Last month, as part of our Smart Management for Small Water Systems project, I traveled with Glenn Barnes, Senior Project Director at the Environmental Finance Center at UNC Chapel Hill, to visit a small water system that is in quite a financial bind. The system, which has the highest rates in its state, needs an estimated $5 million in infrastructure updates, including a new water tower, upgrades to piping, and treatment facility repairs. With a population of only 900 people in the rural town, revenues are not high enough to cover the cost of repairs. And with some members of the community already paying almost 20% of their monthly income to their water bill, raising already high rates is not an option. This situation is by no means unique, and in fact, is very common to small systems across the country. As water infrastructure ages, many utilities are asking the same questions: how did we get into this situation, and now that we’re here, how do we pay for expensive repairs for our aging infrastructure?
Water Systems: A Brief History
The first public water system was built in Bethlehem, PA in 1755. Yet the first public water treatment plant wasn’t built for another 150+ years, in 1908 in Jersey City, NJ. As a result, systems built in the 1800s were a hotbed for diseases; outbreaks of typhoid and cholera were common in cities across the United States. With the discovery that contaminated water causes disease, local government investments in public water supply grew. By 1866, there were 136 water systems in the United States, both publicly and privately owned, and by 1900, that number had increased to over 3,000 systems.
In the early 1900s, water supply and disinfection continued to be the responsibility of the local government, and regulation occurred primarily at the state level. During this time, towns and cities built water systems to meet the demand of a growing American population. With little federal regulation and a lack of national standards, systems varied widely in material and size. A study by the American Water Works Association in 2010 found that the majority of systems built before 1940 in the United States did not include internal corrosion protection, whether built with cast iron or steel, the two most common piping material at the time. It wasn’t until the 1940s and 1950s that internal corrosion protection became standard in piping for water infrastructure systems. Internal corrosion protection is important because it helps prevent leaching of chemicals into drinking supplies. In 1948, the passing of the Federal Water Pollution Control Act (otherwise known as the Clean Water Act), provided comprehensive planning, technical services, research, and financial assistance to state and local governments for sanitary infrastructure. The Safe Drinking Water Act in 1974 further adopted standards for public water systems.
Systems built before these laws were enacted were renovated to comply with regulations. But even so, many systems in the United States are nearing a century old. As systems age, the value of the system decreases through depreciation and the costs of keeping the systems functioning and providing safe, clean drinking water increases. At nearly a century old, many systems are reaching the end of their useful life. Small systems are especially susceptible to financial burdens when repairs are looming. The costs of running a system are much higher than the revenues that a small system takes in. Many systems choose to raise rates to fund these repairs, but affordability often poses an obstacle when raising rates. High rates can be a financial burden to rate payers, as was the case in the system we visited last month. When raising rates isn’t an option, what can a system do? Though there is no one-size-fits-all solution, here are three options a small system may consider:
1. Collaborate with a neighboring system
One appealing option for systems that find themselves in a financial bind is water system collaboration. This means teaming up with a nearby system to provide services together, whether by sharing the same water source, infrastructure, management, or a combination of the three. Water system collaboration allows capital improvement costs to be spread over more rate-payers. While collaboration can be a viable option, distance can be a deciding factor. In the case of the system we visited last month, the distance to the next system was at least five miles away. If nearby systems are more than a few miles away, connecting systems can be expensive and more trouble than its worth. However, for systems that have close neighbors, this can be a good option, if both systems are open to making changes.
2. Sell the System
One of the best solutions for small towns facing hefty water infrastructure improvement costs is to get out of the water business entirely. There are many larger private systems that are in the business of buying small public and private systems. Large private systems spread the cost of their system over all of their rate-payers. This means that a resident in one town, whose water system is managed by Private Inc., pays the same as a resident in another town, whose system is also managed by Private Inc. Private Inc. is able to collect revenues from its rate-payers and pool the fees into one single capital improvement budget. When repairs are needed, Private Inc. can use its large capital improvement budget to make repairs and upgrades. And when Private Inc. does not have enough funding, the rate increase is spread over a much larger rate-paying base than if the small system were to finance the improvements on its own.
3. Explore Outside Funding Options
Systems can also look into outside funding options from a variety of state and federal agencies, such as the Environmental Protection Agency and the US Department of Agriculture, who both offer loan and grant programs (see summaries of funding opportunities in each state that we’ve developed). Private companies and nonprofits also often offer grants to water systems for infrastructure improvements. Additionally, systems may also choose to issue a bond to fund its improvements. Whichever funding option the system chooses, it can be a worthwhile option for making costly improvements.
Water infrastructure within the United States will become an increasingly pressing issue in the coming years, as systems deteriorate and demand changes. Already, systems such as Flint, Michigan have given this issue national media attention (see our recent post, Four Finance Facts about Flint). The EPA’s Water Infrastructure and Resiliency Finance Center estimates that over $600 billion in infrastructure improvements to America’s water systems will be needed over the next 20 years. Systems will be forced to take action, and a long-term solution will be necessary.
Is your system facing aging infrastructure challenges? What strategies are you using to pay for infrastructure improvements?