Braden, John B.

Mankin, Philip C.

OpenSIUC

JOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATION UCOWR1Economic and Financial Management of Small Water Supply SystemsEconomic and Financial Management of SmallWater Supply Systems: Issue IntroductionJohn B. Braden* and Philip C. Mankin***Dept. of Agricultural and Consumer Economics and Midwest Technology Assistance Center, University of Illinois**Illinois Water Resouces Center, University of IllinoisThe Importance of Water SystemManagementThe 1996 Safe Drinking Water Actamendments set aggressive targets forensuring safe, secure, and reliable communitywater supplies. In raising the bar for systemperformance, Congress also recognized that smallcommunities, as a group, would have greaterdifficulty in meeting the new requirements than largercommunities.According to the most recent available data (U.S.Environmental Protection Agency 2003) nearly50,000 community water systems serve populationsof 10,000 or less; almost 60% of these serve 500 orfewer people. Nearly 52 million people–20% of theU.S. population–depend on these systems. The 2001Drinking Water Infrastructure Needs Survey foundthat the smallest of these systems–those serving3,000 or fewer people–have maintenance andupgrade needs totaling $31 billion.Many small communities are hard-pressed toevaluate needed improvements, raise the funds, andmanage the more sophisticated systems required tomeet the new drinking water standards. Their incomeand revenue bases are limited. Some agingcommunities are not retaining their younger citizens,leaving a declining pool of talent available to masterthe new requirements; others are bedroomcommunities with little cohesion; most have part-time officials and few if any staff members able toplan, oversee, and manage infrastructureimprovements.The challenges associated with small systemshave been apparent for some time (e.g., NationalResearch Council 1997). The 1996 Amendmentsstressed the need to build the technical, managerial,and financial (TMF) capacity of public water systems.The multifaceted nature of the concept of “capacity”is represented in Figure 1. In carrying out the TMFprovisions, the U.S. Environmental ProtectionAgency (EPA) and its state counterparts support avariety of assistance programs. The NationalDrinking Water Advisory Council (NDWAC) advisesthe EPA on matters important to small communitysystems. The Rural Water Association is active inmost states providing direct technical assistance tosmall communities. Six regional EnvironmentalFinance Centers provide technical support for avariety of environmental infrastructure andmanagement needs. Eight university-basedTechnology Assistance Centers develop newtechnologies and management tools appropriate tosmall systems. The National Drinking WaterClearinghouse (http://www.nesc.wvu.edu/ndwc/)serves as a nexus for technical information. Thereis also ongoing review of the regulatory environmentfor small systems. In 2003, the National DrinkingWater Advisory Council’s (2003) affordability reportcommented on variance policies and affordabilitycriteria.While these review and assistance effortscontinue, it is not clear how they all fit together andwhether gaps remain in the support system foreconomic and management needs. In an effort toassess progress and needs, the Midwest TechnologyUNIVERSITIES COUNCIL ON WATER RESOURCESJOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATIONISSUE 128, PAGES 1-5, JUNE 2004Braden and Mankin2JOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATIONUCOWRAssistance Center (MTAC) for Small DrinkingWater Systems assembled a panel of experts inNovember 2003 to assess progress and needs.(MTAC is administered by the Illinois WaterResources Center, the University of Illinois, and theIllinois State Water Survey with financial supportfrom the U.S. Environmental Protection Agency.)The papers in this volume reflect the views of theseexperts.The ContributionsThe authors come from a variety of perspectivesand experience. Professor Cornelia Butler Flora ofIowa State University studies the structure andfunction of rural communities. Her paper outlinesthe social context of rural community assistanceefforts. Professor Flora connects the concept ofcommunity capitals to the case of small watersystems. This concept incorporates six forms ofcapital that communities may already have or shoulddevelop for sustainable development: natural, cultural,human, social, political, and financial/built. Natural,cultural, and human types of capital can betransformed into social, political, and financial/builtcapital. Professor Flora’s basic message is that thebest technologies, tools, or advice will be successfulonly if the community is prepared organizationallyand culturally to benefit from it.Professor Ben Dziegelewski and Mr. Tom Bikof Southern Illinois University conduct research onthe economic and technical performance of watersystems and the factors that seem to correlate withsuccess in system management. Their paperreflects the results of a recent study that developedperformance benchmarks for small public watersystems in the Midwest. Information from a surveyallows them to profile the infrastructure, finances,and management of small systems. We learn that40% of the systems surveyed had no watertreatment and another 10% reported chlorinationonly. Ground water was the major source of drinkingwater.  