Residential Investment Initiative: Lead Service Pipeline Replacement Project
Article, May 2022
What Will It Take to Remove All Lead Service Lines? Common Barriers to Getting the Lead Out of Drinking Water

Despite evidence that there is no safe amount of lead exposure, much work remains to quickly replace lead service lines (LSLs) that supply drinking water in many communities in the U.S.1 The slow pace has also been in spite of wide-ranging policy efforts to lower lead levels and numerous local water crises precipitated by high levels of lead in drinking water. What holds back progress, and what will it take to remove all LSLs?

Municipalities, water systems, property owners, and investors must resolve two key issues to make meaningful strides forward. First, there are coordination challenges: When LSLs are owned partly by the local water system and partly by a property owner (“split ownership”), water systems and property owners may need to work together on replacement.2 Second, there are incentive mismatches: The people deciding whether to replace and pay for LSLs generally do not capture the full benefits of replacement. As several U.S. cities have demonstrated in recent years, improving coordination and better aligning incentives creates opportunities to rapidly replace all LSLs in a more systematic manner.

Split ownership creates coordination challenges

Imagine this scenario: A property owner wants to remove lead from their home’s drinking water, but their water arrives through an LSL that is partly owned by them and partly owned by the local water system. The property owner needs the water system to agree to replace its portion of the LSL at the same time the owner replaces their portion. Or, in a different scenario, a water system has a plan to replace all the LSLs through a block-by-block approach, perhaps to contain costs. However, it needs every property owner on each block to agree to replace and pay for the side of the line that they own at the exact same time.

Property owners and the water system must coordinate their LSL replacement plans by replacing both parts of the LSL at the same time, known as full replacement, because it is the only way to eliminate the risk of lead exposure from water service lines. Replacing only one side of the line, known as partial replacement, avoids the need to coordinate. However, this practice is discouraged as it can temporarily increase lead exposure either from damage to the remaining LSL during construction or from a corrosive reaction when a new copper pipe is combined with an old lead pipe.3

Split ownership of LSLs can create two important coordination challenges for property owners and water systems:

  • Coordinating consent. For full replacement, water systems and property owners must both agree to replace their side of the LSL at the same time. If property owners’ participation in an LSL replacement program is voluntary, a water system that seeks to replace LSLs must persuade property owners to replace their LSLs in accordance with the program. Similarly, if a homeowner wants their LSL replaced, they must work with their water system to avoid partial replacement.4 In contrast, if a state or local law mandates property owners’ participation, there is no need to coordinate consent because only the water system decides whether to conduct LSL replacement.
  • Coordinating funding. Implementing a city-wide full replacement program may require thousands of property owners to secure funding at roughly the same time as each other and at the same time as the water system.5 According to U.S. Environmental Protection Agency (EPA) estimates, average per-line costs in 2016 were $4,578 for water systems and $3,559 for property owners.6 In contrast, when the water system owns the entire LSL or property owners are not required to pay for replacing their portion of the LSL, there is no need to coordinate funding between the water system and property owners because the water system pays for full LSL replacement.

Table 1 shows four coordination approaches under split ownership. The largest coordination challenges exist under a “fully decentralized” approach, where property owners only voluntarily participate and are responsible for funding their side of LSL replacement. Coordination challenges also exist when only consent or funding is centralized. When any coordination challenges exist, they can be reduced by simplifying the methods used for obtaining consent or securing funding. In contrast, coordination challenges are absent under a centralized approach, as property owner participation is mandatory and the water system is responsible for paying for replacement by securing grants, increasing water rates, or identifying other revenue sources.

Table 1. Types of approaches for replacement of LSLs under split ownership structure

(1) Fully decentralized
Voluntary property owner participation
Property owner responsible for some or all funding
(2) Centralized funding
Voluntary property owner participation
Water system responsible for funding
(3) Centralized consent
Mandatory property owner participation
Property owner responsible for some or all funding
(4) Fully centralized
Mandatory property owner participation
Water system responsible for funding

Alignment of incentives needed to secure funding

Even if communities can overcome all coordination challenges, the issue of incentive mismatch remains. Incentive mismatch occurs when those who benefit from LSL replacement do not decide whether to do so and then pay for replacing LSLs.

