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How to Track Reserves

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

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

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

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

Reserves vs Borrowing

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

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).  

Surpluses?

February 16, 2014
economy, finance, funding, Holistic Water Planning, infrastructure, Leadership, local government, management, planning, politics, Revenues, sustainability, Water Funding
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It was not so long ago that we were talking about local and state governments suffering major shortfalls in their revenues as a result of the downturn in the economy.  Cuts were being made to police, fire, education and parks.  Politicians were fussing over the need to cut taxes and cut government expenditures in the process.  Employees lost jobs and benefits were cut.   In a prior blog we discussed the fact that economic upticks and downturns were cyclical, and unlike people, there is a tendency for local and state government policy makers to “hang with the curve” so to speak and have government expenses track the economy as opposed to try to stabilize spending by taking advantage of the ups to create reserves in order to take advantage of the downs.  They ignore the old adage that their grandparents told them – save for a rainy day.  And we don’t recognize those rainy days approaching!  It is not a lot different unfortunately than many citizens who spend when they have money, and are short when they don’t.  We are not a country of savers and it hurts us often.

There is however a major benefit for government to have reserves.  When government has reserves, it can take advantage of lower competition to construct or invest in infrastructure in lean times. There are many examples of governments getting construction done at discounted rates based on timing their projects to economic downturns.  A side benefit is that those governments are spending money at the time when they need to keep people employed.  FDR did this during the Great Depression.  Obama attempted to copy him in 2009 with the AARA monies.  In both cases they may not have invested enough, but both were faced with deficits on the federal level and a Congress that was reluctant to spend. 

The economy has rebounded and state and local governments are starting to run surpluses. The South Florida Sun-Sentinel recently reported that the big “challenge” for the Florida Legislature and many other state and local governments, is they are running surpluses.  Recall the last time the federal government ran a surplus, we got tax cuts that immediately put the feds back in the red because they had not built up any reserves, and won’t even with a balanced budget anytime soon.  Well Florida has $1.3 billion extra on hand and guess what we hear in this election year  – tax cuts, more money for special projects, extended sales tax exemption dates, etc.  Those running for office are thrilled with the surplus because it helps their platform but we hear nothing about restocking the trust funds that were raided during the 2009, 2010 and to some extent the 2011 budgets! 

Expect this to be the norm, and the rhetoric should be troubling to fiscally responsible people.   If we have surpluses, times must be better.  In good times we should be encouraging decision-makers to sock money away in reserves, savings and other solid investments, and at the same time restocking those accounts drained to pay the bills during the down time of the Great Recession.   In Florida, our highway trust fund, environmental trust funds and education funds were drained.  They have not been restocked.  In fact the cuts to most of those programs has not been restored either. The next economic downturn will come – will we be prepared to weather storm by spending our savings as opposed to cutting services which magnifies the impact of residents?

As times get better, utilities owned by local governments should pay particular attention to General Fund revenues.  Many of those General Funds increased contributions from the water and sewer funds to make up the difference in losses of property and sales tax dollars.  That prevented utilities from making investments, or forced them to borrow money to cover investments that might otherwise have been paid for in cash.  Time for the General Fund to pay the utility back!  Time to restock the reserves and time to spend money to catch-up with the deferred maintenance and capital.  Of course the costs are not what they were 3 or 4 years ago, and neither are the interest rates, so we all pay more for the same projects because we could not spend the reserves in the down period.

Utilities should always have significant reserves.  Nothing we do is inexpensive, so having reserves makes it possible to fix things that inevitably go wrong.  Reserves are a part of a well operated, fiscally sound utility. Taking money from the utility during down times hurts both the utility and the local government.  Total reserves diminish of the entity, making it less possible to deal with emergencies, cover the loss of revenues, or take advantage of lower costs for construction projects.  Meanwhile, creating reserves and a pay-as-you-go system for ongoing replacement of pipes and pumps is good business.  It insures that ongoing money is spent to prevent deterioration of the utility system.  The reserves allow for accelerated expenditures when times are tough, prices are down and people need work.  When utilities spend money, it translates to local jobs.  But the only way to do this is make convincing argument of the benefits of reserves and spending.  

