Stacey Isaac Berahzer is a Senior Project Director for the Environmental Finance Center at the University of North Carolina, and works from a satellite office in Georgia.
Water utilities in the United States operate under a variety of organizational structures and governance models. The possibility of a utility adopting a given financial management option depends largely on the governance model of that utility. Ownership and governance of water utilities fall to state and federal government agencies, tribes, municipalities, counties, districts, authorities, not-for-profit water associations, investor-owned water companies, international and national corporations, individuals, homeowner associations, and more. While there are nuances even within each of these classes, according to the Environmental Protection Agency (EPA), water systems in the United States are almost evenly split between those owned by local governments (48%) and those owned by private organizations (47%).
Generally, in research under the Water Research Foundation’s “Defining a Resilient Business Model” project we have found little evidence that organizational structures have had a significant impact on the financial performance of utilities. However an analysis of detailed data from Georgia and North Carolina did show an interesting pattern where independent authorities/districts were concerned.
Independent Water Authorities or Districts
Independent authorities or districts may be formed independently of municipalities and counties, and represent somewhat of middle ground between local government ownership and private corporations. They are special units of local government that are set up with the sole purpose of providing water and/or wastewater services. They are also governed by a board whose responsibility is limited to the water/wastewater utility. These boards can therefore afford the water utility their undivided attention, as opposed to their city and county counterparts. Even the board member selection process can be more focused on individuals who have prior knowledge of water utilities, in particular.
Since they are independent of municipal and county governments, these authorities/districts operate without the possibility of transfers from or out to a government General Fund and do not have the power of taxation or the ability to raise General Obligation bonds. These characteristics induce these types of utilities to approach financial management issues more like private corporations might function. Also, even though the makeup, structure and powers of the governing boards vary across different types of independent authorities and districts, in many cases, these governing board members are appointed to their positions, limiting the influence of elections on their decision-making. The chart below may show the culmination of all of these factors.
According to data from Georgia and North Carolina, independent authorities and districts had, on the median, consistently higher marginal prices than municipal/county-owned utilities as well as non-profits.
Median water marginal price for next 1,000 gallons at 5,000 gallons/month for 650 North Carolina and Georgia utilities by organizational structure, 2007-2011
Drilling down further, the rate at which the median marginal prices rose over time was greater for independent authorities and districts (and non-profits) than it was for municipal/county-owned utilities. These results suggest that governing boards of independent authorities were, on the median, more comfortable setting and raising higher volumetric rates for water service than the city councils and county commissioners were in these two states.
Annual percent increase by organizational structure in monthly water bill for 302 NC and GA utilities that adjusted rates, 2008-2011
Conclusion
Overall, given the lack of empirical evidence that organizational structures influence rate setting or financial performance on a grand scale, it is likely that organizational structures may affect utilities individually but not in a consistent manner across many utilities that would make these influences detectable at the average or median levels.
However, creating an independent authority or district does seem to reduce some of the political and re-election pressures that can overwhelm the rate-setting process at the local level.
One Response to “Does Governing Structure Determine the Financial Health of a Water Utility?”
Martha Zeigler
Having worked for utilities set up as special districts as well as part of a municipality I have observed the conclusions of this article which should be no surprise to anyone. What I believe is just as important, if not more critical, as indicators of financial health are the uses of funding as reflected in the status of the infrastructure, workload efficiency indicators and cash reserves. As elected officials and citizens grapple with the best way to respond to the challenges of adequate supplies of affordable water and wastewater services, statistics such as debt coverage ratio, cost per million gallons of water/wastewater treated, and days of operating expenditures in cash reserves (among other common benchmarks) should be just as important as charges for services and rate increases when deciding on the optimum type of utility structure for their locality.