Economic Guidance for Water Quality Standards 1-1 ECONOMIC GUIDANCE FOR WATER QUALITY STANDARDS WORKBOOK

1. INTRODUCTION
As presented in the Water Quality Standards Regulation, economic factors are taken into consideration at various points in the process of setting, enforcing, or changing Water Quality Standards This guidance is presented to assist States and applicants in understanding the economic factors that may be considered, and the types of tests that can be used to determine if a designated use cannot be attained, if a variance can be granted, or if degradation of high-quality water is warranted. In order to remove a designated use or obtain a variance, the State or discharger must demonstrate that attaining the designated use would result in substantial and widespread economic and social impacts. Likewise, if a degradation in high-quality water is proposed, it must be shown that lower water quality is necessary to accommodate important social and economic development. This workbook provides guidance for those seeking to remove a designated use (such as might occur under a Use Attainability), or obtain a variance based on economic considerations, or to lower water quality in a high-quality water. In addition, it provides guidance to States and EPA regions responsible for reviewing requests for variances and modifications to designated uses, and for approval of antidegradation analyses. The guidance describes the types of information and analyses that should be considered by applicants and reviewers. The guidance, however, is not an exhaustive description of appropriate economic impact analyses.Additional information and tests may be necessary and/or desirable in certain circumstances. The economic impacts considered are those that result from treatment beyond that required by technology-based regulations. Since water quality cannot be lower than that resulting from technology-based limits applied to direct and indirect point source discharges and reasonable Best Management Practices (BMP) applied to nonpoint sources, these are considered to be the baseline. All economic impact analyses of water quality standards should, therefore, address only the cost of improving the water to meet water quality standards or the cost of maintaining water quality in high-quality waters. Although EPA is responsible for approving a State's water quality standards, the State is responsible for interpreting the circumstances of each case and determiningEconomic Guidance for Water Quality Standards 1-2

where there are substantial and widespread economic and social impacts, or where important social and economic development would be inappropriately precluded. Each analysis of economic impacts must demonstrate: that the polluting entity, whether privately or publicly owned, would face substantial financial impacts due to the costs of the necessary pollution controls (substantial impacts or would interfere with development), and that the affected community will bear significant adverse impacts if the entity is required to meet existing or proposed water quality standards (widespread impacts or important development). This Workbook supplements the description contained in the Water Quality Standards Handbook , which should be read first as it contains many important definitions and descriptions of the regulations. Specific attention should be paid to Chapters 2 (Designation of Use) and 4 (Antidegradation), which describe the context in which this guidance is to be used. This Workbook is designed as a series of worksheets and accompanying guidance to be used when actually calculating the impacts of pollution control. The intent of this workbook is to point States and dischargers in the right direction. It does not give definitive answers as to whether or not an entity has demonstrated substantial, widespread, or important economic and social impacts. If a State or discharger has difficulty with any part of the analysis presented in this workbook, they should consider seeking the assistance of a financial expert. In addition, State and regional EPA water quality staff should feel free to contact EPA headquarters' Economic and Statistical Analysis Branch in the Office of Water for advice and assistance. The remaining sections of Chapter 1 provide an overview of the analysis and describe various factors and concepts that generally apply to analyzing the economic impacts of compliance with water quality standards. The following four chapters provide detailed guidance. Throughout this Workbook, the term "financial impacts" refers to impacts on the entity or party that will pay for the pollution control, whereas the term "socioeconomic impacts" refers to changes in the social and/or economic conditions of the affected community. For public-sector entities, such as a publicly owned treatment works (POTW), substantial impacts include financial impacts on the community, taking into consideration current socioeconomic conditions. Widespread, on the other hand, refers to changes in the community's socioeconomic conditions. By contrast, for private-sector entities, substantial impacts refer to financial impacts and widespreadEconomic Guidance for Water Quality Standards 1-3

impacts refer to socioeconomic impacts on the surrounding community. In addition, the term "applicant" refers to whomever will actually complete the economic impact analysis, whether it be the State, an individual discharger, a consultant, or some other organization.

1.1 Designated Uses, Variances, and Antidegradation Pursuant to the Water Quality Standards Regulation (40 CFR 131), States must define statewide water quality goals by: 1) designating water uses and 2) adopting water quality criteria that protect the designated uses. When designating uses, States must consider the use and value of the waterbody for public water supplies, protection and propagation of fish, shellfish and wildlife, recreation in and on the water, agricultural, industrial, and other purposes including navigation. The designated use may or may not coincide with the existing use, but it cannot reflect lower water quality than the existing use. As described in the Water Quality Standards Handbook , if the designated use of a water body is also an existing use, the designated use cannot be downgraded to one that requires less stringent water quality criteria. If, however, the designated use is not an existing use the States may, under certain circumstances, remove the designated use, create new subcategories of the use, or grant a water quality standard. Before a designated use is removed a State or a discharger must conduct and submit a use attainability analysis to EPA. Briefly, a use attainability analysis is an assessment of the physical, chemical, biological and, if necessary, economic factors affecting the attainment of a use. If the analysis shows that, based on any one of these factors, conditions exist which make the use unsuitable or impossible to achieve, then the State may remove the designated use. In many cases, a designated but unattained use for a stream segment need not be removed. Instead, individual dischargers may be granted variances from the water quality standards for a limited time with the expectation that they will be able to comply with water quality standards by the time their variance expires. A variance is preferable to a removal of a designated use since other dischargers, who are capable of meeting the standards, must comply with the standards through their permits. In cases where a discharger can meet water quality based permit limits for some parameters, a variance would not be granted for those parameters. The variance procedure is designed to encourage compliance with the Clean Water Act within a reasonable timeframe. States are also required to adopt an antidegradation policy to protect existing uses, high-quality waters, and water quality in waters that are considered to be outstanding national resources. The antidegradation policy allows States to lower water quality inEconomic Guidance for Water Quality Standards 1-4

higher-quality waters only if it is necessary to accommodate important economic or social development. The use of the term "important" communicates a general sense of the level of economic and social development. This provision is intended to permit degradation of high-quality water bodies in only a few extraordinary cases where the benefits of the economic or social development unquestionably outweigh the costs of lowering water quality. Under no circumstances, however, may water quality fall below that required to protect existing or designated uses. For each of the circumstances described above, the Water Quality Standards Regulation allows the applicant to take economic considerations into account. When applying for a change in a designated use or for a variance, the applicant must demonstrate that meeting water quality standards will cause substantial and widespread economic and social impacts. The antidegradation provision requires that the applicant demonstrate that important economic or social development would be prevented unless lower water quality is allowed. In all three cases, the same general tests of impacts are used. 1.2 Pollution Sources The choice of methods used to evaluate the economic impacts of meeting water quality standards depend, in part, on whether pollution control is the responsibility of a privately or a publicly owned entity. Since the polluting entity or party may not be the one to pay for reductions, the analyses focus on the party that pays for pollution control. Some of the more common privately owned entities include, but are not limited to: manufacturing facilities, agricultural operations, shopping centers andother commercial development, residential developments, and recreational developments. Publicly owned entities include: publicly owned sewage treatment works, roads, and other municipal infrastructure.In an economic impact analysis, the distinction between private-sector and publicsector entities is important as it determines not only who will pay for the necessary pollution control, but also the types of funding mechanisms available. For example, in the case of a privately-owned entity, the facility can raise the money through loans and equity funds but may try to pass some or all of the cost on to the consumer in the form of higher prices. In the case of a publicly-owned entity, the community can float bonds to pay for the capital costs, with the cost of the bonds and operating expenses covered by user fees and/or tax revenues. The different impact measures are addressed in two separate chapters. Chapter Two provides guidance on public-sector entities and Chapter Three provides guidance on private-sector entities. Whether publicly or privately owned, polluting entities can be point (direct discharge) or nonpoint (runoff and erosion) sources of pollution. Attainment of waterEconomic Guidance for Water Quality Standards 1-5

quality standards is not limited to controls placed on point sources. Water quality standards are applicable to nonpoint sources of pollution despite the fact that there may be no direct implementation mechanisms for nonpoint sources. Although pollution control approaches used by nonpoint sources may differ substantially from approaches typically employed by point sources, analysis of the ensuing economic impacts still depends upon whether the entity providing the pollution control is privately or publicly owned. 1.3 Substantial Impacts A financial analysis of the discharger should be conducted to determine if the capital and the operating and maintenance costs of pollution control will have a substantial impact. This analysis is typically performed by the discharger and reviewed by the State, although there may be cases where the State or some other group completes the analysis on behalf of the discharger. The first step is to estimate the capital and the operation and maintenance costs of the necessary pollution control (see Figure 1-1). The second step is to determine how the entity will finance the necessary reductions. If the entity is publicly-owned (e.g. a municipal sewage treatment plant), the households in the community will bear the cost either through an increase in user fees, an increase in taxes or a combination of both. The burden to households resulting from total annual pollution control costs must be estimated. In addition, the financial impact analysis must consider the community's ability to obtain financing and the general economic health of the community. If the entity is privately-owned (e.g. a manufacturing facility), the analysis should consider factors such as the entity's ability to secure financing and the degree to which it will be able to pass the cost of pollution control on to its customers in the form of higher prices. The financial impact analysis of private-sector entities employs a variety of financial ratios and tests. Some of these ratios and tests include benchmark values to help in the analysis. Demonstration of substantial financial impacts is not sufficient reason to modify a use or grant a variance from water quality standards. Rather, the applicant must also demonstrate that compliance would create widespread socioeconomic impacts on the affected community. 1.4 Widespread Impacts States and dischargers will need to consider the possibility that financial impacts could cause far reaching and serious impacts to the community. An important factor in determining the magnitude of these impacts is defining the geographical areaEconomic Guidance for Water Quality Standards 1-6

affected. The affected area might be a town, city, region, county or some combination of these geographical units. Equally important are the types of impacts that might occur. There are no economic ratios or tests per se to evaluate socioeconomic impacts. Instead, therelative magnitude of a group of indicators should be taken into account. For publicsector entities, the applicant will need to estimate the change in socioeconomic conditions that would occur as a result of compliance. Of particular importance are changes in factors such as median household income, unemployment, and overall net debt as a percent of full market value of taxable property. For private-sector entities, the assessment of widespread impacts should consider many of the same socioeconomic conditions. The analysis should also consider the effect of decreased tax revenues if the private-sector entity were to go out of business, income losses to the community if workers lose their jobs, and indirect effects on other businesses. In some instances, several entities potentially may suffer substantial impacts. For example, this situation can arise where several facilities are discharging to a stream segment that is being considered for a change in designated use. While a separate financial analysis should be performed for each facility, the impacts on all the facilities should be considered jointly in the analysis of widespread impacts. 1.5 Antidegradation As with removing a use or granting a variance, eco-nomic impacts are considered as part of an antidegradation review. While the terminology is different, the tests are basically the same. In the first case (discussed in Chapters 2, 3, and 4), a finding of substantial and widespread economic impacts can be the basis for granting a variance or changing a designated use. In the case of antidegradation, the analysis must show that maintaining "high-quality waters" will preclude important economic and social development. As such, the two cases can be thought of as two sides of the same coin. Variances and downgrades refer to situations where additional treatment to meet standards may result in declining economic and social conditions, while antidegradation refers to situations where lowering water quality may result in improved social and economic conditions. When performing an antidegradation analysis, the first question is whether the costs of the pollution controls needed to maintain the high-quality water will interfere with the development. If not, then lower water quality is not"necessary" for the development to take place. If, on the other hand, the costs will interfere with the development and lower water quality is "necessary" for the development to take place, then the analysis must show that the development would be an important economicEconomic Guidance for Water Quality Standards 1-7

and social development. These two steps rely on the same test as the determination of substantial and widespread economic and social impacts. 1.6 Organization of the Rest of the Workbook The remainder of this Workbook addresses the measurement of economic impacts. In Chapter 2, guidance is presented to assist applicants in evaluating financial impacts on public-sector entities. Chapter 3 presents guidance on evaluating financial impacts on private-sector entities. Chapter 4 provides a discussion of how to assess whetherimpacts are widespread as well as substantial. This discussion includes both publicsector and private-sector entities. Chapter 5 applies the concepts developed in Chapters 2, 3, and 4 to antidegradation. Worksheets are included in each chapter that will assist the reader in calculating potential impacts. Chapters 2 and 3 include worksheets for: 1) estimation of annualized costs of pollution control, and 2) evaluation of the financial burden of pollution control. Chapter 4 includes worksheets that can be used in the evaluation of whether the impacts on the entity(ies) will result in widespread economic and social impacts. Chapter 5 includes worksheets for determining if important social and economic development might be lost. In addition to presenting step by step guidance on how to estimate impacts, several of the worksheets provide benchmark comparisons that allow an assessment of the magnitude and relative importance of potential impacts. These worksheets, however, should not be used in isolation. Discussion of key sources of information, important entity and community attributes, and interpretation of results are found only in the accompanying text. Applicants, and State Water Quality staff charged with reviewing the application, should be sure to read all text accompanying the worksheets. While Chapter 2 addresses public-sector treatment requirements, if a substantial portion of the costs of a public facility is borne by a private entity (such as a manufacturing facility that pays substantial user charge fees to a POTW), both Chapters 2 and 3 should be referred to. In all cases, the determination of economic and social impacts must be made on a case by case basis. This determination, therefore, requires the application of good judgement as well as use of the guidance provided in this workbook. Additional information and tests may be required in order to measure the size and extent of theimpacts. Applicants should be aware that they will be required to supply documentation to substantiate their claim of substantial and widespread economic and social impacts. In addition to background data, however, this documentation should include a brief written description of why the applicant believes economic and social impacts will occur.Economic Guidance for Water Quality Standards

2. EVALUATING SUBSTANTIAL IMPACTS: PUBLIC SECTOR ENTITIES

Publi c entities seeking relief from meeting water quality standard requirements must demonst rate that the cost of required water pollution control will result in substantia l impacts and that there will be "widespread" adverse social and economic impacts if they are requiredto meet these standards. For the purposes of this workbook, a public entity refers to any go vernmental unit that must comply with pollution control requirements in orderto meet water quality standards. The most common example is a municipality or se wage authority operating a publicly owned treatment works (POTW) that must b e upgraded or expanded. Municipalities, however, may also be required to control other point s ources or nonpoint sources of pollution within their jurisdiction. The procedures ou tlinedin this chapter apply to all types of publicly financed projects that may b e required to meet water quality standards. Throughout this chapter, the term "State/ discharger" refers to whoever will actually conduct the financial an d socio economic impact analysis for the public entity, whether it be the State, th e municipality, a consultant or some other organization. The remainder of this chapter details methodologies and sources of information fo r determining the financ ial viability of publicly financed projects. Several worksheets are pr esented that will assist in demonstrating substantial impacts. States/dischargers ar e referred to Chapter 4 for guidance on demonstrating wi despread impacts. Readers should keep in mind that the guidance in this chapter is not meant to be exhaustive. The State and/or EPA may require additional information or tests in order to evaluate whethe r substantial and widespread impacts will occur. In addition, the State/discharger should feel free to include any additional information they think is relevant. As mentioned in Chapter 1, the evaluation of substantial impacts resulting from public entity compliance with water quality standards includes two elements, 1) financial impacts to the public entity and 2) current socioeconomic conditions of the community

. Governments have the authority to levy taxes and distribute p ollution control costs among households and businesses according to the tax base. Similarly, sew age authorities charge fo rservices, and thus can recover pollution control costs through users fees. In both cases, a substantial impact will usually affect the wider community. Whether or not the community faces substantial impacts depends on both the cost of the pollution control and the general financial and economic health of the community. If t he public entity passes a significant portion of the pollution control costs along to private fa cilities or firms, then the review procedures outlined in Chapter 3 of thi s workbook should also be cons ulted to determine the impact on the private entities. Both public and private entities should consult Chapter 4 for guidance on how to estimat e potential widespread impacts on the community.Economic Guidance for Water Quality Standards 2-2 This chapt er focuses on ways to determine if the costs of the proposed project wil l likely result in substantial impacts. To make this determination the State/discharger will need to complete a five step analysis. As shownin Figure 2-1 the first step in the process is to estimate the cost of t

he pollution control project and calculate the annual cost of the propos ed pollution control project. The second step is to calculate the total annua l polluti on control cost per household, which includes the cost of the project and existing pollutio n control costs. In the third step, the Municipal Preliminary Screener i s ca lculated, which quickly identifies entities that clearly will not experience substantia l impacts due to the cost of the necessary pollution control. If it is not clear whether there will be substantial impacts, entities should proceed to the fourth step, which is th e ca lculation of the Secondary Test. In this step public entities will need to provid e financial an d socioeconomic information. For example, the ability of the community to finance the project may depend on existing financial conditions in the community such as debt per capita and the community's bond rating. The socioeconomic health of th e community prior to the project's construction will also be an important indicator o f whether the pollution control woul d impose a substantial impact on the community. The fifth and final step of determining whether impacts are "substantial" is evaluating where the c ommunity falls in the impacts matrix. This matrix takes into consideration th e Munici pal Preliminary Screener and the Secondary Test score. Later, in Chapter 4 , estimatedchanges in socioeconomic health indicators will be reviewed to evaluate th e extent to which the impacts can be considered widespread. The remainder of this chapter is divided into five sections that detail the essential steps of an e valuation of substantial impacts for publicly financed projects. Figure 2- 1 illustrates the steps and decision points in this process. The five steps are: Verify Project Costs an d Calculate the Annual Cost of the Pollution Control Project - This section discusses f actors that should be considered when selecting a pollution control project. It also des cribes the type of general information about the propose d project that should be provided. In addition, it discusses how t o ann ualize capital costs of the project and calculate total annual costs of th e pollution control project. Calculat e Total Annualized Pollution Control Costs Per Household - Thi s section o utlines the calculation of total annual pollution control costs pe r household. The costs of the proposed project and existing pollution control ar e included. Ca lculate and Evaluate the Municipal Preliminary Screener Score - Thi s secti on explains the "screener" which identifies only those communities that clearly will not face any substantial impacts.Economic Guidance for Water Quality Standards 2-3 Ap ply the Secondary Test- This measurement incorporates a characterization of the community's current financial and socioeconomic well-being. Assess where the community falls in The Substantial Impacts Matrix - This matrix evaluates whether or not communities are expected to incur substantia l economic impacts due to the impl ementation of the pollution control costs. If the applicantcannot demonstrate substantial impacts, then they will be required t o meetexisting water quality standards. If impacts are expected to be substantial, then the applicant goes on to demonstrate whether they are also expected to b e widespread. 2.1 Verify Project Costs an d Calculate the Annual Cost of the Pollution Control Project. Before the impact an alysis can be performed, the project costs should be verified and then annual costs calculated. 2.1.a Verify Project Costs
Th e first step of an economic analysis of a publicly financed project is an evaluation of the prop osed project. Public entities should consider a broad range of discharg e management options including pollution prevention, end-of-pipe treatment, and upgrades oradditions to existing treatment. Specific types of pollution prevention activities that should be considered are: Public Education; Change in Raw Materials; Substitution of Process Chemicals; Change in Process; Water Recycling and Reuse; and Pretreatment Requirements. Many of these approache s are particularly relevant to industrial indirect discharges to the public system. Whatever the approach, the applicant must demonstrate that th e proposed project is the most appropriate means of meeting water quality standards and mu stdocument project cost estimates. If at least one of the treatment alternatives that meets water quality standards will not have a substantial financial impact, then th e communi ty should not proceed with the analysis presented in the rest of this workbook. General information regarding the proposed pollution control project and other projects considered should be supplied in Worksheet A

. Th e most cost-effective approach to meeting water quality standards should b e considered. Sub missions should include assumptions about excess capacity, populationEconomic Guidance for Water Quality Standards 2-4

gro wth, and consideration of alternative technologies where appropriate. The mos t accurate estimate of project costs may be available from the disc harger's design engineers. If sit e-specific engineering cost estimates are not available, preliminary project cos t estimates can be derived from a comparableproject in the State or from the judgement of exper ienced water pollution control engineers. (See Appendix A for sources o f enginee ring cost information.) Capital, operation and maintenance (O&M), and othe r project c osts can be summarized using Worksheet B . For comparative purposes, cos t estimates (e.g. capital, O&M, other project costs) for each alternative being considered should be presented in the same units (typically annualized costs, $/yr) and for the same year. The next section explains how to annualize project costs. For illustrative purposes, the example of a local government upgrading their existing wastewater treatment facility in order to meet water quality standards is used throughout this ch apter. Details of this example may differ significantly from other project s undertaken to meet water quality objectives . Other types of public-sector water pollution control, h owever, would be analyzed in a similar fashion using the worksheets included in this chapter. 2.1.b Calculate the Annual Costs of the Pollution Control Project Since capital costs typically will be paid over several years, annualized costs are used in the evaluation of economic burden to the community. The capital portion of project costs is typically financed over approximately 20 years, by issuing a municipal deb t instrument such as a general obligation bond or a revenue bond. Local governments may also finance capital costs using bank loans, state infrastructure loans (revolving funds), or feder ally subsidized loans (such as those offered by the Farmers' Hom e Administration). It should be noted that interes t rates used to annualize costs are dependent on the type of d ebt instrument used as well as the recipient's credit standing. For example, revenue bonds typically are financed at a slightly higher interest rate because of their dependence on revenue s from services as opposed to being guaranteed by the full faith and credit of the jurisdiction. Because interest rates affect the interest payment and thus the annualized capital cos t of the project, it is important that the interest rate used on Worksheet B reflect s the debt instrument (i.e. municipal bond, commercial bank loan, state revolving fund loan, or other instrument) likely to be used by the municipality.
The calculation of total annualized cost of the project is presented in Worksheet B