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.

Engineers are getting hired!

November 25, 2013
communciations, contractors, economy, Education, engineering, local government, utilities
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Graduation is two weeks away for students in the Fall semester.  The good news is that unemployment is down which means more students may find jobs.  We see my students, civil engineers, nearly fully employed for the second straight semester.  That is a good sign that economy is bouncing back. 

Many are being hired by utilities and contractors.  The utilities are starting to spend money after several years of lean revenues.  Unfortunately many of these utilities were lean because their local governments have increased general fund contributions to reduce tax burdens of residents.  Reducing tax burdens by moving more money from utilities to general funds hits the utility twice – infrastructure improvements get delayed and catchup on deferred maintenance mean the hit is double the pay as you go policy.  It is no surprise that our infrastructure condition continues to deteriorate when funds are diverted for other purposes.  Hopefully the trend will reverse, but I am not optimistic. 

Contractor hiring is more interesting.  It seems that contractors are having many of the same issues as utilities have talked about for a number of years:  an aging workforce in the upper levels of the organization.  However the contractors are seeing that young engineers have a skill set not currently existing in many contractor organizations.  Contracting in lean times is a limited profit margin business.  Competing for low bid contracts further limits profits.  However when 40% of the cost for construction is often associated with materials, and 20-25% of materials may be wasted, finding a way to be more efficient can save a lot of money.  Engineers know software and some schools, like FAU, have their students use 3 dimensional (3D) BIM software for their design projects.  The BIM software allows contractors to merge drawings into 3 dimensions, finding conflicts, solving them early and identifying means to reduce materials.  For example, many pieces could be cut out of gypsum board, but often only one is cut.  The rest is tossed.  Saving big on materials creates added profits at the same price.  The benefit is seen as being well worth the cost to contractors.  As more contractors move this direction, more engineers will the hired; a good trend.

The engineering profession should benefit from this change.  As contractors hire engineers, there is the potential for better communication between engineers on contractor teams and design engineers.  The only question is getting the engineering community to adopt the same kind of attitude toward the new software tools like 3D software.  At present, far too many engineers do not believe the risks are reduced sufficiently by the costs of the software.  But adopting new methods for design will help communication with contractors and other engineers.  That communication has a benefit in saving dollars and limiting the potential for claims against design firms when conflicts are found in the design drawings.  We find that establishing a partnering mentality on projects fosters a better working relationship.  Great things can be accomplished. 

WHERE IS GROWTH COMING?

October 21, 2013
Development loans, economy, engineering, Environment, finance, Leadership, local government, management, sustainability, Water Funding, water sewer management
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I recent Wall Street Journal article outlined where growth is likely to be coming.  Of no surprise, Arizona, Las Vegas, Central Valley, San Antonio, Dallas, Houston, Denver, Albuquerque, Boise, Pensacola, Tallahassee, Raleigh, Atlanta, and the Washington DC area.  Only one of those areas is has water much water availability.  It means that all of these communities are in areas that are water limited.  We already know that Texas, Las Vegas and Arizona have lots of water problems.  Most of these areas have had issues in the past as well, and will have more in the future. 

Low growth areas:  Detroit, Cleveland, Chicago, Buffalo, Cincinnati, Omaha, and a variety of areas with plenty of water, but old infrastructure and limited funding.  So the big questions is how do we redirect development to areas with plenty of water as opposed to allowing development in areas where we know that there will be serious water supply consequences in the future?  It’s a leadership issue, but local officials and states are so in need to the growth we have discussed in prior blogs, that the long-term realities of water supply limits overrides the short term need to show growth in the communities to delay tax increases, water increases and the like.  But is delays the inevitable, with potentially serious future impacts.

