United States
Environmental Protection
Agency
EPA 832-B-92-OO4
September 1992'
Office of Water (WH-547)
                           Printed on Recycled Paper

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To finance new water
and wastewater
facilities for your commu-
nity, you may need govern-
ment grants or loans, State
Revolving Fund (SRF)
loans, or municipal loans
and bonds. When this
happens, one of the chal-
lenges that you will face is
how to evaluate your
community's creditworthi-
ness - its ability to obtain
loans or issue bonds.
This booklet is
designed to help water
and wastewater utility
managers and community
officials assess and improve
their community's creditwor-
thiness. This booklet de-
scribes what creditworthi-
ness means and what
bankers look at when
deciding to lend a commu-
nity money. It shows you
how to evaluate and
strengthen your
community's financial
health.

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What is meant by
"creditworthiness?"

 Just as you want to make
 sure that your car is road-
 worthy prior to setting off on
 a trip, you want to
 make sure that
 your community
Does your community look
financially strong? Are you
a low risk applicant, and
therefore, a desirable loan
customer?
 is creditworthy prior to
 seeking a loan. Creditwor-
 thiness is a way of describ-
 ing your community's ability
 to repay the money that it
 borrows.

 Bankers are going to look at
 your community's strengths
 and weaknesses to decide
 if you have the ability to
 repay your debts. When you
 approach a bank or invest-
 ment banker, how do they
 see you and your commu-
 nity?
Look at your community the
way loan analysts do.
Identify your strengths and
weaknesses. If necessary,
make changes to improve
your overall creditworthi-
ness.

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 How bankers decide
 if they will lend you
 money.

Bankers will look at a
variety of factors when
evaluating your community.
Some questions they will
ask include:
  What amount of debt do
  you have? What type of
  debt is it? Where do you
  get the money to repay
  the debt?

  Have you experienced
  any problems repaying
  past debts?
How much more money
do you want to borrow
and how are you going to
repay the loan? - Do you
have specific revenue
sources dedicated to
repay the loan? Will you
commit to raise enough
money to pay the debt?
Are you going to pledge
                addi-
                tional
                secu-
                rity for
                the
               loan?
              Will you
            set aside a
          reserve fund
        or take out
      bond insurance?

      How willing are
 you and your commu-
nity to repay your debt? -
What is the tax burden on
users of your system?
Are you close to your
debt or tax limits?

How well do you manage
your municipality/utility? -
Do you have a balanced
budget? Do you have
extra money available for
unexpected expenses?
Do you collect taxes and
user charges on time?
How well have you done
in the past?

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How strong is the
economy of your commu-
nity? Is the population
growing? Is employment
high? Do households
have a good income? Is
there heavy reliance on
one or two employers, or
on a single industry? Is
the industry stable?

Are community and utility
managers experienced
professionals? How long
have they been a part of
the community?
How to
evaluate your
creditworthiness.

On the road to financing, it
is a good idea to assess
your own financial health to
make sure that you are
creditworthy in the eyes of
the bankers.

Generally, an assessment
of your financial condition
requires the calculation of
financial "indicators."

These indicators provide
insight about the condition
    of your community's
        debt burden,
           financial
            operations,
            socioeco-
            nornic condi-
            tions, and
            user fees.
            Look at each
            of these areas
          to understand
        how banks evalu-
     ate your community
   and how you can en-
hance its creditworthiness.

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What's your
debt situation?

One of the first things that
bankers will do when
assessing your creditworthi-
ness is to review your debt
conditions. When your
community has long-term
debt, its overall "debt
burden"  and "debt capacity"
should be evaluated.

•  "Debt Burden" can be
  measured by comparing
  the debt level of the
  community with its popu-
  lation  or median house-
  hold income.
• "Debt Capacity" is meas-
  ured by comparing the
  debt level with the value
  of the real estate in your
  community.

Once these indicators are
calculated you can compare
them to industry bench-
marks and look at their
trends over the past years.
         Debt Burden



         Overall Debt



         Debt Capacity



         Total Property Value
   Overall Debt
   Total Population


   Debt not supported
   by dedicated user fee
   revenues

   Overall Debt	
   Total Property Value


   Full market value
   of real property in the
   community

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How are
your financial
operations?

