"...
to restore and maintain the chemical, physical,
and biological integrity of the Nation's waters."
Section 101(a) of the Clean Water Act
ICrti Al
wirunciti
United States?
Office of Water
?
EPA-823-B-95-002
Environmental Protection?
(4303)
?
March 1995
Agency.
&EPA?
Interim Economic Guidance
for Water Quality Standards
Workbook
Appendix M to the?
,
Water Quality Standards Handbook - Second Edition
Recycled/Recyciable
ql
?
at least 50% racycitad fiber
Printed on paper Mat contains
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
•2
7
=QC.'
MEMORANDUM
SUBJECT: Economic Guidance for Water Quail
FROM:?
Tudor T. Davies, Director
Office of Science and Technology.
TO:
?
Water Management Division Directors
Regions I - X
PURPOSE
EPA-823-B-95-002
OFFICE OF
WATER
rd-.1-Workbook
•
• :"..**. `!; 1,7
The purpose of this memorandum is to transmit the Interim
Economic Guidance for Water Quality Standards Workbook for use by
the States and Regions in considering economics at various points
in the process of setting or revising water quality standards.
POLICY IMPLEMENTATION:
We recommend the subject guidance, including the various
screening levels and measures presented, be itplemented as
reference points and used as guides by the States-and Regions.
The measures outlined in the guidance are not intended to be
applied as absolute decision points. States may
, use other
economically defensible approaches in
-lieu
Cf
.thoSe suggested in
this interim guidance.
This guidance is designed for
.
use in the-Water-quality
standards program and does not represent Agency guidance outside
of that program.
BACKGROUND:
Economic factors may be considered at several different
points in the water quality standards program':
?
quality
standards regulation provide's
for
such consideration in the
following areas:
Section 131.10--Designation of Uses (also applies to
variances)
(g)(6) Controls more stringent than those required by
Sections 301(b) and 306 of this Act would result in .
substantial and widespread economic and social impact.
GC)
Recyclecf/Recyclablo
Printed with Soy/C.anola Ink on paper that
contains at least 50% recycled fiber
Section 131.12--Antidegradation
(a)(2)...allowing lower water quality is necessary to
accommodate important economic or social development in
the areas in which the waters are located...
.Since publication of the water quality standards regulation
in 1983 we have produced extensive guidance on the interpretation
and application of the various regulatory requirements. None of
this guidance, however, dealt extensively with the economic
considerations.
This guidance workbook is intended to fill that gap. It is
anticipated that the guidance will be revised from time to time
to reflect State and Regional experience in its application.. For
example we intend to add case studies as appendices to the
guidance to reflect real-world experiences in its application.
In addition, the Agency is considering-revising the water quality
regulation. If revisions to the regulation are made with respect
to economic considerations, the applicable guidance will be
revised accordingly. However, it is likely to be at. least 3
years before any revisions to the regulation are finally
promulgated and no way of anticipating whether any changes will
be made in the economic provisions .
This guidance is presented to assist States
and EPA Regional
Offices, along with other interested parties, in understanding
the economic factors that may
be considered, and the types of
tests that can be used to determine: (1) if a designated use
cannot be attained, (2) if a variance to an individual discharger
can be granted, or (3) if degradation of high-quality water is
warranted.
The regulatory requirement that must be met is that
attaining a designated use or obtaining a variance would result
in substantial and widespread economic and social impacts. The
regulatory requirement for antidegradation is that it
must be
shown that lower ter?is necessary to accommodate
important social an economic development. This guidance provides
a framework for making these determinations.
The measures and tests suggested in this guidance are
standard economic analytical tools, but the States-are free to
provide other kinds of analysis to support their position.'
The guidance does provide information on the kinds and types of
analysis that are appropriate and how the information can be
assembled in order to make a decision. It is not an exhaustive
description of all appropriate economic_ analysis. Additional
information and tests may be necessary and/or desirable in
certain circumstances.
3
The economic impacts to be considered are those that result
from treatment beyond that required by technology-based
regulations. All economic analyses of water quality standards
should address only the cost of improving the water to meet water
quality standards or the cost of maintaining water quality in
high-quality waters.
Although EPA is responsible for approving a State's water
quality standards, the State is responsible for interpreting the
circumstances of each case and determining where there are
substantial and widespread economic and.social impacts, or where
important economic and social development would be
inappropriately precluded.
Various drafts of this guidance were reviewed by EPA
headquarters and regional offices, States, and.other
organizations. State and Regional staff should feel free to
contact the Economic and Statistical Analysis Branch in the
Office of Science and Technology for advice and assistance
regarding this guidance or related concerns. We would appreciate
receiving feedback from the users of this guidance so: that it can
be improved as necessary. As with all guidance related to the
water quality standards program, this document is considered to
be part of the Water Quality Standards Handbook--Second Edition.
cc: Lee Schroer , OGC
Jim Pendergast, OWM
John Meagher, OWOW
William Painter, OPPE
Regional WQS Coordinators, Regions I- X
INTERIM ECONOMIC GUIDANCE
FOR WATER QUALITY STANDARDS
WORKBOOK
Economics and. Statistical Analysis Branch
Office of Science and Technology
Office of Water
U.S. Environmental Protection Agency
March 1995
ECONOMIC GUIDANCE FOR WATER QUALITY STANDARDS WORKBOOK
TABLE OF CONTENTS
1. INTRODUCTION
?
1-1
1.1
?
Designated Uses, Variances, and Antidegradation
?
1-3
1.2?
Pollution Sources
??
1-5
1.3?
Substantial Impacts
??
1-6
1.4?
Widespread Impacts
?
1-8
1.5?
Antidegradation
??
1-9
1.6?
Organization of the Rest of the Workbook
?
1-10
2.?
EVALUATING SUBSTANTIAL IMPACTS:
PUBLIC SECTOR ENTITIES ?
2-1
2.1?
Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project.??
2-5
2.2?
Calculate Total Annualized Pollution Control Costs Per Household ..
2-10
2.3?
Calculate and Evaluate the Municipal Preliminary Screener Value ?
. . . 2-14
2.4.
?
Apply Secondary Test??
2-15
2.5?
Assess Where the Community Falls in the Substantial Impacts Matrix
2-28
3.?
EVALUATING SUBSTANTIAL IMPACTS: PRIVATE-SECTOR
ENTITIES ?
3-1
3.1?
Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project
?
3-4
3.1.b Calculate the Annual Costs of the Pollution Control Project
?? 3-5
3.2?
Financial Impact Analysis??
3-6
3.3
?
Interpreting the Results
?
3-32
4.?
DETERMINATION OF WIDESPREAD IMPACTS ?
4-1
4.1?
Define Relevant Geographical Area ?
4-2
4.2?
Determine Whether Impacts are Widespread: Public-Sector Entities . . .
4-2
4.3?
Determine Whether Impacts are Widespread: Private-Sector Entities . . .
4-5
4.4?
Estimate Multiplier Effect ?
4-11
4.5?
Economic Benefits of Clean Water ?
4-12
4.6?
Summary of Financial Capability and Determination of Whether
Impacts are Substantial and Widespread
?
4-13
5. ANTIDEGRADATION: ROLE OF ECONOMIC ANALYSIS
?
5-1
5.1?
Verify Project Costs and Calculate the Annual Cost of the Pollution
Control Project
5-5
5.2 Financial Analysis to Determine if Lower Water Quality is
"Necessary"
5-14
5.3 Determine if Economic and Social Development would
be Important
5-33
5.4 Summary
5-35
APPENDIX A: Data Resources and Reference Materials ?
A-1
APPENDIX B: Table of Annualization Factors ?
B-1
APPENDIX C: Conceptual Measures of Economic Benefits
?
C-1
WORKSITEF.TS A through AB
ECONOMIC GUIDANCE FOR WATER QUALITY STANDARDS
WORKBOOK
1. INTRODUCTION
As presented in the Water Quality Standards Regulation, economic factors are
taken into consideration at various points in the process of setting, enforcing, or
changing Water Quality Standards This guidance is presented to assist States and
applicants in understanding the economic factors that may be considered, and the
types of tests that can be used to determine if a designated use cannot be attained, if a
variance can be granted, or if degradation of high-quality water is warranted. In order
to remove a designated use or obtain a variance, the State or discharger must
demonstrate that attaining the designated use would result in substantial and
widespread economic and social impacts. Likewise, if a degradation in high-quality
water is proposed, it must be shown that lower water quality is necessary to
accommodate important social and economic development.
This workbook provides guidance for those seeking to remove a designated use
(such as might occur under a Use Attainability), or obtain a variance based on
economic considerations, or to lower water quality in a high-quality water. In
addition, it provides guidance to States and EPA regions responsible for reviewing
requests for variances and modifications to designated uses, and for approval of
antidegradation analyses. The guidance describes the types of information and
analyses that should be considered by applicants and reviewers. The guidance,
however, is not an exhaustive description of appropriate economic impact analyses.
Additional information and tests may be necessary and/or desirable in certain circum-
stances.
The economic impacts considered are those that result from treatment beyond that
required by technology-based regulations. Since water quality cannot be lower than
that resulting from technology-based limits applied to direct and indirect point source
discharges and reasonable Best Management Practices (BMP) applied to nonpoint
sources, these are considered to be the baseline. All economic impact analyses of
water quality standards should, therefore, address only the cost of improving the water
to meet water quality standards or the cost of maintaining water quality in high-quality
waters.
Although EPA is responsible for approving a State's water quality standards, the
State is responsible for interpreting the circumstances of each case and determining
Economic Guidance for Water Quality Standards
?
1-1
where there are substantial and widespread economic and social impacts, or where
important social and economic development would be inappropriately precluded.
Each analysis of economic impacts must demonstrate:
•
that the polluting entity, whether privately or publicly owned, would face
substantial financial impacts due to the costs of the necessary pollution controls
(substantial impacts or would interfere with development), and
•
that the affected community will bear significant adverse impacts if the entity is
required to meet existing or proposed water quality standards (widespread
impacts or important development).
This Workbook supplements the description contained in the
Water Quality
Standards Handbook,
which should be read first as it contains many important
definitions and descriptions of the regulations. Specific attention should be paid to
Chapters 2 (Designation of Use) and 4 (Antidegradation), which describe the context
in which this guidance is to be used. This Workbook is designed as a series of
worksheets and accompanying guidance to be used when actually calculating the
impacts of pollution control.
The intent of this workbook is to point States and dischargers in the right direction.
It does not give definitive answers as to whether or not an entity has demonstrated
substantial, widespread, or important economic and social impacts. If a State or
discharger has difficulty with any part of the analysis presented in this workbook, they
should consider seeking the assistance of a financial expert. In addition, State and
regional EPA water quality staff should feel free to contact EPA headquarters'
Economic and Statistical Analysis Branch in the Office of Water for advice and
assistance.
The remaining sections of Chapter 1 provide an overview of the analysis and
describe various factors and concepts that
,
generally apply to analyzing the economic
impacts of compliance with water quality standards. The following four chapters
provide detailed guidance.
Throughout this Workbook, the term "financial impacts" refers to impacts on the
entity or party that will pay for the pollution control, whereas the term "socioeconomic
impacts" refers to changes in the social and/or economic conditions of the affected
community. For public-sector entities, such as a publicly owned treatment works
(POTW), substantial impacts include financial impacts on the community, taking into
consideration current socioeconomic conditions. Widespread, on the other hand,
refers to changes in the community's socioeconomic conditions. By contrast, for
private-sector entities, substantial impacts refer to financial impacts and widespread
Economic Guidance for Water Quality Standards ?
1-2
impacts refer to socioeconomic impacts on the surrounding community. In addition,
the term "applicant" refers to whomever will actually complete the economic impact
analysis, whether it be the State, an individual discharger, a consultant, or some other
organization.
1.1
?
Designated Uses, Variances, and Antidegradation
Pursuant to the Water Quality Standards Regulation (40 CFR 131), States must
define statewide water quality goals by: 1) designating water uses and 2) adopting
water quality criteria that protect the designated uses. When designating uses, States
must consider the use and value of the waterbody for public water supplies, protection
and propagation of fish, shellfish and wildlife, recreation in and on the water,
agricultural, industrial, and other purposes including navigation. The designated use
may or may not coincide with the existing use, but it cannot reflect lower water quality
than the existing use. As described in the
Water Quality Standards Handbook,
if the
designated use of a water body is also an existing use, the designated use cannot be
downgraded to one that requires less stringent water quality criteria. If, however, the
designated use is not an existing use the States may, under certain circumstances,
remove the designated use, create new subcategories of the use, or grant a water
quality standard.
Before a designated use is removed a State or a discharger must conduct and
submit a use attainability analysis to EPA. Briefly, a use attainability analysis is an
assessment of the physical, chemical, biological and, if necessary, economic factors
affecting the attainment of a use. If the analysis shows that, based on any one of these
factors, conditions exist which make the use unsuitable or impossible to achieve, then
the State may remove the designated use.
In many cases, a designated but unattained use for a stream segment need not be
removed. Instead, individual dischargers may be granted variances from the water
quality standards for a limited time with the expectation that they will be able to
comply with water quality standards by the time their variance expires. A variance is
preferable to a removal of a designated use since other dischargers, who are capable of
meeting the standards, must comply with the standards through their permits. In cases
where a discharger can meet water quality based permit limits for some parameters, a
variance would not be granted for those parameters. The variance procedure is
designed to encourage compliance with the Clean Water Act within a reasonable
timeframe.
States are also required to adopt an antidegradation policy to protect existing uses,
high-quality waters, and water quality in waters that are considered to be outstanding
national resources. The antidegradation policy allows States to lower water quality in
Economic Guidance for Water Quality Standards
1-3
higher-quality waters only if it is necessary to accommodate important economic or
social development. The use of the term "important" communicates a general sense
of the level of economic and social development. This provision is intended to permit
degradation of high-quality water bodies in only a few extraordinary cases where the
benefits of the economic or social development unquestionably outweigh the costs of
lowering water quality. Under no circumstances, however, may water quality fall
below that required to protect existing or designated uses.
For each of the circumstances described above, the Water Quality Standards
Regulation allows the applicant to take economic considerations into account. When
applying for a change in a designated use or for a variance, the applicant must
demonstrate that meeting water quality standards will cause substantial and
widespread economic and social impacts. The antidegradation provision requires that
the applicant demonstrate that important economic or social development would be
prevented unless lower water quality is allowed. In all three cases, the same general
tests of impacts are used.
1.2 Pollution Sources
The choice of methods used to evaluate the economic impacts of meeting water
quality standards depend, in part, on whether pollution control is the responsibility of a
privately or a publicly owned entity. Since the polluting entity or party may not be the
one to pay for reductions, the analyses focus on the party that pays for pollution
control. Some of the more common privately owned entities include, but are not
limited to: manufacturing facilities, agricultural operations, shopping centers and
other commercial development, residential developments, and recreational develop-
ments. Publicly owned entities include: publicly owned sewage treatment works,
roads, and other municipal infrastructure.
In an economic impact analysis, the distinction between private-sector and public-
sector entities is important as it determines not only who will pay for the necessary
pollution control, but also the types of funding mechanisms available. For example, in
the case of a privately-owned entity, the facility can raise the money through loans
and equity funds but may try to pass some or all of the cost on to the consumer in the
form of higher prices. In the case of a publicly-owned entity, the community can float
bonds to pay for the capital costs, with the cost of the bonds and operating expenses
covered by user fees and/or tax revenues. The different impact measures are
addressed in two separate chapters. Chapter Two provides guidance on public-sector
entities and Chapter Three provides guidance on private-sector entities.
Whether publicly or privately owned, polluting entities can be point (direct
discharge) or nonpoint (runoff and erosion) sources of pollution. Attainment of water
Economic Guidance for Water Quality Standards?
1-4
quality standards is not limited to controls placed on point sources. Water quality
standards are applicable to nonpoint sources of pollution despite the fact that there
may be no direct implementation mechanisms for nonpoint sources. Although
pollution control approaches used by nonpoint sources may differ substantially from
approaches typically employed by point sources, analysis of the ensuing economic
impacts still depends upon whether the entity providing the pollution control is
privately or publicly owned.
1.3 Substantial
Impacts
A financial analysis of the discharger should be conducted to determine if the
capital and the operating and maintenance costs of pollution control will have a
substantial impact. This analysis is typically performed by the discharger and
reviewed by the State, although there may be cases where the State or some other
group completes the analysis on behalf of the discharger. The first step is to estimate
the capital and the operation and maintenance costs of the necessary pollution control
(see Figure 1-1). The second step is to determine how the entity will finance the
necessary reductions. If the entity is publicly-owned (e.g. a municipal sewage
treatment plant), the households in the community will bear the cost either through an
increase in user fees, an increase in taxes or a combination of both. The burden to
households resulting from total annual pollution control costs must be estimated. In
addition, the financial impact analysis must consider the community's ability to obtain
financing and the general economic health of the community.
If the entity is privately-owned (e.g. a manufacturing facility), the analysis should
consider factors such as the entity's ability to secure financing and the degree to which
it will be able to pass the cost of pollution control on to its customers in the form of
higher prices. The financial impact analysis of private-sector entities employs a
variety of financial ratios and tests. Some of these ratios and tests include benchmark
values to help in the analysis.
Demonstration of substantial financial impacts is not sufficient reason to modify a
use or grant a variance from water quality standards. Rather, the applicant must also
demonstrate that compliance would create widespread socioeconomic impacts on the
affected community.
1.4 Widespread
Impacts
States and dischargers will need to consider the possibility that financial impacts
could cause far reaching and serious impacts to the community. An important factor
in determining the magnitude of these impacts is defining the geographical area
Economic Guidance for Water Quality Standards
?
1-5
affected. The affected area might be a town, city, region, county or some combination
of these geographical units.
Equally important are the
types
of impacts that might occur. There are no
economic ratios or tests per se to evaluate socioeconomic impacts. Instead, the
relative magnitude of a group of indicators should be taken into account. For public-
sector entities, the applicant will need to estimate the change in socioeconomic
conditions that would occur as a result of compliance. Of particular importance are
changes in factors such as median household income, unemployment, and overall net
debt as a percent of full market value of taxable property. For private-sector entities,
the assessment of widespread impacts should consider many of the same
socioeconomic conditions. The analysis should also consider the effect of decreased
tax revenues if the private-sector entity were to go out of business, income losses to
the community if workers lose their jobs, and indirect effects on other businesses.
In some instances, several entities potentially may suffer substantial impacts. For
example, this situation can arise where several facilities are discharging to a stream
segment that is being considered for a change in designated use. While a separate
financial analysis should be performed for each facility, the impacts on all the facilities
should be considered jointly in the analysis of widespread impacts.
1.5 Antidegradation
As with removing a use or granting a variance, eco-nomic impacts are considered
as part of an antidegradation review. While the terminology is different, the tests are
basically the same. In the first case (discussed in Chapters 2, 3, and 4), a finding of
substantial and widespread economic impacts can be the basis for granting a variance
or changing a designated use. In the case of antidegradation, the analysis must show
that maintaining "high-quality waters" will preclude important economic and social
development. As such, the two cases can be thought of as two sides of the same coin.
Variances and downgrades refer to situations where additional treatment to meet
standards may result in declining economic and social conditions, while
antidegradation refers to situations where lowering water quality may result in
improved social and economic conditions.
When performing an antidegradation analysis, the first question is whether the
costs of the pollution controls needed to maintain the high-quality water will interfere
with the development. If not, then lower water quality is not "necessary" for the
development to take place. If, on the other hand, the costs will interfere with the
development and lower water quality is "necessary" for the development to take place,
then the analysis must show that the development would be an important economic
Economic Guidance for Water Quality Standards ?
1-6
and social development. These two steps rely on the same test as the determination of
substantial and widespread economic and social impacts.
1.6 Organization
of the Rest of the Workbook
The remainder of this Workbook addresses the measurement of economic impacts.
In Chapter 2, guidance is presented to assist applicants in evaluating financial impacts
on public-sector entities. Chapter 3 presents guidance on evaluating financial impacts
on private-sector entities. Chapter 4 provides a discussion of how to assess whether
impacts are widespread as well as substantial. This discussion includes both public-
sector and private-sector entities. Chapter 5 applies the concepts developed in
Chapters 2, 3, and 4 to antidegradation.
Worksheets are included in each chapter that will assist the reader in calculating
potential impacts. Chapters 2 and 3 include worksheets for: 1) estimation of
annualized costs of pollution control, and 2) evaluation of the financial burden of
pollution control. Chapter 4 includes worksheets that can be used in the evaluation of
whether the impacts on the entity(ies) will result in widespread economic and social
impacts. Chapter 5 includes worksheets for determining if important social and
economic development might be lost.
In addition to presenting step by step guidance on how to estimate impacts, several
of the worksheets provide benchmark comparisons that allow an assessment of the
magnitude and relative importance of potential impacts. These worksheets, however,
should not be used in isolation. Discussion of key sources of information, important
entity and community attributes, and interpretation of results are found only in the
accompanying text. Applicants, and State Water Quality staff charged with reviewing
the application, should be sure to read all text accompanying the worksheets. While
Chapter 2 addresses public-sector treatment requirements, if a substantial portion of
the costs of a public facility is borne by a private entity (such as a manufacturing
facility that pays substantial user charge fees to a POTW), both Chapters 2 and 3
should be referred to.
In all cases, the determination of economic and social impacts must be made on a
case by case basis. This determination, therefore, requires the application of good
judgement as well as use of the guidance provided in this workbook. Additional
information and tests may be required in
.
order to measure the size and extent of the
impacts. Applicants should be aware that they will be required to supply documenta-
tion to substantiate their claim of substantial and widespread economic and social
impacts. In addition to background data, however, this documentation should include
a brief written description of why the applicant believes economic and social impacts
will occur.
Economic Guidance for Water Quality Standards
?
1-7
Figure 1-1:
Steps in the Economic
.
Impact Analysis
Determining Whether Impacts Will be Substantial and Widespread
Determine whether entity or group of entities is
publicly - or privately - owned
Substantial
Impacts
Public?
Private
Estimate
costs
of complying
with
WQS
Estimate costs of complying
with WQS
Allocate costs among
residential and non-residential
users
Use ratio analysis to determine
if impact on entity is
substantial
N
_ on -
Residential
Residential?
Done
Determine if impact is
substantial
Yes
Done
Yes
Widespread
Impacts
Determine if impact is
widespread
Determine if impact is
widespread
Yes
Done
Determine remedy
Determine remedy
2.
