WEF Collection Systems Conference 2017

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1 Enhanced Affordability Analysis of Combined Sewer Overflow Long-Term Control Plans Omaha s CSO! Program Jason Mumm, Stantec, James Theiler, City of Omaha, Andy Baker, Stantec, and Carol Malesky, Stantec ABSTRACT The City of Omaha has an Administrative Order of Consent with the State of Nebraska, which has been negotiated with the Nebraska Department of Environmental Quality (NDEQ). The Order requires the City to meet the requirements of the Combined Sewer Overflow (CSO) Control Policy of the Clean Water Act by More than 90 projects identified in the City's Long Term Control Plan (LTCP) are scheduled to improve water quality in area rivers and streams at a cost of approximately $2.0 billion, with over $4 million spent since the LTCP was implemented, beginning in For local communities engaged in consent decree negotiations with federal or state regulators related to compliance with the Clean Water Act and/or Safe Drinking Water Act, completion of a Financial Capability Assessment (FCA) is standard requirement (USEPA, 1997). The FCA is both a quantitative and qualitative benchmark that is intended to provide a basis of comparison between communities. The components of the FCA are defined by USEPA guidance promulgated twenty years ago; comprising a variety of demographic and economic metrics, and a single key quantitative metric: the Residential Indicator. The Residential Indicator compares an imputed cost per household for sewer service to the community s median household income. Since promulgation of these requirements, based on input from the US Conference of Mayors, National Association of Clean Water Agencies (NACWA), and various other parties, USEPA has advised consent decree communities to submit additional information to enhance the understanding of financial issues. The FCA is extremely important in USEPA s determination of the compliance schedule imposed in these cases. The results of an enhanced affordability assessment approach applied in the City of Omaha, called the Weighted Average Residential Index or WARi are intended to demonstrate the financial burden of the City s LTCP on its residents, as well as fairly reflect the benefits of the City s existing rate assistance programs. Results of this analysis better characterize the financial burdens of Order on Consent compliance for the City. WARi provides the City with a valuable analytical tool to precisely identify the neighborhoods where financial burdens are most pronounced, and to focus its limited financial assistance resources in ways that can achieve measurable results that further reduce financial burdens of the LTCP. KEYWORDS Affordability, Financial Capability Analysis, Consent Decree, rates, financial burden INTRODUCTION Communities relying solely on the USEPA-required components of the FCA have often found that the financial measures that indicate whether a proposed control plan is a low or high financial burden are very limited and do not portray a complete or even an accurate picture. 862

2 These limitations often result in inaccurate assessments where a control plan is deemed to be of low- or medium- burden when a closer inspection of the details would suggest otherwise. The City of Omaha and its consultant, Hawksley Consulting (now part of Stantec), have found that the key limitations of the USEPA methodology are that: a) it uses one imputed bill to assess household burden rather than actual bills for service; b) it considers only median household income for the entire service area as a measure of household income rather than considering the full distribution of income levels; and c) it ignores the concentration of impacts in neighborhoods as well as the distribution of population in those neighborhoods. In response to USEPA s Financial Capability Assessment Framework for Municipal Clean Water Act Requirements released in 2014 (USEPA, 2014), Stantec developed a detailed affordability approach that provides a more complete and accurate picture of the City s financial capability. USEPA s new financial capability assessment framework builds on EPA guidance by encouraging communities to provide additional information that better characterizes residential impacts and financial strength. This paper summarizes Stantec s affordability approach and its application in assessing the financial burden of the City of Omaha s capital improvement program. METHODOLOGY Because of the limitations and shortcomings of the USEPA-required methodology, Stantec developed an enhanced method of assessing affordability called the Weighted Average Residential index (WARi ). In addition to the required FCA criteria, the WARi methodology provides additional insight by considering income levels and financial burdens for each census tract: 53 data points for every tract in the City s service area. The financial impacts to the households in each tract are portrayed graphically by linking it to the City s geographical information system (GIS), and these financial impacts are projected into the future based on the costs of the proposed control plan. As a result, we can demonstrate affordability metrics with high resolution across income levels, service levels, and geography. The methodology is relatively simple, and it offers a more detailed and more accurate assessment of actual financial burdens in communities with varying distributions of household income. For each census tract in the service area: 1. Determine the average residential bill per household by cross-referencing billing data to the appropriate census tract by geocode data. 2. Calculate the financial burden for the average bill in the tract for each of the 16 income bins (standardized) tracked by the US Census Bureau. Financial burden is estimated by dividing the average bill by the midpoint of the income bin. 3. From the US Census data for the census tract, determine the number of households for each income bin. 4. Calculate the weighted average financial burden by multiplying the burden in each income bin by the percentage of population in each bin. 863

