To Sell or Not to Sell? Small Local Governments Look at Privatizing their Public Water Systems

According to Environmental Protection Agency (EPA) estimates, the United States needs over $600 billion for water infrastructure improvements over the next 20 years. The American Society of Civil Engineers has given the United States a “D” grade on their Drinking Water Infrastructure Report Card, citing the older age of many of the country’s pipelines, the large number of water main breaks, and the likelihood of contamination, especially in smaller water systems.

On Monday The Washington Post highlighted that the idea of water privatization has left small and mid-size communities, many of which are already struggling with budget deficits, with a tough choice. Should these local governments continue to manage and maintain their own public water systems? Or is selling their water system to a private corporation a more reasonable option?

Federal Funding or Lack Thereof

It is unclear how much help towns will receive from the federal government for water infrastructure projects. On the campaign trail, Donald Trump promised “crystal clear, crystal clean” drinking water, and his administration included water infrastructure in their 10-year, $1 trillion infrastructure promise. What is not clear is how much of the $1 trillion will be allocated for water infrastructure, particularly when it will be competing with highly-visible projects that improve roads, bridges, tunnels, and railroads. The administration also proposed budget cuts that eliminate a nearly $500 million Water and Wastewater loan and grant program that helps rural communities, along with a slew of EPA programs that would cripple or eliminate water cleanup initiatives.

State Revolving Funds

Another consideration are State Revolving Funds, which were recently increased by less than half a percent. These funds allow states to fund a variety of water infrastructure and water quality projects. With all of the work that’s needed to carry out projects such as wastewater treatment, storm water, and water reuse, the State Revolving Funds budget (which is the lowest it has been in real terms since 1997) will not be able to meet the needs of local government water projects. And rural communities may find themselves without funding. This will leave states and local governments with most of the project bills. This is why the idea of selling public water systems has been so appealing for smaller towns and cities.

Several states have passed legislation that allows towns to sell their water systems at “fair market value” rather than current value, passing the costs of repairs, maintenance, and billing to the new owner. It’s no wonder that 48 water and sewer facilities were purchased in 2015, 53 in 2016, and 23 so far in 2017.

Early Adoption by the Numbers

The pros to selling public water systems may be apparent, but cities that have sold off their water systems might advise otherwise. For example, water service rates can skyrocket as the costs of maintenance and repair are passed to consumers by the private company that purchased the public water system. The New York Times analyzed three recent long-term water or sewer services contracts, and all three cities experienced rate increases that rose more quickly than comparable towns. For one of those cities, Santa Paula, California, the water service rates doubled. In another report published by the Public Citizen think tank, Pekin, Illinois experienced a rate increase of 204% over the 18 years since its water system was privatized. The Food and Water Watch group also reported that privately owned water systems cost the average household 59% more than homes that get their water from public systems. These rate increases can severely impact low-income households that struggle to pay utility bills at current rates.

Since water companies respond to shareholders rather than public needs, many complain about a lower quality of service. Other potential risks reported by the Pacific Institute include cherry-picking service areas, negative impacts on ecosystems and downstream water users, lack of incentive for water conservation, and ignoring the need to confront the long-term health problems associated with exposure to low levels of certain pollutants.

Legal Considerations

Nor is it easy for local governments to buy back their water systems. There are multiple examples of towns that had to fight in court to regain control of the local water system. Even if small cities and towns do win, it ends up being very costly. Mooresville, Indiana took American Water to court to buy back its system, but the court-approved price of $20.3 million was entirely too much for the small town to pay. Their water system remains privately owned. Fort Wayne, Indiana paid a whopping $67 million to get their water system back after a long 13-year process. Missoula, Montana won its legal battle, but is now faced with a $88.6 million bill and exorbitant legal fees.

When it comes to selling public water systems to private companies, local governments should weigh heavily their options. On the plus side, water privatization can seem like a saving grace for communities that are struggling with the cost to maintain their water infrastructure and are facing large budget deficits. Issues of increased water service hikes, service quality, and potentially costly buybacks are significant downsides to these deals. Regardless of the decision a local government chooses, they should first assess all the short-term and long-term impacts on their community.