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There has been significant discussion about the potential impacts of climate change on the world:  more intense rainfall events, more severe thunderstorms and tropical cyclones, droughts, loss of glacial ice and storage, increased demand for crop irrigation.  However for much of the State of Florida, and for much of the coastal United States east of the Rio Grande River, the climate issue that is most likely to create significant risk to health and economic activity is sea-level rise.  Data gathered by NOAA from multiple sites indicates that sea level rise is occurring, and has been for over 100 years. About 8 inches since 1930.

The impact of climate change on Florida is two-fold – Florida often is water-supply limited as topography limits the ability to store excess precipitation for water use during the dry periods and sea level rise will exacerbate local flooding.  The highly engineered stormwater drainage system of canals and control structures has effectively enabled management of water tables and saltwater intrusion by gravity. The advent of sea-level rise will present new challenges, because the water table is currently maintained at the highest possible levels to counter saltwater intrusion, while limiting flood risk in southeast Florida’s low-lying terrain and providing for water supplies.  As sea level rises, the water will not flow by gravity, which disrupts that balance struck between flood risk and water supply availability in the canal system.

Occasional flooding is not new to Florida, but the increasing frequency we currently experience is related to sea level rise, not just along the coast, but for large expanses of developed property inland due to topography and groundwater levels.  As a result, the challenge for water managers in the state, especially in southeast Florida, is to control the groundwater table, because control of the water table is essential to prevent flooding of the low terrain.

The issue is not lost on local governments in south Florida nor on the educational institutions in the area.  Florida Universities are studying the impacts to the region to identify ways in which we can mitigate, respond to and adapt to these changes. My university, Florida Atlantic University, is located in this vulnerable part of the State has been proactive in partnership with the Four County Compact in addressing these issues and we have now joined with other Universities in the State to form the Florida Climate Institute, a consortium working with state and federal agencies to address the multiple challenges and opportunities facing this State. FAU in particular, has been proactive in developing tools to evaluate risk and identify adaptation strategies to protect local and regional infrastructure and property. 

Our efforts have included using high resolution NOAA data to map topography at the +/- 6 inch level, combined that topography with mapping of infrastructure and groundwater, to identify vulnerable areas throughout Broward, Miami-Dade and Monroe Counties, as well as initiated projects in Palm Beach County and other coastal regions throughout the state.  By identifying vulnerability based on sea level changes, the timing and tools for adaptation can be designed and funded to insure a “no-regrets” strategy that neither accelerates nor delays infrastructure beyond its need. 

While we have all heard the discussion of an estimated two to three feet if sea level rise is anticipated by 2100; sea level rise is a slow, albeit permanent change to our environment.  The slow part allows us to make informed decisions about adaptation strategies that may prove useful in the long term as well as the short term.  Of prime importance is the need to plan for these needs 50 or more years out so that we do not increase our exposure to risk.  Keeping development out of low lying areas, redeveloping pumping and piping systems with change in mind and reserving areas where major efforts will need to be undertaken, is important to the public interest and will affect private business, tourism and homeowners.  Sea level rise is already a problem for many low lying areas such as Miami Beach, Fort Lauderdale, Hollywood, and other coastal communities. It will be an incremental problem creeping up on us for the rest of the century and beyond.

The lowest lying areas are the roadways, which are also the location of electrical, water, sewer, phone and drainage infrastructure.  Fortunately given the current Federally funded special imagery and NOAA data systems we are able to predict pretty accurately where flooding will occur.  Linking that information with detailed projections of sea level rise impacts we can  map vulnerable areas and build adaptive measures into every action and plan we undertake.  But the impacts are not only on the coast. Sea level affects ground water table levels and with our intense rainfall areas far inland can be flooded, even subject to long term inundation.  Water levels are rising and will continue to rise as groundwater rises concurrently with sea level. Add the impact summer rains and dealing with water becomes a major priority. Figures 1 and 2 outline the roadway network degradation at present, 1, 2, and 3 ft of sea level rise.  The figures demonstrate that a major, underestimated amount of property is vulnerable on the western edge of the developed areas because the elevations are decreasing as one moves west from I95. 

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While time will impact our environment, there are three options to address the change:

 

  • Protect infrastructure from the impacts of climate change
  • Adapt to the changes, and
  • In the worst case retreat from the change.

 Retreat does not need to be considered in the short or medium term.  South Florida has developed in the last 100 years and there will be well over 100 years of life left.  As a result, the best option is adaptation.  Adaptation takes different forms depending on location.  I have developed a toolbox of options that can be applied to address these adaptation demands, resulting in an approach that will need a more managed integrated water system, more operations and inevitably more dollars.  For example we can install more coastal salinity structures, raise road beds, abandon some local roads, increase storm water pumping, add storm water retention etc. to address many of the problems.  The technology is available today.

