4821
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vvEPA
                United States          Office of Water         March 1984
                Environmental Protection    Programs Operations (WH-547!
                Agency            Washington DC 20460
Financial Capability
Guidebook
                                          OOOR84101
             ' ,-^-v

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United States                                           March 1984
Environmental  Protection                                Revised
Agency
EPA FINANCIAL CAPABILITY GUIDEBOOK
U.S. Environmental Protection Agency
Office of Water Program Operations
Washington, DC

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This report  has been  reviewed by EPA and approved  for publication.  Approval
does not signify that the contents necessarily reflect the views and policies  of
the  Environmental  Protection Agency, nor  does mention  of trade  names  or
commercial products constitute endorsement or recommendation for  use.
Prepared by the Government Finance Research Center of the  Municipal Finance
Officers  Association and Peat,  Mar wick, Mitchell  & Co.

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United States                                           March 1984
Environmental  Protection                                Revised
Agency
EPA FINANCIAL CAPABILITY GUIDEBOOK
U.S. Environmental Protection Agency
Office of Water Program Operations
Washington, DC
                       U.S. Environmental Protection Agency
                       Region  V, Library
                       230 South Dearborn  Street
                       Chicago, Illinois  €0604

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        This report has been reviewed by EPA  and approved for publication.  Approval
        does not  signify that the  contents necessarily reflect the views and policies of
        the  Environmental  Protection  Agency,  nor  does  mention  of  trade names or
        commercial products constitute endorsement or recommendation  for use.
        Prepared by the Government  Finance Research Center  of the Municipal Finance
        Officers Association  and Peat, Warwick, Mitchell &  Co.
        This  document  is  available  to the  public  through  the  National  Technical
        Information Service, Springfield, Virginia 22151.
U,S.  Environmental Protection Agency

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FOREWORD

       This guidebook has been developed for EPA's Office of  Water  Program
Operations to  describe and explain a suggested practical approach which may be
used by a unit of government  to prepare a demonstration of  financial capability.
The  intent of this  demonstration  is  to ensure  adequate  building,  operation,
maintenance, and replacement of a  publicly owned  treatment works.  It is to be
noted that the statements, conclusions, and  recommendations contained herein
are not to be construed  as  setting forth any legal  or  regulatory requirements
beyond  those  set forth  in the Federal  Water  Pollution Control Act, as amended
(33 U.S.C.  466 et  seq.) and the Construction Grants Regulation, W CFR, Part
35.

       This publication  was originally  written by  Catherine L.  Spain, Hamilton
Brown,  and Pat  Watt of the Government Finance  Research  Center (GFRC) and
Larry J. Scully of Peat, Marwick,  Mitchell <5c Co.  EPA staff who reviewed  it
are Myron Tiemens, Paul Kraman, Jim  Meek, Lee Pasarew, Betsy LaRoe, George
Gray,  Donald  Kunkoski,  Keith  Dearth, George  Ames,  Connie  Bosma,  William
Kramer, and  Jerre  Manarolla.   James  Fagan, Joseph  T.  Kelley (GFRC)  and
Suzanne Zoda  also worked on  the second edition.
                                     Ill

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                              TABLE OF  CONTENTS

Chapter                                                                   Page


   I.      Introduction

          o  Purpose of the Guidebook                                        1
          o  Guidebook Audience                                              2
          o  Approach  Used in this Guidebook                                 4
          o  Application and Evaluation Procedures                            4
          o  Guidebook Organization                                          7
   II.     Overview of Approach and Notes on the  Preparation
          of a  Financial Capability  Analysis

          o  An Overview of  the Approach                                    9
          o  -  Worksheet //I:    Roles and  Responsibilities
                               of Local Governments                          9
             -  Worksheet #2:    Facilities Cost Estimate                        9
             -  Worksheet #3:    Financing the Facilities                       11
             -  Worksheet #4:    Determining the Annual Costs
                               per  Household                                 11
             -  Worksheet #5:    Assessing the Community's
                               Debt History                                  11
             -  Worksheet #6:    Evaluating the Community's
                               Financial Condition                           12
          o  Notes on the Preparation of a Financial
             Capability Analysis                                             12
             -  Obtaining  the Data                                            13
             -  Estimating Needed Data                                        13
             -  Knowing Which Number to Use When
               There's a Choice                                              13
             -  Recognizing the Effect of Different
               Accounting Methods                                           13
             -  Incorporating Trend  Analysis into the
               Financial Capability  Assessment                                14
             -  Taking Account of Inflation and  Economic
               Change                                                       14
             -  Considering Overlapping Debt                                  14
             -  Funding Financial Capability Analysis                          15
   III.     Financial Capability  Analysis Worksheets and
          Instructions

          o  Evaluating Results of the Analysis                               17
             -  Worksheet #1:  Roles  and Responsibilities
                              of Local Governments                         23
             -  Worksheet #2:  Facilities Cost Estimate                       27

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           -  Worksheet #3:  Financing the Facilities                        35
           -  Worksheet #4:  Determining the Annual Costs                  47
           -  Worksheet #5:  Assessing the Community's
                            Debt History                                   53
           -  Worksheet #6:  Evaluating the Community's
                            Financial  Condition                            59
Appendices
       A.  Selected  References                                           A-3

       B.  Glossary  of  Financial Terms                                    B-3

       C.  The Calculation of  Capital Recovery Factors                   C-3

       D.  Sensitivity Analysis                                            D-3
LIST OF EXHIBITS
                                                                         Page

Exhibit  I   Integration of Financial Capability Analysis
           into the Construction Grants Process                             3

Exhibit  II  Relationship of Guidebook to  Financial
           Capability Policy Facilities                                      5

Exhibit  III  Flow of Information from Source
           Documents to  Worksheets                                       10

Exhibit  IV  Overlapping Debt in Community "A"                             16

Exhibit  V  Wastewater  Facilities  Financial
           Information  Sheet                                               19

Exhibit  VI  Basis for Identification of Regional
           Costs                                                          24

Exhibit  VII Supplemental Information  Sheet                                 52
                                      VI

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                                 CHAPTER I

                                INTRODUCTION
Purpose of the Guidebook

       This Financial Capability Guidebook  is designed to assist your community
as  it  considers  the  commitment  of  public  funds  to  construct  wastewater
facilities.   Constructing,  operating,  and  maintaining  a  wastewater  system
represents a major financial undertaking  which affects the local government as
well as the customers  who will bear the ultimate cost burden.  It is  important
that your community and its residents fully understand the cost  implications of
the plan;  successful implementation  depends on  their support.  Careful analysis
of the financial and management  aspects of  the system alternatives  will  more
likely result in the choice of a plan which the  community can support.

       This is  the  basis  of  EPA's  Policy  on   Financial  and  Management
Capability as it  applies  to the Federal  Construction  Grants Program.  Before
receiving  a Step 3  or  2+3  grant,  your  community must be able  to demonstrate
that it has the financial capability  to  pay for  the  capital investment and the
cost  of   operation  and   maintenance  of  the  system,  including   equipment
replacement (O,M&R). \J

The Policy requires applicants  to address  the following five questions:

       1.    What is proposed in the  facility plan?
       2.    What roles and responsibilities will local governments have?
       3.    How  much will  the facilities cost at  today's prices?
       4.    How  will   construction  and  operation  of the  facilities   be
            financed?
       5.    What are the annual costs per household?

       In   addition, community officials  must  certify  in  writing  that  the
community  has  analyzed  the  costs  and financial  impacts  of  the   proposed
facilities  and  that  it has the capability to finance and manage the construction
and  operation of  the  facilities  in   accordance  with   the  construction grants
regulations.
\_l This  demonstration is required by the  Clean Water  Act, as  amended, as well
as the revised  Construction  Grants regulations  and the Policy  on Financial  and
Management  Capability.  The  applicant  must submit, along with the Step 3 or
2+3 application, a letter certifying that it has  analyzed  the costs and  financial
impacts of the proposed facilities and that it  has  the  capability to  finance  and
manage construction  and operation.  The certification letter should be signed by
an elected official or chief financial  officer authorized to commit funding  for
the municipality.

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       To  demonstrate financial capability as  required  for an  EPA construction
grant, an  applicant  should complete  a form  called  the Wastewater  Facilities
Financial Information Sheet (Exhibit V) or comparable  information in  a format
stipulated by the delegated State and  the  written  certification described above.
The  Guidebook  also contains a  form called  the Supplemental  Information Sheet
(Exhibit  VII) which is  useful in  evaluating  the overall financial condition of the
community.  Although not specifically required for the  grant application, this
sheet  provides  additional  information  for determining  financial  capability  to
finance and support the wastewater  system.  2f

       While demonstration of  financial capability is not  required  until the  Step
3 or  2+3 application  is made,  the  financial assessment must  be  built into the
planning and  design  stages of  any  project  for which  Federal  funding  will  be
sought.  Changes  in  economic  growth, indebtedness,  tax  revenues, and  other
community  characteristics may  well  influence critical  choices  as  a  project
moves toward the construction  phase.  The time line in Exhibit I recommends the
appropriate level of analysis for the various  stages of project development.  The
preliminary  financial  analysis   undertaken  during the  planning  stage should
identify  for all parties  involved  the  range  of  financial  and  administrative
responsibilities they will share, including estimates  of construction, O,M&R, and
household  costs.   The  more detailed  analysis during  the  design  stage should
refine the preliminary analysis  and  be used as a  basis for developing the  user
charge  system.   The  preliminary financial analysis should help  your community
select the  most cost-effective  and technically  appropriate  solution  for  your
water quality problems.

Guidebook Audience

       While this Guidebook can be used  by grant applicants  from incorporated
and   unincorporated  areas  of   any  size,   it  is  written  especially  to  assist
communities with populations of 10,000 or  less, that:

       o    provide service only within a single jurisdiction or
            sanitary  district; or

       o    represent an independent service area within  a
            regional  system.

Guidance is  particularly important for this  primary audience  since communities
of this size account  for   nearly  70 percent  of  the  total  number of  Federal
construction grants awarded.
2]  In order  to  account  for  unique  aspects of  State laws  governing  local
financing and institutional arrangements,  all States are encouraged  to  develop
specific  guidance  and procedures  for   communities   to   use  to  demonstrate
financial capability.  The  grant applicant may use  any  format it chooses  to meet
the requirement, including, as examples,  a financial plan,  a separate chapter in
the facilities plan, or  procedures as prescribed by a  delegated  State,  provided
that the information  required is  adequately addressed.

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                  EXHIBIT I

INTEGRATION OF FINANCIAL CAPABILITY ANALYSIS
    INTO THE FACILITIES PLANNING PROCESS
Planning Design


Considera-
tion of
Alternative
Systems,
Population
Projections,
Water Quality,
and
Engineering
Data
i
Preliminary
Financial
Analysis
During
Planning
Including
Estimates
of Construction,
O, M&R, and
Household Costs

Facilities
Design
More Detailed
Construction
— ^ and
O,M&R Costs
T
Develop
of User
Charge
t
i
Refinement a
ment
System
1
rid Update of Financial Analysis
Construction
(Step 3 or 2 + 3)
1 4 '
Step 3 or 2 + 3
Grant
Application
4
Financial Capability
Demonstration
and

i >


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Approach Used in  this Guidebook

       Before  a  community is  able to borrow money,  lending  institutions  and
other potential  investors must  have an indication  of the community's  financial
strength.  Bond ratings  are the best known and most commonly used  measure.
The  methodology  used  in  this  Guidebook  relies  on  traditional  credit  analysis
developed by rating  services. 3]  The  techniques  have  been modified  so that
local officials can work  through the analysis themselves.  Whenever possible, the
Guidebook  uses   nontechnical  terminology  to  describe  the  information  and
processes involved in financial capability analysis.

       Long used  in the private sector, financial indicators have  been developed
for  use  in   analyzing   the  fiscal  health   of  both  large  and   small  units  of
government. The  indicators developed for  this Guidebook measure  the  financial
condition of the community and the financial burden of the proposed project on
households.   In examining  such indicators  as  the  real  property tax  collection
rate,  overall  debt  outstanding  as  a  percentage  of  personal   income,  annual
population growth rate, etc., it  is possible to distinguish  between  communities
with adequate  credit  capacity  to undertake a major capital project, and those
likely to experience  financial difficulty.  The  burden upon  individual households
is  measured by the residential  share of the total  wastewater treatment  system
costs.

Application  and Evaluation  Procedures

       In addressing the major  financial capability  issues, information on  diverse
subjects,  such  as  population, tax revenues, debt  obligations,  and  construction
costs is   required.  Completion of  the Financial  Information  Sheets  and  the
Supplemental Information  Sheet  will likely require  the  involvement of  one or
more  individuals.   The  participants may  include  all principal  administrative,
financial, engineering, and  public  works staff and their advisors.

       In order to  demonstrate  financial  capability  of  the  community,  Step 3
and  2+3 applicants  must, at a minimum,  submit the financial and  institutional
information   presented  in   the  Financial  Information  Sheet.   The  optional
Supplemental  Information  Sheet   permits  a  detailed  analysis  of  financial
condition.

       Benchmarks have been  provided on the Supplemental  Information Sheet
for assessing a community's relative financial  strengths  and weaknesses.  These
benchmarks  are intended as general guides and have  been developed through the
statistical analysis of financial  indicators in a  broad  range  of communities, k]
3/ Moody's Investors Service and Standard and  Poors  Corporation are the best
known rating  agencies.

4/ These  indicators do  not take into account  State laws affecting a community's
ability  to raise  revenues.   Therefore,  State-specific  benchmarks  may be more
restrictive or liberal, depending on the  circumstances.

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                                           EXHIBIT II
           RELATIONSHIP OF GUIDEBOOK TO FINANCIAL CAPABILITY POLICY
     EPA POLICY ON
     RNANCIAL AND
     MANAGEMENT
     CAPABILITY—
     REQUIREMENTS
APPROPRIATE
WORKSHEET IN
GUIDEBOOK
  RESULTS ARE
SUMMARIZED IN:
 1.   Facility Plan"

 2.   Rules and
      Responsibilities

 3.   Current Costs

 4.   Financing

 5.   Annual Household Costs

      Certification
Worksheet #1

Worksheet #2

Worksheet #3

Worksheet #4
                                        Worksheets #5 & #6
                                        (optional, not
                                        required by
                                        Policy)
Wastewater
Facilities
Financial
Information
Sheet (Exhibit V]
                                     Supplemental
                                     Information
                                     Sheet (Exhibit VII)
"There is no worksheet in the Guidebook which corresponds to the Facility Plan question in the Policy.
Information to answer this question should come directly from the Facility Plan itself.

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       When assessing  this financial information, some communities may  decide
that the proposed treatment system  is  not financially  feasible.   In such cases, a
number  of potentially less costly alternatives may be considered. 6/

       a)   Restructuring of the  financing may  considerably reduce  the
            assessments or the  monthly carrying  charges.

       b)   Upgrading,   rehabilitation,  and/or   proper   operation   and
            maintenance  of existing  on-site systems should be considered.

       c)   Innovative  or  alternative wastewater  treatment processes may
            be less centralized, less structured, less energy intensive,  and
            sometimes  simpler  to  operate.   Some  examples are:  septic
            systems, mounds, cluster systems, and overland flow.  Another
            example is  the use  of  alternative  conveyance systems, such as
            small  diameter gravity  and pressure sewers  to  carry septic
            tank  effluent  to  better  subsurface  treatment  and disposal
            sites. In many areas, similar systems  can  carry wastewater at
            a fraction  of  the capital cost  and  often at lower maintenance
            and  operation costs  than conventional  gravity  sewers  and
            central  treatment.   These technologies, grouped together as
            Small  Alternative   Wastewater   Systems,  are   particularly
            appropriate  for  rural  areas  or   for   portions  of  larger
            communities with dispersed populations. 7j

       d)   Staged  project  development  allows  a community  to  finance
            the facilities over  an extended  time period rather than to
            finance  the entire  project all  at  once.  Legally  imposed debt
            limits or  large projected  population increases  may  dictate
            staged development.  However, EPA  regulations on  phased  and
            segmented  projects may  discourage this.   EPA  regulations
            (Section  35.2108)  should   be  consulted  before  communities
            decide to stage a project.

       e)   A  community's financial  constraints may  require that  the
            project  be redesigned.  Modifications might  include  smaller
            facilities,  less  sophisticated  treatment  processes to  lower
            investment   and    O,M
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       A  community  that  believes  that  water  quality  standards  impose  a
severe economic burden  may wish to seek a modification of water quality permit
standards.   Under  Section  302(b)(2) of  the Water Pollution  Control  Act  (PL
97-117), affected parties may petition for a change in effluent standards if they
can  demonstrate at  a  public  hearing that  "there  is no  reasonable  relationship
between  the economic and  social costs  and benefits  to be  obtained..."   By law,
the State  administrator  may adjust  the water  quality standards if  the costs are
judged to  be unreasonable.

Guidebook Organization

       This Guidebook contains  information, worksheets, and instructions  which
provide an approach to answering the five  questions.   There are six  worksheets
in  which detailed information  is developed and two summary information sheets
which consolidate the results.  The  six individual  worksheets provide a format to
develop detailed  cost, financing, and management  information pertaining  to the
proposed   waste water   system,  and   financial   indicators   relating  to   the
community's  overall  condition.    The   relationship   between   the  Guidebook
worksheets  and the five  Financial  Capability  Policy  questions  is  shown in
Exhibit  II.

