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THE SHRINKING MIDDLE CLASS

May 21, 2014
economy, funding, graduation, infrastructure, Leadership, local government, management, planning, politics, sustainability, utilities, Water Funding
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In the last blog I commented on the Donald Sterling, Thomas Sowell and Clive Bundy comments the week before. I wonder if letting the hate out just a way to keep us from looking at the bigger picture from a political (and maybe business) perspective? And should utilities we concerned? The answers may be yes, and yes an dhere is why. An August 2012 Pew Research Center report noted that only half of American households are middle-income, down from 61 percent in the 1970s. The shift was downward, not upward as the very rich (0.1%) control 58% of the wealth in the US. In addition, median middle-class income decreased by 5 percent in the last decade, while total wealth dropped 28 percent. The need for social programs, despite cutbacks and revisions to the welfare programs in the Clinton era, have increased – since 2000 Medicaid has increased from 34 million people to 54 million in 2011 and the Supplemental Nutrition Assistance Program (SNAP, or food stamps) from 17 million to 45 million in 2011. Keep in mind that income drives qualification for these services so it means that incomes are down for millions in America. The increase in people needing help is no surprise since there is an ongoing increase in the number of lower-wage service jobs like food preparation, retail and service industry, but the number of middle-class occupations, like teaching and construction, have declined. Since 2010, the State of Florida has added 400,000 jobs, impressive except that the vast majority are service and retail jobs that pay just above minimum wage. The job growth in low wage jobs does not replace the loss of middle income jobs which is why 47% of households did not earn enough to pay income tax in 2103. It is not because they don’t want to, it’s because they don’t get paid enough. And we have tens of millions of these low wage jobs that don’t pay enough for the recipients to pay taxes. Just the opposite of what some of the political discussion would have you believe.

The loss of wages is felt locally more than nationally. It means that local officials hear about costs more because water, sewer, power, etc competes for an ever larger portion of the shrinking paycheck. So we see more attention paid to affordability indexes, the ability to pay. The concept of affordability is to take your annual water and sewer bill and divide it by the average or median local income. The goal is water plus wastewater is under 3.5% of the median income. Keeping the percent low is great and easy when people are making more money, but creates a lot of difficulty when the incomes are static or dropping. An our costs are rising due to the increasing need to maintain and upgrade infrastructure that has been neglected since 1980 (the annual investment is under 1.4% for most of the US infrastructure for the last 30 years. We need to invest above 2.3% to keep up according to GAO).

When income drop, costs become more important, and local water and sewer costs are often easier targets to limit than groceries, rent, power, telephone, cable or other services that are not subject to local official votes. So it is in all of our interests to work with local officials, colleges, vocational schools, public schools et al. to attract or build a economy that features higher income jobs, to get everyone employed, and to provide training, infrastructure, outreach, health care and other help to establish a competent, highly skilled workforce in a community. That means that utilities must support the local efforts to effect social change in the community, to help meet the needs of residents not just with water, but with respect to the local economy as well. Does that mean we are actually agents for social change?

2014 or 1950? Where Did these comments come from?

May 8, 2014
communciations, Detroit, economy, funding, JObs, management, Marketing water, planning, politics, race relations, reserves, Revenues, Uncategorized
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Last week was one heckuva week for societal problems related to race relations.  Seems like someone turned over a rock and the 1950s crawled out.  We started with Cliven Bundy, the Nevada rancher who has been using federal property (read our land) for grazing his cattle for 20 years without paying for it, said after the armed confrontation with federal officials, that “I wonder if Negros weren’t better off as slaves.”  But he says he is not a racist, but wow.  That’s right up there with Rush Limbaugh’s comments about Native Americans in his book 15 years ago. 

 Then we had newspaper columnist and right-wing wonk, Thomas Sowell, who is black, saying in a recent column that “you are poor because you don’t work.”  And it is your fault you don’t work.  In “higher income families, people work.”  So using that line of racist nonsense, given that minorities are disproportionately un- or under-employed, does Mr. Sowell really believe that it is really the choice of all of these people not to work?!  Could there be any other causal links like the lack of education, decaying infrastructure or the lack of local opportunities in their community that might just come into play? That’s like saying Detroit’s problem is not the lack of job opportunities, but the fact that no one wants to work in Detroit.  I think not.

