HomeMy Public PortalAboutExhibit RC 112 - Financial Capability Assessment Framework for Municipal Clean Water Act Requirements of the United States Environmental Protection AgencyUNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON , D .C. 20460
NOV 2 4 20 14
MEMORANDUM
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SUBJECT: Financial Capability Assessment Framework for Mu nicipal Clean
Water Act Requirements
FROM: Ken Kopocis ;(~/(~
Deputy Assistant Administrator
Office of Water (OW)
Cynthia Giles
Assistant Admi 1U<tt.1:W11 r
Office of Enforce and Compliance Assurance (OECA)
TO: Regional Administrators
Reg ional Water Division Directors
Regional Enforcement Division Directors
In May of 2012, we distributed the Integrated Municipal Stormwater and
Wastewater Planning Approach Framework (Integrated Planning Framework).
Since that time, we have made solid progress in promoting integrated approaches to
meet Clean Water Act (CWA) obligations. Thanks to the hard work of regional and
headquarters staff, and the active engagement of cities, many of our enforcement
settlements now embody integrated planning principles in the structure and
schedule for injunctive relief or explicitly in clude integrated planning as part of the
settlement. We have also seen an increasing number of municipalities and local
authorities moving towards developing integrated plans to support the
development of their NPDES permits. We have been working with EPA Regions and
States to assist ~n that process.
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As the implementation of the Integrated Planning Framework has progressed and
evolved, we have been actively engaged with stakeholders on ways to build on our
efforts. Those discussions found a natural focus on issues related to the financial
capability of permittees working toward our shared goals of clean water. On e
consistent theme that emerged was the benefit of more clearly articulating the
flexibility available under the existing guidance. EPA continues to be guided by the
1997 t•combined Sewer Overflows -Guidance for Finan cial Capability Assessment
Internet Address (URL) • http://www.epa.gov
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2 and Schedule Development” (FCA Guidance) that provides an aid for assessing financial capability as part of negotiating schedules for implementing CWA requirements for municipalities and local authorities. The FCA Guidance also encourages permittees “to submit any additional documentation that would create a more accurate and complete picture of their financial capability” that may “affect the conclusion” of the analysis described in the guidance. As part of EPA’s commitment to implementing CWA objectives in a sustainable manner, we have developed the attached “Financial Capability Assessment Framework” (FCA Framework). The FCA Framework has been greatly informed by the comments and experiences of a variety of stakeholders and financial experts. The FCA Framework identifies the key elements EPA uses in working with permittees to evaluate how their financial capability should influence schedules. In addition, the FCA Framework provides examples of additional information that may help some communities provide a “more accurate and complete picture” of their financial capability as is envisioned in the FCA guidance. We will be posting the FCA Framework to our website as an important next step in the pursuit of integrated planning approaches and in our ongoing work with municipalities and local authorities to achieve our shared goals of protecting our nation’s waters. While this memorandum releases the FCA Framework, we know that we will continue to learn and refine our understanding of the issues surrounding financial capability assessments as we use it moving forward. We will continue to look for ways to improve the Framework as we gain new insights and additional information. We look forward to continue working with the Regions on these important issues and encourage you to contact Deborah Nagle, Director, Water Permits Division (nagle.deborah@epa.gov) and Mark Pollins, Director, Water Enforcement Division (pollins.mark@epa.gov) with any questions you might have.
Attachment cc: Regional Permit and Enforcement Liaisons
FINANCIAL CAPABILITY ASSESSMENT FRAMEWORK
November 24, 2014
Purpose
The Environmental Protection Agency (EPA) is committed to working with state and local
government partners to assist local municipalities and local authorities to meet Clean Water Act
(CWA) obligations in a manner that recognizes the unique financial challenges that local
jurisdictions face. This financial capability assessment framework is intended to provide
additional examples and greater clarity on the flexibilities built into existing guidance that local
governments or authorities can use in assessing their financial capability, and the relationship
between that assessment and consideration of schedules for permit and consent decree
implementation. This framework builds on the progress already made in the May 2012
“Integrated Municipal Stormwater and Wastewater Planning Approach Framework,” and the
experience gained from talking with communities about their financial capability in actual, on
the ground circumstances. Integrated Planning has been helping in identifying a permittee’s
relative priorities for projects based on the relative importance of adverse impacts on human
health and water quality and the municipality’s financial capability.
