What investments will be needed to rebuild our national water and sewer infrastructure and provide services to a growing and shifting population and an expanding economy?
By Richard F. Anderson, Ph.D.
Will a new national infrastructure policy help or hurt city water and sewer services?
What is the role of the Federal Government in helping cities provide safe, adequate and affordable water and sewer in a national infrastructure policy?
Answers to these questions require knowledge of current public water and sewer economics and recent trends to help evaluate policy implications; this paper summarizes local and federal investment trends.
Congressional framers of the Clean Water and the Safe Drinking Water Acts promised local governments a technical and financial partnership to achieve national water goals. Those promises are long forgotten. Congress and the Executive branch have steadily retreated from responsibility for local water and sewer services, although they continue to stack up expensive regulatory mandates that trigger affordability burdens for low- and middle-income households. Current discussions of boosting infrastructure investments initiated by the Executive branch are long overdue; and the stated expectation that cities and states need to step up with more of their own money before they ask for federal financial assistance rings hollow in the case of local water and sewer where local government provides roughly 98 percent of the annual investments. Any major improvement in water and sewer infrastructure will rely on a new configuration of bonds, grants, loans and rate increases. A new infrastructure policy can get it right, if the new framers of the policy consider both achievements and systemic problems that have accrued over the last 40 years.
The case is well established that the federal financial partnership with cities died when Congress eliminated the construction grants program in favor of providing capitalization grants to states to disburse to local government as loans with capital and interest payments. Elimination of earmark grants for water and sewer construction soon followed, and local government picked up all the responsibility for providing local services and achieving national health and environmental goals, (Figure 1).
The Magnitude and Trend of Public Water and Sewer Investments
Local government invested $118.9 billion in public water and sewer infrastructure and services just in 2015; some $326 million each day, according to recently released Census estimates. While year over year investments continue to reach historically high levels the increases are retreating rapidly from the seven percent long-term average annual growth rate dating back to the mid-1950s. This review of local government investments (expenditures) and revenues related to public water and sewer 2000 to 2015 is intended to inform the recent policy discussions involving water and sewer infrastructure redevelopment.
The much-anticipated infrastructure renewal legislation announced by Congress and the Executive branch can provide a significant boost to aggregate capital investments to upgrade local water and sewer systems. This sector is already highly leveraged – for example, in 2015 federal support (capitalization grant to states) for sewer capital spending was $1.4 billion in the form of loans to local government from the State Revolving Fund loan program (CWSRF). The Census reports that sewer capital spending in 2015 was $17.8 billion; while leveraging is substantial, $12.71 of local spending for every CWSRF grant dollar, it should be recognized that local government is responsible for repaying 100 percent of the loans and/or municipal bonds employed, plus interest.
Local investments in public water and sewer include capital construction costs and operations and maintenance (O&M) costs. Focusing only on the capital side of the ledger, as is done in public discourse for the last 30 years (the so-called Capital Needs Gap) is misleading. Every physical component of a system requires an operations and maintenance (O&M) investment. Since the mid-1980s O&M costs exceeded capital construction costs. Local government receives little if any financial assistance for operations and maintenance (O&M), and that is important because O&M for sewer systems accounts for two-thirds of the annual $51.4 billion local expenditures. Similarly, the $65 billion local investment in drinking water infrastructure and services devotes nearly 70 percent of the expenditure for O&M. A major portion of the rising cost of water and sewer rates can be traced directly to investments to comply with unfunded federal/state mandates. The lack of consideration for the interplay between mandates, capital investment and O&M costs can be corrected in a new infrastructure policy.
Local government has an impressive record of water and sewer investment, some $1.5 trillion just in the 16-year period from 2000 to 2015; but past achievements do not guarantee future success. Local governments are facing several macro headwinds that, as they are addressed, will likely result in substantial rate increases, and require additional service capacity, including:
- An estimated 80 million increase in population by 2051 that will require a 25 percent expansion in physical plant and service provision;
- An aging water and sewer inventory of pipes, pumps and plants at or beyond their useful life that need replacement;
- Escalation of regulatory costs from federal mandates;
- Competition for investment in infrastructure resilience (e.g., drought, earthquake; flooding; coastal high hazards; and, wildfire);
- A growing rate affordability problem for customers nationwide.
The policy discussions concerning tax reform and infrastructure investment policy are conscious considerations of governmental intervention to redistribute resources. Local government is concerned about their ability to finance the infrastructure needed to service a growing population in compliance with stringent and ever-expanding regulations. Cities are not well positioned financially to expand water and sewer investments.
Water investments (expenditures) were $67.5 billion in 2015.
- Investments increased 83 percent from $35.4 billion in 2000 to $64.9 billion in 2014; yielding an average annual growth rate of 5.6 percent.
- The latest estimate for 2015 was $67.5 billion, a 3.9 percent increase over 2014, but lagging the 15-year average, (Figure 2; Table 1).
Water revenues were $61 billion in 2015.
- Revenues increased roughly 95 percent in the 15-year period from $24.3 billion in 2000 to $50.9 billion in 2014, (Figure 2; Table 1).
- The 15-year average annual growth in revenues was 6.3 percent, but the latest estimate for 2015 was $61 billion, a 3.3 percent increase, nearly half of the 15-year average.
