Maintaining Sustainable Water and Waste Disposal Services Copyright 2011 Community Resource Group, Inc. No part of this presentation may be copied or reproduced without written consent from Community Resource Group, Inc. SECTION 4

For many small rural towns the water supply and/or wastewater facility may be the largest single capital investment in the community.

Steps to maintain financial viability and sustainable water and waste disposal services Review Financial Statements regularly Use financial ratios to measure performance Review user rates annually Plan ahead

Current Ratio Liquidity ratio that measures organization’s availability of cash to pay current debt Current Assets Current Assets Current Liabilities CURRENT RATIO CURRENT RATIO

Current Ratio Calculation EXAMPLE $98,434 $39, (current assets) (current liabilities) (current ratio) A ratio that exceeds 1.5 is in good shape. This current ratio shows the system is This current ratio shows the system is growing in a positive direction. growing in a positive direction.

Debt Service Ratio A measure of the cash flow that is available to meet annual interest and principal payments on debt. Net Operating Income Net Operating Income Depreciation DEBT SERVICE COVERAGE RATIO

For Fiscal Year ,637 (net operating income) 17,640 (depreciation expense) 12,663 (interest expense) $23,100 (total debt service) Debt Service Coverage Ratio (DSCR) EXAMPLE Depreciation and interest expense included DSCR 1.38 For Fiscal Year ,100 (net operating income) 17,640 (depreciation expense) 12,184 (interest expense) $23,100 (total debt service) DSCR 1.34 The debt service ratio exceeds 1.1 – the minimum DSCR ratio. This means the system minimum DSCR ratio. This means the system is in a negative direction from the prior year and needs to be watched.

For Fiscal Year ,840 (net income) 23,100 (total debt service) $23,100 (total debt service) Debt Service Coverage Ratio (DSCR) DSCR 1.38 For Fiscal Year ,824 (net income) 23,100 (total debt service) $23,100 (total debt service) DSCR 1.34 EXAMPLE cash-basis income and budget statement (depreciation and interest not included) The debt service ratio exceeds 1.1 – the minimum DSCR ratio. This means the system minimum DSCR ratio. This means the system is in a negative direction from the prior year and needs to be watched.

Operating Ratio A measure of financial efficiency that indicates the utility’s ability to cover total expenses with revenues. The minimum operating ratio should be 1.0 or greater and it is recommended to have a minimum operating ratio of 1.1 or greater. Total Annual Revenues Total Annual Expenses OPERATING RATIO

Ratios are used to review financial trends and track utility’s financial performance from one year to the next. to the next.

Questions to Ask:  Are the financial ratios moving in a positive or negative direction?  Are retained earnings (in the balance sheet) going up or down?  Is net income going up or down?

Unit-of-Service Measures Reviewing a utility’s operations from a unit-of-service perspective can give decision- makers a better understanding of how the utility is performing over time.

Unit-of Service Example  Average revenue per customer per month: $81, mo. $27.00  Total expense per customer per month: $79, mo. $26.64  Total debt service per customer per month: $23, mo. $7.70  Total cost to produce water per 1000 gallons: $79,928 15,000,000 gals/1000 $5.33  Revenue per 1000 gallons sold: $77,153 14,250,000 gals/1000 $5.41  Average customer use per month: $14,250, mo gallons  Average revenue per customer per month: $81, mo. $27.00  Total expense per customer per month: $79, mo. $26.64  Total debt service per customer per month: $23, mo. $7.70  Total cost to produce water per 1000 gallons: $79,928 15,000,000 gals/1000 $5.33  Revenue per 1000 gallons sold: $77,153 14,250,000 gals/1000 $5.41  Average customer use per month: $14,250, mo gallons PRETTY GOOD WATER SYSTEM PERFORMANCE DATA 2010

User Rates  Should be reviewed annually as part of the annual budget preparation process  Should be adjusted at least once every 5-6 years

Your annual budget should provide for the funding and accumulation of financial reserves

Must be equal to 10% of annual debt- service payment until one full year’s principal and interest payments have accumulated. Debt Service Reserve

To be used for significant, unforeseen/unplanned repairs. Should be equal to most recent years’ typical expenditure for unscheduled/reactive repairs PLUS 10% Emergency Reserve

To be used for replacement and/or rehabilitation of system components that have a useful lifespan of less than 15 years. Fund should be based on a prioritized schedule of inventory that requires replacement and/or rehabilitation in the foreseeable future. Planned Equipment Reserve

PLAN For The Future! Projecting for financial needs is a key part of a financially sustainable utility.