y^f^V^^ffSf^-fffff^Sf"^ :-:%. . V":; *' Environmental Protectibri"^:~&*i'£r^ ^ij^M^^j^^^"'K^iX^'^M ,'£>::4;?-'"-::;; ^'^^^^feSS^^^^^^fell^^?. "A-is |S - , v- i",p3«*tfe . '»! £'';-:''':'". ' :;r;">jij?S?:5.,i. ,', IV.*'J .» * "C-Ci-.-m^r- .-,. : .'I'M" llF^ --:.»......C--.'* ' *> ^ '' .->- , ^ '. - ' -" ' * ». '-^-i-lr/f.*ff^. --*," T-^- 'i .iij? ... '!- f , -, i?Tl, *47-i* A-i';« r-sl." * t^^tr^r siiSs^Gi ------- ------- Budgeting A water pipe broke on Main Street and your town is rationing water. The supply of wastewater treatment chemicals is low, and there's a delivery problem. What a day. You may already be swamped by the day-to-day activi- ties of keeping your utility's operations afloat. Now you're asked to become an accountant and develop next year's budget. This brochure has some information that can help you accomplish the task. Expenses and expectations Many communities are overwhelmed by the high costs of upgrading or maintaining their water and wastewa- ter systems to meet state and federal water-quality stan- dards. The public expects you to provide reliable ser- vices even though you might encounter financial and other problems along the way. 1 ------- Your grip on the issues can be strengthened by applying sound business principles. A budget is one of the most important tools for operat- ing water or wastewater systems as self-sufficient utilities. A carefully crafted budget can be very helpful to you. Financia! management A financial management system encompasses all aspects of operating a self-sufficient utility. It includes all man- agement policies involving the administration and oper- ations of water or wastewater systems from the estab- lishment of utility rate schedules to the purchase of spare parts. The accounting system and the budget are key compo- nents of the management system. The accounting sys- tem controls spending and furnishes timely financial reports. The data from the financial reports is neces- sary for you to develop a meaningful budget. A good understanding of the budget process means you can better manage your entire utility. ------- The secrets of budgeting Developing an annual budget requires detailed knowl- edge about your water or wastewater system. The bud- get is a powerful financial management instrument that both authorizes and restricts spending. It's very impor- tant for you to have accurate financial data when you prepare a budget. The budget captures the goals and objectives of the local utility in dollars and cents. It's the only document produced by the water or wastewater system that projects revenues and expenses for next year. After it's adopted, you can use the budget as a blueprint for next year's entire operation. Educated estimates Revenue values are the foundation for budget calcula- tions. They must be reliable and predictable so that adequate money is available to cover operational expen- ses throughout the year. One of the most dependable ways to project future revenue comes from tracking previous years' revenue. Fortunately, customer consumption is usually very pre- dictable. Individual customer usage will vary from sea- ------- son to season, but these fluctuations will stay about the same from year to year. If the rates remain the same, you can expect next year's total user service charge revenue to be very similar to last year's. Table A on page 8 can help you develop revenue trend information and the budget amounts. On the first line, list the annual revenue from user service charges for the past three years. On the second line, calculate the per- cent of change between each year. To determine the percent of change, divide this year's revenue value by last year's value. This year's revenue value would be the most accurate value of either the current year's budget number or the annualized value of the user service charges acquired to date. The EPA publication A Water and Wastewater Manager's Guide for Staying Financially Healthy has a discussion of actual vs. budget revenue. You can perform these same calculations on previous years to identify the user service charge percentage change trend for your utility. (Note that past rate changes will affect trends.) Review the trend percentages and determine if an aver- age percentage change of the three years is better than using this year's percentage change to estimate next year's revenue. You can also choose an average percen- tage based on your unique knowledge of current condi- tions. Multiply the current year's revenue by the best percentage change value to arrive at the budget value for next year's user service charge revenue.You can fig- ure out trend information on all items in the same way. ------- New revenue Don't follow historical trends alone because there may be something new in the works that'll cause the num- bers to stray from the norm next year. Reflect this knowl- edge in the budget. For example, maybe