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This report has been reviewed by EPA, and approved for publica-
tion. 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 and Peat,
Marwick, Mitchell & Co.
This document is available to the public through the National
Technical Information Service, Springfield, Virginia 22151.
11
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FOREWARD
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 demon-
stration 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 Grant Regulation, 40 CFR, Part 35.
This publication was written by Catherine L. Spain, Hamilton
Brown, and Pat Watt of the Government Finance Research Center
and Larry J. Scully of Peat, Marwick, Mitchell & 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.
111
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TABLE OF CONTENTS
Chapter
I. Introduction
Purpose of the Guidebook 1
Guidebook Audience 2
Approach Used in this Guidebook 4
Application and Evaluation Procedures 4
Guidebook Organization 6
II. Overview of Approach and Notes on the Prepa-
ration of a Financial Capability Analysis 7
• An Overview of the Approach 7
• - Worksheet #1: Roles and Responsibilities
of Local Governments 7
- Worksheet #2: Facilities Cost Estimate 9
- Worksheet #3: Financing the Facilities 9
- Worksheet #4: Determining the Annual
Costs Per Household 9
- Worksheet #5: Assessing the Community's
Debt History 9
- Worksheet #6.: Evaluating the Community's
Financial Condition 10
• Notes on the Preparation of a Financial
Capability Analysis 10
- Obtaining the Data 11
- Estimating Needed Data 11
- Knowing Which Number to Use When
There's a Choice 11
- Recognizing the Effect of Different
Accounting Methods 12
- Incorporating Trend Analysis into the
Financial Capability Assessment 12
-• Taking Account of'Inflation and Economic
Change 12
- Considering Overlapping Debt 13
- Funding Financial Capability Analysis 15
III. Financial Capability Analysis Worksheets and
Instructions 17
• Evaluating Results of the Analysis 17
- Worksheet #1: Roles and Responsibilities
of Local Governments 23
v
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Paqe
- Worksheet #2:
- Worksheet #3:
- Worksheet #4:
- Worksheet #5:
- Worksheet #6:
Facilities Cost Estimate 27
Financing the Facilities 35
Determining the Annual Costs 45
Assessing the Community's
Debt History 51
Evaluating the Community's
Financial Condition 55
Appendices
A.
B.
Selected References
Glossary of Financial Terms
A-l
A-2
LIST OF EXHIBITS
Paqe
Exhibit I
Exhibit II
Exhibit III
Exhibit IV
Exhibit V
Exhibit VI
Integration of Financial Capability
Analysis into the Facilities
Planning Process
Flow of Information from Source
Documents to Worksheets ....
Overlapping Debt in Community "A" .
Wastewater Facilities Financial
Information Sheet
Model for Identification of Regional
Cost Basis ,
Supplemental Information Sheet
8
14
19-21
24
49
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. This Guidebook has been writ-
ten to suggest one way of conducting the analyses required by
the Policy on Financial and Management Capability that applies
to the Federal Construction Grants Program. Before applying for
a Step 3 or 2+3 grant, your community must be certain it can
demonstrate that it has the financial capability to pay for the
initial capital investment and the cost of operations and main-
tenance (including equipment replacement).!/ This Guidebook
will assist officials in your community in analyzing the fi-
nancial impact of a proposed project on the community as a whole
and on individual households.
The Policy requires applicants to address the following six
major issues.
1. What is proposed in the facilities plan?
2. What roles and responsibilities will local govern-
ments 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?
6. Can your community afford the proposed wastewater
treatment facilities?
The Guidebook provides individual worksheets and instruc-
tions for these issue areas, a summary "Wastewater Facilities
Financial Information Sheet" (Exhibit IV) which is designed
to help your community demonstrate financial capability,
I/ This demonstration is required by the Clean Water Act, as
amended, as well as the revised construction Grants regula-
tions 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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and a "Supplemental Information Sheet" (Exhibit VI), which
provides the basis for an in-depth evaluation of financial
condition.I/
Issue 2 can be addressed by filling out Worksheet #1. Issue
3 is the focus of Worksheet #2. Issue 4 is explored using Work-
sheet #3. Issue 5 can be answered by completing Worksheet #4.
These first four worksheets are in a format that permits the
needed information to be easily transferred to the Financial
Information Sheet. Finally, Issue 6 may be answered by proceeding
through Worksheets #5 and #6 which allow for the development of
eleven key financial indicators. These indicators may then be
entered in the Supplemental Information Sheet. The instructions
for each worksheet explain what information is needed, where it
may be found, and what the results may indicate. The Financial
Information Sheet and the Supplemental Information Sheet summarize
the information on the worksheets and can provide the basis for
an overall assessment of your community's financial capability.
While demonstration of financial capability is not required
until the Step 3 or 2+3 application is made, the financial assess-
ment should 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 analy-
sis undertaken during the planning stage should identify for all
parties involved the range of financial and administrative re-
sponsibilities in which they will share including estimates of
construction, 0,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 com-
munity select the most cost-effective as well as a 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
I/ In order to account for unique aspects of State laws govern-
ing local financing and institutional arrangements, all
States are encouraged to develop specific guidance and pro-
cedures for communities to use to demonstrate financial
capability. The grant applicant may use any format it choses
to meet the requirement, including, as examples, a capital
improvement plan, 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
Construction
(Step 3 or 2-i-3)
Considera-
tion of
Alternative
Systems,
Population
Projections,
Water Quality,
and
Engineering
Data
Preliminary
Financial
Analysis
During
Planning
Including
Estimates
of Construction,
0, M&R, and
Household Costs
Facilities
Design
More Detailed
Construction
and
0. M&R Costs
I
Step 3 or 2 + 3
Grant
Application
Development
of User
Charge System
Financial
Capability
Analysis
Refinement and Update of
Financial Analysis
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especially to assist communities with populations of 10,000 or
less, that:
• Provide service only within a single jurisdiction
or sanitary district; or
• 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.
Approach Used in this Guidebook
Before a community is able to borrow money, lending insti-
tutions 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.]./ The techniques have been modified so that
local officials can work through the analysis themselves. When-
ever 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 com-
munity and the financial burden of the proposed project on house-
holds. 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 total waste-
water treatment and facilities annual costs.
