&EPA
United States
Environmental Protection
Agency
Office of Water
(4303)
EPA-623-B-95-002
March 1995
interim Economic Guidance
for Water Quality Standards
Workbook
"... to restore and maintain the chemical,
physical, and biological integrity of the Nation's
waters."
Section 101 (a) of the Clean Water Act
Appendix M to the
Water duality Standards Handbook - Second Edition
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 2V0460
r-r'K 2 7 1950 EPA-823-B-95-002
OFFICE OF
WATER
MEMORANDUM
SUBJECT: Economic Guidance for Water Qualify S^aj^dards^--Workbook
FROM: Tudor T. Davies, Director
Office of Science and Technology
TO: Water Management Division Directors
Regions I - X
PURPOSE
The purpose of this memorandum is to transmit the Interim
Economic Guidance for Water Quality Standards Workbook for use by
the States and Regions in considering economics at various points
in the process of setting or revising water quality standards.
POLICY IMPLEMENTATION:
We recommend the subject guidance, including the various
screening levels and measures presented, be implemented as
reference points and used as guides by the States and Regions.
The measures outlined in the guidance are not intended to be
applied as absolute decision points. States may use other
economically defensible approaches in lieu of those suggested in
this interim guidance.
This guidance is designed for use in the water quality
standards program and does not represent Agency guidance outside
of that program.
BACKGROUND:
Economic factors may be considered at several different
points in the water quality standards program. The water quality
standards regulation provides for such consideration in the
following areas:
Section 131.10--Designation of Uses (also applies to
variances)
(g)(6) Controls more stringent than those required by
Sections 301(b) and 306 of this Act would result in
substantial and widespread economic and social impact.
Recycled/Recyclable
Primed with Soy/CanoU Ink on papwthat
contains at toast 50% nKyctoO fibor ,
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Section 131.12--Antidegradation
(a)(2)...allowing water quality is necessary to
accommodate important economic or social development in
the areas in which the waters are located...
Since publication of the water quality standards regulation
in 1983 we have produced extensive guidance on the interpretation
and application of the various regulatory requirements. None of
this guidance, however, dealt extensively with the economic
considerations.
This guidance workbook is intended to fill that gap. It is
anticipated that the guidance will be revised from time to time
to reflect State and Regional experience in its application. For
example we intend to add case studies as appendices to the
guidance to reflect real-world experiences in its application.
In addition, the Agency is considering revising the water quality
regulation. If revisions to the regulation are made with respect
to economic considerations, the applicable guidance will be
revised accordingly. However, it is likely to be at least 3
years before any revisions to the regulation are finally
promulgated and no way of anticipating whether any changes will
be made in the economic provisions.
This guidance is presented to assist States and EPA Regional
Offices, along with other interested parties, in understanding
the economic factors that may be considered, and the types of
tests that can be used to determine: (1) if a designated use
cannot be attained, (2) if a variance to an individual discharger
can be granted, or (3) if degradation of high-quality water is
warranted.
The regulatory requirement that must be met is that
attaining a designated use or obtaining a variance would result
in substantial and widespread economic and social impacts. The
regulatory requirement for antidegradation is that it must be
shown that lower water quality is necessary to accommodate
important social and economic development. This guidance provides
a framework for making these determinations.
The measures and tests suggested in this guidance are
standard economic analytical tools, but the States are free to
provide other kinds of analysis to support their position.
The guidance does provide information on the kinds and types of
analysis that are appropriate and how the information can be
assembled in order to make a decision. It is not an exhaustive
description of all appropriate economic analysis. Additional
information and tests may be necessary and/or desirable in
certain circumstances.
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The economic impacts to be considered are those that result
from treatment beyond that required by technology-based
regulations. All economic analyses of water quality standards
should address only the cost of improving the water to meet water
quality standards or the cost of maintaining water quality in
high-quality waters.
Although EPA is responsible for approving a State's water
quality standards, the State is responsible for interpreting the
circumstances of each case and determining where there are
substantial and widespread economic and social impacts, or where
important economic and social development would be
inappropriately precluded.
Various drafts of this guidance were reviewed by EPA
headquarters and regional offices, States, and other
organizations. State and Regional staff should feel free to
contact the Economic and Statistical Analysis Branch in the
Office of Science and Technology for advice and assistance
regarding this guidance or related concerns. We would appreciate
receiving feedback from the users of this guidance so that it can
be improved as necessary. As with all guidance related to the
water quality standards program, this document is considered to
be part of the Water Quality Standards Handbook--Second Edition.
cc: Lee Schroer , OGC
Jim Pendergast, OWM
John Meagher, OWOW
William Painter, OPPE
Regional WQS Coordinators, Regions I - X
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J INTERIM ECONOMIC GUIDANCE
FOR WATER QUALITY STANDARDS
^ WORKBOOK
Economics and Statistical Analysis Branch
Office of Science and Technology
Office of Water
U.S. Environmental Protection Agency
March 1995
Agency
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ECONOMIC GUIDANCE FOR WATER QUALITY STANDARDS WORKBOOK
TABLE OF CONTENTS
1. INTRODUCTION 1-1
1.1 Designated Uses, Variances, and Antidegradation 1-3
1.2 Pollution Sources 1-5
1.3 Substantial Impacts 1-6
1.4 Widespread Impacts 1-8
1.5 Antidegradation 1-9
1.6 Organization of the Rest of the Workbook 1-10
2. EVALUATING SUBSTANTIAL IMPACTS:
PUBLIC SECTOR ENTITIES 2-1
2.1 Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project 2-5
2.2 Calculate Total Annualized Pollution Control Costs Per Household . . . 2-10
2.3 Calculate and Evaluate the Municipal Preliminary Screener Value . . . 2-14
2.4. Apply Secondary Test 2-15
2.5 Assess Where the Community Falls in the Substantial Impacts Matrix . 2-28
3. EVALUATING SUBSTANTIAL IMPACTS: PRIVATE-SECTOR
ENTITIES 3-1
3.1 Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project 3-4
3.1.b Calculate the Annual Costs of the Pollution Control Project 3-5
3.2 Financial Impact Analysis 3-6
3.3 Interpreting the Results 3-32
4. DETERMINATION OF WIDESPREAD IMPACTS 4-1
4.1 Define Relevant Geographical Area 4-2
4.2 Determine Whether Impacts are Widespread: Public-Sector Entities .... 4-2
4.3 Determine Whether Impacts are Widespread: Private-Sector Entities ... 4-5
4.4 Estimate Multiplier Effect ' 4-11
4.5 Economic Benefits of Clean Water 4-12
4.6 Summary of Financial Capability and Determination of Whether
Impacts are Substantial and Widespread 4-13
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5. ANTIDEGRADATION: ROLE OF ECONOMIC ANALYSIS 5-1
5.1 Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project 5-5
5.2 Financial Analysis to Determine if Lower Water Quality is
"Necessary" 5-14
5.3 Determine if Economic and Social Development would
be Important 5-33
5.4 Summary 5-35
APPENDIX A: Data Resources and Reference Materials A-l
APPENDIX B: Table of Annualization Factors B-1
APPENDIX C: Conceptual Measures of Economic Benefits C-l
WORKSHEETS A through AB
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ECONOMIC GUIDANCE FOR WATER QUALITY STANDARDS
WORKBOOK
1. INTRODUCTION
As presented in the Water Quality Standards
Regulation, economic factors are taken into consideration
at various points in the process of setting, enforcing, or
changing Water Quality Standards This guidance is
presented to assist States and applicants in understanding
the economic factors that may be considered, and the types
of tests that can be used to determine if a designated use
cannot be attained, if a variance can be granted, or if
degradation of high-quality water is warranted. In order to
remove a designated use or obtain a variance, the State or
discharger must demonstrate that attaining the designated
use would result hi substantial and widespread economic
and social impacts. Likewise, if a degradation hi high-
quality water is proposed, it must be shown that lower
water quality is necessary to accommodate important social
and economic development.
This workbook provides guidance for those seeking to
document that uses meeting the fishable/swimmable goals
of the Act are not attainable, obtain a variance based on
economic considerations, or to lower water quality in a
high-quality water. In addition, it provides guidance to
States and EPA regions responsible for reviewing requests
for variances, modifications to fishable/swimmable
designated uses, documentation that fishable/swimmable
uses are not attainable, and for approval of antidegradation
analyses. The guidance describes the types of information
and analyses that should be considered by applicants and
reviewers. The guidance, however, is not an exhaustive
description of appropriate economic impact analyses.
Additional information and tests may be necessary and/or
desirable hi certain circumstances.
The economic impacts considered are those that result
from treatment beyond that required by technology-based
Economic Guidance for Water Quality Standards
1-1
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regulations. Since water quality cannot be lower than that
resulting from technology-based limits applied to direct and
indirect point source discharges, these are considered to be
the baseline. All economic impact analyses of water
quality standards should, therefore, address only the cost of
improving the water to meet fishable/swimmable uses or
the cost of maintaining water quality in high-quality waters.
Although EPA is responsible for approving a State's
water quality standards, the State is responsible for
interpreting the circumstances of each case and determining
where there are substantial and widespread economic and
social impacts, or where important social and economic
development would be inappropriately precluded. Each
analysis of economic impacts must demonstrate:
• that the polluting entity, whether privately or pub-
licly owned, would face substantial financial
impacts due to the costs of the necessary pollution
controls (substantial impacts or would interfere with
development), and
• that the affected community will bear significant
adverse impacts if the entity is required to meet
existing or proposed water quality standards
(widespread impacts or important development).
This Workbook supplements the description contained
in the Water Quality Standards Handbook, which should be
read first as it contains many important definitions and
descriptions of the regulations. Specific attention should be
paid to Chapters 2 (Designation of Use) and 4
(Antidegradation), which describe the context in which this
guidance is to be used. This Workbook is designed as a
series of worksheets and accompanying guidance to be used
when actually calculating the impacts of pollution control.
The intent of this workbook is to point States and
dischargers in the right direction. It does not give
definitive answers as to whether or not an entity has
demonstrated substantial, widespread, or important
Economic Guidance for Water Quality Standards
1-2
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economic and social impacts. If a State or discharger has
difficulty with any part of the analysis presented in this
workbook, they should consider seeking the assistance of
a financial expert. In addition, State and regional EPA
water quality staff should feel free to contact EPA
headquarters' Economic and Statistical Analysis Branch in
the Office of Water for advice and assistance.
The remaining sections of Chapter 1 provide an
overview of the analysis and describe various factors and
concepts that generally apply to analyzing the economic
impacts of compliance with water quality standards. The
following four chapters provide detailed guidance.
Throughout this Workbook, the term "financial
impacts" refers to impacts on the entity or party that will
pay for the pollution control, whereas the term
"socioeconomic impacts" refers to changes in the social
and/or economic conditions of the affected community.
For public-sector entities, such as a publicly owned
treatment works (POTW), substantial impacts include
financial impacts on the community, taking into
consideration current socioeconomic conditions.
Widespread, on the other hand, refers to changes in the
community's socioeconomic conditions. By contrast, for
private-sector entities, substantial impacts refer to financial
impacts and widespread impacts refer to socioeconomic
impacts on the surrounding community. In addition, the
term "applicant" refers to whomever will actually complete
the economic impact analysis, whether it be the State, an
individual discharger, a consultant, or some other organiza-
tion.
1.1 Designated Uses, Variances, and Antidegradation
Pursuant to the Water Quality Standards Regulation (40
CFR 131), States must define statewide water quality goals
by: 1) designating water uses and 2) adopting water
quality criteria that protect the designated uses. When
designating uses, States must consider the use and value of
the waterbody for public water supplies, protection and
Economic Guidance for Water Quality Standards
1-3
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propagation of fish, shellfish and wildlife, recreation in and
on the water, agricultural, industrial, and other purposes
including navigation. The designated use may or may not
coincide with the existing use, but it cannot reflect lower
water quality than the existing use. As described in the
Water Quality Standards Handbook, if the designated use
of a water body is also an existing use, the designated use
cannot be downgraded to one that requires less stringent
water quality criteria. If, however, the designated use is
not an existing use the States may, under certain
circumstances, remove the designated use, create new
subcategories of the use, or grant a water quality standard.
Before a designated use is removed a State or a
discharger must conduct and submit a use attainability
analysis to EPA. Briefly, a use attainability analysis is an
assessment of the physical, chemical, biological and, if
necessary, economic factors affecting the attainment of a
use. If the analysis shows that, based on any one of these
factors, conditions exist which make the use unsuitable or
impossible to achieve, then the State may remove the
designated use.
In many cases, a designated but unattained use for a
stream segment need not be removed. Instead, individual
dischargers may be granted variances from the water
quality standards for a limited time with the expectation
that they will be able to comply with water quality
standards by the time their variance expires or that an
adjustment in the applicable standards is warranted. A
variance is preferable to a removal of a designated use
since other dischargers, who are capable of meeting the
standards, must comply with the standards through their
permits. In cases where a discharger can meet water
quality based permit limits for some parameters, a variance
would not be granted for those parameters. The variance
procedure is designed to lead to the attainment of the water
quality goals of the Clean Water Act within a reasonable
timeframe.
States are also required to adopt an antidegradation
policy to protect existing uses, high-quality waters, and
Economic Guidance for Water Quality Standards
1-4
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water quality in waters that are considered to be
outstanding national resources. The antidegradation policy
allows States to lower water quality in higher-quality
waters (that are not ONRWs) only if it is necessary to
accommodate important economic or social development.
The use of the term "important" communicates a general
sense of the level of economic and social development.
Under no circumstances, may water quality fall below that
required to protect existing or designated uses.
For each of the circumstances described above, the
Water Quality Standards Regulation allows the applicant to
take economic considerations into account. When applying
for a change in a designated use or for a variance, the
applicant must demonstrate that meeting the
fishable/swimmable goals of the Act will cause substantial
and widespread economic and social impacts. The antide-
gradation provision requires that the applicant demonstrate
that important economic or social development would be
prevented unless lower water quality is allowed. In all
three cases, the same general tests of impacts are used.
1.2 Pollution Sources
The choice of methods used to evaluate the economic
impacts of meeting water quality standards depend, hi part,
on whether pollution control is the responsibility of a
privately or a publicly owned entity. Since the polluting
entity or party may not be the one to pay for reductions,
the analyses focus on the party that pays for pollution
control. Some of the more common privately owned
entities include, but are not limited to: manufacturing
facilities, agricultural operations, shopping centers and
other commercial development, residential developments,
and recreational developments. Publicly owned entities
include: publicly owned sewage treatment works, roads,
and other municipal infrastructure.
Economic Guidance for Water Quality Standards
1-5
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determines not only who will pay for the necessary
pollution control, but also the types of funding mechanisms
available. For example, in the case of a privately-owned
entity, the facility can raise the money through loans and
equity funds but may try to pass some or all of the cost on
to the consumer in the form of higher prices. In the case
of a publicly-owned entity, the community can float bonds
to pay for the capital costs, with the cost of the bonds and
operating expenses covered by user fees and/or tax
revenues. The different impact measures are addressed in
two separate chapters. Chapter Two provides guidance on
public-sector entities and Chapter Three provides guidance
on private-sector entities.
Whether publicly or privately owned, polluting entities
can be point (direct discharge) or nonpoint (runoff and
erosion) sources of pollution. Attainment of water quality
standards is not limited to controls placed on point sources.
Water quality standards are applicable to nonpoint sources
of pollution despite the fact that there may be no direct
implementation mechanisms for nonpoint sources.
Although pollution control approaches used by nonpoint
sources may differ substantially from approaches typically
employed by point sources, analysis of the ensuing
economic impacts still depends upon whether the entity
providing the pollution control is privately or publicly
owned.
1.3 Substantial Impacts
A financial analysis of the discharger should be
conducted to determine if the capital and the operating and
maintenance costs of pollution control will have a
substantial impact. This analysis is typically performed by
the discharger and reviewed by the State, although there
may be cases where the State or some other group
completes the analysis on behalf of the discharger. The
first step is to estimate the capital and the operation and
maintenance costs of the necessary pollution control (see
Figure 1-1). The second step is to determine how the
entity will finance the necessary reductions. If the entity
is publicly-owned (e.g. a municipal sewage treatment
Economic Guidance for Water Quality Standards
1-6
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Figure 1-1:
Steps in the Economic Impact Analysis
Determining Whether Impacts Will Be Substantial and Widespread
Determine whether entity or group of entities is
publicly - or privately - owned
Estimate costs of complying
withWQS
Estimate costs of complying
withWQS
Use ratio analysis to determine
if impact on entity is
substantial
Allocate costs among
residential and non-residential
users
Non-Residential
Residential
Determine if impact is
substantial
Widespread
Impacts
Determine if impact is
widespread
Determine if impact is
widespread
Determine remedy
Determine remedy
Economic Guidance for Water Quality Standards
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plant), the households in the community will bear the cost
either through an increase in user fees, an increase in taxes
or a combination of both. The burden to households
resulting from total annual pollution control costs must be
estimated. In addition, the financial impact analysis must
consider the community's ability to obtain financing and the
general economic health of the community.
If the entity is privately-owned (e.g. a manufacturing
facility), the analysis should consider factors such as the
entity's ability to secure financing and the degree to which
it will be ible to pass the cost of pollution control on to its
customers in the form of higher prices. The financial
impact analysis of private-sector entities employs a variety
of financial ratios and tests. Some of these ratios and tests
include benchmark values to help in the analysis.
Demonstration of substantial financial impacts is not
sufficient reason to modify a use or grant a variance from
water quality standards. Rather, the applicant must also
demonstrate that compliance would create widespread
socioeconomic impacts on the affected community.
1.4 Widespread Impacts
States and dischargers will need to consider the
possibility that financial impacts could cause far reaching
and serious impacts to the community. An important factor
in determining the magnitude of these impacts is defining
the geographical area affected. The affected area might be
a town, city, region, county or some combination of these
geographical units.
Equally important are the types of impacts that might
occur. There are no economic ratios or tests per se to
evaluate socioeconomic impacts. Instead, the relative
magnitude of a group of indicators should be taken into ac-
count. For public-sector entities, the applicant will need to
estimate the change in socioeconomic conditions that would
occur as a result of compliance. Of particular importance
are changes in factors such as median household income,
unemployment, and overall net debt as a percent of full
Economic Guidance for Water Quality Standards
1-8
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market value of taxable property. For private-sector
entities, the assessment of widespread impacts should
consider many of the same socioeconomic conditions. The
analysis should also consider the effect of decreased tax
revenues if the private-sector entity were to go out of
business, income losses to the community if workers lose
their jobs, and indirect effects on other businesses.
In some instances, several entities potentially may suffer
substantial impacts. For example, this situation can arise
where several facilities are discharging to a stream segment
that is being considered for a change in designated use.
While a separate financial analysis should be performed for
each facility, the impacts on all the facilities should be
considered jointly in the analysis of widespread impacts.
1.5 Antidegradation
As with removing a use or granting a variance, eco-
nomic impacts are considered as part of an antidegradation
review. While the terminology is different, the tests are
basically the same. In the first case (discussed in Chapters
2, 3, and 4), a finding of substantial and widespread
economic impacts can be the basis for granting a variance
or changing a designated use. In the case of
antidegradation, the analysis must show that maintaining
"high-quality waters" will preclude important economic and
social development. As such, the two cases can be thought
of as two sides of the same coin. Variances and
downgrades refer to situations where additional treatment
to meet standards may result in declining economic and
social conditions, while antidegradation refers to situations
where lowering water quality may result in improved social
and economic conditions.
When performing an antidegradation analysis, the first
question is whether the costs of the pollution controls
needed to maintain the high-quality water will interfere
with the development. If not, then lower water quality is
not "necessary" for the development to take place. If, on
the other hand, the costs will interfere with the
development and lower water quality is "necessary" for the
Economic Guidance for Water Quality Standards
1-9
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development to take place, then the analysis must show that
the development would be an important economic and
social development. These two steps rely on the same test
as the determination of substantial and widespread
economic and social impacts.
1.6 Organization of the Rest of the Workbook
The remainder of this Workbook addresses the
measurement of economic impacts. In Chapter 2, guidance
is presented to assist applicants in evaluating financial
impacts on public-sector entities. Chapter 3 presents
guidance on evaluating financial impacts on private-sector
entities. Chapter 4 provides a discussion of how to assess
whether impacts are widespread as well as substantial. This
discussion includes both public-sector and private-sector
entities. Chapter 5 applies the concepts developed in
Chapters 2,3, and 4 to antidegradation.
Worksheets are included in each chapter that will assist
the reader in calculating potential impacts. Chapters 2 and
3 include worksheets for: 1) estimation of annualized costs
of pollution control, and 2) evaluation of the financial
burden of pollution control. Chapter 4 includes worksheets
that can be used in the evaluation of whether the impacts
on the entity(ies) will result in widespread economic and
social impacts. Chapter 5 includes worksheets for
determining if important social and economic development
might be lost.
In addition to presenting step by step guidance on how
to estimate impacts, several of the worksheets provide
benchmark comparisons that allow an assessment of the
magnitude and relative importance of potential impacts.
These worksheets, however, should not be used in
isolation. Discussion of key sources of information,
important entity and community attributes, and
interpretation of results are found only in the accompanying
text. Applicants, and State Water Quality staff charged
with reviewing the application, should be sure to read all
text accompanying the worksheets. While Chapter 2
addresses public-sector treatment requirements, if a
Economic Guidance for Water Quality Standards
1-10
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substantial portion of the costs of a public facility is borne
by a private entity (such as a manufacturing facility that
pays substantial user charge fees to a POTW), both
Chapters 2 and 3 should be referred to.
In all cases, the determination of economic and social
impacts must be made on a case by case basis. This
determination, therefore, requires the application of good
judgement as well as use of the guidance provided in this
workbook. Additional information and tests may be
required in order to measure the size and extent of the
impacts. Applicants should be aware that they will be
required to supply documentation to substantiate their claim
of substantial and widespread economic and social impacts.
In addition to background data, however, this documen-
tation should include a brief written description of why the
applicant believes economic and social impacts will occur.
Economic Guidance for Water Quality Standards
1-11
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2. EVALUATING SUBSTANTIAL IMPACTS:
PUBLIC SECTOR ENTITIES
Public entities seeking relief from meeting water quality
standard requirements must demonstrate that the cost of
required water pollution control will result in substantial
impacts and that there will be "widespread" adverse social
and economic impacts if they are required to meet these
standards. For the purposes of this workbook, a public
entity refers to any governmental unit that must comply
with pollution control requirements in order to meet water
quality standards. The most common example is a
municipality or sewage authority operating a publicly
owned treatment works (POTW) that must be upgraded or
expanded. Municipalities, however, may also be required
to control other point sources or nonpoint sources of
pollution within their jurisdiction. The procedures outlined
in this chapter apply to all types of publicly financed
projects that may be required to meet water quality
standards. Throughout this chapter, the term
"State/discharger" refers to whoever will actually conduct
the financial and socioeconomic impact analysis for the
public entity, whether it be the State, the municipality, a
consultant or some other organization.
The remainder of this chapter details methodologies and
sources of information for determining the financial
viability of publicly financed projects. Several worksheets
are presented that will assist in demonstrating substantial
impacts. States/dischargers are referred to Chapter 4 for
guidance on demonstrating widespread impacts. Readers
should keep hi mind that the guidance hi this chapter is not
meant to be exhaustive. The State and/or EPA may require
additional information or tests in order to evaluate whether
substantial and widespread impacts will occur. In addition,
the State/discharger should feel free to include any
additional information they think is relevant.
As mentioned in Chapter 1, the evaluation of substantial
impacts resulting from public entity compliance with water
quality standards includes two elements, 1) financial
Economic Guidance for Water Qualify Standards
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impacts to the public entity and 2) current socioeconomic
conditions of the community. Governments have the
authority to levy taxes and distribute pollution control costs
among households and businesses according to the tax base.
Similarly, sewage authorities charge for services, and thus
can recover pollution control costs through users fees. In
both cases, a substantial impact will usually affect the
wider community. Whether or not the community faces
substantial impacts depends on both the cost of the
pollution control and the general financial and economic
health of the community.
If the public entity passes a significant portion of the
pollution control costs along to private facilities or firms,
then the review procedures outlined in Chapter 3 of this
workbook should also be consulted to determine the impact
on the private entities. Both public and private entities
should consult Chapter 4 for guidance on how to estimate
potential widespread impacts on the community.
This chapter focuses on ways to determine if the costs
of the proposed project will likely result in substantial
impacts. To make this determination the State/discharger
will need to complete a five step analysis. As shown in
Figure 2-1 the first step in the process is to estimate the
cost of the pollution control project and calculate the annual
cost of the proposed pollution control project. The second
step is to calculate the total annual pollution control cost
per household, which includes the cost of the project and
existing pollution control costs. In the third step, the
Municipal Preliminary Screener is calculated, which
quickly identifies entities that clearly will not experience
substantial impacts due to the cost of the necessary
pollution control. If it is not clear whether there will be
substantial impacts, entities should proceed to the fourth
step, which is the calculation of the Secondary Test. In
this step public entities will need to provide financial and
socioeconomic information. For example, the ability of the
community to finance the project may depend on existing
financial conditions in the community such as debt per
capita and the community's bond rating. The
socioeconomic health of the community prior to the
Economic Guidance for Water Quality Standards
2-2
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project's construction will also be an important indicator of
whether the pollution control would impose a substantial
impact on the community. The fifth and final step of
determining whether impacts are "substantial" is evaluating
where the community falls in the impacts matrix. This
matrix takes into consideration the Municipal Preliminary
Screener and the Secondary Test score. Later, in Chapter
4, estimated changes in socioeconomic health indicators
will be reviewed to evaluate the extent to which the impacts
can be considered widespread.
