investment

H2O Update and Comments for City Council

This week in committee session City Council voted to move forward with Plan C from the proposed water rate restructuring plan presented by the Water Division. The full council will likely vote in the next couple of weeks to approve and move forward with the rate increases as of January 1, 2016. The media is mostly portraying this as a 12% rate increase in 2016, which is true, but is only one piece of the story. The images above are the slides from the full presentation given on August 26, 2015, by the Water Division. Slide 14 shows the increases that will occur over the next 5 years, resulting in an increase of just under 30% from 2015 to 2020.

A quick reminder that the goal of this increase is to help return Water Division reserve funds to $3M, by providing an additional $1M in revenue each year over the 5 years. The reserve funds are intended to allow more pipe to be replaced each year and also to cover unexpected water main breaks. I'm not going to revisit all the reasons why this is not likely to actually occur, this already is my 3rd post about water mains, so feel free to check out earlier musings. But I do have a couple of new items for your perusal.

First: Sunday, October 11, there was a water main break on North Church. These breaks happen fairly often, but this break was special in that it was well documented and photos and video were shared by a resident who lives on the street where the break occurred, a resident who happens to also be the Mayor of Rockford. You can see his video of a river flowing down North Church and pictures of public works staff working through the night to dig up and replace the 75+ year old pipes on his Instagram feed. (You can also see my hopefully not too snarky comments on his video...)

Second: A few weeks ago I did a little more research and put together a spreadsheet comparing the population of Rockford to the miles of water main, from 1860 to the present. Please note -- the population data fell right on the decade, while the water main data fell in between the decades (2005, 1995, 1985, etc.), so the timing of the data isn't as precisely aligned as the spreadsheet portrays. But the trends are obvious enough, even with that discrepancy.

Since 1970, Rockford's population has increased about 1.2%. The size of our water system has increased 112%. We've gone from 14.5 feet of water main per person to 30.45 feet of water main per person. And of course pipes aren't the only component of the infrastructure system, pipes go along with roads, sidewalks, power lines, sewer, curbs, etc. So each person's share of the bill to maintain all this stuff has increased exponentially over time. Let me remind you that the current proposed water rate increase is only intended to help address pipes that were laid before 1950; it's almost too painful to even think about what type of rate increase would be needed to address those pipes post-1960.

If I'm able to get my name on the public comment docket, I'll be making remarks at City Council this coming Monday. I will voice my support of the rate increase but also my opinion that it's a wholly incomplete solution, another band aid on a system that has been irreparably broken for decades. The capital structure must change, the development pattern must change, the hard decisions must start to be made today, not put off until whole neighborhoods need to be evacuated to other areas of the city where services are still intact. (I'm not being dramatic. See EPA study of Saginaw, Michigan's "Green Zone", with 72% property vacancy, where the city is proposing decommissioning infrastructure.) There's a lot more I want to say, but three minutes is pretty short. Do you have any suggestions about what I should or shouldn't say? Feel free to comment below. I in no way think my comments will have any impact, but heck, I'd love for someone to know that citizens are actually reading the CIP and studying the reports, and that we're watching and listening to see if our leaders are willing to truly take on the big issues or just keep kicking that can.

I'll post my comments here next week.

We've Done Ponzi Proud.

We've probably all heard of a Ponzi Scheme, and have at least a vague understanding that it's a type of investment we want to avoid. Named for Boston businessman Charles Ponzi (who promised investors a 50% return in just 90 days based on arbitrage in International Mail Coupons) these deals snag investors with promises of high, consistent returns, and little to no risk. 

Charles Ponzi, 1920. Via  Wikipedia .

Charles Ponzi, 1920. Via Wikipedia.

And for a while, these schemes can actually deliver on their promises -- as long as the pool of investors continues to grow exponentially. There is no legitimate "business" here, no real sales or creation of wealth; the scheme depends on paying returns out of new investments, rather than profits. Without a constant influx of new investor dollars, a Ponzi scheme will fall apart and the promotor will be caught or disappear.

Photo via WREX, story and news coverage  here . There were many more empty chairs than pictured here, only 6 residents attended the meeting.

Photo via WREX, story and news coverage here. There were many more empty chairs than pictured here, only 6 residents attended the meeting.

Last Wednesday I attended a Community Input session held by the Water Division of the City of Rockford. The purpose of the meeting was to solicit feedback on proposed rate hikes which are intended to provide an additional $1M for the "Water Pipe Replacement Program" which currently accounts for about $1.5M of the Capital Improvement Plan (CIP) funds allocated to the Water Division. (view full 2015-2019 CIP; Water Division begins pg. 76). 

Tim Holdeman, Water Superintendent, explained the expanse of the water system and the various threats that impact the City's ability to reliably provide the highest quality water to all residents. These threats include the size of the system (850+ miles of water mains, 26 wells) and decrease in water usage (due to increased industry efficiency, decreased number of residential users, better water conservation by business and residents, recent cooler, wet summers, etc.) resulting in decreased revenue. But the major threat is the age of the mains. Here come a lot of statistics, stick with me, I'll try to be as brief and as clear as possible.

Slide from Water Division presentation, graph showing miles of pipe at each age range.

Slide from Water Division presentation, graph showing miles of pipe at each age range.

