Declining Revenue
Tennessee Association of Utility Districts
August 6, 2009
Evan N. Pratt, PE, Principal
Orchard, Hiltz, and McCliment
ohm-advisors.com

Learning Objectives
• Identify changing trends in financial challenges
to public utilities
• Identify current problems and reactions
• Identify actions you can take to create a
contingency plan

Baseline: How’s It Going?
• Problems are different today
• Problems are bigger today

Baseline: The Problems
• Declining Revenue
• Rising Expenses
• Both

Baseline: Common Language
• Revenue: Basic Components
– User Fees and Connection fees
• Expenses: Basic Components
– Labor
– Capital Improvements
– Debt Retirement
– O and M
– Administrative

The Future: Expenses

The Future: Revenue

The Future: Big Problem!

The Future: Challenges
Change has to make sense to people.
• Communicate how you are cutting costs
• Manage costs by managing assets
• Make up for lost revenue
• Focus on desired level of service of customers

Plan for the Unknown
• Concept: Sensitivity analysis
– Assume revenue trend is worse
– Assume costs escalate faster
– Run at least one parallel budget
• Concept: Contingency plan

Plan for the Unknown
Typical cost controls
• Freeze hiring
• Cut budgets
• Layoffs
• Reduce Capital spending
• Freeze rates
• Delay higher cost maintenance
• Find lowest prices

Plan for the Unknown
Issue: Cost vs More Cost
• Reduce Capital spending
• Freeze rates
• Delay higher cost maintenance
• Find lowest prices

How to get Behinder
80,000,000
70,000,000
60,000,000 Needed Funding
50,000,000
$ Budget
40,000,000 Existing Funding
30,000,000
20,000,000
10,000,000
-
2005 2010 2015 2020 2025 2030
Years

Sidebar: Financial Issue
GASB
34
Depreciation Accounting
• Cannot account for true cost
• Infrastructure condition is not assessed

Plan for the Unknown: Value
Managing Assets Saves $
• What do you have
• Condition
• Service level
• Maintenance
• Life cycle approach – capital &
maintenance

Plan for the Unknown
• How do I really know my costs for the next
10 years?
• CIP with funding options
• Operational Assessment – www.apwa.net
• Asset Management approach
– Capital work
– Maintenance work

Plan for the Unknown
• Now you know WHAT you need
• You have some idea how to pay for it
• It’s Rate Study time!
• CRITICAL TIP: Sensitivity Analysis

Funding CIP and Maintenance
• Are you capturing all your costs today?
• Where do these (CIP and maintenance)
fit in your rates/fees?

AWWA Manual M1 (2000)
• 5 basic methods of funding
– Connection fees
– User Fees
– Debt Financing
– Developer reimbursement (SDCs)
– Stock issuance (Third Party funding)

Financing Tip
• Debt financing gives you a buffer for rate hikes
• TMBF, Revolving Loan Funds, or other low
interest programs cut costs 25-30%

Conclusions
• Things suck
• They will get worse
• You will find a way
• It hurts less with a plan

On Leadership
• People hear what leaders do more than what
they say.
• Survival is not just for the strongest or smartest
• Survivors will be those who adapt most
quickly. Look for them on staff.

Key Points
• Problems are tougher than ever
• Learn more about your system, its
needs, the costs, and the rate impacts
• TOOLS: Sensitivity Analysis and
Contingency Plan (worst case)

Key Points
• Communicate the issues with staff and the
public. Solutions too!
• Brag about cost savings
• Relate public desire to service costs

Questions
http://www.advancing communities.blogspot.com
ohm-advisors.com