Municipal drinking water and wastewater treatment operations are facing growing financial uncertainty due to federal funding cuts and grant freezes. 

Communities are facing demands on many fronts, from mandates to address PFAS and other new kinds of contamination, to aging service and sewer lines, all of which can come with high price tags. The federal government has historically been a key partner in financing upgrades to sewer and water utilities, and the previous administration oversaw levels of funding for public works projects that were unprecedented in recent times. 

But more recent shifts in federal spending are leaving many local utilities feeling vulnerable.

Contaminant regulations

PFAS. In May 2025, the EPA announced intended changes to PFAS regulations finalized in 2024 for drinking water systems. While the maximum contaminant levels of 4 ppt for PFOA and PFOS will remain in place, proposed changes include:

Rescinding the “hazard index” MCL for the “shorter chain” PFAS: PFNA, PFHxS PFBS and HFFPO-DA (GenX)

Extending the deadline for drinking water systems to comply with the MCLs for PFOA and PFOS from 2029 to 2031 

To formalize these intended changes, the EPA plans to propose a new PFAS drinking water rule in the fall of 2025, with finalization by spring of 2026. 

Unchanged for now is the EPA’s designation of PFOA and PFOS as hazardous substances under CERCLA (the Superfund law), finalized in mid-2024, which could create liability for any entity that handles PFAS-laden wastewater. The Biden-era EPA had announced that it would focus enforcement on industrial dischargers rather than municipal wastewater agencies and other so-called “passive receivers” of PFAS generated or released by others, but this is an informal policy that does not shield wastewater treaters from litigation by third parties, such as citizens or state governments. 

Currently pending before Congress is the Water Systems PFAS Liability Protection Act (originally introduced during the last administration), which would protect public water and wastewater systems from CERCLA liability for their handling of PFAS, but the fate of that legislation remains unclear. Meanwhile, significant developments on PFAS regulation in wastewater streams continue to occur on the state level. In Maine and Connecticut, all land application of biosolids has been banned due to PFAS concerns, and eight other states have partial restrictions, interim measures and/or testing and reporting requirements that apply to PFAS in biosolids.

Perchlorate. The EPA has committed to proposing a National Primary Drinking Water Regulation for perchlorate by November 2025. Federal activity trails behind Massachusetts and California, both of which have had enforceable MCLs for perchlorate for more than a decade, and California is widely expected to set an even lower standard in the next few years. Other states — including Nevada and Arizona — have set notification levels for perchlorate in drinking water.

1,4-Dioxane. Momentum for 1,4-dioxane regulation is building at both state and federal levels. In November 2024, the EPA released a final revised risk determination for this chemical; also in 2024, New York, which has had an enforceable MCL for 1,4-dioxane in drinking water since 2020, became the first state to limit it in consumer products (where dioxane has historically been used in laundry detergents, shampoos and similar products). New Jersey, Illinois and Virginia are in the process of defining their own MCLs for 1,4-dioxane, as is California, which has had notification and response levels in place since 2010.

Federal funding

Earlier this year, EPA Administrator Lee Zeldin announced a goal of reducing EPA spending by 65% through a combination of spending and workforce cuts over the remainder of the current administration. To support this goal, the White House’s fiscal year 2026 Budget Request released in early May included a 55% reduction in annual spending at the EPA, which includes a 90% cut to Drinking Water and Clean Water State Revolving Funds, the primary mechanism for federal water infrastructure funding. 

Prior to that announcement, a broad funding freeze on federal grants signaled the Trump Administration’s overall intent to reduce public spending. While this widespread freeze has been withdrawn, uncertainty around grants from the Inflation Reduction Act and Infrastructure Investment and Jobs Act has created doubt and delay among public water systems needing funds to respond to aging infrastructure and emerging contaminants. 

During the crafting of the recently passed “Big Beautiful Bill,” the Senate had actively debated rolling back municipal bond tax exemptions to offset the cost of extending existing tax cuts. While these rollbacks did not survive to the final bill, it’s important to note that the future of municipal bond tax exemptions remains a subject of ongoing debate, with the House Budget Committee having identified cutting these exemptions as a $250 billion potential source of revenue. 

