The capital of Texas, the City of Austin is home to over a million residents—and it’s growing fast. According to the 2020 Census, Austin’s population grew by 28% since 2010. Austin Water is the city’s municipally owned water utility.
Building Resilience and Ensuring Affordability with Debt Management Strategies
Many public utilities struggle to strike a balance between two competing needs: maintaining infrastructure to deliver dependable service while ensuring rates are affordable for customers of all income levels. Add in pressures such as the pandemic crisis, spiraling cost of living, and the effects of climate change, and the complexity of this challenge soars. Austin Water has met it by implementing debt management strategies that have reduced overall debt service cost by a total of $591.2 million since 2016 even as it works to improve infrastructure and enterprise resilience for extreme weather and a growing population.
Unique local challenges
Austin, Texas has been one of the fastest-growing cities in the United States for nearly a decade as top tech businesses, festivals, and sun-seeking transplants from around the country flock to the state capital. Such a rapidly growing population can be both a blessing and a curse for a community, as investment in infrastructure becomes essential to delivering municipal services on an increasingly larger scale.
In addition, other pressures have contributed to the need for infrastructure investment. Extreme weather events are becoming increasingly frequent because of climate change. Episodes like February 2021’s deep freeze strain infrastructure in areas like Texas that are unaccustomed to severe temperature swings. Yet infrastructure investments come at a high cost. Utilities in general—and municipally owned utilities in particular—must address affordability and service delivery for residents.
Developing a debt management strategy
With trends forecasting steady increases in the cost of water and wastewater service in Austin, in 2016 Austin Water leadership determined a recalibration was needed to develop a debt management strategy that balanced debt increases for critical infrastructure investments with affordability. Its financial services team developed and implemented a multi-year debt management strategy with four distinct components. These include:
- Near-zero percent interest loans. In 2016, the Texas Water Development Board approved $266.6 million in near-zero percent interest loans for Austin Water to fund nine major infrastructure projects. These loans have enabled the utility to invest in infrastructure improvements that represent significant cost savings for its customers. Total savings since 2016: $20.6 million.
- Capital recovery fees. Capital Recovery Fee (CRF) dollars derive from a one-time charge for new water and wastewater connections. Beginning in 2016, Austin Water increased capital recovery fees to ensure new developments pay their fair share for water and wastewater infrastructure needed to provide new service. This allows for a significant increase in CRF collections, which have been critical to reducing debt service requirements through annual debt defeasance transactions.
- Debt defeasances and refundings. Over the last five years, Austin Water has used Capital Recovery Fee dollars for annual debt defeasance transactions that reduce future debt service requirements. This helps the utility to manage debt costs through refundings at reduced interest rates, improving financial performance and mitigating rate increases. Total savings since 2016: $270.8 million.
- Cash financing of capital projects. Since 2016, Austin water has increased its cash financing of capital projects from 20% to between 35 to 50%, which limits its debt exposure for capital programs.
As part of its strategic approach to debt management, the utility conducted its first Affordability Benchmark Study in 2018 to set benchmarks and make recommendations for affordability metrics that would be tracked and measured annually. It also developed an organizational process to balance investments in rehabilitation and new projects that funds growth and development while prioritizing funding for high-priority needs. This process entails analyzing spending, meeting with operations staff, determining priorities, and approaching decisions through a coordinating committee that includes representatives from each of the utility’s divisions.
“From a planning perspective, our challenge is prioritizing capital investments and operational needs,” Assistant Director for Financial Services Joseph Gonzalez explained. “We need to prioritize projects that will improve our resilience but also consider our more immediate needs when it comes to long-term financial and capital planning.”
Austin Water’s approach to debt service management has helped it create future capacity. Its current debt service coverage financial policy targets 1.75 times the debt service coverage, meaning that every dollar of debt service savings reduces annual revenue requirements by $1.75. The utility’s debt management strategy has reduced overall debt service cost by a total of $591.2 million since 2016.
Benefits to residents
Residents have benefitted from the utility’s debt management strategy through measures including rate reductions and freezes, assistance programs, and other improvements to affordability. For example, in the five years since changes were implemented, Austin Water has held water rates at a stable level and below water and wastewater industry indices.
Customers enrolled in the utility’s Customer Assistance Program for low-income residents received rate reductions of between 8.4% and 11.4% over the last three years, making Austin Water’s assistance program one of the most robust in the nation. In addition, Austin Water offered rate reductions under COVID-19 relief programs for as long as 18 months for low-income residents., Austin Water also offered customers emergency utility bill relief initiatives when residents were affected by extreme winter weather in February 2021, when prolonged cold temperatures from Winter Storm Uri damaged private plumbing systems across the city.
As Amy Petri, Austin Water’s marketing services manager, noted, “We’ve been able to keep rates flat for more than three years. But ours is more than a story of affordability. With our investments in infrastructure, we’re also working toward water system security for our community.”
Preparing for the future
Austin Water staff plan to continue pursuing the current strategies into the foreseeable future. “The Capital Recovery Fee dollars have been a big factor in our ability to reduce debt service by the millions,” Gonzalez noted. “Historically, we took this revenue stream and incorporated it into our funding for annual debt service payments. Now, we can maximize the impact of the savings by targeting specific future debt service through debt defeasance.” He illustrated through an example: Austin Water has already focused on reductions in debt service for a 2028 wastewater treatment plant. “By targeting debt service for the future, we have capacity to take on some of these projects without a significant increase in rates and cost structure.”
Improvements in forecasting ability have also allowed Austin Water staff to model the impact of different infrastructure investment and debt service scenarios. “We can look at what it does to debt service five, 10, or even 20 years from now and start to plan how we stagger projects or manage their impact with defeasance strategies,” Gonzalez explained.
Christina Romero, Austin Water’s financial manager, emphasized that the utility’s staff is also focusing on addressing future impacts of climate change. “In November 2018, we created our Water Forward Plan, an integrated water resource plan for the next 100 years that evaluates how climate change affects future water supplies and demand, which we update annually.” Austin Water is also working to establish a utility-wide Climate Working Group to monitor trends, research, and analysis that might influence its resilience and infrastructure planning.
Lessons for other governments
To keep up with rising infrastructure costs, other utilities could look beyond rate increases and implement debt management initiatives like Austin Water’s. Doing so begins by identifying a revenue stream or reserve balance that could be used to defease debt in a targeted way. “Debt management strategies have given us greater financial flexibility,” Gonzalez said. “This has helped us be successful in spite of the complexity our community faces.”