RESIDENTIAL INDICATOR

Median Household Income (MHI)
«Census Year MHI

+ MHI Adjustment Factor

+ Adjusted MHI (Line 201 x Line 202)
Annual WWT and CSO Control Cost
Per Household (CPH)

(Line 109)

Residential Indicator:

Annual Wastewater and CSO Control
Costs per Household as a percent of
Adjusted Median Household Income

(CPH as % MHI)
(Line 204 + Line 203 x 100)

Worksheet 2

Line Number
201
202

203

204

205

CSO Guidance for Financiai Capability Assessment and Schedule Deveiopment

Page 17


SUMMARY OF PERMITTEE FINANCIAL CAPABILITY INDICATORS

Indicator

Boni Rating (Line 303)

Overalfi ‘Net Debt as a
Percent of Full Market
Property Value

(line 4423)

Unexnpioyment Rate (Line
501}

Medfan Household Income
(Line: 601)

Property Tax Revenues as
a Pereent of Full Market
Property Value (Line 703)

Property Tax Revenue
Collestion Rate
(Linge: 803)

Permantee Indicators Score
(Summ af Column B +
Nunsiver of Entries)

Worksheet 9

Column A:
Actual Value

Column B:
Score

Line Number

901

902

903

904

905

906

907

CSO Guidance for Financiai Capability Assessment and Schedute Development

Page 38


Property Tax Revenue Collection Rate

The property tax revenue collection rate is an indicator of the efficiency of the tax collection
system and the acceptability of tax levels to residents

Worksheet 8 Instructions

The property tax revenue collection rate is calculated on Worksheet 8. The property tax
revenues collected was listed in Worksheet 7, Line 702. Enter this value on line 801. Enter the
property taxes levied on line 802. Divide the property tax revenue collected by the property taxes
levied and multiply by 100 to present the coilection rate as a percentage on line 803.

Data Sources

Property taxes levied can be computed by multiplying the assessed value of real property by
the property tax rate, both of which are available from a community's financial statements or the
state assessor's office (see Worksheet 4, Line 404). Property tax revenues are available in
communities’ annual financial statements. Occasionally, the assessment and tax revenue data of
communities partially serviced by the permittee may have to be prorated to provide a clearer
picture of the permittee’s property tax revenue collection rate.

Benchmarks

+ Weak: Below 94%
+ Mid-range 94-98%

+ Strong: Above 98%.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 34


* Other viable funding mechanisms and sources of financing

These factors, may warrant phasing the CSO control implementation schedules in a manner
other than would be prescribed by logical engineering sequencing and normal construction
practices. This section illustrates how these considerations may affect scheduling and provides
some general scheduling boundaries to aid all parties in negotiating the final implementation
schedule for CSO controls.

Scheduling is first considered during the permittee’s development of an LTCP. The LTCP
should assess CSO control alternatives including estimated design and construction time
requirements for various components of the CSO controls. In general. CSO controls should be
implemented as expeditiously as possible

The permittee should first develop a tentative implementation schedule based on logical
engineering sequencing and normal construction practices. The permittee should complete a
critical path analysis to identify the shortest implementation schedule that will achieve the control
objectives identified in the LTCP (See guidance: Combined Sewer Overflows-Guidance for Long-
term Control Plan (EPA 832-13-95-002)). Asa result of negotiations with state NPDES and
EPA authorities, it may be appropriate to modify the tentative design and construction schedule
based on the environmental and financial considerations listed above.

In general, the final negotiated schedule for CSO controls would reflect two types of
modifications to the engineering and construction schedule. First, where CSOs discharge to.
sensitive or significantly use-impaired water bodies, the final schedule would provide for expedited
implementation of the controls for these discharges. Second, the schedules may be phased or
extended to reflect the significance of various financial considerations, particularly financial
capability. The number of years to implement the CSO controls would be negotiated between the
permittee, EPA and state NPDES authorities.

The following discussion provides more information on environmental and iinancial
considerations that affect implementation schedules for CSO controls.

Guidance for Financial Capability Assessment and Scheaule Development Page 43


Financial Benchmarks and Information Sources

The information used to develop the indicators needed for the tinancial assessment is
drawn from several different sources. In generai, this information should be available through a
combination of local, state, and Federal sources. Project cost information ts available in the
LTCP. Socioeconomic information, such as median household income, is available from census
data. Detailed financial information is available from a community's annual financial statements.
Financial statements may be obtained directly from a community or, in most states, from the state
auditor's office which maintains a central file of audited reports. When the permittee’s service
area involves more than one jurisdiction, it will be necessary to examine data for each jurisdiction

to develop the necessary data

CSO Guidance for Financial Capability Assessment anda Schedule Development Page 11


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Guidance for Financial Capability Assessment and Schedule Development



The time periods presented in this guidance should be viewed as general boundaries to aid all
parties in establishing reasonable and effective CSO control implementation schedules

It is important to note that the final CSO control implementation schedule established for
each permittee should be a time period that is negotiated between the permittee and EPA and state
NPDES authorities based on the specific circumstances of each permittee’s environmental and
financial situation, pius the specific nature of any engineering and construction requirements. The
time periods presented in this guidance should be viewed as general boundaries to aid all parties in
establishing reasonable and effective CSO control implementation schedules

Guidance for Financial Capability Assessment and Schedule Development Page 51


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Guidance for Financial Capability Assessment and Schedule Development


consideration which usually results in an extended implementation schedule with phased
construction is the financial capability consideration

Application of environmental and financial considerations to the development of
implementation schedules for three hypothetical permittees is presented in Table 5

Permittee number | required an eight year normal engineering/construction schedule to
implement the CSO controls. Negotiations between the permittee and EPA and the state NPDES
authorities resulted in agreement that four years would be allowed for the special circumstances of
the permittee’s low-burden financial capability category. Therefore, the eight-year engineering
schedule took precedence over the financial consideration (therefore were no environmental
considerations), and the schedule for implementation of CSO controls was eight years

Permittee number 2 required three years to implement long-term controls under a normal
engineering/construction schedule. Negotiations with the NPDES and WQS authorities concluded
that four years would be necessary to obtain SRF loans. A four-year implementation schedule for
CSO controls was established by the NPDES permitting authority to accommodate the most time
consuming funding option.

Implementation of permittee number 3's CSO controls required a six-year normal
engineering/construction schedule. However, the following environmental and financial
considerations affected the final schedule

* One of the permittee’s CSO outfalls discharges to a bathing beach. Bathing beaches are
defined as sensitive areas in the CSO Control Policy. Although a normal
engineering/construction schedule would have eliminated this outfall in four years, it was
determined that the schedule could be modified to eliminate this outfall in two years.

* The permittee’s cost per household as percent of median household income is 2.2
percent, yielding a Residential Indicator of “Weak.” The other socioeconomic, debt, and
financial indicators yield a Permittee Indicators score of 1.7, or “Mid-Range.” According
to Table 3, these two indicators place the permittee in the “High-Burden” category for
financial capability.

* User fees will have to increase significantly

The unusual nature of permittee number 3's “high burden” financial capability category
resulted in a sixteen-year schedule for this financial consideration after negotiations with the EPA
and state NPDES authorities. Therefore, the permittee would receive a sixteen-year schedule to
implement all CSO controls, with a special requirement that the CSO discharge to the bathing
beaches be removed in the first two years of the schedule.

It is important to note that the final CSO control implementation schedule established for
each permittee should be a time period that is negotiated between the permittee and EPA and state
NPDES authorities based on the specific circumstances of each permittee’s environmental and
financial situation, plus the specific nature of any engineering and construction requirements.

Guidance for Financial Capability Assessment and Schedule Development Page 49


DEBT INDICATORS

The debt indicators described below were selected to assess the current debt burden
conditions and the ability to issue new debt. These indicators are the bond rating and overall net
debt as a percent of full market property value. When these indicators are not available for the
permittee, other financial data which illustrates debt burden and debt issuing capacity may be used
to assess the permittee's financial capability in this area.

Bond Rating

The information needed to evaluate the bond ratings is presented in Worksheet 3. Recent
bond ratings for the permittee and service area communities summarize a bond rating agency's
assessment of a permittee's or community's credit capacity. General obligation (G.O.) bonds are
bonds issued by a local government and repaid with taxes (usually property taxes). They are the
primary long-term debt funding mechanism in use by local governments. General obligation bond
ratings reflect financial and socioeconomic conditions experienced by the community as a whole.