       The  "Wastewater  Facilities Financial Information  Sheet"  (Exhibit  V)
provides  a  format  that  can  be used  to summarize the  answers  to  the five
questions  posed by  the Financial and Management Capability policy.   Question  1
(above) requests  a  synopsis of  facility  plan  information,  and  the  answers  to
Questions 2-5 may  be developed by using Guidebook Worksheets //I - /M;  this
information may then  be  transferred  to the Wastewater  Facilities Financial
Information Sheet.   The "Supplemental   Information  Sheet"  (Exhibit  VII)  is  a
summary of the information developed  on Worksheets  #5 and #6,  providing  11
key  indicators  by  which  a  community  may  evaluate  its  overall  financial
condition.

       This chapter of the  Financial Capability Guidebook introduces the reader
to the purpose of  the Guidebook and the  major issues that will  be addressed.
Chapter  II explains  the  approach  to be  used  in completing  the worksheets  as
well as  some notes on locating and understanding information  sources.  Chapter
III presents and explains the Wastewater Facilities Financial  Information  Sheet
and  the  first  four  worksheets.    In  the  last  section   of  Chapter   III,  the
Supplemental  Information  Sheet and the  fifth  and  sixth    worksheets  are
explained.   Appendix A  has   been included to  provide  references  to  other
resource  materials  on   financial  indicators, credit  analysis,  and  financial
capability.  Definitions of the more technical terms used in the worksheets are
found  in  Appendix  B.   Appendix  C  demonstrates how to calculate  a Capital
Recovery  Factor.   Appendix  D  discusses how  to perform a sensitivity analysis
and how it can be used to test  the  impact of differing assumptions.

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                                 CHAPTER II


    OVERVIEW OF  APPROACH AND NOTES ON  THE PREPARATION OF  A
                     FINANCIAL CAPABILITY ANALYSIS

       Chapter  I has introduced  you to the purpose of the Guidebook and  the
methods you can use to analyze your community's financial capability.  To assist
you in filling  out the worksheets as accurately and thoroughly as possible, this
chapter provides an  "Overview of the Approach"  which  is intended to provide an
understanding  of how one source of information  will influence or be influenced
by another. In addition, the chapter contains some "Notes on the Preparation of
a Financial Capability Analysis," which  anticipate  difficulties  in  locating or
putting together  necessary information for  the worksheets.


An Overview of the Approach

       The  key  to  understanding  the  approach   used  is   to  recognize   the
interrelationships  between  information  used   in   the  analysis  of  financial
capability  and the results  of the analysis.  Exhibit III illustrates the flow of
information from source documents to the worksheets  and then downward from
worksheet  to  worksheet  until it reaches  its final destination on  the  Wastewater
Facilities   Financial  Information   Sheet  (Exhibit  V)  or   the  Supplemental
Information Sheet (Exhibit VII).  As an introduction  to the worksheets in Chapter
HI, a  brief description of each follows,  with a  list  of the  major resources to be
consulted  for  its completion.

       Worksheet //I;   Roles   and  Responsibilities   of  Local  Governments.
Worksheet  //I  is  intended to  summarize the key management agencies, the roles
they will  be assigned,  and the agreements that  will be  needed  to  provide  for
continued  cooperation  in  the  management of  the  facilities.   An  applicant
proposing  to construct a waste water treatment facility  designed to serve  two or
more  public agencies must show how the  costs will  be allocated among  the
participating jurisdictions or agencies.  Among  the  documents used in filling  out
this worksheet are:

       o    preliminary agreements reached during the planning and design
           stages; and

       o    map(s) of the overlapping jurisdictions  that collect  taxes or
           charge user fees within the wastewater  service area.

       Worksheet #2;   Facilities Cost  Estimate.  A  realistic  assessment  of
financial  capability  depends  on  accurate estimates of construction, operation,
maintenance,  and replacement  costs for  the  proposed  wastewater  facilities.
These  estimates  provide  the basis for   determining  both the  amount of local
financing required and the annual cost to the user  necessary to support the new
facilities.   Worksheet #2 summarizes the construction costs and operation,

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                        EXHIBIT III
       FLOW OF INFORMATION FROM SOURCE DOCUMENTS TO WORKSHEETS
SOURCE DOCUMENTS
WORKSHEETS AND INFORMATION SHEETS

PRIMARY AGREEMENTS FROM
PLANNING AND DESIGN STAGES
MAPS OF OVERLAPPING
JURISDICTIONS




WORKSHEET #1
ROLES AND RESPONSIBILITIES
OF LOCAL GOVERNMENTS
0
PLANNING REPORTS
ENGINEERING DESIGN STUDIES
USER CHARGE STUDIES

ENGINEERING STUDIES
FINANCIAL RECORDS FOR EXISTING
O,M*R AND DEBT SERVICE
ESTIMATES OF CONSTRUCTION-RELATED COSTS
ESTIMATES OF INTERGOVERNMENTAL
ASSISTANCE
ESTIMATES OF OTHER SOURCES OF
FUNDING USED TO REDUCE AMOUNT
BORROWED

U.S. CENSUS BUREAU REPORTS-
CURRENT ECONOMIC AND DEMOGRAPHIC
DATA
ENGINEERING REPORTS




















WORKSHEET #2
FACILITIES COST ESTIMATE
<>
WORKSHEET #3
FINANCING THE FACILITIES
0
WORKSHEET #4
DETERMINING THE ANNUAL
COSTS PER HOUSEHOLD
<>
WASTEWATER FACILITIES
FINANCIAL INFORMATION SHEET

ANNUAL FINANCIAL REPORTS
REPORTS TO STATE AND OTHER
REGULATORY AGENCIES
OFFICIAL STATEMENTS




WORKSHEET #5
ASSESSING THE COMMUNITY'S
DEBT HISTORY
ANNUAL FINANCIAL REPORTS
STATE AGENCY PUBLICATIONS
STATEWIDE ORGANIZATION REPORTS
SPECIAL STUDIES FROM PLANNING
DEPARTMENT AND ASSESSOR' S
OFFICE





WORKSHEET #6
EVALUATING THE COMMUNITY'S
FINANCIAL CONDITION
                              10
                                         SUPPLEMENTAL INFORMATION SHEET

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maintenance,  and replacement  costs for the  proposed system. J_/  Estimates in
today's prices  should  be developed for all  of the costs that will  be incurred,
including  management, overhead, outside services, and  equipment  replacement.
The  major sources of information for Worksheet #2 are:

       o   planning  reports;
       o   engineering design studies; and
       o   user charge studies.

       Worksheet #3;   Financing  the  Facilities. Worksheet #3 estimates  the
amount to  be  borrowed  by the  grantee  and  the methods of  financing  that
amount.  Total annual costs, which include operation,  maintenance,  replacement,
and  debt service for the new as  well as existing facilities, are then calculated
and  a summary of the sources of funds for  paying the annual costs  is provided.
Information  for completing this  worksheet  comes  from Worksheets //I and ft2 as
well as:

       o   engineering studies;
       o   community financial  records  showing existing O,M<5cR and  debt
           service costs;
       o   cost  estimates  of  construction-related  costs  obtained   from
           outside experts;
       o   estimates of construction costs  to  be paid by  Federal  and/or
           State governments;
       o   estimates of  other  sources of  funding  that  will  be used to
           reduce the amount borrowed; and
       o   method of financing  the amount to be borrowed.

       Worksheet #4;  Determining the Annual Costs Per Household. The purpose
of this  worksheet is  to  determine the total  annual  costs per  household for  the
community's  wastewater treatment system.   The information  required on  this
worksheet comes principally from Worksheets #2  and #3, but it also relies on:

       o   U.S.  Census  Bureau  reports   on   current   economic  and
           demographic  data; and
       o   engineering reports.

       Worksheet #5;  Assessing the  Community's Debt  History. The purpose  of
this  worksheet  is   to  profile  and summarize  the community's debt  history.
Information  presented  on  this  worksheet is  used for calculating the financial
indicators found on  Worksheet  #6.  To establish community  debt levels before
and  after  construction of  the  proposed  facilities,  Worksheet #5  will  draw
information  from a  number of the following sources:

       o   annual financial reports;
j_/  "Replacement" has been defined by The Clean Water  Act in  this instance  to
mean periodic  replacement of equipment  or other items  necessary to keep the
system operational for its  expected useful life.
                                      11

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       o   reports submitted  to State and other regulatory agencies;
       o   State agency publications; and
       o   official statements issued in conjunction with bond sales.

       Worksheet #6:   Evaluating the  Community's Financial  Condition.  The
assessment  of a community's financial  condition  involves  the calculation  and
analysis of 11 key financial indicators.  The indicators have  been chosen because
of their  importance in explaining  the  difference  in  creditworthiness  between a
community with  a  strong  credit  rating  and  one that has a  weak credit rating.
Worksheet #6 draws primarily from the data on other worksheets  but also  may
require information  from:

       o   annual financial reports;
       o   State agency publications;
       o   reports prepared  by statewide organizations; and
       o   special studies prepared by  the  planning department and  the
           assessor's office.

       Working  through  the  six  worksheets  will  enable  your  community  to
evaluate its  financial  strengths and weaknesses.  The transfer of information on
a line-by-line basis from  the  worksheets  to  the  Financial Information Sheet
(Exhibit  V)  and  the  Supplemental  Information Sheet  (Exhibit  VII) represents the
final steps on the Exhibit  III  flow  chart.
Notes on the Preparation of a Financial  Capability Analysis

       Financial  analysis   of   proposed  wastewater  facilities  requires   the
collection  of  financial  information,  calculation of several  key indicators,  and
analysis of the results obtained through  the process.  Because local governments
differ  significantly  in their  financial practices,  some difficulties may arise in
conducting this  analysis.  This  section identifies a number of potential problems
and  suggests ways for coping  with  them.  Among the issues addressed are  the
following:

       o   obtaining the data;
       o   estimating needed data;
       o   knowing  which nurriber  to  use when there's a choice;
       o   recognizing the effect  of  different accounting methods;
       o   incorporating  trend analysis  into  the  financial  capability
           assessment;
       o   taking account of  inflation  and  economic change—sensitivity
           analysis;
       o   considering overlapping debt; and
       o   funding financial capability analysis.

       While  this  list  is  not  exhaustive, it addresses  a  number  of common
concerns  in locating and  understanding  information sources.  The remainder of
this  chapter is devoted to explaining  these problems in more detail.
                                       12

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       Obtaining  the  Data.   Obtaining   the   data  needed  to  complete  the
worksheets  contained in this  Guidebook  may  be complicated by a  number  of
factors, such as:
       o   the size of the community;
       o   the type of information requested;  and
       o   the timing of the request.
       Small governments  may  not have the staff or detailed  financial reports
needed  for  assembling the data used in the financial analysis.  However, if  the
jurisdiction  has  had a recent bond sale, most of the data needed will be found
in  the official statement.

       Other sources of  data that  may be used in completing the  worksheets  are
supporting  engineering reports, reports  prepared for State regulatory agencies,
and data submitted  to the U.S. Census Bureau.  If data availability proves to be
a  problem,  there  may  be staff people at  the  State level who  could  provide
technical assistance to the community in collecting the data.

       Estimating  Needed Data.  If no  other source is available,  the  community
might find  county-wide data useful to  make estimates of its own  finances.   Per
capita  values for  key county data elements —  revenues,  expenditures, etc.   —
are calculated,  then  multiplied  by the community's population  to  produce a
reasonable  estimate of the particular data element  for the community.

       Although  the analysis  will only be  as  reliable  as  the  estimates,  this
solution to  the  data availability  problem  is better than  the  alternative —  no
analysis. It is imperative that the  assumptions and procedures used in estimating
needed  data be documented.

       Knowing  Which Number  to Use  When  There's  a  Choice.  Sometimes,
judgment  calls  may be  required   to  determine  which  number   to  use  for a
particular data element.  A good  example  of  this occurs in a resort community
where  seasonal fluctuations  in  population  occur.  In choosing the best number,
several  factors must be considered:

       o   how  will the seasonal  population share the  burden  of paying
           for the proposed  facilities?  and

       o   what impact  does the  increased population have on the local
           government's finances?

       Depending on how the project will  be financed,  it might  be  appropriate
to  choose  some  number  in  between  the  alternative  values.    As  with other
estimates, the reason for  choosing  one  number over another should be disclosed.

       Recognizing  the Effect  of  Different Accounting  Methods.  The  basis of
accounting  used  by a jurisdiction will  have an effect on the financial capability
analysis.  This means that interjurisdictional comparisons are not perfect. While
we recognize  that  a  problem   exists,   there  is  no   simple   solution.   The
recommendation  is  to go  forward  with the analysis and  decision-making  process
                                      13

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because  it is unlikely  that  accounting differences alone will  materially affect
the results.

       Incorporating  Trend Analysis into the  Financial  Capability  Assessment.
The indicators  found on the Supplemental Information  Sheet may  show signs of
strength or  weakness  for the  community.   In  evaluating the  results  of the
analysis, it may be helpful to analyze  the data going  back five years  to discern
any trends in the community's  financial  condition.  For  instance, the indicator
values may be registering weak  in  the current year, but the community may be
in the midst  of an upswing or improvement in its financial  condition.  This is an
important consideration for  the local  official  who  must  make  a  decision  about
the feasibility of a project.

       Taking Account of Inflation and Economic Change.   Ideally,  our analysis
would take  a  projection's  approach  and  analyze the community's  financial
condition at a point in the  future  when  the proposed facilities are operational
by projecting income, population, total revenues, expenditures,  debt  outstanding,
and other  key data  elements several  — even many  —  years  into  the  future.
While this  approach is  preferred, it is  not necessary. Instead, one  can  determine
if a community's current financial  situation would enable it to  assume the  costs
of the  proposed wastewater treatment facilities  (expressed in  today's  prices)
were  the improvement  made  today,  thus getting around the need to forecast key
values.

       It may be argued that  this  approach  is too  simplistic.  This  shortcoming
can be  overcome through  a series of  "sensitivity analyses"  which assess how the
key indicators  would change under  differing  assumptions.   For  example, if there
is concern  about  the   impact  of  inflation  on the  cost  of O,M<5cR, the cost
estimates and other variables that are sensitive to inflationary  pressures can be
adjusted upward  and the  analysis can be repeated  to  determine how  household
burden changes.  This approach is explained in more detail  in Appendix D.

       Considering Overlapping Debt.  The proportionate share of tax-supported
(general obligation)  debt  of local  governments  whose  boundaries  overlap the
community is a critical  component of the financial  analysis.  2]  Data  on the
outstanding  debt  of  such jurisdictions may not  be readily available unless a
recent official statement  for a  bond  issue has been prepared.  If it  is  necessary
to  estimate  these  data, the  approach used  in  the  following  example  is
recommended.

       Assume four jurisdictions overlap Community A  (a county,  school district,
library district, and park district), and  each has  incurred debt. Steps  A through
E, which follow, establish the process for identifying the total overlapping debt
to be borne  by Community A's property owners.  Exhibit  IV gives a suggested
2]   Overlapping  debt is defined as  the proportionate share of debts of  local
governmental units  located  wholly  or  in  part  within  the  boundaries  of the
reporting government which must be borne  by persons or property within  each
governmental unit.
                                       14

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format  for the analysis.   The "other" row  reminds the reader that there
may be many more overlapping jurisdictions.

       A.  Identify each  of Community A's overlapping jurisdictions that
           have incurred debt.   (If not known, a list of these  jurisdictions
           should  be available   through   the  State  or  the  community
           assessor's office.)

       B.  Identify  the  total amount of  tax-supported  outstanding debt
           for each of the overlapping jurisdictions (less sinking funds).

       C.  Identify  the  percentage  of  each  overlapping  jurisdiction's
           outstanding debt charged  to persons or property in  Community
           A. The percentage is based on the estimated full market value
           of real property of  the respective jurisdictions  in  Community
           A.

       D.  Multiply  the   total  outstanding  debt  of  each  overlapping
           jurisdiction  by  the  percentage identified  for  Community  A
           (Column B x C).

       E.  Add  the figures in  Column D to  arrive at total overlapping
           debt  for Community A.

       Funding Financial Capability  Analysis.  While  the  Guidebook  is written
for use by State  and  local staff  persons, completion of the analysis may possibly
involve a financial consultant or engineer.  Doing the analysis may require some
time and money.   However, when  measured against the total  cost  of  a project,
financial  capability analysis is a sound investment because  it provides an early
warning  if financing problems may crop up.

       Communities that  have an ongoing or completed Step 1  facilities plan or
Step 2 design may amend  their Step  1 or 2 grant to include these  costs.  Other
communities  can  expect   to  pay  the cost of  this  analysis  along with  other
planning  and  design  costs.  The  Clean  Water Act,  however, provides  for  an
allowance to defray costs incurred prior  to Step 3 and 2+3 applications.  There
is  also  the  possibility for  an advance of this allowance  for  small  communities
selected by the State.
                                       15

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            EXHIBIT IV




OVERLAPPING DEBT IN COMMUNITY "A"
(A)
Overlapping
Jurisdictions
County
School
District
Library
District
Park
District
Other
(B)
Outstanding
Debt (less
Sinking Fund)
$10,500,000
16,800,000
3,000,000
4,000,000


(C)
% Chargeable
to Community "A"
25%
95%
100%
50%

(E) Total Overlapping
Debt
(D)
Outstanding
Debt Attributable
to Community "A"
$ 2,625,000
15,960,000
3,000,000
2,000,000

$23,585,000
               16

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                                 CHAPTER III


    FINANCIAL CAPABILITY ANALYSIS WORKSHEETS AND  INSTRUCTIONS

       Your community's financial capability concerns all parties that will pay a
portion  of the cost of the new  wastewater facilities.   Elected  officials, finance
officers, public  works department heads, citizens, and lending  institutions may
view the issue  from different perspectives.  An adequate  response must address
the concerns of each of  these groups.