The we have Donald Sterling, the owner of the Los Angeles Clippers NBA team, who was taped making racists comments, then received a lifetime ban and multi-million dollar fine for his comments about minorities, and then, instead of apologizing, states that he wishes he’d just paid the woman who taped him off.  Huh?   Of course it is not the first time for Mr. Sterling who lost a case several years ago over his practices of renting property in LA, so I guess we should have expected it.

Of course there are those who argue these folks were simply misunderstood.  Maybe Mr. Sowell was just pandering to his fan base, but what does that say about his fan base that he can write a column that purports that “you are poor because you don’t work” because you don’t want to work and no one says anything?  He clearly appears to be besmirching the inner city minority population, but as I noted in a prior blog, rural America is significantly worse off economically than urban America.  Rural America is where health care suffers, the lack of health insurance is pervasive, income are lower and unemployment higher.  There are poor across all races, and in all settings.  And given his fan base is includes a lot of poor, white, rural people who aren’t making a lot of money or who can’t find jobs, he’s talking about you!

The Bundy comments stem from his standoff with federal officials over many years of not paying for grazing (like the rest of us could get away with that!).  He and those that came armed to his defense are more indicative of a larger, far-right, anti-government sentiment around the country that has persisted for years.  The west has a number of these groups (recall Ruby Ridge, Waco, Black Hawk helicopter-ists, etc.) that are basically anarchists that disagree with America as it is today.    All white.  But of course as we have seen in the Sudan, Rwanda, the middle east and throughout history, hate can come from all races and religions. All harboring hatred of others not like them.  Understanding why is more difficult, but the commonality seems to be that they all have the perception that the others are somehow treated differently, which allows them to move up the economic ladder faster or allows them to “game the system.”  The perception, which may be completely false, persists because it somehow justifies the actions of these people.

So given the comments of the past week, are we back in the 1950s?  Or 1870s?  How are we here in 2014?  Prejudice and hate were not wiped away magically by civil rights legislation, integration, communication and education alone, but really, does this type of attitude have a place in today’s world? If so why?  Hate has created trouble in the world for thousands of years.  Hate is a problem because hate is a means to distract people from real problems or to force your problems on others.  But in truth, psychologists will tell you that in most cases, the Haters tend to hate themselves, which is something we all need to remember.  Hate is developed because you cannot control a situation or someone else gets something you want.  Therefore it is that someone else’s fault, not yours.  It is easier when race, sex, sexual orientation, religion or other factors represent the “somebody else,” but the reality is haters hate themselves first, then project their hate onto others.  They need help. Professional help. Counseling.  Many of them. Even whole societies. They need to go get help for themselves and the rest of us. 

Sea Level Rise, SE Florida Style

May 6, 2014
Climate, economy, engineering, Flooding, funding, infrastructure, planning, politics, sea level rise, sustainability, Uncategorized, utilities, water sewer management, water supplies
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There has been significant discussion about the potential impacts of climate change on the world:  more intense rainfall events, more severe thunderstorms and tropical cyclones, droughts, loss of glacial ice and storage, increased demand for crop irrigation.  However for much of the State of Florida, and for much of the coastal United States east of the Rio Grande River, the climate issue that is most likely to create significant risk to health and economic activity is sea-level rise.  Data gathered by NOAA from multiple sites indicates that sea level rise is occurring, and has been for over 100 years. About 8 inches since 1930.

The impact of climate change on Florida is two-fold – Florida often is water-supply limited as topography limits the ability to store excess precipitation for water use during the dry periods and sea level rise will exacerbate local flooding.  The highly engineered stormwater drainage system of canals and control structures has effectively enabled management of water tables and saltwater intrusion by gravity. The advent of sea-level rise will present new challenges, because the water table is currently maintained at the highest possible levels to counter saltwater intrusion, while limiting flood risk in southeast Florida’s low-lying terrain and providing for water supplies.  As sea level rises, the water will not flow by gravity, which disrupts that balance struck between flood risk and water supply availability in the canal system.

Occasional flooding is not new to Florida, but the increasing frequency we currently experience is related to sea level rise, not just along the coast, but for large expanses of developed property inland due to topography and groundwater levels.  As a result, the challenge for water managers in the state, especially in southeast Florida, is to control the groundwater table, because control of the water table is essential to prevent flooding of the low terrain.

