ENVIRONMENTAL FINANCIAL ADVISORY BOARD
    Members


 Karen Massey, Chair

  Helen Akparanta

    Aurel Arndt

    William Cobb

    Edwin Crooks

    Hope Cupit

     Lisa  Daniel

  Marie De La Parra

  Donna Ducharme

    Rick Giardina

 Ann Grodnik-Nagle

-leather Himmelberger

   Jeffrey Hughes

   Philip Johnson

     Mark Kim

    Suzanne Kim

  Courtney Knight

    Thomas Liu

  James MacAdam

  Mathilde McLean

 G, Tracy  Mehan, 1!I

   Wayne Seatan

   Blanca  Surgeon

   Joanne Throwe

   Lennne Tobias

   Jeffrey Walker

 Jennifer Wasrnger

    Richard Weiss


  Michael Shapiro
    Designated
   Federal Official
February 26, 2016

Dr. Andrew Sawyers, Director
Office of Wastewater Management
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460

Dear Dr, Sawyers:

The Environmental financial Advisory Board (EFAB) is pleased to present you with recommen-
darions regarding how lire Water Infrastructure Resiliency and Finance Center (WIRFC) can best
support small systems in developing financial capacity.

Under your leadership, KFAB was issued a charge from the U.S. EPA's Office of Water in May
2015 to determine what role WIRFC could play to address/support financial capacity develop-
ment for small drinking water and wastewater systems, A work group was formed to evaluate the
best way for WIRFC to collaborate with various entities providing technical and financial assis-
tance in order to help small water and wastewater systems become more financially sustainable.

The RFAB believes that financial capacity is but one pan of overall capacity development which
also includes technical and managerial capacity. Without proper or adequate funding, technical
and managerial challenges small systems face may or can be exacerbated.  Therefore, F,FAB be-
lieves that WIRFC should consider financial capacity as one of its main activities since it has the
potential to be the most impactful in terms of improving public health.

The EFAB believes that WIRFC should understand the resources and tools that exist to help en-
hance system financial capacity and to build its work around these tools, fill in gaps in resources,
and provide coordination rather than recreate resources that already exist.  Detailed steps which
WIRFC can take to assist small systems in developing financial capacity have been set  forth in
the enclosed document using a phased manner which can be altered depending on the resources
available and the priorilies set by WIRFC. Phase I is immediate term which includes maintaining
a list of available financial capacity resources.  Phase II would he within the next 2 to 4 years and
includes WIFRC sen ing as a clearinghouse of resources  and providing a peer to peer exchange
in order to share information between systems. Finally, Phase III wouid be the next 3 to 10 years
where WIFRC can focus on facilitating complicated projects/issues especially in terms  of system
restructuring.

In conclusion, we are pleased to provide you with the detailed  results of our recommendations in
a document entitled "Financial Capacity Development for Small Drinking'Wastewater Systems."
We hope that you find our specific recommendations valuable and thank you for the opportunity
to assist you with this charge.
Sincerely,
                       Karon Massey, Chair
                       Environmental Financial Advisory Board
                             Innovative and Cost Effective Environmental Protection

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          Financial Capacity Development for Small Drinking/Wastewater Systems

Agency Charge:

The Environmental Financial Advisory (EFAB) received the following charge from EPA's Water
Infrastructure Resiliency and Finance Center (WIRFC) at the May 2015 board meeting in
Washington, D.C.

What role can the Center play to address and/or support financial capacity development for
small drinking water and wastewater systems?

Many small systems face an array of challenges that severely limit their ability to become and
remain financially sustainable. These challenges include developing a sustainable financial
system through affordable rate structures, the ability to adequately analyze the financial
implications of various infrastructure alternatives, and then obtaining funding to support the
construction, operation, maintenance, and replacement of infrastructure of the alternative
chosen. These challenges are also driven by limited technical capacity of staff working at these
small systems. Assistance in these areas is provided by a number of entities including EPA,
USDA, technical assistance providers (e.g. National Rural Water Association, Rural Community
Assistance Partnership), and the Environmental Finance Centers, but these efforts are often not
well coordinated.
The Center requests EFAB identify ways in which the Center can work with various entities to
provide a coordinated array of technical and financial assistance to help small systems address
the challenges described above. This strategy could include identifying the full array of funding
sources available and assistance to successfully develop funding applications to meet their
needs.

