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Completing the Picture: Financial Capability Analysis

Posted By Johanna M. Bell, Thursday, August 31, 2017
Updated: Tuesday, October 31, 2017

Over half of Idaho cities provide waste/reclaimed water treatment facilities, while 78% provide drinking water.  Additionally, over 99% of Idaho cities are tasked with drainage and stormwater management for impervious surfaces including streets, parking lots, and buildings.  These varied responsibilities require Idaho cities to play important roles as the primary funders of the Clean Water Act and the Safe Drinking Water Act.  

Most, if not all, Idaho cities face complex water quantity and quality issues that are heightened by  issues such as population growth or decline, source water supply and quality, challenging regulations, and aging infrastructure.   To address these complex issues, Idaho cities make significant investments in waste/reclaimed water, drinking water, and drainage infrastructure.  These capital projects can rehabilitate existing systems, improve operation and maintenance, or be implemented to address emerging regulatory requirements.  

Given these issues, it is not surprising that Idaho cities and their utility customers frequently find themselves facing difficult economic challenges with limited financial capabilities.  Guidance issued by the EPA in 2014  recognizes these issues and seeks to address these financial capability challenges by identifying ways the federal Environmental Protection Agency (EPA) and States can develop and implement new approaches.  For Idaho cities these new approaches are critical to achieving water quality goals at lower costs and in ways that address the most pressing problems first.

The 2014 EPA guidance recognizes that long-term approaches to meeting Clean Water Act objectives should be sustainable and within a local government or authority’s financial capability; and that financial capability includes Safe Drinking Water Act obligations as well. In short, EPA recognized that the financial capabilities of Idaho cities are important to consider when EPA or the State develop schedules for infrastructure project requirements in permits or enforcement actions to help protect human health and the environment.   This process for evaluating parameters that measure an Idaho city’s financial capability builds upon EPA guidance initially published in 1997. A two-phase approach is applied. The first phase identifies the financial impact of costs (i.e., utility rates) on residential households as a percentage of local median household income (MHI).  The value for this indicator characterizes whether the costs impose a “low,” “medium,” or “high” financial impact on residential users. 

 

Residential Financial Capability Indicators

Financial Impact

Low

Mid-Range

High

Residential Indicator (% of MHI)

< 1.0%

1.0 - 2.0%

> 2.0%

 

The second phase identifies six factors used to evaluate debt, socioeconomic, and financial conditions that affect a city’s financial capability.  These indicators characterize a city’s financial capability as “strong,” “mid-range,” or “weak.”

 

City Financial Capability Indicators

Debt Indicators

Strong

Mid-Range

Weak

1. Bond Ratings

AAA, AA, A

BBB

BB, B, CCC, CC, C, D

2. Overall Net Debt as % of Full Market Property Value

< 2%

2 - 5%

> 5%

 

Socioeconomic Indicators

Strong

Mid-Range

Weak

3. Unemployment Rate

1% < National Average (NA)

+/- 1% NA

1% > NA

4. Median Household Income (MHI)

25% > Adjusted National (AN) MHI

+/- 25% AN MHI

25% < AN MHI

 

Financial Management Indicators

Strong

Mid-Range

Weak

5. Property Tax Revenue Collection Rate

> 98%

94 - 98%

< 94%

6. Property Tax Revenues as % of Full Market Property Value

> 2%

2 - 4%

> 4%

 

AIC believes it is a good idea for Idaho cities to develop or update a "financial capability analysis" periodically and submit their finding to the permitting authority as they re-apply for wastewater discharge permits.  A financial capability analysis is an important tool as Idaho cities protect the environment, incorporate affordable water quality improvements, and coordinate with the drinking water program to provide universal access to water, waste/reclaimed water, and drainage/stormwater services in support of economic development in Idaho. 

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