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Applicable for Utility Districts and Authorities

Better Utility Budgeting and Financial Planning

Financial oversight of public utilities is essential to ensuring citizens have access to affordable water, sewer, gas, and other utility services. This oversight must be intentional and planned. The following sections outline several basic best practices in utility budgeting and financial planning.

Review the Audit

Monitoring Blue

Analyze the previous year’s audited financial statements to understand revenue sources and types of expenses. Identify significant changes since the audit (capital additions, issuance of debt, new customers, etc.). Take note of any audit findings or recommendations and ensure they are addressed.

Current Year Operations

Expenditures Red

Evaluate the current year’s operations and consider factors such as changes in customer demand, service levels, and operational efficiency. Identify any unforeseen challenges or opportunities that may impact the budget. Understand the key drivers of costs in the current year, such as personnel expenses, maintenance, and ongoing capital projects. Evaluate whether any cost-saving measures or efficiency improvements can be made.

Revenue, Expense, and Cashflow Projections

Revenues Blue

Consider revenue and expense trends from previous years and project future operations based on factors like customer growth, rate adjustments, and changes in service demand. Forecast cash flows to ensure your utility maintains adequate cash to pay for bills as they become due without the need for operating loans.

Capital Planning

Capital Expenditures Red

Based on the audit and operational assessment, note any critical infrastructure needs or capital projects for the current year. Incorporate these into the budget and consider funding options. Develop a long-term capital improvement plan that aligns with the utility’s strategic goals and will address infrastructure challenges over time. Understanding the current state of assets, planning for their replacement or improvement, and identifying appropriate funding sources, all contribute to the long-term sustainability and reliability of utility services. By integrating the insights from the previous year’s audit and the current year’s operational data, the utility can develop a more accurate and informed budget that reflects the financial reality and goals of the utility. Regular monitoring and adjustments throughout the year are also necessary to respond to changing conditions and ensure financial stability.

Rate Setting

Rate Setting Blue

Rates and charges set by the governing body should be sufficient for all reasonable expenses of operation, including interest and other nonoperating expenses. Rates should also generate enough cash to pay both principal and interest requirements on debt. Rates are expected to be adjusted to cover these costs and should always be reasonable and justifiable. Each utility should have rates sufficient to have a positive change in net position separate from grant proceeds and contributions. Utilities that do not achieve a positive change for two years will be referred to the oversight of the Tennessee Board of Utility Regulation (TBOUR). A policy for periodic rate studies is a proactive and strategic approach to managing the financial health of a utility. Conducting thorough internal reviews during non-rate study years allows utilities to proactively address challenges, optimize operations, and lay the groundwork for informed decision-making in subsequent rate studies. Some utility systems have an annual cost-of-living rate increase that is adopted once, and then rates adjust at an inflationary percentage each year.


Depreciation Red

Depreciation is often one of the largest operating expenses of a utility system. Depreciation is the allocation of the cost of a capital asset (such as equipment and facilities) over its estimated useful life. It helps to accurately reflect the wear and tear on these assets over time and allocate associated costs to the periods in which the asset provides service. Depreciation is crucial in financial reporting, rate-setting, asset management, and decision-making for utilities.

Budget Format

Budget Format Blue

State law requires the budget to be adopted on a basis consistent with generally accepted accounting principles (GAAP). A GAAP format that reconciles to statutory and cash bases helps ensure your rate structure is sufficient to support operations, comply with state law, and have needed cash flow. Columns for the prior audit year, estimated current year, and upcoming budget year, with clearly defined sections assist management and the governing body as they prepare, adopt, and monitor the budget.


Policies Red

Sound financial policies lay the foundation for good financial decisions. At a minimum, you should have policies for internal controls, budget adoption, cash flow management, billing, rate increases/adjustments, asset management, and debt management.


Budget to Actual Blue

Once you have the annual budget adopted and long-term financial plans in place, they should be reviewed and updated as needed to make sure your utility system remains on track.

Schedule of Outstanding Debt

Cash Flow Forecast Schedule

Basic Cash Flow Estimating

Cash Flow Management


A Utility District's or Authority's ability to track how much revenue is coming into the Utility and how much is going out is vital to its fiscal health. Prior to its adoption, the budget must contain adequate revenues to fund operations throughout the year.

Forecasting Budgetary Amounts


Mechanisms for forecasting revenues and expenditures that consider economic trends and growth rates provide for reliable revenue estimates. Utility Districts or Authorities that do not routinely forecast budgetary amounts may find revenues overstated and expenditures understated.