. First, cap ital costs are summed and the portion of costs to be paid for with grant monies are deducted, as these costs will not need to be financed. Next, the annualization factor is calculated using the formula supplied on Worksheet B , or the annualization factor is found in Appendix B. Annualiz ed capital cost is then calculated by multiplying the total capital costs to be financed by the annualization factor.Economic Guidance for Water Quality Standards 2-5 Next, annual operating and maintenance costs are summed, and the total is added to the annualized capital cost. These costs should include the costs of monitoring , insp ection, permitting fees, waste disposal charges, repair, administration, replacement, and any other recurring costs. All recurring costs should be stated in terms of dollars per year. The sum of the annualized ca pital cost and total annual operating and maintenance costs is the total annual co st of the project. In the next section, the annualized costs paid by households in the community are calculated. 2.2 Calculate Total Annualized Pollution Control Costs Per Household In order to assess theburden that total pollution control costs are expected to have on household s, an average annualized pollution control cost per household should b e calculated for all households inthe community that would bear project costs. In order to evaluate substantial impacts, therefore, the analysis must establish which households will actually pay for pollution control as well as what proportion of the costs will be borne by households. These apportione d project costs are then added to existing pollution control costs paid by households.
It i s important to first define the affected community. The "community" is th e governmental jurisdiction responsible for p aying compliance costs. In practice, pollution controlprojects may serve several communities or just portions of a community. In the case of a sewage agency serving s everal communities, once project costs are allocated to each com munity served, the economic analysis is conducted on a community b y community basis. In the c ase of a community in which only a portion of the community is served, the affected commu nity is defined as those who will pay the compliance costs. In such c ases, it may be difficult to obtain socioeconomic data for just part of th e commu nity and data for the entire community may be used instead. The area that i s affectedmay not be the same as the area that is paying, therefore it may be appropriate to evaluate widespread impacts, described in Chapter 4, over a community that is defined differently than the paying community.
If project costs were estimated for some prior year, these costs should be adjuste d upward to reflect current year prices using the average annual national Consumer Price Index (CPI) inflation rate for the period. The CPI inflation rate is available from th e Bureau of Labor Statistics. An additional source reporting the CPI inflation rate is th e CPI Detail ed Report , which is published monthly by the U.S. Department of Labor , Bureau of Labor Statistics. The ratio of the current CPI to the CPI for the year of the cost estimates indicates how much costs have increased over the period. This ratiocan be applied to the cost estimates to "bring them up to current year costs." Likewi se, there are engineering cost indices that can be used for this purpose.Economic Guidance for Water Quality Standards 2-6 If pr oject costs are not distributed simply according to wastewater flow or ta x revenues, then consideration should be given to separately analyzing the impacts on users who pay a disproportionate share of the costs. This situation can arise, for example , where industrial dischargers to a sewer system are assessed pollutant surcharges to pay for their share of the cost of advanced treatment necessitated by the presence of thei r polluta nts. Remaining costs would then be split among households according t o wastewate rflow or tax revenues, whichever is appropriate. The total amount of th e pollution control project to be recouped by surcharges should, therefore, be removed from the total project cost before costs are allocated according to wastewater flow or ta x revenues. In calculating the total annual co st of pollution control per household, current costs of pollution c ontrol must be considered along with the projected annual costs of th e propose d pollution control project. The existing cost per household usually can b e obta ined from the most recent municipal records. For example, it can be found in th e sewer enterprise fund accounts for communities that maintain a separate enterprise fund. It is not necessary, in such cases, to sum all the cost components. Instead, use the most recent operating revenues, divided by the number of households served. In cases where the community does not maintain a separate enterprise fund for sewers, the cost elements can be summed from the consolidated statement for the community. If the portion o f propos ed project costs that households are expected to pay is known or is expected t o remain unchan ged, then use Worksheet C to calculate the total annual cost of pollution control per household. If the portion paid by households is based on flow, then should refer to Worksheet C: Option A as well. The cost per household as a percent of median household income is used in Section 2.3 as a screener to quickly identify those communities that clearly will not fac e substantial impacts due to po llution control. For guidance in estimating impacts on nonhousehold users (e.g., industrial, commercial), refer to Chapter 3. 2.3 Calculate and Evaluate The Municipal Preliminary Screener Value Whether or not the community is expected to incur "substantial" e conomic impacts due to t he pollution control project is determined by jointly considering the results of tw o tests. The first test is a "screener" to estab lish whether the community can clearly pay for the p roject without incurring any substantial impacts. The Municipal Preliminary Scre ener estimates the total annual pollution control costs per household (existing costs plus those attributable to the proposed project) as a percentage of median househol d income. The screener is written as follows: Municipal Preliminary Screen er = Average Total Pollution Control Cost per Household Median Household IncomeEconomic Guidance for Water Quality Standards 2-7 Median household income information for many municipalities is available from the 1990 Census of Population. If median household income is not available for the current year, i t should be estimated for the current year by using the CPI inflation rate for th e period between the year t

hat median household income is available and the current year. To calculate the inflation rate over the relevant period, use the "percent change from the previous annual average" (annual inflation rate) presented in the CPI Detailed Report

. Forexample, if the current year is 1993, 1990 is the most recent year that median household income is available, and the percentage changes for the 1990, 1991, and 1992 annual averages respectively are: 5.2, 4.1 and 2.9, the adjustment factor equals: Adjustment Factor = 1.052 * 1.041 * 1.029 = 1.13 Adjusted Median Household Income = Median Household Income * Adjustment Factor
Dependi ng on the results of the screener, the community is expected to incur little , mid-range, or large economic impacts due to the proposed project (see Worksheet D ). If the tot al annual cost per household (existing annual cost per household plus th e increment al cost related to the proposed project) is less than 1.0 percent of median household income, it is assumed that the project is not expected to impose a substantial economic hardship on households. Thescreener is therefore set at 1.0 percent of median household income. Communities with screener results of less than 1 .0 but still fairly close to 1.0, however, may still want to proceed to the Secondary Test.
C o mmunities are expected to incur mid-range impacts when the ratio of total annual compl iance costs to median household income is between 1.0 and 2.0 percent. If th e average annual cost per household exceeds 2.0 percent of median household income, then the project may place an unreasonable financial burden o n many of the households within the community. In either case, communitie s move on to the Secondary affordability Test to demonstrate substantial impacts. For example, assume that Community XYZ has a screener of 2.3 percent. Although it appears that the community faces large impacts , substant ial impacts have not necessarily been demonstrated and the community mus t proceed to the next step and apply the Secondary Test. Dischargers with screener values well belo w 1.0 percent are assumed to be able to pay for pollution control withou t incurrin g any substantial economic impacts and are required to meet existing wate r quality standards. They do not need to proceed to the Secondary Test (see Figure 2-1). 2.4. Apply Secondary Test The Secondary Test is designed to build upon the characterization of the financia l burdenidentified in the Municipal Preliminary Screener. The Secondary Test indicates the community's ability to obtain financing and de scribes the socioeconomic health of theEconomic Guidance for Water Quality Standards 2-8

commun ity. Indicators describe precompliance debt, socioeconomic, and financia l management conditions in the community. Using thes e indicators and the scoring system described b elow, the impact of the cost of pollution control is estimated. Specifically , applicants are required to present the following six indicators for the community: Debt Indicators Bond Rating (if available) - a measure of credit worthiness of the community; Overall Ne t Debt as a Percent of Full Market Value of Taxable Property - a measure of debt burden on residents within the community; Socioeconomic Indicators
Un employmentRate - a measure of the general economic health of th e community; Median Household Income - a measure of the wealth of the community; Financial Management Indicators Property Tax Reve nue as a Percent of Full Market Value of Taxable Property - a measure of th e funding capacity available to support debt based on the wealth of the community; and Property Tax Collection Rate - a measure of how well the local government i s administered.
A more detailed description of the six indicators, as well as alternative indicators for st ates with property tax limitations, are presented below. Table 2-1 summarizes th e indicators and what is considered to be a strong, mid-range, or weak rating. Debt Indicators Bond Rating Current ratings f

or the community summarize a bond rating agency's assessment of a community's credit capacity. The ratings generally reflect current financial conditions. If security enhancements like bond insurance have been used for the bond issue, however, the bon d rating on a particular issue may be higher than local conditions justify. Onl y ratings for uninsured bonds, therefore, should be used. Many small and medium sized communities have not used debt financing for projectsEconomic Guidance for Water Quality Standards 2-9

an d, as a result, have no bond rating. The absence of a bond rating does not indicate strong or weak financial health. When a bond rating is not available, this indicator should not be included in theanalysis of substantial impacts. When available, the rating for the most recent general obligation bond sh ould be used. If a general obligation bond has not been issued recently, the most recent rating for a sewer bond should be used. Recen t bond ratings are included in municipal bond reports from rating agencies (e.g., Moody's Bond Record, Standard and Poor's Corporation ). Overall Net Debt as a Percent of Full Market Value of Taxable Property Overall Net Debt is debt repaid by property taxes. It excludes debt that is repaid by special user fees (e.g. revenue debt). This indicator provides a measure of debt burden on residen ts within the community and measures the ability of local governmen t jurisdictions to issue additional debt. It includes the debt issued directly by the loca l jur isdiction and debt of overlapping entities, such as school districts. It compares th e level of deb t owed by the community with the full market value of real property used to support that debt and serves as a measure of the community's wealth. Debt information is available from the financial statement of e ach community. In most cases, recent financial statements are on file with the State (e.g., State Auditor's Office). Overlapping debt may or may not be provided in a community's finan cial statements. The pro perty assessment data (assessment ratio) should be readily available through th e community or the State Assessor's Office. The boundary of the affected community generally conforms to one or more community boundaries. Therefore, proratin g community data

to reflect specific service area boundaries is not normally necessary for evaluating the general financial capability of the affected community. Socioeconomic Indicators Unemployment Rate The u nemployment rate is defined as the percent of a community's labor forc e currently unemploy ed. If the unemployment rate in the service area is not available, the encompassin g county's rate may be used as a substitute. The Bureau of Labor Statistics (BLS) maintains current unemployment rate figures for municipalities and counties

. National une mployment data is also needed for comparison purposes. This information can be obtained from the BLS are available by requ est at (202) 606-6392. A community's un employment rate is considered to be below the national average if it is more than 1% below th e national average. Similarly, a community's unemployment rate is considered to be above the national average if it is more than 1% above the national unemployment rate. If the community's employment rateis equal to the national average unemployment rate, pl us or minus 1%, then the community's unemployment rate is assessed as bein g equal to the national rate.Economic Guidance for Water Quality Standards 2-10 Median Household Income Median household income (MHI) is defined as the median of the total income dollars received per household during a calendar year in a given area. It serves as an overal l i n dicator of community spending capacity. Median household income, which was also used in the screener process, is available from the 1990 Census or through state dat a centers. The state value is also needed for comparison purpos es. If a community's median household income is more than 10% below the state's median household income, then it is considered to be below the state's median . If a community's median household income is more than 10% above the state's median, then it is considered to be above the stat e median val ue. If, however, the community's median household income is equal to th e state m edian, plus or minus 10%, then the community's median household income i s assessed as being equal to the state's median household income. Financial Management Indicators Property Tax Revenues as a Percent of Full Market Value of Taxable Property This indicator can be referred to as the "property tax burden" since it indicates th e fundi ng capacity to support new expenditures, based on the wealth of the community

. Some states and local jurisdictions may have established legal limits on the amount o f property taxes that can be levied as a percent of full market or assessed value of rea l property. Property assessment data should be readily available through the community or the State Assessor's Office. Property tax revenues are av ailable in communities' annual financial statements. Property Tax Revenue Collection Rate This rate is an indicator of the efficiency of the tax collection system and a measure of how well the local government is administered. It compares the actual amoun t collec ted from property taxes to the amount levied. Property taxes levied can b e computed by multiplying the assessed value of real propert y by the property tax rate, both of which are available from a community's financial statements or the State Assessor' s Office.Economic Guidance for Water Quality Standards 2-11

Alternative Indicators for States with Property Tax Limitations Two of the indicators may not be appropriate in states with statutory limits on property tax collections and/or rates, or where data on full-market value of taxable property are not available. The first of these indicators -- The Overall Net Debt as Percent of Full Market Value of Taxable Property -- can be replaced with: Overall Net Debt Per Capita In calculating the Secondary Score, the following ratings for Overall Net Debt Per Capita should be used: Greater than $3,000 = weak = 1 $1,000 - $3,000 = mid-range = 2 Less than $1,000 = strong = 3The second of these indicators -- Property Tax Revenues as a Percent of FullMarket Value of Taxable Property -- has no appropriate substitute in cases where property taxes are at their limit or where full-market value of taxable property cannot be estimated. In such cases, this indicator should be dropped and the other five factors are assigned equal weights.

These s ix indicators are then used to form a composite assessment of th e communi ty's economic health and the financial impact of the required project

. Worksheet E can be used to record each indicator. For each of the six indicators, th e community is rated as weak, mid-range, or strong, based on the thresholds presented in Table 2-1. For example, if a community 's median household income equals $15,000 and the state's median household income equals $17,000, the community would be considered weak o n this measure. If, however, the community's median household income wer e $19,000, then the community would be considered strong on this measure.
Nex t, a Secondary Score is calculated for the community by weighting eac h indicatorequally and assigning a value of 1 to each indicator judged to be weak, a 2 to each in dicator judged to be mid-range, and a 3 to each strong indicator. A cumulativ e asse ssmentscore is arrived at by summing the individual scores and dividing by th e number of

factors used. Worksheet F ,provided at the end of Section 2.4, guides th e applic antthrough this calculation. The cumulative assessment score is evaluated a s follows: less than 1.5 is considered weakEconomic Guidance for Water Quality Standards 2-12 between 1.5 and 2.5 is considered mid-range greater than 2.5 is considered strong For example, consider a Community XYZ, which has:

aweak ratio of overall net debt to full market value of taxabl e property = 1, a weak bond rating = 1, a mid-range unemployment rate = 2, a mid-range median household income = 2, a strong property tax collection rate = 3, and a strong r atio of property tax revenues to full market value o f taxable property = 3. [(1 + 1 + 2 + 2 + 3 + 3)/6] = 2 The Secondary Score for Community X YZ, equal to 2, falls into the mid-range category. If the applicant is not able to develop one or more of the six indicators, they must provide an explanation as to why the indicator is not appropriate or not available. Since the point of the analys is is to measure the overall burden to the community, the debt and socioeconomic indicators are assumed to be better measures of burden than the financial management indicators. Consequently, if one of the debt or socioeconomic indicators is not a vailable, the State/discharger should average the two financial managemen t indicators and use this averaged value a s a single indicator with the remaining indicators. This averaging is necessary so that undue weight is not given tothe financial management indicators. 2.5 Assess Where the Community Falls in The Substantial Impacts Matrix The res ults of the two tests are considered jointly in determining whether th e community is expected to incur subs tantial impacts due to the proposed pollution control project.
In the fol lowing matrix, the cumulative assessment score for the community i s combined wit

h the estimated household burden. The combination of factors establishes whether impacts can be expected to be substantial. In the example of Community XYZ, their screener equaled 2.3 percent and their cumulativeassessment score equaled 2. They are, therefore, in the middle cell in the far right column and thus have a rating of "X" in the matrix presented below (Table 2-2). In the matrix, " X" indicates that the impact is likely to be substantial. The closer th e community is to the upper right hand corner of the matrix, the greater the impact

.Economic Guidance for Water Quality Standards 2-13

Similarly, " " indicates that the impact is not likely to be substantial. The closer to the lower left hand corner of the matrix, the smaller the impact. Finally, the "?" indicates that the impact is unclear. For communities that fall into the "?" category, if the res ults of both the Secondary Test and the Munic ipal Preliminary Screener are borderline, then the community should move into the category closest to it. Take, for example, a community that falls into the center box, with a cumulative assessment score of between 1.5 and 2.5 and a percent of median household income (MHI) between 1.0 and 2.0. If the cumulative score was 1.6 and the percent of MHI was 1.8, then the community should beconsidered to fall into one of the adjac ent "X" categories. If results are not borderline, other factors such as th e impact on low or fixed income households, the presence of a failing local industry, and other projects the c ommunity would have to forgo in order to comply with water quality standar ds should be considered. Relevant additional information might includ e information collected from interviews with municipal financial officers, special reports on in dustry trends that may affect local employers, and specific financial and economic indicators. The State/discharger should provide any additional information they feel is rele vant. This additional information will be critical where the matrix results are no t conclusive.
EPA will interpret a " " rating to mean that the community is not expected t o incur substantial impacts as a result of the pollution control project. Communities falling into this category will be required to meet existing water quality standards. If th e applican tState/discharger disagrees with the results of the Secondary Test, they ma y presen tadditional information to the Regional EPA Administrator documenting th e unique circumstances of the community. Since the impacts are not substantial, there is no need to demonstrate widespread impacts. EPA will interpret a "X" rating to mean that the community will incur substantial impacts. Before a water quality standard is modified or change d, however, communities falling into this category must demonstrate that impacts are also wid espread. For those communities rated "?", EPA's interpretation will relyon the additional information presented by the State/discharger. It should be noted that, in this case, there is no "correct" set of information. It will be up to the applicant to collect whatever information they feel is relevant in describing the unique circumstances af fecting their community. For example, the matrix may suggest that the community' s financial condition is strong. At thesame time, however, a local industry may be failing. In such a case, it is important to determine the importance of that industry to the loca l economy (as measured by its contribution to area employment, payroll, and tax revenues) and whether the industry itself would be affected by the projec t. Communities falling into either th e "X" or the "?" category should proceed to Chapter 4 to determine whether the impacts are also expected to be widespread.Secondary Analysis Determine whether municipality will incur substantial impacts based on the cost of pollution control and the characterization of municipality’s current financial and socioeconomic well-being Screening Process Is it clear that municipality will not face substantial economic impacts? Allocate Total Pollution Control Costs Residential, Industrial, Commercial, Others Annualize Total Pollution Control Costs Annual Cost of Existing and Proposed Pollution Reductions Estimate Total Pollution Control Costs Capital Cost & Annual O&M Cost of Existing and Proposed Pollution Controls

Substantial Impacts Residentials Costs Figure 2-1: Measuring Substantial Impacts (Public Entities)

Use guidance in Chapter 3 if non-residential costs are anticipated to be substantial

Request Rejected

NonResidential Costs

Yes

Proceed to analysis of widespread impacts in Chapter 4 Request Rejected

No Substantial Impacts NoTable 2-1 Secondary Indicators

Secondary Indicators Indicator Weak Mid-Range Strong Bond Rating Below BBB (S&P) BBB (S&P) Above BBB (S&P) Below Baa Baa (Moody's) or Baa (Moody's) (Moody's) Overall Net Debt as Percent of Full Above 5% 2%-5% Below 2% Market Value of Taxable Property Unemployment More than 1% National Average More than 1%

above National below National Average Average Median Household More than 10% State Median More than 10% Income below State Median above State Median Property Tax Revenues as a Percent of Full Above 4% 2%-4% Below 2% Market Value of Taxable Property Property Tax Collection Rate < 94% 94% - 98% > 98%Table 2-2 Assessment of Substantial Impacts Matrix
Secondary Municipal Preliminary Screener Score Less than 1.0 Percent Between 1.0 and Greater than 2.0 Percent 2.0 Percent Less than 1.5 ? X X Between 1.5 and ? X 2.5 Greater than 2.5 ?Economic Guidance for Water Quality Standards 3-1

