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efc.sog.unc.edu

Water Finance for Very Small Water Systems

Shadi Eskaf eskaf@sog.unc.edu 919-962-2785 Environmental Finance Center at UNC School of Government NCWOA Very Small Groundwater Systems Seminar March 13, 2014 Wilkesboro, NC

Housed at the UNC School of Government. Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective and financially sustainable ways. http://efc.sog.unc.edu

Acknowledgement

U.S. Environmental Protection Agency

Public Water Supply Section (Division of Water Resources, NC DENR)

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Smart Management for Small Water Systems under a Cooperative Agreement with the US EPA

• The EFCN provides training and technical assistance to small public water systems in all fifty states and five territories to help local water systems achieve and maintain compliance with the Safe Drinking Water Act.

• Workshops, trainings and direct assistance are provided on: – Asset Management – Water Loss Reduction – Water System Collaboration – Fiscal Planning and Rate Setting – Energy Management – Funding Coordination, and – Managerial and Financial Leadership

• Sign up for direct assistance at http://efcnetwork.org/one-on-one/ or come see me at the break

A little about you and your systems

• Water system management is your primary job • You are responsible for financial management of the

system • You have individual water meters for households • You budget and account for your water system

separately from other programs • Your customers are charged directly and separately

for water • How much do you charge/set aside for the water

system (each household/month) – NC local governments with <500 people and good

financial record, charge $16-$49/month for average water bills (half more than $22/month)

Topics to Discuss Today

• Budgeting 101: Understanding Your Costs and Revenues

• Capital Planning

• Financing Your Water System Needs

Is there anything else you want to learn today?

Take-away Points • Budget for your water system separately

• Track and record your expenses and revenues over time

• Create a simple plan to rehabilitate, replace or add assets, how much it will cost, and how you will pay for it

• Use a cash-flow model to project your revenues and expenses for next few years. Adjust your charges over time as needed.

• Look for ways to lower costs but avoid running your system into the ground. Energy management and working with neighboring systems can help.

• There are freely available resources (tools, guidebooks, advisors) who can help you with financial planning

BUDGETING AND FINANCE 101

How many of you have a budget for your household?

It’s the same thing for your water system.

Why Budget for the Water System at All?

• Costs always going up • Capital rehabilitation or replacement • System expansion • Changes to revenue, expected or not • Think 5-10 years out

Budget for water separately • Government-owned water systems operate

as “enterprise funds”—stand-alone business units within the government that are self-sustaining.

• Owners can also set up a separate account

for privately-owned water systems, similar to an enterprise fund for water. Think of your water system as separate from your other businesses.

How do you treat your water system as part of your overall enterprise? Separate entity?

Core function?

Guidebooks on Setting Rates/Financial Planning

http://www.epa.gov/safewater/smallsystems http://www.awwa.org

http://www.epa.gov/ogwdw/smallsystems/pdfs/guide_smallsystems_final_ratesetting_guide.pdf

Water System Finance Diagram

Operating Costs

Current Capital Projects

Debt Service

Your Revenues

Debt

Reserve Funds -

Where does your water system revenue come from?

Understanding your Revenue • Simply put, the money you have to cover

your costs

• Local governments: rates tied to usage. • Mobile home parks/HOAs: included in rent?

Flat fee? Metered charge?

• If included in rent, consider a portion of the rent to be dedicated explicitly for the water system. Treat it as such!

Revenue Table

Three Types of Costs

• Operating costs – everyone has these • Capital costs – everyone will have these • Debt service – if you take out a loan or

bond

Understanding Operating Costs • What you need to run your business day in and day out

• What are your operating cost categories?

– Personnel – Energy – Chemicals – Water bulk purchases – Office equipment – Supplies – Lab – Billing, meter reading – Maintenance – Etc.

Understanding Capital Costs • The “big stuff”

• Rehabilitation & replacement of existing infrastructure

• New infrastructure as needed to serve your customers

What are your capital cost categories? What pieces of equipment do you want to budget for?

Understanding Debt Service

• What you owe on loans and bonds, paid back on a regular schedule

Cost Table

Controlling Costs

How do you do it?

