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The country’s most severe drinking water problems, from high levels of contaminants and foul-smelling water to pipe breaks, low water pressure, and expensive rates, are generally found in the thousands of small systems that serve dozens of people up to a few thousand.
These systems are public health crises waiting to emerge, said Denise Schmidt, director of water at the Environmental Policy Innovation Center, a group that works with water utilities on infrastructure funding.
Though some are perpetually struggling, small water systems, especially those serving low-income communities, are encountering a fresh set of economic and political hurdles in their quest for safe drinking water.
In recent industry surveys, small utilities report that accessing financing to repair and upgrade their systems is becoming increasingly difficult. Their credit ratings are deteriorating, making borrowing more expensive. The rates they charge customers are not covering the cost of providing water service, thus digging a long-term financial hole. Extreme weather is burdening them with unexpected and daunting repairs to their reservoirs, treatment plants, and pipe networks. Federal water quality mandates for PFAS and lead pipe replacements, though both providing public health benefits, are an added cost.
Small systems, in effect, are walking a precarious path. They are trying to survive today while also staring at a gathering wave of necessary replacements to aging pipes and treatment plants.
The Trump administration and Republican allies in Congress, meanwhile, are casting more obstacles. The White House’s tariffs have increased the price of equipment and materials. And the House’s fiscal year 2027 budget would cut the main federal water infrastructure program by about a quarter.
“I don’t think people realize how big this wave is and how much it’s going to cost,” said Blake Anderson, president and founder of Mogollon Water Management, a company that operates and maintains 11 small water systems in northeast Arizona. “The utilities that were built in 1970 now are 56 years old. There was a lot of development that happened back then. And all of these waves are going to start crashing.”
Negative Outlook
Crashing sounds are gaining strength.
Last year, for the first time, S&P Global, a credit rating agency, lowered the financial outlook for small water and wastewater utilities from stable to negative. Large and medium utilities remained stable.
The increased pessimism for small water utilities is due to stiffening financial headwinds, said Malcolm D’Silva, an associate director at S&P, which rates roughly 1,700 water and wastewater utilities. Ninety-one percent of the agency’s credit downgrades last year were for small systems, he said. Credit downgrades increase the cost of borrowing.
D’Silva narrated a story in two parts. One is the “expense squeeze.” Costs are rising across the board. First from the post-Covid inflation and supply chain shortages, and now from the Trump administration’s tariffs. Half of the utilities that responded to the American Water Works Association’s annual survey said that tariffs had “moderate or considerable” pressure on equipment and materials costs. At the same time, revenue is not keeping up. In the same survey, only 43 percent of utilities said they charged customers enough to fully cover service costs.
The second part is managerial. Small systems typically do not have the technical expertise, staff, or budget to analyze their infrastructure and apply for funding in the way that larger utilities do. Some might keep only paper records of their pipe networks. The smallest systems have volunteer board members or staff that might also oversee the fire department and run a business.
The positive news is that last year might have been the bottom for small systems, D’Silva said. S&P is seeing some improvement in the first half of 2026, with the rate of downgrades slowing. More utilities have instituted rate increases to fill budget holes, D’Silva said.
Federal Question Mark
Just as one hole is closing, however, another might be opening.
Every year the White House lobs a spending plan toward Capitol Hill and members of Congress decide whether those numbers are a good idea. For fiscal year 2027, the Trump administration proposed a roughly 90 percent cut to the two state revolving funds, the main federal sources of water infrastructure funding.
Congress usually sustains the state revolving funds, which have broad support. But this budget cycle could be different.
A House spending bill cuts the revolving funds by about 24 percent combined. The House Appropriations Committee approved the bill on June 3.
The bill provides $1.2 billion for the Clean Water State Revolving Fund (27 percent cut) and $911 million for the Drinking Water State Revolving Fund (19 percent cut). The Senate has not yet introduced its version.
The Environmental Policy Innovation Center, or EPIC, tracks state revolving fund expenditures and project proposals in 15 states. At Circle of Blue’s request, EPIC analyzed small system and very small system requests for drinking water funding. By EPA’s definition, small systems serve fewer than 10,000 people and very small systems fewer than 3,300.
The data indicate high demand from these systems. Some 61 percent of projects seeking drinking water funding were small or very small. However, only about a third of these proposed projects advanced to the next step in the funding process. This “highlights significant unmet infrastructure needs,” EPIC analysts wrote.
Water infrastructure funding needs and the status of the revolving funds were a point of discussion during a House Energy and Commerce Committee hearing on May 20.
Jessica Kramer, the head of the EPA Office of Water, defended the administration’s proposed cuts. Her justification: the states have $14.8 billion in uncommitted state revolving funds, those sitting in coffers for more than a year without being allocated. That money should be distributed first, she argued.
“It doesn’t do any good to get the money to the states if the states aren’t actually getting it out to the communities that need it,” Kramer said.
Schmidt, the EPIC water director, had a different view. Two issues are being wrapped into one, she said. If state administrative capacity to review and approve applications is the problem, then focus on that. But don’t use it to rationalize disinvestment in an otherwise successful decades-long infrastructure program.
“Uncommitted does not mean unneeded,” Schmidt said. “Cutting moves us farther from the solution.”
The View from Arizona
The financial pressures that populate D’Silva’s and Schmidt’s spreadsheets are the on-the-ground reality for Blake Anderson.
Anderson is the president and founder of Mogollon Water Management, a company that operates and maintains 11 small water systems in the White Mountains of northeastern Arizona. Mogollon oversees the smallest of the small – systems ranging in size from 29 service connections to roughly 1,100.
These are not the sophisticated, professionally managed systems that you would see in Phoenix or Flagstaff.
“They’re volunteer board members and they’re aware that there’s some sort of money for water out there but they don’t know where it is, or if they do know, they aren’t sure how to go about applying and accessing it,” Anderson said, describing the challenges for small systems in securing grants and loans.
“Most of them have never done a capital improvement project over $50,000,” he added. “And so there is not institutional knowledge in how do you manage a federally funded program or a state funded program? How do you go about securing engineers or contractors? What are the proper procurement practices?”
One school of thought for solving the small systems problem is that there should be fewer of them. By connecting with larger systems or forming regional partnerships, small utilities could grow into medium-sized utilities with favorable economics: more customers to cover expensive infrastructure costs, better credit ratings, money to hire knowledgeable staff.
Research from Manny Teodoro at the University of Wisconsin indicates that the target size for utility consolidations should be about 20,000 service connections, or about 60,000 people. At that point the most serious water quality violations become far less common and operating costs become more reasonable.
Where might funding for consolidations come from? States like California have dedicated programs, though even those are facing funding shortfalls. Another source is federal: the state revolving funds that House Republicans want to cut.
Lead image: Kevin Sonnichsen, water commissioner, right, and Alan Novacek, backup operator and sewer commissioner, left, gaze into the Creighton water treatment facility in this file photo from 2021. Built in 1993, the facility uses reverse osmosis to remove nitrate. Creighton was the first community in Nebraska to use reverse osmosis to remove nitrate in drinking water. Photo © J. Carl Ganter/Circle of Blue
