The fifth pillar of affordability is Delinquency Management
This is the final in a series of posts outlining five pillars of affordability strategy for water and sewer utilities. None of these pillars is sufficient on its own, but together they offer a practical way to think about affordability comprehensively and strategically. Past posts described the first four pillars of affordability: quality, efficiency, rate design, and income-qualified assistance.
The fifth and final pillar of affordability is delinquency management. Even if utilities provide excellent service, operate efficiently, price progressively, and offer a smart assistance program, so long as utilities operate on a fee-for-service basis there will sometimes still be residential customers who fall behind on their bills. How water and sewer utilities manage residential delinquencies determines whether and when personal finance problems become systemic failures or public health crises.
Fortunately, most residential water/sewer bill delinquencies aren’t really a result of affordability problems. As always, rigorous research on delinquencies is rare, but experience and observation suggest that a large majority of delinquencies are short-term, idiosyncratic phenomena that have little to do with affordability.
Sometimes credit cards expire. Sometimes people are out of town when bills arrive. Sometimes people simply forget to pay. My own analysis in one major U.S. city found that short-term, 30-day delinquencies happen more or less at random and that nearly 75 percent of customers shut off for nonpayment had service restored within 48 hours. That’s an annoyance, not an affordability crisis.
The long-term delinquencies, however, present a potentially serious problem. Residential customers who fall 60, 90, or more than 120 days behind in payments are likely in some sort of personal or financial distress. How should utilities handle such cases?
There are three conventional ways of dealing with serious delinquencies in water/sewer bills:
- Shut off service
- Write off the financial loss
- Place a lien on the customer’s property
Let’s consider these choices.*
Shutoffs for nonpayment. Water utilities provide a service that is essential to human health and prosperity—it is the very reason that these systems exist. Shutting off service is a fundamental failure of that mission. Disconnecting residential customers for nonpayment is an unpleasant task that makes everyone involved feel bad. Nobody gets into the water business to deny service.
More importantly, residential shutoffs endanger public health. Inadequate water service increases vulnerability to disease and raises the community’s health risk. Residents without water service must turn to expensive bottled or kiosk water for drinking, further exacerbating affordability problems. A lack of water service can contribute to a declaration that a home is uninhabitable and, in extreme cases, can lead to loss of child custody.Residential shutoffs for nonpayment are inhumane, bad for public health, and a direct betrayal of a utility’s mission. We should eliminate them.
Write off the loss. All business of any significant size eventually have customers who rack up debts and, for whatever reason, simply do not pay what they owe. At some point it becomes more cost-effective to write off those bad debts than to continue trying to collect what is owed.
Ignoring a few residential delinquencies won’t threaten a utility’s financial viability. But if a utility regularly allows nonpayment without consequence, then more and more accounts will fall into long-term delinquency. In some cases—possibly many—customers don’t pay because they’ve learned that they don’t have to. Given the choice to pay for a service or receive the same service for free, it stands to reason that a lot of people will choose the latter.
We do no favors for the poor by allowing the water/sewer system to fall into financial distress. If disconnecting customers for nonpayment is direct betrayal of a utility’s mission, then writing off delinquent accounts as bad debt is an indirect betrayal of that same mission. Ignoring delinquencies doesn’t change a utility’s need for revenue, it simply shifts costs from customers who don’t pay to customers who do—or else it starves the utility of needed revenue. In the long run, revenue losses lead to declining service quality, which is the worst possible outcome for affordability.
Property / tax liens. Some utilities move long-term delinquent account balances into property tax bills or real estate liens after giving customers ample notice and a reasonable period of time to pay. With a tax lien, the utility receives payment when the taxing authority (in the U.S., usually a county government) collects property taxes. With a property lien, the utility receives the value of the delinquent account when the property is bought or sold. This approach effectively transforms a water/sewer delinquency from a utility billing issue into a property tax or real estate issue.
To be clear, turning delinquent balances into taxes or liens doesn’t solve the underlying problem of unaffordable water. But liens provide customers with legal protections that most utility customer service processes do not. Civil court processes govern property tax foreclosures, which afford homeowners significant protection. Most utilities provide no such judicial process for delinquent customers. In theory, moving outstanding water balances onto the tax bill could put homeowners at risk of foreclosure; in reality, it is highly unlikely that water liens cause people to lose their homes. Customers who fall into serious delinquency because they cannot afford their water bills probably also cannot afford their property taxes or mortgages. Foreclosures are far more likely to arise from those other expenses than from water bills, and in any case, we should never foreclose for water debt alone.**With a property lien, there is no risk of foreclosure due to water debt—the utility simply gets money whenever the property is sold.† The lien becomes a financial asset to the utility.
…but ultimately an easy choice
In a world of bad alternatives, liens are the least bad.
Liens compel payment without threatening disconnection. In that way, liens help ensure that utilities get the revenue that they need without endangering public health or depriving anyone of services that they need to live.
Liens allow utilities to fulfill their service missions to every customer while maintaining their financial sustainability.
The fifth and final pillar of affordability, then, is that utilities should manage delinquencies with liens—not shutoffs or write-offs.
*Some utilities—most notably Phoenix, Arizona—have used another alternative: flow restrictors that maintain service at a very low water pressure for customers who fall delinquent.
**Governments can choose not to foreclose for water debt alone as a matter of policy.
†Thanks to Bill Senft for pointing out the merits of this approach