If yours is one of the thousands of departments that applied for but didn't receive American Recovery and Reinvestment Act of 2009 funding, you're not alone. The numbers bandied about while the legislation was negotiated raised more expectations than will be met.
Arizona received 300 applications totaling $1 billion in shovel-ready water and wastewater projects, but only $80 million in related stimulus funds. Based on the priority of applications, the state expects to be able to provide funding for only 51 projects.
Virginia received 240 applications totaling $20.1 million in drinking water funding and can afford to fund only 20.
Such shortfalls come just as the industry was hitting its stride in terms of proactive financial planning. Over the last decade, many departments had seriously begun addressing their backlog of renewal and replacement needs while providing for the infrastructure necessary to support regulatory and growth-related needs. It would be very unfortunate to lose this momentum.
The problem is bigger than any one player: Creative solutions are needed at the federal, state, and local levels. As illustrated on the next page, ensuring that financing is available for long-term needs is going to require multiple sources.
Fortunately, you can take steps to move the most important capital projects forward while minimizing the risk of negative financial fallout. Over the next year, PUBLIC WORKS will profile operations that are proactively managing their communities' infrastructure needs so you can identify elements relevant to your operation.
Future stimulus bills or other grant programs may emerge, but the nation's needs far outweigh what Washington, D.C., can provide in direct funding. But other federal action can help turn plans into reality. PUBLIC WORKS will be providing updates on these as well, both through this publication and a blog at www.pwmag.com.
Support for borrowing programs. Rep. Barney Frank (D-Mass.), chair of the U.S. House of Representatives' Financial Services Committee, is sponsoring several bills to help cities secure reliable access to the municipal bond market at affordable rates.
In particular, the Municipal Bond Insurance Enhancement Act of 2009 would provide up to $50 billion in reinsurance funds to help utilities that can't get private bond insurance. The theory behind the proposed legislation is that investors will be more confident about buying bonds from issuers with less-than-stellar credit ratings if the federal government provides an additional layer of insurance for the loan.
Raising caps on private activity bonds (PABs) to facilitate public-private partnerships. Instead of financing facilities for general public use, such as a bridge or courthouse, this type of municipal bond is issued for the benefit of, or due to the substantial participation of, a nongovernmental entity.
Certain types of private-activity bonds, including those issued to fund solid waste, water, and sewerage facilities, are tax-exempt but “qualified,” meaning they're subject to volume caps identified for each state. Since most states use them to support real estate projects instead of infrastructure, less than 2% has been spent on water and sewer projects nationwide.
Raising or eliminating the caps would encourage more private investment in public projects.
Extending stimulus loan provisions. Preliminary drafts of the federal state revolving loan program emulate provisions of the American Recovery and Reinvestment Act's water and sewer funding — such as dedicating a portion for principal forgiveness or negative interest opportunities — and add new provisions that would help with the financial crunch by, for example, extending the maximum repayment period from 20 to 30 years.
The programs' reauthorization would provide at least $20 billion in additional seed funding for loans and other financial support for water projects over the next five years.
WHAT STATES CAN DO
While states have financial challenges of their own, progressive leaders realize that strong cities and counties are critical to solving the financial crisis. They could help local officials move forward with capital programs by advocating a number of programs.
Pooled bond programs. Many states issue bonds on behalf of a “pooled” group of communities. Most participants have been small and mid-sized communities that want the higher bond ratings states typically provide but can't afford to do so unless they share issuance costs with like-minded communities.
But now, the financial crisis is prompting larger cities to participate in these state-sponsored bonding programs.
The Virginia Resources Authority, for example, issued $219 million in an offering that included such first-time participants as the Alexandria Sanitation Authority, King George County, Loudoun County, and York County. Standard & Poor's gave the bonds a AAA rating for senior debt and a AA rating for subordinate debt.
Stimulus programs or other direct funding. While balanced-budget requirements limit the opportunities for such programs, even limited involvement could help advance the most urgent capital programs.
