The Tarheel Pipeline, Winter 2015

Winter 2015

feature

recently did a presentation on water/sewer rates for a town council in a small town. During the presentation it became obvious that the council

members had very limited knowledge about how the water/sewer services were provided and what the board’s responsibility was to ensure that

the services were financially viable. It then occurred to me that it was very probable that no one had ever provided any guidance to them on these

important matters. Therefore, below is a quick guide on what every board member/council member/alderman should know about their water/

sewer system.

Know your type of system.

Your water system’s source could

be either a well, surface water plant, purchase system or a

combination of these types. Your wastewater may be pumped to

another system or to your own facility for treatment. It is important to know

these details because each type of system has unique requirements and the

elected officials are responsible to ensure that the system is adequately

funded to meet these requirements. Do not hesitate to ask questions of the

manager/administrator and staff to learn about these details.

Know what the Law requires.

Municipal and County

governments and Sanitary Districts (i.e. publically owned

utilities) that operate water/sewer systems are bound by the

NC General Statutes (i.e. State Law) which require compliance with

technical, financial and managerial standards. Elected officials take

an oath that they will follow the applicable laws when conducting the

business of their system. An elected official cannot be expected to know

all the laws but they should seek knowledgeable sources to help them

make informed decisions about their system operations.

Know your funding requirements.

The general statutes

dictate that publically owned systems operate their water/

sewer utilities as an “Enterprise.” An Enterprise Fund must

be established and maintained separately from other funds such as

the General Fund. General Fund revenues come from property and

sales taxes which pay the expenses for providing services to the entire

population served within its boundaries (such as police, fire, garbage,

recreation). Enterprise Fund revenues must come from the utility’s

customers that use the services. The Enterprise Fund must be self-

sufficient, the expenses incurred to provide the services must be paid

from revenues generated from the users of the services. The utility

cannot operate in a deficit; it must generate enough revenue to pay the

expense of providing the services. The elected officials are responsible

for setting water/sewer rates that will generate enough revenue to meet

the financial obligations of the utility.

Understand the true cost of providing utility services.

The true cost of providing utility service includes the annual

operating cost and the long term cost of sustaining the services.

Annual operating costs include the supplies, materials and staffing

needed to provide the services in accordance with the rules and

regulations set forth by state and federal law. Long term costs include

infrastructure and equipment repair and replacement that is necessary to

ensure that the utility can operate continuously into the future.

Understand the audit.

Publicly owned utilities are required to

have an annual financial audit. The main purpose of the audit is

to determine if the utility’s financial records and proceedings are

in order. An auditor will provide a financial report and state if there are

any deficiencies in the records or financial procedures for the reporting

period. It is not the auditor’s responsibility to report whether the utility

is meeting their financial obligations for the system’s continuous

operation. An auditor may or may not point out if the system is coming

up short financially because their primary objective is to determine if

the records are in order and the numbers add up correctly. However, it

is easy to determine the system’s financial condition by reviewing the

audit objectively. The audit will show the total annual revenues and the

total annual expenditures in the Water/Sewer Enterprise Fund. If the

expenditures exceed the revenues for the reporting period, then there

is obviously a problem. If the revenues and the expenditures balance

you need to check to determine if there is a revenue line item showing

a contribution from the “Fund Balance.” This shows that the utility had

to take money from their reserve fund in order to balance the budget.

Even if the annual revenues exceed the expenditures there may still be

a potential problem. The audit will also show the “net change” in the

financial position. The financial position includes depreciation, capital

improvements and debt retirement for the system. If the net change

is shown in parenthesis (a negative number) then it means that the

system is not meeting their long-term obligations to fund the system’s

infrastructure into the future.

WHAT EVERY BOARD MEMBER

NEEDS TO KNOW ABOUT

WATER & SEWER SERVICES

By Marty Wilson, NCRWA Technical Specialist