Outline. 40 Second Introductions. Introduction - Public Water and Wastewater Characteristics

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GAWP Leadership Academy Level 2, Day 5 Stacey Isaac Berahzer Senior Project Director Environmental Finance Center at the University of North Carolina 10/03/13 GAWP Headquarters 40 Second

edu Outline Introduction Accounting Financial Reporting Budgeting Funding Methods Affordability (of rates) Full Cost Accounting (covered in Level 1) Asset Management/Benchmarking Introduction -

1 GAWP Leadership Academy Level 2, Day 5 Stacey Isaac Berahzer Senior Project Director Environmental Finance Center at the University of North Carolina 10/03/13 GAWP Headquarters 40 Second Introductions 1. Name? 2. Organization? 3. Responsibility? 4. One thing I hope to get out of this session is Outline Introduction Accounting Financial Reporting Budgeting Funding Methods Affordability (of rates) Full Cost Accounting (covered in Level 1) Asset Management/Benchmarking Introduction - Public Water and Wastewater Characteristics These utilities are enterprises They raise bulk of their revenues generally from bills and other fees They have a high percentage of fixed costs They protect public health and environment They are service industries They are production industries They are self-regulating monopolies They are balanced by democracy 3 4

2 Government Accounting ACCOUNTING GAAP Generally Accepted Accounting Principles establishes the rules & conventions that guide the form and content of general-purpose financial statements GASB Governmental Accounting Standards Board the primary standard-setting authority for gov t, excluding the federal gov t 5 6 Fund Accounting Fund Accounting An accounting system that is unique to state & local gov t A government s resources are segregated into categories, (i.e. funds ) to identify both the source of funds and the use of funds State and local governments use three broad categories of funds: governmental funds, proprietary funds and fiduciary funds FUNDS Government Proprietary Fiduciary General Special Revenue Debt Service Capital Projects Permanent Enterprise Internal Service 7 8

3 Fund Accounting Examples of Government Funds: General Fund each gov t has one account for all resources that are not required to be accounted for in other funds. Includes most major gov t functions such as police, fire, sanitation etc. special revenue established to account for resources that are legally restricted for specific purposes, e.g. lottery money for education capital projects used when buying/building major capital facilities Exercise 1 Fun with Funds Which fund(s) should be used to account for the following activities: Activity Police An electric utility system Construction of a new wastewater plant Public Transit Municipal motor vehicle pool (maintenance) Fund(s) 9 10 Depreciation Loss of use & value; or The systematic & rational allocation of the cost of tangible noncurrent operating assets over the period benefited by the use of the asset Source: Government and Not-for-Profit Accounting: Concepts and Practices, By Michael H. Granof, Saleha B. Khumawalas GASB 34 Passed in 1999; should have been implemented by every local gov t by FY 2004 It states that gov ts need to include depreciation in the financial statements, in order to: Evaluate whether the government's current-year revenues were sufficient to pay for current-year services See the cost of providing services to its citizenry Understand the extent to which the government has invested in capital assets Source: GASB 34 Preface and Summary, GASB 11 12

4 Capitalizable Asset Two years or more of useful life and has materiality (e.g. cost $500 or more; or cost $10,000 or more) FINANCIAL REPORTING Financial Planning and Reporting Tools Planning Tools - Examples Annual reports Financial Statements Accounting reports CIPs Cash flow plans Annual budgets Performance measures 10 Year Needs 5 Year Capital Improvement Plan 8 year Financial Plan 1 Year Budget 15 16

5 Budgeting Budgeting Tools Budget - An instrument to implement and manage public policy by obtaining and appropriating the necessary resources for service delivery Budget Process activities that encompass the development, implementation, and evaluation of the budget for the provision of services Inflationary Adjustment converting current dollars into constant (real) dollars based on a selected index Consumer Price Index an indicator that measures the change in prices paid for a fixed basket of goods and services as purchased by average urban consumers Construction Cost Index - calculated by Engineering News-Record; tracks the change in price for a specific combination of construction labor, steel, concrete, cement and lumber GFOA Exercise 2 Reading Financial Statements Government Finance Officers Association Offers awards in several categories for proper finance documents Mission to enhance and promote the professional management of governments for the public benefit by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership 19 20

