Water Online the Magazine gives Water & Wastewater Engineers and end-users a venue to find project solutions and source valuable product information. We aim to educate the engineering and operations community on important issues and trends.
Issue link: http://wateronline.epubxp.com/i/255370
(tax regulations provide a formula for determining the maximum earnings rate on the reserve fund, which is typically slightly lower than the all-in cost of borrowing for the utility). In low-yield markets like today's, reserve funds tend to cost the utility money, as the earnings rate is less than the borrowing rate. Municipal Borrowing And Performance In addition to funding costs, public entities (including most municipal water systems) are subject to much greater public scrutiny than private enterpris- es. In part, public (and/ or political) account- ability may also drive rate costs down. Often public entities are viewed as less efficient than their corporate counterparts, but we've certainly found that is not always true. Public entities tend to be con- strained in their rev- enue growth (or ability to increase rates and charges) by executive or legislative bodies which seek to manage the overall tax burden on their constituents. Water and sewer utilities, which provide necessary ser- vices, tend to be further constrained, as it is not in the public's best interest to cut off those who cannot afford to pay. Public accountability with constrained growth tends to force a level of efficiency one might not normal- ly expect in the organization. Ultimately, most utilities do seek to run efficiently and often reduce operating and/ or construction costs through the use of outside vendors when high public employee wage requirements or oner- ous public procurement processes might drive costs up. Looking to the future, much has been made of the state of the water infrastructure in the U.S. and the need for significant capital upgrades. While many have focused on the overall financial health of the country's municipalities as the gateway to securing more water infrastructure funding, this is not always the case. As was stated earlier, water utilities are generally considered one of the highest credit entities in existence. If a utility needs capital investment and can derive the incremental revenue to support it, financing is most often available for those projects. The limitation in securing new capital generally is driven by the lack of incremental revenue. Examining the current revenue landscape for water utilities, it is important to segment those that have ample supply and those that don't. Thus, some utilities need conservation measures to manage supply, while others are facing customer conservation measures that result in declining revenues. Most water and sewer utility revenue models are consumption-based. Water charges are often based on a metered flow by pipe size and customer type, and sewer charges are often based on the metered water flow. Historically, increasing consumption could pay for additional capital needs or rising operating costs, and a rate increase was thought to directly correlate to a similar percentage increase in revenues. In today's water environment, we find rate increases are necessary to simply maintain revenues at current levels as consumption declines — leaving little, if any, incremental revenue to fund capital projects. To remedy this situation, utilities are looking to new revenue models to fund their growing operating costs and capital needs. New revenue models range from moving to larger fixed-charge amounts as a percentage of the bill to more esoteric models such as peak-set base rate models. The latter tends to smooth a utility's revenue or purchased quantity plans with higher rates for use above the purchased quantity. As the industry moves forward, it is important to ensure we continue to utilize the benefits provided to the sector through tax-exempt bond issuance. Tax exemption provides significant subsidies to the sector, which ensures water and sewer utilities can continue to provide safe, reliable services for years to come. Capital Funding wateronline.com ■ Water Online The Magazine 18 Jay Gorman, vice president in the Raymond James General Industrials Group, has more than 10 years of corporate finance experience, having worked myriad successful acquisitions, divesti- tures, joint ventures, partnerships, and other strategic initiatives for diversified industrial and basic manufacturing companies. Kevin Thompson is a managing director with the Public Finance Investment Banking group of Raymond James. Thompson has more than 25 years' experience structuring fixed-income securities for public and private entities. Photo credit: "Municipal Bonds," © 2014 LendingMemo, used under an Attribution 2.0 Generic license: http://creativecommons.org/licenses/by/2.0/ 1 6 _ V E R T _ 0 2 1 4 E Z i n e _ R a y m o n d J a m e s _ D G . i n d d 3 16_VERT_0214 EZine_Raymond James_DG.indd 3 1 / 3 1 / 2 0 1 4 1 : 0 6 : 4 7 P M 1/31/2014 1:06:47 PM