There is a menace threatening many of the nation's small water and wastewater systems today. It is a problem that has the potential to endanger the lives of thousands and damage millions of dollars in equipment.
This threat doesn't directly involve angry terrorists, furry creatures who are just moments from death and feel the urge to drown their sorrows in your well, or even the much maligned e coli bacteria.
No, this threat comes from the prevalence of "Current year" budget practices, and it has the potential to cripple more small systems than terrorists and a whole herd of small furry creatures put together. We are talking about systems operating under annual budgets that are all too generously referred to as "Break-Even" budgets, and do not contain provisions to help the system prepare for the future or unforeseen crisis situations.
In a nutshell, systems which pay their bills each and every month...but are left with a zero balance after Peter is through paying Paul.
When you are responsible for making key decisions at a rural water or wastewater system that is "just breaking even," it is a lot like walking along a tightrope without a safety net to catch you if you fall.
In this issue of The Safe Drinking Water Trust eBulletin we'll discuss a free and easy to use resource available online that is designed to help your system construct a proactive budget, pick a rate structure that will help you meet your budget, and will even help cushion your fall if ol' Mother Nature decides to blow you off of that narrow piece of wire you might be clinging to.
Additional Resources
EPA's Asset Management: A Handbook for Small Water Systems
www.epa.gov/safewater/smallsys/pdfs/guide_smallsystems_asset_mgmnt.pdf [1]
Putting the Horse back in Front
Have you ever started to put on a shirt only to find that as soon as you attempted to line up the top button with the buttonhole, things went terribly wrong? By the time you reached the last button, nothing seemed to be lined up correctly.
Successful financial management of a water or wastewater system can be a lot like buttoning a shirt. If you start off right (by planning and preparing not only for today, but for tomorrow as well), things will generally fall into place...barring any major catastrophes like a missing button (or a hurricane). However, if you are like many people, and just grab the first button your hand comes into contact with and groggily push it through, let's say the third buttonhole from the top, things will keep getting further off track.
As systems across the nation begin to comply with the reporting standards of the Government Accounting Standards Board (GASB) Statement 34, the difference between the traditional budgetary compliance model (break-even) and the long-term planning model championed by GASB become increasingly evident.
As you can see, it is important to start things off on the right foot (or button!). For this to happen, you should establish a budget for your system that is based on project needs first. Otherwise, you might just be putting the proverbial cart before the horse.
At an average cost of just $1.27 per thousand gallons, municipally treated drinking water is a real bargain. In fact, it may just be too good of a deal. Consider that your customers would have to fork over $4883.17 for 1,000 gallons of bottled water at a local convenience store (and that doesn't even include the cost of delivering it to their homes).
Once you have determined how much money your system will need to keep running, pay your bills, and sock a little money away for a rainy day, then you can establish a rate and structure that will allow you to reach your required goals. Since you are already operating under an existing rate structure, it is important to consider initiating a rate study to see if your current rates are really meeting your needs.
Breaking Away from the Break-Even Approach
Systems across the nation, especially those that are thankful to just "Break-Even" at the end of each year should consider engaging in little practice we like to call proactive budgeting, or budgeting for the future.
For years many water and municipal boards operated under a "current year" focus, getting through each budget year without paying much heed to the long-term needs of their systems. However, when you take into account that the EPA predicts that the nation's water system infrastructure will need roughly $277 billion in upgrades over the next 20 year, it's enough to make you believe that there is no time like the present to begin saving for that rainy day.
Since the inception of the 1996 Safe Drinking Water Act (SDWA) Amendments, water systems have been required to prove their ability to function as technically, managerially, and financially sound operations. In a nutshell, as a water board you're required to make certain that your system is charging enough to support itself. If not, you could see your ability to receive state and federal funding reduced.
In order to meet that obligation, your rate structure must be designed to produce enough revenue to operate the system in a safe, lawful, and financially sound manner, while at the same time maintaining your infrastructure and preparing for the future.
Creating a reserve fund is a good first step toward maintaining your assets and infrastructure, as well as to matching the benefit with the cost.
Reactive budgeting, trying to find the money once a problem has occurred, places the burden on your customers who happen to be around when the problem occurs. Once the problem is fixed and the resulting bills are paid, everyone else gets to enjoy the benefits without footing the bill. A proactive budget will help spread the costs over the life of the assets.
Check with your state primacy agency to learn the specific requirements for establishing a reserve fund in your state.