Many utilities develop multi-year plans to strategize implementing and paying for infrastructure projects. Developing asset management plans and capital improvement plans (CIPs) have long been considered critical practices for utilities of all sizes to account for the rehabilitation and replacement of aging infrastructure, incorporate new assets or changes to the water or wastewater system, and other needed infrastructure projects. CIPs usually include cost estimates for projects that have been identified for at least the next five years, and sometimes for longer time periods. By examining many recent CIPs, it is possible to estimate how much utilities across an entire state are collectively planning to spend on capital projects. This provides policymakers and funders a glimpse at what utilities believe they should be spending, supplying supplemental information to the national infrastructure needs survey estimates.
The EFC conducted this analysis for the state of North Carolina, where nearly 500 local governments own and operate water and wastewater utilities serving close to 90% of people connected to centralized systems. By examining 75 local government CIPs and statistically extrapolating to all other local government utilities, we estimated their planned capital expenses for five years and twenty years.
Estimated 5-Year and 20-Year Planned Capital Spending
Based on extrapolations from recent CIPs, local government utilities in the state would collectively face about $10.7 – 13.7 billion in water and wastewater capital projects over five years in 2020 dollars. The analysis is detailed in this new report.
Approximately half of the total planned capital spending occurs by the 16 large utilities serving more than 100,000 people each and slightly more than half the service population collectively. The CIPs for all 16 large utilities were obtained and their documented plans account for about $5.8 billion in water and wastewater capital projects over a five-year period.
All other utilities in the state face plans to spend between $4.9 – 7.9 billion over five years, based on a 90% confidence interval statistical extrapolation from a stratified sampling of CIPs. This assumes that all small and medium local government utilities in the state have, or should have, planned capital expenses at similar levels to their peer-sized utilities with sampled CIPs. Since a small number of utilities, particularly smaller systems, may not be planning any capital expenses, this estimate is likely marginally higher than what is actually planned across the state over the next five years. However, only 6% of local government utilities in North Carolina have not had any capital outlays within a five-year period, suggesting that the overestimation is likely to be small.
Extrapolating to 20 years of planned capital expenses adds uncertainty because most Capital Improvement Plans do not cover twenty years. Assuming that the trends in planned spending in the CIPs continue unabated for 20 years, with a 2%/year cost inflation factor, local government utilities in the state would collectively face about $36 – 44 billiona in water and wastewater capital projects over 20 years in 2020 dollars, within a 90% confidence interval. There is, however, a lower degree of confidence in the 20-year estimates than in the five-year estimates because most analyzed CIPs did not cover twenty years.
Planned Spending May Not Lead to Actual Spending
Based on CIPs, local government utilities in North Carolina have plans for $10.7 – 13.7 billion in water and wastewater capital projects for the five years. This is more than twice as much as their recent capital outlays, which total slightly over $1 billion/year. The 16 large utilities alone have plans to spend more than that amount annually over five years.
Plans for capital projects do not always lead to actual projects and actual spending. Local governments facing challenges in funding or financing capital projects, or shifting priorities and conditions, may not implement their projects as planned. Some of the projects planned in the CIPs may end up being delayed, downsized, or deleted.
Estimating what local governments plan to spend, rather than what they actually spend, provides a more comprehensive assessment of the total funding that is needed to implement all of the capital projects that were specified by the utilities. In North Carolina, planned projects would cost more than twice what utilities are currently spending in capital outlays.
Funding the Plans
Funding all of the planned capital projects for the next five years at more than $2 billion per year is challenging with current resources. Operating revenues for local government utilities in North Carolina total over $3.2 billion per year, but more than $2.6 billion is spent on operations, maintenance, and existing debt service, leaving little to fund new capital projects from cash. An EFC analysis of debt capacity in 2019 estimated that all local government water and wastewater utilities in North Carolina could collectively issue between $14.9 – 23.4 billion of new debt over twenty years (less than $1 billion per year), but that the debt capacity of small local governments is very limited. The loans and grants funding programs administered by state and federal agencies and non-profit organizations provide a critical source of funding to local government utilities. Additionally, local governments now also have access to American Rescue Plan (ARP) funds, which can be used to pay for water and wastewater infrastructure projects. Considering that planned capital spending is much higher than what has been funded in recent years, the ARP funds can provide a significant supplement to pay for local governments’ planned projects.
Shadi Eskaf is a Research Director/Senior Project Director at the Environmental Finance Center at the University of North Carolina, Chapel Hill. He works on environmental finance projects in local, state, and national settings.
a These estimates are higher than recent capital needs assessments. The 2017 North Carolina’s Statewide Water and Wastewater Infrastructure Master Plan: The Road to Viability estimated that the 20-year water and wastewater infrastructure needs were between $17 – 26 billion (or $18 – 27 billion in 2020 dollars). US EPA’s 2015 Drinking Water Infrastructure Needs Survey and Assessment and 2012 Clean Watersheds Needs Survey combine to estimate North Carolina’s 20-year water and wastewater infrastructure needs at approximately $24 billion in 2020 dollars. However, as explained in the report, it is not an apples-to-apples comparison. The $36 – 44 billion is what is estimated to be planned capital spending — not needs — assuming that trends in planned capital spending continue for twenty years.