Kirkwood Water: Selling the Farm

Kirkwood Water has a budget gap. The source of this gap is twofold. First, our water mains (the big pipes that transport water to each Kirkwood block) are at the end of their lifespan and thus have a high rate of leaks and breaks. Secondly, some of Kirkwood’s service lines (the smaller pipes that transport water from mains to individual homes) were made of lead and, by federal statute, need to be replaced by 2036.

The water main problem does double damage. These leaks and breaks, of course, undermine the reliability of Kirkwood Water as a service, but they also cost the city directly. Because Kirkwood Water stopped producing its own water in 2004 and now buys it wholesale before distributing it to customers, any water lost in transit through leaks and breaks comes out of the city’s pocket. In FY 2025, the city forfeited nearly 30% of its purchased water at a complete loss, with main breaks and unaccounted-for water from faulty meters and undiscovered leaks accounting for the vast majority of those losses.

Modern water mains can last for 100+ years, so if the old ones were staggered so that they were also failing at a rate of 1% a year, we’d actually be in pretty okay shape. Unfortunately, they were almost all built around the same time and thus are also all failing at about the same time. The city currently budgets $2,225,600 a year to replace ~1% of its water mains a year, but it has capital needs of ~$90 million over the next ten years. That means we need something like $6.5 million per year in additional funding for the next decade.

The lead service line issue compounds the utility’s financial woes. Under the EPA’s 2024 Lead and Copper Rule Improvements, public water systems are required to replace lead service lines within ten years —though the rule is currently being challenged in court, and its future under the current administration is uncertain. Regardless of the federal timeline, lead is bad for you, so this should be a priority. The city is still in the midst of assessing exactly how many lead service lines we actually have (at last count 530 of Kirkwood’s service lines are made of lead and another 1,500 are made of unknown materials), and there are some grant funding opportunities available (although Kirkwood has yet to win any), so it’s not clear exactly how much this issue adds to the $6.5 million annual funding gap, but suffice it to say it’s not helping. In short, we’ve got two big problems and one massive hole in the water budget. The only question is how we’re going to plug it. (All puns very much intended).

Everything You Ever Wanted to Know About Private Utility Management

Many members of the Kirkwood City Council now seem to be circling the conclusion that the only way to cover this deferred maintenance is by selling Kirkwood Water to a private utility, Missouri American Water Company (MAWC). I’m much more skeptical, but to explain why, we first need to take a look at how private utilities are regulated.

Because private utilities like MAWC are natural monopolies —you can’t exactly switch water providers!— states set up boards called Public Service Commissions (PSCs) to regulate them and determine how much revenue they’re legally allowed to earn. That fair rate of return is calculated via the following formula:

Revenue Requirement = (Rate Base × Authorized Rate of Return) + Operating Expenses + Depreciation + Taxes

The most important part of this formula is the rate base: the total value of all the physical water delivery infrastructure the company owns: pipes, pumps, meters, tanks, etc. This rate base is what PSC lets the company earn a profit on, typically around 9-10% per year. Put another way, the amount of physical infrastructure a private utility owns is the determinant for how much profit they’re allowed to make and thus the water rate they’re allowed to charge, while operational costs —routine maintenance, service calls, etc.— are disincentivized.

Given this dynamic, Kirkwood Water’s significant capital needs will provide Missouri American Water with an opportunity to increase its rate base and thus raise rates on its full St. Louis County customer base for decades to come.

The Long-Term Trap

In the near term, privatizing Kirkwood Water may work out relatively well for the city: Kirkwood gets a big infusion of cash (using this 2004 estimate and updating it for inflation, we’re looking at somewhere in the neighborhood of $13 million) while the cost of its infrastructure upgrades gets spread across MAWC’s full St. Louis County customer base. But the same cost-sharing mechanism that benefits Kirkwood today is almost certainly going to leave Kirkwood residents paying higher rates in the long run.

Because while Kirkwood Water would be MAWC’s latest acquisition, it almost certainly would not be its last. Since Missouri’s Fair Market Value statute, was passed in 2013, the pace of these private acquisitions of formerly public utilities has really ramped up, and now MAWC is seeking further state-level rule changes to help them cash in on their growth.

The Public Service Commission requires utilities to segment their investment activities into districts, with capital costs (and thus rate increases) limited to the customer base of the district in which the improvements were made. But MAWC has been lobbying for years to combine those districts into a single statewide rate. In a 2018 rate case, the PSC consolidated MAWC’s districts from three to two. MAWC had pushed to go all the way to one.

I’ll quote from this 2018 Joplin Globe article I found featuring MAWC’s Christie Barnhart:

As part of the rate order, the PSC [Public Service Commission] also consolidated water districts statewide from the current three districts to two. One district will include all customers in St. Louis County, and the second district will cover all other Missouri water customers, including Joplin.

The PSC has gradually been consolidating districts, Barnhart said.

“We have gone from eight to three to two,” she added.

…

Barnhart said Wednesday that Missouri American would likely continue to seek single-tariff pricing statewide in future rate cases

And indeed, MAWC was back before the PSC just last year making the same request. So far, the dam has held, but in a state dominated by Republicans sympathetic to private enterprise, it remains unclear for how long.

