What's the Bill?
The Mayors of America Detail Local Government
Expenditures on Sewer and Water from 1991 to 2005
By Rick Anderson and the Mayors Water Council

To see the original report
visit www.usmayors.org.

With old infrastructures in need of repair and new technologies emerging, local government is forced to allocate funds to ensure these services are being provided for. Even in the past 10 years, the amount local government has spent on these vital services has increased significantly. Local government spent $82 billion to provide sewer and water services and infrastructure in the fiscal year (FY) 2005, up from $45 billion in FY1992. The local government share of spending on sewer is just over 95 percent, and the state share is just under 5 percent.

The local government share of spending on water supply is over 99 percent. Total spending on sewer and water from 1991-1992 to 2004-2005 is $841 billion. The trend is for greater spending levels. Factors contributing to the increased need for investment include: population growth and land use development; an aging water infrastructure that needs constant maintenance and rehabilitation; climate change impacts that threaten water supplies from drought; reduced snow-pack; salt water intrusion on coastal aquifers from rising sea levels; and increased storms, hurricanes and flooding that require infrastructure hardening.

Local government is the primary investor in public-purpose sewer and water. Costs and spending will increase dramatically over time, and the added costs from climate change impacts are not currently included in infrastructure financing discussions. The nation's cities need more help from the federal government and greater access to private equity to address investment needs over the next 50 years.

Introducing the Need for Funding

A recent article in Water and Wastes Digest (May 2007) told the tale of a nun protesting a water rate increase at a public hearing on the basis that God gave us the water so people should not have to pay for it. A water utility consultant agreed but added that someone has to pay for the pipes, pumps and water treatment works. A review of local government expenditures published by the U.S. Bureau of the Census indicates a long-standing tradition of citizens, businesses, organizations and institutions — system “users” or “customers” — paying for pipes, pumps and treatment works.

Additionally, the Census information clearly indicates that local government is, and has been, the public agent responsible for providing municipal sewer and water services and collecting revenues from users as a government enterprise activity. By-and-large this has been a very successful arrangement. Americans enjoy many public benefits from having access to safe and affordable water supplies throughout the nation, with relatively few exceptions. What is ironic about the nun's protestations is that local government was doing such a good job at keeping user rates and fees economical that when it comes time to exact increases the public is shocked.

Providing local sewer and water services is an endeavor colored by a history of challenges big and small. Local governments are facing some of their greatest challenges right now. Population growth and increased land development requires major capital investment in sewer and water infrastructure. The existing inventory of drinking water and wastewater physical assets, the “infrastructure,” is aging and in need of rehabilitation.

Climate change impacts might increase the severity and geographic extent of droughts placing greater stress on traditional water supplies — and rising sea levels might increase saltwater intrusion on fresh water aquifers along coastal areas. Increased hurricanes, storms and flooding will require more sophisticated water supply and treatment planning and probably more expensive water and wastewater infrastructure protection. These converging forces suggest that the costs for sewer and water services in the nation will only increase in the future.

Much attention has been focused on the U.S Environmental Protection Agency’s (EPA) Needs Gap analysis as an infrastructure investment benchmark in many respects. The Gap provides a useful way to gauge what additional infrastructure investment will be required over a 20-year period for public sewer and water systems to comply with existing law.

Many organizations and commentators suggest that the gap is somewhere between $500 billion and $1 trillion. A common reaction to the Gap is that it is staggering and we should be fearful that failing to adequately address it will result in an unwanted diminution in the quality of life in America. One policy perspective commonly expressed today is that local government needs to dramatically increase spending on sewer and water infrastructure. But this view may be overly simplistic. A review of local government expenditures for sewer and water services over a recent 14-year period indicates that local government is, by any measurement, the single largest investor in public sewer and water infrastructure and services, and the level of local government expenditure has experienced sharp increases.