       In order to assist your  community in evaluating its financial capability,
this chapter provides:

       o   Six  Worksheets,  with line-by-line instruction, which cover roles
           and responsibilities,  financing, facilities  cost, household  costs,
           community debt, and financial conditions.  (Worksheets //I -  #4
           are  on pages  23-52  and  Worksheets #5  and #6 are on  pages
           53-68.)

       o   Wastewater  Facilities  Financial  Information  Sheets  (pages
           19-21),   a   three   page   set   which   provides   space   to
           answer the basic questions asked  in  the "Policy  on  Financial
           and Management  Capability." These three summary  sheets can
           be  completed  by  transferring  the  figures  developed   on
           Worksheets #1 - //4  to the appropriate lines on  the  Financial
           Information Sheet.

       o   A Supplemental Information Sheet (page 52) which  covers  the
           community's   debt   history  and  financial  condition.   The
           Supplemental  Information Sheet (Exhibit  VII) can be  completed
           using the  information developed on Worksheets  //5  and //6.


Evaluating Results of the Analysis

       As  stated  earlier, this  Guidebook  does  not provide a fully developed
credit  analysis.   But, it  does embody a brief, reliable  basis  for evaluating your
community's ability to assume new debt.  The information provides assistance but
not the answer  to  whether your community should  undertake  the  proposed
project.  Guidance documents are not intended to replace local judgment.

       Through  the  Guidebook,  we have stressed the  importance of evaluating
the results, whether positive or negative, in light  of your community's particular
circumstances.   For  example, a  community that is dependent on a single industry
with an  uncertain future must look beyond the predominantly positive indicators
that may exist  in the present.

       The  purpose  of  guidance  is  "to point  in  the  right  direction."  The
presence of strong indicators in  the  analysis  should encourage  your community
to undertake the project as planned; weak  indicators should  caution against  it,
                                       17

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with  particular  attention   paid   to   reviewing  less   costly  alternatives  or
restructuring the  financing.  Whatever  choice your community makes, however, it
will  benefit  from. a  systematic analysis of financial  capability  as  the project
progresses through planning,  design, and construction.
                                        18

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                                  EXHIBIT V
Wastewater Facilities  Financial
Information  Sheet
Applicant

Name	
Address.

City	
ContacL
Telephone
What Is Proposed In The Facilities Plan?
• The proposed facilities will be:
  (check more than one if applicable)
• If treatment facilities are proposed, do they
  feature low O + M Cost Technology such as ponds,
  trickling filters, overland flow? If yes, please identify.
              D New



              D Yes
D An expansion  D An upgrade
   NO
  The facilities will serve:
  Indicate the approximate percentage
  of the plant's capacity that will be
  allocated to each.
    D Existing    D Existing Area  D Existing
       Population      Served by      Industries
       on Sewers      On-Slte
                    Systems
                D Anticipated
                  Growth
* Entities to be served:
D County      D Municipality   D Sewer district  D Industry
• Design population
              (Year
                                       19

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                                      EXHIBIT V (Continued)

Wastewater  Facilities  Financial
Information  Sheet

What Roles And Responsibilities Will Local Governments Have?	
Cooperative arrangements between various entities may be required to meet the management needs of wastewater treatment facilities.
• What agency will:

• Will there be financial contributions by:

• Have participating agencies been asked
  to review:

• Have agreements been sought between
  the operating agency and:
                                   Own the facilities
                         Operate
                                             Finance
Other agencies Q Ye§ D No  Industry D Yes D No
Westewater facilities
plan QYesDNo

Participating
agencies QYesDNo
Population
projections  D Yes Q No
Service areas
boundaries
from line
 (101)


 (103)
 (105)


 (107)
                                                   Other agencies D Yes D No  Industry D Yes D No

How Much Will The Facilities Cost At Today's Prices?	

The following figures are estimated costs for construction, operation, and maintenance of the proposed facilities. Dollar amounts are
uninflated and reflect today's prices.
A.  Construction costs estimate                           B. Estimated annual operation, maintenance, and replacement
• Wastewater treatment plant
• Pump stations
• Interceptor sewers
• Collection sewers
• On-site systems
• Land acquisition
• Other
• Total construction costs 	
How Will The Facilities Be Financed?
A. Amount to be borrowed
• Grantee share of construction costs
• Construction-related costs

• Amount to be borrowed
(201) • Labor
(202) • Utilities
(203) • Materials
(204) • Outside services
(205) • Misc. expenses
(206) • Eouioment reolacement
(207)
= (208)
from lino
(309)
(315)

_ (321)

C. Total estimated annual wastewater facilities costs
• Netexistino O.M + R
• Existing annual debt service
• O,M + R for proposed facilities
• Debt service for proposed facilities
• Total estimated annual wastewater
facilities costs

from lint)
(328)
(329)
(330)
(331)
(332)

• Total operation,
maintenance and
replacement costs

B . Methods of financing the amo
Financing Amount Interest
method borrowed rate
General
obligation
bond
Revenue
bond
Loan



D. Sources of funding for total an
facilities costs
• Sewer service charges
• Surcharge
• Special assessments and fees
— connection fee
— betterment assessments
— other
• Transfers from other funds
• Other
• Total funding
a ••«•""'•• lroml,n.
per year (209)
per year (210)
par year (211)
per year (212)
per year (213)
per year (214)
per year (215)

unt to be borrowed
Annual
Term of debt service
maturity payment
(322)
(323)
(324)


nual wastewater
from lint
(333)
(334)
(335)
(336)
(337)
(338)
(339)
	 (340)
                                                  20

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                              EXHIBIT V (Continued)

Wastewater  Facilities Financial
Information  Sheet

What Are The Annual Costs Per Household?
                                                                               from line
•Total estimated annual wastewater            fromim.  • Total annual costs
  facilities charges                           (400)    per household                   (406)
• Nonresidential share of total annual charges    (401)
• Residential share of total annual charges       (402)
• Number of households                     (403)
• Annual costs per household for
  —wastewater collection and treatment         (404)
  —other                                  (405)
Certification of Financial Capability
Your community must certify that it has the capability to finance and manage the proposed facility.

The answers to the proceeding questions will provide useful information regarding the cost of the
proposed facility, how it will be financed, and what this means in terms of costs to the typical household
user. In order to evaluate effectively the true impact of the proposed treatment system, however, this
information must be viewed within the overall context of the community's financial condition, financial
resources, legal constraints, and local public policy.

Listed below are additional elements relating to a community's overall financial condition and its ability
to pay the local costs of constructing and operating the treatment system. These factors should be
considered before signing the financial and management capability certification.



           • reasonableness of population projections relative to historic
             trends (if new population growth is needed to help finance
             the proposed system.)

           • total current outstanding indebtedness

           • state finance laws and legal debt limits

           • historical trends in your community's revenue sources (e.g.,
             changes in taxable assessed property valuation with respect
             to population)

           • current bond rating and its historical trend
If your community would have difficulty financing the proposed project, it should consider alternative
methods of financing to mitigate the adverse impacts, re-evaluate the project alternative and scope,
or consider staging  implementation to spread out financing to future users. When certifying your
project, the community should be fully satisfied that both the users and the community as a whole
have the capability to finance and manage the facility as proposed.
                                         21

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 ROLES AND RESPONSIBILITIES                                  Instructions
 OF LOCAL GOVERNMENT                                              for
                                                                 Worksheet //]
 PURPOSE OF WORKSHEET ffi

       Worksheet #1  is  intended  to  summarize the key  management agencies,
 the  roles they  will  be assigned,  and the  agreements  that  will  be needed to
 provide  for  continued  cooperation   in  the   management  of  the  facilities.
 Preliminary agreements reached during planning and design should be reviewed
 to complete this section.

       Worksheet #1 should be completed whether  you  are a small town  building
 your  own facility or are  part of a group of jurisdictions or agencies  involved in
 a  regional system.  If you are proposing to construct a  wastewater treatment
 facility designed to serve two or more public agencies  or  jurisdictions, you must
 provide  an  executed  intermunicipal  service   agreement  which  shows,  at  a
 minimum, how the  cost  will be  allocated  among  the  parties,  the  formula  by
 which costs are allocated, and the manner in  which the  cost allocation  system
 will  be  administered.  \J  This requirement  may  be  waived  by  the Regional
 Administrator  or  the  delegated  State  if  you already have  an  agreement  or
 ongoing  service  relationship  and  if  the supplier  agency is  financially strong
 enough to continue  the project if one or more  of  the customer agencies  fails to
 participate (40 CFR 35.2107).

       The  intermunicipai  service  agreement  serves as  the  legal,  contractual
 basis  for  implementation  of the  wastewater treatment system, and  guarantees
 future commitments.   Although  it will  guard against reneging  or  unilateral
 actions by  participants,  it should  also  serve  as a basis  for a sound  working
 relationship.  Its   institutional  provisions  should  provide  for  a management
 framework,  and  should assign  roles  and  responsibilities  for management  and
 operation of  the  system.  In  addition  to its  cost  allocation  information, the
 intermunicipal service agreement should also include:

       1.  delineation  of  sewer service areas of regional  participants
           (include a map);

       2.  guarantee of future  flow capacity and provision for annual
!_/ The regional  cost basis  consists of  facilities (including  equipment, sewage
treatment   facilities,  and  interceptors,  etc.)  and  services  (administrative,
managerial, legal, etc.) which are to be shared by two or more jurisdictions  and
are,   therefore,  eligible  for   regional  cost  allocation.   An  auditable  cost
accounting system  is usually maintained by the  supplier agency; it defines  the
regional  cost  basis and is included in  service  agreements.  Exhibit VI provides
the basis for identifying regional costs.
                                      23

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                                       EXHIBIT VI

               BASIS FOR IDENTIFICATION OF REGIONAL COSTS
                   • Proposed Regional Facilities:
                          Local  share of  capital cost  of new components  proposed in regional
                          facilities plan.

                   • Contributed Capital  Facilities:
                          Value of existing facilities which are to be incorporated into regional system
                          (based on an estimate of the replacement value, fair market value, or
SYSTEM-WIDE             undepreciated value of the component).
CAPITAL
COST                     Estimated value of land on which existing contributed facilities are located
BASIS                     (calculated at  fair market value or other acceptable method).
   L
                   • Periodic Capital Requirements:
                          Additions or expansion of equipment or system components (not included
                          in initial facilities plan), as required by regional  use.


                   • Direct Costs for Regional System O & M:
SYSTEM-WIDE             Annual costs directly attributable to regional operation, maintenance and
____.._._..,.              replacement identified in appropriate budget categories of the regional
AND                      system operator.

MAINTENANCE      • Administrative Costs for Regional System:
COST BASIS               Costs associated with management, administration, and overhead of the
L                          regional operator. For example, if a  municipality operates the system,
                          appropriate portions of administrative time must be identified in the munic-
                          ipal  budget.
                    SOURCE: Financial Planning for Wastewater Facilities: A Guide for Wyoming Local Officials, Part 3,
                           "Regional Wastewater Facilities: Cost Sharing, Financing, and Intergovernmental Relations,"
                           (Wyoming Department of Environmental Quality), page 16.
                                           24

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           adjustment and sale of capacity between participants;

       3.  provision  for cost-accounting  system to assure  auditability  of
           regional operations and costs;  and

       4.  establishment   of   an  oversight  or   advisory   committee  to
           monitor financial  aspects  and policy-making on a  continuing
           basis.

Instructions for Worksheet #1
       Line  101   Identify the  participating agencies  that will  own,  operate,
       and/or finance  the facilities.  Participating  agencies may include  other
       municipalities, sewer   districts,  authorities,  state  or  federal  agencies
       (such as housing authorities)  which will  use  the facilities.  It does  not
       include agencies  which only provide financing, such as U.S. E.P.A., FmHA
       or HUD.

       Line 102  Indicate if the  participating agencies  have any prior  experience
       in performing their assigned roles.

       Lines 103 - 104  Prior to the construction  of the  facilities,  participating
       agencies  should  identify  the  type  and  amount  of their  contribution.
       Perhaps,  for  example, community  "A" will  provide $1,000,000  for  the
       construction  of the facility from its general fund  and  bond anticipation
       notes, while  the  sanitary district will provide the land.  In addition,  the
       community will be responsible for a percentage  of  the long-term debt.

       Lines 105  -  106  Continued  planning by technical,  legal, and  political
       representatives  from  participating  agencies is  necessary to maintain  an
       understanding  of each  agency's  role  and  financial  responsibility.   In
       addition, the planning  of  waste water facilities is closely tied to land  use
       planning   and   other   independent   activities   of  the    participating
       jurisdictions.  Plan reviews can  aid in  coordinating other related local
       activities.  .Check  the items to  be reviewed  and describe the forum  for
       review.

       Lines 107  - 108  A  number of intergovernmental agreements  may  be
       necessary  to  maintain  a  well  organized  management  system.   The
       agreements  may  cover ownership,  financing, excess  capacity  allocation,
       operating  cost allocations, sewer use ordinances,  and liability and legal
       arrangements. Identify the participating agencies, the type of agreements
       involved,  and existing  agreements that have been drafted in  the planning
       and design steps  or are in effect.
                                       25

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WHAT ROLES AND RESPONSIBILITIES WILL
LOCAL GOVERNMENTS HAVE?
                                            Worksheet #1
A. WHAT AGENCY WILL:
   • Does The Agency Have
    Experience In Performing
    The Function?
Own the
Facilities
Operate The
Facilities
Finance The
Facilities
(101)
D Yes D No
D Yes D No
D Yes D No
(102)
B. WILL THERE BE A
   FINANCIAL CONTRIBUTION
   BY:

   • Amount Expected?
C. WILL THE PARTICIPATING
   AGENCIES BE ASKED TO
   REVIEW:

   • What Will Be The Forum
    For The Review (i.e,
    Meeting, Comments On
    Draft Documents)?
   Participating
   Agencies
   D Yes D No
   Wastewater
   Facilities
   Plan
   D Yes QNo
   Industry

   D Yes D No
   Population
   Projections

   D Yes D No
   Service
   Area
   Boundaries
   D Yes
(103)



(104)


(105)



(106)
D. WILL AGREEMENTS BE
   SOUGHT BETWEEN THE
   OPERATING AGENCY AND:

   • Describe The Type
     Of Agreement Required
     (i.e., Ordinance Approval,
     Cost Allocation, Excess
     Capacity).
   Participating      Other Local
   Agencies         Agencies
   D Yes D No       D Yes Q No
                    Industry        (107)

                    D Yes D No

                   	    (108)
                                          26

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                                                                Instructions
FACILITY  COST ESTIMATE                                        for
                                                                Worksheet #2
PURPOSE OF WORKSHEET in

       A  realistic  assessment  of  financial  capability  depends  on  accurate
estimates  of  construction, operation,  maintenance, and  replacement costs  for
the  proposed  wastewater  facilities.   These  estimates provide  the  basis   for
determining both the amount  of  local financing required and the  annual  cost to
users necessary to support the new facilities.

       Worksheet  //2  summarizes  the  construction   costs  (Section  A)  and
operation,  maintenance, and  replacement costs for the  facilities  (Section  B).
Estimates  should  be developed  for  all of  the costs that  will be  incurred,
including management, overhead, outside services, and  equipment replacement.
             NOTE;   The  costs  should  be   for  the  completed  system
       including  all  its  segments and  phases.   A  complete  wastewater
       treatment system consists  of all  the treatment works necessary to
       meet  the  requirements of Title  III of the  Act, and includes the
       following: (i) the transport of wastewater from individual homes or
       buildings to a plant or facility where  treatment of  the  wastewater
       is  accomplished;  (ii)  the  treatment  of wastewater  to  remove
       pollutants; and  (iii) the  ultimate  disposal,  including recycling or
       reuse,  of  the treated wastewater and residues which  result from
       the treatment process.
Instructions for Section A

       In Section A, provide a current estimate of the construction costs of the
facilities  by  component.  (Information is  needed  in  this  format  because  the
Federal/State share  for  each component is different, and in Worksheet  //3,  this
information is required to determine  the grantee share.)  Since some estimates
may  be several years old, updated values  should be  developed by the project
engineer; otherwise, the  community can apply EPA  cost  indices to the original
estimates.   EPA national average indices are provided in this section, but more
accurate regional indices are available  in the EPA  documents referenced in the
footnotes.
                                      27

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       Line  201   Enter the construction  costs  for  the  wastewater  treatment
       plant including  sludge handling facilities.  Update the engineering  cost
       estimates to  current dollars by using the EPA Small City Conventional
       Treatment Index. 2] To use the index, multiply the engineer's cost by the
       ratio of the  index value for the current year  over the value for the  year
       the  engineer made  the  estimate.  The national  index  values  for  1973
       through 1983 are:
                      EPA CONSTRUCTION COST INDEX FOR
                SMALL CITY CONVENTIONAL TREATMENT PLANTS

                               Year           Index

                               1973              93
                               1974             112
                               1975             110
                               1976             119
                               1977             128
                               1978             145
                               1979             158
                               1980             168
                               1981             180
                               1982             186
                               1983             196   (3rd Quarter)

            For example, a 1976 cost estimate  of $2,000,000 would be updated
       to 1983 as follows:
       $2,000,000 (1976) x             =  $3,294,000 (1983)
       Line  202 - 204  To update  the  engineer's cost  estimates for the pump
       stations, interceptor sewers, and  collection sewers to current  dollars, use
       the EPA Complete  Urban  Sewer System Index (CUSS). 3/
2j  See Appendix  A,  U.S.  EPA, Construction Costs  for  Municipal Wastewater
Treatment  Plants;   1973-1982,  EPA/430/9-83-004  (Washington, D.C.: Office of
Water Program  Operations June 1983).

