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$Rp Workshop
Financial Management and Leveraging
\> Sponsored by:
U.S. Environmental Protection Agency
Locations:
Atlanta, GA
Boston, MA
Chicago, IL
Dallas, TX
San Francisco, CA
Denver, CO
August October, 1990
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HEADQUARTERS LIBRARY
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
PARTICIPANTS MANUAL
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Table of Contents
Session
I. Introduction
II. Long Term Financial Planning in SRF Programs - Analyzing
Alternative SRF Loan Terms and Rates
HI. Assisting Smaller Communities - SRF Advantages and
Limitations
IV. Financial Capability Assessment Process
V. Financial Operations Management
Background
Financial Operations Management Functions
VI. Overview of Accounting Functions
VII. Leveraging - Background and Status
What is Leveraging?
» Where is Leveraging Planned or Being Used?
How do the Programs Compare?
VIII. The Leveraging Decision
Process Used to Examine Leveraging
Working with Consultants, Advisors, and
Underwriters
The Rating Game: A Review of the SRF Bond
Rating Process
Steps in Issuing a Bond for the SRF
Leveraged Program Impacts on Management/
Administration
Paoe
1-1
11-1
111-1
IV-1
V-1
V-2
V-5
VI-1
VII-1
VII-3
VII-9
VII-13
VIII-1
VIII-9
VIII-19
VIII-27
VIII-33
TABLE OF CONTENTS
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SESSION I - INTRODUCTION
INTRODUCTION
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Introduction
Welcoming Remarks
Training Team Introduction
Workshop Objectives
Workshop Agenda
Participant Introduction
Issues Discussion
1-1
I. INTRODUCTION
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Workshop Objectives
Address Current SRF Financial Management
Challenges
Focus on the Role of Leveraging in SRF
Programs
Address the Needs of the Majority of
Participants
Encourage a Constructive Exchange of
Information Among Participants
1-2
INTRODUCTION
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SRF Cycle
SRF
Planning
and
Design
Reporting
and
Evaluation
1-3
INTRODUCTION
-------
I.
II.
III.
IV.
IV.
V.
VI.
VII.
Agenda
1990 SRF Financial Management/Leveraging Workshop
VIII.
Day One"
Introduction
Long Term Financial Planning in SRF Programs - Analyzing
Alternative SRF Loan Terms and Rates
Break
Assisting Smaller Communities - SRF Advantages and Limitations
Financial Capability Assessment Process
Day Two"
Financial Capability Assessment Process - Continued
Financial Operations Management
Background
Financial Operations Management Functions
Letter of Credit
Loan Tracking
Cash Budgeting and Investment Management
Operations Management Issues: Insights from Other States
Break
Overview of Accounting Functions
Introduction to Governmental Accounting
Basic Accounting Terminology
Building SRF Statements
Steps in Establishing an Accounting System
Lunch
Leveraging - Background and Status
What is Leveraging?
Where is Leveraging Planned or Being Used?
Presentation by State representatives (if available)
Break
How do the Programs Compare?
Reserve fund approach
Blended rate approach -
Leveraged-Joan approach
Day Three"
The Leveraging Decision
Process Used to Examine Leveraging
Working with Consultants, Advisors, and Underwriters
reak
The Rating Game: A Review of SRF Bond Rating Process
Steps in Issuing a Bond for the SRF
Leveraged Program Impacts on Management/
Administration
Time
1:00-1:45
1:45-2:15
2:15-2:30
2:30-3:15
3:15-4:30
8:30-9:00
9:00-10:00
10:00-10:15
10:15-11:30
11:30-1:00
1:00-2:00
2:00-2:45
2:45-3:00
3:00-4:00
IX. Workshop Summary and Conclusion
8:30-9:15
9:15-10:00
10:00-10:15
10:15-10:45
10:45-11:15
11:15-11:45
11:45-12:00
I-4
I. INTRODUCTION
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Issues Discussion
1-5
I. INTRODUCTION
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SESSION !! - LONG-TERM FINANCIAL PLANNING
IN SRF PROGRAMS
II. LONG TERM FINANCIAL PLANNING
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Long-Term Financial Planning in SRF Programs
- Analyzing SRF Loan Terms and Rates
Introduction - Importance of Long-Term
Financial Planning
Why Conduct Financial Planning?
Limitations of Long-Term Financial Planning
Description of Spreadsheet Modeling
What is Spreadsheet Modeling?
Use of Spreadsheet Software
Software Programs Available
Illustrative Example
Relationship to Leveraging
1-1
II. LONG TERM FINANCIAL PLANNING
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Introduction
Initial Focus of SRF Financial Planning has
Been on the Short Term
Financial Planning Activities have Included:
Securing State Match
Identifying IUP Candidates (Mix of
Activities/Uses)
Establishing Acceptable Loan Terms and
Rates
With Successful Implementation of Programs
Other Issues May be Addressed
What is Long-Term?
Roles
State
Financial Advisor/Consultants
GICS Work Station Concept
11-2
II. LONG TERM FINANCIAL PLANNING
-------
Why Conduct Long-Term Financial Planning?
Assess the Impact on the Fund of Different
Financial Assistance Options
Assess the Impact of Different Loan Interest
Rates and Repayment Terms
Assess the Ability of SRF to Address the
State's Needs Over the Long-Term
Assess Impact of Other Programs (e.g., state
grant) Combined with the SRF on Ability to
Address Needs
Evaluate the Need for and Impact of
Leveraging
Generate Information for Planning
Set Priorities
Program Planning
Presentation to Communities
1-3
II. LONG TERM FINANCIAL PLANNING
-------
Limitations of Long-Term Financial Planning
Exact Forecasting of Future Events is Not
Possible
Planning Models(Spreadsheets) Must be
Updated Regularly
Planning Forecasts Must be Interpreted -
Experience is Required
Tendency To Focus on the Bottom Line
Forecast, Rather Than the Overall Indications
From Results
11-4
II. LONG TERM FINANCIAL PLANNING
-------
Description of Spreadsheet Modeling
A Spreadsheet is a Table of Cells Arranged in
Columns and Rows
Each Cell May Hold Data, a Formula, or a
Label
Formulas are Used to Establish Mathematical
or Logical Relationships Between the Cells
Menus Are Used to Drive the Software
Changing Key Variables Allows for Quick and
Easy Recalculations
May be Used to Develop Analytical Reports
11-5
II. LONG TERM FINANCIAL PLANNING
-------
Use of Spreadsheet Software
Spreadsheet Software is Adequate for the
Type of Modeling Needed
Other Software May be Used (i.e., Special
Purpose Software)
Variety of Spreadsheets in Use by States
Today:
IUP Development/Outlay Management
Track Cash Disbursement
Track Binding Commitments
Track Grant Payments
Focus Has Been on Distribution of SRF Funds -
Not Repayment and Subsequent Loan Planning
Planning Models Viewed as Extensions of
Existing Modeling (for Nonleveraged Programs)
1-6
II. LONG TERM FINANCIAL PLANNING
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Basic Planning Model Features
Menu Driven for Ease of Operation
Likely to Model the Following:
SRF Capitalization
Cash Disbursement
Individual Loan Repayment Schedules
Revenues and Expenses
Fund Balance
Sources and Uses of Working Capital
Funds
Ability to Needs
Menu May be Designed to Easily Modify Loan
Rates and Term
f
Sensitivity Analyses May Be Developed
May Conduct Time-Series Analyses of Actual
Versus Projected Conditions - Use in Setting
Policies
1-7
II. LONG TERM FINANCIAL PLANNING
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Total Annual Unleveraged SRF Loans
Impact of Varying Interest Rates
1 r 1 1i 1 1 r~" i 1 1 1 1 r
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
0% Loans -e- 3% Loans -*- 6% Loans
II. LONG TERM FINANCIAL PLANNING
-------
Cumulative Unleveraged SRF Loans
Impact of Varying Interest Rates
350
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
0% Loans
3% Loans
6% Loans
II-9
II. LONG TERM FINANCIAL PLANNING
-------
Software Programs Available (1)
Standard Spreadsheets
Lotus 123
Microsoft Excel
Quatro Pro
General Financial Modeling Software
Examples:
ONE-UP, Comshare, Inc
IFPS/Personal, Execucom Systems Corp
ENCORE! PLUS, Ferox Microsystems
CFO Advisor, Financial Feasibilities Inc.
JAVELIN PLUS, Information Resources,
Inc.
