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Fred
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Tag Archives: infrastructure
Planning for Change (like sea level rise)
After my last post, I was asked about sea level rise and how to get started with the issue in a very “red” area as it was characterized. I have come to the conclusion that the insurance industry will make sea level rise real for politicians in those places where it is impermissible for bureaucrats to discuss it. Here’s why. Say you have a house in a low lying area that is vulnerable to sea level rise and/or storm surge. One is permanent, the other temporal, but in both cases are potentially catastrophic if you live in this house. You bought the house, got a loan for 80 or 90% of its value and then got insurance for it. Now the insurance is there to insure that if your house gets swept away or damaged, there will be enough money to pay off your loan. That’ s what many people miss. Insurance is for the bank, no you, which is why your loan documents require that you get and hold insurance while you have the house. After your loan is paid off, there is no such requirement.
Now let’s say we are out 20 years. You have enjoyed your house but have decided to sell it. Now the banks will value it and are willing to loan say 80% of its value. They of course assume that the house will increase in value with time so even if you make no improvements, if they have to foreclose on it they will get their money back (a major part of the problem with the financial crisis of 2008 was they banks could not get their money out of the properties). Even if it doesn’t, as your loan is paid down, their risk decreases. The loan documents require that you get insurance to cover your costs.
So far so good, but what happens when the insurers will not give you insurance for the full value of the property? In Florida the State creates Citizen’s to deal with the fact that private, commercial insurers saw too much risk in coastal areas and refused to issue policies. Now the State and Citizen’s have the risk. Fine, but that isn’t dealing with the same issue – if the insurer think the value of the property will decrease, or the risk increases a lot, they will not issue policies. Or they will revise policies to say they will pay once – but will not insure you for rebuilding. You may think this will not happen, but Citizen’s is already discussing this option. Hence if you lose your house, they will pay you (so you can pay the bank, and then you are on your own. Now the bank may be willing to offer you a distressed property as an options (Welcome to Detroit), but that won’t be in the same risk zone.
Take this further, let’s say Citizen’s for example says we will pay full value if you lose the house but will not insure a rebuild? That means they probably will not give insurance to the guy who wants to buy our house in 20 years. How much is your house worth now? Probably nothing, which means now the bank will be looking at your insurance coverage and say – whoa – if the house is not worth anything on a resale, that means they may not get paid when you sell your house if you sell if before it is paid off (the norm)!! That is an unacceptable risk, and they need a solution. Of course if your house suddenly has no value, it means local governments get no revenue for taxes (good for you, but bad for providing essential services like storm water. You may not believe this discussion is happening, but it is.
So here’s what I think happens. I think the banks figure this out and start looking at vulnerability as a part of loans. I think they start thinking about what the value in 20 or 30 years might be and if they can get their loan monies back out of property. That will slow property values. I think the insurance industry does the same, and working with banks will further set the prices acceptable for vulnerable property. They are not good investments. If you own such property, you may get insurance in the short-term, but long-term your house value may decrease. At some point, your house will have no resale value, unless……
BUT there iis a big caveat to all this. Coastal areas are high value markets. Lots of activity and lots of investment opportunities. It all depends on what is being done to protect those properties, and depending on the federal governments to bail out private property is unrealistic. It is a local issues, so I also think the banks and insurance industry will start looking at what local governments are doing to protect investments in private property. Do they have a sea level rise adaptation plan? Are the storm water systems updated/upgrades/maintained? Are roads, water supplies and sewer systems capable of functioning under the changed condition? Is there a 50 or 100 year vision on how the community adapt to nature? If yes, there is comfort that investments are protected. If everyone’s head is buried in denial…..Detroit’s calling. U-haul anyone?
PS No disrespect to Detroit, my father’s hometown and the home to many of my current and departed family. For those who do not know, Detroit is high, has access to lots of water, sewer, roads, power and lots of land at reasonable cost, along with a jobs and manufacturing history. Perfect opportunity, one not lost on our ancestors.
How Long should the Leadership vision be?
We do 5, 10 and 20 year plans for infrastructure. But how long do we expect to this infrastructure to last? For example, how many roads only last 10 or 20 years? Most roads only seem to grow with time. Ancient Roman roads are the basis for many current roads. We keep adding roads – few are ever abandoned. They simply do not go away. So a 5, 10 or 20 year planning period makes little sense.
