Bridging the Funding Gap

Following the economic turmoil of 2008, the federal government rang in 2009 by allocating $787 billion in funding for various causes -- to support school districts, digitalize health records and build and repair infrastructure, for instance, including that of the water and wastewater industry. With $12 billion of the stimulus pie allotted to the water sector, a year and a half later the editorial staff of Water & Wastes Digest takes a look at the state of funding today.

Recovery Report
By March 2010, more than $200 billion in recovery dollars had been awarded and $62 billion received, as reported by recipients under Section 1512 of the American Recovery and Reinvestment Act (ARRA). At the time of print, a second-quarter update reflecting April 1 to June 30 transactions was pending posting on www.recovery.gov.

Stimulus money has been earmarked for desperately needed—and what might otherwise have been cancelled or postponed—water projects, including treatment plant upgrades, collection line extensions, reservoir dam repairs and meter installations. To date, recipients ranging from the Flathead, Idaho, County Water and Sewer District No. 8 ($700,000 loan) to Illinois’ Flagg Creek Water Reclamation District (nearly $6.1-million grant) to North Lenoir Water Corp. in North Carolina ($5.76-million contract) have put their awards to work.

Uncertainty Looms
Has this cash infusion sufficed to help bridge the nation’s notorious water infrastructure funding gap? With a limited—and dwindling—supply of ARRA dollars, where else can governments turn to acquire the wherewithal they need to maintain safe, effective water operations?

Some industry professionals doubted the power of their $12-billion ARRA share even before President Obama put pen to paper. More have joined this school of thought as the government continues to select recipients and distribute funds.

Edward J. Donahue III, president and CEO of specialty consulting practice Municipal & Financial Services Group (MFSG), believes that the act has had minimal impact in the field.

“The industry has done such a good job of convincing the public that it is self-supporting that only a few percent of the stimulus funds were directed to water or wastewater projects,” Donahue said. Today’s federal budget, he added, is simply too meager to support the kind of construction grants the U.S. saw in the 1970s.

The most significant funding challenges facing MFSG’s municipal clients, according to Donahue, are deferred infrastructure maintenance and regionalization. When elected officials and investor-owned utilities freeze rates to appease the public, they fail to rally the financial support needed for the inspections and repairs that keep taps flowing and streets dry. To address issues rooted in infrastructure neglect, many smaller entities are forming more broad-reaching authorities or commissions.

“We routinely suggest to our clients that they need to develop a long-term plan to reinvest in infrastructure—that they need to sell this plan to the public and to regulators, and that they need to then stick to the plan,” Donahue said.

Fair Pricing
At the heart of these problem-solving plans is fair water pricing. The average American invests 25 cents in water daily, according to the U.S. Environmental Protection Agency (EPA), compared with the $23.57 a day for transportation and $17.65 a day for food cited in U.S. Department of Labor’s most recent Consumer Expenditure Survey. An ongoing rate hike trend, however, has stirred public outrage in communities across the country.

“The water and wastewater industry has done too good a job of lulling customers into expecting service to be virtually free,” Donahue said. “The circumstances that we’ve consistently undercharged for water and sewer service by deferring maintenance costs is no excuse to continue to undercharge for service.”

For those clients unable or unwilling to raise rates immediately to the level needed, MFSG suggests introducing limited increases over a specified time period. Once system owners hit the break-even mark, their commitment to continued annual adjustments is key. With limited or no access to ARRA dollars, water leaders must consider rate changes and alternative funding sources—and yes, they are out there.

Challenges Persist
Even with the questionable assistance of ARRA dollars, the country’s water and wastewater infrastructure continues to be in serious need of repair. The EPA estimates that the need for water and wastewater infrastructure investment over the next two decades is $635 billion. Some of the most pressing areas requiring attention are the replacement or rehabilitation of buried water and wastewater infrastructure, specifically, water mains and sewage collection handling enormous volumes of water without fail.

