Bonds and Financing

Infrastructure Funding and Transformative Financial Planning

Two federal laws enacted in 2021 provide funding for state and local infrastructure investments.  The American Rescue Plan Act, signed into law on March 11, 2021, is the federal government’s effort to boost the U.S. economy after the challenging effects of the COVID 19 pandemic.  The Infrastructure Investment and Jobs Act, signed into law on Nov. 15, 2021, provides $1.2 trillion in federal funding for a wide range of infrastructure projects.

Both laws offer a potential source of funding for electric system infrastructure improvements.  The Recovery Act funds are distributed automatically to state and local governments. Infrastructure Investment funds require applications.

The Rescue Plan monies accord substantial discretion to state and local governments when deciding which infrastructure projects to support.  Projects must fit into one of four categories, one of which includes broadband. Utilities considering advanced metering infrastructure may be able to use Rescue Plan funds.

The Infrastructure Investment and Jobs Act is another opportunity to make transformative infrastructure improvements.  The IIJA is a $1.2 trillion dollar infrastructure package addressing many types of infrastructure with electric being one of the highlights.  The package includes just $550 billion in new spending; with $650 billion normally allocated each year for highways and other infrastructure projects.

The Infrastructure Investment and Jobs Act includes allocation of $65 billion for broadband, with the goal of bringing high-speed connectivity to underserved regions of the country. The law also allocates $7.5 billion to build and operate publicly accessible electric vehicle charging infrastructure and $65 billion to supplement existing power structure work and innovative approaches to grid resiliency and energy improvements.  Some of the funds will come with no match or cost-share requirements and some will be in the form of loans with principal forgiveness, or grants. If your utility receives funds under these provisions, be sure the grant funds used for capital investment are properly recorded as contributed capital. Your auditor can help guide you in this area.

The influx of potential funding makes now an important time to set appropriate revenue requirements and to review key financial targets to establish a long-term forecast. Many utilities may need rate increases and bonding beyond federal funding to meet operating and capital needs. For some utilities this planning may be difficult because it will involve a change in practices. Too many governing boards and councils have avoided rate increases, even during strong economic periods. These utilities often operate at a loss, spend down cash, forego capital investments, and remain unprepared for strategic investments in infrastructure.

This unprecedented time is an opportunity to change the way we think about financial planning.  Utilities should set their sights on at least three key financial targets and develop a plan to achieve them. 

  • Debt coverage ratio is a measurement of debt affordability. The general guideline is to generate sufficient cash flow from operations in each fiscal year to cover the utility’s debt payments 1.25 times. Utilities with insufficient mandated debt coverage can technically be in default and considered higher risk, facing higher interest rates for future bonds.
  • Minimum cash reserves identify the minimum amount of cash a utility should hold. Policies that define a minimum cash reserve make for healthier utilities when established and followed.  A cash reserve policy does not reference a specific dollar amount, but follows a defendable methodology to give future decision makers guidance and accountability.
  • Operating income is a measurement of revenues less expenses in each fiscal year.  If a utility has a negative operating income, current rate payers are not paying their fair share and future rate increases will need to be much higher to recoup the deficiencies.

The plan incorporating these targets should include small, incremental rate adjustments implemented over time and it is important to stick to the plan. Small incremental rate adjustments have a powerful compounding effect for utility revenue recovery and allow customers to prepare for rate changes and avoid rate shock. Small increases advertised well in advance and implemented on schedule are key to maintaining financial health and are typically tolerated for customers of all income levels.

Above all, tried and true financial planning principles are the best strategy for long-term financial sustainability.  The unprecedented forthcoming federal funds give utilities a unique opportunity to boost their current financial position and help create a pathway to a transformative future.