"Revenue bond" ratings, by comparison, reflect the financial conditions and management
capability of the wastewater utility. They are repaid with revenues generated from user fees.
Revenue bonds are sometimes referred to as water or sewer bonds. In some cases these bonds
may have been issued by the state on behalf of local communities. (Additional information on
bonds is contained in EPA’s Combined Sewer Overflows—Guidance For Funding Options (EPA
832-B-95-007 )

Bond ratings normally incorporate an analysis of many financial capability indicators. These
analyses evaluate the long term trends and current conditions for the indicators. The ultimate bond
ratings reflect a general assessment of the current financial conditions. However, if security
enhancements like bond insurance have been used for a revenue bond issue, the bond rating may be
higher than justified by the local conditions.

Many smail and medium-sized communities and permittees have not used debt financing for
projects and, as a result, have no bond rating. The absence of bond rating does not indicate strong
or weak financial health. When a bond rating is not available, this indicator may be excluded from
the financial analysis.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 21


The Financial Capability Matrix

The results of the Residential Indicator and the Permittee Financial Capability indicators
analyses are combined in the Financial Capability Matrix to evaluate the level of financial burden
the CSO controls may impose on a permittee. This matrix can be used by permittees. EPA and
state NPDES authorities to establish reasonable and workable CSO control implementation
schedules.

Worksheet 10 Instructions

First, enter the value of the Residential Indicator (Cost Per Household as a % of MHI) from
Line 205 (Worksheet 2) on Line 1001 of Worksheet 10. Enter the Permittee Financial Capability
Indicators score from Line 907 (Worksheet 9) on Line 1002. With this information, find the
financial burden category for the permittee in the Financial Impact Matrix (Table 3). Enter the
category on line 1003

For example, if the Residential Indicator from Line 1001 is 1.3% and the Permittee Financial
Capability Indicators score from Line 1002 is 2.1, the Financial Capability Matrix would indicate
that implementation of the CSO control would be “Medium Burden” for the permittee.

The result from the Financial Capability Matrix is used to develop a CSO implementation
schedule as described in Section V: CSO Schedule Development.

Guidance for Financial Capability Assessment and Schedule Development Page 39


The CSO Strategy recommended that all CSOs be identified and categorized according to their
status of compliance with these requirements. It also set forth three objectives

. Ensure that if CSOs occur, they are only as a result of wet weather

. Bring all wet weather CSO discharge points into compliance with the technology-
based and water quality-based requirements of the CWA

. Minimize the impacts of CSOs on water quality. aquatic biota. and human health.

In addition, the CSO Strategy charged all States with developing state-wide permitting strategies
designed to reduce, eliminate, or control CSOs.

Although the CSO Strategy was successful in focusing increased attention on CSOs, it fell
short in resolving many fundamental issues. In mid-1991, EPA initiated a process to accelerate
implementation of the Strategy. The process included negotiations with representatives of the
regulated community, State regulatory agencies, and environmental groups. These negotiations
were conducted through the Office of Water Management Advisory Group. The initiative
resulted in the development of a CSO Control Policy, which was published in the /‘ederal
Register on April 19, 1994 (59 Federal Register 18688). The intent of the CSO Control Policy is
to:

. Provide guidance to permittees with CSOs, NPDES permitting and enforcement
authorities, and State water quality standards (WQS) authorities

. Ensure coordination among the appropriate parties in planning, selecting,
designing, and implementing CSO management practices and controls to meet the
requirements of the CWA

. Ensure public involvement during the decision-making process.

The CSO Control Policy contains provisions for developing appropriate, site-specific
NPDES permit requirements for all CSSs that overflow due to wet weather events. It also
announces an enforcement initiative that requires the immediate elimination of overflows that
occur during dry weather and ensures that the remaining CWA requirements are complied with as
soon as possible.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 2


FINANCIAL MANAGEMENT INDICATORS

The financial management indicators used to evaluate a permittee’ s financial management
ability are property tax revenue as a percent of full market value of real property and property tax
revenue collection rate.

Property Tax Revenues as a Percent of Full Market Property Value

This indicator can be referred to as the "property tax burden" since it indicates the funding
capacity available to support debt based on the wealth of the community. It also reflects the
effectiveness of management in providing community services.

Worksheet 7 Instructions

Property tax burden is computed on Worksheet 7. The full market value of reai property was
calculated in Worksheet 4. line 404. Enter the full market value on line 701. Enter the most recent
year's property tax revenue on line 702. General fund revenues are primarily property tax receipts.

Data Sources

The property assessment data should be readily available through the community or the
State's assessor office (see Worksheet 4, Line 404). Property tax revenues are available in
communities’ annual financial statements. Occasionally, the assessment and tax revenue data of
communities partially serviced by the permittee may have to be prorated to provide a clearer
picture of the permittee's property tax burden

Benchmarks

* Weak: Above 4%
* Mid-range: 2%-4%

+ Strong: Below 2%.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 32


If the permittee’s service area includes more than one jurisdiction. it may be necessary to
develop a weighted MHI for the entire service area. The Bureau of Census's designated MHI
areas generally encompass most permittees’ service areas. For this reason, the calculation of a
weighted MHL usually will not be necessary to reasonably represent the permittee's MHI. When a
weighted MHI must be acquired. a weight would be assigned to each jurisdiction to reflect its

share of the total households.

The following example illustrates how to develop a weighted MHI value before adjusting it
to current year dollars. Ifa permittee is a regional authority that serves three local jurisdictions,
the weighted average MHI would be calculated as follows:

Number of
risdiction MHI Households (HH
A $30,000 100.000
B $45,000 25,000
c $25,000 $0,000
175,000
Weighted MHI MHI, | war | : uatt | it | . vat ( a
530.00 | $45,000 20) : $25.0 ae)
$17,143 36.429 $7.143
$30,715

Data Sources

Median household income is available for most communities from the latest census. In the few
cases where a local jurisdiction's MHI is not available, the surrounding county's MHI may be
sufficient. Each state has a state data center that serves as a local source of census data for public
use. This center may be contacted to obtain the information available from the Bureau of Census
for use during this assessment (see Appendix B).

CSO Guidance for Financial Capability Assessment and Schedule Development Page 18


Overail Net Debt as a Percent of Full Market Property Value
Description

Overall net debt is debt repaid by property taxes in the permittee's service area. It excludes
debt which is repaid by special user fees (e.g. revenue debt). This indicator provides a measure of
the debt burden on residents within the permittee's service area and measures the ability of local
governmental jurisdictions to issue additional debt. It includes the debt issued directly by the local
Jurisdiction and debt of overlapping entities, such as school districts. This indicator compares the
level of debt owed by the service area population with the full market value of real property used
to support that debt and serves as a measure of financial wealth in the permittee’s service area.
Information needed to develop overall net debt as a percent of full market value is identified on
Worksheet 4

Ww Instruction:
Enter requested data on Worksheet 4, lines 401 - 405.

Line 401 - Direct Net Debt - Enter the amount of each jurisdiction's general obligation debt
outstanding that is supported by the property in the permittee's service area. General
obligation bonds are secured by the "full faith and credit" of the community and are payable
from general tax revenues. This debt amount excludes general obligation bonds that are
payable from some dedicated user fees or specific revenue source other than the general tax
revenues. These general obligation bonds are called "double-barreled bonds.”

Line 402 - Debt of Overlapping Entities - Calculate the permittee's service area's share of any
debt from overlapping entities using the process illustrated below

1. Identify in Column A below each overlapping entity that has incurred debt that must be
partially supported by the permittee's service area. (Check the State assessor's office for
this information).

2. Identify the total amount of tax-supported outstanding debt for each overlapping entity in
Column B. Money in a sinking fund is not included in the outstanding debt since it
represents periodic deposits into an account to ensure the availability of sufficient monies
to make timely debt service payments.

3. Identify the percentage of each overlapping entity's outstanding debt charged to persons
or property in the permittee's service area in Column C. The percentage is based on the
estimated full market value of real property of the respective jurisdictions

CSO Guidance for Financtal Capability Assessment and Schedule Development Page 24


IV. PHASE TWO: PERMITTEE FINANCIAL CAPABILITY INDICATORS

In the second phase, selected indicators are assessed to evaluate the financial capability of the
permittee, These indicators will examine the permittee's debt burden, socioeconomic conditions,
and financial operations. The second-phase review examines three general categories of financial
capability indicators for the permittee.