3/ See  Appendix A,  U.S.  EPA, Construction Costs  for  Municipal Wastewater
Conveyance Systems;  1973-1979, EPA 430/9-81-003 (Washington, D.C.: Office of
Water Program  Operations (FRD-21) January 1981).
                                     28

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HOW MUCH WILL THE FACILITIES COST                                      Worksheet #2
AT TODAY'S PRICES?                                                     Section A
         A.  CONSTRUCTION COSTS ESTIMATE
            System Component                     Cost         Total Cost

         •   Wastewater Treatment Plant	
            Sludge Handling Facilities	
             (Year to be built	)                              	(201)

            Pump Stations
                                                               	(202)

         •   Interceptor Sewers
                                                               	(203)

         •   Collection Sewers
            On-site And Other Innovative
            Alternative Systems
                                                                        (204)
                                                               	(205)

            Land Acquisition
                                                               	(206)
            Other
             Inspection and Construction        	
             Management
                                                               	(207)
          TOTAL CONSTRUCTION COSTS
             (201 + 202 + 203 + 204 + 205
             + 206 + 207)                                                 (208)
                                          29

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                          EPA COMPLETE URBAN  SEWER
                               SYSTEM COST INDEX

                               Year           Index

                               1973             100
                               1974             110
                               1975             123
                               1976             132
                               1977             143
                               1978             154
                               1979             175
                               1980             185
                               1981             202
                               1982             218
                               1983             227   (3rd  Quarter)

       Updates are available from EPA. ±1

       Line 205  Enter  current estimates for innovative  and alternative systems
       such as on-site, alternative conveyance, land for land  application,  and
       the I
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       This  detailed  format  is  modeled  after  the  one  found  in  an  EPA
publication and is  intended to encourage a complete  review of potential O,M&R
costs.  5/  A complete review is particularly important since some  new  plants
coming on-line have  experienced O,M&R costs that are significantly  higher than
the original  estimate.

       Complete the matrix on  Worksheet //2 Section  B  which consists of cost
categories  running  down the left-hand column  and system  components  listed
across  the top of the page.  O,M&R cost  estimates for:

       o  treatment plants;
       o  pump stations; and
       o  sewers

may have to be updated  by the project  engineer or by using EPA cost indices.
O,M&R for Wastewater Treatment Plants

       Update the engineer's  cost estimate for the  wastewater plant to current
dollars using  the "EPA O,M
-------
       For example,  a $250,000 1976  estimate of O,M&R costs for  a plant
would be updated to 1983 by multiplying  the  1976 cost estimate by the  ratio of
the 1983 cost index to the 1976 index:
             $250,000 (1976) x           = $444,600 (1983)
O,M&R for Pump Stations

       To update  the  pump station  O,M6cR costs, use the following EPA cost
index values: 7j

                           PUMP STATION 0,M&R INDEX

                               Year           Index

                               1974           1219
                               1975           1317
                               1976           1401
                               1977           1490
                               1978           1660
                               1979           1884
                               1980           1967
                               1981           2107
                               1982           2178
                               1983           2222   (3rd Quarter)

Convert past estimates to current dollars by multiplying the engineer's estimate
by  the ratio of the index  values for the  appropriate years, and  use  regional
values where available.
O,M&R for Sewers

       To update  the sewer  O,M&R costs, use the EPA O,M&R  cost  index  for
sewer lines. 7/  National values  for 1974 to 1983 are:
7j U.S. EPA, "Quarterly Indexes of  Direct Cost for Operation, Maintenance and
Repair  of  Raw  Wastewater  Pumping  Stations and Gravity Sewers," Office of
Water Program Operations, Washington, D.C.
                                      32

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                        SEWER O,M&R INDEX

                         Year           Index

                         1974           1160
                         1975           1249
                         1976           1354
                         1977           1461
                         1978           1573
                         1979           1745
                         1980           1876
                         1981           2091
                         1982           2200
                         1983           2298   (3rd Quarter)
Line 209  Having updated the O,M<5cR cost estimates, provide labor  costs
by system  component including  salaries,  fringe  benefits, and overtime.
Also, estimate  management and  support services (indirect costs)  needed
for the  labor category.

Lines 210 - 214   For each of the categories listed (utilities, materials,
etc.), provide  cost data broken  down by system components (treatment
plant, sludge handling disposal, etc.).  In some cases, cost estimates may
have  to be  reviewed with  the engineering  firm  responsible  for the
original estimate  to:

      o   expand  management costs  to  reflect  new  institutional
          arrangements approved by local officials; and

      o   refine  other costs based on more recent field data (e.g., new
          plants of similar design may show a need  for more chemicals).

Line 215  Total operation,  maintenance, and replacement costs is the sum
of lines 209 + 210 + 211  +  212 + 213 + 214.

Enter the O,M
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B. ESTIMATED ANNUAL OPERATION, MAINTENANCE, AND                                  Worksheet # 2
   REPLACEMENT COSTS FOR THE PROPOSED FACILITIES                                  Section B

                                                      System Components
                                            Sludge
        Cost                   Treatment      Handling    Pump     Interceptor    Collection   On-Site     Total
     Categories                  Plant         Disposal    Stations   Sewers       Sewers      Systems    Costs

     • Labor (Salaries, Fringe
      Benefits, & Overtime)
      - Operations	    	    		
      - Maintenance	    	    		
      - Management             	     	    		
      - Support Services
       (Purchasing, Data
       Processing, Finance,
       Etc.)                    	     	    	    	    	    	     	
     Total                      	     	    	    	    	    	             (209)
     • Utilities (Fuel & Power)
      - Electricity	    		
      - Fuel Oil	     	
      - Natural Gas	    		
      - Automotive Fuel          			
      - Water Service	    	    	    	    		
      - Other	     	
     Total                                                                                                   (210)
     • Materials & Supplies
      - Chemicals
        (itemize)		     	
      - Maintenance	
      - Automotive	
      - Laboratory	
      - Administrative
        Supplies	
      - General	
     Total                                                                                                   (211)
     • Outside Services
      •Sludge Hauling
        or Disposal	     	     	
      -  Engineering
        Service	    	        	     	
      •  Data Processing		
      -  Other	
     Total                      	     	    	    	    	     	     	(212)

     • Miscellaneous
      Expenses
      -  Insurance               	     		     	
      -  Travel & Meals           	     	    	    	    	     _^	     	
      -  Telephone               			
      -Training	    		
      -  Equipment Rental		     	
     Total                      	     	    	    	    	     	     	     (213)

     • Equipment Replacement
      -  Process Equipment
        (e.g., Pumps,
        Scrappers,
        Collectors, etc.)		     	
      -  Vehicles	    	    	     	     	
      - Minor Miscellaneous      			
      -  Other	        .        	     	
     Total                      	     		     	     	(214)

     • Total Operation, Maintenance, and Replacement Costs                                                        (215)


                                                           34

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                                                                Instructions
FINANCING THE  FACILITIES                                        for
                                                                Worksheet #3
PURPOSE OF WORKSHEET #3

       Worksheet #3 identifies  the amount  to  be borrowed  by your community
and the methods of financing  that amount.  Total annual costs, which include
operation, maintenance,  and debt  service for the new as well  as  any  existing
facilities, are then  calculated and  a summary of the sources  of funds for paying
the annual costs is  provided.

Instructions  for Section A
       Section  A  outlines a  method  for  determining the amount the  grantee
must borrow to pay for the construction and construction-related costs.

       Lines  301-309   Turn   back  to  Worksheet #2,  lines  201-207,  for  the
       necessary  construction cost  data.  Then  give  the  anticipated  amount of
       the EPA,  State, and  other agency shares of  the  construction costs for
       each component  in the  spaces  provided.  Contributing  agencies  might
       include grants from FmHA, HUD, and others.

             The  total  grantee  share (309) is  calculated  by subtracting  the
       EPA, State, and  other shares from the construction cost for each system
       component  (301-307)  and  by adding  together  the results.  You should
       check with your State  to determine the level of Federal funding that you
       will likely receive and include this amount under the EPA share.

       Line 310  This includes interest paid during or before construction due to:

            o   securing  short  term financing  necessary  to cover  the
                delay  in receiving grants and loans; or

            o   obtaining short  term  financing for  the local  share in
                anticipation  of long-term financing in a year or  two.
                       EXAMPLE:  FINANCING GRANT SHARE

             The  financing  of  a  construction  project  by EPA  is  on  a cost
       reimbursement basis  which means that the local government must be able
       to   finance   about   3 months  worth  of  grant  reimbursable  project
       expenditures.   As an  example  on  how  to  estimate  the  cost of  this,
       consider a project of which the total EPA grant  share is  $3,000,000 and
       which is  to be  constructed over a 24-month  period.  If we assume equal
       monthly payments over  the  24  months, the  average  monthly payment
       would  be  $125,000   ($3,000,000/24).    Thus,  approximately   $375,000
       ($125,000 x 3)
                                      35

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HOW WILL THE FACILITIES BE FINANCED?
                                                                Worksheet #3
                                                                 Section A
A.  AMOUNT TO BE BORROWED FOR CONSTRUCTION
    AND CONSTRUCTION-RELATED COSTS

Grantee Share of Construction Costs
                     From
  System Component    Line^

Wastewater Treatment
Plant                 201

Pump Stations         202

Interceptor Sewers      203

Collection Sewers       204

On-Site Systems        205

Land Acquisition       206

Other                207

Total
  Con-
struction
  Cost
 EPA
Share
State
Share
Other
Grants
Grantee
 Share
                 $.
                        $.
                          $.
                           (301)

                           (302)

                           (303)

                           (304)

                           (305)

                           (306)

                           (307)

                           (308)
Total Grantee Share
(301 + 302 + 303 + 304 + 305 + 306 + 307)
                                             (309)
                                        36

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       will  have to be financed  for each and every quarter until  the  project is
       done in 2 years.  The cost of this (at, say 9 percent) is :

                          $375,000 x .09/12 x 24 = $67,500
                     EXAMPLE:  FINANCING THE LOCAL SHARE

             In  addition to financing the grant share, a community must  finance
       its share of construction  costs.  If in the above example the local  share
       were  $500,000 (i.e., if the total cost of construction  were $3,500,000),
       then the community must provide temporary  financing for $500,000 until
       provision for long-term financing is  made.  Assuming that this amount is
       bonded  at  the end of  the  project  and  that  the entire local  share is
       financed on a  short-term  basis at the start of the project,  the  cost of
       financing would be:

                          $500,000 x .09/12 x 24 = $90,000

             In  the  case of  our example,  the  total  of $67,500  and  $90,000
       ($157,500) would  be entered on line 310.
       Line 311   In some instances, a  community  may decide  to  provide loans
       from its  general  fund to its  wastewater  fund in  order  to  finance early
       project  expenditures  with  the  understanding  that  the  loan  will  be
       repayed at the  time the  project is permanently financed.  Enter the total
       amount of such loans on  line 311.

       Line 312  This is  the amount the community will have to pay for  planning
       and design which is not  covered by EPA and State contributions.  If  the
       community  has  not  received a Step  1  or  Step  2  grant, the EPA
       contribution is  based on a  table that specifies an allowable amount  for
       planning  and design cost depending on  the  total construction  cost.  The
       EPA contribution is the grant percentage  (e.g., 75 or 55 percent) times
       the allowable amount. j$/

       Line 313  Include legal, financial, and other fees associated with the sale
       of bonds,  including:

             o   preparing  the  official statement;
&/  See Appendix  B,  40 CFR Part 35, Subpart I. This describes  the  EPA  Policy
on Planning and Design Allowance.
                                      37

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             o   printing  the bonds;
             o   advertising the bonds; and
             o   underwriter costs.

             Another cost might be the  funds borrowed by  the  community and
       then  loaned  to  households  to  cover their cost of  connecting to  the
       lateral sewer.

             The table below provides some  historical data on issuance  costs.
TOTAL MARKETING COST 9/
($5 to $10

Item
Legal
Local Attorney
Bond Counsel
Bond Election
Total Legal
Financial Advisor
Accountant
Notice
Prospectus
Printing
Rating
Signature
Other
Total
Million Issues, Cost per $1,000)
General
Obligation
$1.62
2.00
.50
~$O2
1.44
.97
.14
.91
.23
.53
.06
.21
$8.61


Revenue
$3.75
2.96
.45
!?7A6
2.63
1.05
.12
1.30
.25
.78
.03
2.19
$15.51
       Line 314  Other costs might  include a one-time contribution to a reserve
       fund if required by bond or loan agreements.

       Line 315  Total  the entries from lines 310, 311, 312, 313,  and  314.
9/  John E.  Petersen and  Wesley C. Hough, Creative Capital  Financing for State
and Local Governments (Chicago:  Municipal  Finance Officers Association, 1983),
as reprinted from Governmental Finance, September, 1983.  Used with permission.
                                      38

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                                                                    Worksheet #3
                                                                      Section A
 Construction-Related Costs

 Interest Paid on Loans and Notes                                   $	 (310)

 Repayments to Other Funds                                            	 (311)


 Local Share of Planning
 and Design Costs                                                              (3"\2)

 Legal, Financial and Other Fees
 for Issuance and Sale of Bonds                                          	 (313)
Other Costs (Identify)
                                                                               (314)
Total Construction-Related Costs                                      $	 (315)
(310 + 311 + 312 + 313 + 314)                                         	


Grantee Contributions (Reduction in Amount to be Borrowed)

Accumulated Property Tax  Revenue                                 $	 (316)

Local Funds (Reserves) Available
for the Project                                                       	 (317)

Prepaid Connection Fees and
Betterment Assessments                                                	 (318)

Other Sources of Front-End Funding (Identify)


     	                                          	 (319)


Total Grantee Contributions                                           $	 (320)
(316 + 317 + 318 + 319)                                                '
Amount to be Borrowed                                             $            (321)
(309 + 315-320)                                                     	
                                           39

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       Lines 316  - 320   List  all sources  of  front-end  one-time financing the
       grantee will  use  to  reduce  the  amount to  be  borrowed.   These  may
       include:

             o   property tax revenues;
             o   local funds (reserves) available for  the  project;
             o   prepaid  connection  fees  and betterment  assessments;10/
                 and
             o   other  sources  of  front-end  funding  that  reduce  the
                 amount  to  be  borrowed, such  as  contributions  from
                 industry.

       Line 321   Calculate  the  amount  to be borrowed by adding the  total
       grantee  share   (309)  and  total  construction-related  costs  (315)  and
       subtracting grantee  contributions  (320)  that  will  be  used to reduce the
       amount to be borrowed.

       Return  to the Financial  Information Sheet  (Exhibit  V) and  enter the
required information.

Instructions for Section B
       In  Section  B, the annual debt service (principal and  interest)  for each
form of borrowing that may be  used to  finance local costs  is added  together to
obtain  a total annual  debt service.  This information is  then  carried forward to
Section C, where the total wastewater treatment system costs are calculated.

       Lines 322 - 324  For each  financing method, identify the dollar  amount
       borrowed, the number  of years for  which the funds  are to be borrowed,
       and the estimated interest rate in the boxes on 322, 323, and  324.

             For each of the methods of financing  used  by  the grantee, find the
       annual debt  service payment.  For  the  sake of simplicity,  assume the
       payments remain  constant (level  payments)  over the life  of the bonds or
       the loan. To  calculate the annual debt service (principal and interest)  for
       each method  of financing used, multiply the appropriate capital recovery
       factor found in the Capital  Recovery Table on the  bottom of Worksheet
       //3-B by the  amount  borrowed. An example  follows:
10/  Betterment  assessments   are   defined  as  levies   made  against  certain
properties  to  defray the cost  of improvements,  which are defined as buildings
and other attachments or annexations to land.
                                      40

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                                                                Worksheet #3
                                                                  Section B
R   METHODS OF FINANCING THE AMOUNT TO BE BORROWED
Financing
Method
General
Obligation
Bond
Revenue
Bond
Loan
Total
Amount
Borrowed




Interest
Rate




Term of
Maturity




Annual Debt
Service
Payment




                               Capital Recovery Table
                                                                          (322)



                                                                          (323)


                                                                          (324)


                                                                          (325)
Length of
Maturity in
Years
10
15
20
25
30
35
40
Interest Rates in Percents
7
.142
.110
.094
.086
.081
.077
.075
8
.149
.117
.102
.094
.089
.086
.084
9
.156
.124
.110
.102
.097
.095
.093
10
.163
.131
.117
.110
.106
.104
.102
11
.170
.139
.126
.119
.115
.113
.112
12
.177
.147
.134
.128
.124
.122
.121
13
.184
.155
.142
.136
.133
.132
.131
14
.192
.163
.151
.145
.143
.141
.141
15
.199
.171
.160
.155
.152
.151
.151
                                       41

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              Amount to be borrowed        $5,000,000

              Interest Rate                  12%

              Maturity                      20 years

              Capital Recovery Factor      .134
              Annual Debt Service Pay-
              ment (.134 x 5,000,000)        $  670,000
       Line 325   Add  the  annual debt  service  payments  for  each  method  of
       financing   to  determine   the  annual  debt  service  for  the  proposed
       facilities.

       Upon  completion of  this section,  enter  the required information on the
Financial Information Sheet (Exhibit V).

Instructions For Section C
costs.
       Section  C  calculates  the  total  annual  wastewater  treatment  system
       Lines 326 - 329  These  four  lines are  for information about the existing
       facility's annual costs.  If the proposed  project represents a new plant,
       please go  to line  330.   Otherwise, enter  information  on  the  annual
       operations, maintenance, and  replacement (O,M<5cR) costs  for the existing
       facility (326), and  the annual debt  service  being  paid  for  the existing
       facility (329).  (Note: Some existing O,M&R  costs may be discontinued  as
       a  result of  the new  project  (327) or  may  be  included  in  the  new
       facility's costs  and should be  subtracted  from  existing  costs  (326)  to
       determine the net  annual O,M<5cR  costs (328).)

