Software aids wastewater program planning

For more than 20 years, the Fairfax County, Va., Department of Public Works and Environmental Services has used a financial planning process for its Wastewater Management Program to assure sustained operating performance of its integrated sewer system. The process, which has been updated over the years, has succeeded in providing funding for capital projects regardless of variables beyond the county’s control, such as economic downturns, unfunded regulatory mandates, and local and regional water quality initiatives.

By the late 1990s, however, the county knew it needed to develop a new financial model that could be used to actively manage or more efficiently support the financial planning process. Using a new spreadsheet-based computer program created by the county and its consultant, White Plains, N.Y.-based Red Oak Consulting, a division of Malcolm Pirnie, department officials forecasted and monitored information, such as system revenues, expenses and fund balances.

“Early on, we were aware that financial modeling was necessary to help us improve our capacity to recommend service rates to finance infrastructure improvements,” says Ed Jones, financial manager for the Wastewater Management Program. “Using a model helps us trend fund balances and performance measures and obtain the information we need to make sound financial decisions.”

The model also sets up reserves as a hedge against economic downturns, links capital budgeting and financing considerations to rate and charge impacts, and monitors financial management parameters. Department managers also can access historic, current and long-term financial data; determine trends and long-term capital planning and re-investment needs; preview funding scenarios; and monitor financial performance criteria. “The challenge is modeling and updating a complex system that includes a rapidly growing and economically diverse customer base, complicated inter-jurisdictional agreements, major capital expenditures and various debt issuances/recalls,” says Jeff Kent, fiscal administrator for the program.

In late 2002, the department converted the existing spreadsheet system to one that uses Microsoft Excel and Microsoft Access. The updated software and database give department managers more convenience and flexibility in adjusting rates and charge structures.

The model also has been used to produce five-year forecasted financial statements that support county planning reports. Additionally, using the new system, the county tracks management performance indicators (e.g., operating margin, current ratio, debt coverage and return on assets) to provide a general assessment of the financial health of the wastewater program.

Quickly and easily evaluating the financial impact of rate changes, debt options and capital investment plans helps department officials make decisions and ensure that strategic management goals are met. “Using the results of the detailed financial modeling efforts, we can ensure compliance with existing bond covenants and other requirements, as well as better project our long-term financial position,” Jones says.

Long-range planning is critical for projecting growth to support the county’s development of capacity-sharing agreements with neighboring communities. “Managing capacity on a regional basis requires not only significant cooperation between local governments, but it also depends on our ability to accurately forecast wastewater generation well into the future,” explains Shahram Mohsenin, director of the county’s Wastewater Planning and Monitoring Division.

Consequently, a 25-year forecast was developed to supplement the five-year plan for capital improvement planning purposes. The long-range (25-year) financial plan identifies the timing of infrastructure expansions and upgrades of new projects to meet emerging water quality criteria and growth needs. Both the five-year and 25-year forecasts are designed to identify when to issue debt, such as revenue bonds or state revolving fund loans, to satisfy cash flow needs. Besides monitoring projected cash reserves, the county can determine debt ratios, including debt coverage.

As a result of the county’s financial planning, the Wastewater Management Program has stabilized annual operational and maintenance costs, largely eliminated the need to conduct large-scale reactive maintenance projects and established sufficient fund balances to support proactive fiscal management. Currently, the county is planning to recall sewer revenue refunding bonds issued in 1993 because interest yields on fund balances are relatively low while interest rates being paid on the bonds are relatively high. The department’s planning efforts have provided sufficient funds to pay for the recall. “Because we constantly have an eye on the future, we have been able to protect our system from most of the impacts of the recession, as well as proactively respond to new, more stringent regulations that require capital investment into our infrastructure,” Mohsenin says.

In fact, in late March, six states agreed to reduce the amount of nitrogen and phosphorus that is discharged to the Chesapeake Bay by more than 50 percent. Even though the Bay cleanup requirements are still being discussed, it is clear that the Fairfax County treatment plant’s nitrogen removal needs will increase substantially, which will increase its construction and operation costs. “The cost increases can now be evaluated using the financial model, allowing us to manage the cost impacts to our customers,” Jones says.

Fairfax County’s Wastewater Management Program has garnered national attention for quality and fiscal responsibility. The county recently received the Platinum Peak Performance Award from the Washington, D.C.-based Association of Metropolitan Sewerage Agencies for five consecutive years of 100 percent regulatory compliance. In addition, the Washington, D.C.-based Environmental Protection Agency recognized the county as a charter 2003 Clean Water Partner for its leadership role in protecting the Chesapeake Bay. Previously, in 2000, Fitch upgraded the un-insured rating of the Fairfax County 1996 sewer revenue bonds from AA to AAA based on the economic health of the service area, the cash stability of program operations and the competitive sewer service rates.