11/7/2017. Planning, Financing & Replacing Utility Equipment. Our Mission. Environmental Finance Center Areas of Focus

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1 Planning, Financing & Replacing Utility Equipment 2017 KS/IIMC Municipal Clerks Certification Institute & Master Academy November 15, 2017 Presented by: Nicholas Willis, Program Manager Wichita State University Environmental Finance Center Our Mission To be a collaborative resource, creating solutions to environmental challenges to improve quality of life in communities. Environmental Finance Center Areas of Focus Asset Management Energy Management Planning Financial Management Leadership Through Decision-making and Communication Managing Drought Water Loss Reduction Collaborating with Neighboring Communities Water Conservation Management and Finance 101 Workforce Development Board Training Budgeting 1

2 Training & Technical Assistance If your water utility serves less than 10,000: Board training Water auditing Asset management Capital Improvement Planning Equipment Replacement Planning Workforce Planning Full Cost of Services Long term, all costs MUST be recouped How much is this? How to finance? Divide: Operations & Maintenance Repair, Rehab & Replace Capital Improvement Enterprise or General? Enterprise Fund User charges Reserve accounts Auditing Annual budget Local control General Fund Taxes & some fees Reserve accounts Auditing Annual budget Limited local control 2

3 Municipal Utility Best Practices Users pay for service full cost Utilities neither subsidize or are subsidized Limit transfers in/out Labor & equipment well documented if shared Annual updates of: Budgets Capital Improvement Plans Equipment Replacement Plans Funding Sources Internal/External Funding: Capital Projects Internal Funding: Operation and Maintenance Loans Grants Customer Rates Customer Fees Special Funds Impact Fees Taxes Bonds Quick Poll Raise your hand if you are older than the community you work for 3

4 Importance of Long Term Planning Infrastructure Lifespan Infrastructure on tail end of usable lives Civilization does not exist without: Water Sewer Energy Transport Rome (and Lindsborg, Norton, Onaga & Coffeyville) weren t built in a day Planning required to rebuild Quick Poll Raise your hand if your community has at least one reserve account with money in it Quick Poll Raise your hand if your community has utility reserve account(s). 4

5 Financial Reserves Best practice to have cash available in reserve Accounts have different names Having cash > having various accounts One account can be sufficient Needs funded Financial Reserves Operational 3 6 months expenditures Smooths cash flow Allows for rainy days Allows to absorb higher than expected costs Debt Service Reserves Required by lender Reduces interest costs Repair/Replacement Based on schedule Varies year to year Savings account for high priced items that are too cheap for debt High Service Pumps Tower maintenance Well servicing Emergency Covers unexpected costs Minimum of current cost of most expensive capital item not in inventory Depreciation Depreciation shows the cost of a long lived asset Utilities use straight line depreciation in most cases to show true costs of capital items Depreciation shown in budget as expense Example. $10,000 motor with a 10 year life Annual depreciation cost of $1,000 5

6 Capital Improvement Reserves Necessary to pay upfront costs Engineering, land, surveys, legal, etc. Informed by Capital Improvement Plan Use reduces debt burden Reserve fund most likely to have large swings in value Best practice transfer most depreciation expense to this fund PLANNING FOR ASSET REPLACEMENT Utility Assets Water & Sewer Utility Mostly long lived capital assets Numerous assets with 5 20 year lives Lots of assets can be rebuilt or rehabbed Proper O&M can extend asset lives 6

7 Repair, Replace & Rehab Planning Target expensive, but not too expensive assets Pumps Electric motors Hydrants Chlorinators Filter media Tank painting/maintenance Prioritization of Equipment Replacement Criticality: Cost of failure Direct cost to repair Legal, social, environmental, bad press, closure of schools, businesses, hospitals, roads, etc. Likelihood of failure Moving parts Past experience Redundancy Maintenance/neglect Critical Assets Risk Analysis Medium Risk Low Risk High Risk Medium Risk Which category of assets do I care about the most? The least? Probability of Failure 7

8 Decreasing criticality Decrease cost and/or probability of failure Maintain, maintain, maintain Spare parts Replacement/rebuild Build redundancies Other Factors Prioritization Lead time I can select from 100 s of in stock pickups How many 125 hp centrifugal pumps are in stock? Spare parts Obsolescence Upcoming significant expenses Large tires, rebuilds, software licenses, etc. Budgeting For Repairs, Replacement & Rehabilitation Best Practices Estimate costs Establish equipment reserve Fund reserve Pay from reserve Estimate costs 8

9 Financing Repair, Replacement and Rehabilitation of Assets Best practice pay from reserve funds Other options: If long lived (i.e., sewer pipe lining): Outside financing If short lived (i.e., ¾ truck): Municipal Lease Purchase Municipal Lease Purchases Municipalities cannot take bank loans in KS Lease/purchase achieves same purpose Generally used for mobile equipment Many banks will run a lease/purchase Tax advantages to lenders How it looks From KS Dept of Administration 9

10 Exercise Budgeting for Repair, Replacement & Rehabilitation Capital Improvement Planning Looks longer term 5+ years Typically: Details price of more expensive assets Inclusive design, finance, construction, disposal Identifies year of project Includes justification Written explanation of need, alternatives, risks if not completed, comfort level of cost estimate Reasons for Capital Improvement Planning Meeting regulatory requirements Proactive not reactive Inform future decision makers Funding institutions see system thinks long term Not binding, unlike annual budgets 10

11 Tips for Capital Improvement Planning Set arbitrary minimum price for asset Stay realistic Five year minimum Justify need Coordinate with other projects Look at broad options Detail funding options Discuss openly Capital Improvement Plan Plan to include example CIP for discussion Capital Improvement Planning Exercise 11

12 Training Opportunities Capital Improvement Plan Feb 13, 2018 McPherson Rates & Finance (1 CMC or 1 MMC) Nov. 2, 2017 Gardner Dec. 14, 2017 Dodge City Jan. 25, 2018 Salina April 19, 2018 Pittsburg May 17, 2018 Newton KanCap Board Training (1 CMC or 1 MMC) Dec. 7, 2017 Pratt Asset Management Nov. 1, 2017 Gardner Dec. 13, 2017 Dodge City Jan. 24, 2018 Salina April 18, 2018 Pittsburg May 2, 2018 Wichita Questions Contact: Nicholas Willis, Program Manager WSU Environmental Finance Center nicholas.willis@wichita.edu