“Much of the infrastructure was laid down in the earlier eras—paid by our parents and grandparents—and is now approaching the end of its useful life,” said Tom Curtis, deputy executive director of the American Water Works Association (AWWA). “Although there are different estimates of the size of the challenge we face, every group that has looked at this has concluded that the required investment is big and can be postponed only at the peril of continued reliable water and sewer service.”

Despite the current state of the infrastructure, the public still fails to recognize the importance of infrastructure investment, and pipes, mains and collectors tend to follow the “out-of-sight-and-out-of-mind” public notion, according to Curtis. Consequently, many elected officials and utility boards are reluctant to raise rates and other local charges sufficiently to meet the investment challenge.

Hope in the Bank
When it comes to infrastructure funding, the problems generally exceed the solutions; however, not all hope is lost. Industry organizations are working to develop solutions that can help bridge the funding gap. For example, the AWWA, Water Environment Federation and Association of Metropolitan Water Agencies are working to develop a new tool for drinking water and wastewater infrastructure projects that will deliver low-cost funds: the National Water Infrastructure Bank.

If created, this Water Infrastructure Bank would be able to lower the cost of financing by enabling drinking water and wastewater systems, as well as State Revolving Fund (SRF) programs, to access funds at the Treasury bond rates. In turn, the bank would repay the borrowed funds with interest and limited cost to the federal government.

“A Water Infrastructure Bank would assist by making very low-interest financing available to large projects, and by buying state SRF bonds at low interest so as to help those states that use SRF bonds to leverage their SRF capital,” Curtis said. “By keeping the cost of finance low, communities can lower the cost of their infrastructure projects. Because the bank would make loans, local officials and utility boards would be encouraged to undertake projects sooner rather than delay in the hope of some ‘magic money’ appearing from Washington, D.C., and because the bank would operate like a bank, there would be loan terms and conditions to ensure the new infrastructure is operated and maintained on a sustainable basis going forward so that utilities don’t again get behind in the upkeep and replacement they need to be making on their infrastructure assets. [Additionally], the bank would make loan guarantees and subordinate loans so as to encourage public-private partnerships and other innovative finance mechanisms.”

As proposed by the AWWA—because the bank would lend directly to large projects that are too big to be served by the SRFs and would lend to the SRFs directly—the development of the Water Infrastructure Bank will not compete with the SRFs. On the contrary, the bank would help grow the SRFs so that they could make more and larger loans to small and medium-size utilities, Curtis said.

Work in Progress
For now, the Water Infrastructure Bank is just a concept. There have been hearings about how the bank would be funded and operated, and there is plenty of interest in and growing support of this initiative. Supporters include Pennsylvania Gov. Edward G. Rendell, who attended these hearings, according to Curtis.

This support also is fueled in part by the growing recognition that the government does not have any money for new big grant programs. To put this in context, there is increasing agreement that the federal budget deficit needs to be trimmed significantly. In 2010, about 43 cents of every federal dollar is borrowed money. By 2011, the interest of the national debt will be approximately the size of the defense budget.

“Few people believe this is sustainable, and my personal belief is that those who look to Washington expecting large new grant programs are going to be disappointed,” Curtis said. All of this makes the idea of a bank more attractive.

“AWWA’s water bank proposal operates on loans: treasury loans to capitalize the bank, and water bank loans to water systems at interest as close to Treasury rates as possible. These loans are repaid with interest. Utilities repay the bank, and the bank repays the Treasury. So, in a holistic sense and viewed over time, the bank does not add to the national debt or deficit. It does stimulate important economic activity with clear benefits to our public health, economy, quality of life and fire protection—things which only tap water delivers.”

Authors’ Note: Water & Wastes Digest will keep you posted on future developments about the Water Infrastructure Bank initiative.

Neda Simeonova is editorial director of Water & Wastes Digest. Simeonova can be reached at nsimeonova@sgcmail.com or 847.391.1011. Caitlin Cunningham is associate editor for Water & Wastes Digest. Cunningham can be reached at ccunningham@sgcmail.com or 847.391.1025.

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