One of the ongoing discussions at all levels of government is the lack of funding for many programs as a result of economic difficulties in 2008. Economic difficulties are nothing new. We had economic downturns in late 1970s/early 1980s, 1991-1992, 1999-2000, and 2008-2009 as examples, and we have often incurred the same issues. Unfortunately it appears to the general public that we make many of the same mistakes over and over. From a federal level we hear the argument about the need for tax cuts to spur spending in the private sector, while Keynesian economists who suggest greater expenditures by government to pull us out of economic difficulty. Both arguments have their points, but how opposites can solve the same problem is difficult for the public to see. Perhaps a little understanding of the economic sector and analogies to our personal lives and the water industry would help us.
From the perspective of an ongoing growing economy, the goal would be to have the consistently increased gross product, growing at a reasonable rate, just as it seems reasonable for our salaries to rise at or above inflation rates and our ability to “bank” water for those growth spurts are common pursuits. From a national perspective, you know you are doing well when your economy grows just over the rate of population growth. When it grows a lot faster, economists worry about overheating. These high growth rates have occurred as recently as 1996-1999 and 2002-2007, but are often associated with economic “bubbles” which means that a specific sector seems to be growing really faster, creating a demand for investments that further drive up the perceived value. The benefit to utilities and governments for these growth spurts was that revenues generally grew faster than the costs.
Of course bubbles are speculative, and at some point investors realize the value is not there and stop investing. The sector collapses wreaking havoc on the economy, resulting in the economy not growing at a rate exceeding the population growth. In these cases, the revenues to fund those services people expect, grow slower than population or may even decline as they did in 2008-2009. Government has not been able to deal with these changes well, but from a personal perspective, these ups and downs are common in peoples’ lives, and we try to deal with them by putting money away in the proverbial “savings for a rainy day.” Businesses have historically tried to do this as well and utilities try to secure water sources for the same reasons. However, many governments have not, and it is worth trying to understand why not, the impact it has today and how to resolve the issue going forward.
Two things appear to drive the issue, and they are related to the two schools of thoughts on economics. First there is a tendency to spend at the level of your revenues. People, companies and governments all do this. So in good times, our expenses often rise to match revenues, partly for catch-up purposes, but partly simply because there is more disposable income. When revenues greatly exceed expenditures, there can be a tendency by utilities and governments to reduce their revenues by cutting rates reducing taxes and the proverbial thought that “people can better manage money than government.” We saw this in 2001 after the federal government finally balanced the budget and started creating surpluses (that could have been used to pay off some of the accumulated debt, but that’s an entirely different story). Many states saw the same phenomenon (Florida is an excellent example). However this thought process is akin to a person who goes to his or her boss and asks them to reduce their salary because they are accumulating too much money. No person ever does this. Instead we bank that money for the “rainy” day. So does it make sense for government to cut their revenues in the surplus times?
Consider that down times follow surplus times. If revenues are reduced during times of plenty, there is no savings for that “rainy” day. As a result the current path leads to a tendency to suggest cuts in expenses in down times, but this actually exacerbates the economic problem. Income decreases and because demand is down, prices fall (basic supply and demand). As expenses decrease, the economy contracts, which means even more people are affected – it can be a vicious circle. Economic disruption creates a negative impact on government revenues, sometimes disproportionately. So by reducing revenues in the surplus times, actually compounds the impact of economic downturns, by eliminating the potential for expenditures from savings, requiring spending from borrowing.
At the federal level, we hear the tax cuts versus more spending argument, but neither addresses what individuals have long known – we need to bank surpluses, not ask for pay cuts or extensively borrow in lean times. The concept of Keynesians is that government should make up the difference between the private and public sector spending to maintain the level of spending in the total economy, but Keynes did not say that is should all come from borrowing. There is an implicit assumption that some of this should come from savings, just like it does for individuals. Heavy borrowing can complicate future revenues by increasing future revenues needs, the other side of the argument. Trying to make up for revenue shortfalls increasing rates and fees when the funds of people and corporations are limited, compounds their problem. The economy may grow to make up for those cuts, but that is a speculative argument. The results of austerity is evident in Spain, Greece, Italy and Ireland where their economies continue to contract, not improve. That solution clearly does not work. That’s like asking for a pay cut and reducing your expenses significantly – you don’t live better and those depending on you don’t either. Cutting revenues while increasing expenses creates the worst of both worlds and makes future concerns even more of a problem. The federal conundrum is, well, a conundrum. Not sure what the solutions are there, but there are no easy choices and few of us have much control of input.
But locally ourselves and our utility systems, are completely under our control. A modification to the paradigm of economic needs or our utilities for the future of our system is needed. We should rethink our economic vision for the next cycle to mimic what many people attempt to do. We need to figure out what our revenues need to be, and plan long-term for maintaining a given revenue flow. There will be up and down times, but we can plan for these. We should create policies that denote that revenues in excess of expenditures should be banked for that “rainy day.” We should control the urge to expand expenses in the good times. We should then use those banked revenues for the future. Then when the next economic downturn hits, we have banked revenues that can be used to maintain the level of service to our customers. We should have a policy on this as well. The benefit to utilities is that the investment in lean times often comes at a reduced cost (demand is down so prices fall), while providing an economic stimulus locally (more jobs). The City of Dania Beach’s nanofiltration plant had this benefit – 70 cents on the dollar costs, plus a grant. 100 jobs created. Policies on generating surpluses and spending them in lean times on projects like this would seem to make things easier for everyone in the future, but to follow such a trek requires leadership, policies, and self control within the organization.
The question is where is that leadership coming from to make these decisions and to resist political expediency?