By Alicia James, Project Manager, UNC Environmental Finance Center
Public utilities systems provide communities with clean, safe drinking water and wastewater treatment. They improve the environment, health, and quality of life in communities where we live, work, and play. These benefits, as well as the associated costs, are often overlooked. Establishing and maintaining excellent public utility infrastructure demands investments in expertise, strategy, competence, and, most notably, funding. Funding is the most critical component due to the capital-intensive nature of utilities, requiring substantial resources for initial construction and ongoing operations and maintenance of the existing system(s).
Infrastructure funding can come from many different sources. Common funding mechanisms include user fees, property tax revenue, and debt service. In the North Carolina FY 2023-25 state budget, funding was appropriated to multiple local government units to support public systems with various utility infrastructure needs. Funding amounts vary from relatively small ($125,000) to substantial ($85 million) awards. The budget refers to these funds as “directed grants,” which means the NC General Assembly specifies in the session law which entities will receive funding and how much. Directed grants offer numerous benefits, including injecting essential capital into anticipated projects. While directed grants may constitute substantial one-time financial support, it’s crucial to recognize that financial resources represent just one facet of the broader infrastructure puzzle.
Let’s look at the example of Fictional Town, USA, which is rapidly growing. A recent economic development initiative concluded with the exciting announcement that a prominent manufacturing plant is set to commence construction within the city limits. This industry presence is expected to impact the local and statewide economy, along with ripple effects consistent with an increasing residential population: expanding road, residential, retail, and school construction to accommodate anticipated growth. Fictional Town has engaged with several private and public partners, including engineering experts who designed an extensive project to replace water lines and upgrade three pump stations within municipal limits.
Fictional Town received a $10 million directed grant to fund a portion of its infrastructure development plans. The Town is in an ideal position to receive directed grant funds because several things were already in place. They completed a self-assessment of their fiscal health and considered the long-term implications of accessing infrastructure financing. Examining future funding (such as debt and potential future rate increases) to operate and maintain system upgrades, as well as prioritizing and planning future project phases, are some considerations Fictional Town explored with public and private partners. The Town also shared anticipated growth plans and funding alternatives in a notice to customers that outlined short- and long-term goals and the intention to minimize drastic rate increases for the existing residential customer base.
Sustainable funding is a complement to a thorough implementation plan. Combined at the right time, the two will positively impact infrastructure projects throughout their life cycles. Fictional Town, USA’s receipt of a directed legislative grant bolstered its public utilities planning and complemented the due diligence, oversight, and existing project management processes. However, the reverse approach could cause the opposite impact. Obtaining funding from any origin without a coordinated, multi-step plan to responsibly execute may compound future challenges and elevate project management risks. Potential concerns include overlooking key process points, rushing the process, and enabling unsustainable practices. Any of these could evolve into major problems that create more expensive and time-consuming repairs overall. One way to avoid these pitfalls is for local units to ask and answer holistic questions such as:
- Can we manage and maintain the infrastructure?
- Will we need to raise rates to cover associated depreciation and debt service?
- If a rate increase is needed, can we create enough buy-in to support it? Can our user base afford it?
If your municipality received a legislatively directed grant, and you want to integrate these funds into a successful plan to address future infrastructure needs, we can help. The UNC Environmental Finance Center enhances the ability of governments and other organizations to provide environmental programs in financially sustainable ways. If you’d like to share more about anticipated needs or seek guidance to manage a one-time cash investment, please get in touch with us at EFC@sog.unc.edu or complete this form to request assistance.