Reimagining Water Infrastructure for Justice and Health Equity

By Pamela Russo, Kimberlee Cornett, Radhika Fox, and Rebecca Morley

How We Got Here: At the turn of the 20th century, governments recognized the importance of safe water and sanitation to advance public health. However, much of the infrastructure is in dire need of repair, with federal investment falling short. This disproportionately affects so-called “disadvantaged communities (DACs),” which were excluded from water infrastructure investments due to racist policies, systems, and practices and as a result, experience higher water costs and poorer water quality than whiter wealthier communities. DACs have a backlog of water projects to which the new lead service line replacement (LSLR) and soon PFAS requirements will be added. This creates immense pressure on the water utilities and the communities that support them via their water rates.

A More Just Water System: The Bipartisan Infrastructure Law (BIL) allocates $50 billion for local water projects, with about 80 percent distributed through State Revolving Funds (SRF) along with a unique requirement that 49 percent of the funding be distributed in the form of grants, principal forgiveness, or negative interest rate loans to DACs. Now is the time to deploy these funds in ways that dismantle the unjust systems that led us to today’s challenges. To help DACs receive their fair share of investment now and in the future, we need to have a deeper understanding of the ways the current system shuts them out. Philanthropy, along with the nonprofit and private sectors, should laser focus on removing those barriers.

Navigating Water Funding and Finance: Competition is steep for the most incentivized public financing dollars. Communities with the privilege of staff with technical and financial expertise are well positioned to develop compelling funding applications. Communities with stable tax bases and strong economies have traditionally been the most successful in securing public dollars--for example, receiving a greater share of federal clean water infrastructure dollars. The process of getting on a state intended use plan can be opaque, and the application process complex. The Robert Wood Johnson Foundation (RWJF) has provided grant funding to the Environmental Policy Innovation Center and New Jersey Future to help DACs put together successful SRF applications. SRF also requires substantial planning and prerequisite documents such as audits, engineering reports, feasibility studies, and rate studies. The reimbursement for these costs varies by state. RWJF’s Impact Investment team made a PRI to Communities Unlimited to pay for such predevelopment costs.

Beyond the challenges of navigating the SRF program, there simply isn’t enough public funding to solve drinking water infrastructure needs—including LSLR. Ballooning project costs are quickly absorbing the historic new funding. Assuming SRF funding returns to pre-2022 levels, the need for blended capital solutions will increase. Figure 1 shows the typical sources used for LSLR. Communities need technical assistance providers that can help them assemble capital from different sources, offer comprehensive financial assistance over the long run (e.g., two to three construction seasons) that are steeped in environmental finance, and who have the trust of the community.

Figure 1: Sources of Capital for LSLR, Summit Partners

Additionally, blended capital strategies require DACs to take on new debt, which means solid credit ratings and the ability to repay that debt (likely through water rates or taxes). Yet, thousands of DACs are unable to access the municipal bond market due to actual or perceived lack of credit worthiness. State bond banks are one strategy to open up access to capital for DACs by pooling their bonds with bigger and wealthier municipalities resulting in better rates and terms. RWJF is working with the Water Finance Exchange to explore bond insurance and pooled financing bond programs to enable DACs with low credit ratings to borrow needed funds at lower interest rates. The goal is to increase equity in financing, and reduce rate increases for residents with lower incomes.

Run, Don’t Walk. Maximizing the free or low-cost public money before tapping other sources is a more cost-effective solution for DACs compared to municipal bonds and private capital, which can result in steeper increases in user rates. As the proverb goes “time and tide wait for none.” Acting now will help communities maximize public funds and get ahead of ballooning project costs. The cost of waiting is enormous, with communities and ratepayers expected to pay up to triple their initial pre-COVID project costs if they delay water projects. Steep inflation, supply chain issues, rising interest rates, and construction costs are driving up project costs. Figure 2 compares the amortization schedules for a real community project that benefited from federal financing and historically low interest rates in 2019 (i.e., at 2 percent over 30 years). The pre-pandemic construction contract resulted in an annual loan payment of $2.4 million and $73 million overall. If the community had waited until 2023, the interest rate would have climbed to 3.5 percent, and the annual loan payment and total payment would have jumped to $5.12 million and $153.82 million, respectively. Delaying to 2027, would have resulted in an annual payment of nearly $8 million and a staggering increase of the total payment to $237.78 million. Looking at these scenarios you can see that even if grants were available, they would support less of the total project cost and the remaining debt component at higher interest rates would result in considerably higher community costs. Moving quickly is particularly critical for DACs because waiting will mean catastrophically more expense for their communities and higher water bills for consumers.

Figure 2: Amortization Schedule Comparison for a Community Water Infrastructure Project (2019, 2023, 2027)

Source: Summit Consulting, LLC (2024)

Putting Philanthropic Tools to Work: Funders and investors can help communities access and absorb federal resources and can help communities develop and implement blended capital solutions where federal dollars are insufficient to meet their needs. For example, philanthropy can support technical assistance providers who are trusted by the community and have environmental finance expertise to help DACs develop and implement clear funding and financing plans. These plans should forecast the timing for LSLR and associated costs (e.g. creating inventories, community engagement); the sources of capital; and how any debt will be repaid (including the impact on rate payers with lower incomes). These plans can help funders and investors gain insights into the ways that they can help remove barriers to capital. By supporting blended investment solutions to address water infrastructure needs in DACs, philanthropy can model innovative and equitable approaches. Over time, these innovations can inform how the SRFs operate. A long-term priority must be to build the capacity of states to incorporate these innovations as their standard practices.

Conclusion: Urgent action is needed to address funding gaps and historical disinvestment in water infrastructure for DACs. Time is of the essence to access both the low-cost public money and private capital needed to fill funding gaps. Missing this opportunity will widen health and economic inequities because the cost burden will be greater for DACs. Philanthropy can play a vital role in ensuring the Bipartisan Infrastructure Law reaches communities most in need so that everyone, everywhere can turn on the tap without a second thought.

Pamela Russo is a senior program officer with the Robert Wood Johnson Foundation (RWJF), Kimberlee Cornett is senior director, impact investments at RWJF, Rebecca Morley is a consultant to RWJF, Radhika Fox is former assistant administrator of EPA’s Office of Water and strategic advisor to RWJF.

This blog was prepared following a convening by The Joyce Foundation and the Federal Reserve Bank of Chicago on January 10, 2024. The goal of the convening was to identify the information and resources communities need to tackle lead service line replacement. The Chicago Fed and the Joyce Foundation have prepared a report on the convening, “Identifying information gaps to help communities navigate lead service line replacement.” This blog is intended to provide deeper perspective on the need to develop a deeper understanding of the ways the current systems of water infrastructure funding shut out disadvantaged communities, and the urgency of action to address those barriers.