GAWP Leadership Academy – Level 2, Day 5 Stacey Isaac …Affordability 6. Full Cost Accounting 7....

http://efc.sog.unc.edu @EFCatUNC

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 30, 2014

http://efc.sog.unc.edu @EFCatUNC 2

Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective, and financially sustainable ways through:

• Applied Research • Teaching and Outreach

• Program Design and Evaluation

How you pay for it matters

Outline

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

3

40 Second Introductions

1. Name? 2. Organization? 3. Responsibility? 4. One thing I hope to get out of this session

is …

Which of the following MOST interests you?

1. Accounting 2. Fin. Reporting 3. Budgeting 4. Funding Methods 5. Affordability 6. Full Cost Accounting 7. Asset Management

Accountin

g

Fin. R

eporting

Budgetin

g

Funding M

ethods

Affordabilit

y

Full C

ost Acco

unting

Asset M

anagement

3% 3%

28% 28%

10%

21%

7%

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

6 Slide compiled by UNC EFC

ACCOUNTING

7

Government 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


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


Fund Accounting

FUN

DS

Government

General

Special Revenue

Debt Service

Capital Projects

Permanent

Proprietary Enterprise

Internal Service Fiduciary …


Where would water and wastewater fall?

Fund Accounting

FUN

DS

Government

General

Special Revenue

Debt Service

Capital Projects

Permanent

Proprietary Enterprise Example:

Water/Sewer

Internal Service Fiduciary …


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”

Activity Fund(s) Police An electric utility system Construction of a new wastewater plant Public Transit Municipal motor vehicle pool (maintenance)

13

Which fund(s) should be used to account for the following activities:

Slide compiled by UNC EFC

Which fund should be used to account for police?

1. General 2. Special Revenue 3. Debt Service 4. Capital Projects 5. Enterprise 6. Internal Service

General

Specia

l Revenue

Debt Servi

ce

Capital P

rojects

Enterpris

e

Internal S

ervice

94%

0%6%

0%0%0%

Which fund should be used to account for an electric utility system?

General

Specia

l Revenu...

Debt Servi

ce

Capital P

rojec...

Enterpris

e

Internal S

ervi...

13%6%

0%

74%

3%3%


Which fund should be used to account for an electric utility system?

General

Specia

l Revenu...

Debt Servi

ce

Capital P

rojec...

Enterpris

e

Internal S

ervi...

0% 0% 0%3%

97%

0%


Which fund should be used to account for Public

Transit?

General

Specia

l Revenu...

Debt Servi

ce

Capital P

rojec...

Enterpris

e

Internal S

ervi...

0% 0% 0%

33%

67%

0%


Which fund should be used to account for municipal motor vehicle pool (maintenance)?

General

Specia

l Revenu...

Debt Servi

ce

Capital P

rojec...

Enterpris

e

Internal S

ervi...

50%

3%

37%

3%3%3%


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

19

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

20

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

22

Financial Planning and Reporting Tools

• Annual reports • Financial Statements • Accounting reports • CIPs • Cash flow plans • Annual budgets • Performance measures


Planning Tools - Examples

• 10 Year Needs • 5 Year Capital Improvement Plan • 8 year Financial Plan • 1 Year Budget


Budgeting

• 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


Budgeting Tools

• 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


http://enr.construction.com/economics/FAQ.asp

http://enr.construction.com/economics/FAQ.asp

GFOA

• 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”


Exercise 2 – Reading Financial Statements

28

COMMON FUNDING METHODS

29

Who Really Pays

• 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

• Save in advance and pay • Pay as you go (current receipts) • Pay afterwards (someone loans you

money) • Grants


Where Do You Get Your Capital?

• Reserve funds • Current year’s revenues • Government grants and loans • Commercial debt market


Where Does the Money Come From?