Using litigation

For some time, a powerful tool to complement public funding has been litigation against contaminant manufacturers, aimed at shifting the burden of clean-up costs by holding them accountable for the pollution their products caused. 

Landmark settlements are currently delivering financial relief to drinking water agencies impacted by PFAS. These include $12.5 billion from 3M, $1.18 billion from DuPont, $750 million from Tyco and $316.5 million from BASF — all manufacturers of products identified as causes of PFAS contamination in public water supplies. These settlements are a result of the Aqueous Film-Forming Foam multidistrict litigation, which consolidates cases across the country with similar defendants (manufacturers of PFAS, which are a significant component of AFFF). Distributions from the 3M and DuPont settlements began in June 2025, and payments from the Tyco settlement are expected to begin in early 2026. The court’s attention is now expanding toward soil contamination cases, with cost recovery potential for municipalities, airports, landfills and fire training facilities affected by PFAS in their soil.  

Taking legal action against the manufacturers of products that have caused the contamination of municipal resources with regulated chemicals has been a successful cost recovery strategy for water utilities for more than 20 years. In September 2024, the city of Lindsay, California, obtained $9.5 million through a suit against SQM North America, claiming that the company sold perchlorate-tainted fertilizer to local farmers, who were unaware of the risks and whose use of the fertilizer many decades ago had resulted in the contamination of a city well with the perchlorate. Lindsay’s legal team argued that, beginning in the 1920s, SQMNA could have reduced perchlorate concentrations in its fertilizer but failed to do so, resulting in unnecessarily dangerous levels of perchlorate in its products. The award has enabled the city to restore the well with a two-stage ion exchange treatment plant and should even cover its future operation and maintenance costs, ensuring long-term protection from perchlorate for the city’s water supply.  

In April 2023, the city of Pomona, California, was awarded more than $30 million due to perchlorate contamination in 14 of its drinking water wells that required the shutdown of those wells, treatment process modification and ultimately the construction of a new plant. To protect ratepayers, Pomona hired experts who found evidence that 90% of the area’s perchlorate contamination came from fertilizer products used on local citrus groves from the 1930s through the 1950s and manufactured by SQMNA. Like in the Lindsay case, Pomona’s legal team argued that SQMNA had the ability to remove perchlorate from its fertilizer but chose not to. The city sought past and future costs associated with investigating and remediating the perchlorate contamination, and after a 13-year legal battle with multiple trials and appeals, the Ninth Circuit Court of Appeals ruled in favor of Pomona. The $30 million payment represents Pomona’s full costs, both those already incurred and those expected over the next 30 years, for treating perchlorate in its drinking water supply, together with certain costs awarded by the court, plus interest.

In 2017, Golden State Water Company, which delivers water to 80 communities in California, discovered 1,2,3-TCP in several of its drinking water wells during routine testing. The immediate stopgap response was shutting down the wells and finding alternative water sources. The water company then built two new water treatment plants to return water quality to acceptable standards, which cost millions of dollars. Golden State felt an ethical duty to hold the polluters accountable and recover cleanup costs through litigation. They retained legal help in 2018 and obtained a settlement in less than two years, using proceeds to pay for the new treatment plant and the cost of expensive replacement water from alternative sources rather than passing on the costs to their customers.

Funding strategy

Now more than ever, municipal sewer and water utilities must consider funding mechanisms in addition to federal support. With EPA budget and staffing cuts, the growing unpredictability of federal grant and loan programs and potential changes to tax exemptions, agencies are encouraged to proactively secure funding outside of the federal government domain as they work to deliver safe, clean water to consumers and the environment. 

Water contamination litigation is a forward-thinking strategy that allows municipal water systems to seek funding for pollution cleanup without incurring upfront costs. By taking advantage of legal options, agencies can address environmental challenges, protect consumers from contamination and hold polluters accountable without saddling ratepayers with the cost of cleanup. 

Ken Sansone is a senior partner at SL Environmental Law Group.