6 Who Really Pays COMMON FUNDING METHODS Current customers (you) New customers Future customers (the next generation) The people that own and buy products from industries (including you) US tax payer (including you and some lady who lives in San Francisco, CA!) How the Payments are Made Where Do You Get Your Capital? Save in advance and pay Pay as you go (current receipts) Pay afterwards (someone loans you money) Grants Reserve funds Current year s revenues Government grants and loans Commercial debt market 23 24

25 26 Grants Aren t Completely Free Money http://efc.sog.unc.

7 Where Does the Money Come From? About Grants Loans Grants Bonds User fees Assessments Impact fees Taxes NOT a good way to find a grant! Grants Aren t Completely Free Money Application for the grant can be expensive staff time and money Applications can take months to process Often lots of strings attached Often require a percentage match Click here to access the following table Lots of competition Difficult to sustain 27 28

Bonds A written promise to repay borrowed money (on a definite schedule and usually at a fixed rate of interest for the life of the bond) Different types exist: General Obligation (GO) Revenue 29 30

8 Bonds A written promise to repay borrowed money (on a definite schedule and usually at a fixed rate of interest for the life of the bond) Different types exist: General Obligation (GO) Revenue The Trouble with Loans/Bonds is User Fees they need to be repaid!! Charged regularly to all customers: industrial, commercial and residential Customers bills relate to their consumption (usually) Utilities can develop rates based on their expected costs Example water/sewer/stormwater utility fees 31 32

9 Assessments Impact Fees A recurrent charge to a sub-group of the population The sub-group receives benefits from an environmental service or improvement not enjoyed by others in the area Close cost/benefit relationship equity One-time charges to new users Typically assessed when building permits are issued Close cost/benefit relationship equity Taxes Taxes - SPLOST Charged against: Income (federal/state level) Property (local level) Sales (state level, with surcharges at the local level) Local Sales Tax Example: SPLOST Special Purpose Local Option Sales Tax 1% county sales tax (municipalities may get involved as well) Available since 1980s Must be approved by referendum NOT applicable to O&M costs 35 36

10 Taxes Tax Increment Financing Trust Funds All new property taxes for an area are reinvested into the same area Particularly applicable to urban, blighted areas Example: Atlantic Station, Atlanta On the Atlantic Steel Mill brownfield site in Midtown Atlanta Redeveloped 138 acres into a live-work-play area 2,800 new trees planted Detention facilities to reduce peak run off Special account set up to receive and disburse revenues for a specific program/activity Legislature may pledge revenue from a funding source - trust fund created to manage revenue What Goes Into Reviewing Rates for the Next Year? A closer look at User Fees SETTING USER RATES Are we following State law? Are we allocating the costs to the right customers? Will our customers understand these rates? Will it provide sufficient cost recovery? What exactly does this include? Do these rates send the right signals to our customers, based on our objectives? Will our customers be able to pay these rates?

rates Determine critical characteristics of

appropriate rate structure Cost-of-Service

costs and revenues Re-evaluate/adjust rate

customers Rate should be easy to understand

Background Information: How Rates and Usage

11 The Process of Setting Rates Learn essential background information about rates Determine critical characteristics of your utility and community Design the most appropriate rate structure Cost-of-Service Study Compute the rates using projected costs and revenues Re-evaluate/adjust rate structure to fit primary objectives Basic Principles Aim at full cost pricing Set equitable rates Share rate structure with customers Rate should be easy to understand Rates should be examined annually Consider fixed costs vs. variable costs Allow for reserve account(s) Promote water conservation? Promote economic development? Background Information: How Rates and Usage Interact Public Perception: Utility Reality: Source: Fayetteville Observer 2/6/2004 Source: Orange Water & Sewer Authority

