Hi all. Here is another radio show I did last week talking about my company Public Utility Management and Planning Services Inc. and water sustainability. Take a listen. Let me know what you think. Thanks
Fred
Are Pensions Really Broke?
Nearly 10 years ago it was predicted that the water industry would experience a large exodus of experienced workers. It did not happen; likely it was only delayed by the 2008 financial crisis. If that is the case, will there be an acceleration of retirements in the next few years? If so, what are the plans the plans for knowledge capture? GIS, work orders, MMIS, and other programs will help, but capture is important as the next “generation” of employees will not have the advantage of years of experience in finding valves, and pipes, etc. We need to plan ahead for the knowledge capture issue, develop training for newer employees and figure a means to access lost knowledge in the future. Capture is a big issue, but what we hear more of is the potential for a drain on our resources for funding these retirements? The news is full of stories of dire consequences of retirement defaults coming for the public sector. Keep in mind many utilities are publically owned and these employees are part of the public retirement systems. Is this real or a political position for another agenda? Do we need to be worried?
Interestingly it depends on whether you were looking before 2008 or after. This picture was very different. Even in my state of Florida, the pension system was fully funded before 2008, dropped just after, but has returned to near full funding as a result of the improvement in investment returns. Most of these systems rely on investment returns so changes can cause the system solvency to change rapidly over short periods of time. Looking only at a short instant in time belies the long-term truth and it is the longer view we need to look at. Good thing Wall Street normally goes up, but the impact of poor investment strategies by a limited few (2008) has significant impacts across society in everyone’s pension programs. Look at all the 401k programs – those incurred crushing blows just as pension programs did. So yes there may be problems, but many of these pension systems are not nearly as strapped as you would be led to believe in part because they have always relied on people continuing to pay into the system. Hence they always have cash flow, unlike personal accounts.
The long-term view or the impact on personal accounts doesn’t faze the “fixers” who have many ideas to “fix” the pension problem. One of the concepts championed is to change enrollment to a 401k vs a fixed benefit system. Another camp suggests privatizing. But both radically change the long-term solvency of vested employees and here’s why. Under the current concept for public retirement systems, your employer and often you, pay matching amounts into the system. According to a study done some years back in Florida, over 80% of people who get public sector jobs do not stay long enough to become vested in the system. That means that while they get their contributions back, the retirement system keeps the match, reducing long term costs to the public. All full time employees pay into the system. Retirement systems rely on cash flow from current employees for payouts to retirees, thereby protecting the invested funds and allowing the system to “weather” periodic financial difficulties. That’s why the system solvency will based on what is happening on the stock market. The system is designed to grow at a given rate, so if you reduce the people paying in, you accelerate the use of invested dollars because the cash flow diminishes. In many respects that is what happened to some of the industrial pension systems –automation and outsourcing jobs overseas cut down the payees so much that the pension system could not sustain itself. So it’s relatively easy to demonstrate that both cutting jobs through privatizing and 401k type programs accelerate the crisis and will create future burdens on the taxpaying public. These two solutions sound great, but are simply unsound.
There are other ways to mess up retirement systems. The federal workforce has decreased from 6.6 million in the late 1960s to 4.5 million today. Clearly the reduction in employees contributing will have an impact on significant federal pensions. Florida and many other states, with the windfalls on the late 1990s, reduced vesting from 10 years to 5 or 6. That means that a greater percent of people will become vested, which means more future obligations. That’s not a solution for solvency. Florida’s legislature changed the contributions from only the government entity paying (a total of 10.4%) and required employees to contribute. The employee match is their money and they get it back with interest, meaning only 7./4% remains in the system. If experience with social security and other states is an indication, both shares will have to increase so that their combined total will be in the 13-14% range. How did hat save anyone money?
So what’s the solution? Two things. First, the initial way these pension plans were set up were actuarially sound. They should be revisited for contribution amounts, vesting period and expected return rates on investments (one of social security’s issues is that they own so many Treasury bonds that pay under 2% that it is hard to get a valuable rate of return). This is a project for experts, not policians to consider and evaluate. The big issue though is age for retirement. I know this is not popular, but let’s talk social security here as an example. The text of the 1935 Social Security Act says that benefits were to be granted at age 65 (Section 202). However the average age that people live to was 60 for men and 64 for women, meaning the average person NEVER collected social security. Now it is 76 and 81, which means they collect for 12 to 15 years, tremendous difference in the obligations. We all appreciate good medicine and most look forward to retirement, but keep in mind it comes with a price. Since 50 is the new 30, we probably will all probably can be working longer.
Water and sewer workers like police and fire, are vital to thriving communities. So, let’s act with caution when looking at fiscal impacts that may come to utilities in the future. Since many of these folks have, and have worked hard to secure a retirement package, it will need to be funded. But we must act judiciously when making changes to the current program. Cut off payees – and ratepayers will make up the difference. Change the type of program, and the potential for major losses occurs.
If you live on an island, and your groundwater table is tidal, what should your datum be for storm water planning purposes? Average tide? High tide? Seasonal high tide? If you are the local official with this problem, what do you do, realizing that the difference from mean tide and seasonal high tide (when most flooding occurs) is 1.5 feet? Realizing that property and infrastructure is at much higher risk for periodic inundation, does the failure to address the problem indicate a lack of willingness, understanding, hope or leadership? We see all four responses among local officials, but the “head in the sand” mode is the most curious. It’s tough challenges that often define leaders. With sea level rise, there is time to plan, construct infrastructure in stages, arrange funding, and lengthen the life of infrastructure and property. Meanwhile, those insurers, banks and the public we talked about in a prior blog wait and watch.
Hi All.
This is a radio show I did this week. One of 4 I have scheduled. It talks about me and my company, outlook, thoughts. Take a listen. Let me know what you think!
Fred
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.
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.
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?
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…
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.
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?
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