• Loans • Grants • Bonds • User fees • Assessments • Impact fees • Taxes


About Grants

34

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

• Lots of competition

• Difficult to sustain

35

$0$2$4$6$8

$10$12$14

Total (in 2000 Dollars)

CWSRF

EPA Line Item

Construction Grant

Major Grants Have Diminished; Replaced by Loans

EPA Wastewater Spending by Type (billions of dollars)

http://efc.sog.unc.edu/project/gff

Click here to access the following table

37

A new addition?: WRRDA Background

Source: http://transportation.house.gov/wrrda/)

• Signed into Public Law 113-121 on June 10th, 2014

• Transportation and Infrastructure Committee

• Authorized 34 big water projects, including the Savannah Harbor Expansion Project (SHEP)

• Amended the CWSRF Program (expanded and added FSPs)

• Created Water Infrastructure Finance and Innovation Authority (WIFIA)

Relationships: WRRDA, WIFIA and CWSRF

WRRDA (Water Resources Reform &

Development Act )

CWSRF (Clean Water State Revolving

Fund)

WIFIA (Water Infrastructure

Finance and Innovation Authority)

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 …

they need to be repaid!!


User Fees

• 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


Assessments

• 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


Impact Fees

• One-time charges to new users • Typically assessed when building permits

are issued • Close cost/benefit relationship equity


Taxes

• Charged against: – Income (federal/state level)

– Property (local level)

– Sales (state level, with surcharges at the local level)

• Local Sales Tax – Example: SPLOST


Taxes - 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


Slide compiled by UNC EFC 48

Taxes – Tax Increment Financing

• 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


Trust Funds

• 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


SETTING USER RATES A closer look at User Fees

What Goes Into Reviewing Rates for the Next Year?

Do these rates send the right signals to our

customers, based on our objectives?

Will it provide sufficient cost recovery?

Are we allocating the costs to the

right customers?

What exactly does this include?

Will our customers understand these

rates?

Will our customers be

able to pay these rates?

Are we following

State law?

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

Compute the rates using projected

costs and revenues

Re-evaluate/adjust rate structure to fit primary objectives

Cost-of-Service Study

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

Set rates based on projected water use

Raising rates lowers water use Rule of thumb: water use declines ~2-6% as rates increase 10%

Background Information: How Rates and Usage Interact

Public Perception: Utility Reality:

Source: Fayetteville Observer 2/6/2004 Source: Orange Water & Sewer Authority

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.

Why Does this Happen? Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year

Source: CMU Director Doug Bean’s presentation to the Charlotte City Council on December 1, 2008.

EXERCISE 3 Rank Rate Setting Objectives

58

Understanding Your Utility and Served Community

• 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

1. ________ 2. ________ 3. ________ 4. ________

Full cost recovery/ revenue stability

Encouraging conservation

Fostering business-friendly

practices

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.

Groups

1. Lorraine, Lance, Joseph, Wayne, Jenerrah, Billy, Sean

2. Jennifer, Michael R, Chip, Thomas, Tracy, Scott, Robert

3. Bret, Autron, Nathan, Ted, Daniel, Tammie, Jason

4. Gregory, Matthew, Marcus, Kevin, Vic, Johnny

5. Deanna, Damond, John, Guy, Michael M, Emily

61

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: http://efc.sog.unc.edu/reslib/item/customer-assistance-program-costing-tool-north-carolina.

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-05-006. Office of Water, Washington DC. 62 pages. http://www.epa.gov/waterinfrastructure/pdfs/final_ratesetting_guide.pdf

• Georgia Environmental Protection Division (2007). Conservation-Oriented Rate Structures. http://www1.gadnr.org/cws/Documents/Conservation_Rate_Structures.pdf

http://www.epa.gov/waterinfrastructure/pdfs/final_ratesetting_guide.pdf

http://www.epa.gov/waterinfrastructure/pdfs/final_ratesetting_guide.pdf

http://www1.gadnr.org/cws/Documents/Conservation_Rate_Structures.pdf

http://www1.gadnr.org/cws/Documents/Conservation_Rate_Structures.pdf

AFFORDABILITY

65

Making the Case for Considering Affordability

66

Altruistic Reasons

• Wanting to help folks! • Caring about your customers


Your Bottom Line

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


Concept of Lifeline Rates

• “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


70

0

50

100

150

200

250

0

1-1,

000

1,00

1-2,

000

2,00

1-3,

000

3,00

1-4,

000

>4,0

00

Num

ber o

f Rat

e St

ruct

ures

Monthly Consumption Allowance (gal/month)

