CFGFOA Meeting Orlando, Florida March 29, 2019 Nick Smith, CGFM 1 - PowerPoint PPT Presentation

CFGFOA Meeting Orlando, Florida March 29, 2019 Nick Smith, CGFM 1

Some Questions 1. What is Affordability? 2. How is it Measured? 3. Why Are We Discussing It? 4. How Do We Address It? 5. Will It Be Easy? 2

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What Is Affordability?  Ability to pay water and sewer bill  “Can they pay?” not “will they pay?”  Typically not referring to an individual, but a grouping of customers 4

Affordability Measurement  Annual water and sewer bill compared to income  Median Household Income (MHI) is the common income measurement  Environmental Protection Agency (EPA) Guidance of 4.5% 5

Measurement – Rating Agencies  Fitch – MHI, 2.0% combined water / sewer bill  Moody’s – No quantitative measurement  Standard & Poor’s (S&P) – Market Position Assessment  Uses Median Household Effective Buying Income (MHHEBI)  Takes MHHEBI and poverty level into consideration  Scores from 1 to 6 (strongest to weakest) 6

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Issues with Current Measurements  The issues are not at the median  Most rates are affordable when compared to MHI  Various income distributions and poverty thresholds  Some customers do not receive a water bill directly  “Hard to Reach” customers  Typically passed on through rent  Does not take other factors into consideration  Housing  Healthcare  Other essential services 8

Other Measurements  Affordability Ratio at the 20 th income percentile (AR20)  Dr. Manny Teodoro, Texas A&M  Takes into other essential household expenses, persons per household, income, and essential water and sewer service  Minimum Wage Hours  How many hours does it take to pay for essential service?  Poverty Level Income 9

Issues Facing the Water Industry % Ranked Critically Ranking Issue Important Renewal and Replacement of Aging 1 Infrastructure 64 2 Financing Capital 55 Public Understanding of Water Systems and 3 Services 50 Long ‐ term Water Supply 4 50 Public Understanding of the Value of Water 5 44 2018 State of the Water Industry Report. AWWA 10

Aging Infrastructure 11 Source: American Society of Civil Engineers (ASCE)

Government Spending Source: Public Spending on Transportation and Water Infrastructure, 1956 to 217 . Congressional Budget Office 12

Stagnant Purchasing Power Source: For Most U.S. workers, real wages have barely budged in decades. Drew Desilver 13

Increasing Rates Source: For Most U.S. workers, real wages have barely budged in decades. Drew Desilver Source: 2017 Cost of Clean Water Index . NACWA 14

Views on Water “The human right to water entitles “…the right to safe everyone to sufficient, safe, and clean drinking acceptable, physically water and sanitation as accessible and a human affordable water for right that is essential for personal and domestic the full enjoyment of uses.” life and all human rights.” ‐ 2010 United Nations General Assembly Resolution 15

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Customer Assistance Programs  EPA defined CAPs  Bill discount  Flexible terms  Lifeline rates  Temporary assistance  Water efficiency 17

Who Benefits from CAPs?  Typical customers targeted by CAPs  Low ‐ income (most common)  Customers Undergoing Hardship  Senior citizens  Disabled  Military 18

Opportunities of CAPs  Ability to retain customers  Consistently collecting lower sales revenue as opposed to infrequent collections  Cost avoidance  Collection of bad debt, arrearages, etc.  Shutoff costs, labor, etc.  Addresses potential political opposition  Rate increases less likely to disproportionately affect low ‐ income customers with a program in place 19

Challenges of CAPs  Process may be confusing for customers  May need additional outreach and education  May reduce signaling for water conservation pricing  Balancing revenue stability with eligibility and targeting  Increased social burden for utility staff  Funding 20

Legal Pathways  2017 study completed by the Environmental Finance Center at the University of North Carolina at Chapel Hill  Navigating Legal Pathways to Rate ‐ Funded Customer Assistance Programs  Created as a roadmap to help utilities navigate the legality of funding CAPs through rates 21

Noncommission‐Regulated Utilities Source: Navigating Legal Pathways to Rate ‐ Funded Customer Assistance Programs: A Guide for Water and 22 Wastewater Utilities

