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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.

Explaining Surpluses

February 21, 2014
communciations, economy, finance, funding, Leadership, management, Marketing water, planning, Reserve Funding, Revenues, Surpluses, sustainability, Uncategorized, Water Funding
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My last blog was a discussion about surpluses.  The State of Florida will have a $1.3 billion surplus this year and a host of politically expedient answers for where that money goes (tax cuts, pork projects, projects to help election results), but little mention of replenishing trust funds and reserves that were emptied to balance the budget amid tax cuts from 2010 – 2012.  But perhaps it is not the legislators or their constituents that we should blame for not understanding the need for reserves because the truth is that most people are not used to saving.  A recent article I read noted that 72 percent of Americans live paycheck to paycheck and would have difficulty putting $2000 together if needed.  $2000 is not a lot of money these days – it won’t buy you a transmission for example or a new engine for your car.  It won’t cover first, last and a deposit on a rental.  And it won’t cover the down payment on a house or most cars.  There are people who do not receive enough income to achieve some degree of savings, but not 72% of us.  We have come to perceive that having little savings is normal, but it wasn’t always this way and it is not this way everywhere in the world.  Back in the day, American saved more than they do now.  The reason is not that they had more money (they didn’t) or that they had less to spend money on (as things cost more proportionately).  But it was that “rainy day” they all knew would come and when they would need money.  They had been through depressions, recession and losses of industries (remember those Concord coachmakers did not get a federal bailout in trying to compete with Henry Ford).  They knew that there would be times when they needed to rely on themselves to survive and savings was the key.

There are two major differences from the past.  The most important is the fact is that credit was a lot harder to come by back in the day, so you needed cash for those big purchases.  That has changed dramatically in 50 years.  Today we get advertisements for credit cards – in the mail, instant credit at stores, easy credit for cars, and in the early 2000s, no-money-down-no-income-verification loans on real estate.  The need to save evaporated.  The access to easy credit has eliminated much of the need to save for those big expenses.  We can borrow to acquire them.  If we have a job problem, we borrow against the house or life insurance policy.  These are good backstops that help us maintain our way of life.

At the same time as we are being extended opportunities to secure funds to spend, we are barraged by advertisements and flyers and pitches to spend that money on products and services, many of which we probably don’t need, but are “cool” to have.  We are encouraged to compete to have better “stuff” than the other guy, and make sure we have the newest technology.  We all do it.  Just look at all phones can do, while keeping in mind that the old Bell phone I bought in college still works regardless of the situation and still sounds good.  No cool ringtones however, nor photo capability.  All that means we spend less on “needs” and more on “stuff.” 

Given this backdrop it is no surprise the attitude of decision-makers in government toward revenues and expenses.  Re-education of the public is needed as opposed to rhetoric.  We need to move the public discussion away from the concept of a balanced budget being expenses equal revenues to the correct concept of revenues + reserve expenses = expenses plus savings.  At times you use reserves (and savings =0) while other times reserve expenses are 0, while savings are positive. When big expenses come, borrow, but recurring expenses should not be funded through borrowing (credit).  We should seek to avoid is the desire to cut taxes (akin to cutting our salaries) to bring the budget back into balance that if we run a surplus, or spend it on “stuff.”  Such a system leaves room for those lean times when revenues may fluctuate but expenses do not (or increase).  

SEA LEVEL RISE AND FLOOD PROTECTION

February 12, 2014
communciations, Flooding, funding, infrastructure, Leadership, local government, management, planning, politics, Revenues, sea level rise, stormwater, sustainability, Tidal flooding, Uncategorized, utilities
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Regardless of the causes, southeast Florida, with a population of 5.6 million (one-third of the State’s population), is among the most vulnerable areas in the world for climate change due its coastal proximity and low elevation (OECD, 2008; Murley et al. 2008), so assessing sea level rise (SLR) scenarios is needed to accurately project vulnerable infrastructure (Heimlich and Bloetscher, 2011). Sea level has been rising for over 100 years in Florida (Bloetscher, 2010, 2011; IPCC, 2007).  Various studies (Bindoff et al., 2007; Domingues et al., 2008; Edwards, 2007; Gregory, 2008; Vermeer and Rahmstorf, 2009; Jevrejeva, Moore and Grinsted, 2010; Heimlich, et al. 2009) indicate large uncertainty in projections of sea level rise by 2100. Gregory et al. (2012) note the last two decades, the global rate of SLR has been larger than the 20th-century time-mean, and Church et al. (2011) suggested further that the cause was increased rates of thermal expansion, glacier mass loss, and ice discharge from both ice-sheets. Gregory et al. (2012) suggested that there may also be increasing contributions to global SLR from the effects of groundwater depletion, reservoir impoundment and loss of storage capacity in surface waters due to siltation.