EVALUATING SUBSTANTIAL IMPACTS:
PUBLIC SECTOR ENTITIES
Public entities seeking relief from meeting water quality standard requirements must
demonstrate that the cost of required water pollution control will result in substantial
impacts and that there will be "widespread" adverse social and economic impacts if they
are required to meet these standards. For the purposes of this workbook, a public entity
refers to any governmental unit that must comply with pollution control requirements in
order to meet water quality standards. The most common example is a municipality or
sewage authority operating a publicly owned treatment works (POTW) that must be
upgraded or expanded. Municipalities, however, may also be required to control other
point sources or nonpoint sources of pollution within their jurisdiction. The procedures
outlined in this chapter apply to all types of publicly financed projects that may be
required to meet water quality standards. Throughout this chapter, the term
"State/discharger" refers • to whoever will actually conduct the financial and
socioeconomic impact analysis for the public entity, whether it be the State, the
municipality, a consultant or some other organization.
The remainder of this chapter details methodologies and sources of information for
determining the financial viability of publicly financed projects. Several worksheets are
presented that will assist in demonstrating substantial impacts. States/dischargers are
referred to Chapter 4 for guidance on demonstrating widespread impacts. Readers should
keep in mind that the guidance in this chapter is not meant to be exhaustive. The State
and/or EPA may require additional information or tests in order to evaluate whether
substantial and widespread impacts will occur. In addition, the State/discharger should
feel free to include any additional information they think is relevant.
As mentioned in Chapter
1,
the evaluation of substantial impacts resulting from public
entity compliance with water quality standards includes two elements,
1)
financial impacts
to the public entity and 2) current socioeconomic conditions of the community.
Governments have the authority to levy taxes and distribute pollution control costs among
households and businesses according to the tax base. Similarly, sewage authorities charge
for services, and thus can recover pollution control costs through users fees. In both
cases, a substantial impact will usually affect the wider community. Whether or not the
community faces substantial impacts depends on both the cost of the pollution control and
the general financial and economic health of the community.
If the public entity passes a significant portion of the pollution control costs along to
private facilities or firms, then the review procedures outlined in Chapter 3 of this
workbook should also be consulted to determine the impact on the private entities. Both
public and private entities should consult Chapter 4 for guidance on how to estimate
potential widespread impacts on the community.
Economic Guidance for Water Quality Standards
This chapter focuses on ways to determine if the costs of the proposed project will
likely result in substantial impacts. To make this determination the State/discharger will
need to complete a five step analysis. As shown in Figure 2-1 the first step in the process
is to estimate the cost of the pollution control project and calculate the annual cost of the
proposed pollution control project. The second step is to calculate the total annual
pollution control cost per household, which includes the cost of the project and existing
pollution control costs. In the third step, the Municipal Preliminary Screener is
calculated, which quickly identifies entities that clearly will not experience substantial
impacts due to the cost of the necessary pollution control. If it is not clear whether there
will be substantial impacts, entities should proceed to the fourth step, which is the
calculation of the Secondary Test. In this step public entities will need to provide
financial and socioeconomic information. For example, the ability of the community to
finance the project may depend on existing financial conditions in the community such
as debt per capita and the community's bond rating. The socioeconomic health of the
community prior to the project's construction will also be an important indicator of
whether the pollution control would impose a substantial impact on the community. The
fifth and final step of determining whether impacts are "substantial" is evaluating where
the community falls in the impacts matrix. This matrix takes into consideration the
Municipal Preliminary Screener and the Secondary Test score. Later, in Chapter 4,
estimated changes in socioeconomic health indicators will be reviewed to evaluate the
extent to which the impacts can be considered widespread.
The remainder of this chapter is divided into five sections that detail the essential steps
of an evaluation of substantial impacts for publicly financed projects. Figure 2-1
illustrates the steps and decision points in this process. The five steps are:
•
Verify Project Costs and Calculate the Annual Cost of the Pollution Control
Project -
This section discusses factors that should be considered when selecting
a pollution control project. It also describes the type of general information about
the proposed project that should be provided. In addition, it discusses how to
annualize capital costs of the project and calculate total annual costs of the
pollution control project.
•
Calculate Total Annualized Pollution Control Costs Per Household -
This
section outlines the calculation of total annual pollution control costs per
household. The costs of the proposed project and existing pollution control are
included.
Calculate and Evaluate the Municipal Preliminary Screener Score -
This
section explains the "screener" which identifies only those communities that
clearly will not face any substantial impacts.
Economic Guidance for Water Quality Standards
?
2-2
•
Apply the Secondary Test -
This measurement incorporates a characterization
of the community's current financial and socioeconomic well-being.
•
Assess where the community falls in The Substantial Impacts Matrix -
This
matrix evaluates whether or not communities are expected to incur substantial
economic impacts due to the implementation of the pollution control costs. If the
applicant cannot demonstrate substantial impacts, then they will be required to
meet existing water quality standards. If impacts are expected to be substantial,
then the applicant goes on to demonstrate whether they are also expected to be
widespread.
2.1 Verify
Project Costs and Calculate the Annual Cost of the Pollution Control
Project.
Before the impact analysis can be performed, the project costs should be verified and
then annual costs calculated.
2.1.a Verify Project Costs
The first step of an economic analysis of a publicly financed project is an evaluation
of the proposed project. Public entities should consider a broad range of discharge
management options including pollution prevention, end-of-pipe treatment, and upgrades
or additions to existing treatment. Specific types of pollution prevention activities that
should be considered are:
•
Public Education;
Change in Raw Materials;
Substitution of Process Chemicals;
•
Change in Process;
Water Recycling and Reuse; and
Pretreatment Requirements.
Many of these approaches are particularly relevant to industrial indirect discharges to
the public system. Whatever the approach, the applicant must demonstrate that the
proposed project is the most appropriate means of meeting water quality standards and
must document project cost estimates. If at least one of the treatment alternatives that
meets water quality standards will not have a substantial financial impact, then the
community should not proceed with the analysis presented in the rest of this workbook.
General information regarding the proposed pollution control project and other projects
considered should be supplied in
Worksheet
A.
The most cost-effective approach to meeting water quality standards should be
considered. Submissions should include assumptions about excess capacity, population
Economic Guidance for Water Quality Standards?
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growth, and consideration of alternative technologies where appropriate. The most
accurate estimate of project costs may be available from the discharger's design engineers.
If site-specific engineering cost estimates are not available, preliminary project cost
estimates can be derived from a comparable project in the State or from the judgement of
experienced water pollution control engineers. (See Appendix A for sources of
engineering cost information.) Capital, operation and maintenance (O&M), and other
project costs can be summarized using
Worksheet B.
For comparative purposes, cost
estimates (e.g. capital, O&M, other project costs) for each alternative being considered
should be presented in the same units (typically annualized costs, $/yr) and for the same
year. The next section explains how to annualize project costs.
For illustrative purposes, the example of a local government upgrading their existing
wastewater treatment facility in order to meet water quality standards is used throughout
this chapter. Details of this example may differ significantly from other projects
undertaken to meet water quality objectives. Other types of public-sector water pollution
control, however, would be analyzed in a similar fashion using the worksheets included
in this chapter.
2.1.b Calculate the Annual Costs of the Pollution Control Project
Since capital costs typically will be paid over several years, annualized costs are used
in the evaluation of economic burden to the community. The capital portion of project
costs is typically financed over approximately 20 years, by issuing a municipal debt
instrument such as a general obligation bond or a revenue bond. Local governments may
also finance capital costs using bank loans, state infrastructure loans (revolving funds),
or federally subsidized loans (such as those offered by the Farmers' Home
Administration).
It should be noted that interest rates used to annualize costs are dependent on the type
of debt instrument used as well as the recipient's credit standing. For example, revenue
bonds typically are financed at a slightly higher interest rate because of their dependence
on revenues from services as opposed to being guaranteed by the full faith and credit of
the jurisdiction. Because interest rates affect the interest payment and thus the annualized
capital cost of the project, it is important that the interest rate used on
Worksheet B
reflects the debt instrument (i.e. municipal bond, commercial bank loan, state revolving
fund loan, or other instrument) likely to be used by the municipality.
The calculation of total annualized cost of the project is presented in
Worksheet B.
First, capital costs are summed and the portion of costs to be paid for with grant monies
are deducted, as these costs will not need to be financed. Next, the annualization factor
is calculated using the formula supplied on
Worksheet B,
or the annualization factor is
found in Appendix B. Annualized capital cost is then calculated by multiplying the total
capital costs to be financed by the annualization factor.
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Next, annual operating and maintenance costs are summed, and the total is added to
the annualized capital cost. These costs should include the costs of monitoring,
inspection, permitting fees, waste disposal charges, repair, administration, replacement,
and any other recurring costs. All recurring costs should be stated in terms of dollars per
year. The sum of the annualized capital cost and total annual operating and maintenance
costs is the total annual cost of the project. In the next section, the annualized costs paid
by households in the community are calculated.
2.2 Calculate
Total Annualized Pollution Control Costs Per Household
In order to assess the burden that total pollution control costs are expected to have on
households, an average annualized pollution control cost per household should be
calculated for all households in the community that would bear project costs. In order to
evaluate substantial impacts, therefore, the analysis must establish which households will
actually pay for pollution control as well as what proportion of the costs will be borne by
households. These apportioned project costs are then added to existing pollution control
costs paid by households.
It is important to first define the affected community. The "community" is the
governmental jurisdiction responsible for paying compliance costs. In practice, pollution
control projects may serve several communities or just portions of a community. In the
case of a sewage agency serving several communities, once project costs are allocated to
each community served, the economic analysis is conducted on a community by
community basis. In the case of a community in which only a portion of the community
is served, the affected community is defined as those who will pay the compliance costs.
In such cases, it may be difficult to obtain socioeconomic data for just part of the
community and data for the entire community may be used instead. The area that is
affected may not be the same as the area that is paying, therefore it may be appropriate
to evaluate widespread impacts, described in Chapter 4, over a community that is defined
differently than the paying community.
If project costs were estimated for some prior year, these costs should be adjusted
upward to reflect current year prices using the average annual national Consumer Price
Index (CPI) inflation rate for the period. The CPI inflation rate is available from the
Bureau of Labor Statistics. An additional source reporting the CPI inflation rate is the
CPI Detailed Report,
which is published monthly by the U.S. Department of Labor,
Bureau of Labor Statistics.
The ratio of the current CPI to the CPI for the year of the cost estimates indicates how
much costs have increased over the period. This ratio can be applied to the cost estimates
to "bring them up to current year costs." Likewise, there are engineering cost indices that
can be used for this purpose.
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If project costs are not distributed simply according to wastewater flow or tax
revenues, then consideration should be given to separately analyzing the impacts on users
who pay a disproportionate share of the costs. This situation can arise, for example,
where industrial dischargers to a sewer system are assessed pollutant surcharges to pay
for their share of the cost of advanced treatment necessitated by the presence of their
pollutants. Remaining costs would then be split among households according to
wastewater flow or tax revenues, whichever is appropriate. The total amount of the
pollution control project to be recouped by surcharges should, therefore, be removed from
the total project cost before costs are allocated according to wastewater flow or tax
revenues.
In calculating the total annual cost of pollution control per household, current costs of
pollution control must be considered along with the projected annual costs of the
proposed pollution control project. The existing cost per household usually can be
obtained from the most recent municipal records. For example, it can be found in the
sewer enterprise fund accounts for communities that maintain a separate enterprise fund.
It is not necessary, in such cases, to sum all the cost components. Instead, use the most
recent operating revenues, divided by the number of households served. In cases where
the community does not maintain a separate enterprise fund for sewers, the cost elements
can be summed from the consolidated statement for the community. If the portion of
proposed project costs that households are expected to pay is known or is expected to
remain unchanged, then use
Worksheet C
to calculate the total annual cost of pollution
control per household. If the portion paid by households is based on flow, then should
refer to
Worksheet C: Option
A
as well.
The cost per household as a percent of median household income is used in Section
2.3 as a screener to quickly identify those communities that clearly will not face
substantial impacts due to pollution control. For guidance in estimating impacts on non-
household users (e.g., industrial, commercial), refer to Chapter 3.
2.3?
Calculate and Evaluate The Municipal Preliminary Screener Value
Whether or not the community is expected to incur "substantial" economic impacts due
to the pollution control project is determined by jointly considering the results of two
tests. The first test is a "screener" to establish whether the community can clearly pay for
the project without incurring any substantial impacts. The Municipal Preliminary
Screener estimates the total annual pollution control costs per household (existing costs
plus those attributable to the proposed project) as a percentage of median household
income. The screener is written as follows:
Municipal Preliminary Screener = Average Total Pollution Control Cost per Household
Median Household Income
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Median household income information for many municipalities is available from the
1990 Census of Population. If median household income is not available for the current
year, it should be estimated for the current year by using the CPI inflation rate for the
period between the year that median household income is available and the current year.
To calculate the inflation rate over the relevant period, use the "percent change from the
previous annual average" (annual inflation rate) presented in the
CPI Detailed Report.
For example, if the current year is 1993, 1990 is the most recent year that median
household income is available, and the percentage changes for the 1990, 1991, and 1992
annual averages respectively are: 5.2, 4.1 and 2.9, the adjustment factor equals:
Adjustment Factor = 1.052 * 1.041 * 1.029 = 1.13
Adjusted Median Household Income =
Median frousehold Income * Adjustment Factor
Depending on the results of the screener, the community is expected to incur little,
mid-range, or large economic impacts due to the proposed project (see
Worksheet D).
If the total annual cost per household (existing annual cost per household plus the
incremental cost related to the proposed project) is less than 1.0 percent of median
household income, it is assumed that the project is not expected to impose a substantial
economic hardship on households. The screener is therefore set at 1.0 percent of median
household income. Communities with screener results of less than 1.0 but still fairly close
to 1.0, however, may still want to proceed to the Secondary Test.
Communities are expected to incur mid-range impacts when the ratio of total annual
compliance costs to median household income is between 1.0 and 2.0 percent. If the
average annual cost per household exceeds 2.0 percent of median household income, then
the project may place an unreasonable financial burden on many of the households within
the community. In either case, communities move on to the Secondary affordability Test
to demonstrate substantial impacts. For example, assume that Community XYZ has a
screener of 2.3 percent. Although it appears that the community faces large impacts,
substantial impacts have not necessarily been demonstrated and the community must
proceed to the next step and apply the Secondary Test. Dischargers with screener values
well below 1.0 percent are assumed to be able to pay for pollution control without
incurring any substantial economic impacts and are required to meet existing water
quality standards. They do not need to proceed to the Secondary Test (see Figure 2-1).
2.4. Apply Secondary Test
The Secondary Test is designed to build upon the characterization of the financial
burden identified in the Municipal Preliminary Screener. The Secondary Test indicates
the community's ability to obtain financing and describes the socioeconomic health of the
Economic Guidance for Water Quality Standards
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community. Indicators describe precompliance debt, socioeconomic, and financial
management conditions in the community. Using these indicators and the scoring system
described below, the impact of the cost of pollution control is estimated. Specifically,
applicants are required to present the following six indicators for the community:
Debt Indicators
•
Bond Rating (if available) - a measure of credit worthiness of the community;
Overall Net Debt as a Percent of Full Market Value of Taxable Property - a
measure of debt burden on residents within the community;
Socioeconomic Indicators
• Unemployment Rate - a measure of the general economic health of the
community;
•
Median Household Income - a measure of the wealth of the community;
Financial Management Indicators
•
Property Tax Revenue as a Percent of Full Market Value of Taxable Property - a
measure of the funding capacity available to support debt based on the wealth of
the community; and
•
Property Tax Collection Rate - a measure of how well the local government is
administered.
A more detailed description of the six indicators, as well as alternative indicators for
states with property tax limitations, are presented below. Table 2-1 summarizes the
indicators and what is considered to be a strong, mid-range, or weak rating.
Debt Indicators
Bond Rating
Current ratings for the community summarize a bond rating agency's assessment of a
community's credit capacity. The ratings generally reflect current financial conditions.
If security enhancements like bond insurance have been used for the bond issue, however,
the bond rating on a particular issue may be higher than local conditions justify. Only
ratings for uninsured bonds, therefore, should be used.
Many small and medium sized communities have not used debt financing for projects
Economic Guidance for Water Quality Standards
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2-8
and, as a result, have no bond rating. The absence of a bond rating does not indicate
strong or weak financial health. When a bond rating is not available, this indicator should
not be included in the analysis of substantial impacts. When available, the rating for the
most recent general obligation bond should be used. If a general obligation bond has not
been issued recently, the most recent rating for a sewer bond should be used. Recent
bond ratings are included in municipal bond reports from rating agencies (e.g.,
Moody's
Bond Record, Standard and Poor's Corporation).
Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt is debt repaid by property taxes. It excludes debt that is repaid by
special user fees (e.g. revenue debt). This indicator provides a measure of debt burden
on residents within the community and measures the ability of local government
jurisdictions to issue additional debt. It includes the debt issued directly by the local
jurisdiction and debt of overlapping entities, such as school districts. It compares the
level of debt owed by the community with the full market value of real property used to
support that debt and serves as a measure of the community's wealth.
Debt information is available from the financial statement of each community. In most
cases, recent financial statements are on file with the State (e.g., State Auditor's Office).
Overlapping debt may or may not be provided in a community's financial statements. The
property assessment data (assessment ratio) should be readily available through the
community or the State Assessor's Office. The boundary of the affected community
generally conforms to one or more community boundaries. Therefore, prorating
community data to reflect specific service area boundaries is not normally necessary for
evaluating the general financial capability of the affected community.
Socioeconomic Indicators
Unemployment Rate
The unemployment rate is defined as the percent of a community's labor force
currently unemployed. If the unemployment rate in the service area is not available, the
encompassing county's rate may be used as a substitute. The Bureau of Labor Statistics
(BLS) maintains current unemployment rate figures for municipalities and counties.
National unemployment data is also needed for comparison purposes. This information
can be obtained from the BLS are available by request at (202) 606-6392. A community's
unemployment rate is considered to be below the national average if it is more than 1%
below the national average. Similarly, a community's unemployment rate is considered
to be above the national average if it is more than 1% above the national unemployment
rate. If the community's employment rate is equal to the national average unemployment
rate, plus or minus 1%, then the community's unemployment rate is assessed as being
equal to the national rate.
Economic Guidance for Water Quality Standards ?
2-9
Median Household Income
Median household income (MHI) is defined as the median of the total income dollars
received per household during a calendar year in a given area. It serves as an overall
indicator of community spending capacity. Median household income, which was also
used in the screener process, is available from the 1990 Census or through state data
centers. The state value is also needed for comparison purposes. If a community's median
household income is more than 10% below the state's median household income, then it
is considered to be below the state's median. If a community's median household income
is more than 10% above the state's median, then it is considered to be above the state
median value. If, however, the community's median household income is equal to the
state median, plus or minus 10%, then the community's median household income is
assessed as being equal to the state's median household income.
Financial Management Indicators
Property Tax Revenues as a Percent of Full Market Value of Taxable Property
This indicator can be referred to as the "property tax burden" since it indicates the
funding capacity to support new expenditures, based on the wealth of the community.
Some states and local jurisdictions may have established legal limits on the amount of
property taxes that can be levied as a percent of full market or assessed value of real
property. Property assessment data should be readily available through the community
or the State Assessor's Office. Property tax revenues are available in communities' annual
financial statements.
Property Tax Revenue Collection Rate
This rate is an indicator of the efficiency of the tax collection system and a measure
of how well the local government is administered. It compares the actual amount
collected from property taxes to the amount levied. Property taxes levied can be
computed by multiplying the assessed value of real property by the property tax rate, both
of which are available from a community's financial statements or the State Assessor's
Office.
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2-10
Alternative Indicators for States with Property Tax Limitations
Two of the indicators may not be appropriate in states with statutory limits on
property tax collections and/or rates, or where data on full-market value of taxable
property are not available.
The first of these indicators -- The Overall Net Debt as Percent of Full Market Value
of Taxable Property -- can be replaced with:
Overall Net Debt Per Capita
In calculating the Secondary Score, the following ratings for Overall Net Debt Per
Capita should be used:
Greater than $3,000
=
weak
= 1
$1,000 - $3,000
=
mid-range
=
2
Less than $1,000
=
strong
=
3
The second of these indicators -- Property Tax Revenues as a Percent of Full-
Market Value of Taxable Property -- has no appropriate substitute in cases where
property taxes are at their limit or where full-market value of taxable property
cannot be estimated. In such cases, this indicator should be dropped and the other
five factors are assigned equal weights.
These six indicators are then used to form a composite assessment of the
community's economic health and the financial impact of the required project.
Worksheet E
can be used to record each indicator. For each of the six indicators, the
community is rated as weak, mid-range, or strong, based on the thresholds presented in
Table 2-1. For example, if a community's median household income equals $15,000 and
the state's median household income equals $17,000, the community would be considered
weak on this measure. If, however, the community's median household income were
$19,000, then the community would be considered strong on this measure.
Next, a Secondary Score is calculated for the community by weighting each
indicator equally and assigning a value of 1 to each indicator judged to be weak, a 2 to
each indicator judged to be mid-range, and a 3 to each strong indicator. A cumulative
assessment score is arrived at by summing the individual scores and dividing by the
number of factors used.
Worksheet
F,provided at the end of Section 2.4, guides the
applicant through this calculation. The cumulative assessment score is evaluated as
follows:
• less
than 1.5 is considered weak
Economic Guidance for Water Quality Standards
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2-11
•
between 1.5 and 2.5 is considered mid-range
•
greater than 2.5 is considered strong
For example, consider a Community XYZ, which has:
•
a weak ratio of overall net debt to full market value of taxable
property = 1,
•
a weak bond rating = 1,
•
a mid-range unemployment rate = 2,
•
a mid-range median household income = 2,
•
a strong property tax collection rate = 3, and
•
a strong ratio of property tax revenues to full market value of
taxable property = 3.
K1+1+2+2+3+3)/61=2
The Secondary Score for Community XYZ, equal to 2, falls into the mid-range category.
If the applicant is not able to develop one or more of the six indicators, they must
provide an explanation as to why the indicator is not appropriate or not available. Since
the point of the analysis is to measure the overall burden to the community, the debt and
socioeconomic indicators are assumed to be better measures of burden than the financial
management indicators. Consequently, if one of the debt or socioeconomic indicators is
not available, the State/discharger should average the two financial management
indicators and use this averaged value as a single indicator with the remaining indicators.
This averaging is necessary so that undue weight is not given to the financial management
indicators.
2.5 Assess Where the Community Falls in The Substantial Impacts Matrix
The results of the two tests are considered jointly in determining whether the
community is expected to incur substantial impacts due to the proposed pollution control
project.