TM/1, Sinper Corp.
State Generated Models
(1) This is not an endorsement of the listed software
1-10
II. LONG TERM FINANCIAL PLANNING
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Relationship of Modeling to Leveraging
Analyzing the General Impact of Leveraging is
Possible Through Basic Modeling Process
However, Analyzing Various Leveraging
Structure Options Requires Specialized
Modeling
Leveraging Option Modeling Should be
Conducted by Experienced State Financial
Analysts or Financial Advisors
Approach Should Help States Identify the
Leveraging Structure that Balances:
Needs
Amount of Funds Available for Loans
SRF Loan Interest Subsidy
State Risks
Program Manageability
Other Program Funding (e.g., Grants)
1-11
II. LONG TERM FINANCIAL PLANNING
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SESSION 111 - ASSISTING SMALL COMMUNITIES
ASSISTING SMALL COMMUNITIES
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Assisting Small Communities - SRF
Advantages and Limitations
Introduction
Conditions Confronting Small Communities
SRF Design Options and Limitations
SRF Program Coordination with Outreach
Efforts
State Examples
111-1
I. ASSISTING SMALL COMMUNITIES
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Introduction
Significance of Small Communities
Large Number of Projects
May Not Have Participated in Grant
Program
Difference Between Small and Economically
Distressed Communities
Small Communities May Be Affluent
Large Communities May Be Economically
Distressed
Large Communities Have Greater Access
to Credit Markets
Small and Economically Distressed
Communities Have More Limited Financing
Options
State Examples
111-2
III. ASSISTING SMALL COMMUNITIES
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Conditions Confronting Small Communities
Increased Water Program Requirements
Water Pollution Control
Drinking Water Supply
NPS/Estuary/Wetland/Groundwater
Programs
Controls More Stringent on- Small Water
Bodies
Limited Experience and Resources
Difficult to Recruit and Hold Qualified
Staff
Limited Budget Resources
Need for Increased Self Sufficiency
Federal Program Financial Assistance
Diminishing
State Financial Resources Strained
Strict Enforcement Standards in Place
1-3
I. ASSISTING SMALL COMMUNITIES
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SRF Design Options
Very Low or Zero Interest Loans
Loan - Grant Equivalence
Use of Non-Capitalization Grant Funds For
Small Community Loans
Eliminate Title II Requirements
Match May Cover Many Loans
Increased Eligibility
Collection Systems
Growth Projects/Reserve Capacity
SRF Loan Available for Low Tech Solutions
111-4
ASSISTING SMALL COMMUNITIES
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SRF Limitations/Disadvantages for
Small Communities
Loan Must be Repaid
Affordabilty May Still be an issue
Cost of Operations May be Prohibitive
Project May be Low State Priority
111-5
I. ASSISTING SMALL COMMUNITIES
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SRF Program Coordination with
Outreach Efforts
Address All Financial Assistance Sources
- SRF
Other Federal Assistance (e.g., Farmers
Home, EDA, HUD)
Supplemental State Grants/Loans
Private
Address Operating/Technical Support
Technical Assistance
Use of Contract Engineers for O&M
Joint Purchasing
Equipment Sharing
Other Support
Information Dissemination (e.g., EFIN)
Training
Financial Planning Assistance
Involve Small Communities in Planning
Structure of SRF
1-6
ASSISTING SMALL COMMUNITIES
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Information Dissemination
Marketing Materials
e.g., Brochures, Videotapes, Slide Shows
Presentations
e.g., Booth at Municipal Meetings
Meetings
e.g., Personal visit to describe SRF
State Examples
lil-7
III. ASSISTING SMALL COMMUNITIES
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SESSION IV - FINANCIAL CAPABILITY
ASSESSMENT PROCESS
IV. FINANCIAL CAPABILITY ASSESSMENT
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Financial Capability Analysis Overview
What is Financial Capability Analysis?
Why is it Important to the SRF Program?
When is Financial Capability Analysis Used?
How is Financial Capability Analysis
Conducted?
IV-1
IV. FINANCIAL CAPABILITY ASSESSMENT
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What is Financial Capability Analysis (FCA)?
FCA is the Process Used to Assess a
Community's Ability to Meet Financial
Obligation
Roots in Construction Grants Program
Broadened Under the SRF Program
IV-2
IV. FINANCIAL CAPABILITY ASSESSMENT
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Roots in Construction Grants Program
Ensure Compliance with CWA
Pre-1977 - Focus on Capital Costs
Post-1977 - Focus on O&M
»,
Ability to Maintain Facilities Over Useful Life
Financial Capability Policy (1984)
Certification
Demonstration
Financial Capability Guidebook
Purpose
Scope
Burden on User (Households)
Debt Capacity of Grantee (Community)
IV-3
IV. FINANCIAL CAPABILITY ASSESSMENT
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Evolution Under the SRF Program
Long-Term Maintenance of Facilities
Measure by Burden on User
Long-Term Protection of the Fund
Measure by Security of Fund
Focus on 0,M and "Big R"
IV-4
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Use of Financial Capability Analysis
COMMUNITIES
IV-5
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
SRF Challenge
Under
SRF Program
IV-6
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
FCA Considerations
Security
Credit
Enhancements
Protective
Covenants
Aid Intercepts
Collections
Burden
"Appropriate
Technology"
Variable Rates
Blended Assistance
IV-7
IV. FINANCIAL CAPABILITY ASSESSMENT
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Why is FCA Important to the SRF Program?
"Equivalency Projects" Must Assure They
Have Financial Capability to Construct and
Operate a POTW
FCA is the Process that Should Be Used to
Assess the Dedicated Repayment Source
FCA Identifies Communities that Cannot
Afford SRF Loans and Would Present a Default
Risk to the Fund
*
FCA May be Used as a Screening Process for
Insurance or Reserve Requirements Imposed
on Loan Applicants
FCA May be Used as a Screening Process for
Other State or Federal Assistance Programs
State Analysts May Identify Ways for
Struggling Communities to Improve Their
Financial Condition
FCA will Identify High Cost Projects that Need
to be Reviewed in Terms of Appropriate
Technology, Phased Construction, and
Regionalization
IV-8
IV. FINANCIAL CAPABILITY ASSESSMENT
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When is FCA Used?
Primarily Used During Loan Application
Process
Applicant Submits Information on Technical,
Legal, and Financial Aspects of the Project
Staff with Financial Analysis Responsibilities
Review Materials to Determine Whether
Applicant Has Sufficient Capabilities
Clarifications May be Requested Before Final
Determination is Made
IV-9
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
How is Financial Capability Analysis
Conducted?
Comparable to Rating Agency Approach
4
Combination of Indicators
Debt Structure
Financial Operations
Socioeconomic Conditions
User Fee Impact
The "Single" Indicator
IV-10
IV. FINANCIAL CAPABILITY ASSESSMENT
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Financial Capability Analysis
Pyramid of Information
Application
Materials
State and National
Reference Sources
Professional
Experence
IV-11
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Types of Information Used in FCA
Data can be Found From a Variety of Sources
Municipal Financial Reports
State Governments
U.S. Government Reference Sources
Private Sector/Research Organizations
Quantity and Format of Data will Vary Across
States
Size of Community
Economic Conditions
.1 *
Possible to Use Substitute Information in Cases
Where Preferred Information is Limited
Categories of Data Used in FCA
Debt
Financial Operations
Socioeconomic
User Fee Impact
IV-12
IV. FINANCIAL CAPABILITY ASSESSMENT
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Conducting an Analysis
Analyzing Debt Structure Indicators
Analyzing Financial Operations Indicators
Analyzing Socioeconomic Condition Indicators
Analyzing User Fee Impact indicators
\V-t3
\V. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing Debt Structure and Conditions
Distinction Between Long-Term and Short-Term
Debt
Municipal Long-Term Debt Characterization
Revenue Debt
General Obligation Debt
Gross Direct Debt
Direct Net Debt
Overlapping Net Debt
Overall Net Debt (= Long-Term Debt)
Debt Limits
Revenue Limits
Voter Approval
Key Issue is the Ability of Community to Incur
Additional Long-Term Debt
IV-14
IV. FINANCIAL CAPABILITY ASSESSMENT
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Analyzing Debt Structure and
Conditions - Cont.