a new 200- home subdivision is going to spring up in your town in the next few months. This means you'll see a surge in tap fees as people move into the neighborhood and then you'll get an increase in user ser- vice charge revenue for water and wastewater ser- vices. The connection-related revenue will be short-term so this item will not make a reliable trend. Develop your budget using trends and also the new user service charge revenue expected from the subdivision. Keep in mind the future plans for your community when you are working up a budget. New systems If you've got a new system, you won't have trends because your system has no history. Typical use pat- terns can be a reliable barometer to forecast what's on the horizon for your system. The average residential customer uses between 4,000 and 6,000 gallons of water/wastewater per month. (Check ------- with surrounding utilities to come up with a more accu- rate average for your community.) It's important to esti- mate usage as accurately as possible to avoid a budget deficit the first year and a rate increase the next year. You can estimate user service charge revenue by assum- ing a value for usage per residence and applying your utility rate schedule. Multiply this amount by the num- ber of households expected to connect to the system to arrive at the monthly user service charge revenue from your residential customers. Multiply this value by 12 months to find the residential user service charge rev- enue for one year. Small commercial customers have usage patterns simi- lar to residences (about 5,000 gallons per month). Project their consumption as you would a residence. However, larger commercials and industries can use tremendous amounts of water. If you're unfamiliar with new, large customers, call the plant managers and ask how much water they expect to use. Base an estimate on the answer and your own experience. Once you've decided how much water each industry will use, you can calcu- late user service charge revenue to help build the water and wastewater budgets. 6 ------- Other revenue sources Although user service charges probably comprise most of the annual water or wastewater revenue, there are other revenue sources to consider. Taxes/assessments are usually collected separately from user service charges to pay off debt that was under- taken to provide new capital facilities like treatment facilities or sewer lines. This revenue source generally remains constant from year to year. Tap and other connection fees stem from new growth. When preparing the budget, find out if there are any new housing permits or annexation plans that will add new customers. Talk to builders about their plans to develop within your service area. Customer late payments should be charged to those who are tardy with their monthly bills. Generally, this revenue can be projected by using an average trend. However, local economics can change a utility's collec- tion pattern. Interest income from checking accounts and investments has to be used exclusively for the utility, regardless of where it's invested. Also, utilities will often have large, interest- generating cash reserves for emer- gencies and re- placing equip- ment. Ask the bookkeeper how much cash is available each month from the investment. Inter- ------- est income is easy to project because interest rates are fairly constant. Additional revenue may be collected by your system. Develop the budget for these additional revenue items by using trends, individual knowledge, or other meth- ods. At this point, all of the revenue should be projected for the budget year. The bottom line is to have enough revenue flowing into the system to offset the money flowing out this is the heart of a self-sufficient util- ity. Table A Revenues User Service Charges % of Change Assessments % of Change Connection Fees % of Change Interest Income % of Change Other Income % of Change Total Revenue Year 3 500,000 1,300 33,000 12,000 3,000 549,300 1.02 1.18 1.00 1.23 1.07 Year 2 510,000 1,530 33,000 14,480 3,200 562,210 1.02 .95 1.00 1.17 1.12 Year 1 520,000 1,450 33,000 17,300 3,600 575,350 1.02 1.03 1.00 1.03 1.03 Budget 530,000 1,500 33,000 19,800 3,600 587,900 There are several revenue sources, and each should be separately evaluated. Year 1 is the current year, Year 2 is last year, and Year 3 is the year before that. Take the steps outlined on the next page to complete the rev- enue budget. 8 ------- 1. Complete the form with revenue data from prior years. 