In the following matrix, the cumulative assessment score for the community is
combined with the estimated household burden. The combination of factors establishes
whether impacts can be expected to be substantial. In the example of Community XYZ,
their screener equaled 2.3 percent and their cumulative assessment score equaled 2. They
are, therefore, in the middle cell in the far right column and thus have a rating of "X" in
the matrix presented below (Table 2-2).
In the matrix, "X" indicates that the impact is likely to be substantial. The closer
the community is to the upper right hand corner of the matrix, the greater the impact.
Economic Guidance for Water Quality Standards
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2-12
Similarly, V" indicates that the impact is not likely to be substantial. The closer to the
lower left hand corner of the matrix, the smaller the impact. Finally, the "T indicates that
the impact is unclear.
For communities that fall into the "?" category, if the results of both the Secondary
Test and the Municipal Preliminary Screener are borderline, then the community should
move into the category closest to it. Take, for example, a community that falls into the
center box, with a cumulative assessment score of between 1.5 and 2.5 and a percent of
median household income (MHI) between 1.0 and 2.0. If the cumulative score was 1.6
and the percent of MHI was 1.8, then the community should be considered to fall into one
of the adjacent "X" categories. If results are not borderline, other factors such as the
impact on low or fixed income households, the presence of a failing local industry, and
other projects the community would have to forgo in order to comply with water quality
standards should be considered. Relevant additional information might include
information collected from interviews with municipal financial officers, special reports
on industry trends that may affect local employers, and specific financial and economic
indicators.. The State/discharger should provide any additional information they feel is
relevant. This additional information will be critical where the matrix results are not
conclusive.
EPA will interpret a "1" rating to mean that the community is not expected to
incur substantial impacts as a result of the pollution control project. Communities falling
into this category will be required to meet existing water quality standards. If the
applicant State/discharger disagrees with the results of the Secondary Test, they may
present additional information to the Regional EPA Administrator documenting the
unique circumstances of the community. Since the impacts are not substantial, there is
no need to demonstrate widespread impacts. EPA will interpret a "X" rating to mean that
the community will incur substantial impacts. Before a water quality standard is modified
or changed, however, communities falling into this category must demonstrate that
impacts are also widespread. For those communities rated "?", EPA's interpretation will
rely on the additional information presented by the State/discharger. It should be noted
that, in this case, there is no "correct" set of information. It will be up to the applicant to
collect whatever information they feel is relevant in describing the unique circumstances
affecting their community. For example, the matrix may suggest that the community's
financial condition is strong. At the same time, however, a local industry may be failing.
In such a case, it is important to determine the importance of that industry to the local
economy (as measured by its contribution to area employment, payroll, and tax revenues)
and whether the industry itself would be affected by the project. Communities falling into
either the "X" or the "?" category should proceed to Chapter 4 to determine whether the
impacts are also expected to be widespread.
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2-13
Non-
Residential
Allocate Total Pollution
Costs
C
ontrol Costs
Residential, Industrial,
Commercial, Others
.01(
SecondaryAnalysis`'
No Substantial
Impacts
Determine whether
municipality will incur
substantial impacts based on
the cost of pollution control
and the characterization of
municipality's current
financial and socioeconomic
well-being
117.tiniate Total
Pollution
ontrol
Costs
Capital Cost & Annual
O&M Cost of Existing
and Proposed Pollution
Controls
Annualize Total Pollution
Control
Costs
Annual Cost of Existing
and Proposed Pollution
Reductions
Residentials Costs
Screening Process
Is it clear that municipality
will not face substantial
economic impacts?
No
Substantial Impacts
Proceed to analysis of
widespread impacts in
Chapter 4
Yes
)■■
Figure 2-1:
Measuring Substantial Impacts
(Public Entities)
Request Rejected
Request Rejected
Use guidance in
Chapter 3 if
non-residential costs
are anticipated to
be substantial
Table 2-1
Secondary Indicators
Secondary Indicators
Indicator
Weak
Mid-Range
Strong
Bond Rating
Below
BBB (S&P)
BBB (S&P)
Above BBB (S&P)
Below Baa
Baa (Moody's)
or Baa (Moody's)
(Moody's)
Overall Net Debt as
Percent of Full
Above 5%
2%-5%
Below 2%
Market Value of
Taxable Property
Unemployment
More than 1%
above National
National Average
More than 1%
below National
Average
Average
Median Household
More than 10%
State Median
More than 10%
Income
below State Median
above State
Median
Property Tax
Revenues as a
Percent of Full
Above 4%
2%-4%
Below 2%
Market Value of
Taxable Property
Property Tax
Collection Rate
<
94%
94% - 98%
>
98%
Table 2-2
Assessment of Substantial Impacts Matrix
Secondary
Score
Municipal Preliminary Screener
Less than 1.0 Percent
Between 1.0 and
2.0 Percent
Greater than
2.0 Percent
Less than 1.5
X
Between 1.5 and
2.5
Greater than 2.5
•
3. EVALUATING SUBSTANTIAL IMPACTS: PRIVATE-SECTOR ENTITIES
For facilities owned by the private sector, measuring substantial impacts requires
estimating the financial impacts on the entities that will pay for the pollution controls. For
example, compliance with water quality standards may require that a particular facility,
perhaps a factory, install additional wastewater treatment. After estimating the cost of the
additional wastewater treatment, the next step is to measure the ability of the factory to
pay for the additional treatment. If the analysis shows that the entity will not incur any
substantial impacts due to the cost of pollution control (e.g., there will be no significant
changes in the factory's level of operations nor profit), then the analysis is completed. If,
on the other hand, the analysis shows that there will be substantial impacts on the entity,
then the resulting impacts on the surrounding community must be considered (e.g. the
impact of lost employment on the community's employment base, or the impact on the
overall economy of the community). Impacts to the surrounding community, referred to
as widespread impacts, are addressed in Chapter 4.
The following sections describe the steps involved in evaluating whether impacts will
be substantial. These steps are outlined in Figure 3-1. This chapter explains how to adapt
each of the steps to a range of data sources and provides worksheets to assist the
discharger in working through each step. The analytic approach presented here can be
used for a variety of private-sector entities, including commercial, industrial, residential
and recreational land uses, and for point and nonpoint sources of pollution. The guidance
provided in this chapter, however, is not meant to be exhaustive. The State and/or EPA
may require additional information or tests in order to evaluate whether substantial and
widespread impacts will
occur. In addition, the applicant should feel free to include any additional information
they feel is relevant. The steps described in further detail in the rest of the chapter are:
•
Verify Project. Costs and Calculate the Annual Cost of the Pollution Control
Project -
This section discusses factors that should be considered when verifying
that the proposed pollution control project is the most appropriate solution to the
pollution problem. It also describes the type of general information that should
be provided about the proposed project. In addition, it discusses how to annualize
capital costs of the project and calculate total annual costs of the pollution control
project.
•
Financial Impact Analysis -
This section describes the types of financial tests
that should be applied to measure the impact on the applicant. The primary
measure is profitability. The secondary measures include indicators of liquidity,
solvency, and leverage.
Most of this chapter is written in terms of evaluating whether there will be a substantial
impact on a particular discharger. This type of analysis is necessary whenever there is a
Economic Guidance for Water Quality Standards
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3-1
request for a variance. These same tests, however, can be used to analyze the impact on
a group of dischargers, as might be the case in a use attainability analysis. For example,
there may be several facilities that would confront similar requirements to improve their
waste water discharges in order to meet a higher water quality standard under
consideration. The same primary and secondary tests would be used to measure
substantial impacts in the dischargers. The difference would be, however, when the
analysis moved to measuring widespread impacts. Here the impacts on the total group
of dischargers (or all dischargers in the relevant reach) would be used to measure whether
or not the impacts are considered widespread.
3.1 Verify Project Costs and Calculate The Annual Cost of the Pollution Control
Project
Before the impact analysis can be performed, the project costs should be verified and
the annual costs calculated.
3.1.a Verify Project Costs
The first step in the financial impact analysis is an evaluation of the proposed pollution
control project. Private entities should consider a broad range of discharge management
options including pollution prevention, end-of-pipe treatment, and upgrades or additions
to existing treatment. Specific types of pollution prevention activities to be considered
include:
•
Change in Raw Materials;
•
Substitute Process Chemicals;
•
Change in Process;
•
Water Recycling and Reuse; and
•
Pretreatment Requirements.
Whatever the approach, the discharger must demonstrate that the proposed project is the
most appropriate means of meeting water quality standards and must document project
cost estimates. If at least one of the treatment alternatives that allows the applicant to
meet water quality standards would not impose substantial impacts, then they are not able
to demonstrate substantial impacts and should not proceed with the analysis presented in
the remainder of this workbook.
Since the most cost-effective approach to meeting water quality standards should be
considered, submissions should list their assumptions about excess capacity, future
facility expansion, and alternative technologies. The most accurate estimate of project
costs may be available from the discharger's design engineers. These estimates can be
compared to estimates available from EPA.
Economic Guidance for Water Quality Standards
?
3-2
3.1.b Calculate the Annual Costs of the Pollution Control Project
In order to perform the economic tests, the cost of the pollution control needed to
comply with the Water Quality Standards must be calculated and converted to an
annualized cost. Initially, pollution control costs are expressed in two parts: (1) the
capital costs of purchasing and installing the equipment and (2) the yearly operating and
maintenance (O&M) costs. Both the capital and O&M cost estimates should be provided
by the discharger requesting relief To assess whether the costs represent the most cost
effective means of meeting the water quality standards, they should be compared to costs
at comparable entities that meet the same standards. For dischargers covered by effluent
guidelines, compliance costs have been calculated by the Agency and are available for
comparative purposes. (See Appendix A.) Costs for nonpoint sources are less readily
available.
Instead of assuming that the total capital costs will be paid in the first year of
operation, these costs are usually annualized. By assuming that costs are spread out over
several years, annualization calculates the amount that will be paid each year, including
the financing costs. In order to allow for comparisons across cases, the analysis should
assume that the applicant will borrow the capital for the pollution control equipment and
repay the loan in even annual installments over a 10 year period. The assumption of ten
years is based on the likely life of the equipment. The assumption of even annual
installments is made for convenience. The interest rate on the loan should be equivalent
to the rate the applicant pays when it borrows money. If it borrows from the parent firm,
the interest charge should be equivalent to the interest charged by the parent firm. If the
parent firm would lend the entity money without interest, then the interest payments
should be equivalent to the interest rate the applicant would pay to borrow from a bank
or on its line of credit. If it is impossible to determine the appropriate interest rate, the
analysis should assume an interest rate equal to the prime rate plus one percent.
The financial tests discussed below compare the costs of compliance to other costs and
revenues of the applicant. Compliance costs and other costs and revenues must, therefore,
be comparable. In other words, they should be calculated for the same year. If
compliance costs are estimated assuming construction several years in the future, they
should be deflated back to the year of the financial data. This can be done by assuming
that the inflation rate over the last five years will continue into the future. See discussion
in Section 2.2, and Appendix A for references to inflation/deflation indices. Likewise,
if costs were estimated for an earlier year, they should be inflated to current year costs.
The Annualized Cost of Pollution Control can be calculated using
Worksheet
G.
3.2 Financial
Impact Analysis
The purpose of the financial impact analysis is to assess the extent to which existing
or planned activities and/or employment will be reduced as a result of meeting the water
Economic Guidance for Water Quality Standards
?
3-3
quality standards. The tests described in this Workbook are not designed to determine the
exact impact of pollution control costs on an entity. They merely provide indicators of
whether pollution control costs would result in a substantial impact.
Four general categories of financial tests are presented in the following sections. As
indicated below, the four categories are divided into a primary measure of financial
impacts and three secondary measures of financial impacts:
Primary Measure
•
Profit -- how much will profits decline due to pollution control expenditures?
Secondary Measures
•
Liquidity -- how easily can an entity pay its short-term bills?
•
Solvency -- how easily can an entity pay its fixed and long-term bills?
•
Leverage -- how much money can the entity borrow?
Profit and solvency ratios are calculated both with and without the additional compliance
costs (taking into consideration the entity's ability, if any, to increase its prices to cover
part or all of the costs). Comparing these ratios to each other and to industry benchmarks
provides a measure of the impact on the entity.
For all of the tests, it is important to look beyond the individual test results and
evaluate the total situation of the entity. While each test addresses a single aspect of
financial health, the results of the four tests should be considered jointly to obtain an
overall picture of the economic health of the applicant and the impact of the water quality
standards requirement on the applicant's health. The results should be compared with the
ratios for other entities in the same industry or activity. In addition, the ratios and tests
should be calculated for several years of operations. This will allow long-term trends to
be differentiated from short-term conditions.
The structure, size, and financial health of the parent firm should also be considered.
An important factor, which may not be reflected in the preceding measures, is the value
of an applicant's product or operations to its parent firm. For example, if a facility
produces an important input used by other facilities owned by the firm, the firm may be
likely to support the facility even if it appears to have only borderline profitability. The
results of these tests and other relevant factors, can be used to make a judgement as to the
likely actions of the applicant (e.g. shut down entirely, close one or more product/service
lines, shift to other products/services, not proceed with an expansion, continue operations
at current levels) faced with the pollution control investment.
Economic Guidance for Water Quality Standards
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3-4
Each type of test measures a different aspect of a discharger's financial health. The
primary measure evaluates the extent to which an applicant's profit rate will change, and
compares the profit level to typical profits in that industry. The secondary measures
provide additional information about specific impacts that the discharger would bear if
required to meet water quality standards. In some cases, the tests might indicate that the
discharger would remain profitable (Profit) after investing in pollution control, but would
have trouble borrowing the needed capital (Leverage). This situation would indicate a
need to work with the discharger in choosing the technology and schedule used to meet
the regulations. In other cases the tests might show that the discharger has a short-term
problem with meeting the financial obligation imposed by the standards, but could handle
it in the long-run (Liquidity vs. Solvency). This is important information when
considering whether or not to grant a variance so as to allow more time for compliance.
Since it is the discharger that will have to pay for the wastewater treatment, the
financial tests presented in this Workbook use data about the discharger's operations. This
data, however, may not be readily available for the discharger itself, and if available, the
discharger may consider the information to be confidential. It is EPA policy, however,
that applications based on economic considerations must be accompanied by data that
demonstrate the impacts.
If the information is not available at the discharger level, it can be estimated from the
balance sheets or income statements of the firm that owns or controls the discharger.
Estimates can be made in a variety of ways. One commonly used approach is to compare
the discharger's sales or revenues to the firm's sales or revenues and apply this ratio to
other financial factors. For example, if the discharger is responsible for 20 percent of its
firm's revenues, than it is assigned 20 percent of the firm's current assets and current
liabilities. In some cases, particularly with manufacturing facilities, the discharger may
not sell its production directly, but may ship it to another facility owned by the same firm.
In this case, the discharger's share of sales should be calculated by determining the market
value of the goods produced by the discharger, using market prices for the year being
analyzed.
The primary and secondary measures are described below, along with an example of
specific tests to be used. While there are several ratios that could be used for each test,
to simplify the presentation only one ratio per test is described in detail. All four primary
and secondary measures, however, should be used in the analysis.
In most cases, interpreting the results requires comparisons with typical values for the
industry. Among the sources that provide comparative information are: Robert Morris
Associates'
Annual Statement Studies,M oody's Industrial Manual,
Dun and Bradstreet's
Dun's Industry Norms,
and Standard & Poor's
Industry Surveys.
The
Annual Statement
Studies, Dun's Industry Norms ,
and Standard
&
Poor's
Industry Surveys
provide
composite statistics for firms grouped into various manufacturing and service industries.
Economic Guidance for Water Quality Standards
?
3-5
The
Moody's Industrial Manual
provides detailed financial information on individual
firms that can be used for comparison purposes. Although benchmarks are available for
most financial tests, EPA emphasizes that the discharger should consider these
benchmarks as indicators of financial health and not as definitive measures.
3.2.a Primary
Measure: Profitability
The Profit Test measures what will happen to the discharger's earnings if additional
pollution control is required. If the discharger is making a profit now but would lose
money with the pollution control, then the possibility of a total shutdown or the closing
of a production line must be considered. Greatly reduced, but still positive, profits are
also of concern. Likewise in the case of a proposed facility or proposed expansion; if
estimated profits would drop considerably with pollution control, then the development
might not take place.
Two pieces of information are needed for the Profit Test. The first piece is the total
annual cost of the required pollution control from
Worksheet G.
The second piece is the
earnings information from the entity's income statement
(Worksheet H).
Profit Test -
Earnings Before Taxes
Revenues
The Profit Test should be calculated with and without the cost of pollution control. In
the former case, the annualized cost of pollution control (including O&M) is subtracted
from the discharger's earnings before taxes (revenues minus costs excluding income
taxes) for the most recently completed fiscal year. Profits before pollution control
investments have been made should be examined to determine whether the discharger was
already in trouble (either not profitable or profits far below industry norms) before
pollution control investments were made. If the discharger is already not profitable, it
may not claim that substantial impacts would occur due to compliance with water quality
standards.
The Profit Test can be calculated using
Worksheets H, and
I.
Earnings before taxes
(EBT) should be calculated for at least the three previous fiscal years in order to identify
any trends or atypical years. Earnings with pollution control costs should be calculated
for the latest year with complete financial information. Arguably, as long as the applicant
maintains positive earnings, it can afford to pay for the pollution control. Over the long
run, however, the owner is likely to shift operations to more profitable facilities, if
possible. The workbook, therefore, guides the applicant through a more thorough
analysis, which compares the EBT, with and without pollution control, to total revenues
to yield a profit rate and change in the profit rate due to pollution control. (Use
Worksheet I.)
These profit rates should be compared to those for facilities in similar
Economic Guidance for Water Quality Standards
?
3-6
lines of business. As with other tests, it may not be possible to compare the discharger's
rate directly with the rates of similar facilities. In such cases the discharger's profit rate
should be compared with that of firms that concentrate in similar businesses, using data
in
Moody's Industrial Manual, Dun & Bradstreet's Industry Norms and Key Business
Ratios, Standard & Poor's Industry Surveys,
or Robert Morris's
Annual Statement Studies.
If the discharger's ratio compares favorably with the median or upper quartile ratio for
similar businesses, the discharger is considered to be financially healthy. A typical
income statement, like those found in
Moody's Industrial Manual,
has been included in
Exhibit 3-1. The appropriate data have been underlined.
Although complicated, the analysis should consider whether the discharger or firm
would be able to raise its prices in order to cover some or all of the pollution control costs.
In such a case, revenues increase and earnings fall by an amount less than the costs of
pollution control. The degree to which the discharger is able to raise prices is difficult to
predict, and depends on many factors. Considerations should include the level of
competition in the industry, the likelihood of competitors' facilities facing similar project
costs, and the willingness of consumers to pay more for the product.
3.2.b Secondary Measures
The following secondary measures provide additional important information about the
financial health of the discharger. All primary and secondary measures will be included
in the analysis. It is not sufficient to conclude that the discharger will be unprofitable
after pollution control investments. In addition, the applicant should feel free to include
any additional information about the discharger's financial health that they feel is relevant.
Liquidity
Liquidity is a measure of how easily a discharger can pay its short-term bills. One
measure of liquidity is the Current Ratio, which compares current assets with current
liabilities. Current assets include cash and other assets that are or could reasonably be
converted into cash during the current year. The following items are considered to be
current assets:
•
Inventories--
finished products, products in the process of being manufactured,
raw materials, supplies, fuels, etc.;
•
Prepaid expenses --
expenses paid in advance of use such as prepaid rent;
•
Short-term investments --
savings accounts, certificates of deposit;
•
Accounts receivable;
Economic Guidance for Water Quality Standards
?
3-7
•
Marketable securities;
and
•
Cash.
Likewise, current liabilities are items that must be paid within the current year. The
following items are considered to be current liabilities:
•
Accounts payable --
purchases of goods for resale and services received in the
normal course of business;
Wages payable;
•
Short-term notes payable --
any debt initially incurred and due in the current
year;
Accrued expenses --
expenses that have been incurred but have not yet been paid
at the end of the accounting period;
•
Taxes; and
•
Current portion of any long-term debt.
A more stringent test is the Quick Ratio, also known as the Acid Test, which compares
current assets without inventories to current liabilities. It does not include inventories
since they may take time to convert to cash and may be valued on the discharger's books
for more than they could be sold.
The Current Ratio should be calculated for each of the last three full fiscal years for
which there are data. Comparing ratios for three years will identify any trends that are
developing and will ensure that the most recent year is not an unusual year that might
distort the results of the analysis.
The Current Ratio is calculated by dividing current assets by current liabilities.
Current Ratio - Current Assets
Current Liabilities
The Current Ratio can be calculated using
Worksheet J.
The general rule is that if the
Current Ratio is greater than 2, the entity should be able to cover its short-term
obligations. Frequently, lenders require this level of liquidity as a prerequisite for
lending. While a Current Ratio of greater than 2 indicates that the entity can probably
cover its short-term obligations, the impact of a major capital investment such as the
Economic Guidance for Water Quality Standards
?
3-8
pollution control project must be judged in conjunction with the other three financial tests
described in this guidance.
In addition, this rule (Current Ratio > 2) may not be appropriate for all types of private
entities covered by Water Quality Standards. The Current Ratio of the discharger in
question should be compared with ratios for other dischargers in the same line of
business. It may not be possible, however, to compare the discharger's ratio directly with
other similar dischargers because this information frequently is unavailable at the facility
level or is considered confidential. In cases where a direct comparison cannot be made,
the discharger's Current Ratio should be compared with the ratio for firms that concentrate
in similar businesses. If the discharger's ratio compares favorably with the median or
upper quartile ratio for similar businesses, it should be able to cover it's short term
obligations. Among the sources that provide comparison information are: Robert Morris
Associates'
Annual Statement Studies, Moody's Industrial Manual,
and Dun and
Brad street's
Dun's Industry Norms.
The
Annual Statement Studies
and
Dun's Industry
Norms
provide composite statistics for firms grouped by different manufacturing and
service industries. The
Moody's Industrial Manual
provides detailed financial
information on individual firms. Pages from both of these sources are displayed in
Exhibits 3-2 and 3-3, with the appropriate data indicated.
Solvency
Solvency is a measure of an entity's ability to meet its fixed and long-term obligations.
These obligations are bills and debts that are owed on a regular basis for periods longer
than one year. Solvency tests are commonly used to predict financial problems that could
lead to bankruptcy within the next few years. Since any single year of data can easily be
distorted by unusually high or low net income or by the timing of debt, solvency tests
must be considered over at least three years of data in order to reveal long-term trends.