And there’s a whole big state out there. MAWC is active from the I-70 corridor…

To southwest Missouri…

With plenty of room for further expansion.

As infrastructure needs grow, MAWC will acquire more municipal systems and, by its own admission, would prefer to finance those investments by raising rates on customers across the full state rather than insulating St. Louis County from improvements made in KC or Jeff City or Springfield. The same district consolidation that would spread Kirkwood’s costs across St. Louis County is the mechanism by which Kirkwood ratepayers would eventually subsidize infrastructure upgrades everywhere else MAWC operates.

A municipal utility like Kirkwood Water doesn’t work this way. It just needs to cover its costs. There’s no profit margin, no shareholders to pay, and it can borrow money more cheaply because government bonds are tax-exempt. In the long run it is much better for consumers if Kirkwood owns its own water utility.

Minding the Gap

Still, the short-term funding gap is unavoidable. As I said at the top, Kirkwood Water needs something like $68 million —$6.5 million per year— in additional funding over the next decade to replace its mains, but these pipes last for a very long time, so after that, Kirkwood Water should be in pretty good shape for the next 90 or so years.

Where does that short-term funding come from if not the sale of the system itself? Well, the short-term nature of the gap lends itself to two primary possibilities. Oe=ne possibility is that one-time infusions of cash could be used to plug the hole. I’ve repeatedly beaten the drum on the $2 million the Council left on the table in 2024 by blocking the sale of the two Jefferson lots the city had issued RFPs for a year earlier, but the last two iterations of the council missed an even bigger gap-closing opportunity when they failed to appropriate any of the $5.6 million in American Rescue Plan Act (ARPA) funding the city received in the wake of COVID towards the aging water system.

The more classic solution for municipalities looking to cover short-term, acute fiscal needs is for them to issue bonds: Sell $70 million worth of bonds, and then repay the bonds with interest over the long haul —say 30 years. The idea is that you trade the money that you will have in the future for it all right now up front when you need it and the buyers of the bond charge you interest for the service they provided. Put another way, the users of the pipes now should not have to foot the full cost of pipes that will still be around long after they’re gone.

Did you just roll your eyes at the idea that Kirkwood could solve its problems by taking on more debt? Well, here it’s important to specify exactly what kind of bonds I’m talking about, because different debt instruments come with different rules.

Recently, Kirkwood has come to heavily rely on COPs —bond-like instruments (but not technically bonds) that essentially allow the city to utilize a rent-to-own structure to fund capital improvements. The city likes COPs because they don’t require voter approval, but that cowardice comes with the cost of forcing the city to pay much higher interest rates. On the other end of the spectrum are general obligation bonds, which require four-sevenths (~57%) supermajority approval from Kirkwood voters, but, because they are backed by the full faith and credit of the city, charge the city much lower interest rates. Moody’s just downgraded Kirkwood from Aa1 to Aa3 this past December, so a big new GO bond issuance is almost certainly off the table both politically and financially.

Somewhere in between those two, though, are what are known as revenue bonds. Revenue bonds require voter approval, but only a simple majority of 50% +1 rather than the supermajority 57% threshold required by GO bonds, and unlike COPs, they are backed by a dedicated revenue stream (parking revenue, tolls, usage fees, etc.) with the city’s guarantee that it will adjust fee rates as needed to cover the debt. Their interest rates fall somewhere in between COPs and GO bonds.

Revenue bonds would seem to make quite a bit of sense as a funding source for Kirkwood Water for a few reasons. First, the revenue source is already built in: Kirkwood Water charges users of its water. Second, the bond would be funded by the same group of people who benefit from Kirkwood Water infrastructure upgrades. Residents of Meacham Park, for example, are not connected to Kirkwood Water so they would not have to foot any of the bill for infrastructure upgrades that they do not benefit from. Third, because revenue bond interest is tax-exempt, the city can finance these upgrades more cheaply than a private company like MAWC could. And spreading the cost over 30 years through a bond is far less painful for ratepayers than trying to close a $68 million gap through short-term rate hikes alone.

Any Given Tuesday

I believe using revenue bonds may help to dampen the short term costs of infrastructure upgrades while facilitating the long term benefits that come with Kirkwood retaining its own water utility, but I also want to have the humility to say that there’s a tremendous amount of tradeoffs and uncertainty surrounding either choice.

What I do know is that I find the zeal and enthusiasm with which some conservative Council Members —most notably Al Rheinnecker and Paul Schaefer— seem to be pursuing privatization, to be off-putting. If we wind up selling Kirkwood Water, it will be a very sad outcome for the community. Selling a public utility to a private company to temporarily patch a hole in the city budget is not some master stroke of economic efficiency; it’s selling the farm. Now, sometimes the farm does need to be sold, but it’s also important to remember that once it is, there’s no buying it back.

If privatization does indeed end up being the call, I feel strongly that we’ll want the decision made by level-headed folks who weren’t directly involved with getting us into this mess — not people whose motivations we can’t fully parse. And if the issue is taken to voters as a referendum, I want to know that no thumbs are on the scale. Tuesday’s election may be our last chance to make sure that’s the case.

Correction: The original story stated that revenue bonds did not require voter approval. That is not true. In Missouri, revenue bonds require simple majority approval by voters. The Kirkwood Gadfly regrets these errors.