to create a tax district to support downtown revitalization, which could include stormwater infrastructure projects.

New County Watershed Improvement District Tax. Counties within the Jordan Lake watershed can establish watershed improvement taxes under G.S. 139, Art. 3, which can be used for “the prevention of flood water and sediment damages, and for furthering the conservation, utilization and disposal of water and the development of water resources.”

New County Special Services District Tax. Counties have a similar authority as Municipal Service Districts, and can create a sub county district made up of property owners who benefit from a particular investment.

Watershed Protection Utility Fee. While not common, utilities could include a specifically designated watershed protection charge on the customer utility bill. The City of Raleigh expanded its water utility

2 Carrboro brought this number to 11 in Fiscal Year 2018.

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bill to include a watershed protection fee, which is currently $0.1122 per 100 cubic feet of water. According to the Raleigh website, the revenue from the fee is used “to pay for the Upper Neuse Clean Water Initiative, as well as additional drinking water quality improvements to the treatment system, and/or for protective restoration projects.” Non-designated water or wastewater utility customer charges. This is how many of the stormwater projects related to nutrient management in Jordan Lake are already being funded. Utilities do not need a specific fee designated to stormwater in order to utilize rate revenue for some nutrient management projects that are integrated into the provision of their water and wastewater services (e.g. protecting water supply watersheds). Property Assessments. Cities have authority to invest in infrastructure on public and private land and to attach the cost of the infrastructure on the property through a tax assessment. This is an underutilized environmental finance tool in North Carolina. For more on property assessments, see https://canons.sog.unc.edu/levying-special-assessments-to-fund-public-infrastructure/. ii. Maps/Figures Watershed Drainage Basin Revenueshed

The watershed drainage basin revenueshed shown above consists of all tax parcels and environmental service rate payers within the Jordan Lake Watershed, defined as the Haw HUC8 watershed taken from the National Watershed Boundary Database published by the USGS.

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Water Supply Revenueshed

The water supply revenueshed is made up of 8 municipalities, 3 counties, and 1 water authority that have access now to Jordan Lake water or could in the future have access based on Jordan Lake Allocations and current planning initiatives. All entities but two, Hillsborough and Holly Springs, have some or all of their territory also located in the watershed drainage basin revenueshed. For the purposes of this study, both Jordan Lake Partnership members and water allocation holders are considered to be beneficiaries of increased water quality within Jordan Lake and are thus the entities included in the water supply revenueshed. Water Supply Revenueshed Generation

Entities JLP Member? Water Allocation Holder?

Apex Y Y Cary Y Y Chatham County Y Y Durham Y Y Hillsborough Y Y Holly Springs Y Y

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Morrisville Y Y Orange County Y Y

Entities JLP Member? Water Allocation Holder? OWASA Y Y Pittsboro Y Y Raleigh Y Y Wake County Y

Comprehensive Water Quality Protection Revenueshed

*The total revenueshed includes both the watershed drainage basin and the water supply revenuesheds.

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The tables below show the revenue generation differences among the three revenuesheds for water service and property taxes.

Water Utility Service and Revenues

Watershed Drainage

Revenueshed Water Supply Revenueshed

Comprehensive Water Quality

Protection Revenueshed*

Service Population 689,399 1,193,535 1,547,763 Water/Sewer Operating Revenue $289,733,463 $497,976,880 $655,060,337 *Accounts for Duplicates in Service Population and Estimated Revenue in Watershed

There are 0.86 million more water customers in the comprehensive water quality protection revenueshed than in the watershed drainage basin revenueshed. If we take into consideration that some customers are in both the watershed drainage basin and water supply revenuesheds, and we don’t double count them for revenue generating purposes, then the comprehensive water quality protection revenueshed contains an estimated $365 million more in water and sewer operating revenue per year, according to LGC data for the 2016-17 fiscal year.

Property Tax

Watershed Drainage

Revenueshed Water Supply Revenueshed

Comprehensive Water Quality

Protection Revenueshed*

Population 853,164 1,458,922 2,200,242 Property Tax Revenues $993,003,834 $1,552,802,234 $2,210,979,836

*Accounts for Duplicates in Service Population and Estimated Revenue in Watershed

There are 1.35 million more residents in the comprehensive water quality protection revenueshed than in the watershed drainage revenueshed, representing an estimated $1.218 billion more in property tax revenue per year, according to LGC data for the 2016-17 fiscal year. iii. Jordan Lake Water Quality Protection Revenueshed Model The Jordan Lake Water Quality Protection Revenueshed Model (“Jordan Lake Revenueshed Model”) tool allows decision makers to experiment with the different ways to generate revenue for nutrient management projects by seeing estimates of revenue generated by increasing the rates and fees of existing revenue generating mechanisms. The model is designed to provide general information – more precise modeling would be needed to study specific policy proposals. Property Tax parcel data and tax valuation is current as of 2017, and was downloaded from NC OneMap. Water and wastewater rates, effective January 1, 2018, and stormwater rates, effective July 2017, are sourced from the 2018 NC Water and Wastewater Rates Survey and the 2018 NC Stormwater Fees Survey published by the EFC. The number of residential and commercial customers for water and wastewater systems in 2017 as well

