John Stamm, Extension Agent, Franklin County, Ohio State University Extension
Holly Doughman, USDA-RD
Karen Mancl, Professor Food, Agricultural and Biological Engineering, The Ohio State University
Lori Libby, Center for Public Management and Regional Affairs, Miami University
Three aspects of financial management must be considered with public water systems. The first and key element to successful financial management is balancing the funding necessary to provide a safe, reliable water supply with what the user can afford. Second, the use of public funds must be accountable to customers, state and county auditors, lenders, and regulators. Third, strategies can be developed to borrow capital funds to improve or extend water service with a plan in place to assess system users to pay back these obligations.
Funds to operate and maintain a water system come from the customers through their water bills. To determine how much is needed, break down the water system operation into important activities.
Personnel
Wages for full-time and part-time employees are just a part of personnel costs. Benefits, like insurance, must also be included in the budget. Include employee uniforms along with continuing education, training, and membership in professional organizations. Remember, retaining a certified operator is the most important element of a successful water system. Therefore, adequate personnel resources are critical.
Monitoring and Testing
Regular water testing is not only required for water systems, it is a necessary operation and maintenance tool. Water systems must budget funds to meet regulatory requirements for testing. If a water system has its own lab, then chemicals, supplies, testing equipment maintenance, and training all must be considered in the budget.
Operation and Maintenance
Everything from source water protection, water storage maintenance and cleaning, water treatment chemicals and equipment maintenance, pump repairs and maintenance, flushing and repairing water lines, and grounds cleaning and upkeep is included under operation and maintenance in the budget. Electricity, fuel, and even liability coverage can be easily overlooked. Remember, operations are tasks that are necessary to provide safe water and must be done. Maintenance includes tasks to protect the investment in the water system. It is easy to "skimp" on maintenance since it may not be required. However, neglecting equipment can result in greater expenses than performing routine maintenance.
Overhead
Billing, reporting, record keeping, communications, meeting space, and permit fees are just some of the necessary items that can be easily overlooked in a water system budget.
Depreciation
Facilities, equipment, and vehicles are all assets that lose value with time. Depreciation must be a part of budget considerations.
Emergency Contingency
Even in well-run water systems, emergencies occur. Funds must be available to respond quickly to an emergency. Receiving an insurance claim takes time, and in an emergency, waiting for a check from the insurance company before repairing or replacing a component in the water system may not be feasible.
Water rates must be set to reflect the true cost of providing water to customers. Rate studies balance the cost of producing water with the water paid for by the customers. A water audit compares the amount of water treated with the amount recorded at the water meters. Discrepancies may be due to water leaks, malfunctioning meters, or even water theft. Customers provide revenues to a water system in a variety of ways. Regular bills for water use is the most obvious source of revenue. Hook-up charges, connect/disconnect fees, and late payment penalties are other sources of funds to a water system.
Rate structures can vary among customers. Discounts may be extended to large water users. Flat rates, ascending scales, or descending scales are used by water systems. Consider the community goals when selecting a rate structure. Ascending scales, with increasing charges for high water use, encourage water conservation. Lower rates for industrial water users may be needed to attract or retain an industry, but the residential customers must then make up the difference to keep revenues in balance with costs.
The Ohio Rural Water Association provides advice and technical assistance to small communities in how to conduct a rate study. Call 614-451-4020 for more information.
Remember to keep complete financial records. Records and inventories are subject to review and audit when public funds are involved.
Funding is needed upfront to pay engineers and contractors for the design and construction of water system improvements or extensions. Remember, these improvements must be paid for by the customers so a plan must be in place to repay these loans through revenues collected from customers. When servicing a debt, interest is added to the budget along with the costs of managing the loan. Planning ahead for these types of expenditures can help a community reduce its need to borrow money and the associated interest payment.
Capital improvement accounts can be included in the annual budget. By setting money aside for planned improvements, a community will gain interest rather than pay it.
Low-interest loans are available from some organizations to meet special goals. Low-income residents, elderly customers, and projects that produce jobs or that alleviate emergencies may make all or a portion of a project eligible for low-interest loans. A limited number of grants are also available to communities when they meet the goals of the granting agency.
Unfortunately, loans, especially loans from the federal government, can increase project costs to comply with the requirements of the lender. Be sure to consider the conditions and the impact on project costs before accepting loans or grants. Possible lender requirements are:
The cost of providing safe water to customers can be calculated and is likely to increase in the future. Plan to raise rates in small increments to keep up with rising costs. It is never easy or popular to raise water rates, but a necessary large increase after years of no increases is especially hard for customers to accept.
Communicate with customers about the benefits and costs of their water system. When rate increases are planned, notify customers in advance so they can plan accordingly. Most of all, save for future capital expenditures. It benefits the community to keep capital improvement accounts in local financial institutions earning interest rather than paying interest to an outside lender.