Indicators
Primary:
Overall Net Debt (OND) as Percent of Total
Property Assessment
OND per Capita
Debt Coverage Ratio
Recent Revenue and G.O. Bond Ratings
Percent Change in Annual OND Payments
After SRF Loan
Others:
Net Direct Debt as Percentage Allowed by
Law
OND Annual Debt Service as Percent of
Total Property Tax Assessment
OND Annual Debt Service as a Percent of
Total General Fund Expenditures
OND Annual Debt Service as a Percent of
Total General Fund Revenues
OND as Percent of Personal Income
Percent OND Due Within Next Five Years
IV-15
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing Debt Structure and
Conditions - Cont.
Considerations:
Impact of SRF Loan on Debt Conditions
Impact of Planned Future Capital
Improvements on Debt Conditions
Security Provisions Required In Past
Experience with Debt Issuance and
Repayment
Change in Indicator Values Over Time -
Trends
Credit History
IV-16
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Debt Structure Comparative Data
National Benchmarks
U.S. Census
International City Management Association
(ICMA)
- EPA
Regional Data
Individual State Benchmarks
Regional Benchmarks
IV-17
IV. FINANCIAL CAPABILITY ASSESSMENT
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Debt Indicator Reference Sheet
ICMA Warning Signals
Overall Net Debt Exceeding 10 Percent of
Assessed Valuation
Overall Net Debt Exceeding $1,200 Per Capita
Increase of 20 Percent Over the Previous Year in
Overall Net Debt as a Percentage of Market
Valuation
Overall Net Debt Per Capita Exceeding 15
Percent of Per Capita Personal Income
Net Direct Debt Exceeding 90 Percent of the
Amount Authorized by State Law
U.S. Census Generated Indicator - Illustrative
* Net Overall Debt Per Capita
Mean:
Median:
$764
$415
Financial Condition
Average: <$518
Below Average: $518-$837
Weak: >$837
Debt Coverage Ratio
Mean 4
Median 2.5
IV-18
IV. FINANCIAL CAPABILITY ASSESSMENT
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Analyzing Municipal Operations and
, Conditions
Management - Ability to Manage Financial
Operations
Liquidity - Ability to convert assets into cash
Revenues - Stability and Level of Revenues to
cover operating costs
Expenses - Growth and Level of Operating Costs
Composite Operating Ratios - Revenues Relative
to Expenditures
IV-19
IV. FINANCIAL CAPABILITY ASSESSMENT
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Analyzing Municipal Operations and
Conditions - Cont.
Indicators
Liquidity
Current Ratio - Current Assets/Current
Liabilities
Quick Ratio - Current Asset Excluding
Receivables/Current Liabilities
Revenue
Revenue per Capita
Intergovernmental Revenues as Percent of
Total
Budget Variance (Actual Revenues as a
Percentage of Budgeted)
Revenues as a Percentage of Median
Household Income (MHI)
Property Tax Revenues Percentage
Change
Property Tax Collection Rate
Total Taxes as a Percentage of MHI
1V-20
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing Municipal Operations and
Conditions - Cont.
Expenses
Operating Expenditures Per Capita
Fixed Expenses as Percent of Total
Expenditures
Operating Expenditures as Percentage of
MHI ;
Budget Variance (Actual as Percent of
Budget Expenses)
Composite Operating Indicators
Operating Ratio: Current Revenue as a
Percentage of Current Expenditures
Total Current Expenditures as a
Percentage of Fund Balance
Considerations
Change in Indicator Levels Over Time -
Trend Information
Future Plans and Needs That May Impact
Revenue and Expense Conditions
IV-21
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Financial Operations Comparative Information
Warning Signs
Deterioration of Revenue Base
Poor Revenue Estimating Practices
Inefficiency in Revenue Collection Practices
Excessive Growth of Overall Expenditures
Relative to Revenue Growth
Ineffective Budgetary Controls
U.S. Census Generated Indicators
Taxes as a Percent of MHI
* Current Revenues as a Percentage of Current
Expenses
Operating Expenditures as a Percentage of
MHI
IV-22
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing Socioeconomic Conditions
Socioeconomic Conditions and Trends
Important for Complete Assessment of
Community
Analysis of Conditions That Impact
Community Ability to Repay Loans
Socioeconomic Information Useful When
Combined with Other Indicators (e.g., User
Rate as Percent of MHI)
IV-23
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing Socioeconomic Conditions - Cont,
Indicators
Population Growth or Decline
- Historical and Projected Trend
-- 5 or 10 Year Period
Population Over 65
Poverty Level
- Persons
- Families
Median Household Income
Personal Income
Housing
- Occupation Rate
- Expansion/Construction Activity
Employment
- Unemployment Rate
- Change in Unemployment Rate
-- Concentration of Employment
- Creation of New Jobs
IV-24
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Socioeconomic Condition
Reference Information
Warning Signs
Declining Population
Increasing Vacancy Rates in Residential,
Commercial, or Industrial Buildings
Declining Local Economy Measured by Retail
Sales, Gross Business Receipts, Business
Failures, Etc.
increasing Revenue Requirements Coupled
with Declining Tax Base (or Reduced
Collection Rates)
Growth in Unemployment and Poverty Levels
Stagnant Income Coupled with Increasing
Revenue Requirements
Reduced Growth in Population Coupled with
Increasing Revenue Requirements
Concentration of Employment within Single
Unstable Industry
IV-25
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Socioeconomic Condition Reference
Information - Cont.
U.S Census Indicators
Median Household Income
Population Growth
Population Below Poverty Level
Housing Starts -
Occupancy Rates
IV-26
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing User Rate Impact of
Planned Facility
Primarily Concerned with impact on Residential
User Costs
Calculation of User Fees Addressed in Facility
Planning and Loan Application :
Calculations Should Address All Wastewater
Collection and Treatment Costs (Include
Connection Fees)
Included are Current and Estimated Cost Per
Household
IV-27
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing User Rate Impact of
Planned Facility - Cont.
Indicators
Percentage Change in Annual Cost Per
Household
Annual Cost Per Household as Percent of
Median Household Income
Annual Cost Per Household as Percent of
Personal Income .
Considerations
User Fees Sufficient to Cover All Costs?
Have Calculations Included All Costs?
Operations, Maintenance, and
Replacement
Existing and New Facilities
Ineligible (for Assistance) Capital Costs
IV-28
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
User Fee Impact Reference Information
Warning Signs
User Fees Greater than 1.75% of Median
Household Income
Percent of MHI Indicator Greater than Found in
Similar Communities in the State
User Fees Greater than Cable TV Rates
Significant Increase in Fees Coupled with Wide
Spread Public Opposition to the Project
Industry Benchmarks
High Cost Indicators (EPA)
MHI
< $10,000
$10,000-17,000
> $17,000
% of
1.0%
1.5%
1.75%
Note: Above MHI in 1980 Dollars. CPI Escalation
Factor of 1.55 Should Be Applied to Adjust
MHI to 1989 Dollars
IV-29
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Structuring Financial Capability Analyses
Overview of Methodologies
Various Alternative Financial Capability Analysis
Methodologies May be Used
States May Combine Methods for a
"Customized" Approach
V * '
Important to Establish Approach:
Effective in Analyzing Financial Capability
Acceptable to Involved Parties
Manageable by SRF Staff
Basic Methodologies:
Ratio Analysis
Trend Analysis
Size of Communities Will Affect Selection and
Use of Methodologies
IV-30
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
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Conducting a Comprehensive Financial
Capability Analysis
Selection of Indicators
Mix of Indicators
Number of Indicators
Use of Indicators in State FCA "System"
Ratio Analysis
Trend Analysis
Combination Approach
Considerations:
Ability of Communities to Supply Data
Availability of Supplemental Data
Determination of Sufficient Data
Determination of Sufficient Number of
Indicators
Availability of "Benchmarks" for
Comparative Purposes
Resources Available to Conduct Review
Role of State Specialists
IV-32
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
Analyzing the Riskiness of SRF
Loan Portfolios
Bond Rating Agency Approach to Analyzing SRFs
Analyze Security of Underlying Loans
SRF Agencies with History of Performance
Security Enhancements
EPA Annual Review Approach
i
Review State FCA Procedures
Review State FCA System
Selectively Review Projects
Risk Management Techniques *
Comprehensive FCA Used
Security Requirements
Insurance
Reserves
Monitoring Practices
Delinquencies
Establishment of Goals and Policies - Limit
Percent of Loan Dollars for Communities in
"High Risk" Categories as Defined by State
IV-33
IV. FINANCIAL CAPABILITY ASSESSMENT
-------
-------
SESSION V
FINANCIAL OPERATIONS MANAGEMENT
V. FINANCIAL OPERATIONS MANAGEMENT
-------
-------
Financial Operations Management
Background and Purpose of Presentation
Overview of Primary Financial Operation
Functions
Letter of Credit Process
Loan Tracking/Reporting
Cash Management
Investment of Idle Funds
Insights From States
V-1
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Background
New Management Issues Arise Under the SRF
Program
Organizational Responsibilities &
Relationships
- Staff Skills
Financial Operations Management
Processes
Construction Grants Program Management
Functions are Related to SRF Financial
Management
Leveraged Program Financial Operations
V-2
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Purpose of Session
Promote Understanding of Basic Financial
Operations Processes
Describe Potential Interaction Between
Different State Agencies with Financial
Operations Responsibilities
Identify Potential Problems and Management
Issues
Identify Tracking and Reporting Mechanisms
Discuss Lessons Learned Among States
V-3
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Illustration of Departmental Interaction
Environmental
Department
SRF/CG
Unit
BudgeVFinance
Unit
I
Finance
Department
J
State
Treasurer
Accounting
Department
J
V-4
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Letter of Credit Function
General Description
Potential Management Problems
Management Indicators
V-5
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Letter of Credit General Description
Federal
State
Local
Payments
Capitalization
Grant
I
Request for
Verification
Verification
Cash Draw
Wired
U.S.
