Small Systems Tackle Financial Challenges through Technical Assistance

| By Dr. Ahmed Rachid El-Khattabi

For years, thousands of small drinking water systems in the United States have been facing big financial challenges that undermine their ability to provide their customers with safe and affordable drinking water. As a result of these challenges, many small water systems, defined by the U.S. Environmental Protection Agency (EPA) as those serving fewer than 10,000 people, are unable to deliver safe drinking water to their customers. Across the country, an estimated 45 million people served by these systems may be receiving water that is unsafe to drink.

Small systems serve approximately 27 percent of the total population receiving drinking water from public water systems and tend to serve rural, low-income, or vulnerable populations. As such, they struggle to collect adequate funds through rates thus creating an imbalance between revenue and costs. For many of these water systems, this imbalance is further exacerbated by the daunting need to upgrade their aging infrastructure. Because of inadequate funds, they require large capital investments to cover these costs. Over the past year, rising inflation and construction costs have only served to make covering expenses more onerous.

Additionally, existing and new regulatory requirements that water systems must comply with to protect human health have the perverse effect of compounding some of the financial burdens faced by these already struggling systems. The Revised Lead and Copper Rule, for instance, requires that water systems create lead service line inventories. Creating the inventory not only requires significant financial investment but also requires having staff with expertise in GIS or data modeling. Additionally, currently drafted regulation for per- and polyfluoroalkyl substances (PFAS) is likely to create even more financial strain given that systems may have to upgrade or retrofit their water treatment plants to comply.

The imbalance between revenue and costs means that many small systems struggle to operate as financially independent, viable businesses. Public water systems are expected to collect sufficient revenue to develop, construct, operate, maintain and manage treatment plants and other water infrastructure needed to provide customers with safe and reliable drinking water.

In response to longstanding financial infrastructure-related challenges, the federal government earmarked $55 billion for water infrastructure as part of the Bipartisan Infrastructure Law (BIL). The funding made available by the BIL represents the largest federal investment in water-related infrastructure in the country’s history and much of it is meant to help struggling water systems.

Federal funding notwithstanding, the complexity of the challenges faced by small systems go beyond the mere availability of funding. According to EPA, many small systems “are often disproportionately impacted by technical, managerial and financial capacity challenges.” For instance, small systems generally have difficulty attracting and maintaining a skilled workforce to operate their water treatment plants by virtue of being in small towns or rural areas. Notably, these systems often don’t have a highly trained engineer on staff to identify and address threats to drinking water or access to a sufficient workforce to maintain and improve infrastructure.

Perhaps ironically, the financial capacity challenges that many of these systems face preclude them from being able to fully take advantage of the funds being made available because they often don’t have the capacity or capability needed to do so. They often lack financial expertise to navigate the federal system to determine eligibility for certain types of funding, the capacity to prepare applications, or the ability to effectively weigh their options to determine which opportunities may best fit their situation.

The challenges faced by small systems are often the result of decades-long demographic and economic shifts that, in many cases, have resulted in substantial revenue losses for water systems over the years. This means that though the underlying financial models being used by water systems may have worked well in the past, they are likely unsustainable in the long run.

Due to the compounding of costs, capacity limitations at the local level and the complexity of issues faced by small systems, small systems need extra support to fully take advantage of the BIL funds available. More importantly, these systems need support implementing the funding in ways that will create lasting solutions that they can financially sustain. Accordingly, EPA is providing resources in the field as part of the implementation of the BIL by funding technical assistance through 29 Environmental Finance Centers across the country. These centers are tasked with delivering targeted technical assistance to local governments, states, Tribes and non-governmental organizations and work with lower capacity systems to help them overcome the hurdles they face in accessing funding.

The Environmental Finance Center at the University of North Carolina at Chapel Hill (EFC at UNC) is one such technical assistance provider. Over the years, the EFC at UNC has created several tools to help water systems structure their finances (rates analysis tool), plan out expenditures over a 20-year horizon (plan to pay tool), consider rate impacts on affordability (affordability tool), weigh considerations associated with different loan types (loan subsidy calculator), and get a five-year snapshot of their overall financial health (financial health checkup tool).

Dr. Ahmed Rachid “AR” El-Khattabi is the associate director of the Environmental Finance Center at the University of North Carolina at Chapel Hill (UNC). El-Khattabi earned his Ph.D. from UNC’s Department of City and Regional Planning and his research focuses on economic development and urban water management.

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