United States Office of Water February 1997
Environmental Protection Office of Wastewater Management (4204) EPA 832-B-97-OG4
Agency
Combined Sewer Final
Overflows—Guidance for
Financial Capability
Assessment and Schedule
Development
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TABLE OF CONTENTS
I. INTRODUCTION 1
Background 1
History- of CSO Policy 1
Key Elements of the CSO Policy 3
Guidance to Support Implementation of the CSO Policy 6
Goal of this Guidance 6
Organization of Guidance 8
Audience 8
II. CSO FINANCIAL CAPABILITY ASSESSMENT APPROACH 9
The Two-Phase Approach 10
Financial Benchmarks and Informational Sources II
III, PHASE ONE: THE RESIDENTIAL INDICATOR 12
Developing CPH Estimates 12
Developing the MHl 16
Developing the Residential Indicator , , , 19
Analyzing the Residential Indicator 19
IV. PHASE TWO; PERMITTEE FINANCIAL INDICATORS 20
Debt Indicators 21
Bond Rating 21
Overall Net Debt as a Percent of Full Market Property Value 24
Sociocxonomic Indicators 28
Unemployment Rate 28
Median Household Income 30
Financial Management Indicators 32
Property Tax Revenues as a Percent of Full Market Property Value 32
Property Tax Revenue Collection Rate 34
Analyzing Permittee Financial Capability Indicators , 36
The Financial Capability Matrix : . 39
V. CSO SCHEDULE DEVELOPMENT 42
Environmental Considerations 44
Discharges to Sensitive Areas 44
Use Impairment , 44
Primary Financial Considerations 46
Financial Capability 46
Secondary Financial Considerations 47
Grant and Loan Availability 47
Sewer User Fees 48
Other Viable Funding Mechanisms and Sources of Financing 48
Scheduling Considerations 48
ACRONYM LIST 52
STATE DATA CENTERS 53
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ANNUALIZATION FACTORS 55
PRESENT VALUE FACTORS 57
INFLATION ADJUSTMENT FACTORS 5H
REFERENCES
Worksheet I - Cost Per Household 15
Worksheet 2 - Residential Indicator 17
Worksheet 3 - Bond Rating 23
Worksheet 4 - Overall Net Debt as a Percent of Full Market Property Value 27
Worksheet 5 - Unemployment Rate 29
Worksheet 6 - Median Household Income 31
Worksheet 7 - Property Tax Revenues as a Percent of Full Market Property Value 33
Worksheet 8 - Property Tax Revenue Collection Rate 35
Worksheet 9 - Summary of Permittee Financial Capability Indicators 38
Worksheet 10 - Financial Capability Matrix Score 40
Table 1 - Roles and Responsibilities 5
Table 2 - Permittee Financial Capability Indicator Benchmarks 37
Table 3 - Financial Capability Matrix 41
Table 4 - Financial Capabilities General Scheduling Boundaries 46
Table 5 - Scheduling Considerations for Hypothetical Permittees 50
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I. INTRODUCTION
Background
Combined sewer systems (CSSs) are wastewater collection systems designed to carry
sanitary sewage (consisting of domestic, commercial and industrial wastewater) and storm water
(surface drainage from rainfali or snow melt) in a single pipe to a treatment facility. CSSs serve
about 43 million people in approximately 1,100 communities nationwide. Most of these
communities are located in the Northeast and Great Lakes regions During dry weather, CSSs
convey domestic, commercial, and industrial wastewater In periods of rainfall or snow melt, total
wastewater flows can exceed the capacity of the CSS and/or treatment facilities. When this
occurs, the CSS is designed to overflow directly to surface water bodies, such as lakes, rivers,
estuaries, or coastal waters. These overflows - called combined sewer overflows (CSOs) - can be
a major source of water pollution in communities served by CSSs.
Because CSOs contain untreated domestic, commercial, and industrial wastes, as well as
surface runoff, many types of contaminants can be present. Contaminants may include pathogens,
oxygen-demanding pollutants, suspended solids, nutrients, toxics, and floatable matter. Because
of these contaminants and the volume of the flows, CSOs can cause a variety of adverse impacts
on the physical characteristics of surface water, impair the viability of aquatic habitats, and pose a
potential threat to drinking water supplies. CSOs have been shown to be a major contributor to
use impairment and aesthetic degradation of many receiving waters and have contributed to
shellfish harvesting restrictions, beach closures, and even occasional fish kills.
History of the CSO Control Policy
Historically, the control of CSOs has proven to be extremely complex. This complexity
stems partly from the difficulty in quantifying combined sewer overflow (CSO) impacts on
receiving water quality and the site specific variability in the volume, frequency, and
characteristics of CSOs. In addition, the financial considerations for communities with CSOs can
be significant. The U.S. Environmental Protection Agency (EPA) estimates the CSO abatement
costs for the 1,100 communities served by CSSs to be approximately $41.2 billion.
To address these challenges, EPA's Office of Water issued a National Combined Sewer
Overflow Control Strategy on August 10, 1989 (54 Federal Register 37370). This Strategy
reaffirmed that CSOs are point source discharges subject to National Pollutant Discharge
Elimination System (NPDES) permit requirements and Clean Water Act (CWA) requirements.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 1
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The CSO Strategy recommended that all CSOs be identified and categorized according to their
status of compliance with these requirements. It also set forth three objectives:
Ensure that if CSOs occur, they are only as a result of wet weather
* Bring all wet weather CSO discharge points into compliance with the technology-
based and water quality-based requirements of the CWA
* Minimize the impacts of CSOs on water quality, aquatic biota, and human health.
In addition, the CSO Strategy charged all States with developing state-wide permitting strategies
designed to reduce, eliminate, or control CSOs.
Although the CSO Strategy was successful in focusing increased attention on CSOs, it fell
short in resolving many fundamental issues. In mid-1991, EPA initiated a process to accelerate
implementation of the Strategy. The process included negotiations with representatives of the
regulated community. State regulatory agencies, and environmental groups. These negotiations
were conducted through the Office of Water Management Advisory Group. The initiative
resulted in the development of a CSO Control Policy, which was published in the federal
Register on April 19, 1994 (59 Federal Register 18688). The intent of the CSO Control Policy is
to:
Provide guidance to permittees with CSOs, NPDES permitting and enforcement
authorities, and State water quality standards (WQS) authorities
Ensure coordination among the appropriate parties in planning, selecting,
designing, and implementing CSO management practices and controls to meet the
requirements of the CWA
Ensure public involvement during the decision-making process,
The CSO Control Policy contains provisions for developing appropriate, site-specific
NPDES permit requirements for all CSSs that overflow due to wet weather events. It also
announces an enforcement initiative that requires the immediate elimination of overflows that
occur during dry weather and ensures that the remaining CWA requirements are complied with as
soon as possible.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 2
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Key Elements of the CSO Control Policy
The CSO Control Policy contains four key principles to ensure that CSO controls are
cost-effective and meet the requirements of the CWA:
Provide clear levels of control that would be presumed to meet appropriate health
and environmental objectives "
• Provide sufficient flexibility to municipalities, especially those that are financially
disadvantaged, to consider the site-specific nature of CSOs and'to determine the
most cost-effective means of reducing pollutants and meeting CWA objectives and
requirements
* Allow a phased approach for implementation of CSO controls considering a
community's tlnancial capability
• Review and revise, as appropriate. WQS and their implementation procedures
when developing long-term CSO control plans to reflect the site-specific wet
weather impacts of CSOs.
In addition, the CSO Control Policy clearly defines expectations for permittees, State
WQS authorities, and NPDES permitting and enforcement authorities. These expectations
include the following:
Permittees should immediately implement the nine minimum controls (NMC),
which are technology-based actions or measures designed to reduce CSOs and
their effects on receiving water quality, as soon as possible but no later than
January 1, 1997. More information on the NMC can be found in the EPA
document Combined Sewer Overflows Guidance for Nine Minimum Controls
(EPA832-B-95-003)
Permittees should give priority to environmentally sensitive areas
* Permittees should develop long-term control plans (LTCPs) for controlling CSOs.
A permittee may use one of two approaches: 1) demonstrate that its plan is
adequate to meet the water quality-based requirements of the CWA
("demonstration approach"), or 2) implement a minimum level of treatment (e.g.,
primary clarification of at least 85 percent of the collected combined sewage flows)
that is presumed to meet the water quality-based requirements of the CWA, unless
data indicate otherwise ("presumption approach")
• WQS authorities should review and revise, as appropriate, State WQS during the
CSO long-term planning process
NPDES permitting authorities should consider the financial capability of permittees
CSO Guidance for Financial Capability Assessment and Schedule Development Page 3
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when reviewing CSO control plans.
