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Pyramid Schemes and Pension Plans

October 4, 2014
borrowing for infrastructure, debt funding, economy, innovation, Leadership, local government, planning, politics, Responsibility, Revenues, sanitary sewer, sustainability, Uncategorized, utilities, Water Funding
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A Ponzi scheme is an illegal program whereby investors are promised big return son investments in a short period of time, and where the underlying basis for this return is deliberately mis-stated.  We continually find people who perpetrate Ponzi schemes and when they are finally caught, they get put in jail.  For those unsure, a Ponzi scheme is defined as a scheme where the scheme operator says they will pay a high return to its investors from their original investment, but instead uses money from new capital paid to the operator by new investors rather than from profit earned by the operator.  Hence it is a flow through of money from people putting money in to people who are getting out.  To get returns on the investments for the earlier investors, the pool of new people must increase with time, so that there are always more people paying in that there were previously.  It that does not occur, then we have a problem.

What is a retirement system?  A retirement system is a form of deferred compensation used to attract and keep workers, by deferring a portion of their pay 10, 20 30 or 40 years from now.  It is part of the compensation to the employee.  With a retirement system, people pay into a program, where their money is invested.  A retirement system tends to rely on the fact that the number of people paying in increases exponentially so that the actual invested dollars are never touched, instead the new proceeds exceed the monies paid out.  For a pension, plan it assumes your invested dollars remain invested and profitable, and that the revenues from the new people in the system, exceed the monies paid to retirees.  What is the difference?  Well, the retirement system actually supposedly has assets while Ponzi scheme does not.  Otherwise, the systems work similarly – dollars paid in generally go out to others, and there is an assumption that the number or payees increases exponentially (a percentage every year).

So what happens to a pension plan when the number of employees decreases from 6.7 million to 4.4 million over 40 years?  Would you expect there to be a pension plan problem?  And if so why?  And who is at fault?  That is exactly what has happened to federal government employees since 1967.  And many states have seen reductions in the last 20 years as well.  So it is any wonder why these pension systems might be at risk?  The push to privatize services ensures that the basic assumption that the number of payees in a pension plan increases exponentially will be violated, which makes the pension plan vulnerable.  And ho is at fault.  I would suggest the people pushing privatization, who look only at short term consequences as opposed to long-term impacts.  Perhaps this needs to be part of any such discussion going forward.  Just a thought…

Post Recession Good News

September 29, 2014
finance, funding, Leadership, local government, management, planning, politics, Responsibility, Revenues, sanitary sewer, Uncategorized, utilities, Water Funding
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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

September 24, 2014
Banking industry, borrowing for infrastructure, Congress, contractors, debt funding, economy, engineering, finance, funding, growth, infrastructure, Leadership, local government, planning, politics, Reserve Funding, Risk, sanitary sewer, Uncategorized, Water Funding, water sewer management
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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

September 20, 2014
borrowing for infrastructure, Climate, communciations, Congress, debt funding, Economic Bubbles, economy, funding, growth, infrastructure, innovation, JObs, Leadership, local government, planning, politics, Responsibility, Revenues, Risk, Uncategorized, Water Funding, water sewer management
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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.

 

1/4 the semester is Gone!

September 15, 2014
Climate, communciations, debt funding, Detroit, Economic Bubbles, economy, finance, growth, infrastructure, JObs, Leadership, management, planning, politics, Risk, Uncategorized, Water Funding
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The first month of the fall semester has slammed me, which accounts for a little less blog activity on my part.  But as fall rolls in many local governments are dealing with final budgets, new projects and dealing with taxes and fees.  Students are back to school and industries are looking to the end of the year and 2015.  How fast time flies.  Our students that graduated last spring all have jobs and half of our seniors that will graduate in December do as well.  With engineers or contractors.