 

SUSTAINABILITY OF UTILITIES – PART 2

October 11, 2013
Environment, finance, funding, infrastructure, Leadership, local government, management, planning, politics, Risk Management, sanitary sewer, sustainability, Uncategorized, water sewer management
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SUSTAINABILITY OF UTILITIES – PART 2

Let’s take a look at some scenarios. Let’s assume you are a utility that serves 20,000 people (8000 customers), with 60 miles of water pipe, 60 miles of sewer pipe, 17 lift stations, and a water and wastewater plant.  Replacing this infrastructure might be valued at $90 million for pipe, $35 million for treatment plants, water supply and pumping equipment (current day dollars).  Let’s also assume that their annual budget is $11 million and the typical demands are 3 MGD yielding a monthly bill of $115/mo (water and sewer).

Let’s make some general assumptions like that the pipe infrastructure might last 100 years, but clearly the treatment and mechanical parts would mot.  They would need ongoing maintenance and replacement.  50 years is probably too long, but let’s go with it.  If the overall costs increase at 3% per year and money is set aside for repair and replacement. The utility will see fairly steady rates if the customer base grows 2-3% per year.  Ten years out, the budget will be $16 million.  Now for the scenarios.

If the customer base has grown at 3% per year, the customers will increase to almost 27,000.  More of an issue is what happens if that increase in demand (from 3 to over 3.4 MGD) needs to come from a new water source and requires new capacity.  Many utilities will use impact fees to offset this cost to current customers so as not to adversely impact current customers too severely .That’s the current assumption.  The result looks like this at 10 and 20 years:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

26878

36122

 

Accounts

  

8000

10751

14449

 

Water  Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Sewer Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     76,618,436

 $167,725,278

Operations budget

  

 $     9,000,000

 $     16,255,001

 $  29,358,340

Capital Budget

  

 $     1,600,000

 $       3,502,557

 $    7,667,441

Debt

  

 $        400,000

 $         400,000

 $      400,000

Monthly Amount

  

 $              115

 $                156

 $             216

Increase per year

    

5%

5%

 
         

 

Assume 1% of pipe Replacement Costs +2% Plant

    

 

Assume operating budget inc 3%/yr but construction increases 5%/yr

  

 
                     

 

But what if the new treatment and supply are 50% more costly and impact fees assume the lower investment (typical)?  The cost for the budget and for the infrastructure replacement increases (with the delta from debt).  Cost are 50% higher:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

26878

36122

Accounts

  

8000

10751

14449

Water  Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Sewer Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     92,289,117

 $202,029,937

Operations budget

  

 $     9,000,000

 $     23,731,487

 $  42,861,706

Capital Budget

  

 $     1,600,000

 $       3,815,971

 $    8,353,534

Debt

  

 $        400,000

 $       1,325,000

 $    2,825,000

Monthly Amount

  

 $              115

 $                224

 $             312

Increase per year

    

8%

7%

 

The normal assumptions are that growth will continue, but what if it does not?

 

What can be gleaned as a result of a non-growth or net decrease scenario?  How does sustainability get affected?  Let’s look at the no growth scenario.  In this light, rates will need to increase at least 5% per year to insure that the utility remains rate neutral.  If there is significant deferred maintenance, which is typical of may utilities, that cost will be added to the bill.  There are examples of utilities in Florida who finally caught up with deferred obligations which doubled their customers’ bill.  This scenario is doable, but the only real assumption changes that can be made are related to the lack of growth.  Deferring maintenance will once exacerbate the problem as there is not guarantee that growth will return.  Rate neutrality becomes a public relations issue, but not insurmountable.

