Water Finance 101 Shadi Eskaf Environmental Finance Center at the University of North Carolina, Chapel Hill Environmental Finance Center Network 919.962.2785 eskaf@sog.unc.edu

Session Objectives Learn how to think about your water system as a financial entity Understand some basic financial facts about water systems across the country

Let’s Start With the Basics What does your water system do?

“System” is in the eye of the beholder System serves an important environmental and health purpose -- protecting community’s water resources and supplying community with highest quality drinking water. System serves an important public service – providing community with basic services that everyone in the community can afford. System serves as a well managed public enterprise – putting into practice forward-thinking sustainable business practices. 

Enterprise Fund Your water system is supposed to be an enterprise fund, a self-sustaining business unit If you are a governmental system, you are not supposed to receive tax dollars nor support the general fund

Rates Rates are the primary source of income for local government and other community systems We’ll spend a lot of time today talking about rates

Ideal Pricing Prices cover full “costs” of service Prices send and reinforce strategic messages Prices follow State’s laws and policies Beneficiaries pay for their benefits Polluters pay for their pollution Ability to pay is recognized and addressed Simple

Water System Finance Diagram Operating Costs Your Revenues Reserve Funds Current Capital Projects Debt Debt Service

Current Capital Projects Note... Operating Costs Your Revenues Reserve Funds X Current Capital Projects Debt Debt Service

Understanding Operating Costs What you need to run your business day in and day out What are your operating cost categories?

Understanding Operating Costs Personnel Water bulk purchases Chemicals Office equipment Computers Supplies Etc.

Understanding Capital Costs The “big stuff” Rehabilitation & replacement of existing infrastructure New infrastructure as needed to serve your customers

Understanding Capital Costs 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

Determining Current Revenues Setting Aside a Reserve Determining Costs Determining Current Revenues Setting Aside a Reserve Determining Revenues Required Designing Rate to Cover Costs Implementing the Rate Reviewing the Rate http://www.epa.gov/ogwdw/smallsystems/pdfs/ guide_smallsystems_final_ratesetting_guide.pdf

Where does your water system revenue come from?

Reserve Account(s) If revenues exceed costs, the extra money can go into one or more reserve account(s) specifically for the water system Can set up specific reserves for narrower purposes (designated reserves) Examples: unrestricted, rate stabilization, rainy day, capital reserve, etc. If you include depreciation as a cost, this is where that money would go

Why Do You Need a Reserve Account? Future Capital Needs Rainy Day Fund—what happens if your revenue is decreased? Emergency Fund

How Much Do You Need In Your Reserves? It depends (see http://efc.web.unc.edu/2013/02/12/right-sizing-reserve-funds/) 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?

Challenges Unique to Small Systems

Public Water System Inventory This is a snapshot of the universe of systems we regulate under SDWA. The first bar represents community water systems.... those that serve a permanent, resident population. The other two are non-community systems, with the middle one representing systems serving the same population over time, such as schools, churches, factories, office buildings, etc. The last bar represents systems serving a transient population, such as restaurants, truck stops, gas stations, campgrounds, etc. The total inventory is about 157,000 PWS. As you can see, small systems (3,300 or less) make up about 94% of all systems, and almost all of the transient systems. So, in terms of NUMBERS of systems, small systems really dominate.

Public Water Systems Serving Less than 3,300 Small systems are found throughout the US... this map shows the distribution of public water systems serving 3,300 or less, showing total numbers and percent of inventory for each state. The total number for the US is about 143,000 small systems, of which about 1/4 are community systems (43,000). Public Water Systems Serving Less than 3,300

20-Year Capital Infrastructure Needs for Community Water Systems Exhibit 2.41: Need per Residential Connection by System Size Source: 2007 DWINSA and 2006 CWSS Based on the survey we do every two years to quantify the infrastructure needs for water systems, there's a real disparity between small and large systems. The smaller the system, the greater the infrastructure need, when looking at a per connection basis. You can see what a challenge this represents when it comes to user rates.

Community Water Systems with Health-Based Violations During FY2011 System Size CWS Inventory Systems in Violation Percent of Size Category <= 500 29,065 7,145 25% 501-3,300 13,832 1,253 9% 3,301-10,000 4,950 425 10,001-100,000 3,812 278 7% >10,000 420 13 3% In addition to the infrastructure element, we are especially concerned about the performance of these small systems when it comes to meeting health protection standards for their customers. As you can see, the smallest systems have much higher violation rates than the larger systems, and these are the health-based standards, not just aesthetic standards. Source: SDWIS FY11Q3 frozen tables

Small System Challenges Dis-economies of Scale Insufficient Revenue from Small Customer Base Regulatory Compliance Addressing Current and Future Infrastructure Needs Workforce – retirements and high turnover As you can see, small systems face a whole host of challenges, ranging from dis-economies to workforce. Many of these issues are symptomatic of underlying managerial and fiscal deficiencies that lead to the outward problems, that's why we are excited about the efforts that are about to get underway in your project.