Adaptive Financial Management - Wet Weather Partnership

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Adaptive

Financial Management:

Defining Consent Decree Requirements
Within Community Financial Capabilities

Eric Rothstein, CPA

Galardi Rothstein Group

April 23, 2009

Presentation Outline


Lessons of recent experience


Market volatility is normal


EPA guidance inadequacies


Adaptive financial management


Utility financing imperatives


Rethinking financial capability


Consent Decree implications


Structure and schedule


Monitoring and enforcement



2

Presentation Outline


Lessons of recent experience


Market volatility is normal


EPA guidance inadequacies


Adaptive financial management


Utility financing imperatives


Rethinking financial capability


Consent Decree implications


Structure and schedule


Monitoring and enforcement



3

Lessons of recent experience:

Market volatility is normal

Source: U.S. Department of Energy’s Energy Information Administration

Lessons of recent experience:

Market volatility is normal

Lessons of recent experience:

Market volatility is normal

Concrete

Reinforcing

Steel

Building

Steel

Copper

PVC Pipe

Fuel

Formwork

Skilled

Labor

Increase: 2000
-

2006

$/cy

$/ton

$/ton

$/ft

$/ft

$/gal

$/msf

$/hr

65

450

350

2.35

12.00

1.50

435

20

30%

61%

114%

102%

55%

100%

45%

27%

Lessons of recent experience:

Market volatility is normal

Lessons of recent experience:

EPA guidance inadequacies

Residential Indicator Calculation











Guidance Line No.

Current WWT Costs


(O&M and Debt Service)




102

Projected Annual O&M expenses






103

Projected Debt Service for Program CIP





104

Projected WWT & Program CIP Costs





105


Total Current & Projected Costs



106


Residential Share of WWT Costs




107

Total Number of Households in Service Area



108

WWT Costs Per Household






109


Census Year Median Household Income

(MHI)



201

MHI Adjustment Factor





202

Adjusted MHI







203


Annual WWT and CSO Control Cost Per Household



204


Residential Indicator:

Annual WWT & CSO Cost Per Household as a Percent of MHI



205

9

Lessons of recent experience:

EPA guidance inadequacies


Absence of financial planning and
appropriate provision for capital financing


Exclusion of other water quality investments


No framework for consideration of additional,
site specific, factors’


No guidance on how schedule relief
determined

No major metropolitan
permittee has a ‘high
burden’ per EPA

Several permittees have
developed CIPs with
schedules > 20 years

10

Lessons of recent experience:

EPA guidance inadequacies


Current financial capability assessment
methodology is
fundamentally

flawed


Enforcement of sub
-
optimality


Incremental adjustments insufficient


NACWA guiding principles highlight:


primacy of local factors in determining financial
capabilities


Need for a holistic perspective consistent with
EPA’s evolving regulatory approach


Consent Decree negotiations / debate has
devolved to nonsensical manipulations of
workbook formulations


Blindness to common sense meaning of
financial capability

Presentation Outline


Lessons of recent experience


Market volatility is normal


EPA guidance inadequacies


Adaptive financial management


Utility financing imperatives


Rethinking financial capability


Consent Decree implications


Structure and schedule


Monitoring and enforcement



11

Adaptive financial management:

Utility financing imperatives


Revenue sufficiency



O&M expenses



Capital financing


Debt / equity financing



Other uses of funds (taxes, reserves, etc.)


Fulfill fiduciary responsibilities / public acceptance


Stewardship of public funds / transparency


Attract capital on favorable terms


Bond ratings / debt service coverage


Flexibility


Ability to deliver projects / services
reliably
in dynamic
environment


Adaptive financial management:

Utility financing imperatives


Dynamic environment:


Revenue effects of economic
downturn, drought, etc.