 

Component

  

Value today

10 years

20 years

 

Customers

  

20000

20000

20000

Accounts

  

8000

8000

8000

Water  Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

Sewer Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     57,011,312

 $  92,865,420

Operations budget

  

 $     9,000,000

 $     12,095,247

 $  16,255,001

Capital Budget

  

 $     1,600,000

 $       2,606,231

 $    4,245,276

Debt

  

 $        400,000

 $         400,000

 $      400,000

Monthly Amount

  

 $              115

 $                157

 $             218

Increase per year

    

5%

5%
               

Now let’s look at the decline issue.  If the population decreases by 25% over the ten year horizon, what does this say?  The costs will remain relatively constant, but the number of customers and demands for water will drive the rates up significantly. In ten years the rates could double in a community that is likely economically disadvantaged.  The higher rates may begin to discourage economic development, rate neutrality exacerbate the problem and may increase in costs for regulatory or deferred maintenance obligation becomes a significant issue:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

16341

13352

 

Accounts

  

8000

6537

5341

 

Water  Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

 

Sewer Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

 

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     57,011,312

 $  92,865,420

 

Operations budget

  

 $     9,000,000

 $     12,095,247

 $  16,255,001

 

Capital Budget

  

 $     1,600,000

 $       2,606,231

 $    4,245,276

 

Debt

  

 $        400,000

 $         400,000

 $      400,000

 

Monthly Amount

  

 $              115

 $                193

 $             326

 
     

7%

7%

 
         

 

Assume 1% of pipe Replacement Costs +2% Plant

    

 

Assume operating budget inc 3%/yr but construction increases 5%/yr

  

 
                         

 What can we glean from this?  Interestingly the failure to accumulate costs for growth, and the declining rate base end up with similar monthly costs.  Only by the no growth and collecting appropriate impact fees will costs be controlled, and even in that case, costs will double every 20 years or less.  The reality is that the failure to follow proper revenue collection protocols will severely limit the utility in future years.  High capital costs impact rates significantly.  Leaving it to some future commissioner to raise the rates is unfair to both the future decision-makers and customers.  It does not make you a leader either. 

WATER SEWER GARBAGE FEES

October 4, 2013
economy, finance, funding, Leadership, local government, management, Uncategorized
2 Comments

A recent article in the South Florida SunSentinel newspaper raised an interesting question.  What they did was line up all the cities in the county and identify the total fees paid to the City by residents.  They took the tax rates, plus water, sewer, storm water, fire, garbage and any other fees.  The article raised an interesting question.  For example, Hollywood, West Park and Lauderdale Lakes had the highest cost per household – in excess of $3500/year.  The other end of the spectrum was Hillsboro Beach, Sea Ranch Lakes and Southwest Ranches, each under $2000/household.  Of note is that Southwest Ranches provides no water or sewer service (all wells and septic tanks on large lots), so a direct comparison is not really appropriate.  Property taxes were low, but fire fees were really high.  Sea Ranch Lakes is a tiny community with no sewer, so again, not really a good comparison.  Hillsboro Beach is among the wealthiest communities, but also tiny. 

 Most communities had total fees between $2100 and 3200/resident.  Why the difference? First, the value of property varies widely.  West Park and Lauderdale lakes have among the lowest values per household, so their taxes must be higher to provide the same level of service.  Hollywood, and Dania Beach (#4 on the list) had higher water, sewer and storm water costs.  While both have recent, ongoing infrastructure programs, both have large transfers from the water and sewer fund to the general fund, and in both cases the water and sewer customer base does not match the property tax base.  In Dania Beach’s case, the service area is half the City, so those residents are supporting the property tax funded services at a higher rate than their neighbors.  Hollywood struggled with major budget issues to used water and sewer funds to balance the budget.

The problem that this article did not address, but should have was that where water, sewer and storm water costs were high, what was driving this? Was in infrastructure investments that others simply have yet to make?  That’s ok and the fact that these utilities invested now may be more timing.  If the result is due to transfers to the general fund, that is an entirely different, and somewhat disconcerting problem.  First since the service areas are not the same. There is a fairness issue.  Some residents pay more for the same services.  It means the water and sewer system is not really an enterprise, with rates based on service costs.  Instead it is being used as a tax source.