Much of the actual needs are local, but the problem is regional and requires a concerted effort of federal, state and local agencies and the private sector to address the scales of the problem.  A community can address the local problems, but the regional canals, barriers, etc., are beyond the scope of individual agencies.  Collaboration and discussion are needed. 

The needs will be large – in the tens of billions.  But there are two things in south Florida’s favor – time and money.  The expenditures are over many, many years.  Most important in the near term need is the early planning and identification of critical components of infrastructure and policy needs and timing for same.  That is what FAU does best.  At risk are nearly 6 million of Floridians their economy and lifestyle, $3.7 trillion in property (2012) in south east Florida alone and a $260 billion annual economy.  All of these are expected to continue to increase assuming the appropriate plans are made to adapt to the changing sea level.  Protection of the area for the next 100-150 years is achievable as long as we have the science, the understanding and the will to do it.  Plan now, and over the rest of this century starting now we can raise those billions of dollars needed.

 


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. 


We have talked about reserves, the need for them, reasons why they are neglected and how to establish appropriate numbers (an area where more research is needed).  Reserves are an issue when the economy tanks.  We all recall the problem in 2008, but this is where utilities need to look beyond just their system to see what might be coming.  2008 was a problem that we should have seen coming, or at least planned for, but did not.  But it means that we need to look at the national and local economic picture and understand a little about events beyond our reach that can affect us.  Utilities and governments generally do not do this well. 

In 2005-2007, it was very clear we had a property bubble going on.  There was discussion on the news, financial channels, Wall Street Journal and even columns by economist like Paul Krugman.  A few of us may have taken advantage of the bubble through prudent real estate sales, but many did not.  Likewise, few utilities or governments planned for its inevitable fall.  After the crunch hit, those who owed the least amount of money, had savings and had stable incomes fared better than those who did not.  Same for governments.  Unfortunately most Americans and most governments fell into the “did not” category. 

So let’s look at a couple issues.  First, we knew there was a bubble and should know that all bubbles pop.  We had the tech stock bubble in the late 1990s.  People on Wall Street knew that the investments had turned to real estate and bankers where busy loaning money out with no interest for two years, no money down, adjustable rate mortgages and the like.  If you owned a computer you were inundated with Countryside and various other folks trying to loan you money.  Or buy your house and pay you an annuity if you were older. 

The reason that these “opportunities” were so prevalent was to help speculators who expected to own the property for short periods of time, or help those who might not have the means to buy time to get the means to support the payments.  All the subsequent financial instruments discussed in books like “Too Big to Fail” come from tools used by bankers to disperse the risk associated with speculators and the risky.  It made money for bankers and investment houses (remember they are private businesses beholden to their private stockholders). 

Like all bubbles, we get caught up in the money being made by speculators (and yes if you invest in the stock market you are speculating).  We try to grab onto the rising instruments to get ahead, but we forget that especially with real estate, the growth overall rate across the nation could only grow at the rate of population growth.  It is basic supply and demand. 

For governments, revenues rise, especially during real estate bubbles.  Some bubbles last for years, which creates a distorted view of the future.  In south Florida, there was a lot of buzz concerning water supply projections and arguments between regulatory staff and utilities over water supplies that were projected 20 years in the future, based on demand projections from 2000-2005.  When the dust settled in 22011, most of those issued disappeared because virtually all projections were substantially revised downward.  And most revenue growth projections were likewise revised downward and capacity needs delayed.  Planning 20 years out is historically inaccurate because the global economy can impact local growth.

Of course these new projections are incorrect as well.  Because the test period was 2005-2010 or 2000- 2010, the growth is stunted.  So they are likely underestimating demand and revenues.  Uncertainty with time means that the accuracy of projection decreases with time.  As a result, simply relying on past projection methods increases risk that of significant deviations.

I do an exercise n class where I give students three sets of projections.  10 years apart, for 50 years.  I tell them nothing else.  The examples are The State of Nevada, Cleveland, and Collier County, FL.  All are in the past (Cleveland is 1910-1950) There is absolutely no easy method that can project the growth in either Collier County or the State of Nevada, or that Cleveland’s population will drop in half. We could do the same with Detroit and never project that decrease either.  But when you tell them where the population are and what year, the wheels start to turn.  They realize that economics is a major issue.  While Nevada and Collier grew from 1960-2000, the rate of change is likely to be very different in 2010 to 2020 due to the 2008 recession. 