. Debt Indicators - Assess current debt burden of the permittee or the communities
within the permittee's service area and their ability to issue additional debt to
finance the CSO controls. The indicators selected for this purpose are:

: Bond Ratings (General Obligation and/or Revenue Bond Fund)
- Overall Net Debt as a Percent of Full Market Property Value

. Socioeconomic Indicators - Assess the general economic well-being of residential
users in the permittee’s service area. The indicators selected for this purpose are:

- Unemployment Rate
- Median Household Income

. Financial Management Indicators - Evaluate the permittee's overall ability to
manage financial operations. The indicators selected for this purpose are:

- Property Tax Revenue Collection Rate
- Property Tax Revenues as a Percent of Full Market Property Value

Even though the financial capability analysis reflects current conditions, pending changes in
the service area should be considered in development of the second phase indicators. For example,
if the current unemployment rate is high, but there is a new plant opening that will stimulate
economic growth, the unemployment indicators for the service area would need to be modified to
reflect the projected impact of the new plant. The permittee should submit documentation of such
conditions to the appropriate EPA and state NPDES authorities for consideration. When the
permittee is a sanitary district, sewer authority or similar entity, the second phase indicators related
to property values and tax revenues may not be applicable. In those circumstances, the permittee
may simply use the remaining indicators or submit other related documentation that will help assess
its financial capability to implement the CSO controls.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 20


PROPERTY TAX REVENUES AS A PERCENT OF FULL MARKET PROPERTY

VALUE
Worksheet 7
Line Number
Full Market Value of Real
Property (Line 404) 701
Property Tax Revenues 702
Property Tax Revenue as a
Percent of Full Market Property
Value
(702 + 701 x 100) 703

CSO Guidance for Financial Capability Assessment and Schedule Development Page 33


COST PER HOUSEHOLD
Worksheet |

Line Number

Current WWT Costs
. Annual Operations and

Maintenance Expenses (Excluding

Depreciation) 100
. Annual Debt Service (Principal

and Interest) 101

*Subtotal*

(Line 100 + Line 101) 102
Projected WWT and CSO Costs
(Current Dollars)
. Estimated Annual Operations and

Maintenance Expenses (Excluding

Depreciation) 103
. Annual Debt Service (Principal

and Interest) 104

*Subtotal*

(Line 103 + Line 104) 105
Total Current and Projected WWT and
CSO Costs (Line 102 + Line 105) 106
Residential Share of Total WWT and
CSO Costs 107
Total number of Households in Service
Area 108
Cost Per Household
(Line 107 = Line 108) 109
CSO Guidance for Financiai Capability Assessment and Schedule Development Page 15


REFERENCES

International City/County Management Association. 1994. /valuating Financial Condition: - A
Handbook for Local Government. Washington, D.C. International City/County Management
Association.

Moody's Investor Services, Inc. 1995. Medians - Selected Indicators of Municipal Performance.
New York, N.Y. Moody's Investor Services, Inc.

Moody's Investor Services, Inc, 1989. Moody's on Municipals - An Introduction to fssuing Debt.
New York, N.Y. Moody's Investor Services, Inc

Standard and Poor's Corporation. 1993. Municipal Finance Criteria New York, N.Y. Standard
and Poor's Corporation.

U.S. Environmental Protection Agency. 1984. Financial Capability Guidebook.

U.S. Environmental Protection Agency. 1992. The Road to Financing - Assessing and Improving
Your Community's Creditworthiness. EP A 832-B-92-004.

U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows-Guidance Jor Long-
term Control Plan, EPA-832-B-95-002.

U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows—Guidance Sor Nine
Minimum Controls. EPA 832-B-95-003

U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows—Guidance for
Funding Options. EPA 832-B-95-007.

U.S. Environmental Protection Agency. 1995. Combined Sewer Overflows—Guidance for
Screening and Ranking. EPA 832-B-95-004.

U.S. Environmental Protection Agency. 1995. Interim Economic Guidance for Water Quality
Standards. EPA 823-B-95-002.

US Environmental Protection Agency. 1989. Building Support For Increasing User Fees. EPA
430/09-89-006.

Guidance for Financiat Capability Assessment and Schedule Develapment Page 59


. Unemployment rate

‘ Median household income
. Property tax revenue collection rate
. Property tax revenues as a percent of full market property value

It must be emphasized that the financial indicators found in this guidance might not
present the most complete picture of a permittee’s financial capability to fund the CSO controls.
However, the financial indicators do provide a common basis for financial burden discussions
between the permittee and EPA and state NPDES authorities. Since flexibility is an important
aspect of the CSO Policy. permittees are encouraged to submit any additional documentation that
would create a more accurate and complete picture of their financial capability

Although this guidance focuses on the role of financial capability tor development of an
implementation schedule for CSO controls, the financial capability analysis process can be usetul
for the identification and evaluation of long-term control alternatives in the LTCP,

The second goal is to assist the permittee, EPA and state NPDES authorities in
cooperatively developing CSO control implementation schedules. This will involve an evaluation
of the following environmental and financial considerations listed in the CSO Policy:

. Eliminating overtlows to sensitive areas

. Use impairment

. Financial capability

. Grant and loan availability

. Previous and current sewer user fees and rate structures

. Other viable funding mechanisms and sources of financing

This guidance does not recommend specific schedules for implementation of the CSO
controls based on financial capability or other considerations identified in the CSO Policy. It
does, however, provide general boundaries to aid all parties in negotiating reasonable and
effective schedules for implementation of the CSO controls

[t is important to recognize that scheduling flexibility is not the only form of relief
available to permittees. The CWA and EPA regulations provide mechanisms for the review and
revision of WQS. The CSO Policy also encourages the "review and revision, as appropriate, of
water quality standards and their implementation procedures when developing CSO control plans
to reflect the site-specific wet weather impacts of CSOs." During the process of developing the

CSS Guidance for Financial Capability Assessment and Schedule Development Page?


Median Household Income

Median household income (MHI) is defined as the median amount of total income dollars
received per household during a calendar year in a given area. It serves as an overall indicator of.
community earning capacity. Worksheet 6 is used to present information for this indicator

rksheet 6 In: ion.
Median household income was discussed during the first phase assessment and is presented
on Worksheet 2. On line 601 of Worksheet 6. enter the adjusted MHI from Worksheet 2 (line
203). Use the MHI adjustment factor from Worksheet 2 (line 202) to calculate the adjusted

national MHI from the latest census, national MHI value (line 602) and enter the value on Line
604

Data Sources
Median household income is available through state data centers. Refer to Worksheet 2 for
MHI of the permittee's service area. Refer to Appendix B for the address and telephone number of

the state's data center to acquire the latest census national MHI value.

Benchmarks

Compare the permittee's MHI to the adjusted national MHI:

«Weak: More than 25% below Adjusted National MHI
« Mid-Range: + 25% of the Adjusted National MHI
* Strong: More than 25% above Adjusted National MHI

CSO Guidance for Financial Capability Assessment and Schedule Development Page 30


OVERALL NET DEBT AS A PERCENT OF FULL MARKET PROPERTY VALUE

Worksheet 4
Line N

Direct Net Debt
(G.O. Bonds Excluding Doubie-
Barreled Bonds) 401
Debt of Overlapping Entities
(Proportionate Share of
Multijurisdictional Debt) 402
Overall Net Debt
(Lines 401+402) 403
Market Value of Property 404
Overall Net Debt as a Percent of
Full Market Property Vaiue
(Line 403 divided by
Line 404 x 100) 405

CSO Guidance for Financiai Capability Assessment and Schedule Development Page 27


when reviewing CSO control plans

Table | illustrates the roles and responsibilities of permittees. NPDES permitting and
enforcement authorities. and state WQS authorities.

In addition to these key elements and expectations, the CSO Control Policy also addresses
important issues such as ongoing or completed CSO control projects, public participation, small
communities and watershed planning

CSO Guidance for Financiat Capability Assessment and Schedule Development Page 4


Key Elements of the CSO Control Policy

The CSO Control Policy contains four key principles to ensure that CSO controls are
cost-effective and meet the requirements of the CWA

. Provide clear levels of control that would be presumed to meet appropriate health
and environmental objectives

. Provide sufficient flexibility to municipalities. especially those that are financially
disadvantaged, to consider the site-specific nature of CSOs and to determine the
most cost-effective means of reducing pollutants and meeting CWA objectives and
requirements

. Allow a phased approach for implementation of CSO controls considering a
community's financial capability

. Review and revise, as appropriate. WQS and their implementation procedures
when developing long-term CSO control plans to reflect the site-specific wet
weather impacts of CSOs

In addition, the CSO Control Policy clearly defines expectations for permittees, State
WQS authorities, and NPDES permitting and enforcement authorities. These expectations
include the following

. Permittees should immediately implement the nine minimum controls (NMC),
which are technology-based actions or measures designed to reduce CSOs and
their effects on receiving water quality, as soon as possible but no later than
January |, 1997. More information on the NMC can be found in the EPA
document Combined Sewer Overflows Guidance for Nine Minimum Controls
(EPA 832-B-95-003)

. Permittees should give priority to environmentally sensitive areas

. Permittees should develop long-term control plans (LTCPs) for controlling CSOs.
A permittee may use one of two approaches: 1) demonstrate that its plan is
adequate to meet the water quality-based requirements of the CWA
(“demonstration approach”), or 2) implement a minimum level of treatment (e.g.,
primary clarification of at least 85 percent of the collected combined sewage flows)
that is presumed to meet the water quality-based requirements of the CWA, unless
data indicate otherwise (“presumption approach”)

. WQS authorities should review and revise, as appropriate, State WQS during the
CSO long-term planning process

. NPDES permitting authorities should consider the financial capability of permittees

CSO Guidance for Financial Capability Assessment and Schedule Development Page 3


Developing the MHI Estimate

The second step in developing the Residential Indicator is to determine the adjusted median
househald income (MHI) for the permittee’s entire wastewater service area. Information and
calculations used to develop the adjusted MHI vaiue are presented in Worksheet 2 and its
Instructions.