Table 1 illustrates the roles and responsibilities of permittees. NPDES permitting and
enforcement authorities, and state WQS authorities.
In addition to these key elements and expectations, the CSO Control Policy also addresses
important issues such as ongoing or completed CSO control projects, public participation, smail
communities and watershed planning.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 4
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CSO Guidance for Financial Capability Assessment and Schedule Development
Pages
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Guidance to Support Implementation of the CSO Control Policy
To help permittees and NPDES permitting and WQS authorities implement the provisions
of the CSO Control Policy, EPA has developed the following documents:
• Combined Sewer Overflows --Guidance for Long-Term Control Plan (EPA 832-
B-95-002)
» ('omhined Sewer Overflows (inidance for Nine Minimum (Controls (EPA 832-B-
95-003)
• Combined Sewer Overflows (jtiidance for Screening and Ranking (EPA 832-B-
95-004)
* (Combined Sewer Overflows Guidance for Monitoring and Modeling (EPA 832-
B-97-001)
Combined Sewer Overflows Guidance for financial (Capability Assessment and
Schedule Development (EPA 832-B-97-004)
» Combined Sewer Overflows—Guidance for founding Options (EPA 832-B-95-
007)
Combined Sewer Overflows Guidance for Permit Writers (EPA 832-B-95-008)
Goal of this Guidance
The CSO Policy recognizes the need to address the relative importance of environmental
and financial issues when developing an implementation schedule for CSO controls to be
contained in the LTCP and the NPDES permit or other enforceable mechanism. According to the
CSO Policy, an implementation schedule "may be phased based on the relative importance of
adverse impacts upon WQS and designated uses, priority projects identified in the long-term plan,
and on a permittee's financial capability."
This guidance has two goals. The first goal is to provide a planning tool for evaluating the
financial resources a permittee has available to implement CSO controls. This assessment will
involve the use of the following financial capability indicators listed in the CSO Policy:
• Total annual wastewater and CSO control cost per household as a percent of
median household income
* Bond ratings
» Overall net debt as percent of full market property value
CSO Guidance for Financial Capability Assessment and Schedule Development Page 6
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* Unemployment rate
1 Median household income
* Property tax revenue collection rate
• Property tax revenues as a percent of full market property value
It must be emphasized that the financial indicators found in this guidance might not
present the most complete picture of a permittee's financial capability to fund the CSO controls.
However, the financial indicators do provide a common basis for financial burden discussions
between the permittee and EPA and state NPDES authorities Since flexibility is an important
aspect of the CSO Policy, permittees are encouraged to submit any additional documentation that
would create a more accurate and complete picture of their financial capability.
Although this guidance focuses on the role of financial capability for development of an
implementation schedule for CSO controls, the financial capability analysis process can be useful
for the identification and evaluation of long-term control alternatives in the LTCP.
The second goal is to assist the permittee, EPA and state NPDES authorities in
cooperatively developing CSO control implementation schedules. This will involve an evaluation
of the following environmental and financial considerations listed in the CSO Policy:
* Eliminating overflows to sensitive areas
* Use impairment
• Financial capability
* Grant and loan availability
» Previous and current sewer user fees and rate structures
» Other viable funding mechanisms and sources of financing
This guidance does not recommend specific schedules for implementation of the CSO
controls based on financial capability or other considerations identified in the CSO Policy. It
does, however, provide general boundaries to aid all parties in negotiating reasonable and
effective schedules for implementation of the CSO controls.
It is important to recognize that scheduling flexibility is not the only form of relief
available to permittees The CWA and EPA regulations provide mechanisms for the review and
revision of WQS. The CSO Policy also encourages the "review and revision, as appropriate, of
water quality standards and their implementation procedures when developing CSO control plans
to reflect the site-specific wet weather impacts of CSOs." During the process of developing the
CSO Guidance for Financial Capability Assessment and Schedule Development Page 7
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LTCP, the permittee should consult with NPDES and WQS authorities to share information on
the water quality impacts of CSOs, the attainability of WQS, and the appropriate water quality-
based requirements of the permit. It may be appropriate to conduct a use attainability analysis and
revisit existing designated uses in order to ensure that the LTCP selected will be sufficient to
attain WQS. EPA's "Interim Economic Guidance for Water Quality Standards-Workbook"(EPA-
823-B-95-002) provides an approach for assessing whether a water pollution project will impose
"substantial and widespread social and economic impacts," as defined in EPA regulations.
Organization of Guidance
Section II summarizes & two phase approach for assessing a permittee's financial
capability to implement CSO controls. Section HI describes the first phase which calculates the
financial impact of wastewater and CSO controls on individual households. Section IV describes
the second phase used to calculate a permittee's debt, socioeconomic and financial conditions.
The results of the first and second phases are combined to give an overall assessment of a
permittee's financial capability to be used in CSO schedule development. Although financial
capability is only one factor in schedule development, a major portion of this guidance is devoted
to financial capability assessment because of the complexity of the process and its importance.
Section V describes the schedule development process for implementing CSO controls, and
details how environmental and financial considerations influence schedule development.
Audience
This guidance is designed for use by permittees, EPA and state NPDES authorities, and
other personnel with CSO planning and permitting responsibilities. It is written in a format that
allows individuals with limited municipal financial assessment experience to conduct CSO
financial capability assessments and negotiate reasonable CSO implementation schedules.
Individuals with experience in establishing schedules for enforcement orders and reviewing
financial capability assessments under the Water Quality Standards, Construction Grants and State
Revolving Fund (SRF) programs will be able to quickly and efficiently conduct the assessment
detailed in this guidebook,
CSO Guidance for Financial Capability Assessment and Schedule Development ' Page 8
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II. CSO FINANCIAL CAPABILITY ASSESSMENT APPROACH
This section describes a process for evaluating parameters that measure a permittee's
financial capability to implement CSO controls. The process reflects the experience of EPA in the
Water Quality Standards (WQS) program. Construction Grants program. State Revolving Fund
(SRF) program and the water enforcement program. Experience with these programs provides
the foundation upon which EPA has built the CSO financial capability assessment approach.
In the WQS program, economic factors are considered in the process of modifying WQS.
State WQS authorities conduct economic analysis of the impacts that will result from treatment
levels beyond the technology-based requirements of the Clean Water Act. EPA's "Interim
Economic Guidance for Water Quality Standards" (EPA 823-B-95-002) provides an approach
for assessing substantial and widespread social and economic impacts of specific water pollution
control projects. The process to identify "substantial" impacts is similar to the process used in this
guidance to analyze financial capability and its implications for scheduling CSO controls.
Under the Construction Grants Program, financial capability assessments were conducted
by municipalities and reviewed by EPA to demonstrate that municipalities had the ability to pay
for the capital investments and the costs for operation and maintenance of the wastewater
facilities. The assessments measured the financial conditions of the municipality and the financial
burden the proposed projects imposed on households, Some of the financial indicators used in the
demonstrations were similar to those used in this guidance. The demonstration procedure is
described in EPA's "Financial Capability Guidebook" (1984)
As part of SRF program implementation, states devised financial capability assessment
procedures for loan applicants. Often the procedures include a review of the same financial
indicators described in this document.
The Agency's water enforcement program conducts detailed evaluations of a permittee's
current financial conditions to assess the amount of penalty that can be borne by the permittee for
violations of the CWA. The evaluations frequently include financial indicators used in this
guidance.
The CSO financial capability assessment process also reflects the approach taken by bond
rating agencies and other investment industry firms to assess a municipality's or wastewater
utility's overall financial condition and credit capacity. The bond rating agencies generally use the
same types of financial information when they evaluate specific bond issues. Rating agencies
evaluate this information to determine the overall financial health of an issuer and identify any
factors that could make it difficult for the permittee to repay its bonds. The approach developed
for the CSO financial capability assessment incorporates the principles used by the rating agencies.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 9
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The Two-Phase Approach
The guidance presents a two-phase approach to assessing a permittee's financial capability.
The first phase identifies the combined impact of wastewater and CSO control costs on individual
households. The second phase examines the debt, socioeconomic, and financial conditions of a
permittee- The results of the two-phase analysis are combined in a Financial Capability Matrix.
Permittees and the WQS and NPDES authorities can use this matrix to assess the financial burden
of the CSO control costs and establish reasonable schedules to implement the CSO controls.
Phase one determines a Residential Indicator This indicator is the permittee's average
cost per household (CPH) for wastewater treatment (WWT) and CSO controls as a percentage of
the local median household income (MHI). It reflects the residential share of current and planned
WWT and CSO controls needed to meet the requirements of the CWA. A value range for this
indicator characterizes whether the costs impose a "low," "mid-range" or "high" financial impact
on residential users.
