*Note: Watch the archived webcast of Josh's presentation here.
On the morning of July 20, 2017, tomorrow, I will have the great opportunity to testitfy to the U.S. Senate Environment and Public Works Subcommittee on Fisheries, Water and Wildlife on “Innovative Financing and Funding: Addressing America’s Crumbling Water Infrastructure." To be asked by Senator Tammy Duckworth (D-IL) to present the perspective of Illinois communities—large and small, urban and rural, rich and poor—was both a daunting task and a great honor. In advance of the hearing, to ensure we were truly representing the diversity of partners we've worked with over the last two decades of intense work on regional water supply policy in northeastern Illinois, we convened a brain trust of our peers. While the testimony below is MPC's take on the situation, it is in many ways informed by that ongoing dialog across sectors. In many ways that reflects one of the great strengths of MPC—connecting the dots across issues and stakeholders to get to the heart of the matter.
Senate Environment and Public Works Committee
Oral Testimony of Josh Ellis
Metropolitan Planning Council, Chicago
Good afternoon. My name is Josh Ellis. I’m Vice President of the Metropolitan Planning Council, a non-profit, non-partisan urban and regional development policy organization based in Chicago. I am pleased to be here today and to have the opportunity to present information and ideas to the committee as you grapple with America’s funding for water infrastructure, innovative financing and funding options available to stakeholders, and how to move the needle toward more improved infrastructure and water resource management.
Since 1934, MPC has been dedicated to shaping a more equitable, sustainable and prosperous Chicago region for everyone. At MPC we recognize the importance of our water resources for their ecological, recreational and economic value. We also recognize that sound infrastructure policies and timely infrastructure investments are critical for protecting and fully utilizing our water resources and for supporting economic activity.
There are plenty of possible improvements to existing finding and financing tools, and in many instances we’re simply not using them. Before rushing into “innovative financing,” let’s tackle “effective financing” first. In my experience working with and advising many of the Chicago region’s 400+ independent water utilities, there is huge divergence in practices on rate setting, financial management, accounting and asset management. Communities with the staff capacity and technical know-how to employ best practices largely are doing so. Many other communities, in contrast, are not. Water and wastewater rates are left unchanged for years, even as costs escalate. Rates are set based on what is politically acceptable, rather than what the system actually needs. Many, and more likely most, communities have no dedicated revenue stream for stormwater and flooding-related costs. Without sufficient, sustained and dependable incoming revenue, you can’t even use traditional financing tools, such as the low interest loans from the State Revolving Fund, or municipal bonds. Those tools work, but many, many communities do not put themselves in a position to use them.
Water resources—a river, an aquifer, a pipe network—that should be managed at a larger scale are not.
The federal government can do many things, whether through incentives built into SRF scoring, through grants made available through SRF set aside programs, through the basic requirements for eligibility for those programs to encourage full cost pricing, through asset management plans, through consistency in reporting and budgeting, or through use of the M-36 auditing tool from the American Water Works Association. These would all fall short of mandates, but would start to push communities and utilities in the right direction.
More broadly, in my estimation the SRF program works pretty well as a whole, but the variation between states seems to mean that while there’s a best practice in this state and a best practice in that state, nobody has figured out the full suite of best practices. Some states provide grants for infrastructure planning, some don’t. Some have decoupled management of the loan program from their environmental regulatory agency. Some haven’t. Some have very progressive rate structures for low-income communities. Some don’t. I’m fully cognizant of the need some state-to-state variability to account for land use types, population density, water sources, and more, but after decades of variability between states, it may be time for more consistent use of established best practices.
At the heart of it, in my experience we need to make the SRF function more like a loan you’d secure from a bank or other lending source. We need to speed up review time. Applicants need certainty so they can balance construction schedules, cost to retain consultants and more. But for low-income communities, the cost to complete an application, let alone do the pre-engineering work, can essentially rule them out. Some communities need planning grants, or for the cost of planning to be reimbursable through the loan. And it’s worth noting that rural assistance programs and the SRF address fundamentally different water management challenges, and should not be collapsed into one.
HOWEVER, fixing the money won’t necessarily fix the problem. Governance, and specifically fragmentation of governance, is a huge problem. The Chicago area has hundreds and hundreds of independent water utilities, more or less one for each municipality. Some areas of the country have a higher share of larger, regional water or wastewater utilities, where you get better economy of scale and perhaps less politicized decision-making, but many areas of the country are just like Illinois. Each municipality has their own utility, and water management decisions are inextricably linked to other municipal political decisions. Hard choices like rate increases get delayed. Capital improvements get delayed. Opportunities to collaborate with neighboring communities get delayed. And water resources—a river, an aquifer, a pipe network—that should be managed at a larger scale are not.
