Archive

Tag Archives: investment

Post Recession Good News

September 29, 2014
finance, funding, Leadership, local government, management, planning, politics, Responsibility, Revenues, sanitary sewer, Uncategorized, utilities, Water Funding
Leave a comment

 

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….

DECREASING WATER DEMANDS VS INFRASTRUCTURE NEEDS

September 24, 2014
Banking industry, borrowing for infrastructure, Congress, contractors, debt funding, economy, engineering, finance, funding, growth, infrastructure, Leadership, local government, planning, politics, Reserve Funding, Risk, sanitary sewer, Uncategorized, Water Funding, water sewer management
Leave a comment

Earlier this year the Journal for AWWA had several articles about water use and infrastructure needs.  One of the major concerns that has arisen in older communities, especially in the Rust Belt and the West is that demands per person have decreased.  There are a number of reasons for this –the 1992 Energy Policy Act changes to plumbing codes that implemented low flush fixtures, the realization in the west that water supplies are finite and conservation is cheaper than new supplies, a decline in population, deindustrialization, and climate induced needs.  But all add up to the result that total water use has not really changed over the past 30 years and in many locales, water sales may have decreased.  Water utilities rely on water sales for revenues so any decrease in sales must be met with an increase in cost.  Price elasticity suggests the increase will be met with another decrease in sales, etc.  It is a difficult circle to deal with.  So less water, whether through deliberate water conservation or other means, creates a water revenue dilemma for utilities.  A concern about conserving to much and eliminating slack in the system also results.

Less water means less money for infrastructure.  Communities do not see a need for new infrastructure because there are fewer new people to serve.  Replacing old infrastructure has always been a more difficult sell because “I already have service, why should I be paying for more service” is a common cry, unless you are in my neighborhood where the water pipes keep breaking and we are begging the City to install new lines (they are on my street J)  Educating customers about the water (and sewer) system are needed to help resident understand the impacts, and risk they face as infrastructure ages.  They also want to understand that the solutions are “permanent” meaning that in 5 or 10 years we won’t be back to do more work.  Elected officials and projected elected officials (the tough one) should be engaged in this discussion because they should all be on the same page in selling the ideas to the public.  And the needs are big.  We are looking at $1 trillion just for water line replacement by 2050 and that is probably a low number(2010 dollars).  The biggest needs are in the south where infrastructure will start hitting its expected life.  The south want west will also be looking for about $700 billion in growth needs as well.  All this will cause a need for higher rates, especially with ¼ less low interest SRF funds avaialalbe this year from Congress.

Responsibility, Failure and the Lack of Funds

September 20, 2014
borrowing for infrastructure, Climate, communciations, Congress, debt funding, Economic Bubbles, economy, funding, growth, infrastructure, innovation, JObs, Leadership, local government, planning, politics, Responsibility, Revenues, Risk, Uncategorized, Water Funding, water sewer management
Leave a comment

Public water and sewer systems have the responsibility to protect the health, safety and welfare of the public they serve, just as engineers do.  This is includes not just complying with regulatory mandates (they are minimum standards), but enacting such precautions as are needed to address things not included in the regs.  Unfortunately we continue to pay too much attention on regulatory compliance and evaluate the condition of the system using unaccounted for water losses or leaks fixed in the system as a measure of condition.  That may be an incorrect assumption.  The problem is that unless we understand how the system operates, including how it deteriorates with time, the data from the past may well be at odds with the reality of the future.  For example, that leak in your roof can be a simple irritation for a long time if you ignore it.  But ignoring it creates considerable potential for damage, including roof failure if too much of the structure underneath is damaged.  With a water system, pipes will provide good service for many years will minimal indication of deterioration.  Then things will happen, but there is little data to indicate a pattern.  But like your roof leak, the damage has been done and the leaks are an indication of the potential for failure.  Bacteria, color, pressure problems and flow volumes are all indicators of potential problems, but long-term tracking is needed to determine develop statistical tools that can help with identifying end of life events.  Basic tools like graphs will not help here.

