Perspectives: Options for Funding Acton’s Response to PFAS

The discovery of PFAS in Acton’s groundwater confronts the town with the prospect of many millions of dollars of new capital costs to add PFAS treatment capacity to the Acton Water District’s (AWD’s) local water treatment plants and/or to connect to the Massachusetts Regional Water Authority (MWRA) system. How can these competing priorities be accomplished: raise enough revenue to service long-term debt, cover operating costs (including system maintenance and competitive staff compensation), encourage conservation, limit the financial impacts on those Actonians least able to pay, and assure that Acton’s tap water is safe and legal? This article lays out five options under discussion, and offers the author’s assessment of the viability and desirability of each.

CORRECTION, March 16, 2023: The outstanding long-term debt of the Acton Water District is $22.5M, rather than $35M, as was stated when this Perspectives piece was published on January 8, 2023. The number has been changed in the text and is explained in Note 7.

A previous post described the AWD’s rapidly escalating costs to pull water out of the ground, treat it to remove dangerous materials, and deliver it to Acton homes and businesses. This financial situation has been greatly exacerbated by the discovery of PFAS in Acton’s groundwater. Technology exists to remove PFAS from water, but it is expensive to acquire, install, and operate. Other water sources exist with lower PFAS content, but none of them is easy for Acton to access, and all involve substantial additional expense.

According to the draft warrant for the 2023 AWD Annual Meeting, voters will be asked to approve between $17M and $23M of new borrowing, most of which is related to PFAS remediation (see Note 1). This new borrowing would be on top of the $22.5M of long-term debt carried over from previous years (see Note 7, added March 16, 2023). The cost of connecting Acton to the MWRA system is unknown at this time, but a guesstimate in the multiple tens of millions of dollars was recently contemplated by the Water Resources Advisory Committee (WRAC) (see WRAC Discussion of 11.3.22). Note that all of the future dollar numbers in this post are estimates with considerable uncertainties. The numbers will come into somewhat sharper focus as the March 15, 2023 date for the AWD Annual Meeting approaches, but it seems inevitable that the numbers will be big.

The AWD Finance Committee, the AWD Commissioners, and the Town Water Resources Advisory Committee have had multiple discussions about how to handle these daunting new costs. Five broad categories of options have been discussed (please see previous post for background):
(1) Incorporate new capital costs into the current flat-rate debt fee system
(2) scale charges for both capital costs and operating costs by volume consumed
(3) scale each water-taker’s debt service fee by their fraction of Acton’s total water usage
(4) pay for PFAS capital costs through a property tax levy
(5) get someone else to pay for [part of] the PFAS remediation costs.
Because Green Acton is an environmental group, this article will pay particular attention to conservation and environmental justice implications of each option.

These problems are not unique to Acton. Water costs are going up almost everywhere, and many public water suppliers are struggling to find a viable balance among multiple important priorities. Valuable sources in developing this article have been the website on Financing Sustainable Water from the Alliance for Water Efficiency, the U.S. Environmental Protection Agency’s (EPA’s) websites on Understanding your Water Bill and on Pricing and Affordability of Water Services, and a website for Massachusetts Public Water Suppliers trying to restructure their rates.

Option 1: Add new capital costs into current flat-rate debt fee system

As detailed in the previous post, the AWD charges each water-taker a usage rate that is scaled according to how many cubic feet of water they took in that quarter, plus a debt fee that is a uniform $60 per housing unit (or per business or per municipal account). The debt fee covers the payments of interest and principle for long-term debt the AWD has taken on to build water treatment plants and water mains, and to acquire land for source protection. Each increment of debt was authorized by Acton voters at an AWD annual meeting. The current debt commitments, and the contribution of each to the debt fee, are transparently documented on the My Water Bill webpage.

When the AWD debt fee was first put in place to fund the construction of Acton’s first water treatment plant, the fee was a uniform $15 across all accounts. But over the years Acton’s water infrastructure has become more complex, largely in response to the need to treat the water for more contaminants. The debt fee has quadrupled, to $60, and for water-takers who use less than 937 cu ft of water per summer quarter, the debt fee comprises more than half of their water bill.

If no conscious decision is made to change the AWD pricing structure for debt service, the mounting debt-repayment costs will simply be split evenly among all of the AWD water-takers each year going forward. The magnitude of the debt service fee in the coming years would depend on many things, including whether low-cost loans are available through the Massachusetts State Revolving Fund and whether EPA imposes more a more stringent maximum contaminant level (MCL) for PFAS than the limit currently in effect in Massachusetts, and whether other contaminants of concern are identified in the future.