Infants and young children likely benefit the most from LSL replacement. Even low levels of lead in blood have been shown to cause long-term harm to children by affecting intelligence, ability to pay attention, and academic achievement.7 LSL replacement can allow children to reap large benefits far into the future, especially when long-term gains in income, education, health, or social outcomes are realized. However, children depend on the adults in their lives to advocate and pay for LSL replacement. Similarly, tenants in a rental property, who are the ones drinking water from the LSL, depend on their landlords to make replacement decisions.

In contrast, municipalities, water systems, property owners, and investors can decide to replace LSLs, but their returns are indirect at best, such as through higher tax revenues or property values, and often minimal, especially in the near term.

Municipalities are responsible for delivering a range of services and meet multiple goals for their residents. They must balance the interests of many constituents, not all of whom will directly benefit from LSL replacement and some of whom may be more concerned with costs and taxes than with benefits. In some areas, municipalities either own or are financially responsible for the water system. In those cases, the municipal government must consider both the costs that it may incur from having its water system invest in LSL replacement and the health benefits that may accrue to its residents today and in the future.

Water systems, whether as organizations owned by municipalities or as independent firms, may benefit from investing in an LSL replacement program because it can reduce costs through elimination of water treatment methods, such as corrosion control.8 However, this benefit only occurs if all LSLs in the system are completely removed. Otherwise, LSL replacement does not generate a new income stream or cost savings that can be passed along to ratepayers or an investor.

Property owners will not experience a direct financial benefit from LSL replacement by, for example, reducing the monthly water bill. However, they may be able to capture future financial benefits if LSL replacement increases the property’s value for a potential buyer or allows landlords to raise rents for their tenants. There is some evidence that removing LSLs increases property values. This evidence suggests that LSL removal is most likely to increase property values when it is easy for buyers and sellers to know whether an LSL is present and when the public has focused its attention on the health dangers of lead.9 In many cities, LSL disclosures are not widely available, making it less certain that LSL replacement would allow property owners to reap potential financial benefits. Also, if LSL disclosures reduce property values, then disclosure could disproportionately affect low-income and minority property owners, who are more likely to own older homes with LSLs.

Investors can lend money to municipalities, water systems, or property owners to help them pay for LSL replacement. Investors may also lend money to state drinking water revolving funds, which in turn lend money to municipalities and water systems.10 Investors will lend money when they expect to be repaid and receive a financial return, here in the form of interest payments on a loan. However, a private investor may be reluctant to lend to a water system because, as explained previously, they do not expect LSL replacements to generate a new income stream or cost savings that the water system can pass along to the investor as a financial return. Property owners may be better able to provide a financial return than a water system because of their ability to capture more of the LSL replacement benefits; yet investors may prefer to make one large loan to a water system than to make many smaller loans to property owners given the fixed costs of loan origination.

Together, these incentive mismatches can make funding for LSL replacement difficult to secure. Municipalities, water systems, property owners, and investors will generally decide to replace LSLs or to fund replacement only when the benefits they expect to receive are greater than the costs they pay. Large incentive mismatches can make LSL replacement less widespread and slower paced. In contrast, if those who could benefit the most from eliminating lead in drinking water, such as children and tenants, could make the decision, there would likely be fewer hurdles to replacing all LSLs.

Improving coordination and incentives can accelerate LSL replacement

Creating a more favorable environment for the implementation of widespread LSL replacement programs requires increasing coordination and aligning incentives. The greatest opportunities exist in large cities like Chicago. With an estimated 380,000 LSLs, the Chicago water system’s coordination challenges are significantly more complex than for small cities, especially under a decentralized approach.11 Coordination could be improved by adopting tools to streamline consent and funding under a decentralized approach or by taking on a more centralized approach. In turn, improved coordination can speed up the pace of LSL replacement and lower total project costs, such as by allowing for a block-by-block replacement effort instead of a house-by-house approach. Given its size, Chicago’s estimated funding need of $8 billion to $10 billion also requires thoughtful approaches to incentivize funders that have the capacity to make long-term investments in LSL replacement. The large funding need could create opportunities for the private sector to develop new and creative financing approaches.