Construction to repair and replace local water, sewer and stormwater infrastructure is expected to reach $3.2 and $4.8 billion respectively for water and sanitary sewer. The federal SRF programs are only $1.7 Billion in SRF loans, 24% below 2012 and well below the levels identified by the federal government to sustain infrastructure condition.  The only reason for the decrease seems to be a demand by Congress to reduce budgets, especially EPA’s budget where this money resides.  But the 2008 recession and its lingering effects to date have deferred a significant amount of infrastructure investments, and the forecast does not rectify the past deficits, and likely does not address the current needs either.  Few water and sewer systems are flush with funds to update infrastructure and borrowing has become a difficult sell for many public officials.  Lake Worth, FL just had a $60 million bond issue for infrastructure redevelopment defeated by voters two weeks ago.  The officials know they need this infrastructure, but the public is unconvinced because few serious problems have occurred.  We have to get the public past this view so we can improve reliability and public safety.  Those are the arguments we need to demonstrate.  The question is how.

 

It’s Budget Time Again

July 14, 2014
debt funding, economy, finance, funding, planning, Reserve Funding, reserves, Revenues, Risk, Rural Utilities, Surpluses
Leave a comment

The good news is that for many local governments, property values are up and so is the economy, especially in urban areas.  However that does not mean that the budget approval difficulties of 2009-2012 have passed or been resolved.  In fact the arguments may continue despite improvements in financial position.  Why?  There are a number of policies that were implemented in the recession years that were especially difficult for utilities:

  1. Borrowed or transferred water and sewer monies to avoid raising taxes against falling property values (note that raising taxes on falling values would have yielded a zero sum game, but raising taxes commensurate might have “un”elected a few people
  2. Failing to have long-term financial plan and even fewer have multiyear budgets.  Included are automatic rate adjustments that some are questioning or deferring now, despite having been approved several years ago
  3. Bad investments – public or private.  In either case, if the revenues are not realized, the local entity gains no benefit.  This can include public private infrastructure investments, privatization or investing cash.  Scenarios need to be created to figure out what happens when things don’t go as planned.
  4. Failing to save for a rainy day before the crash.  Our grandparents knew we need to save for a rainy day.  We talk about the lowered level of savings among Americans and the potential issues that could arise if economic difficulties occur.  So exactly why do our elected leaders think it is a great idea not to collect monies in good times for a rainy day?  Other than politics that is?

 

We have identified four errors in public policy at the local level.  The questions for the 2015 budget are:

 

  1. Can we repay those funds we “borrowed” from during the down years?
  2. Can we keep the total revenues increasing (may not mean a tax increase, but certainly not a rollback)?
  3. Can we develop realistic scenarios for public investments.  Nothing worse than stranded infrastructure like that $6milion parking garage that grossed under $100 in the last 6 months because no one uses it because there is not business need for it.
  4. Can we develop reserve policies that allow local governments and especially utilities to create and maintain repair and replacement funds, reserves, and “savings” for the next rainy day.  It’s coming.  At some point.
  5. Can we develop a 5 year plan of where the community vision is?

I think this would be a start for a lot of us.

Infrastructure Condition

July 10, 2014
engineering, finance, infrastructure, innovation, planning, Risk, Risk Management, Road Repair, Uncategorized
Leave a comment

We are all cognizant of the low grades on infrastructure given annually by ASCE and periodically by USEPA.  We spend about 1.8% of our GNP on infrastructure.  We used to spend twice that much and it is likely that we need to spend upwards of 2.4% to stay even.  Much or our infrastructure is “forgotten” because it is buried.  American Water Works Association published a book to highlight his problem – Buried No Longer.  But is it helping.  In a recent Roads & Bridges article, they noted that the bridge system continues to age faster than the repair rate.  The states with more than 15% deficient bridges are mostly Great Plains states, and the northeast.  The latter is no surprise because the infrastructure is generally much older in the northeast.  What was also interesting was that in a recent American City and County magazine, many of the states that have bridge issues, also have below average trust among the public.  And most of the areas with the bridge issues are rural states, like North Dakota and West Virginia.  This harkens back to a prior couple blogs when it was noted that poorer, less educated people tend to live rural lifestyles, and lobby for less taxes, yet expect government to be there to resolve crises.  Interesting….

