The Municipal Bond Market and Water Utilities: The Impact of Capital Markets on Local Communities and their Water Services

Abstract

The majority of medium- to large-sized municipal water utilities in the United States rely on the 4 trillion USD municipal bond market to finance all or a portion of their operations, maintenance, and capital improvements. Despite the scale and power of the bond market in setting the guardrails for water utilities and local government services, there are limited studies that center municipal bonds in local water management. This dissertation analyzes how the municipal bond market drives and responds to municipal characteristics as expressed through water utility finance. Through empirical, heuristic, and statistical methods, I show that 1) utilities servicing distressed communities are trading off financial risk for affordability risk, 2) nonpayment is only material for water utility finance if nonpayment elasticity exists, and 3) the bond market does not price physical climate risk but does apply a racial yield penalty. The findings have implications for the management of local water utilities as well as broader implications for how infrastructure finance intersects with water management across the U.S.