The remainder of this chapter is divided into five
sections that detail the essential steps of an evaluation of
substantial impacts for publicly financed projects. Figure
2-1 illustrates the steps and decision points in this process.
The five steps are:
• Verify Project Costs and Calculate the Annual
Cost of the Pollution Control Project - This
section discusses factors that should be considered
when selecting a pollution control project. It also
describes the type of general information about the
proposed project that should be provided. In
addition, it discusses how to annualize capital costs
of the project and calculate total annual costs of the
pollution control project.
• Calculate Total Annualized Pollution Control
Costs Per Household - This section outlines the
calculation of total annual pollution control costs
per household. The costs of the proposed project
and existing pollution control are included.
• Calculate and Evaluate the Municipal
Preliminary Screener Score - This section
explains the "screener" which identifies only those
communities that clearly will not face any
substantial impacts.
• Apply the Secondary Test - This measurement
incorporates a characterization of the community's
current financial and socioeconomic well-being.
Economic Guidance for Water Quality Standards
2-3
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Figure 2-1:
Measuring Substantial Impacts
(Public Entities)
Use guidance in Chapter 3 if
non-residential costs are
anticipated to be substantial
Non-
Residential
Costs
Capital Cost & Annual
O&M Cost of Exiting
and Proposed Pollution
Controls
* * ,"^1S;
JIIIBS^ Total RiUatimi
Annual Cost of Existing
and Proposed Pollution
Reductions
i
AOocate Total PoDutkm
Residential, Industrial,
Commercial, Others
Residential! Costs
Is it clear that municipality
will not face substantial
economic impacts?
Yes
Request Rejected
No
Determine whether
municipality will incur
substantial impacts based on
the cost of pollution control
and the characterization of
municipality's current
financial and socioeconomic
well-being
1
No Substantial
Impacts
Request Rejected
Substantial Impacts
Proceed to analysis of
widespread impacts in
Chapter 4
Economic Guidance for Water Quality Standards
-------
2.1
Assess where the community falls in The
Substantial Impacts Matrix - This matrix
evaluates whether or not communities are expected
to incur substantial economic impacts due to the
implementation of the pollution control costs. If the
applicant cannot demonstrate substantial impacts,
then they will be required to meet existing water
quality standards. If impacts are expected to be
substantial, then the applicant goes on to
demonstrate whether they are also expected to be
widespread.
Verify Project Costs and Calculate the Annual
Cost of the Pollution Control Project.
Before the impact analysis can be performed, the project
costs should be verified and then annual costs calculated.
2.1.a Verify Project Costs
The first step of an economic analysis of a publicly
financed project is an evaluation of the proposed project.
Public entities should consider a broad range of discharge
management options including pollution prevention, end-of-
pipe treatment, and upgrades or additions to existing
treatment. Specific types of pollution prevention activities
that should be considered are:
Public Education;
Change in Raw Materials;
Substitution of Process Chemicals;
Change in Process;
Water Recycling and Reuse; and
Pretreatment Requirements.
Many of these approaches are particularly relevant to
industrial indirect discharges to the public system.
Whatever the approach, the applicant must demonstrate that
the proposed project is the most appropriate means of
meeting water quality standards and must document project
cost estimates. If at least one of the treatment alternatives
Economic Guidance for Water Quality Standards
2-5
-------
that meets water quality standards will not have a
substantial financial impact, then the community should not
proceed with the analysis presented in the rest of this
workbook. General information regarding the proposed
pollution control project and other projects considered
should be supplied in Worksheet A.
The most cost-effective approach to meeting water
quality standards should be considered. Submissions
should include assumptions about excess capacity,
population growth, and consideration of alternative
technologies where appropriate. The most accurate
estimate of project costs may be available from the
discharger's design engineers. If site-specific engineering
cost estimates are not available, preliminary project cost
estimates can be derived from a comparable project in the
State or from the judgement of experienced water pollution
control engineers. (See Appendix A for sources of
engineering cost information.) Capital, operation and
maintenance (O&M), and other project costs can be
summarized using Worksheet B. For comparative
purposes, cost estimates (e.g. capital, O&M, other project
costs) for each alternative being considered should be
presented in the same units (typically annualized costs,
$/yr) and for the same year. The next section explains
how to annualize project costs.
For illustrative purposes, the example of a local
government upgrading their existing wastewater treatment
facility in order to meet water quality standards is used
throughout this chapter. Details of this example may differ
significantly from other projects undertaken to meet water
quality objectives. Other types of public-sector water
pollution control, however, would be analyzed in a similar
fashion using the worksheets included in this chapter.
2.1.b Calculate the Annual Costs of the Pollution
Control Project
Since capital costs typically will be paid over several
years, annualized costs are used in the evaluation of
economic burden to the community. The capital portion of
Economic Guidance for Water Quality Standards
2-6
-------
Worksheet A
Pollution Control Project Summary Information
Current Capacity of the Pollution Control System
Design Capacity of the Pollution Control System
Current Excess Capacity %
Expected Excess Capacity after Completion of Project %
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed below. (Attach additional page if necessary).
Please describe the other pollution control options considered, explaining why each option was rejected.
(Attach additional page if necessary).
-------
Worksheet B
Calculation of Total Annualized Project Costs
A. Capital Costs
Capital Cost of Project $
Other One-Time Costs of Project (Please List, if any):
Total Capita] Costs (Sum column) $ (1)
Portion of Capital Costs to be Paid for with Grant Monies $ (2)
Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal) (i)
Time Period of Financing (in years)
(n)
Annualization Factor = 1 + i (or see Appendix B)
0+0 " l (4)
Annualized Capital Cost [Calculate: (3) x (4) ]
(5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
Total Annual O & M Costs (Sum column) $ (6)
C. Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ] $ (7)
-------
project costs is typically financed over approximately 20
years, by issuing a municipal debt instrument such as a
general obligation bond or a revenue bond. Local
governments may also finance capital costs using bank
loans, state infrastructure loans (revolving funds), or
federally subsidized loans (such as those offered by the
Fanners' Home Administration).
It should be noted that interest rates used to annualize
costs are dependent on the type of debt instrument used as
well as the recipient's credit standing. For example,
revenue bonds typically are financed at a slightly higher
interest rate because of their dependence on revenues from
services as opposed to being guaranteed by the full faith
and credit of the jurisdiction. Because interest rates affect
the interest payment and thus the annualized capital cost of
the project, it is important that the interest rate used on
Worksheet B reflects the debt instrument (i.e. municipal
bond, commercial bank loan, state revolving fund loan, or
other instrument) likely to be used by the municipality.
The calculation of total annualized cost of the project is
presented in Worksheet B. First, capital costs are summed
and the portion of costs to be paid for with grant monies
are deducted, as these costs will not need to be financed.
Next, the annualization factor is calculated using the
formula supplied on Worksheet B, or the annualization
factor is found in Appendix B. Annualized capital cost is
then calculated by multiplying the total capital costs to be
financed by the annualization factor.
Next, annual operating and maintenance costs are
summed, and the total is added to the annualized capital
cost. These costs should include the costs of monitoring,
inspection, permitting fees, waste disposal charges, repair,
administration, replacement, and any other recurring costs.
All recurring costs should be stated in terms of dollars per
year. The sum of the annualized capital cost and total
annual operating and maintenance costs is the total annual
cost of the project. In the next section, the annualized
costs paid by households in the community are calculated.
Economic Guidance for Water Quality Standards
2-9
-------
2.2 Calculate Total Annualized Pollution Control
Costs Per Household
In order to assess the burden that total pollution control
costs are expected to have on households, an average
annualized pollution control cost per household should be
calculated for all households in the community that would
bear project costs. In order to evaluate substantial impacts,
therefore, the analysis must establish which households will
actually pay for pollution control as well as what
proportion of the costs will be borne by households. These
apportioned project costs are then added to existing
pollution control costs paid by households.
It is important to first define the affected community.
The "community" is the governmental jurisdiction
responsible for paying compliance costs. In practice,
pollution control projects may serve several communities or
just portions of a community. In the case of a sewage
agency serving several communities, once project costs are
allocated to each community served, the economic analysis
is conducted on a community by community basis. In the
case of a community in which only a portion of the
community is served, the affected community is defined as
those who will pay the compliance costs. In such cases, it
may be difficult to obtain socioeconomic data for just part
of the community and data for the entire community may
be used instead. The area that is affected may not be the
same as the area that is paying, therefore it may be
appropriate to evaluate widespread impacts, described in
Chapter 4, over a community that is defined differently
than the paying community.
If project costs were estimated for some prior year,
these costs should be adjusted upward to reflect current
year prices using the average annual national Consumer
Price Index (CPI) inflation rate for the period. The CPI
inflation rate is available from the Bureau of Labor
Statistics. An additional source reporting the CPI inflation
rate is the CPI Detailed Report, which is published monthly
by the U.S. Department of Labor, Bureau of Labor
Statistics.
Economic Guidance for Water Quality Standards
2-10
-------
The ratio of the current CPI to the CPI for the year of
the cost estimates indicates how much costs have increased
over the period. This ratio can be applied to the cost
estimates to "bring them up to current year costs."
Likewise, there are engineering cost indices that can be
used for this purpose.
If project costs are not distributed simply according to
wastewater flow or tax revenues, then consideration should
be given to separately analyzing the impacts on users who
pay a disproportionate share of the costs. This situation
can arise, for example, where industrial dischargers to a
sewer system are assessed pollutant surcharges to pay for
their share of the cost of advanced treatment necessitated
by the presence of their pollutants. Remaining costs would
then be split among households according to wastewater
flow or tax revenues, whichever is appropriate. The total
amount of the pollution control project to be recouped by
surcharges should, therefore, be removed from the total
project cost before costs are allocated according to
wastewater flow or tax revenues.
In calculating the total annual cost of pollution control
per household, current costs of pollution control must be
considered along with the projected annual costs of the
proposed pollution control project. The existing cost per
household usually can be obtained from the most recent
municipal records. For example, it can be found in the
sewer enterprise fund accounts for communities that
maintain a separate enterprise fund. It is not necessary, in
such cases, to sum all the cost components. Instead, use
the most recent operating revenues, divided by the number
of households served. In cases where the community does
not maintain a separate enterprise fund for sewers, the cost
elements can be summed from the consolidated statement
for the community. If the portion of proposed project costs
that households are expected to pay is known or is expected
to remain unchanged, then use Worksheet C to calculate
the total annual cost of pollution control per household. If
the portion paid by households is based on flow, then
should refer to Worksheet C: Option A as well.
Economic Guidance for Water Quality Standards
2-11
-------
Worksheet C
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control
Amount of Existing Costs Paid By Households
Percent of Existing Costs Paid By Households
Number of Households*
Annual Cost Per Household [Calculate: (2)/(4) ]
* Do not use number of hook-ups.
_$_
$
(1)
(2)
(4)
(5)
B. New Pollution Control Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b or c and continue as directed.)
D a) Yes [fill in percent from (3) ]
D b) No, they are expected to pay
percent. (6a)
percent. (6b)
D c) No, they are expected to pay based on flow. (Continue on Worksheet C, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet B] $
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ]
Amount to Be Paid By Households [Calculate: (7) x (8) ] $
Annual Cost per Household [Calculate: (9)/(4) ] $
(7)
(8)
(9)
(10)
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10) f$
(11)
-------
Worksheet C: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment) (1)
Usage due to Household Use (MGD of Household Wastewater) (2)
Percent of Usage due to Household Use [Calculate: (2)/(l) ] %(3)
Total Annual Cost of Pollution Control Project $ (4)
Industrial Surcharges, if any $ (5)
Costs to be Allocated [Calculate: (4) - (5) ] $ (6)
Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7)
Annual Project Cost per Household [Calculate: (7)/Worksheet C, (4) ] $ (8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet C, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ] |$ (io)
-------
The cost per household as a percent of median
household income is used in Section 2.3 as a screener to
quickly identify those communities that clearly will not face
substantial impacts due to pollution control. For guidance
in estimating impacts on non-household users (e.g.,
industrial, commercial), refer to Chapter 3.
2.3 Calculate and Evaluate The Municipal
Preliminary Screener Value
Whether or not the community is expected to incur
"substantial" economic impacts due to the pollution control
project is determined by jointly considering the results of
two tests. The first test is a "screener" to establish whether
the community can clearly pay for the project without
incurring any substantial impacts. The Municipal
Preliminary Screener estimates the total annual pollution
control costs per household (existing costs plus those
attributable to the proposed project) as a percentage of
median household income. The screener is written as
follows:
Municipal Preliminary Screener =
Average Total Pollution Control Cost per Household
Median Household Income
Median household income information for many
municipalities is available from the 1990 Census of
Population. If median household income is not available
for the current year, it should be estimated for the current
year by using the CPI inflation rate for the period between
the year that median household income is available and the
current year. To calculate the inflation rate over the
relevant period, use the "percent change from the previous
annual average" (annual inflation rate) presented in the CPI
Detailed Report. For example, if the current year is 1993,
1990 is the most recent year that median household income
is available, and the percentage changes for the 1990,
1991, and 1992 annual averages respectively are: 5.2, 4.1
and 2.9, the adjustment factor equals:
Economic Guidance for Water Quality Standards
-------
Adjustment Factor = 1.052 * 1.041 * 1.029 = 1.13
Adjusted Median Household Income =
Median Household Income * Adjustment Factor
Depending on the results of the screener, the community
is expected to incur little, mid-range, or large economic
impacts due to the proposed project (see Worksheet D).
If the total annual cost per household (existing annual cost
per household plus the incremental cost related to the
proposed project) is less than 1.0 percent of median
household income, it is assumed that the project is not
expected to impose a substantial economic hardship on
households. The screener is therefore set at 1.0 percent of
median household income. Communities with screener
results of less than 1.0 but still fairly close to 1.0,
however, may still want to proceed to the Secondary Test.
Communities are expected to incur mid-range impacts
when the ratio of total annual compliance costs to median
household income is between 1.0 and 2.0 percent. If the
average annual cost per household exceeds 2.0 percent of
median household income, then the project may place an
unreasonable financial burden on many of the households
within the community. In either case, communities move
on to the Secondary affordability Test to demonstrate
substantial impacts. For example, assume that Community
XYZ has a screener of 2.3 percent. Although it appears
that the community faces large impacts, substantial impacts
have not necessarily been demonstrated and the community
must proceed to the next step and apply the Secondary
Test. Dischargers with screener values well below 1.0
percent are assumed to be able to pay for pollution control
without incurring any substantial economic impacts and are
required to meet existing water quality standards. They do
not need to proceed to the Secondary Test (see Figure 2-1).
2.4, Apply Secondary Test
The Secondary Test is designed to build upon the
characterization of the financial burden identified in the
Economic Guidance for Water Quality Standards
2-15
-------
Worksheet D
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any
substantial economic impacts as a result of the proposed pollution control project. The formula is as
follows:
Total Annual Pollution Control Cost per Household
Median Household Income *
(D
(2)
A. Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or
Worksheet C, Option A (10) ]
Median Household Income*
Municipal Preliminary Screener (Calculate: [(l)/(2)] x 100)
B. Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark Comparison:
Little Impact
Less than 1.0%
Mid-Range Impact
1.0%-2.0%
Large Impact
Greater than 2.0%
Indication of no
substantial
economic impacts
Proceed to Secondary Test
1990 Census adjusted by CPI inflation rate if necessary.
-------
Municipal Preliminary Screener. The Secondary Test
indicates the community's ability to obtain financing and
describes the socioeconomic health of the community.
Indicators describe precompliance debt, socioeconomic, and
financial management conditions in the community. Using
these indicators and the scoring system described below,
the impact of the cost of pollution control is estimated.
Specifically, applicants are required to present the
following six indicators for the community:
Debt Indicators
• Bond Rating (if available) - a measure of credit
worthiness of the community;
• Overall Net Debt as a Percent of Full Market Value
of Taxable Property - a measure of debt burden on
residents within the community;
Socioeconomic Indicators
• Unemployment Rate - a measure of the general
economic health of the community;
• Median Household Income - a measure of the
wealth of the community;
Financial Management Indicators
• Property Tax Revenue as a Percent of Full Market
Value of Taxable Property - a measure of the
funding capacity available to support debt based on
the wealth of the community; and
• Property Tax Collection Rate - a measure of how
well the local government is administered.
A more detailed description of the six indicators, as well
as alternative indicators for states with property tax
limitations, are presented below. Table 2-1 summarizes the
indicators and what is considered to be a strong, mid-
range, or weak rating.
Economic Guidance for Water Quality Standards
2-17
-------
Debt Indicators
Bond Rating
Current ratings for the community summarize a bond
rating agency's assessment of a community's credit
capacity. The ratings generally reflect current financial
conditions. If security enhancements like bond insurance
have been used for the bond issue, however, the bond
rating on a particular issue may be higher than local
conditions justify. Only ratings for uninsured bonds,
therefore, should be used.
Many small and medium sized communities have not
used debt financing for projects and, as a result, have no
bond rating. The absence of a bond rating does not
indicate strong or weak financial health. When a bond
rating is not available, this indicator should not be included
in the analysis of substantial impacts. When available, the
rating for the most recent general obligation bond should be
used. If a general obligation bond has not been issued
recently, the most recent rating for a sewer bond should be
used. Recent bond ratings are included in municipal bond
reports from rating agencies (e.g., Moody's Bond Record,
Standard and Poor's Corporation).
Overall Net Debt as a Percent of Full Market Value of
Taxable Property
Overall Net Debt is debt repaid by property taxes. It
excludes debt that is repaid by special user fees (e.g.
revenue debt). This indicator provides a measure of debt
burden on residents within the community and measures the
ability of local government jurisdictions to issue additional
debt. It includes the debt issued directly by the local
jurisdiction and debt of overlapping entities, such as school
districts. It compares the level of debt owed by the
community with the full market value of real property used
to support that debt and serves as a measure of the
community's wealth.
Economic Guidance for Water Quality Standards
2-18
-------
Debt information is available from the financial
statement of each community. In most cases, recent
financial statements are on file 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 (assessment ratio) should be
readily available through the community or the State
Assessor's Office. The boundary of the affected
community 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
affected community.
Socioeconomic Indicators
Unemployment Rate
The unemployment rate is defined as the percent of a
community's labor force currently unemployed. If the
unemployment rate in the service area is not available, the
encompassing county's rate may be used as a substitute.
The Bureau of Labor Statistics (BLS) maintains current
unemployment rate figures for municipalities and counties.
National unemployment data is also needed for comparison
purposes. This information can be obtained from the BLS
are available by request at (202) 606-6392. A community's
unemployment rate is considered to be below the national
average if it is more than 1 % below the national average.
Similarly, a community's unemployment rate is considered
to be above the national average if it is more than 1 %
above the national unemployment rate. If the community's
employment rate is equal to the national average
unemployment rate, plus or minus 1%, then the
community's unemployment rate is assessed as being equal
to the national rate.
Median Household Income
Median household income (MHI) is defined as the
median of the total income dollars received per household
during a calendar year in a given area. It serves as an
Economic Guidance for Water Quality Standards
2-19
-------
overall indicator of community spending capacity. Median
household income, which was also used in the screener
process, is available from the 1990 Census or through state
data centers. The state value is also needed for comparison
purposes. If a community's median household income is
more than 10% below the state's median household
income, then it is considered to be below the state's
median. If a community's median household income is
more than 10% above the state's median, then it is
considered to be above the state median value. If,
however, the community's median household income is
equal to the state median, plus or minus 10%, then the
community's median household income is assessed as being
equal to the state's median household income.
Financial Management Indicators
Property Tax Revenues as a Percent of Full Market
Value of Taxable Property
This indicator can be referred to as the "property tax
burden" since it indicates the funding capacity to support
new expenditures, based on the wealth of the community.
Some states and local jurisdictions may have established
legal limits on the amount of property taxes that can be
levied as a percent of full market or assessed value of real
property. Property assessment data should be readily
available through the community or the State Assessor's
Office. Property tax revenues are available in
communities' annual financial statements.
Property Tax Revenue Collection Rate
This rate is an indicator of the efficiency of the tax
collection system and a measure of how well the local
government is administered. It compares the actual amount
collected from property taxes to the amount levied.
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.
Economic Guidance for Water Quality Standards
2-20
-------
Alternative Indicators for States with
Property Tax Limitations
Two of the indicators may not be appropriate
in states with statutory limits on property tax
collections and/or rates, or where data on full-
market value of taxable property are not
available.
The first of these indicators — The Overall Net
Debt as Percent of Full Market Value of
Taxable Property ~ can be replaced with:
Overall Net Debt Per Capita
In calculating the Secondary Score, the
following ratings for Overall Net Debt Per
Capita should be used:
Greater than $3,000 = weak = 1
$1,000-$3,000 = mid-range = 2
Less than $1,000 = strong = 3
The second of these indicators — Property Tax
Revenues as a Percent of Full-Market Value of
Taxable Property — has no appropriate
substitute in cases where property taxes are at
their limit or where full-market value of
taxable property cannot be estimated. In such
cases, this indicator should be dropped and the
other five factors are assigned equal weights.
These six indicators are then used to form a composite
assessment of the community's economic health and the
financial impact of the required project. Worksheet £ can
be used to record each indicator. For each of the six
indicators, the community is rated as weak, mid-range, or
strong, based on the thresholds presented in Table 2-1.
Economic Guidance for Water Quality Standards
2-21
-------
Worksheet E
Data Used in the Secondary Test
Please list the following values used in determining the Secondary Score. Potential sources of the data
are indicated.
A. Data Collection
Data Potential Source Value
Direct Net Debt Community Financial Statements
Town, County or State Assessor's Office
$ (1)
Overlapping Debt Community Financial Statements
Town, County or State Assesor's Office $ (2)
Market Value of Property Community Financial Statements
Town, County or State Assessor's Office
$ (3)
Bond Rating Standard and Poors or Moody's
(4)
Community Unemployment 1990 Census of Population
Rate Regional Data Centers %(5)
National Unemployment Bureau of Labor Statistics
Rate (202) 606-6392 %(6)
Community Median 1990 Census of Population
Household Income $ (7)
State Median Household 1990 Census of Population
Income $ (8)
Property Tax Collection Community Financial Statements
Rate Town, County or State Assessor's Office %(9)
Property Tax Revenues Community Financial Statements
Town, County or State Assessor's Office $ (10)
-------
Worksheet E, Continued
B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2)) $ (11)
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(ll)/(3)] x 100)
2. Property Tax Revenues as a Percent of Full Market Value of Taxable Properly
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
*(13)
-------
For example, if a community's median household income
equals $15,000 and the state's median household income
equals $17,000, the community would be considered weak
on this measure. If, however, the community's median
household income were $19,000, then the community
would be considered strong on this measure.
Next, a Secondary Score is calculated for the community
by weighting each indicator equally and assigning a value
of 1 to each indicator judged to be weak, a 2 to each
indicator judged to be mid-range, and a 3 to each strong
indicator. A cumulative assessment score is arrived at by
summing the individual scores and dividing by the number
of factors used. Worksheet F, provided at the end of
Section 2.4, guides the applicant through this calculation.
The cumulative assessment score is evaluated as follows:
• less than 1.5 is considered weak
• between 1.5 and 2.5 is considered mid-range
• greater than 2.5 is considered strong
For example, consider a Community XYZ, which has:
• a weak ratio of overall net debt to full
market value of taxable property = 1,
• a weak bond rating = 1,
• a mid-range unemployment rate = 2,
• a mid-range median household income = 2,
• a strong property tax collection rate = 3,
and
• a strong ratio of property tax revenues to
full market value of taxable property = 3.
[(1 + 1+2-1-2-1-3 + 3)/6] = 2
The Secondary Score for Community XYZ, equal to 2,
falls into the mid-range category.
If the applicant is not able to develop one or more of the
six indicators, they must provide an explanation as to why
the indicator is not appropriate or not available. Since the
point of the analysis is to measure the overall burden to the
Economic Guidance for Water Quality Standards
2-24
-------
-------
Wot »et F
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as
a single indicator with the remaining indicators.
Indicator
Bond Rating
Worsksheet E, (4)
Overall Net Debt as Percent
of Full Market Value of
Taxable Property
Worksheet E, (12)
Unemployment
Worksheet E, (5)& (6)
Median Household Income
Worksheet E, (7) & (8)
Property Tax Revenues as a
Percent of Full Market
Value of Taxable Property
Worksheet E, (13)
Property Tax Collection
Rate
Worksheet E, (9)
Secondary Indicators
Weak*
Below BBB (S&P)
Below Baa (Moody's)
D
Above 5%
n
Above National Average
D
Below State Median
D
Above 4%
D
< 94%
D
Mid-Range*
BBB (S&P)
Baa (Moody's)
D
2%-5%
D
National Average
D
State Median
D
2%-4%
D
94% - 98%
D
«. ***
Strong
Above BBB (S&P) or
Baa (Moody's)
D
Below 2%
D
Below National Average
D
Above State Median
D
Below 2%
D
> 98%
D
Score
* Weak is a score of 1 point
'* Mid-Range is a score of 2 points
SUM
Strong is a score of 3 points
AVERAGE
-------
community, the debt and socioeconomic indicators are
assumed to be better measures of burden than the financial
management indicators. Consequently, if one of the debt
or socioeconomic indicators is not available, the
State/discharger should average the two financial
management indicators and use this averaged value as a
single indicator with the remaining indicators. This
averaging is necessary so that undue weight is not given to
the financial management indicators.