Treasury
t
I t
State
Treasury
uu
State
Match
Disbursements
Request for \
Disbursement
Request for
Cash Draw
State Bank
* Request for Cash
» Flow of Funds
V-6
Start Here
;5ash to
Pay
n voice
..Contractor
. or
Vendor
Invoice
for
Incurred
Cost
Local
Recipient
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Letter of Credit Process Illustration
Request
Disbursement
SRF
Section
Check and Request Preparation
of Cash Draw Request
Env. Dept.
Finance Sect
Check Against
Project Progress
Cont. Grants
Section
Prepare 'Request for Funds" Form
Show Account Balance
State Dept.
of Finance
State Accounting of Cash Transaction
Wire Trasfer
Request
US
Treasury
EPA Given Opportunity
to Review Request
EPA
Regional Off.
Cash Draw from LOG
State Bank
(SRF Account)
Wire Transfer
V-7
Community
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Letter of Credit Process -
Potential Management Problems
Delay in Processing Request
Seasonal Peak Work Loads
Incorrect Record Keeping
Little or No Tracking
Overly Complex State Administrative Process
Untrained or Inexperienced Staff/Limited Staff
Resources
Noncompliance with Cash Draw Rules
V-8
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Letter of Credit Process -
Management Techniques
Formalize Procedures
Responsibilities
Input/outputs
Processing Goals
Track/Report
Confirmation Reports
Monthly Report on Specific Activities -e.g.,
List of Cash Draw Requests Prepared by
Budget Office
Summary Reports - e.g., Total Processing
Time for Cash Draw Disbursement Cycle
Comparison Between Established Goals and
Actual Performance
Solicit Staff Input
Staff Meetings
Memorandums
Computerize
Networks
E-Mail
"Sneaker" Net
V-9
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
General Description
Potential Problems
Management Techniques
V-10
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Process Description
Identify Payments Due
Issue Bills (Optional)
Record Payments
Issue Late Notices
Record Late Payments
Initiate Default Process
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Identify Payments
Due
Issue Bill
(Optional)
Recipient
Repayment
Record
I
Report
Ontime Payments
Late Paymts(<30 Days)
Recipient
Nonpayment
Aging Account
Report
Late Repayment
Penally
Computation
Past Due Notice
to Recipient
1
Recipient
Late Payment
I
Late Payment
Report
Nonpayment
I e.g,. 120 Days Past Due
Default
Action
]
V-12
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Information Tracked
Project Design/Construction Progress
Loan Account Information
Amount
Loan Interest Rate
Payment Schedule
Billing Information
Amount Due
Payments
Late Payment Information
Aging Accounts
By Account
Summary
V-13
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Potential Management Problems
Lack of Tracking/Summary Reporting
Insufficient Coordination Among Departments
Limited Late Payment/Enforcement Policy
Inexperienced/Limited Staff Resources
Limited Use of Computerized Systems Resulting
in Inefficiencies
Limited Tracking Regarding Repayment
Restrictions of State Match Bonds
V-14
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Management Techniques
Formalize Procedures
- Billing
Recording Collection
Generation of On Time/Late Reports/" Watch
List"
Late Payment Penalty Computation
Late Payment Notification
Default Notification/Actions
t
Elements of Procedures
Staff Position Responsibilities
Specific Actions
Processing Goals
V-15
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Loan Repayment Process
Management Techniques
Tracking/Reporting
Aging of Accounts
< 30 days
30 - 60 days
60 - 90 days
90- 120 days
> 120 days
Repayment Amount by Aging Category
- Number of Loans by Aging Category
Size/Financial Condition of Late Payers
List of "Repeat Offenders"
Trends
Solicit Staff Input
Use of Computerized Systems
Packaged Loan Processing Systems
Consider Using Loan Service Agencies
V-16
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Cash Budgeting and Investment Management
General Description
Background
Cash Budgeting
Investment Management
Potential Problems
Management Techniques
V-17
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Cash Budgeting and Investment Management
Background
Cash Should be Managed by SRF
Ensure Availability of Cash for Payments (e.g.,
Loan Disbursements)
Minimize Short Term Borrowing
Maximize Interest Income (Subject to SRF
Policies)
Requires Development of Cash Budget Process
and Strategic Cash Investment Practices
Roles and Responsibilities
V-18
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Cash Budgeting
Cash Budgeting is a Traditional Element of
Government Financial Management
Cash Budget Should be Developed Annually for
SRF
Represents a Forecast of Monthly Receipts and
Disbursements
Cash Needs Serve as Basis for Short Term
Investment Strategies
V-19
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Cash Flow in SRF
Fixed
Assets
Loans &
Other Assist
P&ynwnt Purchass
Accounts
Receivable
Admin.
Expenses
Proceeds^ % Repayment
Cash Draws -
Federal Grant
& State Match
Debt
(Leveraging)
V-2O
V. FINANCIAL OPERATIONS MANAGEMENT
-------
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Cash Cycle
$
Surplus
(Invest Short Term)
Revenues Expenses
Deficit
(Liquidate Short-Term
Investments)
Time
V-22
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Cash Investment Management
Investment Normally Controlled by State
Treasurer
Provides for Greater Control of Cash
Provides for Potentially Higher Return
Type of Cash Investments May be Controlled by
State Law
V-23
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Overview of Investment Approach
Assess the Cash Needs by Function
Develop Annual Demand by Month
Identify the Appropriate Mix of Marketable
Securities
Considerations
Default Risk
Marketability
Maturity
Market Trends
Qualified Investments
V-24
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Types of Marketable Securities - Examples
U.S. Treasury Bills (T-Bills)
3, 6, 9, and 12 Month
Minimum Denomination $10,000
Negotiable Certificates of Deposit (CDs)
Security Reflects Health of Bank
Certificate of Time Deposit at Commercial
Bank
Interest Paid at Maturity
Minimum Denomination: $100,000
Repurchase Agreements (Repos)
Purchase Security with Guarantee of
Repurchase by Issuing Entity
Most Often T-Bills
Issuers are Normally Banks/Financial
Institutions
Minimum Denomination: $100,000
V-25
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Potential Problems
No Cash Budget Developed
Difficult to Estimate Receipts and Disbursements
SRF Staff May Have Little Control Over
Investment Strategies
V-26
V. FINANCIAL OPERATIONS MANAGEMENT
-------
Management Techniques
Adopt Cash Budgeting Techniques Common to
Other State Departments
Explore State Investment Practices to Determine
Ability of SRF to Independently Guide
Investment Approach
Track Budgeted Versus Actual Receipts and
Disbursements - Modify Budgeting Assumptions
as Appropriate
V-27
V. FINANCIAL OPERATIONS MANAGEMENT
-------
-------
SESSION VI
OVERVIEW OF ACCOUNTING FUNCTIONS
VI. OVERVIEW OF ACCOUNTING FUNCTION
-------
-------
State Governmental and SRF Accounting
Introduction to State Governmental Accounting
Summary of State Governmental Accounting
Principles
State Governmental Accounting Fund Structure
Review of SRF Financial Statements
SRF Audit Requirements - Status Report
VI-1
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Introduction to State Governmental
Accounting
Accounting is a Self-Regulating Profession
Standards and Principles Established by the
American Institute of Certified Public
Accountants (AICPA)
Private Sector Accounting Regulated by
Financial Accounting Standards Board (FASB)
Governmental Accounting Regulated by
Governmental Accounting Standards Board
(GASB)
Accountants Comply With Generally Accepted
Accounting Principles (GAAP)
Auditing Standards are Established by Same
Boards
Federal Government Yellow Book Includes
Audit Requirements in Addition to Generally
Accepted Audit Standards (GAAS)
VI-2
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Basic Governmental Accounting
Principles from GAAP
Accounting and Reporting Capabilities
Fund Accounting System
Types of Funds
- Governmental
- Proprietary
- Fiduciary
Accounting for Fixed Assets and Long-Term
Liabilities
Number of Funds
VI-3
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Basic Governmental Accounting
Principles from GAAP - Cont.
