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On Taxes and Fees – Is starving Government the Answer?

October 6, 2015
Banking industry, borrowing for infrastructure, engineering, ethics, finance, Leadership, local government, management, Reserve Funding, reserves, Responsibility, Revenues, Risk, Road Repair, sanitary sewer, Uncategorized, Water Funding, What could possibly go wrong?
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Most states were doing pretty well before the 2008 recession hit, but that ended in 2009. Most states had to make extremely difficult cuts or raise taxes, which was politically unacceptable. Of course invested pension systems received a lot of attention as their value dropped and long term sufficiency deteriorated, which was fodder for many changes in pensions, albeit not how they were invested. The good news is a lot of them came back in the ensuing 5 years, but 2015 may be different. A number of states have reported low earnings in 2015 and whether this may be the start of another recession. The U.S. economy has averaged a recession every six years since WWII and it has been almost seven years since the last contraction. With China devaluing their currency, this may upset the economic engine. At present there are analysts on Wall Street who suggest that some stocks may be overvalued, just like in 1999. If so, that does not bode well states like Illinois, Kansas, New Jersey, Louisiana, Alaska and Pennsylvania that are dealing with significant imbalances between their expenses and incomes. Alaska has most of its revenue tied to oil, so when oil prices go down (good for most of us), it is a huge problem for Alaska that gives $2200 to every citizen in the state. An economic downturn portends poorly for the no tax, pro-business experiment in Kansas that has been unsuccessful in attracting the large influx of new businesses, or even expansion of current ones. California and next door Missouri, often chided by Kansas lawmakers as how not to do business, outperform Kansas.

Ultimately the issue that lawmakers must face at the state and as a result the local level is that tax rates may not be high enough to generate the funds needed to operate government and protect the states against economic down turns. There is a “sweet spot” where funds are enough, to deal with short and long term needs, but starving government come back to haunt these same policy makers when the economy dips.   It would be a difficult day for a state to declare bankruptcy because lawmakers refuse to raise taxes and fees.

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Engineers without Borders discussion continued.

July 30, 2015
engineering, Leadership, population growth, water sewer management, water supplies
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The most recent issue of the magazine Population Connection notes several interesting things.  First, the world’s population grows by 80 million people per year, predominantly in areas that are not “first World” countries.  In many of these places water is limited – 1.2 billion people live in these areas. By 2030, 40% of the people, especially those in these areas will be facing water deficits that will increase their risks.  Some of these deficits will be exacerbated by climate changes.  Agriculture is responsible for 70% of water use, and that number is not expected to decline as the need for agricultural products increases with time.  So clearly water use and population are related, just as carbon dioxide concentrations in the atmosphere and population appear to be related. Worse yet, the number of urban residents that do not have access to wastewater services is expected to increase by 50%.  The good news, not so much in the US, where such services are expected and available to the vast majority of people.  So the problem – most of these people live in Third World countries that lack both the economic resources and social infrastructure to deal with these problems.  This is what Engineers Without Borders is trying to address but it does raise that question – what are the social consequences of trying to help them?  Surely engineering ethics say we should help protect the public health, safety and welfare, which this work does.  But on the other side, if they develop more and add more people, does that add to the strain on limited resources in these areas which might damage the public health safety and welfare.  Which is the more critical issue?  And how do we decide? How should engineers evaluate the conflict between public health and sustainability from an ethics perspective? Just asking?

Interesting Conversations

July 27, 2015
economy, engineering, Leadership, water sewer management, water supplies
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Over the past couple weeks I have been at two conferences and had two interesting conversations.  The first one was in Anaheim at the AWWA Annual Conference and Exposition.  The subject was the organization Engineers Without Borders (EWB).  The organization has the mission to help get drinkable water to people in undeveloped parts of the world.  Nearly two billion people do not have clean drinking water which drastically impacts their health and ability to be productive and earn a living.  Many of these people live in Africa and Asia; some in central and South America as well.  The mission is a noble one – to help people.  But the guy I was talking to raised an interesting question – if we help all these people get water, they will demand more resources and if the resources are already limited, won’t creating more demands for those resources compromise our access and cost to those services?  Hence helping them actually creates competition with us for the same resources and that can compromise our goals.  Clearly not a fan of EWB, but, an interesting take on the issue..…

The second conversation was a few days later when a group of people were talking politics.  The conversation inevitably ended up on political parties and people and service organizations like Engineers Without Borders that are often viewed as being ”liberal” or “progressive” as opposed to “conservative.”  The discussion got around to this question – would conservative groups give money to progressive groups like EWB?  The answer was a resounding yes, because that would improve conditions which would make people more productive, which means more jobs, and more income to give more people access to buy more things, which creates a demand for more things, which expands the economy.  In other words, increase profits for those folks building the “things.”  Interesting twist, and you thought is was all about water….

