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2. . Overview. Perspective: Market Forces and Financial CapabilityWhy does Financial Capability Matter?The CSO LTCP/FCA dance (abbreviated version)Brief Overview of the 1997 EPA FCA GuidanceKey Financial Capability IssuesTwo General Strategic Financial ApproachesMaximizing Your Community's Lev
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1. 1
Financial Capability and Market Forces Affect CSO Decision-Making
Lisa Hollander, NEORSD
Paul Calamita, AquaLaw
Chicago – April 17, 2008
2. 2 Overview Perspective: Market Forces and Financial Capability
Why does Financial Capability Matter?
The CSO LTCP/FCA dance (abbreviated version)
Brief Overview of the 1997 EPA FCA Guidance
Key Financial Capability Issues
Two General Strategic Financial Approaches
Maximizing Your Community’s Leverage
3. 3 Perspective on Market Forces and Financial Capability Great Time to Negotiate Sewer Overflow Control Programs:
Lousy economic times – everyone’s eyes should be open about LTCP commitments
No one should be making “wishful” commitments or commitments that are known to be problematic but hope the agencies will be reasonable with the next Mayor who will actually have to do all of this….
4. 4 Great Time to Negotiate…. Very sobering for everyone regarding financial ability
Election year on top of it with new administration on the way
BUT EPA Enforcers (and especially DOJ) still want to treat everyone the same - even if it is a lousy deal
20 years; consent decree strait-jacket, level of control beyond public benefit, etc.
EPA enforcement continues to run the national CSO program
5. 5 Great Time to Negotiate Green infrastructure = opportunity to shake up the status quo on acceptable LOC, schedule, and performance measures
Green even may give you access to OW instead of only OECA
Model “Green” LTCPs in the works….
6. 6
Why Financial Capability Matters
7. 7 Why Financial Capability Matters CSO communities need to understand what they really can afford in terms of CSO control
Especially what they can afford to commit to in a federal consent decree – which leaves little room for easy renavigation/extending of schedules
Necessary financial projection exercise
8. 8 Financial Capability Matters Current budget and needs is the starting point
Capital needs to keep the system running for the next 20 years or more
Appropriate level of O&M
New capital CSO controls
O&M associated with new CSO controls
Depreciation (or just stay on the treadmill)
Funding strategy
9. 9 Funding Strategy/Approach Funding strategy
Rates (Pay-Go)
Debt
Combination: PayGo/Debt
Lifeline rates (implications for FCA)
Increasing overall capability under EPA’s guidance (maybe)
Legality
Political considerations
10. 10 How the Regulators Seek to Use YOUR Financial Capability Some EPA enforcers view FC as the ONLY thing that matters in determining your level of control and schedule
Some Enforcers view their role as getting your community to
spend as much as you can afford to spend
as expeditiously as possible (this is right out of the CSO Policy)
11. 11 How the Regulators Seek to Use YOUR Financial Capability That is one way they believe they can say they treated everyone the same (even if poorly)
But, CSO Policy calls for community specific solutions
cost-benefit/knee-of-the-cost-curve analyses
These can be viewed using a wide range of factors with the “knees” falling at widely differing levels of control
Schedules are often affected by local factors and other local community development initiatives
12. 12
Overview of the LTCP/FCA Dance
13. 13 LTCP/FCA Dance DOJ/EPA/State opening offer:
15 years
4-6 overflow events in a typical year
Implemented via federal consent decree
Strict performance measures
Very limited ability for community to change course
14. 14 LTCP/FCA Dance Communities complete the FCA guidance
Increasingly with outside professional assistance
EPA also using outside experts
Rarely do both sides agree to a “T”
Get close enough to turn your negotiations to the “deal”
15. 15 LTCP/FCA Dance If agencies view your FC as being strong
They will aggressively seek to extract everything they can get from you over the shortest time period
If your FC may be weak (or can be portrayed as weak) you should be able to use that to seek greater flexibility in terms of (1) overall LOC, (2) how that LOC is achieved, and (3) schedule
16. 16 LTCP/FCA Dance Vast majority of cases reach agreement
Some communities have LTCP/Consent Decree regret over time
A few recent ones even before the ink is dry
Some cases do not reach agreement….
CSO conference 2007: “A federal judge is a beautiful thing….”
17. 17
Brief Overview of the 1997 FCA Guidance
18. 18 EPA Financial Capability Guidance
Residential Indicator
and
Financial Indicator
Inform
Matrix to assess CSO burden
19. 19 Residential Indicator
Annual household wastewater cost divided by number of households
How will program (and other wastewater) costs impact households?
20. 20 Residential Indicator Total Wastewater Costs
Residential Share
Number of residences
Cost per Household (CPH)
Median Household Income (MHI)
Residential Indicator: CPH as a percent of MHI
21. 21 Financial Indicator Capability of community to pay for control program and related costs
Six indicators across three categories:
Debt: Bond Rating, Debt as % of Property Value
Socioeconomic: Unemployment, MHI
Financial: Revenues as % of Property Value, Collection Rate
22. 22 Financial Indicator Additional criteria often advanced by community to better capture local conditions and trends
Examples later….
FI Range
Weak
Mid-range
Strong
RI/FI Matrix to determine level of burden
23. 23 Financial Capability Matrix
24. 24 Financial Indicator FCA is intended as a snapshot
This could be favorable in poor economic times
But could badly miss the mark if trends are not assessed….
25. 25 Financial Indicator
See other detailed financial presentations from CSO 2006 and 2007 Workshops for more details
www.nacwa.org
www.wetweatherpartnership.com
26. 26
KEY FCA Factors/Considerations
When Negotiating Your FC
27. 27 Residential Indicator What costs to include
All known/projected wastewater
Storm water?