Valuation of Fixed Assets
Depreciation of Fixed Assets
Accrual Basis in Governmental Accounting
Budgeting, Budgetary Control, Budgetary
Reporting
Transfer, Revenue, Expenditure, and Expense
Account Classification
Common Terminology
Interim and Annual Financial Reports
VI-4
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Fund Structure
A Fund is a Fiscal Entity with a Self-Balancing
Set of Accounts
Record Cash and Other Financial Resources,
Related Liabilities, and Fund Balance
Segregated for the Purpose of Recording
Actions Related to Unique Activities
State and Local Governments Maintain Seven
Types of Funds That Fall within Three
Categories: '
- Governmental
- Proprietary
- Fiduciary
VI-5
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Governmental Funds
General Fund
Special Revenue Fund
Capital Projects Fund
Debt Service Fund
VI-6
VI. OVER VIEW OF ACCOUNTING FUNCTIONS
-------
Proprietary Funds
Enterprise Fund
Internal Service Fund
VI-7
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Fiduciary Funds
Trust and Agency Funds
Expendable/Nonexpendable Trust Funds
Pension Funds
Agency Funds
VI-8
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Review of SRF Financial Statements
Relationship Among Financial Statements
Balance Sheet
Statement of Revenue, Expense, and Changes
in Fund Balance
Statement of Change in Financial Position
Example: Linking Operating Transactions to
Financial Statements
VI-9
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Relationship Among Financial Statements
Earnings Activity
(Statement of Revenues,
Expenses, and Changes
In Fund Balance)
Balance Sheet
(beginning of year)
Balance Sheet
Financing and
Investment Activity
(Statement of Change
In Financial Position)
VI-10
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Balance Sheet
A Balance Sheet Presents the Financial
Position of the SRF:
Assets or Resources Available
Liabilities or Claims on the Resources of
the SRF
Fund Equity or Net Contribution by the
SRF
The Sheet Simply Shows a "Balance"
Assets = Liabilities + Fund Equity
Resource = Claims on Resources
Financial Actions Cause Offsetting Entries that
Keep the Accounts Balanced (Debits and
Credits)
The Balance Sheet Also Reports the Year-End
Stock of Funds
Balance Sheet Does Not Report the Financing
Activity of the SRF
VI-11
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Balance Sheet Concept
-Cash
-Investments
-LOG
-Loans
LIABILITIES
-Accounts Payable
-Bonds Payable
FUND EQUITY
-Grant/Match
-Fund Balance
ASSETS
LIABILITIES + FUND EQUITY
VI-12
VI. OVER VIEW OF ACCOUNTING FUNCTIONS
-------
State of Fresh Water
Balance Sheet
Year Ending December 31, 1989
ASSETS
Investments (Note 1)
Cash in Bank
Receivables
Undisbursed Federal LOC Payments (Note 2)
Guarantee Reserve Fund
Loans Outstanding
Capitalized Interest Outstanding
Total Assets
LIABILITIES AND FUND EQUITY
LIABILITIES
Accounts Payable
Payroll Payable
Bonds Payable
Total Liabilities
FUND EQUITY
Contributions from EPA
Contribution from State
Fund Balance
Total Fund Equity
TOTAL LIABILITIES AND FUND EQUITY
1989
$364,204
$0
$0
$1,753,291
$0
$1,480,944
$0
$3,598,439
$0
$2,517
$0
$2,517
$3,000,000
$600,000
($4,078)
$3,595,922
$3,598,439
VI-13
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Revenues, Expenses, and Fund Balance
Equivalent to an Income Statement
Shows the Revenue and Expense Activity Over
the Fiscal Year
Net Result Impacts the Fund Balance
When Revenues Exceed Expenses, Fund
Balance Increases
When Expenses Exceed Revenues, Fund
Balance Decreases
VI-14
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Revenues, Expenses, and
Fund Balance - Cont.
SRF Revenues From Interest Earnings
Loan Repayments
Investments
Administrative Fees Outside the SRF
SRF Expenses
Outside Services
Personnel
Supplies
Bond Insurance
Interest
Fund Balance Equals Beginning Balance Plus
Revenues Minus Expenses
VI-15
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Overview of Statement of Revenues,
Expenses, and Changes in Fund Balance
Revenues
Net Revenue
Operations
(Expenses)
Fund
Balance
VI-16
VI, OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Statement of Revenues, Expenses,
and Changes in Fund Balance
Year Ending December 31, 1989
1989
REVENUES
Interest Earned on:
Loans to Communities
Investments
Guarantee Reserve Fund
Other Revenue
Total Revenue
EXPENSES
Program Administration
Interest on Bonds and Notes
Purchase Bond Insurance
Other Expenses
Total Expenses
Excess (Deficit) of Revenues
Over Expenses
Fund Balance (Deficit) at beginning of year
Fund Balance (Deficit) at end of year
$0
$11,029
$0
$0
$11,029
$15,107
$0
$0
$0
$15,107
($4,078)
$0
($4,078)
VI-17
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Statement of Change in Financial Position
Report Financing and Investment Activity of
the SRF Over Reporting Period
Indicates the Sources and Uses of Working
Capital
Sources/Uses Should not Be Confused
with Revenues/Expenses
Compares the Previous Year's Balance Sheet
with the Current Year's Balance Sheet
Tracks Only the Principal in Fund
Bond Issue Proceeds
Principal Portion of Loan Repayment
Shows Net Change in the Working Capital
Available to SRF
VI-18
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
Change in Financial Position
Sources
of Funds
Bond Proceeds
Change in
Fund
Balance
Capitalization
Grant
Payments
State Match
Loan
Repayments
Pool of
Working
Capital
Uses
of Funds
Loan
Disbursements
Loan
Refinancing
Bond Principal
Repayment
VI-19
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
State of Fresh Water
Statement of Change in Financial Position
Year Ending December 31, 1989
SOURCES OF WORKING CAPITAL
Excess (deficit) of Revenues over
Expenditures
Capitalization Grant Payments
Cash Draws from LOG
State Appropriations
Bond Proceeds
Loan Principal Repayments
Total Sources of Working Capital
USES OF WORKING CAPITAL
Establish Federal LOC
Loan Disbursements
Loan Refinancing
Repayment of Principal on Bonds
Total Uses of Working Capital
Net Sources (Uses) of Working Capital
WORKING CAPITAL BALANCES
Beginning of Year
End of Year
1989
($4.078)
$3,000.000
$1,246,709
$600,000
$0
$0
$4,842,631
$3,000,000
$1,480,944
$0
$0
$4,480,944
$361.687
$0
$361,687
VI-20
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
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Notes to Financial Statements
Notes are a Critical Element of the Financial
Statement
Notes Contain Information on "Off Financial
Statement" Issues
Notes Offer Clarifications and Explanations for
Line Items from Each of the Three Financial
Statements
VI-23
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
SRF Audit - Status Update
Revised Draft Audit Guide
Single Audits
Clarifications from IG
Local Government Auditing
VI-24
VI. OVERVIEW OF ACCOUNTING FUNCTIONS
-------
SESSION VII
LEVERAGING - BACKGROUND AND STATUS
VII. LEVERAGING BACKGROUND AND STATUS
-------
-------
Leveraging - Background and Status
What is Leveraging?
Where is Leveraging Planned or Being Used?
How do Programs Compare?