Personnel costs (OPEB)


Materials and supplies cost
escalation


Credit market conditions


Construction cost escalation


Asset management needs


Adaptive financial management:


Rethinking financial capability

102

Current WWT Costs (O&M and Debt Service)

$100,000,000

103

Projected Annual O&M expenses

$5,000,000

104

Projected Debt Service (4.5%) for CIP (
incl
:
CSO, SSO & Sys
Improv
)

$161,152,800

105

Projected WWT & Program CIP Costs

$166,152,800

106


Total Current & Projected Costs

$266,152,800

107

Residential Share of WWT Costs

65.00%

108

Total Number of Households in Service Area


225,000

109

WWT Costs Per Household

$770.00

201

Census Year Median Household Income

$40,000

202

MHI Adjustment Factor

1

203

Adjusted MHI

$40,000

204

Annual WWT and CSO Control Cost Per
Household as % of MHI

1.93%

Financial Capability Assessment Example

LTCP


Financial Capability Metric Summary


CSO Program Costs



$1,500M

SSO Program Costs



$ 800M

System Improvements



$ 325M

Asset Management




$ 500M

Stormwater





$ 375M


Total





$3,500M


FCA Interest Rate





4.5%

Adaptive financial management:


Rethinking financial capability

Adaptive financial management:

Rethinking financial capability


What the EPA guidance and enforcement posture
gets right:


Claim on MHI is one reasonable metric


Schedule relief, if substantive, mitigates burden


Service is generally under
-
priced


Limiting the merit of claims for subsidy / support


Yet, a static workbook approach to assessment
denies that financial capability:


changes with changing conditions


reflects “local” factors


must be considered holistically



Adaptive financial management:

Rethinking financial capability


What do you consider when determining to
purchase a new car, boat, second home?


Can you define a fixed schedule today?


Would you commit to purchases without considering
other pending claims on income?


How do you weigh needs of less fortunate?


Would such a schedule need to be adjustable to
accommodate salary changes, price trends of the
planned purchases, etc?


Would you plan to purchase a 2009 model car
irrespective of technology advances coming later?


Relevant principles derive from common sense
perceptions based on personal experience


Presentation Outline


Lessons of recent experience


Market volatility is normal


EPA guidance inadequacies


Adaptive financial management


Utility financing imperatives


Rethinking financial capability


Consent Decree implications


Structure and schedule


Monitoring and enforcement



18

Consent Decree implications:

structure and schedule


Based on common sense approach to financial
capability assessment:


Ramp rates to an agreed upon MHI figure

based on
local circumstances and funding mechanisms


Set a program investment level based upon capital
financing enabled by ramped rates


Define priorities for water quality investment based on
projected performance of improvements


Develop program schedules based on forecast of
capital financing enabled by ramped rates


Schedules are accelerated / decelerate based on readily
monitored variances from forecasted costs, MHI, etc.


Consent Decree implications:

enforcement and monitoring


Enforcement: re
-
thought approach characterized
by:


Reliance on available data


Transparency


Consistency across permittees


Require expeditious schedule


Ensure high
-
priority investments in water quality


Monitoring: re
-
thought approach addresses
scheduling protocols absent in current guidance


Adjust scheduling based on changes in costs, MHI

Consent Decree implications:

Atlanta: High Burden denied


$3.2 Billion CD/FACD agreed in 1997/98


Fixed milestones: CSO by 08, SSO by ‘14


Intervening period:


2004: 89% system rate increase by 2008


2005 MOST to eliminate 2
nd

year of rates


2007 Drought
-
response water use restrictions


$45 million/yr estimated revenue effect


2008 89% rate increase by 2012


NOW: Average bills above 2% MHI


Projecting additional near 50% increase by 2014


2016 MOST renewal periods completed

Conclusions


Volatility and uncertainties characteristic


EPA guidance is fatally flawed though some
elements are useful


Utility finance imperatives are straight
-
forward and
relatively transparent


Financial capability requires rethinking:


Adaptive management is applicable for financial matters
as for watershed management


Adaptive management akin to personal approach to
financial capability


Consent Decrees may be readily written and
enforced under adaptive management approach



Adaptive

Financial Management:

Defining Consent Decree Requirements
Within Community Financial Capabilities

Eric Rothstein, CPA

Galardi Rothstein Group

April 23, 2009