1. Water Finance 101 Shadi Eskaf
Environmental Finance Center at the University of North Carolina, Chapel Hill
Environmental Finance Center Network

2. 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

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

4. “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. 

5. 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

6. 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

7. 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

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

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

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

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

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

13. Understanding Capital Costs
What are your capital cost categories? What pieces of equipment do you want to budget for?

14. Understanding Debt Service
What you owe on loans and bonds, paid back on a regular schedule

15. 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
guide_smallsystems_final_ratesetting_guide.pdf

16. Where does your water system revenue come from?

17. 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

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

19. How Much Do You Need In Your Reserves?
It depends
(see
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?

20. Challenges Unique to Small Systems

21. 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.

22. 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

23. 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.

24. 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, ,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

25. 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.