Application and Evaluation Procedures
In addressing the six major financial issues, information
on diverse subjects such as population, tax revenues, debt obli-
gations, and construction costs is required. Completion of the
Financial Information Sheet and the Supplemental Information
Sheet will likely require the involvement of one or more indi-
viduals. The participants should include all principal adminis-
trative, financial, engineering, and public works staff and
advisors.
I/ Moody's and Standard and Poor's Investment Services are
the best known rating agencies.
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In order to demonstrate financial capability, Step 3 and
2+3 applicants must, at a minimum, submit the financial and
institutional information presented in the Financial Information
Sheet, along with an analysis of that information. The optional
Supplemental Information Sheet permits a detailed analysis of
financial condition.
Benchmarks have been provided on the Supplemental Infor-
mation Sheet for assessing a community's relative financial
strengths and weaknesses. These benchmarks have been developed
through the statistical analysis of financial indicators in a
broad range of communities.±/
When assessing this financial information, some communities
may decide that the proposed treatment system is not financially
feasible. A number of potentially less costly alternatives may be
considered.I/
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 con-
sidered.
c) __ Innovative or alternative wastewater treatment pro-
cesses 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 areas. In many areas, similar systems can
carry wastewater at a fraction of the capital cost and
often at lower maintenance and operation costs than con-
ventional gravity sewers and central treatment. These
technologies, grouped together as Small Alternative
Wastewater Systems (SAWS), are particularly appropriate
for rural areas or for portions of larger communities
with dispensed populations.
_!/ These indicators do not take into account State laws such
as those in California, affecting a community's ability to
raise revenues. Therefore, State-specific standards may
be more restrictive.
2/ EPA regulations (Section 35.2030) require sewered communities
~~ with a population of 10,000 or less to give considerations
to appropriate low cost technologies — facultative ponds,
trickling filters, oxidation ditches, or overland flow land
treatment -- and for unsewered communities of 10,000 or less,
consideration must additionally be given to on-site systems.
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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 pop-
ulation increases may dictate staged development.)
However, EPA regulations on phased and segmented pro-
jects 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 in-
clude smaller facilities, less sophisticated treatment
processes to lower investment and 0,M&R costs, or
elements of both. Alternatives might include trickling
filters or ponds.
A community that believes that water quality standards im-
pose an unfair economic burden may wish to seek a modification
of water quality permit standards. Under Section 302(b)(l) of
the Water Pollution Control Act (PL 95-217), 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 unrea-
sonable.
Guidebook Organization
This chapter of the Financial Capability Guidebook intro-
duces 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 worksheets that evaluate the first
four issue areas identified in the beginning of this chapter.
In the last section of Chapter III, the final two issues are
addressed by the Supplemental Information Sheet and the
accompanying worksheets. 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.
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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 Guide-
book and the methods you will use to analyze your community's
financial capability. To assist you in filling out the work-
sheets 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 II illustrates the flow of information from source docu-
ments to the worksheets and then downward from worksheet to
worksheet until it reaches its final destination on the Waste-
water Facilities Financial Information Sheet or the Supplemental
Information Sheet. As an introduction to the worksheets in
Chapter III, a brief description of each follows, with a list of
the major resources to be consulted for its completion.
Worksheet #1; Roles and Responsibilities of Local Govern-
ments. 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. An applicant proposing to con-
struct a wastewater treatment facility designed to serve two or
more public agencies must show how the costs will be allocated
among the participating jurisdictions or agencies. Preliminary
agreements reached during planning and design should be reviewed
to complete this section. Among the documents used in filling
out this worksheet are:
• Preliminary agreements reached during the planning
and design stages; and
• Map(s) of the overlapping jurisdictions that collect
taxes or charge user fees within the wastewater service .
area.
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EXHIBIT II
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
PLANNING REPORTS
ENGINEERING DESIGN STUDIES
USER CHARGE STUDIES
ENGINEERING STUDIES
FINANCIAL RECORDS FOR EXISTING
0,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 #1
ROLES AND RESPONSIBILITIES
OF LOCAL GOVERNMENTS
WORKSHEET #2
FACILITIES COST ESTIMATE
WORKSHEET #3
FINANCING THE FACILITIES
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
ANNUAL FINANCIAL REPORTS
STATE AGENCY PUBLICATIONS
STATEWIDE ORGANIZATION REPORTS
SPECIAL STUDIES FROM PLANNING
DEPARTMENT AND ASSESSOR' S
OFFICE
WORKSHEET #5
ASSESSING THE COMMUNITY'S
DEBT HISTORY
WORKSHEET #6
EVALUATING THE COMMUNITY'S
FINANCIAL CONDITION
SUPPLEMENTAL INFORMATION SHEET
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Worksheet #2; Facilities Cost Estimate. A realistic as-
sessment of capability depends on accurate estimates of con-
struction, 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 user charges necessary to support the new
facilities. Worksheet #2 summarizes the construction costs and
operation, maintenance, and replacement costs for facilities.
Estimates should be developed for all of the costs that will
be incurred, including management, overhead, outside services,
equipment replacement, and reserves necessary to construct
betterments, expansion, and/or improvements required to
accommodate future services. The major sources of information
for Worksheet #2 are:
• Planning reports;
• Engineering design studies; and
• User charge studies.
Worksheet #3; Financing the Facilities. Worksheet #3
identifies the amount to be borrowed by the grantee and the
methods of financing that amount. Total annual costs, which
include operations, 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 #1 and #2 as well as:
• Engineering studies;
• Community financial records showing existing
0,M&R and debt service costs;
• Cost estimates of construction-related costs
obtained from outside experts;
• Estimates of construction costs to be paid by
Federal and/or State governments;
• Estimates of other sources of funding that will
be used to reduce the amount borrowed; and
• 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 and
facilities. The information required on this worksheet comes
principally from Worksheets #2 and #3, but also relies on:
• U.S. Census Bureau reports on current economic
and demographic data; and
• Engineering reports.
Worksheet #5; Assessing the Community's Debt History. The
purpose of this worksheet is to profile and summarize the com-
munity's debt history. Information presented on this worksheet
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is used for calculating the financial indicators found on Work-
sheet #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:
• Annual financial reports;
• Reports submitted to State and other regulatory
agencies;
• State agency publications; and
• Official statements.
