A New Model for Clean Water in the 21st Century

Municipal water and sewer bond issuance in the United States, 2008-11. (Source: Thomson Municipal Market Monitor)
Municipal water and sewer bond issuance in the United States, 2008-11. (Source: Thomson Municipal Market Monitor)

The latest turmoil in global stock markets following Standard & Poor’s decision to downgrade its rating of the United States government has led many to fear another serious economic downturn. We asked our Sustainability Roundtable: what hope is there for global cooperation on sustainability issues like food security, energy policy and climate change in a renewed economic crisis? Is it possible for any of these issues to play an important part of international policy discussions?

Christine E. Boyle is a research fellow at the Environmental Finance Center at the University of North Carolina at Chapel Hill.

Here in the summer of boring yet critical national discussions, let me take a moment bring your ability to brush your teeth with clean water directly into the larger national political discussion of debt and ratings agencies. As we all experienced this summer, discussion of bonds, debt, T-bills and the like is about as interesting as staring at a white-washed office wall. However, as we were forcibly made aware, the consequences of debt and an organization’s ability to borrow money are high. A government’s ability to borrow money is critical to providing funding to cover high upfront costs of large capital projects such as building bridges, waste water facilities, schools and the like.  
Without national and local government bonds to fund critical environmental infrastructure (wastewater treatment facilities, drinking water plants, stormwater-runoff drains and infrastructure), our nation will reverse rapidly in terms of water-related illnesses and deaths. 

A national commitment to environmental health

One need only go back in U.S. history by 150 years to discover a very different portrait of sanitation-related public health in this country. Major American cities experienced severe disease outbreaks, including cholera in 1832, 1849 and 1866 and typhoid in 1848. During this era, America's fast-growing cities lacked sewers and relied on contaminated wells for their drinking water supplies. Although by the mid-19th century many cities had built centralized water supply systems, these systems provided raw river water without any treatment. Huge investments in the early 20th century brought the U.S. into the modern era of environmental protection and public health.

Major federal involvement following the Federal Water Pollution Control Act of 1948 propelled America's water systems to be among the cleanest in the world. I say this with great pride.  

Bringing us back to 21st-century America, let us consider what the confluence of under-investment, decreased debt ratings and the hidden costs of degrading water infrastructure mean for our society, and ability to be a global leader in environmental health discussions.

The chart at the upper left shows the steep declines in bonds issued for water and sewer systems in the past four years. Analysts attribute declines to diminished creditworthiness of the municipal bond insurers in the second quarter of 2008 following the housing market crisis. What the precipitous decline in funding for water and sewer capital upgrades means for you and your community is increasing vulnerability of water systems to contamination and ultimately more polluted water bodies and drinking water supplies.

The crisis has arrived. What now? — A new model for water utility management

With an aging infrastructure, widespread population growth, stricter environmental regulations and decreased financial support from federal and state grants, water utilities in the United States face unprecedented gaps between the revenue collected from rates and fees and the costs of protecting public health and the environment, according to a recent Water Research Foundation Report (2011). The Environmental Protection Agency does not predict near-term relief for utilities, estimating that it will cost up to $1 trillion over the next 20 years to replace and repair water and wastewater infrastructures.

Although Standard and Poor’s U.S. sovereign debt rating downgrade applied specifically to the federal debt rating, and not to local governments, it is an interesting time to examine the role of rating agencies in environmental infrastructure debt ratings, especially given the prominence and controversial nature of these agencies in the global debt "game."  

External evaluation of a local government or utility’s credit worthiness in the United States is carried out by a number of credit rating agencies (Standard and Poor’s, Moody’s and Fitch Group). Major credit rating agencies rate utilities according to a number of criteria, updated as recently as 2008, that include utility financial operations and policies. Standard and Poor’s rating factors for municipal water utilities include:

  • Economic considerations;

  • Financial data/capital improvement plan;

  • Rate-setting philosophy and practices;

  • Operational characteristics;

  • Management; and

  • Legal provisions.

Standard and Poor’s gave the following outlook on how the U.S. sovereign debt downgrade may affect water utilities:

“Public utilities:  Like many state and local government general obligation (GO) credits, public utilities can often raise their own revenues locally and don't rely on revenues from the federal government. The public utilities are in an enviable position in that they are monopolies and the service they provide is essential. These utilities also typically aim to generate a profit that provides debt service coverage, which is a positive for their ratings. The main impact for utilities would be lower sales volume and revenues from a slower economy, and we might see some ratings drop in the near-term. Because of their close ties to the federal government, we would change the outlook on two of the higher-rated public utilities, Tennessee Valley Authority (TVA) and Bonneville Power Administration (BPA) to negative. “  

Given the confluence of the need to borrow and government’s withering ability to borrow, how are our nation’s water utilities, and the ratings agencies that control ability to borrow money, equipped to deal with a “new normal” for utility management?

Water utilities today face three pressing challenges — the economic downtown (“Great Recession”), decaying infrastructure, and the national trend of decreasing water use (and resulting decreased revenues)?  Alone these three conditions may not critically threaten the business of utility operation and management, but as an optimist in the water resources field — I see this as a grand opportunity to face the difficult questions head on and shift to an entire new paradigm of water utility management thinking.

It is time for a new utility business model to align revenues with mounting expenses, and to think strategically about how this can occur. You can see more about 21st-century strategies for water finance management here. Cooperation between the rating agencies, the general public who vote for water services bonds, and the regulatory agencies such as EPA must be part of local political and community discussions — in the U.S. and in communities across the Pacific Rim. Its time to get our communities’ houses in order and regain credibility as leaders in global environmental health. Let's continue the discussion — contact me at boyle.christine@gmail.com.