To assess your financial
operations you need to look
at overall municipal opera-
tions and at specific utilities'
operations. Usually this
involves a review of your
community's and utilities'
ability to:

•  Cover annual operating
   expenses with incoming
   annual revenues.
       Maintain good financial
       reporting procedures.

       Develop and follow your
       annual budget.

       Collect taxes and user
       fees owed by your resi-
       dents and businesses.
     A variety of indicators can
     be used to evaluate these
     areas. The way that some
     commonly used indicators
     are calculated is presented
     below.
     Utility
     Ooeratina Ratio
Utiiity Operating Revenues
Utility Operating Expenses
     Debt Coverage
     Utility Operating
 './" Surplus as % of
 '•—- Total Expenses
Total Revenues - Non-debt Expenses
Annual Debt Services      :  ::


Utility Operating (Revenues'- Expenses)
Utiiity Operating Expenses
 ' ,T Property Tax
 .— Collection Rate
Total Property Tax Collected
Total Property Tax Billed
                                                        1	;

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What are your
community's
soeioeconomic
conditions?

  By looking at soeioeco-
  nomic conditions you can
  identify weaknesses in your
  community's tax base that
  may concern bankers.
  Frequently, the following
  information is reviewed:

  • Population growth or
    decline over a period of
    time (e.g., five years).
     Unemployment levels
     and employment trends
     in your community.

     Income levels — both per
     capita and median
     household income.

     Future prospects for
     municipal and utility
     revenues.
      Percentage Change
      in Population
      Unemployment
      Rate (%)
      Median
      Household Income
Current Population
Previous Population
  -1
Total Unemployed
Total Employed
x100
U.S. Census Median
Household Income

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 8
What are your
yser fees?

To complete the assess-
ment of your community's
overall creditworthiness it is
necessary to look at the
effect that projected user
fees will have on your
users.

•  Annual utility user fees or
   operations cost per
   household as a percent
   of Median Household
   Income (MHI) is a popu-
   lar indicator.  It is viewed
   as a good measure of
   affordability because it
   combines the user fee
   burden resulting from a
   new facility with the
   overall  earning power of
   the community.
     Percentage change in
     utility user fees or opera-
     tions cost per household
     establishes the magni-
     tude of cost increase. If
     there is a significant
     percentage change in
     user fees, it's a good idea
     to compare the new user
     fee to the user fees in
     other communities that
     are similar in size and
     have similar economic
     conditions.
Ccsts of Utility
— r Operations as a
j/; Percentage of =
Median Household
Income
Cost per Household x 1 00
Median Household Income
      Percentage
      Change in User Fee
Projected Average User Fee
Existing Average User Fee
-1

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 How can you
 use the indicators?

Once you have calculated
values for the indicators,
you can compare them with
benchmarks such as state
averages or industry stan-
dards. This will help you
understand your
community's strengths and
weaknesses.
There are many sources of
information on indicators.
For example, Moody's
Investor Services publishes
state by state  averages for
some indicators such as
debt per capita.

The U.S. Bureau of Census
provides useful socioeco-
nomic data for evaluating
your community.
Some States have devel-
oped averages for various
financial indicators.

When you start reviewing
your community's financial
condition, you'll probably
want to assess many
different indicators. To aid
you in your analysis, a table
of general values for some
common indicators has
been included at the end of
           this booklet.

           Your
           community's
           values for these
               and other
               indicators
              will influ-
              ence its
              creditworthi-
              ness and
              borrowing
              costs.
Stronger values usually
mean you can borrow
money for lower costs. A
municipal financial consult-
ant can help you assess
your potential borrowing
costs.

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   10
  How to make your
  community's credit
  stronger.

After you understand your
community's creditworthi-
ness indicators, you'll be in
a position to communicate
its strengths to bankers and
bond credit analysts. You'll
be able to identify problems
and find ways to address
them. This will help you
increase your community's
overall creditworthiness.
Here are some ideas for
improving several weak
indicators.

Expenses are
increasing faster than
revenues (decreasing
operating ratio)

•  Review revenue sources
  to identify opportunities
  for appropriate increases.