3. EVALUATING SUBSTANTIAL IMPACTS: PRIVATE-SECTOR ENTITIES
For facilities owned by the private sector, measuring substantial impacts require s estimating the financial impacts on the entities that will pay for the pollution controls. For ex ample, compliance with water quality standards may require that a particular facility, perhaps a factory, install additional wastewater treatm ent. After estimating the cost of the additional wastewater treatment, the next step is to measure the ability of the factory to pay for the additional treatment. If the analysis shows that the entity will not incur any sub stantial impacts due to the cost of pollution control (e.g., there will be no significant changes in the factory's level of operations nor profit), then the analysis is completed. If, on the other hand, th e analysis shows that there will be substantial impacts on the entity, then the resulting impacts on the surrounding community must be considered (e.g. th e impactof lost employment on the community's employment base, or the impact on th e overall economy of the community). Impacts to the surrounding community, referred to as widespread impacts, are addressed in Chapter 4. The following sections describe t he steps involved in evaluating whether impacts will be substantial. These steps are outlined in Figure 3-1. Thi s chapter explains how to adapt each of the steps to a range of data sources and provides worksheets to assist th e dischargerin working through each step. The analytic approach presented here can be used for a variety of private-sector entities, including commercial, industrial, residential and recreational land uses, and for point and nonpoint sources of pollution. The guidance provided i n this chapter, however, is not meant to be exhaustive. The State and/or EPA may require additional information or tests in order to evaluate whether substantial and widespread impacts will oc cur. In addition, the applicant should feel free to include any additional informatio n they feel is relevant. The steps described in further detail in the rest of the chapter are: Verify Project Costs an d Calculate the Annual Cost of the Pollution Control Project - This section discu sses factors that should be considered when verifying that the pro posed pollution control project is the most appropriate solution to the pollution problem. It also describes the type of general information that shoul d be provided about the proposed project. In addition, it discusses how to annualize capital costs of the project and cal culate total annual costs of the pollution control project.
Fin ancial Impact Analysis - This section describes the types of financial test s that should be applied to measure the impact on the applicant. The primary measure is profitability. The secondary measures include indicators of liquidity, solvency, and leverage. Most of this chapter is written in terms of evaluating whether there will be a substantial impact on a particul ar discharger. This type of analysis is necessary whenever there is aEconomic Guidance for Water Quality Standards 3-2

request for a varianc e. These same tests, however, can be used to analyze the impact on a group of dischargers, as might be the case in a use attainability analysis. For example, there may be several facilities that would confront similar requirements to improve their waste wat er discharges in order to meet a higher water quality standard unde r considerati on. The same primary and secondary tests would be used to measur e substan tial impacts in the dischargers. The difference would be, however, when th e analysis moved to measuring widespread impacts. Here the impacts on the total group of dischargers (or all dischargers in the relevant reac h) would be used to measure whether or not the impacts are considered widespread. 3.1 Verify Project Costs and Calculate The A nnual Cost of the Pollution Control Project Before the impact analy sis can be performed, the project costs should be verified and the annual costs calculated. 3.1.a Verify Project Costs The first step in the financial impact analysis is an evaluat ion of the proposed pollution control project. Private entities should consider a broad range of discharge management options including pollutio n prevention, end-of-pipe treatment, and upgrades or additions to existing treatment. Specific types of pollution prevention activities to be considered include: Change in Raw Materials; Substitute Process Chemicals; Change in Process; Water Recycling and Reuse; and Pretreatment Requirements. Whatever the approach, the discharger must demonstrate that the proposed project is the mostappropriate means of meeting water quality standards and must document project cost est imates. If at least one of the treatment alternatives that allows the applicant t o meet water quality standards would not impose substantial impacts, then they are not able to demonstrate substantial impacts and should not proceed with the analysis presented in the remainder of this workbook.
S ince the most cost-effective approach to meeting water quality standards should be consid ered, submissions should list their assumptions about excess capacity, futur e fac ility expansion, and alternative technologies. The most accurate estimate of projec t cos ts may be available from the discharger's design engineers. These estimates can b e compared to estimates available from EPA.Economic Guidance for Water Quality Standards 3-3

3.1.b Calculate the Annual Costs of the Pollution Control Project
In order to p erform the economic tests, the cost of the pollution control needed t o compl y with the Water Quality Standards must be calculated and converted to a n annualized cost. Initially, pollution control costs are expressed in two parts: (1) th e capital costs of purcha sing and installing the equipment and (2) the yearly operating and maintenance (O&M) costs. Both the capital andO&M cost estimates should be provided by the discharger requesting relief. To assess whether the costs represent the most cost effective means of meeting the water quality standards, they should be compared to costs at comparable entities that meet the same standards. For dischargers covered by effluent guidelines, compliance costs have been calculated by the Agency and are available fo r compara tive purposes. (See Appendix A.) Costs for nonpoint sources are less readil y available. Instead of a ssuming that the total capital costs will be paid in the first year o f operation, these costs are usually annu alized. By assuming that costs are spread out over several y ears, annualization calculates the amount that will be paid each year, including th e financing costs. In order to allow for comparisons across cases, the analysis should assume that the applicant will borrow the capital for the pollution control equipment and repay the loan in eve n annual installments over a 10 year period. The assumption of ten years is based on the likely life of the equipment. The assumption of even annua l installments is made f

or convenience. The interest rate on the loan should be equivalent to the rate the applicant pays whenit borrows money. If it borrows from the parent firm, the interest charge sh ould be equivalent to the interest charged by the parent firm. If the parent firm would lend the entity money without interest, then the interest payment s should be equivalent to the interest rate the applicant would pay to borrow from a bank or on its line of credit. If it is impossible to determine the appropriate interest rate, th e analysis should assume an interest rate equal to the prime rate plus one percent. The financial tests discussed below compare the costs of c ompliance to other costs and revenues of the applicant. Compliance costs and other costs and rev enues must, therefore, be comparable. In other words, they should be calculated for the same year. I f compliance costs are estimated assuming construction several years in the future, the y should bedeflated back to the year of the financial data. This can be done by assuming that the inflation rate over the last fi ve years will continue into the future. See discussion in Section 2.2, and Appendix A for references to inflation/deflation indices. Likewise , if costs were estimated for an earlier year, they should be inflated to current year costs. The Annualized Cost of Pollution Control can be calculated using Worksheet G

. 3.2 Financial Impact Analysis
T h e purpose of the financial impact analysis is to assess the extent to which existing or planned activities and/or employment will be reduced as a result of meeting the waterEconomic Guidance for Water Quality Standards 3-4

quality standards. The tests described in this Workbook arenot designed to determine the exactimpact of pollution control costs on an entity. They merely provide indicators of whether pollution control costs would result in a substantial impact. Four ge neral categories of financial tests are presented in the following sections. As indicat ed below, the four categories are divided into a primary measure of financia l impacts and three secondary measures of financial impacts: Primary Measure Profit -- how much will profits decline due to pollution control expenditures? Secondary Measures Liquidity -- how easily can an entity pay its short-term bills? Solvency -- how easily can an entity pay its fixed and long-term bills? Leverage -- how much money can the entity borrow? Profit and solvency ratios are calculate d both with and without the additional compliance costs (taking into consideration the entity's ability, if any, to increase its prices to cover part or all of the costs). Comparing these rati os to each other and to industry benchmarks provides a measure of the impact on the entity.
Fo r all of the tests, it is important to look beyond the individual test results an d evaluate the total situation of the entity. While each test addresses a single aspect o f financial health, the results of the four tests should be considered jointly to obtain an overall picture of the economic health of the applicant and the impact of the water quality standards requirement on the applicant's health. The results should be compared with the ratios for other entities in the same industry or activity. In addition, the ratios and tests should be calculated for several years of operations. This will allow long-term trends to be differentiated from short-term conditions. The structure, size, and financial health of the parent firm should also be considered. An important factor, which may not be reflected in the preceding measures, is the value of an applic ant's product or operations to its parent firm. For example, if a facility produces an important input used by other facilities owned by the firm, the firm may be likely to support the facility even if it appears to have only borderline profitability. The results of these tests and other relevant factors, can be used to make a judgement as to the likely actions of the applicant (e.g. shut down entirely, close one or more product/service lines, shift to other products/services, not proceed with an expansion, continue operations at current levels) faced with the pollution control investment.Economic Guidance for Water Quality Standards 3-5 Ea ch type of test measures a different aspect of a discharger's financial health. Th e primary measure evaluates the extent to which an applicant's profit rate will change, and compares the profit level to typical profits in that industry. The secondary measure s provide additional information about specific impacts that the discharger would bear i f required to meet water quality standards. In some cases, the tests might indicate that the discharger would remain profitable (Profit) after investing in pollution control, but would have trouble borrowing the needed capital (Leverage). This situation would indicate a need to work with the discharger in choosing the technology and schedule used to meet the regulations. In other cases the tests might show that the discharger has a short-term problem with meeting the financial obligation imposed by the standards, but could handle itin the long-run (Liquidity vs. Solvency). This is important information whe n consid ering whether or not to grant a variance so as to allow more time for compliance. Since it is the discharger that will have to pay for the wastewater treatment, th e financial tests presented in this Workbook use data about the discharg er's operations. This data, however, may not be readily available for the discharger itself, and if available, the dischargermay consider the information to be confidential. It is EPA policy, however, tha tapplications based on economic considerations must be accompanied by data that demonstrate the impacts. If the information is n ot available at the discharger level, it can be estimated from the bal ance sheets or income statements of the firm that owns or controls the discharger

. Estimates can be made in a variety of ways. One commonly used approach is to compare the dischar ger's sales or revenues to the firm's sales or revenues and apply this ratio t o other financial factors. F or example, if the discharger is responsible for 20 percent of its firm' s revenues, than it is assigned 20 percent of the firm's current assets and curren t liabi lities. In some cases, particularly with manufacturing facilities, the discharger may not sell its production directly, but may ship it to ano ther facility owned by the same firm. In this case, the discharger's share of sales should be calculated by determining the market value o f the goods produced by the discharger, using market prices for the year bein g analyzed. The primary an d secondary measures are described below, along with an example of specific tests to be used. While there are several ratios that could be used for each test, to simplify the presentation only one ratio p er test is described in detail. All four primary and secondary measures, however, should be used in the analysis. In most cases, interpreting the resu lts requires comparisons with typical values for the i n dustry. Among the sources that provide comparative information are: Robert Morris Associates' Annu al Statement Studies , Moody's Industrial Manual , Dun and Bradstreet's Du n's Industry Norms , and Standard & Poor's Industry Surveys . The Annual Statement Stud ies , Dun's Industry Norms , and Standard & Poor's Industry Surveys provid e composite statistics fo r firms grouped into various manufacturing and service industries.Profit Test Earnings Before Taxes Revenues

Economic Guidance for Water Quality Standards 3-6 The Moody's Industrial Manualprovides detailed financial information on individua l firms that can be usedfor comparison purposes. Although benchmarks are available for most fi nancial tests, EPA emphasizes that the discharger should consider thes e benchmarks as indicators of financial health and not as definitive measures. 3.2.a Primary Measure: Profitability The Profit Test measures what will happen to the discharger's earnings if additiona l poll ution control is required. If the discharger is making a profit now but would los e m o ney with the pollution control, then the possibility of a total shutdown or the closing of a production line must be considered. Greatly reduced, but still positive, profits ar e als o of concern. Likewise in the case of a proposed facility or proposed expansion; i f esti mated profits would drop considerably with pollution control, then the development might not take place.
Two pieces of information are needed for the Profit Test. The first piece is the total annual cost of the required pollution control from Worksheet G . The second piece is the earnings information from the entity's income statement ( Worksheet H ).

The Profit Test should be calculated withand without the cost of pollution control. In the former case, the annualized cost of pollution control (including O&M) is subtracted from the discharger's earnings before taxes (revenues minus costs excluding incom e taxes) for the most recently completed fiscal year. Profits before pollution contro l investments have been made should be examined to determine whether t he discharger was alr eady in trouble (either not profitable or profits far below industry norms) before pollution control investments were made. If the discharger is already not profitable, i t may not claim that substantial impacts w ould occur due to compliance with water quality standards.
The Profit Test can be cal culated using Worksheets H, and I . Earnings before taxes (EBT) should be calculate d for at least the three previous fiscal years in order to identify anytrends or atypical years. Earnings with pollution control costs should be calculated for the latest year with complete financial information. Arguably, as long as the applicant maintains pos itive earnings, it can afford to pay for the pollution control. Over the long run, however , the owner is likely to shift operations to more profitable facilities, i f possible. The workbook, therefore, guides the applicant through a more thoroug h analysis, whic h compares the EBT, with and without pollution control, to total revenues to yield a profit rate and change in the profit rate due to pollution control. (Us e Workshe etI .) These profit rates should be compared to those for facilities in similarEconomic Guidance for Water Quality Standards 3-7

lines of business. As with other tests, it may not be possible to compare the discharger's rate directly with the rates of similar facilities. In such cases the discharger's profit rate shoul d be compared with that of firms that concentrate in similar businesses, using data in Moody 's Industrial Manual , Dun & Bradstreet's Industry Norms and Key Busines s Ratios , Standard & Poor's Industry Surveys , or Robert Morris's Annual Statement Studies

. If the di scharger's ratio compares favorably with the median or upper quartile ratio fo r similarbusinesses, the discharger is considered to be financially healthy. A typica l in come statement, like those found in Moody's Industrial Manual , has been included in Exhibit 3-1. The appropriate data have been underlined. Althoug h complicated, the analysis should consider whether the discharger or firm would be able to raise its prices in order to cover some or all of the pollution control costs. In such a c ase, revenues increase and earnings fall by an amount less than the costs o f pollution control. The degree to which the discharger is able to raise prices is difficult to predict, a nd depends on many factors. Considerations should include the level o f competition in the industry, th e likelihood of competitors' facilities facing similar project costs, and the willingness of consumers to pay more for the product. 3.2.b Secondary Measures The following secondary measures provide addition al important information about the financial health of the discharger. All primary and secondary measures will be included in the analysis. It is not sufficient to conclude that the discharger will be unprofitabl e after pollution co ntrol investments. In addition, the applicant should feel free to include any additional information about the discharger's financial health that they feel is relevant. Liquidity Liq uidity is a measure of how easily a discharger can pay its short-term bills. On e me asure of liquidity is the Current Ratio, which compares current assets with curren t liabilit ies. Current assets include cash and other assets that are or could reasonably b e converted into cash during the current year. The following items are considered to b e current assets: Inventories-- finished products, products in the process of being manufactured, raw materials, supplies, fuels, etc.; Prepaid expenses -- expenses paid in advance of use such as prepaid rent; Short-term investments -- savings accounts, certificates of deposit; Accounts receivable ;Current Ratio Current Assets Current Liabilities

Economic Guidance for Water Quality Standards 3-8 Marketable securities ; and Cash

. Likewise, current liabilities are items that must be paid within the current year. Th e following items are considered to be current liabilities: Accounts payable -- purchases of goods for resale and services received in th e normal course of business; Wages payable ; Short-t erm notes payable -- any debt initially incurred and due in the curren t year; Accrued expenses-- expenses that have been i ncurred but have not yet been paid at the end of the accounting period;
Taxes ; and Current portion of any long-term debt

. A more stringent test is the Quick Ratio, also known as the Acid Test, which compares curren tassets without inventories to current liabilities. It does not include inventorie s since they may take time to co nvert to cash and may be valued on the discharger's books for more than they could be sold. The Current Ratio should be calculated for each of the last three full fiscal years for which there are data. Comparing ratios for three years will identify any trends that ar e devel oping and will ensure that the most recent year is not an unusual year that migh t distort the results of the analysis. The Current Ratio is calculated by dividing current assets by current liabilities.

The Current Ratio can be calculated using Worksheet J . The general rule is that if the Current Ratio is greater than 2, the entity should be able to cover its short-term ob ligations. Frequently, lenders require this level of liquidity as a prerequisite fo r lending. While a Current Ratio of greater than 2 indicates that the entity can probabl y cover i ts short-term obligations, the impact of a major capital investment such as th eBeaver s Ratio Cash Flow Total Debt

Economic Guidance for Water Quality Standards 3-9 pollution control project must be judged in conjunct ion with the other three financial tests described in this guidance. In addition, this rule (Current Ratio > 2) may not be appropriate for all types of private entities covered by Water Quality Standards. The Current Ratio of the discharger i n question should be compared with ratios for other dischargers in the same line o f business. It may not be possible, however, to compare the discharger's ratio directly with other similar dischargers because this information frequently is unavailable at the facility level or is c onsidered confidential. In cases where a direct comparison cannot be made, the discharger's Current Ratio should be compared with the ratio f or firms that concentrate in similar b usinesses. If the discharger's ratio compares favorably with the median o r upper qu artile ratio for similar businesses, it should be able to cover it's short term obligations. Among the sources that provide co mparison information are: Robert Morris Assoc iates' Annual Statement Studies , Moody's Industrial Manual , and Dun an d Brads treet's Dun's Industry Norms . The Annual Statement Studies and Dun's Industr y Norm s provide composite statistics for firms grouped by different manufacturing an d serv ice industries. The Moody's Industrial Manualprovides detailed financia l informatio n on individual firms. Pages from both of these sources are displayed i n Exhibits 3-2 and 3-3, with the appropriate data indicated. Solvency Solvency is a measure of an entity's ability to meet its fixed and long-term obligations. Th ese obligations are bills and debts that are owed on a regular basis for periods longer than one year. Solvency tests are commonly used to predic t financial problems that could lead to bankruptcy within the next few years. Since any single year of data can easily be dis tortedby unusually high or low net income or by the timing of debt, solvency test s must be considered over at least three years of data in order to reveal long-term trends. As with liquidity, there are several possible tests for solvency. One commonly used solvency test (called Times Interest Earned) compares income before interest and taxes to i nterest expenses. Another solvency test, the Beaver's Ratio, compares cash flow t o to tal debt. This test has been shown to be a good indicator of the likelihood o f bankruptcy.

The Beaver's Ratio can be calculated using Worksheet K . Cash Flow is a measure of the ca sh the entity has available to it in a given year. Since depreciation is a n accounting cost -- a cost that does not use any currently available revenues -- it is added back to reported net income after taxes to get cash f low. Total debt is equal to the currentDebt / Equity Ratio Long Term Liabilities

Owners Equity

Economic Guidance for Water Quality Standards 3-10 debt for the current year plus the long term debt, since current debt includes that part of long-term debt that is due in the current year. If the Beaver's Ratio is greater than 0.20 the discharger is considered to be solvent (i.e., can pay its long-term debts). If the ratio i s less than 0.15 the discharger may be insolvent (i.e., go bankrupt). If the ratio is between 0.15 and 0.20, then fut ure solvency is uncertain. The discharger's Beaver's Ratio should be compared with th e ratios of similar dischargers. However, as with other ratios, it may not be possible to compare the discharger's rati o di rectly with other similar dischargers. In cases where a direct comparison cannot b e made, t he discharger's Beaver's Ratio should be compared with that of firms that co ncentrate in similar businesses, using information from income accounts and balance sheets in Moody's Industrial Manual . If the discharger's ratio compares favorably with similar businesses, it should be able to meet its fixed and long term obligations. A typical b alance sheet and income statement have been included in Exhibits 3-4 (for calculating total debt) and 3-5 (for c alculating cash flow). The appropriate data from them has been underlined. Leverage
Levera ge tests measure the extent to which a firm already has fixed financia l obligations and thus indicate how much more money a firm is capable of borrowing

. Firms that rely heavily on debt may find it difficult and expensive to borrow additional funds. Most leverage tests co mpare equity to some measure of debt or fixed assets. The Debt to Equity Ratio is the most commonly used method of measuring leverage. Unlike the ratios discussed above, the debt to equity ratio cannot be easily calculated for a single facility; it must be calculated for the firm, since it is usually the firm, not the facility, that borrows mo ney. The ratio measures how much the firm has borrowed (debt) relative to the amount of capital which is owned by its stockholders (equity). Since values for the Debt to Equity Ratio vary widely by the type of enterprise, the ratio should be compared with the ratio for firms in similar lines of business. The ratio also should be calculated with at least three years of data. The Deb t to Equity Ratio is equal to Long-Term Liabilities (long-term debt such a s bonds, debentures, and bank debt, and all other noncurrent liabilities like deferred income taxes) divide d by Owners' Equity. Owner's Equity is the difference between total assets and total liabilities, including contributed or paid in capital and retained earnings. Fo r publicly held firms, use Net Stockholders Equity (which is the equivalent of Tota l Stockholder Equity minus any Treasury Stock).Economic Guidance for Water Quality Standards 3-11

The Debt to Eq uity Ratio can be calculated using Worksheet L . Since there are n o generally accepted Debt/Equity Ratio values that apply to all types of economic activity, the ratio s hould be compared with the ratio of firms in similar businesses. If the entity's ratio compares favorably with the median or upper quartile ratio for similar businesses, it should be able to borrow additional funds. These ratios can be calculated using data in Robert Morris Associates' Annual Statement Studies , Moody's Industria l Manual , and Dun & Bradstreet's Dun's Industry Norms . Pages from these sources have been included i n Exhibits 3-6 and 3-7, with the appropriate data indicated. For entities with special sources of funding, leverage is not an appropriate measure of their ability to raise capital. Examples are agriculture and affordable housing, wher e special loan programs may be available. In these case s, an analysis of the probability that the project would receive this money is appropriate. 3.3 Interpreting the Results The financial analysis should be used to determine if there willbe a substantial adverse impacton the applicant. As indicated above, the Profit Test should be considered first. The Pro fit Test measures what will happen to the discharger's earnings if additiona l poll ution control is required. If the discharger is making a profit now but would los e m o ney with the pollution control, then the possibility of a total shutdown or the closing of a production line must beconsidered. Likewise in the case of a proposed facility; if it would make money without the pollution control but would make much less or even lose money with i t, then the development might not take place. In either case, there is th e chanc e that employment will be lost and local purchases by the discharger reduced