The second phase develops the Permittee Financial Capability Indicators. Six indicators
are used to evaluate the debt, socioeconomic, and financial conditions that affect a permittee's
financial capability to implement the CSO controls. These indicators serve as the basis for a
second phase analysis that will characterize the permittee's financial capability as "weak," "mid-
range" or "strong,"
A Financial Capability Matrix combines the Residential Indicator {first phase) and
Permittee Financial Capability Indicators (second phase) to give an overall assessment of the
permittee's financial capability. This assessment can be used to help establish an appropriate CSO
control implementation schedule.
Since flexibility is an important component of the CSO Policy, WQS authorities, NPDES
authorities, EPA personnel, and permittees should communicate throughout the CSO control
planning process to coordinate the development of an effective LTCP. This guidance document
provides all CSO participants with a structured yet flexible approach for evaluating the financial
burden CSO controls place on permittees. It also recognizes the importance of this financial
burden when establishing a CSO control implementation schedule. The financial capability
information developed in this guidance provides a basis for the permittee and the NPDES
authorities to negotiate the implementation schedule for the CSO controls. However, when a
permittee believes that there are unique circumstances that would affect the conclusion of this
guidance, the permittee may submit documentation of its unique financial conditions to the
appropriate EPA or State NPDES authorities for consideration.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 10
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Financial Benchmarks and Information Sources
The information used to develop the indicators needed for the financial assessment is
drawn from several different sources. In general, this information should be available through a
combination of local, state, and Federal sources. Project cost information is available in the
LTCP. Socioeconomic information, such as median household income, is available from census
data. Detailed financial information is available from a community's annual financial statements.
Financial statements may be obtained directly from a community or, in most states, from the state
auditor's office which maintains a central file of audited reports. When the permittee's service
area involves more than one jurisdiction, it will be necessary to examine data for each jurisdiction
to develop the necessary data.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 11
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III. PHASE ONE: THE RESIDENTIAL INDICATOR
The Residential Indicator measures the financial impact of the current and proposed WWT
and CSO controls on residential users. Development of this indicator starts with the
determination of the current and proposed WWT and CSO control costs per household (CPH).
Second, the service area's CPH estimate and the median household income (MHI) are used to
calculate the Residential Indicator Finally, the Residential Indicator is compared to established
financial impact ranges to determine whether CSO controls will produce a possible high, mid-
range or low financial impact on the permittee's residential users. Worksheets are provided to aid
in developing the Residential Indicator.
Developing CPH Estimate
The first step in developing the CPH is to determine the permittee's total WWT and CSO
costs by adding together the current costs for existing wastewater treatment operations and the
projected costs for any proposed WWT and CSO controls. The next step is to calculate the
residential share of the total WWT and CSO costs. The final step is to calculate the CPH by
dividing the residential share of total WWT and CSO costs by the number of households in the
permittee's total wastewater service area.
Current WWT costs are defined as current annual wastewater operating and maintenance
expenses (excluding depreciation) plus current annual debt service (principal and interest). This
fairly represents cash expenses for current wastewater treatment operations. (Expenses for funded
depreciation, capital replacement funds, or other types of capital reserve funds are not included in
current WWT costs, because they represent a type of savings account rather than an actual
operation and maintenance expense.)
Estimates of projected costs are made for any proposed WWT projects and the CSO
controls. Any concerns about including specific proposed WWT projects or CSO controls in the
projected costs, or the length of the planning period, should be discussed with the appropriate
NPDES permitting and enforcement authorities. These costs are adjusted to current dollars (i.e.,
deflated). These include projected operation and maintenance expenses plus projected debt
service costs for any proposed WWT and the CSO controls. The residential or household costs
exclude the portion of expenses attributable to commercial, governmental and industrial
wastewater discharges. The information and calculations used to develop the CPH and the
Residential Indicator are presented in Worksheets 1 and 2 and their instructions.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 12
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Worksheet \ Instructions
Enter the requested data on lines 100 through 109. The operation and maintenance costs
on lines 100 and 103 should include all significant cost categories, such as labor, chemicals,
utilities, administration, and equipment replacement Do not include depreciation on line 100 or
line 103. Adjust the projected annual WWT and CSO costs to current dollars using the average
annual national Consumer Price Index (CPI) inflation rate for the past five years available from
the Bureau of Labor Statistics. The CP! is used as a simple and reliable method of indexing
projected WWT costs and household income For example, if the most recent five year average
CPI is 4 percent, and the projected annual O& M and debt service costs will begin in 2 years,
adjust the projected costs with the following formula:
Adjusted Projected Costs (Current Dollars) Projected Cosfs •" Adjustment I*actor
The adjustment factor can be calculated using the following formula or the present value factor
from the table on page 55:
•Adjustment f-'actor • ,925
(1 »(7>/y™" (i i ,()4>-
The annualized debt service cost information for the projected WWT facilities and
projected CSO controls (Line 104) can be calculated using an annualization factor obtained from
the table on page 56, which reflects the local borrowing interest rate and borrowing term of the
permittee. For example, if the adjusted projected debt costs (current dollars) are $25,000,000 and
typical borrowing terms include an interest rate of eight percent over 20 years, then costs can be
annualized with the following calculation:
Annual Debt Sen-ice Costs -Adjusted Debt Costs * Annualization l-'actor
Annual Debt Sun-ice Cost -$25.000,000* -1019 --S2.547.500
The annualization factor can be calculated using the following formula;
i , r- Interest Rale . „ .08 no ,,»,,,
Annualtzalton {• actor- > Interest Rale 1.08= .1019
(1 * Interest Raleffani 1 (1+.U8)-" 1
CSO Guidance for Financial Capability Assessment and Schedule Development Page 13
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The annualized debt service cost for the projected WWT facilities and projected CSO
controls is entered on line 104. Add the current and projected wastewater treatment and
projected CSO control costs to estimate the total WWT and CSO costs (line 102 + line 105).
Calculate the residential share of the total cost (line 106) and enter on line 107.
The residential share of total costs (line 107) is computed by multiplying the percent of total
wastewater flow including infiltration and inflow attributable to residential users by the total costs
(line 106). For example, for a permittee with the following characteristics:
Total Costs: $12.000,000
Residential Flow: 10.5 Million Gallons per Day
Total Flow: 13.1 Million Gallons per Day
The residential share of the total cost is:
,11 - , ... -j, v. , ,. Hasidetitial 1Iaxii'waiw I'low
Residential Miaiv of t jww I nial ( oxtx
Tout! tt'astewalvr i'low
„.,,,,, .,. itnnnnonn ").5 Million GdlloUX Pi'f DflV
Residential Slum' of ( uxix X] 2.000.0(10
13,1 Million Gallons Per Day
59,600.00(1
Calculate the CPH (line 109) by dividing total residential share costs (line 107) by the total
number of households (line 108) in the permittee's total wastewater service area.
Data Sources
The permittee's latest financial reports should be available to develop the current
wastewater treatment costs. In order to comply with accounting requirements, most permittees
develop a combined statement of revenues, expenses, and changes in fund balance. These reports
should be available directly from the permittee, or, in some states, from central records kept by
the state auditor or other state offices. (Many states conduct audits and generate financial reports
- i.e., balance sheet, statement of revenues, expenses, and changes in fund balance, and statement
of cash flows, for each permittee.) Projected costs and households in the wastewater service area
should be available through planning documents. The Bureau of Labor Statistics frequently has
data on the number of households in the service area.
The Consumer Price Index rate (CPI) should be the average rate for the previous five
years. The CPI is available through the Bureau of Labor Statistics.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 14
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COST PER HOUSEHOLD
Worksheet I
Current WWT Costs
* Annual Operations and
Maintenance Expenses (Excluding
Depreciation)
* Annual Debt Service (Principal
and Interest)
*Subtotal*
(Line 100 + Line 101}
Line Number
100
101
102
Projected WWT and CSO Costs
(Current Dollars)
Estimated Annual Operations and
Maintenance Expenses (Excluding
Depreciation)
* Annual Debt Service (Principal
and Interest)
* Subtotal*
(Line 103 + Line 104)
Total Current and Projected WWT and
CSO Costs (Line 102 + Line 105)
103
104
105
106
Residential Share of Total WWT and
CSO Costs
Total number of Households in Service
Area
Cost Per Household
(Line 107-Line 108)
107
108
109
CSO Guidance for Financial Capability Assessment and Schedule Development
Page 15
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Developing the MHI Estimate
The second step in developing the Residential Indicator is to determine the adjusted median
household income (MHI) for the permittee's entire wastewater service area. Information and
calculations used to develop the adjusted MHI value are presented in Worksheet 2 and its
instructions.
