1. www.efc.unc.edu Best Practices in Utility System Management Stacey Isaac Berahzer Senior Project Director Environmental Finance Center at the University of North Carolina Georgia Department of Community Affairs: CDBG Applicants’ Workshop 12/04/15 Pine Mountain, Georgia

2. 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

3. Outline Local Government Accounting 101 Financial Indicators/Benchmarking Rate Setting and Dashboard Other Relevant Tools 3

4. LOCAL GOVERNMENT ACCOUNTING 101 4

5. 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 5 Slide compiled by UNC EFC

6. Fund Accounting FUNDS Government General Special Revenue Debt Service Capital Projects Permanent Proprietary Enterprise Internal Service Fiduciary … 6 Slide compiled by UNC EFC Where would water and wastewater fall?

7. Fund Accounting FUNDS Government General Special Revenue Debt Service Capital Projects Permanent Proprietary Enterprise Example: Water/Sewer Internal Service Fiduciary … 7 Slide compiled by UNC EFC

8. 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 8

9. 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 More changes coming … according to Bond Buyer article 9

10. 10 “It plans to consider several improvements to components of the financial reporting model, including a change that would cause governments to provide more detail about their debt service funds in their financial reports. It also wants to see if changes can be made that would lead governments to release their financial reports in a more timely fashion.”

11. FINANCIAL INDICATORS/BENCHMARKING 11

12. Key Financial Indicators Operating Ratio Debt Service Coverage Ratio Days of Cash on Hand Current Ratio

13. Whiteboard Video: Financial Benchmarking http://www.waterrf.org/Pages/Projects.aspx?PID=4366

14. Operating Ratio You can calculate two ratios: one including depreciation, and one excluding depreciation

15. Debt Service Coverage Ratio

16. Days of Cash on Hand Unrestricted cash and cash equivalents (Operating Expenses – Depreciation) / 365 =

17. Current Ratio Unrestricted cash and cash equivalents + Receivables, net Current Liabilities =

18. One More to Mention: Asset Depreciation* *Caveat – This indicator is only as good as your depreciation schedule and even then historic pricing is likely to distort the results. Benchmark? Don’t get close to 1.0

19. Why Care About This? Funders and ratings agencies care about this As you think about the future needs of your system, you have to know where you are starting from

20. Whiteboard Video: Credit Rating Agency Considerations http://www.waterrf.org/Pages/Projects.aspx?PID=4366

21. 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..... 21 Source: Moody’s Water and Sewer Rating Methodology

22. 22 Operating Ratio Debt service Coverage Ratio Quick Ratio Days Cash on Hand Cost Recovery Leverage Condition of Physical Assets Net Transfers Ratios on North Carolina’s Dashboard

23. RATE SETTING 23

24. 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.

25. 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%

26. Operations & maintenance expenditures Taxes and accounting costs Contingencies for emergencies Principal and interest on long-term debt Reserves for capital improvement Source water protection Set Rates Based on “ Full Cost Pricing”

27. 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

28. 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.

29. 29

30. Dashboard - New look and new functions Ability to edit your utility's data or add a new utility/rate structure to the dashboard. (These edits and additions will be saved on your computer until you delete your cookies) Easier way to select your utility from the dropdown menu: now you can type in your utility's name Ability to click on and select any utility on the map You can now view your rates at 500 gallon/month increments between 0 and 15,000 gallons/month Ability to observe the effects of raising rates by more than 50% (up to doubling your rates)

31. 31 Click here to change data

32. Edit Data or Add Utility

33. OTHER RELEVANT TOOLS

34. http://efc.sog.unc.edu/project/gff Click here to access the following table 34

35. 35 Source: http://efc.sog.unc.edu/project/gff

36. Free online tools available: Free online tool available: On the EFC Website Go to http://efc.sog.unc.edu and search for “Water and Sewer Rates Analysis Model” http://efc.sog.unc.edu

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

38. User-Friendly Capital Improvement Plan (C.I.P.) for Water & Wastewater Utilities Tool Free, simplified CIP 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. http://efc.sog.unc.edu Find it in Resources / Tools.

39. What the Tool Does Summarizes your utility’s capital needs in the next 20 years, and estimates rate increases needed to fully fund the capital projects, based on debt and/or cash funding requirements

40. 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” http://efc.sog.unc.edu

41. More EFC Related tools Tools Developed by the EFC at UNC Capital Improvement Plan (CIP) Tool for Water and Wastewater Utilities, version 2.0Capital 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 ShockDashboard for Using Capital Reserve Fund to Avoid Rate Shock Customer Assistance Program Costing Tool Rates Dashboards for Several Different States’ Water and Wastewater UtilitiesRates Dashboards for Several Different States’ Water and Wastewater Utilities Revolving Fund Model Loan Assistance Program sog.efc.unc.edu  resources  tools 41

42. Small Systems: Get Free Help Now! Thanks to the US EPA, Small Water Systems (10,000 or fewer people served) are applicable to seek out free technical assistance from the Environmental Finance Center Network (EFCN): –Creating an Asset management plan –Near-term financial planning and rate setting –Analyzing your revenues and expenses –Offering ideas on how to effectively budget –Long-term capital planning –Assessing options for lowering energy use and/or water loss –Identifying sources of outside funding –Collaborating with other water systems In-depth assistance includes several hours of back and forth between the Environmental Finance Center Network and the water system staff or their consultants. Sign up for direct assistance at http://efcnetwork.org/assistance/request- assistance/http://efcnetwork.org/assistance/request- assistance/

43. Stay in Touch to Learn More http://efc.web.unc.edu Follow us on Twitter: @EFCatUNC Subscribe to our Environmental Finance Blog Tools, trainings, assistance and resources for small water systems from the EFCN http://www.efcnetwork.org

44. Acknowledgements  Funding provided by GEFA, and EPA 44

45. www.efc.unc.edu Contact Stacey Isaac Berahzer EFC at University of North Carolina, Georgia Office 770-509-3887 berahzer@unc.edu