The good news is that the economy continues to tick up, construction and construction jobs are back to 2005 levels (which if you recall was a lot), and the stock markets are making money for somebody because they are up as well.  Alan Greenspan can complain that housing maybe lagging, but that is more a lack of people having funds or being able to move.  Meanwhile construction of projects that were deferred might be addressed?  Time will tell but it raises an interesting question –  can we plan on growth forever?  We assume a continuous growth rate (like 1 or 2% per year), but is that reasonable since it means more people come to an area each year than they did the year before?  Works for bacteria, maybe not so much for people.  Ask Detroit.  Or Cleveland.  And does this type of growth create unintended consequences for us?  I think this is a  good question for a future blog and of course a question that economists and politicians do not want to answer.  It would be highly disruptive to our plans.   So since it is election season again, we all need to be prepared for the inundation of campaign sales pitches that try to convince us to vote for someone, or more likely to vote against someone.  That’s probably not the way it was intended to go, but it’s what politics has degenerated to in so many places.  Ideology and adherence to it under any circumstances often prevents us from looking objectively at issues and reaching real solutions, some of which may have winners and losers, but may be necessary to improve long-range forecasts.  Listen to the political patter and decide where the plan is.

For example, ignoring the evidence that the climate is changing, places constituents in perilous positions…..in the future.  Not now and few climate impacts need drastic immediate action.  But longer term, storm sewer will be inadequate, there will be less water stored in glaciers, less rainfall in places (like the southwestern US), more frequent flooding in coastal areas, etc.  The problem may be 50 years from now, but wholesale infrastructure programs take that long.  It took the US 50 years to build the interstate system.  Nearly 40 years to dig canals in south Florida, 20 year to acquire property for a reservoir in North Carolina, etc.  Things take time and meanwhile if we need to alter current practice, such as elevating roadways and building to avoid flooding, the time to start is now, not in 50 years when solving that problem is overwhelming.  Find those water sources now, so development and competitors can be controlled.  Finding water that may take 20 years to secure and construct is an unmanageable issue the year before you need it.  You need a plan.  Where do you hear that planning?

What about that failing infrastructure?  We tend to ignore it until it fails.  But if it fails, that can be catastrophic.  Engineers and operations personnel know deterioration occurs, and know that it will take time to plan, design and refurbish of replace infrastructure.  But projects continue to get deferred for lack of funds.  Aggressively planning repair and replacement may actually save money in the long-run, but our planning tends only to be short-term.  So how do we change that?  Perhaps the state agencies that require local planning to be submitted and approved will push for better evaluation of infrastructure.  GASB 34 clearly did not go far enough.  Too many communities do not track their work and even fewer document the conditions when they make repairs.  Too little data is collected on what fails, when and why.  WE can collect huge amounts of data with work orders that track work.  Perhaps a regulatory frontier.  Or maybe, just maybe, some enlightened managers will decide tracking information is actually fairly easy.  The question is the platform.  Stay tuned… we are working on that…

Risk of Losses for Property In Florida

September 8, 2014
Banking industry, Education, innovation, Insurance, JObs, Leadership, politics, Reserve Funding, reserves, Revenues, Surpluses, sustainability, Uncategorized
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In my last blog I outlined the 10 states with the greatest losses since 2006.  Florida was not among them, yet given our legislature’s on-going discussion and hand-wringing with the state run Citizen’s insurance, you would  think we have a major ongoing crisis with insurance here.  Maybe we do, but I will provide some facts.  Citizens,averaged between 1 and 1.5 million policies over the last 8 years.  according the the South Florida SunSentinel, the average person pays $2500 per year for windstorm coverage.  Somehow I think I want that bill because my insurance is about $6000 through my private insurer and when I had Citizens it was $5700/yr.  But I digress.

Let’s assume there is 1.2 million policies over that time paying the #2500/yr. That totals.$3 billion a year in premiums.  That means Citizens should have reserves of $24 billion because they have not paid-out since 2006.  They have $11 billion according to the SunSentinel sources.  So wher eis the rest of the money?  We can assume there are operating expenses.  They pay their executives very well for a government organization.  I am sure they pay the agents as well.  I asked a couple friends in the industry and they indicate that for private companies, about half your premium goes the the agent who writes the policy.  That’s only Citizens.

Let’s assume there are conservatively another 8 million policies in Florida and since many of those are inland, let’s day they average $1500/yr.  If you have it for less, check out your policy!.  That means there is another $12 billion collected each year for a total of $15 billion per year.

Now let’s look at storms.  According to Malmstadt, et al 2010, the ten largest storms 1900–2007, corrected for 2005 dollars are as follows:.