Wi 2 Instructions

Enter the requested information on Worksheet 2, lines 201 through 203. MHI from the
latest census year should be adjusted to current year dollars with the average CPI inflation rate
from the latest census year to the current year using the following formula

tdjusted \{LH MHP * djustnent fvactor

The MHI adjustment factor can be calculated using the following formula or the inflation
adjustment factor from the table on page 58:

MHI Adjustment Factor (1 eC pp wrt tsar-Census Var

For example, if a permittee’s MHI was $30,000 in the 1990 census vear, the average annual
CPI since 1990 was 4 percent and the current year is 1992, the following calculation would be

made to adjust the MHI to current dollars:

Adjustment Factor ~ br. 04yP!" 1.0816

Adjusted MH $30,000 © LO8IG — $32.448

On Worksheet 2, calculate the adjusted MHI by entering the latest census MHI value on line
201. Then enter the MHI Adjustment Factor on line 202. Finally, multiply the MHI (line 201) by
the Adjustment Factor (line 202) and enter the Adjusted MHI on line 203.

CSO Guidance for Financial Capability Assessment ana Schedule Development Page 16


Guidance to Support Implementation of the CSO Control Policy

To help permittees and NPDES permitting and WQS authorities implement the provisions
of the CSO Control Policy, EPA has developed the following documents

. Combined Sewer Overflows Guidance for Long-ferm Control Plan (EPA 832-
B-95-002)

. Combined Sewer Overjlows Guidance jor Nine Minimun Comrols (EPA 832-B-
95-003)

. Combined Sewer Overflows Guidance for Screening and Ranking (EPA 832-B-
95-004)

. Combined Sewer Overflows Guidance for Monitoring and Modeling (EPA 832-
B-97-001)

* Combined Sewer Overflows--Guidance for Financial Capability Assessmem and

Schedule Development (EP A 832-B-97-004)

. Combined Sewer Overflows—Guidance for Funding Options (EPA 832-B-95-
007)
. Combined Sewer Overflows Guidance for Permit Writers (EPA 832-B-95-008)

Goal of this Guidance

The CSO Policy recognizes the need to address the relative importance of environmental
and financial issues when developing an implementation schedule for CSO controls to be
contained in the LTCP and the NPDES permit or other enforceable mechanism. According to the
CSO Policy, an implementation schedule “may be phased based on the relative importance of
adverse impacts upon WQS and designated uses, priority projects identified in the long-term plan,
and on a permittee’s financial capability.”

This guidance has two goals. The first goal is to provide a planning tool for evaluating the
financial resources a permittee has available to implement CSO controls. This assessment will
involve the use of the following financial capability indicators listed in the CSO Policy:

. Total annual wastewater and CSO control cost per household as a percent of
median household income

. Bond ratings

. Overail net debt as percent of full market property value

CSO Guidance for Financiai Capability Assessment and Schedule Development Page 6


Worksheet 3 Instructions

Enter the most recent bond ratings on Worksheet 3, lines 301 and 302. Note that ratings are
requested for general obligation bonds and revenue bonds. When there are severai different bond
ratings, enter the most recent bond rating on Line 303 as the summary bond rating

Data Sources

Municipal bond reports from rating agencies (e.g, Moody's Bond Record, Standard &
Poor's Corporation) provide recent ratings

Benchmarks
M. 's Tnv ices

“Baa” is the minimum investment grade rating. See Afoody's on Municipals - an
/mroduction to Issuing Debt for a description of bond ratings

Moody's Investor Services’ Ratings

. Weak: Ba, B, Caa, Ca, C
. Mid-Range. Baa
. Strong: Aaa, AA, A

ndar Poor

"BBB" is the minimum investment grade rating. See Standard & Poor's Mumcipal Finance
Criteria for a description of bond ratings

Standard and Poor's Ratings

. Weak: BB, B, CCC, CC, C, D
. Mid-Range. BBB
. Strong: AAA, AA, A

CSO Guidance for Financial Capability Assessment and Schedule Development Page 22


EPA

United States Office of Water February 1997

Environmental Protection Office of Wastewater Management (4204) EPA 832-8-97-004 :
Agency

. .
Combined Sewer Final

Overflows—Guidance for
Financial Capability
Assessment and Schedule
Development


and addresses them as soon as possible. As was the case for sensitive areas, giving high priority to
certain use-impaired waters might mean that discharges to other waters would be addressed later
in the implementation schedule than would be the case under a normal engineering and
construction schedule.

The EPA document Combined Sewer Overflows Guidance for Screening and Ranking
(EPA-832-B-95-004) can provide assistance in identifying which CSO discharge points are likely
to have the greatest adverse impact on water quality. aquatic life, or human health

Guidance for Financial Capanitity Assessment and Schedule Development Page 45


II. CSO FINANCIAL CAPABILITY ASSESSMENT APPROACH

This section describes a process for evaluating parameters that measure a permittee’s
financial capability to implement CSO controls. The process retlects the experience of EPA in the
Water Quality Standards (WQS) program, Construction Grants program. State Revolving Fund
(SRF) program and the water enforcement program. Experience with these programs provides
the foundation upon which EPA has built the CSO financial capability assessment approach.

In the WQS program, economic factors are considered in the process of modifying WQS.
State WQS authorities conduct economic analysis of the impacts that will result from treatment
levels beyond the technology-based requirements of the Clean Water Act. EPA's “Interim
Economic Guidance for Water Quality Standards" (EPA 823-B-95-002) provides an approach
for assessing substantial and widespread social and economic impacts of specitic water pollution
control projects. The process to identify "substantial" impacts is similar to the process used in this
guidance to analyze financial capability and its implications for scheduling CSO controls.

Under the Construction Grants Program, financial capability assessments were conducted
by municipalities and reviewed by EPA to demonstrate that municipalities had the ability to pay
for the capital investments and the costs for operation and maintenance of the wastewater
facilities. The assessments measured the financial conditions of the municipality and the financial
burden the proposed projects imposed on households. Some of the financial indicators used in the
demonstrations were similar to those used in this guidance. The demonstration procedure is
described in EPA's "Financial Capability Guidebook” (1984)

As part of SRF program implementation, states devised financial capability assessment
procedures for loan applicants. Often the procedures include a review of the same financial
indicators described in this document

The Agency's water enforcement program conducts detailed evaluations of a permittee's
current financial conditions to assess the amount of penalty that can be borne by the permittee for
violations of the CWA. The evaluations frequently include financial indicators used in this
guidance.

The CSO financial capability assessment process also reflects the approach taken by bond
rating agencies and other investment industry firms to assess a municipality's or wastewater
utility's overall financial condition and credit capacity. The bond rating agencies generally use the
same types of financial information when they evaluate specific bond issues. Rating agencies
evaluate this information to determine the overall financial health of an issuer and identify any
factors that could make it difficult for the permittee to repay its bonds. The approach developed
for the CSO financial capability assessment incorporates the principles used by the rating agencies.