The issue is not lost on local governments in south Florida nor on the educational institutions in the area.  Florida Universities are studying the impacts to the region to identify ways in which we can mitigate, respond to and adapt to these changes. My university, Florida Atlantic University, is located in this vulnerable part of the State has been proactive in partnership with the Four County Compact in addressing these issues and we have now joined with other Universities in the State to form the Florida Climate Institute, a consortium working with state and federal agencies to address the multiple challenges and opportunities facing this State. FAU in particular, has been proactive in developing tools to evaluate risk and identify adaptation strategies to protect local and regional infrastructure and property. 

Our efforts have included using high resolution NOAA data to map topography at the +/- 6 inch level, combined that topography with mapping of infrastructure and groundwater, to identify vulnerable areas throughout Broward, Miami-Dade and Monroe Counties, as well as initiated projects in Palm Beach County and other coastal regions throughout the state.  By identifying vulnerability based on sea level changes, the timing and tools for adaptation can be designed and funded to insure a “no-regrets” strategy that neither accelerates nor delays infrastructure beyond its need. 

While we have all heard the discussion of an estimated two to three feet if sea level rise is anticipated by 2100; sea level rise is a slow, albeit permanent change to our environment.  The slow part allows us to make informed decisions about adaptation strategies that may prove useful in the long term as well as the short term.  Of prime importance is the need to plan for these needs 50 or more years out so that we do not increase our exposure to risk.  Keeping development out of low lying areas, redeveloping pumping and piping systems with change in mind and reserving areas where major efforts will need to be undertaken, is important to the public interest and will affect private business, tourism and homeowners.  Sea level rise is already a problem for many low lying areas such as Miami Beach, Fort Lauderdale, Hollywood, and other coastal communities. It will be an incremental problem creeping up on us for the rest of the century and beyond.

The lowest lying areas are the roadways, which are also the location of electrical, water, sewer, phone and drainage infrastructure.  Fortunately given the current Federally funded special imagery and NOAA data systems we are able to predict pretty accurately where flooding will occur.  Linking that information with detailed projections of sea level rise impacts we can  map vulnerable areas and build adaptive measures into every action and plan we undertake.  But the impacts are not only on the coast. Sea level affects ground water table levels and with our intense rainfall areas far inland can be flooded, even subject to long term inundation.  Water levels are rising and will continue to rise as groundwater rises concurrently with sea level. Add the impact summer rains and dealing with water becomes a major priority. Figures 1 and 2 outline the roadway network degradation at present, 1, 2, and 3 ft of sea level rise.  The figures demonstrate that a major, underestimated amount of property is vulnerable on the western edge of the developed areas because the elevations are decreasing as one moves west from I95. 

Image

While time will impact our environment, there are three options to address the change:

 

  • Protect infrastructure from the impacts of climate change
  • Adapt to the changes, and
  • In the worst case retreat from the change.

 Retreat does not need to be considered in the short or medium term.  South Florida has developed in the last 100 years and there will be well over 100 years of life left.  As a result, the best option is adaptation.  Adaptation takes different forms depending on location.  I have developed a toolbox of options that can be applied to address these adaptation demands, resulting in an approach that will need a more managed integrated water system, more operations and inevitably more dollars.  For example we can install more coastal salinity structures, raise road beds, abandon some local roads, increase storm water pumping, add storm water retention etc. to address many of the problems.  The technology is available today.

Much of the actual needs are local, but the problem is regional and requires a concerted effort of federal, state and local agencies and the private sector to address the scales of the problem.  A community can address the local problems, but the regional canals, barriers, etc., are beyond the scope of individual agencies.  Collaboration and discussion are needed. 

The needs will be large – in the tens of billions.  But there are two things in south Florida’s favor – time and money.  The expenditures are over many, many years.  Most important in the near term need is the early planning and identification of critical components of infrastructure and policy needs and timing for same.  That is what FAU does best.  At risk are nearly 6 million of Floridians their economy and lifestyle, $3.7 trillion in property (2012) in south east Florida alone and a $260 billion annual economy.  All of these are expected to continue to increase assuming the appropriate plans are made to adapt to the changing sea level.  Protection of the area for the next 100-150 years is achievable as long as we have the science, the understanding and the will to do it.  Plan now, and over the rest of this century starting now we can raise those billions of dollars needed.