Controlling Costs: Some Options for Small Water Systems

1. Energy management and water loss reduction

2. Partnering with other systems to reduce costs

3. Asset transfer and system consolidation

What you don’t want to do is NOT rehabilitate your water system

Energy Management Techniques • # 1: Reducing water loss! Promoting

conservation among customers also helps. • Equipment changes (e.g.: variable drive motors) • Process changes • Billing rates changes • Time of operation changes • If using surface water, possible electricity

generation? Pumping water is largest consumer of energy

System Partnership Options

• Bulk purchases • Sharing staff • Sharing heavy equipment • Using the same accounting or billing firm • Using the same contract operator • System interconnections and bulk water

purchase/sales

Does anyone in the room have these types of partnership

arrangements?

Transferring Ownership of Water System

• When is it time to transfer a water system? Is it possible? – Current compliance status with regulatory agencies – Potential interconnection – Another organization with interest – State of system’s assets – State of system’s finances

• See http://www.efc.sog.unc.edu/event/webinar-water-system-partnerships-regionalization-%E2%80%93-water-company-model for a recorded webinar about this option

How many of you would like to get out of the water business?

Has anyone here tried?

Balancing the Budget: All Categories

• At the end of the year, you should bring in at least enough revenue to cover all of your costs

• This includes operating costs, capital costs, debt service and future capital costs (saving ahead for upcoming expenses)

Reserve Account(s) • If revenues exceed costs, the extra money can go into one or

more reserve account(s) specifically for the water system

• You can either set up a separate account (e.g.: checking account) for the water system to more easily manage finances for the system, or keep everything lumped together in one account and just do separate accounting so that you know exactly what portion belongs to the water system.

• You can set up more than one account for the water system. E.g.: capital reserve account, operations accounts, purchase water account, etc.

ALWAYS TREAT THE WATER REVENUES AS INDEPENDENT OF YOUR OTHER BUSINESSES. KEEP GOOD RECORDS.

How Much Do You Need In Your Reserves?

• It depends (see http://efc.web.unc.edu/2013/02/12/right-sizing-reserve-funds/)

But set a minimum target! • Enough to pay for your most expensive piece

of equipment? • Enough to cover your costs if you had no

revenue for two months? • Enough to cover the projects in your capital

improvement plan?

Now Calculate How Much Revenue You Need Next Few Years

Don’t forget to add capital costs and debt service in

future years here!!!

Track Your Actual Revenues and Expenses Every Year

• Keep good records • Create a multi-year cash flow model. List

every year’s revenues, expenses and reserve allocations.

• Last year’s ending balance = this year’s starting balance.

• Starting balance + revenues – expenses = this year’s ending balance. Always keep it above your reserve target.

Water & Sewer Rates Analysis Model http://efc.sog.unc.edu/ Find it in Resources / Tools

Free, simplified Excel tool allowing you to model and compare two rate structures on your projected fund balance

Funded by NC DENR Public Water Supply Section

CAPITAL PLANNING AND FINANCE

Two Related Concepts: Asset Management & Capital Planning

http://www.epa.gov/safewater/smallsystems/pdfs/guide_smallsystems_asset_mgmnt.pdf http://www.epa.gov/safewater/smallsystems/managementhelp.html

5 Things to Track for Each Asset in an Asset Management Inventory

1. Name/Description/location of every asset

2. Age of asset 3. Condition (and service history) 4. Criticality (how important it is) 5. Expected useful life remaining

Source: EPA’s “Asset Management: A Handbook for Small Systems”

Create an Asset Inventory

Source: EPA’s “Asset Management: A Handbook for Small Water Systems”

http://www.epa.gov/safewater/smallsystems/pdfs/final_asset_inventory_for_small_systems.pdf

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Some Rules of Thumb – Expected Life

• Pipelines, valves: 40-50 years • Mechanical equipment: 15 years • Wells and springs: 25-35 years • Storage tanks: 30-60 years • Meters: 10-15 years • Concrete will need refurbishing within 30 years

Create an Asset Inventory

Source: EPA’s “Asset Management: A Handbook for Small Systems”

Prioritize Asset Rehab. / Replacement

Source: EPA’s “Asset Management: A Handbook for Small Water Systems”

Long Term Capital Planning

• After building our asset management plan, begin to price out the rehabilitation/replacement costs for every asset. Figure out how much you expect to pay every year in the upcoming 5-10 years for capital projects.

