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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
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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.
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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.
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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
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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
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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
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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:
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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