A trillion-dollar federal infrastructure package and a chance to reform the water sector
– Warning: mixed metaphors ahead –
Observers of America’s water, sewer, and stormwater systems have known for years that the nation faces a trillion-plus-dollar bill for repairs, replacements, and upgrades. I’ve long been skeptical about the prospect of federal funding alleviating that burden in any significant way. With Congress ideologically divided and its chambers split across parties, the idea of a major infrastructure program coming out of Washington would seem unlikely on its face.
But rumblings over the past eighteen months have made me reconsider. Last spring the White House released an infrastructure plan that called for significant investments in water.*
Just before the 2018 mid-term elections, Congress passed the bipartisan America’s Water Infrastructure Act, which signaled federal priorities for the water sector but stopped short of sending tens of billions into the nation’s pipes and canals. Then last week President Trump met with House Speaker Pelosi and Senate Minority Leader Schumer and apparently agreed in principle on a $1-2 trillion federal infrastructure program.†
Little is known about the dimensions of the program, beyond the eye-popping figures. What might a huge federal infrastructure package mean for the water sector?
Back to an afterthought?
Transportation is the politician’s perennial infrastructure darling, as “roads and bridges” (Rosenbrigez) offer excellent credit-claiming opportunities for politicians who like to associate themselves with gleaming, highly visible projects. President Trump has made a career of putting his name on buildings, so we shouldn’t be surprised that he’d like to put his name on some Rosenbrigez, too. Although Pelosi and Schumer’s letter on infrastructure to the White House last week mentions “broadband, water, energy, schools, [and] housing,” transportation continues to grab the headlines: Time’s glibly declared that all $2 trillion was for Rosenbridgez.
Although water, sewer, and flood control systems are arguably more vital, much of that infrastructure is literally buried. Politicians aren’t clamoring to put their names on sewage treatment plants. Creating credit-claiming opportunities for water infrastructure is an ongoing challenge. If Washington is really going to pour hundreds of billions of dollars into infrastructure, water sector leaders will need to work hard to make sure their systems aren’t forsaken in favor of sexier transportation projects.
The promise & perils of fiscal federalism
Let’s assume for blogging’s sake that the water sector gets some major love (say, >$300 billion) in a trillion-dollar infrastructure bill. When contemplating such a massive federal capital infusion, it’s worth considering the last time Uncle Sam poured hundreds of billions into the water sector. The 1972 Clean Water Act and 1974 Safe Drinking Water Act included grants that provided as much as 90% matches for local investments in water and sewer infrastructure. The political genius behind the CWA and SDWA was that sweeping new environmental mandates came with considerable sweeteners in the form of federally-funded jobs in construction and environmental engineering. The federal funding made the new regulations politically palatable. From a policy perspective, the idea was for the federal funding to help create systems that local governments would operate, maintain, and upgrade in perpetuity.
Unfortunately, it hasn’t worked that way. One of the main reasons so much of America’s water infrastructure is in trouble is that there are strong structural disincentives for local leaders to invest adequately in water systems, as I’ve observed before. Maintaining water infrastructure doesn’t offer much of a credit-claiming opportunity, and local officials worry a great deal about being blamed for rate increases. Many of the organizations that operate water systems are ill-suited to the task; the institutions that govern and regulate water infrastructure are badly fragmented and often ineffective.
Attaching some strings
A federal water infrastructure funding package that fails to address the systemic factors that got us into this mess would be a wasted opportunity. Hundreds of billions of dollars might help shore up failing systems today, but would simply kick the problem down a generation: our children and grandchildren would face a similar infrastructure crisis in 2070, and justifiably curse their forebearers.
Rather than simply firing a money cannon at local water systems, federal leaders should use a massive funding package as leverage to reform the institutions that govern, regulate, and finance water infrastructure in America. In future posts I’ll explore some of the strings that Congress might consider attaching to their water infrastructure dollars.
*President Trump has since disowned his own plan. 🙄
†Still unclear is the small matter of how to raise a couple trillion dollars. Donald, Nancy, and Chuck are supposed to meet about that soon.
Devils (and angels) in the details, Part 3
In early January the California Water Board released its draft proposal for a statewide low-income water bill assistance program. My last couple posts summarized the proposal and discussed the perverse incentives for rate design that the subsidy might create. Continuing the theme of unintended consequences, this one looks at what the statewide assistance program might mean for poor-performing small water systems.
All else equal, when it comes to water systems, bigger is better. Water and sewer systems require big infrastructure investments and lots of operating costs to work. When those costs can be spread across large numbers of people and businesses, the average price of water is lower. That makes utilities textbook examples of economies of scale.
Less obviously, the organizations that operate utilities also are subject to economies of scale. Larger organizations can hire and retain higher-quality employees and maintain specialized personnel. As my past research work with David Switzer has shown, these advantages help larger water systems take advantage of human capital in ways that smaller systems can’t.
Larger systems also enjoy significant financial advantages. Larger customer bases tend to be more economically diverse, providing a degree of financial stability to a utility. Financial markets favor large utilities, too, allowing them access to finance capital at lower interest rates than their smaller cousins.
Thing is, just as in the rest of the United States, most of California’s water utilities are really, really small. More than three quarters of California’s 2,800 water systems serve fewer than 3,300 people, but collectively serve just 2% of the state’s population. Meanwhile, the 183 largest systems serve 80% of the state’s population.
Small system struggles
Unfortunately, small systems tend to suffer disproportionately from poor water quality. Here’s the correlation* between annual Safe Drinking Water Act health violations and utility size in California, based on EPA data from 2010-2018:
Affordability also correlates with system size. So do poverty, income, and unemployment. My recent analysis of water and sewer rates nationwide shows that, all else equal, both AR20 and HM decline as utilities increase in size—that is, on average, water and sewer affordability gets better as utilities get bigger.
