http://thehill.com/homenews/administration/225875-obama-state-of-us-infrastructure-embarrassing
We will see…
Maybe Washington is Starting to See the Infrastructure Problem?
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An Answer: If the assumption of all economists, government officials and investors is that the population must increase exponentially, what does that suggest for our future?
“If the assumption of all economists, government officials and investors is that the population must increase exponentially, what does that suggest for our future?” was a question asked a few days back. Did you ponder this at all? I suggest we should and here is why. An exponential growth rate assumes a certain percent increase every year. That means the increase in population is greater the farther out you go. That doesn’t really make sense except perhaps at one point in Las Vegas (but not anymore). The economy cannot really expand at a rate greater than the expansion of the population because there is no one to buy the goods or increase the demand, which is why increasing the US population is going to be viewed favorably by all politicians regardless what they say today. House values do not increase faster than population increase unless they are in a bubble, nor does the stock market really (inflation adjusted). Your water sales will not increase faster than your system’s population increase for any extended period of time either, so an assumption of ever increasing water sales is likely to be an overestimation sooner as opposed to later. And then what – you have to raise rates, and keep raising rates to keep up because your demands are too low?
And what if your growth stagnates, or goes backwards as many did in 2009/2010? That was a severe problem for most entities, causing layoffs and higher prices, pay cuts and deferral of needed improvements, mostly because no one had reserves because people thought the good times would roll on forever. Layoffs, price hikes, pay cuts and deferral of needed improvements do help society (of course if you had lots of reserves, you weathered the recession without a problem, but too many did not). Keep in mind the repair, replacement, and maintenance needs, along with ongoing deterioration, do not diminish with time or lack of new customers. We have relied on new people to add money to solve old as well as new problems for many years. What is the contingency if growth stops?
So a growth scenario makes us feel better and more confident when we borrow funds. But if growth does not stop, where is the water to come from? What are the resources that will be used faster? Where does the power come from to treat the water or cool the houses? And the cooling water to cool those power plants? Even renewable resources are limited – most metals and oil have likely passed their peaks as far as production and water does not always fall consistently. We have overstressed aquifers and over allocated surface waters, especially in the west. So while growth makes us feel good financially, we need answers to the growth scenario despite the fact that we may have more funding. Many resources are not limitless, but an exponential growth pattern ignores this. Locally growth maybe less of an issue, but society wise? Maybe a societal problem, or maybe we get into extreme completion with each other. Some how that doesn’t look like a solution either
QUESTION TO PONDER FOR THE DAY
If the assumption of all economists, government officials and investors is that the population must increase exponentially, what does that suggest for our future?
A GRIM FISCAL FAIRY TALE
Once upon a time, people worked until they died. But the longer people lived, the more infirmities impacted older people, and the concept of stopping work came into play. So these folks labored all their lives, put some money away in a safe place, like a bank, where someone else would watch over an manage their money until they needed it. Then one day, they found out that the banks have gambled and lost on real estate, and their money was gone. There was no government to bail anyone out. So the people had to try to go back to work, became beggars and destitute or died. The government thought this was unfair to those older folks who had worked so hard, but through absolutely no fault of their own, had lost everything. So the government decided that it would “tax” people a portion of their income, and put it into a retirement system. People could retire at 65, and of course they were only expected to live another r3 or 4 years. There were 16 people laying in for every person taking out. And the government told the banks that they could not gamble with people’s hard earned savings, passed legislation and created an insurance pool to backstop losses by criminal or unethical activity. All was good and the people were happy.
As time went on some things changed. For one, people lived more than 3 or 4 years. The population retirees increased, and the ratio dropped to 1:10 and then to 1:6 ration of retirees:workers, but the “tax” did not go up, but investments were made that increased the pool. It was called good management. The government also encouraged people to save money by deferring taxes, which they did, and the banks used it to make money. All good as long as the investors gambled well. They gambled so well, they were able to talk the government into undoing the anti-gambling rules from the past, so their pool to invest was twice as much. And the markets grew and the portfolios grew and the people were happy.