Discussion

Financial capacity is one part of capacity development that includes technical, managerial, and
financial capacity. However, having proper or adequate funding is fundamental to many of the
other challenges a water utility faces. Without adequate funding, a system cannot recruit or
retain operators, perform necessary tests to ensure compliance, repair infrastructure, replace
infrastructure, or handle emergencies as they arise. Without funding, it is nearly impossible to
perform technical or managerial activities. Therefore, EFAB believes that WIRFC should
consider financial capacity as one of its main activities. We believe that this particular issue has
the potential  to be the most impactful in terms of improving public health. Systems will require
proper funding in order to address public health concerns.

There has been quite a bit of work done in the area of financial capacity with many tools
already in existence and many organizations offering help in this area.  This is not to say that
there is not more work to be done in this area, quite the contrary; many small utilities struggle
with trying to obtain and maintain financial capacity.  Rather, it is  EFAB's contention that it
would be best for WIRFC to understand the resources and tools that exist for financial capacity

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and to build its work off these tools and fill in gaps in resources rather than recreate resources
that already exist. Therefore, one of the first activities completed by the EFAB was to inventory
some of the existing tools and resources. This list is presented below along with links, where
applicable. This list is not prioritized in any way.

Available Resources or Tools

   •   List of funding sources by state developed by the EFC Network
       http://efcnetwork.org/resQurces/funding-sources-bv-state/
   •   Small Community Water Infrastructure Exchange
       http://www.scwie.orR/
   •   Engineers Without Borders
       http://www.ewb-usa.orR/
   •   American Water Works Association Small Communities
       httpV/www.awwa.QrR/resources-tools/water-knowledge/small-svstems.aspx
   •   Community Engineering Corps
       http://www.communitvenRineerinRCorps.orR/
   •   Water Environment Federation Small Communities
       http://wef.org/publications/page wet.aspx?id-4647&paRe-ca§ion=Small%20Com
       munities
   •   Oklahoma Public Water Supply and Wastewater Planning Guides and Fiscal
       Sustainability Plan Edition
       http://www.owrb.ok.Rov/Ruides/
       http://www.owrb.ok.Rov/guides/WastewaterPlanninRGuideFSP.pdf
   •   Assessing Managerial Capacity Guide (from EPA Workgroup)
       http://water.epa.gov/tvpe/drink/pw5/smaHsv5tems/upload/epa816kl2004.pdf
   •   Pennsylvania Early Intervention/Early Distressed Community Program
       http://communitv.newpa.com/proRrams/early-intervention-proRram-eip/
       http://pelcentral.org/what-we-do/local-governnnent/earlv-intervention-profiram/
   •   State Clearinghouse Programs
       (WIRFC would need  to determine how many states have these and where they can be
       accessed)
   •   Guidebook to Sustainable Management of Rural and Small Systems 2013 (EPA et al)
   •   Workshop in a Box: Sustainable Management of Rural and Small Systems 2013 (EPA et
       al)
   •   Making a Difference for Rural and Small Utilities 201S (EPA/USDA)
   •   Rural Development's Sustainable Management tools
       httpV/www.rd.usda.Rov/proRrams-services/services/sustainable-manaRement-tools
   •   AWWA Small Systems Rates manual:
       http://www.awwa.org/store/productd eta i I. aspx?productid=674 2
   •   National Association of Regulatory Utility Commissioners
       http://www.naruc.orR/
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   •   Small Public Water Systems and Capacity Development
       http://water.epa.gov/tvpe/drink/pw5/snriall5V5tems/index.cfrn
   •   Government Finance Officers Association
       http://www.fifoa.org/
   •   Online resources and support for water and wastewater operators (Illinois)
       http://smaHwatersupplv.org/
   •   State Water Finance Program Guides
   •   Steve Grossman Study on Financing Teams

Some of the Greatest Concerns/Challenges for Small Systems

There are many concerns and challenges that small systems face in trying to obtain and
maintain  financial capacity. The EFAB compiled a list of what we felt were the biggest
challenges and concerns faced by small systems in this area.

   •   Adverse to taking on debt. Small systems may delay or avoid major system upgrades in
       order to avoid taking on debt. This practice may result in systems who wait too long to
       complete their infrastructure upgrades so that the project becomes an emergency and
       may cost several times more than a planned replacement. Also, many systems have
       become grant reliant, either delaying upgrades or waiting for systems to fail in order to
       qualify for emergency grant funding. Local and national funding agencies have become
       somewhat complicit by awarding funding based on emergencies that were due to lack of
       upkeep.

   •   Maximum debt Capacity reached.  In addition to being averse to taking on debt, some
       small systems have the problem of being at their maximum debt capacity. Systems in
       this situation have reached the limit of their ability to use debt to finance infrastructure
       projects and cannot use this mechanism for funding.

