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All years referred to in this report are fiscal years unless otherwise indicated. |
This paper assesses the extent to which the financing of local water supply facilities will burden state and local governments in the next two decades, and suggests alternatives by which federal, state, and local governments can reduce water supply expenditures. This paper responds to a request by the Senate Committee on Environment and Public Works.
Kenneth I. Rubin and Michael Deich of the Congressional Budget Office's
Natural Resources and Commerce Division wrote the report with the assistance
of Ruth Michelson. Everett M. Ehrlich supervised their work. The authors
wish to thank John Boland, Johns Hopkins University; Jerry Cooper, Farmers
Home Administration; James Groff, National Association of Water Companies;
Nancy Humphrey, Transportation Research Board; Kyle Schilling, Institute
of Water Resources, Corp of Engineers; and Jack Sullivan, American Water
Works Association for valuable comments on earlier drafts. Patricia H.
Johnston edited the manuscript, assisted by Nancy H. Brooks. Angela Z.
McCollough and Gwen Coleman prepared the report for publication.
Edward M. Gramlich
Acting Director
May 1987
SUMMARY
I - INTRODUCTION
II - WATER UTILITIES' NEED FOR CAPITAL, FISCAL YEARS 1984-2000
III - STATE AND LOCAL OPTIONS: ALTERNATIVE SOLUTIONS TO WATER SUPPLY PROBLEMS
IV - FEDERAL POLICY ALTERNATIVES
APPENDIX - REFERENCES USED IN CALCULATING FUTURE CAPITAL DEMANDS
| TABLES | |
| 1. | Size and Ownership of Municipal Water Supply Systems, By Number of People Served |
| 2. | Average Water Prices, By Number of People Served |
| 3. | Percent of Various Rate Structures Used By Public and Private Utilities in Fiscal Year 1982, By Number of People Served |
| 4. | Federal Spending for Water Supply, By Federal Agency, Fiscal Years 1986-1988 |
| 5. | Annual Capital Spending for Municipal Water Supplies, Fiscal Years 1977-2000, By Region |
| 6. | Annual Aggregate and Per Capita Capital Spending, By Number of People Served, Fiscal Years 1984-2000 |
| BOX | |
| DEFINITIONS OF RATE SCHEDULES USED BY WATER UTILITIES | |
Concern that localities would be unable to finance needed water supply facilities prompted the 99th Congress to consider (and the House to pass) bills that would have significantly expanded the federal role in financing municipal water supply systems. Similar legislation is likely to be introduced in the current Congress. Paradoxically, the last Congress also reduced funding for existing programs that support these systems. The Administration's budget for fiscal year 1988 seeks further reductions in most of these programs.
From fiscal years 1977 through 1983, water utilities spent an average
$4.7 billion annually to replace and expand local water supply facilities.
Nationwide, capital spending per capita averaged $25 per year. Spending
across regions varied widely, from $10 per capita in the Mid-Atlantic region
to $54 per capita in the Mountain states. The CBO projects that for the
United States as a whole, annual capital spending for local water supply
will be 11 percent less per capita from 1984 through 2000 than it was in
the 1977-1983 period. In six of the nine Census regions, capital spending
will fall, declining between 3 percent in the New England area and 32 percent
in the South Atlantic region. Capital spending will rise in three regions,
but in two of these regions, the increase will be less than 10 percent.
In only one region, the Mid-Atlantic, will per capita capital expenditures
rise sharply--by over 40 percent.
STATE AND LOCAL POLICY OPTIONS
State and local governments could pursue a number of strategies to reduce the amount of capital investment that will be needed for water supplies. These include promoting water conservation through price reform and consumer education, adopting less capital-intensive water supply technologies, and taking advantage of recent financial innovations.
Reforming price schedules holds particular promise, because many public water utilities charge prices that are less than the full cost of supplying water. Lacking signals about the true cost of water, consumers use more than they would if they had to pay for the full cost of their consumption. The result is overinvestment in water supply facilities.