An Urban vs Rural community Question

July 1, 2015
borrowing for infrastructure, communciations, Detroit, economy, Education, engineering, Environment, finance, Leadership, local government, management, Marketing water, Water Funding, water sewer management, Water treatment
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As technology advances I have an observation, and a question that needs to be asked and answered.  And this could be a pretty interesting question.  Back in the day, say 100 or 150 years ago, there were not so many people.  Many activities occurred where there were few people and impacts on others were minimal.  In some cases ecological damage was significant, but we were not so worried about that because few people were impacted by that ecological damage.  In the 20th century, in urban locations, the impact of one’s activities on others became the basis for zoning laws – limiting what you could do with your property because certain activities negatively impacted others.  And we certainly had examples of this – Cuyahoga River burning for one.  Of course this phenomenon of zoning and similar restrictions was mostly an urban issue because there potential to impact others was more relevant in urban areas.  We also know that major advances in technology and human development tend to occur in population centers (think Detroit for cars, Pittsburgh and Cleveland for steel, Silicon Valley, etc.).  People with ideas tend to migrate to urban areas, increasing the number of people and the proximity to each other.  Universities, research institutions, and the like tend to grow up around these industries, further increasing the draw of talent to urban areas.  The observation is that urban areas tend to have more restrictions on what people do than rural areas.  So the question – do people consciously make the migration to urban areas realizing that the migration for the potential financial gain occur with the quid pro quo of curbing certain freedoms to do as you please?  Of does this artifact occur once they locate to the urban areas?  And is there a lack of understanding of the need to adjust certain activities understood by the rural community, or does it become yet another point of philosophical or political contention?  I have blogged previously about the difference between rural and urban populations and how that may affect the approach of utilities, but read a recent article that suggests that maybe urban citizens accept that financial gains potential of urban areas outweighs the need to limit certain abilities to do as you please to better the entire community.  They are motivated by potential financial opportunities that will increase their standing and options in the future.  So does that mean urban dwellers understand the financial tradeoff differently than rural users?  Or is it a preference issue.  And how does this translate to providing services like water to rural customers, who often appear to be more resistant to spending funds for improvements?  While in part their resistance may be that their incomes tend to be lower, but is their community benefit concern less – i.e. they value their ability to do as they please more than financial opportunities or the community good?  I have no answer, but suggest that this needs some further study since the implications may be significant as rural water systems start to approach their life cycle end.

Another Ethical Question….

June 27, 2015
agriculture, ethics, Leadership, mining, oil and gas, water quality, water sewer management, water supplies, Water treatment
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I am working on a book on engineering ethics. My wife and I were talking about the ethical obligations of engineers and how that compares to the medical industry (which she is in).  Engineers by canon, creed, code and law, have an obligation to protect the public health, safety and welfare above all else, including their clients and their firms.  It is one of the reasons that engineering services provided to the public require a license and why codes exist to help guide design.  My wife recently raised an interesting question – if licensure means that you must protect the public health, safety and welfare, can you sign and seal a project for which the consequences are not perfectly known?  It harkens back to a lecture I do in my summer environmental science and engineering class – the infamous “What could possibly go wrong?” lecture.  In that lecture we look at logging, mining, oil and gas and agriculture.  I should note that we need each of these industries and will continue to need them for the foreseeable future, so abandoning any of them is not an acceptable answer.  But in each case there are large, historical consequences, as well as current ongoing consequences.  Let’s start with logging which fed the rapid development of many cities by providing accessible building materials.  And actually let’s just start in the upper half of the state of Michigan where loggers cut timber across the state for over 50 years, eliminating white pines form many areas.  The logs were sent down small streams and rivers, many of which had to be altered to take the logs.  Rivers like the AuSable and Manistee changed completely afterward (starting with the loss of sweepers, increased siltation, the loss of the grayling (fish), and the need to introduce trout.  Siltation is a difficult issue for water plants to deal with.  Today the AuSable is a “high quality fishing water” with open fishing season, but limits of zero trout kept in many places or only really large fish (rare in cold water), which means catch and release only, which sounds more like – “not enough fish, so put them back” as opposed to high quality fishing waters.    We needed the logs, but the impacts of logging were never considered and 150 years later, we still suffer the effects.  Few engineers were involved.