And then it came to pass that the banks again gambled on real estates, and created complicated investment tools to hide the risk, but the risk was exposed and half the money was gone overnight. And the retired were wondering about jobs again. But there were no jobs. And the employed now had fewer jobs. So less people paid into the system. And the people were sad. And mad because they thought they were being protected from the gambling of the past. They did not understand.
And the government could supply no answers because they had changed the rules and they knew the people would be unhappy, so the government felt there was no choice, so they borrowed money, and bailed out the banks. And some people were happy. And some people were concerned about all that debt. And some people wondered why it was that history could repeat itself and put society at risk. And some people asked why people who did bad things were not punished.
And none of these questions has been answered. Good thing that these fairy tales don’t depict anything real right?
Post Recession Good News
The National League of Cities reports that nearly ¾ of municipalities are better off in2013 than they were in 2012. In Broward County, over half the cities actually have more revenue in 2013 than they did in 2006. Property values are up in 72% of Counties, and real estate activity was high in 2012 and 2013, although it has slowed in 2014. Nearly 60% of the municipalities were not projected deferral of capital improvements, although 1/3 expect to reduce maintenance and 40% to defer capital. The biggest challenge cities identified was street condition (23%, followed by sewer, stormwater and water although these were all under 16% which is a bit disappointing given the condition of much of this infrastructure). Money remained their biggest challenge. Total local government budgets are $3 trillion, and the bond market Is a robust $3.7 trillion. New construction for local water, sewer and stormwater infrastructure is expected to reach $750 billion in 2014, with 3.2 and 4.8 billion respectively for water and sanitary sewer.
Pensions are the biggest liability and one that is critical for many local entities with their own pension plans (like Detroit). Many others have or will migrate to a state plan, or were already part of a state plan. Having a large pool off employees decreases risk to the pension plan and increased revenues (and future outlays). Pension plans or Ponzi schemes? Now that is the question….
DECREASING WATER DEMANDS VS INFRASTRUCTURE NEEDS
Earlier this year the Journal for AWWA had several articles about water use and infrastructure needs. One of the major concerns that has arisen in older communities, especially in the Rust Belt and the West is that demands per person have decreased. There are a number of reasons for this –the 1992 Energy Policy Act changes to plumbing codes that implemented low flush fixtures, the realization in the west that water supplies are finite and conservation is cheaper than new supplies, a decline in population, deindustrialization, and climate induced needs. But all add up to the result that total water use has not really changed over the past 30 years and in many locales, water sales may have decreased. Water utilities rely on water sales for revenues so any decrease in sales must be met with an increase in cost. Price elasticity suggests the increase will be met with another decrease in sales, etc. It is a difficult circle to deal with. So less water, whether through deliberate water conservation or other means, creates a water revenue dilemma for utilities. A concern about conserving to much and eliminating slack in the system also results.
Less water means less money for infrastructure. Communities do not see a need for new infrastructure because there are fewer new people to serve. Replacing old infrastructure has always been a more difficult sell because “I already have service, why should I be paying for more service” is a common cry, unless you are in my neighborhood where the water pipes keep breaking and we are begging the City to install new lines (they are on my street J) Educating customers about the water (and sewer) system are needed to help resident understand the impacts, and risk they face as infrastructure ages. They also want to understand that the solutions are “permanent” meaning that in 5 or 10 years we won’t be back to do more work. Elected officials and projected elected officials (the tough one) should be engaged in this discussion because they should all be on the same page in selling the ideas to the public. And the needs are big. We are looking at $1 trillion just for water line replacement by 2050 and that is probably a low number(2010 dollars). The biggest needs are in the south where infrastructure will start hitting its expected life. The south want west will also be looking for about $700 billion in growth needs as well. All this will cause a need for higher rates, especially with ¼ less low interest SRF funds avaialalbe this year from Congress.
