U.S. cities face deluge of water system costs, threats to funds

WASHINGTON Fri Feb 15, 2013 3:17pm EST

WASHINGTON Feb 15 (Reuters) - Repairing U.S. water infrastructure is becoming increasingly expensive and options for funding upgrades to sewers, storm drains and drinking water systems are under threat, the National League of Cities told a congressional hearing on Friday.

Costs for the repairs run into the hundreds of billions of dollars, with federal estimates of needed drinking water system upgrades at $334.8 billion and updating wastewater and stormwater management infrastructure at $298.1 billion over 20 years, said Michael Sesma, a city council member of Gaithersburg, Maryland, speaking on behalf of the cities' group.

"In our estimation, these investment levels are actually an underestimate given the advancing age of our infrastructure, the burden of unfunded federal regulatory mandates, and factors not yet known as a result of our changing climate," he said.

Cities and counties operate and finance almost all of the country's water infrastructure, with help from the federal and state governments.

But the federal government sets most of the environmental standards these systems must meet. That can leave some places scrambling to find funds to bring their systems up to code. Alabama's Jefferson County borrowed heavily when it was told its sewers were in breach of environmental regulations. The debt load, along with interest rate swaps and other risky measures, led the county to file for municipal bankruptcy in 2011.

As its budget fight intensifies, the U.S. Congress is considering limiting financing mechanisms that many places use to cover infrastructure costs, including capping the tax exemption for interest paid by municipal bonds. Issuers say this will drive up their financing costs, as they will have to offer the higher interest rates comparable to taxable bonds.

Tax-exempt bonds financed more than $23 billion worth of water and wastewater infrastructure projects in the first half of 2012, and three-quarters of capital works in the United States were built by state and local governments using the debt, Sesma said. They save "an average of 25 to 30 percent on interest costs with tax-exempt municipal bonds as compared to taxable bonds."

"If the federal income tax exemption is eliminated or limited, states and local governments will pay more to finance projects, leading to less infrastructure investment, fewer jobs, and greater burdens on citizens who will have to pay higher taxes and fees," he added.

Sesma also said Congress should not cut water revolving loan funds as it seeks to reduce its spending, and should consider "mechanisms that lower the cost of borrowing. He also suggested the federal government "offer direct loans and loan guarantees ... or remove the federal volume cap on tax-exempt bonds for water and wastewater infrastructure projects."

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