12 Why Does this Happen? Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year Understanding Your Utility and Served Community Utilities costs are mostly fixed, not dependent on the amount of water sold/used by the customers. But the majority of revenues come from the amount of water sold. If customers conserve, revenues drop significantly but not costs. Source: CMU Director Doug Bean s presentation to the Charlotte City Council on December 1, What is the make up of your served community? Have a lot of large families? What is the community s ability to pay? Is it a seasonal community? Does demand vary greatly in the summer? Does a large fraction of your revenues come from a small number of customers? Do you anticipate any large capital expenses in the next few years? Check/create your C.I.P. and asset management plan. Do you have any debt service payment requirements? Do you expect to meet demands comfortably (in case there is a drought)? Rank your utility s rate setting objectives Before You Begin: Rank Your Utility s Rate Setting Objectives Full cost recovery/ revenue stability Fostering businessfriendly practices Encouraging conservation Maintaining affordability (keeping rates low to whom?) Refer to this list and focus on the highest ranked objectives when following the guidelines for selecting the appropriate rate structure design.

13 Guidelines: Elements of Rate Structure Designs 1. Customer classes/distinction 2. Billing period 3. Base charge 4. Consumption allowance included with base charge 5. Volumetric rate structure 6. (If applicable) Number of blocks, block sizes and rate differentials 7. (Optional) Temporal adjustments 8. Frequency of rate changes Scenario: Rural Water Utility With Naturally High Costs and Excess Capacity, Wants to Maintain Affordability 1. Customer class: possibly create separate residential class. 2. Billing period: use monthly. 3. Base charge: if majority of customers use little water, charge fair base charge and include allowance. Otherwise, low base charge, and shift high rates to high volume users. 4. Consumption allowance: if including, set at a lifeline amount (~2,000 gallons/month). 5. Volumetric rate structure: probably use uniform 6. (If applicable) Block design: if using, first block at least 4,000 GPM, depending on your customers consumption. 7. (Optional) Temporal adjustments: none. 8. Frequency of rate changes: annual. Note: Set up a customer assistance program: Pricing Out Your Rate Structure (References) Use any of several reference documents with step by step instructions on calculating projected costs, revenues and rates: AWWA (2000). Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices, M1. U.S. Environmental Protection Agency (2006). Setting Small Drinking Water System Rates for a Sustainable Future: One of the Simple Tools for Effective Performance (STEP) Guide Series. EPA 816-R Office of Water, Washington DC. 62 pages. ide.pdf Georgia Environmental Protection Division (2007). Conservation-Oriented Rate Structures. uctures.pdf AFFORDABILITY 52

14 Making the Case for Considering Affordability Altruistic Reasons Wanting to help folks! Caring about your customers Your Bottom Line Concept of Lifeline Rates When customers have trouble paying their bills, there is a cost to the utility, in the form of: Arrearages Late payments Disconnection notices Terminating the service Fielding calls from the delinquent customers Providing a minimal amount of water, at a reduced cost to all customers, regardless of income level or ability to pay Source: AWWA Manual M1 Often some consumption is included in the base charge 55 56

15 Number of Rate Structures Consumption included with Base Charge for Residential Customers among 455 Water and 343 Wastewater Rate Structures ,000 1,001 2,000 Monthly Consumption Allowance (gal/month) 2,001 3,000 Water 3,001 4,000 Wastewater >4,000 National Affordability Guidelines Safe Drinking Water Act established special assistance in those communities that have an average residential bill of over 2% of MHI USDA has a program to provide funds for water and sewer systems. Loans are made for projects where the residential water bills are 1.5% of MHI. National Water Affordability Programs report: affordability programs should be based on a measure of 2% of income for poor households, rather than using MHI. Source: Water and Sewer Rates and Rate Structures in Georgia September 2012, by GEFA/EFC 57 Where is Your Assistance Going? If you aren t using full cost pricing, its likely that the large water users are benefiting significantly more in absolute terms than your small water users. FULL COST ACCOUNTING 59 60

Applications of Full Cost Accounting Full Cost Hierarchy Calculating of efficiency measures Comparing costs to other jurisdictions Documenting

Capital to serve new customers Mandated watershed/water quality protection Proactive maintenance Asset management/capital rehabilitation

