Financial Capability and Market Forces Affect CSO Decision-Making Lisa Hollander, NEORSD Paul Calamita, AquaLaw Chicag

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?