As with liquidity, there are several possible tests for solvency. One commonly used
solvency test (called Times Interest Earned) compares income before interest and taxes
to interest expenses. Another solvency test, the Beaver's Ratio, compares cash flow to
total debt. This test has been shown to be a good indicator of the likelihood of
bankruptcy.
Beaver's Ratio -
Cash Flow
Total Debt
The Beaver's Ratio can be calculated using
Worksheet K.
Cash Flow is a measure
of the cash the entity has available to it in a given year. Since depreciation is an
accounting cost -- a cost that does not use any currently available revenues -- it is added
back to reported net income after taxes to get cash flow. Total debt is equal to the current
Economic Guidance for Water Quality Standards
?
3-9
debt for the current year plus the long term debt, since current debt includes that part of
long-term debt that is due in the current year.
If the Beaver's Ratio is greater than 0.20 the discharger is considered to be solvent (i.e.,
can pay its long-term debts). If the ratio is less than 0.15 the discharger may be insolvent
(i.e., go bankrupt). If the ratio is between 0.15 and 0.20, then future solvency is uncertain.
The discharger's Beaver's Ratio should be compared with the ratios of similar dischargers.
However, as with other ratios, it may not be possible to compare the discharger's ratio
directly with other similar dischargers. In cases where a direct comparison cannot be
made, the discharger's
.
Beaver's Ratio should be compared with that offirms that
concentrate in similar businesses, using information from income accounts and balance
sheets in
Moody's Industrial Manual.
If the discharger's ratio compares favorably with
similar businesses, it should be able to meet its fixed and long term obligations. A typical
balance sheet and income statement have been included in Exhibits 3-4 (for calculating
total debt) and 3-5 (for calculating cash flow). The appropriate data from them has been
underlined.
Leverage
Leverage tests measure the extent to which a firm already has fixed financial
obligations and thus indicate how much more money a firm is capable of borrowing.
Firms that rely heavily on debt may find it difficult and expensive to borrow additional
funds. Most leverage tests compare equity to some measure of debt or fixed assets. The
Debt to Equity Ratio is the most commonly used method of measuring leverage. Unlike
the ratios discussed above, the debt to equity ratio cannot be easily calculated for a single
facility; it must be calculated for the firm, since it is usually the firm, not the facility, that
borrows money. The ratio measures how much the firm has borrowed (debt) relative to
the amount of capital which is owned by its stockholders (equity). Since values for the
Debt to Equity Ratio vary widely by the type of enterprise, the ratio should be compared
with the ratio for firms in similar lines of business. The ratio also should be calculated
with at least three years of data.
The Debt to Equity Ratio is equal to. Long-Term Liabilities (long-term debt such as
bonds, debentures, and bank debt, and all other noncurrent liabilities like deferred income
taxes) divided by Owners' Equity. Owner's Equity is the difference between total assets
and total liabilities, including contributed or paid in capital and retained earnings. For
publicly held firms, use Net Stockholders Equity (which is the equivalent of Total
Stockholder Equity minus any Treasury Stock).
Debt/Equity Ratio -
Long-Term Liabilities
Owners
/
Equity
Economic Guidance for Water Quality Standards
?
3-10
The Debt to Equity Ratio can be calculated using
Worksheet L.
Since there are no
generally accepted Debt/Equity Ratio values that apply to all types of economic activity,
the ratio should be compared with the ratio of firms in similar businesses. If the entity's
ratio compares favorably with the median or upper quartile ratio for similar businesses,
it should be able to borrow additional funds. These ratios can be calculated using data in
Robert Morris Associates'
Annual Statement Studies, Moody's Industrial Manual,
and Dun
& Bradstreet's
Dun's Industry Norms.
Pages from these sources have been included in
Exhibits 3-6 and 3-7, with the appropriate data indicated.
For entities with special sources of funding, leverage is not an appropriate measure of
their ability to raise capital. Examples are agriculture and affordable housing, where
special loan programs may be available. In these cases, an analysis of the probability that
the project would receive this money is appropriate.
3.3 Interpreting the Results
The financial analysis should be used to determine if there will be a substantial adverse
impact on the applicant. As indicated above, the Profit Test should be considered first.
The Profit Test measures what will happen to the discharger's earnings if additional
pollution control is required. If the discharger is making a profit now but would lose
money with the pollution control, then the possibility of a total shutdown or the closing
of a production line must be considered. Likewise in the case of a proposed facility; if it
would make money without the pollution control but would make much less or even lose
money with it, then the development might not take place. In either case, there is the
chance that employment will be lost and local purchases by the discharger reduced.
Whether or not these impacts will be considered widespread is addressed in Chapter 4.
There are several more complicated scenarios that all involve making a judgement as
to the likely impacts on the discharger, including questions of the timing of compliance.
For example, the Profit Test may indicate that the applicant will continue to maintain
profit levels typical for its industry after compliance, but the Debt/Equity Ratio may
indicate that they will have trouble raising the required capital through debt. This
problem may be solved by giving them more time to meet the regulations (a variance),
so that they can restructure their debt and/or find alternative sources of funds. In another
case, the applicant might argue that while they will still make money and be able to raise
the needed capital, they would alternatively spend those funds on an expansion which
would have resulted in increased employment and income for the community. This is a
more difficult situation to analyze, and will depend on judgments about the relative
importance of water pollution control versus economic growth. These issues are
discussed in more detail in Chapter 4.
Another possible scenario is that the discharger may shift to an alternative economic
activity (e.g., manufacture another product or produce a different crop). While the
Economic Guidance for Water Quality Standards
?
3-11
applicant will not have gone out of business, this shift may result in reduced profits,
employment, and purchases in the local community that must be considered. In each
case, it is important to take the entire picture presented by the four ratios into account in
judging whether or not the discharger will incur substantial impacts due to the cost of the
necessary pollution reductions.
Using the guidance presented in this chapter, applicants that feel they have
demonstrated substantial impacts should proceed to Chapter 4: Determination of
Widespread Impacts. If dischargers are not able to demonstrate substantial impacts, the
entity must meet existing standards. If a group of dischargers within the community will
experience the substantial impacts resulting from compliance with water quality
standards, these impacts should be considered jointly when assessing whether or not the
impacts will be widespread.
Economic Guidance for Water Quality Standards
?
3-12
Estimate Costs of
Pollution
Con
rot
Necessary
to
Meet \\ ate'
Quality Standards
Capital Cost, Annual
O&M Cost
Annualize Pollution
Control osts
Annual Cost of Proposed
Pollution
Reduction
Fin
ancial Impact
Analysis
No Substantial
Determine whether private
Impacts
entity will incur substantial
impacts based on primary
and secondary measures of
financial health
)11f Substantial Impacts
Proceed to analysis of
widespread impacts in
Chapter 4
Figure 3-1:
Measuring Substantial Impacts
(Private Entities)
Request Rejected
Economic Guidance for Water Quality Standards
Exhibit 3 - 1
XYZ,
INC.
CONSOLIDATED
STATEMENTS OF
INCOME AND
RETAINED EARNINGS
(DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988
1987
1986
Net sales
S42,389,957
$33,294,962
$30,730,768
Cost of sales
35,981,363
26,405,930
24,972,185
Gross profit
6,408,594
6,889,032
5,758,583
Selling, general and administrative expenses
3,957,771
3.876,206
3,824,226
Income from operations
2,450,823
3,012,826
1,934,357
Other income (deductions)
Interest income
441,891
347,613
362,295
Interest expense
(10,985)
(22,513)
(46,467)
Other investment income - net
134,690
Miscellaneous
55,066
48,660
93.654
Total other income (deductions) - net
485,972
373.760
544.172
Income before income taxes
2,936,795
3,386,586
2,478,529
Provision for income taxes
1,139,118
1,620,012
1,150,949
Net income
1,797,677
1,766,574
1,327,580
Retained earnings, beginning of year
1,157,528
1,726,292
1,983,007
Stock dividend
(2,610,888)
(1,952,645)
(1,365,590)
Cash dividend ($.11 per share, 1988; $.08 per share,
1987; $.06 per share, 1986)
(391,960)
(300,693)
(218,705)
Common stock acquired and retired
(2,591)
(82,000)
Retained earnings (deficit), end of year
$
(50,234)
$
1,157.528
$
1,726,292
Weighted average number of shares outstanding
3,593,048
3 630 652
3,637,798
Earnings per common share
$.50
$
49
$.36
See accompanying Notes to Financial Statements
INDEPENDENT
AUDITORS'
REPORT
To the Shareholders of XYZ, Inc.:
We have audited the consolidated balance sheets of XYZ, Inc. at September 30,
1988 and 1987, and the related consolidated statements of income and retained
earnings (deficit), and cash flows for each of the three years in the period ended
September 30, 1988. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures'
n the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present fairly, in
all material respects, the financial position of the companies at September 30, 1988
and 1987, and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1988 in conformity with generally accepted
accounting principles.
DELOITTE HASKINS & SELLS
Minneapolis, Minnesota
December 5, 1988
Exhibit 3-2
353
MANUFACTURERS • GAMES, TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES. SIC #3944
Comparative Historical Data?
Current Data Sorted b
y
Sales
17
19
1
19
#
Postretirement
Benefits
Type of Statement
4?
•
4
1
11
11
21
24
Unqualified
1
3
7
10
2
1
2
7
14
Reviewed
3
5
3
1
2
1
Compiled
17
20
18
Tax Returns
2
5
2
1
8
Other
411190-
4/1/91-
4/1/92-
3/31/91
3/31/92
3/31/93
17(4/1/-9/30/92)
58 (10/1/92-3131/93)
ALL
ALL
ALL
0-1MM
1-3mm
3-5MM
5-10MM
10-25MM
25MM & OVER
47
68
75
NUMBER OF STATEMENTS
6
13
9
17
8
22
%
%
ASSETS
%
%
%
%
%
%
7.1
8.9
7,2
Cash & Equivalents
7.4
13.3
5.8
•?
27.0
30.9
31.8
Trade Receivables - (net)
24.5
32.0
36.0
31.9
30.4
35.3
Inventory
47.4
31.0
28.3
2.1
1.9
1.7
All Other Current
.6
2.2
2.7
68.1
72.1
76.1
Total Current
79.8
78.5?
"
72.7
19.2
17.5
16.7
Fixed Assets (net)
16.1
14.4
17.2
4.2
3.7
3.1
Intangibles (net)
1.8
2.2
5.4
8.5
6.7
4.1
All Other Non-Current
2.3
4.9
4.7
100.0
100.0
100.0
Total
100.0
100.0
100.0
LIABILITIES
16.4
12.6
14.0
Notes Payable Short-Term
13.9
12.3 -
..
11.8
3.4
2.3
3.0
Cur. Mat.-L/T/D
4.5
3.6
.7
11.7
13.1
14.6
Trade Payables
14.5
12.0
16.5
.7
.9
.6
Income Taxes Payable
.5
7
8.1
9.0
11.1
All Other Current
5.6
10.8
11.9
40.3
38.0
43.2
Total Current
38.8
39.2
41.7
13.2
13.4
12.2
Long Term Debt
15.5
9.4
11.8
1.2
.5
.4
Deferred Taxes
•
•
.1
.5
.6
2.8
5.3
3.5
All Other Non-Current
2.2
2.1
1.7
42.4
42.9
40.6
Net Worth
43.4
48.8
44.3
100.0
100.0
100.0
Total Liabilities and Net Worth
100.0
100.0
100.0
INCOME DATA
100.0
100.0
100.0
Net Sales
100.0
100.0
100.0
35.5
37.2
36.0
Gross Profit
35.5
33.5
35.8
28.5
29.3
30.2
Operating Expenses
29.9
28.2
28.6
6.9
?
•
7.9
5.8
Operating Profit
5.7
5.3
7.2
3.3
1.8
1.2
All Other Expenses (net)
1.1.
.4
1.8
3.7
6.1
4.6
Profits Before Taxes
4.6
4.9
5.3
2.5
.?
..
::RATIOS
.....
1,7
1:2
2.8
.
?
1_9
:
1.3
2;9.
1,8 :
.
?
•?
li3..::
..
Curient.:.........
?
?
•
....?
.
4.5
2 .3
5
! 2 ,
6
,.:111v1:
:1.3
2.3...
1,p.
12
1.4
1.7
1.4
1.7
2.0
1.8
.8
1.1
.8
Quick
.6
.8
1.0
.6
7
.6
.5?
.
.6
.7
34
?
10.6
31
?
11.6 34
?
10.8
14
25.2
31
11.9
56
6.5
. 55
?
6.6
49
?
7.4 56
?
6.5
Sales Receivables
37
10.0
56
6.5
72
5.1
85
?
4.3 85
?
4.3
85
?
4.3
78
4.7
89
4.1
?
-
99
3.7
-62
?
5.9 55
?
6.6
63
?
5.8
79
4.6
43
8.5
68
5.4
104?3.5
85
?
4.3
94
?
3.9
Cost of Sales/Inventory
126
2.9
78
4.7
85
4.3
--146?
2.5
152?
2.4
146?
2.5
166
2.2
140
2.6
118
3.1
21?
17.0
21?
17.7
18?
20.1
10 38.1
12
30.2
29
12.5
29
?
12.4
27
?
13.3 30
?
12.3
Cost of Sales/Payables
27
13.3
22
16.4
39
9.4
50
?7.3
47
?
7.8
61
?
6.0
40
9.1
33
11.0
66
5.5
3.9
3.4
3.3
2.6
3.0
3.3
7.6
6.2
6.3
Sales/Working Capital
4.4
6.5
5.1
17.5
10.8
13.8
14.0
11.5
15.0
7.1
10.1
9.0
6.8
9.2
14.5
(44)?
2.4 (66)
?
3.4
(69)
?
3.6
EBIT/Interest
(12)
1.9
(14)
.?
4.6
(21)
4.3
1.0
1.5•
1.5
'
1.3
2.9
8.9
(23)
?
2.8
(34)
?
13.3
3.3
(24)
?
13.1
2.8
Net Profit ••• Depr., Dep.,
Amort./Cur. Mat L/T/D
?
.
._,
1.8
1.2
.2
.2
.1?
.
.1
.1
.2
.6
.4
.5
Fixed/Worth
.4
.3
.5
.8
.8
1.0
12
.7
1.0
.9
.8
1.0
.7
.5
.7
2.0
.?1.6
1.8
Debt/Worth
1.5
1.1
1.7
3.0
3.3
3.3
3.0
5.5
2.6
34.5
52.8
39.9
% Profit Before Taxes/Tangible
51.2
42.8
37.9
(45)?
16.2
(65)
?
26.1
(70)
?
22.8
Net Worth
9.2
(16)
27.4
(21)
27.9
-1.1
7.0
4.6
-2.8
3.2
17.2
11.7
20.5
17.0
% Profit Before Taxes/Total
21.1
18.6
14.2
5.5
10.8
7.6
Assets
3.3
9.6
8.2
1,9
1.5
1.5
3.9
20.1
44.3
35.8
64.6
42.7
21.4
9.8
15.6
17.1
Sales/Net Fixed Assets
35.8
'?
15.1
11.2
6.5
7.3
7.5
9.5
7.3
7.2
?
-
2.1
2.5
2.6
2.9
2.6
2.1
-?
1.6
2.0
2.0
Sales/Total Assets
2.0
1.8
1.9
1.3
1.5
1.6
1.7
1.5
1.4
•
?
1.1 .
?
.8
.7
.4
.8
1.4
(36)?2.1
(61)
?
1.7
(61)
?
1.6
% Depr., Dep., Amort/Sales
(11)
.8
2.3
2.6
2.9
3.3
2.8
2.5
2.9
3.2
1.8
(12)
?
4.3
2.4
(23)?
4.1
2.7
(30)
?
4.5
°A Officers', Directors',
Owners' Comp/Sales
-
6.7
9.5
7.8
1537661M
1883457M
1840680M
Net Sales (3)
•?3293M
27202M
36782M
116678M
115773M
1540952M
1092333M
1169085M
1136958M
Total Assets (5)
1948M
13736M
20946M
72757M
52973M
974598M
0 Robert Moms Associates 1993
?
M = $thousand MM = $million
See Pages
1 through 15 for Explanation of Ratios and Data
Exhibit 3-3
XYZ, INC.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
1988
1987
ASSETS
Current Assets:
Cash and cash equivalents
$
2,944,964
$
1,459,475
Cash investments
2,244,061
3,369,289
Trade receivables - less allowance for doubtful
accounts: 1988, $85,352; 1987, $135,353
5,025,964
4,171,421
Inventories
4,109,264
3,335,251
prepaid expenses and other
725,964
122,370
Total current assets
15,050,217
12,457,806
Property, Plant and Equipment:
Land
3567217
296,217
Buildings and Improvements
5,476,155
4,837,392
Machinery and equipment
2,160,671
1,546,476
Transportation equipment
1,866,005
1,705,107
Office furniture and equipment
463,750
483,769
Total
10,322,798
8,868,961
Less accumulated depreciation
4,705,580
4,207,598
Property - net
5,617,218
4,661,363
Other
Assets:
Intangible assets - less accumulated amortization:
1988,
$197,437; 1987, $239,281
226,728
252,884
Insurance trust
1,122,796
1,066,964
Other
89,287
77,778
Total other assets
1,438,811
1,397,626
Total
$22,106,246
$18,516,795
LIABILITIES AND
Current
Liabilities:
SHAREHOLDERS'
Current portion of long-term debt
$?
17,902
,
$?
32,405
EQUITY
Accounts payable - trade
5,049,234
2,686,669
Accrued income taxes
21,400
Accrued payroll and employee benefits
681,369
678,752
Container deposits
1,054,373
1,199,263
Other accruals
198,477
178,736
Total current liabilities
7,001,355
4,797,225
Long-term debt
53,706
71,608
Deferred income taxes
249,900
242,200
Shareholders'
Equity:
Common stock - authorized 4,000,000 shares of $.05
par value, issued: 1988, 3,592,673; 1987, 3,268,337
Additional paid-in capital
179,634
163,417
Retained earnings (deficit)
14,671,885
12,084,817
Total shareholders' equity
(50,234)
1,157,528
14,801,285
13,405,762
Total
$22,106,246
$18,516,795
See accompanying Notes to Financial Statements
Exhibit 3-4
XYZ,
INC.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
1988
1987
ASSETS
Current
Assets:
Cash and cash equivalents
$ 2,944,964
$ 1,459,475
Cash investments
2,244,061
3,369,289
Trade receivables - less allowance for doubtful
accounts: 1988, $85,352; 1987, $135,353
5,025,964
4,171,421
Inventories
4,109,264
3,335,251
prepaid expenses and other
725,964
122,370
Total current assets
15,050,217
12,457,806
Property, Plant and Equipment:
Land
356,217
296,217
Buildings and Improvements
5,476,155
4,837,392
Machinery and equipment
2,160,671
1,546,476
Transportation equipment
1,866,005
1,705,107
Office furniture and equipment
463,750
483.769
Total
10,322,798
8,868,961
Less accumulated depreciation
4,705,580
4,207,598
Property - net
5,617,218
4,661,363
Other Assets:
Intangible assets - less accumulated amortization: 1988,
$197,437; 1987, $239,281
226,728
252,884
Insurance trust
1,122,796
1,066,964
Other
89,287
77,778
Total other assets
1,438,811
1,397,626
Total
$22,106,246
$18,516,795
LIABILITIES AND
Current Liabilities:
SHAREHOLDERS'
Current portion of long-term debt
$?
17,902
$?
32,405
EQUITY
Accounts payable - trade
5,049,234
2,686,669
Accrued income taxes
21,400
Accrued payroll and employee benefits
681,369
678,752
Container deposits
1,054,373
1,199,263
Other accruals
198,477.
178,736
Total current liabilities
7,001,355
4,797,225
Long-term debt
53,706
71,608
Deferred income taxes
249,900
242,200
Shareholders' Equity:
Common stock - authorized 4,000,000 shares of $.05
par value, issued: 1988, 3,592,673; 1987, 3,268,337
Additional paid-in capital
179,634
163,417
Retained earnings (deficit)
14,671,885
12,084,817
Total shareholders' equity
(50,234)
1,157,528
14,801,285
13,405,762
Total
$22,106,246
$18,516,795
See accompanying Notes to Financial Statements
Exhibit 3-5
XYZ, INC.
CONSOLIDATED
STATEMENTS OF
INCOME AND
RETAINED EARNINGS
(DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1988, 1987, 1986
1988
1987
1986
Net sales
$42,389,957
$33,294,962
$30,730,768
Cost of sales
35,981,363
26,405,930
24,972,185
Gross profit
6,408,594
6,889,032
5,758,583
Selling, general and administrative expenses
3,957,771
3,876,206
3,824,226
Income from operations
2,450,823
3,012,826
1,934,357
Other income (deductions)
Interest income
441,891
347,613
362,295
Interest expense
(10,985)
(22,513)
(46,467)
Other investment income - net
134,690
Miscellaneous
55,066
48.660
93.654
Total other income (deductions) - net
485,972
373,760
544.172
Income before income taxes
2,936,795
3,386,586
2,478,529
Provision for income taxes
1,139,118
1 620.012
1.150.949
NetIncome
1,797,677
1,166;574
1,327,580
Retained earnings, beginning of year
1,157,528
1,726,292
1,983,007
Stock dividend
(2,610,888)
(1,952,645)
(1,365,590)
Cash dividend ($.11 per share, 1988; $.08 per share,
1987; $.06 per share, 1986)
(391,960)
(300,693)
(218,705)
Common stock acquired and retired
(2,591)
(82,000)
Retained earnings (deficit), end of year
$
(50,234)
$
1,157,528
$
1,726,292
Weighted average number of shares outstanding
3,593,048
3,630,652
3,637,798
Earnings per common share
$.50
$.49
$.36
See accompanying Notes to Financial Statements
INDEPENDENT
AUDITORS'
REPORT
To the Shareholders of XYZ, Inc.:
We have audited the consolidated balance sheets of XYZ; Inc. at September 30,
1988 and 1987, and the related consolidated statements of income and retained
earnings (deficit), and cash flows for each of the three years in the period ended
September 30, 1988. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present fairly, in
all material respects, the financial position of the companies at September 30, 1988
and 1987, and the results of their operations and their cash flows for each of the three
;years in the period ended September 30, 1988 in conformity with generally accepted
accounting principles.
DELOITTE HASKINS & SELLS
Minneapolis, Minnesota
December 5, 1988
Exhibit 3-6
353
MANUFACTURERS • GAMES, TOYS & CHILDREN'S VEHICLES; EXCEPT DOLLS & BICYCLES.