3 Once the calculation has been completed for each tract, the weighted average impact of the entire service area can be determined by weighting the result from each tract by the total household populations in those tracts. As an additional measure, the methodology is also readily adapted to determine the EPA Residential Indicator for each census tract, and for the entire service area, thus meeting the current regulatory standards but also allowing for much greater levels of detail. In some cases, the WARi values contradict the financial burden indicated by the EPA Residential Indicator, suggesting either higher or lower threshold limits should be considered. RESULTS Given approximately $2.0 billion of capital spending anticipated over the course of the City s LTCP, sewer rates have increased significantly since the Order on Consent was negotiated in With ten years remaining on the term of the City s LTCP, the enhanced affordability analysis provides the information the City needs about the financial burden at present and how it will change as the City continues to raise rates to finance the improvements necessary for compliance with the LTCP. Projections of future rate increases rely on numerous factors. The project team prepared a longterm financial planning model to analyze these factors and evaluate alternative scenarios for use in the affordability assessment. Annual forecasts of potential rate increases are applied to the average bills by census tract to project annual changes in WARi throughout the period of the LTCP. Key indicators from the analysis include quantifying the degree of income skew from the national average, which is considered the normal income distribution in the United States; evaluated for the City s entire service area, and presented in Figure 1 for the whole City. The figure shows that the City s income distribution approximates that for the United States, which is not always the case in CSO communities. In fact, we find many communities under consent orders are skewed from the national norm, with greater proportions of households in the lower income bins and fewer in the higher income bins. In Figure 2, a baseline map shows the variation in median household income among census tracts in the City s service area. Darker red census tracts indicates lower MHI and predicts areas that may have affordability concerns. The WARi analysis was performed in conjunction with an update to the City s conventional FCA, which includes anticipated full costs for the overall management of the sanitary and combined collection system, including both future repair and replacement needs and improvements associated with future regulatory impacts. The WARi methodology improves upon USEPA s approach by accounting for income skew and mapping a year-by-year projection of residential financial burdens which typically can be used to help negotiate the most costeffective water quality solutions at the right time. In the City s case, this enhanced view of affordability provides more useful data regarding the use of ratepayer assistance funds and multifamily household affordability. 864

