WATER AFFORDABILITY IN TENNESSEE: APPLYING MODERN PORTFOLIO THEORY TO ASSESS THE RISK-RETURN TRADE-OFF OF CLEAN WATER ACT SUBSIDIES

Affordable access to clean water is an environmental justice concern in the United States (US); economic conditions, income, and location influence a community’s access to clean water and their ability to afford critical upgrades to existing water system infrastructure. In 1987, amendments to the Clean Water Act (CWA) created the Clean Water State Revolving Fund (CWSRF) which allowed the Environmental Protection Agency (EPA) to annually allocate funds to the states to offer assistance for water infrastructure projects. This amendment allows communities to better afford upgrades to their wastewater infrastructure by applying for subsidies, in the form of principal loan forgiveness, so they can meet CWA standards. This study analyzes if CWSRF principal loan forgiveness is being allocated in a way that prioritizes small and disadvantaged communities in Tennessee. The efficiency of the principal loan forgiveness program is examined from 2019-2022, with respect to the risk and return of allocations. The return considered in this analysis is not a traditional return on investment, but a measure of meeting the greatest need as determined by the socioeconomic indicator variables. The risk includes factoring in volatility in the socioeconomic position of Tennessee counties. Using modern portfolio theory, we found that there are risk-return efficiency gains achieved in the efficient frontier compared to the reference points when risks are factored into the allocation process. We propose policy recommendations, such as lowering the eligibility threshold for principal forgiveness, and highlight the potential of MPT to be used as a dynamic policy tool by accounting for the nuanced uncertainties related to allocating finite public resources.