Author: Austin Thompson (Page 1 of 2)

Austin is a project director at the Environmental Finance Center at UNC Chapel Hill. She recently graduated with a Master's of Environmental Management from Duke University's Nicholas School of the Environment. In her spare time, she enjoys racing road bikes and spending time outdoors.

Financial Resilience: Tools to test a utility’s ability to “weather the storm”

These are unprecedented times. As the COVID-19 pandemic continues, social norms have changed and unemployment has risen sharply across the nation. As states have pushed residents to stay home, water usage patterns have altered for both commercial and residential customers. In many cases, commercial customers have decreased use while residential customers have increased. Schools have been closed for months, some of which are the largest water customers in a small town or county. Executive orders have been passed, mandating that service cannot be cut-off for non-payment.

In short, revenues have changed. The level of change varies based on the makeup of the utility’s customer base and the specific hardships within the area, but the change exists in every case. These changes in revenues are typically associated with losses, meaning that budget predictions are off and the actual revenue collected will be much lower than planned.

Utilities will need time to recover these losses. But how do we measure a utility’s ability to bounce back? Bring in the buzz word: Resilience.

At the EFC, we see this pandemic as both very different than anything the US has ever experienced, and also very similar to some of the short-term shocks experienced by utilities in past emergencies. For example, a drinking water utility serving a coastal community that has been walloped by a hurricane.  In both cases, utilities that are more financially resilient are more likely to bounce back faster. Continue reading

Environmental Impact Bonds: Where are they now?

In 2017, the EFC wrote about an exciting new financial instrument: the Environmental Impact Bond (EIB). At the time of the original blog post, EIBs were mostly theoretical, the only one in existence being issued by DC Water, but still very early in the process. Modeled after the Social Impact Bond, an EIB was novel and intriguing. Today, EIBs remain exciting, but more of them are beginning to surface. EIBs are tied to a group, Quantified Ventures, that structures the bond and has been pushing the ball forward.

The first EIB, issued by DC Water, aimed to address combined sewer overflows (CSOs) and a consent decree by utilizing green infrastructure, instead of the traditional gray infrastructure. The EIB allowed DC Water to share the risk of an unconventional project with impact investors, in this case Goldman Sachs and the Calvert Foundation. This works through a “pay for success” model, which creates a performance payout system that aligns the interest of the utility/municipality with that of the investors. The EIB creates a situation where otherwise risk-averse local governments can think outside the (gray infrastructure) box. Continue reading

Visualizing the Value (of a State Revolving Fund Loan)

Imagine a town called “Smallville.” Smallville, as you might guess, is small. The town’s water utility needs a new water tank, and they need it now. Like most systems across the US, Smallville’s system is aging and has significant infrastructure needs. Smallville generally knows the assets that are most critical and has assigned a level of risk to each. The numbers say that Smallville needed to replace the tank a few years ago, and failure is imminent. The tank will cost Smallville $400,000.

So, what does Smallville do? The utility does not have a lot of cash on hand and has historically relied on grants to supplement the funding package for infrastructure replacement. The customers are just like those across the county–sensitive to rate increases. Unfortunately, Smallville has felt the reduction in available grant funding and worries that even if the utility does get a grant for the tank that the asset could fail during the “waiting” period between applying for funds and receiving them. Continue reading

Municipal Finance in a Pandemic: How is the Market Responding?

Municipal Bonds & COVID-19: What is going on?

Prior to the outbreak of COVID-19 in the US, the municipal (“muni”) bond market was strong. Investors looking for a non-taxable rate of return were hungry for municipal bonds, driving interest rates down for borrowers (state and local governments) and pushing more debt into the marketplace. Most governments have a cap on the amount of non-taxable municipal bonds they can issue, so many had expanded to include taxable bonds (at a higher rate of return for investors and a higher interest rate for borrowing).

Historically, muni bonds have been very low risk. The rate of default on municipal bonds is very low, and investors see muni bonds as a safe haven for return. The rate of return is often quite low, as determined by the safety of investment, but from a portfolio standpoint, they are a safe addition. As of the end of 2019, the muni bond market was incredibly strong; perhaps the strongest it has ever been. Many state and local governments had strong “rainy day funds” or days of cash on hand, making the risk of default even lower and the bond rating even higher. 

Then, COVID-19 made its way to the US and changed the marketplace. Muni bonds have historically performed well during economic downturns, as issuers rarely default– specifically those with great bond ratings. COVID-19 changed this perspective within the market. Investors began selling off everything, including municipal bonds, leaving issued debt sitting in the market unclaimed and driving up interest rates for borrowers. The stock market followed suit, dropping rapidly over just a matter of days, pushing many to wonder if the US was headed for another recession. Why did this happen? And most importantly, what is next? Continue reading

What’s the Use? Assessing Trends in North Carolina’s Residential Water Use

After droughts and in light of future concerns over water resources, the topic of conservation has risen in importance. While regional differences in supply concerns exist across the United States and even on a smaller scale, within states, there have been consistent pushes on a federal-level to move towards more efficient use without customer behavior change. Most research suggests that behavior change is “hard,” but by addressing use at the fixture, consumers can continue flushing and showering just as much and use less water.

In addition to this push towards more efficient appliances, the rise in the water and wastewater rates across the US and more specifically, in North Carolina, have put additional incentive on users to conserve, as they are continually sent a strong pricing signal. Weather and household size can also have profound impacts on water use, but the regionality of weather and general trend towards population growth across the country make it harder to assess the impact on total use. Despite all of the factors that impact total demand, federal and state leaders remain interested in how demand is changing over time and what that means for communities strapped for supply and communities struggling to bring in sufficient revenues to cover rising expenses.  Continue reading

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