Rank   Storm                         Year        Loss($bn)

1 Great Miami                        1926       129.0

2 Andrew                               1992        52.3

3 Storm                                  1944       35.6

4 Lake Okeechobee               1928       31.8

5 Donna                                1960       28.9

6 Wilma                                  2005       20.6

7 Charlie                                2004        16.3

8 Ivan                                     2004        15.5

9 Storm # 2                            1949        13.5

10 Storm # 4                          1947       11.6

So for all bu the top 9 storms in a 107 year history,the annual receipts exceed the losses for a storm.   The total over the period is $450 billion (adjusted to 2005 dollars)  That means an average of $4 billion per year.  So what is the issue?  Sure a big storm could wipe out the trust fund, but that is what Lloyd;’son London, re-insurers and the ability to borrow funds is all about.

I suggest that the fuzz is really about is this.  Most people do not understand the concept of an insurance pool.  That includes many public officials.  The idea of insurance is to pool resources is to collect huge sums of money so that if something bad occurs, there is the ability to compensate people for their losses.  Insurance is a good thing but individually we hope it is never us that needs to be compensated because that means something bad happened.  But we expect our premiums to pay into that pool, build large pools of money, and have money when you need it. The more people that pay in, the more the  risk is split and lower the likelihood that any individual suffers a loss.  Hence the lower risk should lower premiums.  And people who live in high risk area should pay more than those who don’t.  Flood plains, dry forests, coastal areas, high wind areas, tornado alley, etc are all high risk.  Florida is one, but clearly there are many others,

So Citizens has a pile of money. Most private insurance companies should also, although their money is invested and they expect most of that will not be paid out.  I suspect the concern is a fear that the pile of cash will create a public furor, but that shows a lack of communication and education.  Cash is good.  Lots of it is better.  It’s like running surpluses in government or in your personal savings account. The idea is to have money when you need it.  Running at a point where you never have surpluses guarantees you will have deficits that require cuts in services,and possibly losses of jobs when the economy tanks again.   For insurance, those losses occur when big event hit.  Fortunately those are infrequent, but they have and will happen.  We need the cash pools on hand to protect our citizens just in case.    In the meantime we need some leadership and education of the public.

Sea Level Rise Planning Part 2

June 26, 2014
Climate, communciations, economy, engineering, Environment, Flooding, infrastructure, innovation, Leadership, local government, management, planning, politics, Risk, Risk Management, sea level rise, stormwater, Uncategorized, utilities, water sewer management
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In the last blog we discussed 10 planning steps for sea level rises.  When planning 50-100 years other factors can come into play as well.  As a result, to allow flexibility in the analysis due to the range of increases within the different time periods, an approach that uses incremental increases of 1, 2, and 3 feet of SLR is suggested.  Hence infrastructure is built to meet milestones, not arbitrary dates lessening the potential for stranded assets.. The increments can work as threshold values in planning considerations in terms of allowing planners the ability to know ahead of time where the next set of vulnerable areas will be to allow a for proactive response approach that can be matched to the observed future sea levels.

But prior to developing infrastructure plans, the local community needs to define an acceptable level of service (LOS) for the community. A level service would indicate how often it is acceptable for flooding to occur in a community on an annual basis.  1% is 4 days per years and for a place like Miami Beach, this is nearly 2 ft NAVD88, well above the mean high tide.  The failure to establish an acceptable LOS is often the cause of failure or loss of confidence in a plan at a later point in time.  The effects of SLR of the level of service should be used to update the mapping to demonstrate how the level of service changes, so that a long-term LOS can be defined and used for near-term planning.

With the LOS known, the vulnerability assessment is developed using a GIS based map of topography and the groundwater levels associated with wet and dry season water levels.  LiDAR is a useful tool that may be available at very high resolution in coastal areas.  Topographic maps must be “ground-truthed” by tying it to local benchmarks and transportation plans.  USGS groundwater and NOAA tidal data from local monitoring stations to correlate with the groundwater information. Based on the results of these efforts, the GIS-based mapping will provide areas of likely flooding.

GIS map should be updated with layers of information for water mains, sewer mains, canals, catch basins, weirs and stormwater facilities.  Updating with critical infrastructure will provide a view of vulnerability of critical infrastructure that will be funded by the public sector. Ultimately policy makers will need more information to prioritize the needed improvements.  For example, a major goal may be to reduce Economic Vulnerability.  This means identifying where economic activity occurs and potential jobs.  At-risk populations, valuable property (tax base) and emergency response may be drivers, which means data from other sources should be added.