Background
Local governments and authorities want to provide clean water for their communities, and they
play an essential role in providing wastewater and stormwater infrastructure and services for
their citizens, businesses and institutions. These municipal functions have been an important part
of implementing the CWA to protect public health and improve water quality in streams, lakes,
bays, and other waters nationwide. However, significant water quality challenges remain. Public
officials remain strong supporters of the CWA goals and objectives by directing the public
investments that are necessary to comply with the Act and to provide clean water for their
citizens. Many local governments face complex water quality issues that are heightened by the
need to address population growth or decline, increases in impervious surfaces, source water
supply needs, and aging infrastructure. In recent years, many local governments and authorities
have increased investments in their wastewater and stormwater infrastructure through capital
projects to rehabilitate existing systems, improve operation and maintenance, and address
additional regulatory requirements. As programs are implemented to improve water quality and
attain CWA objectives, many state and local government partners find themselves facing
difficult economic challenges with limited resources and financial capability. We recognize these
challenging conditions and are working with states and local governments to develop and
implement new approaches that will achieve water quality goals at lower costs and in a manner
that addresses the most pressing problems first.
Long-term approaches to meeting CWA objectives should be sustainable and within a local
government or authority’s financial capability. The financial capability of these entities and other
relevant factors are important to consider when developing appropriate schedules for
infrastructure projects in permits or enforcement actions to help protect human health and the
environment. EPA’s financial capability assessment guidance, “Combined Sewer Overflows:
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Guidance for Financial Capability Assessment and Schedule Development” (FCA Guidance)
(EPA 832-B-97-004) provides a reference point to aid all parties in negotiating reasonable and
effective schedules for implementing CWA requirements, and the flexibility to take into account
local considerations that may not be fully captured by the approach detailed in the guidance. As
described in more detail in this Framework, the guidance provides for consideration of the
impact on residential rate payers and the financial capability of the permittee using a suite of
indicators, as well as allowing schedules to be responsive to circumstances unique to that
community, while advancing the mutual goal to protect clean water. The FCA Guidance
encourages permittees to provide any additional information that would be useful in
understanding those unique or atypical circumstances and how they may affect CWA schedules,
so that all relevant information presented by a community can be taken into account to ensure
that a full understanding of financial capability guides the development of schedules.
Financial Capability Assessment
The following are key elements of EPA’s approach to the evaluation of the financial capability
of municipalities to inform implementation schedules, both in permits and enforcement actions.
The elements are fully compatible with the FCA Guidance, integrated planning approaches, and
the flexibility embodied in both.
1. The 1997 FCA Guidance identifies a valuable assessment that provides a common
basis for financial burden discussions between the permittee, EPA and state NPDES
authorities. Permittees have the option of submitting additional information that
would create a more accurate and complete picture of their financial conditions. The
financial capability assessment described in the 1997 FCA Guidance identifies
information that provides a basis for a general comparison of financial conditions
between communities across the country and provides a consistent assessment of basic
financial indicators as part of the overall analysis. Additional information that the
community provides on its unique financial circumstances will be considered so that
schedules take local considerations into account. Where appropriate, this information can
result in schedules that are different than the schedules suggested by the baseline analysis
suggested in the 1997 FCA Guidance.