   •   Generally supports other aspects of municipal government. The water system revenues
       may be used to support other aspects of the government, such as other public works,
       rather than being a dedicated enterprise fund. This transfer may be done overtly or
       covertly.  Sometimes monies are directly transferred while other times the water funds
       may be used to pay salaries of individuals who work in more than one area of
       government. This practice is prevalent in small communities and severely restricts the
       community's ability to finance needed infrastructure,

   •   No financial expertise. Small utilities often lack financial expertise within their leadership
       structure. They may have no one  with experience in bookkeeping or financial matters.
       It  may be too expensive for them to hire such personnel, so they may depend on
       volunteers or less qualified individuals. Often they don't know where to turn to gain or
       acquire this expertise.

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•  No technical expertise. Similar to the situation with financial capacity, small systems
   often have few personnel and the personnel they have may be tasked with many
   functions other than water or wastewater. These systems are highly unlikely to have an
   engineer on staff or other personnel highly trained in the engineering aspects of the
   utility. Often they do not know where to turn to gain or acquire this expertise.

•  Lack of willingness to take pro-active action. Small systems often lack managerial
   competency and staffing consistency. They have part-time managers and finance staff
   which focus on the highest priority actions needed to keep the system running.

•  Lack of a separate finance utility (enterprise fund).  Enterprise funds can be established
   "for a utility, health care, recreational transportation facility." The fund allows the
   community/system to better account for the total cost of the service they are providing
   and how that service is being funded. Furthermore an enterprise fund allows the surplus
   or retained earnings generated by the system to remain with the system,

•  Need to raise rates. Small systems may understand that they need to raise rates,
   however, they may not have the financial capacity to hire a financial professional to
   conduct rate impact studies, trend analyses or develop additional data to determine
   what rates are appropriate to maintain and improve the system and develop a plan to
   obtain acceptance. A related issue to raising rates might be that the system's
   constituents are  aging on a fixed income and/or declining in numbers making raising
   rates difficult. Small communities also often lack the political will to raise rates.

•  Help with Raising Rates. When small systems choose to raise rates, they may have
   limited experience regarding the best way to do this. In many cases, they would benefit
   from  an outside source to assist them with the rate increase process and presenting this
   information as well as  the need to raise the rates to the public.

•  Ability to identify/define/educate/community what they should be doing. Since
   water/wastewater infrastructure is often unseen, it can be difficult for a system to
   educate their constituents regarding the need for infrastructure investments.
   Education/outreach is important when discussing potential rate increases or informing
   the public about  changes to the system. EPA has the "Value of Water" campaign which
   may be very helpful in this effort.

•  Some small systems are located in remote areas and rely solely on whichever
   engineering firm is willing to work with them.  Many small systems are located in areas
   that are serviced by only a small number of engineering firms, or possibly only one,
   making it very difficult to use a qualifications based selection process. Furthermore, if
   the same engineer both scopes out the project and  designs it, there can be a conflict of
   interest or a lack of a second opinion regarding the selected alternative.

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   •  WIRFC should define what is meant by success in the area of building financial capacity,
      including how it could be measured and how to know whether success has been
      achieved.

   •  WIRFC should look at lessons learned over the last ten years at both the state and local
      level in the area of building financial capacity. This wi!l provide guidance regarding
      where practice should move in the next ten years.

Phase III: Recommendations that can be implemented within the next 3 to 10 years.

   •  WIRFC should concentrate on hard or extremely complicated projects. EPA may be
      better situated to understand and navigate between states/systems especially when it
      comes to the possibility of restructuring. EPA may have a better handle on approaches
      that may be able to be used to address these issues. EPA could develop a series of case
      studies based on this work. It is anticipated that this work would be generated by the
      states and systems reaching out to EPA and asking for this assistance and is not
      intended to be the other way around {EPA generating this work on their own.)

   •  WIRFC may be able to be a clearinghouse for projects that are having trouble finding
      funding for a variety of reasons. Perhaps information sharing could be done by
      webinars, conference calls, and opportunities for sharing between states.

   •  One way to help systems understand how to define and measure success in the area of
      financial capacity is to have a mission statement and to understand, develop, and set up
      goals. WIRFC may be able to have a role in assisting systems in this effort. Goals may
      also tie to policies and procedures and WIRFC may also be able to promote the
      development of better policies  and procedures. For example, a policy could be put in
      place that some action occurs, such as an automatic rate increase, when a certain
      financial ratio is reached.

