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This analysis isn’t watered down

Municipal credit analyst Matt Fabian looked at the cost of water in his weekly industry analysis and warned that climate change is driving up costs for water utilities, costs that will ultimately come to consumers. “Well documented and perhaps permanent changes in weather patterns are producing volatility in utility service provision and revenues,” Fabian wrote in his June 1 analysis for Municipal Market Analytics. For drought-stricken places like California, conservation efforts are starting to take a bite out of utility revenues, he said. (In general, conservation efforts make people use less water, which means less money for water utilities.) In places like the Southeast or North where flooding is a threat, water utilities will have to spend more on things like storm water management or improvements to wastewater treatment facilities.

There are also costs associated with keeping compliant with the federal Clean Water Act. But even bigger than that, said Fabian, is the need to keep up with improvements in scientific research. Fabian suspects water utilities are far behind: “The conservative nature of municipal utility engineers implies that new technological innovations are only slowly adopted and that most systems are not at state of the art standards,” he said. (Never mind the roughly $1 trillion in deferred maintenance costs shared by utilities across the country.)

So what does this mean? For one, customer rates are rising and will continue to rise in response to the changes, Fabian said. In fact, between 2004 and 2014, the American Water Works Association documented a nationwide average increase of 50 percent in residential water rates. The shift will also put more ratings pressure on utilities. Lead ratings agencies might place a greater emphasis on supply sustainability and/or infrastructure adequacy, Fabian said, a move that could lead to more downgrades.

Health-care bomb coming

It’s a one-two punch these days with pensions and retiree health-care costs. Thanks to a new accounting change, 2015 is the first year governments have to report their outstanding pension costs as liabilities on their government-wide balance sheet. That’s punch No. 1 (unless you are among the lucky few with a fully funded pension system). Punch No. 2 comes next year when governments have to do the same thing with their outstanding retiree health-care liabilities.

The Governmental Accounting Standards Board made it official this week when they approved the new reporting rule for what’s commonly called OPEB (Other Post-Employment Benefits). Starting in finance statements for fiscal year 2017, municipalities and states have to include the cost of health insurance and other benefits besides pensions, costs that they now only provide in footnotes. (Pension plans will have to comply with the rule a year earlier.) The potential impact here is tricky to determine. Most estimates place governments’ unfunded OPEB liabilities far higher than pension liabilities; we will be looking at some pretty big numbers. (States alone have about $530 billion in unfunded liabilities, according to a November 2014 Standard & Poor’s report.) But that’s because many governments don’t set aside money for health-care costs like they do for pensions. That's because OPEBs generally don't enjoy the same legal protections as pensions. So, unlike the pension liabilities, the state and municipal governments can theoretically cut OPEB liabilites pretty drastically -- that is, if governments can stomach cutting health-care promises to retirees.

Workin’ for the man

Moody’s Investors Service pointed out some big state winners in last week’s announcement that the average labor force participation rates increased this year in 22 states. In particular, the gains bode well for states such as Arkansas, Delaware, New Mexico and South Carolina, Moody’s said, where workers withdrew from the labor force in large numbers after the Great Recession. The last time at least 22 states made employment gains between January and April was in 2007.

On the flip side, Moody’s noted that Texas fell to be among the 10 worst performers for the first four months of 2015. The state weathered the post-recession period with only a slight decline in labor force participation, but weak oil prices have hurt the state as of late.