The average life expectancy of a water main is 70 years. About 20% of the City's water mains are older than this, some as old as 120 years. According to the current CIP, "Replacing all the water mains older than 70 years would cost approximately $200 million...replacing the highest risk water main would cost approximately $21 million." But wait, there's more! According to the flyer distributed to residents along with our water bills, "The City should be replacing 3-4 miles of water pipe per year. Currently we are replacing about 1 mile per year. It costs between $1.5 to $2.5 million per mile to replace water pipe." Feeling nervous yet? We're just getting started. Back to the CIP: "Because the capital improvement needs are so much greater than available funding...the highest priority projects are considered for further analysis and funding. If the funding is available, the project becomes programmed...then...it is taken before City Council where if approved it becomes committed....A project may also be driven to become programmed or committed based on roadway projects that are committed by other Divisions or State entities....The cost of committed and programmed projects for 2015-2017 are about twice the Water Replacement and Improvement Account (WRIA) budget." 

Let's take a step back and consider this information, taken word for word directly from the City's own documents. Pipe that is 70+ years should be replaced, and we've got 120 miles of that. We'd need $200M to do it, but currently we're spending only $1.5M a year. At this rate it will take 133 years to replace the pipe that right now, today, is already 70+ years old.  And you're only asking for $1M more each year for the next 5 years? Holy Sh*t we've got a problem on our hands.

Compound this problem with the fact that, as the CIP states, projects are often added on to the WRIA budget based on other projects, typically road work (when it makes sense to replace mains if the road is already torn up). But these are projects that the Water Division cannot necessarily anticipate, projects which may not replace the mains that are at the top of the priority list because they are at the highest risk of failure. The 2015 CIP WRIA budget is $5M, and the project breakdown lists 10 committed and 9 programmed projects, for a total of just over $9M, or a deficit of over $4M. Currently the 2019 CIP breakdown lists only 3 committed and 2 programmed projects with a projected surplus of $3.3M; I asked Mr. Holdeman how likely it is that the 2019 project list will expand to meet or even exceed the number of projects in the 2015 and he responded "Very likely." 

Slide from Water Division presentation, graph shows number of repairs to water system. 

Slide from Water Division presentation, graph shows number of repairs to water system. 

Compound this problem yet again with a series of very cold winters, and overall repairs increasing by 30% (not surprising considering all the other factors). The Water Division attempts to hold reserves of $3M to address unexpected breaks, but Mr. Holdeman stated that in the winter of 2013 alone unexpected main breaks used up $2.2M of the reserves; add right on top of that the fact that reserves are being used to pay for those pesky unpredictable committed and programmed projects. 

So, where does that leave us? And why did I begin this tirade by defining a Ponzi scheme? Consider carefully the language used on the City's website: "The City of Rockford Public Works Department is pleased to present the 2015-2019 Improvement Program, which proposes $139M of infrastructure investment throughout the City." Here, investment and improvement are very loaded words. "Improvement" implies that the work to be done will leave the system better than it was before, more ready to provide the service for which it was intended. In the case of WRIA, the improvement is so negligible in light of the size of the system and the scope of the problem, it barely registers. 

Screen Shot 2015-08-29 at 9.24.19 PM.png

And "Investment"? For over a century the people of Rockford have been investing in a system that was flawed, faulty, doomed from the start. A system that promised little to no risk and depended totally on the expansion of users to fund not reinvestment in the original system but growth, growth, growth. Sound familiar?

Take another look at the graph of the age of pipes in our system. The pipes that are 70+ years old are certainly a problem. But I see another problem that is just a few short years down the road, certainly fewer than 133 years down the road. There are nearly 500 miles of pipes that are 20-70 years old, and where did the return on the "investment" of building those pipes go? Was it paid back to investors with interest? Well, if you count being able to turn on a faucet or flush a toilet a "return on investment", perhaps, but that's not really a return on investment, it's a service in exchange for payment. Did the return on investment at least go back into the water system, to maintain and replace older pipes? Ok, one more recap (and I promise it's the last): 120 miles of pipes 70+ years old, an out of balance CIP, and proposed rate increases that won't even make a dent...honey, we're in over our heads and the lifeguard is very busy fixing a parking garage (which, by the way, has little chance for a return on investment, either). 

We've done Ponzi proud, folks. And I'm not blaming the current administration, the trouble started long before them. For decades we've been buying into a flawed development scheme that "entices cities to exchange near-term cash advantages of new growth for the long-term maintenance obligation..." and the failure of our cities to remain solvent, to provide the most basic of services to their residents, is a serious problem. But it's only part of the problem, because our cities, including Rockford, continue to buy into this scheme, the promise that just building one more road, widening a few more lanes, allowing new development to add 8-9 miles of pipe to the City's maintenance obligations a year, will somehow right the ship.

I have a call in to Mr. Holdeman with a few more questions, mostly because I want him to tell me I'm wrong, that the system isn't as doomed as it appears (I'll amend this post with any answers that add light to the situation). He, like most city employees I have encountered, is a pleasant, capable, intelligent person who is committed to doing their best for the City of Rockford. But the system? It's broken, y'all. If I thought doubling our bills was the answer, I'd gladly pay twice as much for water service. But the choices are going to get much, much harder than that before this Ponzi scheme crashes and burns (and by then, our water system may not be reliable enough to put the fire out).

*The infrastructure/Ponzi scheme analogy isn't mine, thanks to Strong Towns for that*

**As of 8/31/15 the Water Division is still accepting comments on the proposed rate hike. I encourage Rockford residents to take their brief survey and if this post helped inform your responses in any way, let me know in the comments below.**