To get a feel for what the near-term debt fee increase might look like, consider that the existing debt $22.5M (Note 7) and the draft warrant for the 2023 Annual Meeting proposes more than $17M of new borrowing. So perhaps the fee might increase by 50%, from $60 per unit per quarter to $90 per unit per quarter. Further increases can be expected in future years.

The flat-rate debt fee does not encourage water conservation, because water-takers pay the same debt fee regardless of whether they conserve or squander. Moreover, a disproportionate share of the community’s debt-repayment responsibility falls on low-volume water takers, for whom the debt fee is a higher fraction of their water bill. To the extent that low-volume water-takers may also tend to be low-income households (because they are less likely to be filling swimming pools or watering vast lawns), an ever-increasing fraction of the water bill charged as a fixed-rate debt fee is also antithetical to the goals of environmental justice.

Option 2: Charge for both debt repayment and operating costs by cubic feet consumed

In this option, all costs of running the AWD, including the interest and principal repayment for long- and short-term debt, would be recovered by per-volume water use charges. In this regard, the AWD bill could come to resemble an Eversource bill, with various components of the provided service charged on a consumption basis. In an unpublished white paper, AWD Finance Committee (FinCom) Chair Ron Parenti showed that a flat rate debt fee of $0.032 per cubic foot could garner the necessary income for the AWD, and be less expensive for low-volume customers (See Note 2).

This option has been discussed at several meetings of the AWD Commissioners (notably on 11/22/2021 and 12/05/2022), and was not enthusiastically received. A serious objection is that the amount of revenue for debt service payment coming into the AWD would vary significantly from quarter to quarter and unpredictably from year to year. In exceptionally wet years, when people don’t water their lawns much, fewer debt-service dollars would flow to the district. Perversely, drought years would also yield low debt-service income to the AWD because of the additional restrictions on non-essential outdoor water use.

This volatility would challenge the district’s planning and budgeting, and might make it harder to obtain favorable interest rates on new loans. The existing long-term loans were contracted with the understanding that the district has this rock-solid, unchanging income stream with which to repay the loans. A 2017 collaboration among the Massachusetts Division of Ecological Restoration (DER), Department of Conservation & Recreation (DCR), and the Alliance for Water Efficiency (AWE) has documented cases in which water districts experienced downgrading of their bond ratings when diminished water sales led to diminished revenues.

From a conservation perspective, this option would introduce a perverse incentive. The AWD has had a robust — indeed, an award-winning — program to encourage water conservation, including rebates for low-flow water usage appliances, education around indoor and outdoor conservation practices, and presentations to community and school groups. Tying the income stream that pays those big debt-service bills to water usage introduces a subtle nudge to sell more water — or at least not work so hard to sell less water by encouraging conservation. The DER/DCR/AWE study found that when reduced sales revenue led to districts failing to cover their fixed costs adequately, “conservation is often blamed.”

Option 3: Scale water-taker debt charge by fraction of total water usage

In this option, there would still be a debt fee, but it would not be the same for each water-taker. Each water-taker would pay for a share of that quarter’s debt-repayment expense proportional to the fraction — of all water the AWD served that quarter — their use comprises. All those fractions added together would total to exactly the number of dollars the AWD needs to pay its debt service costs for that quarter.

For example, in Jan/Feb/Mar of 2022, the AWD pumped a total of 118.6 million gallons of water. Let’s imagine a four-person household that used 20,000 gallons of water across those three months (a figure very close to Acton’s average usage of 55 gallons per person per day). That household’s 20,000 gallons would be divided by the total 118.6 million gallons pumped, meaning the household used 0.0169% of the total distributed water in that quarter. Thus, that household’s share would be 0.0169% of AWD’s total debt repayment cost for that quarter. Low-volume water-takers would pay less, and high-volume water-takers would pay more, but the AWD would end up with the amount of money it needs to pay its bills.

A potential drawback to this option is that a household or business would not know in advance how much their debt fee would be each quarter, potentially making budgeting more difficult. On the other hand, this variation from quarter to quarter works toward incentivizing and rewarding conservation. Let’s imagine that our hypothetical household does not water a lawn or top up a swimming pool or do anything else to drive up summer water usage: every quarter, year after year, summer and winter, the household draws the same 20,000 gallons of AWD water. Across July/Aug/Sept of 2022, the AWD pumped a total of 143.6 million gallons of water. The summer total was 21% more than the winter total because other households and businesses — unlike our hypothetical one — used more water for seasonal uses. For the summer quarter, our hypothetical conserving household used only 20,000 gallons divided by 143.6 million gallons, or .0139% of the water used in Acton that quarter. This is a smaller fraction than during the winter, so their share of the AWD’s debt cost in the summer months would be correspondingly smaller.

