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April 16, 2010

The Soaring Federal Deficit And Your Water Service Fees

Filed under: law — Tags: , , , , , , , , , — Jason Mumm @ 1:08 pm

Eventually the piper must be paid. For municipal governments, balancing the budget is a constant concern and one that is becoming more difficult reduced revenues have force many to cut funding for some core services. In Washington however, balanced budgets are not a concern, nor it seems is the staggering deficit that comes with massive spending programs that are unsupported by revenues.

Experts anticipate the national deficit will reach 10% of Gross Domestic Product (GDP) in 2010. Deficits are financed by the sale of Treasury Bonds issued to those willing to buy US debt. Financing this new spending requires the Treasury Department to sell trillions of dollars in new Treasury Bonds to provide cash to operate the government. As the recession has kept interest rates relatively low, it has been possible to borrow funds at reasonable rates, but now these conditions are changing – and not changing for the better.

Recent demand for US Treasuries has been relatively strong recently as well, owing to investor concern regarding the European Union’s handling of the Greek financial crisis. However as the EU gains control of the situation, coupled with increased demand for corporate bonds, those that purchase US Treasuries now have other attractive options. And many of them are no longer investing as much in US debt instruments the way they were.

To combat declining demand and attract investors, the US Treasury must increase the rates it pays on its debt. Costs of increasing interest rates will of course be borne by US taxpayers. Increasing rate trends are poised to continue as spiraling federal spending will only drive the deficit to unprecedented levels, compelling the US Treasury to compete even more aggressively to attract investors willing to purchase US debt.

How does this impact the rates consumers pay for water and water utility service? As noted, increasing deficits require the federal government to pay more in interest to finance ongoing government operations. More importantly, as US Treasury instrument rate comprises the “floor” or “risk free rate” this sets the ‘baseline rate for nearly all other major lending rates. Prime rates, mortgage, corporate bond yields and many other investments rely on this baseline to set their rates. As the “risk free rate” increases, rates on other investment instruments increase as well.

Water Utility Consultants are continually requested to develop plans that keep consumer rates as low as possible. Unfortunately, when the need arises to replace key infrastructure, the part of the cost that is financed will be more expensive. In the end, when local water providers must finance a project, the cost to end consumers will increase because of rising debt costs.

Municipal Bonds are a common financing vehicle for water and wastewater service providers and are the primary method by which providers can finance replacement projects and system upgrades. As the US Treasury rates have been relatively low, Municipal Bonds have been fairly reasonably priced as well. Now there is a significant upward pressure on these rates – as driven by the federal deficit – that should lead utility managers to expect higher costs for debt service and higher costs for Municipal Bond financing. In the end, a great deal of the cost for higher interest rates will be borne by consumers through higher water rates and fees.

Jason Mumm is a highly respected and important advisor in the area of Water Utility Consulting. Providing sound financial guidance to water utility companies, Jason helps improve performance and helps utilities manage water rates. Grab a totally unique version of this article from the Uber Article Directory

March 10, 2010

Water Utilities can Avoid Disaster when Replacing Infrastructure

Filed under: law — Tags: , , , , , , , , , , , , , , — Jason Mumm @ 7:38 am

As water and wastewater infrastructure ages and deteriorates, the cost of replacing it all becomes a growing concern. Replacement costs can be astronomical and, and it doesn’t help that many utilities have not planned for the inevitable expenditures for replacement. When providers cannot postpone replacement of this infrastructure, the high costs come as a shock to previously oblivious rate-paying customers. The resulting conflict between providers and ratepayers can be enough to cause gnashing of teeth for even large, well-heeled utilities. Unfortunately, the problem can occasionally be insurmountable for small water systems.

The EPA reports that water utilities serving fewer than 3,300 customers – make up nearly 85% of all water systems in the United States. For these systems, the cost of infrastructure replacements is more than large, it’s unbelievable. The small town of Lebannon, OR provides a good example. The cost of replacing Lebannon’s incredibly old water treatment plant is going to cause water rates to increase by 60% is only one example among many of how major capital replacement costs in one small town can lead to a significant increase in customer water rates.

When presented with such high cost for replacing important equipment and infrastructure, what should a small utility do? There are no simple answers. The seemingly endless supply of grant dollars for these systems has all but disappeared, meaning that in order to avoid a 60% rate hike, even small utilities have to plan ahead for their replacement needs. Back in Lebannon, OR, the old water treatment plant had been in service since 1946! Running at capacity, the plant was only able to stay one day ahead of demand. It is not surprising that the facility would need to be substantially upgraded or replaced at some point – at least some time around the 64th year of service.

Replacement costs and expenditures for major upgrades can be estimated by qualified engineers. Communities can initiate smaller scale rate increases to establish a fund in anticipation of these costs. Communities can also use these funds to establish debt capacity for financing of the total facility replacement cost. Planning for future replacement is essential for small utility and water providers that may not currently have cash funds or access to credit markets.

Massive and surprising increases to water service rates can be avoided by realistic financial planning done well in advance. Water Utility Consultants can help move the process along, but there is a great deal that local utilities can do without consulting help – beginning with understanding the need to plan. Accurately estimating the remaining service life of existing facilities is critical. Acquiring estimates for plant and facility replacement is also possible without too much additional help. Then, the utility has reasonably accurate information upon which to base future decisions.

As facility-life expectancy and replacement costs are understood and at least estimated, informed decisions can be made that may preclude imposing massive rate hikes on consumers. Utilities can then work within the community to research the best way to fund the replacement project and to set realistic expectations for future fee increases. Will most utilities have to increase service fees? Most likely, the answer to this is ‘yes.’ Although the costs are expensive, preparing in advance to replace aging infrastructure and establishing a solid financial plan to guide funding, utilities can avoid having to inform customers of sometimes staggering and unexpected fee increases. Utilities that wait until an integral facility becomes inoperable have narrowed their options to zero and are inviting trouble.

StepWise Water Utility Consultants assist water utilities nationwide improve operations and improve cash flow management in difficult economic times. Contact the Water Utility Consultants and Wastewater Consulting Experts at StepWise today! This and other unique content ” articles are available with free reprint rights.