Many directors of public enterprises such as public utilities and solid waste management have limited or no formal training in accounting and finance. Their backgrounds are often in engineering or operations, so they typically rely on financial professionals either within their department or in the local government's finance department for advice on financial issues. In many municipalities, customer service and billing for the enterprise is managed by the finance department. To excel in their positions, therefore, public finance directors use knowledge and skill sets in all the major business disciplines--accounting, finance, management/operations and marketing.
In most cases, public enterprises are intended to be self-supporting. They should normally be managed much like a business, with their expenditures recovered primarily through charges to users. This means that rate increases are sometimes required, often when:
* User rate revenues are lower than previously anticipated because of economic conditions or weather patterns.
* Operating expenses are higher than previously anticipated, often due to circumstances beyond the local government's control (e.g., energy, chemical and fuel prices, construction materials.).
* Substantial capital investment is needed to prepare for growth in the service area, to address renewal and replacement requirements of the existing infrastructure, or to comply with new regulatory requirements.
* The governing body has decided to initiate or increase transfers from the enterprise fund to the general fund.
There never seems to be a "right time" to request an increase in user rates--the economy is in a recession, or elections are on the horizon. The finance director needs to work closely with the enterprise staff to develop a rate case that will make the enterprise look its best to the governing body, the public, and third parties such as the rating agencies that evaluate the creditworthiness of the enterprise.
To properly assist the enterprise in developing a strong rate case, the finance director needs a fundamental knowledge of best management practices that are applicable to the enterprise, especially financial practices. Best management practices can help keep the enterprise operationally and financially sustainable while minimizing user rate increases over the long term. A credit/bond rating is an assessment of risk, and a well-managed enterprise has less implied risk, which can translate to higher credit ratings and lower interest rates and borrowing costs on debt financings.
User rates should be competitive and affordable. A user rate comparison is a valuable tool (see Exhibit 1) in "selling" rate increases to governing bodies. If the rates are higher than those of neighboring governments, there should be a valid explanation (e.g., differences in service area characteristics). Well-managed enterprises don't always have the lowest rates; enterprises with lower rates might be experiencing operating losses or failing to perform needed renewals and replacements on existing infrastructure.
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Many industry references discuss best management practices, including publications from the three major credit rating agencies, Moody's, Standard and Poor's, and Fitch Ratings. Rating agencies routinely release publications that discuss the best management practices they consider when evaluating an enterprise. Some of these key practices are discussed below.
The enterprise should have business principles or a business plan approved by the governing body. Long-range planning is a proactive approach to managing the enterprise. Rating agencies often request copies of written planning documents because enterprises that plan ahead and have contingency plans may have less financial risk. The finance director should help the enterprise develop appropriate business principles and a long-term plan, as these items will affect management decisions. …