For a hypothetical year in which the AWD is on the hook for $2M in long-term debt costs ($500,000 per quarter), our hypothetical household’s winter debt service share would be $84. But in the summer, they would be somewhat subsidized by their water-squandering neighbors, with their share dropping to $69. That is not a huge difference, but it would send the correct message that water conservation in Acton is rewarded. That $2M is approximately the repayment cost for long-term debt in the FY23 draft budget (see Note 3). If, as seems likely, debt increases in future years, the reward for conserving water will increase.

Comparing options 1, 2, and 3

Options 1, 2, and 3 share an attribute: new PFAS costs would be covered by some variation of a debt fee applied to each water-taker’s AWD bill. Before moving on to the drastically different options 4 and 5, let us compare these three options. The matrix below compares the advantages of each:

Option 1. This current system has protected AWD’s borrowing ability by reliably bringing in, quarter after quarter, a known amount of revenue for debt repayment in wet seasons and dry, even as the AWD’s proactive conservation program has resulted in less water usage per water-taker. However, it has had the disadvantage, as AWD’s total debt has grown, of loading a disproportionate share of new debt cost onto low-volume water users. Also, the flat debt fee does nothing to encourage conservation by customers.

Option 2. This approach, which charges both capital costs and operating costs in proportion to gallons of water used, solves both of those problems. However, it would greatly increase volatility in the AWD’s income, and would provide a perverse incentive to ease back on AWD conservation efforts — because each gallon of water conserved would mean less income for the district. These concerns are not idle worries, as attested by DER/DCR/AWE descriptions of water districts that have had their bond ratings lowered when their water revenue decreased, with the blame laid on conservation. The AWD has been a faithful steward of the funds provided by rate-payers, earning a glowing report from auditors; the district’s concerns about financial volatility need to be taken seriously.

Option 3. My understanding of this option is that all four features in the matrix above would be favorable to the people of Acton and to the AWD. The same amount of debt-repayment revenue would flow into the AWD each quarter, in wet seasons and dry. Low-volume water-takers would pay a lower debt fee than high-volume customers. Water-takers who were frugal in their non-essential summer outdoor water use would be subsidized by water-takers who squandered water in the summer. There would be no perverse incentive to back off from District conservation efforts.

A possible drawback of Option 3 is that it is unconventional and unfamiliar. EPA’s website contains verbal and graphic descriptions of seven different rate structures in use by water suppliers, and differentiates them according to their effectiveness at encouraging conservation. Scaling by fraction of total water usage is not among the approaches listed there, which suggests that either this approach has not been tried or is quite rare.

One possible tactic to minimize the perceived risk of trying a novel approach would be to leave the debt fee exactly as it is for existing debt, and apply Option 3 only to new debt associated with PFAS. This new type of debt repayment fee could be itemized on water bills specifically as “PFAS Remediation Fee,” which would remind Actonians once per quarter of the AWD’s strenuous efforts to solve our PFAS problem.

Option 4: Fund PFAS costs through property tax

The AWD’s Charter from the Commonwealth of Massachusetts authorizes the District to collect taxes “in the same manner in which town taxes are required to be assessed” — in other words, property taxes. Property taxes are used in many localities to support water infrastructure, for example, Maricopa, Pinal, and Pima counties in Arizona and the Town of Dennis here in Massachusetts. Massachusetts has an established process by which localities can establish a dedicated surcharge on real estate taxes that “may be appropriated and spent on maintenance, improvements and investments to municipal drinking, wastewater, and stormwater infrastructure needs.”

Paying for expensive new water infrastructure via property tax is progressive, in that households with the most valuable property — and thus presumably a greater ability to pay — bear larger costs. But it does not encourage water conservation because taxpayers have no ability to decrease their water costs by conserving.

This tax option came up at the AWD Commissioners’ meeting on Dec. 6, 2022, but was not well received. Quite a large upheaval would be needed in the AWD’s billing and accounting system, the mindset of AWD water-takers, and the AWD’s relationship to Acton’s Town government.