The Conference of Mayors has long supported policies that increase the number and type of financial tools in the toolkit for cities to choose among to successfully address their water resource issues. Increasing aggregate local government spending on sewer and water has been the rule for some time now.

A 2005 survey of cities by the Conference of Mayors indicates that cities have been financing increased spending via pay-as-you-go methods that involve increased user rates and fees. In addition to the continuation of increases to user rates and greater levels of debt from financing infrastructure investment using municipal bonds, we should question why Congress has recently limited federal financial assistance for sewer and water infrastructure investment and, why Congress resists changes to the federal tax code that limits public access to private equity markets for public purpose sewer and water investment.

Local government expenditures on public-purpose sewer and water is the second highest municipal expenditure category, exceeded only by education expenditures. The competition for local government financial resources is not likely to change in the near future. Therefore, realignment of federal policies that impede water infrastructure investment by severely limiting public access to private equity is called for.

Local government also can improve the situation by expanding the use of asset management techniques, and by expanding the use of private sector technology expertise where it makes sense to do so.

Setting the Census Table

The U.S. Bureau of the Census reports combined local and state expenditures on sewer systems and services in 1991-1992 were $21 billion. Local government expenditures for that period were $20.1 billion. State expenditures on sewer for that same period were $0.9 billion. The local government share is just over 95 percent of spending.

By 2004-2005, local government increased expenditures by 75.4 percent over 1991-1992 ($35.2 billion compared to $20.1 billion). State 2004-2005 expenditures increased by 23.1 percent over 1991-1992 levels ($1.1 billion compared to $0.9 billion). The local share of expenditures in 2004-2005 rose to 96.9 percent of the combined local and state expenditures.

Spending on sewer systems and services over the 14 years of data provided by the Bureau of the Census has been robust, even though many argue there is not enough spending on sewer infrastructure. Combined local and state spending was $383.8 billion, local spending was $367.4 billion and state spending was $16.3 billion.

The Census tables provided disaggregated information on local government sewer capital outlay for 12 of the 14 years examined. Total local government capital outlay for infrastructure over the 12 years of data reported was $119.4 billion. The average annual capital expenditure for those 12 years is $9.9 billion. Using that average as a proxy for the two years where data are not disaggregated and adding it to the 12 year total would bring the 14 year capital outlay to an estimated $139.2 billion. Capital outlay ranged from around 33 to 44 percent of total local government expenditures for the data reported and averages around 37 percent.

Sewer System Revenues

Census data indicates that local government revenues from providing sewer services increased 100.7 percent from 1991-1992 levels at $15.5 billion compared to 2004-2005 levels at $31.2 billion. The local share of sewer revenues averages around 99.8 percent over the 14 years of data examined. The state share is relatively small, but constant around 0.2 percent.

The ratio of local sewer revenues over expenditures is less than 1.0 (1.0 would be a perfect match between revenues and expenditures). A ratio of 1.0 would indicate that a system may have achieved full-cost pricing for the current configuration of physical assets and its operations and maintenance (O&M). A ratio greater than 1.0 could indicate that a system has achieved more than full-cost pricing. It could indicate that a system has achieved self-sustainability.

However, different people might define what these ratios represent differently. While an optimist might find a ratio exceeding 1.0 to be a sign of a well managed, self-sustaining system, the pessimist might view it as government overcharging the users. Unless there is clear dialogue between system managers and their planning goals, local government leaders and their attitudes toward enterprise activities and capital investment considerations and the customer base there will likely be confusion over how to interpret any such ratio. Similarly, confusion can arise by comparing the ratio for an individual system to the aggregate ratio for all systems. In that case, it is simply not possible to fully explain why the ratio might be in disequilibrium (i.e., 1.0).

The ratio of sewer revenues over expenditures has improved over time, but is subject to variation. Revenues were 77.3 percent of expenditures in 1991-1992, but rose to 88.5 percent in 2004-2005. The variation, however, is evident. The ratio was 73.6 percent in 1992-1993, and 95.1 percent in 2000-2001.

