American Rescue Plan (ARPA) funding enabled many municipalities with a rare opportunity to invest in infrastructure and other priorities without making the compromises those investments might otherwise have required. For some communities, ARPA helped accelerate planned enhancements to their water and sewer systems, as well as other capital projects. For others, it helped absorb costs that otherwise may have required higher rates, additional borrowing, or reserve spending. Those choices may have been appropriate, but they can also make it difficult to determine whether current resources remain aligned with the utility’s ongoing needs.
Most Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) must be spent by Dec. 31, 2026. As municipalities transition away from that funding source, a post-ARPA rate review can help leaders reassess the assumptions that guided decisions during the funding period and determine whether current revenues, reserves, and capital plans can sustain the system over time.
What may have changed during the ARPA period?
Questions that were once deferred now warrant closer examination. Aspects that may demand additional attention include:
- Rate increases that were paused while ARPA funding was available.
- Capital replacement needs that remain unfunded after ARPA dollars are exhausted.
- Reserve targets that no longer align with current risks.
- Operating costs that have grown faster than rates.
- Rate structures that haven’t been reevaluated despite significant infrastructure investments.
While none of these findings automatically indicate that rates need to increase, they do suggest that underlying assumptions should be revisited.
What questions should utility leaders be asking?
Municipalities should determine whether current revenues can meet immediate and long-term budget needs without temporary funding. Operating costs, debt service, capital reinvestment, and reserve requirements should all be examined in the context of the utility’s financial position.
A productive review often begins with two separate questions:
- Does the utility system generate enough revenue to meet its financial needs?
- If additional revenue is required, how will rate increases be passed along to customers?
Separating revenue adequacy from rate design helps communities make more transparent and defensible decisions. A municipality may determine that additional revenue is needed, but that doesn’t automatically resolve how the cost should be distributed across the rate structure.
How can forecasting support better decisions?
A long-term utility forecast can help leaders evaluate how different funding, capital, and rate-setting decisions may affect the utility’s financial position before mounting pressures limit their options. Its purpose isn’t to predict the future with certainty, but to test the implications of different assumptions and choices.
For example:
- What happens if a major project is delayed?
- Should infrastructure be funded through rates, debt, reserves, or a combination of all three?
- How would future borrowing affect rates?
- What happens if usage trends change?
- How much rate adjustment may be needed under different scenarios?
Forecasting can also help leaders explore broader questions about the utility’s financial strategy, including the balance between fixed and usage-based charges, the allocation of costs among customer classes, and the relationship between rates, reserves, and capital planning.
The bottom line
ARPA funding helped many municipalities move important projects forward, address deferred needs, and reduce financial pressures that might otherwise have required difficult trade-offs. As that funding comes to an end, the most important question isn’t whether rates need to increase next year. It’s whether utility leaders clearly understand the system’s long-term financial position and the choices required to sustain it.