Next we look at mining.  Again we needed the gold, silver, lead, iron, etc. from the mines.  The gold rushes started in the 1840s and expanded across the west.  Material was dug out, metals processed and mines abandoned.  The tailings from these mines STILL leach metals into waterways.  The metals content remains toxic to ecology and to us in drinking water, and will continue be so for years.  Metals are often expensive to remove via treatment.  Sometimes the situation is serious enough that the federal government will construct treatment plants to protect downstream waters (drinking waters for people), as they have done in Leadville and Idaho Springs, Colorado.  The tailings issue will be with us for years, which is why the mining industry is subject to regulations today.  Maybe we learned something?  Engineers have become more involved with mining with time, but historically, not so much.

With agriculture (Ag) the big issue is runoff and siltation.  Siltation has increases as more property is farmed.  The runoff also contains pesticides herbicides, and fertilizers, which impact downstream ecological sites, as well as creating difficulty for water treatment.  Ag is largely unregulated with respect to runoff and best management practices are often lacking.  The results include dead zones in the Gulf of Mexico and the Pacific.  Engineers try to deal with water quality issues in rivers and streams, but the lack of ability to effect changes with Ag practices is limiting.  There are situations like Everglades where the engineers did exactly what was asked (drain it), but no one asked the consequences (lack of water supply), or the impact of farming north of the Everglades (nutrients).

The Everglades results, along with the unknowns associated with fracking (primarily surface and transport) brought the question to my wife — should an engineer sign off on a project for which the consequences are uncertain, unstudied or potentially damaging the public health safety and welfare, like fracking wells, or oil/gas pipelines across the arctic (or Keystone)?  Engineers design with the best codes and intentions and clearly the goal is to design to protect the public, but she has a great point – when you know there are uncertainties, and you know there are unknowns that could impact public health, safety and/or welfare, or which could create significant impacts, should we be signing off?  I am not so sure.  What are your thoughts?

photo 4IMG_6527 (2015_03_08 17_53_48 UTC)

Economy of Scale?

June 17, 2015
economy, Education, management, Marketing water, Water Funding
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I am in the initial stages of a project to look at economy of scale, utility bench-markings, asset management and impacts of economic disruption on utility systems. I should note that I am looking for volunteers, so let me know. But an initial question is whether economy of scale still applies. We think it should but given the disparities across the US, does it. As a quick survey, I enlisted several volunteer utilities to provide me with some basic information that I sued to create some ratios. And then we discussed them. The baselines were accounts and cost per millions of gallons produced.  The graphics are shown below. Economy –of-scale is alive and well. That means if you have a small utility, you cannot expect to have the same costs/gallon, or the same rates, as your larger neighbors. If you do, you are probably shoring your maintenance or capital programs. That leads to bigger costs later. Instead of comparing yourself to your larger neighbors, see what happens when you compare yourself to cable and cellphones in your area. You may be surprised.

economy of scale MGY economy of scale cost per MGY

Part 2 Financing Infrastructure

May 19, 2015
borrowing for infrastructure, debt funding, Detroit, Economic Bubbles, engineering, finance, funding, Water Funding
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The true risk to the community of pipe damage is underestimated and the potential for economic disruption increases.  The question is how do we lead our customers to investing in their/our future?  That is the question as the next 20 years play out. Making useful assumptions about increases in demands, prices, inflation rates etc. are key to useful projections and long-term sustainability. Building too much or too little capacity for example can have disastrous consequences (to the ratepayers on the former, to the local economy for the latter).

Getting funding relies on economic strength, a problem of you are in a depressed area (Detroit) or a boom that could crash at any time (North Dakota).  P3 opportunities are available for cash strapped communities but they come with a cost.  Risk must be allocated fairly – the private community will not take on too much risk without increasing costs significantly. Loss of control is one of those risk conversion issues.  Extensive planning and feasibility analyses should be expected – far more scrutiny than most utilities are used to.  The economic strength of the community is important to private investors.