Worksheet 2 Instructions
Enter the requested information on Worksheet 2, lines 201 through 203. MHI from the
latest census year should be adjusted to current year dollars with the average CPI inflation rate
from the latest census year to the current year using the following formula
Adjusted MH! \fffl « Adjustment l-'actor
The MHI adjustment factor can be calculated using the following formula or the inflation
adjustment factor from the table on page 58:
MHI Adjustment f*'acu>r (1
For example, if a permittee's MHI was $30,000 in the 1990 census year, the average annual
CPI since 1990 was 4 percent and the current year is 1992, the following calculation would be
made to adjust the MHI to current dollars:
Adjustment Factor - (I t-.04)l9°:H9
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RESIDENTIAL INDICATOR
Worksheet 2
Median Household Income (MHI) Line Number
• Census Year MHI 201
• MHI Adjustment Factor 202
• Adjusted MH! (Line 201 x Line 202) 203
Annual WWT and CSO Control Cost
Per Household fCPH)
(Line 109) 204
Residential Indicator:
Annual Wastewater and CSO Control
Costs per Household as a percent of
Adjusted Median Household Income
(CPH as % MHI)
(Line 204 - Line 203 x 100) 205
CSO Guidance for Financial Capability Assessment and Schedule Development Page 17
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If the permittee's service area includes more than one jurisdiction, it may be necessary to
develop a weighted MHI for the entire service area. The Bureau of Census's designated MHI
areas generally encompass most permittees" service areas. For this reason, the calculation of a
weighted M.HI usually will not be necessary to reasonably represent the permittee's MHI. When a
weighted MHI must be acquired, a weight would be assigned to each jurisdiction to reflect its
share of the total households.
The following example illustrates how to develop a weighted MHI value before adjusting it
to current year dollars. If a permittee is a regional authority that serves three local jurisdictions,
the weighted average MHI would be calculated as follows:
Number of
Jurisdiction MHI Households (HH)
A $30.000 100.000
B $45,000 25,000
C $25,000 50,000
175,000
HH. i HH. \ { HHr
Weighted MHI MHI. - - — - MIU, - — - MHIr
'•' B
- - — - , - — r - —
Total HHJ B{ Total HI I) ( Total If/f
^ 175,!)()» I { !75,OOUJ ^ 175.000 /
$17,143 - S6.429 •' S7.143
$30.715
Data Sources
Median household income is available for most communities from the latest census. In the few
cases where a local jurisdiction's MHI is not available, the surrounding county's MHI may be
sufficient. Each state has a state data center that serves as a local source of census data for public
use. This center may be contacted to obtain the information available from the Bureau of Census
for use during this assessment (see Appendix B).
CSO Guidance for Financial Capability Assessment and Schedule Development Page 18
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Developing the Residential Indicator
Worksheet 2 Instmcijojis
To calculate the Residential Indicator (line 205 of Worksheet 2), divide the annual WWT and
CSO control cost per household (line 109 transferred to line 204) by the Adjusted MHI (line 203)
and multiply by 100
Analyzing the Residential Indicator
The Residential Indicator will be used in the Financial Capability Matrix in Section IV to heip
permittees, and EPA and state NPDES authorities determine reasonable and workable long-term
CSO control schedules. (The Residential Indicator does not provide special recognition for low
income groups since their influence is automatically reflected in the median household income
component of the indicators.)
To assess the financial impact CSO controls may have on the permittee's residential users,
the Residential Indicator is compared to the financial impact ranges that reflect EPA's previous
experience with water pollution control programs. These ranges are as follows:
Financial Impact
Low
Mid-Range
High
Residential Indicator (CPH as %
MHI)
Less than 1 0 Percent of MHI
1.0 -2.0 Percent of MHI
Greater than 2.0 Percent of MHI
When the Residential Indicator is less than 1.0 percent, between 1.0 and 2.0 percent, and
greater than 2.0 percent, the financial impact on residential users to implement the CSO controls
will be characterized as "low," "mid-range," and "high," respectively Unless there are significant
weaknesses in a permittee's financial and socioeconomic conditions, second phase reviews for
permittees that have a low residential indicator score (less than 1.0) are unlikely to result in longer
implementation schedules. Permittees with low residential indicators may wish to forego the
second phase analysis and proceed with the normal engineering and construction implementation
schedule developed as part of the CSO planning process.
In situations where a permittee believes that there are unique circumstances that would affect
the conclusion of the first phase, the permittee may submit documentation of its unique financial
conditions to the appropriate state NPDES and EPA authorities for consideration.
CSO Guidance for Financial Capability Assessment and Schedule Development
Page 19
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IV. PHASE TWO: PERMITTEE FINANCIAL CAPABILITY INDICATORS
In the second phase, selected indicators are assessed-to evaluate the financial capability of the
permittee. These indicators will examine the permittee's debt burden, socioeconomic conditions,
and financial operations. The second-phase review examines three general categories of financial
capability indicators for the permittee;
Debt Indicators - Assess current debt burden of the permittee or the communities
within the permittee's service area and their ability to issue additional debt to
finance the CSO controls. The indicators selected for this purpose are:
Bond Ratings (General Obligation and/or Revenue Bond Fund)
Overall Net Debt as a Percent of Full Market Property Value
* Socioeconomic Indicators - Assess the general economic well-being of residential
users in the permittee's service area. The indicators selected for this purpose are:
Unemployment Rate
Median Household Income
Financial Management Indicators - Evaluate the permittee's overall ability to
manage financial operations. The indicators selected for this purpose are:
Property Tax Revenue Collection Rate
Property Tax Revenues as a Percent of Full Market Property Value
Even though the financial capability analysis reflects current conditions, pending changes in
the service area should be considered in development of the second phase indicators. For example,
if the current unemployment rate is high, but there is a new plant opening that will stimulate
economic growth, the unemployment indicators for the service area wouid need to be modified to
reflect the projected impact of the new plant. The permittee should submit documentation of such
conditions to the appropriate EPA and state NPDES authorities for consideration. When the
permittee is a sanitary district, sewer authority or similar entity, the second phase indicators related
to property values and tax revenues may not be applicable. In those circumstances, the permittee
may simply use the remaining indicators or submit other related documentation that will help assess
its financial capability to implement the CSO controls.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 20
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DEBT INDICATORS
The debt indicators described below were selected to assess the current debt burden
conditions and the ability to issue new debt. These indicators are the bond rating and overall net
debt as a percent of full market property value. When these indicators are not available for the
permittee, other financial data which illustrates debt burden and debt issuing capacity may be used
to assess the permittee's financial capability in this area.
Bond Rating
The information needed to evaluate the bond ratings is presented in Worksheet 3. Recent
bond ratings for the permittee and service area communities summarize a bond rating agency's
assessment of a permittee's or community's credit capacity. General obligation (G.O.) bonds are
bonds issued by a local government and repaid with taxes (usually property taxes). They are the
primary long-term debt funding mechanism in use by local governments- General obligation bond
ratings reflect financial and socioeconomic conditions experienced by the community as a whole.
"Revenue bond" ratings, by comparison, reflect the financial conditions and management
capability of the wastewater utility. They are repaid with revenues generated from user fees.
Revenue bonds are sometimes referred to as water or sewer bonds. In some cases these bonds
may have been issued by the state on behalf of local communities. (Additional information on
bonds is contained in EPA's Combined Sewer Overflows—Guidance For Funding Options (EPA
832-B-95-007 ).
Bond ratings normally incorporate an analysis of many financial capability indicators. These
analyses evaluate the long term trends and current conditions for the indicators. The ultimate bond
ratings reflect a general assessment of the current financial conditions. However, if security
enhancements like bond insurance have been used for a revenue bond issue, the bond rating may be
higher than justified by the local conditions
Many small and medium-sized communities and permittees have not used debt financing for
projects and, as a result, have no bond rating. The absence of bond rating does not indicate strong
or weak financial health. When a bond rating is not available, this indicator may be excluded from
the financial analysis.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 21
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Worksheet 3 Instructions
Enter the most recent bond ratings on Worksheet 3, lines 301 and 302. Note that ratings are
requested for general obligation bonds and revenue bonds. When there are several different bond
ratings, enter the most recent bond rating on Line 303 as the summary bond rating,
D.aja Sourggg
Municipal bond reports from rating agencies (e.g., Moody's Bond Record, Standard &
Poor's Corporation) provide recent ratings.
Benchmarks
Moody's Investor Services
"Baa" is the minimum investment grade rating. See Moody's on Municipals - an
Introduction to Issuing Debt for a description of bond ratings.
