Municipal water utilities and the bond market: how financial risk and resilience impacts local water services in U.S. cities

Keywords: Water resources, Infrastructure, Municipal finance
Session Type: Virtual Paper Abstract
Day: Saturday
Session Start / End Time: 2/26/2022 09:40 AM (Eastern Time (US & Canada)) - 2/26/2022 11:00 AM (Eastern Time (US & Canada))
Room: Virtual 25

Abstract

Local governments in the U.S. are largely responsible for the provision of water services (drinking water and wastewater). Local governments and municipal water and sewer utilities (“utilities”) therefore must secure and treat drinking water, manage wastewater, and critically, finance infrastructure operations and maintenance, and capital improvements. The municipal bond market is the most salient method by which utilities finance their water infrastructure needs; utilities are thus tied to capital markets and associated market risks (e.g., interest rate risk and credit risk). While the financialization of the water sector has been studied, the consequences of the underlying financing mechanism (the municipal bond market) are not well understood in the water management sector. We present data retrieved from municipal bond offering documents for selected Pennsylvania and North Carolina water utilities to show how the bond market impacts utility operations and ultimately, the affordability and reliability of their water services. Data presented include bond rating, interest rates, operating revenue, water rates, and demographics of ratepayers from ~1990 to 2020. The period captures the impacts of regional deindustrialization (and related local economic downturns) and the 2008 financial crisis. Our case study data synthesis shows how financial risk is mitigated through water rate increases and/or deferred capital investments, adding to the growing affordability and aging infrastructure crises in many U.S. cities. Our analysis highlights the importance of financial cycles when considering the modern hydro-social cycle.