A particular complication in applying this methodology to Acton would be that not all properties get their tap water from the AWD. A case could be made that it would not be fair to levee such a tax on properties that are outside the AWD service area. On the other hand, a case could also be made that all residents of Acton benefit from safe water in schools and public buildings, and that property values are protected by being part of a PFAS-safe water community.

Option 5: Find alternative funder of [at least some] PFAS costs

Various avenues are being explored to find someone else to pay at least part of the bill, rather than require Acton residents to absorb the entire cost of a PFAS solution. Possibilities include litigation, state funding, and federal funding. All of these possibilities are fairly speculative at this point.

The Acton Water District has joined with many other public water suppliers in a multidistrict lawsuit against the manufacturers of PFAS. A brief update provided at the Nov. 14, 2022 meeting of the AWD Commissioners said that there have been several motions by the defendants to stop the suit, and that it’s not yet possible to provide a timeline for the how the litigation may play out.

Hope for Massachusetts state funding is one of the reasons why connecting to the MWRA is considered especially attractive by some stakeholders. MWRA is negotiating with three regional consortia: MetroWest, North Shore, and South Shore. According to an MWRA press release dated November 16, 2022, the MetroWest group includes Acton, Bedford, Chelmsford, Concord, Groton, Holliston, Hopkinton, Lincoln, Littleton, Maynard, Natick, Sudbury, Wayland, Wellesley, and Weston. A regional solution that benefits such a large number of towns might have the political clout to advocate successfully for funding at the Massachusetts Statehouse. The North Shore and South Shore groups are further advanced than the MetroWest group, having completed feasibility studies. There is not enough capacity to service all three areas, according to the press release.

Publicity around the $50 billion dollars allocated to water and wastewater infrastructure in the federal Bipartisan Infrastructure Bill has raised hopes that some of that money could flow to Acton. This is the largest investment in drinking water infrastructure that the federal government has ever made. However, a look at the fine print shows that most of this money will be allocated via the State Revolving Funds of Massachusetts (and other states). This was an astute move on the part of the federal government, as it means that the money can be lent and re-lent many times rather than being a one-time cash infusion. That portion of the Infrastructure Bill water funding slated for distribution as direct grants or forgivable loans is directed towards disadvantaged communities, a category that does not include Acton. This is an admirable decision from the point of view of environmental justice. But from the point of view of Acton’s financial situation, this tosses us back to considering Options 1, 2, or 3 — how shall we repay borrowed money?

Moving forward

In December 2021, the AWD Commissioners considered commissioning a Water Rate Study by an outside expert who would model alternative rate structures (see Note 4). This seems like a good next step, given the complexity of the options for funding long-term capital debt service described in this post, in addition to the questions about operational costs raised at the end of the previous post. The AWD has accurate records of water usage going back many years; presumably, these data could help model how each option would impact cost to low-, medium- and high-volume water-takers, as well as the level and volatility of revenue to the AWD in wet and dry years. Tools to do such modeling are available from the Alliance for Water Efficiency and probably from others as well.

The decision as to whether or not to hook up to the MWRA will be a momentous fork in the road for Acton. Because we don’t yet know if the MetroWest consortium will be offered a chance to connect — let alone what the terms might be — it is premature to speculate on whether Acton would be better off treating water locally for PFAS and other contaminants or connecting to the MWRA. However, it is timely to start thinking about what process should be used to arrive at a decision, and what factors should be taken into account in such a decision. Cost — both the initial construction cost and ongoing costs (see Note 5) — is certainly a factor. But non-financial factors also deserve serious consideration. Would Acton still be held to the amount of water in our current Water Management Act permit and registration, or would there be a possibility of obtaining more water (see Note 6)? Which option would put Acton in a better position to cope with other emerging contaminants in the future? How would we interact with the other towns along the route from the current MWRA distribution system to Acton, and how much do we value local control? The routes under consideration are said to include the Bruce Freeman and Assabet River bicycle trails; would access to the bike trails be disrupted, and if so, for how long? Would the community’s incentive to preserve open space diminish if groundwater source protection were no longer a motivator? These questions are just the beginning. Whatever the process, ample opportunity for public education, thoughtful discussion, and public input should surely play a major role.