       Lines 330  and 331   Cost  estimates for  the  proposed facilities  can  be
       found on line 215 of  Worksheet #2, and line 325  of  this worksheet.  If
       annual reserves are  required by bond  indentures, loan  agreements  or
       state law, add the  amount  to the  annual debt service and enter  on line
       331.

       Line  332   Add  lines  328,  329,  330, and 331 to  find the  total  annual
       wastewater  treatment system costs.  This is  the  amount  the community
       must  raise  annually  from  all  local sources  to  own and  operate the
       system.

             The  information from this section should now  be  transferred  onto
       the Financial  Information Sheet (Exhibit  V).
                                      42

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                                                            Worksheet #3
                                                              Section C
C. TOTAL ESTIMATED ANNUAL LOCAL WASTEWATER TREATMENT SYSTEM COSTS

   • Existing Annual Operation,
    Maintenance, and Replacement Costs       $ _ (326)

   • Discontinued Annual Operation
    Maintenance, and Replacement Costs
    to be Discontinued as a Result of
    Proposed Project                        $ _ (327)

   • Net Existing Annual Operation,
    Maintenance, and Replacement Costs
    (Net) (326-327)                           $ _ (328)

   • Existing Annual Debt Service              $ _ (329)

   • Estimated Annual Operation,
    Maintenance, and Replacement Costs
    of Proposed Facilities (215)                $ _ (330)

   • Estimated Annual Debt Service and
    Other  Required  Expenses  for  Proposed *
    Facilities (325)                           *
   • Total Estimated Annual Local
    Wastewater Treatment System
    Costs (328 + 329 + 330 + 331 )              $ _ (332]

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                                                                   Worksheet #3
                                                                     Section D
0.  SOURCES OF FUNDING FOR TOTAL ANNUAL
    WASTEWATER TREATMENT AND FACILITIES COSTS
    • Sewer Service Charges                      _$ _            (333)

    • Surcharge on Sewer Service Charges           _            (334)

    • Special Assessments and Fees

         — Connection Fees
           ($ _ per connection, number of   _            (335)
           connections _ )

         - Betterment Assessments
           ($ - per --             _            (336)
           number _ )

         - Other (Describe)
    • Transfers From Other Funds
      ( I dentif y )
                                               	            (338)

      Other (Identify)
                                                                              (339)
    • Total Funding                             $	            (340)
                                           44

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Instructions for  Section D

       Section  D  identifies  the  sources   of  funding  for   the   total  annual
wastewater treatment system costs that were calculated  in the previous section.
A  list  of  potential revenue  sources  has been provided in this section, including
both operating and non-operating  revenues.  In  some situations, only one source
may be applicable.

       Worksheet  //3D is provided  to  assist local officials  in  thinking  about
setting  up a  cost  recovery system by displaying  a range of possible  revenue
sources that might be used  in  financing a publicly owned treatment works.  In
addition,  it   provides  an   early  opportunity   to  determine  whether  existing
estimates   of  revenue sources  — particularly sewer service  charges  —  are
unrealistically low.

       Line 333  Include here  the most  up-to-date estimated revenues from  all
       sewer  service charges   paid by  system   users  (both  residential  and
       non-residential).  The engineer is likely to have estimated these on a cost
       per gallon or similar  basis (or they may be  provided in  the facility plan).

       Line 334  Include here estimated revenues from  a surcharge on  sewer
       service charges.

       Lines 335 - 337   Some  sources of non-operating  revenues  are the funds
       derived  from  connection   fees,  betterment  assessments,   front-foot
       assessments, and other  fees to recover capital costs.   In completing  this
       section, the applicant is cautioned to consider  here only those funds that
       are available to pay  annual costs.  Special assessments and  fees that are
       prepaid by  community  residents and  are used  to reduce  the amount of
       borrowing should not be included here because  they are not available to
       pay annual costs  of the  facility.

       Line 338    In  some  instances, there  may be transfers from other funds
       such as property  tax  revenues from the community's general fund.  These
       sources should be  entered here.

       Line 339  Other  sources  of funding should  be  listed  here.  Examples
       include  interest  on  investments  and  revenues  from   the  sale  of
       by-products  and  any annual  payments  made  by households  who  have
       accepted a loan from the community.

       Line 340  Add lines  333, 334,  335,  336, 337,  338,  and 339 to  calculate
       total  funding.  If line  340  is less than line 332, then the total annual
       costs are not  covered by the funding sources and the  system will not be
       self-supporting.  In  such cases the applicant should review the revenue
       program  and plan to make adjustments  so  that  the system will pay for
       itself.
                                       45

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Note: A  major  discrepancy between total funding  (line 340)  and total
cost (line 332) should be a matter of serious  concern to all  parties since
this  could be considered an early warning  sign of a financially troubled
project.  If total funding is significantly less than total  costs, you should:

      1)  Check your arithmetic to eliminate  errors.  If the shortfall in
          revenues  is not  an arithmetic error,  either  revenues must  be
          increased or costs (capital and/or operating) must  be  decreased
          in  order  to  balance  inflows and outflows.

      2)  Check your source  for estimated sewer service  charges  (line
          334).   For  many jurisdictions  the  only discretionary revenue
          source  will  be  sewer  service  charges.    Thus,  for   such
          jurisdictions major  discrepancies  between cost and revenue can
          only be made  up  by raising sewer service charges.
                                46

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                                                                Instructions
DETERMINING THE ANNUAL COSTS                                  for
PER HOUSEHOLD                                                Worksheet #4
PURPOSE OF WORKSHEET #4

       The  purpose  of this  worksheet  is  to  determine the  annual costs  per
household for the community's wastewater treatment facilities.

       The  determination  of annual  wastewater  treatment  system costs  for
individual households  provides a  basis for assessing the financial  impact  of  the
project  on residential users in the community.  In reviewing  the project  costs, it
may  be  determined  that  the proposed facilities  are too  expensive  for  the
affected community's residents.

       The judgement  as  to whether  the annual household  cost  is  too  high is
essentially a local one that must be answered  by the community  and the  State.
The purpose of this section is to  calculate the real total average annual cost to
the residential  users  of the  system  so that  an informed decision  can  be made.
EPA has provided guidance in this matter to  the states which may  be  of some
help  to  your  community.  See  Guidance for  Implementing  the   Financial  and
Management Capability Policy, ll/

Instructions for Worksheet #4
       Line 400  Enter the total estimated local annual  wastewater treatment
       system costs from Worksheet 3, line  332.

       Line  401   Enter  the  nonresidential  share  of  total  estimated annual
       wastewater  treatment  system  costs  here.   The  nonresidential  share
       includes:

             o  the annual industrial share; and
             o  any  annual income which  will not  be paid  directly  or
                indirectly  by  the residential users,  such  as the  sale  of
                by-products and  interest income.

       Line 402 Subtract line  401 from 400 to  find the residential share of  the
       total estimated annual wastewater treatment and facilities costs.

       Line 403   Identify  the  current  number  of  households  to  be served
       by the wastewater facilities.  You may wish  to perform this
ll/  U.S.E.P.A.  "Transmittal  of  Guidance  for  Implementing the  Financial and
Management Capability Policy,"  OWPO '84-13,  December  20,  1983  memo from
Henry L.  Longest  II, Director, Office  of  Water  Program  Operations  to  Water
Management Division Directors Regions I - X.
                                      47

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                                                             Worksheet #4
WHAT ARE THE ANNUAL COSTS PER HOUSEHOLD?

    • Total Estimated Annual Wastewater Treatment
      System Costs (332)                            $	     (400)

    • Nonresidential Share of Total Annual
      Wastewater Treatment System Costs              $	     (401)

    • Residential Share of Total Annual Wastewater
      Treatment System Costs (400 - 401)               $	     (402)

    • Numberof Households                         	     (403)

    • Annual Wastewater Treatment System
      Cost Per Household (402-i-401)                  $	     (404)

    • Other Annual Costs Per Household (Identify)

                                                  $	     (405)
       Total Annual Costs Per Household                 „>                     i*nc\
       (404 + 405)                                  $            	     (406)
                                     48

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analysis using the number of  households that will exist when the facility
is operational.

Line 404 Divide the residential share of the annual wastewater  treatment
and facilities costs  (402) by the number of households  (403) to calculate
the annual wastewater treatment and facilities costs per household.

Line 405   Other annual  costs per household are important to  include in
this  analysis  of  household   burden.  Examples  include  service  line
installation costs, connection fees, and assessments.  Include  here costs
that are paid by the customer to private  enterprises (such as  a plumber)
as well as to the agency operating the system.  Some difficulty may  be
encountered  in  entering  these amounts into the analysis for the following
reasons:

      o    Not  all households in the community will  necessarily be
           affected. (For  example, connection  fees  may only  be
           required from households  that are to  join the system
           for   first  time   because  of   an  expansion   of   the
           facilities);

      o    Fees  and assessments  may be variable  based on  such
           factors as the length of a homeowner's  lot; and

      o    Frequently the "other" cost recovered  from  households
           are  one-time fees or  assessments  and are not  repaid
           over a period of years.

Given these  problems, some suggestions for proceeding with the  analysis
of annual costs  per  household follow:

      o    Consider  the impact on  a new user  of the  system,
           including all potential fees  that a homeowner  may be
           required  to   pay  in  order  to  receive  wastewater
           treatment  services.    Any  variable   fees  should   be
           estimated at  their maximum amounts.

      o    Express   the  one-time   fees   and    assessments   as
           annualized costs based on the assumption that the new
           user  will not  be  able  to  pay these  costs  without
           borrowing.  To do this, choose  an  interest rate and  a
           payback  period   and  find   the  appropriate  capital
           recovery factor  (See  Table on Worksheet #3B),  then
           multiply the amount  of  the   one-time  fee  and/or
           assessment  by  the   capital recovery  factor.   As  an
           example, consider  the following:
                               49

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      Connection Fee                               $2,000

      Interest Rate                                 10%

      Length of Loan                               20  years

      Capital Recovery Factor                      .117

      Annual Cost ($2,000 x .117)                   $234



The amount (in this case, $234)  should be entered on line 405.

      o   If you have  an  existing sewer system and will be adding
          new  users  who  will  pay  additional charges  to  join the
          system,  it may  be desirable  to  complete Worksheet #4
          twice -- once for  existing  users  and once for  new users.
          The  cost of collector sewers are  usually borne by  only
          those users  who abut the new sewer  lines  or who  may
          potentially   benefit   from   connecting   to  them.   For
          communities who are  presently sewered but  are  planning
          to build new sewers  for  new users, the cost for these
          sewers should  not be divided among all  household  costs
          in  the  community.   For   these  situations,  the annual
          household  costs  should be  calculated in  two steps  using
          Worksheet #4 twice.  The  first calculation would include
          the system-wide costs to  be shared  by all  customers
          (treatment   facilities   construction  and  O,M
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             Line 402: Residential share of total
             system-wide annual costs:                   $750,000

             Line 403:     Number  of households to  be
             served:                                        5,000

             Line 404: Annual system-wide cost per
             household (402/403):                            $150

             Line 405:     Other annual household costs:         0

             Line 406:     Total  annual system-wide cost
             per household:                                  $150

       Step 2:  Calculate annual household cost for households to  be  newly
       sewered:

             Line 402:     Residential share of annual
             costs for new sewers:                       $75,000

             Line 403:     Number  of households on  new
             sewers:                                        1,000

             Line 404:     Annual cost per household for
             new sewers:                                     $75

             System-wide annual cost from
             Step 1:                                         $150

             Line 405:     Other household costs
             (annualized connection fee
             calculated in above example):                   $234

             Line 406:     Total  annual cost per household
             for those on new sewers:                       $459
       The information required  to answer the questions posed by the  Financial
Management  Capability Policy has now been developed and can be  transferred
to the Financial Information  Sheet (Exhibit V).  This information  pertains to the
proposed wastewater system:  what it will  cost the community and the users, and
how  it  will  be  financed  and maintained,  A  community  may wish to consider
additional information  relating to its financial situation prior to certifying that
it  has the necessary  capability.  Worksheets  //5 and //6 and the  Supplemental
Information   Sheet  (Exhibit  VII)  focus on  community  fiscal information  and
provide a means to develop a number of financial indicators  by  which financial
capability might be further analyzed.
                                      51

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                                            EXHIBIT VII
Supplemental
Information  Sheet
  This Supplemental Information Sheet may be used by your community as the basis for an In-depth evaluation of
financial condition. It outlines a method for assessing a community's relative financial strengths and weaknesses.

What Is The Community's Debt History?	
A. Bond Ratings
• Community's most recent general obligation bond rating
                                                     Rating
                                                                      Date of rating
• Community's most recent revenue bond rating

B. Outstanding Debt
                                                   Rating
Dato of rating
                   from lln»
                   (500)

                   (501)
  General Obligation Bonds
  Revenue Bonds
  Gross Direct Debt
  Direct Net Debt
  Overlapping Net Debt
  Overall Net Debt
  Other Debt
  New Debt for Other Capital Improvements
C. Debt Repayment Schedule
• Total Overall Net Debt Due
  (including new issue) within next 5 years
D. Debt Limits
• Briefly describe any limits on debt that apply to your community.
                                                                                         (502)
                                                                                         (503)
                                                                                         (504)
                                                                                         (505)
                                                                                         (506)
                                                                                         (507)
                                                                                         (508)
                                                                                         (509)
                                                                                         (515)
                                                                                           (516)
What % of your debt limit is currently used?_
                                                                                           (517)
What Is The Community's Financial Condition?
Indicator
Indicator value
1. Annual rate of change in population
2. Current surplus as a % of total
current expenditures
3. Real property tax collection rate
4. Property tax revenues as a % of full
market value of real property
5. Overall net debt as a % of full market
value of real property
6. Overall net debt outstanding as a % of
personal income
7. Direct net debt per capita
8. Overall net debt per capita
9. % direct net debt outstanding due
within next 5 years
10. Operating ratio
11. Coverage ratio
%

%



$
$

%
%
Indicator rating
Weak Average Sti^.ig
Below - 1 %
Below 0%
Below 96%
Above 4%
Above 5%
Above 12%
Above $750
Above $1,000
Below 10%
Below 100%
Below 120%
- 1 % to 1 %
0% to 5%
96% to 98%
2% to 4%
3% to 5%
4% to 12%
$250 to $750
$450 to $1,000
10% to 30%
100% to 120%
120% to 170%
Above 1%
Above 5%
Above 98%
Below 2%
Below 3%
Below 4%
Below $250
Below $450
Above 30%
Above 120%
Above 170%


(602)
(610)
(611)
(615)
(616)
(619)
(620)
(621)
(622)
(630)
(631)
                                           52

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                                                                Instructions
ASSESSING THE COMMUNITY'S                                       for
DEBT POSITION                                                 Worksheet #5
PURPOSE OF WORKSHEET #5

       The  purpose  of  this  worksheet  is  to  profile  and   summarize  the
community's debt position, including the proposed project.  Information presented
on  this worksheet  is used  for  calculating  the financial  indicators found  on
Worksheet #6.

GENERAL INSTRUCTIONS

       This  Worksheet is divided into  four sections,  each providing  background
information  related  to  the  community's  debt  history.  The sections  cover  bond
ratings, outstanding  debt, debt repayment, and debt limits.

Instructions  for Section A
       Line 500   Give  the  community's  most recent  general  obligation  bond
       rating and the date of the rating.

       Line 301  Give the community's (or  its wastewater  utility's) most recent
       revenue bond rating and the  date of the rating.

       Enter this  information  on the  Supplemental  Information Sheet  (Exhibit
VII).  If the community  has never  had a rating, enter N/A as not applicable.

Instructions for Section B
       Information  on  the  community's debt  outstanding  is  presented in  this
section.  In calculating the amount of debt outstanding, include here only the
principal.  Do not include any interest.

       Line 502  Give  the  amount  of general  obligation debt outstanding, and
       any new debt for the  proposed project.   General obligation  bonds are
       those  for whose  payment  the  full faith and credit of  the  issuer has been
       pledged and  are payable most commonly from  real  property  taxes and
       other   general  revenues.  Include  here  any general  obligation  bonds
       secured  by  earmarked  revenues  that  flow outside  the general  fund
       (double-barreled bonds).

       Line 503  Give  the  amount of revenue  bonds outstanding, including any
       new debt for the proposed facilities.

       Line 504  Gross  direct debt is  the total amount  of general obligation and
       revenue bonds outstanding.  (Lines 502 plus 503).

       Line 505  Direct net debt is  gross direct debt (line 504) less  debt that  is
       self-supporting (revenue  bonds) and double-barreled bonds.
                                      53

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WHAT IS THE COMMUNITY'S DEBT HISTORY?
                                                                   Worksheet #5
                                                                  Sections A and B
A.  BOND RATINGS

    • Community's Most Recent General
      Obligation Bond Rating
B.
                                           Rating
      Community's Most Recent
      Revenue Bond Rating
 DEBT



• General Obligation
 Bonds

• Revenue Bonds

• Gross Direct Debt

• Direct Net Debt

• Overlapping Net Debt

• Overall Net Debt

• Other Debt

• New Debt for Other
 Capital Improvements
                                                   Date of Rating
                                                                        (500)
                                                                        (501)
              Rating        Date of Rating



Outstanding   +  This Project   =   Total
                                                                             (502)


                                                                             (503)

                                                                             (504)

                                                                             (505)

                                                                             (506)

                                                                             (507)

                                                                             (508)

                                                                             (509)
                                          54

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       Line 506  Overlapping net debt is the community's proportionate share of
       tax-supported debt of local  government  units  located  wholly  or  in  part
       within the limits  of  a community which must be  borne by property  or
       persons in that community's boundaries.  (Chapter II provides guidance  on
       determining a community's overlapping debt.)