Roads are not the only limit. The WPA-era water mains are approaching 80 years old, and still providing good service, and our Clean Water Act-era sewer improvements are approaching 40. Sewer lines are similarly situated. Many water plants are over 70; we celebrate 100 years on many. Again, planning for only 20 years makes little sense in the context of the larger length of time.
More interesting, we rarely borrow money to pay for these projects for less than 20, 30 or 40 years. So our infrastructure outlives our plans and our borrowing. Often permits are less that the borrowing for infrastructure, which can cause stranded capacity in plants that may never be used. Miami-Dade County has such a situation – they are not alone.
Let’s look at this in the context of groundwater withdrawals. There are areas across the US where groundwater levels have fallen. They have fallen because of human activity to pump them for crops and water use. Colorado has a 100 year management plan in the Denver basin which is basically make the water last 100 years. Then what? Texas has shorter plans. The eastern Carolina drained parts of the Black Creek already, so this is not a theoretical western state issue only. How do we address this?
Or let’s go back to Miami-Dade County the outer banks of North Carolina, historical downtown Charleston, SC, and many other venues where sea level rise could impact water, sewer, storm water and roadway infrastructure. As we redevelop those area, should plans look at the true life of those assets (100 years) vs. the 20 year plan?
Both issues involve the sustainability of infrastructure systems, which means the ability to adapt them to changing future conditions. We have known for 10-15 years that stationarity is no longer accepted for future projections. But we need leadership to move the infrastructure planning to the future changing conditions.
Challenge or Change – What makes leaders?
Let’s think about great leaders in business and politics in the US. Our two greatest leaders were Lincoln and FDR. Lincoln led us through challenging times, but his means to govern and organization of the federal government was a huge change from those before him. FDR led us through the challenge of the Great Depression and WW2. But government and the world was hugely different as a result of his tenure in Office (and thanks to Truman for completing it).
Other political leaders included all those crazy radical forefathers who had the audacity in 1776 to think that average people could actually govern themselves. We have no conception to day what a crazy idea that was in the 18th century as we take it for granted today. Teddy Roosevelt changed how we viewed open space. But mostly is change that people wrought that made them leaders.
In business, Ford changed how car were made in an effort to sell more at lower costs. Edison changed the world with the light bulb. Los Angeles would not exist if William Mulholland had not conceived of bringing water and power across the mountains. So is it change or challenge that creates leaders? Or both? Or something else?
Barriers to Public Sector Leaders? Part 3
In the last two blogs we discussed the three issues were associated with risk tolerance in the public sector which stifles innovation, application of business principles to public sector efforts, and the lack of vision and understanding of consequences. In this blog we will explore the third issue – the lack of vision. This is perhaps the hardest of the three parameters discussed. One would think that applying private sector business principles would help with the vision process, but it does not because the terms for elected officials are comparatively short term. In addition, our demands on the private sector are short term profits which has hurt the long-term vision of both public and private sectors.
What is a vision? It is supposed to be a concept of where you want your organization to be in a longer-term future. It is an agent for change and those developing the vision are outlining the change they want in the organization. What services are to be provided, what water sources are to be used, energy self sufficiency, wastewater reuse opportunities, incorporation of storm water to sources waters, etc.? All possible ideas, but they only scratch the surface of the universe of opportunities that might exist. The key is change, which normally requires thinking outside the proverbial box. Change rarely comes from doing the same thing over and over. Change requires innovation. So by its very nature, the status quo is not leadership because no change is required. Managers who “don’t rock the boat” may be excellent managers, but they are not leaders. Elected officials who’s mantra is not to raise rates, are not leaders either.
Your customers often are a great source for defining vision. They will tell you what services they want. I recall a meeting went to where I was talking about leadership to some elected officials. The public was present in force. I brought up the concept of developing a vision. The public was encouraged. They spoke out about ideas. All very good. Then one of the Board members informed everyone that vision statements were the job of the attorney and he would just write one up. That did not go over nearly as well as that Board member had hoped. He was abdicating his roles in overseeing the utility as well as any leadership role he might have hoped to have. The public knew what they wanted, and it was clearly change, something the Board member clearly did not want.
