Water Systems Need Investment and Affordability

Utilities are pulled by opposing economic and infrastructure pressures.

By Brett Walton, Circle of Blue

On March 6, in Flint, Michigan, a city wounded by lead, the Democratic presidential candidates promised to reinvest in America’s outdated water systems.

“Cities and towns are struggling, in order to provide basic services,” said Vermont Sen. Bernie Sanders, touting a $US 1 trillion investment plan. “Among many other things, we need to rebuild our crumbling infrastructure, our water systems, our wastewater plants, our roads and our bridges. The wealthiest country in the history of the world has got to get its priorities right.”

The need is indeed enormous, and not only in Flint. Replacing the country’s more than 7 million lead service lines could cost up to $US 50 billion, according to Fitch Ratings. Sewer operators told the U.S. Environmental Protection Agency that they expect to spend $US 271 billion between 2012 and 2017 to maintain service, a figure that understates the actual need. (An untold number of utilities delayed projects because of limited budgets.) And repairing the nation’s water distribution pipes, which spread more than 1.2 million miles beneath city streets, could cost $US 1 trillion in the next two decades, according to the American Water Works Association.

Financing the endeavor is a formidable task. Little has changed at the federal level since the end of Barack Obama’s first term when, post-stimulus, investment in water systems moved up the national political agenda. Congress today remains resolutely opposed to large spending increases. Even a bipartisan bill to send emergency aid to Flint and other communities facing high repair costs has been held up by Republicans who oppose new federal expenditures. Other bills in Congress to establish water financing programs are in their second or third attempt. Cities and towns, meanwhile, face water and sewer costs that are rising at more than twice the rate of inflation. Analysts predict that they will rise for the foreseeable future.

Nested within the financing challenge is another vexation: how to ensure, in the frenzy of potential construction, that poor people and small communities still have access to clean, affordable water. It is a question without a simple answer. Affordable water requires an all-in effort that cuts across the political spectrum, a mix of redirected spending priorities, tax policy, social programs, and engineering assessments at the local, state, and federal levels. The urgency, experts assert, will grow, as water systems enter the Replacement Era — to use American Water Works Association’s phrase — while a high-tech economy widens the distance between the well-compensated haves and the struggling have-nots.

“People are asking the question legitimately,” Jason Mumm, a water analyst with Hawksley Consulting, told Circle of Blue. “There is not any magic answer. I get the sense that we’d like to have one. Funding water systems in a way that is also affordable — I don’t think anyone has a good idea of how to do that.”

The Problem

Three forces are pulling in different directions. The first is economic. Income for most Americans fell in the last 15 years, giving rise to fear and uncertainty about balancing groceries, medical bills, housing costs, and keeping the water and lights on. Median real household income, a measure of the buying power of total earnings, benefits, and investment interest, is the same today as it was two decades ago. Yet median figures do not reveal what is going on at the top or bottom. While income for the top 10 percent of American households rose 2.8 percent between 1999 and 2014, income for the poorest 10 percent plummeted 16.5 percent, according to the U.S. Census Bureau. These people are the most vulnerable.

When bills go unpaid, cities, reluctantly, are cutting off water to the poor. The shutoffs in Detroit in 2014 — when about 17,000 household had temporary service cuts — are well known, but residents are losing access to water in many other cities. Baltimore, for example, shut off water to 8,100 homes last year, the city’s Department of Public Works told Circle of Blue. Though assistance programs are available, many residents either do not use them, do not know about them, or still cannot afford water.

The second force is old or outdated infrastructure. Distribution pipes put into the ground before the Great Depression need to be replaced, as do lead service lines. Because national investment in water pipes peaked in the boom years following World War II, the replacement rate — the number of pipes that ought to be replaced in a given year — is expected to rise through at least 2035, according to the U.S. Environmental Protection Agency. In addition, new investment must be made to adapt to climate change and water scarcity, and to cleanse water of a range of chemical and biological contaminants — both new threats, such as pharmaceuticals, and longstanding enemies, like nitrate and arsenic. These factors will add to the repair bill.

The third force is the reluctance of financial institutions to invest in water supply, transport, or treatment infrastructure. The reason: neither the federal, state, nor city governments are guaranteeing enough water infrastructure project loans. Such construction programs, hugely expensive, are almost never undertaken without government loan guarantees, particularly state and federal government loan supports. The government guarantees, a system in place since the start of the American republic, assure lenders that in the event of trouble — technical problems, construction delays, cost overruns — they will get paid.

Together, the forces of economics and infrastructure age are exerting tremendous pressure on cities. Federal investment in water infrastructure as a share of spending peaked in 1977, when nearly three out of every four dollars came from U.S. taxpayers. Now, circumstances have dramatically flipped. More than 95 percent of spending is state and local, and most of that is from utility ratepayers.

The need to reinvest is opposed by political pressure to keep water rates low. City councils, elected by popular vote, hesitate to approve the rate increases necessary to maintain the system.

“Politicians have relied on the fact that we have infrastructure that lasts 50 to 100 years, and they have deferred maintenance,” Martin Querin, assistant public works director for water in Vallejo, California, told Circle of Blue.

Similar stories are not hard to find. Stacey Isaac Berahzer of the University of North Carolina’s Environmental Finance Center, which works with utilities on water rates, recalled a lone council member in a Georgia town who pushed for a rate increase to patch the town’s leaky pipes. She told Berahzer that around town and in the grocery store fellow residents would not talk to her after she staked her position.

