To make matters worse, the clean-water tooth fairy has vacated our nation’s capital, perhaps forever. With mounting federal deficit interest costs squeezing out funds for domestic spending, it’s now wishful and magical thinking that Uncle Sam can and will ever again underwrite the cleanup of most local systems or subsidize households who cannot afford costlier water. Like it or not, this is now a state and local financial policy problem.
State and municipal leaders now need to engage realistically in a new era of long-term planning to assure ample water supplies and manageable pricing to recover and deliver clean water. This includes both freshwater utilities as well as the sanitary sewer systems operated by municipalities and special districts. Fresh approaches to conservation will undoubtedly be required in coming decades, as Los Angeles has shown to be possible. Even so, what seems inevitable is that the price of clean water will keep escalating faster than the general consumer inflation index — and much faster in some cases. In the end, state legislatures will need to get into the act if the problem is to be addressed before it’s too late.
Small-town America is where the pain points are already popping up. Whether it’s for clean freshwater facilities in rural America, the rationing of water for agriculture or the cost of state-mandated wastewater plant upgrades, the canaries in the coal mine have typically been rural and exurban communities.
Examples range from the farm towns in California’s Central Valley, to the fast-growing exurban Texas city of New Braunfels, to the tiny bucolic village of Beulah, Mich., to what was once the 1800s “Silver City” of Meriden, Conn. Each of them has its own unique story, but they share a common denominator: cost pressures for delivering clean water to a limited population base. In New Braunfels, utility providers are implementing annual rate hikes of nearly 10 percent on water and sewer services to cover infrastructure expansion and regulatory costs in a fast-growing region. In Beulah, sewer fees jumped 51 percent this year to help finance a state-ordered wastewater plant upgrade. Meriden already requires higher rates to remove phosphorus and replace lead pipes and yet still faces operating budget deficits.
Residents in small towns with limited tax bases bear disproportionate cost burdens when environmental regulators require extensive infrastructure upgrades. Federal and state aid to such smaller burgs may help, but it’s typically not sufficient to offset skyrocketing per capita costs of water purification and delivery. The U.S. Department of Agriculture has programs to help rural communities, but its budget is limited and nowadays subject to ubiquitous federal cost-cutting.
What the Experts Think
These financial pressures amplify the tension between environmental compliance and social equity, raising critical questions about subsidy mechanisms, rate structures and state vs. local financing responsibility. There are no magic wands to wave these problems away: It will take hard work, reprioritization of public finances and thoughtful policymaking to make ends meet in the various financial scenarios.
In an effort to get ahead of a nationwide outbreak of water shortages and a potential tsunami of rate increases, a few years ago the American Water Works Association (AWWA) convened a group of experts from various industries and professional associations in a project it called Water 2050. It was largely an awareness-building exercise, with few concrete and universal action prescriptions. It was directionally correct, but lacked details and “tough love” in most cases.
The AWWA project does urge adoption of “full-cost pricing” — rates that factor in past and future costs for operations, maintenance, and new and upgraded infrastructure — so that water utilities do not underprice themselves out of business over time. It also advances the concept of a nationwide governance approach, although it offers no actionable steps to make that happen in today’s fractured political world. It ignores the waning political will, let alone the fiscal ability, to finance solutions through the endlessly underwater federal budget. Nor does it address today’s most basic political realities: Who, for example, is going to tell the White House that high tariffs on imported steel and cement will raise the costs of water transmission and treatment facility construction?
Although it didn’t provide much in the way of specifics, Water 2050 was a necessary and very important first step. It did identify the potential for new technologies to reduce operating costs and eliminate wasted usage. Artificial intelligence could be one such game-changer by turning off wasteful overuse of water by businesses, farmers and households — although AI alone will not drive affluent homeowners and high-end developers in water-sparse states to forego backyard swimming pools as a local entitlement. There is ample room for follow-up by the various public finance experts to team up with technologists and practical engineers to write up a top-10 list of actions that can actually move the needle.
Rethinking Utility Rate Setting
One dimension of this problem that screams for cross-association efforts is the way most water and sewer utilities set their usage rates. Despite all the good efforts by the Governmental Accounting Standards Board pushing agencies to include the full cost of infrastructure depreciation in their financial statements, there is the age-old problem that budgets and pricing decisions are separated from and precede financial reporting.