Eighty percent of systems have some sortof supplemental water storage to maintain pressureand meet peak demands. Most systems (59%)reported an increase in the population served. Yet,17% of systems reported total revenues that wereless than total costs, and more than 35% of systemswith less than 500 customers had no reserve fund.Additionally, 51% of these systems had notincreased their water rates during the past five years.Dziegielewski and Bik recommend the developmentof case studies to demonstrate successfultechniques for achieving sustainability includingsuccessful engagement of consumers, restructuring,and regionalization alternatives.Bill Jarocki, Director of the EnvironmentalFinance Center at Boise State University, developsFigure 1. Simplified overview of a small water system.JOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATION UCOWR3Economic and Financial Management of Small Water Supply Systemstools that communities can use to plan for systemimprovements, develop needed financing, andmanage their systems. Mr. Jarocki’s paperemphasizes the advances made in the 1996 SDWAAmendments in conceptualizing the viability of watersystems. The new concept, “capacity,” attemptedto capture a number of the dimensions identified byFlora as well as Dziegielewski and Bik. Importantly,the concept was applied not in a binary fashion—pass/fail—but along a multidimensional continuum.This innovation changed the game for small systems.The new approach focuses on continuousimprovement rather than just being satisfactory. Mr.Jarocki focuses especially on the maintenance ofcapital facilities and related capital budgeting as animportant component of long-term success of smallwater systems. He notes that many systems fail todistinguish capital from operating budgets and toprepare financially for expenses of replacingequipment or meeting new requirements. New publicaccounting standards that went into force in 2003may increase awareness and attention to capitalbudgeting, but it is not yet clear how smallcommunities will respond. Carl Brown serves as a consultant to smallcommunities, advising on water rate analysis andsetting water charges. Picking up on themesemphasized by Mr. Jarocki, Mr. Brown has foundthat many small communities are reluctant to engagein open discussion of the economic realities of watersupply. His message is that realistic projection ofthe resources required to operate and maintaindrinking water infrastructure are essential to assurereliable and safe water supplies. Furthermore, heemphasizes the need for continuous planning andimprovement, because water systems and the needsthey meet are never in static equilibrium. Mr. Brownargues that communities that recognize and respondto this reality will reap the rewards of a strongerfinancial future.Dean Heneghan’s consulting engineering firmprovides contractual planning and managementservices for several small community water systems.In his paper, Mr. Heneghan describes various waysthat communities and contract management servicescan work together to provide safe and reliable water.This flexibility allows individual systems to decidewhat to do in-house and what to obtain from outsidesources. Contractors may be able to deploypersonnel more efficiently, sustain better training,and spread the costs of management across moreend-users than a small system, thereby improvingservices and reducing costs.Jim Maras represents the Rural Utilities Serviceof the U.S. Department of Agriculture, a majorprovider of financing for rural infrastructure. Mr.Maras’ paper stresses the need to treat smalls townsas small towns; that is, they should not be expectedto achieve the level of sophistication or specializationon their own that larger communities can reach. Awater system’s ability to achieve and maintaincompliance with federal and state drinking waterstandards is dependent on its technical, financial, andmanagerial capacity (TMF). One study has shownthat communities with over 3,000 persons often havethe capacity to self-finance more of theirinfrastructure needs than smaller communities.Besides the obvious challenges of funding,technology, and administering regulations in ruralareas, staff turnover and difficulty of maintainingskills are important barriers for small systems. Mr.Maras emphasizes the need for flexibility in trainingand other aspects of compliance to tailor services tothe needs of targeted groups.Common ThemesA number of common themes are evident in thisgroup of papers. One is that a great deal of progresshas been made in expanding training programs,supplying tools and information for use by smallcommunities, and encouraging innovation.Furthermore, the regulatory and funding agenciesare paying close attention to the viability of thesesystems. The Safe Drinking Water Act Amendmentsof 1996 are credited with focusing on the financialand managerial viability of small systems, and thereare encouraging signs. According to a communitywater system survey conducted in 2001 (U.S.Environmental Protection Agency 2002),approximately one-quarter of the publicly-ownedsmall systems that were operating in the red in 1995had eliminated their deficits by the year 2000.Other successes include improved technicalperformance (violations of drinking water standardshave decreased), acceptance of the need fordeveloping technical, managerial, and financial(TMF) capacity, more collaboration between entities,and more regionalization due to capital investment.The “Sanitary Surveys,” a form of self-assessmentBraden and Mankin4JOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATIONUCOWRthat has been promoted in some regions and states,is recognized as a useful foundation for decision-making. One way that some systems have becomemore viable is essentially to go out of business andcontract with another, better-equipped system forwater delivery and distribution management. Notcoincidentally, the overall number of small systemsdecreased by 8% between 1993 and 2002. For thosethat remain, better data from the assessments, bettertraining for officials and operators, and the use of avariety of planning tools have supported an increasein the availability of financial support. In addition,communication and collaboration between systemshas been fostered by the increased involvement ofwater system directors and operators in voluntaryprofessional associations.In spite of the successes, the papers in this issueidentify gaps in knowledge, training, staffing, andfinancial resources. When it comes to small drinkingwater systems, few problems are due to pollution.Most of the problems result from poor planning andmanagement.First among the noted weaknesses is the abilityto measure managerial