Tracking economic activity is a utility responsibility.  We need to know what is really happening, and understand bubbles.  We need to recognize that when property values and housing number increase fast, it will be short term.  Plan for savings and reserves.  Figure out what your recovery period might be.  We need to understand our economic base.  For example try this out and see what your conclusion is.  Florida’s economy is based on three major industries: agriculture, tourism and housing.  What could possibly go wrong with that model?  Well if we have an economic problem nationally, 2 of 3 take major hits because people outside the state do not travel to Florida and retirements get put off.  The economy gets hit hard and recovery is slow.  We have experienced that exact phenomenon from 2009 to date.  And many of those jobs are low wage positions which means the people who struggle most get hit hardest.  Storm events can impact the state.  Bit hits to all three, and agriculture is also a low wage industry.  It is a precarious economic model that sets itself up for potential fluctuations.  We need to plan for this.  It is our responsibility, utility staff and decision-makers to plan and prepare for the next big event.  


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.

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.


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).  


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.  


A number of years ago I had the pleasure of speaking with archeaologist Bryan Fagan for an hour or so before a presentation he gave at a conference.   Dr. Fagan is a modern-day Indiana Jones, who has been all over the world studying ancient ruins.  Dr. Fagan expressed his career as “50 years of studying drainage ditches,” but with studying drainage ditches he could provide you with the rise and fall of civilizations through history.  His book Elixir outlines a number of these civilizations:  Egyptian, Babylonia, Southeast Asia, and even the American West.  His findings were that the civilization expended as far as infrastructure could be constructed to allow water to flow to where it was needed, whether that was Alexandria or Ur.  Later civilizations expanded and developed as technology allowed water to flow further.  Rome demonstrated that water could be moved with more than ditches, which would have been a severe limitation for Rome and other civilizations based in dry areas with topography.  The Romans constructed extensive tunnels and aqueducts to supply Rome with water from mountains to the east and north. A recent article noted that we probably know about 20% of the Roman tunnel system as we keep discovering more of it each year – tunnels lost in the Dark Ages after the fall of Rome.  Dr. Fagan notes that it was access to water that allowed human civilizations to develop and evolve.  It is why a number of engineering organizations like Water for People and Engineers Without Borders focus their efforts on providing access to clean water to people in Third World countries.  It is their only way to get to the modern world.  All other infrastructure:  roads, major buildings, etc., result from the access to clean water that allows people to be healthy and productive.

So if civilization rises and falls with access to water, why is it so hard to get public officials to fund water supply and rehabilitation projects?  We talk of an infrastructure crisis in the United States because our average water and sewer infrastructure systems are working on 50 years old and deterioration is evident.  We have many mid-western communities with water, but no customers to pay for deteriorating infrastructure (Detroit), and southeastern utilities that have lost factories that supported the bulk of their utility, and insufficient growth in the customer base to deal with operations and maintenance.  As a result, outages and breaks occur more frequently, costing more money to repair, but under the auspices of maintaining rates, the revenues do not increase to support the needed repairs. 

At least the southeast has surface supplies, albeit perhaps limited, which constrains growth (Atlanta), but our fastest growth often occurs in areas we know have limited precipitation, like a lot of the American West.  Yet somehow we expect groundwater sources that do not recharge locally, to sustain the community indefinitely without disruption – ignoring the fact that history tells us communities cease to function when water supplies are exhausted.  USGS identified many areas that have long-term permanent declines in aquifers as a result of pumpage for agricultural and community uses.  No one raises the question about the aquifer levels – permits get issued, but little data is gathered and very limited plans are available in most places to deal with the declines.  And no one raises a question about aquifer levels because stopping growth to deal with water supplies is not in conformance with the desire to grow, which is required to support additional services demanded by the community. 

No one questions how to secure the water either, much of which has been “created” by federal tax dollars spend over 50 years ago during the era of great dam building (1920-1960).  However, as these systems and populations age, the concern about costs will continue to engender discussion.  And hand wringing.  Water costs money.  Water creates civilization and sustains it.  When we take it for granted, it becomes all too easy to fall behind the proverbial “eight-ball,” and the system crashes.  It is a testament to the utility personnel – the managers, engineers and operators – that these systems continue to operate as they do.  But bailing wire and duct tape only go so far.  We need to develop a frank discussion about the need to infuse funds – local, federal, state and private – into addressing our infrastructure needs.  The dialog needs to commence sooner, as opposed to after failure. 


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?


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.

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