In the 17 western states where existing water rights exceed the average supply, state governments could also encourage more efficient use of water by allowing markets a greater role in allocating the existing water supply. Markets work well only if there are unambiguous, transferable, and quantifiable property rights attached to the good being traded. Under current law, such rights rarely exist for water. Despite the difficulties raised by current law, voluntary water transfers do occur and have become more common in recent years. While most transfers result from individual negotiations among the affected parties, some fledgling water markets have been started. That these transfers take place, despite the lack of supporting institutions and despite the legal complexities involved, suggests that far more transfers would occur if the legal and institutional climate were more conducive to trade.
For most areas in the eastern United States, water is not scarce, but simply inefficiently distributed--that is, individual systems sometimes experience large shortfalls while the water-basin as a whole has an abundant supply. A water-short system could build new capital facilities to import water from outside the basin. Alternatively, the system could pursue the less expensive method of connecting and jointly operating the individual systems in a region. The greatest barrier to system interconnection is a lack of information. State governments could serve the role of "honest broker," developing and disseminating information that could be expensive for an individual locality to acquire, but crucial to the prospects of any joint operating agreement.
Finally, states could create a legal and institutional climate that minimized the cost of capital for local water utilities. In general, state governments could increase the range of financial instruments available to local water authorities. States also could use their stronger position in credit markets to assist localities more directly. For example, states could establish bond pools for local issues, which would help issuers take advantage of the economies of scale that characterize credit markets.
FEDERAL POLICY ALTERNATIVES
By providing support for municipal water supplies, the federal government has sought to further several goals, including increasing the availability and quality of local water supplies, promoting efficient state and local water supply policies, and increasing local economic development. When considering the direction of future federal policies for water supply, the Congress might wish to add a further goal: reducing the federal deficit. Several approaches to meet the last goal are discussed below.
Reduce or Eliminate Federal Grants and Loans for Local Water Supply
The Administration's budget request for fiscal year 1988 calls for a sharp reduction of federal grants and loans for constructing facilities for municipal water supplies. The Administration's proposals would lower federal spending by more than $200 million annually compared with spending under current law.
Maintain Current Support for Municipal Water Supplies
By restructuring existing programs, the Congress could maintain the existing level of federal support for municipal water supply, while furthering other goals such as reducing the federal deficit.
Facilitate Voluntary Transfers of Federally Controlled Water. Nearly all water rights, including rights to water from federal water projects, are held under state law. In those states that encourage water transfers, however, the federal role could be significant. Bureau of Reclamation projects deliver nearly 20 percent of western agricultural water, and users of that water must comply with federal as well as state rules governing its distribution. Trading water rights would reduce the cost of local water supplies (by reducing the need to build more expensive capital projects), while increasing federal revenues by raising both income taxes and payments to the Bureau of Reclamation.
Restructure Requirements for FmHA Loans and Grants. The Farmers Home Administration (FmHA) provides grants and loans to small, low-income communities in order to promote investment in water supply facilities. The current structure of the FmHA's program unintentionally also encourages localities both to choose inefficient, capital-intensive facilities and to maintain those facilities poorly.
The Congress could address these problems through a number of alternatives. First, the FmHA could provide technical and financial advice directly to communities. The cost of this service would partially be offset by the increased efficiency of investments by FmHA program beneficiaries. Second, as part of the grant application, the FmHA could require communities to examine specific alternative solutions to their water supply problems. While this would bring a variety of alternatives to the attention of local water supply officials, it might increase the importance of grantsmanship in determining which communities receive FmHA funding, making the efficient provision of water supply facilities relatively less important. Finally, FmHA grants and loans could be conditioned on the willingness of recipients to comply with a specific maintenance schedule. Publishing these schedules would be useful for local officials unsure of the optimal maintenance timetables for their plants. The requirement that communities must follow predetermined maintenance schedules, however, would carry with it the danger that such schedules would disregard local conditions or be too expensive to develop properly.
Revolving Fund for Local Water Supply Facilities. Current grant and loan programs for water supply could be combined and used to capitalize a revolving fund. The fund would make low-interest loans to states and localities for use in expanding or rehabilitating water supply systems. Loan repayments would be used to make further loans. Earmarking funds for water supply would make federal subsidies more predictable. If earmarking reduced the frequency of Congressional review, however, allocations would be less likely to reflect Congressional spending priorities.
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