Budget management effectiveness
Description: This measure has short-term and long-term aspects. The short-term calculations are commonly used financial performance indicators, and the long-term consideration is a more comprehensive analytical approach to assessing budget health over the course of several decades.
Short-term (typically per year):
- Revenue to expenditure ratio: Total revenue ÷ total expenditures.
- O&M expenditures (percent): 100 X (O&M expenditures ÷ total operating budget).
- Capital expenditures (percent): 100 X (capital expenditures ÷ total capital budget).
- Debt ratio: Total liabilities ÷ total assets. Total liabilities are the entire obligations of the utility under law or equity. Total assets are the entire resource of the utility, both tangible and intangible. Utilities often have different debt-risk acceptability levels, thus the ratio itself should be considered within each utility’s unique circumstances. This is a QualServe Indicator.
- Life-cycle cost accounting: Has the utility conducted a life-cycle cost accounting analysis that explicitly incorporates accepted service level risks, asset condition, budget needs based on the values (net present values) of utility current and future assets, etc., and made financial and budget management decisions accordingly (yes/no)?
2. Financial procedure integrity
Description: Questions that gauge presence of internal utility processes to ensure a high level of financial management integrity.
- Does the utility have financial accounting policies and procedures (yes/no)?
- Are financial results and internal controls audited annually (yes/no)?
- Have the number of control deficiencies and material weaknesses been reduced from previous audits (yes/no)?
3. Bond ratings
Description: Bond ratings are a general indicator of financial viability; however, they are not always within a utility’s control and are less important if a utility is not participating in capital markets. Smaller utilities often struggle to obtain high ratings. Even though a higher bond rating is desirable and this provides a general indicator of financial health, the bond rating should not be considered alone. It should be considered in light of other factors such as the other measures suggested for this Attribute.
- Has your bond rating changed recently? If so, why? Does the change reflect the utility’s financial management in a way that can and should be acknowledged and, if need be, addressed?
4. Rate adequacy
Description: This measure helps the utility to consider its rates relative to factors such as external economic trends, short-term financial management, and long-term financial health. It recognizes that a “one size fits all” calculation would not be realistic due to each utility’s unique situation and the number of variables that could reasonably be considered. The following three questions prompt assessment of key components of rate adequacy.
- How do your rate changes compare currently and over time with the inflation rate and the Consumer Price Index (CPI) or Consumer Price Index for All Urban Consumers (CPI-U)? (Rate increases below CPI for very long may suggest rates are not keeping up with utility costs.) (Using a rolling rate average over time will adjust for short-term rate hikes due to capital or O&M spending needs.)
- Have you established rates that fully consider the full life-cycle cost of service and capital funding options? (See the life-cycle cost accounting discussion, above.)
- Does your utility maintain a rate stabilization reserve to sustain operations during cycles of revenue fluctuation, in addition to 60- (or 90-) day operating reserves?
More information on resources for this attribute-related measure can be found in the EUM Resource Toolbox.
 From AWWA and AwwaRF, Selection and Definition of Performance Indicators for Water and Wastewater Utilities, p. 51. 2004. Note: This material is copyrighted and any reprinting must be by permission of the American Water Works Association.
 Section 707 of Executive Order 13123 defines life-cycle costs as, “…the sum of present values of investment costs, capital costs, installation costs, energy costs, operating costs, maintenance costs, and disposal costs over the life-time of the project, product, or measure.” Life-cycle cost analysis (LCCA) is an economic method of project evaluation in which all costs arising from owning, operating, maintaining, and disposing of a [facility/asset] are considered important to the decision. LCCA is particularly suited to the evaluation of design alternatives that satisfy a required performance level, but that may have differing investment, operating, maintenance, or repair costs; and possibly different life spans. LCCA can be applied to any capital investment decision, and is particularly relevant when high initial costs are traded for reduced future cost obligations. See also: http://www.epa.gov/EMS/position/eo13148.htm, http://www.wbdg.org/resources/lcca.php.