Building, borrowing — and getting better — by the billions

All of us make decisions on how we pay for things. How utilities pay for very expensive construction makes a big difference.

Doan Valley Relief and Consolidation Sewer construction. NEORSD file photo.

ow do we finance sewer and stormwater projects and utility operations? If you’re a customer, the answer is “your sewer bill.”

At least that’s where the funding comes from. But how do we use that revenue to cover the cost of critical sewer and stormwater services? Cash? Loans? The reality is it takes a little more exploration, and the answer has an effect on the bills customers pay.

It starts with a rate study, which the Sewer District does every five years. It’s just like setting your budget.

You predict what big expenses might be coming up, how you plan to pay off existing debt, and what your operating costs might be.

The Sewer District operates three large wastewater treatment plants, transports and treats nearly 90 billion gallons of wastewater every year through 326 miles of large sewers, and addresses long-standing regional flooding, erosion, and other stormwater issues across 475 miles of streams, pipes and culverts in our 355 square mile service area. To provide these essential public health and water quality services to our 1 million customers across 62 communities, the Sewer District looks at:

  • Sewer District expenses, like upcoming construction projects, utilities, and chemicals
  • Revenue needed to cover those costs
  • Debts, like the “mortgage” on Sewer District projects, and required debt service payments
  • Population and consumption trends
  • Long-term spending needs, including large-scale projects on the horizon

The rate setting process is governed by several layers of controls, including trust agreements for existing bonds, the Board adopted Debt Management Policy, and District Management Targets.

Financing huge construction projects. Think of it like a mortgage.

Most of work is related to Project Clean Lake, the Sewer District’s 25-year federally-mandated program to reduce combined sewer overflows. Prior to Project Clean Lake, the Sewer District eliminated about 4.5 billion gallons of combined sewer overflow. Ten years into Project Clean Lake, the Sewer District has eliminated an additional 1 billion gallons, and we anticipate eliminating 3 billion gallons more by 2036. That means that a total 8.5 billion gallons of combined sewage will no longer make its way to our lake, rivers, and streams.

Project Clean Lake is expensive. Maintaining our current infrastructure — plants, sewer pipes and stormwater systems — is also expensive.

The Sewer District has $1.8 billion in debt. In 2021, the annual debt payment — again, think “mortgage” — is $106 million and, by 2026, the debt payment will increase to $164 million a year.

This increase is the result of our plan to invest an additional $1.3 billion in the sewer system by the end of 2025. A significant portion is directly related to Project Clean Lake.

There are no federal or state grants to pay for these projects, and, with no external funding, these investments are paid for by our customers.

If the Sewer District does not charge its customers the appropriate rate to cover the cost of service — service that provides customers the ability to flush toilets, wash clothes, take a shower — it could be financially damaging, impacting our ability to cover our debt service. In turn, it would impact the ability to treat wastewater and stormwater, construct new infrastructure, and maintain existing infrastructure, which, in some cases, is over 100 years old. In short, it would roll back the significant public health and water quality progress we’ve made over the last 50 years.

How the Sewer District manages and finances projects has a direct impact on our customers’ rates.

Rate projections: Better by half

During the 2016 rate study, the Sewer District projected a 9.6% rate increase from 2022 through 2026. Over the past 5 years, the Sewer District focused on reducing that projected rate increase. Some examples of steps taken to reduce the rate include:

  • Excellent Credit Rating Provides Opportunity for Bond Refinance: Three bonds were refinanced for a savings of $83 million, for an annual savings of $4.7 million;
  • Skilled Employees to Manage Projects: Good project management saved $39.5 million;
  • Favorable Bidding Environment: Lower bids resulted in a savings of $73 million;
  • COVID-19: In anticipation of potential revenue loss, the Sewer District froze a significant portion of operations spending in March 2020, including a freeze on hiring and annual salary adjustments. By the end of 2020, it was clear the revenue impact was not as significant as anticipated. With a mostly-frozen operations budget, expenses were $22.3 million under our $148.8 million sewer budget.

Additionally, the Sewer District successfully modified the Project Clean Lake consent decree, the legally binding and rigid contract with the federal government defining the projects the Sewer District will execute and costs the Sewer District customers’ will spend through 2036. The Sewer District was successful in saving $90 million and delayed several projects from 2017 through 2021 as negotiations were underway.