In a prior blog we talked about the boom towns of North Dakota.  Things were booming in 2013 but the downturn in oil prices may get ugly.  The need for more fracking wells may have decreased (at least temporarily) and the decrease in the oil and gas costs has cut into local revenues, so is this is the time to keep planning for the boom?  South Florida did this in the early 2000s – and well, that real estate boom put quite a dent in the economy and population estimates for 2020 and 2030.  The balloon popped and so did the economy.  South Florida had the resiliency to bounce back because of weather and proximity to South America.  We have seen the result to an industrial economy – where a community relies on industry, well industry can be fickle.  Ask Detroit.  Or Cleveland.  Or any number of other Rust Belt cities.  Now they have infrastructure, but much of it is underused.
So while the Plains states plan for the boom, the boom has settled in some places. Already the oil and gas industry has shed 100,000 jobs (many high salary).  Texas, Kansas, North Dakota and Oklahoma are facing financial challenges in 2015 due to funding losses.  Alaska is dipping into reserves.  But that doesn’t mean the results of the 2010-2014 boom are not continuing, or at least portions of them.  Frack water continues to be discharged to local wastewater systems, but the revenues to pay for the needed upgrades is lacking.  Effluent limits for nitrogen and TOC for some rivers have decreased as a result of constant increased loading to the streams (more flow increases total loads, so if flows remain the same, the concentrations must decrease to maintain total loading).  The costs to reduce ammonia, for example from 10 mg/l to 2 or 3 mg/L can be $1-2/1000 gallon – over 50% or more of the current cost for treatment.

So is it a surprise that some communities fight the boom times?  Booms create disruption and uncertainly, and a need for technology (and costs).  Maybe stability does matter, as it can contain costs and treatment requirements.  However the boom can help communities in financial distress.  Detroit and Flint would love a boom – both have the infrastructure in place to support it as opposed to rural communities in the Plains.  But that’s is a key – they already HAVE the infrastructure in place.  The Plains, well, do not.

There is a lot of older, underutilized infrastructure out there.  Detroit, Flint, Cleveland, Akron, Toledo and Philadelphia are among the older industrial cities that have stable populations – people that live there most of their lives, have a trained and educated workforce, and normally have lots of water and infrastructure, and lots of potential employees, all of which are underutilized and at risk due to economic losses. But the booms rarely go to older cities. How that is?  Is this a leadership issue?  Convenience?  Quick profits?  And how long will the boom last?  Is it a matter of lack of understanding or regulations that creates the boom?  A combination of factors?  A better PR program?

Remember we all play defense.  Industry does not.  Industry plays offense all the time.  The private sector mode is play offense.  Get the message out.  Frame the message.  Win the game.  Is winning the game at any cost the right answer?  For boomers it is.  What about the rest of us?

Infrastructure Funding Options

May 15, 2015
American Water Works Association, finance, funding, Leadership, Marketing water, Risk, Risk Management, Water Funding
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The US EPA estimates that there is a $500 billion need for infrastructure investment by 2025.  The American Water Works Association estimate $1 trillion.  Congress recently passes the Water infrastructure Finance and Innovation Act (WIFIA) at $40 million/year, rising to $100 million in 5 years, which is a drop in the bucket.  Peanuts.  We have so many issues with infrastructure in the US and Congress tosses a few scheckles at the problem and thinks it is solved.  The reality is that the federal government wants to get out of the water infrastructure funding business and shift all water infrastructure to the local level.  This is a long-standing trend, going back to the conversion of the federal water and sewer grant programs to loan programs.

The reality is that local officials need to make their utility system self-sustaining and operating like a utility business whereby revenues are generated to cover needed maintenance and long-term system reliability.  The adage that “we can’t afford it” simply ignores the fact that most communities cannot afford NOT to maintain their utility system since the economic and social health of the community relies on safe potable water and wastewater systems operating 24/7.  Too often decision are made by elected officials who’s vision is limited by future elections as opposed to long-term viability and reliability of the utility system and community.  This is why boom communities fall precipitously, often never recovering – the boom is simply not sustainable.  Long-term planning is a minimum of 20 years, well beyond the next election and often beyond the reign of current managers.  Decisions today absolutely affect tomorrow’s operators.  Dependency on water rates may be a barrier, but this ignores the fact that power, telephone, cable television, gas, and internet access are generally more expensive hat either water or sewer in virtually all communities.  We need water. Not so sure about cable tv or he internet.  Great to have, but needed to survive?