Expenditures on Water
Supply Systems and Services

The Census reports combined local and state expenditures on water supply systems and services in 1991-1992 were $24.8 billion. Local government expenditures for that period were $24.6 billion. State expenditures on sewer for that same period were $209 million. The local government share is just over 99 percent of spending.

By 2004-2005 local government increased expenditures by 85.3 percent over 1991-1992 (45.6 billion compared to $24.6 billion). State 2004-2005 expenditures increased by 52.8 percent over 1991-1992 levels ($319 million compared to $209 million). The local share of expenditures in 2004-2005 remained greater than 99 percent of the combined local and state expenditures.

Like sewer expenditures, the Census data indicates robust spending on water supply systems and services over the 14 years of data reported, even though arguments can and have been made that not enough spending has occurred. Combined local and state spending was $477.5 billion, local spending was $473.7 billion and state spending was $3.7 billion.

Revenues from Water Supply Systems and Services

Census data indicates that local government revenues from providing water supply services increased 91.9 percent from 1991-1992 levels at $19.3 billion compared to 2004-2005 levels at $37.1 billion. The local share of sewer revenues averages around 99.5 percent over the 14 years of data examined. The state share is relatively small, but constant around 0.5 percent.

The ratio of local water supply revenues over expenditures is less than 1.0; hence, the discussion concerning sewer systems is applicable in this case. The aggregate ratio has improved slightly over the 14-year time period, but the fluctuation in the ratio is considerable. Revenues were 78.5 percent of expenditures in 1991-1992, reached a peak of 87.9 percent in 1995-1996 and declined to 81.3 percent in 2004-2005.

Combined Sewer and Water Supply Expenditures and Revenues

Combined local government spending on sewer and water supply has increased by 79.7 percent from $45.6 billion in 1991-1992 to $82 billion in 2004-2005. Combined revenues increased by 95.8 percent from $34.9 billion in 1991-1992 to $68.3 billion in 2004-2005. The rate of increase in revenues exceeded the rate of increase in expenditures, yet there remains a $12 billion gap in revenues.

Aggregate local government spending on sewer and water over the 14 years of data available are $367.4 billion for sewer and $473.7 billion for water supply. Combined spending on sewer and water supply for this period is $841.1 billion.

The EPA Needs Gap estimated investment needs over a 20 year period. It is not unusual for public managers to estimate public infrastructure development on a 20 year planning horizon, even though Capital Improvement Plans are typically estimated on a five to six year horizon. For the purposes of this report a 20 year planning horizon was chosen to project estimated local government expenditures on sewer and water. A conservative as well as an aggressive projection is estimated to provide a range of estimates, and they are calculated according to simple techniques described below.

A conservative projection (or low to moderate estimate) of combined local government expenditures on sewer and water supply is calculated based on the 14 year average of spending over 1991-1992 to 2004-2005, (i.e., $61.2 billion). Assuming the average investment of 14 years is maintained for an additional six years (i.e., $367.2 billion), the estimated overall combined investment for a 20 year period beginning 1991-1992 would be $1.208 trillion.

An aggressive projection (or high-end estimate) of combined local government spending on sewer and water supply can be estimated based on the percentage change in spending from year to year. There is considerable variation in the percent change in investment based on the 14 years of Census data reviewed. Percentage change in local government investment ranges from a low of 1.55 in 2000-2001 compared to 1999-2000, to a high of 10.79 in 2001-2002 compared to 2000-2001. Interestingly the high and low percentage change years were back to back. On average, a 5 percent increase is not an unreasonable assumption.

An aggressive local government investment projection is calculated based on applying the average of 13 years percentage change in investment at 4.975 percent. When applied to the last reported investment year by the Census data of $82 billion in 2004- 2005, the additional six years worth of investment contributing $585.2 billion, and an estimated 20 year projection of $1.442 trillion. Estimated spending, under these circumstances, would result in annual spending of $109.7 billion in 2010-2011.

