UIC’s Government Finance Research Center releases water rate setting study of northeastern Illinois

In 2021, the Illinois General Assembly commissioned the Government Finance Research Center at the University of Illinois Chicago to conduct a water rate setting study. The first research report and related policy briefs just released by the GFRC focus on the Lake Michigan Service Area, which comprises 172 municipalities currently relying on Lake Michigan water, as well as 112 municipalities that could feasibly be served by Lake Michigan in the future.

Throughout the study, the GFRC researchers received guidance from an advisory committee composed of representatives from state government agencies, municipal and private water utilities, environmental justice and consumer advocacy organizations, and others.

In the study, the GFRC researchers employed a mixed-methods research approach that applied both quantitative analyses utilizing secondary data from a variety of sources, and qualitative case study analyses that relied upon a review of municipal documents, news articles and semi-structured interviews with system- and municipal-level water system representatives.

To facilitate comparisons across the region, the GFRC researchers used a standardized water bill, equal to the price residents pay for 5,000 gallons per month. Across the LMSA, the 2021 average standardized bill is $45. However, most residents of the LMSA pay $20 for 5,000 gallons of water a month, the rate offered by the City of Chicago. Residents of the 12 municipalities that directly pump water from Lake Michigan and produce water for others often have lower water rates.

In examining the water rate setting process, the GFRC researchers discovered important variations in practices across the LMSA, including the use of base charges to stabilize revenues, the process and timing of implementing water rate changes, the use of third-party consultants, and municipal practices regarding financial management and long-term planning. These variations in rate-setting practices translate into differences in the water bills that residents receive across the LMSA.

Across the LMSA, water bills have increased by an average of 22.5% from 2014 to 2020. These increases are driven by inflation, decreasing water demand, aging infrastructure, changes in water quality requirements and the pursuit of new technologies. Nonrevenue water creates important challenges for municipalities, as managing repairs for water system loss can be difficult. Disadvantaged communities face additional challenges in rate setting, including higher operational costs and lack of access to loans, stronger resistance to water rate increases necessary to fund operations and infrastructure needs, and limited economic base and reduced financial ability to maintain a water fund or to cope with sudden large-scale expenses such as infrastructure failures. And the governmental fragmentation of water systems across the LMSA is a barrier to the cross-subsidization of resources.

The pursuit of equitable rate setting requires a better understanding of affordability. Municipalities across the LMSA do not have one single working definition of affordability. Rather, municipalities often rely on benchmarking or comparing the amount they charge their customers to what other communities charge. The GFRC researchers found wide variation in the financial and punitive penalties associated with initiating water service, as well as for non-payment of household water bills. LMSA municipalities that charge higher water rates require customers to pay their water bills faster and are less likely to have affordability programs.

Policy recommendations based on the findings from this first report include the need for uniform communication standards for water bills; increased municipal capacity, expertise and knowledge; strategic municipal investment and support for disadvantaged communities; state-level policies and programs focused on affordability; support for intergovernmental coordination; and regular data collection to populate relevant dashboards and tools.

In the second phase of this study, the GFRC researchers will examine municipalities throughout the remainder of the state of Illinois. Research is currently underway for the second report, which is scheduled for release in December 2024.

The first report and related policy briefs are available for download on the GFRC website.