This fragmentation compounds underlying environmental, economic and equity issues. For a community whose population is declining, which is common in many older, inner-ring suburbs, as well as many rural communities, or for communities where the remaining population is increasingly uniformly poor, there is simply no revenue base—incomes, property values, sales proceeds, billable water consumption—to generate sufficient resources to manage the water and wastewater system.
If a community has shrunk by 10,000 people, but the system of pipes, pumps and water towers has not shrunk, you have fewer people, and often poorer people, trying to pay to maintain the system.
A responsible water manager would try to pay the full costs of providing service, but that only leads to higher and higher water rates as she tries to squeeze water from a stone—in the Illinois context, some of our poorest communities end up with the the highest water rates.
Case in point, Dixmoor, Illinois, which has a per capita income of approximately $13,000 per year, sells water for $12.52 per 1,000 gallons. Lake Forest, where per capita income is closer to $77,000 per year, sells water for about $5.30 per 1,000 gallons. $12.52 in Dixmoor, $5.30 in Lake Forest. It’s not apples to apples, since they have different water management needs, but the disparity in their income-to-rate is staggering. When water rates get this high—even when necessary to maintain the system it can become difficult for households to pay for their water. So you see shutoffs and delinquent bills. In an affluent community, or at least one with a diversity of incomes, you can have lower rates for lower income households. But in a strictly low-income community, that isn’t an option.
Additionally, in a community with few other revenue-generating activities or amenities, the dependable revenues from water and wastewater rates can look very tempting as you grapple with other municipal concerns—safety, education, pensions, salaries, etc. This is not an urban, suburban or rural issue, this is systemic across many parts of the U.S.
Streamlining the SRF program, or developing some new bonding mechanism, or anything that anyone might reasonably call “innovative finance” isn’t going to solve this problem. Simply put, we have too many small water utilities, even medium sized ones, operating as a department within a municipal government that won’t be able to access those financing tools anyway. Chicago would be able to access those tools, as would an Oklahoma City, or a Little Rock. For those larger utilities, more money and more money faster is what’s needed to they can try to accelerate infrastructure repair and modernization.
But for other American communities, it’s time to start thinking hard about modernizing the governance of water and wastewater systems. There are many tried and true options, but all have different pros and cons. Consolidation of neighboring utilities. Creating governance independent of the municipality. Privatization. The problem is that, for a community struggling to get through today, it’s hard to take time to assess options for the future, even if you have the in-house expertise to do so. Where these studies happen, people to find benefits: A 2008 study on the economic impacts of utility coordination and consolidation in the Lehigh Valley in Eastern Pennsylvania found that consolidation from 40 separate utilities to one regional utility would result in an average household savings of $260 per year, and a total savings regionally of $56 million per year by 2020.
The federal government should not mandate consolidation, privatization or anything else, but it can encourage, incentivize and reward communities for taking steps to ensure that they’re choosing the best management option for themselves. Some steps to consider might include a federal a task force on water utility governance, or a study on this phenomenon of shrinking population, lower incomes/revenues and higher maintenance costs. You could also require, rather than simply allow, states to make grants available for management studies (i.e. consolidation, privatization, etc.) through an SRF set-aside program. It may also be time to consider whether Metropolitan Planning Organizations, which have historically had a transportation focus, could be evolved to address water and wastewater planning as well.
Many of our existing financing options work pretty well, but simply can’t be accessed.
So in sum, I am not convinced that for most communities and water utilities money, financing and funding solutions, are the primary problem, nor the solution. In fact, I think many of our existing financing options work pretty well, but simply can’t be accessed in a timely fashion or at all. I’d urge a focus on effective financing first, and innovation second. Moreover, I’d urge us to take a step back and ask whether or not the underlying, inefficient, and outdated governance structure of many—not all, certainly – but many of our water systems is in fact the problem we need to grapple with first.
Before I close I want to note that in preparing for today MPC convened a brainstorming and discussion session among many Illinois stakeholders, from water utilities to environmental organizations, the City of Chicago to the Illinois Rural Water Association. In that session we examined a wide range of issues—Asian Carp and other invasive species, nutrient trading the Mississippi River watershed, opportunities for investment and leveraging of private capital in river corridor revitalization and more. The written testimony I’ve provided captures many of those other topics, and I’d be happy to address any or all of them during the discussion portion of our session today.
Thank you again for the chance to share my perspective on our nation’s, and our communities’, water infrastructure management issues. I look forward to your questions, and to working with all of you to address some of these systemic problems and significant opportunities.
Hopefully and thankfully submitted,
Metropolitan Planning Council