2. Financial capability is on a continuum. Although the FCA Guidance approach
categorizes financial burden as “high, medium, or low,” this does not mean that schedules
will be rigidly set according to the break points between the categories. For example, two
communities whose total residential share of costs are 1.1% and 1.9% of median
household income (MHI) are both categorized in the FCA Guidance as having a
“medium” burden for the Residential Indicator (RI). All other things being equal, the
appropriate schedules for those communities are likely to be different. Similarly, all other
things being equal, two communities whose residential share of costs are 1.9% and 2.1%
of MHI would be more likely to have similar overall compliance timeframes, even
though one community is ranked as having a “medium” burden and the other as having a
“high” burden. Finally, additional information submitted by the community may affect
the length of the schedule regardless of where the community is on the “high, medium,
and low” continuum.
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3. EPA will consider all CWA costs presented in the analysis described in the FCA
Guidance. EPA originally published the FCA Guidance to assist in negotiating schedules
for communities with combined sewer systems, as these typically represent the most
expensive CWA compliance issues. The FCA Guidance has since been recognized as
equally suitable for considering other municipal CWA obligations as well, such as those
related to separate sanitary sewer systems. With the release of EPA’s 2012 Integrated
Planning Framework, the Agency clarified that the financial capability analysis could
include costs of: stormwater and wastewater; ongoing asset management or system
rehabilitation programs; existing, CWA related capital improvement programs; collection
systems and treatment facilities; and other CWA obligations required by state or other
regulators. Where the costs of multiple CWA obligations are included in an FCA, each of
those costs should be enumerated separately, so as to provide an understanding of how
each contributes to the overall analysis.
4. When presented, Safe Drinking Water Act (SDWA) obligations will be considered,
primarily as additional information about a permittee’s financial capability. EPA
believes that the SDWA obligations of a community can be an important consideration in
establishing schedules for implementing integrated plans. EPA recognizes that both clean
water and drinking water costs are often covered through charges on a single rate base.
One component of a financial capability assessment includes an evaluation of the
residential indicator that is based on only CWA costs as this best reflects the intended use
of the metric and allows for comparisons with other communities. Drinking water costs
may be reflected in other components of a financial capability assessment. For example,
the financial capability indicator includes consideration of bond rating of the entity that
issues debt to fund the permittee’s capital project, which can be impacted by both
wastewater and drinking water obligations for a permittee that provides both services. If a
community has incurred general obligation debt associated with the SDWA, these
obligations would be considered in the indicator “overall net debt as a percent of full
market property value.” In addition, as discussed below, additional information, including
information regarding drinking water obligations, may be submitted for consideration in
analyzing financial capability. To the extent that drinking water costs are not fully
addressed by these other components, communities are encouraged to provide additional
information about these costs.
5. Communities should demonstrate how the CWA work included as costs in the
financial capability assessment will be implemented, including appropriate
assurances that those expenditures will be made.
The Financial Capability Assessment Guidance and Examples of Additional Information
that are Relevant to a Consideration of Financial Capability
The specific approaches laid out in the FCA Guidance provide a good foundation for the
assessment of financial capability. As stated in the guidance and outlined in this Framework,
communities can build on that foundation to include additional relevant information. The FCA
Guidance presents a two-phased approach to assessing overall financial capability. The first
phase assesses the impact on residential customers, and the first step is to calculate the portion of
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the annual costs that would be borne by residential households for both current and projected
Clean Water Act related expenses. The residential share of the annual costs of CWA obligations
is then compared to the MHI of the service area. MHI is calculated using current census data and
may be adjusted based on the current Consumer Price Index. Finally, the CWA compliance costs
per household are divided by the adjusted MHI to calculate the residential indicator (RI). The
FCA Guidance then identifies various ranges of RI scores as “low, mid-range or high” levels of
burden. In situations where there are unique circumstances that would affect the conclusion of
the first phase of the assessment, additional information documenting unique financial conditions
may be submitted.
The second phase of the financial capability analysis assesses the financial strength of the
permittee. Six indicators are used to evaluate the debt, socioeconomic and financial conditions
that affect a permittee’s financial capability to implement CWA controls necessary for
compliance with the Act. These include bond ratings, overall net debt as a percent of full market
property value, unemployment rate, median household income, property tax revenue collection
rate, and property taxes as a percent of full market property value. In the Guidance, EPA has
established benchmarks for each of the six indicators showing whether the indicator reflects a
“weak”, “mid-range”, or “strong” financial capability. These benchmarks are used to generate an
overall score of a permittee’s financial capability.
