By Brett Rosenberg
June 29, 2009

The United States Conference of Mayors' Water Council met during the 77th Annual Meeting in Providence to continue the dialogue on how to address the nation's water infrastructure needs. Pleasanton (CA) Mayor Jennifer Hosterman, acting Chair of the Water Council, facilitated the session. Following a brief discussion of proposed resolutions before the Environment Policy Committee, Mayors Water Council members heard from Kansas City Mayor (MO) Mark Funkhouser, who discussed the challenges his city faces due to extremely costly combined sewer system revitalization and flood control projects, as federal support seems to wane and the economy continues to deteriorate. Mayors also heard from Eric Peterson of Hawkins Delafield & Wood LLP, who discussed "structured" risk analysis and alternative means of financing and delivering water infrastructure projects.

Funkhouser focused his remarks on the challenges cities face when it comes to accessing federal funds for water infrastructure capital projects. Kansas City and other communities, particularly those of over 100,000 are often ineligible for State Revolving Loan Funds (SRF) due to what are called affordability criteria, according to Funkhouser. In many instances, states allot much of their federal SRF allocations to smaller jurisdictions, the idea being that they do not have a large enough population base to financially support the necessary infrastructure through user rates and municipal bonds. Whereas larger cities are deemed to have enough rate payers to support the costs of water infrastructure without undue financial hardship.

The reality, according to Funkhouser, is that in Kansas City, with a population of about 450,000, and other large cities, the costs of general operation and maintenance of treatment plants, along with updating aging infrastructure and retrofitting combined sewer systems and other unfunded federal mandates are often beyond their immediate financial means.

Funkhouser said, "As a nation, we have failed to finance the infrastructure put in place by our preceding generations." He continued, "Our generation is consuming the infrastructure that our grandparents put in." Today, Kansas City faces a $2.4 billion tab for a federally mandated combined sewer system retrofit, the largest infrastructure project in the city's history, and another $2.1 billion for flood control projects.

Funkhouser noted that these are not short-term projects and reiterated that the city is not in a position to pass all the costs solely to rate payers, especially considering that there are over 19,000 families in the city that live below the poverty level.

Funkhouser explained that in Missouri, large cities received only a very small percentage of the overall pool of ARRA money. Of the over $108 million allocated to the clean water SRF in the state, Kansas City, the state's largest city, received only $3 million in grants and loan funds. The mayor, noting that combined sewer overflows contribute over six billion gallons of diluted sewage to area waterways annually, said that we need to devise a more equitable means of distributing federal resources to cities and charging customers a price more in line with what they can afford.

With regard to getting the community on board to at least entertain the idea of funding the CSO and flood control projects, Funkhouser explained that there is a process in place in Kansas City that involves a citizen "Wet Weather Panel" and a water utility task force. These groups, the mayor said, have helped the city "overcome the shock of the costs" by framing the need in terms of environmental and public health necessities.

Petersen followed the mayor with a presentation about alternative water infrastructure financing models. He focused his remarks on the need to move away from the public sector comparator (PSC) financing model toward a more "structured" risk analysis-based model.

Petersen built his case on the fact that local governments have historically paid for the lion's share of the massive costs of water and sewer infrastructure — $1.427 trillion between 1956 and 2006. Noting that, "It's not how much money you spend on water infrastructure, but how wisely you spend it," Petersen explained that the traditional PSC financing method, which normally involves a design-build process, has several shortcoming, including awarding contracts to the lowest and often underqualified bidders; slow project delivery; higher long-term costs; and a tendency toward legal disputes.

Instead, Petersen suggested that it would be beneficial for mayors to consider taking a business case approach to procurement and other infrastructure decisions. With early involvement and public leadership on environmental stewardship, mayors can, according to Petersen, effectively guide infrastructure projects through alternative delivery methods that are better equipped to minimize risk and maximize the benefit to the public.

Petersen reviewed several alternatives to the traditional PCS method including variations of the Design-Build-Operate model, all of which are a form of public-private partnership. Each financing model is designed to recognize and minimize risks to local government through recognizing a set of criteria that are unique to each capital project and each community. The benefits of alternative project delivery include a lifecycle focus; increased competition and collaboration; cuts in capital, operating and maintenance costs; the transfer of performance risk to a private operator; and the promotion of innovation.

Through conducing a business case analysis of a major project, Petersen concluded that alternative project delivery models are better equipped to deliver "value for money" in schedule, cost and performance than the traditional public sector comparator model.