 

Top Ten Reasons to Deny Climate Change is Occurring in no Particular Order

April 24, 2014
borrowing for infrastructure, Climate, Development loans, economy, engineering, Environment, finance, funding, infrastructure, innovation, Leadership, local government, management, planning, Revenues, sea level rise, stormwater, Transportation, utilities, Water Funding, water sewer management, water supplies, Water treatment
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I had to share this, from a nonscientific survey of people adamantly opposed to any consideration of changes to our climate:

1. I can’t do anything about it so I don’t care about it
2. People can’t alter what is happening with the earth because it is too big
3. It’s natural, so we can’t do anything about it
4. It’s not an issue now, so it’s somebody else’s future problem
5. The science is inconclusive so why do anything yet. Let’s see what happens
6. Trying to address it will cut jobs
7. We won’t be competitive (i.e our profits will drop)
8. It requires changing our business model (energy)
9. If we talk about it no one will develop in our community
10. Costs too much

I had to post this as many of you will have comments. But before you do, these about this a minute……

The first five are based on no facts, but a desire to ignore the issue entirely. The second five are more poignant because aren’t these pretty much the same arguments to deny the need to correct water pollution concerns in the 1930s? Or 1950s? Or even 1970s? Or even today with hog farms, frack water, acid mine waste, coal dust slurries, etc.? Or actually pretty much every regulation? I seem to recall Tom Delay making this argument when he was in Congress before he was indicted.

Now think about the Clean Water Act, Clean Air Act, Safe Drinking Water Act, and others. These regulations are designed to correct ills of the past that were simply ignored due to the first five arguments above, ignoring the fact that prevention is always less costly than cleanup afterward. To we pass regulations to clean up problems and protect the public health going forward. Otherwise why have a regulation?

So let’s talk about that jobs impact. The reason is that after the passage of these regulations, didn’t the number of professional jobs (like civil and environmental engineers, environmental and other scientists – STEM jobs) increase? Isn’t increasing STEM jobs a priority? So won’t dealing with climate issue perhaps create a similar increase in STEM jobs? Yes, costs for water increased and the cost for the effects of climate changes will cost money, but don’t these challenges create opportunities? Isn’t this akin to dealing with problems with development from the past? Just asking…..

Why Bad Ideas Won’t Die

April 11, 2014
contractors, engineering, funding, innovation, Leadership, local government, management, planning, politics
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Once upon a time, many years ago there was a young city manager in a backwood town in the south. He had been told he was a bright young man, and had done well in city manager school. He was full of ideas on how to serve the public to make things better for the community and the people in the community, realizing you can’t get rich being a city manager. Getting rich was not his issue – he wanted to help people and thought he could bring his education and ideas to bear on the many problems city’s face. He was also very entrepreneurial – he tried to organize the city to operate like the business that it was by trying to make operations more efficient, providing training to employees that basically never had any, developing mechanisms to track work performed, and updating infrastructure (piping, curbs, sewers, treatment plants). He spent 60-80 hours a week, including countless nights each week at his job, no doubt underpaid. For the most part, the employees bought into his ideas because, well, he never asked them to do something he wouldn’t do, and often would go into the field to work with them on important projects to show them what was needed or what he expected. The staff became well trained and efficient. So far, so good.

Over time he noticed a few interesting trends, but because he was young, he did not have a point of reference to understand them all. One he noticed was that the elected officials always asked for multiple alternatives. But when he presented more than one, he found that the worst option, the one most difficult to implement, or the one that would create added problems, always seemed to be the one chosen. Bad options were like a magnet for these elected officials. So he became more reluctant to present more than one option because doing so made his job much more difficult and, well the point of presenting options that have issues seems counterproductive to good government. Of course that created some friction.

Ok now that you are done laughing hysterically at this young man, keep in mind the story is true and happened less than 30 years ago, so this is not ancient history. It took a few years after frustration and stress took their toll and this young man moved on in his career. City management was just too stressful. It took a few more years to understand that answer to the options riddle – the bad options were chosen because some was lobbying the elected officials for that bad option. Why? Because those lobbying always knew someone who could benefit from the need to “fix” the problem created by that option. So the idealist meets the reality – kind of deflating. He moved on from there.

So how does that affect utilities? Think about your budgets, and especially your capital budgets. Figure out what you NEED to do your job, and then figure out if you have a budget strategy to get it. Do you pad your budget to insure the budget office doesn’t arbitrarily cut your request, because “that’s what they do?” Do your elected officials delay capital projects because it is an election year and they do not want to raise rates? Does the city manager remove the new hires because he needs more money to be diverted to the general fund? Sound familiar? Welcome to the game this young man found so many years ago. 30 years and things definitely have not improved. When you run a business, you know what you need to do the job. You should be able to ask for what you need, and get it without a lot of conflict. Your budget and finance directors should be SUPPORT positions, not gatekeepers. Their job is to find money to pay for operations. You should set the need, and they find the funds, but it doesn’t work that way does it?

