February 2009 Vol. 64 No.2
General
EXCLUSIVE: Underground Construction’s 12th Annual Municipal Survey: Year of Hope and Caution
Considering the state of the economy, results from Underground Construction’s 12th Annual Municipal Survey reflected surprising optimism among city personnel across the United States. Understandably nervous and cautious about 2009, municipal personnel expect their funding levels to decline somewhat, though still remain near 2008 levels.
Also no surprise is the fact that more than 87 percent of respondents cited funding and related issues as their number one concern for 2009. One municipal manager from Maryland voiced concern regarding “our customers’ ability to pay for water and sewer services.”
However, by-and-large, those surveyed were also hopeful – and excited – about the opportunity to receive a huge influx of federal funding as part of the economic stimulus package currently being debated in Congress.
In some cases, municipal personnel were not as much concerned about budget shortfalls as how funding was being secured. In Ohio, a respondent pointed out that “lack of dedicated funding” was hurting their sewer/water district. Also, in light of the recession, many cities are restructuring their departments with hiring freezes, reduced budgets and even delayed projects. “Basically, we’re being asked to do more with less,” said a California respondent.
Surveys were distributed through both regular mail and e-mail with a website link to over 8,000 municipal sewer/water management personnel directly involved or responsible for underground piping infrastructure. Responses were categorized by region and city populations to avoid artificially skewing results. The study was conducted in November and December 2008. Cities responding to the survey ranged in size from as small as 267 residents all the way up to the nation’s top four most populous cities: New York, Los Angeles, Chicago and Houston.
Recession impacts
Contrary to what many believe, sewer and water funding is not recession proof – as several municipal managers pointed out in the survey. Recession resistant is a more accurate market description.
Sewer and water systems have an independent revenue stream through user fees. However, that revenue is often inadequate to fund annual operations, let alone much needed improvements or maintenance to aging systems. Many elected city officials can’t resist the temptation of “holding the line” against rate increases – a popular political ploy – even when their underground infrastructure in crumbling. Too many times, its takes intervention by state departments of environmental quality or the federal Environmental Protection Agency to force cities to react. The result is that sewer/water departments are often under-funded and annually struggle to gain additional funding from city coffers just to cover operating costs. The current recession is limiting overall funding for municipalities as tax revenues slow, meaning sewer/water departments may ultimately have to start scaling back spending to their core user-fee funded levels.
A survey respondent from Minnesota observed that they are already experiencing “declining activity in tax levies,” and an official from Wisconsin echoed that “we’re having a funding shortage caused by levy limits.” A New York muni respondent added that they “are reducing budgets” in anticipation of reduced city income.
Tight budgets are definitely raising concerns, according to the survey results. A city employee from Michigan said his major concern for 2009 was simply getting the “budget to do needed repair work.” Added a state of Washington respondent, “our biggest concern is being able to maintain high quality installations/repairs at reasonable costs.”
But for most survey respondents, such comments represent a worse case scenario. The short term spending outlook for sewer and water infrastructure boils down to three unknowns: just how long will the recession last; how much more will be allocated to sewer/water with the stimulus package; and when will stimulus monies actually be distributed into the hands of cities? As 2009 moves forward, municipal managers are proceeding with cautious optimism until these questions are answered.
Spending plans
Survey respondents expect overall funding for their sewer and water departments to fall an estimated 4.1 percent, from $12.2 billion actual in 2008 to projected spending levels of $11.7 billion in 2009. It should come as no surprise that the most of the reduced spending is coming in new construction, primarily due to the fact that housing construction has slowed to a crawl in most regions of the country (with a few notable exceptions such as Texas and Oklahoma).
Overall new construction spending was projected to decrease from $7.5 billion to $7.1 billion in 2009. Sewer/storm sewer spending levels were estimated to fall from $4.5 billion to $4.3 billion.
Sewer rehabilitation spending was one of the bright spots of the survey as city officials are hoping to match last year’s spending levels of $3.3 billion.
In recent years, water infrastructure has seen a significant increase in attention and funding across the country. Water rehabilitation, once thought impractical and expensive, has grown from a fledgling industry to a billion dollar-plus market. But water’s growth is expected to slow with the economy in 2009. New water construction will contract from $3 billion to $2.8 billion, and rehab funding levels will drop from $1.4 in 2008 to $1.3 this year.
It is important to distinguish that projected spending levels in this survey are based upon anticipated “actual” funds generated by in-place user fees and other city revenues sources. Many municipal managers are either keeping planned construction/rehabilitation on the back burner or even developing programs to launch quickly as federal funding becomes available. There is a chance that 2009 spending levels could reach or slightly exceed 2008 levels by the fourth quarter. The odds are also good that 2010 spending levels will actually see a substantial increase, perhaps as high in some areas as 15 – 20 percent. As one veteran senior municipal official from the Southeast stressed: “We think we’ll be able to increase our spending, perhaps by a lot, with the stimulus money – we desperately need to. But we won’t count on it until they actually ‘show us the money’.”
Rehabilitation work could potentially see the most direct benefit from stimulus funding. Often, those types of infrastructure problems have already been defined. Cities and consulting engineering firms can react faster to letting that work. Indeed, several respondents said they could launch major rehab programs quickly if stimulus money became available.
Another driver for emphasizing rehab programs is that the recession has not slowed monitoring and enforcement protocols by state DEQs and the EPA. One city official said stimulus money could “keep us out of hot water with the EPA.”