That small systems struggle is no secret, and California has in recent years sought to encourage system consolidation through a variety of carrots and sticks. The process is slow, however, and fraught with political conflict. Consolidation is not a panacea, and there are plenty of struggling large and medium-sized systems. But the data are clear on this point: on average, with water utilities, bigger is better.
Props and levers
What does all this have to do with low-income assistance? The proposed program would transfer significant resources from relatively affluent to relatively poor communities. In many cases, those communities are served by the small, perennially underperforming utilities that too often provide lousy water quality at very high prices. Financial pressures from ratepayers are among the strongest incentives for small utilities to consolidate. A low-income assistance program will disproportionately benefit customers of those systems (which is good), but could inadvertently prop up systems that would otherwise move toward consolidation due to financial pressures (which is bad). To some failing small systems, low-income assistance could be financial life support system.
But if structured correctly and implemented carefully, low-income water assistance could help drive small system consolidation. Financial assistance for low-income customers could make consolidation more attractive for the larger utilities and private firms that might otherwise be reluctant to take on the responsibility for troubled small systems with less affluent customers. More directly, the state could make assistance funds contingent on consolidation or compliance with SDWA management requirements. Statewide assistance might be a potent lever to push recalcitrant small systems toward consolidation and its blessings.
That’s why statewide low-income water bill assistance should not be considered in isolation, but rather as part of a comprehensive strategy to improve water systems. The same applies to any plan for a national water affordability assistance program.
Whether a statewide assistance program would prop up failing small systems or lever them into consolidation and sustainability will depend in large part on the administrative structures and processes used to implement the program. I’ll take up those administrative angels and devils in my next post.
*Fitted with a negative binomial regression.
†There are probably another dozen or so studies that I could link here.
The Garden State has quietly enacted a law that could transform water infrastructure in America.
Signed during Governor Christie’s waning days in office, New Jersey’s 2017 Water Quality Accountability Act (WQAA) introduced a series regulations requiring local water utilities to develop asset management plans, report on infrastructure conditions, and reinvestment adequately in their systems. For outsiders to the water sector, the WQAA might seem like a set of narrow, technocratic rules. But it’s really much, much more—not because of the rules themselves, but because the data that the rules will generate can change the way that people think about the crucial but unseen systems that sustain American cities.
A renaissance artifact in a German village helps explain why.
Drinking water and credit claiming
While Governor Christie was signing the WQAA, my wife and I were sightseeing in Germany. There we visited Wertheim, a small town nestled on the banks of a river. Right in the village square stands the Engelsbrunnen, or “Angel’s Well.” The village has been there since the 8th century, but this well was constructed in 1574. The well’s construction transformed life in the village—before the well was built, villagers had to walk 100 yards down to the river to fetch water.
But the really interesting thing about this well is the structure that surrounds it. This wasn’t just a utilitarian bit of public works—it was, and remains, a jewel at the heart of the village. It’s named for the twin angel sculpture at the top of the structure, but what really stands out is the sculpture in front, at eye-level:
That is the mayor of Wertheim in 1574. He didn’t just want his people to have water, he wanted them to know who delivered it. And every day, when the villagers filled their pails of water, they’d do so standing face to face with the image of the mayor who built it. For Wertheim, the well was a major improvement in quality-of-life. For the Mayor, the Engelsbrunnen was what political scientists call a credit-claiming opportunity.
Politicians then, like politicians now, like to claim credit for good things. In the 19th and early 20th centuries, modern drinking water systems provided politicians with ample credit-claiming opportunities. And with good reason! Drinking water systems are amazing! They are the everyday miracles of the modern age.
Blame avoidance and infrastructure neglect
Unfortunately the politics of American drinking water have changed. For decades Americans have had the luxury of taking drinking water for granted. Maintaining or upgrading drinking water systems doesn’t offer the same kind of credit-claiming opportunity as building them.
When the public takes water for granted, leaders fear anger over rate increases, which they must balance against the fear of a disaster. As National Association of Water Companies CEO Rob Powelson put it: “No president or governor wants to have a Flint Water Crisis on their hands.”
That’s what political scientists call blame avoidance.
The thing is, blame-avoidance isn’t a very good motivator for infrastructure investment. If my political goal is to avoid blame for a disaster, then my tradeoff is tax or rate increases today vs. the risk of disaster on my watch. Rate increases today are immediately visible and unpopular; to politicians, the risk of disaster can feel remote—my successor’s problem, not mine.
From fear of failure to expectation of excellence
That’s where New Jersey’s WQAA has the chance to transform the politics of drinking water. With the data generated under this new law, researchers will be able to trace the full nexus of the relationships between costs, water quality, system performance, and capital reinvestment. We’ll be able to show how to maintain affordability while also maintaining public health and economic prosperity.
But most importantly, all that analysis can make water infrastructure a credit-claiming opportunity again. We’ll be able to quantify the health and environmental benefits that come from water infrastructure, and so give leaders a reason to brag about their investments in these critical systems.
My only gripe with the WQAA is its name: the word “accountability” implies a threat of punishment for failure, rather than opportunity for success. With due respect to the NJ legislature I’d have preferred a different name: the Water Quality Accountability Achievement Act. Water system maintenance, reinvestment, and public reporting on performance shouldn’t be feared as a cause of punishment, but embraced as a chance to celebrate excellence.
Hats off to New Jersey’s water leaders for seizing this moment and blazing a promising trail. New Jersey’s WQAA gives water sector leaders the chance to make this moment an inflection point: the time when water stopped being an afterthought and became a core policy concern again; when the water sector turned away from fear of failure and back to visionary achievement.