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NACWA is pleased to announce the availability of its new white paper The Evolving Landscape for Financial Capability Assessment – Clean Water Act Negotiations & the Opportunities of Integrated Planning , which builds on NACWA’s previous white papers on the subject.  Funded through the Targeted Action Fund (TAF), the new paper explores the current opportunities for more rational financial capability assessment and will serve as a foundation for NACWA’s ongoing advocacy on the issue.  

This Member Update provides a brief summary of the new paper and highlights how public agency members can use the information in the paper now in any ongoing negotiations involving financial capability.  

New Approach to Financial Capability Leverages Integrated Planning Opportunities

The Association has long advocated for wholesale revision of EPA’s 1997 guidance¹ on financial capability to incorporate a more holistic, prioritization-based approach that looks at a range of indicators to assess the economic and environmental soundness of a particular investment. With the release of its Integrated Planning Framework in June 2012, EPA acknowledged this need for greater prioritization for Clean Water Act (CWA) programs.  The EPA Framework, however, continued to rely on the outdated 1997 guidance to assess the financial capability of communities to make the needed CWA investments.

NACWA’s new white paper outlines how adopting a cash-flow forecasting approach – in place of EPA’s existing dual indicator matrix – will better enable the type of prioritization envisioned by the Integrated Planning Framework.  Cash-flow forecasting tests whether the revenues necessary to implement a CWA program can be generated without creating a high burden on the community.  Projections of system-wide rate increases to generate the necessary funds can be used to estimate residential customer bills for the life of the program, factoring in current and historical information, as well as projected economic growth to evaluate the burden of different spending levels across the community and at different income levels.  Such forecasting does not require data intensive analyses or complex regulatory protocols, and utilities can generate much of the information using existing information from ongoing utility management efforts.    

Recent Consent Decree Negotiations Provide Valuable Lessons for Other Utilities

In addition to the opportunities presented by the Integrated Planning Framework, recent developments regarding financial capability during consent decree negotiations have provided further openings for utilities to use new approaches that deviate from or dispense with the matrix calculations in EPA’s 1997 guidance.  As NACWA’s new white paper explains, numerous alternative approaches and measures have been advanced in advocacy and Consent Decree negotiations to date, with varying degrees of success.  For example, several permittees² have provided information on income distributions within their communities to go beyond the 1997 guidance’s sole focus on Median Household Income. Other permittees have advanced strategic financial plans to demonstrate that building financial capabilities over extended periods is required to enable manageable program financing. These efforts have had an impact.  Before 2007 no major metropolitan permittee had been deemed to face a “High Burden” enabling schedule relief under the Guidance.  But since then several communities have been acknowledged as facing such a burden and granted over 20-year compliance schedules.  

EPA enforcement treats the 1997 guidance as a “gatekeeper” for consideration of financial capability-based concerns, often asserting that the calculations are required to initiate negotiations.  Permittees are faced with the option of performing the requisite calculations and attempting to use “additional documentation” to better characterize their circumstances or declining to participate in the exercise by offering cash-flow forecast data in substitute.  Though most permittees have performed the simplistic matrix calculations, both approaches have been employed with success.  As highlighted in the new paper, this strategy of dispensing with the EPA guidance calculations should be recognized as a legitimate, and in many cases, compelling option.

Interplay Between NACWA Paper and New AWWA/WEF/USCOM Tool

The American Water Works Association (AWWA), the Water Environment Federation (WEF) and the U.S. Conference of Mayors (USCOM) recently completed a project that they hope will provide guidance on financial capability assessments using the EPA guidance framework, largely through the use of alternative measures beyond demand on median household income.  The AWWA/WEF/USCOM assessment tool offers insight and guidance on how to enhance and append the information employed within the two-phase indicator framework in the current EPA guidance.  The use of more and better information to characterize the prospective burden of water quality program costs using the 1997 guidance will no doubt improve the resulting financial capability assessments, but NACWA continues to believe that more fundamental change to the underlying methodology is needed.  NACWA’s new white paper lays out the case for this broader change.  

NACWA Next Steps

EPA has recently acknowledged that its 1997 guidance may have certain limitations and has initiated a dialogue with the U.S. Conference of Mayors, National League of Cities, and the National Association of Counties to provide additional clarification on how financial capability assessments can better account for the unique challenges facing the clean water community.³  Most notably, EPA has indicated that clean water utilities, when evaluating financial capability using the 1997 Guidance, can include all wastewater and stormwater costs when considering the demands placed on median household income.  NACWA plans to participate actively in this dialogue when it is broadened beyond elected officials, but is already working to set up its own meetings with EPA on financial capability and the new paper.  NACWA will alert the membership when these meetings are scheduled.   

To date, EPA has been resistant to wholesale changes to its 1997 guidance, but in recent discussions on integrated planning, EPA has indicated that it will work to develop a new document, most likely a policy memorandum, that is expected to clarify the limitations of its 1997 guidance and outline where additional information or potentially alternative approaches can be used to supplement and potentially supplant the guidance’s matrix calculations.  This new policy document and how NACWA’s new white paper can inform its content will be the focus of NACWA’s upcoming meetings with the Agency.  

In addition, NACWA will be using the new paper in its continued advocacy on Capitol Hill to secure legislation instructing EPA to revise its 1997 guidance.

¹U.S. Environmental Protection Agency (EPA), Combined Sewer Overflows: Guidance for Financial Capability Assessment and Schedule Development, EPA 832-B-97-004, February 1997 (1997 or EPA guidance)

²Including, for example, the cities of Akron, Atlanta, and Honolulu as well as the St. Louis Metropolitan Sewerage District and Northeast Ohio Regional Sewer District.  

³U.S. Environmental Protection Agency (EPA) Memorandum: Assessing Financial Capability for Municipal Clean Water Act Requirements; from Nancy Stoner and Cynthia Giles to EPA Regional Administrators, Regional Water Division Directors and Enforcement Division Directors; January 18, 2013, pp. 2.