Fiscal institutions and racial equity: Determining the price of water

Abstract Municipal water utilities across the United States establish their own rate structures to cover operations, maintenance, depreciation, and outstanding debt repayment. Yet, little is known about how rates are determined to ensure equity and/or affordability. To identify sources of variation in residential drinking water rates, we examine municipalities in northeastern Illinois, 2015–2019. Controlling for water utility characteristics, billing structures, financial management, service quality, and demographic/socioeconomic factors, we find no statistically significant correlations between water rates and median household income or race when nonrevenue water from leaking infrastructure is considered, revealing relative racial equity in water pricing within these communities. A larger water distribution network, more water included in the base charge, and a greater number of months in the billing cycle are all associated with lower rates. Purchasing water through an individual or cooperative agreement, a greater proportion of nonrevenue water from leaking infrastructure, a higher minimum monthly base charge, and more revenue debt outstanding (while controlling for nonrevenue water) are all associated with higher rates. We also find a positive correlation between municipal sewer rates and drinking water rates that supports findings from prior research. Overall, our research aids in the development of public policy that ensures all households have access to affordable and safe drinking water to promote water equity and public health.