The budget battle is a huge expense for every community, and one that largely provides no real benefit but detracts from productivity. None of the game playing helps the utility or the ratepayers, just like the bad options don’t help the community at large either. Yet it is funny that over time, city managers have moved away from people with technical backgrounds in public works and public administration toward people with business experience. The argument is that we need to run the city more like a business, so this should be a good fit. But it is not in part because there is a lack of understanding of the underlying public works services. Public works is a service, not a business. As a result, we see far too much political expediency as opposed to benefits to the payors.

From a business perspective, creating a series of enterprise funds like water, sewer, storm water, roads, and parks is a step in the right direction, but only if those separate enterprises (think companies) can stand on their own. For example, it is completely inappropriate to use your utility to fund the general fund. Borrow from it, yes; some purchased services, yes; huge subsidies, no. When large amounts of funding are diverted, it means that both the general fund and the utility suffer (and for the moment let’s ignore the legal issue if the utility rate base is not the same as the city tax base). Business rarely diverts large revenue streams from other enterprises to keep them afloat for long, so why in government, do business people pursue this path? In the business world, if the general fund was such a loser, we’d cut it loose, or spin it off and make it stand on its own. Ok we can’t really cut the general fund loose (police and fire are in there and we love them), but making is stand on its own is what finance, budget and city managers should be pushing elected officials to do. That would make set up a system of full-cost operations, which will allow residents to understand the true cost of their services, which is completely appropriate. Subsidizing services at the expense of public health is not a good long-term policy is it? . And while you are at if general fund, where are those surpluses we ran to allow us to reduce borrowing for capital projects?

Will the Default in Detroit Affect Me?

April 8, 2014
borrowing for infrastructure, debt funding, Detroit, economy, engineering, Environment, finance, infrastructure, innovation, local government, Michigan, planning, politics, Risk Management, stormwater, sustainability, Uncategorized, utilities
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So Detroit defaulted on it’s debt obligations.  Do does that impact you?  Well, that depends on whether you are a utility looking revenue bonds, a city looking for general fund bonds or some combination.  The issue in Detroit with debt is that they pledged the full faith and credit of their taxing authority to repay the debt.  Their taxing ability was insufficient to accomplish this goal, which means that there could now be distrust in that promise for other cities.  So if you are a city and you are making this pledge, Detroit could impact you, or at least create more review on your balance sheets.  If you are a utility that is pledging revenues that have no limitations on amount, the concern is likely less.  Of course in either cases, the question is what the rest of your balance sheet looks like.  If you have no reserves, do not charge the full cost for service, have a heavy debt load, have high rates already, or send a lot of funds to the general fund, that could be a problem.  If you have avoided these pitfalls, the bond market will see much less of an issue. 

Keep in mind that Detroit is not the only default – another big one is the Birmingham and several other create questions about general fund uses of funds, which makes it of greater importance to keep our financial house in order.  IN part this can be done by creating the appropriate enterprise funds and remove those services from the general property tax fund.  That permits local focus on the true cost of general taxing users and creates a delineation between general fund and enterprise costs.  That can help elected officials focus on the true general fund issues:  police, fire, EMS, administration without hiding those costs with subsidies from other funds.

 

Infrastructure Replacement

March 10, 2014
Banking industry, borrowing for infrastructure, debt funding, economy, engineering, finance, funding, infrastructure, Leadership, local government, management, planning, Revenues, Risk, sustainability, Uncategorized, underwriters, utilities, Water Funding, water sewer management
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We all know that our infrastructure is deteriorating.  Deferred maintenance increases the risk of system failure. The need for capital reinvestment within the utility industry has historically been very low. As a result, in its “2013 Report Card for America’s Infrastructure,” the American Society of Civil Engineers assigned a grade of “D” to America’s drinking water systems, citing billions of dollars of annual funding shortfalls to replace aging facilities near the end of their useful lives and to comply with existing future federal water regulations (ASCE, 2013).  AWWA estimates that investments of at least $1 trillion are needed over the next 25 years.

