12 Apr 2011

Non-profit profits at water utilties

Some people forget that cash is not the only way to "take profits" from a business. That leads them to the false conclusion that the people who own/run non-profits cannot find a way to help themselves while claiming to help others.

NB: By "help themselves," I mean taking more than their wages might indicate.

How do they help themselves? There are the obvious ways:
  • Getting reimbursed on a per diem- instead of cost basis for travel;
  • Hiring extra workers to reduce their own workload;
  • Getting paid more than market wage, with the approval of a friendly board of directors;
  • Consuming more perks (nice office, car, extra vacation, etc.);
  • and so on...
I'm not going to begrudge them these forms of income, but I'd prefer that everyone look at the whole picture.

(I first started thinking about these issues after reading a history of the National Geographic Society, one of the wealthiest non-profits in the world. My recent visit to the "non-profit" World Bank did nothing to dispel my thought that these social servants can have a pretty good life. Churches? Let's not go there.)

Right, so that's just a starting point to set up this more interesting angle:

I can't remember who gave me this idea, and I may have it wrong, but here's how it works:
  1. A utility (private or public) claims it needs $200 million to improve infrastructure.
  2. A bond issue is approved, backed by future revenue (rate increases) or property taxes.
  3. The bond brings $200 million to the utility, which then raises rates to cover repayment.
  4. The work is done for $150 million.
  5. The extra $50 million goes to perks, bonuses (under budget!), etc.
Does this make sense? I'm not sure that financial or operating audits would catch this process, since it takes several years and involves moving money back and forth between accounts, budgets and divisions.

You're comments (and examples!) welcome!


The Pasadena Pundit said...

If I correctly understand the situation you describe, the public entity is unregulated by the CPUC because it is not a profit making entity (Investor Owned Utility or IOU). But like an IOU there is an incentive to pad costs so that the increment of regulated profit is higher and the base expenses also higher. If such a nonprofit is a natural monopoly all the better at this game.

Which all goes to maybe explain why the MWD of So Cal raised water rates during a recession and proceeded to spend the money on landscaping and other make work projects while its execs flew off to D.C. meetings with huge perks and per diems.

An entire city in California is managed in the manner you describe. They have a $200 million annual General Fund budget but only spend $170 million or so. They secretly fail to roll the surplus each year into the next years budget and instead squirl it away in investments while hiding the rest in the electric utility reserve and redevelopment agency "loans." There is no public hearing or authorization via a Board Letter for this policy of over-budgeting and under-spending. An audit would be hard pressed to find the hidden money disguised as Utility Reserve or loans to Redevelopment Agency. It all goes on sub rosa. But it continually issues press releases about how it is financially strapped. The Press buys the spin and never probes - they don't even have the smarts of how to read Certified Annual Financial Report.

Then the Recession and inflation hit. They scream in the newspapers about bone cutting budget decreases and they have to raise water rates to cover the bloat.

Jay said...

It's pretty rare, in my experience, for a public project to come in under budget, but a technique used on municipal road projects goes like this. Prepare a set of plans, specifications and estimate. Use qualtities for the estimate that are higher than the quantities supported by quantity take-off of the plans. Use the excess costs generated from the inflated quantities to cover change orders resulting from deficiencies in the plans or changed conditions. That way the project administrators don't have to seek approval for additional funds to cover cost overruns. This is an opaque way of including a project contingency.

Bottom Line: Transparency is needed on public projects to earn trust.

David Zetland said...

@Jay -- LADWP did a version of this in the 50s (or maybe still today), where they raised rates *ahead* of cost. They claimed it saved them paperwork 9fewer rate hearings) but they were banking surplus all those years.

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