. Whether or not these impacts will be considered widespread is addressed in Chapter 4. There are several morecomplicated scenarios that all involve making a judgement as to the likely impacts on the discharger, including questions of the timing of compliance. For ex ample, the Profit Test may indicate that the applicant will continue to maintai n profit l evels typical for its industry after compliance, but the Debt/Equity Ratio may indicate that they will have trouble raising the required capital through debt. Thi s problem may be solved by giving them more time to meet the regulations (a variance), so that they can restructure their deb t and/or find alternative sources of funds. In another case, the applicant might argue that while they will still make money and be able to raise the needed capital, they would alternatively spend those funds on an expansion whic h would have resulted in increased employment and income for the community. This is a more diffi cult situation to analyze, and will depend on judgments about the relativ e imp ortance of water pollution control versus economic growth. These issues ar e discussed in more detail in Chapter 4. Another possible scenario is that the discharger may shift to an alternative economic activity (e.g., manufacture another product or produce a different crop). While th eEconomic Guidance for Water Quality Standards 3-12

applicant wil l not have gone out of business, this shift may result in reduced profits , emp loyment, and purchases in the local community that must be considered. In eac h case, it is imp ortant to take the entire picture presented by the four ratios into account in judging whether or not the discharger will incur substantial impacts due to the cost of the necessary pollution reductions. Usin g the guidance presented in this chapter, applicants that feel they hav e demon stratedsubstantial impacts should proceed to Chapter 4: Determination o f Widespread Impacts. If dischargers are not able to demonstrate substantial impacts, the entity must meet existing standard s. If a group of dischargers within the community will experi ence the substantial impacts resulting from compliance with water quality standards, these impacts should be considered jointly when assessing whether or not the impacts will be widespread.Estimate Costs of Pollution Control Necessary to Meet Water Quality Standards Capital Cost, Annual O&M Cost

Financial Impact Analysis Determine whether private entity will incur substantial impacts based on primary and secondary measures of financial health Annualize Pollution Control Costs Annual Cost of Proposed Pollution Reduction

Substantial Impacts Figure 3-1: Measuring Substantial Impacts (Private Entities)

Request Rejected

Proceed to analysis of widespread impacts in Chapter 4 No Substantial ImpactsEconomic Guidance for Water Quality Standards

### Exhibit 3-1

XYZ,INC . CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT) FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988 1987 1986 Net sales $33,294,962 $30,730,768 Cost of sales 26,405,930 24,972,185 Gross profit 6,889,032 5,758,583 Selling, general and administrative expenses 3,876,206 3,824,226 Income from operations 3,012,826 1,934,357 $42,389,957 35,981,363 6,408,594 3,957,771 2,450,823 Other income (deductions) Interest income 347,613 362,295 Interest expense (22,513) (46,467) Other investment income - net 134,690 Miscellaneous 48,660 93,654 Total other income (deductions) - net 373,760 544,172 Income before income taxes 3,386,586 2,478,529 Provision for income taxes 1,620,012 1,150,949 Net income 1,766,574 1,327,580 441,891 (10,985) 55,066 485,972 2,936,795 1,139,118 1,797,677 Retained earnings, beginning of year 1,726,292 1,983,007 Stock dividend (1,952,645) (1,365,590) Cash dividend ($.11 per share, 1988; $.08 per share, 1987; $.06 per share, 1986) (300,693) (218,705) Common stock acquired and retired (82,000) Retained earnings (deficit), end of year $ 1,157,528 $ 1,726,292 Weighted average number of shares outstanding 3,630,652 3,637,798 Earnings per common share $.49 $.36 1,157,528 (2,610,888) (391,960) (2,591) $ (50,234) 3,593,048 $.50 See accompanying Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT To the Shareholders of XYZ, Inc.: We have audited the consolidated balance sheets of XYZ, Inc. at September 30, 1988 and 1987, and the related consolidated statements of income and retained earnings (deficit), and cash flows for each of the three years in the period ended September 30, 1988. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the companies at September 30, 1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1988 in conformity with generally accepted accounting principles. DELOITTE HASKINS & SELLS Minneapolis, Minnesota December 5, 1988Exhibit 3-2 353 MANUFACTURERS • GAMES, TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES. SIC # 3944 Comparative Historical Data Current Data Sorted by Sales

17 19 19 Type of Statement 4 4 11 11 21 24 Unqualified 1 3 7 10 2 1 2 7 14 Reviewed 3 5 3 1 2 17 20 18 Tax Returns 2 5 2 1 8 1 Compiled 1 # Postretirement 1

Benefits

Other 4/1/90- 4/1/91- 4/1/92- 3/31/91 3/31/92 3/31/93 17(4/1/-9/30/92) 58 (10/1/92-3/31/93) ALL ALL ALL 0-1MM 1-3mm 3-5MM 5-10MM 10-25MM 25MM & OVER 47 68 75 NUMBER OF STATEMENTS 6 13 9 17 8 22 % % % ASSETS % % % % % % 7.1 8.9 7.2 Cash & Equivalents 7.4 13.3 5.8 27.0 30.9 31.8 Trade Receivables - (net) 24.5 32.0 36.0 31.9 30.4 35.3 Inventory 47.4 31.0 28.3 2.1 1.9 1.7 All Other Current .6 2.2 2.7 68.1 72.1 76.1 Total Current 79.8 78.5 72.7 19.2 17.5 16.7 Fixed Assets (net) 16.1 14.4 17.2 4.2 3.7 3.1 Intangibles (net) 1.8 2.2 5.4 8.5 6.7 4.1 All Other Non-Current 2.3 4.9 4.7 100.0 100.0 100.0 Total 100.0 100.0 100.0
16.4 12.6 14.0 Notes Payable Short-Term 13.9 12.3 11.8 3.4 2.3 3.0 Cur. Mat.-L/T/D 4.5 3.6 .7 11.7 13.1 14.6 Trade Payables 14.5 12.0 16.5 .7 .9 .6 Income Taxes Payable .5 .5 .7 8.1 9.0 11.1 All Other Current 5.6 10.8 11.9 40.3 38.0 43.2 Total Current 38.8 39.2 41.7 13.2 13.4 12.2 Long Term Debt 15.5 9.4 11.8 1.2 .5 .4 Deferred Taxes .1 .5 .6 2.8 5.3 3.5 All Other Non-Current 2.2 2.1 1.7 42.4 42.9 40.6 Net Worth 43.4 48.8 44.3 100.0 100.0 100.0 Total Liabilities and Net Worth 100.0 100.0 100.0 LIABILITIES

100.0 100.0 100.0 Net Sales 100.0 100.0 100.0 35.5 37.2 36.0 Gross Profit 35.5 33.5 35.8 28.5 29.3 30.2 Operating Expenses 29.9 28.2 28.6 6.9 7.9 5.8 Operating Profit 5.7 5.3 7.2 3.3 1.8 1.2 All Other Expenses (net) 1.1 .4 1.8 3.7 6.1 4.6 Profits Before Taxes 4.6 4.9 5.3 INCOME DATA

2.5 2.8 2.9 4.5 2.8 2.8 1.7 1.9 1.8 Current 2.3 1.9 1.9 1.2 1.3 1.3 1.5 1.3 1.2 RATIOS

1.4 1.7 1.4 1.7 2.0 1.8 .8 1.1 .8 Quick .6 .8 1.0 .6 .7 .6 .5 .6 .7 34 10.6 31 11.6 34 10.8 14 25.2 31 11.9 56 6.5 55 6.6 49 7.4 56 6.5 Sales Receivables 37 10.0 56 6.5 72 5.1 85 4.3 85 4.3 85 4.3 78 4.7 89 4.1 99 3.7 62 5.9 55 6.6 63 5.8 79 4.6 43 8.5 68 5.4 104 3.5 85 4.3 94 3.9 Cost of Sales/Inventory 126 2.9 78 4.7 85 4.3 146 2.5 152 2.4 146 2.5 166 2.2 140 2.6 118 3.1 21 17.0 21 17.7 18 20.1 10 38.1 12 30.2 29 12.5 29 12.4 27 13.3 30 12.3 Cost of Sales/Payables 27 13.3 22 16.4 39 9.4 50 7.3 47 7.8 61 6.0 40 9.1 33 11.0 66 5.5

3.9 3.4 3.3 2.6 3.0 3.3 7.6 6.2 6.3 Sales/Working Capital 4.4 6.5 5.1 17.5 10.8 13.8 14.0 11.5 15.0 (44) 2.4 (66) 3.4 (69) 3.6 EBIT/Interest (12) 1.9 (14) 4.6 (21) 4.3

7.1 10.1 9.0 6.8 9.2 14.5 1.0 1.5 1.5 .8 1.3 2.9 (23) 2.8 3.3 2.8 Amort./Cur. Mat.L/T/D

8.9 (34) 13.3 (24) 13.1 Net Profit + Depr., Dep., .5 1.8 1.2 .2 .2 .1 .1 .1 .2 .6 .4 .5 Fixed/Worth .4 .3 .5 .8 .8 1.0 1.2 .7 1.0 .9 .8 1.0 .7 .5 .7 2.0 1.6 1.8 Debt/Worth 1.5 1.1 1.7 3.0 3.3 3.3 3.0 5.5 2.6 (45) 16.2 (65) 26.1 (70) 22.8 Net Worth 9.2 (16) 27.4 (21) 27.9

34.5 52.8 39.9 % Profit Before Taxes/Tangible 51.2 42.8 37.9 1.1 7.0 4.6 2.8 3.2 17.2 11.7 20.5 17.0 % Profit Before Taxes/Total 21.1 18.6 14.2 5.5 10.8 7.6 Assets 3.3 9.6 8.2 .4 1.9 1.5 .8 1.5 3.9 20.1 44.3 35.8 64.6 42.7 21.4 9.8 15.6 17.1 Sales/Net Fixed Assets 35.8 15.1 11.2 6.5 7.3 7.5 9.5 7.3 7.2 2.1 2.5 2.6 2.9 2.6 2.1 1.6 2.0 2.0 Sales/Total Assets 2.0 1.8 1.9 1.3 1.5 1.6 1.7 1.5 1.4 (36) 2.1 (61) 1.7 (61) 1.6 % Depr., Dep., Amort./Sales (11) .8 2.3 2.6

1.1 .8 .7 .4 .8 1.4 2.9 3.3 2.8 2.5 2.9 3.2 (12) 4.3 (23) 4.1 (30) 4.5 Owners' Comp/Sales

1.8 2.4 2.7 % Officers', Directors', 6.7 9.5 7.8 1537661M 1883457M 1840680M Net Sales ($) 3293M 27202M 36782M 116678M 115773M 1540952M 1092333M 1169085M 1136958M Total Assets ($) 1948M 13736M 20946M 72757M 52973M 974598M © Robert Morris Associates 1993 M = $thousand MM = $million See Pages 1 through 15 for Explanation of Ratios and Data

### Exhibit 3-3

XYZ,INC . CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1988 AND 1987
1988 1987 ASSETS Current Assets: Cash and cash equivalents $ 1,459,475 Cash investments 3,369,289 Trade receivables - less allowance for doubtful accounts: 1988, $85,352; 1987, $135,353 4,171,421 Inventories 3,335,251 prepaid expenses and other 122,370 Total current assets 12,457,806 $ 2,944,964 2,244,061 5,025,964 4,109,264 725,964 15,050,217 Property, Plant and Equipment: Land 296,217 Buildings and Improvements 4,837,392 Machinery and equipment 1,546,476 Transportation equipment 1,705,107 Office furniture and equipment 483,769 Total 8,868,961 Less accumulated depreciation 4,207,598 Property - net 4,661,363 356,217 5,476,155 2,160,671 1,866,005 463,750 10,322,798 4,705,580 5,617,218 Other Assets: Intangible assets - less accumulated amortization: 1988, $197,437; 1987, $239,281 252,884 Insurance trust 1,066,964 Other 77,778 Total other assets 1,397,626 226,728 1,122,796 89,287 1,438,811 Total $18,516,795 $22,106,246

LIABILITIES AND Current Liabilities: SHAREHOLDERS' $ 17,902 EQUITY 5,049,234 Current portion of long-term debt $ 32,405 Accounts payable - trade 2,686,669 Accrued income taxes 21,400 Accrued payroll and employee benefits 678,752 Container deposits 1,199,263 Other accruals 178,736 Total current liabilities 4,797,225 681,369 1,054,373 198,477 7,001,355 Long-term debt 71,608 53,706 Deferred income taxes 242,200 249,900 Shareholders' Equity: Common stock - authorized 4,000,000 shares of $.05 par value, issued: 1988, 3,592,673; 1987, 3,268,337 Additional paid-in capital 163,417 Retained earnings (deficit) 12,084,817 Total shareholders' equity 1,157,528 179,634 14,671,885 (50,234) 14,801,285 13,405,762 Total $18,516,795 $22,106,246 See accompanying Notes to Financial Statements

### Exhibit 3-4

XYZ,INC . CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1988 AND 1987
1988 1987 ASSETS Current Assets: Cash and cash equivalents $ 1,459,475 Cash investments 3,369,289 Trade receivables - less allowance for doubtful accounts: 1988, $85,352; 1987, $135,353 4,171,421 Inventories 3,335,251 prepaid expenses and other 122,370 Total current assets 12,457,806 $ 2,944,964 2,244,061 5,025,964 4,109,264 725,964 15,050,217 Property, Plant and Equipment: Land 296,217 Buildings and Improvements 4,837,392 Machinery and equipment 1,546,476 Transportation equipment 1,705,107 Office furniture and equipment 483,769 Total 8,868,961 Less accumulated depreciation 4,207,598 Property - net 4,661,363 356,217 5,476,155 2,160,671 1,866,005 463,750 10,322,798 4,705,580 5,617,218 Other Assets: Intangible assets - less accumulated amortization: 1988, $197,437; 1987, $239,281 252,884 Insurance trust 1,066,964 Other 77,778 Total other assets 1,397,626 226,728 1,122,796 89,287 1,438,811 Total $18,516,795 $22,106,246

LIABILITIES AND Current Liabilities: SHAREHOLDERS' $ 17,902 EQUITY 5,049,234 Current portion of long-term debt $ 32,405 Accounts payable - trade 2,686,669 Accrued income taxes 21,400 Accrued payroll and employee benefits 678,752 Container deposits 1,199,263 Other accruals 178,736 Total current liabilities 4,797,225 681,369 1,054,373 198,477 7,001,355 Long-term debt 71,608 53,706 Deferred income taxes 242,200 249,900 Shareholders' Equity: Common stock - authorized 4,000,000 shares of $.05 par value, issued: 1988, 3,592,673; 1987, 3,268,337 Additional paid-in capital 163,417 Retained earnings (deficit) 12,084,817 Total shareholders' equity 1,157,528 179,634 14,671,885 (50,234) 14,801,285 13,405,762 Total $18,516,795 $22,106,246 See accompanying Notes to Financial Statements

### Exhibit 3-5

XYZ,INC . CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT) FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988 1987 1986 Net sales $33,294,962 $30,730,768 Cost of sales 26,405,930 24,972,185 Gross profit 6,889,032 5,758,583 Selling, general and administrative expenses 3,876,206 3,824,226 Income from operations 3,012,826 1,934,357 $42,389,957 35,981,363 6,408,594 3,957,771 2,450,823 Other income (deductions) Interest income 347,613 362,295 Interest expense (22,513) (46,467) Other investment income - net 134,690 Miscellaneous 48,660 93,654 Total other income (deductions) - net 373,760 544,172 Income before income taxes 3,386,586 2,478,529 Provision for income taxes 1,620,012 1,150,949 Net income 1,766,574 1,327,580 441,891 (10,985) 55,066 485,972 2,936,795 1,139,118 1,797,677 Retained earnings, beginning of year 1,726,292 1,983,007 Stock dividend (1,952,645) (1,365,590) Cash dividend ($.11 per share, 1988; $.08 per share, 1987; $.06 per share, 1986) (300,693) (218,705) Common stock acquired and retired (82,000) Retained earnings (deficit), end of year $ 1,157,528 $ 1,726,292 Weighted average number of shares outstanding 3,630,652 3,637,798 Earnings per common share $.49 $.36 1,157,528 (2,610,888) (391,960) (2,591) $ (50,234) 3,593,048 $.50 See accompanying Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT To the Shareholders of XYZ, Inc.: We have audited the consolidated balance sheets of XYZ, Inc. at September 30, 1988 and 1987, and the related consolidated statements of income and retained earnings (deficit), and cash flows for each of the three years in the period ended September 30, 1988. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the companies at September 30, 1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1988 in conformity with generally accepted accounting principles. DELOITTE HASKINS & SELLS Minneapolis, Minnesota December 5, 1988Exhibit 3-6 353 MANUFACTURERS • GAMES, TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES. SIC # 3944 Comparative Historical Data Current Data Sorted by Sales

17 19 19 Unqualified 4 4 11 11 21 24 Reviewed 1 3 7 10 2 1 2 7 14 Compiled 3 5 3 1 2 17 20 18 Other 2 5 2 1 8 1 Tax Returns 1 # Postretirement Benefits 1

Type of Statement

4/1/90- 4/1/91- 4/1/92- 3/31/91 3/31/92 3/31/93 17(4/1/-9/30/92) 58 (10/1/92-3/31/93) ALL ALL ALL 0-1MM 1-3mm 3-5MM 5-10MM 10-25MM 25MM & OVER 47 68 75 NUMBER OF STATEMENTS 6 13 9 17 8 22

% % % ASSETS % % % % % % 7.1 8.9 7.2 Cash & Equivalents 7.4 13.3 5.8 27.0 30.9 31.8 Trade Receivables - (net) 24.5 32.0 36.0 31.9 30.4 35.3 Inventory 47.4 31.0 28.3 2.1 1.9 1.7 All Other Current .6 2.2 2.7 68.1 72.1 76.1 Total Current 79.8 78.5 72.7 19.2 17.5 16.7 Fixed Assets (net) 16.1 14.4 17.2 4.2 3.7 3.1 Intangibles (net) 1.8 2.2 5.4 8.5 6.7 4.1 All Other Non-Current 2.3 4.9 4.7 100.0 100.0 100.0 Total 100.0 100.0 100.0
16.4 12.6 14.0 Notes Payable Short-Term 13.9 12.3 11.8 3.4 2.3 3.0 Cur. Mat.-L/T/D 4.5 3.6 .7 11.7 13.1 14.6 Trade Payables 14.5 12.0 16.5 .7 .9 .6 Income Taxes Payable .5 .5 .7 8.1 9.0 11.1 All Other Current 5.6 10.8 11.9 40.3 38.0 43.2 Total Current 38.8 39.2 41.7 13.2 13.4 12.2 Long Term Debt 15.5 9.4 11.8 1.2 .5 .4 Deferred Taxes .1 .5 .6 2.8 5.3 3.5 All Other Non-Current 2.2 2.1 1.7 42.4 42.9 40.6 Net Worth 43.4 48.8 44.3 100.0 100.0 100.0 Total Liabilities and Net Worth 100.0 100.0 100.0 LIABILITIES

100.0 100.0 100.0 Net Sales 100.0 100.0 100.0 35.5 37.2 36.0 Gross Profit 35.5 33.5 35.8 28.5 29.3 30.2 Operating Expenses 29.9 28.2 28.6 6.9 7.9 5.8 Operating Profit 5.7 5.3 7.2 3.3 1.8 1.2 All Other Expenses (net) 1.1 .4 1.8 3.7 6.1 4.6 Profits Before Taxes 4.6 4.9 5.3 INCOME DATA

2.5 2.8 2.9 4.5 2.8 2.8 1.7 1.9 1.8 Current 2.3 1.9 1.9 1.2 1.3 1.3 1.5 1.3 1.2 RATIOS

1.4 1.7 1.4 1.7 2.0 1.8 .8 1.1 .8 Quick .6 .8 1.0 .6 .7 .6 .5 .6 .7 34 10.6 31 11.6 34 10.8 14 25.2 31 11.9 56 6.5 55 6.6 49 7.4 56 6.5 Sales Receivables 37 10.0 56 6.5 72 5.1 85 4.3 85 4.3 85 4.3 78 4.7 89 4.1 99 3.7 62 5.9 55 6.6 63 5.8 79 4.6 43 8.5 68 5.4 104 3.5 85 4.3 94 3.9 Cost of Sales/Inventory 126 2.9 78 4.7 85 4.3 146 2.5 152 2.4 146 2.5 166 2.2 140 2.6 118 3.1 21 17.0 21 17.7 18 20.1 10 38.1 12 30.2 29 12.5 29 12.4 27 13.3 30 12.3 Cost of Sales/Payables 27 13.3 22 16.4 39 9.4 50 7.3 47 7.8 61 6.0 40 9.1 33 11.0 66 5.5

3.9 3.4 3.3 2.6 3.0 3.3 7.6 6.2 6.3 Sales/Working Capital 4.4 6.5 5.1 17.5 10.8 13.8 14.0 11.5 15.0 (44) 2.4 (66) 3.4 (69) 3.6 EBIT/Interest (12) 1.9 (14) 4.6 (21) 4.3

7.1 10.1 9.0 6.8 9.2 14.5 1.0 1.5 1.5 .8 1.3 2.9 (23) 2.8 3.3 2.8 Amort./Cur. Mat.L/T/D

