Policy in the Pandemic: Water Bills, COVID, and Retirement Portfolios
By Martin Doyle
Through a collaboration with Raftelis Financial Consulting, and hard work of Duke PhD student Erika Smull, the Nicholas Institute’s Water Policy Program has been quantifying how the COVID lockdowns have affected water use (“consumption”) in several cities around the United States. We compared water consumption in 2020 to the previous few years. Our idea was that during lockdowns, water use in businesses would plummet, while residential water use would increase. There are a lot of conjectures, but we wanted hard numbers to see if there would be a “COVID slump” in U.S. water use.
What we first documented is that water consumption had not actually changed that much as of the end of April. Water consumption varies from year to year, and the changes in consumption during COVID were about the same as the normal variation we see from year to year. There was generally a decrease in water use from businesses, but an increase in residential water use. Neither of these changes was particularly large or systemic across the cities we analyzed. From a water utility perspective, this was good news.
However, we are now keeping our eye on three other big wrinkles in this story. First, the trends are changing; it looks like there was a bigger drop in some of our initial set of cities in May and early June compared to April. Second, we have more cities enrolling in our study, some of which are showing bigger changes in water use than our original cities. (We will be updating our analysis and insights via Raftelis’ COVID resource portal.)
And third, the big effect of COVID may be in the bills, not in the water use. Based on a recent inventory, most states have implemented a moratorium on water disconnections. (The exceptions are Alabama, Arkansas, Idaho, Minnesota, Nebraska, New Mexico, South Dakota, Vermont.) These disconnection moratoria are important to ensure that the poorest in communities, amidst the broad economic depression, are able to continue getting the most basic of their needs: water.
While the moratoria on shutoffs ensure water for the poor, they may also prove financially problematic down the road. First, it is entirely unclear how long the moratoria on unpaid bills will last; some states are already considering how they will recover past-due revenue from customers, which may include increasing bills in the future to make up for the current shortfall. This will only exacerbate the water affordability challenge for many in the U.S.
But utilities have their own bills to pay, and they depend on customers paying water bills for this revenue. Normally less than 1% of water utility customers in the U.S. fail to pay their water bills, based on a survey by the American Water Works Association (AWWA). But if that number increases dramatically—and why wouldn’t it as the pandemic goes on—the amount of revenue coming to utilities will decrease. This presents water utilities with a very large problem. A recent study by Raftelis and AWWA estimated the financial impact of COVID on the drinking water industry to be somewhere in the neighborhood of $10 billion; my guess is that this is quite conservative.
In a worst-case scenario, the COVID crisis continues for many more months, sustaining high unemployment, reduced water demand, and increased nonpayment of water bills—all combining to a perfect storm that disrupts the revenue of water utilities substantially. Again, in a worst-case scenario, these utilities would potentially not be able to make payments on their debt, i.e., municipal bonds. As the conservative writer Yuval Levin has noted, during state and municipal crises of the past, the federal government played a critical role as a fiscal backstop, ensuring the solvency of state and local governments. But to date, the U.S. Congress—actually, the Senate—has not been amenable to helping cities, which would mean that a small number of cities may actually have to default on their muni bond payments.
Here is the real problem: muni bonds are typically the safest of safe investments. According to a review by Moody’s of municipal bond performance, there have been fewer than 5 water-related muni bond defaults over the past 50 years. Because of this stability, muni bonds are often a bedrock of individual retirement portfolios. The largest holder of municipal bonds as investment assets are households and nonprofit organizations, with the second-largest holder being mutual funds (based on data from the Federal Reserve, see table L.212; yes, I skim the tables in Appendix Z of Federal Reserve reports).
If defaults start rising because of a cascading effect of COVID on local governments, then the ripples through the economy (including into retirement accounts) would be something to watch. This may seem far-fetched, but remember the surprise when we learned how people not making mortgage payments in Florida threatened the entire global economy in 2008 (for reference, see “Short, The Big”).
Martin Doyle is director of the Water Policy Program at Duke University's Nicholas Institute for Environmental Policy Solutions and a professor of river science and policy at Duke University’s Nicholas School of the Environment.
The Big Questions
To continue the conversation on this week's topic, here are a few questions for further consideration and study:
- How many people are not paying water bills?
- Will nonpaying customers who cannot legitimately pay somehow eventually be compelled to pay through liens on homes, shutoffs, or evictions?
- Do states with moratoria on shutoffs have an obligation to cities and utilities to backstop the associated loss of payments/revenue?
- If water utilities begin facing default, will states or the federal government step in, or will they let them default, with all the messy financial interconnections that will then emerge?
What to Know for This Week
- Ten municipal borrowers defaulted on bond payments for the first time in May and another 10 in June, the highest totals for those months since 2012, according to an article in The Wall Street Journal. Many state and local governments are facing steep declines in collection of taxes, fees, and other revenues as a result of COVID-19 shutdowns. Despite these economic pressures, investors are being drawn back to municipal bonds, "hungry for yield and seeking more safety than the stock market can provide," The Journal reported.
- The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) is launching its first podcast, Nature Insight: Speed Dating with the Future, on July 8 to provide personal perspectives on the values of nature from around the world. The inaugural episode will feature a conversation with disease ecologist Dr. Peter Daszak, president of EcoHealth Alliance, about the current COVID-19 pandemic and how to predict and reduce the risks of future pandemics through changes in public policy, local community empowerment, and personal behavior. Estimates indicate that there are 1.7 million undiscovered viruses in wildlife that could emerge in the future, Daszak says.
- The latest Food Price Outlook from the U.S. Department of Agriculture forecasts a 3% rise in grocery prices for this year, which would be the largest annual increase since 2011, reports the Food & Environment Reporting Network. The projected increase is largely attributable to the coronavirus-propelled surge in the costs of meat, poultry, and fish at the supermarket.
- The national government of Kenya approved the introduction of a 14% value added tax (VAT) on off-grid solar products, removing an exemption for equipment for the “development and generation of solar and wind energy, including deep cycle batteries which use or store solar power.” The tax increase comes at a difficult time for off-grid developers and the rural and peri-urban customers they serve, as they are already facing economic headwinds due to COVID-19. The Energy Access Project at Duke had previously analyzed the effects of tax increases in the off-grid sector and found that an increase of this magnitude would result in reduced sales of about 33,000 solar home system kits per year, representing households that will now likely continue to be without any type of electricity access under the new tax.
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