Worksheet #6; Evaluating the Community's Financial Con-
dition. The assessment of a community's financial condition
involves the calculation and analysis of 11 key financial indi-
cators. The indicators have been chosen because of their im-
portance 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 requires information from:
• Annual reports;
• State agency publications;
• Reports prepared by statewide organizations; and
• Special studies prepared by the planning depart-
ment and the assessor's office.
Working through the six worksheets will enable your community
to evaluate its financial strengths and weaknesses. The trans-
fer of information on a line-by-line basis from the worksheets
to the Financial Information Sheet and the Supplemental Infor-
mation Sheet represents the final steps on the flow chart.
Notes on the Preparation of a Financial Capability Analysis
Financial analysis of proposed wastewater facilities re-
quires the collection of financial information, calculation of
several key indicators, and analysis of the results obtained
through the process. Because local governments differ signifi-
cantly 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:
• Obtaining the data;
• Estimating needed data;
• Knowing which number to use when there's a choice;
• Recognizing the effect of different accounting
methods;
• Incorporating trend analysis into the financial
capability assessment;
10
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• Taking account of inflation and economic change;
• Considering overlapping debt; and
• 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.
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:
• The size of the community;
• The type of information requested; and
• 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 esti-
mates 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 esti-
mates, 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. Some-
times, 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
11
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population occur. In choosing the best number, several factors
must be considered:
• How will the seasonal population share the
burden of paying for the proposed facilities?;
and
• 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. For our purposes,
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 because the impact will not ma-
terially 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 indi-
cator 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 feasi-
bility of a project.
Taking Account of Inflation and Economic Change. Ideally,
our analysis would take a projections approach and analyze the
community's financial condition at a point in time in the future
when the proposed facilities are operational by projecting in-
come, 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 ne-
cessary. Instead, we determine if a community's current financial
situation would enable it to assume the future costs of the pro-
posed wastewater treatment facilities (expressed in today's
prices), 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
12
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differing assumptions. For example, if there is concern about
the impact of inflation on the cost of 0,M&R, the cost estimates
and other variables that are sensitive to inflationary pressures
can be adjusted upward and the analysis can be repeated to de-
termine how household burden changes.
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.I/ 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 III gives a
suggested 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 juris-
dictions 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 juris-
diction'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 over-
lapping jurisdiction by the percentage identified
for Community A (Column B x C).
E. Add the figures in Column D to arrive at total over-
lapping debt for Community A.
I/ Overlapping debt is defined as the proportionate share of
debts of local governmental units located wholly or in part
within the limits of the reporting government which must be
borne by persons or property within each governmental unit.
13
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EXHIBIT III
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
14
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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. When measured against the total cost of a project,
financial capability analysis is a sound investment because it
can be very helpful.
Communities that have an ongoing or completed Step 1 fac-
ilities 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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CHAPTER III
FINANCIAL CAPABILITY ANALYSIS WORKSHEETS AND INSTRUCTIONS
Your community's financial capability concerns all parties
who will pay a portion of.the cost of the new wastewater fa-
cilities. Elected officials, finance officers, public works
department heads, citizens, and lending institutions would 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 fin-
nancial capability this chapter provides:
• Six Worksheets, with line by line instruction, which
cover roles and responsibilities, financing, facilities
cost, household costs, community debt and financial
conditions. (Worksheets #1-4 are on pages 23-48 and
Worksheets #5 and 6 are on pages 51-65).
• A Supplemental Information Sheet (page 49) which covers
the community's debt history and financial condition.
The Supplemental Information Sheet can be completed
using the information developed on worksheets #5 and #6.
• A three page set of Wastewater Facilities Financial
Information sheets (pages 19-21) which provide space to
answer the six 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 and the Supplemental
Information Sheet to the appropriate lines on the
Financial Information Sheet.
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 un-
certain 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."
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 or restructuring the financing. 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.
17
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EXHIBIT IV
Wastewater Facilities Financial
Information Sheet
Applicant
Name
Address.
City
Zip-
Contact.
Telephone.
What Is Proposed In The Facilities Plan?
• The proposed facilities will be:
(check more than one if applicable)
D New
Q An expansion Q An upgrade
• If treatment facilities are proposed, do they
feature low 0 + M Cost Technology such as ponds,
trickling filters, overland flow? If yes, please identify.
Yes
D 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-Site
Systems
D Anticipated
Growth
• Entities to be served:
County
D Municipality D Sewer district Q Industry
• Design population
(Year
19
-------
EXHIBIT IV (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.
fromlln*
(101)
' What agency will:
G Own the facilities
Operate
Finance
• Will there be financial contributions by: G Other agencies
• Have participating agencies been asked Q Wastewater
to review: facilities plan
• Have agreements been sought between Q Participating
the operating agency and: agencies
How Much Will The Facilities Cost At Today's
Q Industry
0 Population
projections
Q Other agencies
Prices?
n Service area
boundaries
Q Industry
(103)
(105)
(107)
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-fiite 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
• Ampunt to be borrowed
(201) • Labor
(202) • Utilities
(203) • Materials
(204) . Outside services
(205) • Misc. expenses
(206) • Eauioment reolacement
(207)
_ (208)
• Total operation,
maintenance and
reolacement costs
from lln«
(309)
(315)
/oon\
(321)
C. Total estimated annual wastewater facilities costs
• Net existing 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 lln«
(328)
(329)
(330)
(331)
(332)
B. Methods of financing the amo
Financing Amount Interest
method borrowed rate
General
obligation
bond
Revenue
bond
Loan
Total -s;
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
l,,mlln.
par year (209)
per year (210)
per year (211)
per year (212)
per year (213)
par year (21 d)
per year (215)
unt to be borrowed
Annual
Term of debt service
maturity payment
(322)
(323)
(324)
-' X;-s; (325)
nual wastewater
Iromlln*
(333)
(334)
(335)
(336)
(337)
(338)
(339)
(340)
20
-------
EXHIBIT IV (Continued)
Wastewater Facilities Financial
Information Sheet
What Are The Annual Costs Per Household?
from line
• Total estimated annual wastewater i.omime • Total annual costs per household - (406)
facilities charges (400)
• 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)
Can Your Community Afford The Proposed Wastewater Treatment Facilities?
