Written by Shadi Eskaf, Research Director, EFC at UNC
Three months after the COVID-19 pandemic suddenly changed how Americans live and work, the financial implications for water systems are becoming apparent. Back in March, we forecasted some of these effects, but we couldn’t measure those changes at that time. As time passes, water systems are able to take stock on how much has changed, and for how long they might be able to provide service. In late April/beginning of May, we polled water and wastewater utilities in North Carolina to assess the effects of COVID-19 conditions on utility finances. Responses for three of the six poll questions from 49 small water systems serving fewer than 10,000 people are summarized below.[Click here to view the full poll results of all 95 responding utilities including those of larger water and wastewater systems].
1: Most Small Water Systems Experienced or Anticipated Net Reductions in Revenue, by Varying Degrees
Nearly every small water system anticipated reductions in revenue due to COVID-19 conditions. Most were unable to estimate those revenue losses at that time. However, among the small number that were able to estimate those reductions, their experiences demonstrate that revenue losses are highly dependent on each system’s local situation. For instance, two small water systems estimated low losses of 2% and 5%, while three small water systems indicated that net revenues were at least 25% lower than what they normally would be as a consequence of COVID-19 conditions. Revenue losses are dependent on the composition of the water use across the customer base (specifically non-residential vs. residential customers) and the design of the water rate structures, particularly the rates that apply to non-residential water use. Secondly, revenue losses also depend on the proportions of customers who are delinquent on paying their bills. As in other states, the State of North Carolina enacted a moratorium on late fees and penalties, and suspended disconnections from water systems due to non-payment. At the same time, unemployment rates increased making it more difficult for customers to pay their bills. Preliminary analysis reveals that delinquency rates have gone up for some utilities, but not universally, and not at the same level. Some utilities are experiencing significant reductions in collections, which increases their revenue losses compared to other utilities. Revenue losses from canceling late fees and penalties typically are not significant, but delinquencies in paying water bills without the consequence of shutoffs at least delays revenue collection by a few months, exacerbating cash flow issues for water systems.
For small water systems that would like free assistance from the Environmental Finance Center Network in forecasting revenue losses for the next 12-24 months and considering options for recovery, please contact us.
2: Some Small Water Systems Face Imminent Catastrophic Financial Losses
When asked how long the water systems could continue to pay for their operations and capital expenses under current COVID-19 conditions, the majority indicated that they would be able to do so for at least seven months (and many for at least a year). Even with net reductions in revenue, these small water systems have sufficient resources and reserves to continue paying their expenses and provide themselves with enough time to adjust their immediate plans to recover from longer-term COVID-19 conditions. On the other hand, there are some small water systems that face near-immediate financial collapse as a result of loss of revenue due to the pandemic. Nearly a quarter of the responding small water systems in this North Carolina poll are struggling or would struggle to maintain operations if conditions continued for six months. At present, it is difficult to estimate how long COVID-19 conditions will last, how soon businesses can recover (even after states open), whether there will be subsequent resurgence of the pandemic and additional reductions in operations, and so on. Water systems that do not have sufficient reserves to support their operations for more than six months should consider quickly making plans to recover. The Environmental Finance Center Network can help (schedule an appointment).
3: Capital Projects May Suffer
When water systems face difficulties in paying for operations, one cost-cutting strategy that is frequently employed is delaying, reducing, or canceling planned capital projects. This was already evident among a large proportion of small water systems in North Carolina a couple of months into COVID-19 conditions. A little more than one-third of poll respondents indicated that they are delaying starting a capital project and/or pausing or slowing down a project for which construction has already begun. While short-term delays to capital projects can reduce immediate expenses in times of financial difficulty, lengthy delays or permanent cancelations of projects have severe detrimental effects on the conditions of the assets and the ability for the water system to provide safe and adequate service. Furthermore, construction costs rise faster than inflation. Thus, delaying capital projects often increases their costs substantially making it harder for the small water systems to afford them. During this pandemic, water systems are encouraged to continue developing asset management plans and going forward with the projects in their capital improvement plans as scheduled. If you need assistance in considering alternative timelines or different scenarios in funding your capital projects, feel free to contact us or use the Plan to Pay: Scenarios to Fund your C.I.P. spreadsheet tool.
Resources for small water systems recovering from COVID-19 conditions:
View the EFCN’s resources for small water systems related to COVID-19.
The EFCN has tools and staff available to help small water systems serving fewer than 10,000 people assess their financial implications of COVID-19 conditions, forecast the next 12-24 months, and plan for options to recover from those implications. If you wish to schedule an appointment to talk with the EFCN, please complete this online form.
Finally, please be on the lookout for virtual or in-person trainings in your state or region. Some of the trainings are focused on COVID-19 financial consequences and recovery, while others are focused on other financial management topics. As always, the trainings are free to attend thanks to a co-operative agreement with US EPA. Check this webpage regularly for newly-scheduled trainings.