Reality of more than $1B in water funding washes over South Dakota municipalities
With nearly $1.6 billion in state and federal funding for water and sewer improvements entering the coffers of cities and rural water systems, engineering and contracting firms in the state are bracing for impact.
LAKE PRESTON, S.D. — Lake Preston, a city of around 500 people in eastern South Dakota, received more than $5 million in grants and loans to upgrade its water and sewer infrastructure. With some qualifying projects already in planning stages, the city was able to get a much-needed head start on fielding bids for construction.
But Mayor Andy Wienk says the bidding process was an eye-opener.
“With the water tower, when we were originally bidding, we came back with one bid, just because other companies didn't have the time to take it on,” Wienk said. “And I'm sure that's part of the cost increase, too, is the demand on construction companies.”
Since then, Lake Preston has scrapped plans for upgrading its water tower and will focus solely on modernizing the city’s sewers and water mains. It’s one of several municipalities and water systems that told Forum News Service they are planning on either scaling back planned projects or asking for more money from the state Department of Agriculture and Natural Resources (DANR).
In April, the DANR made headlines for doling out more than $1.1 billion in funding for improving the state’s water and wastewater infrastructure, an investment Gov. Kristi Noem said would “serve our grandchildren and their grandchildren.”
However, as the months pass, the daunting reality of turning those dollars into results on a tight federal schedule has become more clear to municipalities, water systems, contractors and engineers around the state.
All told, a spokesperson for the DANR says the investment in water infrastructure will total nearly $1.6 billion.
“The investment is more than $400 million in my 11 counties, a combination of loans and federal grants,” said Todd Kays, the executive director of the First District Association of Local Governments, one of six regional development districts in the state. “I can't even imagine comparing that to what a normal year would be. It’s probably 10 years worth of work.”
Hundreds of billions in federal infrastructure dollars mean intense competition
In 2021, the American Rescue Plan Act set aside $350 billion in recovery funds for state and local governments. The money came with a directive on what it could be spent on, with options including replacing lost public sector revenue, spending on public health and investing in water, sewer or broadband infrastructure.
South Dakota, which received $974 million in grant funds from this program, has appropriated funds for 11 different projects , with the largest by far being $660 million earmarked for investment into water infrastructure. That funding has been buttressed by hundreds of millions in loans from the state’s drinking water and clean water revolving funds, a partnership between the state and the Environmental Protection Agency.
At least 29 other states have also allocated the federal dollars toward water infrastructure.
Sources familiar with the process tell Forum News Service the hundreds of billions in infrastructure spending passed through Congress since the beginning of 2021 will force states and municipalities to compete with each other for the nation’s finite construction capacity, exacerbating labor and material shortages in South Dakota and around the country.
“At a time when we don't have enough workers and the construction inflation is running away, we are going to add more pressure on construction projects,” Rep. Dusty Johnson told Forum News Service in an interview on Aug. 8. “We're going to make it harder for the private sector to make investments. So American dollars will build less because of the actions of our federal government.”
Adding to the intensity of the competition is the tight schedule attached to the federal Rescue Plan funds: Municipalities must submit plans by March 1, 2024, execute construction contracts by the end of 2024 and disburse all American Rescue Plan Act funds by the end of 2026.
While municipalities can frontload the dollars and begin using state funds when those run out, a DANR spokesperson said the department has concerns about the plan's timeframe. Without a change to federal law, unused funds would be forfeited if these deadlines are not met.
Contracting, engineering firms may not be able to keep up
The municipalities and rural water systems looking to turn these time-sensitive grants into major water and sewer improvements fall into two general camps. Some, such as Mitchell and Yankton, already had projects underway that qualified for American Rescue Plan Act grants, meaning the cities say they should be able to get to the construction phase by next year, avoiding major wait times or serious price increases.
But, for municipalities working from scratch, the backlog for engineers and contractors could mean a variety of difficult choices, from deciding not to move forward with any projects to scaling back the scope of a project or taking on more loans to meet price increases.
“When you get this type of money, you send the message out to all of the cities in South Dakota and say, dream up anything you can dream up,” said Brad Johnson, who served on the Board of Water and Natural Resources for 16 years. “And so they're creating projects that they maybe wouldn't have thought about doing for another 10 years. So it's those projects that are the ones that are probably going to run into problems down the road.”
Though communities deciding to forego funding would increase the chances of DANR granting other requests for increased funding, expecting an increase in funding is a gamble, as the application must be approved by the board. The process could mean lengthy delays in the already-tight timeline.
Banner Engineering, a major municipal engineering firm based in the northeast part of the state, is already at capacity, and has had to turn away multiple projects.
“There have been times this year where there are projects that normally we would want to go after,” said Dennis Rebelein, the head of the wastewater department at Banner Engineering. “But with the present state of workloads, you're a little more selective as to which work you do and which work you pass on.”
On the contracting side, even without the bulk of projects near the construction phase, several firms told Forum News Service that the cost and wait times of key materials such as PVC pipe, which has increased in cost as much as four times in the past year, continue to rise.
According to the Mortenson Construction Cost Index , building costs have increased more than 22% since the beginning of 2021.
And, even if these firms wanted to increase capacity to meet the coming demand, hiring workers remains difficult.
“We’ve given up on hiring,” said Dustin Usselman, the owner of the Aberdeen-based contracting firm South Dakota Underground.
Though some sources hoped the bid prices begin evening out as supply chain issues are resolved, the pressure on municipalities to take advantage of the once-in-a-generation funding washing over South Dakota could take the state’s construction capacity to its outer limit.
“It's not as if, well, if we don't get it spent this year we'll just wait until next year, wait until the backhoe operators are available. No, this money goes away,” Jay Gilbertson, the executive director at East Dakota Water Development District, told Forum News Service. “And I've heard a lot of people speculate that the government is going to allow for an extension because so many people won't be able to make it. But that's not necessarily a good business model, thinking that funds we’re told won’t be there on Jan. 1, 2027, will in fact be there.”