Responsibility, Failure and the Lack of Funds
Public water and sewer systems have the responsibility to protect the health, safety and welfare of the public they serve, just as engineers do. This is includes not just complying with regulatory mandates (they are minimum standards), but enacting such precautions as are needed to address things not included in the regs. Unfortunately we continue to pay too much attention on regulatory compliance and evaluate the condition of the system using unaccounted for water losses or leaks fixed in the system as a measure of condition. That may be an incorrect assumption. The problem is that unless we understand how the system operates, including how it deteriorates with time, the data from the past may well be at odds with the reality of the future. For example, that leak in your roof can be a simple irritation for a long time if you ignore it. But ignoring it creates considerable potential for damage, including roof failure if too much of the structure underneath is damaged. With a water system, pipes will provide good service for many years will minimal indication of deterioration. Then things will happen, but there is little data to indicate a pattern. But like your roof leak, the damage has been done and the leaks are an indication of the potential for failure. Bacteria, color, pressure problems and flow volumes are all indicators of potential problems, but long-term tracking is needed to determine develop statistical tools that can help with identifying end of life events. Basic tools like graphs will not help here.
Construction to repair and replace local water, sewer and stormwater infrastructure is expected to reach $3.2 and $4.8 billion respectively for water and sanitary sewer. The federal SRF programs are only $1.7 Billion in SRF loans, 24% below 2012 and well below the levels identified by the federal government to sustain infrastructure condition. The only reason for the decrease seems to be a demand by Congress to reduce budgets, especially EPA’s budget where this money resides. But the 2008 recession and its lingering effects to date have deferred a significant amount of infrastructure investments, and the forecast does not rectify the past deficits, and likely does not address the current needs either. Few water and sewer systems are flush with funds to update infrastructure and borrowing has become a difficult sell for many public officials. Lake Worth, FL just had a $60 million bond issue for infrastructure redevelopment defeated by voters two weeks ago. The officials know they need this infrastructure, but the public is unconvinced because few serious problems have occurred. We have to get the public past this view so we can improve reliability and public safety. Those are the arguments we need to demonstrate. The question is how.
It’s Budget Time Again
The good news is that for many local governments, property values are up and so is the economy, especially in urban areas. However that does not mean that the budget approval difficulties of 2009-2012 have passed or been resolved. In fact the arguments may continue despite improvements in financial position. Why? There are a number of policies that were implemented in the recession years that were especially difficult for utilities:
- Borrowed or transferred water and sewer monies to avoid raising taxes against falling property values (note that raising taxes on falling values would have yielded a zero sum game, but raising taxes commensurate might have “un”elected a few people
- Failing to have long-term financial plan and even fewer have multiyear budgets. Included are automatic rate adjustments that some are questioning or deferring now, despite having been approved several years ago
- Bad investments – public or private. In either case, if the revenues are not realized, the local entity gains no benefit. This can include public private infrastructure investments, privatization or investing cash. Scenarios need to be created to figure out what happens when things don’t go as planned.
- Failing to save for a rainy day before the crash. Our grandparents knew we need to save for a rainy day. We talk about the lowered level of savings among Americans and the potential issues that could arise if economic difficulties occur. So exactly why do our elected leaders think it is a great idea not to collect monies in good times for a rainy day? Other than politics that is?
We have identified four errors in public policy at the local level. The questions for the 2015 budget are:
- Can we repay those funds we “borrowed” from during the down years?
- Can we keep the total revenues increasing (may not mean a tax increase, but certainly not a rollback)?
- Can we develop realistic scenarios for public investments. Nothing worse than stranded infrastructure like that $6milion parking garage that grossed under $100 in the last 6 months because no one uses it because there is not business need for it.
- Can we develop reserve policies that allow local governments and especially utilities to create and maintain repair and replacement funds, reserves, and “savings” for the next rainy day. It’s coming. At some point.
- Can we develop a 5 year plan of where the community vision is?
I think this would be a start for a lot of us.
Musings – on the role of finance
Are finance and budget personnel gate-keepers or operations support staff? The answer make a great difference to your operation. Gate keepers slow the process by creating barriers to overcome (think Dilbert). Support staff means they readily acquire the necessary resources to insure smooth operation (not Dilbert). Which do you have?
Economic Challenges or Challenges to Economics?