The residential indicator calculated in phase one and the permittee capability indicators analyzed
in phase two are evaluated together in a Financial Capability Matrix to assess the level of
financial burden. The level of burden is then used to inform discussions to establish an
appropriate schedule for meeting CWA obligations in permits and enforcement actions. EPA
uses these indicators, including the annualized costs as a percent of MHI, to help assess when
costs are reaching levels that may represent a high burden on ratepayers and that longer
compliance timeframes are likely to be appropriate to spread the cost over a longer period. EPA
does not view or use the Financial Capability Matrix as a rigid metric that points to a given
schedule length or threshold over which the costs are unaffordable.
Permittees have suggested and the FCA Guidance recognizes that the two step analysis may not
provide a complete representation of financial capability. As noted above, other relevant
financial or demographic information presented that illustrates the unique or atypical
circumstances faced by a permittee will also be considered in evaluating financial capability. The
presentation of additional information can be very valuable in analyzing financial capability, and
the submission of this type of information has become fairly common practice. For example, in
many consent decree negotiations, additional information has resulted in the establishment of
schedules that differ from the ones suggested by the baseline analysis described in the FCA
Guidance.
Some examples of information that may be relevant in negotiating schedules to be included in
permits and consent decrees are given below. In order for such information to adequately
illustrate that a permittee’s situation is atypical, EPA encourages permittees to compare any
additional information on their circumstances to national averages or to that of other permittees.
The examples given below are not intended to be a complete list, nor a list of factors that will be
relevant in every community. Rather it provides an illustration of information that may prove
useful in some instances.
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Examples of Information Related to Residential Impacts:
1. Income distribution by quintile, geography or other breakdown, illustrating how
income distribution in the service area differs from comparable data on the
national level or for similar cities.
2. Where cities have adopted differential rates for low income customers, the
income distribution that led to that rate structure.
3. Information about service area poverty rates and trends.
4. Projected, current and historical sewer, and stormwater fees as a percentage of
household income, quintile, geography or other breakdown.
5. Information on sewer and water usage for various classes of ratepayers or by
type of dwelling unit.
6. Information on the percent of households who own versus rent.
Examples of Information Related to Financial Strength:
1. Historical population trends or population projections.
2. Service area unemployment data and trends, or other labor market indicators,
including unemployment on an absolute basis.
3. Rate or revenue models, including dynamic financial planning models showing
the projections of impacts over the program period. All revenue sources tied to
CWA obligations may be included as appropriate.
4. Rate determination studies used to develop and support recent rate increases.
5. Data and trends on late payments, disconnection notices, service terminations,
uncollectable accounts, or revenue collection rates.
6. Historical increases in rates or other dedicated revenue streams.
7. State or local legal restrictions or limitations on property taxes, other revenue
streams or debt levels.
8. Other costs or financial obligations, such as those that relate to drinking water or
other infrastructure, that significantly affect a permittee’s ability to raise revenue.
9. Circumstances that may affect a permittee’s bond rating. For instance, incurring
debt beyond certain thresholds may negatively impact the permittee’s bond
rating, thus reducing the ability to raise capital.
10. Financial plans that show the implications of incurring additional debt for a
permittee’s ability to secure financing, including projections of metrics such as
debt ratios, debt service coverage, debt per customer, days of cash on hand, days
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of working capital and other metrics used by rating agencies. Such data should
be benchmarked to metrics such as rating agency medians and relative to similar
entities. This will be especially relevant where the permittee does not have a
bond rating.
11. Extraordinary stressors such as those from natural disasters, municipal
bankruptcies, unusual capital market conditions, or other situations which impact
a permittee’s ability to raise revenue or acquire needed financing. When such
stressors occur, they may also provide support for making changes to existing
schedules.