SIC # 3944
Comparative Historical Data?
Current Data Sorted by Sales
17
19
1
19
#
Postretirement Benefits
Type of Statement
Unqualified
4
4
1
11
11
21
24
Reviewed
1
3
7
10
2
1
2
7
14?
•
Compiled
3
5
3
1
2
1
Tax Returns
17
20
18
Other
2
5
2
1
8
4/1/90-
4/1/91-
4/1/92-
3131191
3/31/92
3131/93
17(411/-9130/92)
58 (10/1/92-3/31193)
ALL
ALL
ALL
0-1MM
1-3mm
3-5MM
5-10MM
10-25MM
25MM & OVER
47
68
75
NUMBER OF STATEMENTS
6
13 .
9
17
8
22
ASSETS
%
%
%
%
%
%
7.1
8.9
7.2
Cash & Equivalents
7.4
13.3
5.8
27.0
30.9
31.8
Trade Receivables - (net)
24.5
32.
'
36.0
31.9
30.4
35.3
Inventory
47.4
31.0
28.3
2.1
1.9
1.7
All Other Current
.6
2.2
2.7
68.1
72.1
76.1
Total Current
79.8
78.5
72.7
19.2
17.5
16.7
Fixed Assets (net)
16.1
14.4
17.2
4.2
3.7
3.1
Intangibles (net)
1.8
2.2
5.4
8.5
6.7
4.1
All Other Non-Current
2.3
4.9
4.7
100.0
100.0
100.0
Total
100.0
100.0
100.0
LIABILITIES
16.4
12.6
14.0
Notes Payable Short-Term
13.9•
12.3
11.8
3.4
2.3
3.0
Cur. Mat.-LTI7D .
4.5
3.6
.7
11.7
13.1
14.6
Trade Payables
14.5
12.0
16.5
.7
.9
.6
Income Taxes Payable
.5
.5
.7
8.1
.?9.0
11.1
All Other Current
5.6
10.8
11.9
40.3
-.?38.0
43.2
Total Current
38.8
39.2
41.7
13.2
13.4
122
Long Term Debt
15.5
9.4
11.8
-1722.8
5.35
7743.5
All Other
uereneb
Non-Currentsaxes
7772.2
752.1
-761.7'
42.4
42.9
40.6
Net Worth
43.4
48.8
44.3
1009
'?1000
117013
Total Liabfines auu Net Worth
10070
10070
16070
INCOME DATA
100.0
100.0
100.0
Net Sales
100.0
100.0
100.0
35.5
37.2
36.0
Gross Profit
35.5
33.5
35.8
28.5
29.3
30.2
Operating Expenses
29.9
28.2
28.6
6.9
7.9
5.8
Operating Profit
5.7
5.3
7.2
3.3
1.8
1.2
All Other Expenses (net)
1.1
.4
1.8
3.7
6.1
4.6
Profits Before Taxes
4.6
4.9
5.3
RATIOS
2.5
2.8
2.9
4.5
2.8
2.8
. 1.7
1.9
1.8
Current
2.3
1.9
1.9
1.2
1.3
1.3
1.5
'?1.3
1.2
1.4
1.7
1.4
1.7
2.0?
.
1.8
.8
1.1
.8
Quick
.6
.8
1.0
.6
.7
.6
.5
.6
.7
34?
10.6
31?
..
?11.6
34? 10.8
14
25.2
31
11.9
56
6.5
55? 6.6
49?
7.4
56?
6.5
Sales Receivables
37
10.0
56
6.5
72
5.1
85? 4.3 85? 4.3
85?
4.3
78
4.7
89
4.1
99
3.7
62?
5.9
55? 6.6
63? 5.8
79
4.6
43
8.5
68
5.4
104?
3.5
85? 4.3
94?
3.9
Cost of Sales/Inventory
126
2.9
78
4.7
85
4.3
146
? 2.5
152? 2.4
146
?2.5
166
2.2
140
2.6
118
3.1
21? 17.0
21?
17.7 18
?
20:
10
38.1
12
30.2
29
12.5
29? 12.4
' 27? 13.3
30? 12.3
Cost of Sales/Payables
27
13.3
22
16.4
39
9.4
50? 7.3
47?
7.8
61? 6.0
40
9.1
33
11.0
66
5.5
3.9
3.4
3.3
2.6
3.0
3.3
7.6
6.2
6.3
Sales/Working Capital
4.4
6.5
5.1
17.5
10.8
13.8
14.0
11.5
15.0
7.1
10.1
9.0
6.8
9.2
14.5
(44)? 2.4 (66)? 3.4
(69)? 3.6
EBIT/Interest
(12)
1.9
(14)
4:6
(21)
4.3
1.0
1.5
.?
1.5 .
.8
.
1.3
2.9
8.9
(23)?
2.8
(34)?
13.3
3.3
(24)? 13.1
2.8
Net Profit + Depr., Dep.,
Amort./Cur. MaLL/T/D
.5
1.8
1.2
.2
.2
.1
.1
.1
.2
.6
A
.5
FixedNVorth
.4
.3
.5
.8
.8
1.0
1.2
.7
1.0
.9
.8
1.0
.7
.5
.7
2.0
1.6
1.8
OebtlWorth
1.5
1.1
1.7
3.0
3.3
3.3
3.0
5.5
2.6
34.5
52.8
39.9
% Profit Before Taxes/Tangible
51.2
42.8
37.9
(45)? 16.2 (65)? 26.1
(70)?
22.8
Net Worth
9.2
(16)
27.4.
(21)
27.9
-1.1
7.0
4.6
-2.8
3.2
17.2
11.7
20.5
17.0
% Profit Before Taxes/Total
21.1
18.6
14.2
5.5
10.8
7.6
Assets
3.3
9.6
8.2
-.4
1.9
1.5
-.8
1.5
3.9
20.1
44.3
35.8
64.6
42.7
21.4
9.8
15.6
17.1
Sales/Net Fixed Assets
35.8
15.1
11.2
6.5
7.3
7.5
9.5
7.3
7.2
2.1
2.5
2.6
2.9
2.6
2.1
1.6
2.0
2.0
.?
Sales/Total Assets
2.0
1.8
1.9
1.3
1.5
1.6
1.7
1.5
1.4
1.1
.8
.7
.4
.8
1.4
(36)
? 2.1
(61)
? 1.7
(61)? 1.6
% Depr., Dep., Amort./Sales
(11)
.8
2.3
2.6
2.9
3.3
2.8
2.5
2.9
3.2
1.8
(12)? 4.3
2.4
(23)? 4.1
2.7
(30)? 4.5
% Officers', Directors',
Owners' Comp/Sales
6.7
9.5
7.8
1537661M
1883457M
1840880M
Net Sales ($)
3293M
27202M
36782M
116678M
115773M
1540952M
1092333M
1169085M
1136958M
Total Assets (5)
1948M
13736M
20946M
72757M
52973M
974598M
O Robert Morris Associates 1993
?
M = $thousand MM = $million
See Pages 1 through 15 for Explanation of Ratios and Data
Exhibit 3 -7
XYZ,
INC.
CONSOLIDATED
BALANCE
SHEETS
SEPTEMBER 30, 1988 AND 1987
1988
1987
ASSETS
Current Assets:
Cash and cash equivalents
$
2,944,964
$
1,459,475
Cash investments
2,244,061
3,369,289
Trade receivables - less allowance for doubtful
accounts: 1988, $85,352; 1987, $135,353
5,025,964
4,171,421
Inventories
4,109,264
3,335,251
prepaid expenses and other
725,964
122,370
Total current assets
15,050,217
12,457,806
Property, Plant and Equipment:
Land
356,217
296,217
Buildings and Improvements
5,476,155
4,837,392
Machinery and equipment
2,160,671
1,546,476
Transportation equipment
1,866,005
1,705,107
Office furniture and equipment
463,750
483 769
Total
10,322,798
8,868,961
Less accumulated depreciation
4,705,580
4,207,598
Property - net
5,617,218
4,661,363
Other Assets:
?
.
Intangible assets - less accumulated amortization: 1988,
$197,437; 1987, $239,281
226,728
252,884
Insurance trust
1,122,796
1,066,964
Other
89,287
77.778
-?
Total other assets
1,438,811
1,397,626
Total
$22,106,246
$18,516,795
LIABILITIES AND
Current
Liabilities:
SHAREHOLDERS'
Current portion of long-term debt
$?
17,902
$?
32,405
EQUITY
Accounts payable - trade
5,049,234
2,686,669
Accrued income taxes
21,400
Accrued payroll and employee benefits
681,369
678,752
Container deposits
1,054,373
1,199,263
Other accruals
198,477
178,736
Total current liabilities
7,001,355
4,797,225
Long-term debt
53,706
71,608
Deferred income taxes
249,900
242,200
Shareholders'
Equity:
Common stock - authorized 4,000,000 shares of $.05
par value, issued: 1988, 3,592,673; 1987, 3,268,337
Additional paid-in capital
179,634
163,417
Retained earnings (deficit)
14,671,885
12,084,817
Total shareholders' equity
(50,234)
1,157,528
14,801,285
13,405,762
Total
$22,106,246
$18,516,795
See accompanying Notes to Financial Statements
4.
DETERMINATION OF WIDESPREAD IMPACTS
The financial impacts of undertaking pollution controls could potentially cause far-
reaching and serious socioeconomic impacts. If the financial tests outlined in Chapter 2
and 3 suggest that a discharger (public or private) or group of dischargers will have
difficulty paying for pollution controls, then an additional analysis must be performed to
demonstrate that there will be widespread adverse impacts on the community or
surrounding area. There are no economic ratios per se that evaluate socioeconomic
impacts. Instead, the relative magnitudes of indicators such as increases in
unemployment, losses to the local economy, changes in household income, decreases in
tax revenues, indirect effects on other businesses, and increases in sewer fees for
remaining private entities should be taken into account when deciding whether impacts
could be considered widespread. Since EPA does not have standardized tests and
benchmarks with which to measure these impacts,' the following guidance is provided as
an example of the types of information that should be considered when reviewing impacts
on the surrounding community.
In certain circumstances, the information presented here may not adequately address
all potential impacts. At a minimum, however, the analysis must define the affected
community (the geographic area where project costs pass through to the local economy),
consider the baseline economic health of the community, and finally evaluate how the
proposed project will affect the socioeconomic well-being of the community. Applicants
should feel free to consider additional measures not mentioned here if they judge them
to be relevant. Likewise, applicants should not view this guidance as a check list. In all
cases, socioeconomic impacts should not be evaluated incrementally, rather, their
cumulative effect on the community should be assessed. More detailed guidance on the
factors that should be considered when evaluating the socioeconomic impacts to
communities of meeting water quality standards is given below.
4.1 Define Relevant Geographical Area
One important factor in determining the magnitude of these impacts is defining the
geographical area in which they occur. In some cases, one community's loss may be
another community's gain, as in the case of a plant moving to another community. In the
case of municipal pollution control projects, the affected community is most often the
immediate municipality. There are, however, exceptions where the affected community
includes individuals and areas outside the immediate community. For example, if
business activity in the region is concentrated in a nearby community and not in the
immediate community, then the nearby community may also be affected by loss of
income in the immediate community and should be included in the analysis. If business
activity of the region is concentrated in the immediate community, then outlying
communities dependent upon the immediate municipality for employment; goods, and
services should also be included in the analysis. Similarly, if a large number of workers
Economic Guidance for Water Quality Standards
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4-1
commute to an industrial facility that is significantly affected by the costs, then the
affected community should include the home communities of commuters as well as the
immediate community.
The relevant geographic area for evaluating the socioeconomic effects of compliance
by private entities varies with each situation. For impacts from actions by a private entity,
the area will typically be determined by the area in which the majority of its workers live
and where most of the businesses that depend on it are located. There are no simple rules
for defining the relevant area or community; the decision is based on the judgement of the
discharger and state, subject to EPA review.
4.2 Determine Whether Impacts are Widespread: Public-Sector Entities
In demonstrating that impacts will be substantial, the applicant will have shown that
compliance with water quality standards would be burdensome to the community. To
demonstrate that impacts will also be widespread, the applicant must examine the
estimated
change
in socioeconomic conditions that occur as a result of compliance.
There are no explicit criteria by which to evaluate widespread impacts. It is
recommended, however, that changes in the socioeconomic indicators listed below be
considered. For each indicator listed, the applicant should estimate the potential change
from precompliance conditions if the community were to adopt pollution controls.
•
Median Household Income;
•
Community Unemployment Rate;
•
Overall Net Debt as a Percent of Full Market Value of Taxable Property;
•
Percent of Households Below Poverty Line;
•
Impact on Community Development Potential; and
•
Impact on Property Values.
Precompliance estimates of the first three indicators were consideredin Chapter 2 in the
Secondary Test. Estimated changes should be described qualitatively in
Worksheet M.
Depending on the size and type of impacts on industrial and commercial discharges, these
estimated changes may be relatively large or small. In addition to changes in income,
unemployment, and debt, affected communities may be faced with impaired development
opportunities if pretreatment requirements or significantly higher user fees are imposed
by the POTW. The municipality should therefore assess the potential for the loss of
future jobs and personal income to the community if businesses would chose not to locate
in the affected community. The potential for impaired development opportunities can be
judged, in part, by comparing post-compliance costs to costs in neighboring communities.
The cost of pollution control may also have an adverse effect on property values. Where
property taxes are used to finance the project, property values may fall in response to
higher taxes. Similarly, if the project will be financed through user fees, demand for
Economic Guidance for Water Quality Standards
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4-2
property in the community may fall, thus decreasing the value of property in the
community.
The extent to which estimated changes can be interpreted as significant, however, will
depend on the health of the community before compliance. It is therefore not possible to
identify acceptable or unacceptable estimated changes for each indicator. For example,
if Community XYZ were determined to be in a weak condition before compliance. As
defined in Chapter 2, but the evaluation of widespread impacts suggests that all of the
indicators listed above will remain virtually unchanged, then widespread impacts have not
been demonstrated. Alternatively, if Community XYZ were very healthy, the estimated
change in the indicators listed above would have to be very large in order for widespread
impacts to occur.
In addition, there may be secondary impacts (not captured by the primary and
secondary tests) to the community. Secondary impacts might include depressed economic
activity in a community resulting from loss of purchasing power by persons losing their
jobs due to increased user fees. The next section describes secondary impacts in greater
detail.
4.3 Determine Whether Impacts are Widespread: Private-Sector Entities
If the financial tests suggest that a private entity or group of entities will have difficulty
paying for pollution controls, then an additional analysis must be performed to
demonstrate that there will be widespread adverse impacts on the community or
surrounding area. The current economic condition of the affected community and the role
of the affected entities within the community should first be considered when determining
whether the affected community will be able to absorb the impacts of reduced business
activity or closures. Through property taxes and employment, the entity(ies) may be a
key contributor to the economic base of the affected community. In this situation,
reductions in employment caused by compliance with the water quality standards could
be widespread if workers have no other employment opportunities nearby. Impacts may
also be significant where the entity(ies) is a primary producer of a particular product or
service upon which other nearby businesses or the affected community depend. The
impacts of reduced business activities or closure will be far greater in this case than if the
products are sold elsewhere. These two examples illustrate how the interdependence
between the affected entity(ies) and the affected community is a major factor in
demonstrating that the impacts are not only substantial, but also widespread.
As important as the extent of socioeconomic impacts is the type of impacts that might
occur. A worksheet has been provided to assist applicants in their evaluation of
socioeconomic impacts.
Worksheet
N is designed as a list of the factors applicants
should consider in determining whether impacts are not only substantial but also
widespread. The worksheet is organized to follow the text below. To make the most
Economic Guidance for Water Quality Standards
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4-3
efficient use of this worksheet, applicants should read the remainder of Section 4.3 and
then collect the data suggested in the worksheet. Applicants should feel free, however,
to use anecdotal information to describe any current community characteristics or
anticipated impacts that are not listed in the worksheet.
Potentially, one of the most serious impacts on the affected community's economy is
the loss of employment caused by a reduction in business activity or closure. The size of
this impact is dependent on the number of jobs lost relative to the total number of jobs in
the community, and to the job opportunities available in the community. Typically, a
decline in employment leads to a decline in personal income in the affected community.
The total amount of income lost by the affected community will depend, in part, on the
future job prospects of those losing their jobs. If employees leave the area in search of
opportunities, all of their income will be lost to the affected community. Workers who
are unable to market the full range of their skills to a new employer will receive lower
wages in subsequent jobs. If employees stay in the area and find lower paying jobs or
receive unemployment benefits, the loss of income to the affected community would be
equal to the difference between existing and future income; the cost of unemployment
benefits is calculated as a government expense or an expense borne someplace else,
whichever is appropriate to the situation.
To assess the net impact on employment in the affected community, the existing rate
of unemployment should be considered as an indicator of worker mobility between jobs.
When the unemployment rate is very high in an affected community, workers will have
a difficult time finding other jobs in that community. Where possible, comparisons
should be made between industry employment levels in the community and the nation as
a whole. If employment levels in the industry as a whole are falling, the industry may be
in decline regardless of the burden placed on them by water quality standards regulations.
If it is clear that a private-sector entity will go out of business regardless of water quality
standards, the impact of the pollution controls should not be viewed as substantial. If the
entity is in a marginal position, however, the effect that meeting water quality standards
will have on the entity and the community should be considered. Applicants should also
consider whether the lack of alternative employment opportunities may lead to an
increased need for social services in the affected community. If the costs of increased
social services will be borne by the affected community, they should be included in the
assessment of widespread and substantial impacts.
Socioeconomic impacts may also include effects on the local government(s) such as
loss of property tax revenues. If the financial tests in Chapter 3 suggest that an entity or
group of entities will close, then the assessed value of property and tax revenues will fall.
If the entities are a major source of revenue for the affected community, this loss in tax
revenue may be significant. One example might be water quality standards that affect
farming practices in an agricultural region. Compliance with these standards might lower
the profitability of many farms, even to the point of forcing them to cease operations. To
Economic Guidance for Water Quality Standards
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4-4
assess the impact, the loss in property tax revenues should be compared to total property
tax revenues in the affected community to determine the relative size of the loss. In
general, a drop of 1 percent in property tax revenues would be considered significant.
If compliance is evaluated in the context of a public investment for which the private
entity is paying a share (e.g., a factory's share of the cost to upgrade a municipal treatment
plant), then the analysis of widespread impacts is more complicated. If the financial
analysis shows that the entity or group of entities cannot pay their share of the cost, then
the socioeconomic and public entity analysis should include this additional burden on
other users. Likewise, if the entity or group of entities are significant users of the local
utilities, then a reduction in business activity or closure may lead to a lowered demand
and possible decreased efficiency for local utilities. For example, a water supply system
may be designed with a large industrial user in mind. If much of the demand is
eliminated, the system may become excessively expensive for the remaining users.
Affected communities may also be faced with impaired development opportunities if
the need to comply with water quality standards discourages other businesses from
locating in the area. In situations where the affected facility has not been built, additional
expenditures on water pollution controls may delay or cancel the construction. The
applicant should, therefore, consider not only the loss of potential jobs and personal
income to the community if the entity is not built, but the future losses in jobs, personal
income and tax revenues from other businesses that would choose not to locate in the
affected community.
There may be some cases in which the socioeconomic impacts of implementing
pollution controls are large enough that they are felt at the state level. For example, the
State may lose tax revenues from lost production and lost income if a business closes.
This will be of particular importance if the business is a major employer in the State
and/or the State is experiencing a period of high unemployment and fiscal distress. At the
same time, the State may encounter increased expenditures for unemployment
compensation and social services. In reviewing state level impacts, the applicant should
consider the degree to which decreases in employment and personal income in one area
of the State are offset by increases in employment and personal income in other parts of
the State. In most cases, impacts at the state level will be relatively minor. If not, then
impacts are widespread.
4.4 Estimate
Multiplier Effect
The effects of increased unemployment, decreased personal income, and reductions
in local expenditures by the entity or group of entities (public and private) will be
compounded as money moves through the local economy. Some portion of the lost
income would have been spent in the local economy for the purchase of other goods and
services and thus for the salaries of other local employees. These local employees, in
Economic Guidance for Water Quality Standards
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4-5
turn, would have spent some portion of their income in the local economy. This
multiplier effect means that each dollar lost to an employee results in the loss of more than
one dollar to the local economy.
The U.S. Department of Commerce, Bureau of Economic Analysis (BEA) has
developed several multipliers to estimate the effect of reduced economic activity on
output (sales), earnings, and employment. These multipliers are available by industry
sector for 39 or 531 different industry classifications, depending on the level of detail
required. Applicants that are interested in using these multipliers are advised to consult
a copy of
RIMS II Regional Multipliers: A User Handbook of the Regional Input-Output
Modeling System,
available from the National Technical Information Service (NTIS). The
NTIS document number is #PB-86-230-216 and orders can be placed by calling NTIS at
(703) 487-4650. Additional information on using multipliers is available from the BEA
at (202) 606-5343.
4.5 Economic
Benefits of Clean Water
Benefit-cost analysis is not required to demonstrate substantial and widespread
effects under the.
Federal Water Quality Standards regulation.
In many cases, there may be economic benefits that accrue to the affected community
from cleaner water. For example, in a rural community where the primary source of
employment is agriculture, the reduction of fertilizer and pesticide runoff from farms
would reduce the cost of treating irrigation water to downstream users. Another example
might be an industrial facility discharging its wastewater into a stream that otherwise
could be used for recreational cold-water fishing. Treatment or elimination of the
industrial wastewater would provide a benefit to recreational fishermen by increasing the
variety of fish in the stream. In both cases, the economic benefit is the dollar value
associated with the increase in beneficial use or potential use of the waterbody. The types
of economic benefits that might be realized will depend on both the characteristics of the
polluting entity and characteristics of the affected community, and should be considered
on a case by case basis.
Since the assessment of benefits requires site-specific information, it will be up to
States to determine the extent to which benefits can be considered in the economic impact
analysis. This determination should be coordinated with the EPA Regional Office. A
more detailed description of the types of benefits that might be considered is given in
Appendix C. This appendix is not intended to provide in-depth guidance on how to
estimate economic benefits; rather, it is intended to give States an idea of the types of
benefits that might be relevant in a given situation.