CSO Guidance for Financial Capability Assessment and Schedute Development Page 9


LTCP, the permittee should consult with NPDES and WQS authorities to share information on
the water quality impacts of CSOs, the attainability of WQS, and the appropriate water quality-
based requirements of the permit. [t may be appropriate to conduct a use attainability analysis and
revisit existing designated uses in order to ensure that the LTCP selected will be sufficient to
attain WQS, EPA's "Interim Economic Guidance for Water Quality Standards-Workbook"(EPA-
823-B-95-002) provides an approach for assessing whether a water pollution project will impose
"substantial and widespread social and economic impacts." as defined in EPA regulations

Organization of Guidance

Section Il summarizes a two phase approach for assessing a permittee’s financial
capability to implement CSO controls. Section II describes the first phase which calculates the
financial impact of wastewater and CSO controis on individual households. Section IV describes
the second phase used to calculate a permittee’s debt, socioeconomic and financial conditions.
The results of the first and second phases are combined to give an overail assessment of a
permittee’s financial capability to be used in CSO schedule development. Although financial
capability is only one factor in schedule development. a major portion of this guidance is devoted
to financial capability assessment because of the complexity of the process and its importance.
Section V describes the schedule development process for implementing CSO controls, and
details how environmental and financial considerations influence schedule development

Audience

This guidance is designed for use by permittees, EPA and state NPDES authorities, and
other personnel with CSO planning and permitting responsibilities. It is written in a format that
allows individuals with limited municipal financial assessment experience to conduct CSO
financial capability assessments and negotiate reasonable CSO implementation schedules.
Individuats with experience in establishing schedules for enforcement orders and reviewing
financial capability assessments under the Water Quality Standards, Construction Grants and State
Revolving Fund (SRF) programs will be able to quickly and efficiently conduct the assessment
detailed in this guidebook

ESO Guidance for Financial Capability Assessment and Schedule Development Page 6


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Guidance for Financial Capability Assessment and Schedule Development


FINANCIAL CAPABILITY MATRIX
Table 3

Residential Indicator

Permittee (Cost Per Household as a % of MHI)
Financial
Capability
Indicators Score Low Mid-Range High
(Socioeconomic, Debt (Below 1.0 %) (Between 1.0 and (Above 2.0 %)
and Financial 2.0%)
Indicators)
Weak
(Below 1.5) Medium Burden High Burden High Burden
Mid-Range
(Between 1.5 and 2.5) Low Burden Medium Burden High Burden
Strong
(Above 2.5) Low Burden Low Burden Medium Burden

Guidance for Financial Capability Assessment and Schedule Development Page 41



UNEMPLOYMENT RATE

Worksheet 5
Line Number

. Unemployment Rate - Permittee 501

Source:
. Unemployment Rate - County

(use if permittee's rate is

unavailable) 502
. Source
Benchmark:
. Average National

Unemployment Rate 503

. Source:

CSO Guidance for Financial Capability Assessment and Schedule Development Page 29


PRIMARY FINANCIAL CONSIDERATIONS
Financial Capability

The CSO Controt Policy recognizes that financial capability is a significant factor in schedule
development. A permittee’s financial capability is assessed according to where the permittee falls
on the Financial Capability Matrix calculated in worksheet 10. The matrix characterizes the
financial burden on the permittee to implement CSO controls as either “Low Burden.” “Medium
Burden,” or “High Burden.”

To aid permittees, and EPA and state NPDES authorities during the negotiations necessary
to establish implementation schedules for CSO controls, general time periods are presented in
Table 4 that correspond with the permittee's Financial Capability Matrix Score summarized in
Worksheet 10. The general implementation schedule time boundaries provide a basis for
developing consistent and reasonably uniform implementation schedules across the nation in
situations where permittee's CSO controls impose similar financial burdens. The time boundaries
are not intended to replace the negotiations and deliberations necessary to balance ail of the
environmental and financial considerations that influence the site specific nature of the controls and
implementation schedules

FINANCIAL CAPABILITY GENERAL SCHEDULING BOUNDARIES

Table 4
Financial Capability Matrix Category Implementation Period
Low Burden Normal Engineering/Construction
Medium Burden Up to 10 years
High Burden Up to 15 Years*
*(Schedule up to 20 years based on
negotiation with EPA and state NPDES
authorities)

Generally, a permittee in the “Low Burden” category would be expected to implement CSO
control projects based on a normal engineering and construction schedule. In all cases, discharge
to sensitive areas and impaired waters would be addressed on a high priority basis

For permittees in the “Medium Burden” category, an implementation schedule up to 10 years
might be appropriate. A permittee in the “High Burden” category is likely to incur substantial
financial impacts to implement CSO controls; in such cases, an implementation schedule up to 15
years might be appropriate. In unusually “High Burden” situations, an implementation schedule up
to 20 years may be negotiated with state NPDES and EPA authorities.

Guidance for Financial Capability Assessment and Schedule Development Page 46


SOCIOECONOMIC INDICATORS

The socioeconomic indicators are used to assess the general economic weil-being of
residential users in the permittee’s service area. The indicators used to assess economic conditions
are unemployment rate and median household income. When the permittee has additional
socioeconomic data, it may want to submit the data to the appropriate EPA and state NPDES
authorities to facilitate a better understanding of the permittee's unique economic conditions.
Several examples of this type of socioeconomic data could be poverty rate. population growth, and
employment projections

Unemployment Rate

Unemployment information is entered on Worksheet 5. The unemployment rate is defined as
the percent of a permittee's service area residents on the unemployment rolls

Ww. eet 5 Instructions

Unemployment values are entered on lines 501 - 503 on Worksheet 5. If the unemployment
rate for a permittee's service area is not available, the unemployment rate for the county in which
the service area is located may be used as a substitute. On line $03, enter the average national
unemployment rate.

Data Sources

The Bureau of Labor Statistics (BLS) maintains current unemployment rate figures for
municipalities and counties over 25,000 population. National and state unemployment data are
also available for comparison purposes. This information can be obtained from the BLS by
request at (202) 606-6392.

Benchmarks

Compare the permittee's unemployment values with the national average values. National
averages are readily available through the Bureau of Labor Statistics.

+ Weak: More than | percentage point above the National Average
+ Mid-range: + | percentage point of the National Average
+ Strong: More than | percentage point below National Average

For example, if the national average unemployment rate is 6 percent, an unemployment rate greater
than 7 percent would be considered weak, while an unemployment rate less than 5 percent would
be considered strong.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 28


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CSO Guidance for Financial Capability Assessment and Schedule Development


Developing the Residential Indicator
Wi 2 In ion:

To calculate the Residential Indicator (line 205 of Worksheet 2), divide the annual WWT and
CSO control cost per household (line 109 transferred to line 204) by the Adjusted MHI (line 203)
and multiply by 100

Analyzing the Residential Indicator

The Residential Indicator will be used in the Financial Capability Matrix in Section IV to help
permittees, and EPA and state NPDES authorities determine reasonable and workable long-term
CSO control schedules. (The Residential Indicator does not provide special recognition for low
income groups since their influence is automatically reflected in the median household income
component of the indicators. )

To assess the financial impact CSO controls may have on the permittee ’s residential users,
the Residential Indicator is compared to the financial impact ranges that reflect EPA's previous
experience with water pollution control programs. These ranges are as follows:

Financial Impact Residential Indicator (CPH as % MHI)
Low Less than 1.0 Percent of MHI
Mid-Range 1.0 - 2.0 Percent of MHI

High Greater than 2.0 Percent of MHI

When the Residential Indicator is less than 1.0 percent, between |.0 and 2.0 percent, and
greater than 2.0 percent, the financial impact on residential users to implement the CSO controls
will be characterized as “low,” “mid-range,” and “high,” respectively. Unless there are significant
weaknesses in a permittee’s financial and socioeconomic conditions, second phase reviews for
permittees that have a low residential indicator score (less than 1.0) are unlikely to result in longer
implementation schedules. Permittees with low residential indicators may wish to forego the
second phase analysis and proceed with the normal engineering and construction implementation
schedule developed as part of the CSO planning process.

In situations where a permittee believes that there are unique circumstances that would affect
the conclusion of the first phase, the permittee may submit documentation of its unique financial
conditions to the appropriate state NPDES and EPA authorities for consideration.

CSO Guidance for Financial Capability Assessment and Schedule Develapment Page 19


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Page 56

Guidance for Financial Capability Assessment and Schedule Development


Analyzing Permittee Financial Capability Indicators

This section describes how the indicators in the second phase may be used to generate an
overall score of a permittee’s financial capability. The indicators are compared to national
benchmarks to form an overall assessment of the permittee's financial capability and its effect on
implemention schedules in the long-term CSO contro! plan

In situations where a permittee believes that there are unique circumstances that would affect
the conclusion of the second phase, the permittee may submit documentation of its unique financial
conditions to the appropriate EPA and state NPDES authorities for consideration. The purpose of
additional information is to clarify unique circumstances which are not fairly represented by the
overall scores of the selected indicators. An example could be where a state or community
imposes restrictions on property taxes

Worksheet 9 Instructions

The indicators generated from the worksheets are compared to the state, national or industry
benchmarks presented in Table 2. Information compiled from Worksheets 3 through 8 is
summarized in Column A on Worksheet 9. Score each of these values using the rating standards in
Table 2 and the following score benchmarks and enter the appropriate number in Column B. The
score definitions are:

Benchmarks Score
. Weak 1
. Mid-Range 2
* — Strong 3

To calculate an average score for the indicators, total the values in Column B and divide by the
number of entries. Enter the average score on Line 907

