Funding the Future: Meeting the Costs of Capital Replacement

JOURNAL OF CONTEMPORARY WATER RESEARCH & EDUCATION In 1996, significant amendments to the Safe Drinking Water Act (SDWA) were adopted that reflected the concerns of many in the drinking water industry to define the performance of water utilities in broader terms. Prior to this time, water systems that were providing safe drinking water on a consistent basis were considered “viable,” and failing systems were termed “non-viable.” The SDWA amendments discarded this binary measurement system and formalized the idea of “capacity,” which now encompasses the technical, management, and financial aspects of delivering safe drinking water to the public. Instead of a pass-fail basis of measuring performance, capacity could be measured along a continuum. This article focuses on the measures of financial capacity that reflect the commitment of managers and boards of directors regarding the long-term funding requirements of drinking water systems. This new concept of capacity required the regulated community of water systems—as well as the regulators and other stakeholders—to develop measures of capacity to determine the point upon the capacity continuum where systems would be more likely than not to be sustainable. State drinking water programs were required to develop measures of technical, financial, and managerial capacity for proposed water systems as well as for those seeking to borrow money from the new Drinking Water State Revolving Fund (DWSRF) for system improvements. Many states have used those capacity measures to examine existing water systems and to search for those needing capacity building assistance. Regarding financial capacity, the Idaho Drinking Water Program uses eleven indicators that describe the fiscal capacity and financial management of water systems seeking state revolving loan funds. Among these are indicators that can be used either to compare the capabilities of water systems that are similar in size or to track financial performance of an individual system over time. From such comparisons, we can draw inferences about the financial indicators that correlate with the reliability, safety, and cost of providing safe drinking water. Experts believe that the long-term success of water systems is related to keeping their capital facilities in good shape. This means not only investing in the water system when it is built, but also anticipating the costs of replacing it when it wears out. Regulatory agencies have devoted program resources toward improving the sustainability of public water systems. In 2003, the U. S. Environmental Protection Agency (EPA), for example, released two handbooks for water system managers addressing the topics of strategic planning and capital asset management (U.S. Environmental Protection Agency, 2003a; 2003b).