The answers to the preceding questions will provide useful information regarding the cost of the proposed facility, how it will be financed,
and what this means in terms of cost to the typical household user. In order to evaluate effectively the true impact of the proposed project,
however, this Information must be viewed within the overall context of the community's financial capability, which is the measure of its existing
financial condition, financial resources, legal constraints, and local public policy that balances among competing financial needs.
Listed below is a series of questions that will provide Information about your community's current financial condition as well as its ability to
pay for the local share of the proposed facility. The answers to these questions will help ensure that the community fully understands the
cumulative financial impacts of constructing the proposed facility on top of Its previous financial commitments.
1. Does your community plan to rely on new population growth to help finance the proposed treatment system and to meet
other local obligations? If so, are the population projections realistic?
2. Over the past five years, what has happened to your community's taxable assessed property valuation relative to its population?
3. Does your community rely on other sources of revenue? If so, are there discernible trends for these revenues?
4. What is the total current outstanding Indebtedness of your community?
5. How much additional debt can your community legally incur?
6. What Is your community's bond rating? Has it changed within the last two years?
If the information above indicates that the proposed system's cost impacts on the individual households and/or the community are too high,
the community should consider other methods of financing to mitigate financial impacts, reevaluate project alternatives and scope, or consider
staging implementation to spread out financing to future users.
21
-------
Instructions
ROLES AND RESPONSIBILITIES OF LOCAL GOVERNMENT for
Worksheet #1
PURPOSE OF WORKSHEET #1
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 a 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.!/
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 intermunicipal 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 relation -1 ip.
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);
I/ 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 audit-
able cost accounting system is usually maintained by the
supplier agency; it defines the regional cost basis and is
included in service agreements. Exhibit V is a model for
determining regional cost basis.
23
-------
EXHIBIT V
MODEL FOR IDENTIFICATION OF REGIONAL COST BASIS
• 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,
SYSTEM-WIDE or ""depreciated value of the component).
CAPITAL
COST Estimated value of land on which existing contributed facilities are
located (calculated at fair market value or other acceptable method).
• Periodic Capital Requirements:
Additions, expansion, or replacement of equipment or system components
(not included in initial facilities plan), as required by regional use.
• Direct Costs for Regional System 0 & M:
Annual costs directly attributable to regional operations and maintenance,
SYSTEM-WIDE Identified in appropriate budget categories of the regional system operator.
OPERATIONS
AND • Administrative Costs for Regional System:
MAINTENANCE Costs associated with management, administration, and overhead of
COST BASIS tne regiona| operator. For example, if a municipality operates the
I system, appropriate portions of administrative time must be identified
I in the municipal budget.
SOURCE: Financial Planning for Wastewater Facilities: A Guido for Wyoming Local Officials. Part 3,
"Regional Wastewater Facilities: Cost Sharing, Financing, and Intergovernmental Relations,"
(Wyoming Department of Environmental Quality), page 16.
24
-------
2. Guarantee of future flow capacity and provision for
annual adjustment and sale of capacity between par-
ticipants;
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.
Line 102 Indicate if the agencies have any prior
experience in performing their assigned roles.
Lines 103 - 104 Prior to the construction of the faci-
lities participating agencies should identify the type
and amount of their contribution. For example, Community
"A" will provide $1,000,000 for the construction of the
facilities 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 per-
centage of the long-term debt, and a special Housing and
Urban Development fund will finance a portion of the sewer
collection system costs.
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 plan-
ning of wastewater facilities is closely tied to land use
planning and other independent activities of the partici-
pating 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
-------
WHAT ROLES AND RESPONSIBILITIES WILL
LOCAL GOVERNMENTS HAVE?
Worksheet #1
A. WHAT AGENCY WILL:
D Own the D Operate The D Finance The (101)
Facilities Facilities Facilities
• Does The Agency Have
Experience In Performing
The Function?
D Yes D No
D Yes D No
D Yes D No (102)
B. WILL THERE BE A
FINANCIAL CONTRIBUTION
BY:
• Amount Expected?
D Other
Agencies
D Industry
(103)
(104)
C. WILL THE PARTICIPATING
AGENCIES BE ASKED TO
REVIEW:
• What Will Be The Forum
For The Review (i.e,
Meeting, Comments On
Draft Documents)?
D Wastewater
Facilities
Plan
D Population
Projections
D Service
Area
Boundaries
(105)
(106)
D. WILL AGREEMENTS BE D Participating D Other
SOUGHT BETWEEN THE Agencies Agencies
OPERATING AGENCY AND:
H! Industry
(107)
• Describe The Type
Of Agreement Required
(i.e., Ordinance Approval,
Cost Allocation, Excess
Capacity).
(108)
26-
-------
Instructions
for
FACILITIES COST ESTIMATE Worksheet #2
PURPOSE OF WORKSHEET #2
A realistic assessment of capability depends on accurate
estimates of construction, operations, maintenance, and re-
placement costs for the proposed wastewater facilities. These
estimates provide the basis for determining both the amount of
local financing required and the user costs necessary to support
the new facilities.
Worksheet #2 summarizes the construction costs (Section A)
and operations, 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.I/
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.
Line 201 Enter the construction costs for the wastewater
treatment plant including sludge handling facilities. Up-
date 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 1981 are:
!_/ A complete wastewater treatment system consists of all the
treatment works necessary to meet the requirements of Title
III of the Act, involving 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.
2/ See Appendix A, U.S. EPA, Construction Costs for Municipal
Wastewater Treatment Plants; 1973-1978, EPA/43-9-8-0013
(Washington, D.C.: Office of Water Program Operations
(FRD-11 - April 1980).
27
-------
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 and Force Mains
(202)
Interceptor Sewers
(203)
Collection Sewers
(204)
On-Site Systems
(205)
Land Acquisition
(206)
• Other
Inspection and Construction
Management
(207)
• TOTAL CONSTRUCTION COSTS
(201 + 202 + 203 + 204 + 205
+ 206 + 207) (208)
28
-------
EPA CONSTRUCTION COST INDEX FOR
SMALL CITY CONVENTIONAL TREATMENT PLANTS
Year
Index
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
93
112
110
119
128
145
158
168
180
186
(3rd Quarter]
For example, a 1976 cost estimate of $2,000,000 would be
updated to 1981 as follows:
$2,
000,
000
(1976) x
180
119
(1981 =
(1976)
$
3,
025,
210
(1
981)
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).I/
EPA COMPLETE URBAN SEWER
SYSTEM COST INDEX
Year
Index
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
100
110
123
132
143
154
175
185
202
218 (3rd Quarter)
Quarterly updates are available from EPA..?/
Lines 205-206 Enter current estimates for on-site
systems and land acquisition on lines 205 and 206.