Presentation(s) by State Representative(s)
VIM
VII. LEVERAGING BACKGROUND AND STATUS
-------
SRF Capitalization Funding
Versus 2008 Needs
$ Millions
SRF Funding Versus Estimated Needs
Capitalization Grant
Funding
Needs ($000)
VII-2
-------
What is Leveraging?
Definitions
Application to SRF Program
Basic Structures
Terminology
VII-3
VII. LEVERAGING BACKGROUND AND STATUS
-------
Leveraging Definitions
General Definition:
,»
THE USE OF DEBT TO GENERATE A HIGHER
LEVEL OF FUNDS AVAILABLE FOR SRF
LOANS
As Defined in Initial Guidance/Regulations
Tied to Cash Draw Issues
Incorrectly understood to Imply Only
"Reserve Fund" Model is Leveraging
Broader Definition Appropriate
VI1-4
VII. LEVERAGING BACKGROUND AND STATUS
-------
Background
Roots in Corporate Finance
"Financial Leveraging" Refers to Amount of
Debt Used
Reflects Corporate Capital Investment
Requirements
Private Sector Tax Deductibility of Interest
Payments Provides Savings and Higher
Earnings Per Share
VII-5
VII. LEVERAGING BACKGROUND AND STATUS
-------
State Match Versus Leveraging Bonds
Distinction Between Match Bonds and-Bonds
for Leveraging
States May Issue Bonds for State Match
G.O. Bonds
Revenue Bonds
ViI-6
VII. LEVERAGING BACKGROUND AND STATUS
-------
Basic Leveraging Program Description
Reserve Fund Approach
U.S EPA/
Fed. Treasury
LOG DSR
Grant
Per Cash
Draw Rules
Match
SRF
Match
State
Bond Issue
Net Bond
Proceeds
Funds Available for Loans
Bond Redemption
Acount
Loans @
5.5%
Issuance
Costs
Communities
Loan
Repayments
Annual
Debt Service
Bond
Holders
\
VII-7
VII. LEVERAGING BACKGROUND AND STATUS
-------
Terminology
Aggressive Leveraging
Match Bonds
Leveraged-Loan Approach
Reserve Fund Style Leveraging
Blended Rate Leveraging
Leveraging Ratio
Interest Rate Subsidy
VII-8
VII. LEVERAGING BACKGROUND AND STATUS
-------
Where is Leveraging Planned or
Being Used Today?
Locations
Review of Handout
Similarities/Differences
Presentation(s) by State Representative(s)
Tax Issues
VII-9
VII. LEVERAGING BACKGROUND AND STATUS
-------
Locations
Alabama
Arizona
Colorado
Iowa ,
Maryland
Minnesota (1)(2)
Missouri
New Jersey
NewYorkd)
North Dakota
(1) Aggressive Leveraging (Minnesota - FY89 Only)
VII-10
VII. LEVERAGING BACKGROUND AND STATUS
-------
Program Characteristics
Basic Structure
Leveraging Ratio
Number and Timing of Projects
Organization - Lead Agency
Interest Rate Subsidy Offered
Use of Aggressive Leveraging
Supplemental Reserve for Locations With No
Bonded Debt History
Bond Ratings
Administrative Fee
Size of Issue
State Backing
VII-11
VII. LEVERAGING BACKGROUND AND STATUS
-------
Tax Issues
Arbitrage/Rebate
Advance Refunding
Debt Service Reserve Funds
Pooled Bond Restrictions
Reporting Ramifications
VII-12
VII. LEVERAGING BACKGROUND AND STATUS
-------
How Do The Leveraging Programs Compare?
Overview
"Reserve Fund" Approach
"Blended Rate" Approach
"Leveraged Loan" Approach
VIM 3
VII. LEVERAGING BACKGROUND AND STATUS
-------
Overview
No Two Programs are Identical
,, *
Differences Reflect:
Extent and Timing of Needs
State Law
Subsidy Level Desired/Required
Professional Judgement Regarding
Marketability and Rating
Administrative Ease
Basic Elements of the Structures Allow Them
to be Classified into Three Categories
Reserve Fund Approach
Blended Rate Approach
Leveraged Loan Approach
VIM 4
VII. LEVERAGING BACKGROUND AND STATUS
-------
Reserve Fund Approach
Interest Earnings from Debt Service Reserve
Fund Used to Subsidize Loan Interest Rate
Debt Service Reserve (DSR) "Oversized"
Normally Funded with Federal Letter
of Credit Draws (Cap Grant)
Loan Disbursements Made with Bond
Proceeds
Arbitrage Restrictions Impact DSR Interest
Earning Rate (If Tax-Exempt Bonds)
Rebate
Yield Restriction
\
VII-15
VII. LEVERAGING BACKGROUND AND STATUS
-------
Reserve Fund Approach - Cont.
Level of Interest Rate Subsidy Affected by:
Size of Reserve
Leveraging Ratio
Market Rates
Bonds Issued are Revenue Bonds
Loan Repayments Primarily Used to Make
Bond Payments
DSR Funds (Equal to Cap. Grant) Available for
Future Use or to Pay Debt Service
VIM 6
VII. LEVERAGING BACKGROUND AND STATUS
-------
Reserve Fund Leveraging Model
U.S. EPA/
Fed. Treasury
LOCDSR
$25.0 M
Match
State
$60.0M
@ 8%, ',
SRF
Match
$5.0 M
Net Bond
Proceeds
$58.8 M
Funds Available for Loans
$58.8M+5.0M-63.8M
Bond Redemption
Account
$2.0M+5.3M-7.3M*
Coverage:$7.3M/6.1-1.2
Loans @
5.5%
Loan
Repayments
$5.3 M/Year
Annual
Debt Service
$6.1 M/Year
issuance
Costs
$1.2M
Communities
$63.8M
Bond
Holders
$12. Million in funds available for future use
VI I-17
VII. LEVERAGING BACKGROUND AND STATUS
-------
Reserve Fund Leveraging
Model Characteristics/Assumptions
Grant: $25.0 Million/State Match: $5.0 Million
Leverage Ratio: 2-1
Bond Size: $60 Million
Municipal Debt Rate: 8 Percent
Interest Rate on DSR: 8 Percent
Coverage Requirement: 1.2, or 120 Percent of
Debt Service
Bond Issuance Costs: 2 Percent of Issue
Bond Funds Loaned Out Immediately
Model Represents One Year of Multi-year
Program
Assumes Equal Annual Principal and Interest
Debt Payments
VII-18
VII. LEVERAGING BACKGROUND AND STATUS
-------
Minnesota State Revolving Fund
. ita(
Mf»r
Investnu
Earning:
" \ 1
Operating |
Reserve *
Account
i
207.
OF
FEDERA
GRANT
State
Match
-
WATER POLLUTION CONTROL REVOLVING FUND Obli
ent Bond proceeds EPA I
. LOG
A Asne;ded i
K > + t 1
Revenue Loan Principal _ nCDl?
Account Account and Interest Redemption DSRF
Account Account Accoun
C
\. Loans ^Sv>vXs>^
Loan ' ! Ea^h^interest
Repayments paymeJtV^ate
Investment earnings . ^"^^^^ | '
.e
al
gation
^"^v^ Admin
Excess Over Requirement Expense
Other
SRF
Purposes
VII-19
VII. LEVERAGING BACKGROUND AND STATUS
-------
Cash Draw Considerations
Approaches to Cash Draw
Aggressive
Group of Projects
All Projects
Historic Curve
Rules Affect the Speed at Which Cash Draw is
Allowed
Regulations
VII-20
VII. LEVERAGING BACKGROUND AND STATUS
-------
Blended Rate Leveraging Model
Bond Funds, Grant Funds, and Match Funds
Commingled and Available for Loans
Zero or Low Interest Rate Assigned for Cap.
Grant and Match Portion of Loan
Market Rate Assigned to Portion of Loan
Funded with Bond Proceeds
Effect is Blending of Interest Rate
All Funds Lent Out Under this Scenario
Greater Total Dollars Lent Compared to
Reserve Fund Model
Traditional Debt Service Reserve In Place
Funded With Bond Procee'ds
Supplemental DSR for Unrated
Communities May be Used
,f
Level of Interest Rate Subsidy Offered
Impacted By:
Leverage Ratio
Market Rates
VII-21
VII. LEVERAGING BACKGROUND AND STATUS
-------
Blended Rate Model
State
$60.0M Bond Issue'
@8.0%, 20 Years
Match
U.S. EPA/
Federal
Treasury
Cap. Grant
SRF
Bond Proceed*
I5&8U
Match
$5.0M
Cap. Grant
$25.0M
Available for Loans:$52.8+5.0+25.0-82.8
Debt Service
Reserve
$6.0M
DSR
Interest
.$.48M/Year
Bond Redemption
Account ,
$.48M+6.92M-7.4M
Coverage:$7.4/6.1-1.2
Loans @
5.5%
Communities
$82.8M
Loan Repaymts.