Economic Guidance for Water Quality Standards
-------
Table 2-1
Secondary Indicators
Indicator
Bond Rating
Overall Net Debt .
as Percent of Full
Market Value of
Taxable Property
Unemployment
Median Household
Income
Property Tax
Revenues as a
Percent of Full
Market Value of
Taxable Property
Property Tax
Collection Rate
Secondary Indicators
Weak
Below BBB (S&P)
Below Baa
(Moody 's)
Above 5%
More than 1 %
above National
Average
More than 10%
below State Median
Above 4%
< 94%
Mid-Range
BBB (S&P)
Baa (Moody's)
2%-5%
National Average
State Median
2%-4%
94% - 98%
Strong
Above BBB (S&P)
or Baa (Moody's)
Below 2%
More than 1 %
below National
Average
More than 10%
above State Median
Below 2%
> 98%
Economic Guidance for Water Quality Standards
2-27
-------
2.5 Assess Where the Community Falls in The
Substantial Impacts Matrix
The results of the two tests are considered jointly in
determining whether the community is expected to incur
substantial impacts due to the proposed pollution control
project.
In the following matrix, the cumulative assessment score
for the community is combined with the estimated
household burden. The combination of factors establishes
whether impacts can be expected to be substantial. In the
example of Community XYZ, their screener equaled 2.3
percent and their cumulative assessment score equaled 2.
They are, therefore, in the middle cell in the far right
column and thus have a rating of "X" in the matrix
presented below (Table 2-2).
In the matrix, "X" indicates that the impact is likely to
be substantial. The closer the community is to the upper
right hand corner of the matrix, the greater the impact.
Similarly, V" indicates that the impact is not likely to be
substantial. The closer to the lower left hand corner of the
matrix, the smaller the impact. Finally, the "?" indicates
that the impact is unclear.
Economic Guidance for Water Quality Standards
2-28
-------
Table 2-2
Assessment of Substantial Impacts Matrix
Secondary
Score
Less than 1.5
Between 1.5 and
2.5
Greater than 2.5
Municipal Preliminary Screener
Less than 1.0 Percent
?
/
/
Between 1.0 and
2.0 Percent
X
7
/
Greater than
2.0 Percent
X
X
7
For communities that fall into the "?" category, if the
results of both the Secondary Test and the Municipal
Preliminary Screener are borderline, then the community
should move into the category closest to it. Take, for
example, a community that falls into the center box, with
a cumulative assessment score of between 1.5 and 2.5 and
a percent of median household income (MHI) between 1.0
and 2.0. If the cumulative score was 1.6 and the percent
of MHI was 1.8, then the community should be considered
to fall into one of the adjacent "X" categories. If results
are not borderline, other factors such as the impact on low
or fixed income households, the presence of a failing local
industry, and other projects the community would have to
forgo in order to comply with water quality standards
should be considered. Relevant additional information
might include information collected from interviews with
municipal financial officers, special reports on industry
trends that may affect local employers, and specific
financial and economic indicators. The State/discharger
should provide any additional information they feel is
relevant. This additional information will be critical where
the matrix results are not conclusive.
EPA will interpret a "S* rating to mean that the
community is not expected to incur substantial impacts as
Economic Guidance for Water Quality Standards
2-29
-------
a result of the pollution control project. Communities
falling into this category not be able to justify water quality
standards providing for less protection than the
fishable/swimmable goals of the Act, and will not be able
to justify degradation of high quality waters. If the
applicant State/discharger disagrees with the results of the
Secondary Test, they may present additional information to
the Regional EPA Administrator documenting the unique
circumstances of the community. Since the impacts are not
substantial, there is no need to demonstrate widespread
impacts. EPA will interpret a "X" rating to mean that the
community will incur substantial impacts. Before a water
quality standard is modified or changed or a high quality
water (other than an ONRW) degraded, however,
communities falling into this category must demonstrate
that impacts are also widespread. For those communities
rated "?", EPA's interpretation will rely on the additional
information presented by the State/discharger. It should be
noted that, in this case, there is no "correct" set of
information. It will be up to the applicant to collect
whatever information they feel is relevant in describing the
unique circumstances affecting their community. For
example, the matrix may suggest that the community's
financial condition is strong. At the same time, however,
a local industry may be failing. In such a case, it is
important to determine the importance of that industry to
the local economy (as measured by its contribution to area
employment, payroll, and tax revenues) and whether the
industry itself would be affected by the project.
Communities falling into either the "X" or the "?" category
should proceed to Chapter 4 to determine whether the
impacts are also expected to be widespread.
Economic Guidance for Water Quality Standards
2-30
-------
3. EVALUATING SUBSTANTIAL
PRIVATE-SECTOR ENTITIES
IMPACTS:
For facilities owned by the private sector, measuring
substantial impacts requires estimating the financial impacts
on the entities that will pay for the pollution controls. For
example, compliance with water quality standards may
require that a particular facility, perhaps a factory, install
additional wastewater treatment. After estimating the cost
of the additional wastewater treatment, the next step is to
measure the ability of the factory to pay for the additional
treatment. If the analysis shows that the entity will not
incur any substantial impacts due to the cost of pollution
control (e.g., there will be no significant changes in the
factory's level of operations nor profit), then the analysis
is completed. If, on the other hand, the analysis shows that
there will be substantial impacts on the entity, then the
resulting impacts on the surrounding community must be
considered (e.g. the impact of lost employment on the
community's employment base, or the impact on the
overall economy of the community). Impacts to the
surrounding community, referred to as widespread impacts,
are addressed in Chapter 4.
The following sections describe the steps involved in
evaluating whether impacts will be substantial. These steps
are outlined in Figure 3-1. This chapter explains how to
adapt each of the steps to a range of data sources and
provides worksheets to assist the discharger in working
through each step. The analytic approach presented here
can be used for a variety of private-sector entities,
including commercial, industrial, residential and
recreational land uses, and for point and nonpoint sources
of pollution. The guidance provided in this chapter,
however, is not meant to be exhaustive. The State and/or
EPA may require additional information or tests in order to
evaluate whether substantial and widespread impacts will
occur. In addition, the applicant should feel free to include
any additional information they feel is relevant. The steps
described in further detail in the rest of the chapter are:
Economic Guidance for Water Quality Standards
-------
Figure 3-1:
Measuring Substantial Impacts
(Private Entities)
aie Costs of Pollution
Coatrotl-fcceMarrtoMeet
Capital Cost, Annual
O&M Cost
I
Annual Cost of Proposed
Pollution Reduction
i
Determine whether private
entity will incur substantial
impacts based on primary
and secondary measures of
financial health
No
Substantial
Impacts
Substantial Impacts
Proceed to analysis of
widespread impacts in
chapter 4
Request Rejected
Economic Guidance for Water Quality Standards
-------
• Verify Project Costs and Calculate the Annual
Cost of the Pollution Control Project - This
section discusses factors that should be considered
when verifying that the proposed pollution control
project is the most appropriate solution to the
pollution problem. It also describes the type of
general information that should be provided about
the proposed project. In addition, it discusses how
to annualize capital costs of the project and
calculate total annual costs of the pollution control
project.
• Financial Impact Analysis - This section describes
the types of financial tests that should be applied to
measure the impact on the applicant. The primary
measure is profitability. The secondary measures
include indicators of liquidity, solvency, and
leverage.
Most of this chapter is'written in terms of evaluating
whether there will be a substantial impact on a particular
discharger. This type of analysis is necessary whenever
there is a request for a variance. These same tests,
however, can be used to analyze the impact on a group of
dischargers, as might be the case in a use attainability
analysis. For example, there may be several facilities that
would confront similar requirements to improve their waste
water discharges in order to meet a higher water quality
standard under consideration. The same primary and
secondary tests would be used to measure substantial
impacts in the dischargers. The difference would be,
however, when the analysis moved to measuring
widespread impacts. Here the impacts on the total group
of dischargers (or all dischargers in the relevant reach)
would be used to measure whether or not the impacts are
considered widespread.
Economic Guidance for Water Quality Standards
3-3
-------
3.1 Verify Project Costs and Calculate The Annual
Cost of the Pollution Control Project
Before the impact analysis can be performed, the project
costs should be verified and the annual costs calculated.
3.1.a Verify Project Costs
The first step in the financial impact analysis is an
evaluation of the proposed pollution control project.
Private entities should consider a broad range of discharge
management options including pollution prevention, end-of-
pipe treatment, and upgrades or additions to existing
treatment. Specific types of pollution prevention activities
to be considered include:
• Change in Raw Materials;
• Substitute Process Chemicals;
• Change in Process;
• Water Recycling and Reuse; and
• Pretreatment Requirements.
Whatever the approach, the discharger must demonstrate
that the proposed project is the most appropriate means of
meeting water quality standards and must document project
cost estimates. If at least one of the treatment alternatives
that allows the applicant to meet water quality standards
would not impose substantial impacts, then they are not
able to demonstrate substantial impacts and should not
proceed with the analysis presented in the remainder of this
workbook.
Since the most cost-effective approach to meeting the
fishable/swimmable goals of the Act and avoiding
degradation of high quality waters should be considered,
submissions should list their assumptions about excess
capacity, future facility expansion, and alternative
technologies. The most accurate estimate of project costs
may be available from the discharger's design engineers.
These estimates can be compared to estimates available
from EPA.
Economic Guidance for Water Quality Standards
3-4
-------
3.1.b Calculate the Annual Costs of the Pollution
Control Project
In order to perform the economic tests, the cost of the
pollution control needed to meet the fishable/swimmable
goals of the Act and avoid degrading high quality waters
must be calculated and converted to an annualized cost.
Initially, pollution control costs are expressed in two parts:
(1) the capital costs of purchasing and installing the
equipment and (2) the yearly operating and maintenance
(O&M) costs. Both the capital and O&M cost estimates
should be provided by the discharger requesting relief. To
assess whether the costs represent the most cost effective
means of meeting the water quality standards, they should
be compared to costs at comparable entities that meet the
same standards. For dischargers covered by effluent
guidelines, compliance costs nave been calculated by the
Agency and are available for comparative purposes. (See
Appendix A.) Costs for nonpoint sources are less readily
available.
Instead of assuming that the total capital costs will be
paid in the first year of operation, these costs are usually
annualized. By assuming that costs are spread out over
several years, annualization calculates the amount that will
be paid each year, including the financing costs. In order
to allow for comparisons across cases, the analysis should
assume that the applicant will borrow the capital for the
pollution control equipment and repay the loan in even
annual installments over a 10 year period. The assumption
of ten years is based on the likely life of the equipment.
The assumption of even annual installments is made for
convenience. The interest rate on the loan should be
equivalent to the rate the applicant pays when it borrows
money. If it borrows from the parent firm, the interest
charge should be equivalent to the interest charged by the
parent firm. If the parent firm would lend the entity
money without interest, then the interest payments should
be equivalent to the interest rate the applicant would pay to
borrow from a bank or on its line of credit. If it is
impossible to determine the appropriate interest rate, the
analysis should assume an interest rate equal to the prime
rate plus one percent.
Economic Guidance for Water Quality Standards
3-5
-------
The financial tests discussed below compare the costs of
compliance to other costs and revenues of the applicant.
Compliance costs and other costs and revenues must,
therefore, be comparable. In other words, they should be
calculated for the same year. If compliance costs are
estimated assuming construction several years in the future,
they should be deflated back to the year of the financial
data. This can be done by assuming that the inflation rate
over the last five years will continue into the future. See
discussion in Section 2.2, and Appendix A for references
to inflation/deflation indices. Likewise, if costs were
estimated for an earlier year, they should be inflated to
current year costs. The Annualized Cost of Pollution
Control can be calculated using Worksheet G.
3.2 Financial Impact Analysis
The purpose of the financial impact analysis is to assess
the extent to which existing or planned activities and/or
employment will be reduced as a result of meeting the
water quality standards. The tests described in this
Workbook are not designed to determine the exact impact
of pollution control costs on an entity. They merely
provide indicators of whether pollution control costs would
result in a substantial impact.
Four general categories of financial tests are presented
in the following sections. As indicated below, the four
categories are divided into a primary measure of financial
impacts and three secondary measures of financial impacts:
Primary Measure
• Profit — how much will profits decline due to
pollution control expenditures?
Secondary Measures
• Liquidity — how easily can an entity pay its short-
term bills?
• Solvency — how easily can an entity pay its fixed
and long-term bills?
Economic Guidance for Water Quality Standards
3-6
-------
Worksheet G
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant) $ (1)
Interest Rate for Financing (Expressed as a decimal) (i)
Time Period of Financing (Assume 10 years*) 10 years (n)
Annualization Factor** *= 1 + i (2)
(1+i)10 - 1
Annualized Capital Cost [Calculate: (1) x (2) ] $ (3)
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal charges, repair, administration and replacement)*** $ (4)
Total Annual Cost of Pollution Control Project [ (3) + (4) ]
(5)
While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
Or see Appendix B for calculated annualization factors
For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replaced once every three years, include one-third of the cost in
each year).
-------
• Leverage — how much money can the entity
borrow?
Profit and solvency ratios are calculated both with and
without the additional compliance costs (taking into
consideration the entity's ability, if any, to increase its
prices to cover part or all of the costs). Comparing these
ratios to each other and to industry benchmarks provides a
measure of the impact on the entity.
For all of the tests, it is important to look beyond the
individual test results and evaluate the total situation of the
entity. While each test addresses a single aspect of
financial health, the results of the four tests should be
considered jointly to obtain an overall picture of the
economic health of the applicant and the impact of the
water quality standards requirement on the applicant's
health. The results should be compared with the ratios for
other entities in the same industry or activity. In addition,
the ratios and tests should be calculated for several years of
operations. This will allow long-term trends to be
differentiated from short-term conditions.
The structure, size, and financial health of the parent
firm should also be considered. An important factor,
which may not be reflected in the preceding measures, is
the value of an applicant's product or operations to its
parent firm. For example, if a facility produces an
important input used by other facilities owned by the firm,
the firm may be likely to support the facility even if it
appears to have only borderline profitability. The results
of these tests and other relevant factors, can be used to
make a judgement as to the likely actions of the applicant
(e.g. shut down entirely, close one or more product/service
lines, shift to other products/services, not proceed with an
expansion, continue operations at current levels) faced with
the pollution control investment.
Each type of test measures a different aspect of a
discharger's financial health. The primary measure
evaluates the extent to which an applicant's profit rate will
change, and compares the profit level to typical profits in
Economic Guidance for Water Quality Standards
3-8
-------
that industry. The secondary measures provide additional
information about specific impacts that the discharger
would bear if required to meet water quality standards. In
some cases, the tests might indicate that the discharger
would remain profitable (Profit) after investing in pollution
control, but would have trouble borrowing the needed
capital (Leverage). This situation would indicate a need to
work with the discharger in choosing the technology and
schedule used to meet the regulations. In other cases the
tests might show that the discharger has a short-term
problem with meeting the financial obligation imposed by
the standards, but could handle it in the long-run (Liquidity
vs. Solvency). This is important information when
considering whether or not to grant a variance so as to
allow more time for compliance.
Since it is the discharger that will have to pay for the
wastewater treatment, the financial tests presented in this
Workbook use data about the discharger's operations. This
data, however, may not be readily available for the
discharger itself, and if available, the discharger may
consider the information to be confidential. It is EPA
policy, however, that applications based on economic
considerations must be accompanied by data that
demonstrate the impacts.
If the information is not available at the discharger
level, it can be estimated from the balance sheets or income
statements of the firm that owns or controls the discharger.
Estimates can be made in a variety of ways. One
commonly used approach is to compare the discharger's
sales or revenues to the firm's sales or revenues and apply
this ratio to other financial factors. For example, if the
discharger is responsible for 20 percent of its firm's
revenues, than it is assigned 20 percent of the firm's
current assets and current liabilities. In some cases,
particularly with manufacturing facilities, the discharger
may not sell its production directly, but may ship it to
another facility owned by the same firm. In this case, the
discharger's share of sales should be calculated by
determining the market value of the goods produced by the
Economic Guidance for Water Quality Standards
3-9
-------
discharger, using market prices for the year being
analyzed.
The primary and secondary measures are described
below, along with an example of specific tests to be used.
While there are several ratios that could be used for each
test, to simplify the presentation only one ratio per test is
described in detail. All four primary and secondary
measures, however, should be used in the analysis.
In most cases, interpreting the results requires
comparisons with typical values for the industry. Among
the sources that provide comparative information are:
Robert Morris Associates' Annual Statement Studies,
Moody's Industrial Manual, Dun and Bradstreet's Dun's
Industry Norms, and Standard & Poor's Industry Surveys.
The Annual Statement Studies, Dun's Industry Norms , and
Standard & Poor's Industry Surveys provide composite
statistics for firms grouped into various manufacturing and
service industries. The Moody's Industrial Manual
provides detailed financial information on individual firms
that can be used for comparison purposes. Although
benchmarks are available for most financial tests, EPA
emphasizes that the discharger should consider these
benchmarks as indicators of financial health and not as
definitive measures.
3.2.a
Primary Measure: Profitability
The Profit Test measures what will happen to the
discharger's earnings if additional pollution control is
required. If the discharger is making a profit now but
would lose money with the pollution control, then the
possibility of a total shutdown or the closing of a
production line must be considered. Greatly reduced, but
still positive, profits are also of concern. Likewise in the
case of a proposed facility or proposed expansion; if
estimated profits would drop considerably with pollution
control, then the development might not take place.
Two pieces of information are needed for the Profit
Test. The first piece is the total annual cost of the required
Economic Guidance for Water Quality Standards
3-10
-------
pollution control from Worksheet G. The second piece is
the earnings information from the entity's income statement
(Worksheet H).
Profit Test = Ea"an^ B^ore Taxes
Revenues
The Profit Test should be calculated with and without
the cost of pollution control. In the former case, the
annualized cost of pollution control (including O&M) is
subtracted from the discharger's earnings before taxes
(revenues minus costs excluding income taxes) for the most
recently completed fiscal year. Profits before pollution
control investments have been made should be examined to
determine whether the discharger was already in trouble
(either not profitable or profits far below industry norms)
before pollution control investments were made. If the
discharger is already not profitable, it may not claim that
substantial impacts would occur due to compliance with
water quality standards.
The Profit Test can be calculated using Worksheets H,
and I. Earnings before taxes (EBT) should be calculated
for at least the three previous fiscal years hi order to
identify any trends or atypical years. Earnings with
pollution control costs should be calculated for the latest
year with complete financial information. Arguably, as
long as the applicant maintains positive earnings, it can
afford to pay for the pollution control. Over the long run,
however, the owner is likely to shift operations to more
profitable facilities, if possible. The workbook, therefore,
guides the applicant through a more thorough analysis,
which compares the EBT, with and without pollution
control, to total revenues to yield a profit rate and change
in the profit rate due to pollution control. (Use Worksheet
I.) These profit rates should be compared to those for
facilities in similar lines of business. As with other tests,
it may not be possible to compare the discharger's rate
directly with the rates of similar facilities. In such cases
the discharger's profit rate should be compared with that of
firms that concentrate in similar businesses, using data in
Economic Guidance for Water Quality Standards
3-11
-------
Worksheet H
Calculation of Earnings Before Taxes
With and Without Pollution Control Project Costs
A. Earnings Without Pollution Control Project Costs
EBT = R - CGS - CO
Where:
EBT =
R =
CGS =
CO =
Earnings Before Taxes
Revenues
Cost of Goods Sold (including the cost of materials, direct labor, indirect
labor, rent and heat)
Portion of Corporate Overhead Assigned to the Discharger (selling,
general, administrative, interest, R&D expenses, and depreciation on
common property)
R
CGS
CO
Three Most Recently Completed Fiscal Years
19 19 19
$
$
$
$
$
$
$
' $
$
(1)
(2)
(3)
EBT [ (1) - (2) -(3) ]
(4)
Considerations: Have earnings before taxes changed over the three year period? If so, what would a
"typical" year's EBT be? Please explain below.
-------
Worksheet H, Continued
B. Earnings With Pollution Control Project Costs
EWPR = EBT - ACPR
Where: EWPR = Earnings with Pollution Control Project Costs
EBT = Earnings Before Taxes (4)
ACPR = Total Annual Costs of Pollution Control Project [Worksheet G, (5) ]
19 *
EBT (4) $ (5)
ACPR [Worksheet G, (5)] $ (6)
EWPR [ (5) - (6) ] $ (7)
* The most recently completed fiscal year
Considerations: Is the discharger expected to have positive earnings after paying the annual cost of
pollution control? D Yes D No
Additional Comments:
-------
Worksheet I
Calculation of Profit Rates
With and Without Pollution Control Project Costs
A. Profit Rate Without Project Costs
PRT = EBT -s- R
Where:
PRT
EBT
R =
Profit Rate Before Taxes
Earnings Before Taxes
Reveneus
EBT [Worksheet H, (4)]
R [Worksheet H, (1)]
PRT = Calculate: [(l)/(2)]
Three Most Recently Completed Fiscal Years
19
19
19
0)
(2)
(3)
Considerations: How have profit rates changed over the three years?
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
How do these profit rates compare with the profit rates for this line of business"? Please discuss
below.
-------
Worksheet I, Continued
B. Profit Rate With Pollution Control Costs
PRPR = EWPR + R
Where: PRPR = Profit Rate With Pollution Control Costs
EWPR = Before-Tax Earnings With Pollution Control Costs
R = Reveneus
The Most Recently
Completed
Fiscal Year
19
EWPR [Worksheet H, (7)] $ (4)
R [Worksheet H, (1)] $ (5)
PRPR [Calculate: (4)/(5)] (6)
Considerations:
What is the percentage change in the profit rate due to pollution control costs ? Calculate as follows:
(PRPR - PR)/PR x 100
How does the profit rate with pollution control compare to the profit rate of this line of business?
-------
Moody's Industrial Manual, Dun & Bradstreet's Industry
Norms and Key Business Ratios, Standard & Poor's
Industry Surveys, or Robert Morris's Annual Statement
Studies. If the discharger's ratio compares favorably with
the median or upper quartile ratio for similar businesses,
the discharger is considered to be financially healthy. A
typical income statement, like those found in Moody's
Industrial Manual, has been included in Exhibit 3-1. The
appropriate data have been underlined.
Although complicated, the analysis should consider
whether the discharger or firm would be able to raise its
prices in order to cover some or all of the pollution control
costs. In such a case, revenues increase and earnings fall
by an amount less than the costs of pollution control. The
degree to which the discharger is able to raise prices is
difficult to predict, and depends on many factors.
Considerations should include the level of competition in
the industry, the likelihood of competitors' facilities facing
similar project costs, and the willingness of consumers to
pay more for the product.
3.2.b Secondary Measures
The following secondary measures provide additional
important information about the financial health of the
discharger. All primary and secondary measures will be
included in the analysis. -It is not sufficient to conclude
that the discharger will be unprofitable after pollution
control investments. In addition, the applicant should feel
free to include any additional information about the
discharger's financial health that they feel is relevant.
Liquidity
Liquidity is a measure of how easily a discharger can
pay its short-term bills. One measure of liquidity is the
Current Ratio, which compares current assets with current
liabilities. Current assets include cash and other assets that
are or could reasonably be converted into cash during the
current year. The following items are considered to be
current assets:
Economic Guidance for Water Quality Standards
3-16
-------
.Exhibit 3-1
XYZ, INC.
CONSOLIDATED
STATEMENTS OF
INCOME AND
RETAINED EARNINGS
(DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988
1987
1986
Nat sales
Cost of sales
Gross profit
Setting, general and administrative expenses
Income from operations
Other income (deductions)
Interest income
Interest expense
Other investment income - net
Miscellaneous
Total other income (deductions) - net
Income before income taxes
Provision for income taxes
Net income
Retained earnings, beginning of year
Stock dividend
Cash dividend ($.11 per share, 1988; $.08 per
share, 1987; $.06 per share, 1986)
Common stock acquired and retired
Retained earnings (deficit), end of year
Weighted average number of shares outstanding
Earnings per common share
35.981 .363
6,408,594
3.957.771
2,450,823
441,891
(10,985)
55.066
485.972
4,936,795
1,139.118
1,797,677
1,157,528
(2,610,888)
(391,960)
(2591)
$ (50.234)
3593,048
$50
$#,294,962
26.405.930
6,889,032
3.876.206
3,012,826
347,613
(22,513)
48.660
373,760
3356,586
i.620.012
1,766,574
1,726,292
(1,952,645)
(300,693)
(82.000)
S 1.157.528
3,630,652
f.49
24.972.185
5,758,583
3.824.226
1,934,357
362,295
(46,467)
134,690
93,654
544.172
1.150,949
1,327,580
1,983,007
(1,365,590)
(218,705)
$ 1,726,292
3.637,798
$.36
See accompanying Notes to Financial Statements
INDEPENDENT
AUDITORS'
REPORT
To the Shareholder* of XYZ, Inc.:
We have audited the consolidated balance sheets of XYZ, Inc. at September 30,
1988 and 1987, and the related consolidated statement* of income and retained
earnings (deficit), and cash flows for each of the three yean in me period ended
September 30, 1988. These financial statements arc the responsibility of the
Company's management Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements ue free of material
misstatement An audit include* examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
to our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the companies at
September 30, 1988 and 1987, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1988 in
conformity with generally accepted accounting principle!.
