Water and Sewer Rate Scenarios for the Town of Pittsboro, NC

1. Water and Sewer Rate Scenarios for the Town of Pittsboro, NC David Tucker Environmental Finance Center School of Government University of North Carolina at Chapel Hill Presentation to the Town Board of Pittsboro, N.C. Monday, January 26, 2015

2. Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective, and financially sustainable ways through: • Applied Research • Teaching and Outreach • Program Design and Evaluation How you pay for it matters

3. NC DENR • Funding for this project has been provided by the Public Water Supply Section of the Division of Water Resources of NC DENR. • If you wish to provide feedback on the EFC’s work on this project, please contact either of at NC DENR: • Jessica Godreaujessica.godreau@ncdenr.gov, or • Julia Cavalier julia.cavalier@ncdenr.gov

4. Smart Management for Small Water Systems Smart Management for Small Water Systems*under a Cooperative Agreement with the US EPA http://efcnetwork.org • The EFCN will provide training and technical assistance to small public water systems in all fifty states and five territories to help local water systems achieve and maintain compliance with the Safe Drinking Water Act. • Workshops and trainings will be provided in these areas: • Asset Management • Water Loss Reduction • Water System Collaboration • Fiscal Planning and Rate Setting • Energy Management • Funding Coordination, and • Managerial and Financial Leadership

5. The Goal • Review the water and wastewater rates to determine if (and how) they could be modified to fully fund the water and wastewater enterprise fund now and in the future. • “Fully fund” includes being able to pay for capital expenses as well as O&M.

6. The issues • Rates are not covering full current operating costs and future capital costs. • At present, either the General Fund would have to subsidize the W&S Enterprise Fund to fully fund this, and/or the fund balance would be drawn down further. • Water sales and revenues declined after peaking in FY10-11. • Expenses have been increasing (FY08-14): • Total operating expenses have risen at over 6%/year. • W&S systems will need significant expansion in the next 20 years.

7. Recent financial performance 1 • Between FY2012-14, operating revenues were sufficient to pay for O&M… …but not for depreciation (average shortfall ≈ $250,000/year). • Operating Ratio (including depreciation) declined to between 0.89 and 0.91 each year during the same period.

8. Recent financial performance 2 • Water & Sewer Funds, FY08-14: • Enterprise fund balance: • $2,694,855 (FY08) to $1,177,278 (FY14). • Has declined every year. • Capital reserve fund balance: • $39,999 (FY08) to $1,433,577 (FY14). • Has increased every year. • Combined fund balance fairly stable: • around $2.5 M annually.

10. Total Operating Expenses including Depreciation Both W&S Funds Capital Reserve Fund Enterprise Fund

11. N.C. Water & WW Rates Dashboard

12. Water & Sewer Rates Analysis Model for Pittsboro, NC • Used EFC’s “Water & Sewer Rates Analysis Model” to fit Pittsboro’s needs and conditions. • Projects revenues, expenses and end-of-year fund balance for up to 20 years. • Can modify rates for next five years. • Populated using data and information provided by Ms. Nancy Emslie, Finance Officer.

13. Current Water & Sewer Rates

14. Current Water & Sewer Rates

16. Key Questions • What should W&S fund balance target be? • Set in all models at 1 year of op-ex, or $2.7 M. • In addition to current W&S debt financing, what will capital needs be in next 5 years and how will those be financed? • How to keep the W&S rates affordable? • For everyone? For the least affluent?

17. Three Initial Scenarios • Scenario A: • No depreciation. No new debt. Principle and interest payments for existing long-term W&S system debt. • Scenario B: • Add: Approximately half of FY2014 depreciation (i.e. $250,000/year) for each of next 20 years. • Scenario C1: • Add: A theoretical future loan of $1,000,000 across 30 years at 3.00% interest is assumed, with P&I payments beginning in FY2017.

18. Examples of Potential W&S Rates to Meet Model Targets • The largest rate increases for A, B, and C1 come in FY2016. • Targets a 1.02 operating ratio. • Smaller % increases in subsequent years (FY2017-2020). • Targets a 1.10 operating ratio. • The following tables show where the rates would be at the end of five years.

19. Scenario A: FY2020 Rates

20. Scenario B: FY2020 Rates

21. Scenario C1: FY2020 Rates

22. FY2020: Affordability of Scenario C1 • This is a scenario with a greater % increase in the base charge than the volumetric rates; • Targets 1.02 (FY2016) and 1.10 (FY2017-20) operating ratios. • Assumes no increase in Pittsboro’s MHI between FY2015 and FY2020. • It is probably more likely that it will increase.

23. Questions & future work?

24. What now? • Pick scenario(s) to investigate in more detail. • Can adjust Rates Model variables such as: • Fund balance target / policy • Speed/size of rate increase (e.g. phase in slower) • Targeted operating ratio for W&S enterprise fund • Amount of depreciation included each year • Amount of new debt (if any) reflected each year • Can look for options to lower oper. expenses. • Can request further assistance from the EFC.

25. David Tucker919-966-4199drtucker@sog.unc.edu Environmental Finance Center CB #3330, School of Government, Knapp-Sanders Building University of North Carolina at Chapel Hill Chapel Hill, NC 27599-3330 USA

26. Additional Presentation Slides

27. All Six Modeled Rate Scenarios

29. FY2020: Affordability of Scenario C1

30. Scenario A: FY2016 Rates

31. Scenarios B and C: FY2016 Rates

32. FY2016: Affordability of Scenario C1 • This is a scenario with a greater % increase in the base charge than the volumetric rates; • Targets 1.02 (FY2016) operating ratio. • Assumes no increase in Pittsboro’s MHI between FY2015 and FY2016. • It is probably more likely that it will increase.