Beyond Rates: Other Finance Strategies 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 about other common sources of water system revenue Consider ways to control costs Understand the debt market Discuss available loan and grant programs

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) Which of these do you like best? Which of these does your board like best?

Grants Aren’t Completely Free Money Application for the grant can be expensive – staff time and money Applications can take months to process Often lots of strings attached Often require a percentage match Lots of competition Difficult to sustain But the thing about grants, is that they’re not exactly free.

Quick Thought on Grants This presentation is about sustainable program finance Grants are not sustainable finance

The Main Source: Your Revenue Pay as you go (current receipts) Save in advance and pay Pay later (someone loans you money) Grants (let someone else pay)

Assessments A recurrent charge to a sub-group of the population The sub-group receives benefits from an environmental service or improvement not enjoyed by others in the area Close cost/benefit relationship  equity Description: Special assessments are recurrent charges levied by local jurisdictions on a sub-group of population. The sub-group receives benefits from an environmental service or improvement not enjoyed by others in the area. – getting to the challenge of watersheds that I discussed earlier…. For example, if a community wants to finance treatment plant improvements that contribute to lake clean-up, residents with waterfront property, or residents not hooked up to the central sewerage facility but enjoying recreational benefits from clean water, could be assessed a special surcharge. When benefits accrue to residents outside the improvements area, the benefits typically must be shown through some measure, such as higher property values, increased business activity, or frequent use of recreational sites. Special assessment/ improvement districts could be used to define the geographical boundary of any environmental improvement, e.g., a sewer or stormwater management district. Advantages: The advantages of this tool relate to the potential revenue yield, which could be stable, and to increased equity and an improved cost/benefit relationship. Extending revenue requirements to suburban residents, who may have lower infrastructure costs and greater ability to pay, can relieve the burden on inner city residents. Asking inner city residents to pay for suburban developments may prove inequitable. Incentives recognizing the true costs of environmental services is important. Limitations: Although total equity my not be entirely possible with assessments alone – there may be no ability to collect, for example, from downstream users benefiting from upstream water quality improvement. Assessments based on predictions of property value increases, and documentation of results, requires strict record-keeping and periodic reassessments which may require special management tools unavailable to communities.

Tap & Impact Fees One-time charges to new users Typically assessed when building permits are issued Close cost/benefit relationship  equity Impact or development fees are one-time charges to new users of government services, to pay for the expansion of the services that they require or impact Impact fees typically are assessed when building permits or certificates of occupancy are issued. Advantages: For development purposes-predictable up-front costs Close cost-benefit relationship Disadvantages -could be criticized for deterring development and creating inter-jurisdictional competition -if the fee is being directly turned around into capital needed for the development – there is a not a lot of time. It may be hard for localities to ascertain capital needs and thus size fees.

Periodic Charges Deposits on new accounts Penalties for late payment Cutoff/reconnection fees Meter re-reading fees

Innovative Funding Sources For example, rent out your water tower for cellphone receivers or put ads on the tower itself

When You Need Cash Now: The Debt Market Lenders will look at your creditworthiness, your ability to repay the debt, in determining whether to loan to you and your interest rate

The Debt Market Two types—Loans and Bonds Loans are universally available Bonds are typically only available to large systems with significant revenues and managerial capacity

Loans Typically from a bank Can be from a government-sponsored program such as the Drinking Water State Revolving Fund Another avenue would be to apply for loans. Loans allow you take action today rather than tomorrow. Which can mean that the action is cheaper, this is especially the case when you’re talking about land acquisition. The most common loans for watershed protection projects are the EPA’s Clean Water and Drinking Water State Revolving funds, created as tools to provide local governments with low-interest loans for water infrastructure projects. Continuing the precedent set under the American Recovery and Reinvestment Act in 2009, Congress set aside 20% of the $3.5 billion designated for both funds in 2010 to be used for a “green project reserve.” This green reserve funding must be spent solely on green infrastructure, water and energy efficiency and environmentally innovative projects. In 2010, an estimated $414 million from the Clean Water SRF and $273 million from the Drinking Water SRF will be available in the form of low-interest loans and grants for these environmentally beneficial projects. Eligible recipients for funding under the Clean Water SRF (CWSRF) include Publicly Owned Treatment Works (POTWs), communities, citizen groups, and non-profits. Under the Drinking Water SRF (DWSRF), eligible recipients include publicly and privately owned community water systems and non-profit non-community water systems. Some of the projects that have already been funded with the ARRA funding include Green roofs, swales, and other bioinfiltration projects Retrofit or replacement of water using fixtures, fittings, equipment, appliances, including incentives such as rebates Projects that identify and quantify the benefits of using integrated water resources management approaches Wet-weather management systems for parking areas Installation of water meters Projects that facilitate adaptation of clean water programs to climate change Green streets projects Reclamation, recycling, and reuse of existing rainwater, stormwater, etc. Projects that incorporate differential uses of water based on level of treatment (purple pipes)

Bonds A written promise to repay borrowed money (on a definite schedule and usually at a fixed rate of interest for the life of the bond) Different types exist: General Obligation (GO) Revenue Source: bettermondays.com Bonds are a attribute brought to the watershed protection table by state and local governments. Description: A bond is a written promise to repay borrowed money on a definite schedule and usually at a fixed rate of interest for the life of the bond. Bonds can stretch out payments for new projects over a period of fifteen to thirty years. State and local governments repay this debt with taxes, fees, or other sources of governmental revenue. MANY different types of bonds exist, but: It is the source of pledged security or repayment for bonds, or the type of collateral used, that defines the type of bond, for example, general obligation bonds, a myriad of revenue bonds, or hybrids. Advantages: Bonds provide financing for immediate capital needs. If the project qualifies, tax-exempt bonds can be a low-interest way of acquiring capital. Limitations: Certain types of bonds require voter approval. Bonds only spread out costs of a project; an ultimate revenue source still needs to be identified. There may be some competition for debt capacity at the State or local level. Some State and local governments may also have statutory limitations on the dollar amount and/or number of bonds that can be issued. Issuing bonds is an expensive and time-consuming process, and requires sound legal and financial advice.

Ratings Source: The Bond Market Association Moody’s uses 1,2,3 Fitch and S&P use +, - These ratings are for investors for particular securities, but they have a lot to say about the financial management of a utility. They will influence the cost of your capital and are influenced by how you manage your finances. Source: The Bond Market Association

Moody’s Water & Sewer Rating Distributions 2013 Source: Moody’s Investor Service

Available at http://www. nhhefa Source: Moody’s “U.S. Municipal Bond Defaults and Recoveries, 1970-2011”

A Quick Aside On Debt... The only way “the bonds” pay for anything is if one of these people lives in your community... Source: picasaweb.google.com/.../fLQy4iWz7ZNrMaDwZG13iA Source: commons.wikimedia.org/wiki/File:20060825_Barr... Baseball: Barry Bonds. Singer: Gary U.S. Bonds.

Loan & Grant Programs

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Thank you! Shadi Eskaf Environmental Finance Center Network 919-962-2785 eskaf@sog.unc.edu