PROSPECTS FOR REVENUE-SHARING IN REDUCING INEQUITIES IN DRINKING WATER INFRASTRUCTURE FINANCING

Drinking water infrastructure is aging across the United States and is in desperate need of significant capital investments. While federal funds designated for capital infrastructure improvements have increased in recent decades, the burden of financing these necessary developments falls overwhelmingly at the local level. Because drinking water is mainly paid for at the local level, this financial burden is passed to ratepayers. To build a conceptual foundation of the current state of this infrastructure, we conducted a broad review that aimed to understand four main themes: (a) the implications of widespread aging physical infrastructure, (b) the available pathways for financing capital investments at the local level, (c) chronic underinvestments in physical drinking water infrastructure, and (d) the inequities that both drive the issue and result from it. From our initial research, we identified the goals of shifting the burden of financing the necessary capital investments away from ratepayers and reducing utility dependence on the revenue generation capacity of the local service area. The guiding question of this project is how to finance critical improvements to drinking water infrastructure without exacerbating inequities at the local level. Because low-income communities are carrying the burden of repayment, our specific objective is to explore how equalization mechanisms could be applied at the state level to reduce the inequities between low-income and high-income communities at the local level.

Our next step was to identify examples of successful equalization mechanisms at the state-level that we could draw lessons from. We turned our attention to public school financial reforms, which often focused on implementing equalization mechanisms to achieve either adequate or equitable funding in schools. Education finance reforms occurred through two primary eras; the first, less successful push for reform was based on arguments of equity, while the later, more successful cases were those rooted in concepts of adequate school funding. We then evaluated the main education funding formulas that resulted from these reforms. At the highest level, funding formulas break down into two categories: student-based and program and/or resource-based. From there, student-based structures break down into foundation grant or guaranteed tax base models, resulting in three main categories of funding formulas. Through five state-level case studies, we detailed the collection and redistribution processes for funding, the breakdown of state and local contributions, and isolated the equalization mechanism in each formula.

Drawing from the equalization mechanisms identified in each school funding formula, we built a step-by-step parallel to how these formulas could be similarly applied to reduce inequities in drinking water payments. We identified the parallels in actors (e.g., students and households, school districts and utilities, etc.) and in measures (e.g., minimum cost to educate one student and the minimum cost to provide basic water service to one household), and built out theoretical models for how these formulas might look in the water sector. We conducted feasibility studies in two states, North Carolina and Washington, to characterize the existing landscape of potential legal, political, and fiscal barriers and/or opportunities to implementing policies of this type. The following report covers four main sections, (a) history and current challenges in providing drinking water, (b) education financial models and lessons learned, (c) applying these models to water, and (d) feasibility studies in Washington and North Carolina.

Our conclusion distills the main takeaways from our research and highlights the success of education finance reform in improving equity in education funding across school districts. The main lessons learned from this project were that (a) adequacy-based language is more successful than equity-based language in passing financial reform legislation and achieving equalization outcomes; and (b) more research is needed to understand the feasibility of each of the three funding formulas in each state where it may be applied. To that end, we have provided a list of follow-up research questions to guide future inquiry into the success of implementing equalization mechanisms in the water sector to reduce drinking water inequities.