DELOITTE HASKTNS * SELLS
Mmneapolii, Minnesota
December 5, 1988
-------
• Inventories — finished products, products in the
process of being manufactured, raw materials,
supplies, fuels, etc.;
• Prepaid expenses — expenses paid in advance of
use such as prepaid rent;
• Short-term investments — savings accounts,
certificates of deposit;
• Accounts receivable;
• Marketable securities; and
• Cash.
Likewise, current liabilities are items that must be paid
within the current year. The following items are
considered to be current liabilities:
• Accounts payable — purchases of goods for resale
and services received in the normal course of
business;
• Wages payable;
• Short-term notes payable — any debt initially
incurred and due in the current year;
• Accrued expenses — expenses that have been
incurred but have not yet been paid at the end of
the accounting period;
• Taxes; and
• Current portion of any long-term debt.
A more stringent test is the Quick Ratio, also known as the
Acid Test, which compares current assets without
inventories to current liabilities. It does not include
inventories since they may take time to convert to cash and
Economic Guidance for Water Quality Standards
3-18
-------
may be valued on the discharger's books for more than
they could be sold.
The Current Ratio should be calculated for each of the
last three full fiscal years for which there are data.
Comparing ratios for three years will identify any trends
that are developing and will ensure that the most recent
year is not an unusual year that might distort the results of
the analysis.
The Current Ratio is calculated by dividing current
assets by current liabilities.
Current Ratio =
Current Assets
Current Liabilities
The Current Ratio can be calculated using Worksheet J.
The general rule is that if the Current Ratio is greater than
2, the entity should be able to cover its short-term
obligations. Frequently, lenders require this level of
liquidity as a prerequisite for lending. While a Current
Ratio of greater than 2 indicates that the entity can
probably cover its short-term obligations, the impact of a
major capital investment such as the pollution control
project must be judged in conjunction with the other three
financial tests described in this guidance.
In addition, this rule (Current Ratio > 2) may not be
appropriate for all types of private entities covered by
Water Quality Standards. The Current Ratio of the
discharger in question should be compared with ratios for
other dischargers in the same line of business. It may not
be possible, however, to compare the discharger's ratio
directly with other similar dischargers because this
information frequently is unavailable at the facility level or
is considered confidential. In cases where a direct
comparison cannot be made, the discharger's Current Ratio
should be compared with the ratio for firms that
concentrate in similar businesses. If the discharger's ratio
compares favorably with the median or upper quartile ratio
for similar businesses, it should be able to cover it's short
Economic Guidance for Water Quality Standards
3-19
-------
Worksheet J
Calculation of The Current Ratio
CR = CA -s- CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expenses, and accounts
receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes; and
the current portion of long-term debt)
Three Most Recently Completed Fiscal Years
19 19 19_
CA
CL
CR [Calculate: (l)/(2)]
$
$
$
$
$
$
(1)
(2)
II II 1 II l»
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
Is the Current Ratio (3) greater than 2.0? D Yes D No
How does the Current Ratio (3) compare with the Current Ratios for other firms in this line of business?
-------
term obligations. Among the sources that provide
comparison information are: Robert Morris Associates'
Annual Statement Studies, Moody's Industrial Manual, and
Dun and Bradstreet's Dun's Industry Norms. The Annual
Statement Studies and Dun's Industry Norms provide
composite statistics for firms grouped by different
manufacturing and service industries. The Moody's
Industrial Manual provides detailed financial information
on individual firms. Pages from both of these sources are
displayed in Exhibits 3-2 and 3-3, with the appropriate data
indicated.
Solvency
Solvency is a measure of an entity's ability to meet its
fixed and long-term obligations. These obligations are bills
and debts that are owed on a regular basis for periods
longer than one year. Solvency tests are commonly used
to predict financial problems that could lead to bankruptcy
within the next few years. Since any single year of data
can easily be distorted by unusually high or low net income
or by the timing of debt, solvency tests must be considered
over at least three years of data in order to reveal long-
term trends.
As with liquidity, there are several possible tests for
solvency. One commonly used solvency test (called Times
Interest Earned) compares income before interest and taxes
to interest expenses. Another solvency test, the Beaver's
Ratio, compares cash flow to total debt. This test has been
shown to be a good indicator of the likelihood of
bankruptcy.
Beaver /s Ratio =
Cash Flow
Total Debt
The Beaver's Ratio can be calculated using Worksheet
K. Cash Flow is a measure of the cash the entity has
available to it in a given year. Since depreciation is an
accounting cost - a cost that does not use any currently
Economic Guidance for Water Quality Standards
3-21
-------
Exhibit 3-2
MANUFACTURERS • GAMES, TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES. «ic t 3944
Comparative Hiatorioal Data
Currant Data Sorted by Sato.
i;
11
2
17
4/1/80-
3/31/81
ALL
47
%
7.1
27.0
31.6
2.1
68.1
18.2
4.2
8.6
1OO.O
16.4
3.4
11.7
.7
8 1
40.3
13.2
1.2
2.6
42.4
100 0
10O.O
36.6
28.E
6.8
3.3
3 7
' ?.*
Vt
: t£
1.4
.8
e
3A 10.6
66 6.6
8E 4.3
62 6.9
104 3.6
146 2 6
21 17.0
28 12.4
60 7.3
3.8
7.6
7.1
1441 2.4
1.O
8.9
(23) 2.8
.2
.6
.8
.8
2.0
3.0
34.8
I4EI 16.2
-1.1
11.7
e.E
20.1
8.8
6.E
2.1
1.6
1.1
(36} 2.1
2.8
1.8
(12) 4.3
1 63766 1M
18
21
7
1
20
4/1/81-
3/31(82
AU.
es
%
8.8
30.8
30.4
1.8
72,1
17.6
3.7
6.7
10O.O
12.6
2.3
13.1
.8
8.0
38.0
13.4
.E
B.3
42.8
10OO
1OO.O
37.2
28.3
7.8
1.8
6 1
. ' . ,..?**
• \ ""»»
'; 1,S
1.7
1.1
7
31 11.6
48 7.4
•B 4.3
66 6.6
86 4.3
162 24
21 17.7
27 13.3
47 7.8
3.4
6.2
10.8
10.1
(66) 3.4
1.6
134) 13.3
3.3
.2
.4
.8
.8
1.6
3.3
B2.8
(BE) 26.1
7.0
20.6
10.8
1.8
44.3
1B.6
7.3
2.6
2.O
1.6
.8
(611 1.7
3.3
2.4
(231 4.1
8.E
1883467M
1168O8BM
1
18
24
14
18
4/1/82-
3/31/83
ALL
76
%
7.2
31.8
3B.3
1.7
78.1
16.7
3.1
4.1
10O.O
14.0
3.0
14.6
.6
11.1
43.2
12.2
.4
3.E
40.6
1OO.O
10O.O
36.0
30.2
6.8
1.2
4 g
. .- '' ' '•'«*
. • •• :.. . : IJr
• '•• •••*,»
1.4
.8
e
34 10.8
66 6.E
•6 4.3
63 6.8
84 3.8
146 2 6
18 20.1
30 12.3
• 1 6.0
3.3
6.3
13.8
8.0
168) 3.6
1.6
(24) 13.1
2.8
1.2
.1
.6
1.0
1.0
1.8
3.3
38.8
(70) 22.8
4.6
17.0
7.6
1.6
3E.8
17.1
7.6
2.6
2.0
1.6
.7
161) 1.6
2.8
2.7
130) 4.6
7.8
1840680ft
11388B8M
* Poatratiramant Banafita
Typa of Statamant
Unqualified
Reviewed
Compiled
Tax Returns
Other
NUMBBt OF STATEMENTS
ASSETS
Caah & Equivalents
Trada Raceivablaa - (nat)
Inventory
All Other Currant
Total Currant
Fixed Aaaata (net)
Intangibles (nat)
All Other Non-Currant
Total
U ABILITIES
Notes Payable Short-Term
Cur. M.t.-UT/D
Trade Payable*
Income Taxes Payable
All Other Current
Total Currant
Long Term Debt
Deferred Taxes
All Other Non-Current
Net Worth
Total liabilities and Net Worth
INCOME DATA
Net Sale*
Groaa Profit
Operating Expenaes
Operating Profit
All Other Expenses (net)
Profit* Before Taxes
; •' -:-.. «wnoa
.' Y • . -Buna*
Quick
Salea Receivables
Coat of Salea/lnvantory
Cost of Sales/Payable*
Sales/Working Capital
EBrT/lnterest
Net Profit + Depr.. Dap..
Amort./Cur. Mat.UT/D
Fixed /Worth
Debt/Worth
% Profit Before Taxes/Tangible
Net Worth
K Profit Before Taxes/Total
Aasats
Sales/Net Faced Aeeacs
Salea/Total Aaaets
% Depr., Dap., Amort ./Sales
% Officers', Directors',
Owners' Comp/Selas
Net Sates l«)
Total Assets (t)
1 3
3 6
2 B
17(4/1/-»V30/92)
0-1MM 1-Smm
• 13
% %
7.4
24.6
47.4
.6
78.8
16.1
1.8
2.3
100.0
13.8
4.6
14.6
.6
6.6
38.8
1B.E
.1
2.2
43.4
100.0
100.0
36.6
28.8
B.7
1.1
4 6
' **
i.3
•.*,*'
1.7
.6
.E
14 2E.2
S7 10.0
78 4.7
78 4.6
12« 2.8
1*6 2.2
10 38.1
27 13.3
40 8.1
2.6
4.4
14.0
6.8
(121 1.8
.8
4
7 10
3
2
68 110/1/82-3/31/83)
3-6MM 6-10MM
• 17
% %
13.3
32.0
31.0
2.2
78.6
14.4
2.2
4.8
100.0
12.3
3.6
12.0
.6
10.8
38,2
8.4
.6
2.1
48.8
100.0
100.0
33.6
28.2
6.3
.4
4.8
*»
1,*
'"*£
2.0
.8
.6
31 1 1 .8
•6 6.6
•8 4.1
43 8.6
78 4.7
14O 2.6
12 30.2
22 16.4
33 11.0
3.0
6.6
11.6
8.2
114) 4.6
1.3
4
2
1
1
10-26MM
8
%
M
72
88
•8
•6
118
28
38
M
•
(21)
11
1
2
8
26MM * OVBt
22
%
6.8
36.0
28.3
2.7
72.7
17.2
6.4
4.7
100.0
11.8
.7
16.E
.7
11.8
41.7
11.8
.8
1.7
44.3
100.0
100.0
36.8
28.6
7.2
1.8
6.3
**
r x
M.
1.C
.7
6.6
6.1
3.7
6.4
4.3
3.1
12.6
8.4
6.E
3.3
6.1
, . J6.P-..
14.6
4.3
2.8
.1
.4
1.2
.7
1.6
3.0
61.2
8.2
-2.8
21.1
3.3
-.8
64.6
36.8
8.6
2.8
2.0
1.7
.4
(11) .8
2.6
.1
.3
.7
.6
1.1
6.6
42.8
(16) 27.4
3.2
18.6
0.6
1.6
42.7
16.1
7.3
2.6
1.8
1.6
.8
2.3
2.9
(211
.2
.6
1.0
.7
1.7
«••
37.8
27.8
17.2
14.2
8.2
3.8
21.4
11.2
7.2
2.1
1.8
1.4
1.4
2.e
3.2
3283M 27202M
1848M 13736M
38782M 116678M
20040M 727E7M
116773M
62873M
164O862M
B746S8M
• Robert Morns Associates 1893
M = (thousand MM - (million
See Pases 1 through IB for Explanation of Ratios and Data
-------
Exhibit 3-3
-XYZ, we.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
ASSETS Current Assets:
Cash and cash equivalents
Cash investments
Trade receivables - less allowance for doubtful
accounts: 1988, $85,352; 1987, $135,353
Inventories
prepaid expenses and other
Total current attete
Property, Plant and Equipment:
Land
Buildings and Improvements
Machinery and equipment
Transportation equipment
Office furniture and equipment
Total
Less accumulated depreciation
Property - net
Other Assets:
Intangible assets - less accumulated amortization:
1988, $197,437; 1987, $239,281
Insurance trust
Other
Total other assets
Total
LIABILITIES AND Current Liabilities:
SHAREHOLDERS' Current portion of long-term debt
EQUITY Accounts payable - trade
Accrued income taxes
Accrued payroll and employee benefits
Container deposits
Other accruals
Total eun*« liabilities
Long-term debt
Deferred income taxes
Shareholders' Equity:
Common stock - authorized 4,000,000 shares of $.05
par value, issued: 1988, 3,592,673; 1987,
3,268,337
Additional paid-in capital
Retained earnings (deficit)
Total shareholders' equity
Total
Sec accompanying Notes to Financial Statements
1988
$ 2,944,964
2,244,061
5,025,964
4,109,264
725.964
15,050,217
356,217
5,476,155
2,160,671
1,866,005
463.750
10,322,798
4.705580
5,617,218
226,728
1,122,796
89.287
1,438,811
$22.106.246
$ 17,902
5,049,234
681^69
' 1,054,373
198.477
7,001,355
53,706
249,900
179,634
14,671,885
(50.234)
14,801,285
$22.106.246
1987
$ 1,459,475
3,369,289
4,171,421
3,335,251
122.370
I£,45?,*06
296,217
4,837,392
1,546,476
1,705,107
483.769
8,868,961
4,207.598
4,661,363
252,884
1,066,964
77.778
1,397,626
$18.516.795
$ 32,405
2,686,669
21,400
678,752
1,199,263
178.736
xmjaa
71,608
242,200
163,417
12,084,817
1.157.528
13,405,762
$18.516.795
-------
available revenues - it is added back to reported net
income after taxes to get cash flow. Total debt is equal to
the current debt for the current year plus the long term
debt, since current debt includes that part of long-term debt
that is due in the current year.
If the Beaver's Ratio is greater than 0.20 the discharger
is considered to be solvent (i.e., can pay its long-term
debts). If the ratio is less than 0.15 the discharger may be
insolvent (i.e., go bankrupt). If the ratio is between 0.15
and 0.20, then future solvency is uncertain. The
discharger's Beaver's Ratio should be compared with the
ratios of similar dischargers. However, as with other
ratios, it may not be possible to compare the discharger's
ratio directly with other similar dischargers. In cases
where a direct comparison cannot be made, the
discharger's Beaver's Ratio should be compared with that
of firms that concentrate in similar businesses, using
information from income accounts and balance sheets in
Moody's Industrial Manual. If the discharger's ratio
compares favorably with similar businesses, it should be
able to meet its fixed and long term obligations. A typical
balance sheet and income statement have been included in
Exhibits 3-4 (for calculating total debt) and 3-5 (for
calculating cash flow). The appropriate data from them has
been underlined.
Leverage
Leverage tests measure the extent to which a firm
already has fixed financial obligations and thus indicate
how much more money a firm is capable of borrowing.
Firms that rely heavily on debt may find it difficult and
expensive to borrow additional funds. Most leverage tests
compare equity to some measure of debt or fixed assets.
The Debt to Equity Ratio is the most commonly used
method of measuring leverage. Unlike the ratios discussed
above, the debt to equity ratio cannot be easily calculated
for a single facility; it must be calculated for the firm,
since it is usually the firm, not the facility, that borrows
money. The ratio measures how much the firm has
borrowed (debt) relative to the amount of capital which is
Economic Guidance for Water Quality Standards
3-24
-------
Worksheet K
Calculation of Beaver's Ratio
BR = CF -5- TD
Where: BR = Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Three Most Recently Completed Fiscal Years
19 19 19
Cash Flow:
Net Income After Taxes $ $ _$ (1)
Depreciation $ . $ $ (2)
CF [Calculate: (1) + (2)] _$ _$ _$ (3)
Total Debt:
Current Debt $ $ $ (4)
Long-Term Debt $ $ $ (5)
Total Debt $ $ $ (6)
Beaver's Ratio:
BRK3)/(6>1 I I » a L_ I OT
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
Is the Beaver's Ratio for this discharger greater than 0.2? EH Yes D No
Is the Beaver's Ratio for this discharger less than 0.15? D Yes D No
Is the Beaver's Ratio for this discharger between 0.2 and 0.15? D Yes D No
How does this ratio compare with the Beaver's Ratio for other firms in the same business?
-------
Exhibit 3-4
XYZ, INC.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
ASSETS
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current Assets:
Cash and cash equivalents
Cash investments
Trade receivables - less allowance for doubtful
accounts: 1988, $85,352; 1987, $135,353
Inventories
prepaid expenses and other
Total current assets
Property, Plant and Equipment:
Land
Buildings and Improvements
Machinery and equipment
Transportation equipment
Office furniture and equipment
Total
Less accumulated depreciation
Property - net
Other Assets:
Intangible assets - less accumulated amortization:
1988, $197,437; 1987, $239,281
Insurance trust
Other
Total other assets
Total
Current Liabilities:
Current portion of long-term defer
Accounts payable - trade
Accrued income taxes
Accrued payroll and employee benefits
Container deposits
Other accruals
Total current liabilities
LoflfrtCT^t&fo
Deferred income taxes
Shareholders' Equity:
Common stock - authorized 4,000,000 shares of $.05
par value, issued: 1988, 3,592,673; 1987,
3,268,337
Additional paid-in capital
Retained earnings (deficit)
Total shareholders' equity
1988
$ 2,944,964
2,244,061
5,025,964
4,109^64
725.964
15,050,217
356,217
5,476,155
2,160,671
1,866,005
463.750
10,322,798
4.705.580
5,617,218
226,728
1,122,796
89087
1,438,811
$22.106.246
*•"-«£»
5,049,234
681369
1,054^73
198.477
7,001,355
1&JK6
249,900
179,634
14,671,885
(50.234)
14,801^85
1987
$ 1,459,475
3,369,289
4,171,421
3,335,251
122.370
12,457,806
296,217
4,837,392
1,546,476
1,705,107
483.769
8,868,961
4,207,598
4,661,363
252,884
1,066,964
1,397^626
$18.516.795
*;*»»*»
2,686,669
21,400
678,752
1,199,263
178.736
4,797,225
71,60?
242,200
163,417
12,084,817
1.157.528
13,405,762
Total
See accompanying Notes to Financial Statement!
$18.516.795
-------
Exhibit 3-5
XYZ, me.
CONSOLIDATED
STATEMENTS OF
INCOME AND
RETAINED EARNINGS
(DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988
1987
1986
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other income (deductions)
Interest income
Interest expense
Other investment income - net
Miscellaneous
Total otter income (deductions) - net
Income before income taxes
Provision for income taxes
KetiwxwrK!
Retained earnings, beginning of year
Stock dividend
Cash dividend ($.11 per share, 1988; $.08 per
share, 1987; $.06 per share, 1986)
Common stock acquired and retired
Retained earnings (deficit), end of year
Weighted average number of shares outstanding
Earnings per common share
$42,389,957
35.981363
6,408,594
3.957.771
2,450,823
441,891
(10,985)
55.066
485.972
2,936,795
1.139.118
!»TS>7,«77
1,157,528
(2,610,888)
(391,960)
(2591)
$ (50.234)
3,593,048
$.50
$33,294,962
26,405.930
6,889,032
3.876.206
3,012,826
347,613
(22,513)
48.660
373.760
3,386,586
1.620.012
j,7«^?4
1,726,292
(1,952,645)
(300,693)
f82.000)
$ 1.157.528
3,630,652
£.49
$30,730,768
24.972.185
5,758,583
3.824.226
1,934,357
362,295
(46,467)
134,690
93.654
544.172
2,478,529
1.150.949
M27.580
1,983,007
(1,365,590)
(218,705)
$ 1,726.292
3.637,798
$.36
See accompanying Notei to Financial Statements
INDEPENDENT
AUDITORS'
REPORT
To the Shareholder! of XYZ, Inc.:
We have audited the consolidated balance iheett of XYZ, Inc. at September 30,
1988 and 1987, and the related consolidated natemenu of income and retained
earnings (deficit), and cash flows for each of the three yean in die period ended
September 30, 1988. These financial statements are the responsibility of the
Company's management. Our responsibility it to express an opinion on these
financial statements baaed on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform me audit to obtain
reasonable assurance about whether the financial statements are free of material
miaftatemenL An audit includes examining, on a teat basis, evidence supporting
the amounts and disclosures in the financial statements. An audit alto includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe mat our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the companies at
September 30, 1988 and 1987, and the remits of their operations and their caab
flows for each of the three yean in the period ended September 30, 1988 in
conformity with generally accepted accounting principles.
DELOITTE HASIONS A SELLS
Minneapolis, Minnesota
December 5, 1988
-------
owned by its -stockholders (equity). Since values for the
Debt to Equity Ratio vary widely by the type of enterprise,
the ratio should be compared wittt the ratio for firms in
similar lines of business. The ratio also should be
calculated with at least three years of data.
The Debt to Equity Ratio is equal to Long-Tenn
Liabilities (long-term debt such as bonds, debentures, and
bank debt, and all other noncurrent liabilities like deferred
income taxes) divided by Owners' Equity. Owner's Equity
is the difference between total assets and total liabilities,
including contributed or paid in capital and retained
earnings. For publicly held firms, use Net Stockholders
Equity (which is the equivalent of Total Stockholder Equity
minus any Treasury Stock).
Debt/Equity Ratio =
-Term Liabilities
Owners / Equity
The Debt to Equity Ratio can be calculated using
Worksheet L. Since there are no generally accepted
Debt/Equity Ratio values that apply to all types of
economic activity, the ratio should be compared with the
ratio of firms in similar businesses. If the entity's ratio
compares favorably with the median or upper quartile ratio
for similar businesses, it should be able to borrow
additional funds. These ratios can be calculated using data
in Robert Morris Associates' Annual Statement Studies,
Moody 's Industrial Manual, and Dun & Bradstreet's Dun 's
Industry Norms. Pages from these sources have been
included in Exhibits 3-6 and 3-7, with the appropriate data
indicated.
For entities with special sources of funding, leverage is
not an appropriate measure of their ability to raise capital.
Examples are agriculture and affordable housing, where
special loan programs may be available. In these cases, an
analysis of the probability that the project would receive
this money is appropriate.
Economic Guidance for Water Quality Standards
3-28
-------
Worksheet L
Debt to Equity Ratio
DER = LTL + OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities (long-term debt such as bonds, debentures, and bank
debt, and all other noncurrent liabilities such as deferred income taxes)
OE = Owner Equity (the difference between total assets and total liabilities,
including contributed or paid in capital and retained earnings)
Three Most Recently Completed Fiscal Years
LTL
OE
19
19
19
0)
(2)
DER
(3)
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
How does the Debt to Equity Ratio compare with the ratio for firms in the same business?
-------
Exhibit 3-6
MANUFACTURERS • GAMES. TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES. «IC * 3944
Compar«tiva Historical Data
34
66
86
62
104
146
21
29
60
(44)
I23)
I46)
(36!
(12l
11
57
•4H/80
3/31/91
AU.
47
7.1
27.0
31.9
2.1
68.1
19.2
4.2
8.6
100.0
16.4
3.4
11.7
.7
8.1
40.3
2.B
42.4
100.0
36 .E
286
6.9
3.3
3.7
2.6
1.7
1.2
1.4
.8
- 6
10.6
6.6
4.3
6.9
3.6
2.6
17.0
12.4
7.3
3.9
7.6
17 6
7.1
2.4
1.0
8.9
2.8
.6
.2
.6
.8
.9
2.0
3.0
34.6
16.2
-1.1
11.7
6.6
-.4
20.1
a.e
6.6
2.1
1.6
1.3
1.1
2 1
2 8
1.8
4.3
6 7
1E37661M
1002333M
19
21
7
1
20
4/1/91-
3/31/92
ALL
68
8.8
30.9
30.4
1.9
72.1
17.6
3.7
6.7
100.0
12.6
2.3
13.1
.9
9.0
38.0
134
6.3
42.9
100.0
37.2
28.3
7.9
1.8
8.1
2.8
1.9
1.3
1.7
1.1
.7
31 11.6
49 7.4
86 4.3
66 6.6
86 4.3
162 2.4
21 17.7
27 13.3
47 7.8
3.4
6.2
10.8
10.1
168) 3.4
1.6
(34) 13.3
3.3
1.8
.2
.4
.8
.8
1.6
3.3
62.8
166) 26.1
7.0
20.E
10.8
1.9
44.3
16.8
7.3
2.6
2.0
1.6
.8
(91) 1.7
3.3
2.4
(23) 4.1
9.6
1883467M
11 6908 6M
1
19
24
14
18
4/1/92-
3/31/93
ALL
76
7.2
31.8
36.3
1.7
78.1
16.7
3.1
4.1
10O.O
14.0
3.0
14.6
.6
11.1
43.2
3.6
100.0
36.0
30.2
6.8
1.2
48
2.9
1.8
1.3
1.4
.8
•6
34 10.8
6* 6.6
86 4.3
63 6.8
94 3.9
146 2.6
18 20.1
30 12.3
61 6.0
3.3
8.3
13.8
9.0
169) 3.6
1.6
(24) 13 1
2.8
1.2
.1
.6
1.O
1.0
1.8
3.3
39.6
(70! 22.8
4.6
17.0
7.6
1.6
36.8
17.1
7.6
2.6
2.0
1.6
.7
(611 1.6
2.8
2.7
ISO) 4.6
78
1840680M
1136968M
f Poetretif ement Banefha
Type of Statement
Unqualified
Reviewed
Compiled
Tax Return.