What Are Our Options?  Introduce legal language that expressly allows rate ‐ funded CAPs  Argue why a CAP is not affected by limitations / challenges  Use another funding method  Donations, round ‐ up policies, etc.  Tax revenues / general fund 23

“Express Language” Example  DC Water and Sewer Authority  D.C. Code § 34 ‐ 2202.16(b ‐ 1)(1) ‐ (2)  “…shall offer financial assistance programs to mitigate the effect of any increases in retail water and sewer rates on low ‐ income residents of the District, including a low ‐ impact design incentive program” 24

“Not Affected” Example  City of Atlanta Department of Watershed Management  Atlanta City Code §6 ‐ 306,  Authority to “annually appropriate and donate money, derived from taxation, contributions, or otherwise, for and to any corporation, company, association, or institution for purely charitable purposes.”  Georgia Supreme Court case law supports business case 25

2018 Federal Poverty Level (FPL) Number of Children Family Size None One Two Three One Person $13,064 N/A N/A N/A Two People 16,815 17,308 N/A N/A Three People 19,642 20,212 20,231 N/A Four People 25,900 26,324 25,465 25,554 Five People 31,234 31,689 30,718 29,967 Source: U.S. Census Bureau 26

Case Study #1 – Detroit  Water Residential Assistance Program (WRAP)  Assistance up to $1,000 per household  $25 monthly bill credit  Home water audits  Home repairs up to $1,000  Must be at or below 150% of poverty threshold 27

Case Study #2 – Philadelphia  Tiered Assistance Program Upper Limit Monthly Percent of FPL Bill (TAP) 50% 2%  Water bill based on income 100% 2.5% compared to federal poverty 150% 3% levels  Various other programs  Zero interest loans on repairs  Conservation assistance  Payment agreements 28

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Types of Charges  Account Charge  Billing and customer service related charges  Base Charge  Accounts for fixed costs associated with capacity, peak flows, etc.  Variable Charge  Accounts for costs that vary based on quantity of water used and other costs not included above 30

Fixed Charges  Fixed charges promote revenue stability  Does not fluctuate with consumption  Rating agencies view higher fixed charge recovery as a strength  Some utilities use minimum charges and include a flow allowance within the base charge  Higher fixed charges may disproportionately affect low ‐ income customers 31

How Utilities Respond to Cost Recovery Needs Rank Category Response ‐ % 1 Shift more of cost recovery to fixed fees 33 2 Change in growth related fees 25 3 Shift to increasing block structure 16 4 Increasing financial reserves 14 5 No changes 11 5 Implement rate stabilization reserves 11 6 Revenue diversification 6 7 Incorporating seasonal rates 5 8 Shift to decreasing block structure 2 Source: 2018 State of the Water Industry Report. AWWA 32

Typical Rate Structures  Decreasing block  Uniform volumetric  Increasing block  Increasing ‐ decreasing block  Flat rate 33

Rate Structure Survey Rank Rate Structure Response ‐ % 1 Increasing block 50 2 Uniform volumetric 29 3 Decreasing block 16 4 Increasing ‐ decreasing block 4 5 Flat Rate 1 Source: AWWA Water and Wastewater Rate Survey 34

Increasing Block Structure  Promotes conservation  Lower priced initial block  Certain levels of use are quasi ‐ fixed so a portion of fixed charges may be allocated to variable  High consumption customers contribute to increased fixed costs over time  Allows low ‐ income and low use customers to affect their bill  May reduce revenue stability if conservation signals are followed 35

Water Budget Rates  Form of increasing block rate structure  Based on estimated water needs of the particular customer’s efficient use  Charged based on efficient and inefficient use  Two customers could pay different amounts for same use  Requires more customer data  Often more costly to implement 36

Lifeline Rates  Another form of increasing block structure  Subsidized first block to cover basic water needs  Often priced below marginal cost  Low income does not necessarily mean low use  Can apply to all of the residential class  Not targeted to low ‐ income customers 37

Using Data – Detroit  Shutoffs have an inverse relationship to income  Inability to pay increases, but at a decreasing rate when comparing total bill to income  Link between income and usage  Low income customers had low usage  Case to be made for increasing block structure  Lower first block rate directly reaches low income customers 38