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.
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.
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?
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….
Interesting that while we all love low gas prices and the low cost of energy is fueling an expansion of our economy, including the first gains in middle income salaries since 2008, the states reliant on oil and gas may be facing real problems financially. A year ago I read an article that noted the reluctance of North Dakota residents and politicians to invest in roads and other infrastructure despite the influx of oil money. Keep taxes low was the mantra. SO they did. A recent Governing magazine article notes that a dollar drop in oil means $7.5 million decrease in revenues for the State of New Mexico. Since oil has lost about $30 a barrel in the past year – that is $200 million loss. Louisiana sees a $12 million cost/dollar drop so they have $171 billion less to work with. Alaska, perhaps the most oil dependent budget (90 percent) has a $3.4 billion shortfall, but $14.7 billion in revenues. Texas, North Dakota, Oklahoma and Kansas are other states facing losses. Fast growing states like North Dakota and Wyoming now have hard decisions to make. Growth in Texas, Oklahoma, Louisiana and Arkansas may be cut by 2/3 of prior estimates as a result. A double hit on anticipated revenues.
The comparison is interesting financial straights experienced by the “property value” states like Florida, Nevada and Arizona before and after the economic collapse in 2008. Florida politicians couldn’t wait to cut taxes and slow spending during boom years, then got caught badly after the 2008 recession when property values dropped in half and state sales tax revenues (tourism) dropped steeply. They ran out of reserves and refused to raise taxes (after cutting them), so cut things like education and health care to balance the budget. Not sure how either helped low and middle class Floridians get back on track since Florida has primarily create low wage jobs since that time, not high paying jobs. We are paying the price still. I am guessing Nevada and Arizona are similar.
We clearly have not learned the lessons of the many mill towns in the south or the rust belt cities of the Midwest that encountered difficulties when those economies collapsed. Everyone refused to believe the good times would end. Now Detroit is half of its former self and Akron has the same population as it did on 1910.
The moral of the story is that booms great, but short term. Diversity in the economy is a key. Florida will continue to be subject to economic downturns more severe than other states when it relies primarily on tourism and retirees to fuel the economy. Detroit relied on automobiles, Akron rubber and chemicals, Cleveland steel, etc. Some day the Silicon Valley will suffer when the next generation of technology occurs that makes the current works obsolete. It is what happens when you are a “one economy” town. It is also what happens when you believe the booms are “normal” and fail to financially plan by putting money aside during the boom to soften the subsequent period.
An argument could be made that if the federal government had not enacted tax cuts in 2000 when the budget was finally balanced and surpluses were presumed to loom ahead, we could have banked that money (or bought down our debts), and the amount of borrowing would have been less in 2008. Buying down debt when times are good is good business. So is putting money in reserve. The question is why the politicians do not understand it. We can run government like a business financially, but takes leadership to do it. It takes leadership to explain why reserves are good and tax cuts are a future problem. It takes leadership to make hard decisions like raising taxes, spending more on infrastructure, requiring people to move out of flood plains, not rebuilding in vulnerable areas, and curtaining water use policies when they damage society. Leadership is making decisions that help the needs of the many, versus the needs of the few. Oh wait, I see the issue now. We need Spock to lead us…
Once upon a time, people worked until they died. But the longer people lived, the more infirmities impacted older people, and the concept of stopping work came into play. So these folks labored all their lives, put some money away in a safe place, like a bank, where someone else would watch over an manage their money until they needed it. Then one day, they found out that the banks have gambled and lost on real estate, and their money was gone. There was no government to bail anyone out. So the people had to try to go back to work, became beggars and destitute or died. The government thought this was unfair to those older folks who had worked so hard, but through absolutely no fault of their own, had lost everything. So the government decided that it would “tax” people a portion of their income, and put it into a retirement system. People could retire at 65, and of course they were only expected to live another r3 or 4 years. There were 16 people laying in for every person taking out. And the government told the banks that they could not gamble with people’s hard earned savings, passed legislation and created an insurance pool to backstop losses by criminal or unethical activity. All was good and the people were happy.
As time went on some things changed. For one, people lived more than 3 or 4 years. The population retirees increased, and the ratio dropped to 1:10 and then to 1:6 ration of retirees:workers, but the “tax” did not go up, but investments were made that increased the pool. It was called good management. The government also encouraged people to save money by deferring taxes, which they did, and the banks used it to make money. All good as long as the investors gambled well. They gambled so well, they were able to talk the government into undoing the anti-gambling rules from the past, so their pool to invest was twice as much. And the markets grew and the portfolios grew and the people were happy.
And then it came to pass that the banks again gambled on real estates, and created complicated investment tools to hide the risk, but the risk was exposed and half the money was gone overnight. And the retired were wondering about jobs again. But there were no jobs. And the employed now had fewer jobs. So less people paid into the system. And the people were sad. And mad because they thought they were being protected from the gambling of the past. They did not understand.
And the government could supply no answers because they had changed the rules and they knew the people would be unhappy, so the government felt there was no choice, so they borrowed money, and bailed out the banks. And some people were happy. And some people were concerned about all that debt. And some people wondered why it was that history could repeat itself and put society at risk. And some people asked why people who did bad things were not punished.
