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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
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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.
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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.
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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.
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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
-------
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
-------
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
-------
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:
-------
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,
-------
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)
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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
$200,000,000
To calculate Indicator 4 (line 614), divide the most current year's
property tax revenues (603) plus any increase in property taxes that will
be required to finance the project by the current full market value of
real property and multiply by 100.
Current Year's Property Tax Revenues
Full Market Value of Real Property
x 100
Two points should be noted regarding this indicator:
o) a high ratio can be an important indicator of fiscal pressure in the
community because sustained growth in property tax revenues will
not be feasible — unless property values are increasing
proportionately; and
o) as is the case with several of the other indicators discussed above,
the analyst may find it useful to track the value of the indicator for
the five year period preceding the current year.
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Worksheet # 6
Indicators 5-9
INDICATOR 5
• Overall Net Debt as a Percentage of Full Market
Value of Real Property (507 H- 614 X 100) % (616)
INDICATOR 6
• Per Capita Income _$ (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)
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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
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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.
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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)
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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
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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.
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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
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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.
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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.
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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
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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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