Economic Guidance for Water Quality Standards
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4-6
4.6 Summary
of Financial Capability and Determination of Whether Impacts are
Substantial and Widespread
Using the guidance described in this document, the applicant must demonstrate that the
pollution control measures needed to meet water quality standards are not affordable. In
addition, the applicant will have to show that there will be widespread adverse impacts
to the community if it is required to meet standards. A summary checklist of the steps
required in this process is presented in Table 4-1. This checklist also presents the type of
data the applicant will need to collect to support each step. Whether or not the applicant
has successfully demonstrated that substantial and widespread economic and social
impacts would occur, however, will depend upon the EPA Regional Administrator's
review of the application.
If the EPA Regional Administrator determines that substantial and widespread
economic and social impacts have not been demonstrated, then the discharger must meet
the water quality standards. Alternatively, if substantial and widespread economic and
social impacts have been demonstrated, then the discharger will not have to meet the
water quality standards. The discharger will, however, be expected to undertake some
additional pollution control. The criteria outlined in Chapters 2 and 3 should be used to
determine the most protective pollution control technique that would not impose a
substantial impact on the entity. In addition, the discharger should check with EPA and
the State regularly to determine what else will be required of them. It is then up to the
State to revise the standards in the water body to reflect the uses that would be achieved
if the discharger adopts the next most protective pollution control technique. The State
will also have to revise its water quality criteria to protect the newly attainable uses. The
discharger's NPDES permit will then be revised to reflect the new limits associated with
revised criteria. Finally, federal regulations require that water quality standards be
reviewed every three years to determine if there is any new information or technology that
allows attainment of the full designated use without causing substantial and widespread
social and economic impacts.
Economic Guidance for Water Quality Standards
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4-7
Table 4-1
Demonstration of Substantial and Widespread
Economic and Social Impacts of Attainment of Designated Uses
CHECKLIST
INFORMATION THAT WILL BE REQUIRED FROM
STEPS
APPLICANT
1. Demonstrate
that designated use is a potential use and not an Data from State Water Quality Assessment Documents and water quality
existing use.
standards regulations.
Demonstrate that entity will incur substantial economic impacts.
a. Identify all reasonable pollution reduction options, Information on end-of-pipe treatment, possible treatment upgrades,
additions to existing treatment, and pollution prevention activities
including the following:
•
change in raw materials,
•
substitution of process chemicals,
•
change in process,
•
water recycling, reuse and efficiency,
•
pretreatment requirements, and
•
public education.
b. Evaluate
costs of all reasonable pollution reduction Assumptions about water demand, treatment capacity, expansion plans,
options, population growth, and effectiveness of control in reducing pollution for
each option. Estimate of project costs from design engineers, costs of
comparable projects in the State, or judgement of experienced water
pollution control engineers.
c. Identify
lowest cost pollution reduction option that allows Information on treatment efficiencies for alternative pollution reduction
entity to meet water quality standards.
techniques. Cost estimates for all alternatives.
Table 4-1 CHECKLIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
3. Evaluate
entity's financial health
(Public Entities Only):
a.
determine method of financing, Information on user fee financing mechanisms such as Revenue Bonds.
Information on tax based financing mechanisms such as General
Obligation Bonds.
b.
annualize pollution reduction project costs,
Information on appropriate interest rates and period of financing.
c.
allocate project costs,
Information on user groups, wastewater flow by user group, and
surcharges on industrial users.
d.
apply Municipal Preliminary Screener test,
Information on average total annual pollution control cost per household
and median household income.
e.
Depending on the results of the Municipal Preliminary Information on results of Municipal Preliminary Screener test, overall net
Screener test, apply Secondary Test. debt as a percent of full market value of taxable property, median
household income, bond rating, community unemployment rate, property
tax collection rate, and property tax revenues as a percent of full market
value of taxable property.
4. Evaluate
entity's financial health
(Private Entities Only):
0
a.
annualize pollution reduction project costs,
Information on appropriate interest rates and period of financing.
b.
Primary Measure:
profitability,
Information that will allow evaluation of whether an entity will remain
profitable after incurring the cost of pollution reduction including:
•
revenues,
•
cost of goods sold,
Table 4-1 CHECKLIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
portion of corporate overhead assigned to the entity, and
total annualized pollution reduction project costs.
Secondary measures:
solvency,
Information that will allow evaluation of the entity's ability to meet its
fixed and long-term obligations including:
•
long-term debt,
•
current debt,
•
net income after taxes, and
•
depreciation.
liquidity, and
Information that will allow evaluation of how easily an entity can pay its
short-term bills such as:
•
current assets,
•
current liabilities, and
•
total annualized pollution reduction project costs.
leverage.
Information that will allow evaluation of the extent to which a firm
already has fixed financial obligations and therefore how much money
it will be able to borrow including, long-term liabilities and owner equity.
5. Determine
whether impacts are widespread
(Public Entities
Only):
a. Evaluate
change in socioeconomic conditions that occur
as a result of compliance. Information on changes in median household income, community
unemployment rate, overall net debt as a percent of full market value of
taxable property, percent of households below the poverty line, impact
on community development potential, and impact on community
Table 4-1 CHECKLIST (Cont'd.)
STEPS
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
Determine whether impacts are widespread
(Private Entities
property values resulting from compliance.
Only):
a.
Define community,
Information on the geographical boundary of the area in which the
majority of the
entity's
workers live and where most of businesses that
depend on the entity are located.
b.
Evaluate effect on employment,
Current unemployment, change in unemployment due to investment in
c.
Evaluate effect on tax revenues,
pollution reduction.
Information on the likely effect on assessed value of property tax
revenues if the entity must adopt pollution reductions.
d.
Assess impairment of development opportunities,
Information on the likelihood that the need to adopt pollution reductions
in the affected community would discourage other businesses from
e.
Collect any relevant additional information that locating in the area in the future.
demonstrates widespread socioeconomic impacts.
Any additional information that suggests that there are unique conditions
7.
• Evaluate economic benefits of cleaner water.
in the affected community that should also be considered.
Information on potential benefits of cleaner water including enhanced
recreational opportunities, reduced treatment costs for downstream users
8.
Public comment and debate period.
and increased property values.
Be prepared to supply backup information on the application to modify
Table 4-1 CHECKLIST (Cont'd.)
STEPS
?
INFORMATION THAT WILL BE REQUIRED FROM
APPLICANT
9.
If substantial and widespread economic and social impacts are or change a designated use to the public.
demonstrated, determine which pollution reduction option should
be implemented.
Information on the cost and efficiency of affordable pollution reduction
alternatives.
10.
Redesignate uses.
Uses will be determined by the level of "affordable" pollution reduction.
11.
Standards will be adopted to protect new uses.
Once uses are established, standards should be revised to protect those
12.
Effluent limits and permits will be modified.
uses.
. 13. Re-evaluate
water quality standards in three years.
Limits will be modified to reflect effluent concentrations associated with
the "affordable" pollution reduction technique.
Per federal regulations, water quality standards must be revised every
three years to determine if there is any new information or technology
that allows attainment of the full designated uses without causing a
substantial and widespread economic
and social impact.
5. ANTIDEGRADATION: ROLE OF ECONOMIC ANALYSIS
Under the Water Quality Standards program, each State must develop, adopt and
retain a statewide antidegradation policy and establish procedures for its implementation.
The antidegradation policy is intended to protect current water quality; in only a limited
set of cases can economic grounds be used to allow for a lowering of water quality. In
particular, if the quality of the water exceeds levels necessary to support the propagation
of fish, shellfish, and wildlife and recreation in and on the water (i.e. "high-quality
water"), then economic considerations can be taken into account. Before any lowering
of water quality in high-quality waters, however, an antidegradation review must
determine that the lowering is necessary in order to accommodate important economic or
social development in the area in which the waters are located.
Antidegradation is not a "no growth" rule and was never designed nor intended to be
one. It is a policy that allows the public to make decisions about important environmental
actions. Where the State intends to provide for development, it may decide that some
lowering of water quality in "high-quality waters" is necessary to accommodate important
economic or social development. Any such reduction in water quality, however, must
protect existing uses fully and must satisfy the requirements for intergovernmental
coordination and public participation.
While the terminology is different, the tests to determine substantial and widespread
economic impacts (used when removing a use or granting a variance) are basically the
same as those used to determine if there might be interference with an important social
and economic development (antidegradation). As such, antidegradation analysis is the
mirror image of the analyses described in Chapters 2, 3 and 4. Variances and downgrades
refer to situations where additional treatment needed to meet standards may result in
worsening economic conditions; while antidegradation refers to situations where lowering
water quality may result in improved social and economic conditions.
When performing an antidegradation review, the first question is whether the pollution
controls needed to maintain the high-quality water will interfere with the proposed
development. If not, then the lowering of water quality is not warranted. If, on the other
hand, the pollution controls will interfere with development, then the review must show
that the development would be an important economic and social one. These two steps
rely on the same tests as the determination of substantial and widespread impacts. It
should be stressed at the outset that substantial economic impacts does not mean driving
profits to zero, nor precluding all other municipal expenditures.
The following sections describe the steps involved in performing an economic impact
analysis as part of an antidegradation review. These steps are outlined in Figure 5-1. The
analytic approach presented here can be used for a variety of public-sector and private
sector entities, including POTWs, commercial, industrial, residential and recreational land
Economic Guidance for Water Quality Standards
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5-1
uses, and for point and nonpoint sources of pollution. The guidance provided in this
chapter, however, is not meant to be exhaustive. The State and/or EPA may require
additional information or tests. In addition, the applicant should feel free to include any
additional information they feel is relevant. The steps described in further detail in the
rest of the chapter are:
•
Verify Project Costs and Calculate the Annual Cost of the Pollution Control
Project -
This section describes the factors considered when verifying that the
proposed pollution control project is the most appropriate solution and the type of
information that should be provided about the proposed project. It discusses how
to annualize capital costs of the project and calculate total annual costs of the
pollution control project.
•
Determine if Requirements would Interfere with Development (i.e., lower
water quality is "necessary") -
This section describes the types of financial tests
that should be used to determine if maintaining the high-quality water would
interfere with the development.
•
Determine if Economic and Social Development would be Important -
This
section presents factors to be considered in determining whether the development
would be important from an economic and social point of view.
These steps closely parallel the analytic techniques presented in Chapters 2, 3, and 4.
These chapters should be read for more detail.
5.1 Verify
Project Costs and Calculate The Annual Cost of the Pollution Control
Project
Before the impact analysis can be performed, the project costs should be verified and
the annual costs calculated. Both private-sector and public-sector entities should consider
a broad range of discharge management options including pollution prevention, end-of-
pipe treatment, and upgrades or additions to existing treatment.
Whatever approach, the discharger must demonstrate that the proposed project is the
most appropriate means of meeting water quality standards and must document project
cost estimates. If there is at least one of the treatment alternatives that allows the
applicant to maintain high-quality water without incurring substantial impacts, then they
have failed to show that the requirements would interfere with the development. Cost
information, and the assumptions underlying the cost estimates, should be supplied on
Worksheet 0.
The following two sections (5.1.a and 5.1.b) discuss analyzing public-sector projects.
Section 5.1.c discusses private sector projects.
Economic Guidance for Water Quality Standards?
5-2
5.1.a Public-Sector Developments: Calculate the Annual Costs of the Pollution
Control Project
Since capital costs typically will be paid over several years, annualized costs are used
in the evaluation of economic burden to the community. The capital portion of public-
sector project costs is typically financed over approximately 20 years, by issuing a
municipal debt instrument such as a general obligation bond or a revenue bond.
The calculation of total annualized cost of the project is presented in
Worksheet P.
First, capital costs are summed and the portion of costs to be paid for with grant monies
are deducted, as these costs will not need to be financed. Next, the annualization factor
is calculated using the formula supplied on
Worksheet P,
or the annualization factor is
found in Appendix B. Annualized capital cost is then calculated by multiplying the total
capital costs to be financed by the annualization factor.
The interest rates used to annualize costs are dependent on the type of debt instrument
used as well as the issuer's credit standing. Therefore, the interest rate used on
Worksheet P
reflects the debt instrument (i.e. municipal bond, commercial bank loan,
state revolving fund loan, or other instrument) likely to be used by the municipality.
Next, annual operating and maintenance costs are added to the annualized capital cost.
O&M costs should include the costs of monitoring, inspection, permitting fees, waste
disposal charges, repair, administration, replacement, and any other recurring costs. All
recurring costs should be stated in terms of dollars per year. The sum of the annualized
capital cost and total annual operating and maintenance costs is the total annual cost of
the project.
5.1.b Public-Sector Developments: Calculate Total Annualized Pollution Control
Costs Per Household
To assess the burden that total pollution control costs are expected to have on
households, an average annualized pollution control cost per household should be
calculated for all households in the community that would bear project costs. In order to
evaluate substantial impacts, therefore, the analysis must establish which households will
actually pay for pollution control and what proportion of the costs will be borne by
households. Then, these apportioned project costs are added to existing pollution control
costs paid by the households.
Iti s important to define the affected community. The "community" is the
governmental jurisdiction or jurisdictions responsible for paying compliance costs.
If project costs were estimated for some prior year, these costs should be adjusted
upward to reflect current year prices using the average annual national Consumer Price
Economic Guidance for Water Quality Standards
?
5-3
Index (CPI) inflation rate for the period. The CPI inflation rate is available from the
Bureau of Labor Statistics. An additional source reporting the CPI inflation rate is the
CPI Detailed Report,
which is published monthly by the U.S. Department of Labor,
Bureau of Labor Statistics.
In calculating the total annual cost of pollution control per household, current costs
of pollution control must be considered along with the projected annual costs of the
proposed pollution control project. The existing cost per household usually can be
obtained from the most recent municipal records. For example, use the most recent
operating revenues of the sewer enterprise fund, divided by the number of households
served. If the portion of proposed project costs that households are expected to pay is
known or is expected to remain unchanged, then use
Worksheet Q
to calculate the total
annual cost of pollution control per household. If the portion paid by households is based
on flow, then should refer to
Worksheet Q: Option A
as well.
5.1.c Private-Sector Entities: Calculate the Annual Costs of the Pollution Control
Project
As with public-sector investments, the total capital costs are usually spread out over
several years. Annualization calculates the amount that will be paid each year, including
the financing costs. In order to allow for comparisons across cases, the analysis should
assume that the applicant will borrow the capital and repay the loan in even annual
installments over a 10 year period. The assumption of ten years is based on the likely life
of the equipment. The assumption of even annual installments is made for convenience.
The interest rate on the loan should be equivalent to the rate the applicant pays when it
borrows money.
The financial tests discussed below compare the costs of compliance to other costs and
revenues of the applicant. Compliance costs and other costs and revenues must, therefore,
be calculated for the same year. See discussion in Section 2.2, and Appendix A for
references to inflation/deflation indices. The Annualized Cost of Pollution Control for a
private-sector entity can be calculated using
Worksheet R.
5.2 Financial
Analysis to Determine if Lower Water Quality is "Necessary"
The purpose of the financial impact analysis is to assess the extent to which planned
development will be reduced as a result of maintaining water quality. There are two sets
of tests presented in this section: one set for publicly owned developments, such as
POTWs, and another for privately owned developments, such as new manufacturing
facilities. The tests are not designed to determine the exact impact of pollution control
costs on an entity. They merely provide indicators of whether pollution control costs
would result in a substantial impact.
Economic Guidance for Water Quality Standards ?
5-4
5.2.a Public-Sector Developments: Calculate and Evaluate the Municipal
Preliminary Screener Value
Whether or not maintaining high-quality water is likely to interfere with a
development due to additional public-sector costs is determined by jointly considering the
results of two tests. The first test is a "screener" to establish whether the community can
clearly pay for the project. The Municipal Preliminary Screener estimates the total per
household annual pollution control costs to be borne by households (existing costs plus
those attributable to the proposed project) as a percentage of median household income.
The screener is written as follows:
MunicipalPreliminaryScreener
AverageTotalPollittionControlCostperHousehold
MedianHouseholdIncome
Median household income information for many municipalities is available from the
1990 Census of Population. To estimate median household income for the current year,
use the CPI inflation rate for the period between the year that median household income
is available and the current year.
Depending on the results of the screener, the community is expected to incur small,
mid-range, or large economic impacts (see
Worksheet S).
If
the total annual cost per
household (existing annual cost per household plus the incremental cost related to the
proposed project) is less than 1.0 percent of median household income, then the
requirements are not expected to impose a substantial economic hardship on households
and would not interfere with the development.
Communities are expected to incur mid-range impacts when the ratio of total annual
compliance costs to median household income is between 1.0 and 2.0 percent. If the
average annual cost per household exceeds 2.0 percent of median household income, then
the project may place a large financial burden on many of the households within the
community and the requirements may interfere with the development. In either case,
communities move on to the Secondary Test to demonstrate substantial impacts.
5.2.b Public-Sector Developments: Secondary Test
The Secondary Test is designed to build upon the characterization of community
identified in the Municipal Preliminary Screener. The Secondary Test indicates the
community's ability to obtain financing and describes the socioeconomic health of the
community. Indicators describe precompliance debt, socioeconomic, and financial
management conditions in the community. Using these indicators and the scoring system
Economic Guidance for Water Quality Standards
5-5
described below, the impact of the cost of pollution control is estimated. Specifically,
applicants are required to present the following six indicators for the community:
Debt Indicators
•
Bond Rating (if available) - a measure of credit worthiness of the community;
Overall Net Debt as a Percent of Full Market Value of Taxable Property - a
measure of debt burden on residents within the community;
Socioeconomic Indicators
•
Unemployment Rate - a measure of the general economic health of the
community;
•
Median Household Income - a measure of the wealth of the community;
Financial Management Indicators
Property Tax Revenue as a Percent of Full Market Value of Taxable Property -
a measure of the funding capacity available to support debt based on the wealth
of the community; and
•
Property Tax Collection Rate - a measure of how well the local government is
administered.
A more detailed description of the six indicators is presented in Section 2.4, including
a discussion of alternative measures to use in States with property tax caps and limitations
on assessed values.
Worksheet T
can be used to estimate each of the indicators. Table
5-1 summarizes the indicators and what is considered to be a strong, mid-range, or weak
rating.
The Secondary Score is calculated for the community by weighting each indicator
equally and assigning a value of 1 to each indicator judged to be weak, a 2 to each
indicator judged to be mid-range, and a 3 to each strong indicator. A cumulative
assessment score is arrived at by summing the individual scores and dividing by the
number of factors used.
Worksheet
U guides the reader through this calculation. The
cumulative assessment score is evaluated as follows:
less than 1.5 is considered weak
• between 1.5 and 2.5 is considered mid-range
•
greater than 2.5 is considered strong
Economic Guidance for Water Quality Standards
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5-6
If the applicant is not able to develop one or more of the six indicators, they must
provide an explanation as to why the indicator is not appropriate or not available. Since
the point of the analysis is to measure the overall burden to the community, the debt and
socioeconomic indicators are assumed to be better measures of burden than the financial
management indicators. Consequently, if one of the debt or socioeconomic indicators is
not available, the applicant should average the two financial management indicators and
use this averaged value as a single indicator with the remaining indicators. This averaging
is necessary so that undue weight is not given to the financial management indicators.
5.2.d Public-Sector Developments: Assess Whether the Requirements Would
Interfere With the Development
The results of the two tests are considered jointly in determining whether the
community is expected to incur substantial impacts that would interfere with the
development. As shown in Table 5-2, the cumulative assessment score for the community
is combined with the estimated household burden. The combination of factors establishes
whether impacts can be expected to be substantial.
In the matrix, "X" indicates that the impact is likely to interfere with the development.
The closer the community is to the upper right hand corner of the matrix, the greater the
likelihood. Similarly, "J" indicates that the impact is not likely to interfere with
development. The closer to the lower left hand corner of the matrix, the smaller the
likelihood. Finally, the "?" indicates that the impact is unclear.
5.2.e Private-Sector Developments: Financial Measures
Four general categories of financial tests are used to determine if maintaining high-
quality water will interfere with privately owned development. The four categories are
divided into a primary measure of financial impacts and three secondary measures of
financial impacts:
Primary Measure
•
Profit -- how much would profits decline due to pollution control expenditures?
Secondary Measures
•
Liquidity -- how easily can an entity pay its short-term bills?
•
Solvency -- how easily can an entity pay its fixed and long-term bills?
•
Leverage -- how much money can the entity borrow?
Profit and solvency ratios are calculated both with and without the additional compliance
costs (taking into consideration the entity's ability, if any, to increase its prices to cover
Economic Guidance for Water Quality Standards ?
5-7
part or all of the costs). Comparing these ratios to each other and to industry benchmarks
provides a measure of the impact on the entity. Since antidegradation reviews involve
new or expanded operations, the ratios often will be calculated using estimated values
from pro-forma income statements and balance sheets prepared for the development.
For all of the tests, it is important to look beyond the individual test results and
evaluate the total situation of the entity. While each test addresses a single aspect of
financial health, the results of the four tests should be considered jointly to obtain an
overall picture. The results should be compared with the ratios for other entities in the
same industry or activity.
The primary and secondary measures are described below, along with an example of
specific tests to be used. While there are several ratios that could be used for each test,
to simplify the presentation only one ratio per test is described. In most cases, interpreting
the results requires comparisons with typical values for the industry. Among the sources
that provide comparative information are: Robert Morris Associates'
Annual Statement
Studies, Moody's Industrial Manual,
Dun and Bradstreet's
Dun's Industry Norms,
and
Standard & Poor's
Industry Surveys.
The
Annual Statement Studies, Dun's Industry
Norms ,
and Standard & Poor's
Industry Surveys
provide composite statistics for firms
grouped into various manufacturing and service industries. The
Moody's Industrial
Manual
provides detailed financial information on individual firms that can be used for
comparison purposes. Each of the tests is discussed in more detail in Chapter 3.
5.2.f Private-Sector Developments: Primary Measure
Primary measure is the Profit Test, which measures the development's earnings if it
is required to provide pollution control necessary to maintain the high-quality waters and
if it is not required to do so. If maintaining high-quality water would result in
considerably lower profits, then the development might not take place.
Two pieces of information are needed for the Profit Test. The first piece is the total
annual cost of the required pollution control from
Worksheet R.
The second piece is the
earnings information from the entity's income statement
(Worksheet
V).
Profit Test -
Earnings Before Taxes
The Profit
Revenues
Test should be
calculated with and without the cost of the pollution control. In the former case, the
annualized cost of pollution control (including O&M) is subtracted from the discharger's
estimated earnings before taxes (revenues minus costs excluding income taxes). The
Profit Test can be calculated using
Worksheets V, and W.
These profit rates should be
Economic Guidance for Water Quality Standards
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5-8
compared to those for facilities in similar lines of business, using data in
Moody's
Industrial Manual, Dun & Bradstreet's Industry Norms and Key Business Ratios,
Standard & Poor's Industry Surveys,
or Robert Morris's
Annual Statement Studies.