2. Divide the revenue in Year 1 by the revenue in Year 2, and write the amount on the line between the two years (520,000 / 510,000 = 1.02). This gives the percent of growth over the prior year. 3. Divide the revenue in Year 2 by the revenue in Year 3, and write the amount on the line between the two years (510,000 / 500,000 = 1.02). This gives the percent of growth over the prior year. 4. The budget amount is determined by multiplying the current year's revenue by the growth trend per- centage (520,000 x 1.02 percent = 530,400). Expenses Table B on page 13 can help you develop expense trend information and budget amounts for the two kinds of expenses fixed and variable. Fixed expenses, like contracts and debt service, don't change during the year. They're easy to project simply because they're constant, and you generally know the amounts in advance. For instance, if the utility con- tracts out mowing, it's easy to complete the budget amount by looking at the contract. Variable expenses fluctuate with changes in treatment volume or consumption. Costs of water and wastewa- ter treatment, such as chemicals and electricity, vary with the volume that's treated. For example, water use dips in cold wet weather and soars in hot dry seasons when people water lawns and wash cars. You can expect a jump in water chemical expenses if weather forecasters predict an unusually hot dry summer. Also, don't forget that most wastewater systems have pipes ------- that leak. Periods of above-normal rain mean water seeps into pipes and runs to the treatment plant, swelling the influent volume, and boosting treatment costs. Remem- ber these relationships when budgeting because these expenses will change in proportion to user service charge revenue. Variable expenses will also increase if more customers are added. Ask employees, managers, and other knowl- edgeable people about customer growth expectations. This would include new subdivisions, shopping malls, businesses, or industries. The rule of thumb is to add more variable costs to the expense budget if you add new user service charge revenue to the revenue bud- get. Still other expenses, such as wages, could contain both a fixed portion (40 hours) and a variable portion (over- time). Developing trend information and applying your knowledge of the local situation is probably the best way to develop the budget for these costs. Typical expenses Starting on the next page are some common budget expense items and ways to project their costs: ------- Administration expenses occur when another depart- ment manages something, like billing, for the water or wastewater operation. This is common with cities that have centralized administration. These expenses should be consistent and easy to calculate from year to year even though you have little control over the amount of administrative charges. Develop the budget amount from growth trends and discussions with staff members. Wages may be easy to project from trends. If you're not going to hire additional people, then the fixed 40- hour wage amount can be computed (use projected wage rate). The overtime portion is difficult to know. Your best estimate would be based on prior years and con- versations with management. Benefits include things like insurance, vacation, and retirement plans. These are fixed expenses that are usually based on the number of employees and their pay. Develop this budget item from trends, unless there is a signifi- cant change in the number of employees. Utilities include water, fuel, and telephone expenses. These are generally fixed and easily projected from trends. Equipment replacement is a fixed amount. This money, set aside each year to replace major equipment compo- nents, assures optimal operation of the water or waste- water system. The amount is frequently determined by local officials with help from you and your engineer. Budget the fixed amount. Debt repayment is a fixed expense made up of princi- pal repayment and interest expense. If your utility has issued bonds, there's an amortization schedule that lists every payment broken down by principal and interest (much like a home mortgage). Use this list for the bud- get amount. If this is unavailable, use the amount pro- jected by trends. 11 ------- Electricity and chemicals are variable expenses based on production, treatment, or pumping. A budget based on trends is best for each of these categories. Be aware of new growth in user service charges that trends won't reveal, like those from a new subdivision or mall. Be sure to call the electric company about pending rate changes. Discuss chemical usage and projected costs with staff and manufacturers. Parts, plus repairs and maintenance expenses, depend on the condition of your equipment. This can change greatly from year to year in a utility. Still, your best estimate for parts expenses comes from your knowl- edge and trends based on prior years. Other expenses are budgeted by developing a trend amount or talking to knowledgeable people and pro- jecting a value based on your informed estimate. An item in this category is an estimate for unforeseen expen- ses. This contingency expense item can be as large as 5 percent of the total budget. tin 12 ------- Table B Expenses Administration % of Change Wages % of Change Benefits % of Change Electricity and Chemicals % of Change Utilities % of Change Equipment Replacement % of Change Debt Repayment % of Change Parts % of Change Other Expenses % of Change Total Expenses Year 3 75,000 122,000 40,000 57,000 25,000 50,000 110,000 35,000 24,000 538,000 1.04 1.04 1.04 1.07 1.05 1.00 1.00 1.07 1.08 Year 2 78,000 127,000 41,600 61,000 26,250 50,000 110,000 37,000 26,000 556,850 1.04 1.04 1.04 1.03 1.06 1.00 1.00 1.05 1,12 Year 1 81,000 132,000 43,300 63,000 27,800 50,000 110,000 39,000 29,000 575,100 1.04 1.04 1.04 1.04 1.06 1.00 1.00 1.05 1.08 Budget 84,000 137,000 45,000 64,000 29,500 50,000 110,000 41,000 31,000 591,500 There are several expenses and each should be sepa- rately evaluated. Year 1 is the current year, Year 2 is last year, and Year 3 is the year before that. Take the steps outlined below to complete the expense budget. 1. Complete the form with expense data from prior years. 13 ------- 2. Divide the expenses in Year 1 by the expenses in Year 2, and write the amount on the line between the two years (81,000 / 78,000 = 1.04). This gives the percent of growth over the prior year. 3. Divide the expenses in Year 2 by the expenses in Year 3, and write the amount on the line between the two years (78,000 / 75,000 = 1.04). This gives the percent of growth over the prior year. 4. The budget amount is determined by multiplying the current year's expenses by the growth trend percentage (81,000 x 1.04% = 84,240). Selling the budget The budget is complete and now ready for marketing. It's time to develop your sales pitch because you'll be selling your product at the budget presentation and public hearings. You may have to use personal persua- sion, especially when you're seeking political support for a general rate in- crease, new equip- ment, or expensive maintenance items. The EPA publication Building Support for Increasing User Fees may be helpful with this effort. Check with depart- ment heads, manage- ment, and other key players to make sure you've really reached a con- sensus and that yj .your budget pro- jections are ------- accurate. If you had an open dialogue throughout the budget development and preparation process, you will have a good base for your selling efforts. Now, it's time to discuss your budget's costs and ben- efits with elected officials. The main political rule to remember is not to surprise anyone. Keep in mind that politicians have many items under consideration paramount among them is re-election. They're inter- ested in how your proposed budget affects their ward or district. Whenever possible, talk personally with each elected official before the public budget hearings. As individu- als, they are interested in different aspects of the bud- get. They're sure to ask what's in it for them, so care- fully shape your message and highlight the benefits they'll receive. Take the time to assure them that their constituents are treated equitably in the budget. Even though you expect to break even this year, you may need to consider a rate increase because you expect expenses to exceed revenue for the new budget year. You will need to fully explain to everyone why you expect higher expenses. This can be touchy. You can't sway people to your side just by reciting each line item. You need to provide details so they can under- stand that they are getting their money's worth. You must convince both constituents and elected officials that your budget is in their best interests. Public hearings A good public education program is the key to success at a public hearing. People need to know about the benefits of their water and wastewater systems. An ongoing public education program is very helpful when you are proposing a rate increase. The EPA publication Building Support for Increasing User Fees has an excellent 15 ------- section on conducting a public edu- cation campaign. The public hearing can be a platform for you to discuss the benefits that a rate increase is buying. Reassure the public that rate increases are necessary to maintain the quality of the water and/or waste water treatment sys- tem. A rule of thumb is that small, annual rate increases are more palatable than large, irregular rate increases. You should be enthusiastic and organized when pre- senting the budget to elected officials and the public. You need to talk intelligently about the budget and the utility's operations. You should also be prepared to field politi- cally motivated questions about revenue and expense projections. Your credibility is on the line, so there's a real need to communicate honestly and convincingly. 