Small Water Systems Face Big Financial Challenges

small water system

By Liz Harvell

Of the more than 151,000 public water systems in the United States, 97 percent — 146,767 — are considered small water systems under the Safe Drinking Water Act, according to the U.S. Environmental Protection Agency (EPA). Despite the high number of public water systems that are considered small systems, which, by definition, serve 10,000 or fewer people, they serve a relatively small percentage (27 percent) of the total population receiving drinking water from public water systems.

While many of these active small systems regularly deliver safe, reliable drinking water to their customers, as a group they face special challenges that can lead to problems. Smaller systems have higher numbers of annual health violations, with almost 26 percent of systems with a service population under 500 having violations, compared to 17 percent of systems with a service population greater than 100,000. Systems with violations have to work rapidly to make changes to their system or else face fines. But making these improvements to an ailing system can be even more difficult for a small system, which often does not have the capital reserves or other resources of a large system. Small systems also often lack technical and management expertise. There are agencies and organizations that provide support to small systems, but the needs often outweigh the available capacity of these organizations. All these challenges ultimately impede their ability to achieve and maintain system sustainability.

One of the core of the obstacles to system sustainability relates to financial management. Like any other revenue-based enterprise, small systems face budget constraints. The financial decisions small systems make are crucial because they affect long-term financial standing and can ultimately influence the quality of drinking water and the health of their customers. Since water systems obtain most of their revenue from user charges, the fairness of rate structures is imperative to both the utility and the customers of the water system.

In order to ensure proper funding of utilities, it is critical that small systems fully have capacity and knowledge for both long-term fiscal planning and rate setting. A full understanding of the financial health of a water system can ensure that rates are set optimally, giving small systems the ability to finance projects while continuing to provide safe drinking water to their customers.

Small systems should look to set rates that promote utility priorities while recovering the full cost of operation. Oftentimes, small systems may need to adjust their rates in order to achieve this — which is easier said than done. Small systems’ obstacles and uncertainties pertaining to rates include affordability, a reluctance to raise rates and customer complaints due to higher pricing than neighboring systems.

The Environmental Finance Center (EFC) at the University of North Carolina at Chapel Hill (UNC) has developed Financial Sustainability and Rates Dashboards to help some systems with this quandary. These free, interactive Rates Dashboards provide a general analysis of how a given water systems’ rates compare based on multiple metrics including system finances, system characteristics, customer base socioeconomic conditions, geography, and history. The dashboards compare measures — such as monthly water bill for the selected consumption amount, conservation price signals, and the ratio of operating revenues to operating expenses for the selected system — to key indicators or to the systems within the selected comparison group. These dashboards have been prepared for a number of states and include many small local government and not for profit water utilities.

By using the EFC at UNC’s Rates Dashboards, a system can compare the monthly bill charged for any consumption level from zero gallons per month to 15,000 gallons per month at 500-gallon intervals. The dashboard user can also raise rates by up to 100 percent and observe the hypothetical effects on the system’s rates, revenues, and rate affordability.

Although the Rates Dashboards are a great resource for answering various financial questions that systems may have, the EFC at UNC currently does not have dashboards for all 50 states and not all systems are included in every dashboard. However, it is still essential that these small systems are able to compute and understand their financial standing. This can be done by calculating various metrics to assess the financial condition of a small system using key financial indicators. These key financial indicators—debt coverage ratio, current ratio, and days of cash on hand—are imperative for a small system’s fiscal planning.

Even with sound fiscal planning and financial management, small systems can often still struggle to find viable solutions to address their needs in the current climate of decreasing local budgets and increasing regulatory requirements.

There is no denying that small systems typically cost more to operate on a per capita basis than larger systems due to a lack of economy of scale. For many small water systems, collaboration and/or consolidation may be the best solution. System collaboration can come in a variety of forms, from extremely informal information sharing sessions, to sharing of personnel or purchasing, to assistance with regulatory compliance. Given the vast flexibility of cooperation approaches, even small systems that are uncomfortable ceding control are often able to find a model that works for them and achieves considerable benefits. In some cases, small systems merge completely to mitigate many of the challenges originally faced by their size.

The state of Alabama illustrates the potential impact increased collaboration can have on small systems. Alabama had nearly 1,300 small water systems 40 years ago. In the last decade, however, this number has substantially decreased. Today, Alabama has 588 systems, using collaboration—and even consolidation—to decrease to this number.

This trend allows for an increase in the joint resources available to new systems. In the case of Alabama systems, collaboration efforts have contributed to a significant decrease of noncompliance issues relating to water quality in the state. According to the EPA’s Enforcement and Compliance History Online (ECHO) database, Alabama’s rate of noncompliance issues within the state was drastically below the national average in 2016; only 10 percent of Alabama’s public water systems had violations, far below that national average of 34 percent of public water systems within a state. More specifically, only 2 percent of Alabama’s systems had health-related violations, compared to national average of 8 percent.

Addressing the challenges of small systems through improved financial management and strategies such as increased collaboration requires a concerted effort by local water system leaders as well as resource organizations that support utilities. The EFC at UNC’s Smart Management for Small Water Systems Project, made possible through a cooperative agreement with the EPA, seeks to do just that. The project addresses these major issues facing small water systems across the nation. Experts work with small systems across the country, US territories, and the Navajo Nation to confront issues ranging from asset management and rate setting to water loss detection and conservation.

The Smart Management for Small Water Systems Project is part of the EPA’s greater effort to provide water and wastewater system staff and private well owners with training and tools to enhance system operations and management practices. The effort includes work by the National Rural Water Association to help small systems to achieve and maintain compliance with the Safe Drinking Water Act, as well as the Rural Community Assistance Partnership’s work with private well owners, small publicly-owned wastewater systems, and onsite or decentralized wastewater systems to help improve water quality.


Liz Harvell
Outreach Coordinator | Environmental Finance Center

Liz Harvell is the outreach coordinator for the Environmental Finance Center, part of the School of Government at the University of North Carolina at Chapel Hill. Harvell graduated from UNC-Chapel Hill, majoring in Business Journalism, with a minor in Environmental Science and Studies. As an undergraduate she interned with The Institute for the Environment, The Dow Jones News Fund and the Three Zeros Initiative.

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