March 13, 2024

Funding for Houston’s Water & Sewer System

Funding for Houston’s Water & Sewer System

After the General Fund, the next most important fund in the City of Houston is the Combined Utility System (CUS). This is the fund that is used to finance our water and sewer service. By state law, the finances for a municipality operating a water and sewer system must be segregated and with minor exceptions, the money raised by water and sewer charges cannot be used for any other purpose.

For most of Houston's history, the system has been financially and operationally challenged. Houston’s expandable clay soils make maintaining water and sewer lines that do not leak problematic. In addition, as Houston aggressively annexed new territories in 1960s-1990s, it inherited water and sewer systems from utility districts in those areas. In most cases those systems were not designed for integration with a larger system and some not were not built to the highest standards. This has resulted in a very decentralized system, spread over Houston’s 660 square miles with an uneven quality of construction. To give you a point of reference, Texas’ other large cities operate five or fewer waste treatment plants. Houston has 39.

The City’s previous leaders did have the foresight to tie up a great deal of the region’s rights to surface water. As a result, Houston provides water not only to its residents but also sells water outside of the City to about a half million customers, mostly through wholesale sales to other regional utility systems. Because of this, the City has enjoyed a reliable supply of freshwater and been able to realize some efficiencies of scale.

The most challenging area for the City has been in its processing of sewer.1 Because of the difficult soil conditions and the hodge-podge origins of the system, it leaks very badly. This allows raw sewage to be discharged into the surrounding environment, which normally makes its way to our bayou system. It also allows floodwater to inundate the system, overwhelming the processing plants during floods causing them to dump untreated or partially treated sewage into the bayous. As a result, some argue that the City is the largest regional polluter.

Because of these problems, Houston has been subject to various sanctions by EPA since the 1980s. The most recent was a 2021 consent agreement. That agreement requires the City to make $2 billion in improvements to its wastewater system over the next fifteen years.

For years, the City undercharged for the water and wastewater services it provided. As recently as 2016, the fund was technically insolvent, i.e., its liabilities exceeded its assets. And that was without accounting for the massive infrastructure improvements needed. Mayor Annise Parker took the first action to attempt to shore up the system’s finances. In 2010, City Council jacked up rates by about 25% and implemented an annual automatic rate increase equal to inflation and the population growth for the previous year.

However, after 2010, the inflation rate was near zero and the City’s population began to stall. As a result, the annual increase only averaged about 2% from 2012-2020. That slightly improved the fund’s financial condition, raising its fund balance to 4% of total liabilities by the end of 2020. However, that was still far below what it would take to make the improvements to the system that the EPA was demanding.

To meet this challenge, Mayor Sylvester Turner asked City Council in 2021 to impose a sweeping increase to rates. As ultimately approved by City Council, increases will raise rates from 50%-78% depending on usage. The increase was scheduled to be phased in over five years beginning in 2022. Two of the five increases have taken effect. The next will to added in April and two more in April 2025 and 2026.

Importantly, these increases are in addition to the automatic annual increases enacted in 2010. Because inflation soared during the pandemic, the multiplier effect of combining the two sets of increases has resulted in significantly higher revenue for the CUS than was anticipated. The consultant’s rate study (see p. 5), that was the basis for the 2021 increases, projected that the CUS would need revenues of $1.84 billion by 2026. However, the City’s current monthly report (see p. 16) is projecting that level will nearly be reached this year, two years ahead of schedule. If the City continues to implement both the 2010 and 2021 increases for the next three years as planned, the CUS will significantly overshoot what the consultants projected the system will need.

While the rate increases have and will continue to be painful for many in our city, I commend former mayors Parker and Turner for making the politically difficult decision to support rate increases for the CUS. Had the City not increased the rates, the system would have continued to be unable to make the improvements necessary to deliver reliable service to Houstonians and to begin cleaning up our environmental mess. As a result of those increases, the CUS ended last year with a surplus of $3.1 billion. That is a seven-fold increase from just three years ago.2

So, it appears we will have sufficient funding to make the sorely needed improvements to our rag-tag water and sewer system. Of course, implementing those improvements will be a tremendous challenge. Trying to estimate what is needed to update a wastewater system when it is almost entirely underground is a difficult proposition at best. The City could easily uncover more problems than those currently anticipated.

One large unknown is that the City has been constructing a new freshwater processing plant on Lake Houston. The project is reportedly far behind schedule and over budget. There has not been a lot of public discussion or media coverage about the status of the project. The City is building the plant with some other regional partners. I fear that this project may end up being a costly mess.

But the good news, at least for now, is that from a citywide perspective, the finances for our water and sewer system are in reasonably good shape and not the cause for any immediate concern.


Note 1 - It is important to distinguish between wastewater and storm water. Wastewater is commonly referred to as sewage. It is what we put down our sink drains and toilets. Storm water is the water that runs off our roofs, streets, etc. and is collected in the drainage system, which to make confusing are sometimes referred to as storm “sewers.” The reason that the distinction is important is that storm water is discharged directly into the bayou system without being processed. The wastewater/sewage is processed at plant to remove much of the waste the water is carrying with it.

Note 2 - This is a link to the City most recent audit. The complete financial statements for the CUS can be found at pp. 218-222.

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