16 ------- Measure efficiency Don't let the bud- get gather dust on a dark shelf after it's been approved by the governing body. Use it to assess ef- ficiency and gauge success. This can be determined by com- paring what you thought would happen to what really is happening. The EPA publication A Water and Waste- water Manager's Guide for Staying Financially Healthy can be helpful to you. Because revenue and expenses can differ from month to month for a variety of reasons, it's difficult to make monthly comparisons to a budget stated in yearly amounts. One easy review is comparing the actual percentage results of this year to last year. Generally speaking, if expenses this year are lower than last year, or the percentage spent year-to-date is lower this year than last year, then the budget is probably on course. However, a utility must respond to customer demand even if it means that certain expenses exceed the bud- get. If rates are reasonably adequate, then revenue will equal or slightly exceed expenses. When there's high demand or usage, revenue will increase along with certain expenses, such as chemical treatment. If those situations continue, then it's likely that expenses would exceed the budget. This doesn't necessarily mean trouble, because more volume is being treated than expected. Revenue would also exceed the budget. Compare revenue and expenses in total. In the final analysis, it's good for revenue to slightly exceed expenses regardless of any budgeted amounts. 17 ------- Sharpen your budget skills Now that you've finished developing next year's bud- get, try to enhance the process in future years by fol- lowing the suggestions outlined below. No matter when you started budget preparations this year, get started even earlier next year. This will give you more time for everything both the expected and the unexpected. The EPA publication A Water and Wastewater Manager's Guide for Staying Financially Healthy will help you with your entire financial management system. You probably discovered that records maintained by one department may be useful to others share these. Eliminate duplicate efforts and records that are no longer necessary. Create new records, such as complaint logs, that may point out operational problems. Data is often captured in a way that makes retrieval difficult, especially when different departments use incompatible computers. You may need to switch to a more user-friendly method or a centralized com- puter system. Now that you know what you need, make sure the information is recorded and avail- able. . It might save you time to update records through- out the year rather than creating them at budget time. Remind department heads of the type of data you need so they can maintain those records during the year. X Chart long-range strategies that go beyond a single budget year to deal with irregular, expensive main- tenance without a rate hike. Planning early lets you build a cash reserve. This cushion allows you to 18 ------- weigh alternative, less costly solutions to emergen- cies, rather than merely reacting to the unexpected. Remember, proper planning prevents poor perfor- mance. Ask your co-workers for input constructive sug- gestions can enrich your department and help oth- ers do better next year. Experience is often the best teacher. Use the knowl- edge you gained from this year's budget exercise to improve next year's budget process. A carefully constructed budget can help turn your future into a pleasant experience. Your efforts should be smoother in the coming year, and the planning experience you gained will be extremely helpful when budget time rolls around again. ------- Where to get help This booklet can't solve all your financial problems. It only presents some basic financial concepts and gives you some suggestions for possible improvements. You do not have to solve all your utility's 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 sewer utilities is the U.S. EPA National Small Flows Clearinghouse. It has books and pamphlets on all aspects of small community operations. You can call the clearinghouse toll-free at 1-800-624-8301 or write: U.S. EPA National Small Flows Clearinghouse P.O. Box 6064 Morgantown, W. Va. 26506-6064 There are organizations that offer low-cost books, pam- phlets, conferences, and courses on local financial issues. Call any of these groups. Ask for a publications catalog and a list of course offerings. American Public Works Association (312) 667-2200 American Water Works Association (303) 794-7711 Government Finance Officers Association (312) 977-9700 International City/County Management Association (202) 626-4620 20 ------- Water Environment Federation (703) 684-2400 . Many states and universities have special training courses and on-site assistance programs for solving small com- munities' financial problems. Give them a call and see how they can help you. 21 ------- Acknowledgments This booklet was prepared by Haig Farmer of the U.S. Environ- mental Protection Agency and Alan Major of the University of Tennessee's Municipal Technical Advisory Service. The UT team also included Mary Beatty, Sharon Fitzgerald, and Sharon Rollins. ------- ------- ------- |