Striking a balance: How Arizona water systems can balance affordability with the need for rate increases

Arizona's water systems, especially small and Tribal systems, are facing mounting financial pressures as they strive to maintain affordable rates for residents while ensuring they have enough revenue to cover costs, fund infrastructure improvements and meet regulatory requirements. 

The report Tap Water Affordability in Arizona, recently released by the Kyl Center for Water Policy and supported by the Arizona Water Innovation Initiative, explores the delicate balance between raising water rates to ensure that residents have service stability while also keeping water affordable. 

Written by Grant Heminger, Kathryn Sorensen, Sarah Porter with the Kyl Center and Manny Teodoro at the University of Wisconsin-Madison, the report reveals that many water systems can raise rates without putting water out of reach for most customers, but doing so requires careful planning and consideration of financial and social factors.

Arizona’s community water systems

Water systems in Arizona vary significantly in size and capacity, from large urban utilities to small community systems, and the affordability challenges can differ drastically between these systems. There are 920 community water systems in Arizona, 75 percent of which are classified as small community systems because they serve fewer than 1,850 customers.

Finding the rate information for Arizona’s water systems was a time consuming process. While some systems have rates posted on their websites, most do not. Even when rates are posted they may not include the full cost of water paid by consumers after taxes and other charges are added.

“We had to do a lot of direct outreach,” says Grant Heminger, a research and policy analyst with the Kyl Center and lead author of the report. “We got data by directly contacting hundreds of community water systems so we could develop a centralized dataset for water rates across the state.” 

Another big challenge for this project was determining how to define affordability. There are many ways to measure and interpret affordability, and rather than provide a single way, the researchers provide a comparison between several different measures of affordability.

“The most common way to measure affordability is to look at the median household income level,” says Heminger. “But it was a priority for us to also measure affordability at the 20th percentile income level. We also looked at the national average, as well as minimum wages. Each community needs to decide for itself, given its particular situation, what affordability means for them.” 

Considerations for tap water affordability in Arizona

Water systems often need to raise rates to cover the increasing costs of operation and infrastructure improvements, as well as inflation and new rules about things like lead and PFAS. Without adequate revenue, water systems risk operational failures and the deterioration of critical infrastructure. 

While larger systems can spread their fixed costs across a large customer base, small systems often face the burden of the same fixed costs but with far fewer customers. This disparity makes it harder for small systems to keep rates affordable while still covering their operational costs and making necessary infrastructure investments.

“Small systems face immense pressure because they are trying to maintain infrastructure with limited revenue,” says Heminger. “They often can’t adjust rates as quickly or frequently as larger systems, leaving them vulnerable to financial strain.” 

On average, small systems in Arizona have water rates that are more than twice as old as those of larger systems. This means their rates may not accurately reflect the current cost of providing water, leading to potential shortfalls in revenue.

“If rates are kept too low, systems will struggle to maintain service quality,” says Kathryn Sorensen, director of research at the Kyl Center and co-author of the report. “But if rates are raised too quickly or too high, water can become unaffordable for low-income residents.”

The researchers found that households in Arizona’s lowest income quintile spend an average of 2.22% of their monthly income on 4,000 gallons of tap water, compared to 0.92% for households at the median income level. This disparity shows how water costs can become a burden for those with limited financial resources.

Many water systems could raise rates while maintaining affordability

The good news is that many Arizona water systems, particularly those serving larger populations, have room to raise rates without exceeding commonly accepted definitions of affordability. In fact, the study found that 60-75 percent of water systems in Arizona could raise their rates and still remain below the threshold of affordability, even for low-income households.

“There’s an opportunity here,” says Heminger. “We’ve found that many water providers have room to raise rates and still keep water affordable for most people. The key is to raise rates incrementally and strategically, rather than waiting for large, painful increases down the road.” 

By taking a gradual approach, water systems can secure the revenue they need while avoiding sudden price hikes that could strain household budgets. 

Arizona's Tribal water systems face unique challenges when it comes to water affordability. Several Tribes, including the Gila River Indian Community and the Ak-Chin Indian Community, do not charge for water services. 

For Tribal systems that do charge, the average fee is $36 per month, lower than the state average of $44. However, because household incomes on Tribal lands tend to be lower, the household burden, or the percentage of income spent on water services, is higher for Tribal communities. 

This discrepancy highlights the importance of considering income levels when determining water rates, especially in communities with lower average earnings. Ultimately, these are local decisions.

“Each community and their water leaders together are going to need to work together to find the balance between affordability and ensuring revenue stability for this water system,” Heminger says. “We now know that many of them can do so and still be below 2-3 percent of monthly income for low income households.”

Deciding rates

Ultimately, balancing the need for rate increases with the goal of keeping water affordable requires the active involvement of elected officials and policymakers. While water managers can propose rate increases, it is the responsibility of policymakers—whether they be members of city councils, boards of directors or the Arizona Corporation Commission—to approve these changes.

“Elected officials need to be aware of the trade-offs involved in rate-setting,” says Sorensen. “While there is always pushback against raising rates, it’s important to understand the long-term implications of not doing so. Underinvestment in water infrastructure today could lead to higher costs down the road.”

The report also provides tools for assessing whether rates are affordable and how their rates compare to others. By using standardized tools, leaders can make more informed decisions about when and how to raise rates. So far, the feedback has been positive.

“We've heard from several elected officials, and they feel like it is a tool in a toolbox,” says Sorensen. “It helps them as they're thinking about the need to increase rates, how they might do it, what considerations they need to take into account.” 

The path forward

Ensuring that water remains both affordable and that water systems are able to continue investing in long-term stability is a pressing challenge. The Tap Water Affordability in Arizona report offers a path forward that balances these priorities, showing that it is possible for many water systems to raise rates without pushing water out of reach for low-income households. 

“It’s about striking the right balance,” says Heminger. “We want to make sure everyone has access to affordable water, but we also need to ensure that water systems are financially stable enough to continue providing that water to residents now and into the future.”

For further information, a video recording of the Kyl Center's recent webinar on the tap water affordability report is now available.