•  Examine costs to  identify
  the cause of increasing
  expenses.

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                                                 11
High level
of per capita debt

•  Use additional security
  measures like bond
  insurance and loan
  reserve funds to
  strengthen creditworthi-
  ness.

Socioeconomic
conditions are weak

•  Establish a community-
  wide economic develop-
  ment plan that provides
  incentives for industry to
  locate in your community.

•  Establish a program that
  assists unemployed or
  low-income residents to
  secure state and Federal
  job placement, retraining,
  and financial assistance.
User fees
for new facility
are significantly higher
than current fees

•  Establish a public educa-
  tion program to get user
  support for rate in-
  creases.

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12
How to show your
community in the
      light

It is important to present
your community positively
at financing meetings.
Remember, most bankers
will want to do business
with you, but they need
assurances that your
community won't default on
its loan or bonds. Make it
easy for them to say; "Yes!"

You can be prepared by
following these basic steps:

• Gather the data you need
  to fully assess your debt
  position, financial opera-
        tions, user fees, and
        socioeconomic condi-
        tions.

        Conduct an examination
        of your community's
        financial health using the
        indicators described in
        this booklet. Use any
        additional indicators or
        information that shows
        your community has the
        ability to repay its loans
        and bonds.

        Develop presentation
        materials that highlight
        your strengths and show
        positive actions to
        strengthen your weak-
        nesses.
                      Our Town
               Revenue and Expense Trends
                                            Revenues
                                         ,.„,.» Expenses
' ,„,*'""'""""" 	 " I
,„•'"•" i i


              I98S
1987    1988  •  1989    1990
       Year

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                                                     13
 Where to get help!

This booklet can't solve all
your financing problems. It
only presents some basic
approaches to assessing
and improving your credit-
worthiness.

You don't need to solve all
your community's credit-
worthiness and financial
problems alone. You can
turn to organizations and
professionals who have
faced similar problems and
solved them.

One group that was set up
just to help managers of
small wastewater utilities is
the U.S. EPA National
Small Flows Clearinghouse.
It has books and pamphlets
on all aspects of community
operations. You can call the
clearinghouse toll-free at
1 -800-624-8301 or write to:

  U.S. EPA National Small Flows
  Clearinghouse
  P.O. Box 6064
  Morgantown, WV 26506-6054
There are organizations,
like the ones listed below,
that provide low-cost books,
pamphlets, conferences,
and courses on local finan-
cial issues. Call any of
these groups. Ask for a
publications catalog and a
list of course offerings:

  American Public Works
  Association
  (312)667-2200

  Rural Community Assistance
  Program
  (703) 478-8652

  Government Finance Officers
  Association
  (312)977-9700

  International City Management
  Association
  (202) 626-4620

  Water Pollution Control
  Federation
  (703) 684-2400

  Moody's Public Finance
  Department
  (212)533-0030

  Standard and Poor's
  Corporation
  (212)208-1527

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Comparative Municipal Indicators
                      Weaker
                                Mid-Range
Stronger
Debt Burden
(Overall Net Debt Per Capita)
Debt Capacity
(Overall Net Debt
as a % of Property Value)
Utility Operating Ratio
Debt Service Coverage
Utility Operating
Surplus as a Percent
of Total Expenses
Property Tax
Collection Rate
Annual
Population Change
Unemployment
Median Household
Income (1989$)
Utility Operating
Cost as a % of Median
Household Income
Percentage
Change in User Fees
Above $1,200
Above 5%
Below 100%
Below 120%
Below 0%
Below 94%
Below -1.0%
Above State
Average
Below $17,000
Above 2.0%
Above 1 0%
$750 -$1,200
2%-5%
100-120%
120-140%
0%-5%
94%-98%
-1%-2%
State
Average
$17,000-
$40,000
1.0% -2.0%
5% -10%
Below $750
Below 2%
Above 120%
Above 140%
Above 5%
Above 98%
Above 2%
Below State
Average
Above $40,000
Below 1.0%
Below 5%
              ftDJ.aOV.5RKMEHTPBnrenraOFHCE: 1992 - 617-003 - 1302/67063

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