Financial Performance of Water and Wastewater Utilities: Case of West Virginia Service Districts

Article excerpt

INTRODUCTION

Water and wastewater utilities are bearing the financial brunt of a national infrastructure crisis in responding to the need for construction and renovation of aging water and wastewater facilities. At the same time, they are being subjected to expanded regulatory requirements necessitating major upgrading of facilities as well as increasing their cost of operation. This study examines the financial performance of small municipal and rural public service district (PSD) water and wastewater utilities in light of these increasing financial challenges.

This research is important in evaluating the fiscal capacity of small and rural local water and wastewater utilities to resolve emerging infrastructure needs and to be viable financially with respect to capital investment and the cost of operations and maintenance of such facilities. The financial condition of larger utilities is more likely to receive attention. The credit-worthiness of large utilities has been the subject of at least one recent evaluation (Froehlich, 1991). Smaller, and especially more rural utilities, have not been the subject of such research in spite of their number and impact.

This study measures prevailing financial conditions of such entities, assesses their capacity to fulfill the role required in the face of rural water and wastewater needs and federal regulatory requirements, and evaluates the implications for small and rural communities as they attempt to respond to identified water and wastewater infrastructure needs. The fiscal capacity of these small municipal and rural community water and wastewater utilities has profound policy implications for the national infrastructure crisis.

This study outlines the financial challenges facing small and rural community water and wastewater utilities. It proposes an analytical framework for evaluating the financial performance of these utilities. It initially examines the various perspectives on assessing the financial condition of public organizations and links theM to the substantial literature on local government fiscal stress. The need for comparative fiscal analysis of government organizations (especially enterprise entities like the utilities examined in this study) within a useful framework and methods for financial analysis is highlighted. Finally, an assessment of the financial performance of a sample of small and rural water and wastewater utilities in West Virginia is reported within the framework outlined and the implications of the results of that assessment are evaluated.

FINANCIAL CHALLENGES

The aging infrastructure in the United States has been identified as a prominent national issue. As long ago as the early 1980s, American infrastructure for water supply and distribution and sewer collection and treatment was reported to be deteriorating seriously and in need of rebuilding or major renovation (Barker, 1984; Choate and Walter, 1983). A federal study by the National Council on Public Workers (1988) concluded that America's infrastructure, while not in ruins, was barely adequate.

In spite of the increasing recognition of this infrastructure problem, federal fiscal policies and Reagan-Bush federalism have led to continued devolution of program costs to state and local governments and an overall decline in grants for operating and capital programs in state and local governments (Nathan and Lago, 1988; Houghwont and Richardson, 1987). For example, federal fiscal retrenchment and decentralization efforts in the 1980s have led to the construction of wastewater treatment facilities through capitalized state revolving funds instead of federal grants in aid.

Public investment in national infrastructure has dropped over the last twenty years from four percent of gross national product (GNP) in the late 1960s to a little more than two percent in the late 1980s (Aschauer, 1991). A major congressional report (U.S. Congress, 1984) on the increasing gap between the infrastructure needs and ability to pay for them identified the investment required to construct, reconstruct, rehabilitate or repair capital facilities to a desired level of service standard. …

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