Water Revenue Gap: There exists a persistent 15-16 percent gap in water revenues compared to expenditures.
- Revenue estimates suggest that customer revenues amount to 84 percent of investments from 2000 to 2015, (Figure 2; Table 2);
- There is a $129 billion shortfall in revenues over investments from 2000 to 2015.
|2000-2014 Growth||15-Y ear Annual Average||Change 2014-2015|
|Combined Water & Sewer||101.40%||6.80%||3.80%|
|Local Government Water and Sewer Economics||2000-2015 Revenues ($ thousand)||2000-2015 Expenditures ($ thousand)||Ratio of Revenue to Expenditures 2000-2015||Revenue Gap ($ thousand)|
|Combined Water & Sewer||1,311,145,958||1,505,249,196||87.1||194,103,238|
Sewer investments were $51.3 billion in 2015.
- Investments grew by 86 percent in the 15-year period 2000 ($27 billion) to 2014 ($50.5 billion), (Table 1).
- The 15-year average annual growth rate was 5.8 percent.
- The 2015 estimate of $51.4 billion is a 1.8 percent increase, and a sharp decline from the 7.3 percent 15-year average annual increase.
Sewer revenues were $53.2 billion in 2015.
- Revenues grew 110 percent in the 15-year period 2000 ($24.2 billion) to 2014 ($53.2 billion).
- The 15-year average annual growth rate was 7.3 percent (see Table 1; and Figure 3).
- The steady rise in revenues, however, slowed to a 4.4 percent increase in 2015, ($53.2 billion).
Sewer Revenue Gap: Sewer revenues converged with sewer investments in 2014 and 2015, (Figure 3).
- While sewer revenues are steadily increasing, the recent convergence with revenues is more a case where investment growth is declining to a slow rate (1.8 percent 2014 to 2015).
- Sewer revenues increased to 90 percent of sewer expenditures from 2000 to 2015, (Figure 3; Table 2).
- An estimated $64.9 billion shortfall in revenues over investments occurred over the 2000 to 2015 period.
Combined Water and Sewer
A positive economic sign is the steady, although slow, growth in water and sewer revenues over time, (Figure 4, Table 1). Despite the growth in water and sewer revenues, there remains a $194 billion gap in revenues compared to investments over the period 2000 to 2015 for combined water and sewer. The gap breaks down as follows: $129 billion for water; $65 billion for sewer.
Annual investment levels are typically positive year over year. Since 1956 there have been several negative investment years. Combined investments declined in 2012 and 2013 from 2011 levels, (Figure 4). Positive growth returned in 2014 to 2015.
Local water and sewer revenues routinely lag investment levels for several reasons, many of which deserve a more quantitative explanation: delinquent customer payment and default; system loss of water from pipe breaks; service interruptions of a technical nature or natural cause. Differences may also be influenced by recent capital investments that are posted as a total investment but the revenues are collected via rate structures over an amortization schedule. The disparity between expenditures and revenues are to be expected, but local managers plan for a normalization of full-cost pricing over time; and, consideration of efficiencies that can be achieved. An overall recovery rate of 87 percent provides room for improvement, and technology will play a deciding role where it is employed.
Local governments have experienced enormous growth in water and sewer investment over the last 40 years or more. During this period the EPA has promulgated many unfunded mandates, and subsequently, local governments are faced with customer pressure to stabilize rates because of an increasing affordability problem. Additionally, the federal attitude that all water and sewer costs should be local, and continued Congressional underfunding of the SRF programs has resulted in an estimated $195 billion revenue gap just in the last 16 years. Two conclusions may be drawn from these trends: 1- the $195 billion revenue gap suggests that the key federal aid programs, the CWSRF and DWSRF, are failing to keep pace with construction needs; and, 2- the notion that cities are not investing in water and sewer infrastructure is patently incorrect- the federal financial assistance programs does not alter the fundamental reality that local government is providing nearly 100 percent of annual investment since the elimination of the construction grants program.
The federal/state regulatory focus on promulgating mandates has eclipsed the practical need to create a financially sustainable public water and sewer service delivery system. The next infrastructure policy must focus more on helping public water systems achieve financial sustainability, and seriously consider shifting resources to resiliency planning and investments that expedite resiliency project implementation. In the category of public water and sewer infrastructure, the federal government needs to step up with greater spending or reduce federal mandates.
Materials and Methods
The Mayors Water Council (MWC) of The United States Conference of Mayors (USCM) conducted an analysis of Census data representing water and sewer revenues and expenditures to identify long-term trends and more recent year over year changes. Census estimates reported at www.Census.gov in the state and local government finances category were obtained for analysis. The data on water and sewer expenditures and revenues were reviewed for the time series 2000 to 2015. The data represent total local government revenues and expenditures related to water and sewer. Expenditures include both capital and operations and maintenance (O&M), and for the purposes of this report, the term is interchangeable with investments.
The methods employed include graphing annual expenditures and revenues for water and sewer separately. Combined water and sewer expenditures and revenues were calculated by adding water and sewer expenditures and revenues. Simple rates of change equations were used to track trends anchored to the year 2000. Recent year over year changes were calculated on the short term 2014 to 2015.