Water Infrastructure Finance Commission

Working Group 1: Current Water Infrastructure Needs and Long Term Challenges
Tuesday, February 22, 2011 1pm
State House, Room 350
Approved minutes

In a meeting duly posted, Working Group One (Current Water Infrastructure Needs and Long Term Challenges) convened at 1pm in the Senate Reading Room of the State House.

Members attending: Rep. Carolyn Dykema, Chair; Becky Smith, Bill Callahan, Phil Jasset, David Tery and David Riedell.

Also attending: Jen Pederson, Marianne Connolly and Pam Heidel from MWRA, John Clarkeson from EEA. Leah Robins from Rep Dykema’s office and Lee Murphy from Pennsylvania.

Representative Dykema, Chair opened the meeting at 1:20 welcomed members and guests.

Minutes from meetings held on February 2, 2011, January 11, 2011 and December 14, 2010 at the State House were accepted unanimously.ee Murphy was introduced by Rep Dykema who noted his work at the US EPA in Pennsylvania heading their state-level study, his 16 years managing Pennsylvania’s SRF and focus on asset management.  Mr. Murphy began with a power point presentation which will be submitted to the commission’s records.

The challenge of this commission, as it was in Pennsylvania, is to both get attention on the problem of deteriorating infrastructure AND promotes good solutions.

In Pennsylvania, biggest needs identified in order:

• renewal of existing infrastructure in developed areas
• efficiencies were a huge piece of their recommendations with suggestions like changing the required bid process to the federal level to cut down on paperwork for municipalities

Becky noted that this could be a moment to pivot into new technology and wondered if that was a consideration for PA.  It was included in the report but not the draft legislation

Understanding the infrastructure need is not as simple as comparing EPA needs survey to SRF and other state funding sources

• EPA needs survey:         No Operation and Maintenance OR debt service

Only capital costs

Supposed to look out 20 years, more realistically 5-10 years of data

• SRF  nationally accounts for 15% of what is constructed (in MA where we leverage, that % may be higher), there are other sources of state and federal funding

Need to wrestle with the entitlement mentality from cities and towns (often tied in with unfunded mandate arguments), need to partner with communities to empower them to start filling the gap rather than waiting for federal government.  Construction Grant program part of the roots of this issue.  It ran from 1972 Clean Water Act through 1987 and tapered off in the 90s.  $2.4 Billion in its heyday with 75% of project costs often being covered.  Federal dollars are now in a downward trend and the need is only increasing.

Gap in funding

(Capital + O&M + debt service) – Revenues = gap

Tighe and Bond Water/Sewer Rates Survey may be a key to this puzzle.

In Pennsylvania gap information used to inform state program

• Compare gap to median income system by system to see how much could be reasonably covered by rate increases
• PA SRF coordinates with Pennvest which targets funding of projects to systems whose projects cannot be funded by reasonable user fee based on MHI (reasonableness different for each community based on formula set in legislation and regulations).  More information about this program is forthcoming from Mr. Murphy.
  • If systems can afford a project with user charges, then no subsidy is offered.
  • Wealthier communities have a higher %MHI considered “reasonable”
  • Not necessarily a ceiling/floor of 1.5% across the board, wouldn’t be wise in all systems
  • Communities that are not at the suggested user charge won’t be as competitive in securing subsidy funding
  • Other than issue of equity, there may be no need to give communities funding if they can afford the projects through reasonable rate increases

2002 EPA Gap Report

• Shows nationally what the gap is.  Crude modeling can’t be separated out by state, limited details but a real eye opener of a study.
• Introduces the concept of how small rate increases can be a huge help
• Showed the title wave of replacement needs coming in the near future

How did PA create their gap analysis?

• Assume that rates cover O&M and debt service
• Assume that even though some portion of debt service paid off within 20 years, evens out by not including pay as you go projects
• Deferred needs not reflected in the study
• Random sample of 358 systems, 125 were completed
  • Time and cost intensive
  • Low statistical reliability, not truly random

PA Gap results:

$113.6B Total 20 year needs (O&M, debt service, and capital)

-$69.8B revenues (at current rates)

$43.8B gap

• EPA needs survey is about ½ of what random survey data showed
  • Why the variation?
    • EPA WW documentation is very strict, takes a huge effort to get it all done and supposed to get information from 100% of systems; not all systems cooperate equally
    • EPA DW allocation is a sampling of all systems rather than reaching out to all
      • Considered to be a better survey, more focused on sustainability that encourages states to work with EPA but still very detail orientated
  • Is it possible that stimulus project need is not reflected in EPA need and accounts for some of the gap?
    • Not likely
  • Concern:             EPA needs (assume just covers capital)

+ current user rate (assume covers O&M and debt)

Sum won’t get us to a number similar to PA, still some other capital cost that we aren’t covering

Suggested that Tighe and Bond Water/Sewer Rates Survey may be a missing piece (noted that it overestimates water use to be 90,000 gallons/year) OR that we could incorporate into that other sources of data like the MWRA Advisory Board Water and Sewer Rate survey.  Absent survey information from each system, assumptions will need to be made transparently and defensibly.

Drinking Water Gap graph

• If systems with a gap are required to increase their rate gap goes down dramatically until only small communities are left with a gap—public policy decision for how to address
• Played with what is “affordable” no specific guidelines from EPA since if you have pollution/public health concern it has to be fixed no matter the cost
• PA Governor tast force suggested 1.5% but seen as a guideline
• Gap in each community depends on rates as % of MHI; town by town variation

Waste water address

• Again able to address the bulk of gap with rate increases

Discussion several times about how to consider MWRA communities and if they can be seen separately from MWRA

Rate increases

Both charts set a strong argument for increasing rates, but the hard sell each utility will face in making that case was addressed, strong education campaign to public and industry will be crucial

Mr. Murphy noted that in draft legislation there is requirement for each system to include a customer assistance program.  No details for how to set up, but gives the license to create a fund to help poor pay for the increased costs.

Key task force recommendations that garnered further discussion

• Asset management requirement, pulled literature from EPA report
• Replacement account would be a rainy day fund for each system; ultimately not put into draft legislation since communities could take $ for other purposes at the end of each year
• Technical assistance is already included in DW SRF but there is not anything comparable for WW (27% required by EPA to be set aside, almost all communities in MA participate, concern is that that $ doesn’t circle back through the fund, a big impact over time
• Maximizing non-structural/conservation is a culture and industry shift of mentality, education component will be key

National efforts, was planned to include gap analysis as an option for 2011 SRF but EPA can’t afford it with potential budget cuts looming

Options for MA

Combination of sampling and modeling

• Be careful if sampling to not let too many questions be tacked on that don’t relate to gap
• Off the cuff, guess that modeling alone can be just as accurate but wouldn’t be able to calculate statistical reliability
• Assumptions made need to be both reasonable and transparent

Who does the work?

PA did all of it with state employees

How precise do you need to be to galvanize action?

• What it took to galvanize action was a big number
• More confidence in WW since there were more responses, but as long as you are honest about assumptions folks are more likely to trusts
• PA assumptions:
  • that rates don’t consider capital costs
  • that capital costs are mainly replacement, not building out to serve new rate payers

Next steps:

• Turning our numbers into graph when possible noted as a huge help moving forward in building consensus, Mr. Murphy will provide excel spreadsheets to simplify our process.
• Considering who may be best situated to do the number crunching
• Upcoming meeting scheduled for March 3^rd with EPA to discuss the RDA communities

Meeting adjourned at 3:30.