While a pay-as-you-go capital funding seems like the best way to go, that is difficult to accomplish with the large outlays needed to upgrade the infrastructure system and the controls on rates often exercised by local officials.  As a result, borrowing is required and the condition of infrastructure and the lack of reserves are a part of how the utility is viewed by those who lend monies.   Utility managers need to understand how the lending agencies evaluate risk. 

Lenders use many tests.  Among them are: whether the utility’s annual depreciation expense is used of accumulated as reinvestment in the system, whether adequate reserves are present, whether  annual capital spending that is below the amount of annual depreciation and the amount of revenues in excess of projected debt (debt service coverage).  The target debt service coverage may depend upon the requirements of the underwriter, the rating agencies and the investors.  Debt service coverage could be as low as 15% or as high as 50%.  In 2012, the median all-in annual debt service coverage excluding connection fees for utilities rated “AAA” by Fitch Ratings was 220%, while the median for AA-rated and A-rated utilities was 180% and 140%, respectively. (Fitch, 2012).  

A working capital target of 90 days of rate revenue is a minimum, but since 2008, more is likely to be required depending on the size of the system and the history of revenues.  Where the revenues were stable despite 2008, less may be required.  For those utilities that suffered major decreases, reserves should be far larger – perhaps a year or more.  Other criteria that could be used to evaluate the projects when borrowing money include public health and safety, regulatory compliance, system reliability, the risk and consequences of asset failure, redundancy, community/customer benefit  and sustainability. At the same time, the expectation is that  the utility systems that retain all monies in the system to be utilized to improve the system and pay for debt service, except those used  for the purchase of indirect services from the General Fund that are justified with indirect cost studies. 

 

Despite the above, rate are an issue.  Fitch Ratings has indicated that it considers rates for combined water and wastewater service that are higher than 2% of the median household income – or 1% for an individual water or wastewater utility – to be financially burdensome (Fitch, 2012).  The Environmental Protection Agency (EPA) considers that rates for an individual water or wastewater utility that are greater than 2% of median household income may have a high financial impact on customers. (EPA, 1997). Utilities with a stronger financial profile might have residential charges for combined water and wastewater service that are less than or equal to 1.2% of median household income, or less than or equal to 0.6% for an individual water or wastewater utility. All revenues generated through system operations generally must remain within the system and can only be used for lawful purposes of the system.

Canadian utilities employ more formal polices to establish fiscal policies to provide reserves to insure stability in the event of unforeseen circumstances. Reserve targets focus on ensuring liquidity in the event there is an interruption in funding, increased capital costs due to new regulatory requirements or a short term funding emergency – all the issues evaluated by the bankers.  Reserve targets are policy decisions. Benchmarking is an evolving practice within Canadian public sector utilities particularly as it relates to financial planning and capital financing. The benchmarking exercise provides valuable information to help assess fiscal performance, the needs of customers, and provide the tools to help support optimum performance. 

Planning for Bubbles

March 6, 2014
Banking industry, Economic Bubbles, economy, finance, funding, infrastructure, Krugman, Leadership, local government, management, planning, politics, Reserve Funding, Revenues, Risk, Surpluses, Uncategorized, utilities, Water Funding
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We have talked about reserves, the need for them, reasons why they are neglected and how to establish appropriate numbers (an area where more research is needed).  Reserves are an issue when the economy tanks.  We all recall the problem in 2008, but this is where utilities need to look beyond just their system to see what might be coming.  2008 was a problem that we should have seen coming, or at least planned for, but did not.  But it means that we need to look at the national and local economic picture and understand a little about events beyond our reach that can affect us.  Utilities and governments generally do not do this well. 

In 2005-2007, it was very clear we had a property bubble going on.  There was discussion on the news, financial channels, Wall Street Journal and even columns by economist like Paul Krugman.  A few of us may have taken advantage of the bubble through prudent real estate sales, but many did not.  Likewise, few utilities or governments planned for its inevitable fall.  After the crunch hit, those who owed the least amount of money, had savings and had stable incomes fared better than those who did not.  Same for governments.  Unfortunately most Americans and most governments fell into the “did not” category. 

So let’s look at a couple issues.  First, we knew there was a bubble and should know that all bubbles pop.  We had the tech stock bubble in the late 1990s.  People on Wall Street knew that the investments had turned to real estate and bankers where busy loaning money out with no interest for two years, no money down, adjustable rate mortgages and the like.  If you owned a computer you were inundated with Countryside and various other folks trying to loan you money.  Or buy your house and pay you an annuity if you were older. 