But stimulus aside, revenue streams very much remain a subject of concern for municipalities across the country. Overwhelmingly (70.7 percent), survey respondents believe there is a funding gap in 2009 between what is budgeted for underground piping infrastructure construction and rehabilitation, and what is actually needed to support their department’s annual needs. Most believe that an increase in spending of about 40 percent is needed just to maintain the status quo. Almost 64 percent of survey respondents expect their cities to be forced to seriously consider raising user fees – even in a recession. Cities are averaging almost four years between rate increases.
Other top concerns for cities include: government/EPA regulations, cited by 59.7 percent; finding qualified employees, cited by 37 percent; and maintain positive community relations was mentioned by 34.5 percent.
Trenchless
Trenchless construction and rehabilitation methods continue their strong position within the sewer/water market. Indeed, trenchless techniques continue to draw strong attention and increasing market acceptance. Most trenchless methods actually saw their acceptance ratings increase slightly compared to a year ago (see related chart). And the positive effects upon communities is significant, according to a Montana respondent. “We burst a sanitary sewer force main with minimal disruption to property owners. It was great public relations.”
Related a Florida municipal manager,“We just started doing it (using trenchless methods) and we love it – it is so much more efficient,”
The use of trenchless for new construction for sewer/storm sewer increased from 16.1 percent in 2007, to 18.4 percent in 2008. For water, trenchless’ share of the market was even stronger, increasing from 22.2 percent to 24.3.
With water rehab rightfully perceived as a strong, emerging market, trenchless rehab increased in 2008 to 32.5 percent, up from 30.8 percent a year earlier. The use of trenchless methods for sewer rehabilitation remained relatively flat at 69.6 percent compared to 69.7 percent a year ago.
City and consulting engineering personnel continue to embrace the assimilation of trenchless methods into their projects. Almost 66 percent of cities indicated that trenchless techniques had been utilized in 2008, in increase from 63 percent in 2007. The outlook for trenchless continues to be very bright. Of those who have not utilized trenchless methods, 82.5 percent said they plan to do so within the next five years.
Sixty-eight percent said trenchless has had a moderate to high impact upon their department. And impressively, 62.1 percent claimed they would prefer using trenchless methods whenever practical.
However, trenchless still has its detractors, especially when it comes to economics. A Wisconsin city official emphasized that “the cost for trenchless isn’t cheap enough – too many laterals that need replacement to make trenchless work.”
While manhole rehabilitation continues to draw strong attention from cities – and rightly so – in 2009, each city across the country will average rehabilitating about 95 manholes, down from an average of 101 in 2008.
While trenchless methods continued to penetrate applicable market niches, it is clear that education continues to be extremely important. Several respondents cited the annual Underground Construction Technology Conference as playing a vital role in their decision to incorporate trenchless considerations into their planning.
Asset management, a key buzzword and concept in recent years, has played a steadily increasing role with municipalities. About 63 percent now have an asset management plan in place. Of those without such a strategy, 72 percent plan on implementing an asset management plan in the near future.
Contractors
Cities’ relationships with contractors, according to survey participants, range from contentious to cordial, and everywhere in between. But overall, the rating given to contractors remained constant. On a scale of one to 5, city officials gave contractors a 3.71 rating.
Survey respondents had much to offer contractors. “Be up to date on current products and techniques,” encouraged this city official from South Carolina. “There is still a mentality in our area to look at ‘traditional’ methods first.”
This perspective from a Florida respondent was reflective of several comments: “Don’t lowball the bid and come back with change orders to ramp up the price once work has started.”
A municipal employee from the state of Washington lamented that “we need a great number of area contractors who are equipped and experienced to do trenchless work.”
A survey participant from Ohio suggested that contractors need to watch their “affordability (and I don’t feel this is the same thing as low cost).”
As in the past few surveys, cities strongly believe that quality if the most important feature they look for in contractors (cited by 86.6 percent). Timely completion of projects was also critical to municipal personnel as indicated by 76.5 percent; experience was cited by 74.8 percent; effective dealing with the public, 59.7 percent; and low cost was cited by 50.4 percent.
Consulting engineers
The performance rating for consulting engineering firms increased slightly, reversing a five-year trend. On a scale of one to 5, engineers received a 3.61 rating, up slightly from the 2008 rating of 3.59.
Quality remains the most important feature that cities look for in consulting engineering firms as cited by 85.7 percent of respondents. Understanding new technology was noted by 64.7 percent; productive relationships with contractors, 52.1 percent; and only 50.4 percent cited cost of an important quality of engineering companies.
A Florida respondent believes the consulting engineers should be “trustworthy and anticipate client needs.” A Kentucky city official stressed that engineers should “take the interest of their client above their need to make a buck.” This Ohio respondent wants consultants to be more forward thinking: “Engineers should be understanding and responding to my particular needs instead of doing things the way they’ve always done it.”
This Texas municipal official reflected a familiar theme that has been prevalent in past years as well, suggesting that engineers need to “visit the job site. Too many engineers never get out of the office and end up designing things that look good on paper, but are not practical for the field.”
An Iowa respondent stressed that engineers need to obtain “a better knowledge of the infrastructures of each city that they work with instead of going on what they are told or shown by other engineering firms.”
A Maryland city official suggested that engineers must take “more care in designing projects. The young staff engineer doesn’t have the knowledge of pipe fitting and clearances that we need.”
A Montana survey respondent wants consulting engineers working with his city to “be familiar with various technologies rather than pushing one favorite.”
Summary
Getting a firm handle on 2009 spending can be frustrating. But while spending plans are somewhat reduced for cities in 2009, the market is still among the most stable industries in the country. Public works spending will be maintained at historic levels. Depending upon the actual distribution of stimulus funds, for those contractors and suppliers who maintain a proactive market presence, the last quarter of the year could begin to see a substantial increase in business opportunities that will carry forward through 2010.
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