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Investing in water: Comparing utility finances and economic concerns across U.S. cities

Posted by Content Coordinator on Tuesday, January 3rd, 2017

BROOKINGS INSTITUTION
METROPOLITAN POLICY PROGRAM

By Joseph Kane, Senior Research Analyst and Associate

Summary

This brief describes the current context for local water infrastructure investment in the United States, with a particular focus on large drinking water utilities. As concerns continue to ripple from incidents in Flint, Mich. and beyond, cities remain at the forefront of many investment challenges, yet they often do not have a clear sense of where they stand relative to other markets. By examining how cities vary across three measures of utility finances— operational performance, long-term debt, and rates—and three broader economic measures affecting system performance—changes in population, changes in median household income, and the share of lower-income households—this brief attempts to paint a more complete picture of regional water investment.

Only a handful of drinking water utilities in the largest cities, including those in Washington, Denver, and San Francisco, for example, perform well across all six indicators of financial and economic health. Meanwhile, many cities, from Detroit to Cleveland to Birmingham, Ala., are facing difficulties managing their utility finances while confronting difficult economic realities. Their challenges are spurring action in a variety of innovative planning approaches.

Introduction

In recent months, the country’s water infrastructure challenges have gained greater national visibility thanks to a number of high-profile speeches along the campaign trail, legislative efforts in Washington, and calls for increased investment from the incoming Trump administration. However, much of the hard work continues to rest on the shoulders of individual cities and states, where more than 95 percent of public spending on operations and capital improvements takes place annually.

Water utilities are under enormous pressure to balance a host of physical and financial responsibilities, especially when it comes to providing affordable, clean, and reliable service. From drinking water to wastewater to stormwater, utilities are trying to better quantify their infrastructure needs, develop more targeted plans, and explore a broad set of financing tools to pay for it all. Increasingly, utilities are also learning more from each other and collaborating with a variety of public and private partners to adopt a more flexible, forward-looking approach in future projects.

Flint, Mich. has attracted the most attention given the gravity of its challenges—environmental and otherwise—but the tremendous regional variety and scale of needed investments signal a range of water infrastructure concerns that utilities face nationally. What concerns Flint, after all, may be different from what concerns other cities. Utilities can struggle to locate infrastructure pinch points, create customized strategies, or even identify their relevant peers. Understanding how water needs compare across multiple cities is particularly difficult given the number of information gaps, including inconsistent data, different regulatory needs, and varying operational climates.

This brief provides an overview of the current context for water infrastructure investment in the United States—across larger drinking water utilities in particular—with an eye toward better understanding the financial standing of specific cities and how new solutions may take shape in years to come. By classifying cities according to six major categories of water finance and broad economic trends that affect performance, this brief finds that many large drinking water utilities are facing high levels of long-term debt and other operational and economic pressures that are spurring action in innovative planning approaches.

Understanding water investment challenges at the city level

Across the country, there is a significant mismatch between investment demand and institutional capacity. While more than 88 percent of Americans believe some type of action is needed to solve the country’s water infrastructure challenges, and many analysts agree that the time is ripe for increased infrastructure investment, only about 17 percent of utilities are confident that they can just cover the cost of existing service through rates and fees—let alone pursue needed upgrades. Publicly owned and operated utilities are increasingly running up against tight budgets, debt obligations, and other barriers to investment as user charges, municipal bonds, and traditional financing tools fail to keep up with the level of need.

Utilities of all sizes and geographies are confronting an immense array of investment shortfalls, with some estimates as high as $655 billion over the next two decades. Distribution and transmission infrastructure—including aging pipes and water mains—continue to rank among the most serious drinking water needs, according to the U.S. Environmental Protection Agency (EPA), while wastewater treatment and conveyance concerns are commonly cited in clean water assessments. Although the precise level of investment in these and other project categories can vary markedly from city to city, public utilities pour about $109 billion into water and wastewater spending each year, an amount that has declined in the past decade and often lags behind estimated operation, maintenance, and capital needs.

Financially, utilities have to overcome several hurdles to address these glaring needs, including rising operating costs and unpredictable revenues that can make it difficult to maintain self-sufficiency and make long-term capital plans. When adjusting volumetric rates and other charges, for instance, it can be tough to strike an equitable and efficient balance in generating enough revenue, particularly to cover the maintenance or outright replacement of deteriorating, depreciating assets. Meanwhile, many utilities are dealing with a crushing debt burden. Local governments now hold more than $1.7 trillion in long-term debt, so even though the cost of borrowing to pay for infrastructure upgrades has hovered near record lows, many cities simply do not have the capacity to take on additional debt.

Although the federal government, primarily through EPA, the Department of Agriculture, and the Department of Housing and Urban Development, provides some financial support for water infrastructure, the onus still falls squarely on states and localities. Following the passage of the Clean Water Act and the Safe Drinking Water Act in the early 1970s, EPA initiated a construction grants program to help drive water investment locally; in the 1980s and 1990s, however, EPA began helping to capitalize state-led water loan programs, or state revolving funds (SRFs), for clean water and drinking water projects. Federal funding for these SRFs now amounts to about $2.5 billion each year, or less than 4 percent of the nation’s total water spending, and questions have been raised about  potential inefficient allocations.

Since most water investment is locally driven, cities must prioritize their improvements based on a specific set of economic, political, and environmental factors, a task often easier said than done. From complying with new regulatory requirements to preparing for the next major storm, utilities must carefully weigh local needs when launching new investments. At the same time, the fragmented nature of these improvements can be a challenge to manage, given that there are nearly 52,000 community water systems, and these frequently traverse political boundaries, touch multiple watersheds, and serve a range of different users. Whether installing new pipes or incorporating new treatment technologies, dozens of utilities can be housed in a given city, and the multiplicity of providers can make it hard to access capital and leads to numerous operational inefficiencies.

As a result, utilities are often limited in their capacity and resources to drive sorely needed water investments. Through better asset management, improved accounting practices, and more strategic financial planning, among several other efforts, utilities are striving to provide more sustainable, cost-effective service, but the scale of the nation’s water challenges is raising interest in new innovations and collaborations. Public-private partnerships, utility consolidations, green bonds, and new federal financing options, including EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) program, have garnered considerable attention in this way, but many cities do not always have a clear sense of where they stand economically or otherwise when defining their water infrastructure needs.

Table 1: Six Categories to Gauge Water Investment Performance, 97 Cities

View full version (brookings.edu): Investing in water

About the Brookings Metropolitan Policy Program
www.brookings.edu/about/programs/metro
The Metropolitan Policy Program at Brookings is redefining the challenges facing metropolitan America and identifying assets and promoting innovative solutions to help communities grow in more productive, inclusive, and sustainable ways.

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