Moody's Investor Services' Ratings
Weak; Ba, B, Caa, Ca, C
• Mid-Range: Baa
Strong: Aaa, AA, A
Standard & Poor's
"BBB" is the minimum investment grade rating. See Standard & Poor's Municipal Finance
Criteria for a description of bond ratings.
Standard and Poor's Ratings
Weak: BB, B, CCC, CC, C, D
Mid-Range; BBB
Strong: AAA, AA, A
CSO Guidance for Financial Capability Assessment and Schedule Development Page 22
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BOND RATING
Worksheet 3
Line Number
Most Recent General Obligation
Bond Rating
Date:
Rating Agency:
Rating: 301
Most Recent Revenue
(Water/Sewer or Sewer) Bond
Date: ___
Rating Agency:
Bond Insurance (Yes/No)
Rating: 302
Summary Bond Rating: 303
CSO Guidance for Financial Capability Assessment and Schedule Development Page 23
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Overall Net Debt as a Percent of Full Market Property Value
Description
Overall net debt is debt repaid by property taxes in the permittee's service area. It excludes
debt which is repaid by special user fees (e.g., revenue debt). This indicator provides a measure of
the debt burden on residents within the permittee's service area and measures the ability of local
governmental jurisdictions to issue additional debt. It includes the debt issued directly by the local
jurisdiction and debt of overlapping entities, such as school districts. This indicator compares the
level of debt owed by the service area population with the foil market value of real property used
to support that debt and serves as a measure of financial wealth in the permittee's service area.
Information needed to develop overall net debt as a percent of full market value is identified on
Worksheet 4.
Worksheet 4 Instructions
Enter requested data on Worksheet 4, lines 401 - 405.
Line 401 - Direct Net Debt - Enter the amount of each jurisdiction's general obligation debt
outstanding that is supported by the property in the permittee's service area. General
obligation bonds are secured by the "full faith and credit" of the community and are payable
from general tax revenues. This debt amount excludes general obligation bonds that are
payable from some dedicated user fees or specific revenue source other than the general tax
revenues. These general obligation bonds are called "double-barreled bonds."
Line 402 - Debt of Overlapping Entities - Calculate the permittee's service area's share of any
debt from overlapping entities using the process illustrated below
1. Identify in Column A below each overlapping entity that has incurred debt that must be
partially supported by the permittee's service area. (Check the State assessor's office for
this information).
2. Identify the total amount of tax-supported outstanding debt for each overlapping entity in
Column B. Money in a sinking fund is not included in the outstanding debt since it
represents periodic deposits into an account to ensure the availability of sufficient monies
to make timely debt service payments.
3. Identify the percentage of each overlapping entity's outstanding debt charged to persons
or property in the permittee's service area in Column C. The percentage is based on the
estimated full market value of real property of the respective jurisdictions.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 24
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4. Multiply the total outstanding debt of each overlapping entity by the percentage identified
for the permittee's service area (Column B x C).
5, Add the figures in Column D to arrive at total overlapping debt for permittee's service
area.
(A)
Overlapping
Entities
CounSEv
School District
Total Overlapping
Debt
(B)
Outstanding
Debt (less
Sinking Fund)
$10,500,000
16,800,000
(C)
Percent Chargeable
to Permittee's
Service Area
25%
95%
(D)
Outstanding
Debt Attributable
to Permittee's
Service Area
$2.625,000
15.960,000
$18,585,000
Use 403 - Overall Net Debt - Add lines 401 and 40
404 - Market Value of Property - The property value should reflect the foil market
valae of property within the permittee's service area. It is possible that the tax assessed
pjrarperty value will not reflect full market value. This occurs when the tax assessment ratio is
less than one. In such cases the full market value of property is computed by dividing the
tote! tax assessment value fay the assessment ratio (the assessment ratio represents the
p«a<2SE«tage of the full market value that is taxed at the established tax rate). For example, if
the assessed value is $1,000,000 and the assessment ratio is 50 percent then the full market
value of real property is $1,000,000/30= $2,000,000.
405 - Overall Net Debt as a Percent of Full Market Property Value - Divide line 403 by
lime 404 and multiply by 1 00.
CSO Guiaianee for Financial Capability Assessment and Schedule Development
Page 25
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Data Sources
Debt information is available from the financial statements of each community, in most cases
the most recent financial statements are on tlie with the state (e.g.. State Auditor's Office).
Overlapping debt may or may not be provided in a community's financial statements. The property
assessment data should be readily available through the community or the State's assessor office.
The boundary of most permittees' service areas generally conforms to one or more community
boundaries. Therefore, prorating community data to reflect specific service area boundaries is not
normally necessary for evaluating the general financial capability of the permittee,
Benchmarks
Weak: Above 5%
» Mid-range: 2-5%
* Strona: Below 2%
CSO Guidance for Financial Capability Assessment and Schedule Development Page 26
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OVERALL NET DEBT AS A PERCENT OF FULL MARKET PROPERTY VALUE
Worksheet 4
Line Number
Direct Net Debt
(G.O. Bonds Excluding Double-
Barreled Bonds) 401
Debt of Overlapping Entities
(Proportionate Share of
Multijurisdictional Debt) 402
Overall Net Debt
(Lines 401+402) 403
Market Value of Property 404
Overall Net Debt as a Percent of
Full Market Property Value
(Line 403 divided by
Line 404x100) 405
CSO Guidance for Financial Capability Assessment and Schedule Development Page 27
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SOCIOECONOM1C INDICATORS
The socioeconomic indicators are used to assess the general economic weil-being of
residential users in the permittee's service area. The indicators used to assess economic conditions
are unemployment rate and median household income. When the permittee has additional
socioeconomic data, it may want to submit the data to the appropriate EPA and state NPDES
authorities to facilitate a better understanding of the permittee's unique economic conditions.
Several examples of this type of socioeconomic data could be poverty rate, population growth, and
employment projections.
Unemployment Rate
Unemployment information is entered on Worksheet 5, The unemployment rate is defined as
the percent of a permittee's service area residents on the unemployment rolls.
Worksheet 5 Instructions
Unemployment values are entered on lines 501 - 503 on Worksheet 5. If the unemployment
rate for a permittee's service area is not available, the unemployment rate for the county in which
the service area is located may be used as a substitute. On line 503, enter the average national
unemployment rate.
Data Sources
The Bureau of Labor Statistics (BLS) maintains current unemployment rate figures for
municipalities and counties over 25,000 population. National and state unemployment data are
also available for comparison purposes. This information can be obtained from the BLS by
request at (202) 606-6392.
Benchmarks
Compare the permittee's unemployment values with the national average values. National
averages are readily available through the Bureau of Labor Statistics.
• Weak: More than 1 percentage point above the National Average
Mid-range: ± 1 percentage point of the National Average
* Strong: More than 1 percentage point below National Average
For example, if the national average unemployment rate is 6 percent, an unemployment rate greater
than 7 percent would be considered weak, while an unemployment rate less than 5 percent would
be considered strong.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 28
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UNEMPLOYMENT RATE
Worksheet 5
Line Number
Unemployment Rate - Permittee 501
Source: .
Unemployment Rate - County
(use if permittee's rate is
unavailable) 502
Source:
Benchmark:
Average National
Unemployment Rate: 503
Source:
CSO Guidance for Financial Capability Assessment and Schedule Development Page 29
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Median Household Income
Median household income (MH1) is defined as the median amount of total income dollars
received per household during a calendar year in a given area. It serves as an overall indicator of
community earning capacity. Worksheet 6 is used to present information for this indicator.
Worksheet 6 Instructions
Median household income was discussed during the first phase assessment and is presented
on Worksheet 2. On line 601 of Worksheet 6, enter the adjusted MHI from Worksheet 2 (line
203). Use the MHI adjustment factor from Worksheet 2 (line 202) to calculate the adjusted
national MHI from the latest census, national MHI value (line 602) and enter the value on Line
604.
Data Sources
Median household income is available through state data centers. Refer to Worksheet 2 for
MHI of the permittee's service area. Refer to Appendix B for the address and telephone number of
the state's data center to acquire the latest census national MHI value.