 

Sea Level Rise Planning – Part 1

June 22, 2014
Climate, communciations, Education, finance, Flooding, infrastructure, Insurance, JObs, Leadership, local government, planning, Water Funding, water sewer management
Leave a comment

The rainy season has sort-of started in south Florida and with it comes flooding and discussions of the falls end of season and concurrent high, high tides for the year, flooding and the impact of sea level rise on low-lying areas.  Much focus has been spent on the causes of sea level rise and the potential flooding caused by same.  However the flooding can be used as a surrogate to impacts to the social and economic base of the community.  By performing vulnerability assessments, coastal areas can begin planning for the impacts of climate change in order to safeguard their community’s social, cultural, environmental and economic resources. Policies need to focus on both mitigation and adaptation strategies, essentially, the causes and effects of climate change. Policy formulation should be based on sound science, realizing that policy decisions will be made and administered at the local level to better engage the community and formulate local decisions.

Making long-term decisions will be important.  Businesses look at long-term viability when making decisions about relocating enterprises.  The insurance industry, which has traditionally been focused on a one year vision of risk, is beginning to discuss long-term risks and not insuring property rebuild is risk-prone areas.  That will affect how bankers look at lending practices, which likely will decrease property values.  Hence it is in the community’s interests to develop a planning framework to adapt to sea level rise and protect vulnerable infrastructure through a long-term plan.

While uncertainties in the scale, timing and location of climate change impacts can make decision-making difficult, response strategies can be effective if planning is initiated early on. Because vulnerability can never be estimated with great accuracy due to uncertainty in the rate of warming, deglaciation and other factors, the conventional anticipation approach should be replaced or supplemented with one that recognizes the importance of building resiliency.  The objectives of the research were to develop a method for planning for sea level rise, and providing a means to prioritize improvements at the appropriate time.  In addition the goals were to provide guidance in developing a means to prioritize infrastructure to maximize benefit to the community by prioritizing economic and social impacts.

Adaptation planning must merge scientific understanding with political and intuitional capacity on an appropriate scale and horizon.  According to Mukheibir and Ziervogel (2007), there are 10 steps to consider when creating an adaptation strategy on the municipal level.  To summarize, these are as follows:

  1. Assess current climate trends and future projections for the region (defining the science).
  2. Undertake a preliminary vulnerability assessment of the community and communicate results through vulnerability maps (using GIS and other tools).
  3. Analyze vulnerability spatially, by overlaying development priorities with expected climate change on GIS maps to identify hotspots where adaptation activities should be focused.
  4. Survey current strategic plans and development priorities to reduce redundancy and understand institutional capacity.
  5. Develop an adaptation strategy that focuses on highly vulnerable areas. Make sure the strategy offers a range of adaptation actions that are appropriate to the local context.
  6. Prioritize adaptation actions using tools such as multi-criteria analysis (MCA), cost-benefit analysis (CBA) and/or social accounting matrices (SAM).
  7. Develop a document which covers the scope, design and budget of such actions (what they call a Municipal Adaptation Plan (MAP)).
  8. Engage stakeholders and decision-makers to build political support. Implement the interventions prioritized in the MAP.
  9. Monitor and evaluate the interventions on an ongoing basis.
  10. Regularly review and modify the plans at predefined intervals.