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as the percentage of the service population within the Jordan Lake Watershed were taken from NC Division of Water Resources. Finally, Sales Tax rates used in the model are effective April 2017 and sourced from the NC Department of Revenue. The model functions by allowing a user to select the revenue generating mechanism that he or she wishes to model, the method of raising the rates or fees for that mechanism, and the amount in which to raise the rates or fees. Once those are selected, the model then calculates the additional revenue created in the watershed drainage basin revenueshed, the water supply revenueshed, and the total revenueshed. The model also includes a comparison of the revenue generation in the total revenueshed versus only the water quality revenueshed. For example, raising the rate by 0.1 cents per $100 valuation or $4 per year for a $400,000 home, raises $1.5 million dollar for the watershed drainage basin revenueshed. When also adding beneficiaries within the water supply revenueshed, this increases to $2.9 million. These inputs are displayed in the Jordan Lake Revenueshed Model below for demonstration purposes.

Alternatively, placing a $1.00 water quality fee on the monthly water bill for residential and commercial customers would generate $2.9 million in the watershed drainage basin revenueshed and $6.4 million in the total revenueshed (by including the water supply revenueshed). These inputs are displayed in the Jordan Lake Revenueshed Model below.

The Jordan Lake Revenueshed Model is capable of modeling changes in one or all of the above revenue sources at once. Additional ways to raise revenue include raising the volumetric rate of water and wastewater, raising the stormwater fees by a percentage of the total bill or adding a fee to the stormwater bill, and raising the sales tax rate. Multiple assumptions were used in creating this model. All of these assumptions are written within the tool where the assumption was made. A more detailed description of the methods used to create this

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tool will be forthcoming in the final year of this study. The tool will be used to quickly model the broad financial impacts of different revenue mechanisms and different geographic aggregations options. III. How the Research Informs Management Decisions and Existing Regulations Our research in the second year focused on identifying who the participants in a Jordan Lake comprehensive water quality protection revenueshed could be beyond the primary current contributors. Many of the stakeholders we’ve talked to have indicated a desire at looking at ways of expanding financial responsibility for Jordan Lake water quality beyond entities within the drainage basin. This approach corresponds to a number of national initiatives that have begun promoting different approaches to water quality including the “One Water” approach as well as the creation of Watershed Utilities.3 Right now, the boundary of the revenueshed essentially encompasses all of the regulated entities under the Jordan Lake rules, but we have studied ways to draw the boundary wider, most notably by pulling in the Jordan Lake water allocation holders. Looking at the potential revenue generated by integrating two different revenuesheds provides a helpful comparison as lawmakers move forward with either keeping in place or modifying the existing Jordan Lake Nutrient Management Strategy. In the second year, we also looked at whether there are sources of revenue that are not currently being utilized or which could be expanded. By identifying how much revenue could potentially be generated under the existing framework, our research aims to equip local decision makers and state policy makers with the tools they need to identify whether there is a feasible path to reach nutrient management goals using only the revenue sources they have currently at their disposal. We created a tool, which provides a simple calculation based on each local government or the watershed as a whole, so that an entity can manipulate certain rates/fees to see what it would take to generate a certain amount of revenue for nutrient management. This is explained in greater detail in section II above. Finally, our research focused on identifying opportunities for collaboration that could make nutrient management more effective and cost-efficient. Particularly the work done by our capstone students helps to show how little collaboration is currently occurring in the watershed. As we move forward with assessing and evaluating the types of fee/tax mechanisms which could be used within the different revenueshed boundaries we will model, we hope to highlight opportunities for better collaboration and cost-sharing across the watershed. IV. Building upon the Research in the Coming Year In our final year of research related to the Jordan Lake watershed, we intend to develop two to three possible models for financing nutrient management going forward. The first will be based on a compilation of the data from the first and second years of research, and will require no legislative or policy changes. The other model(s) will look at expanding the sources of revenue to include jurisdictions not currently contributing significant resources to Jordan Lake water quality improvement, specifically focusing on those jurisdictions holding water supply allocations from the lake or its tributaries. The goal in creating the models will be to flesh out the ways in which costs/fees could be allocated among the contributors, and the potential ways in which revenue will then be spent on water quality improvements

3 For more on One Water, see http://uswateralliance.org/sites/uswateralliance.org/files/publications/Roadmap%20FINAL.pdf

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in the lake (i.e. a regional/watershed/statewide authority with spending authority). The models will include a financial analysis and some policy/legal barriers. For each of the models, we intend to consider the following questions:

i. Is it best to base a finance model on a big number (i.e. hundreds of millions to clean up nutrients in the lake) or on the funds that are available (what can each jurisdiction, or the population of the watershed reasonably contribute to nutrient management?)

ii. When putting together a finance model, how should the costs be spread across the various jurisdictions? Does it make sense to finance such a model by going to a jurisdiction (Town of Cary pays X amount), or by reaching the individual residents (the residents of Cary all pay a fee directly to the central authority)?

iii. When assigning financial responsibility, whether to jurisdictions or to individual residents of the watershed, how is affordability taken into consideration and how are lower income populations in the watershed protected?

iv. Once funds are pooled, how can they be spent in a way that spreads the co-benefits (or ancillary benefits) across the watershed?

v. What are the various fee structures that could be used in this scenario, and how much revenue could each generate?