8.9 (34) 13.3 (24) 13.1 Net Profit + Depr., Dep., .5 1.8 1.2 .2 .2 .1 .1 .1 .2 .6 .4 .5 Fixed/Worth .4 .3 .5 .8 .8 1.0 1.2 .7 1.0 .9 .8 1.0 .7 .5 .7 2.0 1.6 1.8 Debt/Worth 1.5 1.1 1.7 3.0 3.3 3.3 3.0 5.5 2.6 (45) 16.2 (65) 26.1 (70) 22.8 Net Worth 9.2 (16) 27.4 (21) 27.9

34.5 52.8 39.9 % Profit Before Taxes/Tangible 51.2 42.8 37.9 1.1 7.0 4.6 2.8 3.2 17.2 11.7 20.5 17.0 % Profit Before Taxes/Total 21.1 18.6 14.2 5.5 10.8 7.6 Assets 3.3 9.6 8.2 .4 1.9 1.5 .8 1.5 3.9 20.1 44.3 35.8 64.6 42.7 21.4 9.8 15.6 17.1 Sales/Net Fixed Assets 35.8 15.1 11.2 6.5 7.3 7.5 9.5 7.3 7.2 2.1 2.5 2.6 2.9 2.6 2.1 1.6 2.0 2.0 Sales/Total Assets 2.0 1.8 1.9 1.3 1.5 1.6 1.7 1.5 1.4 (36) 2.1 (61) 1.7 (61) 1.6 % Depr., Dep., Amort./Sales (11) .8 2.3 2.6

1.1 .8 .7 .4 .8 1.4 2.9 3.3 2.8 2.5 2.9 3.2 (12) 4.3 (23) 4.1 (30) 4.5 Owners' Comp/Sales

1.8 2.4 2.7 % Officers', Directors', 6.7 9.5 7.8 1537661M 1883457M 1840680M Net Sales ($) 3293M 27202M 36782M 116678M 115773M 1540952M 1092333M 1169085M 1136958M Total Assets ($) 1948M 13736M 20946M 72757M 52973M 974598M © Robert Morris Associates 1993 M = $thousand MM = $million See Pages 1 through 15 for Explanation of Ratios and Data

### Exhibit 3-7

XYZ,INC . CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1988 AND 1987
1988 1987 ASSETS Current Assets: Cash and cash equivalents $ 1,459,475 Cash investments 3,369,289 Trade receivables - less allowance for doubtful accounts: 1988, $85,352; 1987, $135,353 4,171,421 Inventories 3,335,251 prepaid expenses and other 122,370 Total current assets 12,457,806 $ 2,944,964 2,244,061 5,025,964 4,109,264 725,964 15,050,217 Property, Plant and Equipment: Land 296,217 Buildings and Improvements 4,837,392 Machinery and equipment 1,546,476 Transportation equipment 1,705,107 Office furniture and equipment 483,769 Total 8,868,961 Less accumulated depreciation 4,207,598 Property - net 4,661,363 356,217 5,476,155 2,160,671 1,866,005 463,750 10,322,798 4,705,580 5,617,218 Other Assets: Intangible assets - less accumulated amortization: 1988, $197,437; 1987, $239,281 252,884 Insurance trust 1,066,964 Other 77,778 Total other assets 1,397,626 226,728 1,122,796 89,287 1,438,811 Total $18,516,795 $22,106,246

LIABILITIES AND Current Liabilities: SHAREHOLDERS' $ 17,902 EQUITY 5,049,234 Current portion of long-term debt $ 32,405 Accounts payable - trade 2,686,669 Accrued income taxes 21,400 Accrued payroll and employee benefits 678,752 Container deposits 1,199,263 Other accruals 178,736 Total current liabilities 4,797,225 681,369 1,054,373 198,477 7,001,355 Long-term debt 71,608 53,706 Deferred income taxes 242,200 249,900 Shareholders' Equity: Common stock - authorized 4,000,000 shares of $.05 par value, issued: 1988, 3,592,673; 1987, 3,268,337 Additional paid-in capital 163,417 Retained earnings (deficit) 12,084,817 Total shareholders' equity 1,157,528 179,634 14,671,885 (50,234) 14,801,285 13,405,762 Total $18,516,795 $22,106,246 See accompanying Notes to Financial StatementsEconomic Guidance for Water Quality Standards 4-1

4. DETERMINATION OF WIDESPREAD IMPACTS The financial impacts of undertaking pollution controls could potentially cause far

reaching and seri ous socioeconomic impacts. If the financial tests outlined in Chapter 2 and 3 sug gest that a discharger (public or private) or group of dischargers will hav e difficulty paying for pollu tion controls, then an additional analysis must be performed to demonstr ate that there will be widespread adverse impacts on the community o r surro unding area. There are no economic ratios per se that evaluate socioeconomi c impacts. Instead, the relative magnitudes of indicators such as increases i n unemployment, loss es to the local economy, changes in household income, decreases in ta x revenues, indirect effects on other businesses, and increases in sewer fees fo r remaining private entities should be taken into account when deciding whether impacts co uld be considered widespread. Since EPA does not have standardized tests an d benchmarks with which to measure these impacts, the following guidance is provided as an example of the types of information that should be considered when reviewing impacts on the surrounding community.
In certain circumstances, the information presented here may not adequately address all potent ial impacts. At a minimum, however, the analysis must define the affecte d community (the geographic area w here project costs pass through to the local economy), consider th e baseline economic health of the community, and finally evaluate how th e proposed project will affect the socioecon omic well-being of the community. Applicants should feel free to consider additional measures not mentioned here if they judge them to be relevant. Likewise, applicants should not view this guidance as a check list. In all cases, socioeconomic impacts should not be evaluated incrementally, rather, thei r cumulative effect

on the community should be assessed. More detailed guidance on the fa ctors that should be considered when evaluating the socioeconomic impacts t o communities of meeting water quality standards is given below. 4.1 Define Relevant Geographical Area One i mportant factor in determining the magnitude of these impacts is defining th e geographi cal area in which they occur. In some cases, one community's loss may b e another community's gain, as in the caseof a plant moving to another community. In the case of municipal pollution control projects, the affected community is most often th e immediate municipality. There are, however, exceptions where the affected community includes individuals and areas outside the immediate community. For example, i f bus iness activity in the region is concentrated in a nearby community and not in th e immed iate community, then the nearby community may also be affected by loss o f income in the immedi ate community and should be included in the analysis. If business activi ty of the region is concentrated in the immediate community, then outlyin g communit ies dependent upon the immediate municipality for employment, goods, an d services should als o be included in the analysis. Similarly, if a large number of workersEconomic Guidance for Water Quality Standards 4-2

com mute to an industrial facility that is significantly affected by the costs, then th e affected community should include the home communities of commuters as well as the immediate community. The relevant geographic area for evaluating the socioeconomic effects of compliance by private entities varies with each situation. For impacts from actions by a private entity, the area will typically be determin ed by the area in which the majority of its workers live and where most of the businesses that depend on it are located. There are no simple rules for defining the relevant area or community; the decision is based on the judgement of the discharger and state, subject to EPA review. 4.2 Determine Whether Impacts are Widespread: Public-Sector Entities
In demonstrating that impacts will be substantial, the applicant will have shown that compliance with water quality standards would be burdensome to the community. T o demonstra te that impacts will also be widespread, the applicant must examine th e estimated change in socioeconomic conditions that occur as a result of compliance. Ther e are no explicit criteria by which to evaluate widespread impacts. It i s recomme nded, however, that changes in the socioeconomic indicators listed below b e considered. For e ach indicator listed, the applicant should estimate the potential change from precompliance conditions if the community were to adopt pollution controls. Median Household Income; Community Unemployment Rate; Overall Net Debt as a Percent of Full Market Value of Taxable Property; Percent of Households Below Poverty Line; Impact on Community Development Potential; and Impact on Property Values. Precompliance estimates of the first three indicators were considered in Chapter 2 in the Secondary Test. Estimated changes should be described qualitatively in Worksheet M

. Depending on the size and type of impacts on industrial andcommercial discharges, these estimatedchanges may be relatively large or small. In addition to changes in income , unemployment, and debt, affected communities may be f aced with impaired development o p portunities if pretreatment requirements or significantly higher user fees are imposed by the PO TW. The municipality should therefore assess the potential for the loss o f future jobs and personal income to the community if businesses would chose not to locate in the affected community. The pote ntial for impaired development opportunities can be judged, in part, by comparing post-compliance costs to cost s in neighboring communities. The cost of pollution control may als o have an adverse effect on property values. Where property taxes are used to finance the project, property values may fall in response t o higher taxe s. Similarly, if the project will be financed through user fees, demand fo rEconomic Guidance for Water Quality Standards 4-3

pr operty in the community may fall, thus decreasing the value of property in th e community. The extent to which estimated changes c an be interpreted as significant, however, will depend on the health of the communit y before compliance. It is therefore not possible to identify acceptable or unacceptable estimated changes for each indicator. For example, if Community XYZ were determined to be in a weak condition before compliance. As de finedin Chapter 2, but the evaluation of widespread impacts suggests that all of th e indicators listed above will remain virtually unchanged, then w idespread impacts have not been demonstrated. Alternatively, if Community XYZ were very healthy, the estimated change in the indicators listed above would have to be very large in order for widespread impacts to occur.
In addition, there may be secondary impacts (not captured by the primary an d secondary tests) to the community. Secondary impacts might include depressed economic activity i n a community resulting from loss of purchasing power by persons losing their jobs due to increase d user fees. The next section describes secondary impacts in greater detail. 4.3 Determine Whether Impacts are Widespread: Private-Sector Entities If the financial tests suggest that a private entity or groupof entities will have difficulty paying for pollution controls, then an additional analysis must be performed t o demonstr ate that there will be widespread adverse impacts on the community o r surrounding area. The current economic condition of the affected community and the role of the affected entities within the community should first be considered when determining whetherthe affected community will be able to absorb the impacts of reduced business ac tivity or closures. Through property taxes and employment, the entity(ies) may be a key contributor to the economic base of the affected community. In this situation , reductio ns in employment caused by compliance with the water quality standards could be widespread if workers haveno other employment opportunities nearby. Impacts may also be significant where the entity(ies) is a primary producer of a particular product or servi ce upon which other nearby businesses or the affected community depend. Th e impacts of reduced business activities or closure will be far greater in this case than if the pr oducts are sold elsewhere. These two examples illustrate how the interdependenc e bet ween the affected entity(ies) and the affected community is a major factor i n demonstrating that the impacts are not only substantial, but also widespread. As important as the extent of socioeconomic impacts is the type of impacts that might occur. A worksheet has been provided to assist applicants in their evaluation o f soci oeconomic impacts. Worksheet N is designed as a list of the factors applicant s should consider in determining whether impacts are not only substantial but als o widespread. The worksheet is organized to follow the text below. To make the mos tEconomic Guidance for Water Quality Standards 4-4

efficientuse of this worksheet, applicants should read the remainder of Section 4.3 and then collect the data suggested in the worksheet. Applicants should feel free, however, to us e anecdotal information to describe any current community characteristics o r anticipated impacts that are not listed in the worksheet. Potentially, one of the most serious impacts on the affected community's economy is the loss of employment caused by a reduc tion in business activity or closure. The size of this impact is dependent on the number of jobs lost relative to the total number of jobs in the comm unity, and to the job opportunities available in the community. Typically, a decline in employm ent leads to a decline in personal income in the affected community. The total amount of income lost by the affected community will depend, in part, on the future job prospects of those losing their jobs. If employees leave the area in search of opportunities, all of their income will be lost to the affected community. Workers who are unabl e to market the full range of their skills to a new employer will receive lowe r wages in subsequent jobs. If employees stay in the area and find lower paying jobs o r receive une mployment benefits, the loss of income to the affected community would be equal to t he difference between existing and future income; the cost of unemploymen t benefits i s calculated as a government expense or an expense borne someplace else , whichever is appropriate to the situation.
To asses s the net impact on employment in the affected community, the existing rate of unemployment should be con sidered as an indicator of worker mobility between jobs. When th e unemployment rate is very high in an affected community, workers will have a diff icult time finding other jobs in that community. Where possible, comparison s should be made between industry emp loyment levels in the community and the nation as a whole. If employment levels in the i ndustry as a whole are falling, the industry may be in decline regardless of the burden placed on them bywater quality standards regulations. If it is clear that a private-sector entity will go out of business regardless of water quality standards, the impact of the pollution controls should not be viewed as substantial. If the entity is i n a marginal position, however, the effect that meeting water quality standards will have on the entity and the community should be considered. Applicants should also con siderwhether the lack of alternative employment opportunities may lead to a n increased need for social services in the affected community. If the costs of increase d social services will be borne by the affected community, they should be included in the assessment of widespread and substantial impacts. Socioeconomic impacts may also include effects on the local government(s) such as loss of property tax revenues. If the financial tests in Chapter 3 suggest that an entity or group of entities will close, then the asses sed value of property and tax revenues will fall. If the entities are a major source of revenue for the affected community, this loss in tax revenue ma y be significant. One example might be water quality standards that affec t farming practices in an agricultural region. Compliance with these standards might lower the profitability of many farms, even to th e point of forcing them to cease operations. ToEconomic Guidance for Water Quality Standards 4-5

assess the impact, the los s in property tax revenues should be compared to total property tax reven ues in the affected community to determine the relative size of the loss. I n general, a drop of 1 percent in property tax revenues would be considered significant. If compliance is evaluated in the context of a public investment for which the private entity is paying a share (e.g., a factory's share of the cost to upgrade a municipal treatment plant), then the analysis of widespread impacts is more complicated. If the financia l analysis shows that th e entity or group of entities cannot pay their share of the cost, then the socio economic and public entity analysis should include this additional burden o n otherusers. Likewise, if the entity or group of entities are significant users of the local ut ilities, then a reduction in business activity or closure may lead to a lowered deman d and possible decreased effi ciency for local utilities. For example, a water supply system may be designed with a large industrial user in mind. If much of the demand i s eliminated, the system may become excessively expensive for the remaining users. Affected communities may also be faced with impaired development opportunities if th e need to comply with water quality standards discourages other businesses fro m locating in the area. In situations where the af fected facility has not been built, additional exp enditures on water pollution controls may delay or cancel the construction. Th e applicant should, therefore, consider not only the loss of potential jobs and persona l incom e to the community if the entity is not built, but the future losses in jobs, personal income and tax revenues from other businesses that would choose not to locate in th e affected community. Ther e may be some cases in which the socioeconomic impacts of implementin g pollution controls are large enough that they are felt at the state level. For example, the State may lose tax revenues from lost production and lost income if a business closes

. This wi ll be of particular importance if the business is a major employer in the Stat e and/or the State is experiencing a period of high unemployment and fiscal distress. At the same time, the State may encounter increased expenditures for unemploymen t compensation and socialservices. In reviewing state level impacts, the applicant should consider t he degree to which decreases in employment and personal income in one area of the State are offset by increases in employment and personal income in other parts of the State. In most cases, impacts at the state level will be relatively minor. If not, then impacts are widespread. 4.4 Estimate Multiplier Effect The effects of increased unemployment, decreased personal income, and reduction s in loc al expenditures by the entity or group of entities (public and private) will b e compo unded as money moves through the local economy. Some portion of the los t income would have been spent in the local economy for the purchase of other goods and servic es and thus for the salaries of other local employees. These local employees, i nEconomic Guidance for Water Quality Standards 4-6

tu rn, would have spent some portion of their income in the local economy. Thi s multiplier effect means that each dollar lost to an employee results i n the loss of more than one dollar to the local economy. The U. S. Department of Commerce, Bureau of Economic Analysis (BEA) ha s devel oped several multipliers to estimate the effect of reduced economic activity o n output (sales), earnings, and employment. These multipliers are available by industry sector for 39 or 531 different industry classifications, depending on the level of detai l require d. Applicants that are interested in using these multipliers are advised to consult a copy of RIMS II Regio nal Multipliers: A User Handbook of the Regional Input-Output Modeling System , available from the National Technical Information S ervice (NTIS). The NTIS document number is #PB-86 -230-216 and orders can be placed by calling NTIS at (703) 487-4650 . Additional information on using multipliers is available from the BEA at (202) 606-5343. 4.5 Economic Benefits of Clean Water Benefit -costanalysis is not required to demonstrate substantial and widesprea d effects under the Federal Water Quality Standards regulation. In many cases, there may be ec onomic benefits that accrue to the affected community from cleaner water. For example, in a rural community where the primary source o f empl oymentis agriculture, the reduction of fertilizer and pesticide runoff from farm s would reduce the cost of treating irrigati on water to downstream users. Another example mi ghtbe an industrial facility discharging its wastewater into a stream that otherwis e coul d be used for recreational cold-water fishing. Treatment or elimination of th e industrial wastewater would provide a benefit to recreational fishermen by increasing the var iety of fish in the stream. In both cases, the economic benefit is the dollar valu e associated with the increase in beneficial use or potential use of the waterbody. The types of economic benefits that might berealized will depend on both the characteristics of the polluting entity and characteristics of the affected community, and should be considered on a case by case basis. Sinc e the assessment of benefits requires site-specific information, it will be up t o States to determine the extent to which benefits can be co nsidered in the economic impact analysis. This determination should be coordinated with the EPA Regional Office. A more detaile d description of the types of benefits that might be considered is given i n Appendix C. This appendix is not intended to provide in-depth guidance on how t o estimate economic benefits; rather, it is intended to give States an idea of the types o f benefits that might be relevant in a given situation.Economic Guidance for Water Quality Standards 4-7

4.6 Summary of Financial Capability and Determination of WhetherImpacts are Substantial and Widespread Using the guidance described in this document, the applicant must demonstrate that the pollution control measures ne eded to meet water quality standards are not affordable. In addition, the applicant will have to show that there will be widespread adverse impacts to t he community if it is required to meet standards. A summary checklist of the step s required in this process is presented in Table 4-1. This checklist also presents the type of data the applicant will n eed to collect to support each step. Whether or not the applicant has successfully demonstrated that substantial and widespread economic and socia l impact s would occur, however, will depend upon the EPA Regional Administrator' s review of the application.
If t he EPA Regional Administrator determines that substantial and widesprea d economic and social impacts havenot been demonstrated, then the discharger must meet the water quality standards. Alternatively, if substantial and widespread economic and social impac ts have been demonstrated, then the discharger will not have to meet th e wat erquality standards. The discharger will, however, be expected to undertake som e additional p ollution control. The criteria outlined in Chapters 2 and 3 should be used to determ ine the most protective pollution control technique that would not impose a substantial impact on the entity. In addition, the discharger should check with EPA and th e State regularly to determine what else will be required of them. It is then up to th e State to revisethe standards in the water body to reflect the uses that would be achieved if the discharger adopts the next most protective pollution control technique. The State will also have to revise its water quality criteria to protect the newly attainable uses. The discharger's NP DES permit will then be revised to reflect the new limits associated with revised criteria. Finally, federal regulations require that water quality standards b e reviewed every three years to determine if there is any new inform ation or technology that allows attainment of the full designated use without causing substantial and widespread social and economic impacts.Table 4-1 Demonstration of Substantial and Widespread Economic and Social Impacts of Attainment of Designated Uses CHECKLIST

STEPS APPLICANT INF ORMATION THAT WILL BE REQUIRED FRO M

1. Demo nstrate that designated use is a potential use and not a n Data from State Water Quality Assessm ent Documents and water quality existing use. standards regulations.

2. Demonst

rate that entity will incur substantial economic impacts.

a. Identify all reasonable pollution reduction options, Infor mation on end-of-pipe treatment, possible treatment upgrades ,

b. Evalu ate costs of all reasonable pollution reductio n Assumptions about water demand, treatment capacity, expansion plans, options, population growth, and effe ctiveness of control in reducing pollution for

c. Identify lowest cost pollution reduction option that allows Information on treatment efficiencies for alternative pollution reduction entity to meet water quality standards. techniques. Cost estimates for all alternatives. additions to existing treatment, and pollution prevention activitie s including the following:

• change in raw materials,

• substitution of process chemicals,

• change in process,

• water recycling, reuse and efficiency,

• pretreatment requirements, and

• public education.

each option. Estimate of project costs from design engineers, costs o f comparab le projects in the State, or judgement of experienced wate r pollution control engineers.Table 4-1 CHECKLIST (Cont'd.) STEPS INF ORMATION THAT WILL BE REQUIRED FRO M APPLICANT

3. Evaluate entity's financial health ( Public Entities Only ):

a. determine method of financing,

b. annualize pollution reduction project costs,

c. allocate project costs,

d. apply Municipal Preliminary Screener test,

e. Depending on the results of the Municipal Preliminary Screener test, apply Secondary Test.

4. Evaluate entity's financial health ( Private Entities Only ):

a. annualize pollution reduction project costs, b. Primary Measure:

profitability, Information on user fee financing mechanisms such as Revenue Bonds. Information on tax based financing mechanisms such as Genera l Obligation Bonds. Information on appropriate interest rates and period of financing.

Informat ion on user groups, wastewater flow by user group, an d surcharges on industrial users. Information on average total annual pollution control cost per household and median household income. Information on results of Municipal Preliminary Screener test, overall net debt as a percent of full market value of taxable property, media n household income, bond rating, community unemp loyment rate, property tax collectionrate, and property tax revenues as a percent of full market value of taxable property.

Information on appropriate interest rates and period of financing.