If it is not possible to develop one or more of the six indicators, the permittee should explain
why the indicator is inappropriate or unavailable. Since the point of the analysis is to measure the
overall financial burden of the CSO controls, the debt and socioeconomic indicators are generally
better measures of this burden than the financial management indicators. Consequently, if one of
the debt or socioeconomic indicators is not available, the two financial management indicators
should be averaged and used as a single indicator to average with the available debt and
socioeconomic indicators. This averaging is necessary so that undue weight is not given to the
financial management indicators.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 36


PERMITTEE FINANCIAL CAPABILITY INDICATOR BENCHMARKS

Average

Table 2
a

Indicator Strong Mid-Range Weak

Bond Rating AAA-A (S&P) or BBB (S&P) BB-D (S&P)
Aaa-A (Moody's) Baa (Moody's) Ba-C (Moody’s)

Overall Net Debt as a |} Below 2% 2% - 5% Above 5%

Percent of Full

Market Property

Value

Unemployment Rate || More than | + | Percentage Point | More than |
Percentage Point of National Average | Percentage Point
Below the National Above the National

Average

Median Household

More than 25%

+25% of Adjusted

More than 25%

Income Above Adjusted National MHI Below Adjusted
National MHI National MHI
Property Tax Below 2% 2% - 4% Above 4%

Revenues as a
Percent of Full
Market Property
Value

Property Tax
Collection Rate

Above 98%

94% - 98%

Below 94%

CSO Guidance for Financial Capability Assessment and Schedule Development

Page 37


CPH
CPI
CSS
cso
CWA
EPA
LTCP
MHI
NMC
NPDES
SRF
WQs

ACRONYM LIST

Cost Per Household

Consumer Price Index

Combined Sewer System
Combined Sewer Overtlow

Clean Water Act

Environmental Protection Agency
Long Term Control Plan

Median Household Income

Nine Minimum Controls

National Pollutant Discharge Elimination System
State Revolving Fund

Water Quality Standards
Wastewater Treatment

Guidance for Financial Capability Assessment and Schedule Development

Page 52


4. Multiply the total outstanding debt of each overlapping entity by the percentage identified
for the permittee's service area (Column B x C)
5. Add the figures in Column D to arrive at total overlapping debt for permittee's service

area.
—==
(A) (B) (C) (D)
Overlapping Outstanding Percent Chargeable Outstanding
Entities Debt (less to Permittee's Debt Attributable
Sinking Fund) Service Area to Permittee's
Service Area
County $10,500,000 25% $2.625.000
Schoo! District 16.800.000 95% 15,960,000
Totah Overlapping
Debt $18,585,000

Lime 403 - Overall Net Debt - Add lines 401 and 402.

Lime 404 - Market Value of Property - The property value should reflect the full market
vakne of property within the permittee's service area. It is possible that the tax assessed
Paaperty value will not reflect full market value. This occurs when the tax assessment ratio is
less than one. In such cases the full market value of property is computed by dividing the
total tax assessment value by the assessment ratio (the assessment ratio represents the
peneentage of the full market value that is taxed at the established tax rate). For example, if
the assessed value is $1,000,000 and the assessment ratio is 50 percent then the full market
value of real property is $1,000,000/.50= $2,000,000

Line 405 - Overall Net Debt as a Percent of Full Market Property Value - Divide line 403 by
Time 404 and multiply by 100. .

CSO Guadtance for Financial Capability Assessment and Schedule Development

Page 25


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Page 55

Guidance for Financial Capability Assessment ‘and Schedule Development


I, INTRODUCTION

Background

Combined sewer systems (CSSs) are wastewater collection systems designed to carry
sanitary sewage (consisting of domestic, commercial and industrial wastewater) and storm water
(surface drainage from rainfall or snow melt) in a single pipe to a treatment facility. CSSs serve
about 43 million people in approximately 1,100 communities nationwide. Most of these
communities are located in the Northeast and Great Lakes regions. During dry weather, CSSs
convey domestic, commercial, and industrial wastewater. In periods of rainfall or snow melt, total
wastewater flows can exceed the capacity of the CSS and/or treatment facilities. When this
occurs, the CSS is designed to overflow directly to surface water bodies, such as lakes, rivers.
estuaries, or coastal waters. These overtlows - called combined sewer overflows (CSOs) - can be
a major source of water pollution in communities served by CSSs

Because CSOs contain untreated domestic, commercial, and industrial wastes. as well as
surface runoff, many types of contaminants can be present. Contaminants may include pathogens.
oxygen-demanding pollutants, suspended solids, nutrients, toxics, and floatable matter. Because
of these contaminants and the volume of the flows, CSOs can cause a variety of adverse impacts
on the physical characteristics of surface water, impair the viability of aquatic habitats, and pose a
potential threat to drinking water supplies. CSOs have been shown to be a major contributor to
use impairment and aesthetic degradation of many receiving waters and have contributed to
shellfish harvesting restrictions, beach closures, and even occasional fish kills.

History of the CSO Control Policy

Historically, the control of CSOs has proven to be extremely complex. This complexity
stems partly from the difficulty in quantifying combined sewer overflow (CSO) impacts on
receiving water quality and the site specific variability in the volume. frequency, and
characteristics of CSOs. In addition, the financial considerations for communities with CSOs can
be significant. The U.S. Environmental Protection Agency (EPA) estimates the CSO abatement
costs for the 1,100 communities served by CSSs to be approximately $41.2 billion

To address these challenges, EPA’s Office of Water issued a National Combined Sewer
Overflow Control Strategy on August 10, 1989 (54 Federal Register 37370). This Strategy
reaffirmed that CSOs are point source discharges subject to National Pollutant Discharge
Elimination System (NPDES) permit requirements and Clean Water Act (CWA) requirements.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 1


ENVIRONMENTAL CONSIDERATIONS
Discharges to Sensitive Areas

The CSO Control Policy states that a permittee’s LTCP should give the highest priority to
“sensitive areas.” Sensitive areas are identified by the NPDES permitting authorities. They
include the following:

* Outstanding National Resource Waters

* National Marine Sanctuaries

* Waters with threatened or endangered species and their habitat

¢ Waters with primary contact recreation

* Public drinking water intakes or their designated protection areas

* Shellfish beds.

For discharges to sensitive areas, the CSO Control Policy provides the following approaches:

¢ Prohibit new or significantly increased overflows

« Eliminate or relocate overflows

+ Where elimination or relocation is not feasible, provide treatment to meet WQS and
regularly reassess the feasibility of prohibition, elimination, or relocation.

During the planning process the permittee should characterize existing CSO conditions and
identify receiving waters that are sensitive areas. The LTCP should give priority to sensitive areas
and any implementation schedule should sequence projects to mitigate impacts on sensitive areas
as early as possible. Giving high priority to sensitive areas might mean ‘in some cases that
discharges to non-sensitive areas would be addressed later in the implementation schedule than
would be the case under a normal engineering and construction schedule.

Use Impairment
Long-term control plans should also give priority to receiving waters that experience
recurring adverse impacts from CSOs on aquatic life, human health or aesthetics. Such waters may

be the subject of public or media concern

Asa result of public participation and discussion with the permitting authority, the permittee
should develop an impiementation schedule that gives high priority to waters with impaired uses

Guidance for Financial Capability Assessment and Schedule Development Page 44


Vv. CSO SCHEDULE DEVELOPMENT

The CSO Policy recognizes that the causes and impacts of CSOs are site-specific water
pollution control problems. Identification of CSO controls involves evaluation of significant
technical, environmental, and financial issues. Therefore. the CSO Policy provides an opportunity
for flexible, phased implementation of CSO controls to achieve compliance with the technology-
based and water quality based requirements of the Clean Water Act.

Under the CSO Policy, permittees with combined sewer systems are expected to implement
the nine minimum CSO controls as expeditiously as possible but no later than January 1, 1997.
The nine minimum controls are technology-based controls that can reduce the magnitude, duration.
and frequency of CSOs and their effects on receiving waters (See guidance: Combined Sewer
Overflows —Guidance for Nine Minimum Controls (EPA, 832-B-95-003)). These minimum
controls are not intended to require significant engineering activities or major construction.

Permittees with combined sewer systems are also expected to develop long-term control
plans (LTCPs) that include provisions tor public participation. monitoring of CSOs and their
impacts, evaluation and selection of control alternatives, and implementation schedules for long-
term controls. A permittee is expected to develop its LTCP as soon as practicable. but generally
within two years after a requirement to develop an LTCP has been specified in its NPDES permit
or other enforceable mechanism. The development and implementation of an LTCP will be
coordinated with implementation of the nine minimum controls. Development of the LTCP
involves negotiations with the EPA and state NPDES authorities and if appropriate. state WQS
authorities. Among other components the LTCP contains fixed-date implementation and financing
schedules to design and construct the needed CSO controls.