The degree to which the discharger is able to raise prices is difficult to predict, and
depends on many factors. Considerations should include the level of competition in the
industry, the likelihood of competitors' facilities facing similar project costs, and the
willingness of consumers to pay more for the product.
5.2.g Private-Sector Developments: Secondary Measures
The following secondary measures provide additional important information about the
financial health -of the development. All primary and secondary measures should be
included in the analysis.
Liquidity
Liquidity is a measure of how easily a discharger can pay its short-term bills. One
measure of liquidity is the Current Ratio, which compares current assets with current
liabilities. Current assets include cash and other assets that are or could reasonably be
converted into cash during the current year. Likewise, current liabilities are items that
must be paid within the current year.
The Current Ratio is calculated by dividing current assets by current liabilities.
Current Ratio -
Current Assets
Current Liabilities
The Current Ratio can be calculated using
Worksheet X.
The general rule is that if the
Current Ratio is greater than 2, the entity should be able to cover its short-term
obligations. Frequently, lenders require this level of liquidity as a prerequisite for
lending. This rule (Current Ratio > 2) may not, however, be appropriate for all types of
private entities. The Current Ratio of the discharger in question should be compared with
ratios for other dischargers in the same line of business.
Solvency
Solvency is a measure of an entity's ability to meet its fixed and long-term obligations.
These obligations are bills and debts that are owed on a regular basis for periods longer
than one year. Solvency tests are commonly used to predict financial problems that could
lead to bankruptcy within the next few years.
Economic Guidance for Water Quality Standards
?
5-9
As with liquidity, there are several possible tests for solvency. One solvency test, the
Beaver's Ratio, compares cash flow to total debt. This test has been shown to be a good
indicator of the likelihood of bankruptcy.
Beaver 's Ratio - Cash Flow
Total Debt
The Beaver's Ratio can be calculated using
Worksheet
Y. Cash Flow is a measure
of the cash the entity has available to it in a given year. Since depreciation is an
accounting cost -- a cost that does not use any currently available revenues -- it is added
back to reported net income after taxes to get cash flow. Total debt is equal to the current
debt for the current year plus the long term debt, since current debt includes that part of
long-term debt that is due in the current year.
If the Beaver's Ratio is greater than 0.20 the development is Considered to be solvent
(i.e., can pay its long-term debts). If the ratio is less than 0.15 the development may be
insolvent (i.e., go bankrupt). If the ratio is between 0.15 and 0.20, then future solvency
is uncertain.
Leverage
Leverage tests measure the extent to which a firm has fixed financial obligations and
thus indicates how much more money a firm is capable of borrowing. Firms that rely
heavily on debt may find it difficult and expensive to borrow additional funds. One
commonly used measure of leverage is the Debt to Equity Ratio.
Debt/Equity Ratio - Long -Term Liabilities
Owners Equity
The Debt to Equity Ratio can be calculated using
Worksheet Z.
Since there are no
generally accepted Debt/Equity Ratio values that apply to all types of economic activity,
the ratio should be compared with the ratio of firms in similar businesses. If the entity's
ratio compares favorably with the median or upper quartile ratio for similar businesses,
it should be able to borrow additional funds. These ratios can be calculated using data in
Robert Morris Associates'
Annual Statement Studies, Moody's Industrial Manual,
and Dun
& Bradstreet's
Dun's Industry Norms.
For entities with special sources of funding, leverage is not an appropriate measure of
their ability to raise capital. Examples are agriculture and affordable housing, where
special loan programs may be available. In these cases, an analysis of the probability that
the project would receive this money is appropriate.
Economic Guidance for Water Quality Standards
5-10
5.2.g Private-Sector Developments: Assess Whether the Requirements Will
Interfere With the Development: Interpreting the Results
The financial analysis should be used to determine if there will be a substantial
adverse impact such as to interfere with the development. If the four tests taken together
indicate that the requirements would interfere with the development, then proceed to
Section 5.3 to determine if the development would be considered important in social and
economic terms.
5.3 Determine If Economic and Social Development Would Be Important
There are no economic ratios per se that determine whether a development would be
considered important. Instead, the relative magnitudes of indicators such as increases in
unemployment, losses to the local economy, changes in household income, decreases in
tax revenues, indirect effects on other businesses, and increases in sewer fees should be
taken into account. The term important is intended to convey a general concept regarding
the level of social and economic development used to justify a change in high-quality
waters.
5.3.a Define Relevant Geographical Area
One important factor is defining the geographical area in which the impacts will occur.
In the case of municipal pollution control projects, the affected community is most often
the immediate municipality. The relevant geographic area for evaluating the importance
of a private-sector development varies with each situation. The area will typically be
determined by the area in which the majority of its workers live and where most of the
businesses that depend on it are located. In either case, the geographical area considered
must include "...the area in which the waters are located." (40 CFR 131.12 (a)(2)) There
are no simple rules for defining the relevant area or community; the decision is based on
the judgement of the applicant and state, subject to EPA review.
5.3.b Public-Sector Developments: Determine Whether Important
While there are no explicit criteria, it is recommended that changes in the
socioeconomic indicators listed below be considered. For each indicator listed, the
applicant should estimate the potential change that would result from the development.
•
Median Household Income;
•
Community Unemployment Rate;
•
Overall Net Debt as a Percent of Full Market Value of Taxable Property;
•
Percent of Households Below Poverty Line;
•
Impact on Community Development Potential; and
• Impact on Property Values.
Economic Guidance for Water Quality Standards
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5-11
Estimated changes should be provided, along with supporting discussions, on
Worksheet
AA.
5.3.c Private-Sector Developments: Determine Whether Important
Determination of whether or not a private-sector development will be important to a
community requires exploring more factors than is the case with public-sector
developments.
Worksheet AB
has been provided to assist applicants in their evaluation
of socioeconomic impacts. It is designed as a list of the factors applicants should consider
in determining whether the development is important. Applicants should feel free,
however, to add anecdotal information to describe any current community characteristics
or anticipated impacts that are not listed in the worksheet.
Potentially, one of the most important impacts on the affected community's economy
is the employment to be gained. The size of this impact is dependent on the number of
new jobs relative to the total number of jobs in the community, and to the other job
opportunities available in the community. Typically, an increase in employment leads to
an increase in personal income in the affected community. The total amount of income
gained by the affected community will depend, in part, on the other job prospects of those
hired. To assess the net impact on employment in the affected community, the existing
rate of unemployment should be considered as an indicator of worker mobility between
jobs.
The analysis should also consider whether the increase in employment opportunities
may lead to a decreased need for social services in the affected community. If the cost
of savings for decreased social services will be borne by the affected community, they
should be included in the assessment.
The effects of increased employment and personal income will be compounded as the
money moves through the economy. This multiplier effect means that each dollar gained
to an employee results in the gain of more than a dollar to the local economy. Multiplier
effects are discussed in more detail in Section 4.4.
Socioeconomic impacts may also include effects on the local government(s) such as
property tax revenues and the demand for other public services. For example, if the
development would be paying a share of the cost to upgrade a municipal treatment plant,
then the analysis of community impacts is more complicated. If the development is
eliminated, the system may become excessively expensive for the remaining users.
5.4 Summary
Using the guidance described in this document, the applicant must demonstrate that
the pollution control measures needed to maintain the high-quality waters will interfere
Economic Guidance for Water Quality Standards?
5-12
with the development. In addition, the applicant will have to show that the development
is important to the community.
The tests used to demonstrate interference and importance are the same as those used
to demonstrate substantial and widespread. The difference is, however, that an
antidegradation review considers situations that would improve the economic condition.
Economic Guidance for Water Quality Standards ?
5-13
Verify
Pollution Control
o q s and Calculate
Anneal(h
osts
Capital Cost, Annual
O&M
Costs,
Interest Rates
Determine if Maintainin
High-Quality Waters Will
Interfere
with
Development
Annual
Cost, Median
Household Income,
Financial Data
Determine
of
Development is
fmp0rlant
Socio-economic
characteristics of
community
Yes 1t
Quality of water may be
reduced as long as existing
and designated uses fully
protected
No
No
Figure 5-1:
Antidegradation Review
No Degradation
Allowed
No Degradation
Allowed
Economic Guidance for Water Quality Standards
TABLE 5-1
SECONDARY INDICATORS
Secondary
.
Indicators
Indicator
Weak
Mid-Range
Strong
Bond Rating
Below BBB (S&P)
Below Baa (Moody's)
BBB (S&P)
Baa (Moody's)
Above BBB (S&P)
or Baa (Moody's)
Overall Net Debt as
Percent of Full Market
Value of Taxable
Property
Above 5%
2%-5%
Below 2%
Unemployment
More than 1% above
National Average
National Average
More than 1% below
National Average
Median Household
Income
More than 10% below
State Median
State Median
More than 10%
above State Median
Property Tax
Revenues as a Percent
of Full Market Value
of Taxable Property
Above 4%
2%-4%
Below 2%
Property Tax
Collection Rate
<
94%
94% - 98%
>
98%
TABLE 5-2
ASSESSMENT OF SUBSTANTIAL IMPACTS MATRIX
Secondary Score
Municipal Preliminary
Screener
Less than 1.0 Percent
Between 1.0 and 2.0
Percent
Greater than
2.0
Percent
Less than 1.5
X
X
Between 1.5 and 2.5
3
X
Greater than 2.5
3
Economic Guidance for Water Quality Standards
?
5-1
APPENDIX
A
DATA RESOURCES AND REFERENCE
MATERIALS
APPENDIX A
Cost Estimation Resources:
U.S. EPA,
Construction Costs for Municipal Wastewater Treatment Plants: 1973-1978,
EPA/430/9-80-003, April, 1980.
U.S. EPA,
Technical Report: Operation and Maintenance Costs for Municipal Wastewater
Facilities,
EPA/430/9-81-004, September, 1981.
U.S. EPA,
Construction Costs for Municipal Wastewater Conveyance Systems: 1973-1979,
EPA/430/9-81-003, January, 1981.
U.S. EPA,
Quarterly Indices of Direct Costs for Operation, Maintenance and Repair: (a) Waste
Pumping Stations, (b) Gravity Sewers,
Office of Municipal Pollution Control, Municipal
facilities Division, Current.
Municipal Statistics Resources:
Bureau of the Census, U.S. Department of Commerce,
County and City Data Book,
published
annually.
Financial and Ratio Analysis Resources:
Leopold A. Bernstein,
The Analysis of Financial Statements,
Dow Jones-Irwin, 1978.
Dun & Bradstreet,
Dun's Industry Norms,
annual.
J. Fred Weston and Eugene F. Brigham,
Managerial Finance,
The Dryden Press, several
editions.
Robert Morris Associates,
Annual Statement Studies,
annual.
Moody's Financial Services,
Moody's Industrial Manual,
annual.
U.S. Department of Labor, Bureau of Labor Statistics,
CPI Detailed
.
Report.
U.S. EPA,
EPA Financial Capability Guidebook,
Office of Water Programs Operations, 1984.
U.S. EPA,
The Municipal Sector Study: Impacts of Environmental Regulations on Municipalities,
EPA 230-09-038, Office of Policy, Planning and Evaluation, September 1988.
Interest Rate
Year
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1
1.0050
1.0100
1.0150
1.0200
1.0250
1.0300
1.0350
1.0400
1.045C
2
0.5038
0.5075
0.5113
0.5150
0.5188
0.5226
0.5264
0.5302
0.534C
3
0.3367
0.3400
0.3434
0.3468
0.3501
0.3535
0.3569
0.3603
0.3638
4
0.2531
0.2563
0.2594
0.2626
0.2658
0.2690
0.2723
0.2755
0.278i
5
0.2030
0.2060
0.2091
0.2122
0.2152
0.2184
0.2215
0.2246
0.2278
6
0.1696
0.1725
0.1755.
0.1785
0.1815
0.1846
0.1877
0.1908
0.193S
7
0.1457
0.1486
0.1516
0.1545
0.1575
0.1605
0.1635
0.1666
0.169i
8
0.1278
0.1307
0.1336
0.1365
0.1395
0.1425
0.1455
0.1485
0.151E
9
0.1139
0.1167
0.1196
0.1225
0.1255
0.1284
0.1314
0.1345
0.137E
10
0.1028
0.1056
0.1084
0.1113
0.1143
0.1172
0.1202
0.1233
0.1264
11
0.0937
0.0965
0.0993
0.1022
0.1051
0.1081
0.1111
0.1141
0.1172
12
0.0861
_
0.0888
0.0917
0.0946
0.0975
0.1005
0.1035
0.1066
0.109i
13
0.0796
0.0824
0.0852
0.0881
0.0910
0.0940
0.0971
0.1001
0.1033
14
0.0741
0.0769
0.0797
0.0826
0.0855
0.0885
0.0916
0.0947
0.0978
15
0.0694
0.0721
0.0749
0.0778
0.0808
0.0838
0.0868
0.0899
0.0931
16
0.0652
0.0679
0.0708
0.0737
0.0766
0.0796
0.0827
0.0858
0.089C
17
0.0615
0.0643
0.0671
0.0700
0.0729
0.0760
0.0790
0.0822
0.0854
18
0.0582
0.0610
0.0638
0.0667
0.0697
0.0727
0.0758
0.0790
0.0822
19
0.0553
0.0581
0.0609
0.0638
0.0668
0.0698
0.0729
0.0761
0.0794
20
0.0527
0.0554
0.0582
0.0612
0.0641
0.0672
0.0704
0.0736
0.076S
APPENDIX C
CONCEPTUAL MEASURES
OF ECONOMIC BENEFITS
Economic Guidance for Water Quality Standards
APPENDIX C
CONCEPTUAL MEASURES
OF ECONOMIC BENEFITS
In valuing benefits associated with an ecological resource such as clean water, a basic
distinction is made between the intrinsic value of the existence of the resource and its
value in use by the human population. Use values are further subdivided into direct or
indirect uses. Other valuation concepts arise from the uncertainty surrounding future uses
and availability of the resource. A classification of these valuation concepts, along with
examples, is presented in Table C-1.
C.1U se Benefits
Estimating the benefits of clean water will depend upon several variables that describe
the attributes of the resource and its uses. A waterbody might be used for recreational
activities (such as fishing, boating, swimming, hunting, bird watching), for commercial
purposes (such as industrial water supply, irrigation, municipal drinking water, and fish
harvesting), or for both. Where recreational activities are created or enhanced due to
water quality improvements, the public will benefit in the form of increased recreational
opportunities. Similarly, the cost of treating irrigation and drinking water to down stream
users could be reduced if pollutant discharges were reduced or eliminated in a particular
stretch of river.
Direct use includes both consumptive and non-consumptive uses. Consumptive uses
can be distinguished from non-consumptive uses in that the former excludes other uses
of the same resource while the latter does not. For example, water is consumed when it
is diverted from a waterbody for irrigation purposes. With non-consumptive uses,
however, the resource base remains in the same state before and after use (e.g.,
swimming). Human health benefits associated with cleaner water could be consumptive
(reduced illness from eating finfish or shellfish) or non-consumptive (reduced exposure
to infectious diseases while recreating).
When estimating benefits, it is important to determine whether or not the resource and
its uses (in this case clean water) can be considered market or non-market resources and
uses (i.e., does a market exist for the resource or its use). For example, commercial
fisheries have a market value reflected by the financial value of landings of a particular
species. By contrast, no market exists to describe the value individuals receive from
swimming. Where market values are available, they should be used to estimate benefits.
In the case of water supply, there may or may not be a market for clean water. Some
water users may be required to pay for that use as in the case of a farmer paying a regional
Economic Guidance for Water Quality Standards
water board to divert water for irrigation purposes. This will be particularly true in the
arid west. By contrast, a manufacturing facility using water for cooling or process water
may not pay anything for the right to pump and use water from an adjacent river. For
resources with no market value, a number of estimation techniques including the travel
cost, estimation from similar markets, and contingent valuation methods have been
developed.
While they are conceptually distinct attributes, consumptive use is frequently
associated with markets and non-consumptive use is frequently associated with non-
market situations. Some resources that are considered market resources, however, may
be used non-consumptively. The converse is also true. As an example of the first, a fee
may be charged (other than parking) to gain entrance to a state park, however, while a
swimmer's use of a lake in the park is not consuming any part of the lake.
Commercial activities that are dependent on clean water which is not directly owned
are said to benefit from indirect use. Examples would be a fishing equipment
manufacturer's dependence on healthy fish stocks to induce demand for its products or the
dependence of property values on the pristine condition of an adjacent water body.
Indirect use is also characterized by the scenic views and water enhanced recreational
opportunities (camping, picnicking, birdwatching) associated with the quality of water in
a water body. Indirect use benefits such as enhanced property values can be estimated
using the hedonic price technique. Care should be taken, however, to not double-count
benefits. If property values reflect the proximity to and thus use of water, then the value
of the use should not be included separately.
C.21 ntrinsic
Benefits
Intrinsic benefits include all benefits associated with a resource that are not directly
related to the current use of the resource. Intrinsic benefits are represented by the sum of
existence and option values. Existence value indicates an individual's (and society's)
willingness to pay to maintain an ecological resource such as clean water for its own sake,
regardless of any perceived or potential opportunity for that individual to use the water
body now or in the future. Contributions of money to save endangered species such as
the snail darter demonstrate a willingness to pay for the existence of an environmental
amenity despite the fact that the contributors may never use it or even experience it
directly.
Option value is the willingness to pay for having a future opportunity to use resources
such as clean water in known or as yet unknown ways. In a sense it is a combination of
insurance and speculative value. Individuals routinely pay to store or transport something
they are not sure they will use in the future because they recognize it would be more
costly to recreate the item than to preserve it. In an ecological sense, pristine habitats and
wildlife refuges are often preserved under the assumption that plant or animal species
Economic Guidance for Water Quality Standards
which may yield pharmaceutical, genetic, or ecosystem benefits are yet to be discovered.
Option value takes on particular importance when proposed development or
environmental perturbations are largely irreversible or pollutants are persistent. Intrinsic
benefits are difficult to measure due to the level of uncertainty associated with these
benefits. The most common approach to estimating intrinsic benefits, however, is the
contingent valuation method, which cannot be described in detail within this short
overview.
C.3S ummary
Total valuation of clean water benefits includes all use and existence values as well as
option value. The proper framework for estimating the economic benefits associated with
clean water consists of 1) determining when damage first occurs or would occur; 2)
identifying and quantifying the potential physical/biological damages relative to an
appropriate baseline; 3) identifying all affected individuals both due to potential loss of
direct or indirect services or uses, and to potential losses attributable to existence values
(may include projections for growth in participation rates); 4) estimating the value
affected individuals place on clean water prior to potential degradation; and 5)
determining the time horizon over which the waterbody would be degraded or restored
to some maximum reduced state of service (if ever), and appropriately discounting the
stream of potential lost services. If evaluating an improvement in water quality, the
procedures are the same except that benefits gained are measured.
Economic Guidance for Water Quality Standards
TABLE C-1
CATEGORIES OF BENEFITS
Use Benefits
Direct
Consumptive:Market
Benefits
Industrial Water Supply
Agricultural Water Supply
Municipal Water Supply
Commercial Fishing
Non-Market Benefits
Recreational Fishing
Hunting
Industrial Water Supply
Agricultural Water Supply
Municipal Water Supply
Non-Consumptive:Swimming
Boating
Human Health
Indirect
Fishing Equipment Manufacturer
Property Values
Aesthetics (scenic views, water enhanced recreation)
Intrinsic Benefits
Option Value (access to resource in future)
Existence Value (knowledge that services of resource exist)
Economic Guidance for Water Quality Standards
Worksheet A
Pollution Control Project Summary Information
Current Capacity of the Pollution Control System
Design Capacity of the Pollution Control System
Current Excess Capacity
Expected Excess Capacity after Completion of Project
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed below: (Attach additional page if necessary).
Please describe the other pollution control options considered, explaining why each option was rejected.
(Attach additional page if necessary).
%.
Worksheet AA
Public-Sector Development
Qualitative Description of Estimated Change
in Socioeconomic Indicators
due to Pollution Control Costs
Estimated
in Median
change
Household
Income (MHI)
Estimated
in the
change
unemployment
rate
Estimated
as
in
a
overall
percent
net
change
of
debt
full
market value of
taxable property
Estimated
in % of
change
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
Worksheet AB
Private-Sector Development
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included.
(1)
Current unemployment rate in affected community (if available).
(2)
Current national unemployment rate.
(3)
Additional number of persons expected to collect unemployment in affected
(4)
community due to compliance with water quality standards.
Expected unemployment rate in the affected community after compliance with
(5)
water quality standards (Current # of persons collecting unemployment
in affected community + (4)/labor force in affected community.
Median household income in affected community.
(6)
Total number of households in affected community.
(7)
Percent of population below the poverty line in affected community:
(8)
Current expenditures on social services in affected community.
(9)
Expected expenditures on social services due to job losses in the affected
(10)
community.
Current total tax revenues in the affected community.
(11)
Tax revenues paid by the private entity to the affected community.
(12)
Worksheet AB, continued
Tax revenues paid by the private entity as a percentage of the affected
(13)
community's total tax revenues. •
Current statewide unemployment rates.
(14)
Additional number of persons expected to collect unemployment in the State
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality
(16)
standards (Current # of persons collecting unemployment in State +
(15)/labor force in State.
Current expenditures on social services in State.
(17)
Expected statewide expenditures on social services due to job losses.
(18)
* In some cases, the affected community will include more than just the municipality in which the private entity is located. If so, the analysis
should consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is
located.
Worksheet B
Calculation of Total Annualized Project Costs
A.
Capital Costs
Capital Cost of Project
Other One-Time Costs of Project (Please List, if any):
Total Capital Costs (Sum column)
(1)
Portion of Capital Costs to be Paid for with Grant Monies
(2)
Capital Costs to be Financed [Calculate: (1) - (2) ]
(3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal)
(i)
Time Period of Financing (in years)
(n)
Annualization Factor – 1
+ (or see Appendix B)
[(1+i)
n-
1]+i
(4)
Annualized Capital Cost
[Calculate: (3) x (4) ]
(5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
Total Annual 0
&
M Costs (Sum column)
C.
Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ]
(6)
(7)
Worksheet C
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control
(1)
Amount of Existing Costs Paid By Households
(2)
Percent of Existing Costs Paid By Households
%(3)
Number of Households*
(4)
Annual Cost Per Household [Calculate: (2)/(4) ]
(5)
* Do not use number of hook-ups.
