Burn Water Districts

BOILING: HOW RISING INFLATION COULD BURN WATER DISTRICTS

Whether at the gas pump or in the grocery store, we all notice when prices rise and fall. A little inflation is a sign of a healthy economy. Too much inflation signals that too many dollars are chasing too few goods and services. Inflation pumps up prices, deflates the value of savings, and can seriously undermine a water district’s planning and financial plumbing in surprising ways.

Inflation Trends. For years, the U.S. has seen relatively weak inflation, averaging 2.25% annually since 2000, slightly lower than the average of 2.92% inflation rate since 1900. Low inflation has been good for consumers and water districts, which have seen low interest rates. However, since 2021, prices increases have been less predictable. The pandemic, a housing boom, and an energy crisis caused by Russia’s invasion of Ukraine have all contributed to the highest inflation in over 40 years.

Index Issues. Certain types of price increases, and inflation, matter to water districts more than others. The price of pizza may not matter, for instance, but the price of pumps and steel can be game changers. The U.S. Federal Reserve and the Bureau of Labor Statistics measure inflation and track indexes or bundles of goods and services. The two main indexes are the Consumer Price Index (CPI) and the Producer Price Index (PPI). CPI includes items like pizza, gas, house prices, doctor bills, water bills, and other costs paid by ratepayers but not utility districts. PPI includes items like labor costs, gas, office rents, employer health insurance premiums, chemical costs, and other goods and services paid by businesses.

In 2021, PPI increased by 9.7% while CPI rose by 7.0%, so inflation has been even worse for water districts than ratepayers. Some water districts may face less exposure to inflation than others, depending on how the districts’ contracts and project cycle. Many water districts obtain goods and services under contracts that provide some initial buffers. Such price increases may also undo engineering estimates, bonding capacity, and other planning considerations.

Caustic Concerns. Districts may see steep increases in operations and capital costs as new contracts include updated terms for pricing, reflecting the rise in PPI. Chemical prices of key inputs, like caustic soda, increased by more than 15% in 2021, which will drive water district operational costs up sharply. A shrinking number of licensed operators and a tight labor market will likely require wage increases. Not many parents encourage their children to pursue careers in wastewater treatment.

Coping Mechanisms. Districts, and water utilities in general, will need to think carefully about how they respond. Facing potential rating downgrades, the City of Houston set its rates to rise annually based on

a “capped” PPI index in 2010. This indexed rate-rise saved ratepayers money over time because repair costs and the cost of borrowing would have been drastically more expensive without the indexed increases. Access to capital allows utilities to build when prices are low and operations are more flexible. When contracts are too favorable to water utilities and resources are scarce, contractors, especially vendors, will be under pressure to sell to whoever is offering to pay the best price. When a vendor does not have enough resources to cover all its contract obligations, the buyer with the “best deal” is often the first to get cut off. The only thing more expensive than paying higher prices for key commodities is going without. Re-procuring commodities and services can be extremely costly, so working with operators, engineers, attorneys, and financial advisors, to maintain operations and prepare for the future, while frustrating, will be critical. AWBD plans to offer more information and professional advice on dealing with inflation between now and annual conference.

Federal Reserve Bank of Cleveland, Inflation 101 (accessed Feb. 28, 2022) https://www.clevelandfed. org/our-research/center-for-inflation-research/ inflation-101.aspx

AWWA, Rate Survey: Water Cost Increases Outpacing Other U.S. Goods and Service (May 9, 2019) https:// www.awwa.org/AWWA-Articles/rate-survey-water-cost-increases-outpacing-other-us-goods-andservices

World Bank Blogs, On Inflation and Water Tariffs: What are the Trends? (April 17, 2022) https://blogs. worldbank.org/water/inflation-and-water-tariffswhat-are-trends H