Wednesday, June 20, 2012

VVWD Budget Problem A Warning Bell Against Water Conservation



The Virgin Valley Water District board had to take on the unpleasant task of "budget augmentation" this week, a typical sweet-sounding political term that means "we spent more than we took in."
But shortfalls and deficits are standard operating procedure for all governmental agencies these days, so it's really not a big deal.
What IS a big deal is the reason for the shortfall.
The water district admits that revenues have fallen $200,000 short of projections for one simple reason: "a decline in customers' water use."  In other words, we're using less water, so there's less money coming into the water district.
Read that again, because it's important.
It's something I've warned about for years, every time some misguided soul starts chirping about Mesquite needing to implement water conservation measures and water restrictions.  It's also what I predicted when the water district took that huge rate increase two years ago.
It sounds loony, but the truth is that conserving water will actually make our water costs go UP!
Here's how it will work:
The water district has a certain amount of fixed costs.  A BIG part of their fixed costs is debt service -- paying back on the bonds they've already taken out to drill wells, build arsenic treatment plants, and buy unneeded irrigation water shares from greedy, well-connected good ole boy profiteers.
The water district (meaning us, the ratepayers) is stuck with these costs. 
So for the sake of easy math, let's say the district needs a million dollars a year just to make their annual bond payments.
In a normal year, again for the sake of easy math, assume they take in a million dollars a year in water payments from homeowners and businesses.
Along comes someone's brilliant idea to raise water rates.  In the middle of a recession.  Sounds like a great way to increase revenue, right? 
Wrong.
Because there happens to be a way to turn a faucet off and leave it off, people begin intentionally using less water.  Less water means less money to the water district.
The water district has bonds that must be paid, so to make up the shortfall, they bump up the rates a little more.
People stuck in the throes of a down economy, looking for ways to squeeze every penny, get even more water-conscious.  They flush every other visit to the bathroom, put timers on their showers, tear out their nice environmentally-friendly grass (which happens to be the best weapon in the battle against greenhouse gases, since green plants convert carbon dioxide to oxygen) and replace it with gravel.
Water usage drops even further, reducing revenue to the water district.
See where this is going?
Every time the water district takes a rate increase, or even worse, starts implementing "water conservation measures" (programs which, ironically, cost them money and increase their operating expenses), cash-strapped rate payers use less water and wind up paying less to the district.
Eventually, the district reaches the point where their revenues aren't enough to pay their bonds, and they default on their notes.  The downward spiral has reached critical mass.
This scenario has already played out once in Utah.
Here's why: Most businesses have costs associated with their product.  If you're selling automobiles, you need to buy steel, tires, plastic, and other parts necessary to make the cars.  When you raise your price and sell fewer cars, it can balance out because you're not spending as much on supplies and parts.
With water, the district doesn't pay anything for the product.  To be sure, there are expenses -- electricity for the pumps, well maintenance, pipe repairs, etc. -- but the product itself is free.  If you're selling less of it, those expenses don't go away, or even go down very much.  So your cash outflow isn't going down when people use less water, but your cash inflow IS.
So before we start drinking the Kool-Aid about water conservation and the need for more rate increases, pay very close attention to this model.
And heed the warnings that are becoming evident at the water district.

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