Other
NUMBER OF STATEMENTS
ASSETS
Caah & Equivalent*
Trade Receivable. - (net)
Inventory
All Other Currant
Total Current
Fixed Aaeett (net)
Intangible* (net)
All Other Non-Current
Total
LIABILITIES
Note* Payable Short-Term
Cur. Mat.-L/T/D
Trade Payable*
Income T.axe* Payable
All Other Current
Total Current
Long Term Debt
All Other Non-Current
NetWorth
Total UabfflloJTncTlm Worth
INCOME DATA
Net Sale*
Gram Profit
Operating Expenea*
Operating Profit
All Other Expenaa* (net)
RATIOS
Currant
Quick
Sale* Receivable.
Coat of Salaa/lnventory
Coat of Salaa/Payable*
Salea/Working Capital
EBIT/lnteraat
Net Profit + Depr., Dap..
Amort./Cur. Mat.LT/D
Fixed/Worth
Debt/Worth
% Profit Before Taxea/Tanglble
NetWorth
% Profit Before Taxea/Total
Aaaeta
Salea/Net Rxed Aaaet*
Salea/Total Aaaet*
* Depr.. Dap., Amort./Sala.
% Officer.', Director.',
Owner*' Comp/Salea
Net Sale* I*)
Total Aaaata («)
1 3
3 6
2 6
1 7(4/1 /-9/30/92)
0-1MM 14mm
6 13
7.4
24.6
47.4
.6
79.8
16.1
1.8
2.3
10O.O
13.9
4.6
14.6
.6
6.6
38.8
2.2
43.4
10O.O
36.6
29.9
6.7
1.1
4.6
4.6
2.3
1.6
1.7
.6
.6
14 26.2
37 10.0
78 4.7
78 4.6
126 2.9
166 2.2
10 38.1
27 13.3
40 9.1
2.6
4.4
14.0
6.8
(12) 1.9
.8
7
2
3-4BMM
31
66
89
43
78
140
12
22
33
(14)
4 4
10 2
3 1
1
68(10/1/92-3/31/93)
6-10MM 10-26MM
17 8
13.3
32.0
31.0
2.2
78.6
14.4
2.2
4.9
12.3
3.6
12.0
.6
10.8
39.2
2.1
48.8
100.0
33.6
26.2
6.3
.4
4.9
2.8
1.9
2.0
.8
.6
11.9 66
6.6 72
4.1 99
8.6 68
4.7 86
2.6 118
30.2 2»
16.4 39
11.0 «6
3.0
6.6
11.6
9.2
4.6 (21)
1.3
11
1
2
8
26MM*iOVER
22
6.8
36.0
28.3
2.7
72.7
17.2
6.4
4.7
11.8
.7
16.6
.7
11.8
41.7
V7
100.0
36.8
28.6
7.2
1.8
2.8
1 -
1.,
1.0
6.6
6.1
3.7
6.4
4.3
3.1
12.6
9.4
6.6
3.3
6.1
16.0
14.6
4.3
2.9
.1
.4
1.2
.7
1.6
3.0
61.2
9.2
-2.8
21.1
3.3
-.8
64.6
36.8
9.6
2.9
2.0
1.7
.4
(111 .8
2.6
116)
.1
.3
.7
.6
1.1
6.6
42.8
27.4 (21)
3.2
18.6
9.6
1.6
42.7
16.1
7.3
2.6
1.8
1.6
.8
2.3
2.9
.2
.6
1.O
.7
1.7
2.6
37.9
27.8
17.2
14.2
8.2
3.9
21.4
11.2
7.2
2.1
1.9
1.4
1.4
2.6
3.2
3293M 27202M
1948M 13736M
M782M
2W46M
116678M 116773M
727E7M 62973M
164O962M
•74688M
• Boben Morni Araociatei 1993
M > tthoueand MM - (million
See Pagea 1 through 16 for Explanation of Ratioa and Data
-------
Exhibit 3-7
XYZ, inc.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
ASSETS
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current Assets:
Cash and cash equivalents
Cash investments
Trade receivables - less allowance for doubtful
accounts: 1988, $85.352: 1987. $135,353
Inventories
prepaid expenses and other
Total current assets
Property, Plant and Equipment:
Land
Buildings and Improvements
Machinery and equipment
Transportation equipment
Office furniture and equipment
Total
Less accumulated depreciation
Property - net
Other Assets:
Intangible assets - less accumulated amortization:
1988, $197,437; 1987, $239,281
Insurance trust
Other
Total other assets
Total
Current Liabilities:
Current portion of long-term debt
Accounts payable - trade
Accrued income taxes
Accrued payroll and employee benefits
Container deposits
Other accruals
Total current liabilities
Long 'tetjn debt
Deferred income taxes
Shareholders' Equity:
Common stock - authorized 4,000.000 shares of $.05
par value, issued: 1988, 3,592,673; 1987,
3,268,337
Additional paid-in capital
Retained earnings (deficit)
Total shareholder!;1 equity
Total
S« accompanying Notei to Financial Statements
1988
$ 2.944,964
2.244,061
5,025,964
4,109,264
725.964
15,050,217
356,217
5,476,155
2,160,671
1,866,005
463.750
10422,798
4.705580
5,617^18
226,728
1,122,796
89487
1,438,811
$22.106.246
$ 17,902
5,049434
681369
1,054373
198.477
7,001355
53,706
249,900
179,634
14,671,885
(50434)
14^01485
$22.106.246
1987
$ 1,459,475
3,369.289
4,171,421
3,335,251
122.370
12,457,806
296,217
4,837,392
1,546,476
1,705,107
483.769
8,868,961
4.207,598
4,661,363
252,884
1,066.964
_ ^77478
1,397,626
$18,516,795
$ 32,405
2,686,669
21,400
678,752
1,199,263
178.736
4,797.225
71,608
242,200
163,417
12,084,817
1.157.528
£MO$,?«2
$18.516.795
-------
3.3 Interpreting the Results
The financial analysis should be used to determine if
there will be a substantial adverse impact on the applicant.
As indicated above, the Profit Test should be considered
first. The Profit Test measures what will happen to the
discharger's earnings if additional pollution control is
required. If the discharger is making a profit now but
would lose money with the pollution control, then the
possibility of a total shutdown or the closing of a
production line must be considered. Likewise in the case
of a proposed facility; if it would make money without the
pollution control but would make much less or even lose
money with it, then the development might not take place.
In either case, there is the chance that employment will be
lost and local purchases by the discharger reduced.
Whether or not these impacts will be considered
widespread is addressed in Chapter 4.
There are several more complicated scenarios that all
involve making a judgement as to the likely impacts on the
discharger, including questions of the timing of
compliance. For example, the Profit Test may indicate that
the applicant will continue to maintain profit levels typical
for its industry after compliance, but the Debt/Equity Ratio
may indicate that they will have trouble raising the required
capital through debt. This problem may be solved by
giving them more time to meet the regulations (a variance),
so that they can restructure their debt and/or find
alternative sources of funds. In another case, the applicant
might argue that while they will still make money and be
able to raise the needed capital, they would alternatively
spend those funds on an expansion which would have
resulted in increased employment and income for the
community. This is a more difficult situation to analyze,
and will depend on judgments about the relative importance
of water pollution control versus economic growth. These
issues are discussed in more detail in Chapter 4.
Another possible scenario is that the discharger may
shift to an alternative economic activity (e.g., manufacture
another product or produce a different crop). While the
Economic Guidance for Water Quality Standards
3-32
-------
applicant will not have gone out of business, this shift may
result in reduced profits, employment, and purchases in the
local community that must be considered. In each case, it
is important to take the entire picture presented by the four
ratios into account in judging whether or not the discharger
will incur substantial impacts due to the cost of the
necessary pollution reductions.
Using the guidance presented in this chapter, applicants
that feel they have demonstrated substantial impacts should
proceed to Chapter 4: Determination of Widespread
Impacts. If dischargers are not able to demonstrate
substantial impacts, the entity must will not be able to
justify water quality standards providing for less protection
than the fishable/swimmable goals of the Act, and will not
be able to justify degradation of high quality waters. If a
group of dischargers within the community will experience
the substantial impacts resulting from meeting the
fishable/swimmable goals of the Act and avoiding
degradation of high quality waters, these impacts should be
considered jointly when assessing whether or not the
impacts will be widespread.
Economic Guidance for Water Quality Standards
3-33
-------
4. DETERMINATION OF WIDESPREAD IMPACTS
The financial impacts of undertaking pollution controls
could potentially cause far-reaching and serious
socioeconomic impacts. If the financial tests outlined in
Chapter 2 and 3 suggest that a discharger (public or
private) or group of dischargers will have difficulty paying
for pollution controls, then an additional analysis must be
performed to demonstrate that there will be widespread
adverse impacts on the community or surrounding area.
There are no economic ratios per se that evaluate
socioeconomic impacts. Instead, the relative magnitudes of
indicators such as increases in unemployment, losses to the
local economy, changes in household income, decreases in
tax revenues, indirect effects on other businesses, and
increases in sewer fees for remaining private entities should
be taken into account when deciding whether impacts could
be considered widespread. Since EPA does not have
standardized tests and benchmarks with which to measure
these impacts, the following guidance is provided as an
example of the types of information that should be
considered when reviewing impacts on the surrounding
community.
In certain circumstances, the information presented here
may not adequately address all potential impacts. At a
minimum, however, the analysis must define the affected
community (the geographic area where project costs pass
through to the local economy), consider the baseline
economic health of the community, and finally evaluate
how the proposed project will affect the socioeconomic
well-being of the community. Applicants should feel free
to consider additional measures not mentioned here if they
judge them to be relevant. Likewise, applicants should not
view this guidance as a check list. In all cases,
socioeconomic impacts should not be evaluated
incrementally, rather, their cumulative effect on the
community should be assessed. More detailed guidance on
the factors that should be considered when evaluating the
socioeconomic impacts to communities of meeting water
quality standards is given below.
Economic Guidance for Water Quality Standards
-------
4.1 Define Helevant Geographical Area
One important factor in determining the magnitude of
these impacts is defining the geographical area in which
they occur. In some cases, one community's loss may be
another community's gain, as in the case of a plant moving
to another community. In the case of municipal pollution
control projects, the affected community is most often the
immediate municipality. There are, however, exceptions
where the affected community includes individuals and
areas outside the immediate community. For example, if
business activity in the region is concentrated in a nearby
community and not in the immediate community, then the
nearby community may also be affected by loss of income
in the immediate community and should be included in the
analysis. If business activity of the region is concentrated
in the immediate community, then outlying communities
dependent upon the immediate municipality for
employment, goods, and services should also be included
in the analysis. Similarly, if a large number of workers
commute to an industrial facility that is significantly
affected by the costs, then the affected community should
include the home communities of commuters as well as the
immediate community.
The relevant geographic area for evaluating the
socioeconomic effects of compliance by private entities
varies with each situation. For impacts from actions by a
private entity, the area will typically be determined by the
area in which the majority of its workers live and where
most of the businesses that depend on it are located. There
are no simple rules for defining the relevant area or
community; the decision is based on the judgement of the
discharger and state, subject to EPA review.
4.2 Determine Whether Impacts are Widespread:
Public-Sector Entities
In demonstrating that impacts will be substantial, the
applicant will have shown mat compliance with water
quality standards would be burdensome to the community.
To demonstrate that impacts will also be widespread, the
Economic Guidance for Water Quality Standards
4-2
-------
applicant must examine the estimated change in
socioeconomic conditions that occur as a result of
compliance.
There are no explicit criteria by which to evaluate
widespread impacts. It is recommended, however, that
changes in the socioeconomic indicators listed below be
considered. For each indicator listed, the applicant should
estimate the potential change from precompliance
conditions if the community were to adopt pollution
controls.
• Median Household Income;
• Community Unemployment Rate;
• Overall Net Debt as a Percent of Full Market Value
of Taxable Property;
• Percent of Households Below Poverty Line;
• Impact on Community Development Potential; and
• Impact on Property Values.
Precompliance estimates of the first three indicators were
considered in Chapter 2 in the Secondary Test. Estimated
changes should be described qualitatively in Worksheet M.
Depending on the size and type of impacts on industrial
and commercial discharges, these estimated changes may
be relatively large or small. In addition to changes in
income, unemployment, and debt, affected communities
may be faced with impaired development opportunities if
pretreatment requirements or significantly higher user fees
are imposed by the POTW. The municipality should
therefore assess the potential for the loss of future jobs and
personal income to the community if businesses would
chose not to locate in the affected community. The
potential for impaired development opportunities can be
judged, in part, by comparing post-compliance costs to
costs in neighboring communities. The cost of pollution
control may also have an adverse effect on property values.
Where property taxes are used to finance the project,
property values may fall in response to higher taxes.
Similarly, if the project will be financed through user fees,
demand for property in the community may fall, thus
decreasing the value of property in the community.
Economic Guidance for Water Quality Standards
4-3
-------
Worksheet M
Qualitative Description of Estimated change
in Socioeconomic Indicators
due to Pollution Control Costs
Estimated change
in Median
Household
Income (MHI)
Estimated change
in the
unemployment
rate
Estimated change
in overall net debt
as a percent of
full market value
of taxable
property
Estimated change
in % of
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
-------
The extent to which estimated changes can be
interpreted as significant, however, will depend on the
health of the community before compliance. It is therefore
not possible to identify acceptable or unacceptable
estimated changes for each indicator. For example, if
Community XYZ were determined to be in a weak
condition before compliance. As defined in Chapter 2, but
the evaluation of widespread impacts suggests that all of the
indicators listed above will remain virtually unchanged,
then widespread impacts have not been demonstrated.
Alternatively, if Community XYZ were very healthy, the
estimated change in the indicators listed above would have
to be very large in order for widespread impacts to occur.
In addition, there may be secondary impacts (not
captured by the primary and secondary tests) to the
community. Secondary impacts might include depressed
economic activity in a community resulting from loss of
purchasing power by persons losing their jobs due to
increased user fees. The next section describes secondary
impacts in greater detail.
4.3 Determine Whether Impacts are Widespread:
Private-Sector Entities
If the financial tests suggest that a private entity or
group of entities will have difficulty paying for pollution
controls, then an additional analysis must be performed to
demonstrate that there will be widespread adverse impacts
on the community or surrounding area. The current
economic condition of the affected community and the role
of the affected entities within the community should first be
considered when determining whether the affected
community will be able to absorb the impacts of reduced
business activity or closures. Through property taxes and
employment, the entity(ies) may be a key contributor to the
economic base of the affected community. In this
situation, reductions in employment caused by compliance
with the water quality standards could be widespread if
workers have no other employment opportunities nearby.
Impacts may also be significant where the entity(ies) is a
Economic Guidance for Water Quality Standards
4-5
-------
primary producer of a particular product or service upon
which other nearby businesses or the affected community
depend. The impacts of reduced business activities or
closure will be far greater in this case than if the products
are sold elsewhere. These two examples illustrate how the
interdependence between the affected entity(ies) and the
affected community is a major factor in demonstrating that
the impacts are not only substantial, but also widespread.
As important as the extent of socioeconomic impacts is
the type of impacts that might occur. A worksheet has
been provided to assist applicants in their evaluation of
socioeconomic impacts. Worksheet N is designed as a list
of the factors applicants should consider in determining
whether impacts are not only substantial but also
widespread. The worksheet is organized to follow the text
below. To make the most efficient use of this worksheet,
applicants should read the remainder of Section 4.3 and
then collect the data suggested in the worksheet.
Applicants should feel free, however, to use anecdotal
information to describe any current community
characteristics or anticipated impacts that are not listed in
the worksheet.
Potentially, one of the most serious impacts on the
affected community's economy is the loss of employment
caused by a reduction in business activity or closure. The
size of this impact is dependent on the number of jobs lost
relative to the total number of jobs in the community, and
to the job opportunities available in the community.
Typically, a decline in employment leads to a decline in
personal income in the affected community. The total
amount of income lost by the affected community will
depend, in part, on the future job prospects of those losing
their jobs. If employees leave the area in search of
opportunities, all of their income will be lost to the affected
community. Workers who are unable to market the full
range of their skills to a new employer will receive lower
wages in subsequent jobs. If employees stay in the area
and find lower paying jobs or receive unemployment
benefits, the loss of income to the affected community
would be equal to the difference between existing and
Economic Guidance for Water Quality Standards
4-6
-------
Worksheet N
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included. (1)
Current unemployment rate in affected community (if available). (2)
Current national unemployment rate. (3)
Additional number of persons expected to collect unemployment in affected (4)
community due to compliance with water quality standards.
Expected unemployment rate in the affected community after compliance with (5)
water quality standards (Current # of persons collecting unemployment
in affected community 4- (4)/labor force in affected community.
Median household income in affected community. (6)
Total number of households in affected community. (7)
Percent of population below the poverty line in affected community. (8)
Current expenditures on social services in affected community. , (9)
Expected expenditures on social services due to job losses in the affected (10)
community.
Current total tax revenues in the affected community. (11)
Tax revenues paid by the private entity to the affected community. • (12)
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Worksheet N, continued
Tax revenues paid by the private entity as a percentage of the affected (13)
community's total tax revenues.*
Current statewide unemployment rates. (14)
Additional number of persons expected to collect unemployment in the State (15)
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality (16)
standards (Current # of persons collecting unemployment in State +
(15)/labor force in State.
Current expenditures on social services in State. (17)
Expected statewide expenditures on social services due to job losses. • (18)
* In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis
should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.
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future income; the cost of unemployment benefits is
calculated as a government expense or an expense borne
someplace else, whichever is appropriate to the situation.
To assess the net impact on employment in the affected
community, the existing rate of unemployment should be
considered as an indicator of worker mobility between jobs.
When the unemployment rate is very high in an affected
community, workers will have a difficult time finding other
jobs in that community. Where possible, comparisons
should be made between industry employment levels in the
community and the nation.as a whole. If employment
levels in the industry as a whole are falling, the industry
may be in decline regardless of the burden placed on them
by water quality standards regulations. If it is clear that a
private-sector entity will go out of business regardless of
water quality standards, the impact of the pollution controls
should not be viewed as substantial. If the entity is in a
marginal position, however, the effect that meeting water
quality standards will have on the entity and the community
should be considered. Applicants should also consider
whether the lack of alternative employment opportunities
may lead to an increased need for social services in the
affected community. If the costs of increased social
services will be borne by the affected community, they
should be included in the assessment of widespread and
substantial impacts.
Socioeconomic impacts may also include effects on the
local government(s) such as loss of property tax revenues.
If the financial tests in Chapter 3 suggest that an entity or
group of entities will close, then the assessed value of
property and tax revenues will fall. If the entities are a
major source of revenue for the affected community, this
loss in tax revenue may be significant. One example might
be water quality standards that affect farming practices in
an agricultural region. Compliance with these standards
might lower the profitability of many farms, even to the
point of forcing them to cease operations. To assess the
impact, the loss in property tax revenues should be
compared to total property tax revenues in the affected
community to determine the relative size of the loss. In
Economic Guidance for Water Quality Standards
4-9
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general, a drop of 1 percent in property tax revenues would
be considered significant.
If compliance is evaluated in the context of a public
investment for which the private entity is paying a share
(e.g., a factory's share of the cost to upgrade a municipal
treatment plant), then the analysis of widespread impacts is
more complicated. If the financial analysis shows that the
entity or group of entities cannot pay their share of the
cost, then the socioeconomic and public entity analysis
should include this additional burden on other users.
Likewise, if the entity or group of entities are significant
users of the local utilities, then a reduction in business
activity or closure may lead to a lowered demand and
possible decreased efficiency for local utilities. For
example, a water supply system may be designed with a
large industrial user in mind. If much of the demand is
eliminated, the system may become excessively expensive
for the remaining users.
Affected communities may also be faced with impaired
development opportunities if the need to comply with water
quality standards discourages other businesses from locating
in the area. In situations where the affected facility has not
been built, additional expenditures on water pollution
controls may delay or cancel the construction. The
applicant should, therefore, consider not only the loss of
potential jobs and personal income to the community if the
entity is not built, but the future losses in jobs, personal
income and tax revenues from other businesses that would
choose not to locate in the affected community.
There may be some cases in which the socioeconomic
impacts of implementing pollution controls are large
enough that they are felt at the state level. For example,
the State may lose tax revenues from lost production and
lost income if a business closes. This will be of particular
importance if the business is a major employer in the State
and/or the State is experiencing a period of high
unemployment and fiscal distress. At the same time, the
State may encounter increased expenditures for
unemployment compensation and social services. In
Economic Guidance for Water Quality Standards
4-10
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reviewing state level impacts, the applicant should consider
the degree to which decreases in employment and personal
income in one area of the State are offset by increases in
employment and personal income in other parts of the
State. In most cases, impacts at the state level will be
relatively minor. If not, then impacts are widespread.
4.4 Estimate Multiplier Effect
The effects of increased unemployment, decreased
personal income, and reductions in local expenditures by
the entity or group of entities (public and private) will be
compounded as money moves through the local economy.
Some portion of the lost income would have been spent in
the local economy for the purchase of other goods and
services and thus for the salaries of other local employees.
These local employees, in turn, would have spent some
portion of their income in the local economy. This
multiplier effect means that each dollar lost to an employee
results in the loss of more than one dollar to the local
economy.
The U.S. Department of Commerce, Bureau of
Economic Analysis (BEA) has developed several
multipliers to estimate the effect of reduced economic
activity on output (sales), earnings, and employment.
These multipliers are available by industry sector for 39 or
531 different industry classifications, depending on the
level of detail required. Applicants that are interested in
using these multipliers are advised to consult a copy of
RIMS II Regional Multipliers: A User Handbook of the
Regional Input-Output Modeling System, available from the
National Technical Information Service (NTIS). The NTIS
document number is #PB-86-230-216 and orders can be
placed by calling NTIS at (703) 487-4650. Additional
information on using multipliers is available from the BEA
at (202) 606-5343.
Economic Guidance for Water Quality Standards
4-11
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4.5 Economic Benefits of Clean Water
Benefit-cost analysis is not required to demonstrate
substantial and widespread effects under the Federal
Water Quality Standards regulation.
In many cases, there may be economic benefits that
accrue to the affected community from cleaner water. For
example, in a rural community where the primary source
of employment is agriculture, the reduction of fertilizer and
pesticide runoff from farms would reduce the cost of
treating irrigation water to downstream users. Another
example might be an industrial facility discharging its
wastewater into a stream that otherwise could be used for
recreational cold-water fishing. Treatment or elimination
of the industrial wastewater would provide a benefit to
recreational fishermen by increasing the variety of fish in
the stream. In both cases, the economic benefit is the
dollar value associated with the increase in beneficial use
or potential use of the waterbody. The types of economic
benefits that might be realized will depend on both the
characteristics of the polluting entity and characteristics of
the affected community, and should be considered on a
case by case basis.
Since the assessment of benefits requires site-specific
information, it will be up to States to determine the extent
to which benefits can be considered in the economic impact
analysis. This determination should be coordinated with
the EPA Regional Office. A more detailed description of
the types of benefits that might be considered is given in
Appendix C. This appendix is not intended to provide in-
depth guidance on how to estimate economic benefits;
rather, it is intended to give States an idea of the types of
benefits that might be relevant in a given situation.
Economic Guidance for Water Quality Standards
4-12
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4.6 Summary of Financial Capability and
Determination of Whether Impacts are
Substantial and Widespread
Using the guidance described in this document, the
applicant must demonstrate that the pollution control
measures needed to meet the fishable/swimmable goals of
the Act are not affordable. In addition, the applicant will
have to show that there will be widespread adverse impacts
to the community if it is required to meet standards. A
summary checklist of the steps required in this process is
presented in Table 4-1. This checklist also presents the
type of data the applicant will need to collect.to support
e,ach step. Whether or not the applicant has successfully
demonstrated that substantial and widespread economic and
social impacts would occur, however, will depend upon the
EPA Regional Administrator's review of the application.
If the EPA Regional Administrator determines that
substantial and widespread economic and social impacts
have not been demonstrated, then the discharger must meet
the fishable/swimmable goals of the Act. Alternatively, if
substantial and widespread economic and social impacts
have been demonstrated, then the discharger will not have
to meet the water quality standards. The discharger will,
however, be expected to undertake some additional
pollution control. The criteria outlined in Chapters 2 and
3 should be used to determine the most protective pollution
control technique that would not impose a substantial
impact on the entity. In addition, the discharger should
check with EPA and the State regularly to determine what
else will be required of them. It is then up to the State to
revise the standards hi the water body to reflect the uses
that would be achieved if the discharger adopts the next
most protective pollution control technique. The State will
also have to revise its water quality criteria to protect the
newly attainable uses. The discharger's NPDES permit
will then be revised to reflect the new limits associated
with revised criteria. Finally, federal regulations require
that water quality standards be reviewed every three years
to determine if there is any new information or technology
Economic Guidance for Water Quality Standards
4-13
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that allows attainment of the goal uses of the Act without
causing substantial and widespread social and economic
impacts.