_!/ See Appendix A, U. S. EPA, Construction Costs for Municipal
Wastewater Conveyance Systems; 1973-1979, EPA 430/9-81-0013
(Washington, B.C.: Office of Water Program Operations (FRD-21)
January 1981) .
2_/ See "Construction Cost Indexes," EPA Office & Water Program
~ Operations, Washington, D.C. or call EPA Regional and State
Agency staffs.
29
-------
Line 207 Enter other costs associated with the
construction project such as inspection and
engineering costs.
Line 208 Enter the total construction costs on the
worksheet (201 + 202 + 203 + 204 + 205 + 206 + 208).
Enter the construction cost estimates onto the Financial
Information Sheet.
30
-------
Instructions for Section B
In Section B, provide estimates of expected operation, main-
tenance, and replacement costs for the facilities. For each cost
category (labor, utilities, etc.) identify, where applicable, the
portion of the cost required by each system component.
This detailed format is modeled after the one found in EPA's
publication and is intended to encourage a complete review of
potential 0,M&R costs.I/A complete review is particularly im-
portant since some new plants coming on-line have experienced
0,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. 0,M&R cost estimates
for;
• treatment plants,
• pump stations, and
• sewers
may have to be updated by the project engineer or by using EPA
cost indices.
OM&R for Wastewater Treatment Plant
Update the engineer's 0,M&R cost estimate for the wastewater
plant to current dollars using the "EPA O/M&R Plant Index." The
index is described in EPA's Analysis of Operations and Maintenance
Costs for Municipal Wastewater Treatment and national and
regional values are published quarterly by EPA.J/2/
The national average values for 1974 through 1981 are:
EPA 0,M&R PLANT INDEX
Year Index
1974
1975
1976
1977
1978
1979
1980
1981
1982
164
188
203
218
235
259
294
328
349 (3rd Quarter)
I./ U.S. EPA, Analysis of Operations and Maintenance Costs for
Municipal wastewater Treatment Systems, 430/9-77-015
(Washington, D.C.: Office of Water Program Operations,
May 1978) page A-38.
^/ Quarterly updates are published in "Index of Direct Costs
for Operation, Maintenance, and Repair, Based on Composite
5MGD Plant," Office of Water Program Operations, Washington,
D.C.
31
-------
B. ESTIMATED ANNUAL OPERATION, MAINTENANCE, AND Worksheet # 2
REPLACEMENT COSTS FOR THE PROPOSED FACILITIES Section B
System Components
Treatment
Plant
Sludge
Handling
Disposal
Pump
Stations
Interceptor
Sewers
Collection
Sewers
On-Site
Systems
Total
Costs
Cost
Categories
• Labor (Salaries, Fringe
Benefits, & Overtime)
• Operations
• Maintenance
. Support Services
(Purchasing, Data
Processing, Finance,
Etc.)
- Administration
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)
32
-------
For example, a $250,000 1976 estimate of 0,M&R costs for a
plant would be updated to 1981 by multiplying the 1976 cost es-
timate by the ratio of the 1981 cost index to the 1976 index:
$250,000 (1976) x 328 (1981) = $404,000 (1981)
203 (1976)
0,M&R for Pump Stations
To update the pump station 0,M&R costs, use the following EPA
cost index values:i/
PUMP STATION 0,M&R INDEX
Year
Index
1974
1975
1219
1317
1976 1401
1977
1978
1979
1980
1981
1982
1490
1660
1884
1967
2107
2178
( 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.
0,M&R for Sewers
To update the sewer 0,M&R costs, use the EPA 0,M&R cost index
for sewer lines.!/ National values for 1974 to 1981 are:
SEWER 0,M&R INDEX
Year Index
1974
1975
1976
1977
1978
1979
1980
1981
1982
1160
1249
1354
1461
1573
1745
1876
2091
2200 (3rd Quarter)
I/ 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.
33
-------
Line 209 Having updated the 0,M&R cost estimates, provide
labor costs by system component including salaries, fringe
benefits, and overtime. Estimate support services and
administration (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 re-
viewed with the engineering firm responsible for the
original estimate to:
• Expand management costs to reflect new insti-
tutional arrangements approved by local off-
icials; and
• Refine other costs based on more recent field
data (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 0,M&R values on the Financial Information Sheet.
34
-------
Instructions
FINANCING THE FACILITIES for
Worksheet #3
PURPOSE OF WORKSHEET #3
Worksheet #3 identifies the amount to be borrowed by the
grantee and the methods of financing that amount. Total annual
costs, which include operations, maintenance, and debt service
for the new as well as any existing facilities, are then cal-
culated 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
shares of the construction costs for each component in
the spaces provided. 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.
Lines 310-315 Construction-related costs include in-
terest paid on construction loans or notes, any repayments
to the community's general fund and planning and design
costs that exceed the allowance from EPA or State aid.
Also include legal, financial, and other fees associated
with the sale of bonds, including:
• Preparing the official statement;
• Printing the bonds;
• Advertising the bonds; and
• 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.
Lines 316 - 320 List all sources of front-end financing the
grantee will use to reduce the amount to be borrowed. These
include:
• Property tax revenues;
• Local funds (reserves) available for
the project;
35
-------
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
System Component
Wastewater Treatment
Plant
Pump Stations
Interceptor Sewers
Collection Sewers
On-Site Systems
Land Acquisition
Other
Total
From
Line
201
202
203
204
205
206
207
Con-
struction
Cost
$
$
EPA
Share
State
Share
Other
Grantee
Share
$.
$.
$.