So the question is “are we that afraid of change that we cannot tolerate leadership?” Are managers and elected officials so concerned about change that they actively suppress it despite public outcry? I often raise the following question when talking to elected officials – how many statues have been raised for politicians who did not raise rates? We’ll talk about that next time…
Barriers to Public Sector Leaders? Part 2
In the last blog we discussed the three issues were associated with risk tolerance in the public sector which stifles innovation, application of business principles to public sector efforts, and the lack of vision and understanding of consequences. In this blog we will explore the second issue – application of business issue into the public sector. The public and private sectors are different. We need to recognize this. For the most part, the public sector does those things that the private sector deems to be averse toward profits. Clearly everyone needs water, but if you can’t get people to pay for it, you can’t make a business out of it. Enter government, which has the ability to lein and condemn houses for failure to be connected. A bit more incentive.
Or take fire service. Fire service in New York was once a private affair. You paid and the fire company would respond. If your house caught fire and you had not paid, then what. No one shows. This was illustrated nicely in the movie “Gangs of New York” and was the catalyst for creating the NYC fire department. And many others. It simply is not acceptable to have some people but not all, because of the risk to everyone. Vaccinations are the same way. Much easier to implement by government. And historically this is what has happened.
But we often hear the commentary about how we should be “running government like a business.” However I suggest this is an oversimplified argument that ignores true differences in the objectives of the public and private sector. The two sectors are different and let’s look at an example. If you were in charge of Ford Motor Company and let’s say you had only two vehicles, the F150 pickup (largest selling vehicle in the US) which has a high profit margin, or a passenger vehicle which does not have a high profit margin and does not sell nearly as well. If you determine that your revenues are likely to decrease as a result of the economy, where do you make cuts? There is an easy metric – cutting costs and reducing production of the passenger vehicle might actually maintain or improve your profit margin. So that manager looks like a brilliant leader.
He (generic) now gets hired to run a City because of his success at Ford. The City of course has a revenue shortfall, so what does he do? Much more difficult. He has police, fire, parks and recreation, planning, etc. so where do you cut. None of them are profit centers; they are all services, the value of which cannot easily be measured. He could evaluate the risk of higher losses if he cuts the fire department, but that likely has other issues. Hence there is a distinct different in the metrics between the sectors. So he cuts all services the same amount – sharing the pain because there is no means to measure the impact of success of cutting costs. Every government employee recognizes this method to reduce the budget. So how would that have worked at Ford? Well, cutting back on the F150 and the passenger vehicle the same percent would likely make the overall situation worse, not better. A Ford executive making that type of decision would be roundly criticized and likely dismissed, but that same person is viewed as a successful manager in the public sector. Nonesense. He’s still an idiot and deserves to be fired. Ditto the other officials that go along with such simplistic decision-making.
The public and private sectors are different, and while there are commonalities, the inability to directly measure impacts on the public sector make private sector applications suspect in many situations. Curtaining services that have much larger, unanticipated consequences, a risk that dissuades innovation because of the inherent risks and the risk of impacting some powerful constituency. Simplistic solutions that are commonly offered up simply mean that these “leaders” simply do not understand what their “products” are nor which ones are a priority. And hence they abdicate their decision-making for simplistic solutions that seem “fair.” Successful leaders in business and government will tell you lesson #1 is life is not fair. We need leadership to help us make better decisions.
Barriers to Public Sector Leaders?
One of the issues that arises in the public water utility sector is where are the leaders? A recent online discussion of the issue identified a number of barriers to public sector leadership, which differentiates the public sector from the private sector. The three issues were associated with risk tolerance in the public sector which stifles innovation, application of business principles to public sector efforts, and the lack of vision and understanding of consequences. Related to the latter is the understanding of the various types and perspectives of expertise within the industry. Over the next three blogs, we will talk about each. Comments welcome of course.
So the first one. For the most part, public officials, city managers, finance directors and elected officials, are particularly risk averse individuals as a group. For one thing, their tenure in any given job is relatively short (city manager are aground 2-3 years). Elected officials spend much of their time trying to stay in office, so clearly their leadership is guided by public opinion, never a strong point for leadership. Regulatory agencies can only be criticized, so why be innovative? For all three, plus the employees working beneath these folks, their performance is in the public eye and the public is rarely forgiving of continued or significant failures. However, innovation is often correlated with risk, which suggests that the risk associated with failure may limit the pursuit or acceptance of innovation – instead keep doing what you have been doing because that creates no waves. Nevermind that the same old way may be inefficient or outdated, the concern is the risk if a new idea fails. The reality is to “stick with what works,” a mantra that has existed in the industry for many yeas, does not accept innovation easily. Particularly of issue is organizations where many mid- and often upper division managers avoid decision-making, but may be particularly poignant in pointing out decision failures of others as a means to improve their own stock – “I’ve never made a bad decision.” But as in baseball, sitting on the bench 0 for 0, means you have never had an at bat, so you have accomplished nothing, while the person who is 6/10 may have accomplished a lot. It is successful risk taking that may lead to changes in the organization, changes in doing business, improvements in efficiency and new means to accomplish tasks or deliver services. You need to think “outside the box,” to use an overused euphemism.