In formation that will allow evaluation of whether an entity will remai n profitable after incurring the cost of pollution reduction including:

• revenues,

• cost of goods sold,Table 4-1 CHECKLIST (Cont'd.) STEPS INF ORMATION THAT WILL BE REQUIRED FRO M APPLICANT

• portion of corporate overhead assigned to the entity, and

c. Secondary measures:

solvency,

liquidity, and

leverage.

5. Dete rmine whether impacts are widespread ( Public Entitie s Only ):

a. Ev aluate change in socioeconomic conditions that occu r as a result of compliance. • total annualized pollution reduction project costs.

Information that will allow evaluation of the entity's ability to meet it s fixed and long-term obligations including:

• long-term debt,

• current debt,

• net income after taxes, and

• depreciation. Information that will allow ev aluation of how easily an entity can pay its short-term bills such as:

• current assets,

• current liabilities, and

• total annualized pollution reduction project costs.

Informatio n that will allow evaluation of the extent to which a firm al ready has fixed financial obligations and therefore how much mone y it will be able to borrow including, long-term liab ilities and owner equity.

Info rmation on changes in median household income, community unemploymen t rate, overall net debt as a percent of full market value of ta xable property, percent of households below the poverty line, impac t on c ommunity development potential, and impact on communityTable 4-1 CHECKLIST (Cont'd.) STEPS INF ORMATION THAT WILL BE REQUIRED FRO M APPLICANT

6. De termine whether impacts are widespread ( Private Entitie s Only ):

a. Define community,

b. Evaluate effect on employment,

c. Evaluate effect on tax revenues,

d. Assess impairment of development opportunities,

e. Collectany relevant additional information tha t demonstrates widespread socioeconomic impacts.
7. Evaluate economic benefits of cleaner water.

8. Public comment and debate period. property values resulting from compliance.

Infor mation on the geographical boundary of the area in which th e majority of the entity's workers live and where most of businesses that depend on the entity are located.

Currentunemployment, change in unemployment due to investment i n pollution reduction. Infor mation on the likely effect on assessed value of property ta x revenues if the entity must adopt pollution reductions.

Information on the likelihood that the need to adopt pollution reductions in th e affected community would discourage other businesses fro m locating in the area in the future. Any additional information that sugg ests that there are unique conditions in the affected community that should also be considered. Info rmation on potential benefits of cleaner water including enhance d recreational opportunities, reduced treatment costs for downstream users and increased property values.
Beprepared to supply backup information on the application to modifyTable 4-1 CHECKLIST (Cont'd.) STEPS INF ORMATION THAT WILL BE REQUIRED FRO M APPLICANT

9. If substantial and widespread economic and social impacts ar e or change a designated use to the public. demonstrated, determine which po llution reduction option should be implemented. Information on the cost and efficiency of affordable pollution reduction
10. Redesignate uses.

11. Standards will be adopted to protect new uses.

12. Effluent limits and permits will be modified. uses.

13. Re-evaluate water quality standards in three years. the "affordable" pollution reduction technique. alternatives.
Uses will be determined bythe level of "affordable" pollution reduction.

Once uses are established, standards should be revised to protect thos e

Limits will be modified to re flect effluent concentrations associated with

Per fed eral regulations, water quality standards must be revised every th ree years to determine if there is any new information or technolog y that al lows attainment of the full designated uses without causing a substantial and widespread economic and social impact.Economic Guidance for Water Quality Standards 5-1

5. ANTIDEGRADATION: ROLE OF ECONOMIC ANALYSIS Under the Water Quality Standards program, each State must develop, adopt an d retain a statewide antidegradation polic y and establish procedures for its implementation. The antideg radation policy is intended to protect current water quality; in only a limited setof cases can economic grounds be used to allow for a lowering of water quality. In particular, if the qualityof the water exceeds levels necessary to support the propagation of fish, shellfish, and wildlife and recreation in and on the water (i.e. "high-quality water"), then economic considerations can be taken into account. Before any lowering of water quality in high-quality waters, however, an antidegradation review mus t determine that the lowering is necessaryin order to accommodate important economic or social development in the area in which the waters are located. Antidegradation is not

a "no growth" rule and was never designed nor intended to be one. It is a policy that allows the public to make decision s about important environmental ac tions. Where the State intends to provide for development, it may decide that som e lowering of water quality in "high-quality waters" is ne cessary to accommodate important economic or social development. Any such reduction in water quality, however, mus t protect e xisting uses fully and must satisfy the requirements for intergovernmenta l coordination and public participation. While the terminology is different, the tests to determine substantial and widespread econ omic impacts (used when removing a use or granting a variance) are basically th e same as those used to determine if there might be interference with an important social and economic development (antidegradation). As such, antidegradation analysis is th e mirror image of the analyses described in Chapters 2, 3 and 4. Variances and downgrades refer to si tuations where additional treatment needed to meet standards may result i n worsening economic conditions; while antidegradation refers to situations where lowering water quality may result in improved social and economic conditions. When performing an antidegradation review, the first question i s whether the pollution controls n eeded to maintain the high-quality water will interfere with the propose d development. If not, then the lowering of water quality is not warranted. If, on the other hand, the pollution controls will interfere with development, then the review must show that the development would be an important economic and social one. These two steps rely on the same tests as the determination of substantial and widespread impacts. I t should be stressed at the outset that substantial economic impacts does not mean driving profits to zero, nor precluding all other municipal expenditures. The following sections describe the steps involved in performing an economic impact analysis as part of an antidegradation review. These step s are outlined in Figure 5-1. The analytic approach presented here can be used for a variety of public-sector and privatesector entities, including POTWs, commercial, industrial, residential and recreational landEconomic Guidance for Water Quality Standards 5-2

uses, and fo r point and nonpoint sources of pollution. The guidance provided in thi s chapter, h owever, is not meant to be exhaustive. The State and/or EPA may requir e additional inform ation or tests. In addition, the applicant should feel free to include any additional information they feel is relevant. The steps described in further detail in the rest of the chapter are: Verify Project Costs an d Calculate the Annual Cost of the Pollution Control Project- This section describes the factors considered when verifying that th e proposed pollution control project is t he most appropriate solution and the type of information that should be provid ed about the proposed project. It discusses how to ann ualize capital costs of the project and calculate total annual costs of th e pollution control project.
Deter mine if Requirements would Interfere with Development (i.e., lowe r water quality is "necessary") - This sect ion describes the types of financial tests that should be used to determine if maintaining the high-quality water woul d interfere with the development. Determine if Economic and Social Development would be Important- This section presents factors to be co nsidered in determining whether the development would be important from an economic and social point of view. These steps closely paralle l the analytic techniques presented in Chapters 2, 3, and 4. These chapters should be read for more detail. 5.1 Verify Project Costs and Calculate The A nnual Cost of the Pollution Control Project Before the impact analysis canbe performed, the project costs should be verified and the annual costs calculated. Both private-sector and pub lic-sector entities should consider a broad range of discharge management options including pollution prevention, end-ofpipe treatment, and upgrades or additions to existing treatment. Whatever approach, the discharger must demonstrate that the proposed project is the mostappropriate means of meeting water quality standards and must document project cost estim ates. If there is at least one of the treatment alternatives that allows th e applicant to maintain high-quality water without incurring substantial impacts, then they have failed to show that the requirements would interfere with the development. Cos t informati on, and the assumptions underlying the cost estimates, should be supplied o n Worksheet O. The following two sections (5.1.a and 5.1.b) discuss analyzing public-sector projects. Section 5.1.c discusses private sector projects.Economic Guidance for Water Quality Standards 5-3

5.1.a Public- Sector Developments: Calculate the Annual Costs of the Pollutio n Control Project Since capital costs typically will be paid over several years, annualized costs are used in the evaluation of economic burden to the community. The capital portion of publicse ctorproject costs is typically financed over approximately 20 years, by issuing a municipal debt instrument such as a general obligation bond or a revenue bond.
The calculation of total annualized cost of the project is presented in Worksheet P

. First, cap ital costs are summed and the portion of costs to be paid for with grant monies are deducted, as these costs will not need to be financed. Next, the annualization factor is calculated using the formula supplied on Worksheet P , or the annualization factor is found in Appendix B. Annualiz ed capital cost is then calculated by multiplying the total capital costs to be financed by the annualization factor. The interest rates used to annualize costs are dep endent on the type of debt instrument used as we ll as the issuer's credit standing. Therefore, the interest rate used o n Wo rksheetPreflects the debt instrument (i.e. municipal bond, commercial bank loan , state revolving fund loan, or other instrument) likely to be used by the municipality. Next, annual operating and maintenance costs are added to th e annualized capital cost. O&M c osts should include the costs of monitoring, inspection, permitting fees, wast e disposal charges, repair, administration, replacement, and any other recurring costs. All recurrin g costs should be stated in terms of dollars per year. The sum of the annualized capital cost and total annual operating and maintenance costs is the total annual cost of the project. 5.1.b Publ ic-Sector Developments: Calculate Total Annualized Pollution Control Costs Per Household
To assess th e burden that total pollution control costs are expected to have o n household s, an average annualized pollution control cost per household should b e calculated for all households inthe community that would bear project costs. In order to evaluate substantial impacts, therefore, the analysis must establish which households will actu ally pay for pollution control and what proportion of the costs will be borne b y households. Then, these apportioned proje ct costs are added to existing pollution control costs paid by the households.
It is important to define the affected community. The "community" is th e governmental jurisdiction or jurisdictions responsible for paying compliance costs.
If p roject costs were estimated for some prior year, these costs should be adjuste d upward to reflect current year prices using the average annual national Consumer PriceEconomic Guidance for Water Quality Standards 5-4

Index (CPI) inflation rate for the period. The CPI inflation rate is available from th e Bureau of Labor Statistics. An additional source reporting the CPI inflation rate is th e CPI Detail ed Report , which is published monthly by the U.S. Department of Labor , Bureau of Labor Statistics.
In calculating the total annual cost of pollution control per household, current cost s of polluti on control must be considered along with the projected annual costs of th e propose d pollution control project. The existing cost per household usually can b e obtained f

rom the most recent municipal records. For example, use the most recen t operating revenues of the sewer enterprise fund, divided by the number of household s served. If

the portion of proposed project costs that households are expected to pay i s known or is expected to remain unchanged, then use Worksheet Q to calculate the total annual cost of pollution control per household. If theportion paid by households is based on flow, then should refer to Worksheet Q: Option A as well. 5.1.c Private-Sector E ntities: Calculate the Annual Costs of the Pollution Control Project As with public-s ector investments, the total capital costs are usually spread out over several years. Annualization calcul ates the amount that will be paid each year, including th e financing costs. In order to allow for comparisons across cases, the analysis should assume that the applicant will borrow the capital and repay the loan in even annua l installments over a 10 year period. The assumption of ten years is based on the likely life of the equipment. The ass umption of even annual installments is made for convenience. The interest rate on the loan should be equivalent to the rate the applicant pays when it borrows money. The financial tests discussed below compare the costs of complian ce to other costs and revenues of the applicant. Compliance costs and other costs and rev enues must, therefore, be calculated for the same year. See discussion in Section 2.2, and Appendix A fo r references to inflatio n/deflation indices. The Annualized Cost of Pollution Control for a private-sector entity can be calculated using Worksheet R

. 5.2 Financial Analysis to Determine if Lower Water Quality is "Necessary" The purpo se of the financial impact analysis is to assess the extent to which planned development will be reduced as a result of maintaining water quality. There are two sets of tests p resented in this section: one set for publicly owned developments, such a s POTWs , and another for privately owned developments, such as new manufacturin g facilities. The tests are not designed to determine the exact impact of pollution contro l cost s on an entity. They merely provide indicators of whether pollution control cost s would result in a substantial impact.Municipal Preliminary Screener Average Total Pollution Control Cost per Household

Median Household Income

Economic Guidance for Water Quality Standards 5-5 5.2.a Public-Sector Developments: Calculate and Evaluate the Municipa l Preliminary Screener Value Whether o r not maintaining high-quality water is likely to interfere with a development due to additional public-sector costs is determined by jointly considering the results of two tests. Thefirst test is a "screener" to establish whether the community can clearly pay for the project. The Municipal Preliminary Screener estimates the total per hou sehold annual pollution control costs to be borne by households (existing costs plus those attributa

ble to the proposed project) as a percentage of median household income. The screener is written as follows:

Median household income information for many municipalities is available from the 1990 Census of Pop ulation. To estimate median household income for the current year, use the CPI inflation rate for the period between the year that median household income is available and the current year. Depending on the results of the screener, the community is expected to incur small, mid-range, or large economic impacts (see Worksheet S ). If the total annual cost pe r household (existing annual cost per household plus the incremental cost related to th e proposed project) is less than 1.0 percent of median household income, then th e requirements are not expected to impose a substantial economic hardship on households and would not interfere with the development. Communities are expected to incur mid-range impacts when the ratio of total annual compl iance costs to median household income is between 1.0 and 2.0 percent. If th e average annual cost per household exceeds 2.0 percent of median household income, then the proj ect may place a large financial burden on many of the households within th e communi ty and the requirements may interfere with the development. In either case , communities move on to the Secondary Test to demonstrate substantial impacts. 5.2.b Public-Sector Developments: Secondary Test The S econdary Test is designed to build upon the characterization of community identifie d in the Municipal Preliminary Screener. The Secondary Test indicates th e comm unity's ability to obtain financing and describes the socioeconomic health of th e commun ity. Indicators describe precompliance debt, socioeconomic, and financia l management conditions in the community. Using thes e indicators and the scoring systemEconomic Guidance for Water Quality Standards 5-6

described b elow, the impact of the cost of pollution control is estimated. Specifically , applicants are required to present the following six indicators for the community: Debt Indicators Bond Rating (if available) - a measure of credit worthiness of the community; Overall Ne t Debt as a Percent of Full Market Value of Taxable Property - a measure of debt burden on residents within the community; Socioeconomic Indicators
Un employmentRate - a measure of the general economic health of th e community; Median Household Income - a measure of the wealth of the community; Financial Management Indicators Property Tax Revenue as a Percent of Full Market Value of Taxable Property - ameasure of the funding capacity available to support debt based on the wealth of the community; and Property Tax Collection Rate - a measure of how well the local government i s administered. A more detailed description of the six indicators is presented in Section 2.4, including a discussion of alternative measures to use in States with property tax caps and limitations on assessed valu es. Worksheet T can be used to estimate each of the indicators. Table 5-1 summarizes the indicato rs and what is considered to be a strong, mid-range, or weak rating. The Secon dary Score is calculated for the community by weighting each indicato r equally and as signing a value of 1 to each indicator judged to be weak, a 2 to eac h indi catorjudged to be mid-range, and a 3 to each strong indicator. A cumulativ e asse ssmentscore is arrived at by summing the individual scores and dividing by th e numberof factors used. Worksheet U guides the reader through this calculation. The cumulative assessment score is evaluated as follows: less than 1.5 is considered weak between 1.5 and 2.5 is considered mid-range greater than 2.5 is considered strongEconomic Guidance for Water Quality Standards 5-7 If the applicant is not able to develop one or more of the six indicators, they mus t provide an explanation as to why the indicator is not appropriate or not available. Since the point of the analys is is to measure the overall burden to the community, the debt and socioeconomic indicators are assumed to be better measures of burden than the financial management indicators. Consequently, if one of the debt or socioeconomic indicators is not available, the ap plicant should average the two financial management indicators and use this averaged value as a single indicator with the remaining indic ators. This averaging is necessary so that undue weight is not given to the financial management indicators. 5.2.d Public-Sector Developments: Assess Whether the Requirements Woul d Interfere With the Development The results of the two tests are considered jointly in determining whether th e community is expected to incur substantial impacts that would interfere with th e development. As shown in Table 5-2, the cumulative assessment scorefor the community is combined with the estimated household burden. The combi nation of factors establishes whether impacts can be expected to be substantial. In the matrix, "X" indicates that the impact is likely to interfere with the development. The closer the c ommunity is to the upper right hand corner of the matrix, the greater the likelihood. Similarly, " " indicates that the impact is not likely to interfere with development

. The closer to the lower left hand corner of the matrix, the smaller th e likelihood. Finally, the "?" indicates that the impact is unclear. 5.2.e Private-Sector Developments: Financial Measures
Fourgeneral categories of financial tests are used to determine if maintaining highquality water will interfere with privately owned development. The four categories are divided i nto a primary measure of financial impacts and three secondary measures o f financial impacts: Primary Measure Profit -- how much w ould profits decline due to pollution control expenditures? Secondary Measures Liquidity -- how easily can an entity pay its short-term bills? Solvency -- how easily can an entity pay its fixed and long-term bills? Leverage -- how much money can the entity borrow? Profit and solvency ratios are calculate d both with and without the additional compliance costs (taking into consideration the entity's ability, if any, to increase its prices to coverProfit Test Earnings Before Taxes Revenues

Economic Guidance for Water Quality Standards 5-8 part or all of the costs). Comparing these rati os to each other and to industry benchmarks pro vides a measure of the impact on the entity. Since antidegradation reviews involv e new or expanded operations, the ratios often will be calculated using estimated value s from pro-forma income statements and balance sheets prepared for the development.
For all of the tests, it is important to look beyond the individual test results an d evaluate the total situation of the entity. While each test addresses a single aspect o f financial health, the results of the four tests should be considered jointly to obtain an overall picture. The results should be compared with the ratios for other entities in th e same industry or activity. The primary and secon dary measures are described below, along with an example of specific tests to be used. While there are several ratios that could be used for each test, to simplify the presentation only one ratio per test is described. In most cases, interpreting the results requires comparisons w ith typical values for the industry. Among the sources th at provide comparative information are: Robert Morris Associates' Annual Statement Studi es , Moody's Industrial Manual , Dun and Bradstreet's Dun's Industry Norms , an d Standard & Poor's Industry Surveys . The Annual Statement Studies , Dun's Industr y Norms , a nd Standard & Poor's Industry Surveys provide composite statistics for firm s group ed into various manufacturing and service industries. The Moody's Industria l Man ualprovides detailed financial information on individual firms that can be used for comparison purposes. Each of the tests is discussed in more detail in Chapter 3. 5.2.f Private-Sector Developments: Primary Measure Primary measure is the Profit Test, which measures the development's earnings if it is required to provide pollution cont rol necessary to maintain the high-quality waters and if it is not r equired to do so. If maintaining high-quality water would result i n considerably lower profits, then the development might not take place.
Two pieces of information are needed for the Profit Test. The first piece is the total annual cost of the required pollution control f rom Worksheet R . The second piece is the earnings information from the entity's income statement ( Worksheet V ).

The Profi t Test should be calcu latedwith and without the cost of the pollution control. In the former case, th e annualized cost of pollution c ontrol (including O&M) is subtracted from the discharger's estimated earnings before taxes (revenues minus costs excluding income taxes). Th e Profit Test can be cal culated using Worksheets V, and W . These profit rates should beCurrent Ratio Current Assets Current Liabilities

Economic Guidance for Water Quality Standards 5-9 co mpared to those for facilities in similar lines of business, using data in Moody' s Indus trialManual , Dun & Bradstreet's Industry Norms and Key Business Ratios , Standard & Poor's Industry Surveys , or Robert Morris's Annual Statement Studies

. The de gree to which the discharger is able to raise prices is difficult to predict, an d depends on many factors. Considerations should include the level of competition in the industry, the likelihood of competitors' facilities facing similar project costs, and th e willingness of consumers to pay more for the product. 5.2.g Private-Sector Developments: Secondary Measures The following secondary measures provide additional impo rtant information about the financial health of the development. All primary and secondary measures should b e included in the analysis. Liquidity Liquidity is a measure of how easily a discharger can pay its short-term bills. On e me asure of liquidity is the Current Ratio, which compares current assets with curren t liabilit ies. Current assets include cash and other assets that are or could reasonably b e converte d into cash during the current year. Likewise, current liabilities are items that must be paid within the current year. The Current Ratio is calculated by dividing current assets by current liabilities.

The Current Ratio can be calculated using Worksheet X . The general rule is that if the Current Ratio is greater than 2, the entity should be able to cover its short-term ob ligations. Frequently, lenders require this level of liquidity as a prerequisite fo r lending. This rule (Current Ratio > 2) may not, however, be appropriate for all types of private entities. The Current Ratio of the discharg er in question should be compared with ratios for other dischargers in the same line of business. Solvency Solvency is a measure of an entity's ability to meet its fi xed and long-term obligations. Th ese obligations are bills and debts that are owed on a regular basis for periods longer than one year. Solvency tests are commonly used to predic t financial problems that could lead to bankruptcy within the next few years.Beaver s Ratio Cash Flow Total Debt

Debt / Equity Ratio Long Term Liabilities

Owners Equity

Economic Guidance for Water Quality Standards 5-10 As with liquidity, there are several possible tests for solvency. One solvency test, the Beaver's Ratio, c ompares cash flow to total debt. This test has been shown to be a good indicator of the likelihood of bankruptcy.