Likewise, some states may ramp up their funding for revolving-fund loan programs or provide other direct funding to help keep critical infrastructure programs moving forward.
PROACTIVE LOCAL RESPONSES
Ultimately, the bulk of funding will continue to come from local taxpayers and system users. To maximize return on increasingly limited resources, consider one or more of the following.
Strategic financial planning. Reviewing various options and scenarios will help you work with elected officials to develop contingency strategies during changing financial circumstances.
For example, if your community hasn't participated in a state-pooled bond program or public-private partnership, now's the time to think about doing so.
Following a systematic financial planning process like the one illustrated on the previous page provides a framework for efficiently expanding the array of options considered and evaluating the funding options in light of the most important goals for the funding program.
Enhanced prioritization for capital programs. A slower economy means commercial/industrial customers are using less water, providing less revenue for many water and sewer utilities because volume-based rates constitute a significant share of annual revenues for most systems. A slower housing market means fewer hookups, which contribute as much as $15,000/home for some utilities.
When revenues are declining, it's more important than ever to identify and clearly present the value of a proposed project to meet stakeholder objectives. The most important can be advanced as revenues expand and the less important ones deferred.
Prioritizing helps you better articulate the specific value contributed by candidate projects as well as make the tough budget decisions when juggling the needs of a wide array of assets, including roads, bridges, buildings, and utility systems. A related strategy is enhanced risk analysis of existing assets to target limited resources on renewal and replacement projects that provide the greatest return.
Revenue enhancement. Consider offering a new product, such as service-line insurance for the portion of water and sewer lines on private property that are the responsibility of individual property owners.
Or recover expenses related to labor, travel time, and vehicles by charging full cost or closer to full cost for special services. Many departments charge only a fraction of the fully loaded cost for turning service on and off. Conduct cost-of-service studies and create new dedicated fees or adjust the fees for special services accordingly.
Or step up billing and collection efforts. Though it requires an up-front investment, technologies such as automatic meter reading ultimately improve financial performance by more accurately tracking water and energy use, getting bills out to customers more quickly, and enabling billing disputes to be quickly resolved.
Some jurisdictions are changing policy to more aggressively use collection powers to encourage timely payment of tax bills and user fees.
Enhanced tracking of projected vs. actual revenues. Given changing usage patterns by both residential and business customers, revenues from both taxes and user fees are unpredictable at best.
For example, a transit agency that depends to a significant extent on toll revenues to support its capital and/or operating budgets may find that projected revenues are less certain than in previous years because of declines in traffic.
Implementing more frequent updates to revenue tracking is important to maintain sufficient reserves and working capital. Also, more detailed customer tracking — such as surveys to more precisely identify what percentage of toll system users are commuters going to and from work vs. tourists vs. non-commuting local riders — may be warranted.
Learning from peers and industry research such as the analysis of effective utility management recently completed by the EPA, several water industry associations, and a number of utilities.
The products of this collaboration include a primer that identifies financial viability as one of 10 critical aspects for a sustainable utility, and identifies key elements of financial viability, such as understanding of full life-cycle costs.
The primer, as well as a case study book and related working papers and reference documents, are available at http://watereum.org.
Next month: A utility lightens the load on city's general fund by creating a dedicated stormwater management fee.
— Matichich (email@example.com) is global technology leader, Financial Services, for engineering firm CH2M Hill.
Plan now to borrow (or raise rates) later
Depending on access to, and the reliability of, funding sources as well as equity to stakeholders and customers, each phase of a capital project or program may require more than one source of funds.
Some phases require combinations of sources. The check marks below show one potential strategy for financing a project's entire life cycle. For example, under the “implementation” column, funds for construction might come from the American Recovery and Reinvestment Act of 2009, long-term borrowing, and other sources of revenue, particularly if the project is to be built in stages.
Develop several strategies that span inception through operation. The advantages and disadvantages of each will be much easier to identify and consider when you're formulating an action plan.