Small Systems with Big Financial Goals: Tools and Strategies for Accessing Funding

Post by Anna Patterson, Project Director at the UNC EFC and Erin Riggs, Executive Director at the UNC EFC

With the holidays right around the corner, water and wastewater utilities are once again thinking to the new year and needed capital improvement projects on the horizon. Luckily there is an unprecedented amount of funding from the federal government to support water, wastewater and stormwater infrastructure investments for small systems.

• Bipartisan Infrastructure Law – The Bipartisan Infrastructure Law (BIL) allocated $50 billion to the EPA to improve the nation’s water and wastewater supply. Funds are distributed through Clean Water and Drinking Water State Revolving Funds (SRF) and are often available to projects that are prioritized on state-specific Intended Use Plans.
• Inflation Reduction Act – Congress authorized $369 billion to be spent on energy security and climate change programs over the next ten years. Some of the available funding will go to bolster tribal, rural, and disadvantaged communities to mitigate negative impacts on water-related systems from climate change and severe drought.
• American Rescue Plan Act – The American Rescue Plan Act (ARPA) was a Covid-19 response financial package that provided funding for many uses, including investments to improve access to clean drinking water and wastewater and stormwater infrastructure expansion and improvement. Much of the funding has been completely allocated, but some states are still funding ARPA projects through their SRF programs.
• Justice 40 Initiative – In 2021, EPA implemented the Justice 40 initiative that mandates that 40% of the funding from certain programs, including SRF funds, flow to disadvantaged communities. This mandate applies to funds released to water and wastewater systems through state SRF programs via BIL, ARPA and the IRA.

Barriers for Funding

The amount of funding available for small water, wastewater, and stormwater system improvements is extraordinary but won’t last forever. Systems need to be ready to apply for funding as it becomes available. A system having financial ducks in a row is key to submitting a successful application. Successful systems will avoid these pitfalls:

• Lack of an up-to-date asset inventory or Capital Improvement Plan
  • To write a successful grant or loan application, a system needs comprehensive knowledge of its physical infrastructure and where there might be room for improvement. An asset inventory or capital improvement plan provides guidance on the current state of a system. Without one, a system may find that the identification of capital projects is challenging and that the process to access funding through their SRF is frustrating. Having “shovel-ready” projects on record will help with a quick, successful project proposal.
• Not following state guidance documents
  • State-specific SRF Intended Use Plans are there to help! Small systems should read them carefully to ensure that each project meets all eligibility requirements. Reaching out to the SRF representative for any questions is a good strategy to make sure that applications don’t lose out on funding based on a technicality.
• Lack of a Rates Analysis
  • Once a system has an idea of what new assets will cost and what loan terms it will need to repay, it may need to adjust its rates accordingly. This type of analysis may identify what rates will need to be in the future to maintain a newly funded asset; ensure rates stay affordable; and advise on how to budget for depreciation, future upgrades, and eventual replacement of assets.

So, where do small systems begin to prepare for accessing the funding and investing it sustainably? In addition to providing technical assistance directly to small systems, the Environmental Finance Center Network has a suite of tools that can help small systems assess their own financial needs.

• Financial Health Checkup – Before a small system can move forward with SRF-funded projects, it’s helpful to know the current status of the utility’s finances. The Financial Health Checkup tool assesses the financial performance of a utility by measuring its ability to pay debt service against revenues and cash available for operations and maintenance. This information can inform strategies for future rate setting and debt capacity.
• Affordability Tools – Given that affordability is a top priority for many small systems, it is critical to think about how future rate increases may impact a system’s most vulnerable customers. UNC EFC’s Affordability tool shows what percentage of a service population will face hardship from existing and projected rates. Using census data, this tool visualizes the impacts of a system’s rates on their specific low-income population of customers, rather than looking at median household income (MHI) alone. If a community has both an affluent and impoverished population, MHI may distort the negative effect that rates are having on low-income community members. SW EFC’s Water Affordability Self-Assessment tool allows users to assess affordability using block rates, which provides a more detailed analysis.
• Plan to Pay – Infrastructure investments are not a one-and-done cost. They require ongoing investment for maintenance going forward, and therefore it is critical for a small system to understand what it will take to pay for capital investments over time. The Plan to Pay tool helps utilities understand their capital improvement needs and how projects will affect their expenses over time. UNC EFC will be releasing an update of this tool in December 2022. The updated tool will provide capital improvement insights and connect to the UNC EFC Rates Dashboards – alleviating the need for utilities to search for their financial data.
• Rates Analysis Model – Small systems may wonder if their rates are too low to support growth and capital investments. UNC EFC offers a Rates Analysis tool to help water and wastewater systems estimate expenses, revenue from rates, and fund balances. The tool also allows utilities to model current and future rates, so they better understand how they need to adjust rates for improved financial sustainability.

Applying for SRF funding can be tough! However, the process may be eased if a utility knows where they are financially and has specific projects planned, including how to pay for them. The Environmental Finance Center Network offers free one-on-one technical assistance for small water and wastewater systems. To read more about technical assistance or request help, fill out our interest form here.

Need technical assistance? The UNC Environmental Finance Center is here to help!

The Environmental Finance Center at UNC Chapel Hill offers free one-on-one technical assistance for small water systems. If you have an interest in our support, fill out our interest form here or contact efc@unc.edu.

Visit https://efc.sog.unc.edu/technical-assistance/ to read more about technical assistance.