The Beaver's Ratio can be calculated using Worksheet Y

. Cash Flow is a measure of the ca sh the entity has available to it in a given year. Since depreciation is a n accounting cost -- a cost that does not use any currently available revenues -- it is added back to reported net income after taxes to get cash f low. Total debt is equal to the current debt for the current year plus the long term debt, since current debt includes that part of long-term debt that is due in the current year. If the Beaver's Rati o is greater than 0.20 the development is considered to be solvent ( i .e., can pay its long-term debts). If the ratio is less than 0.15 the development may be insolv ent (i.e., go bankrupt). If the ratio is between 0.15 and 0.20, then future solvency is uncertain. Leverage Leverage tests measure the extent to which a firm has fixed financial obligations and thus indicates how much more money a firm is capable of borrowing. Firms that rel y heavily on de bt may find it difficult and expensive to borrow additional funds. On e commonly used measure of leverage is the Debt to Equity Ratio.

The Debt to Eq uity Ratio can be calculated using Worksheet Z . Since there are n o generally accepted Debt/Equity Ratio values that apply to all types of economic activity, the ratio s hould be compared with the ratio of firms in similar businesses. If the entity's ratio compares favorably with the median or upper quartile ratio for similar businesses, it should be able to borrow additional funds. These ratios can be calculated using data in Robert Morris Associates' Annual Statement Studies , Moody's Industria l Manual , and Dun & Bradstreet's Dun's Industry Norms

. For entities with special sources of funding, leverage is not an appropriate measure of their ability to raise capital. Examples are agriculture and affordable housing, wher e special loan programs may be available. In these case s, an analysis of the probability that the project would receive this money is appropriate.Economic Guidance for Water Quality Standards 5-11

5.2.g Private-SectorDevelopments: Assess Whether the Requirements Wil l Interfere With the Development: Interpreting the Results The finan cial analysis should be used to determine if there will be a substantia l adverse impact such as to interfere with the development. If the four tests taken together indicate that the requirements would interfere with the development, then proceed t o Section 5.3 to determine if the d evelopment would be considered important in social and economic terms. 5.3 Determine If Economic and Social Development Would Be Important
There are no econ omic ratios per se that determine whether a development would be considered important. Instead, the relative magnitudes of indicators such as increases in unemployment, loss es to the local economy, changes in household income, decreases in tax re venues, indirect effects on other businesses, and increases in sewer fees should be taken into account. The term important is intended to con vey a general concept regarding the leve l of social and economic development used to justify a change in high-quality waters. 5.3.a Define Relevant Geographical Area One important factor is defining the geographical area in which t he impacts will occur. In the case of municipal pollution control projects, the affected community is most often the immediate municipality. The relevant geographic area for evaluating the importance of a private-sector development varies with each situation. The area will typically b e determined by the area in which the majority of its workers live and where most of the businesses that depend on it are l ocated. In either case, the geographical area considered must include "...the area in which the waters are located." (40 CFR 131.12 (a)(2)) There are no simple rules for d efining the relevant area or community; the decision is based on the judgement of the applicant and state, subject to EPA review. 5.3.b Public-Sector Developments: Determine Whether Important While ther e are no explicit criteria, it is recommended that changes in th e socioec onomic indicators listed below be considered. For each indicator listed, th e applicant should estimate the potential change that would result from the development. Median Household Income; Community Unemployment Rate; Overall Net Debt as a Percent of Full Market Value of Taxable Property; Percent of Households Below Poverty Line; Impact on Community Development Potential; and Impact on Property Values.Economic Guidance for Water Quality Standards 5-12

Estimated changes should be provided, along with suppo rting discussions, on Worksheet AA

. 5.3.c Private-Sector Developments: Determine Whether Important Determi nation of whether or not a private-sector development will be important to a community requires exploring more factors than is the case with public-secto r developments. Worksheet AB has been provided to assist applicants in their evaluation of socioeconomic impacts. It is designed as a list of the factors applicants should consider in det ermining whether the development is important. Applicants should feel free , however, to add anecdotal information to describe any current community characteristics or anticipated impacts that are not listed in the worksheet. Potentially, one of the mos t important impacts on the affected community's economy is the employment to be gained. The size of this impact is dependent on the number of new jobs relative to the total number of jobs in the community, and to the other jo b opportunities available in the commun ity. Typically, an increase in employment leads to an in crease in personal income in the affected community. The total amount of income gained by the affected community will depend, in part, on the other job prospects of those hired. To assess the net impact on employment in the affected community, the existing rate of unemployment should be considered as an indicator of worker mobility between jobs. The analysis should also consider whether the increase in employment opportunities may lead to a decreased need for social services in the affected community. If the cost of sav ings for decreased social services will be borne by the affected community, the y should be included in the assessment. The effects of increased employment and perso nal income will be compounded as the money moves through the economy. This multiplier effect means that each dollar gained to an employee results in the gain of more than a dollar to the local economy. Multiplier effects are discussed in more detail in Section 4.4. Socioecon omic impacts may also include effects on the local government(s) such as property t ax revenues and the demand for other public services. For example, if th e development would be paying a shareof the cost to upgrade a municipal treatment plant, then th e analysis of community impacts is more complicated. If the development i s eliminated, the system may become excessively expensive for the remaining users. 5.4 Summary Using the guidance described in this document, the applicant must demonstrate that the pollution control measures needed to maintain the high-quality waters will interfereEconomic Guidance for Water Quality Standards 5-13

with the development. In addition, the applicant will have to show that the development is important to the community. The tests used to demonstrate i nterference and importance are the same as those used to d emonstrate substantial and widespread. The difference is, however, that a n antidegradation revi ew considers situations that would improve the economic condition.Verify Pollution Control Costs and Calculate Annual Costs Capital Cost, Annual O&M Costs, Interest Rates

Determine of Development is Important Socio-economic characteristics of community Determine if Maintaining High-Quality Waters Will Interfere with Development Annual Cost, Median Household Income, Financial Data Figure 5-1: Antidegradation Review

No Degradation Allowed

Quality of water may be reduced as long as existing and designated uses fully protected No

No Degradation Allowed

Yes No

Economic Guidance for Water Quality StandardsTABLE 5-1 SECONDARY INDICATORS

Secondary Indicators Indicator Weak Mid-Range Strong Bond Rating Below BBB (S&P) BBB (S&P) Above BBB (S&P) Below Baa (Moody's) Baa (Moody's) or Baa (Moody's) Overall Net Debt as Percent of Full Market Above 5% 2%-5% Below 2% Value of Taxable Property Unemployment More than 1% above National Average More than 1% below National Average National Average Median Household More than 10% below State Median More than 10% Income State Median above State Median Property Tax Revenues as a Percent of Full Market Value Above 4% 2%-4% Below 2% of Taxable Property Property Tax Collection Rate < 94% 94% - 98% > 98%Economic Guidance for Water Quality Standards 5-1 TABLE 5-2 ASSESSMENT OF SUBSTANTIAL IMPACTS MATRIX

Secondary Score Percent Percent Municipal Preliminary Screener Less than 1.0 Percent Between 1.0 and 2.0 Greater than 2.0

Less than 1.5 ? X X Between 1.5 and 2.5 ? X Greater than 2.5 ?

# A PPENDIX 

# A

D ATA 

# R ESOURCES AND 

# R EFERENCE



# M ATERIALSAPPENDIX A

Cost Estimation Resources: U.S. EPA, Construction Costs for Municipal Wastewater Treatment Plants: 1973-1978 , EPA/430/9-80-003, April, 1980.
U.S. EPA , Technical Report: Operation and Maintenance Costs for Municipal Wastewate r Facilities , EPA/430/9-81-004, September, 1981.
U.S. EPA , Construction Costs for Municipal Wastewater Conveyance Systems: 1973-1979 , EPA/430/9-81-003, January, 1981. U.S. EPA, Quarterly Indices of Dir ect Costs for Operation, Maintenance and Repair: (a) Waste Pumping Stations, (b) Gravit y Sewers , Office of Municipal Pollution Control, Municipal Facilities Division, Current. Municipal Statistics Resources:
Bureau of the Census, U.S. Department of Commerce, County and City Data Book , published annually. Financial and Ratio Analysis Resources: Leopold A. Bernstein, The Analysis of Financial Statements , Dow Jones-Irwin, 1978. Dun & Bradstreet, Dun's Industry Norms , annual.
J. Fre d Weston and Eugene F. Brigham, Managerial Finance , The Dryden Press, severa l editions. Robert Morris Associates, Annual Statement Studies , annual. Moody's Financial Services, Moody's Industrial Manual , annual. U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report. U.S. EPA, EPA Financial Capability Guidebook , Office of Water Programs Operations, 1984. U.S. EPA, The Municipal Sector Study: Impacts of Environmental Reg ulations on Municipalities , EPA 230-09-038, Office of Policy, Planning and Evaluation, September 1988.Interest Rate

Year 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 1 1.0050 1.0100 1.0150 1.0200 1.0250 1.0300 1.0350 1.0400 1.0450 2 0.5038 0.5075 0.5113 0.5150 0.5188 0.5226 0.5264 0.5302 0.5340 3 0.3367 0.3400 0.3434 0.3468 0.3501 0.3535 0.3569 0.3603 0.3638 4 0.2531 0.2563 0.2594 0.2626 0.2658 0.2690 0.2723 0.2755 0.2787 5 0.2030 0.2060 0.2091 0.2122 0.2152 0.2184 0.2215 0.2246 0.2278 6 0.1696 0.1725 0.1755 0.1785 0.1815 0.1846 0.1877 0.1908 0.1939 7 0.1457 0.1486 0.1516 0.1545 0.1575 0.1605 0.1635 0.1666 0.1697 8 0.1278 0.1307 0.1336 0.1365 0.1395 0.1425 0.1455 0.1485 0.1516 9 0.1139 0.1167 0.1196 0.1225 0.1255 0.1284 0.1314 0.1345 0.1376 10 0.1028 0.1056 0.1084 0.1113 0.1143 0.1172 0.1202 0.1233 0.1264 11 0.0937 0.0965 0.0993 0.1022 0.1051 0.1081 0.1111 0.1141 0.1172 12 0.0861 0.0888 0.0917 0.0946 0.0975 0.1005 0.1035 0.1066 0.1097 13 0.0796 0.0824 0.0852 0.0881 0.0910 0.0940 0.0971 0.1001 0.1033 14 0.0741 0.0769 0.0797 0.0826 0.0855 0.0885 0.0916 0.0947 0.0978 15 0.0694 0.0721 0.0749 0.0778 0.0808 0.0838 0.0868 0.0899 0.0931 16 0.0652 0.0679 0.0708 0.0737 0.0766 0.0796 0.0827 0.0858 0.0890 17 0.0615 0.0643 0.0671 0.0700 0.0729 0.0760 0.0790 0.0822 0.0854 18 0.0582 0.0610 0.0638 0.0667 0.0697 0.0727 0.0758 0.0790 0.0822 19 0.0553 0.0581 0.0609 0.0638 0.0668 0.0698 0.0729 0.0761 0.0794 20 0.0527 0.0554 0.0582 0.0612 0.0641 0.0672 0.0704 0.0736 0.0769

# A PPENDIX 

# C

C ONCEPTUAL 

# M EASURES OF 

# E CONOMIC 

# B ENEFITSEconomic Guidance for Water Quality StandardsEconomic Guidance for Water Quality Standards

APPENDIX C CONCEPTUAL MEASURES OF ECONOMIC BENEFITS
In valuing benefits associated w ith an ecological resource such as clean water, a basic distinctio n is made between the intrinsic value of the existence of the resource and it s value in use by the human population. Use values are further subdivided into direct or indirect uses. Other valuation concepts arise from the unc ertainty surrounding future uses and availability o f the resource. A classification of these valuation concepts, along with examples, is presented in Table C-1.

C.1 Use Benefits Estimating the benefits of clean water will depend upon several variables that describe the attr ibutes of the resource and its uses. A waterbody might be used for recreationa l activities (such as fishing, boating, swimming, hunting, bird watching), for commercial purpo ses (such as industrial water supply, irrigation, municipal drinking water, and fish harvest ing), or for both. Where recreational activities are created or enhanced due t o water quality impro vements, the public will benefit in the form of increased recreational opportunities. Similarly, the cost of treating irr igation and drinking water to down stream users could be redu ced if pollutant discharges were reduced or eliminated in a particular stretch of river. Direct use includes both consumptive and non-consumptive uses. Consumptive uses can be distinguished from non-consumptive uses in that the former excludes other uses of the same resource while the latter does not. For example, water is consumed when it is diverted from a waterbody for irrigation purposes. With non-consumptive uses , however, the resource base remains in the same state before and after use (e.g. , swimming). Human health benefits associated with cleaner water could be consumptive (reduc ed illness from eating finfish or shellfish) or non-consumptive (reduced exposure to infectious diseases while recreating). When estimating benefits, it is important to determine whether or not the resource and its uses (in this case clean water) can be considered market or non-market resources and uses (i.e., do es a market exist for the resource or its use). For example, commercia l fisheries have a market value reflected by the financial value of landings of a particular spec ies. By contrast, no market exists to describe the value individuals receive fro m swimming. Where market values a re available, they should be used to estimate benefits. In the c ase of water supply, there may or may not be a market for clean water. Som e water users may be required to pay for that use as in the case of a f armer paying a regionalEconomic Guidance for Water Quality Standards

waterboard to divert water for irrigation purposes. This will be particularly true in the arid west. By contrast, a manufacturing facility using water for cooling or process water may not pay anything for the right to pump and use water from an adjacent river. Fo r resources with no market value, a number of estimation techniques including the travel cost, estimation from similar markets, and contingent valuation methods have bee n developed. Wh ile they are conceptually distinct attributes, consumptive use is frequentl y associa ted with markets and non-consumptive use is frequently associated with non

market situations. Some resources that are considered market resources, however, may be used non-consump tively. The converse is also true. As an example of the first, a fee may be charged (other than parking) to gain entrance to a state park, however, while a swimmer's use of a lake in the park is not consuming any part of the lake.
Comm ercial activities that are dependent on clean water which is not directly owned are said to benefit from indirect use. Examples would be a fishing equipmen t manufacturer's dependence on healthy fish stocks to induce dem and for its products or the depend ence of property values on the pristine condition of an adjacent water body

. Indirec tuse is also characterized by the scenic views and water enhanced recreationa l opportunities (camping, picnicking, birdwatching) associated with the quality of water in awater body. Indirect use benefits such as enhanced property values can be estimated usin g the hedonic price technique. Care should be taken, however, to not double-count benefits. If property values reflect the proximity to and thus use of water, then the value of the use should not be included separately. C.2 Intrinsic Benefits Intrins ic benefits include all benefits associated with a resource that are not directl y related to the current use of the resource. Intrinsic benefits are represented by the sum of exi stence and option values. Existence value indicates an individual's (and society's ) willingness to pay to maintain an ecological resource such as c lean water for its own sake, regardless of any perceived or potential opportunity for that individual to use the water body now or in the future. Contributions of money to save endangered species such as the snail darter demonstrate a willingness to pay for the existence of an environmenta l amenity despi te the fact that the contributors may never use it or even experience i t directly. Option value is the willingness to pay for having a future opportunity to use resources such as clean water in known or as yet unknown ways. In a sense it is a combination of insurance and speculative value. Individuals routinely pay to store or transport something they are no t sure they will use in the future because they recognize it would be mor e costly to recreate the item than to preserve it. In an ecological sense, pristine habitats and wildlife re fuges are often preserved under the assumption that plant or animal specie sEconomic Guidance for Water Quality Standards

which may yield pharmaceutical, genetic, or ecosystem benefits are yet to be discovered. Opti on value takes on particular importance when proposed development o r environmental perturbations are largely irreversible or pollutants are persistent. Intrinsic benefits are difficult to measure due to the level of uncertainty associated with thes e benefit s. The most common approach to estimating intrinsic benefits, however, is th e conting entvaluation method, which cannot be described in detail within this short overview. C.3 Summary Total valuation of clean water benef its includes all use and existence values as well as option value. The proper framework for estimating the eco nomic benefits associated with clean water consists of 1) determining when damage first occurs or would occur; 2 ) iden tifying and quantifying the potential physical/biological damages relative to a n appropriate baseline; 3) identifying all affected individuals both due to potential loss of direct or indirect services or uses, and to potential losses attributable to existence values (may include projections for growth in participation rates); 4) estimating the valu e affect ed individuals place on clean water prior to potential degradation; and 5 ) determining the time horizon over which the waterbody would be degraded or restored to som e maximum reduced state of service (if ever), and appropriately discounting th e stream of potential lost services. If evaluating an improvement in water quality, th e procedures are the same except that benefits gained are measured.Economic Guidance for Water Quality Standards TABLE C-1 CATEGORIES OF BENEFITS

Use Benefits Direct Consumptive: Market Benefits Industrial Water Supply Agricultural Water Supply Municipal Water Supply Commercial Fishing Non-Market Benefits Recreational Fishing Hunting Industrial Water Supply Agricultural Water Supply Municipal Water Supply Non-Consumptive:Swimming

Boating Human Health

Indirect Fishing Equipment Manufacturer Property Values Aesthetics (scenic views, water enhanced recreation)

Intrinsic Benefits Option Value (access to resource in future) Existence Value (knowledge that services of resource exist)

### Worksheet A Pollution Control Project Summary Information
Current Capacity of the Pollution Control System Design Capacity of the Pollution Control System Current Excess Capacity % Expected Excess Capacity after Completion of Project % Projected Groundbreaking Date Projected Date of Completion
Please describe the p ollution control project being proposed below. (Attach additional page if necessary).

Please describe the other pollution control options considered, explaining why each option was rejected. (Attach additional page if necessary).

### Worksheet AA Public-Sector Development Qualitative Description of Estimated Change in Socioeconomic Indicators due to Pollution Control Costs
Estimated change in Median Household Income (MHI)

Estimated change in the unemployment rate

Estimated change in overall net debt as a percent of full market value of taxable property

Estimated change in % of households below the poverty line

Impact on commercial development potential

Impact on Property Values

### Worksheet AB Private-Sector Development Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included.

_____________________________________________ (1) Current unemployment rate in affected community (if available).

_____________________________________________ (2) Current national unemployment rate.

_____________________________________________ (3) Additional number of persons expected to collect unemployment in affected (4) community due to compliance with water quality standards.

_____________________________________________ Expected unemployment rate in the affected community after compliance with (5) water quality standards (Current # of persons collecting unemployment in affected community + (4)/labor force in affected community.

_____________________________________________ Median household income in affected community.

_____________________________________________ (6) Total number of households in affected community.

_____________________________________________ (7) Percent of population below the poverty line in affected community.

_____________________________________________ (8) Current expenditures on social services in affected community.

_____________________________________________ (9) Expected expenditures on social services due to job losses in the affected (10) community.

_____________________________________________ Current total tax revenues in the affected community.

_____________________________________________ (11) Tax revenues paid by the private entity to the affected community.

_____________________________________________ (12)Worksheet AB, continued

Tax revenues paid by the private entity as a percentage of the affected (13) community's total tax revenues.

_____________________________________________ * Current statewide unemployment rates.

_____________________________________________ (14) Additional number of persons expected to collect unemployment in the State (15) due to compliance with water quality standards.

_____________________________________________ Expected statewide unemployment rate, after compliance with water quality (16) standards (Current # of persons collecting unemployment in State + (15)/labor force in State.

_____________________________________________ Current expenditures on social services in State.

_____________________________________________ (17) Expected statewide expenditures on social services due to job losses.

_____________________________________________ (18)

In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis * should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.i [( 1 i) n 1]+i 

### Worksheet B Calculation of Total Annualized Project Costs A. Capital Costs Capital Cost of Project $ Other One-Time Costs of Project (Please List, if any): $ $ $ Total Capital Costs (Sum column) $ (1) Portion of Capital Costs to be Paid for with Grant Monies $ (2) Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3) Type of financing (e.g., G.O. bond, revenue bond, bank loan) Interest Rate for Financing (expressed as decimal) (i) Time Period of Financing (in years) (n)
Annualization Factor = (or see Appendix B) (4) Annualized Capital Cost [Calculate: (3) x (4) ] (5)
B. Operating and Maintenance Costs Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection, permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below) $ $ $ $ $ Total Annual O & M Costs (Sum column) $ (6) C. Total Annual Cost of Pollution Control Project Total Annual Cost of Pollution Control Project [ (5) + (6) ] $ (7)

### Worksheet C Calculation of Total Annual Pollution Control Costs

Per Household

A. Current Pollution Control Costs: Total Annual Cost of Existing Pollution Control $ (1) Amount of Existing Costs Paid By Households $ (2) Percent of Existing Costs Paid By Households %(3) Number of Households* (4) Annual Cost Per Household [Calculate: (2)/(4) ] $ (5) Do not use number of hook-ups. *



### B. New Pollution Control Costs Are households expected to provide revenues for the new pollution control project in the same proportion that they support existing pollution control? (Check a, b or c and continue as directed.)
a) Yes [fill in percent from (3) ] percent.(6a) b) No, they are expected to pay percent.(6b) c) No, they are expected to pay based on flow. (Continue on Worksheet C, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet B] $ (7) Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ] (8) Amount to Be Paid By Households [Calculate: (9) x (10) ] $ (9) Annual Cost per Household [Calculate: (11)/(4) ] $ (10)



### C. Total Annual Pollution Control Cost Per Household Total Annual Cost of Pollution Control Per Household (5) + (10) $ (11)

### Worksheet C: Option A

Calculation of Total Annual Pollution Control Costs Per Household Based on Flow

A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment) (1) Usage due to Household Use (MGD of Household Wastewater) (2) Percent of Usage due to Household Use [Calculate: (2)/(1) ] %(3)
Total Annual Cost of Pollution Control Project $ (4) Industrial Surcharges, if any $ (5) Costs to be Allocated [Calculate: (4) - (5) ] $ (6) Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7) Annual Project Cost per Household [Calculate: (7)/Worksheet C, (4) ] $ (8)



### C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet C, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ] $ (10)Total Annual Pollution Control Cost per Household Median Household Income × 100



### Worksheet D Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will notincur any substantial economic impacts as a result of the proposed pollution control project. The formula is as follows:



### A. Calculation of The Municipal Preliminary Screener Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or $ (1) Worksheet C, Option A (10) ] Median Household Income $ (2) * 

### Municipal Preliminary Screener (Calculate: [(1)/(2)] x 100) %(3)



### B. Evaluation of The Municipal Preliminary Screener

If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test. Otherwise, it is necessary to continue.
Benchmark Comparison:

Little Impact Mid-Range Impact Large Impact Less than 1.0% 1.0% - 2.0% Greater than 2.0%

Indication of no substantial )))))))))))))))) economic impacts Proceed to Secondary Test
1990 Census adjusted by CPI inflation rate if necessary. *

### Worksheet E
Data Used in the Secondary Test
Please list the following values used in deter mining the Secondary Score. Potential sources of the data are indicated.