Why is this relevant?  The City of Fort Lauderdale reported last week that $1 billion will need to be spent to deal with the effect of sea level rise in Fort Lauderdale alone.  Fort Lauderdale is a coastal city with canals and ocean property, but it is not so different from much of Miami-Dade County, Hollywood, Hallandale Beach, Dania Beach and host of other coastal cities in southeast Florida.  Their costs may be a harbinger of costs to these other communities. Doing a “back of the napkin”  projection of Fort Lauderdale’s cost for 200,000 people to the additional million people in similar proximity to Fort Lauderdale means that $5 billion could easily be spent over the next 100 years for costal impoundments like flap gates, pumping stations, recharge wells, storm water preserves, exfiltration trenches and as discussed in this blog before, infiltration galleries. Keep in mind that would be the coastal number and we often ignore ancillary issues.  At the same time, an addition $5 to 10 billion may be needed for inland flooding problems due to the rise of groundwater as a result of SLR.

The question raised in conjunction with the announcement was “is it worth it?”  I suggest the answer is yes, and not just because local politicians may be willing to spend money to protect their constituents.  The reality is that $178 billion of the $750 billion economy of Florida, and a quarter of its population, is in the southeast. With nearly $4 trillion property values, raising a few billion for coastal improvements over 100 years is not an insurmountable task.  It is billions in local engineering and construction jobs, while only impacting taxpayers to the tune of less than 1/10 of a mill per year on property taxes. This is still not an insurmountable problem.

I think with good leadership, we can see our way.  However, that leadership will need to overcome a host of potential local community conflicts as some communities will “get more” than others, yet everyone benefits across the region.  New approaches to working together will need to be tried.  But the problem is not insurmountable, for now…

Groundhogs and Super Bowls

February 3, 2014
finance, infrastructure, Uncategorized, water sewer management, water supplies, Water treatment
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It’s groundhog day and Super Bowl Sunday!  The groundhog saw his shadow indicating 6 more weeks of winter, but you wouldn’t know it at the Super Bowl.  The bright lights are on in New Jersey with over 80,000 fans braving the cool, but no the harsh cold weather of last weekend.  Just like the groundhog this morning, millions will be watching.  The Super Bowl is biggest one day sporting event in the world with over 100 million viewers watching it live in the US, and over a billion around the world.  And we all enjoy the commercials too, but it speaks to our priorities when a 30 second commercial will cost $4 million.  A lot of utilities could do a lot with $4 million.  Just saying….

Detroit – Feast to Famine – it there a Lesson to Learn?

January 20, 2014
economy, engineering, finance, infrastructure, innovation, Leadership, local government, planning, Uncategorized, Water Funding, water sewer management
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I have said before in this blog that my Dad’s family were born and raised in Detroit – not the suburbs, in the City, about a mile north of Tiger Stadium.  My great-grandfather was a butcher.  His sons all became butchers, so my Dad grew up around the butcher shop as a kid.  It was the Depression, but because of the shop, my Dad had food on his table.  My Great-grandmother managed the money, and acquired a number of properties in the area of 13th and Magnolia that the sons, and extended families would eventually move to.  It was a solution to the difficulties outside the shop.  Family was the means to survive the hard times of the Depression. 

Of course Detroit was a booming city – over 100 auto companies were in Detroit at the turn of the last century, and the City was becoming the center of a new mode of transportation – the automobile.  Henry Ford developed the assembly line to allow everyone to own a car, furthering the status of the City.  As the twenties developed, Detroit and Chicago competed to become the “jewel” of the Midwest.  Elaborate stone buildings, expanding infrastructure for roads, trains, water, sewer and storm water were all centerpieces of pride in the City.  Employment and incomes were high, worker benefits were good, the workforce was highly skilled and education was good. Profits were good and the auto industry was Detroit-centric. Detroit was a vibrant City in the first 50 years of the last century. 

Scroll ahead 60 years and how the city has fallen.  The City has lost a million people.  It has $18 billion in debt, and is collecting $0.3 billion less in revenues since 2008.  The tax base has been decimated.  Houses can be purchased for minimal prices.  Churches have been abandoned.  Crime is high.  Employment is down, unemployment remains above the state and national average.  Poverty is up, incomes are down.  Huge areas must be served but serve no one or only a very few.   The City filed the highest profile bankruptcy for a municipality ever.

The television show Low Down Sun last summer provided a graphic look at the City – blocks of the City devoid or mostly so of housing or other buildings, schools no longer in use, roads in disrepair, classic stone buildings with the windows broken out.  You can see what the City was, and the haunting view of the City today are a stark reality.  To add insult to injury, the Sun-Sentinel wrote a recent article about how people are making money doing tours of abandoned buildings in Detroit, or how farming is occurring in the City limits. 