So the question is how do we get the public and the public officials to accept risk taking, and to relax their risk averseness? For innovation to grow, we need leadership, which means risk tolerance. After all doing the same thing over and over, and expecting different results is the definition of insanity isn’t it?
Should Coastal Utility Master Plans Include Sea Level Rise?
Planning is a process utilized by utilities in order to reach a vision of the utility as defined by the customers or the governing board, or to meet certain demands for service projected to be required in the future. Understanding and managing the utility’s assets provides important information related to the ongoing future direction of the utility system. However, the only method to develop that future direction is through the planning process. Planning should be undertaken on a regular basis by all enterprises in an effort to anticipate in to anticipate needs, clarify organizational goals, provide direction for the organization to pursue and to communicate each of these to the public. With water and wastewater utility systems, it is imperative to have ongoing planning activities, as many necessary improvements and programs take months or years to implement and/or complete. Without a short and long-term plan to accomplish future needs, the utility will suffer errors in direction, build unnecessary or inadequate infrastructure and pursue programs that later are found to provide the wrong information, level of service or type of treatment.
Planning can provide for a number of long-term benefits – improvements in ISO ratings to lower fire insurance rates, renewal of improvements as monies become available, rate stability and most importantly – a “vision” for the utility. In creating any plan for a utility system, efforts to understand the operating environment in which the utility operates must be undertaken. Second, the needs of the utility must be defined – generally from growth projections and analyses of current infrastructure condition from repair records or specific investigations. By funneling this information into the planning process, the result of the effort should be a set of clear goals and objectives needs to be defined (Figure 8.1). However, the types of goals and objectives may vary depending on the type of plan developed. There are 4 types of plans that may result from the planning process.
- Strategic Plans – action oriented for management level decision-making and direction
- Integrated Resource Plans – Actions for utility management to tie all parts of the system together
- Facilities Plans – for SRF loans support
- Master Plans – to support capital improvement programs
Any utility planning effort should start with a description (and understanding) of the local environment (built and otherwise). An understanding of the environment from which water is drawn or to be discharged is important. Both water quality and available quantity, whether surface or ground water, are profoundly affected by demand. A reduced demand for surface water helps prevent degradation of the quality of the resource in times of low precipitation. Reduction in the pumping of ground water improves the aquifer’s ability to withstand salt water infiltration, potential surface contamination, upconing of poorer quality water, contamination by septic tank leachate, underground storage tank leakage, and leaching hazardous wastes and other pollutants from the surface. Over-pumping ground water leads denuding the aquifer or to contamination of large sections of the aquifer. Planning for is necessary for surface water systems. Therefore, source water protection must be a part of any water planning efforts, including the appropriate application sites and treatment needs for reuse and residuals.
So let’s toss sea level rise into the mix. What happens when sea level rise inundates coastal areas with saltwater and increase freshwater heads inland? How do we fix that problem and should be plan for it. Clearly master planning should include this threat (as applicable), just as any regulatory issue, water limitation, disposal limit or change in business practices should be considered. One means to reduce the impact of sea level induced groundwater levels is infiltration galleries that may operate 24/7. These systems are commonly used to dispose of storm water (french drains or exfiltration trenches) but what happens if the flow is reversed? Water will flow easily into the system, just as it does for riverbank filtration. The water must be disposed of, with limited options, but let’s toss a crazy idea out there – could it be your new water supply? Just asking, but such a system would not be unprecedented worldwide, only in the coastal communities of the US.
When do we get serious about sea level rise?