The CSO Policy recognizes the need to address the relative importance of environmental and
financial issues when developing an implementation schedule for CSO controls to be contained in
the LTCP and the NPDES permit or other enforceable mechanism. According to the CSO Policy,
an implementation schedule “may be phased based on the relative importance of adverse impacts
on WQS and designated uses, priority projects identified in the long-term plan, and ona
permittee’s financial capability.” The CSO Policy identifies the following environmental and
financial considerations that may affect the phasing of an implementation schedule for CSO
controls:

* Eliminating overflows to sensitive areas
* Use impairment

«Financial capability

© Grant and loan availability

* Previous and current sewer user fees and rate structures

Guidance for Financial Capability Assessment and Schedule Development Page 42


III. PHASE ONE: THE RESIDENTIAL INDICATOR

The Residential Indicator measures the financial impact of the current and proposed WWT
and CSO controls on residential users. Development of this indicator starts with the
determination of the current and proposed WWT and CSO control costs per household (CPH).
Second, the service area's CPH estimate and the median household income (MHI) are used to
calculate the Residential Indicator. Finally, the Residential Indicator is compared to established
financial impact ranges to determine whether CSO controls will produce a possible high, mid-
range or low financial impact on the permittee’s residential users. Worksheets are provided to aid
in developing the Residential Indicator

Developing CPH Estimate

The first step in developing the CPH is to determine the permittee's total WWT and CSO
costs by adding together the current costs for existing wastewater treatment operations and the
projected costs for any proposed WWT and CSO controls. The next step is to calculate the
residential share of the total WWT and CSO costs. The final step is to calculate the CPH by
dividing the residential share of total WWT and CSO costs by the number of households in the
permittee’s total wastewater service area.

Current WWT costs are defined as current annual wastewater operating and maintenance
expenses (excluding depreciation) plus current annual debt service (principal and interest). This
fairly represents cash expenses for current wastewater treatment operations. (Expenses for funded
depreciation, capital replacement funds, or other types of capital reserve funds are not included in
current WWT costs, because they represent a type of savings account rather than an actual
operation and maintenance expense.)

Estimates of projected costs are made for any proposed WWT projects and the CSO
controls. Any concerns about including specific proposed WWT projects or CSO controls in the
projected costs. or the length of the planning period, should be discussed with the appropriate
NPDES permitting and enforcement authorities. These costs are adjusted to current dollars (i.e.,
deflated). These include projected operation and maintenance expenses plus projected debt
service costs for any proposed WWT and the CSO controls. The residential or household costs
exclude the portion of expenses attributable to commercial, governmental and industrial
wastewater discharges. The information and calculations used to develop the CPH and the
Residential Indicator are presented in Worksheets | and 2 and their instructions.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 12


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Page 54

Guidance for Financial Capability Assessment and Schedule Development


The annualized debt service cost for the projected WWT facilities and projected CSO
controls is entered on line 104. Add the current and projected wastewater treatment and
projected CSO control costs to estimate the total WWT and CSO costs (line 102 + line 105).

Calculate the residential share of the total cost (line 106) and enter on line 107.
The residential share of total costs (line 107) is computed by multiplying the percent of total
wastewater flow including infiltration and inflow attributable to residential users by the total costs
(line 106). For example, for a permittee with the following characteristics

Total Costs: $12.000,000
Residential Flow: 10.5 Million Gallons per Day
Total Flow: 13.1 Million Gallons per Day

The residential share of the total cost is

. . + Residential Wastewater (ow
Residential Share of Coss Total Costs « SACU COO
Total Wastewater Flow

10.5 Afillion Gallons Per Day
13.b Afillion Gatlons Per Day

Residential Share of Costs — $12.000.000 «

$9,600,000

Calculate the CPH (line 109) by dividing total residential share costs (line 107) by the total
number of households (line 108) in the permittee’s total wastewater service area

D: re

The permittee’s latest financial reports should be available to develop the current
wastewater treatment costs. In order to comply with accounting requirements, most permittees
develop a combined statement of revenues, expenses, and changes in fund balance. These reports
should be available directly from the permittee, or, in some states, from central records kept by
the state auditor or other state offices. (Many states conduct audits and generate financial reports
- ie., balance sheet, statement of revenues, expenses. and changes in fund balance, and statement
of cash flows, for each permittee.) Projected costs and households in the wastewater service area
should be available through planning documents. The Bureau of Labor Statistics frequently has
data on the number of households in the service area.

The Consumer Price Index rate (CPT) should be the average rate for the previous five
years. The CPI is available through the Bureau of Labor Statistics.

CSO Guidance for Financrat Capability Assessment and Schedule Development Page 14


ANNUALIZATION FACTORS

PRESENT VALUE FACTORS
INFLATION ADJUSTMENT FACTORS
REFERENCES

Worksheet | - Cost Per Houschold beeen

Worksheet 2 - Residential Indicator

Worksheet 3 - Bond Rating

Worksheet 4 - Overall Net Debt as a Percent of Full Market Property Value
Worksheet 5 - Uncmployment Rate

Workshect 6 - Median Houschold Income . ee

Worksheet 7 - Property Tax Revenues as a Percent of Full Market Property Valuc

Workshcet 8 - Property Tax Revenue Collection Rate
Worksheet 9 - Summary of Permittee Financial Capability Indicators
Workshect 10 - Financial Capability Matrix Score

Table 1 - Roles and Responsibilitics

Table 2 - Permittee Financial Capabulity Indicator Benchmarks
Table 3 - Financial Capability Matrix

Table 4 - Financial Capabilitics General Scheduling Boundarics
Table 5 - Scheduling Considerations tor Hypothetical Permittces

40

. 37

4t
46
50


PROPERTY TAX REVENUE COLLECTION RATE

Worksheet 8
Line Number

Property Tax Revenue Collected

(Line 702) 801
Property Taxes Levied 802
Property Tax Revenue Collection

Rate

(line 801 + line 802 x 100) 803

CSO Guidance for Financial Capability Assessment and Schedule Development

Page 35


BOND RATING
Worksheet 3

Line Number

Most Recent General Obligation
Bond Rating

Date
Rating Agency:
Rating: 301

Most Recent Revenue
(Water/Sewer or Sewer) Bond

Date:

Rating Agency:

Bond Insurance (Yes/No)

Rating: 302

Summary Bond Rating: 303

CSO Guidance for Financial Capability Assessment and Schedule Development Page 23


TABLE OF CONTENTS

1. INTRODUCTION
Background . .
History of CSO Policy .
Key Elements of the CSO Policy .
Guidance to Support Implementation of the ‘CSO Policy
Goal of this Guidance
Organization of Guidance
Audience .

fl. CSO FINANCIAL CAPABILITY ASSESSMENT APPROACH
The Two-Phase Approach
Financial Benchmarks and Informational Sources

lI. PHASE ONE: THE RESIDENTIAL INDICATOR
Developing CPH Estimates
Developing the MHI
Developing the Residential Indicator
Analyzing the Residential Indicator

IV. PHASE TWO: PERMITTEE FINANCIAL INDICATORS
Debt Indicators
Bond Rating
Overall Net Debt as a Percent of Full Market Property Value
Sociocconomic Indicators
Unemployment Rate
Median Houschold Income
Financial Management Indicators

Property Tax Revenues as a Percent of Full Market Property Value

Property Tax Revenue Collection Rate
Analyzing Permittee Financial Capability [Indicators
The Financial Capability Matrix

V. CSO SCHEDULE DEVELOPMENT .

Environmental Considerations |. . wee eee
Discharges to Sensitive Areas
Use Impairment ........ . bette eae

Primary Financial Considerations ...................2....
Financial Capability ©... ...
Secondary Financial Considerations
Grant and Loan Availability .................
Sewer User Fees .. .
Other Viable Funding Mechanisms ‘and Sources of Financing
Scheduling Constderations

ACRONYM LIST .... sees
STATE DATA CENTERS eens

CE RAW —

10
ul

12
12
16
19
19

20
21
21
24
28
28
30
32
32
34
36
39

42
44
44
44
46
46

47

47
48
48
48

.. $2
. 53


SECONDARY FINANCIAL CONSIDERATIONS

The three financial considerations--grant and loan availability. sewer user fees, and other
viable funding mechanisms--are normaily investigated early in the process of establishing CSO
controls. They are described in more detail in the EPA document ('umbined Sewer
Overflows—Guidance for Funding Options (EP A-832-B-95-007). They are typically addressed
and resolved in the development of the financial schedule for the LTCP prior to design and
construction. Therefore, these considerations normally do not have a significant impact on the
length of time needed to implement CSO controls. An exception could occur in a case where a
permittee’s CSO controls can be constructed quickly but where the only available CSO funding
source takes an inordinately long time to implement