The next step is to analyze vulnerability spatially, by overlaying development priorities with expected climate change on GIS maps to identify hotspots where adaptation activities should be focused. This effort includes identification of the critical data gaps which, when filled, will enable more precise identification of at risk infrastructure and predictions of impacts on physical infrastructure and on communities. The final deliverable will include descriptions of the recommended concepts including schematics, cost estimates, and implementation plan.

So why go through all this.  Let’s go back to the beginning.  It has to do with community confidence in its leaders.  Resident look at whether their property will be protected.  Businesses look at long-term viability when making decisions about relocating enterprises.  The insurance industry, which has traditionally been focused on a one year vision of risk, is beginning to discuss long-term risks and not insuring property rebuild is risk-prone areas.  That will affect how bankers look at lending practices, which likely will decrease property values.  Hence it is in the community’s interests to develop a planning framework to adapt to sea level rise and protect vulnerable infrastructure through a long-term plan.  Plan or….

BOOMS AND BUSTS IN RURAL AMERICA

June 5, 2014
communciations, Economic Bubbles, economy, energy, fracking, infrastructure, Leadership, local government, management, planning, politics, power, Rural Utilities, Uncategorized, underwriters, utilities
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In a prior blog we talked about the difference between urban and rural counties and the impact of the differences between incomes and how that would affect utilities.  Keep in mind that the 40 largest urban counties in the US contain nearly half the US population as do the 50 largest utilities.  So in a recent article in Governing, the focus was on the few counties where income was higher than average.  In fact, in looking at counties, within the top 20 in per capita income are 10 counties in North and South Dakota.  Interesting until you review why.  All are in areas where fracking is ongoing and corporate farming is prevelant.  It is no surprise that the fracking boom has created wealth in rural areas that have limited populations, limited regulations and state and local officials who are desperate to reduce unemployment and stimulate laggard economies.  We noted before that rural counties are often desperate for jobs, so they often ignore what could possibly go wrong when jobs and development are the only priorities for a community.  Governing used the example of Wells County, ND where the per capita income has doubled since 1997 and is 75% above the national average.  Yet the local governments are looking at which roads they will allow to go back to gravel.  How is this possible? 

The issue is not relegated to just Wells, ND.  Despite the fact that many rural communities in areas with intensive farming or fracking have grown 10-15% since 2007, local officials are finding it difficult to raise taxes to pay for infrastructure.  Roads are the most obvious and pressing issue because of the impact from fracking traffic.  As new wells are constructed, the frackers build new dirt roads and use the existing roadways.  Some believe the need to fix many of the roads is temporary so why bother, but it neglects the need to infrastructure improvements in general.  The same argument could be used for water and sewer infrastructure as well, but these wealthy rural communities do not want to increase governmental spending to improve any infrastructure, so the opportunity to address the community needs is being lost.  

What is more interesting is that the states where these rural counties exist, including the Dakotas, along with Montana, Wyoming, New Mexico, and most of the southeastern states are among the states that rely most heavily on federal funding.  So when incomes increase, the dependency remains.  These are the same states that tax residents the least, spend the least on education, have the poorest health care (and the fewest people signed up for the Affordable Care Act and few have state exchanges) and have the most people in poverty.  The dichotomy between reality and the political perception is interesting in these states, which leads one to wonder if the residents of these states like their situation and keep electing representatives that reflect this desire, or they have fallen victim to political interests that cause them to vote consistently against their better interests, or for the interests of a limited few that deny them access to the education, infrastructure, medical care and other benefits their urban and wealthier neighbors enjoy. 

That is a tough question but the bigger question is how to infrastructure agencies like utilities attempt to overcome either of these perceptions?  Neglecting infrastructure, education, medical and the like does not promote local economies, does not create jobs and more likely causes the migration of the best and brightest young people out of the community in search of better prospects, which further imperils their rural situation.  Keep in mind that most cities are relatively permanent, but fracking, like mining, oil and timber before them, have been booms and busts.  The situation if far more dire after the boomtown than it was before.  After all, what could possibly go wrong when 50,000 miners, or frackers, descend upon a community of 1,500 people?  They will consume all the resources, then leave.  Locally those well paying jobs are imported due to the lack of skills and education, and then they leave with the bust.  This has played out many times in the past.  It is not sustainable.  We need to learn from the past – when the boom hits, make the investments you need in infrastructure, education, medicine, etc. so that the future is better after the bust. 

