Industry Insight and Management Advice from Thomas & Hutton

STRETCHING THE WATER BUCK

As municipalities scramble to work with what they have in this fragile economy, public leaders are expected to do more with far less.  Critical water/wastewater infrastructure projects continue to be at risk, mainly because most of the traditional programs that fund capital projects— collection of fees, such as impact and usage, as well as tax increment financing (bonds) and cash allocation districts—are all suffering.

Try as they might, municipalities often do not collect enough revenue for what they deliver and thus have a difficult time balancing cost accounting with revenue streams.  It’s a far too common theme.  However, there are ways to stretch the water/wastewater buck further than you might think possible.  Here are a few examples:

#1:  Tap the tap fee. Perhaps one of the least leveraged sources of potential revenue associated with water/wastewater facilities is the tap fee.  Given the costs associated with building, say, a new wastewater treatment plant, recovering only 25-50 percent of the cost through tap fees puts a tremendous strain on other funding sources to make up the difference.  Granted, neighboring communities will want to play up their low tap fees as a competitive advantage.  If out of the gate you create such a large discrepancy between capital costs and the revenue streams to cover them, you simply will not be able to bridge the gap without inflicting aggressive tax hikes or other potentially unsavory tactics.  The fact is, in most municipalities, tap fees are grossly undercharged and part of the problem is inadequate, up-front planning.  A proper rate study, early in the process, can go a long way in ensuring an adequate recovery rate as well as managing the expectations of the public.  Get an accurate read on what it will take to design and build the project so you can establish the best and most palatable methods for funding it.  If you wait too long, you may be forced into borrowing— and you better have a stellar credit rating if you end up on that road, otherwise you may be out of options.

#2:  Shine a bright light on sneaky, hidden costs.  Sure, most towns can figure out the standard costs associated with maintaining the operations of a plant (staffing, energy, chemical, etc.) to arrive at a seemingly reasonable user fee.  As you look beyond the more easily anticipated expenses, just know and accept that other costs are going to appear down the road, frequently with very little advance warning.  New regulations, for example, can quickly and unceremoniously throw off the delicate balance between infrastructure funding and infrastructure costs.  New monitoring requirements and the added paperwork that comes in tow will surely increase training requirements as well as operating time.  So, create a budget that can handle a few curve balls.

#3:  Right-size infrastructure assets, do not super-size.  Avoid making overly optimistic assumptions about potential growth, especially in this economic environment, or you will find yourself playing catch-up.  Even if you put together a fee impact model (recommended), if you overestimate growth, you’ll have a much tougher time recovering the capital costs associated with the building and maintaining of the asset. You may still collect the impact fees for a water/wastewater facility, for example, but the recovery will be stretched over a longer period of time.  That, of course, will impact your cash flow and you may end up having to supplement it with another source of revenue such as user fees. 

Building and maintaining critical water/wastewater facilities has never been more challenging, yet there is no rest for the weary.  What are you doing today to ensure that your community has the kind of infrastructure necessary to thrive tomorrow?

We’d like to hear from you!  Please share your feedback, impressions, and experience with us at info@thomasandhutton.com.

INFRASTRUCTURE CORNERS—TO CUT OR NOT TO CUT—THAT IS THE QUESTION

Whether it is staff reductions or program cuts, it is almost always a dicey proposition to scale back on a community’s infrastructure plans.  But there are some pros, as well as cons, associated with putting infrastructure on the back burner.  Here’s our take:

The Pros: 

• A penny saved is a penny (plus interest) earned.  As community programs get approved annually, it is tempting to leave a portion of the revenues in the bank to earn interest.  When money is saved in the bank for 10-20 years, it will generate significant interest and that can create additional discretionary spending for a variety of other programs and projects.

• Could be a politically safer play.  Sacrificing infrastructure investments in the short term could mean additional funding for what may be perceived as more critical community services.  Rusty pipes are one thing, but cuts in highly visible public services like police, fire, and even trash pick-up can create an immediate and significant political backlash.

The Cons:

• You may win the battle, but you will definitely lose the war.  There is no getting around it.  Putting off critical infrastructure needs will catch up with you.  If you expect your community to attract relocating and expanding industry, just know you will not be in the running for long with inadequate roadways, insufficient water and sewer, or any of the necessary permitting.  For example, if your treatment plant has limited capacity, you cannot expect to take 12 months to ramp up and capitalize on an opportunity, because that opportunity will probably disappear.  Most industries are on a tight time frame and are not going to wait around for you.  If you are not keeping the major items in the infrastructure system current, you will never be competitive with other more progressive communities in attracting new businesses. 

• And they all said I was crazy.  If Noah was alive today, he would likely tell you that his decision to build the Ark was not the most popular position he ever took.  But if there was ever a case of “I told you so” in the annals of history, the Ark would have to be it.  While there is seldom a public outcry to prepare for unlikely scenarios, there is no shortage of communities who have learned their Noah’s Ark lesson the hard way.  Whether it was New Orleans in the aftermath of Hurricane Katrina, or the more recent devastating flood events in Tennessee and New England, many community leaders wish now they had a second chance to make key infrastructure decisions.

           Pawtucket River floods in West Warwick, RI; President Obama declared a
     state of emergency for the entire state.

     

     The death toll in Nashville, Tennessee, increased as the waters receded. 
     At least 29 people lost their lives in the flood.

We recognize how hard it is to make the right infrastructure decisions given all the other critical community needs begging for attention.  Our suggestion is to make trade-offs when necessary, but select wisely.  Try to hang on as best as you can to infrastructure maintenance and cut the non-essentials first, like flower planting, fertilizing, irrigation, etc.  And if you can arrange the funding, try to take advantage of the historically low construction costs and low inflation and get ahead of the curve.

What’s your take?  Drop us a line at info@thomasandhutton.com.