EFAB is suggesting that approximately  25 to 33% of WIRFC's focus needs to be on financial
capacity for small systems (we've defined as 10,000 population or fewer.) The extent of the
ability to provide these services will be directly related to the number of staff and the relative
importance WIRFC places on financial capacity. However, WIRFC may also be able to expand
this emphasis if it coordinates efforts with the EFCs, subcontractors, or other assistance
providers. WIRFC can use these recommendations to help determine what types of staff
(number, experience, expertise) they should hire in the future.
                                                                Publication tf830R16003

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   •   No affordable alternative.  Costs associated with adhering to public health and water
       quality standards can be challenging for small systems. Often there are few
       infrastructure alternatives which allow them to meet regulatory requirements and these
       alternatives may not be affordable. In some cases, the "best" alternative is some form
       of restructuring. Restructuring could involve contractual operations, a system lease, a
       circuit rider or a sale or other form of consolidation. Given the unpopularity of such
       approaches, many individuals and organizations are reluctant to advocate or even
       acknowledge their existence or their efficacy. Clearly, however, each of these options
       can address the small system challenges cited above.

   •   System size defeating economy of scales. Often the cost to operate small systems per
       unit volume of production is greater than larger systems. Capital and material costs
       may also be more due to the small qualities purchased.  Additionally, the fewer the
       customers (residential/commercial/industrial) the less the opportunity there is to
       spread out costs.

The EFAB Workgroup considered the possibility of EPA developing a tool similar to FED FUND to
introduce systems to funding sources.  We had several discussions regarding this possibility but
in the end decided it was not the correct tool or was not worth the resources that would need
to be expended. A tool of this type would require considerable work to maintain and update.
However, overtime, if WIRFC desired, a tool of this type could be developed.

Recommendations

What is the role of WIRFC?

The EFAB, in considering the nature of the recommendations to WIRFC, determined that a
phased approach would be best. Some recommendations are items that WIRFC would be able
to implement right away, while others would take more time, and possibly, additional staff.
WIRFC can also look to outside resources, such as the Environmental Finance Centers (EFCs),
who can help implement some of these recommendations. In addition, if WIRFC served in a  role
of coordinating different TA providers (e.g., National Rural Water Association,  Rural Community
Assistance Program, EFCs, and others} it would be able to further the reach of their services.

The recommendations will be split into three phases as shown below. The recommendations
would involve providing services via acting as a repository of information, contracting out
services,  partnering with others, and direct involvement  of WIRFC staff.

Phase I: Recommendations that can be implemented immediately

   •   WIRFC should maintain a list of resources and tools, both national and  by state, for
       financial capacity. The list should be updated as new tools are developed and when
       changes have occurred. The list should be readily available to states and small systems.
       The list of resources should include a description  of what the resource  is, who could

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      benefit from it and how it can be used by a small system. EFAB recommends that WIRFC
      concentrate on resources related to the need to increase rates, the process of
      increasing rates, and communicating rates as an initial starting point.

   •  WIRFC should be a coordinator and/or a promoter of the "Value of Water" campaign
      and ensure that states and localities are aware of the availability of these resources.

   •  WIRFC should match the resources to the concerns/challenges to help systems connect
      resources to their needs. For example, if your challenge is "Need to Raise Rates," tools
      and resources that assist with rate setting would be appropriate for this purpose. Some
      challenges may have multiple resources while some resources may fit multiple
      challenges. A simple chart or matrix may work well for this purpose or a list of resources
      could be developed with a description of the resource followed by the list of
      concerns/challenges that fit that resource. WIRFC should examine whether a tool, such
      as Gl Wiz (Green Infrastructure Wizard) could be used to improve access to the
      resources.

Phase II: Recommendations that can be implemented within the next 2 to 4 years.

   •  WIRFC should consider how the resource information would be structured including
      recommendations on how a utility would use the resource. WIRFC could use quotes
      from utilities who have found the resources to be beneficial to help promote the use of
      the resource list.

   •  The resource list could include a section in which a utility could leave a comment
      indicating whether the resource was helpful or not and possibly why it was or was not
      helpful.  This information could be used to help  improve resources for the future.

   •  WIRFC should act as a clearinghouse for work that the state SRF's or regulatory agencies
      are doing that are  positively impacting financial  capacity. For example,  Montana has a
      requirement that systems have to raise their rates to a certain level in order to be
      eligible for funding. Providing these types of examples from state to state will help
      improve financial capacity. As part of this effort  WIRFC could share coordination models
      that are  used by states with other states. In addition, WIRFC could host a sharing forum
      for states and regions or sit in periodically on sharing forums coordinated by states or
      regions.

   •  WIRFC should facilitate a peer to peer exchange in which water utilities seeking
      assistance can be paired up with water utilities who would  be able to help that utility
      with the issue they are facing. The peers do  not need to be in the same state or even in
      the same region if hosted by WIRFC.

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