• CIP identifies and prioritizes capital projects, identifies funding sources for every project, and sets timelines

Capital Improvement Program • Identify regulatory deficiencies (discuss with

regulatory agencies, look at proposed regulations, talk to consultants), in a 10-20 year window

• Identify growth needs, expansion • Identify deferred maintenance problems or

where current service is inadequate • Prioritize based on need realizing that

“hidden” infrastructure tends to be ignored

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Capital Improvement Program - Timelines

• Use Asset Management Plan to plan for

capital expenses in the long term (~20 years)

• Create a Capital Improvement Plan with a narrower timeline (~5 years) in more detail. Specify the projects and accurate estimates of cost. Plan where money will come from.

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Example Capital Improvement Plan (CIP)

Estimate Required Capital Reserves

Source: EPA’s “Asset Management: A Handbook for Small Water Systems”

Where Can You Find the Prices?

• Call a vendor. Actually, call a few.

• Ask other systems

• Look at past expenses but adjust for increases in costs

• Look up online or in vendor manuals

User-Friendly C.I.P. Tool http://efc.sog.unc.edu/ Find it in Resources / Tools

Free, simplified Excel tool allowing you to list your capital projects and plans for funding them, and automatically estimates rate increases

Funded by NC DENR Public Water Supply Section

http://www.epa.gov/cupss/

Software: CUPSS (EPA)

HOW DO I PAY FOR ALL THIS?

Ways To Pay

• Pay as you go (current receipts) • Save in advance and pay • Pay later (someone loans you money) • Grants (let someone else pay)

Funding Sources Available • Revenues from customers • Loans from banks • Loans & grants from USDA

(http://www.rurdev.usda.gov/UWEP_HomePage.html) or DENR’s Division of Water Infrastructure (http://portal.ncdenr.org/web/wi/) – Local governments can apply to USDA, DWSRF,

CDBG, ARC, State HUC and TAG grants – Private systems can apply to DWSRF, or if doing

a joint project with a local government, local government can apply to any and share

Anything else to talk about?

What financial issues are you having difficulties with right

now?

EFC Resources for Water Systems to Help with Rate Setting

• Guidebooks on designing appropriate rate structures based on utility objectives

• Do-it-yourself tools in Excel to allow you to analyze your rates and try out scenarios

• Benchmarking rates and financial performance (Rates Dashboard)

• Documents that provide information and data on NC rates, tap & impact fees, financial practices, etc.

• Capital planning reference guide • Trainings and workshops • Direct assistance • Weekly blog posts on related financial and managerial

issues • And more…

We Can Assist Small Water Systems for free* *under a Cooperative Agreement with the US EPA

• Water systems serving <10,000 people can contact us for free, direct assistance on: – Asset Management – Water Loss Reduction – Water System Collaboration – Fiscal Planning and Rate Setting – Energy Management – Funding Coordination, and – Managerial and Financial Leadership

Please sign up on the handout if you want us to contact you about any of the above issues, or go to http://efcnetwork.org/one-on-one/

Take-away Points • Budget for your water system separately

• Track and record your expenses and revenues over time

• Create a simple plan to rehabilitate, replace or add assets, how much it will cost, and how you will pay for it

• Use a cash-flow model to project your revenues and expenses for next few years. Adjust your charges over time as needed.

• Look for ways to lower costs but avoid running your system into the ground. Energy management and working with neighboring systems can help.

• There are freely available resources (tools, guidebooks, advisors) who can help you with financial planning

• Contact the EFC if you need any direct assistance

efc.sog.unc.edu

Environmental Finance Center at the University of North Carolina School of Government, Knapp-Sanders Building CB #3330 Chapel Hill, NC 27599-3330 USA

Shadi Eskaf http://efc.sog.unc.edu eskaf@sog.unc.edu http://efcnetwork.org 919-962-2785