The reason that these “opportunities” were so prevalent was to help speculators who expected to own the property for short periods of time, or help those who might not have the means to buy time to get the means to support the payments.  All the subsequent financial instruments discussed in books like “Too Big to Fail” come from tools used by bankers to disperse the risk associated with speculators and the risky.  It made money for bankers and investment houses (remember they are private businesses beholden to their private stockholders). 

Like all bubbles, we get caught up in the money being made by speculators (and yes if you invest in the stock market you are speculating).  We try to grab onto the rising instruments to get ahead, but we forget that especially with real estate, the growth overall rate across the nation could only grow at the rate of population growth.  It is basic supply and demand. 

For governments, revenues rise, especially during real estate bubbles.  Some bubbles last for years, which creates a distorted view of the future.  In south Florida, there was a lot of buzz concerning water supply projections and arguments between regulatory staff and utilities over water supplies that were projected 20 years in the future, based on demand projections from 2000-2005.  When the dust settled in 22011, most of those issued disappeared because virtually all projections were substantially revised downward.  And most revenue growth projections were likewise revised downward and capacity needs delayed.  Planning 20 years out is historically inaccurate because the global economy can impact local growth.

Of course these new projections are incorrect as well.  Because the test period was 2005-2010 or 2000- 2010, the growth is stunted.  So they are likely underestimating demand and revenues.  Uncertainty with time means that the accuracy of projection decreases with time.  As a result, simply relying on past projection methods increases risk that of significant deviations.

I do an exercise n class where I give students three sets of projections.  10 years apart, for 50 years.  I tell them nothing else.  The examples are The State of Nevada, Cleveland, and Collier County, FL.  All are in the past (Cleveland is 1910-1950) There is absolutely no easy method that can project the growth in either Collier County or the State of Nevada, or that Cleveland’s population will drop in half. We could do the same with Detroit and never project that decrease either.  But when you tell them where the population are and what year, the wheels start to turn.  They realize that economics is a major issue.  While Nevada and Collier grew from 1960-2000, the rate of change is likely to be very different in 2010 to 2020 due to the 2008 recession. 

Tracking economic activity is a utility responsibility.  We need to know what is really happening, and understand bubbles.  We need to recognize that when property values and housing number increase fast, it will be short term.  Plan for savings and reserves.  Figure out what your recovery period might be.  We need to understand our economic base.  For example try this out and see what your conclusion is.  Florida’s economy is based on three major industries: agriculture, tourism and housing.  What could possibly go wrong with that model?  Well if we have an economic problem nationally, 2 of 3 take major hits because people outside the state do not travel to Florida and retirements get put off.  The economy gets hit hard and recovery is slow.  We have experienced that exact phenomenon from 2009 to date.  And many of those jobs are low wage positions which means the people who struggle most get hit hardest.  Storm events can impact the state.  Bit hits to all three, and agriculture is also a low wage industry.  It is a precarious economic model that sets itself up for potential fluctuations.  We need to plan for this.  It is our responsibility, utility staff and decision-makers to plan and prepare for the next big event.  

How to Track Reserves

March 1, 2014
economy, finance, infrastructure, innovation, Leadership, local government, management, planning, politics, Revenues, Surpluses, sustainability, Uncategorized, water sewer management
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We have spent some time talking about the need to fund and maintain reserves.  I think most people reading this concur but how do you track reserves?  Every public sector utility gets audited annually.  How many people have actually looked at that audit?  Or attend the discussion with the elected officials with the auditors.  Or know how to read it?  This is an important part of our job.  We need to defend the utility and knowing the financial position is part of the defense. 

The annual audit is commonly called the Comprehensive Annual Financial Report of CAFR.  The finance director normally controls the process.  The CAFR is many, many pages long and include information on revenues and expenses, but also a bunch of other things like assets, depreciated assets, transfers to other funds, outstanding long and short term debt, fund balance and reserves.   The CAFR is designed to be a management tool to help with tracking performance of the entity with time.  CAFRs were redesigned by the Governmental Accounting Standards Board (GASB) about 15 years ago to provide more useful information to lenders and oversight agencies.  It was redesigned to help with management, discussion and analysis of the financial position.  The utility director should be a part of this management, discussion and analysis team and should fully understand its contents as it affects the utility. The CAFR should not be viewed simply as a compliance tool to submit and forget about. 