There is hope, however. According to January 2016 survey from the Value of Water Coalition, a water industry group, respondents were more willing to pay higher water bills once educated about the need for investment and how the money might be spent.

Over time, keeping rates artificially low has led to the circumstances today: a need for investment that cannot be ignored, the cost of water and sewer rising faster than any other municipal service, and sincere worries about the effects that catching up with the backlog will have on the poor.

Measuring the Problem

There is no perfect way to measure affordability, Berahzer said. The most common standard is comparing average water and sewer bills with median household income. This is how the U.S. Environmental Protection Agency does it. The EPA affordability threshold is that an average water and sewer bill should not exceed 4.5 percent of median household income in a utility’s service area.

This method has many flaws. Median household income is an “easy, fast, and cheap” measurement because the Census Bureau collects it, Berahzer said, but it misses what is going on at the extremes.

The U.S. Conference of Mayors, a forum for local leaders, wanted to find out. The group studied average bills and median household income for 30 California cities. The study found many residents paying more than 4.5 percent of income on water and sewer bills. In Escondido, a city of 148,000 near San Diego, average water and sewer bill for more than one in three households exceed that threshold. For 7 percent of Escondido households, an average bill represents 17 percent of income.

No Single Solution

The U.S. Conference of Mayors is one of the most ardent supporters of an increased federal role in water infrastructure spending. Its members also argue that federal water regulations should be loosened for communities in which affordability is a concern. Understandably, less rigorous water quality standards do not sit well with groups who think that clean water is a right for all, and not only for the wealthy.

Other options abound. At least 10 bills on water infrastructure financing have been introduced in Congress. They would allocate more money for existing water funding programs, establish new programs that target large utilities, and expand the use of bond financing for water projects. Many of these bills were introduced in the past without success.

Mumm, the rates consultant, sees a problem with many of these strategies. What cities want is a return to the 1970s, when federal assistance came in the form of grants, which do not need to be repaid. That is not what cities are getting. Low-interest loans, through the state revolving funds, are now the way that Washington funds water infrastructure.

“It’s great that the cost of loans is relaxed,” Mumm said. “But it’s not the interest rate that has the biggest impact on costs. It’s the principle on the loan. We’re not going to impact affordability with low-interest loans.”

Instead, Mumm argues that utilities need to talk about subsidies.

“Unless something turns around with the U.S. economy that causes wages for the groups of people at the lower end of the income distribution to rise – which is difficult to do in a short period of time — we have to look at subsidy of service costs for citizens in the urban core,” Mumm said.

Subsidies can come from two sources: user charges from the water utility’s revenue and taxes from local, state, or federal accounts. Most utilities already run low-income assistance programs.

The best remedy will vary depending on local laws and policies. In California, Proposition 218, which requires that water rates match the cost to deliver the water, discourages utilities from using higher fees on one class of customers to subsidize another, Mumm said. In North Carolina, it is illegal for cities to use utility revenues to fund financial assistance programs, Berahzer said. Assistant programs tend to rely on voluntary contributions, she noted.

Lifeline rates — cheap rates for enough water to cover basic health needs — are another common tool. But even those can be problematic, Berahzer said. Poor families have more people in a household, and thus combined water use of everyone in the house might push the bill into the higher rate tiers. Other options include linking water bill payments to income. Philadelphia is one of the first large cities to experiment with an income-based water rate.

Taxes, the second subsidy option, are sometimes used directly for water. Atlanta uses a one-cent sales tax, which was extended on March 1 for four years, to fund water and sewer projects. Not every state allows such actions, though. Mumm said that Colorado water utilities cannot be funded by tax revenue. Other subsidy schemes such as federal tax breaks and welfare programs put money in the pockets of the poor, who can use the funds to cover water bills.

Affordability in Rural Areas

Small and rural communities have an inherent disadvantage for water infrastructure — namely, that they are small and rural. Public water systems require significant investment, and the per person cost increases as the number of connections decreases. Rural towns have a lot of acreage between houses, which makes sewers and drinking water connections more expensive.

“The bigger you are, the more revenue you have to address problems,” said Diane VanDe Hei, chief executive of the Association of Metropolitan Water Agencies, which represents large utilities. “A regional approach allows you to pool resources.”

VanDe Hei said that regionalization has two forms: in essence, the sharing of hardware and the sharing of software. The former results in pipeline interconnections, shared treatment facilities, and merging smaller units into regional authorities. The latter refers to the consolidation of services such as billing and customer relations. Each can cut down on costs.

The main obstacles are social rather than technical, says Deb Martin, who works with small utilities for the Great Lakes Rural Community Assistance Program. There is a fear of losing control of local planning and occasionally animosity between neighboring towns, even over seemingly trivial matters. “People joke about losing the football game, but that is real,” Martin told Circle of Blue.

Consolidation is being championed in California as a means of providing reliable water service. Thousands of residential wells went dry in farmworker communities in the Central Valley during the last two years, and even when water is flowing it is contaminated with nitrates, arsenic, or other chemicals. A bill approved by the California Legislature in June 2015 allows the State Water Board to force poorly performing water systems to consolidate with larger, neighboring systems. The board has issued two such notices.

These sorts of questions are here to stay. Water infrastructure spending will be an economic, political, and social issue for years to come. Coordinated efforts between government agencies will be most fruitful, but piecemeal approaches are most likely.

“Affordability will continue to be a bigger and bigger problem for utilities across the nation,” Berahzer said. “Rates need to keep going up to chip away at the infrastructure gap. But no utility is doing itself a favor if it ignores affordability. It behooves them to find a way to address it.”