So if Detroit failed, why not Cleveland, Akron, Pittsburgh, St. Louis, Cincinnati or virtually any other large, older Midwestern industrial city?  Sadly many of these cities have lost the industries that made them famous and provided jobs and a stable tax base and incomes.  Many of these cities are also stressed, much as we found Birmingham was.  There are many arguments for what precipitated these losses:  unions, shifts in population, outsourcing offshore, competition within the US, changes in consumer preferences, technology…… the list goes on.  But the reality is it doesn’t matter why, the City must deal with the reality that is.  We all look at Detroit and its recent bankruptcy filings.  Maybe looking at Detroit allows us to feel better about our situations, but we need to learn the lesson from Detroit, Birmingham, Cleveland and others who filed for bankruptcy.  We need to look back to determine where the decisions were that created the issues.  Was it expanding to fast, poor economic assumptions, failure to manage finances better, political failures, failure to raise revenues/taxes/water fees, or failure to maintain or replace infrastructure?  Rarely is it corruption, so it is people trying to do well but failing in their jobs.  The question is why? 

I would start with training.  We need to train our public managers better, but MPA and MBA schools are not teaching about these failures.  In part it may be because we tend to teach positive lessons, versus negative ones, but they would be useful case study of the potential challenges.  In a prior blog I noted that the biggest challenge for government managers is managing in lean times.  Often lean times can be overcome by saving money as fund balances and investing (well), but long-term downturns like Detroit, Cleveland and other cities have experienced cannot be corrected this way.  There are major policy implications that must be overcome. 

From a utility perspective it is important to note that the economic difficulties are not limited to cities and counties but utilities are subject to long-term declines as well.  The problem is particularly acute in industrial communities where a large industry (think mills in the mid-Atlantic states) move away and leave water and wastewater facilities at far less capacity than they were designed for. Small systems may be especially at risk.

As an industry we need to learn from these failures.  We should study the difficult times to determine how the problems can be avoided.  The need to figure out how to manage funds better, deal with customer losses, and define strategies to overcome losses.  If anyone has some thoughts, please respond to the blog, but doesn’t this sound like a research project in the making?

INVESTING IN INFRASTRUCTURE

January 15, 2014
economy, Education, engineering, finance, funding, infrastructure, Leadership, planning, politics, Rural Utilities, Uncategorized, utilities, water sewer management
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When we ask what the biggest issues facing water and sewer are in the next 20 years, the number one answer is usually getting a handle on failing infrastructure.  Related to infrastructure is sustainability of supplies and revenue needs.  Resolving the infrastructure problem will require money, which means revenues, and overcoming the resistance to fully fund water and sewer system by local officials, the potential for significant costs or shortfalls for small, rural systems and the increasing concern about economically disadvantaged people. 

The US built fantastic infrastructure systems in the mid-20th century that allowed our economy to grow and for us to be productive.  But like all tools and equipment, it degrades, or wears out with time.  Our economy and our way of life requires access to high quality water and waste water. So this will continue to be critical. 

ASCE and USEPA have both noted the deteriorated condition of the water and wastewater systems.  In the US, we used to spend 4% of the gross GNP on infrastructure.  Currently is it 2%.  Based on the needs and spending, there is a clear need to reconstruct system to maintain our way of life.  This decrease in funding comes at a time when ASCE rates water and wastewater system condition as a D+ and estimates over $3 trillion in infrastructure investment will be needed by 2020.  USEPA believes infrastructure funding for water and sewer should be increased by over $500 billion per year versus the proposed federal decrease of similar amounts or more. 

Keep in mind much of what has made the US a major economic force in the middle 20th century is the same infrastructure we are using today. Clearly there is research to indicate there is greater need to invest in infrastructure while the politicians move the other way.  The public, caught in the middle, hears the two sides and prefers less to pay on their bills, so sides with the politicians as opposed to the data.  Make no mistake, our way of life results from extensive, highly efficient and economic infrastructure systems. 

In many ways we are victims of our own success.  The systems have run so well, the public takes them for granted.  It is hard to make the public understand that our cities are sitting on crumbling systems that have suffered from lack of adequate funding to consistently maintain and upgrade.  Public agencies are almost always reactive, as opposed to pro-active, which is why we continuously end up in defensive positions and at the lower end of the spending priorities. So we keep deferring needed maintenance. The life cycle analysis concepts used in business would help. A 20 year old truck, pump, backhoe, etc. just aren’t cost effective to operate and maintain.

Another part this problem is that people have grown used to the fact that water is abundant, cheap, and safe. Open the tap and here it comes; flush the toilet and there it goes, without a thought as to what is involved to produce, treat and distribute potable water as well as to collect, treat, and discharge wastewater.