Economic Guidance for Water Quality Standards
4-14
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Tabk
Demonstration of Substantial and Widespread
Economic and Social Impacts of Attainment of Designated Uses
CHECKLIST
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
1. Demonstrate that designated use is a potential use and not an existing Data from State Water Quality Assessment Documents and water quality
use. standards regulations.
2. Demonstrate that entity will incur substantial economic impacts.
a. Identify all reasonable pollution reduction options,
Information on end-of-pipe treatment, possible treatment upgrades,
additions to existing treatment, and pollution prevention activities
-including the following:
• change in raw materials,
• substitution of process chemicals,
• change in process,
• water recycling, reuse and efficiency,
• pretreatment requirements, and
• public education.
b. Evaluate costs of all reasonable pollution reduction options, Assumptions about water demand, treatment capacity, expansion plans,
population growth, and effectiveness of control in reducing pollution for
each option. Estimate of project costs from design engineers, costs of
comparable projects in the State, or judgement of experienced water
pollution control engineers.
c. Identify lowest cost pollution reduction option that allows entity Information on treatment efficiencies for alternative pollution reduction
to meet water quality standards. techniques. Cost estimates for all alternatives.
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Table 4-1 CHECKLIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
3. Evaluate entity's financial health (Public Entities Only):
a. determine method of financing,
b. annualize pollution reduction project costs,
Information on user fee financing mechanisms such as Revenue Bonds.
Information on tax based financing mechanisms such as General
Obligation Bonds.
Information on appropriate interest rates and period of financing.
c. allocate project costs,
d. apply Municipal Preliminary Screener test,
Information on user groups, wastewater flow by user group, and
surcharges on industrial users.
Information on average total annual pollution control cost per household
and median household income.
e. Depending on the results of the Municipal Preliminary Screener Information on results of Municipal Preliminary Screener test, overall
test, apply Secondary Test. net debt as a percent of full market value of taxable property, median
household income, bond rating, community unemployment rate, property
tax collection rate, and property tax revenues as a percent of full market
value of taxable property.
4. Evaluate entity's financial health (Private Entities Only):
a. annualize pollution reduction project costs,
b. Primary Measure:
profitability,
Information on appropriate interest rates and period of financing.
Information that will allow evaluation of whether an entity will remain
profitable after incurring the cost of pollution reduction including:
• revenues,
• cost of goods sold,
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Table 4-1 CHEl 1ST (Cont'd.)
•
STEPS INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
• portion of coiporate overhead assigned to the entity, and
c. Secondary measures: • total annualized pollution reduction project costs.
solvency, Information that will allow evaluation of the entity's ability to meet its
fixed and long-term obligations including:
• long-term debt,
• current debt,
• net income after taxes, and
• depreciation.
liquidity, and Information that will allow evaluation of how easily an entity can pay its
short-term bills such as:
• current assets,
• current liabilities, and
• total annualized pollution reduction project costs.
leverage. Information that will allow evaluation of the extent to which a firm
already has fixed financial obligations and therefore how much money
it will be able to borrow including, long-term liabilities and owner
equity.
5. Determine whether impacts are widespread (Public Entities Only):
a. Evaluate change in socioeconomic conditions that occur as a Information on changes in median household income, community
result of compliance. unemployment rate, overall net debt as a percent of full market value of
taxable property, percent of households below the poverty line, impact
on community development potential, and impact on community property
values resulting from compliance.
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Table 4-1 CHECKLIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
6. Determine whether impacts are widespread (Private Entities Only):
a. Define community,
Information on the geographical boundary of the area in which the
majority of the entity's workers live and where most of businesses that
depend on the entity are located.
b. Evaluate effect on employment,
c. Evaluate effect on tax revenues,
Current unemployment, change in unemployment due to investment in
pollution reduction.
Information on the likely effect on assessed value of property tax
revenues if the entity must adopt pollution reductions.
d. Assess impairment of development opportunities,
Information on the likelihood that the need to adopt pollution reductions
in the affected community would discourage other businesses from
locating in the area in the future.
e. Collect any relevant additional information that demonstrates Any additional information that suggests that there are unique conditions
widespread socioeconomic impacts. in the affected community that should also be considered.
7. Evaluate economic benefits of cleaner water.
8. Public comment and debate period.
Information on potential benefits of cleaner water including enhanced
recreational opportunities, reduced treatment costs for downstream users
and increased property values.
Be prepared to supply backup information on the application to modify
or change a designated use to the public.
-------
Table 4-1 CHE LIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
9. If substantial and widespread economic and social impacts are Information on the cost and efficiency of affordable pollution reduction
demonstrated, determine which pollution reduction option should be alternatives.
implemented.
10. Redesignate uses.
Uses will be determined by the level of "affordable" pollution reduction.
11. Standards will be adopted to protect new uses.
12. Effluent limits and permits will be modified.
13. Re-evaluate water quality standards in three years.
Once uses are established, standards should be revised to protect those
uses.
Limits will be modified to reflect effluent concentrations associated with
the "affordable" pollution reduction technique.
Per federal regulations, water quality standards must be revised every
three years to determine if there is any new information or technology
that allows attainment of the full designated uses without causing a
substantial and widespread economic and social impact.
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5. ANTIDEGRADATION: ROLE OF ECONOMIC
ANALYSIS
Under the Water Quality Standards program, each State
must develop, adopt and retain a statewide antidegradation
policy and establish procedures for its implementation.
The antidegradation policy is intended to maintain existing
uses and the level of water quality necessary to protect
those uses. In only limited cases, economic grounds can be
used to allow for a lowering of water quality. In
particular, if the quality of the water exceeds levels
necessary to support the propagation of fish, shellfish, and
wildlife and recreation hi and on the water (i.e. "high-
quality water"), then economic considerations can be taken
into account (unless the water has been designated an
ONRW.). Before any lowering of water quality hi high-
quality waters, however, an antidegradation review must
determine that the lowering is necessary in order to
accommodate important economic or social development in
the area in which the waters are located.
Antidegradation is not a "no growth" rule and was
never designed nor intended to be one. It is a policy that
allows the public to make decisions about important
environmental actions. Where the State intends to provide
for development, it may decide that some lowering of
water quality hi "high-quality waters" is necessary to
accommodate important economic or social development.
Any such reduction in water quality, however, must protect
existing uses fully and must satisfy the requirements for
intergovernmental coordination and public participation.
While the terminology is different, the tests to
determine substantial and widespread economic impacts
(used when removing a use or granting a variance) are
basically the same as those used to determine if there might
be interference with an important social and economic
development (antidegradation). As such, antidegradation
analysis is the mirror image of the analyses described hi
Chapters 2, 3 and 4. Variances and downgrades refer to
situations where additional treatment needed to meet
standards may result hi worsening economic conditions;
Economic Guidance for Water Quality Standards
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while antidegradation refers to situations where lowering
water quality may result in improved social and economic
conditions.
When performing an antidegradation review, the first
question is whether the pollution controls needed to
maintain the high-quality water will interfere with the
proposed development. If not, then the lowering of water
quality is not warranted. If, on the other hand, the
pollution controls will interfere with development, then the
review must show that the development would be an
important economic and social one. These two steps rely
on the same tests as the determination of substantial and
widespread impacts. It should be stressed at the outset that
substantial economic impacts does not mean driving profits
to zero, nor precluding all other municipal expenditures.
The following sections describe the steps involved in
performing an economic impact analysis as part of an
antidegradation review. These steps are outlined hi Figure
5-1. The analytic approach presented here can be used for
a variety of public-sector and private-sector entities,
including POTWs, commercial, industrial, residential and
recreational land uses, and for point and nonpoint sources
of pollution. The guidance provided in this chapter,
however, is not meant to be exhaustive. The State and/or
EPA may require additional information or tests. In
addition, the applicant should feel free to include any
additional information they feel is relevant. The steps
described hi further detail in the rest of the chapter are:
• Verify Project Costs and Calculate the Annual
Cost of the Pollution Control Project - This
section describes the factors considered when
verifying that the proposed pollution control project
is the most appropriate solution and the type of
information that should be provided about the
proposed project. It discusses how to annualize
capital costs of the project and calculate total annual
costs of the pollution control project.
Economic Guidance for Water Quality Standards
5-2
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Figure 5-1:
Antidedgradation Review
Capital Cost, Annual
O&M Costs, Interest Rates
I
Annual Cost, Median
Household Income,
Financial Data
Yes
I
Socio-economic
characteristics of community
Yes
Quality of water may be
reduced as long as existing
and designated uses fully
protected
No
No Degradation
Allowed
No
No Degradation
Allowed
Economic Guidance for Water Quality Standards
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• Determine if Requirements would Interfere with
Development (i.e., lower water quality is
"necessary") - This section describes the types of
financial tests that should be used to determine if
maintaining the high-quality water would interfere
with the development.
• Determine if Economic and Social Development
would be Important - This section presents factors
to be considered in determining whether the
development would be important from an economic
and social point of view.
These steps closely parallel the analytic techniques
presented in Chapters 2, 3, and 4. These chapters should
be read for more detail.
Economic Guidance for Water Quality Standards
5-4
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5.1 Verify Project Costs and Calculate The Annual
Cost of the Pollution Control Project.
Before the impact analysis can be performed, the
project costs should be verified and the annual costs
calculated. Both private-sector and public-sector entities
should consider a broad range of discharge management
options including pollution prevention, end-of-pipe
treatment, and upgrades or additions to existing treatment.
Whatever approach, the discharger must demonstrate
that the proposed project is the most appropriate means of
meeting water quality standards and must document project
cost estimates. If there is at least one of the treatment
alternatives that allows the applicant to maintain high-
quality water without incurring substantial impacts, then
they have failed to show that the requirements would
interfere with the development. Cost information, and the
assumptions underlying the cost estimates, should be
supplied on Worksheet O.
The following two sections (5.1.a and S.l.b) discuss
analyzing public-sector projects. Section S.l.c discusses
private sector projects.
S.l.a Public-Sector Developments: Calculate the
Annual Costs of the Pollution Control Project
Since capital costs typically will be paid over several
years, annualized costs are used in die evaluation of
economic burden to the community. The capital portion of
public-sector project costs is typically financed over
approximately 20 years, by issuing a municipal debt
instrument such as a general obligation bond or a revenue
bond.
The calculation of total annualized cost of the project is
presented in Worksheet P. First, capital costs are summed
and the portion of costs to be paid for with grant monies
are deducted, as these costs will not need to be financed.
Next, the annualization factor is calculated using the
formula supplied on Worksheet P, or the annualization
Economic Guidance for Water Quality Standards
5-5
-------
factor is found in Appendix B. Annuitized capital cost is
then calculated by multiplying the total capital costs to be
financed by the annualization factor.
The interest rates used to annualize costs are dependent
on the type of debt instrument used as well as the issuer's
credit standing. Therefore, the interest rate used on
Worksheet P reflects the debt instrument (i.e. municipal
bond, commercial bank loan, state revolving fund loan, or
other instrument) likely to be used by the municipality.
Next, annual operating and maintenance costs are added
to the annualized capital cost. O&M costs should include
the costs of monitoring, inspection, permitting fees, waste
disposal charges, repair, administration, replacement, and
any other recurring costs. All recurring costs should be
stated in terms of dollars per year. The sum of the
annualized capital cost and total annual operating and
maintenance costs is the total annual cost of the project.
S.l.b Public-Sector Developments: Calculate Total
Annualized Pollution Control Costs Per
Household
To assess the burden that total pollution control costs
are expected to have on households, an average annualized
pollution control cost per household should be calculated
for all households in the community that would bear project
costs. In order to evaluate substantial impacts, therefore,
the analysis must establish which households will actually
pay for pollution control and what proportion of the costs
will be borne by households. Then, these apportioned
project costs are added to existing pollution control costs
paid by the households.
It is important to define the affected community. The
"community" is the governmental jurisdiction or
jurisdictions responsible for paying compliance costs.
If project costs were estimated for some prior year,
these costs should be adjusted upward to reflect current
year prices using the average annual national Consumer
Economic Guidance for Water Quality Standards
5-6
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Price Index (CPI) inflation rate for the period. The CPI
inflation rate is available from the Bureau of Labor
Statistics. An additional source reporting the CPI inflation
rate is the CPI Detailed Report, which is published monthly
by the U.S. Department of Labor, Bureau of Labor
Statistics.
In calculating the total annual cost of pollution control
per household, current costs of pollution control must be
considered along with the projected annual costs of the
proposed pollution control project. The existing cost per
household usually can be obtained from the most recent
municipal records. For example, use the most recent
operating revenues of the sewer enterprise fund, divided by
the number of households served. If the portion of
proposed project costs that households are expected to pay
is known or is expected to remain unchanged, then use
Worksheet Q to calculate the total annual cost of pollution
control per household. If the portion paid by households
is based on flow, then should refer to Worksheet Q:
Option A as well.
S.l.c Private-Sector Entities: Calculate the Annual
Costs of the Pollution Control Project
As with public-sector investments, the total capital costs
are usually spread out over several years. Annualization
calculates the amount that will be paid each year, including
the financing costs. In order to allow for comparisons
across cases, the analysis should assume that the applicant
will borrow the capital and repay the loan in even annual
installments over a 10 year period. The assumption of ten
years is based on the likely life of the equipment. The
assumption of even annual installments is made for
convenience. The interest rate on the loan should be
equivalent to the rate the applicant pays when it borrows
money.
The financial tests discussed below compare the costs of
compliance to other costs and revenues of the applicant.
Compliance costs and other costs and revenues must,
therefore, be calculated for the same year. See discussion
Economic Guidance for Water Quality Standards
5-7
-------
in Section 2.2, and Appendix A for references to
inflation/deflation indices. The Annualized Cost of
Pollution Control for a private-sector entity can be
calculated using Worksheet R.
Economic Guidance for Water Quality Standards
5-8
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Worksheet O
Pollution Control Project
Summary Information
Design Capacity of the Pollution Control System
Expected Excess Capacity after Completion of Project %
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed. Include description of all pollution
prevention activities included in the project. (Attach additional page if necessary).
Please describe the other pollution control options considered, including pollution prevention activities.
Explain why each option was rejected. (Attach additional page if necessary).
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Worksheet P
Public-Sector Pollution Control
Calculation of Total Annualized Project Costs
A. Capital Costs
Capital Cost of Project
Other One-Time Costs of Project (Please List, if any):
Total Capital Costs (Sum column) $ (1)
Portion of Capital Costs to be Paid for with Grant Monies $ (2)
Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal) (i)
Time Period of Financing (in years) (n)
Annualization Factor = 1 •»- i (or see
(l+i)n - 1 <4>
Appendix B)
Annualized Capital Cost [Calculate: (3) x (4) ] (5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
Total Annual O & M Costs (Sum column) $ (6)
C. Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ] (
"
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Worksheet Q
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control
Amount of Existing Costs Paid By Households
Percent of Existing Costs Paid By Households
Number of Households*
Annual Cost Per Household [Calculate: (2)/(4) ]
* Do not use number of hook-ups.
£
$
(i)
(2)
(4)
(5)
B. New Pollution Control Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b or c and continue as directed.)
D a) Yes [fill in percent from (3) ]
D b) No, they are expected to pay
percent. (6a)
percent. (6b)
D c) No, they are expected to pay based on flow. (Continue on Worksheet Q, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet P] $
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ]
Amount to Be Paid By Households [Calculate: (9) x (10) ] • $
Annual Cost per Household [Calculate: (11)/(4) ] $
(7)
(8)
(9)
(10)
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10)
(11)
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Worksheet Q: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MOD for Wastewater Treatment) (1)
Usage due to Household Use (MGD of Household Wastewater) (2)
Percent of Usage due to Household Use [Calculate: (2)/(l) ] %(3)
Total Annual Cost of Pollution Control Project $ (4)
Industrial Surcharges, if any $ (5)
Costs to be Allocated [Calculate: (4) - (5) ] $ (6)
Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7)
Annual Project Cost per Household [Calculate: (7)/Worksheet Q, (4) ] $ (8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet Q, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) 4- (9) ] $ (io)
I! 'I
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Worksheet R
Private-Sector Development
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant)
(1)
Interest Rate for Financing (Expressed as a decimal)
Time Period of Financing (Assume 10 years*)
(i)
10 years (n)
Annualization Factor =
(Ui)10 - 1
(2)
Annualized Capital Cost [Calculate: (1) x (2) ]
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal charges, repair, administration and replacement)***
(3)
(4)
Total Annual Cost of Pollution Control Project [ (3) + (4) ]
(5)
While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
Or see Appendix B for calculated annualization factors
*** For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replaced once every three years, include one-third of the cost in
each year).
-------
5.2 Financial Analysis to Determine if Lower Water
Quality is "Necessary"
The purpose of the financial impact analysis is to assess
the extent to which planned development will be reduced as
a result of maintaining water quality. There are two sets
of tests presented in this section: one set for publicly
owned developments, such as POTWs, and another for
privately owned developments, such as new manufacturing
facilities. The tests are not designed to determine the exact
impact of pollution control costs on an entity. They merely
provide indicators of whether pollution control costs would
result in a substantial impact.
5.2.a Public-Sector Developments: Calculate and
Evaluate the Municipal Preliminary Screener
Value
Whether or not maintaining high-quality water is likely
to interfere with a development due to additional public-
sector costs is determined by jointly considering the results
of two tests. The first test is a "screener" to establish
whether the community can clearly pay for the project.
The Municipal Preliminary Screener estimates the total per
household annual pollution control costs to be borne by
households (existing costs plus those attributable to the
proposed project) as a percentage of median household
income. The screener is written as follows:
Municipal Preliminary Screener =
Average Total Pollution Control Cost per Household
Median Household Income
Median household income information for many
municipalities is available from the 1990 Census of
Population. To estimate median household income for the
current year, use the CPI inflation rate for the period
between the year that median household income is available
and the current year.
Economic Guidance for Water Quality Standards
5-14
-------
Worksheet S
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any
substantial economic impacts as a result of the proposed pollution control project. The formula is as
follows:
Total Annual Pollution Control Cost per Household
Median Household Income *
A. Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or $ (1)
Worksheet C, Option A (10) ] ^^
Median Household Income* $ (2)
Municipal Preliminary Screener (Calculate: [(l)/(2)] x 100) %(3)1
It. ''
B. Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark Comparison:
Little Impact
Less than 1.0%
Indication of no
substantial
economic impacts
Mid-Range Impact
1.0% - 2.0%
Large Impact
Greater than 2.0%
Proceed to Secondary Test
* 1990 Census adjusted by CPI inflation rate if necessary.
-------
Depending on the results of the screener, the
community is expected to incur small, mid-range, or large
economic impacts (see Worksheet S). If the total annual
cost per household (existing annual cost per household plus
the incremental cost related to the proposed project) is less
than 1.0 percent of median household income, then the
requirements are not expected to impose a substantial
economic hardship on households and would not interfere
with the development.
Communities are expected to incur mid-range impacts
when the ratio of total annual compliance costs to median
household income is between 1.0 and 2.0 percent. If the
average annual cost per household exceeds 2.0 percent of
median household income, then the project may place a
large financial burden on many of the households within
the community and the requirements may interfere with the
development. In either case, communities move on to the
Secondary Test to demonstrate substantial impacts.
5.2.b Public-Sector Developments: Secondary Test
The Secondary Test is designed to build upon the
characterization of community identified in the Municipal
Preliminary Screener. The Secondary Test indicates the
community's ability to obtain financing and describes the
socioeconomic health of the community. Indicators
describe precompliance debt, socioeconomic, and financial
management conditions in the community. Using these
indicators and the scoring system described below, the
impact of the cost of pollution control is estimated.
Specifically, applicants are required to present the
following six indicators for the community:
Debt Indicators
• Bond Rating (if available) - a measure of credit
worthiness of the community;
• Overall Net Debt as a Percent of Full Market Value
of Taxable Property - a measure of debt burden on
residents within the community;
Economic Guidance for Water Quality Standards
5-16
-------
Socioeconomic Indicators
• Unemployment Rate - a measure of the general
economic health of the community;
• Median Household Income - a measure of the
wealth of the community;
Financial Management Indicators
• Property Tax Revenue as a Percent of Full Market
Value of Taxable Property - a measure of the
funding capacity available to support debt based on
the wealth of the community; and
• Property Tax Collection Rate - a measure of how
well the local government is administered.
A more detailed description of the six indicators is
presented in Section 2.4, including a discussion of
alternative measures to use in States with property tax caps
and limitations on assessed values. Worksheet T can be
used to estimate each of the indicators. Table 5-1
summarizes the indicators and what is considered to be a
strong, mid-range, or weak rating.
The Secondary Score is calculated for the community
by weighting each indicator equally and assigning a value
of 1 to each indicator judged to be weak, a 2 to each
indicator judged to be mid-range, and a 3 to each strong
indicator. A cumulative assessment score is arrived at by
summing the individual scores and dividing by the number
of factors used. Worksheet U guides the reader through
this calculation. The cumulative assessment score is
evaluated as follows:
• less than 1.5 is considered weak
• between 1.5 and 2.5 is considered mid-range
• greater than 2.5 is considered strong
Economic Guidance for Water Quality Standards
5-17
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Worksheet T
Data Used in the Secondary Test
Please list the following values used in determining the Secondary Score. Potential sources of the data
are indicated.
A. Data Collection
Data Potential Source Value
Direct Net Debt Community Financial Statements
Town, County or State Assessor's Office
$ 0)
Overlapping Debt Community Financial Statements
Town, County or State Assesor's Office $ (2)
Market Value of Property Community Financial Statements
Town, County or State Assessor's Office
$ (3)
Bond Rating Standard and Poors or Moody's
(4)
Community Unemployment 1990 Census of Population
Rate Regional Data Centers %(5)
National Unemployment Bureau of Labor Statistics
Rate (202) 606-6392 %(6)
Community Median 1990 Census of Population
Household Income $ (7)
State Median Household 1990 Census of Population
Income $ (8)
Property Tax Collection Community Financial Statements
Rate Town, County or State Assessor's Office %(9)
Property Tax Revenues Community Financial Statements
Town, County or State Assessor's Office $ (10)
-------
Worksheet T, Continued
B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2)) $ (11)
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(ll)/(3)] x 100)
2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
-------
Worksheet U
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as
a single indicator with the remaining indicators.
Indicator
Bond Rating
Worksheet T, (4)
Overall Net Debt as Percent
of Full Market Value of
Taxable Property
Worksheet T, (12)
Unemployment
Worksheet T, (5)& (6)
Median Household Income
Worksheet T, (7) & (8)
Property Tax Revenues as a
Percent of Full Market
Value of Taxable Property
Worksheet T, (13)
Property Tax Collection
Rate
Worksheet T, (9)
Secondary Indicators
Weak*
Below BBB (S&P)
Below Baa (Moody's)
D
Above 5%
D
Above National Average
D
Below State Median
D
Above 4%
D
< 94%
D
Mid-Range**
BBB (S&P)
Baa (Moody's)
D
296-5%
D •
National Average
D
State Median
D
2%-4%
D
94% - 98%
D
a* **»
Strong
Above BBB (S&P) or
Baa (Moody's)
D
Below 2%
D
Below National Average
D
Above State Median
D
Below 2%
D
> 98%
D
Score
* Weak is a score of 1 point
** Mid-Range is a score of 2 points
SUM
Strong is a score of 3 points
AVERAGE
-------
TABLE 5-1
SECONDARY INDICATORS
Indicator
Bond Rating
Overall Net Debt as
Percent of Full
Market Value of
Taxable Property
Unemployment
Median Household
Income
Property Tax
Revenues as a Percent
of Full Market Value
of Taxable Property
Property Tax
Collection Rate
Secondary Indicators
Weak
Below BBB (S&P)
Below Baa (Moody's)
Above 5%
More than 1 % above
National Average
More than 10% below
State Median
Above 4%
< 94%
Mid-Range
BBB (S&P)
Baa (Moody's)
2%-5%
National Average
State Median
2%-4%
94% - 98%
Strong
Above BBB (S&P)
or Baa (Moody's)
Below 2%
More than 1 %
below National
Average
More than 10%
above State Median
Below 2%
> 98%
Economic Guidance for Water Quality Standards
5-21
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If the applicant is not able to develop one or more of
the six indicators, they must provide an explanation as to
why the indicator is not appropriate or not available. Since
the point of the analysis is to measure the overall burden to
the community, the debt and socioeconomic indicators are
assumed to be better measures of burden than the financial
management indicators. Consequently, if one of the debt
or socioeconomic indicators is not available, the applicant
should average the two financial management indicators
and use this averaged value as a single indicator with the
remaining indicators. This averaging is necessary so that
undue weight is not given to the financial management
indicators.
5.2.d Public-Sector Developments: Assess Whether the
Requirements Would Interfere With the
Development
The results of the two tests are considered jointly in
determining whether the community is expected to incur
substantial impacts that would interfere with the
development. As shown in Table 5-2, the cumulative
assessment score for the community is combined with the
estimated household burden. The combination of factors
establishes whether impacts can be expected to be
substantial.
In the matrix, "X" indicates that the impact is likely to
interfere with the development. The closer the community
is to the upper right hand corner of the matrix, the greater
the likelihood. Similarly, V" indicates that the impact is
not likely to interfere with development. The closer to the
lower left hand corner of the matrix, the smaller the
likelihood. Finally, the "?" indicates that the impact is
unclear.