Benchmarks
Compare the permittee's MHI to the adjusted national MHI:
• Weak: More than 25% below Adjusted National MHI
• Mid-Range: ± 25% of the Adjusted National MHI
• Strong: More than 25% above Adjusted National MHI
CSO Guidance for Financial Capability Assessment and Schedule Development Page 30
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MEDIAN HOUSEHOLD INCOME
Worksheet 6
Line Number
Median Household Income -
Permittee (Line 203) . 601
* Source:
Benchmark:
Census Year National MHI 602
MHI Adjustment Factor
(line 202) 603
Adjusted National MHI: 604
(line 602 x line 603)
Source:
CSO Guidance for Financial Capability Assessment and Schedule Development Page 31
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FINANCIAL MANAGEMENT INDICATORS
The financial management indicators used to evaluate a permittee's financial management
ability are property tax revenue as a percent of full market value of real property and property tax
revenue collection rate,
Property Tax Revenues as a Percent of Full Market Property Value
This indicator can be referred to as the "property tax burden" since it indicates the funding
capacity available to support debt based on the wealth of the community It also reflects the
effectiveness of management in providing community services,
Worksheet 7 Instructions
Property tax burden is computed on Worksheet 7. The full market value-of real property was
calculated in Worksheet 4. line 404. Enter the full market value on line 701. Enter the most recent
year's property tax revenue on line 702, General fund revenues are primarily property tax receipts.
Data Sources
The property assessment data should be readily available through the community or the
State's assessor office (see Worksheet 4, Line 404). Property tax revenues are available in
communities' annual financial statements. Occasionally, the assessment and tax revenue data of
communities partially serviced by the permittee may have to be prorated to provide a clearer
picture of the permittee's property tax burden,
Benchmarks
• Weak: Above 4%
• Mid-range: 2%-4%
• Strong: Below 2%.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 32
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PROPERTY TAX REVENUES AS A PERCENT OF FULL MARKET PROPERTY
VALUE
Worksheet 7
Line Number
Full Market Value of Real
Property (Line 404) 701
Property Tax Revenues ; 702
Property Tax Revenue as a
Percent of Full Market Property
Value
(702-701x100) __ 703
CSO Guidance for Financial Capability Assessment and Schedule Development Page 33
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Property Tax Revenue Collection Rate
The property tax revenue collection rate is an indicator of the efficiency of the tax collection
system and the acceptability of tax levels to residents.
Worksheet 8 Instructions
The property tax revenue collection rate is calculated on Worksheet 8. The property tax
revenues collected was listed in Worksheet 7, Line 702, Enter this value on line 801. Enter the
property taxes levied on line 802. Divide the property tax revenue collected by the property taxes
levied and multiply by 100 to present the collection rate as a percentage on line 803.
Data Sources
Property taxes levied can be computed by multiplying the assessed value of real property by
the property tax rate, both of which are available from a community's financial statements or the
state assessor's office (see Worksheet 4, Line 404). Property tax revenues are available in
communities' annual financial statements. Occasionally, the assessment and tax revenue data of
communities partially serviced by the permittee may have to be prorated to provide a clearer
picture of the permittee's property tax revenue collection rate.
Benchmarks
» Weak: Below 94%
• Mid-range: 94-98%
• Strong: Above 98%.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 34
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PROPERTY TAX REVENUE COLLECTION RATE
Worksheet 8
Line Number
Property Tax Revenue Collected
(Line 702) 801
Property Taxes Levied 802
Property Tax Revenue Collection
Rate
(line 801 - line 802 x 100) __ 803
CSO Guidance for Financial Capability Assessment and Schedule Development Page 35
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Analyzing Permittee Financial Capability Indicators
This section describes how the indicators in the second phase may be used to generate an
overall score of a permittee's financial capability. The indicators are compared to national
benchmarks to form an overall assessment of the permittee's financial capability and its effect on
implemention schedules in the iong-term CSO control plan.
In situations where a permittee believes that there are unique circumstances that would affect
the conclusion of the second phase, the permittee may submit documentation of its unique financial
conditions to the appropriate EPA and state NPDES authorities for consideration. The purpose of
additional information is to clarify unique circumstances which are not fairly represented by the
overall scores of the selected indicators. An example could be where a state or community
imposes restrictions on property taxes
Worksheet 9 Instructions
The indicators generated from the worksheets are compared to the state, national or industry
benchmarks presented in Table 2. Information compiled from Worksheets 3 through 8 is
summarized in Column A on Worksheet 9. Score each of these values using the rating standards in
Table 2 and the following score benchmarks and enter the appropriate number in Column B. The
score definitions are:
Benchmarks Score
Weak 1
« Mid-Range 2
* Strong 3
To calculate an average score for the indicators, total the values in Column B and divide by the
number of entries. Enter the average score on Line 907.
If it is not possible to develop one or more of the six indicators, the permittee should explain
why the indicator is inappropriate or unavailable. Since the point of the analysis is to measure the
overall financial burden of the CSO controls, the debt and socioeconomic indicators are generally
better measures of this burden than the financial management indicators. Consequently, if one of
the debt or socioeconomic indicators is not available, the two financial management indicators
should be averaged and used as a single indicator to average with the available debt and
socioeconomic indicators. This averaging is necessary so that undue weight is not given to the
financial management indicators.
CSO Guidance for Financial Capability Assessment and Schedule Development Page 36
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PERMITTEE FINANCIAL CAPABILITY INDICATOR BENCHMARKS
Table 2
Indicator
Bond Rating
Overall Net Debt as a
Percent of Full
Market Property
Value
Unemployment Rate
Median Household
Income
Property Tax
Revenues as a
Percent of Full
Market Property
Value
Property Tax
Collection Rate
Strong
AAA-A (S&P) or
Aaa-A (Moody 's)
Below 2%
More than t
Percentage Point
Below the National
Average
More than 25%
Above Adjusted
National MHI
Below 2%
Above 98%
Mid-Range
BBB (S&P)
Baa (Moody's)
2% - 5%
± 1 Percentage Point
of National Average
±25% of Adjusted
National MHI
2% - 4%
94% . 98%
Weak
BB-D (S&P)
Ba-C (Moody's)
Above 5%
More than i
Percentage Point
Above the National
Average
More than 25%
Below Adjusted
National MHI
Above 4%
Below 94%
CSO Guidance for Financial Capability Assessment and Schedule Development
Page 37
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SUMMARY OF PERMITTEE FINANCIAL CAPABILITY INDICATORS
Worksheet 9
Indicator
Bond Rating (Line 303)
Ovesaffi 'Net Debt as a
Percent of Full Market
Propmy Value
Column A:
Actual Value
Column B:
Score
Unemployment Rate (Line
501>
Median Household Income
(Line«S01)
Property Tax Revenues as
a Percent of Full Market
Property Value (Line 703)
Property Tax Revenue
CoIIeestion Rate
(LineWEG)
Permittee Indicators Score
(Sunsiwf Column B ^
Nunfoer of Entries)
Line Number
901
902
903
904
905
906
907
CSO Guidance for Financial Capability Assessment and Schedule Development
Page 38
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The Financial Capability Matrix
The results of the Residential Indicator and the Permittee Financial Capability Indicators
analyses are combined in the Financial Capability Matrix to evaluate the level of financial burden
the CSO controls may impose on a permittee. This matrix can be used by permittees, EPA and
state NPDES authorities to establish reasonable and workable CSO control implementation
schedules.
Worksheet 10 Instructions
First, enter the value of the Residential Indicator (Cost Per Household as a % of MHI) from
Line 205 (Worksheet 2) on Line 1001 of Worksheet 10. Enter the Permittee Financial Capability
Indicators score from Line 907 (Worksheet 9) on Line 1002. With this information, find the
financial burden category for the permittee in the Financial Impact Matrix (Table 3). Enter the
category on line 1003.
For example, if the Residential Indicator from Line 1001 is 1.3% and the Permittee Financial
Capability Indicators score from Line 1002 is 2.1. the Financial Capability Matrix would indicate
that implementation of the CSO control would be "Medium Burden" for the permittee.
The result from the Financial Capability Matrix is used to develop a CSO implementation
schedule as described in Section V: CSO Schedule Development.
Guidance for Financial Capability Assessment and Schedule Development Page 39
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FINANCIAL CAPABILITY MATRIX SCORE
Worksheet 10
Line Number
Residential Indicator Score (Line
205) 1001
Permittee Financial Capability
Indicators Score (Line 907) 1002
Financial Capability Matrix
Category (see matrix next page) 1003
Guidance for Financial Capability Assessment and Schedule Development Page 40
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FINAiNCIAL CAPABILITY MATRIX
Table 3
Permittee
Financial
Capability
Indicators Score
(Socioeconomic, Debt
and Financial
Indicators)
Weak
(Below 1.5)
Mid-Range
(Between 1.5 and 2. 5)
Strong
(Above 2.5)
Residential Indicator
(Cost Per Household as a % of MHI)
Low
(Below 1.0%)
Medium Burden
Low Burden
Low Burden
Mid-Range
(Between 1.0 and
2.0%)
High Burden
Medium Burden
Low Burden
High
(Above 2.0 %)
High Burden
High Burden
Medium Burden
Guidance for Financial Capability Assessment and Schedule Development
Page 41
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V. CSO SCHEDULE DEVELOPMENT
The CSO Policy recognizes that the causes and impacts of CSOs are site-specific water
pollution control problems. Identification of CSO controls involves evaluation of significant
technical, environmental, and financial issues. Therefore, the CSO Policy provides an opportunity
for flexible, phased implementation of CSO controls to achieve compliance with the technology-
based and water quality based requirements of the Clean Water Act.