       Line 507  Overall  net debt is the sum of direct net  debt and overlapping
       debt.  (Lines 505 and 506)

       Line 508  Three important debt "obligations" that should be considered in
       evaluating  a  community's debt load  are  outstanding  leases, unfunded
       pension liabilities, and notes having  a maturity  greater than one  year.
       Insert  here the amount of  other debt the community has outstanding.

       Line 509   Give an  estimate  of the  amount of future planned  debt for
       other  planned  capital improvements  your  community  is  contemplating.
       Include any outstanding bond anticipation notes (BANs)  here.


       Return to the Supplemental Information Sheet (Exhibit  VII) to  record the
required data.

Instructions for Section C
       Section  C  is  used  to  show how  restrictive future  debt  repayment
requirements will  be for  the community.  A  low proportion  of  outstanding debt
coming due during the next five years is an  indication that a large proportion  of
future revenues are  already committed for  debt service, and thus, that  future
financial flexibility will be limited.  This does not mean that a community  should
only borrow funds with short  payback periods (such as 5  years) since that could
indicate  debt  service requirements  during  the  payback  period  that  might  be
greater than can  be afforded.  In general, the  borrowing period  should roughly
match the lifetime of the  facility that  the debt  is used to finance.

       Lines  510 - 514  Give the amount of direct net debt due in each  of the
       next five years.  This should include debt for this project. This  can  be
       obtained from line  325.

       Line 515  Add lines 510, 511, 512, 513, and 514 to calculate total  direct
       net  debt due within the next five years.

       Transfer the data  on to the Supplemental Information Sheet (Exhibit VII).

Instructions for Section D
       Line 516  Briefly describe any constitutional, statutory,  or  charter limits
       on  debt  (other  than  a  referendum  requirement)  that apply  to your
       community, including:

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                                                                     Worksheet #5
                                                                   Sections C and D
C.   DEBT REPAYMENT SCHEDULE


    • Principal Debt Repayment Schedule (Including Proposed Project)
      For Direct Net Debt Within Next 5 Years
                      Existing Debt         This Project            Total
      Yearl      $	 $	  $	       (510)
      Year 2       	   	   	       (511)
      YearS       	   	   	       (512)
      Year 4       	   	   	       (513)
      YearS       	   	   	       (514)

    • Total Direct Net Debt Due (including proposed project) Within Next
      5 Years (510 + 511 + 512 +  513 + 514)                      $	     (515)

D.  DEBT  LIMITS

    • Briefly describe any limitations on debt that apply to your community.                 (516)
    •  What percentage of your debt limit will be used?               	%    (517)
                                           56

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             o    a dollar ceiling on  the  amount that may be outstanding
                  at any one time or the  total amount that may be
                  issued;

             o    a ceiling on the amount that may be outstanding at  the
                  time of incurrence, expressed as  a percentage  of  the
                  assessed valuation  of taxable property or a percentage
                  of regularly recurring revenues;

             o    the ratio  of  past  revenues to future debt service (for
                  revenue bonds); and

             o    any limitation on  the authority  to levy taxes  for debt
                  service.

The  maximum amount of  debt that a  governmental  unit may incur typically is
fixed on  direct gross or direct net debt.

       Line 517  Calculate  (or estimate)  the percentage of the debt limit that
       will be  used  including current debt plus  debt generated by the  proposed
       project.  Since there  are a number of possible limitations that may apply,
       no single formula is available.

       Summarize and record the information from  this section  of Worksheet //5
on the Supplemental Information Sheet (Exhibit VII).
                                      57

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                                                                 Instructions
EVALUATING THE  COMMUNITY'S FINANCIAL                           for
CONDITION                                                      Worksheet #6
PURPOSE OF WORKSHEET #6

       The  assessment  of  a  community's  financial   condition  involves   the
calculation  and analysis of 11  key financial indicators.  These  indicators have
been  selected  because  of their  importance in  explaining  the difference  in
credit worthiness between a community with a strong credit rating and one with
a  weak  credit  rating.  However,  in  evaluating the  indicator  values  for  an
individual community, it may be  necessary  to draw  other  relevant  information
into the  analysis, use judgment, and probe for more  facts and explanations.   For
example, information concerning  the  closing of the  community's  only industry is
not captured in the indicators' analysis, but such an event could  have a very
serious effect on the community's financial condition.

       Worksheet  #6  is  to  be  completed  using the  proposed  project  where
applicable.   Indicators 1,  2  and 3  should be   calculated  based  on   current
information.  If the project is to  be  funded  in part  through the  use of property
taxes, then  indicator 4 should include the proposed project. If general obligation
bonds will  be used  to  finance  the project, then indicators 5 through 9 should
include  the  proposed project.  Indicators 10 and  11  should  include the proposed
project if revenue bonds are planned to be used  to finance  the project.

GENERAL INSTRUCTIONS

       Worksheet #6 provides instructions for calculating the  key indicators of
financial health.  After the  indicator values and ratios are  calculated, enter
them  on the  Supplemental  Information Sheet   and  determine  whether   the
indicators register  a weak, average,  or  strong rating based on  the  benchmarks
given on  the Supplemental  Information  Sheet.

Instructions for Indicator 1  — Population Growth

       Lines 600 -  602 The annual rate of change in population tells the analyst
       whether  or  not a community  is  growing  strongly,  remaining  stable, or
       declining.  This  information  is  relevant  to the  analysis  of  financial
       capability because the economic base —  which typically  is dependent on
       personal  income,  retail sales,  and the market  value of  real  property --
       rises and falls with changes in population.

             To calculate   this  rate,  subtract  the  community's  population  five
       years ago (600) from the  current population (601).  Divide this number by
       five  and divide the result  by  the population five years  ago (600), then
       multiply the result by  100.  For example,

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             a.   Population  5  years ago              27,000
             b.   Current population                   35,000
             c.   "b" - "a" =  8,000
             d.   (8,000 / 5)  =  1,600
             e.   (1,600 / 27,000) x 100 = 5.9%
             If  the population five years ago is  unavailable, pick some other
       period  between 2 and  10  years.  Conduct the analysis as described above
       but change the denominator  (5) in step "d" accordingly.

Instructions for  Indicator 2 — Operating Surplus (or Deficit)

       Lines 603 -  605   Enter the  community's general  fund revenues  for the
       most recently completed  fiscal year for the categories  specified  in lines
       603 and 604. (Treat as revenues only current receipts that flow from tax
       sources,  charges,  and  intergovernmental payments.  Do not include the
       receipts of borrowing.) Add these two categories together to obtain total
       current revenues  (605).

       Lines 606 - 608  The community's general fund expenditures for the most
       recently  completed fiscal year are  divided among operating expenditures
       and debt service payments.   Put the amounts in lines  606 and 607, then
       calculate the total and enter it on  line  608.

       Line 609   The current operating surplus  (or deficit)  is  the  difference
       between  total current revenues and total current expenditures  (605-608).

       Line 610  Indicator 2 is found by dividing the surplus (or deficit) by total
       current expenditures and multiplying by 100. A positive percentage  is a
       healthy  sign  whereas  a  negative  percentage  should  be  taken  as  a
       financial  warning  signal.   The  analysis of  a  community's  surplus  (or
       deficit) should ideally be conducted over a multiyear period to determine
       if the surplus is getting smaller or the deficit is  becoming larger.

Instructions for  Indicator 3 — Property Tax Collection  Rate

       Line 611   The real property tax collection  rate  is an indicator of the
       efficiency of the tax collection system.  It is calculated as follows:
             Property taxes collected during most recently
             	completed tax  year	
             Property taxes levied during most recently
                          completed tax  year
                                       60

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                                                                    Worksheet #6
                                                                    Indicators 1-4
WHAT IS THE COMMUNITY'S FINANCIAL CONDITION?
INDICATOR 1

    •  Community Population 5 Years Ago	          (600)

    •  Current Year Population                        .	          (601)

    •  Annual Rate of Change in Population            	2^.          (602)

INDICATOR 2

    •  Property Taxes                               $	          (603)

    •  Other Revenues                               $	          (604)

    •  Total Current Revenues (19—)                 $                            (605)

    •  Operating Expenditures                        $	          (606)

    •  Debt Service Payments                        $	          (607)

    •  Total Current Expenditures  (19	)             $	          (608)

    •  Current Surplus (Deficit) (605-608)             $	          (609)

    •  Current Operating Surplus (Deficit)
       As A Percentage of Total Current
       Expenditures (609^-608 X 100)                 	%          (610)

INDICATOR 3

    •  Real Property Tax Collection Rate
       (Most Recent Tax Year Available 19	)         	%          (611)

INDICATOR 4

    •  Assessed Value of Real Property                 $	          (612)

    •  Current Assessment Ratio                      	%          (613)

    •  Full Market Value of Real Property             $	          (614)

    •  Property Tax Revenues As A Percentage of
       Full Market Value of Real Property
       (603^-614X100)                            	%          (615)
                                           61

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Generally,  low  collection  ratios  are  evidence   of  tax
delinquency.

Instructions for Indicator 4 — Reliance on Property Tax Revenues

       Lines 612 - 615   Indicator k  identifies if  a community  is  taxing  real
       property  extensively  and  gives  some  indication  of  the  potential  for
       future  revenue growth  from  this  source.   Property tax  revenues  are
       expressed as a percentage of the full market value of real property.

             The first step  in calculating  this  indicator is to enter the assessed
       value of real property on 612.  The current  assessment ratio is needed to
       calculate the  full market  value of real property since  most properties
       are assessed at some percent of market  value less  than  100 percent. This
       is  accomplished by dividing the  assessed value of real property  by  the
       assessment ratio.   For example,
             Assessed value of real property

             Assessment ratio (50 percent)

             Full market value of real
             property (100,000,0007.50)
$100,000,000

 .50


$200,000,000
             To calculate  Indicator 4 (line 614), divide  the most current year's
       property  tax revenues  (603) plus  any increase in  property  taxes that  will
       be  required  to  finance the project by  the  current  full market  value of
       real property and multiply by  100.
             Current Year's Property Tax Revenues
             Full Market Value of  Real Property
x 100
       Two points should be noted regarding  this indicator:

       o)  a  high  ratio can be an important indicator of fiscal pressure in the
           community  because sustained growth in property  tax  revenues  will
           not   be   feasible   —  unless    property   values   are   increasing
           proportionately; and

       o)  as is the case with several  of  the  other indicators discussed above,
           the analyst may find it useful to  track the value of the indicator for
           the five year period preceding the current  year.
                                       62

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                                                                Worksheet # 6
                                                                 Indicators 5-9
INDICATOR 5

    •  Overall Net Debt as a Percentage of Full Market
       Value of Real Property (507 H- 614 X 100)         	%     (616)

INDICATOR 6

    •  Per Capita Income                              _$	       (617)

    •  Personal  Income (617 X 601)                     J>	       (618)

    •  Overall Net Debt as a Percentage of Personal
       Income (507 ^618 X 100)                       	%     (619)

INDICATOR 7

    •  Direct Net Debt Outstanding Per Capita
       (505 -r 601)                                   f	       (620)

INDICATOR 8

    •  Overall Net Debt Outstanding Per Capita
       (507 - 601)                                   !	       (621)

INDICATOR 9

    •  Direct Net Debt Due Within 5 Years as a
       Percentage of Direct Net Debt Due
       (515-5-505X100)                              	%     (622)
                                       63

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Instructions for Indicators 5-9 — Debt Capacity

       This section of the worksheet  organizes information on the community's
outstanding debt  in order to calculate several important indicators covering the
debt capacity of  the  community.  In supplying information about a community's
debt  history, the  analyst  should  include  any  new  debt  for  the  proposed
facilities.

       Line 616   For Indicator 5, divide total overall  net debt (507)  by the  full
       market value  of real  property  (614)  then multiply  by  100.   (For  an
       example of the calculation of overlapping debt, see Chapter II.)  Indicator
       5 compares the amount of  tax-supported debt owed by a community with
       the full market  value  of real  property  in  the  community,  which is  a
       gauge of the community's ability  to support additional borrowing.

       Lines 617  and 618  Another  measure of a community's wealth  is personal
       income which  can also  be used as a yardstick  to  judge the community's
       ability to  repay debt.  If total personal income is  not known, find the per
       capita income in the  community and multiply it by  population (617  x
       601).  If personal  income is not available for  the current year,  update the
       most recent number using the following formula:
             a.   Obtain the consumer price  index
                 (CPI)  for the year  for which income
                 information is available.  13/

             b.   Obtain the CPI for the most recent
                 year.

             c.   Divide "b" by "a" to calculate  a
                 CPI ratio.

             d.   Inflate the per capita income
                 figure by multiplying that amount
                 by the CPI ratio found in "c."
13/  Consumer Price Index

YEAR       CPI          YEAR        CPI         YEAR       CPI
1969         109.8        1974         147.7        1979         217.4
1970         116.3        1975         161.2        1980         246.8
1971         121.3        1976         170.5        1981         272.4
1972         123.3        1977         181.5        1982         289.1
1973         133.1        1978         195.4        1983         298.4
                                      64

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       Line 619  In  Indicator 6, overall net debt is compared with personal income.
       Divide overall net debt (507) by personal income (618) and multiply by  100.

       Line 620  For Indicator 7, divide direct net debt outstanding  (505) by the
       current population  (601).   The  amount  is another indicator of  the  burden
       on  the  community  of  the   general   obligation  debt   issued  by  the
       community.

       Line 621  To calculate Indicator  8, divide overall net  debt outstanding
       (507)  by the  current population (601).  The amount is an indicator of the
       burden on the community and its overlapping jurisdictions.

       Line 622 The  purpose of Indicator 9  is to compare the  percentage of
       direct   net   debt   due within   five  years  to  total  direct  net  debt
       outstanding.  Divide direct  net debt due within 5 years (515) by direct net
       debt outstanding (505) and multiply by 100.  Credit  analysis  teaches us
       that an  especially  long payback should  be  viewed with  caution  because
       the repayment  of  debt  should correspond  to  the   useful  life  of  the
       facility. This does not mean that  a community should only borrow funds
       with short payback periods  (such  as 5 years),  since  that  could indicate
       that debt  service  requirements  during  the  payback  period might  be
       greater than  the community can afford.

Instructions for Indicators  10 and 11  — Analysis of Sewer Enterprise

       The  indicators  presented up   to  this   point  are particularly useful in
assessing  the  financial capability of the  community if it pays  for its  facilities
with general obligation bonds.  The next  part of the  worksheet introduces  two
indicators  which provide  the analyst  with information  upon which  to make  an
informed judgment about projects funded with revenue bonds. Unlike  the analysis
of general obligation  bonds, the financial condition  of the sewer  "enterprise"
fund is of prime importance  in the study of revenue bonds. 14/  Indicators 10  and
11 should be  calculated for  the  first operational year of  the  proposed  system
using anticipated revenues and expenses.

       Lines  623   and  624  Enter   the  expected  operating   revenues   and
       nonoperating revenues (grants, interest,  and  connection  fees)  for  the
       sewer  funds  for  the  current  year and the  first   year  the  system is
       operational.

       Line 625 Add lines  623 and
14/ An  enterprise fund is established  to  account for sewer operations that are
financed and operated  in a manner  similar to a  private  business enterprise —
where  the  intent of  the  governing  body is  that  the  costs  of  providing the
service  be financed or recovered primarily through user  charges.
                                      65

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                                                                Worksheet #6
                                                             Indicators 10 and 11
INDICATORS 10 AND 11

    • Sewer Fund Revenues (First Year Operational)

           Operating Revenues                         $	       (623)

           Non Operating Revenues (Excluding
           Revenue From Borrowing)                   $	       (624)

           Total Revenues (623 + 624)                  $	       (625)

    • Sewer Fund Expenses (First Year Operational)

           Operating Expenses (Excluding
           Depreciation and Reserves)                   $	       (626)

           Annual Debt Service (on sewer bonds)         $	       (627)

           Other Non Operating Expenses                $	       (628)

           Total Expenses                             $	       (629)

    • Operating Ratio (623 ^-626 X 100)                	%     (630)

    • Coverage Ratio ((625 - 626) + 627 X 100)          	%     (631)
                                      66

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       Lines 626 -  628 With  regard  to  sewer fund  expenses,  it  is particularly
       useful   to  single  out   the  operation,  maintenance,  and  replacement
       expenses and annual debt service  on outstanding sewer  revenue bonds.
       Any other nonoperating expenses  should be entered on line 628.  This  also
       should  be done for the  current  year and the  first  year  the  system  is
       operational.

       Line 629 Add lines 626, 627, and  628.

       Line 630  Since the issuer  must  be viewed  as an operating entity,  the
       operating  ratio  is an important indicator of the system's  efficiency.  It
       provides  a   comparison  of   the   community's  operating  revenues  and
       operating  expenses.    The  ratio  is  calculated  by   dividing  operating
       revenues by operating expenses and multiplying  by 100. (623/626 x 100).

             Low ratios  are considered  a warning because  the enterprise must
       rely on  nonoperating  revenues, which tend to be  unpredictable, to shore
       up operating  shortfalls.

       Line 631 Another key  ratio  in the analysis of  an enterprise fund is  the
       coverage ratio.  It is calculated by dividing the net revenues of the fund
       (total revenues  minus operating expenses)  by  the  annual debt service on
       revenue bonds outstanding and multiplying by  100 ((625-626)/627 x 100).

             A low  coverage  ratio   means the enterprise  will  not be  able to
       generate sufficient  revenues  to  pay  all  cash expenses.   In addition to
       examining the quantity  of revenues, consideration  should  also be given to
       the stability  and predictability of the "coverage."

