States Find Innovative Ways to Support Rural and Small Water Systems
Creative strategies help protect communities’ access to clean, affordable water
Rural and small water systems—those serving fewer than 3,300 people—make up 81% of public water systems in the U.S. but account for 93% of violations for noncompliance with federal drinking water standards. These systems face a particular set of barriers to meeting their infrastructure needs, such as constrained revenue bases, high upgrade and maintenance costs, and limited access to funding and financing.
To help address these problems, state and local governments are exploring opportunities to improve small and rural water systems’ data quality and transparency, reduce obstacles to funding and financing, and build partnerships among small water utilities.
Affordability and funding challenges
Small systems generally spend more than double what larger systems pay per capita to address deferred maintenance needs for drinking water. (See Table 1.) And these higher costs, which are often driven by expensive repairs and replacement after years of deferred maintenance, can lead to unaffordable rates for many customers. Additionally, the lack of density in rural areas requires more miles of water lines per customer, further raising costs.
Table 1
Small Water Systems’ Maintenance Costs Are Twice Those of Larger Utilities
Projected per capita drinking water infrastructure needs by system size, 2021-40
| Water system size | 20-year need ($ billions) | Total population served | Per capita cost |
|---|---|---|---|
| Small (<3,300) | $100 | $24,627,690 | $4,065 |
| Medium (3,301 to 100,000) | $273 | $135,259,662 | $2,019 |
| Large (Over 100,000) | $235 | $134,452,529 | $1,749 |
Source: Katherine Shok, Supporting America’s Small Water Systems, March 20, 2024
Because of small systems’ high funding needs and small ratepayer bases, they may be more reliant than larger systems on external funding sources, such as municipal bonds and state and federal dollars provided through State Revolving Funds (SRFs)—dedicated funding programs for water and wastewater established by the Safe Drinking Water Act and the Clean Water Act.
However, stringent eligibility and compliance requirements may prevent small and rural systems from accessing SRF resources. Research indicates that only 7.1% of eligible water utilities received SRF drinking water allocations from 2011 to 2020—in part because small systems struggle to meet program requirements and typically lack the administrative capacity or finances needed to apply. And these challenges are likely to mount as experienced water system workers age out of the workforce: A 2024 federal report estimates that roughly 33% of water utility employees will reach retirement age in the next 10 years.
States have an important role in helping rural communities
As deferred maintenance needs grow for rural and small water systems, state and local governments are exploring innovative ways to strengthen and fund these critical utilities. And several successful efforts have yielded tools that policymakers can use to help rural systems water infrastructure needs.
- Improved data quality and transparency: Policymakers often lack the information to gain a full understanding of rural and small systems’ needs. By helping these systems develop capital improvement plans and asset management plans, which include long-term needs assessments and funding projections, states can support better reporting, encourage transparent planning practices, and ensure that decision-makers have the information they need. Washington’s Department of Health, for example, helps utilities with asset management planning as part of its statewide drinking water strategy. Additionally, states can cultivate more comprehensive utility data with a focus on small and rural systems, as Iowa did by surveying small and rural systems about their needs and synthesizing the results.
- Regionalization: By establishing partnerships among local water systems, states can create economies of scale and enable sharing of contracting, staff, and finances. Regionalization can be highly adaptable depending on local conditions and can range from voluntary, cooperative agreements that combine resources and technical expertise to state-mandated consolidation of small utilities into a single larger system. Ohio is encouraging voluntary regionalization through its capacity development program, which has resulted in large utility mergers, such as the Mid-Ohio Water and Sewer District. Other states, such as North Carolina, have gone farther by providing grants and creating statutory processes to support regionalization. And several states’ SRFs prioritize funding applications that aim to establish regional partnerships.
- Greater access to funding: State SRFs have explored ways to improve the availability of financing for small and rural water systems, including flexible terms, principal forgiveness for certain infrastructure projects, technical assistance with funding application processes, and reduced match requirements. Nebraska’s SRF, for example, provides favorable financing terms—low interest rates, principal forgiveness, and flexible repayment schedules—based on need. Additionally, some states have established their own funds for rural and small systems. For instance, North Carolina’s Viable Utility Reserve provides grants to economically distressed systems.
The challenges facing small and rural communities are stark, and existing funding strategies have been insufficient to address them. But increasingly, state policymakers are exploring innovative strategies to fund small water systems and ensure high-quality affordable drinking water for rural communities.
Elijah Gullett works on The Pew Charitable Trusts’ state fiscal policy project.
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