Grant and Loan Availability

During the long-term planning process. the permittee should develop a financing plan that
identifies sources of capital funds. Generally. these will include some form of loan or grant
Typically, availability of grants and loans will not have a significant impact on the implementation
schedule. In evaluating the effect of grant and loan availability on the permittee’s schedule, the
following funding sources would be considered:

* State wastewater treatment grant programs

¢ SRF Program

¢ State loan program (other than SRF program)

* Rural Utility Services Program (formerly: Rural Development Administration loan
program)

« CoBank loan program
¢ Commercial loans
* Local revenue bonds

¢ Local general obligation bonds

Guidance for Financiai Capability Assessment and Schedule Development Page 47


MEDIAN HOUSEHOLD INCOME

Worksheet 6
Line Number

. Median Household Income -

Permittee (Line 203) 601
. Source:
Benchmark:
. Census Year National MHI 602
. MHI Adjustment Factor

(line 202) 603
. Adjusted National MHI: 604

(line 602 x line 603)

. Source:

CSO Guidance for Financial Capability Assessment and Schedule Development Page 31


FINANCIAL CAPABILITY MATRIX SCORE
Worksheet 10

N er
Residential Indicator Score (Line
205) 100]
Permittee Financial Capability
Indicators Score (Line 907) 1002
Financial Capability Matrix
Category (see matrix next page) 1003

Guidance tor Financial Capability Assessment and Schedule Development Page 40


Data Sources

Debt information is available from the financial statements of each community. In most cases
the most 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 financial statements. The property
assessment data should be readily available through the community or the State's assessor office
The boundary of most permittees’ service areas generally conforms to one or more community
boundaries. Therefore, prorating community data to reflect specific service area boundaries is not
normally necessary for evaluating the general financial capability of the permittee

Benchmarks

+ Weak: Above 5%
+ Mid-range 2-5%

* Strong: Below 2%

CSO Guidance for Financial Capability Assessment and Schedule Development Page 26


The Two-Phase Approach

The guidance presents a two-phase approach to assessing a permittee’s financial capability
The first phase identifies the combined impact of wastewater and CSO control costs on individual
households. The second phase examines the debt, socioeconomic, and financial conditions of a
permittee. The results of the two-phase analysis are combined in a Financial Capability Matrix.
Permittees and the WQS and NPDES authorities can use this matrix to assess the financial burden
of the CSO control costs and establish reasonable schedules to implement the CSO controls

Phase one determines a Residential Indicator. This indicator is the permittee's average
cost per household (CPH) for wastewater treatment (WWT) and CSO controls as a percentage of
the local median household income (MHI). It reflects the residential share of current and planned
WWT and CSO controls needed to meet the requirements of the CWA. A value range for this
indicator characterizes whether the costs impose a “low,” “mid-range” or “high” financial impact
on residential users.

The second phase develops the Permittee Financial Capability Indicators. Six indicators
are used to evaluate the debt, socioeconomic, and financial conditions that affect a permittee's
financial capability to implement the CSO controls. These indicators serve as the basis for a
second phase analysis that will characterize the permittee’s financial capability as “weak,” “‘mid-
range” or “strong.”

A Financial Capability Matrix combines the Residential Indicator (first phase) and
Permittee Financial Capability Indicators (second phase) to give an overall assessment of the
permittee’s financial capability. This assessment can be used to help establish an appropriate CSO
control implementation schedule.

Since flexibility is an important component of the CSO Policy, WQS authorities, NPDES
authorities, EPA personnel, and permittees should communicate throughout the CSO control
planning process to coordinate the development of an effective LTCP. This guidance document
provides all CSO participants with a structured yet flexible approach for evaluating the financial
burden CSO controls place on permittees. It also recognizes the importance of this financial
burden when establishing a CSO control implementation schedule. The financial capability
information developed in this guidance provides a basis for the permittee and the NPDES
authorities to negotiate the implementation schedule for the CSO controls. However, when a
permittee believes that there are unique circumstances that would affect the conclusion of this
guidance, the permittee may submit documentation of its unique financial conditions to the
appropriate EPA or State NPDES authorities for consideration.

CSO Guidance for Financial Capability Assessment and Schedule Development Page 10


Sewer User Fees

As part of the long-term planning process. the permittee should identify existing user fees and
rate structures for wastewater treatment and then develop a new rate structure that includes
recovery of the costs for CSO controls. Depending upon how CSO user fees are apportioned
among residential, commercial, and industrial users, implementation of the LTCP may cause fees
to increase significantly. In most cases, construction of the CSO controls occurs over an extended
period allowing time for an orderly increase in the user fees. Thus, user fees typically are unlikely
to have a significant impact on the implementation schedule. Combining increases in user fees with
an ongoing public education program can help ease the effects of “rate shock” related to the higher
user fees. The EPA document “Building Support for Increasing User Fees,” (EPA 430/09-89-
006) provides specific details on creating a public education program to successfully raise user
fees.

Other Viable Funding Mechanisms and Sources of Funding

The permittee may have to consider alternate sources of funding if loans and grants are not
available or if a need exists to reduce the financial impact of CSO controls on the users. In some
cases. alternative funding mechanisms or financing sources may require additional time to set up.
To evaluate the scheduling impacts of other viable funding mechanisms and sources of financing,
the permittee’s ability to accomplish the following actions would be assessed:

¢ Establish special assessment districts

¢ Increase user fees

* Impose/increase taxes (such as income taxes, sales taxes, or property taxes)
*  Privatize wastewater treatment.

Most permittees would be expected to have several of these options available; therefore other
viable funding mechanisms and sources of funding typically are not likely to have a significant
impact on the implementation schedule.

SCHEDULING CONSIDERATIONS

Establishing an implementation schedule for the CSO controls is a negotiating process
involving the permittee and EPA and state NPDES authorities. Normally, the time period for the
CSO control implementation schedule is defined by the time required for normal engineering and
construction practices. However, environmental and financial considerations can influence the
time allowed to complete the CSO controls. The implementation schedule would always give high
priority to addressing the environmental considerations involving discharges to sensitive areas and
use-impaired water bodies. The CSO controls for these discharges would be constructed as
expeditiously as possible. The implementation schedule can lengthen by phasing construction of
the CSO controls when financial considerations create a financial burden. The primary financial

Guidance for Financial Capability Assessment and Schedule Development Page 48


SCHEDULING CONSIDERATION FOR HYPOTHETICAL PERMITTEES

Table 5
Scheduling Permi: #1 Permittee #2 Permittee #3
Consideration
Engineering/ Construction
Schedule 8 years 3 years 6 years
Sensitive Areas wa Wa 2 years to remove discharges
from sensitive areas
Use Impairment n/a Wa 16 years
Financial Capability 4 years 0 years 0 years
Grant/Loan Availability
0 years 4 years 0 years
User fees/rate Structures
0 years 0 years O years
Other Funding
Mechanisms 0 years 0 years 0 years
Schedule: 8 years 4 years 16 years (removal of discharge
from sensitive area would occur
within first 2 years)

Guidance for Financial Capability Assessment and Schedule Development

Page 50



Wor i tions

Enter the requested data on lines 100 through 109. The operation and maintenance costs
on lines 100 and 103 should include all significant cost categories, such as labor, chemicals,
utilities, administration, and equipment replacement. Do not include depreciation on line 100 or
fine 103. Adjust the projected annual WWT and CSO costs to current dollars using the average
annual national Consumer Price [Index (CPI) inflation rate for the past five years available from
the Bureau of Labor Statistics. The CPI is used as a simple and reliable method of indexing
projected WWT costs and household income. For example, if the most recent five year average
CPI is 4 percent, and the projected annual O& M and debt service costs will begin in 2 years,
adjust the projected costs with the following formula:

wldjusted Projected Costs (Current Dollars) Projected Costs * \djustment Factor

The adjustment factor can be calculated using the following formula or the present value factor
from the table on page 55

Adjustment Factor 1. 1. 995

Checpn* (1048

The annualized debt service cost information for the projected WWT facilities and
projected CSO controls (Line 104) can be calculated using an annualization factor obtained from
the table on page 56, which reflects the local borrowing interest rate and borrowing term of the
permittee. For example. if the adjusted projected debt costs (current dollars) are $25,000,000 and
typical borrowing terms include an interest rate of eight percent over 20 years, then costs can be
annualized with the following calculation:

Annual Debt Service Costs - Adjusted Debt Costs * Annualization Factor

Annual Debt Service Cost ~$25,000,000 * 1019» $2,547,500

The annualization factor can be calculated using the following formula:

Annualization Factor~ ——Hterest Rate, merest Rate -—_ 08 _ ag 1019
(ltdnterest RateyTM 1 (1+.08¢" 1

CSO Guidance for Financial Capability Assessment and Schedule Development Page 13