       Once Worksheet #6 is  completed,  the indicators  can be entered in  the
Supplemental  Information Sheet  (Exhibit  VII).   The  Supplemental Information
Sheet's lower  section  — "What is  the Community's Financial  Condition"  —
allows the  indicators  calculated  in  Worksheet  #6  to  be  ranked  as   strong,
average, or weak. The benchmark values shown on the Supplemental Information
Sheet for  strong, average, and weak  values are based on national figures. It  may
be  that State  or regional  figures are  available  which might  better  serve  for
ranking the community.  In particular, property tax and debt indicators  display a
marked regional  variation and State  or  regional  averages for  those  indicators
may be more desirable as benchmarks against which  to  measure  a community's
financial condition.

       If  after  evaluating  the  eleven  indicators  you  determine  that  your
community's financial  condition is  weak,  it may be  useful  to  recalculate  the
indicators  without the  project to determine the  extent  to  which the  proposed
project is  the cause  for the weak showing.  It may be that the  community would
be in a poor financial position  even  without the impact of the proposed  project.
This additional  analysis can determine whether the problem is  with the proposed
project or  the community's current financial  condition
                                      67

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Evaluating Results of the Analysis

       As  stated  earlier, this  Guidebook does  not provide a  fully  developed
credit   analysis,  but  rather   a  brief,  reliable   basis  for   evaluating   your
community's ability to assume new debt. The information provides assistance but
not  the  answer to  whether your community  should  undertake  the  proposed
project.  Guidance documents are not intended to replace local judgment.

       Throughout  the  Guidebook,  we  have  stressed  the  importance  of
evaluating  the  results,  whether   positive  or  negative,  in  light   of   your
community's   particular circumstances.   For  example,  a  community  that  is
dependent  on  a single  industry with  an uncertain  future  must look beyond the
predominantly positive  indicators  that exist  in the present.

       The purpose  of  guidance is  "to point in the  right direction."  Strong
indicators  should  encourage  your  community  to   undertake the  project  as
planned; weak  indicators  should caution  against  it, with  particular   attention
paid to  reviewing less  costly  alternatives.  Whatever  choice your community
makes,  however,  it  should benefit  from  a systematic  analysis  of  financial
capability  as the project progresses through planning, design, and construction.
                                       68

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APPENDIX A

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                          SELECTED REFERENCES

       The following  reference materials are recommended for communities that
wish  to  acquire  greater  knowledge of  financial  indicators, municipal  bond
ratings, and sound financial practices.

Groves, Sanford M. and Godsey, W.  Maureen.  Evaluation of Local Government
       Financial Condition.  Financial Trend Monitoring System; A Practitioners
       Workbook  for  Charting  Trends  and Interpreting  Results.   Financial
       Jeopardy; Practices and Policies that Can Affect  Financial Condition.
       Financial Performance Goals; A  Guide for Setting  Long-Range Policies.
       Tools  for  Making  Financing  Decisions.   Series   of  five  handbooks.
       Washington, DC: International City Management Association, 1980.

       Five practical  handbooks  designed  to help local government  managers
assess  their  fiscal condition.   They focus  on three  broad variables: external
influences  such as local  demands  for  resources  and  the national and regional
economy; organizational issues including management practices and policies; and
internal  financial  characteristics  (such  as  revenue  and expenditure  patterns,
debt and unfunded liabilities).  For  information  contact 1C MA,  1120 G  Street,
NW, Washington, DC 20005.  (202) 626-4600.

Lamb,  Robert and  Rappaport, Stephen P.  Municipal Bonds;  The Comprehensive
       Review  of  Tax  Exempt  Securities  and   Public  Finance.  New  York:
       McGraw-Hill Book Co.,  1980.

       The  book is  written  for  a  broad  audience but  will be  most useful to
individuals   desiring  a  general overview  of most  of the  major  institutional
features of  the  tax-exempt market.  Readers will find  the  introductory chapters
on growth  of the tax-exempt sector, the buyers and sellers of municipal bonds,
and  the  rating  agencies  to  be informative  and  generally  entertaining.   Order
Municipal Bonds from  McGraw-Hill, Inc.,  1221  Avenue of the  Americas, New
York, NY 10020. (212) 997-1221.

Municipal Finance Officers Association.  Governmental  Accounting, Auditing, and
       Financial Reporting (GAAFR).  Chicago, IL: MFOA, 1980. (234  pp)

       First   published   in   1968,   GAAFR  received  wide  acceptance   by
governmental  accountants  and finance  officers, other  government  officials, and
independent practicing  accountants as  generally  accepted  accounting principles
(GAAP) for  State and local  governments.   Available from:  Municipal  Finance
Officers Association, 180 North Michigan Avenue,  Suite 800, Chicago, IL 60601.
(312) 977-9700.

Rosenberg, Philip and Stallings, C. Wayne.  Is Your City Heading for Financial
       Difficulty?  A  Guidebook  for  Smaller Cities   and  Other  Governmental
       Units.  Chicago, IL: Municipal Finance Officers  Association, 1978.  (43 pp)

       This  publication provides  local officials with step-by-step  procedures for
analyses  of  their  government's  fiscal  condition.  It focuses  on five  major
variables that contribute  to  fiscal decline:  declining economic vitality; financial
                                     A-3

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independence  being lost;  declining  municipal  productivity; deferral of  current
costs to the future; and ineffective  municipal financial management practices. A
series  of  detailed indicators  is  presented  to  assess  each  variable  and a
methodology   for  collecting  and  analyzing  data  on the  variable is  outlined.
Available from MFOA, 180 N. Michigan Ave., Chicago, IL 60601. (312) 977-9700.

Smith, Wade 5.  The Appraisal of Municipal Credit Risk.  New York: Moody's
       Investor Service, Inc., 1979. (442 pp)

       A guide to  the credit aspects of municipal bonds and notes.  Divides  the
components of  municipal  credit  evaluation  into   five  areas:  (1)  population,
wealth,  and  income;  (2)  governmental  organization and  powers; (3)  financial
operations; (4)  general  debt  obligations;  and  (5)  special  and  limited  debt
obligations.  Available from the  publisher, 99  Church  Street, New York,  NY
10007.(212) 553-0300.

Standard and  Poor's Corporation.  Standard and Poor's Rating Guide. New York:
       McGraw-Hill Book Co., 1979.  (417 pp)

       In  this guide,  a major  rating  corporation outlines the  procedures  and
tools it  uses  for  rating  various  types of public and private sector securities,
including corporate bonds, municipal bonds, and bonds offered by public utilities,
hospitals, and housing authorities.  Major  considerations in establishing  a rating
include  economic   base   analysis,  financial   analysis,   debt   levels,    and
administrative  factors.   While   concerned   principally   with  private  sector
securities, this Guide  provides municipal officials with valuable insight into  the
rating process.  Available from McGraw-Hill Books, Princeton Road, Hightstown,
NJ 08520.  (212) 997-1221.
                                      A-4

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APPENDIX B

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                     GLOSSARY OF FINANCIAL  TERMS
ACCOUNTING PERIOD.  A period at the end of which and for which  financial
statements are prepared.

ACCOUNTING PROCEDURES.    All processes  which discover, record, classify,
and summarize financial information to produce  financial reports  and to provide
internal control.

ACCOUNTING SYSTEM.   The total structure of records  and procedures which
discover,  record, classify, summarize  and report information  on the  financial
position and  results  of operations  of  a  government or any of its  funds,  fund
types, balanced account groups, or organizational components.

ACCOUNTS PAYABLE.  A liability account reflecting  amounts on open account
owing to private persons  or organizations for goods  and services  furnished  by a
government (but  not  including  amounts  due  from  other  funds  of the  same
government or to other governments).

ACCOUNTS RECEIVABLE.  An asset account reflecting amounts  owing on  open
account from private persons  or  organizations  for goods and services furnished
by a government  (but  not  including amounts due from other funds of the same
government).   Although taxes and special assessments receivable  are  covered by
this term,  they should be recorded and reported separately  in Taxes  Receivable
and Special Assessments  Receivable accounts respectively.   Amounts due  from
other  funds or from other governments should also be reported separately.

ACCRUAL BASIS.   The  basis   of  accounting  under   which  transactions  are
recognized when they occur, regardless of the timing of related cash  flows.

ACCRUED EXPENSES. Expenses  incurred but not  due until  a later date.

ACCUMULATED  DEPRECIATION.   A   valuation  account   to  record  the
accumulation  of  periodic credits  made  to record the expiration of the estimated
service  life of fixed  assets.

ADVANCE REFUNDING BONDS.    Bonds  issued to refund an outstanding  bond
issue  prior to the date on  which  the outstanding bonds  become due or callable.
Proceeds  of  the advance  refunding  bonds are  deposited  in  escrow  with  a
fiduciary, invested in  U.S. Treasury Bonds  or  other authorized  securities, and
used  to  redeem  the underlying  bonds  at  maturity or call  date and  to  pay
interest on the bonds being refunded or the advance  refunding bonds.

ASSESS.  To value property officially for the purpose of taxation.

ASSESSED VALUATION.  A valuation set  upon real estate or other property  by a
government as a basis for levying taxes.
                                    B-3

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ASSESSMENT.  (1) The process of making the official valuation  of property for
purposes of taxation.  (2) The valuation placed upon property as  a result of this
process.

ASSESSMENT  ROLE.  In  the  case of real property, the official list containing
the legal description of each  parcel  of property and its assessed  valuation.  The
name and address  of the  last known  owner are also usually shown.   In the case
of personal property, the assessment roll is the official list containing  the  name
and  address of the owner,  a description  of the  personal  property, and  its
assessed value.

ASSETS. Resources owned  or  held by a government  which have monetary value.

AUDIT. A  methodical  examination of utilization  of resources. It concludes in a
written report of  its  findings.  An  audit  is a test of management's accounting
system  to  determine the  extent to  which internal accounting  controls are both
available and  being  used.

AUDIT PROGRAM.  A detailed outline of work to be done and procedures  to be
followed in any given  audit.

AUDIT  REPORT.   The  report prepared by  an  auditor covering  the  audit or
investigation made by  him.  As a rule, the report should include  (a) a statement
of  the scope of  the audit;  (b) explanatory  comments  (if any)  concerning
exceptions   by the  auditor  as to application of  generally  accepted  auditing
standards;  (c) opinions; (d) explanatory comments (if  any) concerning  verification
procedures; (e) financial statements  and schedules; and (f) sometimes statistical
tables,  supplementary  comments,  and recommendations.  The auditor's  signature
follows item (c) or (d).

AUDITOR'S OPINION.   A statement signed  by an  auditor  in  which  he or she
states that he or  she  has examined the financial  statements in  accordance with
generally accepted  auditing standards  (with exceptions, if any) and in which he
or she expresses an opinion  of some  or all of the constituent funds and balanced
account groups of the  government as inappropriate.

BALANCE  SHEET.  The  basic financial statement  which discloses  the assets,
liabilities,  and equities  of an entity at a  specified  date  in  conformity with
GAAP.

BASIC  FINANCIAL STATEMENTS.   Those financial  statements,  including  notes
thereto, which are necessary for a fair  presentation of the  financial position
and   results  of operations  of  an   entity in  conformity with  GAAP.   Under
Statement   1,  basic  financial statements  include  a  balance  sheet, an "all
inclusive" operating statement, and (for proprietary funds,  Pension  Trust Funds,
and  Nonexpendable Trust Funds) a statement of changes in financial position.

BETTERMENT.  An addition made to, or change made in, a fixed asset which is
expected to prolong its  life  or to  increase its  efficiency  over  and above that
arising  from maintenance, and the cost of which  is therefore added to the book
                                     B-4

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value of the asset.  The term  is sometimes  applied  to  sidewalks, sewers, and
highways.

BOND. A written promise to pay a specified sum of money called the face value
or principal amount,  at a  specified  date  or dates  in  the  future, called the
maturity date(s),  together  with  periodic  interest at a specified  rate.   The
difference between a  note and a bond is that  the latter runs for a longer period
of time  and  requires greater legal formality.

BOND ANTICIPATION NOTES.  Short-term, interest-bearing  notes issued  by a
government  in anticipation of bonds  to be issued  at a  later  date.  The notes are
retired from proceeds of the bond issue to which they are related.

BOND DISCOUNT.   The excess of the  face value  of a bond  over  the  price  for
which it  is  acquired or  sold.  The price does not  include accrued interest at the
date of  acquisition  or sale.

BOND FUND.  A fund  formerly  used to  account  for the  proceeds of general
obligation bond  issues.  Such proceeds  are  now  accounted  for  in  a Capital
Projects  Fund.

BOND ORDINANCE OR RESOLUTION.  An ordinance or resolution authorizing a
bond issue.

BOND PREMIUM.   The  excess of the price at which  a bond  is acquired or  sold
over its  face value.  The price does  not include  accrued  interest at the date of
acquisition  or sale.

BONDED DEBT.  That portion of  indebtedness  represented by  outstanding bonds.

BONDS AUTHORIZED  AND UNISSUED.  Bonds which have  been legally authorized
but not issued and which can be issued and sold without further authorization.
This term must not be confused  with  the term "margin of  borrowing  power" or
"legal debt margin," either  one of which represents the  difference  between the
legal debt limit of a government  and  the debt outstanding against it.

BONDS ISSUED.  Bonds sold.

CALLABLE  BOND.   A  type of  bond which permits the  issuer  to  pay  the
obligation before the  stated maturity date  by giving  notice of redemption  in a
manner specified in the bond contract.

CAPITAL OUTLAY.  Expenditures which  result  in  the acquisition of or addition
to fixed  assets.

CAPITAL PROJECTS FUND.  A fund created  to  account  for  financial resources
to be used for  the acquisition or construction of major  capital  facilities (other
than those  financed by proprietary funds, Special  Assessment Funds, and Trust
Funds).
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CASH.  An  asset account  reflecting currency, coin, checks, postal and express
money orders,  and  bankers'  drafts  on  hand  or  on deposit with  an  official or
agent  designated as  custodian  of cash and  bank deposits.   All  cash must be
accounted for  as a part of  the  fund to which  it belongs.  Any  restrictions or
limitations   as   to   its  availability  must  be  indicated  in  the  records  and
statements.   It is  not necessary,  however,  to have a separate bank account for
each fund unless required by law.

CASH  BASIS.  A  basis  of accounting  under  which  transactions are recognized
only when cash changes hands.

CERTIFICATE  OF  CONFORMANCE IN FINANCIAL REPORTING PROGRAM.  A
voluntary program  administered by  MFOA  to encourage governments  to  publish
efficiently organized and easily readable CAFRs and to provide peer recognition
and technical assistance to the finance officers  preparing them.

COMPREHENSIVE ANNUAL FINANCIAL REPORT.  (CAFR).  The official annual
report of a government.  It  includes five Combined  Statements -  Overview  (the
"liftable" GPFS) and  basic  financial  statements  for  each individual  fund  and
account group  prepared in  conformity with  GAAP  and  organized into a financial
reporting  pyramid.   It   also   includes  supporting  schedules  necessary  to
demonstrate  compliance with  finance-related legal  and contractual provisions,
extensive introductory  material,  and  a  detailed Statistical  Section.   Every
government  should  prepare and publish  a CAFR as a matter of public record.

CONTINGENT LIABILITIES.  Items which may become liabilities  as a  result of
conditions undetermined at a given  date, such as  guarantees, pending law suits,
judgments under appeal, unsettled dispute  claims, unfilled purchase orders, and
uncompleted contracts.  All  contingent  liabilities  should be disclosed  within the
basic financial  statements, including  the notes thereto.

COST.  (1) The amount of money or  other  consideration exchanged for property
or services.  Costs may be incurred even before money is  paid; that is, as  soon
as liability is incurred.  Ultimately, however,  money or other  consideration must
be given in  exchange.  Again, the cost of some property or service may, in turn,
become a part  of the cost of another property or  service.  For example, the  cost
of part of all of the materials  purchased at  a certain  time will be reflected  in
the cost of  articles made from such materials or in the cost  of  those services  in
the rendering of which the materials were  used.  (2) Expense.

COUPON RATE.  The interest rate specified on interest coupons attached  to a
bond.  The term is  synonymous with nominal interest rate.

COVERAGE.  The ratio of net revenue available for debt service  to the average
annual debt service requirements  of an issue  of  revenue  bonds.

CURRENT.   A term which, applied  to  budgeting and accounting,  designates the
operations  of the present fiscal  period as opposed to  past or future periods.  It
usually connotates  items likely to be used  up or converted into cash  within one
year.
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CURRENT  ASSETS.   Those assets  which are available or can  be made readily
available to  finance  current operations or to  pay current liabilities.  Those
assets  which will  be used  up  or converted into cash within  one year.   Some
examples are  cash, temporary  investments,  and taxes  receivable  which will be
collected within one year.

CURRENT  LIABILITIES.  Liabilities which are payable within one year.

DEBT.   An obligation  resulting  from  the  borrowing of  money or  from the
purchase of  goods and  services.  Debts of governments  include bonds, time
warrants, and floating debt.

DEBT  LIMIT.  The maximum  amount  of gross or net  debt  which is legally
permitted.

DEBT SERVICE FUND.   A  fund established  to  account for the accumulation of
resources   for,  and   the  payment  of,  general long-term  debt  principal  and
interest. Formerly called a sinking fund.

DEBT SERVICE FUND REQUIREMENTS.  The amounts  of  revenue which must be
provided for a  Debt Service Fund so that all principal  and interest payments can
be made in full on schedule.

DEBT SERVICE REQUIREMENT.  The amount of money required to pay interest
on outstanding  debt,  serial  maturities  of principal for serial bonds, and required
contributions to accumulate monies for future retirement  of  term bonds.