Economic Guidance for Water Quality Standards
5-22
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TABLE 5-2
ASSESSMENT OF SUBSTANTIAL IMPACTS MATRIX
Secondary Score
Less than 1.5
Between 1.5 and 2.5
Greater than 2.5
Municipal Preliminary Screener
Less than 1.0
Percent
?
/
/
Between 1.0 and 2.0
Percent
X
?
^
Greater than 2.0
Percent
X
X
7
5.2.e Private-Sector Developments: Financial Measures
Four general categories of financial.tests are used to
determine if maintaining high-quality water will interfere
with privately owned development. The four categories are
divided into a primary measure of financial impacts and
three secondary measures of financial impacts:
Primary Measure
• Profit ~ how much would profits decline due to
pollution control expenditures?
Secondary Measures
• Liquidity — how easily can an entity pay its short-
term bills?
• Solvency — how easily can an entity pay its fixed
and long-term bills?
• Leverage — how much money can the entity
borrow?
Profit and solvency ratios are calculated both with and
without the additional compliance costs (taking into
consideration the entity's ability, if any, to increase its
prices to cover part or all of the costs). Comparing these
ratios to each other and to industry benchmarks provides a
measure of the impact on the entity. Since antidegradation
reviews involve new or expanded operations, the ratios
Economic Guidance for Water Quality Standards
5-23
-------
often will be calculated using estimated values from pro-
forma income statements and balance sheets prepared for
the development.
For all of the tests, it is important to look beyond the
individual test results and evaluate the total situation of the
entity. While each test addresses a single aspect of
financial health, the results of the four tests should be
considered jointly to obtain an overall picture. The results
should be compared with the ratios for other entities in the
same industry or activity.
The primary and secondary measures are described
below, along with an example of specific tests to be used.
While there are several ratios that could be used for each
test, to simplify the presentation only one ratio per test is
described. In most cases, interpreting the results requires
comparisons with typical values for the industry. Among
the sources that provide comparative information are:
Robert Morris Associates' Annual Statement Studies,
Moody's Industrial Manual, Dun and Bradstreet's Dun's
Industry Norms, and Standard & Poor's Industry Surveys.
The Annual Statement Studies, Dun's Industry Norms , and
Standard & Poor's Industry Surveys provide composite
statistics for firms grouped into various manufacturing and
service industries. The Moody's Industrial Manual
provides detailed financial information on individual firms
that can be used for comparison purposes. Each of the
tests is discussed in more detail in Chapter 3.
5.2.f Private-Sector Developments: Primary Measure
Primary measure is the Profit Test, which measures the
development's earnings if it is required to provide pollution
control necessary to maintain the high-quality waters and if
it is not required to do so. If maintaining high-quality
water would result in considerably lower profits, then the
development might not take place.
Two pieces of information are needed for the Profit
Test. The first piece is the total annual cost of the required
pollution control from Worksheet R. The second piece is
Economic Guidance for Water Quality Standards
5-24
-------
the earnings information from the entity's income statement
(Worksheet V).
Profit Test = *""*** Befare Taxes
Revenues
The Profit Test should be calculated with and without
the cost of the pollution control. In the former case, the
annualized cost of pollution control (including O&M) is
subtracted from the discharger's estimated earnings before
taxes (revenues minus costs excluding income taxes). The
Profit Test can be calculated using Worksheets V, and W.
These profit rates should be compared to those for facilities
in similar lines of business, using data in Moody's
Industrial Manual, Dun & Bradstreet's Industry Norms and
Key Business Ratios, Standard & Poor's Industry Surveys,
or Robert Morris's Annual Statement Studies.
The degree to which the discharger is able to raise
prices is difficult to predict, and depends on many factors.
Considerations should include the level of competition in
the industry, the likelihood of competitors' facilities facing
similar project costs, and the willingness of consumers to
pay more for the product.
5.2.g Private-Sector
Measures
Developments: Secondary
The following secondary measures provide additional
important information about the financial health of the
development. All primary and secondary measures should
be included in the analysis.
Liquidity
Liquidity is a measure of how easily a discharger can
pay its short-term bills. One measure of liquidity is the
Current Ratio, which compares current assets with current
liabilities. Current assets include cash and other assets that
are or could reasonably be converted into cash during the
current year. Likewise, current liabilities are items that
must be paid within the current year.
Economic Guidance for Water Quality Standards
5-25
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Worksheet V
Calculation of Earnings Before Taxes
A. Earnings Without Pollution Control Project Costs
EBT = R - CGS - CO
B. Earnings With Pollution Control Project Costs
EWPR = EBT - ACPR
Where: EBT = Earnings Before Taxes
EWPR = • Earnings with Pollution Project Costs
R = Revenues
CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect
labor, rent and heat)
CO = Portion of Corporate Overhead Assigned to the Discharger (selling,
general, administrative, interest, R&D expenses, and depreciation on
common property)
ACPR = Total Annual Costs of Pollution Control Project [Worksheet R (5)]
R
CGS
CO
EBT [ (1) - (2) -(3) ]
ACPR [ Worksheet R (5) ]
(1)
(2)
(3)
(4)
(5)
EWPR [ (4) - (5) ]
(6)
-------
Worksheet W
Calculation of Profit Rates
A. Profit Rate Without Project Costs
PRT = EBT * R
B. Profit Rate With Pollution Control Costs
PRPR = EWPR -^ R
Where: PRT = Profit Rate Before Taxes
PRPR = Profit Rate with Pollution Control Costs
EBT = Earnings Before Taxes
EWPR = Before-Tax Earnings with Pollution Control Costs
R = Revenues
EBT [Worksheet V, (4)]
R [Worksheet V, (1)]
PRT - Calculate: [(1)1(2)]
EWPR [Worksheet V, (6)]
R [Worksheet V, (1)]
PRPR [Calculate: (4)/(5)]
CD
(2)
(3)
(4)
(5)
(6)
-------
The Current Ratio is calculated by dividing current
assets by current liabilities.
Current Ratio =
Current Assets
Current Liabilities
The Current Ratio can be calculated using Worksheet X.
The general rule is that if the Current Ratio is greater than
2, the entity should be able to cover its short-term
obligations. Frequently, lenders require this level of
liquidity as a prerequisite for lending. This rule (Current
Ratio > 2) may not, however, be appropriate for all types
of private entities. The Current Ratio of the discharger in
question should be compared with ratios for other
dischargers in the same line of business.
Solvency
Solvency is a measure of an entity's ability to meet its
fixed and long-term obligations. These obligations are bills
and debts that are owed on a regular basis for periods
longer than one year. Solvency tests are commonly used
to predict financial problems that could lead to bankruptcy
within the next few years.
As with liquidity, there are several possible tests for
solvency. One solvency test, the Beaver's Ratio, compares
cash flow to total debt. This test has been shown to be a
good indicator of the likelihood of bankruptcy.
Beaver's Ratio =
Cash Flow
Total Debt
The Beaver's Ratio can be calculated using Worksheet
Y. Cash Flow is a measure of the cash the entity has
available to it in a given year. Since depreciation is an
accounting cost - a cost that does not use any currently
available revenues — it is added back to reported net
Economic Guidance for Water Quality Standards
5-28
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Worksheet X
Calculation of The Current Ratio
CR = CA H- CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expenses, and accounts
receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes, and
the current portion of long-term debt)
CA _$ (1)
CL $ (2)
CR [Calculate: (l)/(2)] (3)
-------
income after taxes to get cash flow. Total debt is equal to
the current debt for the current year plus the long term
debt, since current debt includes that part of long-term debt
that is due in the current year.
If the Beaver's Ratio is greater than 0.20 the
development is considered to be solvent (i.e., can pay its
long-term debts). If the ratio is less than 0.15 the
development may be insolvent (i.e., go bankrupt). If the
ratio is between 0.15 and 0.20, then future solvency is
uncertain.
Leverage
Leverage tests measure the extent to which a firm has
fixed financial obligations and thus indicates how much
more money a firm is capable of borrowing. Firms that
rely heavily on debt may find it difficult and expensive to
borrow additional funds. One commonly used measure of
leverage is the Debt to Equity Ratio.
Debt/Equity Ratio =
-Term Liabilities
Owners / Equity
The Debt to Equity Ratio can be calculated using
Worksheet Z. Since there are no generally accepted
Debt/Equity Ratio values that apply to all types of
economic activity, the ratio should be compared with the
ratio of firms in similar businesses. If the entity's ratio
compares favorably with the median or upper quartile ratio
for similar businesses, it should be able to borrow
additional funds. These ratios can be calculated using data
in Robert Morris Associates' Annual Statement Studies,
Moody 's Industrial Manual, and Dun & Bradstreet' s Dun 's
Industry Norms.
For entities with special sources of funding, leverage is
not an appropriate measure of their ability to raise capital.
Examples are agriculture and affordable housing, where
special loan programs may be available. In these cases, an
Economic Guidance for Water Quality Standards
5-30
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Worksheet Y
Calculation of Beaver's Ratio
BR = CF * TD
Where: BR = Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Cash Flow:
Net Income After Taxes $ (1)
Depreciation $ (2)
CF [Calculate: (1) + (2)] $ (3)
Total Debt:
Current Debt $ (4)
Long-Term Debt $ (5)
Total Debt $ (6)
Beaver's Ratio:
BR [(3) /(6)] (7)
-------
Worksheet Z
Debt to Equity Ratio
DER = LTL + OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities (long-tenn debt such as bonds, debentures, and bank
debt, and all other noncurrent liabilities such as deferred income taxes)
OE = Owner Equity (the difference between total assets and total liabilities,
including contributed or paid in capital and retained earnings)
LTL _$ (1)
OE $ (2)
DER
(3)
-------
analysis of the probability that the project would receive
this money is appropriate.
5.2.g Private-Sector Developments: Assess Whether the
Requirements Will Interfere With the
Development: Interpreting the Results
The financial analysis should be used to determine if
there will be a substantial adverse impact such as to
interfere with the development. If the four tests taken
together indicate that the requirements would interfere with
the development, then proceed to Section 5.3 to determine
if the development would be considered important in social
and economic terms.
5.3 Determine If Economic and Social Development
Would Be Important
There are no economic ratios per se that determine
whether a development would be considered important.
Instead, the relative magnitudes of indicators such as
increases in unemployment, losses to the local economy,
changes in household income, decreases in tax revenues,
indirect effects on other businesses, and increases in sewer
fees should be taken into account. The term important is
intended to convey a general concept regarding the level of
social and economic development used to justify a change
in high-quality waters.
5.3.a Define Relevant Geographical Area
One important factor is defining the geographical area
hi which the impacts will occur. In the case of municipal
pollution control projects, the affected community is most
often the immediate municipality. The relevant geographic
area for evaluating the importance of a private-sector
development varies with each situation. The area will
typically be determined by the area in which the majority
of its workers live and where most of the businesses that
depend on it are located. In either case, the geographical
area considered must include "...the area in which the
waters are located." (40 CFR 131.12 (a)(2)) There are no
Economic Guidance for Water Quality Standards
5-33
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simple rules for defining the relevant area or community;
the decision is based on the judgement of the applicant and
state, subject to EPA review.
5.3.b Public-Sector Developments: Determine Whether
Important
While there are no explicit criteria, it is recommended
that changes in the socioeconomic indicators listed below
be considered. For each indicator listed, the applicant
should estimate the potential change that would result from
the development.
• Median Household Income;
• Community Unemployment Rate;
• Overall Net Debt as a Percent of Full Market Value
of Taxable Property;
• Percent of Households Below Poverty Line;
• Impact on Community Development Potential; and
• Impact on Property Values.
Estimated changes should be provided, along with
supporting discussions, on Worksheet AA.
5.3.c Private-Sector Developments: Determine Whether
Important
Determination of whether or not a private-sector
development will be important to a community requires
exploring more factors than is the case with public-sector
developments. Worksheet AB has been provided to assist
applicants in their evaluation of socioeconomic impacts. It
is designed as a list of the factors applicants should
consider in determining whether the development is
important. Applicants should feel free, however, to add
anecdotal information to describe any current community
characteristics or anticipated impacts that are not listed in
the worksheet.
Potentially, one of the most important impacts on the
affected community's economy is the employment to be
gained. The size of this impact is dependent on the
Economic Guidance for Water Quality Standards
5-34
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number of new jobs relative to the total number of jobs in
the community, and to the other job opportunities available
in the community. Typically, an increase in employment
leads to an increase in personal income in the affected
community. The total amount of income gained by the
affected community will depend, in part, on the other job
prospects of those hired. To assess the net impact on
employment in the affected community, the existing rate of
unemployment should be considered as an indicator of
worker mobility between jobs.
The analysis should also consider whether the increase
in employment opportunities may lead to a decreased need
for social services in the affected community. If the cost
of savings for decreased social services will be borne by
the affected community, they should be included in the
assessment.
The effects of increased employment and personal
income will be compounded as the money moves through
the economy. This multiplier effect means that each dollar
gained to an employee results in the gain of more than a
dollar to the local economy. Multiplier effects are
discussed in more detail in Section 4.4.
Socioeconomic impacts may also include effects on the
local govemment(s) such as property tax revenues and the
demand for other public services. For example, if the
development would be paying a share of the cost to
upgrade a municipal treatment plant, then the analysis of
community impacts is more complicated. If the
development is eliminated, the system may become
excessively expensive for the remaining users.
5.4 Summary
Using the guidance described in this document, the
applicant must demonstrate that the pollution control
measures needed to maintain the high-quality waters will
interfere with the development. In addition, the applicant
will have to show that the development is important to the
community.
Economic Guidance for Water Quality Standards
5-35
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The tests used to demonstrate interference and
importance are the same as those used to demonstrate
substantial and widespread. The difference is, however,
that an antidegradation review considers situations that
would improve the economic condition.
Economic Guidance for Water Quality Standards
5-36
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\\ orksheet AA
Public-Sector Development
Qualitative Description of Estimated Change
in Socioeconomic Indicators
due to Pollution Control Costs
Estimated change
in Median
Household
Income (MHI)
Estimated change
in the
unemployment
rate
Estimated change
in overall net debt
as a percent of
full market value
of taxable
property
Estimated change
in % of
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
-------
Worksheet AB
Private-Sector Development
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included. • (1)
Current unemployment rate in affected community (if available). (2)
Current national unemployment rate. (3)
Additional number of persons expected to collect unemployment in affected (4)
community due to compliance with water quality standards.
Expected unemployment rate in the affected community after compliance with (5)
water quality standards (Current # of persons collecting unemployment
• in affected community + (4)/labor force in affected community.
Median household income in affected community. (6)
Total number of households in affected community. . (7)
Percent of population below the poverty line in affected community. (8)
Current expenditures on social services in affected community. (9)
Expected expenditures on social services due to job losses in the affected (10)
community.
Current total tax revenues in the affected community. 00
Tax revenues paid by the private entity to the affected community. (12)
-------
Worksheet AB, continued
Tax revenues paid by the private entity as a percentage of the affected (13)
community's total tax revenues.*
Current statewide unemployment rates. (14)
Additional number of persons expected to collect unemployment in the State (15)
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality (16)
standards (Current # of persons collecting unemployment in State +
(15)/labor force in State.
Current expenditures on social services in State. (17)
Expected statewide expenditures on social services due to job losses. (18)
* In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis
should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.
-------
APPENDIX A
DATA RESOURCES AND REFERENCE
MATERIALS
-------
APPENDIX A
Cost Estimation Resources:
U.S. EPA, Construction Costs for Municipal Wastewater Treatment Plants: 1973-1978,
EPA/430/9-80-003, April, 1980.
U.S. EPA, Technical Report: Operation and Maintenance Costs for Municipal Wastewater
Facilities, EPA/430/9-81-004, September, 1981.
U.S. EPA, Construction Costs for Municipal Wastewater Conveyance Systems: 1973-1979,
EPA/430/9-81-003, January, 1981.
U.S. EPA, Quarterly Indices of Direct Costs for Operation, Maintenance and Repair: (a) Waste
Pumping Stations, (b) Gravity Sewers, Office of Municipal Pollution Control, Municipal
Facilities Division, Current.
Municipal Statistics Resources:
Bureau of the Census, U.S. Department of Commerce, County and City Data Book, published
annually.
Financial and Ratio Analysis Resources:
Leopold A. Bernstein, The Analysis of Financial Statements, Dow Jones-Irwin, 1978.
Dun & Bradstreet, Dun's Industry Norms, annual.
J. Fred Weston and Eugene F. Brigham, Managerial Finance, The Dryden Press, several
editions.
Robert Morris Associates, Annual Statement Studies, annual.
Moody's Financial Services, Moody's Industrial Manual, annual.
U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report.
U.S. EPA, EPA Financial Capability Guidebook, Office of Water Programs Operations, 1984.
U.S. EPA, The Municipal Sector Study: Impacts of Environmental Regulations on
Municipalities, EPA 230-09-038, Office of Policy, Planning and Evaluation, September
1988.
-------
APPENDIX B
TABLE OF ANNUALIZATION FACTORS
-------
Jix B.Table of Annualization Factors
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
0.005
1.0050
0.5038
0.3367
0.2531
0.2030
0.1696
0.1457
0.1278
0.1139
0.1028
0.0937
0.0861
0.0796
0.0741
0.0694
0.0652
0.0615
0.0582
0.0553
0.0527
0.01
1.0100
0.5075
0.3400
0.2563
0.2060
0.1725
0.1486
0.1307
0.1167
0.1056
0.0965
0.0888
0.0824
0.0769
0.0721
0.0679
0.0643
0.0610
0.0581
0.0554
0.015
1.0150
0.5113
0.3434
0.2594
0.2091
0.1755
0.1516
0.1336
0.1196
0.1084
0.0993
0.0917
0.0852
0.0797
0.0749
0.0708
0.0671
0.0638
0.0609
0.0582
0.02
1.0200
0.5150
0.3468
0.2626
0.2122
0.1785
0.1545
0.1365
0.1225
0.1113
0.1022
0.0946
0.0881
0.0826
0.0778
0.0737
0.0700
0.0667
0.0638
0.0612
0.025
1.0250
0.5188
0.3501
0.2658
0.2152
0.1815
0.1575
0.1395
0.1255
0.1143
0.1051
0.0975
0.0910
0.0855
0.0808
0.0766
0.0729
0.0697
0.0668
0.0641
Interest Rate
0.03
1.0300
0.5226
0.3535
0.2690
0.2184
0.1846
0.1605
0.1425
0.1284
0.1172
0.1081
0.1005
0.0940
0.0885
0.0838
0.0796
0.0760
0.0727
0.0698
0.0672
0.035
1.0350
0.5264
0.3569
0.2723
0.2215
0.1877
0.1635
0.1455
0.1314
0.1202
0.1111
0.1035
0.0971
0.0916
0.0868
0.0827
0.0790
0.0758
0.0729
0.0704
0.04
1.0400
0.5302
0.3603
0.2755
0.2246
0.1908
0.1666
0.1485
0.1345
0.1233
0.1141
0.1066
0.1001
0.0947
0.0899
0.0858
0.0822
0.0790
0.0761
0.0736
0.045
1.0450
0.5340
0.3638
0.2787
0.2278
0.1939
0.1697
0.1516
0.1376
0.1264
0.1172
0.1097
0.1033
0.0978
0.0931
0.0890
0.0854
0.0822
0.0794
0.0769
0.05
1.0500
0.5378
0.3672
0.2820
0.2310
0.1970
0.1728
0.1547
0.1407
0.1295
0.1204
0.1128
0.1065
0.1010
0.0963
0.0923
0.0887
0.0855
0.0827
0.0802
0.055
1.0550
0.5416
0.3707
0.2853
0.2342
0.2002
0.1760
0.1579
0.1438
0.1327
0.1236
0.1160
0.1097
0.1043
0.0996
0.0956
0.0920
0.0889
0.0862
0.0837
0.06
1.0600
0.5454
0.3741
0.2886
0.2374
0.2034
0.1791
0.1610
0.1470
0.1359
0.1268
0.1193
0.1130
0.1076
0.1030
0.0990
0.0954
0.0924
0.0896
0.0872
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Appendix B.Table of Annualization Factors
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
0.065
1.0650
0.5493
0.3776
0.2919
0.2406
0.2066
0.1823
0.1642
0.1502
0.1391
0.1301
0.1226
0.1163
0.1109
0.1064
0.1024
0.0989
0.0959
0.0932
0.0908
0.07
1.0700
0.5531
0.3811
0.2952
0.2439
0.2098
0.1856
0.1675
0.1535
0.1424
0.1334
0.1259
0.1197
0.1143
0.1098
0.1059
0.1024
0.0994
0.0968
0.0944
0.075
1.0750
0.5569
0.3845
0.2986
0.2472
0.2130
0.1888
0.1707
0.1568
0.1457
0.1367
0.1293
0.1231
0.1178
0.1133
0.1094
0.1060
0.1030
0.1004
0.0981
0.08
1.0800
0.5608
0.3880
0.3019
0.2505
0.2163
0.1921
0.1740
0.1601
0.1490
0.1401
0.1327
0.1265
0.1213
0.1168
0.1130
0.1096
0.1067
0.1041
0.1019
0.085
1.0850
0.5646
0.3915
0.3053
0.2538
0.2196
0.1954
0.1773
0.1634
0.1524
0.1435
0.1362
0.1300
0.1248
0.1204
0.1166
0.1133
0.1104
0.1079
0.1057
Interest Rate
0.09
1.0900
0.5685
0.3951
0.3087
0.2571
0.2229
0.1987
0.1807
0.1668
0.1558
0.1469
0.1397
0.1336
0.1284
0.1241
0.1203
0.1170
0.1142
0.1117
0.1095
0.095
1.0950
0.5723
0.3986
0.3121
0.2604
0.2263
0.2020
0.1840
0.1702
0.1593
0.1504
0.1432
0.1372
0.1321
0.1277
0.1240
0.1208
0.1180
0.1156
0.1135
0.1
1.1000
0.5762
0.4021
0.3155
0.2638
0.2296
0.2054
0.1874
0.1736
0.1627
0.1540
0.1468
0.1408
0.1357
0.1315
0.1278
0.1247
0.1219
0.1195
0.1175
0.105
1.1050
0.5801
0.4057
0.3189
0.2672
0.2330
0.2088
0.1909
0.1771
0.1663
0.1575
0.1504
0.1444
0.1395
0.1352
0.1316
0.1285
0.1259
0.1235
0.1215
0.11
1.1100
0.5839
0.4092
0.3223
0.2706
0.2364
0.2122
0.1943
0.1806
0.1698
0.1611
0.1540
0.1482
0.1432
0.1391
0.1355
0.1325
0.1298
0.1276
0.1256
0.115
1.1150
0.5878
0.4128
0.3258
0.2740
0.2398
0.2157
0.1978
0.1841
0.1734
0.1648
0.1577
0.1519
0.1470
0.1429
0.1394
0.1364
0.1339
0.1316
0.1297
0.12
1.1200
0.5917
0.4163
0.3292
0.2774
0.2432
0.2191
0.2013
0.1877
0.1770
0.1684
0.1614
0.1557
0.1509
0.1468
0.1434
0.1405
0.1379
0.1358
0.1339
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APPENDIX C
CONCEPTUAL MEASURES
OF ECONOMIC BENEFITS
-------
APPENDIX C
CONCEPTUAL MEASURES
OF ECONOMIC BENEFITS
In valuing benefits associated with an ecological
resource such as clean water, a basic distinction is made
between the intrinsic value of the existence of the resource
and its value in use by the human population. Use values
are further subdivided into direct or indirect uses. Other
valuation concepts arise from the uncertainty surrounding
future uses and availability of the resource. A
classification of these valuation concepts, along with
examples, is presented in Table C-l.
C.I Use Benefits
Estimating the benefits of clean water will depend upon
several variables that describe the attributes of the resource
and its uses. A waterbody might be used for recreational
activities (such as fishing, boating, swimming, hunting,
bird watching), for commercial purposes (such as industrial
water supply, irrigation, municipal drinking water, and fish
harvesting), or for both. Where recreational activities are
created or enhanced due to water quality improvements, the
public will benefit in the form of increased recreational
opportunities. Similarly, the cost of treating irrigation and
drinking water to down stream users could be reduced if
pollutant discharges were reduced or eliminated in a
particular stretch of river.
Direct use includes both consumptive and non-
consumptive uses. Consumptive uses can be distinguished
from non-consumptive uses in that the former excludes
other uses of the same resource while the latter does not.
For example, water is consumed when it is diverted from
a waterbody for irrigation purposes. With non-
consumptive uses, however, the resource base remains in
the same state before and after use (e.g., swimming).
Human health benefits associated with cleaner water could
Economic Guidance for Water Quality Standards
-------
TABLE C-l
CATEGORIES OF BENEFITS
Use Benefits
Direct
Consumptive:AfarJte/ Benefits
Industrial Water Supply
Agricultural Water Supply
Municipal Water Supply
Commercial Fishing
Non-Market Benefits
Recreational Fishing
Hunting
Industrial Water Supply
Agricultural Water Supply
Municipal Water Supply
Non-Consumptive: Swimming
Boating
Human Health
Indirect
Fishing Equipment Manufacturer
Property Values
Aesthetics (scenic views, water enhanced recreation)
Intrinsic Benefits
Option Value (access to resource in future)
Existence Value (knowledge that services of resource exist)
Economic Guidance for Water Quality Standards
-------
be consumptive (reduced illness from eating finfish or
shellfish) or non-consumptive (reduced exposure to
infectious diseases while recreating).