Hog Wild – TMDLs Affecting You?

May 29, 2014
Environment, Monitoring Water, politics, TMDLs, Uncategorized, water quality, water supplies
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So I am reading an article in OneEarth, which is a publication of one of the environmental groups.  The pretext is the issues with the movement of hog farm operations into Iowa and the problems it is causing.  They note that the state has cut the regulatory enforcement budget and the number of inspectors while more incidents of contaminated water are found.  The contamination threatens the raw water supply of  downstream water utilities which must do more treatment and monitoring.  Sorry, I had to giggle because I have heard this story before. 

Going back about decade many will recall the “pfiesteria hysteria” as it was called in North Carolina.  The issue was that the Department of Environmental Management had found fish kills where the fish had these weird sores on their bodies, and then a number of people were diagnosed as being infected with the same condition, some of whom died.  The cause was this pfiesteria, which is a flesh-eating organism that enters the nervous system.  Crazy is one of the side effects but it mostly leads to death.  DEM determined that the organism thrived in waters with significant loading from nutrients that they could trace to…..  wait for it…. hog farms!! 

That was not the first time hog farms were implicated in water quality issues, but due to the significant, political influence of the industry, the transgressions were largely ignored due to a lack of enforcement personnel.  Actually when I was in North Carolina we had a hog farm upstream of our wastewater plant.  Periodically the DEM would test the waters downstream of our plant and find bacteria counts to high and they would want to tag us for the violation.  But we never had any indication of violations at our plant (which we tested daily and reported).  You can’t “make” nutrients appear out of thin air – they come from somewhere.  We told DEM that it was a hog farm that periodically dumped the manure pit n the river when it got full.  No treatment was going on.  Then hog farms exploded in North Carolina which led the pfiesteria event.  Finally the State decided enough was enough and imposed a lot of regulations on hog farms which magically …. moved to Iowa where there are no regulations in place.  I guess there is nothing like a good crisis that kills a few people to get past the political influence of the lobbyists (unless you are the NRA).

But here’s the problem for Iowa, which is what North Carolina found.  The regulations actually are in place.  The Clean Water Act prohibits the contribution of pollutants that will impair the quality of water bodies.  Clearly hog farm effluent clearly falls into this category, but the historical focus of the Clean water Act has been on wastewater treatment plants, and lately stormwater, but not agriculture, which is largely exempted in many, rural states.  Yet agriculture is and has always been a major contributor to water quality degradation in watershed for two reasons.  First they disturb the earth by plowing and planting, so rainfall leads to runoff of material (silt) into streams.  With that runoff is herbicides, pesticides, fertilizer (nutrients), and of course in animal husbandry or CAFO operations, bacteria and other pathogens.  Do not forget that the two most significant examples of water quality impacts on water utilities, Milwaukee and Walkerton, were both agricultural runoff problems.

Agricultural runoff impacts the downstream users which are typically developed areas which use the streams for water supply.  So agricultural practices move land based contaminants to the utility intake, which means more treatment cost to customers.  Sometimes these contaminants are a significant health risk.  It took a significant incident for North Carolina to act. The question is what will it take for Iowa to act, and once they do where do the hog farms go next? 

What needs to happen is that the hog farms develop the treatment systems needed to clean up their act.  It would be great for them to pay the cost but history says they won’t.  So maybe the political leadership needs to participate in that solution to maintain the employment base, and maybe utilities and other source water protection agencies, and there are many of them like the US Water Endowment, can help as well.  Politicians want jobs, while ratepayers do not want to pay all the costs.  A collaborative solution seems reasonable, so we will see what Iowa comes up with.  

Economic Challenges or Challenges to Economics?

May 26, 2014
Congress, debt funding, economy, Education, finance, funding, infrastructure, innovation, Leadership, local government, management, planning, politics, Reserve Funding, reserves, Revenues, Surpluses, sustainability, Tax cuts, Uncategorized, utilities, Water Funding, water sewer management
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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.