Notes

(1) Draft warrant articles for the 2023 AWD Annual Meeting request approval to borrow: $8.7M to add PFAS treatment capacity to the South Acton Water Treatment Plant (WTP); $5.4M to add PFAS treatment capacity to the Central Acton WTP; $2.4M for construction of new bedrock wells at 549 Main Street (a source expected to offer low-PFAS water and some drought resiliency); nearly $1M for improvement to the filtration system in West Acton; and $4.9M for a major land acquisition for groundwater source protection. Funds for some of the land acquisition cost might be raised from sources other than borrowing. Taken all together, the “request to borrow” articles in the draft warrant sum to $23,275,000; without the land acquisition, the total is $17,475,000.

(2) Unpublished white paper entitled “Thoughts on Billing Options for AWD Residential Customers” by Ronald R. Parenti of the AWD Finance Committee, dated February 4, 2022. The calculation showed that for the July 2021 billing cycle, charging a flat rate of $0.054 per cubic foot for usage plus $0.032 per cubit foot for debt repayment would have yielded the same revenue to the AWD ($618,000 for water usage and $370,000 for debt fee) as the current rate structure. Users taking less than 1,800 cu ft per quarter would have had a lower total water bill than under the current rate structure (see Parenti figure 9). To account for variation in revenue depending on amount of rain received, the white paper suggests creation of a stabilization fund.

(3) The draft budget, prepared by AWD FinComm and staff for consideration by the AWD Commissioners, shows long-term debt budgeted expense for FY23 as $1,922,298 and proposed expense for FY24 as $2,752,416. 

(4) In the December 20, 2021 draft of the Proposed Warrant Articles for the district’s 2022 Annual Meeting, Article 8 would have been “Appropriate $35,000 from Surplus Revenue for a Water Rate Study.”

(5) An important question in rate-payers’ minds will be whether their quarterly bill would be higher, lower, or approximately the same after MWRA connection. The MWRA describes itself as a “wholesaler” to its member communities, and reports that their charge to member towns (“community assessments”) typically represent 45% of the amount that communities bill their customers. The other 55% covers local costs such as maintaining a local distribution system, billing, and debt service. For FY2022, MWRA’s charge to communities was $4,387.28 per million gallons, or $0.033 per cu ft. If Acton’s accounting worked out at the “typical” 45%–55% ratio between wholesale charges paid to MWRA and local expenses, the amount that would have to be billed to customers would average $0.033 per cu ft (the 45%) plus 0.040 per cu ft (the 55%), for a total of $0.073 per cu ft (the 100%). In an unpublished white paper on “Thoughts on Billing Options for AWD Residential Customers” by AWD FinCom Chair Ron Parenti (dated Nov. 11, 2022), Figure 3 shows the “Effective Rate” currently paid by AWD customers, including both fixed charges and tiered usage charges. According to Parenti’s calculations, only the highest volume water-takers in the AWD system currently pay rates this high. The MWRA cautions that the community assessment “proportion varies considerably among communities,” so this back of the envelope calculation may not be accurate for Acton — but it does indicate the type of questions that Actonians should be asking as decisions about how to pay for water play out in the future.

(6) Acton’s ability to withdraw water is limited by permits and registrations under the Massachusetts Water Management Act, to an authorized total average withdrawal of 1.94 million gallons per day (see 2018 update to the AWD Master Plan, section 3.6).

(7) [added March 16, 2023] The original version of this Perspectives article stated that the outstanding debt of the AWD is $35M, citing the Debt Fee explainer on the AWD website. In preparing a graph for presentation for the Water Rate Study warrant article (#25) at the AWD Annual Meeting, I realized that $35M is actually the total amount borrowed on debts that are not yet fully repaid. After subtracting the repayments of principal that have been made over the years, the amount outstanding is $22.57M. The point made in the Perspectives piece remains unchanged: that AWD is about to take on an amount of new debt that is large relative to its historic debt level. The graph below shows the history of debt acquired and repaid to fund construction of the North, South, and Central Acton Water Treatment plants, based on data provided by the AWD. The borrowing authorized by voters at the AWD Annual District meeting of March 15, 2023 totals $22.55M, although there were numerous cautions that actual costs could be lower or higher.

Disclaimer: The author lives in a part of Acton with private wells rather than AWD service. However, she has followed the rate discussions closely in her role as the Chair of the Green Acton Water Committee, and wishes for a fair, non-acrimonious, and sustainable decision. None of the options identified above was her own idea; all were presented at various meetings of the AWD Commissioners and the AWD Finance Committee. Several members of the AWD staff, Board of Commissioners, and FinCom were helpful in assembling this article, and several Green Acton members provided valuable insights, critiques, and information. Any errors, however, remain the responsibility of the author.