Just like the refusal of hundreds of governmental entities to embed the full actuarial cost of their retirement benefits plans in their operating budgets, many elected policymakers who approve utility budgets try to skate by with just enough revenue to pay for debt service on bonds sold years or decades ago, and not a full-cost charge for facilities replacements. This practice alone virtually guarantees painful future step increases in utility rates when that infrastructure has outlived its design life and requires replacement financing.
There is a political-philosophical issue here: how to avoid passing the buck for resources consumed and services provided today to future consumers and taxpayers. Too often, local water rates focus only backward, not forward. No private-sector company with public shareholders would operate this way without being dinged by its bankers and Wall Street investment analysts for employing accounting gimmicks that focus only on free cash flow and not true economic costs. But local politics doesn’t work that way; it typically follows the path of least resistance.
The Case for Model State Legislation
Two-thirds of all living Americans will eventually be affected to some degree by these inevitable economics if our political leaders continue to ignore them. Those in the lower deciles of our household income strata will be hurt the most. Obviously there are social equity issues here that require thoughtful resolution, and that alone makes the topic distasteful for the divisive political processes of many governmental entities, from the states on down to local agencies. It’s hard to imagine any federal assistance to low-income households for water prices in a Congress that is shrinking Medicaid spending. Nor are most states flush with surplus revenues to provide low-income assistance for local water bills.
What the Water 2050 project did accomplish was to get the various professional groups involved in a dialog that can now continue to heighten awareness among policymakers. These nonpartisan associations can formulate a broad framework that takes an obvious problem, breaks it down into strategic issues that can no longer be avoided and procrastinated upon, and encourages concrete cross-disciplinary actions that are directionally correct and sufficiently meaningful to move toward long-term sustainability. They cannot themselves design utopian solutions for economic inequities, but they can at least identify undeniable, inevitable socioeconomic issues plus feasible options for the political elites to consider.
So in the case of utility rates, it’s now high time for the AWWA, various public works associations and state fiscal professionals’ groups to join with the Government Finance Officers Association, the Council of State Governments and the National Conference of State Legislatures to produce model state legislation that requires a multiyear phase-in of local full-cost rate setting to replace the haphazard and short-sighted budget practices that too often now prevail. If policymakers start now, the path to solutions can be well underway within five years and operationally effective in 10 or less.
Although this requires moderately higher usage rates in the short term, a uniform movement toward full-cost (including depreciation) budgeting for infrastructure replacement can dramatically serve the public better in later years. If the resulting new usage rates would escalate annually by double digits for this reason alone, the mandatory increases could be capped and extended by law to perhaps 2035 at the latest. Lawmakers could provide targeted state fiscal assistance to water utilities in low-income communities for enough years to facilitate viable and sustainable pricing that does not take food off the tables of the working poor.
Implementation Issues
Such an effort also requires some advice to policymakers on how to pay for all this, including the social equity issues that inevitably arise in low-income communities. Nothing of value will happen without direct involvement by politicians at all levels. Elected officials owe their constituencies more than lip service and dodgeball evasions. What we cannot accept is another blue-ribbon report that sits on the shelf. Otherwise the baby boomers and older Gen Xers will once again be leaving another hot mess on the doorsteps of younger generations to clean up eventually. Older generations owe their successors an honest effort.
Local officials may object to state legislative mandates, but experience has shown that voluntary compliance with best practices seldom results in tough decisions. It’s just too easy to pass the buck and take the path of least resistance. So there comes a time when a uniform statewide legal requirement to do what needs to be done must prevail. In some states, there may be mandated-cost and home-rule issues to resolve. That’s where the professional and good government associations can prove their value.
Governors, mayors, city councils, county commissions and state legislators all need to move this issue into their own top-10 policy focus list, even if it’s bitter medicine and impossible to take demonstrable action this year. It’s hard to get voters excited about long-term planning — especially when it involves income distribution and affordability issues — but there is a core generational constituency out there that understands the problem of sustainability, if their elected representatives and supporting professional staffs can package that message in new ways that get traction. Let’s get some forward-thinkers and younger blood engaged in this process before it’s too late.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management. Nothing herein should be construed as investment advice.
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