System Fiscal Sustainability

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1 System Fiscal Sustainability Jeff Hughes UNC Environmental Finance Center UNC School of Government

2 Agenda 1. Fiscal sustainability challenges 2. Strategies for addressing them

3 A few of the resources on efc.sog.unc.edu Blog entries (sign up if you are interested) Listservs Rate and revenue modeling software Legal guides to billing (Kara Millonzi) Financial benchmarking and rates dashboards Capital planning tools Instructional videos Copies of past courses Detailed research projects

4 Financial Leadership in the Water Sector

5 KRISPY KREME CORPORATE ACCOMPLISHMENTS Sales of $778.6 million, a 28 % increase over last fiscal year (52-week year). Net income of $39.1 million, up 51.6 percent over last fiscal year Opening 53 factory stores and 10 commissaries. Acquiring Montana Mills Bread Co., Inc., Achieving a 24.0 percent national market share Being recognized by Restaurants and Institutions SOURCE: Krispy Kreme Annual Report

6 CORPORATE ACCOMPLISHMENTS Renovation of Pump Station ($540,000) Replacement of 14,000 of water ft of water line ($2.9 Million) Rehabilitation of 19,000 ft of sewer line ($650,000) Begun evaluation of reclaimed water project. In house study of establishing more comprehensive water conservation program. Ambitious 15 year CIP identifies $251 million of necessary system improvements. SOURCE: Annual Report

Water Sales (1980-2009) (Slide provided by Orange Water and Sewer

7 Water Sales ( ) (Slide provided by Orange Water and Sewer Authority)

8 Is it variable or is it gone?? Annual MGD Actual Annual 5-Year Moving Average 1967 SWD Forecast 1973 RIBCO Forecast 1980 Complan Forecast Medium 1980 Complan Forecast Medium-Low 1985 Complan Forecast-Medium 1993 WSP Forecast Source: Seattle Public Utilities

9 Source: Fayetteville Observer 2/6/04 Fixed vs. Variable

10 Starting Out Behind? n = 438 (FY 2014) Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

11 FY 2014 Rates and Operating Ratios Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

12 Rates Rising Faster than Inflation Reported in Defining a Resilient Business Model for Water Utilities, Water Research Foundation Report #4366.

13 What is biggest challenge to setting rates in your utility? 1. Falling consumption trends/ difficulty with projections 2. Governing board s unwillingness to raise rates 3. Communities ability to pay more for water and wastewater service 4. Pressure to keep rates comparable to other water utilities 5. Rising cost of other governmental taxes and fees 6. Other? 24% 29% 24% 14% 5% 5%

14 Are revenue increases keeping pace with rate increases? Revenue increases Rate increases Two-thirds of the utilities had lower revenue increases than rate increases (points below the 1:1 line), and almost every utility that raised rates by more than 50% had relatively lower revenue increases. Reported in Defining a Resilient Business Model for Water Utilities, Water Research Foundation Report #4366. Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Revenues are total operating revenues as reported to the Local Government Commission.

15 Percent of Annual Income Spent at 5,000 gal./mo: Median & Low Income Customers 506 Water Bills, 419 Wastewater Bills, and 384 Combined Bills Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

16 Inside/Outside Billing ~62% of utilities (83% of municipalities) have different outside rates Median differential: 1.84 water, 1.92 sewer Median combined bill for 5,000 gallons: Inside $73.82 Outside $ Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

17 Things You Can Do

18 Manage Costs Aggressively Non-revenue water program Asset management Business procedures Energy savings

19 Tell a Compelling Finance Story For yourself For your board For your boss Engineer Finance For your neighbor

20 What do you promise? A. Department's goal is to provide a high level of services to our residents / customers at the lowest possible cost. B. will provide our customers with high quality water and wastewater services through responsible, sustainable, and creative stewardship of the resources and assets we manage. 20

21 Water Distribution System Current Lifecycle Renewal/Replacement Average yearly expenditure over the last 20 years is $226,000 This equates to a 1,396 year replacement schedule Yearly funding should average $4,000, miles of unlined cast iron mains Poor condition of distribution system directly affects water quality Source: Linda Sims, City of Durham, Department of Water Management

22 Compare with Caution $1,200 $1,000 $800 $ $669 $643 $753 $1,032 $600 $563 $414 $582 $497 $524 $400 $298 $282 $200 $0

24 Subscribe to Keep Up-to-Date with the Environmental Finance Blog Examples of relevant blog posts: Declining demands in NC Increasing rates in NC Operating ratios in NC Water debt in NC What s wrong with %MHI Financial strategies And much more!

25 Modify Your Rates on Annual Basis 49% increased rates last year 62% changed rates within the past 2 years Only 11% of rate structures have not changed since total rate structures Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

26 Re-examine your Rate Structure Median combined: $31.00 Low Bills for Low Consumption Amount vs. Revenue Stability Source: 2015 NCLM/EFC North Carolina Water & Wastewater Rates Survey Report

27 Be Conservative with Future Growth Projections

28 Re-examine Connection Policies Mandatory connections Financial incentives for connections More precise tap/capacity charge fees

29 Develop/Improve a Capital Investment Plan Rate impacts Alternative funding scenarios Alternative sales projections Operating cost impacts

30 Consider New Partnerships

31 Consider an Affordability Program Water conservation focused Hardship payments Partnerships with charities

32 Take Out a Loan??? Debt provides an incentive for cleaning up a messy fiscal house Debt allocates payment for assets to users in a fair manner Debt is a sign of being a grown up utility Recognition that putting off costly investments until the next grant comes in may not be feasible. (But don t over borrow )

33 Questions and.burning Issues

34 Draft 2015* by the Numbers (Based on data submitted as of 2/1/15) Operating revenues collected by governmental utilities (FY 2014) Highest (SUBMITTED TO DATE) (FY 2014) Lowest (FY 2014) Median charged by NC utility Average number of blocks 4 Median multiplier for out-of-city rates (Among 83% percent of municipalities) Percent of utilities that raised rates (376 water sewer rate structures) Median increase for those that increased bills >$2.2 billion $197 million (Raleigh) $1,178 (Boiling Springs Lakes) $31.32 Water $38.42 Sewer $67.80 Combined 1.84x Water 1.92x Sewer 53% Water 52% Sewer 4.6% Water 4.9% Sewer

35 Draft 2015* by the Numbers (Based on data submitted as of 2/1/15) Highest rate per 1,000 gallons at 5,000 gallons/month Median base charge Highest base charge $20.00 Water $21.00 Sewer $15.00 Water $16.00 Sewer $31.00 Combined $94.37 Water $65.21 Sewer $90.07 Combined Lowest non-zero base charge $2.47 Water $1.97 Sewer $6.14 Combined Median percentage of customer bill due to base charge at 5,000 48% Water 43% Sewer

Foundations of Finance

Foundations of Finance March 8, 2018 International Woman s Day National Peanut Cluster Day Jeff Hughes Environmental Finance Center UNC School of Government 919.843.4956 jhughes@unc.edu www.efc.sog.unc.edu