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Financial Recovery After Shutdown: Practical Steps to Take Now

by Ira Nicodemus, Business Development Manager
July 27, 2020
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The COVID-19 pandemic brought immediate impacts to municipal budgets. Questions remain of what additional impacts a weakened economy will bring in the coming months and years. 

How long before sales tax bounces back? Will property tax revenue also decrease because of high unemployment and falling home prices? Will events, conferences, festivals, and hotels remain limited for the foreseeable future?

With this in mind, here are some practical strategies to increase revenue and decrease costs in this post-shutdown world. While these options won't singlehandedly fix every issue, they can get your budget back on track by supplementing some areas of the general and utility funds.

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1. Decreasing Cost

Reduce Purchase Price

Some of a city's biggest cost categories are utility costs, equipment, and supplies. Working with your procurement team and/or a third-party consultant, you can reduce costs using these strategies.

Use Cooperatives

Buying through interlocal purchasing cooperatives allows you to benefit from bulk purchase prices that would otherwise be beyond your own buying power. Organizations in certain states, like the Interlocal Purchasing System (TIPS), are excellent resources for low prices. They save you the time of negotiating all your own prices on small-dollar commodities. The time there can then be used focus on achieving greater savings when negotiating bigger contracts and projects.

Enforce Transparent Pricing

A lack of transparency in pricing structure can lead to high margins and hidden fees from suppliers. Requiring open book pricing allows you to see where fees are being charged and how margins are levied. Be sure the provider is truly providing transparent pricing and not just hiding costs “below the line.” 

This exercise takes time. However, you can rest assured you are getting a good price without having to take contracts out for RFP every 2-3 years. This strategy is especially effective in services solicited through a Request for Qualification.

Reduce Utility Costs

Utilities are a large part of most operating budgets, especially if a city has large facilities and/or a Wastewater Treatment Plant. What you pay for utilities in your facilities is made up of two primary factors.

What You Pay for Energy

Simply shopping your energy cost can yield savings and long-term price stability. In deregulated states like Texas, this is allowed in most regions. Unfortunately, getting a good rate requires knowledge beyond what most municipalities have in-house. Using a third-party consultant can ensure you get the best possible rate for your specific situation. 

How Much Energy You Use

If your facilities, lighting, vehicles, etc. are not efficient, you’re going to have a higher energy bill. Even if they are efficient, poor operating procedures like loose schedules and inconsistent temperatures setpoints can waste a lot of energy. Most buildings could save 10-20% simply by implementing better operating practices. Additional saving can be achieved by investing in quick payback energy conservation technologies like lighting, retro-commissioning, and building controls. Make sure you have a set of energy conservation guidelines for operating procedures like building temperatures and schedules…and enforce them!

Reduce Maintenance Costs

Preventative maintenance is a good thing and we do not recommend reducing it in most situations. Doing so would be like not getting an oil change to save $30 only to result in a $3,000 engine swap. What we are talking about is the excessive corrective maintenance that come with equipment past its useful life. Think of a 20-year-old car that needs a $300 repair every other month. It’s better to just invest in a new car!

Create a Strategic Plan

Investment in preventative maintenance is much lower than investment in corrective maintenance. Maintain a documented Asset List for all systems in your city. Service your equipment and assets per their recommended schedules to prolong their life. The cost and time of preventative maintenance is significant. However, it costs less than reactively attempting to address issues when equipment fails.

Invest in Infrastructure

Regardless of how well you maintain them, eventually equipment needs to be replaced. You should have a strategic capital plan that looks at all your assets by age, condition, and current operating cost. Then prioritize and plan it out for a long-term view. This should be a living document that continually invests capital to replace the items no longer worth their upkeep.
While this may seem like spending money to save money, there is a net savings here. When you finance infrastructure upgrades through an Energy Savings Performance Contract (ESPC), the reduction in corrective maintenance and energy consumption more than offsets the cost. ESPCs provide the additional benefit of not requiring bond financing. This allows them to be deployed quickly within existing budgets.

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2. Increase Non-Tax Revenue

You likely have several revenue sources outside of your M&O tax rate that could be adjusted to increase revenue. We are not saying they should be raised just to raise them. However, they should be set at an appropriate market rate to ensure you recoup the actual cost of providing these services.

We also understand that benefits to the Utility Fund are separate from the General Fund. This means that for Utility Fund measures, you must adjust the Utility to General Fund transfer based on the revised cost and efficiencies to see the benefits as an offset to tax revenue.

Rate Study on Rental & Utility Rates

When you rent out city facilities, you must account for the cost of operations, utilities, depreciation, cleaning, and more. Take a thorough accounting of these costs or commission a third-party study. This will ensure your rates are aligned with the market and that you are recouping the costs.

Many cities also provide water, sewer, electric, and/or gas to residents. Production and service costs and demand have increased. Therefore, the rates have grown faster than inflation in recent years. According to Texas Municipal League survey data, since 2013 water and sewer rates have increased on average 3.9% per year. Using a third-party consultant to complete a full study will ensure your rates are appropriate. Your utilities should be a money maker and not a money loser.

Reduce Water Loss

Lost water is a large cost for many municipal water authorities. Water lost through leaks, inaccurate meters, and theft usually accounts for 10-20% of water produced. By implementing a multi-pronged strategy to address each source of loss, you can increase revenue without increasing rates.

Begin by taking an honest look at your annual TWDB water loss report. Separate losses into Real and Apparent losses. Real losses, like leaks, are usually addressed through better monitoring and line improvements. Apparent losses are often easier to address. They are primarily unbilled usage, inaccurate meters, etc. By updating aging meters with new, accurate units with Advanced Metering Infrastructure capability, you can reduce non-revenue water while improving operational efficiency. The savings and increased revenue from these measures will offset the cost (even if financed). This provides a net increase to annual Utility Fund revenue.

Conclusion

While the shutdown poses significant challenges to cities and towns, a combination of the above strategies can help reduce your current cost and offset lost revenue. Every bit helps. Together these can represent a significant improvement to municipal budgets during this difficult time.

Download the Self-Assessment Worksheet

Download our easy-to-use worksheet and complete a self-assessment to see what cost-saving and revenue-increasing activities your city could be taking to get your budget back on track!

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Download the Financial Recovery Worksheet
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