Mary Tiger is the Chief Operating Officer for the Environmental Finance Center and Project Manager for the Water Research Foundation Project.
Making the way to financial sustainability can feel like an uphill battle for utilities when stressed by unexpected weather, economic and demographic obstacles. However, getting a governing board in understanding of and agreement with financial goals can keep a utility on-track to achieve financial resiliency and avoid drastic adjustments in rates.
Financial policies may address a range of issues, but at a minimum, most provide concrete guidance and/or numeric targets for things such as debt service coverage, debt ratios and reserve balances. When asked about the effectiveness of finance policies, 11 out of 19 utilities said that finance policies were very (n=6) or somewhat (n=5) effective in addressing revenue challenges (Water Research Foundation Report #4405, Rates and Revenues: Water Utility Leadership Forum on Challenges of Meeting Revenue Gaps).
Through our research, we have found that water utilities across the country are using financial policies to steer the decision making of their governing boards toward sound fiscal management. The Environmental Finance Center recently interviewed officials from Charlotte-Mecklenburg Utilities, Orange Water and Sewer Authority and the Northeast Ohio Regional Sewer District on the adoption and use of financial policies in each utility.
Interestingly enough, these three utilities have taken three different approaches to developing their financial policies. The Orange Water and Sewer Authority (OWASA) worked closely for a year with the Finance Committee members of its board to identify and define each metric contained in its 8-page financial policy (Board Developed). The seven member board of the Northeast Ohio Regional Sewer District (NEORSD) approved a policy that mainly focuses on reserve policies (Board Approved). And Charlotte-Mecklenburg Utilities adopted its policy internally under the advice of financial advisors and uses the structure of the policy to frame their discussion with the City Council regarding finances and rate changes (Board Reviewed).
Stephen Winters, Finance Director for OWASA, cites the board development process as instrumental to its effectiveness as guiding board decision-making. “They [the board] were part of the process, and as a result, we got a better product and buy-in. Even though the most recent revision was done three to four boards ago, the current board has respect for the metrics because their predecessors were involved.”
Jennifer Demmerle, Director of Finance with NEORSD, said that since the policy was “board adopted,” the board might have a tendency to view the policy as a suggestion rather than a requirement if it would require an unwanted impact on rates. Despite that, its existence and adoption helps ensure the utility gets the rates it needs to meet its target.
Without financial policies, utilities that issue bonds use bond covenants as their de facto financial policy. But for the utilities that want to “climb the mountain” to a better credit rating, each utility that we interviewed cited maintenance of a good or upgrade of an existing credit rating as a reason for their financial policy. For Barry Gullet, Director of Charlotte-Mecklenburg Utilities, their current AAA ratings from all three credit rating agencies not only mean lower interest rates but also ensured access to the market and liquidity. And that is something that his governing board can support and sign onto.
Moving forward with our Water Research Foundation project, we will track financial policies against utility performance to garner understanding of the impact of policies on rates and revenues. We will study the context for adoption and how that influences their use and impact. And we will give utility directors and financial officers that are daunted by the process context they need to make it up the mountain. (I think I can! I think I can! I think I can!)
|Components of Financial Policy
|Board Involvement in Financial Policy
|Retail water and water municipal utility for Mecklenburg County
|Elected 11 member City Council and 1 Mayor
|•debt service coverage ratio •debt portfolio •fund balance as % of operating expenses in current budget •% PAYGO •use of variable rate debt • rate goals
|Orange Water and Sewer Authority
|Retail water and wastewater authority for Chapel Hill, Carrboro and Orange County (NC)
|Appointed 9 member board
|•working capital reserves • capital improvement reserve fund • debt service coverage ratio • debt burden to asset value • sufficiency of revenues above debt requirements • % PAYGO • rate/revenue stabilization fund • service affordability
|Northeast Ohio Regional Sewer District
|Wastewater district serving the City of Cleveland and surrounding suburbs
|Appointed 7 member board
|•working capital reserve account • capital equipment and infrastructure replacement reserve •insurance reserve • rate stabilization account • debt service reserves