Call it a case of tax dollars being flushed down the toilet.

In anticipation of massive population growth prompted by an oil boom in North Dakota, the city of Ray made plans in 2011 to expand much of its infrastructure, including building a $2.5 million wastewater treatment plant, which it completed in July 2014, according to city officials.

But when the price of oil dropped, resulting in a slowdown in the oil industry and population growth, Ray’s brand-new sewage plant didn’t have enough human excrement from the town’s small population to operate, prompting city officials to allow waste haulers from neighboring towns to bring in their feces free of charge to keep the plant afloat.

It’s not just North Dakota taxpayers who were caught in the stink of the waste plant fiasco. Federal taxpayers footed part of the bill as well.

Through the Environmental Protection Agency’s Clean Water State Revolving Fund, low-interest loans were granted to the state and then passed on to Ray, according to federal and state grant records. Later, more than $760,000 of those loans were forgiven.

Taxpayer advocates say the septic mess in Ray is a perfect example of how federal grants can leave states and small towns indebted to Washington.

“The result of the EPA’s loan program is that the people of Ray are now tax slaves to their toilets,” said Richard Manning, president of Americans for Limited Government.

For using federal tax dollars to fund a questionable local sewage plant that can’t even operate off its own waste, the EPA and the town of Ray win this week’s Golden Hammer; a weekly distinction awarded by The Washington Times highlighting examples of wasteful federal spending.

“When the price of oil goes down, it’s understandable that the industry gets gas pains. It’s just too bad for this town the gas pains were merely metaphorical,” said Ryan Ellis, tax policy director at Americans for Tax Reform.

Ray’s sewage woes, originally reported by Nevada’s arm of Watchdog.org, caught the attention of Sen. Rand Paul of Kentucky, a Republican presidential contender who heads the Senate Homeland Security and Governmental Affairs subcommittee on federal spending oversight.

In his most recent waste report, Mr. Paul wrote that the federal grants for Ray’s sewage project should never have been approved given the town’s radical population projections.

“A little town made a big gamble and is now importing sewage,” Mr. Paul wrote.

In 2011, city officials projected that Ray’s population would skyrocket from 713 to 1,750 residents by the time the waste project was completed. But U.S. Census Bureau data showed that Ray’s population had barely increased to 766 as of 2013.

City officials still predict a population boom. Ray’s 2015 comprehensive plan forecasts population growth to 3,500 by 2020, over a 356 percent increase.

However, Williams County — where Ray is located — projected only a 22 percent population growth countywide by 2020, according to the county’s comprehensive plan for 2035.

“Ray and the state seemed to have gotten caught up in the excitement of a boom and missed the forest for the trees,” Mr. Paul wrote in his report.

In an interview with The Times, Bryan Lee Van Grinsven, a lawyer at McGee, Hankla & Backes in Minot, North Dakota, who represents the city of Ray, said that had the price of oil stayed the same, the city’s growing population certainly would have been able to produce enough excrement to maintain the expanded facility.

“Most of the small towns in North Dakota were facing an influx. There weren’t enough hotel rooms, there was a housing shortage, everything was blowing up and expanding,” Mr. Van Grinsven said, adding that Ray’s wastewater facility was at capacity in 2011.

“We can say that the population projections haven’t come to fruition, but no one knew what was going to happen to oil prices,” Mr. Van Grinsven said.

Ray’s public works commissioner, Richard Liesener, said the expanded wastewater facility uses outdoor clay lagoon cells, and if the cells aren’t kept moist with sewage, the clay will dry out and crack, which will lead to leakage.

“This was an initial fill to protect them. [The cells] don’t come filled when you build them. That’s what we’re doing; we’re generating fluid to get them up to a safe level,” Mr. Liesener said.

It is common practice in small communities to haul in outside sewage to get new cells ready for winter, he said.

But offering free disposal for outside waste haulers prompted an outcry from private wastewater disposal contractors.

After a private citizen filed a lawsuit, the city stopped allowing haulers to bring in waste from neighboring towns, RV parks and campgrounds.

“It seems like the city is getting crucified no matter what we do,” Mr. Van Grinsven said.

Chris Edwards, a budget analyst at the Cato Institute, a libertarian think-tank, said Ray’s wastewater project demonstrates how federal-to-state grants often lead to bad policy.

Sewage is a classic local government function, and a city would normally have to justify expenses for a new sewage project. Citizens could challenge a project that they thought was too risky.

“But the problem with federal aid is it allows the local government to go around the checks and balances and get the money from Washington instead,” Mr. Edwards said.

The EPA gives out roughly $4.2 billion every year to local governments under its Clean Water State Revolving Fund program, with interest rates averaging 1.7 percent compared with average market interest rates of 3.7 percent.

Mr. Edwards says that number should be zero.

“There is no advantage of federal funding for local projects, and this shows that it leads to risky decision-making,” he said. “There’s no real rational economic basis for federal aid to local governments. It’s a political thing. Members of Congress need grant programs to point to something that they’ve achieved. I don’t see any advantage in federal funding of these local activities. It would be better if they were funded locally because there would be direct control and it would be more democratic.”

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