Under the CSO Policy, permittees with combined sewer systems are expected to implement
the nine minimum CSO controls as expeditiously as possible but no iater than January 1, 1997.
The nine minimum controls are technology-based controls that can reduce the magnitude, duration.
and frequency of CSOs and their effects on receiving waters (See guidance: Combined Sewer
Overflows -Guidance for Nine Minimum Controls (EPA, 832-B-95-OQ3)). These minimum
controls are not intended to require significant engineering activities or major construction.
Permittees with combined sewer systems are also expected to develop long-term control
plans (LTCPs) that include provisions for public participation, monitoring of CSOs and their
impacts, evaluation and selection of control alternatives, and implementation schedules for long-
term controls. A permittee is expected to develop its LTCP as soon as practicable, but generally
within two years after a requirement to develop an LTCP has been specified in its NPDES permit
or other enforceable mechanism. The development and implementation of an LTCP will be
coordinated with implementation of the nine minimum controls. Development of the LTCP
involves negotiations with the EPA and state NPDES authorities and if appropriate, state WQS
authorities. Among other components the LTCP contains fixed-date implementation and financing
schedules to design and construct the needed CSO controls.
The CSO Policy recognizes the need to address the relative importance of environmental and
financial issues when developing an implementation schedule for CSO controls to be contained in
the LTCP and the NPDES permit or other enforceable mechanism. According to the CSO Policy,
an implementation schedule "may be phased based on the relative importance of adverse impacts
on WQS and designated uses, priority projects identified in the long-term plan, and on a
permittee's financial capability." The CSO Policy identifies the following environmental and
financial considerations that may affect the phasing of an implementation schedule for CSO
controls:
* Eliminating overflows to sensitive areas
• Use impairment
• Financial capability
* Grant and loan availability
• Previous and current sewer user fees and rate structures
Guidance for Financial Capability Assessment and Schedule Development Page 42
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* Other viable funding mechanisms and sources of financing.
These factors, may warrant phasing the CSO control implementation schedules in a manner
other than would be prescribed by logical engineering sequencing and normal construction
practices. This section illustrates how these considerations may affect scheduling and provides
some general scheduling boundaries to aid all parties in negotiating the final implementation
schedule for CSO controls.
Scheduling is first considered during the permittee's development of an LTCP. The LTCP
should assess CSO control alternatives including estimated design and construction time
requirements for various components of the CSO controls. In general CSO controls should be
implemented as expeditiously as possible.
The permittee should first develop a tentative implementation schedule based on logical
engineering sequencing and normal construction practices. The permittee should complete a
critical path analysis to identify the shortest implementation schedule that will achieve the control
objectives identified in the LTCP f'See guidance: Combined Sewer Overflows-Guidance for Long-
term Control Plan (EPA 832-J 3-95-002)). As a result of negotiations with state NPDES and
EPA authorities, it may be appropriate to modify the tentative design and construction schedule
based on the environmental and financial considerations listed above.
In general, the final negotiated schedule for CSO controls would reflect two types of
modifications to the engineering and construction schedule. First, where CSOs discharge to,
sensitive or significantly use-impaired water bodies, the final schedule would provide for expedited
implementation of the controls for these discharges. Second, the schedules may be phased or
extended to reflect the significance of various financial considerations, particularly financial
capability- The number of years to implement the CSO controls would be negotiated between the
permittee, EPA and state NPDES authorities.
The following discussion provides more information on environmental and financial
considerations that affect implementation schedules for CSO controls..
Guidance for Financial Capability Assessment and Schedule Development Page 43
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ENVIRONMENTAL CONSIDERATIONS
Discharges to Sensitive Areas
The CSO Control Policy states that a permittee's LTCP should give the highest priority to
"sensitive areas." Sensitive areas are identified by the NPDES permitting authorities. They
include the following:
• Outstanding National Resource Waters
» National Marine Sanctuaries
» Waters with threatened or endangered species and their habitat
• Waters with primary contact recreation
• Public drinking water intakes or their designated protection areas
• Shellfish beds.
For discharges to sensitive areas, the CSO Control Policy provides the following approaches:
« Prohibit new or significantly increased overflows
* Eliminate or relocate overflows
» Where elimination or relocation is not feasible, provide treatment to meet WQS and
regularly reassess the feasibility of prohibition, elimination, or relocation.
During the planning process the permittee should characterize existing CSO conditions and
identify receiving waters that are sensitive areas. The LTCP should give priority to sensitive areas
and any implementation schedule should sequence projects to mitigate impacts on sensitive areas
as early as possible- Giving high priority to sensitive areas might mean'in some cases that
discharges to non-sensitive areas would be addressed later in the implementation schedule than
would be the case under a normal engineering and construction schedule.
Use Impairment
Long-term control plans should also give priority to receiving waters that experience
recurring adverse impacts from CSOs on aquatic life, human health or aesthetics. Such waters may
be the subject of public or media concern.
As a result of public participation and discussion with the permitting authority, the permittee
should develop an implementation schedule that gives high priority to waters with impaired uses
Guidance for Financial Capability Assessment and Schedule Development Page 44
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and addresses them as soon as possible. As was the case for sensitive areas, giving high priority to
certain use-impaired waters might mean that discharges to other waters would be addressed later
in the implementation schedule than would be the case under a normal engineering and
construction schedule,
The EPA document Combined Sewer Overflows—Guidance for Screening and Ranking
(EPA-832-B-95-004) can provide assistance in identifying which CSO discharge points are likely
to have the greatest adverse impact on water quality, aquatic life, or human health.
Guidance for Financial Capability Assessment and Schedule Development Page 45
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PRIMARY FINANCIAL CONSIDERATIONS
Financial Capability
The CSO Control Policy recognizes that financial capability is a significant factor in schedule
development A permittee's financial capability is assessed according to where the permittee falls
on the Financial Capability Matrix calculated in worksheet 10. The matrix characterizes the
financial burden on the permittee to implement CSO controls as either "Low Burden," "Medium
Burden," or "High Burden."
To aid permittees, and EPA and state NPDES authorities during the negotiations necessary
to establish implementation schedules for CSO controls, general time periods are presented in
Table 4 that correspond with the permittee's Financial Capability Matrix Score summarized in
Worksheet 10. The general implementation schedule time boundaries provide a basis for
developing consistent and reasonably uniform implementation schedules across the nation in
situations where permittee's CSO controls impose similar financial burdens. The time boundaries
are not intended to replace the negotiations and deliberations necessary to balance ail of the
environmental and financial considerations that influence the site specific nature of the controls and
implementation schedules.
FINANCIAL CAPABILITY GENERAL SCHEDULING BOUNDARIES
Table 4
Financial Capability Matrix Category
Implementation Period
Low Burden
Medium Burden
High Burden
Normal Engineering/Construction
Up to 10 years
Up to 15 Years*
* (Schedule up to 20 years based on
negotiation with EPA and state NPDES
authorities)
Generally, a permittee in the "Low Burden" category would be expected to implement CSO
control projects based on a normal engineering and construction schedule. In all cases, discharge
to sensitive areas and impaired waters would be addressed on a high priority basis.
For permittees in the "Medium Burden" category, an implementation schedule up to 10 years
might be appropriate. A permittee in the "High Burden" category is likely to incur substantial
financial impacts to implement CSO controls; in such cases, an implementation schedule up to 15
years might be appropriate. In unusually "High Burden" situations, an implementation schedule up
to 20 years may be negotiated with state NPDES and EPA authorities.
Guidance for Financial Capability Assessment and Schedule Development Page 46
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SECONDARY FINANCIAL CONSIDERATIONS
The three financial considerations-grant and loan availability, sewer user fees, and other
viable funding mechanisms-are normally investigated early in the process of establishing CSO
controls. They are described in more detail in the EPA document (Combined Sewer
Overflows—Guidance for Funding Options (EPA-832-B-95-007). They are typically addressed
and resolved in the development of the financial schedule for the LTCP prior to design and
construction. Therefore, these considerations normally do not have a significant impact on the
length of time needed to implement CSO controls. An exception could occur in a case where a
permittee's CSO controls can be constructed quickly but where the only available CSO funding
source takes an inordinately long time to implement.