Water and Sewer utilities are being funded at less than half the level needed to meet the 30 year demands.  Meanwhile relying on the federal government, which is trying to reduce funding for infrastructure for local utilities is not a good plan either. We need education, research and demonstrations to show those that control funding of the needs. The education many be the toughest part because making the those that control funding agree to increase rates carries a potential risk to them personally.  But there are no statues to those that don’t raise rates – only those with vision.  We need to instill vision in our decision-makers.

Students Get Jobs, and Bring a Fresh Perspective

January 7, 2014
Education, engineering, graduation, infrastructure, innovation, Leadership, Student Achievement, Uncategorized, utilities, water sewer management, water supplies
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We get to start the new semester this week.  The economy is looking up in Florida.  Unemployment is down, although the job growth appears to be mostly minimum wage jobs.  So it is useful to look at last semester’s graduates and see how they are doing.  The good news is they are getting jobs.  In fact our seniors mostly have jobs or internships and none of them are minimum wage jobs.  Excellent news, but let’s look at the new graduates and the workplace. 

A lot of our assumptions about the workplace will change in the 21st century.  The workplace at the “office” is less necessary and younger workers are more comfortable working outside the office environment.  They may be more productive than 20th century managers think they will be because of the side benefits that flex hours allow.  Their entry into the workforce places four generations at work at once:  Traditionalists, Baby Boomers, Gen X, and Gen Y or Millennials.  The latter are the fastest growing segment of the workforce, and are already a larger percent of the workforce than Gen X or Traditionists.  The Traditionalists are retiring and are expected to be under 8 % in 2015.  Gen X and Gen Y will encompass about a third of the workforce going forward.

All of these groups have different perspectives.  Recent studies indicate the following.  Baby Boomers grew up post-WWII in a time of change and reform.  Some believe they are instruments of change.  They are optimistic, hard-working and motivated by position.  Gen X grew up in an era of both parents working, so are resourceful and hardworking, but not as motivated by position.  They are independent, and prefer to work on their own.  And many are contributing to the way government operates throughout the world. They accept technology as a way to involve others.  The use of online means to solicit feedback in government is particularly a Gen X phenomenon.  Public participation, traditionally are arena where limited public involvement actually occurs except with highly unpopular issues.

Gen Y was born in an era when both parents worked, but in their off-time, the parents spent more focus on the kids.  Think of no winners or losers in sports, but at the same time they have had unprecedented access to technology and are often well ahead of their work mates with respect to the use of tools in the workplace.  But, they are resourceful and can easily overcome technology barriers in the workplace. They care about their image and the world around them.  We can use that to implement change.

However, Gen Y is facing a workplace that clearly has winners as well as some skepticism about technology.  While we can expect some difficulties, it is up to the Gen X and Baby Boomers to help Gen Y make the transition. They have fresh viewpoints as they have had to be creative to get ahead.  Just doing things “the same old way,” doesn’t cut it.  I actually find this refreshing and a positive challenge to me because I use these challenges to go back of evaluate what my thinking was (or is).  We need to embrace this perspective and channel their energy and independence to solving today’s problems. 

We need to help them acclimate to the business world, while understanding that their motivations are not the same as Dan Pink notes in his book “Drive.”  We need new ideas and perspectives while welcoming them to the workplace.  That is how we improve productivity, product new ways to work, and develop new tools.  We need all of these in the utility industry as we need better ways to upgrade infrastructure and deliver our services.

There is a lot of talk about the difficulties that Gen Y is having getting jobs.  They often lack experience, but how do you get experience if no one hires you.  It is circular logic and we have all been there. 

We need to give the kids a chance.  I see a lot of potential in our graduates, nearly all of whom are Gen Y.  I see many who are hard working and know how to find answers to their questions.   They are far better prepared than many think.  We get comments all the time about how good our students are.  That is good, because the truth is, especially in the engineering and utility world, the Gen Y workforce does not understand why things were done a certain way in the past, nor why they should remain that way.  I actually find this refreshing and a positive challenge to me because I use these challenges to go back of evaluate what my thinking was (or is).  We need to embrace this perspective and channel their energy and independence to solving today’s problems.  They offer fresh ideas – and don’t necessary understand why.  That’s ok.  Long-term engineering graduates will make contributions to our water, sewer and other infrastructure. 

Happy Holidays to All!

December 25, 2013
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As we come to the end of the year and the height of the holiday season, may all the best wishes be with you and yours.  As a global society, we need to communicate and come together to solve issues of the day.  Wouldn’t it be nice as we think about the blessings bestowed upon us and how lucky we are this holiday season, and that we think about how we can help our globe, the built environmental society, the natural community, the oceans and each other.  Happy Holidays and best wishes to all!!Image 

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