$6.92M/Year
Annual
DebtSert
$6.1M/Year
Bond Holders
$1.3 Million in funds available for future use
VII-22
VII. LEVERAGING BACKGROUND AND STATUS
-------
Maryland SRF Program Structure
Capitalization
Grant and
State Match
SRF
Supplemental
Reserve
Fund
Debt Service
Reserve Fund
Loan Fund
Recipients
Proceeds
Administrative
Revenue
Bond Issue
Annual Debt
Service
VII-23
VII. LEVERAGING BACKGROUND AND STATUS
-------
Blended Rate Program
Model Characteristics/Assumptions
Grant: $25.0 Million/State Match: $5.0 Million
Leverage Ratio: 2-1
Bond Size: $60 Million
Municipal Debt Rate: 8 Percent
Interest Rate on DSR: 8 Percent
Coverage Requirement: 1.2, or 120 Percent of
Debt Service
Bond Issuance; Costs: 2 Percent of Issue
Bond Funds Loaned Out Immediately
Model Represents One Year of Multi-year
Program
Assumes Equal Annual Principal and Interest
Debt Payments
VII-24
VII. LEVERAGING BACKGROUND AND STATUS
-------
Leveraged Loan Model
Cycle:
Total Capitalization Grant and State Match
Lent Out
Repayment Stream Committed as Source of
Debt Repayment
Bonds Issued in Amount Supported by
Repayment Stream
Bond Proceeds Lent to New Borrowers
Loan Repayments from Second Set of
Borrowers Used to Secure and Service New
Debt
VII-25
VII. LEVERAGING BACKGROUND AND STATUS
-------
Leveraged Loan Model
Amount of Leveraged Funding Provided
Affected by:
Size of Initial Grant and Match
SRF Loan Interest Rates
Leveraging Cannot Begin Until Loan
Repayments Flow Back Into SRF
Funds Not Available As Quickly Under This
Model
Model Reflects One Year Only
VII-26
VII. LEVERAGING BACKGROUND AND STATUS
-------
Leveraged Loan Model
Cap. Gram
State Match
$30.0M
Bond Issue
$20.5M
Debt Service-
$2.1 M
Bond Issue
$14.1 M
Debt Service-
$1.4M
Bond Issue
$9.6M
Debt Service"
$.98M
SRF
Repayments Available
for Debt Sen/toe -
Coverage: 120%
$2.5M/1.2-Z1M
Bond Issue
Funds
Distributed as Loans
Repayments Available
for Debt Service -
Coverage: 120%
$1.7M/1.2-1.4M
Bond Issue
Funds
Distributed as Loans
Repayments Available
for Debt Service -'
Coverage: 120%
$1.2M/1.2-.98M
Cyde Continues
Repaymts.
$2.5M/Yr
5.5%
Loans to
Communities
$30.0M
Cyde
One
Repaymts.
$1.7M/Yr
5.5%
Loans to
Communities
S20.5M
Cyde
Two
Repaymts.
J$1.2M/Yr
5.5%
Loans to
Communities
$14.1 M
Cyde
Three
VII-27
VII. LEVERAGING BACKGROUND AND STATUS
-------
-------
SESSION VIII
THE LEVERAGING DECISION
\
VIII. THE LEVERAGING DECISION
-------
-------
The Leveraging Decision
Process Used to Analyze the Leveraging
Decision
Working With Consultants, Advisors, and
Underwriters
The Rating Game: A Review of the SRF Bond
Rating Process
Steps in Issuing Bonds for the SRF
Leveraged Program Impacts on Management
and Administration
VIII-1
VIII. THE LEVERAGING DECISION
-------
Process Used to Analyze Leveraging Decision
Establish Implementation Management Team
Assess Needs of State/Role of SRF
Conduct Initial Assessment of Leveraging
Alternatives
Assess Decision to Explore Leveraging from
State's Perspective
EPA's Evaluation of Leveraging Proposals
VIII-2
VIII. THE LEVERAGING DECISION
-------
Skills Needed on Management Team
Understanding of SRF Program Objectives and
Requirements
Understanding of Finance Industry Structure
(e.g., interest rate cause and affect, alternative
bond structures, etc.)
Experience with State Debt Structuring/Issuing
Process
Financial Modeling
Wastewater Needs Assessment
Administrative Skills
Financial Data Record Keeping
Accounting/Financial Reporting
Engineering/Construction Project Management
Loan Program Administration
VIII-3
VIII. THE LEVERAGING DECISION
-------
Needs of State/Role of SRF
Basis of Assessment
EPA Needs Survey
State Survey
Internal Projections
Timing of Needs/Availability of Funds/Impact
of Inflation/Public Health and Environmental
Costs/Benefits
Current and Future Role of Other Assistance
Programs
State Grant/Loan Programs
Farmers Home Administration, HUD, Etc.
Restrictions
Interest in SRF Program
Survey
Individual Contact
Establish Long-Term Mission for SRF
VIII-4
VIII. THE LEVERAGING DECISION
-------
Conduct Initial Assessment of Alternative
Leveraging Structures
',
*v
Conducted by State/Financial Advisor
Develop Basic Leveraging Structure
Spreadsheets
Reserve Fund Structure
Blended Rate Structure
Others?
Forecast Community Participation in Leveraged
Program
Establish Parameters
Bond Interest Rate
SRF Loan Rate
Issuance Costs
Timing Issues:
Bond Issue
Construction/Repayment
VIII-5
VIII. THE LEVERAGING DECISION
-------
Conduct Initial Assessment of Alternative
Leveraging Structures - Cont.
Conduct Analysis with Spreadsheet Mode!
Level of Subsidy
i '
Level of Funding
Potential Problems
Summarize Findings
Needs
Short- and Long-Term Goals
Market Position
VIII-6
VIM. THE LEVERAGING DECISION
-------
Leveraging Decision Considerations
Quantity and Timing of State Needs
Attractiveness of Leveraging Program
Political Acceptability
Relations Among State Departments
/Legislature
Environmental
Finance
Accounting/Budget
Timing/Ability to Use Outside Independent
Financial Advisors
SRF Management Skills
Training
Experience
Administrative Burden
VIII-7
VIII. THE LEVERAGING DECISION
-------
EPA's Evaluation of Leveraging Proposals
Initial Guidance/Regulations
Qs & As
Interaction During Planning Process
VIII-8
VIII. THE LEVERAGING DECISION
-------
Working With Consultants, Advisors, and
Underwriters
Roles and Motivation
Development of State Strategy for Working
With Firms
Procurement of Services
Basic Rules to Remember
VI11-9
VIII. THE LEVERAGING DECISION
-------
Roles and Motivations
Financial Advisor
Underwriter
Underwriter's Counsel
Bond Counsel
Trustee
VIII-10
VIII. THE LEVERAGING DECISION
-------
Roles and Motivation - Cont,
Financial Advisor
Roles:
Participates in Planning/Program Structure
Publishes Notice of Sale
Prepares Disclosure Document
Opens Bids for Bonds
Motivation:
Independent Expertise for State
Works Under Direction of State
Management
May be Interested in Future Underwriting
Compensated with Consulting Fees
VIII-11
VIII. THE LEVERAGING DECISION
-------
Roles and Motivation - Cont.
Underwriter
Roles:
Assistance in Structuring the Program
Markets Bonds
Purchases Bonds for Resale
Motivation:
Must Balance Marketability of Bonds with
Benefits of Interest Subsidy
Municipal Market is Very Competitive
Receives Issuance Fee
ft
VIII-12
VIII. THE LEVERAGING DECISION
-------
Roles and Motivation - Cont.
*
Underwriter's Counsel
Roles:
Prepares Disclosure Document
Prepares Bond Purchase Agreement
Qualifies Bonds Under State Securities
Law
Additional Assistance as Needed on Legal
Structure
Motivation:
Ensure Bond Purchaser of Legality of Bond
.Structure
Compensated as Part of Issuance Costs
VIII-13
VIII. THE LEVERAGING DECISION
-------
Roles and Motivation - Cont.