 

The strengths of this framework are the initial focus on location-specific science, the use of both economic and social evaluation criteria, and the notion that the plan is not a fixed document, but rather a process that evolves in harmony with a changing environment.  The final two steps occur at regular intervals by the community with associated adjustments made.  The next question is how to develop the data and priorities.

BOSTON

June 18, 2014
American Water Works Association, Boston, communciations, Education, engineering, innovation, Leadership, Uncategorized
Leave a comment

Last week I went to Boston for the American Water Works Association Annual Conference and Exposition.  It is a gathering of thousands of water industry professionals – from operators to university professors to engineers to manufacturers.  It is a good group of people and most know a number of people each year.  The industry is smaller than one things despite there being over 50,000 community water systems in the United States.  All are there to network, which allows them to discuss their issue, learn new ways to approach things, create new contacts and see new equipment and techniques.  Over 11,000 registered.  Good job to AWWA staff and the folks in New England that local hosts.

At the conference, one of many tasks, beyond meetings and education, was to do a class for public officials on what water and sewer utilities are, how they operate, how to deal with revenues and expenses and regulations.  The idea is to help local officials understand the complex utility issues which are often second fiddle to more “surficial” activities like parks, and economic development.   The officials get a certificate from AWWA for 12 hours of class time, but the fact that these folks come, spend the time, get involved and can then experience the rest of the program is to be commended.  I have been doing these public officials classes since my book came out in 2009.  The first two days are always based on the book, but the third day can vary depending on issues in the news and preferences form the public officials group within AWWA.  This year the focus was operations and revenues. The responses were positive, and the interaction was very good.  And I had a blast as well.

It had been 40 years since AWWA was in Boston for ACE.  I have been twice previously – once when I was 7 and we went to the aquarium and once to catch a baseball game at Fenway, while on a 5 game, 4 city, 3 day baseball trip.  Boston led off.  This time, I was able to spend a day looking at the City.  Thanks to my friend Chi Ho Sham who acted as chauffer and tour guide – I expect to repay the gesture whenever he can spend a couple days in S. Florida.  Boston as many of you know is the cradle of the American revolution, and visits to the old North Church, Paul Revere’s house, the USS Constitution, several cemeteries and Faneuil Hall.  Fascinating.  Another trip to come as there is much more to experience than a day.

The moral to the story is that conferences allow us to accomplish many things.  We meet new people, hear new things, and if we spend a little time, we can experience how others live or have lived.  The history is valuable to us personally.

2014 or 1950? Where Did these comments come from?

May 8, 2014
communciations, Detroit, economy, funding, JObs, management, Marketing water, planning, politics, race relations, reserves, Revenues, Uncategorized
Leave a comment

Last week was one heckuva week for societal problems related to race relations.  Seems like someone turned over a rock and the 1950s crawled out.  We started with Cliven Bundy, the Nevada rancher who has been using federal property (read our land) for grazing his cattle for 20 years without paying for it, said after the armed confrontation with federal officials, that “I wonder if Negros weren’t better off as slaves.”  But he says he is not a racist, but wow.  That’s right up there with Rush Limbaugh’s comments about Native Americans in his book 15 years ago. 

 Then we had newspaper columnist and right-wing wonk, Thomas Sowell, who is black, saying in a recent column that “you are poor because you don’t work.”  And it is your fault you don’t work.  In “higher income families, people work.”  So using that line of racist nonsense, given that minorities are disproportionately un- or under-employed, does Mr. Sowell really believe that it is really the choice of all of these people not to work?!  Could there be any other causal links like the lack of education, decaying infrastructure or the lack of local opportunities in their community that might just come into play? That’s like saying Detroit’s problem is not the lack of job opportunities, but the fact that no one wants to work in Detroit.  I think not.

The we have Donald Sterling, the owner of the Los Angeles Clippers NBA team, who was taped making racists comments, then received a lifetime ban and multi-million dollar fine for his comments about minorities, and then, instead of apologizing, states that he wishes he’d just paid the woman who taped him off.  Huh?   Of course it is not the first time for Mr. Sterling who lost a case several years ago over his practices of renting property in LA, so I guess we should have expected it.