Grant and Loan Availability
During the long-term planning process, the permittee should develop a financing plan that
identifies sources of capital funds. Generally, these will include some form of loan or grant.
Typically, availability of grants and loans will not have a significant impact on the implementation
schedule. In evaluating the effect of grant and loan availability on the permittee's schedule, the
following funding sources wouid be considered:
• State wastewater treatment grant programs
• SRF Program
« State loan program (other than SRF program)
« Rural Utility Services Program (formerly: Rural Development Administration loan
program)
• CoBank loan program
• Commercial loans
• Local revenue bonds
• Local general obligation bonds
Guidance for Financial Capability Assessment and Schedule Development Page 47
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Sewer User Fees
As part of the long-term planning process, the permittee should identify existing user fees and
rate structures for wastewater treatment and then develop a new rate structure that includes
recovery of the costs for CSO controls. Depending upon how CSO user fees are apportioned
among residential, commercial, and industrial users, implementation of the LTCP may cause fees
to increase significantly. In most cases, construction of the CSO controls occurs over an extended
period allowing time for an orderly increase in the user fees. Thus, user fees typically are unlikely
to have a significant impact on the implementation schedule. Combining increases in user fees with
an ongoing public education program can help ease the effects of "rate shock" related to the higher
user fees. The EPA document "Building Support for Increasing User Fees," (EPA 430/09-89-
006) provides specific details on creating a public education program to successfully raise user
fees.
Other Viable Funding Mechanisms and Sources of Funding
The permittee may have to consider alternate sources of funding if loans and grants are not
available or if a need exists to reduce the financial impact of CSO controls on the users. In some
cases, alternative funding mechanisms or financing sources may require additional time to set up.
To evaluate the scheduling impacts of other viable funding mechanisms and sources of financing,
the permittee's ability to accomplish the following actions would be assessed:
* Establish special assessment districts
* Increase user fees
« Impose/increase taxes (such as income taxes, sales taxes, or property taxes)
• Privatize wastewater treatment.
Most permittees would be expected to have several of these options available; therefore other
viable funding mechanisms and sources of funding typically are not likely to have a significant
impact on the implementation schedule.
SCHEDULING CONSIDERATIONS
Establishing an implementation schedule for the CSO controls is a negotiating process
involving the permittee and EPA and state NPDES authorities. Normally, the time period for the
CSO control implementation schedule is defined by the time required for normal engineering and
construction practices. However, environmental and financial considerations can influence the
time allowed to complete the CSO controls. The implementation schedule would always give high
priority to addressing the environmental considerations involving discharges to sensitive areas and
use-impaired water bodies. The CSO controls for these discharges would be constructed as
expeditiously as possible. The implementation schedule can lengthen by phasing construction of
the CSO controls when financial considerations create a financial burden. The primary financial
Guidance for Financial Capability Assessment and Schedule Development Page 48
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consideration which usually results in an extended implementation schedule with phased
construction is the financial capability consideration.
Application of environmental and financial considerations to the development of
implementation schedules for three hypothetical permittees is presented in Table 5.
Permittee number 1 required an eight year normal engineering/construction schedule to
implement the CSO controls. Negotiations between the permittee and EPA and the state NPDES
authorities resulted in agreement that four years would be allowed for the special circumstances of
the permittee's low-burden financial capability category. Therefore, the eight-year engineering
schedule took precedence over the financial consideration (therefore were no environmental
considerations), and the schedule for implementation of CSO controls was eight years.
Permittee number 2 required three years to impiement long-term controls under a normal
engineering/construction schedule. Negotiations with the NPDES and WQS authorities concluded
that four years would be necessary to obtain SRF loans. A four-year implementation schedule for
CSO controls was established by the NPDES permitting authority to accommodate the most time
consuming funding option.
Implementation of permittee number 3's CSO controls required a six-year normal
engineering/construction schedule. However, the following environmental and financial
considerations affected the final schedule:
• One of the permittee's CSO outfalls discharges to a bathing beach. Bathing beaches are
defined as sensitive areas in the CSO Control Policy. Although a normal
engineering/construction schedule would have eliminated this outfall in four years, it was
determined that the schedule could be modified to eliminate this outfall in two years.
» The permittee's cost per household as percent of median household income is 2.2
percent, yielding a Residential Indicator of "Weak." The other socioeconomic, debt, and
financial indicators yield a Permittee Indicators score of 1.7, or "'Mid-Range." According
to Table 3, these two indicators place the permittee in the "High-Burden" category for
financial capability.
» User fees will have to increase significantly.
The unusual nature of permittee number 3's "high burden" financial capability category
resulted in a sixteen-year schedule for this financial consideration after negotiations with the EPA
and state NPDES authorities. Therefore, the permittee would receive a sixteen-year schedule to
implement all CSO controls, with a special requirement that the CSO discharge to the bathing
beaches be removed in the first two years of the schedule.
It is important to note that the final CSO control implementation schedule established for
each permittee should be a time period that is negotiated between the permittee and EPA and state
NPDES authorities based on the specific circumstances of each permittee's environmental and
financial situation, plus the specific nature of any engineering and construction requirements.
Guidance for Financial Capability Assessment and Schedule Development Page 49
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SCHEDULING CONSIDERATION FOR HYPOTHETICAL PERMITTEES
Table 5
Scheduling
Consideration
Engineering/ Construction
Schedule
Sensitive Areas
Use Impairment
Financial Capability
Grant/Loan Availability
User fees/rate Structures
Other Funding
Mechanisms
Schedule:
Permittee #1
8 years
n/a
n/a
4 years
0 years
0 years
0 years
8 years
Permittee #2
3 years
n/a
n/a
0 years
4 years
0 years
0 years
4 years
Permittee #3
6 years
2 years to remove discharges
from sensitive areas
1 6 years
0 years
0 years
0 years
0 years
16 years (removal of discharge
from sensitive area would occur
within first 2 years)
Guidance for Financial Capability Assessment and Schedule Development
Page 50
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The time periods presented in this guidance should be viewed as generai boundaries to aid all
parties in establishing reasonable and effective CSO control implementation schedules,
It is important to note that the final CSO control implementation schedule established for
each permittee should be a time period that is negotiated between the permittee and EPA and state
NPDES authorities based on the specific circumstances of each permittee's environmental and
financial situation, plus the specific nature of any engineering and construction requirements. The
time periods presented in this guidance should be viewed as generai boundaries to aid all parties in
establishing reasonable and effective CSO control implementation schedules.
Guidance for Financial Capability Assessment and Schedule Development Page 51
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ACRONYM LIST
CPH Cost Per Household
CPI Consumer Price Index
CSS Combined Sewer System
CSO Combined Sewer Overflow
CWA Clean Water Act
EPA Environmental Protection Agency
LTCP Long Term Control Plan
MHI Median Household Income
NMC Nine Minimum Controls
NPDES National Pollutant Discharge Elimination System
SRF State Revolving Fund
WQS Water Quality Standards
WWT Wastewater Treatment
Guidance for Financial Capability Assessment and Schedule Development Page 52
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International City/County Management Association, 1994. Evaluating Financial Condition: -A
Handbook for Local Government. Washington, D.C. International City/County Management
Association.
Moody's Investor Services, Inc. 1995. Medians - Selected Indicators of Municipal Performance.
New York, N.Y. Moody's Investor Services, Inc.
Moody's Investor Services, Inc. 1989. Moody's on Municipals - An Introduction to Issuing Debt.
New York, N.Y. Moody's Investor Services, Inc.
Standard and Poor's Corporation. 1993. Municipal Finance Criteria New York, N.Y. Standard
and Poor's Corporation.
U.S. Environmental Protection Agency, 1984. Financial Capability Guidebook.
U.S. Environmental Protection Agency. 1992. The Road to Financing - Assessing and Improving
Your Community's Creditworthiness. EPA 832-B-92-004.
U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows-Guidance for Long-
term Control Plan. EPA-832-B-95-002.
U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows—Guidance for Nine
Minimum Controls. EPA 832-B-95-OQ3.
U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows—Guidance for
Funding Options. EPA 832-B-95-Q07.
U.S. Environmental Protection Agency. 1995, Combined Sewer Overflows—Guidance for
Screening and Ranking, EPA 832-B-95-004,
U.S. Environmental Protection Agency. 1995. Interim Economic Guidance for Water Quality
Standards. EPA 823-B-95-002.
US Environmental Protection Agency. 1989. Building Support For Increasing User Fees. EPA
430/09-89-006.
Guidance for Financial Capability Assessment and Schedule Development Page 59
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