For example, the assets should include the value of all installed infrastructure (fixed) and all mobile equipment (non-fixed) as assets.  The depreciation is the total amount of depreciation, assigned as a straight line, since the acquisition of the assets.  You should always have more than 50% of the asset value remaining.  You should understand outstanding debt and debt plus depreciation should be less than your asset values, otherwise you are underwater with your assets.  You should understand the transfers to other funds and the justification for same.

But the reserves are key.  Some of these reserves may be restricted, which means they are likely impact fees, reserves to cover debt coverage requirements or covenants for repair and replacement of other purposes.  Most utilities do not have a separate repair and replacement reserve, but this would be useful for those capital expenses,  Likewise, operating reserves, for use to balance the budget in lean periods should be identified.  The reporting reserves for rate stabilization should be separate from the operating reserves (usually 1.5 to 3 months) to cover the day-to-day expenses.  An understanding of the value and tracking of these reserves is useful to long and short term decision making by utility managers.  Unfortunately most auditors and most finance director do not make separate reserves and tracking becomes a challenge.  But the utility is an operating entity.  Finance, like purchasing and human resources and support agencies designed to provide service to help accomplish the mission of the operating elements of the utility.  You need the support agencies to provide the necessary information to help your decision-making.  Doubtful your finance director wants to hear this, but really, does the utility operate because the finance department does the work or because the utility does?  Just food for though.

Reserves vs Borrowing

February 25, 2014
economy, Education, engineering, finance, funding, infrastructure, Leadership, local government, management, planning, politics, Reserve Funding, Revenues, Surpluses, sustainability, Uncategorized, utilities, Water Funding, water sewer management
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As water and sewer utilities, the public health and safety of our customers is our priority – it is both a legal and moral responsibility. The economic stability and growth of our community depends on reliable services or high quality. The priority is not the same with private business. Private businesses have a fiduciary responsibility to their stockholders, so cutting services will always be preferred to cutting profits. Therein lies the difference and yet the approach is different. Many corporations retain reserves for stability and investment and to protect profits. Many governments retain inadequate reserves which compromises their ability to be stable and protect the public health and safety. Unlike corporations, for government and utilities, expenses are more difficult to change without impacting services that someone is using or expects to use or endangering public health. Our recent economic backdrop indicates that we cannot assume income will increase so we need to reconsider options in dealing with income (revenue) fluctuations. If there are no reserves, when times are lean or economic disruptions occur (and they do regularly), finding funds to make up the difference is a problem. The credit market for governments is not nearly as “easy” to access as it is for people in part because the exposure is much greater. If they can borrow, the rates may be high, meaning greater costs to repay. Reserves are one option, but reserves are a one-time expense and cannot be repeated indefinitely. So if your reserves are not very large, the subsequent years require either raising taxes/rates or cutting costs. An example of the problem is illustrated in Figure 1. In this example the revenues took a big hit in 2009 as a result of the downturn in the economy. Note it has yet to fully return to prior levels as in many utilities. This system had accumulated $5.2 million in reserves form 2000-2008, but has a $5.5 million deficit there after. Reserves only go so far. Eventually the revenues will need to be raised, but the rate shock is far less if you have prudently planned with reserves. You don’t get elected raising rates, but you have a moral responsibility to do so to insure system stability and protection of the public health. So home much is enough for healthy reserves? That is a far more difficult question. In the past 1.5 months of operating reserves was a minimum, and 3 or more months was more common. However, the 2008-2011 economic times should change the model significantly. Many local governments and utilities saw significant revenue drops. Property tax decreases of 50% were not uncommon. It might take 5 to 10 years for those property values to rebound so a ten year need might be required. Sales taxes dropped 30 percent, but those typically bounce back more quickly - 3-5 years. Water and sewer utilities saw decreases of 10-30%, or perhaps more in some tourist destinations. Those revenues may take 3-5 years to rebound as well. Moving money from the utility to the general fund, hampers the situation further. Analysis of the situation, while utility (government) specific, indicates that appropriate reserves to help weather the economic downturns could be years as opposed to months. The conclusion is that governments and utilities should follow the model of trying to stabilize their expenses. Collect reserves. Use them in lean times. Develop a tool to determine the appropriate amounts. Educate local decision-makers and the public. Develop a financial plan that accounts for uncertainty and extreme events that might impact their long-term stability. Take advantage of opportunities and most of all be ready for next time. In other words, plan for that rainy day.