4.3 MAKING THE RATE STRUCTURE WORK FOR YOU - TOWARD A FINANCIAL STRATEGY

With all the effort required to craft a rate structure that fits the needs of the community, it is easy to forget that the real focus is not really the rate structure but rather what the structure is trying to effect. The most effective utilities are those that use the rate structure to achieve a carefully defined programmatic strategy. What ties the programmatic strategy to the rate structure is a financial strategy. This section briefly outlines the basics of developing a financial strategy.

4.3.1 Elements of a Stormwater Utility Financial Strategy

A financial strategy is the result of a carefully managed process built on two fundamental components:

1. A programmatic strategy
2. A financial contextual analysis

Toward A Programmatic Strategy

The efficient and effective delivery of services in local government begins with a carefully defined program statement. Typically, this statement is the result of many hours of interaction among staff, the public and the legislative body. The search here is for a stormwater management programmatic vision for the community. In this process three fundamental questions are addressed:

Where are We Going?

This step involves classic strategic planning where strengths, weaknesses, opportunities and threats are identified for the organization based on an internal and external "environmental" or contextual scan. From this process should emerge a clear sense of purpose (what is "broke" and needs fixing and what is not), a sense of direction (what is important and what can wait), and a timeframe (how fast are we going to move?). Finally a clear mission statement, which distinguishes between what the organization is supposed to do versus what it is supposed to produce, is defined.

Key to the program strategic plan is the concept of level of service. A good program plan not only defines the unit of service and the service area, it clearly enumerates for each service generated and each capital benefit area a target level of service.

What are the Exact Steps Necessary to Get There From Here?

Once the direction and context is established, attention shifts to mapping out step by step how to accomplish the defined mission. This takes the form of a management plan which lays out in simple language who does what with what by when to move the organization from where it is to where it is to be at a time certain future date. It will take time to create an organization, staff it, acquire equipment and, based on experiential knowledge of the area, set up work processes before sustainable efficiency and effectiveness can be achieved.

How is Success Measured?

Finally, a good management plan includes defined, measurable work standards and performance measures that allow the clear benchmarking and subsequent tracking of performance.

Strategic Budgeting

Analysis should proceed from two fronts: a clear enumeration of the current level of service and costs associated with that level, and program options for enhancing service and costs associated with each. Ultimately, the programs must be reduced to finite budget recommendations. Before this can be accomplished, certain key financial questions must be considered and resolved:

• Are the funds generated from the user charge to be used to fund 100% of all stormwater programs, capital and operations, or should the jurisdiction target a level less than 100% and supplement the user charge revenues with other funds?
• § Should the new funds be used solely to fund enhanced operational efforts over and above current efforts such as a system wide "extraordinary maintenance program" to restore system performance (while maintaining current funding sources and amounts to continue historic efforts)? (Note: the transfer of an existing program with no enhanced program from an existing funding source to a user charge without reducing the tax rate for the original source is a difficult strategy to sell to the public).
• Should the new revenues be devoted solely to capital efforts?
• Will other funds be transferred in to supplement the program? Should financial self-sufficiency be accomplished with an increasing rate over a defined period of time (say, three years), where the rate increase is intended to increase annually until a defined target level of support is achieved?

These options can be presented to the legislative body in work session as program budget options where the flows of funds in and out of the utility fund are presented to the legislative body. The graphic below displays an example program option worksheet from a large, rapidly urbanizing county that has minimal defined current effort.

Click here for a more readable version of the budget chart.

The graphic below reflects a financial strategy from the perspective of a fund structure.

4.3.2 Setting the Rate

Rates are typically set in one of two ways: (1) by dividing the amount of revenue that is to be recovered from the user charge by the total number of estimated billing units for any given year, or (2) by setting the rate at a "politically acceptable level" and "backing" into a budget built around those estimated proceeds. In reality, the process is more typically an iterative combination of the two approaches, where an agency starts with needs (approach one), then tempers it with the political reality of the community involved (approach two).

4.3.3 Summary

The rate structure is secondary in importance to the stormwater management program itself. Trying to sell the community on the need for a user charge without first communicating what the charge will buy has proved time and again to be highly ineffective. Most communities have never defined exactly what they want their stormwater management program to accomplish. Development of a user-based charge for services is an excellent stage on which to define the purpose, level of service and performance targets with the community's legislative body. A clear program statement coupled with a well composed rate structure will go a long ways to achieving the program and financial accountability which is, after all, the heart of the utility concept.