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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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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