Example Projects

Learn more about how LSL replacement programs in several cities, mostly in the Upper Midwest, have overcome coordination challenges and incentive mismatches. While individual approaches vary, the suite of new tools used—city ordinances, streamlined homeowner consent processes, subsidies or penalties for property owners, and an expanded set of funding options—enabled a faster pace of replacement.12 Read More

Connect with us

Our staff is committed to working with those already invested in LSL replacement to help facilitate positive change for communities in our region and throughout the nation. We invite readers to write to us at CHI.Lead.Service.Lines.Project@chi.frb.org to share their insights on LSL replacement.

More widespread and rapid replacement of lead service lines will present new challenges—many of them economic and financial. Staff at the Federal Reserve Bank of Chicago are working to advance understanding of the economic and financial challenges and potential solutions, as part of the Federal Reserve’s mission to foster economic opportunity, advance a strong and inclusive economy, and promote an efficient financial system. While this report reflects the individual contributions of the authors, our work on lead service line replacement is supported by a broad community of Chicago Fed staff in the Research, Policy and Public Engagement Department with expertise in public policy, finance and community economic development, led by Alessandro Cocco, vice president, Financial Markets Group; Jane Dokko, vice president, Community Development and Policy Studies; Micah Ragland, vice president, Public Affairs; Sam Schulhofer-Wohl, senior vice president and director of financial policy and outreach; and Anna Paulson, executive vice president and director of research. Jairo Duarte also provided excellent research assistance for this report.

Notes

1 Health Effects of Lead Exposure | Lead | CDC.

2 In some cities such as Denver, CO, the homeowner owns the entire service line to the water main. In others such as Lansing, MI, the water system owns the entire service line to the water main. These ownership structures are excluded from the scope of this article.

3 Science Advisory Board Evaluation of the Effectiveness of Partial Lead Service Line Replacements | US EPA.

4 The Revised U.S. EPA Lead and Copper Rule, which will be fully implemented in October 2024, requires that if a property owner replaces its side of the LSL, then “the water system must replace its portion as soon as practicable but no later than 45 days from the date the customer replaces its portion of the lead service line.”

5 When the property owner is responsible for paying for their side of the LSL, funding challenges could be further exacerbated when the property owner is unable to secure contractors within their budget at the same time as the water system.

6 Economic Analysis Appendices for the Final Lead and Copper Rule Revisions, January 14, 2021; see Appendix A, Exhibit A-3. Cost estimates are in 2016 dollars, reflecting costs observed between 2016 and 2020.

7 Health Effects of Lead Exposure | Lead | CDC.

8 Understanding the Lead and Copper Rule (EPA).

9 For example, consider two studies that examine how LSLs affected property values in cities where lead levels had exceeded legal limits and public attention was focused on health dangers and the replacement of lead service lines. In Do lead water laterals affect property values? (pitt.edu), the authors examined property sales in Pittsburgh, PA, from 2012 through 2018 and found that the expected presence of an LSL reduced a home’s sale price by an average of almost 5%, which represented an average price reduction of $9,700. In Lead Pipes, Prescriptive Policy and Property Values | SpringerLink, the authors examined property sales in Madison, WI, from 2000 to 2015 and found that LSL replacement increased a home’s sale price by an average of 3% to 4%. At an average price increase of almost $6,000, this was triple the average cost of customer-side replacement.

10 EPA provides grants to all 50 states plus Puerto Rico to capitalize state drinking water revolving fund (DWSRF) loan programs. The states contribute an additional 20% to match the federal grants. The 51 DWSRF programs provide no-interest and low-interest loans to eligible recipients for drinking water infrastructure projects, including LSL replacement. How the Drinking Water State Revolving Fund Works | US EPA.

11 For estimates of the number of LSLs and replacement costs for Chicago, see testimony of Andrea Cheng, Commissioner, City of Chicago to U.S. Senate Committee on Environment and Public Works on April 21, 2022. For Illinois LSL replacement program timeline requirements, see 415 ILCS 5/17.12 (ilga.gov).

12 For additional examples of cities across the U.S. engaged in lead line replacement, see Community and utility efforts to replace lead service lines | Environmental Defense Fund (edf.org) and LSLR Financing Case Studies | US EPA.


The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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