The growth in costs can lead to mergers where a utility cannot afford to go it alone – as the economy of scale of larger operations continues to play out in communities.  Several small plants cannot operate at the same cost as one larger plant.  As a result larger projects will increase – from 87 to over 336 between 2005 and 2014.

But these costs are generally plant costs – treatment and storage, not piping.  Distribution pipelines remain the least recognized issue for water utilities (collection pipelines for sewer are similarly situated).  The initial Clean Water Act and Safe Drinking Water acts did not focus on piping systems – only treatment and supply.  The national Council on Public Works concluded their first assessment grade for infrastructure in the 1980s – but piping was not discussed.  ACSCE’s first report card in 1998 did not express concern about piping system.  Yet piping continues to age, and expose communities to risk.  In many communities greater than 50% of their assets are buried pipes.  Tools for assessing the condition of buried pipes especially water distribution pipes is limited to breaks and taps.  As a result the true risk to the community of pipe damage is underestimated and the potential for economic disruption increases.  The question is how do we lead our customers to investing in their/our future?  That is the question as the next 20 years play out.  Many risk issues will be exposed.  The fact that there are not more issues is completely related to the excellent work done by the utility employees.  More to come….

Ability to pay?

April 28, 2015
finance, Leadership, management, Revenues, Water Funding, water sewer management
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So what does ability to pay really mean?  We hear this discussed by political pundits and local officials but few really understand what this means.  Likewise the “I’m on a fixed” budget argument pops up a lot, and it is hard to understand what this really means.

The ability to pay concept was developed many years ago by political scientists and economists looking at the allocation of costs to consumers for government services.  Property taxes are a logical place to start – higher value homes have more potential for loss, so their taxes were more (the percent was the same but because of their value the amount was higher).  For income taxes, those with higher incomes we deemed to have more disposable income and again more to lose, so the rates increased as income rose (we forget that until 1963 the highest income tax rate was 90%, and the economy was growing quickly!).  People with lower incomes had little disposable income because all their money went to food and housing.  Today the issue of affordability arises with water, sewer, taxes and storm water fees, as well as federal and state taxes.  The SRF and bonding agencies often look at 3.5% or 4.5% and the maximum water or water/wastewater cost as a percent of income, but few  utilities charge this much.  Few water and sewer utilities (combined) approach the cost for power per household, let along the cost of cable or cell phone use for all but the cheapest carriers.  Certainly water, sewer and storm water are essential service, but not so much cable, although there are those who will argue the point.  So somehow the ability to pay issue does not apply to private sector services, but does to essential services, especially when we all know we do not collect enough money to cover significant infrastructure needs on those public works systems?  That just does not make logical sense except in the political world.

Likewise the “fixed income” argument is often applied in tandem.  Fixed income is generally applied to retirees, but let’s not forget that 10% of those in poverty are retirees, but 18% of millionaires are over 65.  But don’t most people have a fixed income – their income is fixed by their employer.  They can change jobs but the argument that younger folks should change jobs if they want to earn more is like telling retirees to go back to work.  There is only so much we can do and only so much income to be earned because few control their income.

So on both counts, the ability to pay argument seems like an argument created to keep public service costs down and prevent the full cost application to many.  The squeaky wheel gets coddled, at the expense of society.  Somehow that is not fairness, and subjects us all to unnecessary risks.  The question is who is going to be the person/group to stand up and say enough?

Congratulations Graduates

May 15, 2013
communciations, economy, graduation, Uncategorized
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The first of May is traditionally been graduation month for college students.  We went through our 6 ceremonies 10 days ago at FAU.  It is and should be a day of celebration for the students and their families.  It’s there day.  Congratulations to all graduates!!  Best of luck to all!   The good news is that the economy is picking up.  Pretty much all of our student have jobs in engineering, and employers are calling, looking for engineering interns and graduates.  Good news because clearly the business community sees a growth period ahead.  They are planning for construction.  Governments may be planning capital projects.  The stock market is up, so maybe those 401k plans have finally come back up north.  Housing values are improving in some areas, so maybe we will see that sea of retirements that’s been expected for a number of years.  With an economy based on attracting retirees, it’s been a while coming.

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