4 DISCUSSION After several years of rate increases at two to three times the rate of underlying inflation, the City s residents and its political leaders had become concerned that the financial burdens of its CSO program were too great. A previous study based on the EPA guideline approach had indicated that the financial burdens were moderate (medium burden) but these findings did not appear to assuage concerns. For its part, the City began to investigate ways that it might successfully reduce the cost of the LTCP without the need for a time extension or reduction in control level. Proposed refinements to the current CSO program include technical engineering savings and more optimized project schedules. These efforts resulted in proposals that may save the City approximately 16 percent in total costs if approved by the State of Nebraska. The WARi-based study recently completed found that the current financial burdens for the full system were relatively low and would remain low to moderate through 2027 without any changes to existing LTCP. Additional scenario analysis using the WARi approach helped to illustrate the effects that the City s proposed 16-percent cost reduction may have on residents should the proposals be approved by regulators. With the savings in place, the financial burden would likely remain at a low level through the 2027 timeframe. An important finding, however, was that the number of census tracts rated as high burden was substantially reduced as a result of the savings. While the reduced costs would not eliminate all such high burden neighborhoods, WARi allowed the City to see exactly where those tracts were located, which ones were of highest concern, and which would benefit most immediately from the proposed savings. In turn, this will enable the City to focus its financial assistance programs more precisely to further improve the financial burdens with measurable results. Figure 3 presents two scenarios of potential results under two CIPs. WARi projected for 2027 for the City s wastewater service area under the current draft CIP is presented on the left. Red census tracts identify high burden neighborhoods and produce a systemwide WARi value of 2.41%. This compares favorably to a high burden threshold of 3.9% (the equivalent of 2% of MHI the USEPA s high burden threshold). Pictured on the right is the outlook for the City s financial burdens assuming regulators will approve its proposals resulting in a 16% reduction in total cost and a WARi value of 2.02%. In reviewing the City s billing data and demographic data, it was observed that many of the lowest-income census tracts within the City s service area are also tracts with a high percentage of multifamily households. This can be observed in comparing Figure 4 with Figure 2. Multifamily accounts in the City of Omaha s service area are billed as general commercial customers a different rate schedule than for single family accounts. Because of this different rate structure and because of typically lower usage, on a per household basis, individual multifamily households have a lower burden. Additionally, the City of Omaha provides Sewer Rate Assistance funding (SRAF) to low income households, administered through the Nebraska Low Income Home Energy Assistance Program (LIHEAP). These two factors combine to make a significant difference in the overall affordability of the system. Figure 5 presents a comparison of the projected WARi affordability in 2027 with and without the rate structure benefits and 865

5 SRAF program. Without these two factors, the systemwide WARi would increase from 2.02% to 2.72%, a 34.7% increase. The impact of the SRAF program and multifamily rate structure are so significant because they mitigate the rate burden on the customers at the lower extreme of income distribution. CONCLUSIONS As part of its negotiations with NDEQ in the past, the City has presented its Financial Capability Assessment using standard EPA guidance on the issue. The results of this current study are intended to expand the analysis of the financial burdens to City residents, as well as fairly reflect the benefits of the City s existing rate assistance programs. Results of this analysis better characterize the financial burdens of Order on Consent compliance for the City. Finally, WARi provides the City with a valuable analytical tool to precisely identify the neighborhoods where financial burdens are most pronounced, and to focus its limited financial assistance resources in ways that can achieve measurable results that further reduce financial burdens of the LTCP. Comparison of Income Distribution % of Households with Income Less Than 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% < $10,0 $10,0 $15,0 $15,0 $20,0 City of Omaha $20,0 $25,0 $25,0 $30,0 $30,0 $35,0 $35,0 $40,0 $40,0 $45,0 $45,0 $50,0 $50,0 $60,0 $60,0 $75,0 $75,0 $1, 0 $1, 1 - $125, 0 $125, 1 - $150, 0 $150, 0 - $2, 0 USA 7.22% 5.33% 5.36% 5.32% 5.11% 4.70% 4.67% 4.12% 7.90% 9.93% % 4.92% 5.04% 5.03% Omaha 7.66% 5.62% 5.60% 5.79% 5.77% 4.96% 5.11% 4.77% 8.39% 9.75% % 4.25% 3.67% 3.49% Figure 1. Comparison of City of Omaha Income Distribution with the National Distribution 866

6 Figure 2. Map of Median Household Income for City of Omaha Service Area 2027 WARi, Baseline CIP 2027 WARi, Reduced CIP Figure 3. Projected Weighted Average Residential Index (WARi ) in 2027 Under Two CSO CIP Scenarios 867

7 Figure 4. Percentage of Multifamily Households for City of Omaha Service Area 2027 WARi, With SRAF & Multifamily Rate 2027 WARi, Without SRAF or Multifamily Figure 5. Comparison of Projected WARi in 2027 with and without Affordability and Rate Structure Benefits REFERENCES USEPA. March Office of Water. CSO Guidance for Financial Capability Assessment and Schedule Development, EPA 832-B USEPA. November K. Kopocis and C. Giles. Memorandum: Financial Capability Assessment Framework for Municipal Clean Water Act Requirements. Washington, D.C. 868