Based on my last blog, his inquiry came to me. And I think I actually have an answer: when bakers and insurance companies decide there is real exposure. Let’s see why it will take these agencies. There is very little chance, regardless of good faith efforts, significant expertise, or conscientious bureaucrats to stop growth and development. The lobby is simply too strong and local officials are looking for ways to raise more revenues. Development is the easiest way to increase your tax base. As long as there are no limits placed on develop-ability of properties (and I don’t mean like zoning or concurrency), development will continue. But let’s see how this plays out. Say you are in an area that is likely to have the street inundated permanently with water as a result of sea level rise (it could be inland groundwater, not just coastal saltwater). For a time public works infrastructure can deal with the problem, but ultimately the roadways will not be able to be cleared. Or say you are located on the coast, and repeated storm events have damaged property. In both cases the insurance companies will do one of three things: Refuse to insure the property, insure the property (existing) only for replacement value (i.e. you get the value to replace) but no ability to get replacement insurance, or the premiums will be ridiculous. We partially have this issue in Florida right now. Citizen’s is the major insurer. It’s an insurance pool created by the state to deal with the fact that along the coast, you cannot get commercial insurance. So Citizens steps in. The state has limited premiums, and while able to meet its obligations, in a catastrophic storm would be underfunded (of course in theory is should have paid out very little since 2006 since no major hurricanes have hit the state, but that’s another story).
As the risk increases, Citizens and FEMA, the federal insurer, have a decision to make. Rebuilding where repeated impacts are likely to happen is a poor use of resources and unlikely to continue. Beaches and barrier islands will be altered as a result. The need will be to move people out of these areas, so the option above that will be selected will be to pay to replace (move inland or somewhere else). Then the banks will sit up. The banks will see that the value of these properties will not increase. In fact they will decline almost immediately if the insurance agencies say we pay only to relocate. That means that if the borrowers refuse to pay, the bank may not be able to get its money out of the deal on a resale. We have seen the impact on banks from the loss of property values as a result of bad loans. We are unlikely to see banks engage in similar risks in the future and unlikely to see the federal insurers (Fannie Mae, Freddie Mac) or commercial re-insurers like AIG be willing to underwrite these risks. So where insurance is restricted, borrowing will be limited and borrowing time reduced. That will have a drastic impact on development. The question is what local officials will do about it?
There are options to adapt to sea level rise, and both banking and insurance industries will be paying close attention in future years. Local agencies will need a sea level rise adaptation plan, including policies restricting development, a plan to adapt to changing sea and ground water levels including pumping systems to create soil storage capacity, moving water and sewer systems, abandoning roadways, and the like, and hardening vulnerable treatment plants. Few local agencies have these plans in place. Many local officials along the Gulf states refuse to acknowledge the risk. What does that say about their prospects? Those who plan ahead will benefit. Southeast Florid a is one of those regions that is planning, but it is slow process and we are only in the early stages.
Market or be Outmarketed
Municipal drinking water is strictly regulated by the USEPA. We spend a lot of time testing our water, producing reports, and providing our customers with information on our results. The results show it works, because the number of incidents of contaminated water are few, and rarely affect larger utility systems. We are so good at providing water that the public expects their water to be safe, yet the buy bottled water? Wait, huh? Bottled water? Bottled water is not regulated by the USEPA and is not subject to the same requirements as potable water. There are less than three full time people at FDA inspecting bottled water facilities, versus thousands reviewing public water supplies. Water utilities run millions of analyses per year and must publish the results. So why do they buy bottled water when our water is safe?
Keep in mind that in many areas of the world, the bottled water industries move in and compete for the same supplies as we currently use. North Florida is rife with arguments over flows to springs as are other areas. Some of the water is simply repackaged tap water. So in addition to competing for our customers, they are competing with the sustainability of our drinking water supplies. Then there are the hundreds of thousands of bottles that end up in landfills. More impact on sustainability. At the same time, bottled water is more costly that gasoline, which everyone complains about, but that does not stop the purchases? So what’s up?
Marketing that’s what. We don’t market water. I noted in an earlier blog that we simply don’t market our product, which has allowed others to compete for the same dollars. Customers complain about rate hikes, (averaging about 5% per year for the past 10 years according to the new AWWA study), yet they happily pay over $4/gallons for many of the popular bottled waters, more and more cable channels, fancy phones, etc. Not that any of these commercial products are per se bad, but none are required for survival like water.
Interestingly when we do market, it reaps positive results. New York and San Francisco have seen the wisdom of marketing for year. They ship New York tap water to Florida to make Brooklyn style bagel because Florida Water doesn’t taste the same. DC Water changed its name, and began a marketing campaign that changed public perception of the utility and has allowed it to start dealing with its infrastructure backlog. Some of their ideas include branding the water, and having restaurants serve it in marked glasses, paid for by the utility. Signs on drinking fountains, in schools and even sales of tap water in stores are options some utilities have started. But the key is started. Marketing takes dollars, to reap benefits. Who knows, maybe tap water is the next bottled water….
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