Four Finance Facts about Flint

As this blog is being written, water and community managers from across the country are talking about the water crisis that is occurring in Flint, Michigan. The City made a decision several years ago to discontinue buying Lake Huron water from Detroit in favor of an alternative supplier who was planning on constructing a major new transmission line to provide a “less costly” supply of Lake Huron water. While waiting for the project to be completed, the City relied on water from the Flint River. This source of water was determined to have a different chemical composition that led to water line corrosion causing lead to enter the drinking water supply. In addition to the acute public health impacts of the crisis, the impoverished community is facing a huge price tag to address their infrastructure problems.

As often happens with a crisis, the attention on Flint’s situation is shining a light on challenges that are by no means unique to Flint. While there are many specific circumstances that contributed to the problems in Flint, many of the underlying financial issues facing Flint will have or already have had an impact on water systems across the country. Here are four financial facts that played out in Flint that every water and community manager should be thinking about:

1. The cost of addressing aging, inaccessible infrastructure is enormous.

Water customers have a difficult time understanding why it continues to cost more for their water services (water, wastewater, stormwater) and are surprised and outraged when their bill goes up faster than other services. The harsh reality is that the status of water infrastructure in most communities will make significant cost increases inevitable. Assets have reached their normal lifespan and replacing and rehabilitating those assets often is significantly more expensive than putting in the new assets in the first place. Consider that many critical assets are buried underground and are covered by an almost impenetrable barrier of asphalt, gas lines, and telecommunication lines.

2. Water service has characteristics of a public service and a private good.

Flint has many families that are so financially challenged that paying for basic water service is extremely difficult. Water provision is at the center of an economic conundrum that continues to challenge utilities and societies throughout the world. The US water utility business model is largely designed to treat water as a private good in which individual consumers are responsible for covering the cost of providing what they consume. This model has many benefits and promotes the wise use of water, but it does not always acknowledge the public benefits of water service similar to how society acknowledges (and prices) other public services such as education and public safety which are covered by general taxes rather than user fees. When water services were relatively inexpensive, treating them as a private good was less problematic – almost everyone could cover the cost, but after years of increasing water costs (partially due to fact 1), this is clearly no longer the case. Federal and state governments (on behalf of their tax payers) have stepped in to support other private goods with public service attributes. For example, there is a federally funded Low Income Home Energy Assistance Program (LIHEAP) that helps low income families with their energy costs but there is no targeted equivalent in the water sector. Federal and state subsidies for the water sector do exist in the form of grants, subsidized loans and tax exemptions on debt, but this financial support typically goes directly to an entire water system rather than targeted to the population within the service area that needs it most.

3. Adapting to falling water service demand is difficult.

The population of Flint was close to 200,000 in 1960 and is now under 100,000. Water infrastructure throughout the country was largely developed under the assumption that service population and demands will continue to rise. This assumption is certainly no longer playing out in Flint, but it also is not playing out in many parts of the country even in areas with strong economic growth. Projected water demands that fail to materialize can cause technical and public health problems with oversized treatment and distribution facilities operating sub-optimally. Falling demands also cause tremendous financial challenges with fixed costs such as debt service and asset maintenance distributed among fewer people and over lower volumes. What technologies are in our future? How would the average water or wastewater system operate if the Gates Foundation succeeds in their effort for a waterless toilet? Many assets are designed based on a single demand scenario, but evidence is showing us that economic and technological disruptions are common and should be at least considered. How resilient is your community’s utility business model and capital improvement plan to changing water demand patterns?

4. There are many obstacles to regional collaboration.

The decision to switch water suppliers was driven by an understandable desire to reduce costs. While most of the focus recently has been on looking at the due diligence and monitoring that went on related to that decision, relatively little discussion has addressed why having one struggling water system pull out from partnering with another struggling regional water system with excess capacity would make financial sense in the first place? Regionalization and sharing assets can have financial benefits particularly for communities with falling demands (see item 3), but there are many incentives for keeping systems separate that are difficult to overcome and these may have contributed to the problems in Flint. Water partnerships can involve multiple parties with legacy water agreements and contracts. These agreements can drive outcomes in frustrating, yet understandable directions. For example, take a situation where utility X has separate contracts to sell water to Utilities Y and Z for $3/1,000 gallons. If Y finds another source of water for $2.50/1,000 gallons, it is very hard for X to lower the price to compete with the source even if it may make financial sense to them because it might jeopardize their contract with Utility Z as well. In the end utility Y leaves the partnership and both Utility X and Z are worse off. Regionalization normally doesn’t “just happen;” it often seems to require significant goodwill, energy and external brokering to make it work.

There will be debates for years about what caused the crisis in Flint and there likely is plenty of blame to be distributed, but the crisis also highlights the inherent challenges of providing safe water services across the country. The parties directly involved in the Flint crisis will certainly change many things related to how they operate in future, but will anyone else? Let us know what you think in the comments below.

 

This post originally appeared on the School of Government’s Community and Economic Development in North Carolina and Beyond blog.

5 Comments

  1. We DO NOT need a HEAP program for water and sewer!

  2. Bad water chemistry=bad water=bad pipes= HEALTH HAZARD!!+$$$+ bad PR

  3. Water has been sold for less than the true sustainable cost most everywhere in the country. If this was not the case, we would have no water issues. Because droughts in the south west for example are historically the norm there is no surprise and we should be adapted. Most of the problems today are from leadership that had short vision and boardroom silo perspective. Alternate water is do able for most demand side issues as well as double dipping on the benefits of decreasing the waste water burden. Decreasing the storm water burden as well. But, who can profit, and how is the silo issue I refer to above, and if profit is the issue, where does public service come in? Projects are denied and delayed because of money, yet jobs are claimed to be the reason to keep fossil fuel status quo alive. We can have jobs fixing the water issue as well as implementing emerging systems such as rainwater catchment. But the water district can’t sell the rain, so it is ignored, becoming storm water burden and we the people who can’t afford water, pay for storm water management. Double dipping on benefits is mandatory in todays economy and status quo needs to grow up or get out of the way.

  4. Water rates, and therefore costs to consumers, are frequently set by City Hall via a political process. Often the viewpoint is keeping the rates the same as last year is a “job well done”. Sometimes, City Hall hasn’t done their homework by planning for infrastructure rehabilitation or replacement, often expressed in a Capital Improvement Plan.

    What’s to prevent water system owners from keeping water rates low, falling short of the full cost of system operation and failing to address the need to replace or rehabilitate aging infrastructure, with the hope that the State or Federal Government (or a private investor) will pick up the costs sometime in the future?

  5. We need to educate the public better and more frequently about the value of water, the cost of ownership and the risks of doing nothing. As a member of ASCE who helped put together my state’s report card for water and wastewater components – that has proved very helpful. The report card grades were widely quoted and understood.

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