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The concept of a balanced budget seems a distant theory in Washington DC. Municipal and state governments required to operate with a balanced budget are struggling to maintain core services with reduced revenues caused by deep recession.

The federal government's massive spending programs stand in stark contrast to local government spending philosophies.

The related (and stunning) federal deficits that are unsupported by revenues will only add additional pressure to local governments and service utilities. Experts anticipate the national deficit will reach 10% of Gross Domestic Product (GDP) in 2010. Deficits are financed by the sale of Treasury Bonds issued to those willing to buy US debt. Financing this new spending requires the Treasury Department to sell trillions of dollars in new Treasury Bonds to provide cash to operate the government. As the recession has kept interest rates relatively low, it has been possible to borrow funds at reasonable rates, but now these conditions are changing – and not changing for the better. Recent demand for US Treasuries has been relatively strong recently as well, owing to investor concern regarding the European Union's handling of the Greek financial crisis. However as the EU gains control of the situation, coupled with increased demand for corporate bonds, those that purchase US Treasuries now have other attractive options. And many of them are no longer investing as much in US debt instruments the way they were. Declining demand for US debt requires the federal government to compete harder and more aggressively to sell its Treasuries on the world financial markets. Of course this means paying more interest to investors and passing the bill for those increased interest rates on to taxpayers. Now that the federal treasury needs to sell trillions in new debt instruments, this will be quite costly. This trend towards higher rates should continue indefinitely – especially as the federal spending and the associated deficits continue to spiral out of control. What does this mean for water utility customers? Increased costs on a governmental level of course always impact the individual consumer. Consumers pay higher interest rates on any purchase as well as higher fees for utility costs that require financing for their operations.

The rate the US Treasury pays for its debt is often referred to as the “risk free rate” meaning that an investment in government securities is without appreciable risk. All or most other forms of borrowing are tied to this “risk free rate” baseline. As this baseline rises, consumers and taxpayers will be required to pay more in financing and interest rate costs. Utility Consultants attempt to balance consumer demand for low prices with utility requirements to secure enough funding to support the organization.

It is a difficult juggling act.

Increasing interest rates as driven by federal spending and deficits only make this more difficult. Utilities must pass the costs – including costs for financing – of repairing aging plant and facilities on to its customers. Municipal Bonds are a common financing vehicle for water and wastewater service providers and are the primary method by which providers can finance replacement projects and system upgrades. As the US Treasury rates have been relatively low, Municipal Bonds have been fairly reasonably priced as well. Now there is a significant upward pressure on these rates – as driven by the federal deficit – that should lead utility managers to expect higher costs for debt service and higher costs for Municipal Bond financing.

In the end, a great deal of the cost for higher interest rates will be borne by consumers through higher water rates and fees.
Jason Mumm is a highly respected and important resource in the field of Water Utility Consulting . Delivering financial guidance to water utility companies, Jason helps improve performance and helps utilities manage water rates and costs.

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