A. Data Collection

Data Potential Source Value Direct Net Debt Community Financial Statements Town, County or State Assessor's Office $ (1) Overlapping Debt Community Financial Statements Town, County or State Assesor's Office $ (2) Market Value of Property Community Financial Statements Town, County or State Assessor's Office $ (3) Bond Rating Standard and Poors or Moody's (4) Community Unemployment 1990 Census of Population Rate Regional Data Centers %(5) National Unemployment Bureau of Labor Statistics Rate (202) 606-6392 %(6) Community Median 1990 Census of Population Household Income $ (7) State Median Household 1990 Census of Population Income $ (8) Property Tax Collection Community Financial Statements Rate Town, County or State Assessor's Office %(9) Property Tax Revenues Community Financial Statements Town, County or State Assessor's Office $ (10)

### Worksheet E, Continued

B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2) ) $ (11)

Overall Net Debt as a Percent of Full Market Value of Taxable Property (Calculate: [(11)/(3)] x 100) %(12)

2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable Property (Calculate: [(10)/(3)] x 100) %(13)Worksheet F Calculating The Secondary Score Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average. Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as a single indicator with the remaining indicators.
Secondary Indicators Score Indicator Weak Mid-Range Strong * ** *** Bond Rating Below BBB (S&P) BBB (S&P) Above BBB (S&P) or Worsksheet E, (4) Below Baa (Moody's) Baa (Moody's) Baa (Moody's)

Overall Net Debt as Percent of Full Market Value of Above 5% 2%-5% Below 2% Taxable Property Worksheet E, (12) Unemployment Above National Average National Average Below National Average Worksheet E, (5)& (6) Median Household Income Below State Median State Median Above State Median Worksheet E, (7) & (8) Property Tax Revenues as a Percent of Full Market Value Above 4% 2%-4% Below 2% of Taxable Property Worksheet E, (13) Property Tax Collection Rate Worksheet E, (9) < 94% 94% - 98% > 98%

Weak is a score of 1 point * Mid-Range is a score of 2 points ** SUM

Strong is a score of 3 points *** AVERAGEi [( 1 i) n 1]+i 

### Worksheet G Calculation of Total Annualized Project Costs

Capital Costs to be financed (Supplied by applicant) $ (1)
Interest Rate for Financing (Expressed as a decimal) (i)
Time Period of Financing (Assume 10 years ) 10 years (n) *

Annualization Factor = ** (2)

Annualized Capital Cost [Calculate: (1) x (2) ] $ (3) Annual Cost of Operation and Maintenance (including but not limited to monitoring, inspection, permitting fees, waste disposal charges, repair, administration and replacement) $ (4) ***



### Total Annual Cost of Pollution Control Project [ (3) + (4) ] $ (5)

While actual payback schedules may differ across projects and companies, assume equal annual * payments over a 10-year period for consistency in comparing projects. Or see Appendix B for calculated annualization factors ** For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant *** number of years (e.g., for pumps replac ed once every three years, include one-third of the cost in each year).

### Worksheet H Calculation of Earnings Before Taxes With and Without Pollution Control Project Costs



### A. Earnings Without Pollution Control Project Costs



## EBT = R - CGS - CO

Where: EBT = Earnings Before Taxes

R = Revenues CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect labor , rent and heat) CO = Portion of Corporate Overhead Assigned to the Discharger (selling, general , administrative, interest, R&D expenses, and depreciation on common property)

Three Most Recently Completed Fiscal Years 19 19 19 R $ $ $ (1) CGS $ $ $ (2) CO $ $ $ (3)

EBT [ (1) - (2) -(3) ] $ $ $ (4)

Consideratio ns: Have earnings before taxes changed over the three year period? If so, what would a "typical" year's EBT be? Please explain below.

### Worksheet H, Continued

B. Earnings With Pollution Control Project Costs



## EWPR = EBT - ACPR

Where: EWPR = Earnings with Pollution Control Project Costs

EBT = Earnings Before Taxes (4) ACPR = Total Annual Costs of Pollution Control Project [Worksheet G, (5) ]

19 * EBT (4) $ (5) ACPR [Worksheet G, (5)] $ (6)

EWPR [ (5) - (6) ] $ (7)
The most recently completed fiscal year *

Consid erations: Is the discharger expected to have positive earnings after paying the annual cost o f pollution control? 

### Yes No

Additional Comments:

### Worksheet I Calculation of Profit Rates With and Without Pollution Control Project Costs
A. Profit Rate Without Project Costs PRT = EBT ÷ R

Where: PRT = Profit Rate Before Taxes

EBT = Earnings Before Taxes R = Reveneus
Three Most Recently Completed Fiscal Years

19 19 19 EBT [Worksheet H, (4)] (1) R [Worksheet H, (1)] (2)

PRT = Calculate: [(1)/(2)] (3)

Considerations: How have profit rates changed over the three years?

Is the most recent year typical of the three years? 

### Yes No (If not, you might want to use an earlier year or years for the analysis) How do these profit rates compare with the profit rates for this line of business"? Please discuss below.

### Worksheet I, Continued

B. Profit Rate With Pollution Control Costs

PRPR = EWPR ÷ R

Where: PRPR = Profit Rate With Pollution Control Costs

EWPR = Before-Tax Earnings With Pollution Control Costs R = Reveneus

The Most Recently Completed Fiscal Year 19 EWPR [Worksheet H, (7)] $ (4) R [Worksheet H, (1)] $ (5)

PRPR [Calculate: (4)/(5)] (6)

Considerations: What is the percentage change in the profit rate due to pollution control costs ? Calculate as follows: (PRPR - PR)/PR x 100

How does the profit rate with pollution control compare to the profit rate of this line of business?

### Worksheet J Calculation of The Current Ratio

CR = CA ÷ CL

Where: CR = Current Ratio

CA = Current Assets (the sum of inventories, prepaid expen ses, and accounts receivable) CL = Current Liabilities (the sum of a ccounts payable, accrued expenses, taxes, and the current portion of long-term debt)

Three Most Recently Completed Fiscal Years 19 19 19 CA $ $ $ (1) CL $ $ $ (2)

CR [Calculate: (1)/(2)] (3)

Considerations: Is the most recent year typical of the three years? 

### Yes No (If not, you might want to use an earlier year or years for the analysis) Is the Current Ratio (3) greater than 2.0? 

### Yes No
How does the Current Ratio (3) compare with the Current Ratios for other firms in this line of business?

### Worksheet K Calculation of Beaver's Ratio

BR = CF ÷ TD

Where: BR = Beaver's Ratio CF = Cash Flow TD = Total Debt

Three Most Recently Completed Fiscal Years 19 19 19 Cash Flow: Net Income After Taxes $ $ $ (1) Depreciation $ $ $ (2) CF [Calculate: (1) + (2)] $ $ $ (3)

Total Debt: Current Debt $ $ $ (4) Long-Term Debt $ $ $ (5) Total Debt $ $ $ (6)

Beaver's Ratio: BR [(3) /(6)] (7)
Considerations: Is the most recent year typical of the three years? 

### Yes No (If not, you might want to use an earlier year or years for the analysis) Is the Beaver's Ratio for this discharger greater than 0.2? 

### Yes No Is the Beaver's Ratio for this discharger less than 0.15? 

### Yes No Is the Beaver's Ratio for this discharger between 0.2 and 0.15? 

### Yes No How does this ratio compare with the Beaver's Ratio for other firms in the same business?

### Worksheet L Debt to Equity Ratio

DER = LTL ÷ OE

Where: DER = Debt/Equity Ratio

LTL = Long-Term Liabili ties (long-term debt such as bonds, debentures, and bank debt, and all other noncurrent liabilities such as deferred income taxes) OE = Owner Equity (the difference between total assets and t otal liabilities, including

contributed or paid in capital and retained earnings)

Three Most Recently Completed Fiscal Years

19 19 19 LTL $ $ $ (1) OE $ $ $ (2)

DER [(1)/(2)] (3)

Considerations: Is the most recent year typical of the three years? 

### Yes No (If not, you might want to use an earlier year or years for the analysis) How does the Debt to Equity Ratio compare with the ratio for firms in the same business?

### Worksheet M Qualitative Description of Estimated change in Socioeconomic Indicators due to Pollution Control Costs
Estimated change in Median Household Income (MHI)

Estimated change in the unemployment rate

Estimated change in overall net debt as a percent of full market value of taxable property

Estimated change in % of households below the poverty line

Impact on commercial development potential

Impact on Property Values

### Worksheet N

Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included.

_____________________________________________ (1) Current unemployment rate in affected community (if available).

_____________________________________________ (2) Current national unemployment rate.

_____________________________________________ (3) Additional number of persons expected to collect unemployment in affected (4) community due to compliance with water quality standards.

_____________________________________________ Expected unemployment rate in the affected community after compliance with (5) water quality standards (Current # of persons collecting unemployment in affected community + (4)/labor force in affected community.

_____________________________________________ Median household income in affected community.

_____________________________________________ (6) Total number of households in affected community.

_____________________________________________ (7) Percent of population below the poverty line in affected community.

_____________________________________________ (8) Current expenditures on social services in affected community.

_____________________________________________ (9) Expected expenditures on social services due to job losses in the affected (10) community.

_____________________________________________ Current total tax revenues in the affected community.

_____________________________________________ (11) Tax revenues paid by the private entity to the affected community.

_____________________________________________ (12)Worksheet N, continued

Tax revenues paid by the private entity as a percentage of the affected (13) community's total tax revenues.

_____________________________________________ * Current statewide unemployment rates.

_____________________________________________ (14) Additional number of persons expected to collect unemployment in the State (15) due to compliance with water quality standards.

_____________________________________________ Expected statewide unemployment rate, after compliance with water quality (16) standards (Current # of persons collecting unemployment in State + (15)/labor force in State.

_____________________________________________ Current expenditures on social services in State.

_____________________________________________ (17) Expected statewide expenditures on social services due to job losses.

_____________________________________________ (18)

In some cases, the affected community will include more than just the municip ality in which the private entity is located. If so, the analysis should * consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.

### Worksheet O Pollution Control Project Summary Information
Design Capacity of the Pollution Control System Expected Excess Capacity after Completion of Project % Projected Groundbreaking Date Projected Date of Completion
Please describe the pollution control project being proposed. I nclude description of all pollution prevention activities included in the project. (Attach additional page if necessary).

Please describe the other pollution control options considered, including pollution prevention activities

. Explain why each option was rejected. (Attach additional page if necessary).i [( 1 i) n 1]+i 

### Worksheet P Public-Sector Pollution Control Calculation of Total Annualized Project Costs A. Capital Costs Capital Cost of Project $ Other One-Time Costs of Project (Please List, if any): $ $ $ Total Capital Costs (Sum column) $ (1) Portion of Capital Costs to be Paid for with Grant Monies $ (2) Capital Costs to be Financed [Calculate: (1) - (2) ] $ (3) Type of financing (e.g., G.O. bond, revenue bond, bank loan) Interest Rate for Financing (expressed as decimal) (i) Time Period of Financing (in years) (n)
Annualization Factor = (or see Appendix B) (4)

Annualized Capital Cost [Calculate: (3) x (4) ] (5)
B. Operating and Maintenance Costs Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection, permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below) $ $ $ $ Total Annual O & M Costs (Sum column) $ (6)
C. Total Annual Cost of Pollution Control Project Total Annual Cost of Pollution Control Project [ (5) + (6) ] $ (7)

### Worksheet Q Calculation of Total Annual Pollution Control Costs

Per Household

A. Current Pollution Control Costs: Total Annual Cost of Existing Pollution Control $ (1) Amount of Existing Costs Paid By Households $ (2) Percent of Existing Costs Paid By Households %(3) Number of Households* (4) Annual Cost Per Household [Calculate: (2)/(4) ] $ (5) Do not use number of hook-ups. *



### B. New Pollution Control Costs Are households expected to provide revenues for the new pollution control project in the same proportion that they support existing pollution control? (Check a, b or c and continue as directed.)
a) Yes [fill in percent from (3) ] percent.(6a) b) No, they are expected to pay percent.(6b) c) No, they are expected to pay based on flow. (Continue on Worksheet Q, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet P] $ (7) Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ] (8) Amount to Be Paid By Households [Calculate: (9) x (10) ] $ (9) Annual Cost per Household [Calculate: (11)/(4) ] $ (10)



### C. Total Annual Pollution Control Cost Per Household Total Annual Cost of Pollution Control Per Household (5) + (10) $ (11)

### Worksheet Q: Option A

Calculation of Total Annual Pollution Control Costs Per Household Based on Flow

A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment) (1) Usage due to Household Use (MGD of Household Wastewater) (2) Percent of Usage due to Household Use [Calculate: (2)/(1) ] %(3)
Total Annual Cost of Pollution Control Project $ (4) Industrial Surcharges, if any $ (5) Costs to be Allocated [Calculate: (4) - (5) ] $ (6) Amount to Be Paid By Households [Calculate: (3) x (6) ] $ (7) Annual Project Cost per Household [Calculate: (7)/Worksheet Q, (4) ] $ (8)



### C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet Q, (5) ] $ (9)
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ] $ (10)i [( 1 i) n 1]+i 

### Worksheet R Private-Sector Development Calculation of Total Annualized Project Costs

Capital Costs to be financed (Supplied by applicant) $ (1)
Interest Rate for Financing (Expressed as a decimal) (i)
Time Period of Financing (Assume 10 years ) 10 years (n) *

Annualization Factor = ** (2)

Annualized Capital Cost [Calculate: (1) x (2) ] $ (3) Annual Cost of Operation and Maintenance (including but not limited to monitoring, inspection, permitting fees, waste disposal charges, repair, administration and replacement) $ (4) ***



### Total Annual Cost of Pollution Control Project [ (3) + (4) ] $ (5)

While actual payback schedules may differ across projects and companies, assume equal annual * payments over a 10-year period for consistency in comparing projects. Or see Appendix B for calculated annualization factors ** For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant *** number of years (e.g., for pumps replac ed once every three years, include one-third of the cost in each year).Total Annual Pollution Control Cost per Household Median Household Income × 100



### Worksheet S Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will notincur any substantial economic impacts as a result of the proposed pollution control project. The formula is as follows:



### A. Calculation of The Municipal Preliminary Screener Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or $ (1) Worksheet C, Option A (10) ] Median Household Income $ (2) * 

### Municipal Preliminary Screener (Calculate: [(1)/(2)] x 100) %(3)



### B. Evaluation of The Municipal Preliminary Screener

If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test. Otherwise, it is necessary to continue.
Benchmark Comparison:

Little Impact Mid-Range Impact Large Impact Less than 1.0% 1.0% - 2.0% Greater than 2.0%

Indication of no substantial )))))))))))))))) economic impacts Proceed to Secondary Test
1990 Census adjusted by CPI inflation rate if necessary. *

### Worksheet T
Data Used in the Secondary Test
Please list the following values used in deter mining the Secondary Score. Potential sources of the data are indicated.

A. Data Collection

Data Potential Source Value Direct Net Debt Community Financial Statements Town, County or State Assessor's Office $ (1) Overlapping Debt Community Financial Statements Town, County or State Assesor's Office $ (2) Market Value of Property Community Financial Statements Town, County or State Assessor's Office $ (3) Bond Rating Standard and Poors or Moody's (4) Community Unemployment 1990 Census of Population Rate Regional Data Centers %(5) National Unemployment Bureau of Labor Statistics Rate (202) 606-6392 %(6) Community Median 1990 Census of Population Household Income $ (7) State Median Household 1990 Census of Population Income $ (8) Property Tax Collection Community Financial Statements Rate Town, County or State Assessor's Office %(9) Property Tax Revenues Community Financial Statements Town, County or State Assessor's Office $ (10)

### Worksheet T, Continued

B. Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2) ) $ (11)

Overall Net Debt as a Percent of Full Market Value of Taxable Property (Calculate: [(11)/(3)] x 100) %(12)

2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable Property (Calculate: [(10)/(3)] x 100) %(13)Worksheet U Calculating The Secondary Score Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average. Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as a single indicator with the remaining indicators.
Secondary Indicators Score Indicator Weak Mid-Range Strong * ** *** Bond Rating Below BBB (S&P) BBB (S&P) Above BBB (S&P) or Worsksheet T, (4) Below Baa (Moody's) Baa (Moody's) Baa (Moody's)

Overall Net Debt as Percent of Full Market Value of Above 5% 2%-5% Below 2% Taxable Property Worksheet T, (12) Unemployment Above National Average National Average Below National Average Worksheet T, (5)& (6) Median Household Income Below State Median State Median Above State Median Worksheet T, (7) & (8) Property Tax Revenues as a Percent of Full Market Value Above 4% 2%-4% Below 2% of Taxable Property Worksheet T, (13) Property Tax Collection Rate Worksheet T, (9) < 94% 94% - 98% > 98%

Weak is a score of 1 point * Mid-Range is a score of 2 points ** SUM

Strong is a score of 3 points *** AVERAGE

### Worksheet V Calculation of Earnings Before Taxes

A. Earnings Without Pollution Control Project Costs



## EBT = R - CGS - CO
B. Earnings With Pollution Control Project Costs



## EWPR = EBT - ACPR

Where: EBT = Earnings Before Taxes

EWPR = Earnings with Pollution Project Costs R = Revenues CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect labor , rent and heat) CO = Portion of Corporate Overhead Assigned to the Discharger (selling, general , administrative, interest, R&D expenses, and depreciation on common property) ACPR = Total Annual Costs of Pollution Control Project [Worksheet R (5)]

R $ (1) CGS $ (2) CO $ (3)

EBT [ (1) - (2) -(3) ] $ (4) ACPR [ Worksheet R (5) ] $ (5)

EWPR [ (4) - (5) ] $ (6)

### Worksheet W Calculation of Profit Rates
A. Profit Rate Without Project Costs PRT = EBT ÷ R

B. Profit Rate With Pollution Control Costs

PRPR = EWPR ÷ R
Where: PRT = Profit Rate Before Taxes

PRPR = Profit Rate with Pollution Control Costs EBT = Earnings Before Taxes EWPR = Before-Tax Earnings with Pollution Control Costs R = Revenues

EBT [Worksheet V, (4)] (1) R [Worksheet V, (1)] (2)

PRT = Calculate: [(1)/(2)] (3)

EWPR [Worksheet V, (6)] $ (4) R [Worksheet V, (1)] $ (5)

PRPR [Calculate: (4)/(5)] (6)

### Worksheet X Calculation of The Current Ratio

CR = CA ÷ CL

Where: CR = Current Ratio

CA = Current Assets (the sum of inventories, prepaid expen ses, and accounts receivable) CL = Current Liabilities (the sum of a ccounts payable, accrued expenses, taxes, and the current portion of long-term debt)

CA $ (1) CL $ (2)

CR [Calculate: (1)/(2)] (3)

### Worksheet Y Calculation of Beaver's Ratio

BR = CF ÷ TD

Where: BR = Beaver's Ratio CF = Cash Flow TD = Total Debt

Cash Flow: Net Income After Taxes $ (1) Depreciation $ (2) CF [Calculate: (1) + (2)] $ (3)

Total Debt: Current Debt $ (4) Long-Term Debt $ (5) Total Debt $ (6)

Beaver's Ratio: BR [(3) /(6)] (7)

### Worksheet Z Debt to Equity Ratio

DER = LTL ÷ OE

Where: DER = Debt/Equity Ratio

LTL = Long-Term Liabili ties (long-term debt such as bonds, debentures, and bank debt, and all other noncurrent liabilities such as deferred income taxes) OE = Owner Equity (the difference between total assets and t otal liabilities, including

contributed or paid in capital and retained earnings)

LTL $ (1) OE $ (2)

DER [(1)/(2)] (3)