NDPES
Flood control
SWAG for additional controls on horizon during LTCP implementation period?
Nutrient control?
28. 28 Residential Indicator Financing scenarios have a BIG impact:
Debt financing (bonding)
versus PAYGO
Who decides (locality; input from Funding Task Force, others?)
EPA pushing PAYGO over “generational” equity financing
29. 29 Residential Indicator For MHI and Number of Households: Service area or City limits?
Key issue for many systems given greater suburban MHI….
Get around this by allocating costs between wholesale service area and retail City
If service area, do service agreements allow you to allocate to service area.
30. 30 Residential Indicator Establishing number of households
Overall number
Remove unsewered
Address multiple units
End at number of households served
Based on customer records and census
Survey….
31. 31 Residential Indicator
32. 32 Residential Indicator Establishing average monthly household consumption for residential indicator – what is your system’s average?
How do you do this?
National survey/average
Statewide
System-specific?
33. 33 Residential Indicator CCF = 748 gals (MCF = 1000 gals)
6 CCF = 4,500 gals
6.7 CCF = 5,000 gals
10 CCF = 7,500 gals
34. 34 Residential Indicator Calculating residential share
Current
What about projected?
Business/residential trend
Reaction to major utility revenue needs passed along
When management attention is applied
Wet industries – leave or direct discharge?
35. 35 Residential Indicator How to calculate MHI?
RI = CPH/MHI
MHI trends?
Significant if not keeping pace with CPI!
Declined/Declining population?
Fewer people to pay for rehab of existing system, nevermind new infrastructure
36. 36 Residential Indicator EPA MATRIX: is the low, medium and high burden range correct?
Compare State burden thresholds
VA 1.25% MHI
DE 1.25% MHI
WV 1.25% MHI
37. 37 Financial Indicator Are all six FCA factors relevant/appropriate for your system
Consider bond rating factor
Invalid criteria as EPA has set it up
Recalculate without this factor
38. 38 Financial Indicator Expanded criteria to address State and local issues
Indiana per capita burden scale
Other Factors available or that can be generated?
VA Fiscal Stress Index?
Others
39. 39 Other Key Issues
By the way, What happens when necessary rate increase gets “trimmed”
Reduce O&M?
40. 40
TWO STRATEGIC FCA APPROACHES
41. 41 Option 1: Play the EPA FCA Game Guidance is flawed in the agency’s favor
Nevertheless, the Projection game can make the guidance work for some
Multiple factors – use conservative assumptions for each – these multiple layers of conservatism add up to make the guidance work for some
Add in State/local factors to better tailor the guidance to your community
42. 42 Option 1: Play the EPA FCA Game NB: Not useful for what you really can afford
EPA consultants can be helpful to your case….
Get a written copy of their analysis of your FCA (often it is a complete redo)
If EPA Guidance works (puts you in Heavy or borderline heavy burden) that may be enough FCA analysis – turn to the “DEAL”
Schedule and LOC
43. 43 Option 1: Play the EPA FCA Game Even if you disagree with agencies over FCA, if you reach agreement on LOC and schedule, include FCA in your LTCP
Some view this as a required element of an approvable LTCP
May help agencies approve the “deal” even if they disagree with the FCA
44. 44 Option 2: Decide on What Makes Sense for Your Community If you either don’t have the patience for Option 1 or it does not work for your system
Ignore the guidance and simply decide what makes sense for your community in terms of LOC and schedule and press for it.
Rate climb
Rate ceiling
45. 45 Option 2: Decide on What Makes Sense for Your Community
Regarding rates, know where the rest of the herd is – there are good reasons they are where they are
Credit to Black & Veatch for the following:
46. 46 Option 2: Decide on What Makes Sense for Your Community
47. 47 Option 2: Decide on What Makes Sense for Your Community Schedule
Based on financial capability
Constructability/Implementability
Integration with other community development projects/programs
Other factors (construction premium due to other development)
48. 48 Option 2: Decide on What Makes Sense for Your Community Proceed to implementation to maintain the moral high ground (not stalling, making progress, etc)
Plan aspects that are not LOC dependent
Or, if you really want to send a message, start making irreversible investments in your “right plan”
That will put maximum pressure on the agencies to agree or sue
49. 49
Maximizing Your Community’s Leverage
50. 50 Maximizing Your Leverage Say “no” to develop and implement CD. Only agree to implement the plan you know
negotiate LTCP and consent decree in parallel
EPA then motivated to be as reasonable as they can in order to get a deal by consent
Otherwise, EPA goes back to square one and has to file suit
You have made additional progress during the interim
But note tolling agreement
51. 51 Maximizing Your Leverage More leverage the better run your system is
Have your CSO LTCP development authorized in your NDPES permit to avoid being in violation regarding overflows
Same for your “approved” NMC plan
Minimize/Attack chronic wet weather SSOs?
Minimize treatment plant permit violations?
52. 52 Maximizing Your Leverage Well run utility is a tough nut for EPA/DOJ
Know your “upset” point – what you are willing to do by consent – anything beyond that, regretfully say “no”
53. 53 Maximizing Your Leverage Take the moral high ground by advancing your program
Early action projects
Going forward with LTCP components during negotiations or if negotiations break down
Negotiate hard – especially as benefits diminish compared to costs/lost social investment opportunities
54. 54 Maximizing Your Leverage Having your plan reflect local stakeholder input is the gold standard against the agencies
Elevate to EPA/DOJ/State management – that is where the best deal lies
Just being seen trying is worth the cost….
55. 55
Questions?