capacity, especially for usein the creation and deployment of training programs.There is a need for more information on the behaviorof managers. The perceptions, attitudes, and opinionsof managers affect their behavior. Their concernfor how their rates compare to communities nearbymay be irrelevant to consultants and agencies, butthe fact remains that managers will still want to knowand may be influenced by that information. It maytake extra effort to convince managers that eachsystem is different.While consolidation of systems has been animportant trend, it is a phenomenon that needs to bebetter understood and encouraged. There is a needfor additional consolidation and collaboration amongvulnerable legacy systems. Some systems arereaching an age where replacement will becomeimperative. These older water systems may benefitfrom consolidation (physical linkage) with nearbynewer water systems. The additional load on thesystem can be offset by the revenue generated bythe consolidated system, enabling add-on treatmentcapacity at a cost less than what total replacementwould be. However, consolidation can be difficultfor communities to accept culturally and politically.Skilled, impartial negotiators, organizers, or facilitatorscan help in this regard.There is a need to use information moreeffectively in managing and operating small watersystems. There is too much variation in interpretationof regulations and a lack of broad understanding ofthe distinctive responsibilities of directors, managers,and operators. A greater consistency in SanitarySurveys (as could be accomplished, for example,through a common template and minimum standards)would be helpful in assessing the current state ofsmall systems.Finally, there is a large gap between perceptionsof the availability of financial assistance and theactual support that is available from a variety ofpublic and private sources. In particular, set-asidefunds  in state revolving trust accounts available atlow interest to public systems are often underutilized.At the same time, a large number of small systemsand the politicians that represent them seek financialgrants to solve their problems. Because they do notrequire repayment, grants shield the recipients fromthe true cost of the resources they are using and, inthe long run, may not do as much as loans to helpcommunities understand the true nature of their localservices and to make wise decisions about theirprovision.ConclusionsThe Safe Drinking Water Act Amendments of1996 cast a bright light on the challenges faced bysmall public water systems. In a period whenCongress has determined that all water systemsshould meet increasingly demanding standards forquality and reliability, it has been important torecognize that some systems would have difficultykeeping pace.The 1996 Amendments created a web ofprograms designed to help small systems meet thechallenge, either on their own or with assistance.The training programs and requirements set forth inthe act, the focus on capacity-building, and themandate for states to develop capacity-buildingprograms, have done much to improve the flow ofinformation and the ability to act on it. Partneragencies, including the Rural Utility Service andtechnical service providers, add important strandsto this web. Nevertheless, this problem will not besolved once and for all. It is important to anticipatethe need to sustain training and managerial assistanceprograms and to remind responsible officials thatJOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATION UCOWR5Economic and Financial Management of Small Water Supply Systemsadjustments and investments will be required yearafter year as needs change, infrastructure growsold, and new officials and operators assume theirresponsibilities. The cycle of educating and trainingneeds to be perpetual.Author Bio and Contact InformationJOHN B. BRADEN is Professor of Environmental Economics inthe Department of Agricultural and Consumer Economics atthe University of Illinois. He also coordinates the researchprogram for the Midwest Technology Assistance Center forSmall Public Water Systems, based at the University of Illinois.Professor Braden’s research addresses water quality andenvironmental policy issues. Dr. Braden can be contacted atDepartment of Agricultural and Consumer Economics,University of Illinois, 1301 W. Gregory Drive, Rm 431, Urbana,Illinois 61801, Phone: 217.333.5501, E-mail: jbb@uiuc.edu.PHILIP MANKIN is Research Coordinator for Illinois WaterResources Center at the University of Illinois. He alsocoordinates the research program for the Illinois-Indiana SeaGrant College Program. Dr. Mankin can be contacted at Illinois-Indiana Sea Grant, University of Illinois, 1101 W. PeabodyDrive, Urbana, Illinois 61801, Phone: 217.244-6916, E-mail:pmankin@uiuc.edu.References:National Drinking Water Advisory Council. 2003.Recommendations of the National Drinking Water AdvisoryCouncil to U.S. EPA on Its National Small SystemsAffordability Criteria. Washington, DC.   Available at:h t t p : / / w w w. e p a . g o v / s a f e w a t e r / n d w a c / p d f s /ndwac_affordabilitywg_finalreport.pdfNational Research Council. 1997. Safe Water from Every Tap:Improving Water Service to Small Communities. Committeeon Small Water Supply Systems. National Academy Press.Washington DC.U.S. Environmental Protection Agency. 2002. Community WaterSystem Survey 2000. EPA 815-R-02-005A. U.S.Environmental Protection Agency, Office of Water.Washington DC. Available at: www.epa.gov/safewaterU.S. Environmental Protection Agency. 2003. FACTOIDS:Drinking Water and Ground Water Statistics for 2002. EPA816-K-03-001. Office of Ground Water and Drinking Water.Washington, DC. Available at: http://www.epa.gov/safewater/data/pdfs/02factoids.pdf

Economic and Financial Management of Small Water Supply Systems: Issue Introduction

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Economic and Financial Management of Small Water Supply Systems: Issue Introduction

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