16 Applications of Full Cost Accounting Full Cost Hierarchy Calculating of efficiency measures Comparing costs to other jurisdictions Documenting program costs for grant applications Developing user fees Analysis of expenditure trends for a service Operating expenditures Reactive maintenance Capital to serve new customers Mandated watershed/water quality protection Proactive maintenance Asset management/capital rehabilitation Non-mandated watershed protection Single vs. Triple Bottom Line BENCHMARKS Source: Seattle Public Utilities Quickstart Guide: Project Development Plans 63 64

IMPACT Benchmarking What does the indicator tell us about our utility that will

Which indicators can and should we use to monitor the IMPACT of our financial

65 66 Indicators Ratings Operating Ratio = Operating Expenses/Operating Revenues

Operating Expenses include Depreciation which is not a cash expenditure Credit

17 IMPACT Benchmarking What does the indicator tell us about our utility that will have an IMPACT on how we do business. Which indicators can and should we use to monitor the IMPACT of our financial management efforts and impacts Indicators Ratings Operating Ratio = Operating Expenses/Operating Revenues Operating Margin = (Operating Revenues Operating Expenses)/Operating Revenues Operating Expenses include Depreciation which is not a cash expenditure Credit Quality Moody's S&P Fitch IBCA Prime Aaa AAA AAA Excellent Aa AA AA Upper medium A A A Lower medium Baa BBB BBB Speculative Ba BB BB Very speculative B B B Source: The Bond Market Association 67 68

Improving Your Credit Rating Management quality is a key aspect in the credit assessment of these sectors, and it is reflected in their financial operations and budgeting,

.. Anatomy of a Rare Unenhanced Aaa-Rating: Cobb County, GA Gilt-edged security Effective capital Strong management planning Affordable rates balanced Well-balanced with

18 Improving Your Credit Rating Management quality is a key aspect in the credit assessment of these sectors, and it is reflected in their financial operations and budgeting, capital improvement planning, construction management... Anatomy of a Rare Unenhanced Aaa-Rating: Cobb County, GA Gilt-edged security Effective capital Strong management planning Affordable rates balanced Well-balanced with periodic adjustments capital funding Long-range planning for adequate Strong financial capacity performance Source: Moody s Water and Sewer Rating Methodology Source: Moody s Water and Sewer Rates Analysis Model Instructions RELEVANT TOOLS 72

Water and Sewer Rates Analysis Model http://efc.sog.unc.

edu/reslib/item/water-sewer-rates-analysis-model Data Input 2 73 74

Sewer Rates Analysis Model Results are Excel Spreadsheet with: The

Rates Projected for the next 20 years 75 76

19 Water and Sewer Rates Analysis Model Data Input 1 Water and Sewer Rates Analysis Model Data Input Water and Sewer Rates Analysis Model Charts Water and Sewer Rates Analysis Model Results are Excel Spreadsheet with: The Fund Balance Under Existing Rates The Fund Balance Under Proposed Rates Projected for the next 20 years 75 76

20 More EFC Related tools sog.efc.unc.edu resources tools Tools Developed by the EFC at UNC Capital Improvement Plan (CIP) Tool for Water and Wastewater Utilities, version 2.0 Water & Sewer Rates Analysis Model, version 2.0 Dashboard for Using Capital Reserve Fund to Avoid Rate Shock Customer Assistance Program Costing Tool Rates Dashboards for Several Different States Water and Wastewater Utilities Revolving Fund Model Loan Assistance Program More Benchmarking Information David Ammons - Municipal Benchmarks: Assessing Local Performance and Establishing Community Standards (Sage Publications, 2001) AWWA Benchmarking Performance Indicators for Water and Wastewater Utilities: Survey Data and Analyses Report Questions/Comments Stacey Isaac Berahzer Senior Project Director Environmental Finance Center (770) berahzer@unc.edu

GAWP Leadership Academy Level 2, Day 5

GAWP Leadership Academy Level 2, Day 5 Stacey Isaac Berahzer Senior Project Director Environmental Finance Center at The University of North Carolina GAWP Headquarters October 27, 2015 http://efc.sog.unc.edu