Of course there are those who argue these folks were simply misunderstood.  Maybe Mr. Sowell was just pandering to his fan base, but what does that say about his fan base that he can write a column that purports that “you are poor because you don’t work” because you don’t want to work and no one says anything?  He clearly appears to be besmirching the inner city minority population, but as I noted in a prior blog, rural America is significantly worse off economically than urban America.  Rural America is where health care suffers, the lack of health insurance is pervasive, income are lower and unemployment higher.  There are poor across all races, and in all settings.  And given his fan base is includes a lot of poor, white, rural people who aren’t making a lot of money or who can’t find jobs, he’s talking about you!

The Bundy comments stem from his standoff with federal officials over many years of not paying for grazing (like the rest of us could get away with that!).  He and those that came armed to his defense are more indicative of a larger, far-right, anti-government sentiment around the country that has persisted for years.  The west has a number of these groups (recall Ruby Ridge, Waco, Black Hawk helicopter-ists, etc.) that are basically anarchists that disagree with America as it is today.    All white.  But of course as we have seen in the Sudan, Rwanda, the middle east and throughout history, hate can come from all races and religions. All harboring hatred of others not like them.  Understanding why is more difficult, but the commonality seems to be that they all have the perception that the others are somehow treated differently, which allows them to move up the economic ladder faster or allows them to “game the system.”  The perception, which may be completely false, persists because it somehow justifies the actions of these people.

So given the comments of the past week, are we back in the 1950s?  Or 1870s?  How are we here in 2014?  Prejudice and hate were not wiped away magically by civil rights legislation, integration, communication and education alone, but really, does this type of attitude have a place in today’s world? If so why?  Hate has created trouble in the world for thousands of years.  Hate is a problem because hate is a means to distract people from real problems or to force your problems on others.  But in truth, psychologists will tell you that in most cases, the Haters tend to hate themselves, which is something we all need to remember.  Hate is developed because you cannot control a situation or someone else gets something you want.  Therefore it is that someone else’s fault, not yours.  It is easier when race, sex, sexual orientation, religion or other factors represent the “somebody else,” but the reality is haters hate themselves first, then project their hate onto others.  They need help. Professional help. Counseling.  Many of them. Even whole societies. They need to go get help for themselves and the rest of us. 

Will the Default in Detroit Affect Me?

April 8, 2014
borrowing for infrastructure, debt funding, Detroit, economy, engineering, Environment, finance, infrastructure, innovation, local government, Michigan, planning, politics, Risk Management, stormwater, sustainability, Uncategorized, utilities
20 Comments

So Detroit defaulted on it’s debt obligations.  Do does that impact you?  Well, that depends on whether you are a utility looking revenue bonds, a city looking for general fund bonds or some combination.  The issue in Detroit with debt is that they pledged the full faith and credit of their taxing authority to repay the debt.  Their taxing ability was insufficient to accomplish this goal, which means that there could now be distrust in that promise for other cities.  So if you are a city and you are making this pledge, Detroit could impact you, or at least create more review on your balance sheets.  If you are a utility that is pledging revenues that have no limitations on amount, the concern is likely less.  Of course in either cases, the question is what the rest of your balance sheet looks like.  If you have no reserves, do not charge the full cost for service, have a heavy debt load, have high rates already, or send a lot of funds to the general fund, that could be a problem.  If you have avoided these pitfalls, the bond market will see much less of an issue. 

Keep in mind that Detroit is not the only default – another big one is the Birmingham and several other create questions about general fund uses of funds, which makes it of greater importance to keep our financial house in order.  IN part this can be done by creating the appropriate enterprise funds and remove those services from the general property tax fund.  That permits local focus on the true cost of general taxing users and creates a delineation between general fund and enterprise costs.  That can help elected officials focus on the true general fund issues:  police, fire, EMS, administration without hiding those costs with subsidies from other funds.

