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Costs, Regulation, and Financing of Massachusetts Water Infrastructure: Implications for Municipal Budgets

Posted by Content Coordinator on Wednesday, March 8th, 2017

COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE STATE AUDITOR

Suzanne M. Bump, State Auditor

Executive Summary Increase in Precipitation EventsIn Massachusetts, water infrastructure of all kinds—drinking water, wastewater, and stormwater systems—is primarily a local responsibility. The Division of Local Mandates (DLM) within the Office of the State Auditor (OSA) has undertaken this Municipal Impact Study to examine the financial impact on local governments of infrastructure costs associated with water systems, supplies, and quality. This study is based on an extensive survey of Massachusetts’s municipalities concerning their experience of costs associated with state and federal regulation of locally-owned and operated water infrastructure systems. The survey also inquired about municipal utilization of state and federal loan and grant programs, and sought estimates of the impacts of newly implemented regulatory frameworks associated with the federal government’s Municipal Separate Storm Sewer System (MS4) permits.

The findings suggest that state government can create a more stable, holistic approach to water infrastructure, giving municipalities greater levels of confidence and encouragement to invest in water infrastructure improvements. Some of these involve additional investment at the state level so that municipalities do not bear the entire burden. Other reforms are regulatory, since a predictable, consistent, and collaborative regulatory framework will encourage municipalities to commit more resources to much-needed water system improvements.

Predicted Atlantic Sea Level RiseA legislatively mandated 2012 study by the Massachusetts Water Infrastructure Finance Commission estimated that, at that time, there was a $20.4 billion gap in water infrastructure funding, which is largely the responsibility of local governments. The Commission Report made a series of recommendations concerning potential strategies for closing the gap, including a larger role for state dollars. The Commission also called for policies at the state level that would offer financial incentives and regulatory flexibility in order to encourage greater adoption of regional solutions, technological innovation, and public-private partnerships.

Four years later, and in light of the significant local cost implications of municipal water infrastructure, DLM decided to revisit and supplement the findings contained in the Commission Report with a fresh study. In addition, DLM wanted to obtain data about how the Commonwealth might best encourage enhanced local investment in water quality, supplies, and systems by fostering a more stable regulatory and fiscal environment.

To accomplish this task, DLM invited all 351 cities and towns in Massachusetts to participate in a survey on local water system investments and funding sources. A total of 146 cities and towns submitted completed surveys, representing 42% of the state’s municipalities. Respondents include 88% of all cities and towns with populations greater than 50,000.

Below is a summary of our findings and recommendations, with each page in the original report listed.

Finding 1

Page 25

Massachusetts communities have combined water system spending needs in excess of $17 billion, including $7.24 billion for clean water delivery, $8.99 billion for wastewater treatment and handling, and $1.58 billion for stormwater management.

Recommendation

Page 28

Given the continuing decline of overall state aid as a share of local budgets, the Legislature should expand the State Revolving Fund (SRF) as administered by the Clean Water Trust to provide full grants in addition to its current practices of low-interest loans and limited principal forgiveness for cities and towns undertaking water system repairs and enhancements. This finding also supports a recommendation contained in the Massachusetts Water Infrastructure Commission report that the Commonwealth establish a new Trust Fund for water infrastructure to provide at least $50 million annually for the next ten years in direct state aid for local water infrastructure projects. This funding should be provided in addition to, and run concurrent with, current loan and grant programs, and should focus entirely on grants for eligible water infrastructure projects. In addition—and as an incentive designed to respond to Finding 3 of this study (below)—priority in allocating these funds should be given to municipalities and regional entities seeking supports for projects and programs that enhance water infrastructure regionalization.

Finding 2

Page 28

Over the next twenty years, municipalities foresee significant increases in capital, operating, and staffing costs—$1.58 billion statewide, including $240 million in additional personnel costs—for implementation of new federal stormwater management regulations.

Recommendation

Page 29

To provide additional funding for stormwater-related capital and operating requirements, Massachusetts municipalities should consider the creation of dedicated stormwater enterprises similar to local water and sewer enterprises in structure, operation, and fee-based revenue streams.

Finding 3

Page 29

For most municipalities, regional collaboration on water infrastructure remains a goal rather than a reality; only 36% of survey respondents reported that they are members of regional collaborations on water infrastructure planning and management.