When estimating benefits, it is important to determine
whether or not the resource and its uses (in this case clean
water) can be considered market or non-market resources
and uses (i.e., does a market exist for the resource or its
use). For example, commercial fisheries have a market
value reflected by the financial value of landings of a
particular species. By contrast, no market exists to
describe the value individuals receive from swimming.
Where market values are available, they should be used to
estimate benefits. In the case of water supply, there may
or may not be a market for clean water. Some water users
may be required to pay for that use as in the case of a
farmer paying a regional water board to divert water for
irrigation purposes. This will be particularly true in the
arid west. By contrast, a manufacturing facility using
water for cooling or process water may not pay anything
for the right to pump and use water from an adjacent river.
For resources with no market value, a number of
estimation techniques including the travel cost, estimation
from similar markets, and contingent valuation methods
have been developed.
While they are conceptually distinct attributes,
consumptive use is frequently associated with markets and
non-consumptive use is frequently associated with non-
market situations. Some resources that are considered
market resources, however, may be used non-
consumptively. The converse is also true. As an example
of the first, a fee may be charged (other than parking) to
gain entrance to a state park, however, while a swimmer's
use of a lake in the park is not consuming any part of the
lake.
Commercial activities that are dependent on clean water
which is not directly owned are said to benefit from
indirect use. Examples would be a fishing equipment
manufacturer's dependence on healthy fish stocks to induce
demand for its products or the dependence of property
Economic Guidance for Water Quality Standards
C-3
-------
values on the pristine condition of an adjacent water body.
Indirect use is also characterized by the scenic views and
water enhanced recreational opportunities (camping,
picnicking, birdwatching) associated with the quality of
water in a water body. Indirect use benefits such as
enhanced property values can be estimated using the
hedonic price technique. Care should be taken, however,
to not double-count benefits. If property values reflect the
proximity to and thus use of water, then the value of the
use should not be included separately.
C.2 Intrinsic Benefits
Intrinsic benefits include all benefits associated with a
resource that are not directly related to the current use of
the resource. Intrinsic benefits are represented by the sum
of existence and option values. Existence value indicates
an individual's (and society's) willingness to pay to
maintain an ecological resource such as clean water for its
own sake, regardless of any perceived or potential
opportunity for that individual to use the water body now
or in the future. Contributions of money to save
endangered species such as the snail darter demonstrate a
willingness to pay for the existence of an environmental
amenity despite the fact that the contributors may never use
it or even experience it directly.
Option value is the willingness to pay for having a
future opportunity to use resources such as clean water in
known or as yet unknown ways. In a sense it is a
combination of insurance and speculative value.
Individuals routinely pay to store or transport something
they are not sure they will use in the future because they
recognize it would be more costly to recreate the item than
to preserve it. In an ecological sense, pristine habitats and
wildlife refuges are often preserved under the assumption
that plant or animal species which may yield
pharmaceutical, genetic, or ecosystem benefits are yet to be
discovered. Option value takes on particular importance
when proposed development or environmental perturbations
are largely irreversible or pollutants are persistent.
Economic Guidance for Water Quality Standards
C-4
-------
Intrinsic benefits are difficult to measure due to the level of
uncertainty associated with these benefits. The most
common approach to estimating intrinsic benefits, however,
is the contingent valuation method, which cannot be
described in detail within this short overview.
C.3 Summary
Total valuation of clean water benefits includes all use
and existence values as well as option value. The proper
framework for estimating the economic benefits associated
with clean water consists of 1) determining when damage
first occurs or would occur; 2) identifying and quantifying
the potential physical/biological damages relative to an
appropriate baseline; 3) identifying all affected individuals
both due to potential loss of direct or indirect services or
uses, and to potential losses attributable to existence values
(may include projections for growth in participation rates);
4) estimating the value affected individuals place on clean
water prior to potential degradation; and 5) determining the
time horizon over which the waterbody would be degraded
or restored to some maximum reduced state of service (if
ever), and appropriately discounting the stream of potential
lost services. If evaluating an improvement in water
quality, the procedures are the same except that benefits
gained are measured.
Economic Guidance for Water Quality Standards
C-5
-------
WORKSHEETS
-------
\
Worksheet A
Pollution Control Project Summary Information
Current Capacity of the Pollution Control System
Design Capacity of the Pollution Control System
Current Excess Capacity
Expected Excess Capacity after Completion of Project %
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed below. (Attach additional page if necessary).
Please describe the other pollution control options considered, explaining why each option was rejected.
(Attach additional page if necessary).
-------
Worksheet B
Calculation of Total Annualized Project Costs
A. Capital Costs
Capital Cost of Project
Other One-Time Costs of Project (Please List, if any):
Total Capital Costs (Sum column)
Portion of Capital Costs to be Paid for with Grant Monies $ (2)
Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal) (i)
Time Period of Financing (in years)
(n)
Annual ization Factor = i + i (or see Appendix B)
Annualized Capital Cost [Calculate: (3) x (4) ]
(5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
Total Annual O & M Costs (Sum column) $ (6)
C. Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ]
11
-------
Worksheet C
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control $ (1)
Amount of Existing Costs Paid By Households $ (2)
Percent of Existing Costs Paid By Households %(3)
Number of Households* (4)
Annual Cost Per Household [Calculate: (2)/(4) ] $ (5)
* Do not use number of hook-ups.
B. New Pollution Control Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b or c and continue as directed.)
D a) Yes [fill in percent from (3) ]
D b) No, they are expected to pay
percent. (6a)
percent. (6b)
D c) No, they are expected to pay based on flow. (Continue on Worksheet C, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet B] $ (7)
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ] (8)
Amount to Be Paid By Households [Calculate: (7) x (8) ] $ (9)
Annual Cost per Household [Calculate: (9)/(4) ] $ (10)
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10) |$(11)1
-------
Worksheet C: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MOD for Wastewater Treatment) (1)
Usage due to Household Use (MGD of Household Wastewater) (2)
Percent of Usage due to Household Use [Calculate: (2)/(l) ] %(3)
Total Annual Cost of Pollution Control Project $ (4)
Industrial Surcharges, if any $ (5)
Costs to be Allocated [Calculate: (4) - (5) ] $ (6)
Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7)
Annual Project Cost per Household [Calculate: (7)/Worksheet C, (4) ] $ (8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet C, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ]
-------
Worksheet D
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any
substantial economic impacts as a result of the proposed pollution control project. The formula is as
follows:
Total Annual Pollution Control Cost per Household , nn
£ x 100
Median Household Income *
(D
(2)
A. Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or
Worksheet C, Option A (10) ]
Median Household Income*
Municipal Preliminary Screener (Calculate: [(l)/(2)] x 100)
B. Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark Comparison:
Little Impact
Less than 1.0%
Mid-Range Impact
1.0%-2.0%
Large Impact
Greater than 2.0%
Indication of no
substantial
economic impacts
Proceed to Secondary Test
* 1990 Census adjusted by CPI inflation rate if necessary.
-------
Worksheet E
Data Used in the Secondary Test
Please list the following values used in determining the Secondary Score. Potential sources of the data
are indicated.
A. Data Collection
Data Potential Source Value
Direct Net Debt Community Financial Statements
Town, County or State Assessor's Office
$ 0)
Overlapping Debt Community Financial Statements
Town, County or State Assesor's Office $ (2)
Market Value of Property Community Financial Statements
Town, County or State Assessor's Office
$ (3)
Bond Rating Standard and Poors or Moody's
W
Community Unemployment 1990 Census of Population
Rate Regional Data Centers - %(5)
National Unemployment Bureau of Labor Statistics
Rate (202)606-6392 %(6)
Community Median 1990 Census of Population
Household Income $ (7)
State Median Household 1990 Census of Population
Income $ (g)
Property Tax Collection Community Financial Statements
Rate Town, County or State Assessor's Office %(9)
Property Tax Revenues Community Financial Statements
Town, County or State Assessor's Office $ (10)
-------
Worksheet E, Continued
B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2)) $ (11)
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(11)/(3)] x 100)
2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
-------
Wr heet F
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as
a single indicator with the remaining indicators.
Indicator
Bond Rating
Worsksheet E, (4)
Overall Net Debt as Percent
of Full Market Value of
Taxable Property
Worksheet E, (12)
Unemployment
Worksheet E, (5)& (6)
Median Household Income
Worksheet E, (7) & (8)
Property Tax Revenues as a
Percent of Full Market
Value of Taxable Property
Worksheet E, (13)
Property Tax Collection
Rate
Worksheet E, (9)
Secondary Indicators
Weak*
Below BBB (S&P)
Below Baa (Moody 's)
D
Above 5%
D
Above National Average
D
Below State Median
D
Above 4%
D
< 94%
D
Mid-Range*
BBB (S&P)
Baa (Moody 's)
D
2%-5%
D
National Average
D
State Median
D
2%-4%
D
94% - 98%
D
Strong
Above BBB (S&P) or
Baa (Moody 's)
D
Below 2%
D
Below National Average
D
Above State Median
D
Below 2%
D
> 98%
D
Score
* Weak is a score of 1 point
'* Mid-Range is a score of 2 points
***
Strong is a score of 3 points
SUM
AVERAGE
-------
Worksheet G
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant) _$ (1)
Interest Rate for Financing (Expressed as a decimal) (i)
Time Period of Financing (Assume 10 years*) 10 years (n)
Annual ization Factor** = + i (2)
(1+i)10 - 1
Annualized Capital Cost [Calculate: (1) x (2) ] $ (3)
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal charges, repair, administration and replacement)* $ (4)
Total Annual Cost of Pollution Control Project [ (3) + (4) ]
(5)
While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
Or see Appendix B for calculated annualization factors
For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replaced once every three years, include one-third of the cost in
each year).
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Worksheet H
Calculation of Earnings Before Taxes
With and Without Pollution Control Project Costs
A. Earnings Without Pollution Control Project Costs
EBT = R - CGS - CO
Where: EBT = Earnings Before Taxes
R = Revenues
CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect
labor, rent and heat)
CO = Portion of Corporate Overhead Assigned to the Discharger (selling,
general, administrative, interest, R&D expenses, and depreciation on
common property)
Three Most Recently Completed Fiscal Years
19 19 19
EBT [ (1) - (2)-(3) ]
R $ _$ 3 (1)
CGS $ $ _$ (2)
CO $ $ $ (3)
II (4)
Considerations: Have earnings before taxes changed over the three year period? If so, what would a
"typical" year's EBT be? Please explain below.
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Worksheet H, Continued
B. Earnings With Pollution Control Project Costs
EWPR = EBT - ACPR
Where: EWPR = Earnings with Pollution Control Project Costs
EBT = Earnings Before Taxes (4)
ACPR = Total Annual Costs of Pollution Control Project [Worksheet G, (5) ]
19 *
EBT (4) $ (5)
ACPR [Worksheet G, (5)] $ (6)
EWPR [ (5) - (6) ]
$ (7)
* The most recently completed fiscal year
Considerations: Is the discharger expected to have positive earnings after paying the annual cost of
pollution control? D Yes D No
Additional Comments:
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Worksheet I
Calculation of Profit Rates
With and Without Pollution Control Project Costs
A. Profit Rate Without Project Costs
PRT = EBT H- R
Where:
PRT
EBT
R =
Profit Rate Before Taxes
Earnings Before Taxes
Reveneus
EBT [Worksheet H, (4)]
R [Worksheet H, (1)]
PRT = Calculate: [(l)/(2)]
Three Most Recently Completed Fiscal Years
19
19
19
(1)
(2)
(3)
Considerations: How have profit rates changed over the three years?
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
How do these profit rates compare with the profit rates for this line of business"? Please discuss
below.
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Worksheet I. Continued
B. Profit Rate With Pollution Control Costs
PRPR = EWPR -i- R
Where: PRPR = Profit Rate With Pollution Control Costs
EWPR = Before-Tax Earnings With Pollution Control Costs
R = Reveneus
The Most Recently
Completed
Fiscal Year
19
EWPR [Worksheet H, (7)] $ (4)
R [Worksheet H, (1)] $ (5)
PRPR [Calculate: (4)1(5)] (6)
Considerations:
What is the percentage change in the profit rate due to pollution control costs ? Calculate as follows:
(PRPR - PR)/PR x 100
How does the profit rate with pollution control compare to the profit rate of this line of business?
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Worksheet J
Calculation of The Current Ratio
CR = CA + CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expenses, and accounts
receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes, and
the current portion of long-term debt)
Three Most Recently Completed Fiscal Years
19 19 19
CA _$ _$ _$ (1)
CL $ $ $ (2)
CR [Calculate: (l)/(2)] (3)
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
Is the Current Ratio (3) greater than 2.0? D Yes D No
How does the Current Ratio (3) compare with the Current Ratios for other firms in this line of business?
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Worksheet K
Calculation of Beaver's Ratio
BR = CF -H TD
Where: BR = Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Three Most Recently Completed Fiscal Years
19 19 19
Cash Flow:
Net Income After Taxes $ $ $ (1)
Depreciation $ $ $ (2)
CF [Calculate: (1) + (2)] $ $ _$ (3)
Total Debt:
Current Debt $ $ $ (4)
Long-Term Debt $ $ $ (5)
Total Debt $ $ $ (6)
Beaver's Ratio:
BR [(3) /(6)]
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
Is the Beaver's Ratio for this discharger greater than 0.2? D Yes D No
Is the Beaver's Ratio for this discharger less than 0.15? D Yes D No
Is the Beaver's Ratio for this discharger between 0.2 and 0.15? D Yes D No
How does this ratio compare with the Beaver's Ratio for other firms in the same business?
(7)
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Worksheet L
Debt to Equity Ratio
DER = LTL -s- OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities Qong-term debt such as bonds, debentures, and bank
debt, and all other noncurrent liabilities such as deferred income taxes)
OE = Owner Equity (the difference between total assets and total liabilities,
including contributed or paid in capital and retained earnings)
Three Most Recently Completed Fiscal Years
LTL
OE
19
19
19
(1)
(2)
DER
(3)
Considerations:
Is the most recent year typical of the three years? D Yes D No
(If not, you might want to use an earlier year or years for the analysis)
How does the Debt to Equity Ratio compare with the ratio for firms in the same business?
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Worksheet M
Qualitative Description of Estimated change
hi Socioeconomic Indicators
due to Pollution Control Costs
Estimated change
in Median
Household
Income (MHI)
Estimated change
in the
unemployment
rate
Estimated change
in overall net debt
as a percent of
full market value
of taxable
property
Estimated change
in % of
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
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Worksheet N
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included. (1)
Current unemployment rate in affected community (if available). (2)
Current national unemployment rate. (3)
Additional number of persons expected to collect unemployment in affected (4)
community due to compliance with water quality standards. ^^^
Expected unemployment rate in the affected community after compliance with (5)
water quality standards (Current # of persons collecting unemployment
in affected community + (4)/labor force in affected community.
Median household income in affected community. (6)
Total number of households in affected community. (7)
Percent of population below the poverty line in affected community. (8)
Current expenditures on social services in affected community. (9)
Expected expenditures on social services due to job losses in the affected (10)
community.
Current total tax revenues in the affected community. _ (11)
Tax revenues paid by the private entity to the affected community. (12)
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Worksheet N, continued
Tax revenues paid by the private entity as a percentage of the affected (13)
community's total tax revenues.*
Current statewide unemployment rates. (14)
Additional number of persons expected to collect unemployment in the State (15)
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality (16)
standards (Current # of persons collecting unemployment in State +
(15)/labor force in State.
Current expenditures on social services in State. (17)
Expected statewide expenditures on social services due to job losses. (18)
* In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis
should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.
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Worksheet O
Pollution Control Project
Summary Information
Design Capacity of the Pollution Control System
Expected Excess Capacity after Completion of Project
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed. Include description of all pollution
prevention activities included in the project. (Attach additional page if necessary).
Please describe the other pollution control options considered, including pollution prevention activities.
Explain why each option was rejected. (Attach additional page if necessary).
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Worksheet P
Public-Sector Pollution Control
Calculation of Total Annualized Project Costs
A. Capital Costs
Capital Cost of Project
Other One-Time Costs of Project (Please List, if any):
Total Capital Costs (Sum column) $ (1)
Portion of Capital Costs to be Paid for with Grant Monies $ (2)
Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal) (i)
Time Period of Financing (in years) (n)
Annual ization Factor = - 1 - + i (or see ...
(l+i)n - 1 W
Appendix B)
Annualized Capital Cost [Calculate: (3) x (4) ] (5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
$
Total Annual O & M Costs (Sum column) $ (6)
C. Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ]
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Worksheet Q
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control $ (1)
Amount of Existing Costs Paid By Households $ (2)
Percent of Existing Costs Paid By Households %(3)
Number of Households* (4)
Annual Cost Per Household [Calculate: (2)/(4) ] $ (5)
* Do not use number of hook-ups.
B. New Pollution Control Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b or c and continue as directed.)
D a) Yes [fill in percent from (3) ]
D b) No, they are expected to pay
percent. (6a)
percent. (6b)
D c) No, they are expected to pay based on flow. (Continue on Worksheet Q, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet P] $ (7)
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ] (8)
Amount to Be Paid By Households [Calculate: (9) x (10) ] • $ (9)
Annual Cost per Household [Calculate: (ll)/(4) ] $ (10)
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10) 1$
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Worksheet Q: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment) (1)
Usage due to Household Use (MGD of Household Wastewater) (2)
Percent of Usage due to Household Use [Calculate: (2)/(l) ] %(3)
Total Annual Cost of Pollution Control Project $ (4)
Industrial Surcharges, if any $ (5)
Costs to be Allocated [Calculate: (4) - (5) ] $ (6)
Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7)
Annual Project Cost per Household [Calculate: (7)/Worksheet Q, (4) ] $ (8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet Q, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ] $ (JQ)
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Worksheet R
Private-Sector Development
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant) $ (1)
Interest Rate for Financing (Expressed as a decimal) (i)
Time Period of Financing (Assume 10 years*) 10 years (n)
Annualization Factor = + i (2)
(1+i)10 - 1
Annualized Capital Cost [Calculate: (1) x (2) ] $ (3)
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal charges, repair, administration and replacement)*** $ (4)
Total Annual Cost of Pollution Control Project [ (3) + (4) ]
(5)
While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
Or see Appendix B for calculated annualization factors
*«*
For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replaced once every three years, include one-third of the cost in
each year).
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Worksheet S
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any
substantial economic impacts as a result of the proposed pollution control project. The formula is as
follows:
Total Annual Pollution Control Cost per Household inft
^——^————————————— x 1UU
Median Household Income*
A. Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or
Worksheet C, Option A (10) ]
Median Household Income*
Municipal Preliminary Screener (Calculate: [(l)/(2)] x 100)
(i)
(2)
B. Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark Comparison:
Little Impact
Less than 1.0%
Mid-Range Impact
1.0% -2.0%
Large Impact
Greater than 2.0%
Indication of no
substantial
economic impacts
Proceed to Secondary Test
1990 Census adjusted by CPI inflation rate if necessary.
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Worksheet T
Data Used in the Secondary Test
Please list the following values used in determining the Secondary Score. Potential sources of the data
are indicated.
A. Data Collection
Data Potential Source Value
Direct Net Debt Community Financial Statements
Town, County or State Assessor's Office
$ 0)
Overlapping Debt Community Financial Statements
Town, County or State Assesor's Office $ (2)
Market Value of Property Community Financial Statements
Town, County or State Assessor's Office
$ (3)
Bond Rating Standard and Poors or Moody's
(4)
Community Unemployment 1990 Census of Population
Rate Regional Data Centers %(5)
National Unemployment Bureau of Labor Statistics
Rate (202) 606-6392 %(6)
Community Median 1990 Census of Population
Household Income $ (7)
State Median Household 1990 Census of Population
Income $• (8)
Property Tax Collection Community Financial Statements
Rate Town, County or State Assessor's Office %(9)
Property Tax Revenues Community Financial Statements
Town, County or State Assessor's Office $ (10)
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Worksheet T, Continued
B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2)) $ (11)
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(ll)/(3)] x 100)
2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
%03)
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Worksheet U
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as
a single indicator with the remaining indicators.
Indicator
Bond Rating
Worsksheet T, (4)
Overall Net Debt as Percent
of Full Market Value of
Taxable Property
Worksheet T, (12)
Unemployment
Worksheet T, (5)& (6)
Median Household Income
Worksheet T, (7) & (8)
Property Tax Revenues as a
Percent of Full Market
Value of Taxable Property
Worksheet T, (13)
Property Tax Collection
Rate
Worksheet T, (9)
Secondary Indicators
Weak*
Below BBB (S&P)
Below Baa (Moody's)
D
Above 5%
D
Above National Average
D
Below State Median
D
Above 4%
D
< 94%
D
Mid-Range
BBB (S&P)
Baa (Moody's)
D
2%-5%
D
National Average
n
State Median
n
2%-4%
D
94% - 98%
D
r,, ***
Strong
Above BBB (S&P) or
Baa (Moody's)
D
Below 2%
D
Below National Average
D
Above State Median
D
Below 2%
D
> 98%
D
Score
* Weak is a score of 1 point
'* Mid-Range is a score of 2 points
*** Strong is a score of 3 points
SUM
AVERAGE
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Worksheet V
Calculation of Earnings Before Taxes
A. Earnings Without Pollution Control Project Costs
EBT = R - CGS - CO
B. Earnings With Pollution Control Project Costs
EWPR = EBT - ACPR
Where: EBT = Earnings Before Taxes
EWPR = • Earnings with Pollution Project Costs
R = Revenues
CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect
labor, rent and heat)
CO = Portion of Corporate Overhead Assigned to the Discharger (selling,
general, administrative, interest, R&D expenses, and depreciation on
common property)
ACPR = Total Annual Costs of Pollution Control Project [Worksheet R (5)]
R
CGS
CO
EBT [ (1) - (2) -(3) 1
ACPR [ Worksheet R (5) ]
(1)
(2)
(3)
(4)
(5)
EWPR [ (4) - (5) ]
(6)
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Worksheet W
Calculation of Profit Rates
A. Profit Rate Without Project Costs
PRT = EBT -s- R
B. Profit Rate With Pollution Control Costs
PRPR = EWPR + R
Where: PRT = Profit Rate Before Taxes
PRPR = Profit Rate with Pollution Control Costs
EBT = Earnings Before Taxes
EWPR = Before-Tax Earnings with Pollution Control Costs
R = Revenues
EBT [Worksheet V, (4)] (1)
R [Worksheet V, (1)] (2)
PRT = Calculate: [(l)/(2)] (3)
EWPR [Worksheet V, (6)] $ (4)
R [Worksheet V, (1)] $ (5)
PRPR [Calculate: (4)/(5)] (6)
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Worksheet X
Calculation of The Current Ratio
CR = CA -H CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expenses, and accounts
receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes, and
the current portion of long-term debt)
CA j> (1)
CL $ (2)
CR [Calculate: (l)/(2)]
(3)
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Worksheet Y
Calculation of Beaver's Ratio
BR = CF •*- TD
Where: BR = Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Cash Flow:
Net Income After Taxes $ (1)
Depreciation $ (2)
CF [Calculate: (1) + (2)] _$ (3)
Total Debt:
Current Debt $ (4)
Long-Term Debt $ (5)
Total Debt $ (6)
Beaver's Ratio:
BR[(3)/(6)] (7)
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Worksheet Z
Debt to Equity Ratio
DER = LTL -r OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities Oong-term debt such as bonds, debentures, and bank
debt, and all other noncurrent liabilities such as deferred income taxes)
QE = Owner Equity (the difference between total assets and total liabilities,
including contributed or paid in capital and retained earnings)
LTL _$ (1)
OE $ (2)
1 0)
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Worksheet AA
Public-Sector Development
Qualitative Description of Estimated Change
hi Socioeconomic Indicators
due to Pollution Control Costs
Estimated change
in Median
Household
Income (MHI)
Estimated change
in the
unemployment
rate
Estimated change
in overall net debt
as a percent of
full market value
of taxable
property
Estimated change
in % of
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
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Worksheet AB
Private-Sector Development
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included. (I)
Current unemployment rate in affected community (if available). (2)
Current national unemployment rate. (3)
Additional number of persons expected to collect unemployment in affected (4)
community due to compliance with water quality standards.
Expected unemployment rate in the affected community after compliance with (5)
water quality standards (Current ft of persons collecting unemployment
in affected community + (4)/labor force in affected community.
Median household income in affected community. (6)
Total number of households in affected community. (7)
Percent of population below the poverty line in affected community. (8)
Current expenditures on social services in affected community. (9)
Expected expenditures on social services due to job losses in the affected (10)
community.
Current total tax revenues in the affected community. (II)
Tax revenues paid by the private entity to the affected community. (12)
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Worksheet AB, continued
Tax revenues paid by the private entity as a percentage of the affected (13)
community's total tax revenues.*
Current statewide unemployment rates. (14)
Additional number of persons expected to collect unemployment in the State , (15)
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality (16)
standards (Current # of persons collecting unemployment in State +
(15)/Iabor force in State.
Current expenditures on social services in State. (17)
Expected statewide expenditures on social services due to job losses. (18)
* In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis
should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.
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