B. New Pollution Control Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b
or
c and continue as directed.)
q
a) Yes [fill in percent from (3) ]
q
b) No, they are expected to pay
percent.(6a)
percent.(6b)
q
c) No, they are expected to pay based on flow. (Continue on Worksheet C, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet B]
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) 1
Amount to Be Paid By Households [Calculate: (9) x (10) ]
Annual Cost per Household [Calculate: (1 1)/(4) ]
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10)
Worksheet C: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment)
(1)
Usage due to Household Use (MGD of Household Wastewater)
(2)
Percent of Usage due to Household Use [Calculate: (2)/(1) ]
%(3)
Total Annual Cost of Pollution Control Project
$
(4)
Industrial Surcharges, if any
$
(5)
Costs to be Allocated [Calculate: (4) - (5) ]
$
(6)
Amount to Be Paid By Households [Calculate: (3) x (6) ]
$
(7)
Annual Project Cost per Household [Calculate: (7)/Worksheet C, (4) ]
(8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet C, (5) ]
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ]
(9)
(10)
Worksheet D
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any substantial
economic impacts as a result of the proposed pollution control project. The formula is as follows:
Total Annual Pollution Control Cost per Household
X 100
Median Household Income *
A.
Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or
Worksheet C, Option A (10)
Median Household Income*
Municipal Preliminary Screener
(Calculate: [(1)/(2)] x 100)
%(3)
B. Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark Comparison:
Little Impact
Mid-Range
Impact
Large
Impact
Less than 1.0% 1.0%
- 2.0%
Greater
than 2.0%
Indication of no
substantial
)')
economic impacts
Proceed
to Secondary Test
1990 Census adjusted by CPI inflation rate if necessary.
Worksheet E
Data Used in the Secondary Test
Please list the following values used in deter mining the Secondary Score. Potential sources of the data are
indicated.
A. Data Collection
Data
Potential Source
Value
Direct Net Debt
Community Financial Statements
Town, County or State Assessor's Office
Community Financial Statements
Town, County or State Assesor's Office
Community Financial Statements
Town, County or State Assessor's Office
Standard and Poors or Moody's
1990 Census of Population
Regional Data Centers
Bureau of Labor Statistics
(202) 606-6392
1990 Census of Population
1990 Census of Population
Community Financial Statements
Town, County or State Assessor's Office'
Community Financial Statements
Town, County or State Assessor's Office
Overlapping Debt
Market Value of Property
Bond Rating
Community Unemployment
Rate
National Unemployment
Rate
Community Median
Household Income
State Median Household
Income
Property Tax Collection
Rate
Property Tax Revenues
(1)
(2)
(3)
• (4)
%(5)
%(6)
(7)
(8)
%(9)
(10)
Worksheet E, Continued
B.
Calculation of Indicators
1. Overall Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2) )
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(11)/(3)] x 100)
%(12)
2. Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
%(13)
Secondary Indicators
Indicator
Weak*
Mid-Range
Strong***
Bond Rating
Below BBB (S&P)
BBB (S&P)
Above BBB (S&P) or
Worsksheet E, (4)
Below Baa (Moody's)
Baa (Moody's)
Baa (Moody's)
qqq
Overall Net Debt as Percent
of Full Market Value of
Above 5%
2%-5%
Below 2%
Taxable Property
q
q
q
Worksheet E, (12)
Unemployment
Above National Average
National Average
Below National Average
Worksheet E, (5)& (6)
q
q
q
Median Household Income
Below State Median
State Median
Above State Median.
Worksheet E, (7)
&
(8)
q
q
q
Property Tax Revenues as a
Percent of Full Market Value
Above 4%
2%-4%
Below 2%
of Taxable Property
q
q
q
Worksheet E, (13)
Property Tax Collection Rate
Worksheet E, (9)
<
94%
94% - 98%
'
>
98%
qqq
* Weak is a score of 1 point
SUM
** Mid-Range is a score of 2 points
Worksheet F
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as a
single indicator with the remaining indicators.
*** Strong is a score of 3 points
AVERAGE
Worksheet G
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant)
Interest Rate for Financing (Expressed as a decimal)
Time Period of Financing (Assume 10 years *)
(1)
(i)
10 years (n)
Annualization Factor =
1
(2)
[(1+i)n-1]-1-i
Annualized Capital Cost [Calculate: (1) x (2) ]
(3)
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal
Total Annual
charges, repair,
Cost
administration
of Pollution
and
Control
replacement)
Project
*** (4)
[
(3) + (4) ]
(5)
* While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
** Or see Appendix B for calculated annualization factors
— For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replac ed once every three years, include one-third of the cost in
each
year).
EBT [ (1) - (2) -(3) ]
(4)
Worksheet H
Calculation of Earnings Before Taxes
With and Without Pollution Control Project Costs
A. Earnings Without Pollution Control Project Costs
EBT = R - CGS - CO
Where: EBT = Earnings Before Taxes
R
Revenues
CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect labor ,
rent and heat)
CO = Portion of
.
Corporate Overhead Assigned to the Discharger (selling, general ,
administrative, interest, R&D expenses, and depreciation on common property)
Three Most Recently Completed Fiscal Years.
19
19
19
R
CGS
CO
Considerations:
Have earnings before taxes changed over the three year period? If so, what would a
"typical" year's EBT be? Please explain below.
Worksheet H, Continued
B. Earnings With Pollution Control Project Costs
EWPR = EBT - ACPR
Where: EWPR = Earnings
with Pollution Control Project Costs
EBT = Earnings Before Taxes (4)
ACPR = Total
Annual Costs of Pollution Control Project [Worksheet G, (5) •
19
EBT (4)
$
?
(5)
ACPR [Worksheet G, (5)]
(6)
EWPR [ (5) - (6) ]
(7)
* The most recently completed fiscal year
Considerations:
Is the discharger expected to have positive earnings after paying the annual cost o f
pollution control?
q
Yes
?
q
No
Additional Comments:
Worksheet I
Calculation of Profit Rates
With and Without Pollution Control Project Costs
A. Profit Rate Without Project Costs
PRT = EBT R
Where: PRT = Profit Rate Before Taxes
EBT = Earnings Before Taxes
R = Reveneus
Three Most Recently Completed Fiscal Years
19
19
19
EBT [Worksheet H, (4)]
(1)
R [Worksheet H, (1)]
(2)
PRT
=
Calculate: [(1)/(2)]
(3)
Considerations:
How have profit rates changed over the three years?
Is the most recent year typical of the three years?
q
Yes
q
No
(If not, you might want to use an earlier year or years for the analysis)
How do these profit rates compare with the profit rates for this line of business"? Please discuss
below.
Worksheet I, Continued
B. Profit Rate With Pollution Control Costs
PRPR = EWPR R
Where:
PRPR
= Profit Rate With Pollution Control Costs
EWPR = Before-Tax Earnings With Pollution Control Costs
R = Reveneus
The Most Recently
Completed Fiscal Year
19
EWPR [Worksheet H, (7)]
(4)
R [Worksheet H, (1)]
(5)
PRPR [Calculate: (4)45)]
(6)
Considerations:
What is the percentage change in the profit rate due to pollution control costs ? Calculate as follows: (PRPR
- PR)/PR x 100
How does the profit rate with pollution control compare to the profit rate of this line of business?
CA $ $ $
CL $
Worksheet J
Calculation of The Current Ratio
CR
=
CA ÷ CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expen ses, and accounts receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes, and the
current portion of long-term debt)
Three. Most Recently Completed Fiscal Years
19
19
19
CR [Calculate: ( 1 )/(2)]
Considerations:
Is the most recent year typical of the three years?
q
Yes
q
No
(If not, you might want to use an earlier year or years for the analysis)
Is the Current Ratio (3) greater than 2.0?
q
Yes
q
No
How does the Current Ratio (3) compare with the Current Ratios for other firms in this line of business?
Worksheet K
Calculation of Beaver's Ratio
BR
=
CF TD
Where:
BR
= Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Three Most Recently Completed Fiscal Years
19
19
19
Cash Flow:
Net Income After Taxes
Depreciation
CF [Calculate: (1) + (2)]
$ ?$ ?
(1)
$ ?
$ ?
(2)
$
(3)
Total Debt:
Current Debt
Long-Term Debt
Total Debt
Beaver's Ratio:
BR [(3) /(6)]
(7)
Considerations:
Is the most recent year typical of the three years?
q
Yes
q
No
(If not, you might want to use an earlier year or years for the analysis)
Is the Beaver's Ratio for this discharger greater than 0.2?
q
Yes
q
No
Is the Beaver's Ratio for this discharger less than 0.15?
q
Yes
q
No
Is the Beaver's Ratio for this discharger between 0.2 and 0.15?
q
Yes
q
No
How does this ratio compare with the Beaver's Ratio for other firms in the same business?
Worksheet L
Debt to Equity Ratio
DER
=
LTL OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities (long-term debt such as bonds, debentures, and bank debt,
and all other noncurrent liabilities such as deferred income taxes)
OE = Owner
Equity (the difference between total assets and t otal liabilities, including
contributed or paid in capital and retained earnings)
Three Most Recently Completed Fiscal Years
19
19 19
LTL
OE
DER [(1)/(2)]
Considerations:
Is the most recent year typical of the three years?
q
Yes
q
No
(If not, you might want to use an earlier. year or years for the analysis)
How does the Debt to Equity Ratio compare with the ratio for firms in the same business?
Worksheet M
Qualitative Description of Estimated change
in Socioeconomic Indicators
due to Pollution Control Costs
Estimated
in Median
change
Household
Income (MHI)
Estimated change
in the
unemployment
rate
Estimated
as
in
a
overall
percent
net
change
of
debt
full
market value of
taxable property
Estimated
in % of
change
households below
the poverty line
Impact on
commercial
development
potential
Impact on
Property Values
Worksheet N
Factors to Consider in Making a Determination of Widespread Social and Economic Impacts
Define the affected community in this case; what areas are included.
(1)
Current unemployment rate in affected community (if available).
(2)
Current national unemployment rate.
(3)
Additional number of persons expected to collect unemployment in affected
(4)
community due to compliance with water quality standards.
Expected unemployment rate in the affected community after compliance with
(5)
water quality standards (Current # of persons collecting unemployment
in affected community + (4)/labor force in affected community.
Median household income in affected community.
(6)
Total number of households in affected community.
(7)
Percent of population below the poverty line in affected community.
(8)
Current expenditures on social services in affected community.
(9)
Expected expenditures on social services due to job losses in the affected
(10)
community.
Current total tax revenues in the affected community.
(11)
Tax revenues paid by the private entity to the affected community.
(12)
Worksheet N, continued
Tax revenues paid by the private entity as a percentage of the affected
(13)
community's total tax revenues.*
Current statewide unemployment rates.
(14)
Additional number of persons expected to collect unemployment in the State
(15)
due to compliance with water quality standards.
Expected statewide unemployment rate, after compliance with water quality.
(16)
standards (Current # of persons collecting unemployment in State +
(15)/labor force in State.
Current expenditures on social services in State.
(17)
Expected statewide expenditures on social services due to job losses.
(18)
* In some cases, the affected community will include more than just the municip ality in which the private entity is located. If so, the analysis should
consider the private entity's tax revenues as a percentage of the tax revenues for only the municipality in which the entity is located.
Worksheet 0
Pollution Control Project
Summary Information
Design Capacity of the Pollution.
Control System
Expected Excess Capacity after Completion of Project
Projected Groundbreaking Date
Projected Date of Completion
Please describe the pollution control project being proposed. I nclude description of all pollution prevention
activities included in the project. (Attach additional page if necessary).
Please describe the other pollution control options considered, including pollution prevention activities .
Explain why each option was rejected. (Attach additional page if necessary).
Worksheet P
Public-Sector Pollution Control
Calculation of Total Annualized Project Costs
A. Capital Costs
Capital Cost of Project
Other One-Time Costs of Project (Please List, if any):
Total Capital Costs (Sum column)
(1)
Portion of Capital Costs to be Paid for with Grant Monies ?
(2)
Capital Costs to be Financed [Calculate: (1) - (2) ] ?
(3)
Type of financing (e.g., G.O. bond, revenue bond, bank loan)
Interest Rate for Financing (expressed as decimal)
?
(i)
Time Period of Financing (in years) ?
(n)
Annualization Factor = ?
1
+ (or see
[(1?
4)
Appendix
B)
Annualized Capital Cost
[Calculate: (3) x (4) ]?
(5)
B. Operating and Maintenance Costs
Annual Costs of Operation and Maintenance (including but not limited to: monitoring, inspection,
permitting fees, waste disposal charges, repair, administration and replacement.) (Please list below)
Total Annual 0
&
M Costs (Sum column)
(6)
C.
Total Annual Cost of Pollution Control Project
Total Annual Cost of Pollution Control Project [ (5) + (6) ]
(7)
Worksheet Q
Calculation of Total Annual Pollution Control Costs
Per Household
A. Current Pollution Control Costs:
Total Annual Cost of Existing Pollution Control
(1)
Amount of Existing Costs Paid By Households
(2)
Percent of Existing Costs Paid By Households
%(3)
Number of Households*
(4)
Annual Cost Per Household [Calculate: (2)/(4) ]
(5)
* Do not use number of hook-ups.
B. New Pollution Control.
Costs
Are households expected to provide revenues for the new pollution control project in the same proportion
that they support existing pollution control? (Check a, b
or
c and continue as directed.)
q
a) Yes [fill in percent from (3) ]
0 b) No, they are expected to pay
percent.(6a)
percent.(6b)
q
c) No, they are expected to pay based on flow. (Continue on Worksheet Q, Option A)
Total Annual Cost of Pollution Control Project [Line (7), Worksheet P] $
Proportion of Costs Households Are Expected to Pay [ (6a) or (6b) ]
Amount to Be Paid By Households [Calculate: (9) x (10) ]
$
Annual Cost per Household [Calculate: (11)/(4) ]
C. Total Annual Pollution Control Cost Per Household
Total Annual Cost of Pollution Control Per Household (5) + (10)
Worksheet Q: Option A
Calculation of Total Annual Pollution Control Costs Per Household
Based on Flow
A. Calculating Project Costs Incurred By Households Based on Flow
Expected Total Usage of Project (eg. MGD for Wastewater Treatment)
(1)
Usage due to Household Use (MGD of Household Wastewater)
(2)
Percent of Usage due to Household Use [Calculate: (2)/(1)
%(3)
Total Annual Cost of Pollution Control Project
$
(4)
Industrial Surcharges, if any
$
(5)
Costs to be Allocated [Calculate: (4) - (5) ]
$
(6)
Amount to Be Paid By Households [Calculate: (3) x (6) ]
$
(7)
Annual Project Cost per Household [Calculate: (7)/Worksheet Q, (4) ]
$
(8)
C. Total Annual Pollution Control Cost Per Household
Annual Existing Costs Per Household [Worksheet Q, (5) ]
Total Annual Cost of Pollution Control Per Household [ (8) + (9) ]
(9)
(10)
Worksheet R
Private-Sector Development
Calculation of Total Annualized Project Costs
Capital Costs to be financed (Supplied by applicant)
(1)
Interest Rate for Financing (Expressed as a decimal)
(i)
Time Period of Financing (Assume 10 years *)
10 years (n)
Annualization Factor =
(2)
Annualized Capital Cost [Calculate: (1) x (2) ]
(3)
Annual Cost of Operation and Maintenance
(including but not limited to monitoring, inspection, permitting fees, waste
disposal charges, repair, administration and replacement) ***
(4)
Total Annual Cost of Pollution Control Project [
(3) + (4) ]
(5)
* While actual payback schedules may differ across projects and companies, assume equal annual
payments over a 10-year period for consistency in comparing projects.
Or see Appendix B for calculated annualization factors
*** For recurring costs that occur less frequently than once a year, pro rate the cost over the relevant
number of years (e.g., for pumps replac ed once every three years, include one-third of the cost in
each
year).
Worksheet S
Municipal Preliminary Screener
The Municipal Preliminary Screener indicates quickly whether a public entity will not incur any substantial
economic impacts as a result of the proposed pollution control project. The formula is as follows:
Total Annual Pollution Control Cost per Household
x 100
Median Household Income *
A. Calculation of The Municipal Preliminary Screener
Total Annual Pollution Control Cost Per Household [Worksheet C, (11) or
(1)
Worksheet C, Option A (10) ]
Median Household Income *
(2)
Municipal Preliminary Screener
(Calculate: [(1)/(2)] x 100)
%(3)
B.
Evaluation of The Municipal Preliminary Screener
If the Municipal Preliminary Screener is clearly less than 1.0%, then it is assumed that the cost will not
impose an undue financial burden. In this case, it is not necessary to continue with the Secondary Test.
Otherwise, it is necessary to continue.
Benchmark
Comparison:
Little Impact
?Mid-Range
Impact
?Large
Impact
Less than 1.0% 1.0%
- 2.0%
Greater
than 2.0%
Indication of no
substantial
))))))))))))*))))
economic impacts
Proceed
to Secondary Test
* 1990 Census adjusted by CPI inflation rate if necessary.
Worksheet T
Data Used in the Secondary Test
Please list the following values used in deter mining the Secondary Score. Potential sources of the data are
indicated.
A. Data Collection
Data
Direct Net Debt
Overlapping Debt
Market Value of Property
Bond Rating
Community Unemployment
Rate
National Unemployment
Rate
Community Median
Household Income
State Median Household
Income
Property Tax Collection
Rate
Property Tax Revenues
Potential Source
Community Financial Statements
Town, County or State Assessor's Office
Community Financial Statements
Town, County or State Assesor's Office
Community Financial Statements
Town, County or State Assessor's Office
Standard and Poors or Moody's
1990 Census of Population
Regional Data Centers
Bureau of Labor Statistics
(202) 606-6392
1990 Census of Population
1990 Census of Population
Community Financial Statements
Town, County or State. Assessor's Office
Community Financial Statements
Town, County or State Assessor's Office
Value
(1)
(2)
(3)
(4)
%(5)
%(6)
(7)
(8)
%(9)
$
(10)
Worksheet
T, Continued
B.
Calculation of Indicators
1.Overall
Net Debt as a Percent of Full Market Value of Taxable Property
Overall Net Debt (Calculate: (1) + (2) )
$
Overall Net Debt as a Percent of Full Market Value of Taxable
Property (Calculate: [(11)/(3)] x 100)
• %(12)
2.
Property Tax Revenues as a Percent of Full Market Value of Taxable Property
Property Tax Revenues as a Percent of Full Market Value of Taxable
Property (Calculate: [(10)/(3)] x 100)
%(13)
Secondary Indicators
Indicator
Weak'
Mid-Range "
Strong***
Bond Rating
Below BBB (S&P)
BBB (S&P)
Above BBB (S&P) or
Worsksheet T, (4)
Below Baa (Moody's)
Baa (Moody's)
Baa (Moody's)
qqq
Overall Net Debt as Percent
of Full Market Value of
Above 5%
2%-5%
Below 2%
Taxable Property
q
q
q
Worksheet T, (12)
Unemployment
Above National Average
National Average
Below National Average
Worksheet T, (5)& (6)
q
q
q
Median Household Income
Below State Median
State Median
Above State Median
Worksheet T, (7)
&
(8)
q
q
q
Property Tax Revenues as a
Percent of Full Market Value
Above 4%
2%-4%
Below 2%
of Taxable Property
q
q
q
Worksheet T, (13)
Property Tax Collection Rate
Worksheet T, (9)
<
94%
94% -.98%
>
98%
qqq
* Weak is a score of 1 point
SUM
Worksheet
U
Calculating The Secondary Score
Please check the appropriate box in each row, and record the corresponding score in the final column. Then, sum the scores and compute the average.
Remember, if one of the debt or socioeconomic indicators is not available, average the two financial management indicators and use this averaged value as a
single indicator with the remaining indicators.
** Mid-Range is a score of 2 points
*" Strong is a score of 3 points
AVERAGE
Worksheet V
Calculation of Earnings Before Taxes
A. Earnings Without Pollution Control Project Costs
EBT R - CGS - CO
B. Earnings With Pollution Control Project Costs
EWPR EBT - ACPR
Where: EBT = Earnings Before Taxes
EWPR = Earnings
with Pollution Project Costs
R = Revenues
CGS = Cost of Goods Sold (including the cost of materials, direct labor, indirect labor ,
rent and heat)
CO = Portion of Corporate Overhead Assigned to the Discharger (selling, general ,
administrative, interest, R&D expenses, and depreciation on common property)
ACPR = Total Annual Costs of Pollution Control Project [Worksheet R (5)]
R
CGS
CO
EBT [ (1) -
(2)
-
(3) 1
ACPR [ Worksheet R (5) ]
EWPR[(4)-(5)1
Worksheet W
Calculation of Profit Rates
A.
Profit Rate Without Project Costs
PRT = EBT R
B.
Profit Rate With Pollution Control Costs
PRPR = EWPR R
Where: PRT =
Profit
Rate Before Taxes
PRPR = Profit
Rate with Pollution Control Costs
EBT = Earnings
Before Taxes
EWPR
=?
Before-Tax Earnings with Pollution Control Costs
R
=?
Revenues
EBT [Worksheet V, (4)]
(1)
R [Worksheet V, (1)]
(2)
PRT
=
Calculate: [(1)/(2)]
(3)
EWPR [Worksheet V, (6)]
(4)
R [Worksheet V, (1)]
(5)
PRPR [Calculate:
(4)45)1
(6)
Worksheet X
Calculation of The Current Ratio
CR = CA CL
Where: CR = Current Ratio
CA = Current Assets (the sum of inventories, prepaid expen ses, and accounts receivable)
CL = Current Liabilities (the sum of accounts payable, accrued expenses, taxes, and the
current portion of long-term debt)
CA
CL
CR [Calculate: (1)42)]
(4)
(5)
(6)
$*
Worksheet Y
Calculation of Beaver's Ratio
BR = CF TD
Where:
BR = Beaver's Ratio
CF = Cash Flow
TD = Total Debt
Cash Flow:
Net Income After Taxes
Depreciation
CF [Calculate: (1) + (2)]
Total Debt:
Current Debt
Long-Term Debt
Total Debt
Beaver's Ratio:
BR [(3) /(6)]
(7)
LTL
OE
DER [(1)/(2)]
Worksheet Z
Debt to Equity Ratio
DER
= LTL ÷
OE
Where: DER = Debt/Equity Ratio
LTL = Long-Term Liabilities (long-term debt such as bonds, debentures, and bank debt,
and all other noncurrent liabilities such as deferred income taxes)
OE = Owner Equity (the difference between total assets and t otal liabilities, including
contributed or paid in capital and retained earnings)
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