DIRECT NET DEBT.   Gross  direct debt less  debt that is self-supporting  (revenue
bonds)  and  double-barreled bonds (general obligation bonds secured by earmarked
revenues which flow outside the general fund).

ENTERPRISE  FUND.  A  fund established to account for  operations  (a) that are
financed and  operated  in  a manner  similar to private  business  enterprises  --
where  the  intent  of  the governing body is that the  costs  (expenses, including
depreciation)  of  providing  goods  or   services to  the   general  public  on  a
continuing  basis be financed or recovered primarily through user charges or (b)
where  the  governing  body has decided  that periodic  determination  of  revenues
earned, expenses  incurred,  and/or   net  income   is  appropriate  for  capital
maintenance,  public  policy,  management   control,  accountability,  or   other
purposes.   Examples  of  Enterprise Funds  are  those  for  water, gas, electric
utilities, swimming pools, airports, parking garages, and transit  systems.

ENTITY.   The   basic unit  upon which  accounting and/or  financial  reporting
activities  focus.  The basic governmental  legal and   accounting  entity  is the
individual   fund  and  account group.   Under NCGA Statement  1, governmental
GAAP   reporting  entities  include  (1)   Combined Statements  -  Overview  (the
"liftable" GPFS) and  (2)  financial statements of individual funds (which may be
presented  as columns on Combining Statements -  By Fund  Type,  on physically
separate individual   fund  statements,  or  both).   The  term  "entity" is  also
sometimes  used to describe the composition of "the  government as  a whole"
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(whether the library is  part  of the city or a separate government, whether  the
school system is part of the county or an independent special district,  etc.).

EXPENDITURES.   Decreases  in  net  financial  resources.  Expenditures  include
current operating  expenses  which  require  the current  or  future  use of  net
current assets, debt service, and capital outlays.

EXPENSES.   Decreases in net total assets. Expenses represent the total cost of
operations during a period regardless  of the timing of related expenditures.

FAMILY.   A  family  consists of a householder and  one or more other  persons
living  in  the same household who  are related  to the  householder  by birth,
marriage,  or  adoption; all  persons  who  are  related  to  the householder  are
regarded as members of his  or  her family.  Not all  households contain families,
because a  household may  be composed  of a  group  of  unrelated  persons or  one
person living alone.

FULL  FAITH  AND CREDIT.  A pledge of  the general taxing  power  for  the
payment of debt obligations.  Bonds carrying  such  pledges  are  referred to as
general obligation bonds or full faith  and credit bonds.

FUND.  A  fiscal and accounting entity with a self-balancing set of accounts
recording  cash and other  financial resources, together  with all related liabilities
and residual equities  or balances, and changes  therein, which are segregated for
the purpose of carrying on specific activities or  attaining certain objectives in
accordance  with special regulations, restrictions, or limitations.

GENERALLY  ACCEPTED ACCOUNTING PRINCIPLES (GAAP).  Uniform minimum
standards  of and guidelines to financial accounting  and reporting.  They govern
the form  and content of  the basic  financial  statements  of  an  entity.  GAAP
encompass  the conventions,  rules, and procedures necessary to define accepted
accounting practice at a particular time.  They include not only broad  guidelines
of  general  application,   but  also  detailed  practices  and procedures.   GAAP
provides a standard by which to  measure financial presentations.

GENERALLY  ACCEPTED AUDITING STANDARDS   (GAAS).   Measures  of  the
quality of  the  performance  of  auditing  procedures  and  the  objectives to be
attained through their use.  They are concerned  with  the auditor's  professional
qualities and with  the  judgment  exercised   in  the performance of  an audit.
Generally accepted auditing  standards have been prescribed by (1) the American
Insititute  of  Certified  Public Accountants (AICPA) and  (2)  the U.S.  General
Accounting  Office (GAO) in  Standards for Audit of  Governmental Organizations,
Programs, Activities, & Functions (the "yellow" book).

GENERAL OBLIGATION BONDS.  Bonds for the payment of which full faith and
credit of the  issuing government are  pledged.

GROSS DIRECT DEBT.    The total  amount  of bonded debt  of  a  government
(general obligation bonds  plus revenue bonds).
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HOUSEHOLD.   A household consists of all  the persons who  occupy a  housing
unit.  A house, an apartment,  or  other group of  rooms,  or  a  single room is
regarded as  a  housing  unit, when  it is  occupied  or intended  for occupancy as
separate living  quarters.  A  household includes the related  family members  and
all  the  unrelated  persons,  if any, such as  lodgers, foster  children, wards,  or
employees who  share  the housing unit.  A  person  living alone  in  a housing unit,
or  a  group  of unrelated  persons  sharing a  housing unit  as  partners,  is  also
counted as a household.

INDUSTRIAL REVENUE BONDS.  Bonds  issued by governments, the  proceeds of
which are used to construct facilities for  a private business enterprise.  Lease
payments made  by the business enterprise to the government are  used to service
the  bonds.   Such bonds  may  be  in the  form  of  general  obligation  bonds,
combination bonds, or revenue bonds.

LEVY.  (Verb) To impose taxes, special  assessments, or service  charges for  the
support  of governmental activities.  (Noun) The total  amount of  taxes, special
assessments, or service  charges  imposed  by a government.

LIABILITIES.  Debt or  other legal  obligation arising  out of transactions  in  the
past which  must  be liquidated,  renewed, or refunded at some future date.  This
term does not include encumbrances.

MEDIAN  INCOME.   The  median  income  is   the  amount  which  divides   the
distribution  into  two  equal groups, one having incomes above the median,  and
the other  having  incomes below the median.

MODIFIED ACCRUAL BASIS.  A basis  of  accounting under which revenues  are
recognized  when  they become  both "measurable"  and "available  to  finance
expenditures of the current period"  and expenditures are  recognized  when  the
related  fund liability  is incurred.

MUNICIPAL  IMPROVEMENT  CERTIFICATES.   Certificates issued in  lieu  of
bonds for the financing of  special improvements.  As  a rule,  these  certificates
are placed in the contractor's hands for collection from the special assessment
payers.

NET  REVENUES  AVAILABLE   FOR  DEBT  SERVICE.  Proprietary  fund  gross
operating  revenues less operating  and  maintenance expenses but exclusive of
depreciation and  bond interest.  "Net revenue available for  debt  service" as  thus
defined  is used to compute  "coverage" on revenue bond issues.  See Coverage.
Under  the  laws  of  some  states  and  the  provisions  of   some  revenue bond
indentures, "net revenues available for debt  service" for computation of revenue
bond  coverage  must be computed on a cash basis  rather than in  conformity  with
GAAP.

NET  INCOME.    Proprietary fund  excess  of  operating revenues, nonoperating
revenues,  and  operating  transfers-in  over  operating expenses, nonoperating
expenses,  and operating transfers-out.
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NONOPERATING  EXPENSES.  Proprietary fund expenses which  are not directly
related to the fund's primary service activities.

NONOPERATING  PROPERTIES.  Properties  which are owned by  an  Enterprise
Fund  but which  are  not used  in  the  provision of  the  fund's  primary service
activities.

NONOPERATING  REVENUES.  Proprietary fund revenues which are incidental to,
or by-products of, the  fund's primary service activities.

OFFICIAL  STATEMENT.  A  legal document which  summarizes all the  salient
features  of  the underlying documents and agreements which support a municipal
bond  offering.   It  is  considered  the  disclosure  document  which  presents
information  that  is "material" to  the  offering.  The  official statement  should
contain  what  a reasonable  investor  would need to  know in making  a decision
about the issue.   Thus this document will  usually include a description  of the
issuer, a description of the security  of  the bond, a summary of the  principal
financing documents,  any feasibility studies  which relate  to  the  security,  and
any other "key information."

OVERALL NET DEBT.   The  sum of direct net debt and overlapping debt.

OVERLAPPING   DEBT.   The   proportionate  share  of  the  debts  of  local
governments located  wholly  or  in  part within  the  limits  of  the  reporting
government  which must be  borne by property within each government.   Except
for special  assessment  debt, the amount  of  debt of  each unit applicable  to the
reporting unit  is  arrived at  by (1)  determining  what percentage of the total
assessed  value of the  overlapping  jurisdiction lies within the  limits  of  the
reporting unit,  and (2)  applying  this  percentage  to the  total  debt  of  the
overlapping  jurisdiction. Special  assessment debt is allocated on the basis of the
ratio  of  assessments receivable  in each jurisdiction  which will be  used wholly or
in part  to  pay off the debt to  total assessments receivable which will be used
wholly or in part for this purpose.

OPERATING INCOME.  The excess of  proprietary fund operating  revenues over
operating expenses.

OPERATING REVENUES. Proprietary fund revenues which are directly  related
to the fund's primary service  activities.  They  consist  primarily of user charges
for services.

REVENUE BONDS. Bonds  whose principal and interest  are  payable  exclusively
from  earnings of an Enterprise  Fund.   In addition  to a pledge of  revenues, such
bonds sometimes  contain a mortgage on the Enterprise  Fund's property.

REVENUES.  In general terms,  money received in exchange  for the delivery of
goods and services.  A more precise definition is the additions to  assets, such as
cash  or  accounts receivable,  which: (1) do not increase  any liability, such as a
debt  obligation;  (2) do not represent a  recovery of an  expenditure, such as
results from a return of defective  purchased equipment; (3) do not represent the
cancellation of  certain  liabilities  without a  corresponding  increase  in other
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liabilities or a decrease in  assets, such as forgiveness of a  debt; and (4) are not
contributions made to fund businesslike enterprises.

SERIAL ANNUITY BONDS.  Serial bonds in which the annual installments of bond
principal are so  arranged that the combined payments for principal and interest
are approximately the same each year.

SERIAL BONDS.  Bonds  whose principal is repaid in periodic installments over
the life of  the issue.

SINKING FUND.  A fund  established to  account  for the accumulation of  resources
for, and the payment of, the principal  and interest of general long-term debt.

SPECIAL ASSESSMENT.  A compulsory levy made against  certain properties to
defray part or  all of the cost of a specific improvement or  service deemed to
primarily benefit those properties.

SPECIAL  ASSESSMENT  BONDS.   Bonds payable  from the proceeds of  special
assessments.  If  the  bonds are  payable  only  from the collections of  special
assessments, they are known as special assessment bonds.   If, in addition to the
assessments, the full faith  and credit  of  the government are pledged, they are
known as general obligation special assessment  bonds.

SPECIAL  ASSESSMENT  FUND.   A fund used  to  account  for the  financing of
public improvements  or services deemed  to  benefit  primarily  the  properties
against which special assessments are levied.

SPECIAL  DISTRICT.   An  independent unit of local government  organized to
perform  a single governmental function   or  a  restricted number of  related
functions.  Special districts usually have the power to incur debt and levy taxes;
however,  certain types  of  special  districts  are  entirely  dependent  upon
enterprise  earnings and cannot  impose taxes.  Examples of special  districts are
water  districts,  drainage districts, flood control districts, horpital districts, fire
protection  districts, transit authorities,  port  authorities, and  electric  power
authorities.

SPECIAL DISTRICT BONDS.  Bonds issued by a special district.

STATEMENT OF REVENUES AND EXPENDITURES. The basic financial statement
which  is the governmental fund and  Expendable  Trust  Fund  GAAP  operating
statement.   It  presents  increases  (revenue and  other  financing  sources) and
decreases  (expenditures  and  other  financing  uses)  in an  entity's net  current
assets.

STATEMENT OF REVENUES  AND EXPENSES.   The basic financial statement
which  is the proprietary  fund,  Nonexpendable Trust Fund,  and Pension  Trust
Fund  GAAP operating statement. It presents increases (revenues) and  decreases
(expenses) in an  entity's net total assets.
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APPENDIX C

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             CALCULATION OF CAPITAL  RECOVERY  FACTORS
       If debt is to be  issued at an annual interest rate of I  percent  (e.g., I =
     =  .10) for N  years  (e.g., N - 30 years) then  the capital recovery factor, C,
is:


                   <~   T          I
                   C = I +   	
                             (1  +  I)N -1

The product of C times the amount  of  debt  issued gives the amount of annual
debt  service  payment.   The successive  years  interest payment  factor  and
principal payment factor are I   and P   for 1  < n < N
                            n       n       —  —

where        I, = I                     P. = C - I

             I  = C - P                P  = (1 + DP  - 1
             n        n                n          n

and I   +  P  is the constant  capital  recovery factor C.


       For example, to determine  the  debt service payment due  each  year on
$2,500,000 borrowed  for 15 years  at  11 percent, first  calculate  the  capital
recovery factor:

                   r    11          .11
                   C = .11 +    	
                                (1  +  .ID15 - 1
                      = .11 +
                                3.784,589

                      = .11 + .0290652

                      = .1390652
Next, multiply the  capital recovery  factor  times the  principal borrowed to
determine the annual debt service payment:

                      .139652 x $2,500,000 = $347,663.10

Thus, each  year for  15  years,  a payment of  $347,663.10  must  be made to
completely pay off the $2,500,000 debt.
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APPENDIX D

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                           SENSITIVITY ANALYSIS
       Filling out  the various worksheets of the Guidebook requires a number  of
estimates where precise data are not available.  In addition, it  is frequently the
case that  some of  the numbers  used  constitute  the  best  judgment  of  various
individuals (engineers,  accountants, managers,  etc.).   If an error  were made  in
one  of  these estimates, how serious  would the  resulting  change in cost per
household  be?   In  other words, how  "sensitive"  is the  bottom  line  (cost per
household) to the  various numbers and  estimates  used to  calculate  it?   What
follows  is  an example of a sensitivity  analysis  that might be prepared for your
jurisdiction once you have completed the various  worksheets  of  the Guidebook.

Sensitivity Analysis:  An Example

       Any sensitivity  analysis begins  with a  base case which consists  of the
estimates used in completing  the worksheets. For our example of Anytown, USA,
the base case assumes a borrowing of $750,000  at 10 percent for 20 years which
results  in  annual  debt  service  payments of $88,094.72.  In addition,  Worksheet
#3C indicated  an   estimate  of  $79,000 for  "O,M&R"  for the proposed facility.
This results  in  a  gross annual cost of  $167,094.72.  Since Anytown  has  1,400
Equivalent Household Units (EHU) (basically the number of households that will
pay  the sewer service charge since there is little or no industry and  every EHU
is  assigned to a household),  the resulting household cost  is $119.35 on a  yearly
basis or $9.95 on a monthly basis.
       ANYTOWN,  USA SENSITIVITY ANALYSIS:   BASE  CASE

       Amount to be borrowed                 $  750,000
       Rate (percent/100)                            .1
       Term (years)                                  20
       Debt Service Factor                     .1174596
       Debt Service                          $ 88,094.72
       New O,M&R                                79,000
       Gross Annual Cost                     167,094.72
       Number of EHU's                             1400
       Per Household Cost-Yearly                  119.35
       Per Household Cost-Monthly                  9.95
       But  what if  the  estimate  of the interest rate that will  be paid on  the
bonds  were too  low?  What if the rate  required  to sell  the  bonds  were  11
percent?  As the calculations show, the cost per  household would increase by 36
cents on a monthly basis:
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       ANYTOWN, USA SENSITIVITY ANALYSIS:  RATE

       Amount to be borrowed                   750,000
       Rate                                        .IK-
       Term                                         20
       Debt Service Factor                      .1255756
       Debt Service                           94,181.73
       New O,M&R                              79,000
       Gross  Annual Cost                     173,181.73
       Number of EHU's                            1*00
       Per Household  Cost-Yearly                123.70
       Per Household  Cost-Monthly                 10.31
       Errors in estimation are not limited  to  the vagaries of the marketplace.
It is an  unfortunate  fact that estimates of construction  cost are  often  below
the  actual cost.  What  would  be the  impact of  an  increase  in  the amount
borrowed  by $100,000?  In this case calculations show that the result  would be
an increase of 70 cents on a  monthly basis.
       ANYTOWN, USA SENSITIVITY ANALYSIS: AMOUNT

       Amount  to be borrowed                   850,000<=
       Rate                                         .1
       Term                                         20
       Debt Service Factor                      .1174596
       Debt Service                            99,840.68
       New O,M&R                               79,000
       Gross  Annual Cost                     178,840.68
       Number  of EHU's                             1400
       Per Household Cost-Yearly                 127.74
       Per Household Cost-Monthly                 10.65
       Many  jurisdictions  have experienced  problems  with obtaining  accurate
estimates of operating costs as well as capital costs.  What would be the impact
of an  operating cost of $130,000 instead of the original estimate of $79,000?
Calculation  shows  that  the resulting monthly charge  would be  increased by
$3.03.
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       ANYTOWN, USA SENSITIVITY  ANALYSIS:  OM&R

       Amount to be borrowed                    750,000
       Rate                                           .1
       Term                                           20
       Debt Service Factor                      .1174596
       Debt Service                            88,094.72
       New O,M&R                              130,000<=
       Gross Annual Cost                      218,094.72
       Number of EHU's                             1400
       Per Household Cost-Yearly                 155.78
       Per Household Cost-Monthly                 12.98
       It is worth noting that  an  error in the estimate of operating costs that is
one  half  the  size  of  the  variation  in capital  costs  ($51,000  vs. $100,000)
produces a per  household increase  of  30 percent ($12.98/$9.94).  Clearly, great
attention  should be  devoted  to  determining the accuracy  of  the estimates of
operating  costs.

       The examples  given  above  do  not  exhaust  the  possibilities  for  a
sensitivity  analysis, but they do indicate the range of issues which a sensitivity
analysis can address.
                                                •B.S. oonunra piiwnw omat i 1904
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U.S.  Environmental  Protection Agency
Region V, Library
230  South Dearborn Street
Chicago,  Illinois 60604

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