Revenue Sources and Uses
Customer payments for sewer services comprise MSD’s primary source of income to fund day-to-day operations and the capital program. Other revenues include surcharges collected from industrial customers whose sewage exceeds defined concentration limits, and miscellaneous connection fees, septic hauler charges, and interest on deposits. These revenue-based funds are used to cover MSD operating expenses and debt service on borrowed capital needed to pay for infrastructure projects (the capital program). After these spending needs are met, remaining revenues are used to help fund capital programs.
The figure at upper right shows that sewer service charges constitute the bulk of our revenue-derived income. The figure at left shows that the largest proportion of total expenditures is used to cover operating expenditures. The figure below shows how operating expenditures are allocated among personnel, contracted services, and utilities, fuel, and supplies.
Note: Click figures for larger views.
Operating Expenditures
Operating expenditures include utilities (such as electricity, natural gas, and water), employee salaries and benefits, maintenance of our facilities, fleet-related costs, professional services/contracted services, and materials and supplies. As new technologies and improvements are implemented, MSD strives to hold the operating budget constant.
Debt Service
The majority of annual capital expenditures are covered by funds borrowed through the bond market or low-interest loan programs. The annual interest, or debt service, is paid for by sewer service revenues. MSD is required to show funders that there is enough revenue to cover all operating expenses and the debt service through a performance indicator known as “debt service coverage.” MSD chooses to maintain at least a 1.5 coverage ratio; this means that net revenue is 1.5 times higher than the projected debt payment. The higher the ratio, the more comfortable funders will be in loaning funds, and the lower the interest rate they will offer. That is why we place so much importance on maintaining or improving our bond rating.
In 2009, our debt service coverage was 1.9, somewhat better than our policy target of 1.5. Our debt service as a percentage of total operating expenses was 38.2 percent, well below the maximum of 50 percent set by MSD financial policy.