(301)
(302)
(303)
(304)
(305)
(306)
(307)
(308)
Total Grantee Share
(301 + 302 + 303 + 304 + 305 + 306 + 307)
(309)
36
-------
Worksheet #3
Section A
Construction-Related Costs
Interest Paid on Loans and Notes S (310)
Repayments to Other Funds (311)
Planning and Design Costs that
Exceed Allowance from EPA
and State Aid (312)
Legal, Financial and Other Fees
for Issuance and Sale of Bonds (313)
Other Costs (Identify)
(314)
Total Construction-Related Costs S (315)
(310 + 311 +312 + 313 + 314)
Grantee Contributions
Property Tax Revenues S (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 S (320)
(316 + 317 + 318 + 319)
Amount to be Borrowed S (321)
(309 + 315-320)
37
-------
• Prepaid connection fees and betterment
assessments,-I/and
• 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 and enter the
required information.
Instructions for Section B
In Section B, the annual debt service (principal and in-
terest) 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 and facilities 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
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 cap-
ital recovery factor found in the Capital Recovery Table
on the bottom of page 39 by the amount borrowed. An
example follows:
Amount to be borrowed
Interest Rate
Maturity
Capital Recovery Factor
Annual Debt Service Pay-
ment (.134 x 5,000,000)
$5,000,000
12%
20 years
.134
$ 670,000
I/ 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.
38
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Worksheet #3
Section B
B. 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'
Length of
Original
Maturity
10
15
20
25
30
35
40
Rate of Interest
(322)
(323)
(324)
(325)
8 percent 1 0 percent 1 2 percent 1 5 percent
.149
.117
.102
.094
.089
.086
.084
.163 .177 .199
.131 .147 .171
.117 .134 .160
.110 .128 .155
.106 .124 .152
.103 .122 .151
.102 .121 .151
'See: Eugene L. Grant and W. Grant Ireson, Principles of Engineering Economy (New York:
The Ronald Press Company, 1970). Table E provides compound interest factors at various rates.
39
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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 infor-
mation on the Financial Information Sheet.
Instructions For Section C
Section C calculates two major components of total annual
wastewater treatment and facilities costs; operations, main-
tenance, and replacement costs and debt service.
Lines 326 - 329 These four lines are for information
about existing facilities 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 (0,M&R) costs for any existing
facilities (326), and the annual debt service being paid
for the existing facilities (329). (Note: Some existing
0,M&R costs may be discontinued as a result of the new
project (327) or may be included in new facilities costs
and should be subtracted from those existing (326) to
determine the net annual 0,M&R costs (328).)
Lines 330 and 331 Cost estimates for the proposed faci-
lities can be found on line 215 of Worksheet #2, and line
325 of this worksheet.
Line 332 Add lines 328, 329, 330, and 331 to find the
total annual wastewater treatment and facilities costs.
The information from this section should now be transferred
onto the Financial Information Sheet.
Instructions for Section D
Section D identifies the sources of funding for the total
annual wastewater treatment and facilities costs that were
calculated in the previous section. A list of potential re-
venue sources has been provided in this section, including
both operating and non-operating revenues. In some situations,
only one source may be applicable.
Line 333 Include here 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.
Line 334 Include here estimated revenues from a surcharge
on sewer service charges.
40
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Worksheet #3
Section C
C. TOTAL ESTIMATED ANNUAL WASTEWATER TREATMENT AND FACILITIES COSTS
• Existing Annual Operations, Maintenance, and
Replacement Costs $ (326)
• Discontinued Annual Operations, Maintenance,
and Replacement Costs to be Discontinued as a
Result of Proposed Project (327)
• Net Existing Annual Operations, Maintenance,
and Replacement Costs (Net) (326-327) (328)
• Existing Annual Debt Service (329)
• Estimated Annual Operations, Maintenance,
and Replacement Costs of Proposed
Facilities (215) __, (330)
• Estimated Annual Debt Service for Proposed
Facilities (325) (331)
• Total Estimated Annual Wastewater Treatment
and Facilities Costs (328 + 329 + 330 + 331) $ (332)
41
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Worksheet #3
Section D
D. 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)
^ZZHZHZZH (337)
• Transfers From Other Funds
(I dentify)
(338)
Other (Identify)
(339)
Total Funding J (340)
42
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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 assess-
ments 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 facilities costs.
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.
43
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Instructions
DETERMINING THE ANNUAL COSTS PER HOUSEHOLD for
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 and fac-
ilities' 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.
In order to make this type of judgment, it may be necessary
to develop a set of criteria that will identify high-cost pro-
jects. States are encouraged to develop specific guidance that
can be used to determine if affected households have the ability
to pay for a project. Any number of methods may be used, but
the decision will be left to the individual states.JL/
I./ Examples in use or contemplated by states include:
• The specification of a maximum acceptable house-
hold annual charge;
• The existence of certain fiscal warning signals
such as too much debt per capita; and
• A limitation on average user costs based on some
percentage of the average full valuation of tax-
able real property.
Previously, EPA offered guidance for assessing the financial
feasibility of proposed treatment facilities. A project was
considered high-cost if the annual costs per household exceeded
the percentage of median household income (MHI) listed below:
• 1.0 percent of MHI when the area's MHI is less
than $10,000;
• 1.5 percent of MHI when the area's MHI is between
$10,000 and $17,000; or
• 1.75 percent of MHI when the area's MHI is greater
than $17,000.
The Agency's previous guidance served as a useful screening
technique in the past, and was tied to a fixed grant ratio
of 75 percent Federal to 25 percent local funding. As States
exercise their discretion to lower the Federal share of grant
funding, however, these criteria are becoming obsolete and
there is a growing need for planners and decision-makers to
look at the entire range of financial information in analyzing
financial capability.
45
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Instructions for Worksheet #4
Line 400 Enter the total estimated annual wastewater
treatment and facilities charges (and subcharges) from
Worksheet 3, lines 333+334.
Line 401 Enter the nonresidential share of total
estimated annual wastewater treatment and facilities
charges (and subcharges) here.
Line 402 Subtract line 401 from 400 to find the
residential share of the total estimated annual waste-
water treatment and facilities charges.
Line 403 Identify the current number of households to
be served by the wastewater facilities. You may wish to
perform this analysis using the number of households that
will exist when the facility is operational or at other
future dates.