And none of these questions has been answered. Good thing that these fairy tales don’t depict anything real right?
Some recent reading led me to the following items that seem to crop up when municipalities have fiscal problems that are not otherwise created by the economy or federal or state government decisions:
Assuming high returns of retained earnings (Orange County, CA)
- Pension systems that are underfunded (Portland OR, and others)
- Lack of appropriate financial advisors (many)
- Assuming growth will be exponential
- Failure to address deterioration of infrastructure (many)
- Getting involved in complicated credit swaps and revenues tools involving borrowing (Detroit).
- Declining use by customers that are economically stressed (many)
Food for thought… or caution.
The National League of Cities reports that nearly ¾ of municipalities are better off in2013 than they were in 2012. In Broward County, over half the cities actually have more revenue in 2013 than they did in 2006. Property values are up in 72% of Counties, and real estate activity was high in 2012 and 2013, although it has slowed in 2014. Nearly 60% of the municipalities were not projected deferral of capital improvements, although 1/3 expect to reduce maintenance and 40% to defer capital. The biggest challenge cities identified was street condition (23%, followed by sewer, stormwater and water although these were all under 16% which is a bit disappointing given the condition of much of this infrastructure). Money remained their biggest challenge. Total local government budgets are $3 trillion, and the bond market Is a robust $3.7 trillion. New construction for local water, sewer and stormwater infrastructure is expected to reach $750 billion in 2014, with 3.2 and 4.8 billion respectively for water and sanitary sewer.
Pensions are the biggest liability and one that is critical for many local entities with their own pension plans (like Detroit). Many others have or will migrate to a state plan, or were already part of a state plan. Having a large pool off employees decreases risk to the pension plan and increased revenues (and future outlays). Pension plans or Ponzi schemes? Now that is the question….
In my last blog I outlined the 10 states with the greatest losses since 2006. Florida was not among them, yet given our legislature’s on-going discussion and hand-wringing with the state run Citizen’s insurance, you would think we have a major ongoing crisis with insurance here. Maybe we do, but I will provide some facts. Citizens,averaged between 1 and 1.5 million policies over the last 8 years. according the the South Florida SunSentinel, the average person pays $2500 per year for windstorm coverage. Somehow I think I want that bill because my insurance is about $6000 through my private insurer and when I had Citizens it was $5700/yr. But I digress.
Let’s assume there is 1.2 million policies over that time paying the #2500/yr. That totals.$3 billion a year in premiums. That means Citizens should have reserves of $24 billion because they have not paid-out since 2006. They have $11 billion according to the SunSentinel sources. So wher eis the rest of the money? We can assume there are operating expenses. They pay their executives very well for a government organization. I am sure they pay the agents as well. I asked a couple friends in the industry and they indicate that for private companies, about half your premium goes the the agent who writes the policy. That’s only Citizens.
Let’s assume there are conservatively another 8 million policies in Florida and since many of those are inland, let’s day they average $1500/yr. If you have it for less, check out your policy!. That means there is another $12 billion collected each year for a total of $15 billion per year.
Now let’s look at storms. According to Malmstadt, et al 2010, the ten largest storms 1900–2007, corrected for 2005 dollars are as follows:.
Rank Storm Year Loss($bn)
1 Great Miami 1926 129.0
2 Andrew 1992 52.3
3 Storm 1944 35.6
4 Lake Okeechobee 1928 31.8
5 Donna 1960 28.9
6 Wilma 2005 20.6
7 Charlie 2004 16.3
8 Ivan 2004 15.5
9 Storm # 2 1949 13.5
10 Storm # 4 1947 11.6
So for all bu the top 9 storms in a 107 year history,the annual receipts exceed the losses for a storm. The total over the period is $450 billion (adjusted to 2005 dollars) That means an average of $4 billion per year. So what is the issue? Sure a big storm could wipe out the trust fund, but that is what Lloyd;’son London, re-insurers and the ability to borrow funds is all about.
I suggest that the fuzz is really about is this. Most people do not understand the concept of an insurance pool. That includes many public officials. The idea of insurance is to pool resources is to collect huge sums of money so that if something bad occurs, there is the ability to compensate people for their losses. Insurance is a good thing but individually we hope it is never us that needs to be compensated because that means something bad happened. But we expect our premiums to pay into that pool, build large pools of money, and have money when you need it. The more people that pay in, the more the risk is split and lower the likelihood that any individual suffers a loss. Hence the lower risk should lower premiums. And people who live in high risk area should pay more than those who don’t. Flood plains, dry forests, coastal areas, high wind areas, tornado alley, etc are all high risk. Florida is one, but clearly there are many others,
So Citizens has a pile of money. Most private insurance companies should also, although their money is invested and they expect most of that will not be paid out. I suspect the concern is a fear that the pile of cash will create a public furor, but that shows a lack of communication and education. Cash is good. Lots of it is better. It’s like running surpluses in government or in your personal savings account. The idea is to have money when you need it. Running at a point where you never have surpluses guarantees you will have deficits that require cuts in services,and possibly losses of jobs when the economy tanks again. For insurance, those losses occur when big event hit. Fortunately those are infrequent, but they have and will happen. We need the cash pools on hand to protect our citizens just in case. In the meantime we need some leadership and education of the public.