As you are aware, I have several hobbies and interest, and economics is one of them. Economics has theorists from many different viewpoints, and the commonality among them is that there is no “school of thought” that explains everything. So new schools get developed to explain the current events, or old ones that were discredits are resuscitated, but unfortunately we too often neglect the past, or at least the examples of the past. Too often the obvious gets ignored. For example, we cave money because we know there will be ups and downs. Individual do it, so why don’t governments? We know that we will pay for a product we need. Demand drives the price. If more people want it, the price goes up. Been that way for…. ever maybe? So in my recent reading I came across several musing that keep getting talked about by political pundits, but may be they are not what they appear to be. So let’s take a look at a couple of these that might just affect us….
Is supply side economics is a myth developed by corporate economists to argue for lower taxes. The concept is to give tax breaks to encourage manufacturers and businesses to produce more product which will reduce costs. You know this is patently false. Try selling your reclaimed water at a discount (or give it away) when it is raining. Demand drives the economy, not supply. Every economics student learns this in economics 101. The supply side economics school developed as a means to explain stagflation in the 1970s. The idea what to give tax cuts to those who invested, so they would invest more to make new products, which would trickle down to the rest of us. Still doesn’t work. Why? What they ignored was that the US industrial sector had saturated the US economy with goods and could not grow without new sectors to sell to. Hence the push on Nixon to open up China to foreign trade and investment. But opening foreign markets was great, except they could not afford our products. So we had to make the products there, increase local wages so they could buy the products, and still shipped products back at a cheaper cost that to build them in America. The idea is not new – recall Henry Ford set up the assembly line to cuts costs to allow him to increase wages so his workers could buy his cars. The obvious question is when we saturate China, then what? Africa? Then what? The economy cannot grow faster than the increase in population. So why does supply side economics keep getting traction? Did we mention those tax cuts….
To the big fashion in Germany and the EU is austerity. Austerity is an economic idea that never seems to die despite very limited success and many, many failures. It sounds great – cut costs and balance the budget while cutting revenues (income). Ok, so let’s see how that works in your household – you quit your middle class job and take a minimum wage job. You cut your expenses. Except you can’t sell your house without a loss (and you do not have the cash to make up the difference) and you need your car to get to your new job. But austerity says that if you eat rice, beans, cereal and Ramen noodles, you will soon be far better off than you are now. No one will suffer. Do you believe it? Do you wonder why the Greeks and Irish are not doing so well today and why people are restless? They used to devalue their currency, but the Euro prevents this. They do not have away out. Meanwhile Iceland devalued currency, let the banks fail, took over the bank assets, and are doing much better. Austerity was not the option…. Just saying… And who suffers the most? Not the high income folks.
Tax cuts stimulate the economy. Sounds great. But, from 1944 to 1963, the income tax rate on the highest earning bracket in 1960 was 90% over $200,000. Yes 90%! The economy was great. The middle class was born. House ownerships jumped. Education was up. The economy in the 1970s stagnated after we cut tax rates. We cut the income tax rate in the 1980s, but raised other taxes, and things improved, but then declined. The economy improved after the Bush tax hike in 1991. It did not improve after the Bush tax cuts in 2001. Interesting in their book Presimetrics, Mike Kimel and Mike Kanell noted that higher taxes seem to correlate with a better economy. Is it because investors can’t sell stock so easily when they made a profit so corporations can count of investments longer? Or is it that the increase in revenues allows the federal government to invest in more research and development that further stimulates the economy? Did we mention the tax cuts favor the wealthy?
The moral of the story is that utility managers cannot ignore the economic realities around them. We cannot be trapped by the musings of people who have hidden agendas, which means that our understanding of the way things are must extend beyond the utility itself. The economy, economics, monetary policy, tax policy, demographics and change are areas that utility managers need to be current on. Engineers and managers often understand these issues easily (most are mathematical) but we tend to focus only in out areas. We need to become educated. Recall the earlier blog where I noted the city manager who realized later that the reason elected officials tended to bad alternatives was they were being lobbied to approve the poorer options because their clients could make money from it. You know many ideas that will be lobbied to elected officials and business people in the future. You need to become educated on these ideas and how they affect your utility. You know that rates that are too low will not increase revenues. You know you need to expand sales when possible, perhaps serving new areas, and making the investments for same. You know that not spending money will only increase the risk of failure in the system. You know that not increasing pay will disenfranchise employees. Prepare for these assaults so you can lead your utility down the proper path.
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