Consumption included with Base Charge for Residential Customers among 455 Water and 343 Wastewater Rate

Structures

Water Wastewater

Source: Water and Sewer Rates and Rate Structures in Georgia September 2012, by GEFA/EFC Slide compiled by UNC EFC

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.

Types of Affordability Programs Options facing payment-troubled customers

Percent Number Payment plan to allow customer to pay amount over time 76% 231 Customer referral to private, nonutility agency 54% 163 Customer referral to a local gov. agency for assistance 49% 149 Education 35% 105 In-home conservation assistance 25% 76 Special billing arrangements 21% 64 Change in the rate customer is charged 8% 24 Other 8% 24 One-time bill credit from utility funds 3% 8

2010, Best Practices in Customer Payment Assistance Programs, Water Research Foundation #4404

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

74

Applications of Full Cost Accounting

• 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


Full Cost Hierarchy

• 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

77

Source: Seattle Public Utilities Quickstart Guide: Project Development Plans

BENCHMARKS

78

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

• Operating Ratio = Operating Expenses/Operating Revenues

• Operating Margin = (Operating Revenues –Operating Expenses)/Operating Revenues

Operating Expenses include Depreciation

which is not a cash expenditure


Ratings

82

Credit Quality Moody's S&P Fitch IBCAPrime Aaa AAA AAA

Excellent Aa AA AAUpper medium A A ALower medium Baa BBB BBBSpeculative Ba BB BB

Very speculative B B B

Source: The Bond Market Association

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.....

83

Source: Moody’s Water and Sewer Rating Methodology

“Anatomy of a Rare Unenhanced Aaa-Rating: Cobb County, GA”

• “Gilt-edged security” • Strong management • Affordable rates balanced with periodic

adjustments • Long-range planning for adequate

capacity

84

• Effective capital planning

• Well-balanced capital funding

• Strong financial performance

Source: Moody’s

http://www.cobbwater.org/index.html

ASSET MANAGEMENT

85

Five Core Components

of Asset Management

Current State of the Assets

Level of Service

Criticality

Life Cycle Costing

Long-Term Funding

Source: New Mexico EFC

EXERCISE 4 Town of Greenville

87

RELEVANT TOOLS

Water and Sewer Rates Analysis Model Free, rate-setting tool using only MS Excel,

developed by the Environmental Finance Center at UNC.

Tool development was funded by the

Public Water Supply Section of DWR/ NCDENR

and partly by the USEPA.

Download the latest version at

http://efc.sog.unc.edu. Find it in Resources /

Tools.

http://efc.sog.unc.edu/

Water and Sewer Rates Analysis Model

http://efc.sog.unc.edu/reslib/item/water-sewer-rates-analysis-model Data Input 1

90

http://efc.sog.unc.edu/reslib/item/water-sewer-rates-analysis-model

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

91

CIP for Water & Wastewater Utilities

Another tool that projects how rates will be impacted by your

capital plan (adjustable) Available at

http://efc.sog.unc.edu Find it in Resources /

Tools.


Affordability of Water and Sewer Rates and the Affordability

Assessment Tool • On the EFC

Website Go to http://efc.sog.unc.edu and search for “Affordability Assessment Tool”


More EFC Related 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

sog.efc.unc.edu resources tools

94

http://efc.unc.edu/tools.htm










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


www.efc.unc.edu

Contact

Stacey Isaac Berahzer EFC at University of North Carolina, Georgia Office 770-509-3887 [email protected]

mailto:[email protected]

GAWP Leadership Academy – Level 2, Day 5 Stacey Isaac …Affordability 6. Full Cost Accounting 7....

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