Line 404 Divide the residential share of the annual
wastewater treatment and facilities charges (402) by the
number of households (403) to calculate the annual waste-
water 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 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:
1) Not all households in the community will
necessarily be affected (For example, connection
fees may only be required from households that
join the system the first time because of an ex-
pansion of the facilities.);
2) Fees and assessments may be variable based on
such factors as the length of a homeowner's lot;
and
3) Frequently the "other" costs recovered from house-
holds 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.
1) 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 waste-
water treatment services. Any variable fees
should be estimated at their maximum amounts.
46
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Worksheet #4
WHAT ARE THE ANNUAL COSTS PER HOUSEHOLD?
• Total Estimated Annual Wastewater Treatment
and Facilities Charges (333 + 334) $ (400)
• Nonresidential Share of Total Annual
Wastewater Treatment and Facilities Charges $ (401)
• Residential Share of Total Annual Wastewater
Treatment and Facilities Charges (400-401) $ (402)
• Number of Households (403)
• Annual Wastewater Treatment and Facilities
Cost Per Household (402 * 403) $ (404)
• Other Annual Costs Per Household (Identify)
$ (405)
• Total Annual Costs Per Household
(404 + 405) $ (406)
47
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2) 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 page 39) then multiply the amount of the one-
time fee and/or assessment by factor. As
an example, consider the following:
Connection fee
Interest Rate
Length of Loan
Capital Recovery
Factor
Annual Cost
($2,000 x .117)
$2,000
10%
20 years
.117
$234
3) 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 abutt
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 households in the
community. For these situations two household
costs should be calculated - one for those pre-
sently on sewers and a second for those who may
be connected as a result of the project. Note
the worksheets assume only one class of users
and therefore a second calculation should be made
on Worksheet #4.
The number placed on line 405 is the sum of the "other" house-
hold costs expressed on an annualized basis.
Return to the last part of the Financial Information Sheet
and fill in the required information from this worksheet. The
Financial Information Sheet should now be complete except for
the answers to the seven questions on the third page of the
sheet. To assist in answering these questions, this Guidebook
provides a Supplemental Information Sheet which can help answer
these questions.
The next part of Chapter III shows the Supplemental Infor-
mation Sheet and provides Worksheets #5 and #6 which the
applicant may use to calculate the figures needed to fill in the
Supplemental Information Sheet.
48
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EXHIBIT VI
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
Date of rating
Irom 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 Strong
Below -1%
Below 0%
Below 96%
Above 4%
Above 5%
Above 12%
Above $750
Above $1,000
Below 10%
Below 100%
Below 120%
-1%to1%
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)
49
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Instructions
ASSESSING THE COMMUNITY'S DEBT HISTORY for
Worksheet #5
PURPOSE OF WORKSHEET #5
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.
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 re-
payment, and debt limits.
Instructions for Section A
Line 500 Give the community's most recent general obli-
gation bond rating and the date of the rating.
Line 501 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.
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, including any new debt for the proposed
project. These are bonds 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.
51
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Worksheet #5
Sections A and B
WHAT IS THE COMMUNITY'S DEBT HISTORY?
A. BOND RATINGS
• Community's Most Recent General
Obligation Bond Rating (500)
Rating Date of Rating
• Community's Most Recent
Revenue Bond Rating (501)
Rating Date of Rating
B. OUTSTANDING DEBT
• General Obligation (502)
Bonds
• Revenue Bonds ', (503)
• Gross Direct Debt (504)
• Direct Net Debt (505)
• Overlapping Net Debt (506)
• Overall Net Debt (507)
• Other Debt (508)
• New Debt for Other (509)
Capital Improvements
52
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Line 506 Overlapping net debt is the community's pro-
portionate 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 over-
lapping 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.
Return to the Supplemental Information Sheet to record the
required data.
Instructions for Section C
Section C is used to show how restrictive future debt re-
payment requirements will be for the community. A low pro-
portion of outstanding debt coming due during the next five
years is an indication that a large proportion of future revenues
are already commited 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.
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 onto the Supplemental Information Sheet.
53
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Worksheet #5
Sections C and D
C. DEBT REPAYMENT SCHEDULE
• Debt Repayment Schedule for Direct Net Debt Within Next 5 Years
Yearl $ (510)
Year 2 (511)
Year3 (512)
Year 4 (513)
Year 5 (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 is currently used? % (517)
-------
Instructions for Section D
Line 516 Briefly describe any constitutional, statutory,
or charter limits on debt (other than a referendum re-
quirement) that apply to your community, including:
• A dollar ceiling on the amount that may be
outstanding at any one time or the total
amount that may be issued;
• A ceiling on the amount that may be outstanding
at the time of incurrence, expressed as a per-
centage of the assessed valuation of taxable
property or a percentage of regularly recurring
revenues;
• The ratio of past revenues to future debt service
(for revenue bonds); and
• Any limitation on the authority to levy taxes
for debt service.
The maximum amount of debt that a governmental unit may incur
typicall-y is fixed on gross direct or direct net debt.
Line 517 Calculate (or estimate) the percentage of the
debt limit currently used. 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.
55
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EVALUATING THE COMMUNITY'S FINANCIAL
CONDITION
Instructions
for
Worksheet #6
PURPOSE OF WORKSHEET #6
The assessment of a community's financial condition in-
volves the calculation and analysis of 11 key financial indi-
cators. These indicators have been selected 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. 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.
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 Infor-
mation 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 popu-
lation 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.
b.
c.
d.
e.
Population 5 years ago 27,000
Current population 35,000
»b" - "a" = 8,000
8,000 *• 5 = 1,600
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.
57
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WHAT IS THE COMMUNITY'S FINANCIAL CONDITION?
Worksheet #6
Indicators 1-4
INDICATOR 1
• Community Population 5 Years Ago
• Current Year Population
t Annual Rate of Change in Population
INDICATOR 2
• Property Taxes
• Other Revenues
• Total Current Revenues (19—)
• Operating Expenditures
• Debt Service Payments
• Total Current Expenditures (19—)
• Current Surplus (Deficit) (605-608)
• Current Operating Surplus (Deficit)
As A Percentage of Total Current
Expenditures (609+ 608 X 100)
INDICATORS
• Real Property Tax Collection Rate
(Most Recent Tax Year Available 19—)
INDICATOR 4
• Assessed Value of Real Property
• Current Assessment Ratio
• Full Market Value of Real Property
• Property Tax Revenues As A Percentage of
Full Market Value of Real Property
(603 * 614 X 100)
$.