Bond Counsel ,
Roles:
Independent Counsel
Unqualified Approving Legal Opinion
- . Assistance in Structuring the Program
Preparation of Proceedings/Documents
Motivation:
Ensure Bond Purchaser of Legality of Bond
Structure
Compensated as Part of Issuance Costs
VIII-14
VIII. THE LEVERAGING DECISION
-------
Roles and Motivation - Cont.
Trustee
Roles:
Holds Collateral on Behalf of Owners
Act for Owners in Event of Default
Registrar and Paying Agent Function
Motivation:
Protect Bond Holders from Default
Management Fee Charged
VIII-15
VIII. THE LEVERAGING DECISION
-------
Developing A Strategy for
Working With Firms
Establish Role of State Agency Personnel
Experience with Advisors/Underwriters
Use of Financial Advisors
Conduct Analyses to Support Decision
Making
Attend Meetings as Member of State
Team
Use of Underwriters as Advisors
Develop Alternative Program Structures
Market Conditions
VIII-16
VIII. THE LEVERAGING DECISION
-------
Procurement of Services
State Requirements
Developing RFP's
Selection Process
VIII-17
VIII. THE LEVERAGING DECISION
-------
Basic Rules to Remember
Different Leveraging Structures Result in
Differing Subsidy Levels - Make Sure That
Alternatives Are Properly Considered
Leveraged Programs are Understandable -
Insist that All Elements of the Program are
Explained in Basic Terms
Program Structure Issues are Negotiable - Do
not Automatically Accept Underwriters'
Recommendations/Positions
Do Not Hesitate to Ask - State Managers Who
have Been Through the Experience are
Excellent Reference Sources
VII1-18
VIII. THE LEVERAGING DECISION
-------
The Rating Game: A Review of
Bond Rating Agencies' Approaches
Overview of Approaches Taken By Rating
Agencies
Summary of Standard & Poor's Approach to
SRF Bond Ratings (1)
Summary of Other Rating Agency Approaches
(1) Discussion of this approach should not be
viewed as a recommendation.
VIII-19
VIII. THE LEVERAGING DECISION
-------
Overview
Role of Bond Rating Agencies in Municipal
Finance
Bond Rating Factors Considered
Economic
Debt
Administrative
Fiscal
Security
Definition of Bond Ratings
Example of Credit Analysis
Meaning of Bond Ratings
Relation to SRF Program
Roles Revisited
Credit Issues
Multiple Ratings
Firms
Standard & Poor's (S&P)
Moody's Investor Service
Fitch Investor Service
VIII-20
THE LEVERAGING DECISION
-------
Standard & Poor's Approach
Based on Farmers Home Approach
Establishes Initial Pool Rating - The "Weak
Link" Approach
Rating May be Raised
Credit Enhancements
Overfunding of Debt Service
Reserve(DSR)
Providing Higher Coverage From
Strong Borrowers
Larger Pools have Greater Diversity
Need Lower DSR than Small Pools
Need Lower Coverage than Small
Pools
,
State Financial Capability System in Place will
Impact Bond Ratings Over Time
VIII-21
VIII. THE LEVERAGING DECISION
-------
Standard and Poor's Bond Rating Approach
Rate Individual
Participants
Assign
Initial Rating
(Weak Link Approach)
|
Establish Default
Frequency/Duration Periods
for Pool
1
State Determines
Desired Rating
Compute
Overcollateralization
of Debt Service Reserve
Rating
Assigned
Compute
Coverage
Requirements
VIII-22
VIII. THE LEVERAGING DECISION
-------
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-------
Standard & Poor's Bond Rating
Example
Bond Issue: $100 Million; 100 Borrowers;
Debt Service $10 Million
Borrower Credit Distribution: NIG 5%, BBB
35%, A 35%, AA 20%, AAA 5%
For a AA Pool Rating - Reserve Computed:
NIG: $10 Million (Average Annual Debt
Service) X 5% (Portion of the Pool) X
35% (Default Frequency) X 9 (Duration
Periods) = $1.58 Million
Others Computed In Same Manner
Total Reserve Required: $14.175 Million
Vlll-24
VIII. THE LEVERAGING DECISION
-------
Standard & Poor's Bond Rating
Example - Continued
Coverage Requirements
AA Rated Communities Must Generate
Coverage to Cover A and BBB Debt
Service
Reflects the Default Frequency (35% of
NIG Ratings)
Funds Released After One Year if Unused
VIII-25
VIII. THE LEVERAGING DECISION
-------
Other Rating Agency Approaches
Moody's and Fitch Do Not Use S&P's Specific
Approach
Base Ratings on:
Underlying Financial Capability of Pool
Participants
Security Arrangements
Soundness of Financial Structure
Coverage
Knowledge of Management
VIII-26
VIII. THE LEVERAGING DECISION
-------
Steps in Issuing Bonds for the SRF
Planning
1 *
Establish Financial Structure
Develop Legal Documentation
Bond Marketing
Bond Issuance
VIII-27
VIII. THE LEVERAGING DECISION
-------
Planning
Activity
Assess State Financing Background and
Capability
Choose Potential Borrowers from SRF .
Begin Cash Flow Modeling, Sensitivity Analyses,
and Preliminary Structuring
Ensure that State SRF Legislation is in Place for
Bond Issuance
Form Financing Team - Select Bond Counsel,
Underwriter, and Trustee
Team Member
State/Fin.
Advisor(FA)
State/FA
FA/State
State/FA
State/FA
VIII-28
VIII. THE LEVERAGING DECISION
-------
Establish Financial Structure
Activity
Choose Bond Issuing Entity
Structure Financing
- Finalize Cash Flow
- Security Pledge
- Type of Sale
- Amount
- Capitalized Interest
- Payment Structure
- Early Redemption
- Etc.
Preliminary Monitoring of the Market - Outlook
for Economy and Interest Rates
Team Member
Team
Underwriter*
(UW), FA &
Team
Underwriter*,
FA
Negotiated Sale Only
VIII-29
VIM. THE LEVERAGING DECISION
-------
Draft Documentation
Activity
Draft Trust Indenture, Bond Resolution, Form of
Legal Opinion, and Bond Certificates
Draft Preliminary Official Statement (OS), Bond
Purchase Agreement, and Agreement Among
Underwriters
Draft Loan Agreements and Interagency
Agreement(s)
Draft Documents Distributed to Team for Review
and Comment
Documents Presented to Issuer Board of
Directors for Adoption
Execute Loan Agreements with Borrowers
Team Member
Bond Counsel
Underwriter's
Counsel
State
Team
Team
State
VIII-30
VIM. THE LEVERAGING DECISION
-------
Marketing Bonds
Activity
Team Member
Informal Meeting with Rating Agencies
Form Underwriting Syndicate
Issuer, UW, FA
Underwriter
Monitor the Market and Select Potential Date of Underwriter,
Sale FA/State
List Upcoming Bond Sale Appropriate Publication Underwriter
Submit preliminary OS to Service Bureau
Submit Bond Form to Printer
Underwriter
Bond Counsel
Submit Preliminary OS and Financing Documents Underwriter
to Rating Agencies
Target Potential Investors
Mail Preliminary OS to Potential Investors
Presentation to Rating Agencies
Release of Bond Ratings by Rating Agencies
Underwriter
Underwriter
Team
Underwriter
VIII-31
VIII. THE LEVERAGING DECISION
-------
Bond Issuance
Activity
Preliminary Pricing of Bonds
Final Pricing of Bonds, Bond Purchase
Agreement Signed
Print Bonds
Closing Instructions Circulated to Team
Post Settlement Analysis
Bonds and Purchaser List Delivered to Trustee
Closing
Transfer of Proceeds and Investment
Team Member
Underwriter
Underwriter,
Issuer
Bond Counsel
Bond Counsel,
Underwriter's
Counsel
Underwriter
Underwriter
Team
State, FA, Bond
Counsel,
Trustee
VIII-32
VIM. THE LEVERAGING DECISION
-------
Leveraged Program Impacts on
Management/Administration
*
Size of Leveraged SRF Program vs. Grants
Program
Additional Functions
Planning
Management
Operation
Additional Skills Needed
Financial
Accounting
Loan Tracking/Management
Application of Grants Program Skills to SRF
VIII-33
VIII. THE LEVERAGING DECISION
-------
------- |