 

Infrastructure Replacement

March 10, 2014
Banking industry, borrowing for infrastructure, debt funding, economy, engineering, finance, funding, infrastructure, Leadership, local government, management, planning, Revenues, Risk, sustainability, Uncategorized, underwriters, utilities, Water Funding, water sewer management
Leave a comment

We all know that our infrastructure is deteriorating.  Deferred maintenance increases the risk of system failure. The need for capital reinvestment within the utility industry has historically been very low. As a result, in its “2013 Report Card for America’s Infrastructure,” the American Society of Civil Engineers assigned a grade of “D” to America’s drinking water systems, citing billions of dollars of annual funding shortfalls to replace aging facilities near the end of their useful lives and to comply with existing future federal water regulations (ASCE, 2013).  AWWA estimates that investments of at least $1 trillion are needed over the next 25 years.

While a pay-as-you-go capital funding seems like the best way to go, that is difficult to accomplish with the large outlays needed to upgrade the infrastructure system and the controls on rates often exercised by local officials.  As a result, borrowing is required and the condition of infrastructure and the lack of reserves are a part of how the utility is viewed by those who lend monies.   Utility managers need to understand how the lending agencies evaluate risk. 

Lenders use many tests.  Among them are: whether the utility’s annual depreciation expense is used of accumulated as reinvestment in the system, whether adequate reserves are present, whether  annual capital spending that is below the amount of annual depreciation and the amount of revenues in excess of projected debt (debt service coverage).  The target debt service coverage may depend upon the requirements of the underwriter, the rating agencies and the investors.  Debt service coverage could be as low as 15% or as high as 50%.  In 2012, the median all-in annual debt service coverage excluding connection fees for utilities rated “AAA” by Fitch Ratings was 220%, while the median for AA-rated and A-rated utilities was 180% and 140%, respectively. (Fitch, 2012).  

A working capital target of 90 days of rate revenue is a minimum, but since 2008, more is likely to be required depending on the size of the system and the history of revenues.  Where the revenues were stable despite 2008, less may be required.  For those utilities that suffered major decreases, reserves should be far larger – perhaps a year or more.  Other criteria that could be used to evaluate the projects when borrowing money include public health and safety, regulatory compliance, system reliability, the risk and consequences of asset failure, redundancy, community/customer benefit  and sustainability. At the same time, the expectation is that  the utility systems that retain all monies in the system to be utilized to improve the system and pay for debt service, except those used  for the purchase of indirect services from the General Fund that are justified with indirect cost studies. 

 

Despite the above, rate are an issue.  Fitch Ratings has indicated that it considers rates for combined water and wastewater service that are higher than 2% of the median household income – or 1% for an individual water or wastewater utility – to be financially burdensome (Fitch, 2012).  The Environmental Protection Agency (EPA) considers that rates for an individual water or wastewater utility that are greater than 2% of median household income may have a high financial impact on customers. (EPA, 1997). Utilities with a stronger financial profile might have residential charges for combined water and wastewater service that are less than or equal to 1.2% of median household income, or less than or equal to 0.6% for an individual water or wastewater utility. All revenues generated through system operations generally must remain within the system and can only be used for lawful purposes of the system.

Canadian utilities employ more formal polices to establish fiscal policies to provide reserves to insure stability in the event of unforeseen circumstances. Reserve targets focus on ensuring liquidity in the event there is an interruption in funding, increased capital costs due to new regulatory requirements or a short term funding emergency – all the issues evaluated by the bankers.  Reserve targets are policy decisions. Benchmarking is an evolving practice within Canadian public sector utilities particularly as it relates to financial planning and capital financing. The benchmarking exercise provides valuable information to help assess fiscal performance, the needs of customers, and provide the tools to help support optimum performance.