Municipal water systems face many challenges, but when they must confront regulatory compliance and financial issues simultaneously, agencies are put in a tight spot where every corrective action will be costly and, ultimately, borne by ratepayers. To better identify the level of financial and regulatory challenges facing municipal water systems, Reason Foundation reviewed municipal water funds listed in the fiscal year 2020 annual comprehensive financial reports issued by U.S. counties and cities. We then cross-referenced this data with violation information provided by the U.S. Environmental Protection Agency.
EPA assigns water providers violation points based on a complex formula outlined in a 2009 memo on enforcement targeting to ensure water “systems comply with the requirements of the Safe Drinking Water Act.” It describes its violation point system as follows:
The enforcement targeting formula is the basis for the enforcement targeting tool that identifies public water systems having the highest total non-compliance across all rules, within a designated period of time. A higher weight is placed on health-based violations (including treatment technique and maximum contaminant level violations). The formula calculates a score for each water system based on open-ended violations and violations that have occurred over the past five years but does not include violations that have returned to compliance or are on the ” path to compliance” through a specified enforceable action.
The accompanying map shows data for over 900 city- and county-owned water providers across the United States. Dedicated water districts are not included in this analysis. Dot colors on the map reflect the net income or loss per resident and the number of water quality violation points the water providers have accumulated. The red dots on the map reflect providers with some combination of substantial financial losses or many violation points while green reflects positive net income and/or relatively few violations.
Three municipal water providers serve as good case studies for relatively poor performance across these two metrics.
Lindsay, CA
Lindsay is a small city located in California’s Central Valley. About a third of its residents live in poverty and per capita income is less than half of the state’s average. Lindsay has suffered long-term fiscal distress as documented in a 2021 report by the State Auditor’s Office and this fiscal distress has impacted the city’s ability to provide safe drinking water to residents.
As the California State Auditor Elaine Howle observed in her summary:
Lindsay has improved the condition of its general fund over the past several fiscal years…because the city forgave more than $6 million in loans from restricted funds to its general fund, a violation of Proposition 218, which restricts the use of certain local government funds. This unlawful action has exposed the city to possible litigation from taxpayers and utility ratepayers, and it obscures what we estimate to be a general fund deficit of more than $3 million as of June 30, 2020, instead of its apparent surplus.
Because of both Lindsay’s loan forgiveness and the fact that it has not regularly updated the fees and rates it charges for city services and utilities, it lacks resources in some of its utility funds. The city’s water fund recently incurred a nearly $1 million deficit and is unable to pay for necessary infrastructure projects…
In fiscal year 2020, Lindsay's municipal water fund reported a loss of $195,000, or $14 per user, and had no cash reserves. Without available financial resources or positive cash flow, the city’s water system does not have the resources to tackle water contamination issues. The city’s water system has been repeatedly cited for providing water with excessive levels of two categories of disinfection byproducts: Total Trihalomethanes (TTHM) and Haloacetic Acids (HAA5). According to the city’s 2020 Annual Drinking Water Quality Report:
The TTHMs and HAA5s were found to be out of compliance during 2020 and studies have been completed and identified the options available to correct the violations. The City is pursuing funding to construct improvements. Quarterly sampling and public notification are in place until the violation is corrected.
The report goes on to note that some people who drink water with high TTHM levels over many years “may experience liver, kidney or central nervous system problems, and may have an increased risk of getting cancer,” while excess HAA5 intake over many years may also be a cancer risk.
Lindsay has not imposed a water rate increase since 2015 and does not expect to do so until it completes multiple studies. Meanwhile, residents are obliged to choose between bottled water or taking the risk of bladder cancer due to long-term consumption of disinfection byproducts.
Lemoore, CA
Fifty miles west of Lindsay, the city of Lemoore is also struggling with disinfection byproducts in its municipal water supply even though it is in a stronger financial position to address the problem. The city is fully reliant on groundwater, which has naturally-occurring compounds that react with chlorine to produce TTHMs. Lemoore's city water exceeded TTHM health guidelines in 87 of the 88 samples analyzed between 2014 and 2019.
In fiscal year 2020, Lemoore’s water fund reported a net income of $3.75 million, or $114 per resident. The city also reported substantial general fund reserves and a positive unrestricted net position—two indications of strong overall fiscal health.
In March 2019, the city issued $27.8 million in water revenue bonds to finance the construction of new water treatment plants, an additional well, and a storage tank. It then approved a design-build contract with J.R. Filanc Construction to create the new facilities while also contracting with AdEdge Water Technologies to remove TTHM’s from its chlorinated groundwater using a combination of ozone, activated carbon, and ion exchange.
Unfortunately, the city’s initiative suffered a severe setback in June 2021 when a gas explosion destroyed the city’s new water tank, killing a J.R. Filanc employee and injuring a city worker.
Aiken, SC
Unlike Lindsay and Lemoore, the municipal water in Aiken, SC, did not contain contaminants above legal limits, although its TTHM levels usually exceed 0.15 parts per billion, which is the health guideline published by the Environmental Working Group. Aiken has instead been cited for various procedural violations including failure to maintain a sanitary control area of at least 100 feet around one of the city’s wellheads, employing a system operator lacking the required license grade, and not conducting tests to ensure that fire hydrants have adequate water pressure.
Aiken has a combined water and sewer fund that reported a net loss of $2 million in fiscal year 2020, amounting to about $48 per resident. But the fund had over $10.5 million of cash on hand, suggesting that resources are available to address the procedural issues found by state inspectors.
Conclusion
Every town, city, or county that operates water, sewer, or stormwater systems will continue to face challenges in the coming decades. Larger, older cities with declining populations will be especially challenged, as their infrastructure will require significant investments while their ratepayer bases and (likely) bond ratings fall. But even fast-growing cities will face sourcing and compliance challenges as treatment facilities must be expanded or created to maintain compliance standards with larger demands of water and sewer infrastructure for ratepayers. Finding the right people to operate those systems and facilities is becoming a greater challenge, too.
While hardly a definitive means to identify all potential problems, our modest effort to cross-tabulate financial and compliance data to yield a combined analysis presents a fuller picture of municipal water system challenges and potentially helps identify problems mentioned earlier. While those challenges will affect municipalities differently and unevenly, more forward-thinking and openness to contracting and public-private partnerships in municipal water systems will be required by agencies to ensure systems operate safely and effectively.