Recommendations

Page 29

1. The Legislature should approve legislation designed to promote municipal collaboration and regionalization throughout the Commonwealth by simplifying the process of creating regional public entities that have the power to operate facilities as well as to plan across multiple municipal jurisdictions.

2. As noted in the Recommendation under Finding 1, above, a special state trust fund for water infrastructure should give priority in allocating grants to municipalities and regional entities seeking support for projects and programs that enhance water infrastructure regionalization.

Finding 4

Page 30

Municipalities may not be taking full advantage of current loan and grant programs; only 42% of responding communities have received water infrastructure grants or loans from Massachusetts or the federal government in the past 10 years.

Recommendation

Page 31

The Commonwealth should work to enhance municipal eligibility for state loans and grants by reviewing repayment options and further expanding the capacity of state agencies to reduce or forgive interest and / or principal repayments for smaller projects. At the same time, the Commonwealth should consider additional funding in the DEP budget for expanded outreach in order to educate municipalities about the availability, terms, and benefits for current and future water infrastructure loan and grant resources.

Finding 5

Page 31

The likely impact of climate change on vulnerable water infrastructure is not receiving the attention it deserves; only 6% of survey respondents indicated that they developed any formal climate change plans or policies that affect water infrastructure systems.

Recommendation

Page 32

In following up on the stated goals of its recently promulgated executive order on climate change preparedness, the Baker-Polito Administration should, by July 1, 2017, convene a statewide summit on climate change implications for municipal water infrastructure systems, especially in coastal and riverine flood plain zones. In addition, the Legislature should consider the authorization of designated funds for the purpose of providing municipalities with expert assistance in developing and implementing water infrastructure resiliency and capital investment plans related to climate change impacts.

Finding 6

Page 32

Municipalities reported a low rate of adoption for innovative technologies with the potential to reduce cost and increase efficiency in municipal water systems.

Recommendations

Page 33

The Commonwealth should consider additional incentives and support in this area, including:

1. a requirement that the Operational Services Division (OSD) and the Division of Capital Asset Management and Maintenance (DCAMM) undertake comprehensive reviews of their regulations and practices in order to develop proposed changes to liability standards and procurement requirements to support easier adoption of innovative technologies to improve performance and reduce costs in water infrastructure facilities.

2. adoption of legislation that would create an “innovative communities office” within the Executive Office of Housing and Economic Development to coordinate “the introduction of cutting-edge technologies into the marketplace and incentivize the adoption of these technologies by municipalities.”

3. adoption of legislation designed to encourage local governments to explore opportunities for public-private partnerships (P3).

Finding 7

Page 34

Municipalities favor state administration of stormwater permits, with 75 (51%) of all 146 responding municipalities—and 90% of the 84 communities expressing a preference—indicating that they would rather have DEP administer the MS4 stormwater permit program.

Recommendations

Page 36

1. The Legislature should approve legislation allowing DEP to assume responsibility for issuing MS4 stormwater permits under EPA’s National Pollutant Discharge Elimination System regulatory standards but mandate that funding for the change come from a combination of sources, including not only the state’s general appropriations but also a user fee modeled on DEP’s current Section 70 drinking water assessment and a fee paid by major point industrial and commercial sources based on impervious area or discharge flow rates, thereby minimizing cost impacts on any one state, local, or private sector source.

2. With this additional authority and the additional funding incentives outlined in Recommendations 1 and 3, above, DEP should work with municipalities to develop 10-year rolling capital investment compacts for water infrastructure in order to provide greater stability and predictability to communities in allocating water system dollars.

View full version (ScribD.com): Costs, Regulation, and Financing of Massachusetts Water Infrastructure

About the Massachusetts Office of the State Auditor
www.mass.gov/auditor
The Office of the State Auditor is committed to ensuring that every dollar given to state government is a dollar well spent and that state agencies and contractors follow the rules when spending public funds. To these ends, the Office conducts performance and technical assessments of programs, departments, agencies, authorities, contracts, and vendors. While these audits and reports may uncover problems and issues, they also contain recommendations to improve accountability, efficiency, and transparency, making state government work better for the citizens of the Commonwealth.

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