Savings through wise management, the impacts of COVID-19 and project deferment contributed to the Sewer District reducing the planned rate increase for 2022 by more than half — from 9.6% to 4.2%. Trustees adopted these rates on July 15, 2021.

In addition to financing projects, the Sewer District holds cash reserves, similar to a savings account, to pay for some projects and to quickly pay for emergency repairs in the underground sewer system, when needed. Historically, the Sewer District holds about 900 days, or $330 million, of cash reserves. This is sound financial management. Here’s why:

The Sewer District uses reimbursable loans.

The Sewer District takes advantage of low-interest loans through the Water Pollution Control Loan Fund. These loans offer long-term cost savings to our customers, but these loans are all reimbursable, just like getting a rebate on a product purchase. This means we need to have the cash upfront to pay construction invoices. Paperwork is then submitted to the state for reimbursement. For example, the Shoreline Storage Tunnel, which is one of seven Project Clean Lake tunnels, is $200 million, and we need to make certain we have enough cash on hand to pay those invoices as the project progresses.

The Sewer District is self-insured for underground infrastructure.

The Sewer District has about $3 billion in capital assets and, while we have outside insurance coverage on the plants and other buildings, we self-insure our underground assets. In total, we manage about 350 square miles of sewer pipes, which is equal to the distance between Cleveland and Chicago. One of the Sewer District’s pipes, the Easterly Interceptor, was constructed when Teddy Roosevelt was President of the United States. While the pipe is in good shape, it’s over 100 years old. Plus, by the end of 2036, the Sewer District will be maintaining eight large-scale tunnels to mitigate combined sewage. These tunnels are several miles long and are large enough to fit a semitruck. Given the essential nature of our work, we need to ensure we have the cash on hand to pay for damages and emergency repairs quickly.

The Sewer District had 1,193 days of cash reserves, or $425 million, as of the end of the first quarter 2021. This was unusual for the Sewer District and, like the reduction of the rate from 9.6% to 4.2%, was a result of 1) accumulated savings; 2) Project Clean Lake project deferment from 2017 through 2021; and 3) an unprecedented 2020.

The Sewer District is well aware of these cash reserves, they lead to a reduction in the current rate proposal, and the District has factored those into long-term rate savings.

Over the next five years, the Sewer District will make a $1.3 billion investment in our infrastructure. Five of our most expensive projects will be financed with reimbursable loans from the state offered at very low market terms:

  • Easterly Chemically Enhanced High Rate Treatment Facility — $125 million
  • Westerly Chemically Enhanced High Rate Treatment Facility — $78 million
  • SCSO-2 Kingsbury Run Consolidation Sewer — $70 million
  • Southerly Tunnel and Consolidation — $325 million
  • Shoreline Tunnel — $200 million

The remaining 39 projects, totaling $430 million, will be paid from our cash reserves which will eliminate the need for future financing, reducing the overall debt and the anticipated rate increase for 2027 through 2031.

Financing and cash reserves cover the cost of Sewer District work. What about federal funding?

In the 1970s, the federal government funded about 63% in clean water projects. Today, it’s less than 5%. Clean water agencies, like the Sewer District, work diligently to minimize costs, like those examples mentioned earlier, and continue to aggressively advocate for federal grant funding.

There is little room to significantly reduce capital expenditures, particularly with federally-mandated construction projects, like Project Clean Lake. There is a great need to reinvest federal dollars in our water, wastewater and stormwater systems. Much of the nation’s infrastructure is old and in need of immediate attention, and the need to update these systems is far outpacing the federal investment.

As referenced earlier, the Sewer District holds about $1.8 billion in debt, and by 2036, the annual debt payment will be $164 million. It’s a similar story for hundreds of wastewater and stormwater utilities across the country. Until a sizable investment is made by the federal government, customers will be required to cover the cost while utilities will have to continue to minimize expenditures as much as possible.

While utility financing might seem complex, the goal is not: to provide quality, essential services to our customers at the lowest cost today and in the future.

Official Medium channel of the Northeast Ohio Regional Sewer District in Cleveland, OH