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efc.sog.unc.edu
Water Finance for Very Small Water Systems
Shadi Eskaf [email protected] 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
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 [email protected] http://efcnetwork.org 919-962-2785