Competition for Local Government Spending

Why not simply increase aggregate local government spending on sewer and water? Sewer and water supply are necessary functions to protect public health, provide public safety from fires, support the local economy and protect watersheds, rivers and wildlife ecosystems. As important as this list of functions is, local government is called upon to perform many other functions in the public interest.

If the pattern of spending suggests that priorities are established, even though they tend to change over time, local government places the greatest priority on education. Sewer and water supply systems and services is a distant second priority. Educational expenditures are six times greater than combined sewer and water supply expenditures by local government. The third expenditure priority is the category of other and unallocable general expenditures. The fourth and fifth highest expenditure categories are police protection and highways, respectively.

Discussion

This review of the U.S. Bureau of the Census information reporting local government finances confirms that local government is the leader in expenditures for public purpose sewer and water supply systems and services in America. The local spending share on sewer is about 95 percent, and the local spending share on water supply is upwards of 99 percent. Local spending on sewer and water supply has increased dramatically over a mere 14 year period.

Collection of revenues has seen remarkable improvements as well, but more improvement is clearly needed. If as much as 35 percent of the nation’s major cities will face critical water shortages by 2025, it is important to ensure revenue streams and to employ techniques such as accurate and comprehensive metering to generate accurate billing and audit approaches to find and correct unaccounted for water loss.

Local water managers have achieved remarkable results in providing adequate, affordable and safe water throughout the nation. Much remains to be achieved, especially since the greatest challenges might be in our near-term future. The trend for increased spending on sewer and water supply is likely to continue. Local government will have to deal with population growth and increased water demand. It will also have to deal with the impacts of climate change that can significantly limit water supplies, damage infrastructure and increase polluted waters from storm events.

Anticipating these impacts, planning to adapt and mitigate them and reducing the vulnerability of physical assets will add to the traditional costs of providing these services. If rising sea levels lead to saltwater intrusion on a major coastal aquifer it could disrupt a water supply for millions of people. If major cities that rely on gravity based sewage collection systems are impacted by hurricanes or flooding the potential for widespread contamination is increased.

Local government will likely remain the major investor in public sewer and water supply systems and services. The Conference of Mayors National City Water Survey 2005 reported that major cities are making significant capital investments in water supplies, water and sewer treatment facilities and water and sewer pipe systems. Many cities are making multiple investments in all of these physical assets from 2000 to 2009. The infrastructure investment model of preference is pay-as-you-go, in combination with general obligation and revenue bonds. About a third of the major cities rely to a greater or lesser extent on federal financial assistance through the State Revolving Fund (SRF) loan programs. When all of these financing approaches are taken together local government may only be “running in place.” Current and future challenges, including adaptation strategies to deal with climate change impacts, will require a significant boost in aggregate spending. Local managers will also need to implement more comprehensive asset management programs to ensure that they are getting the most value for customers.

The Conference of Mayors has long supported policies that increase the financial tools in the toolkits for cities to choose among to successfully address their water resources issues. The tools and policies needed are: grants to those local governments that demonstrate dire economic or environmental problems; recapitalization of the SRF loan programs; direct federal aid to cities to deal with CSO and SSO problems requiring costly infrastructure solutions; Congressional and federal/state agency discretion concerning the mounting list of unfunded federal/state mandates; and modification of the federal tax code to allow more private equity to be used for public-purpose sewer and water supply under public operation or oversight.

Rich Anderson is a senior advisor for the Mayors Water Council. The United States Conference of Mayors includes president Douglas H. Palmer, Mayor of Trenton, N.J., vice president Manuel A. Diaz, Mayor of Miami, co-chairman of the Mayors Water Council Martin J. Chavez, Mayor of Albuquerque, N.M., co-chairman of the Mayors Water Council Dan Coody, Mayor of Fayetteville, Ark., and executive director J. Thomas Cochran.