S_
=
1
1
s_
s
(600)
(601)
(602)
(603)
(604)
(605)
(606)
(607)
(608)
(609)
(610)
(611)
(612)
(613)
(614)
(615)
59
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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 cate-
gories 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 606 and 607, then calculate the total
and enter it on 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 x 100
Property taxes levied during most recently
completed tax year
Generally, low collection ratios are evidence of tax de-
linquency.
Instructions for Indicator 4 — Reliance on Property Tax Revenues
Lines 612-615 Indicator 4 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.
59
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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 $100,000,000
Assessment Ratio (50 percent) .50
Full market value of real
property (100,000,000 f.50) $200,000,000
To calculate Indicator 4 (found on 614), divide the
most current year's property tax revenues (603) by the
current full market value of real property and multiply by
100.
Current Year's Property Tax Revenues x 100
Full Market Value of Real Property
Two points should be noted regarding this indicator:
1) 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 pro-
portionately; and
2) 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 preceeding the current year.
60
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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. 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.
c.
d.
Obtain the consumer price index (CPI)
for the year for which income infor-
mation is available.!/
Obtain the CPI for the most recent
year.
Divide "b" by "a" to calculate a
CPI ratio.
Inflate the per capita income figure
by multiplying that amount by the CPI
ratio found in "c". $
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 out-
standing (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.
I/ Consumer Price Index
YEAR
CPI
YEAR
CPI
YEAR
CPI
1969
1970
1971
1972
1973
109.8
116.3
121.3
123.3
133.1
1974
1975
1976
1977
1978
147.7
161.2
170.5
181.5
195.4
1979
1980
1981
1982
217.4
246.8
272.4
289.1
61
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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 * 614 X 100) % (616)
INDICATOR 6
• Per Capita Income _$ (617)
• Personal Income (617 X 601) $ (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) .| (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 + 505 X 100) % (622)
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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
of the general obligation debt issued by 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 out-
standing (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 pay-
back 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 pro-
vide 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.I/
Lines 623 and 624 Enter the expected operating revenues
and nonoperating revenues (grants, interest, and connec-
tion fees) for the sewer funds.
Line 625 Add lines 623 and 624.
Lines 626 - 628 With regard to sewer fund expenses, it
is particularly useful to single out the operations,
maintenance, and replacement expenses and annual debt
service on outstanding sewer revenue bonds. Any other
nonoperating expenses should be entered on 628.
Line 629 Add lines 626, 627, and 628.
I/ An enterprise fund is established to account for sewer opera-
tions 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 S (623)
Non Operating Revenues (Excluding
Revenue From Borrowing) $ (624)
Total Revenues (623 + 624) S (625)
• Sewer Fund Expenses (First Year Operational)
Operating Expenses (Excluding
Depreciation and Reserves) S (626)
Annual Debt Service (on sewer bonds) S (627)
Other Non Operating Expenses S (628)
Total Expenses S (629)
• Operating Ratio (623 * 626 X 100) % (630)
• Coverage Ratio ((625 - 626) * 627 X 100) % (631)
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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 7626 x 100).
Low ratios are considered a warning because the enter-
prise 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 enter-
prise 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, consi-
deration should also be given to the stability and pre-
dictability of the "coverage."
Once Worksheet #6 is completed the indicators can be entered
in the Supplemental Information Sheet shown on page 49. The
Supplemental Information Sheet's lower section -- "What is the
Community's Financial Condition" allows the indicators cal-
culated 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.
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.
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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 construc-
tion.
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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 prac-
tices.
Groves, Sanford, M. and Godsey, W. Maureen. Evaluation of
Local Government Financial Condition. Financial Trend
Monitoring System; A Practioners 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 ICMA, 1140 Connecticut Ave., NW, Washington, DC 20036.
(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. These
readers will find the introductory chapters on the 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. $14.95.
Municipal Finance Officers Association. Governmental Accounting,
Auditing, and Financial Reporting (GAAFR). Chicago, IL:
MFOA, 1980. (234 pp)
First published in 1968, GAAFR receives wide acceptance by
governmental accountants and finance officers, other officials
of government, and independent practicing accountants as generally
accepted accounting principles (GAAP) for State and local govern-
ments. Available from: Municipal Finance Officers Association,
180 North Michigan Avenue, Suite 800, Chicago, IL 60601 for
$35.00. (312) 977-9700.
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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 con-
dition. It focuses on five major variables that contribute to
fiscal decline: Economic vitality declining; Financial inde-
pendence being lost; Declining municipal productivity; Deferral
of current municipal costs to the future; and Ineffective muni-
cipal 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. $6.00.
Smith, Wade S. 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 St., New York, NY 10007.
(212) 553-0300. $14.95.
Standard and Poor's Corporation. Standard and Poor's Rating
Guide. New York: McGraw-Hill Book Col, 1979. (417 pp)
In this guide, a major rating corporation outlines the pro-
cedures 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
for $29.95 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
ACCRUAL BASIS. The basis of accounting under which transactions
are recognized when they occur, regardless of the timing of
related cash flows.
ASSESSED VALUATION. A valuation set upon real estate or other
property by a government as a basis for levying taxes.
CAPITAL OUTLAY. Expenditures which result in the acquisition
of or addition to fixed assets.
CASH BASIS. A basis of accounting under which transactions are
recognized only when cash changes hands.
COVERAGE. The ratio of net revenue available for debt service
to the average annual debt service requirements of an issue
of revenue bonds.
DEBT. An obligation resulting from the borrowing of money or
from the purchase of goods and services. Debts of governments
include bonds, time warrants, notes, and floating debt.
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 de-
preciation) of providing goods or services to the general
public on a continuing basis be financed or recovered pri-
marily 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.
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.
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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Uniform min-
imum 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.
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 govern-
ment (general obligation bonds plus revenue bonds).
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.
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.
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 des-
cription 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. This is the sum of direct net debt and over-
lapping debt.
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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 per-
centage 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.
REVENUE BONDS. Bonds whose principal and interest are payable
exclusively from earnings of an Enterprise Fund. In addi-
tion 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 liabilities or a decrease in assets, such
as forgiveness of a debt; and (4) Are not contributions
made to fund businesslike enterprises.
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.
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