Financial Management, Capital Planning, Need for Inflation Adjustments

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1 Your Utility Uses Money as Fuel- Financial Management, Capital Planning, Need for Inflation Adjustments MWEA Lagoon Seminar Presented by: Rich Grant, PE February 2013

2 Proposed Agenda CONCEPTS User Charges Depreciation Inflation Saving Money CAPITAL PLANNING 5-10 yr Plans & Cash Financing Subsidized Financing INFLATION ADJUSTMENTS

3 Concepts User Charges = Reliable Source of Funding Depreciation = Inevitable wear & tear Inflation = Inevitable reduction of buying power Inadequate (Low) User Charge IS NOT Saving Money

4 Capital Planning

5 Capital Planning Your User Charge needs are unique. It s been a political hot topic to compare rates it s not very useful to your utility. If your utility rates are lower than needed, it s not a cost savings but a path to run the utility into the $$ dirt.

6 System Value with Time $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $ Year Funding Half Depreciation Funding No Depreciation Total Investment

7 Cash & Facilities OK OK Disaster Legend: Cash Balance Facilities Condition Cash depletion Facilities & Depreciation

Utility Capital Funding Needs CAPITAL FUNDING OVERVIEW: Collection System Normal wear & tear, replacement Accelerated damage (odor/corrosion effects) Correction of historic

8 Utility Capital Funding Needs CAPITAL FUNDING OVERVIEW: Collection System Normal wear & tear, replacement Accelerated damage (odor/corrosion effects) Correction of historic issues Infiltration/Inflow Overflows? Treatment, Discharge, Reuse Normal wear & tear, replacement New permit requirements (e.g. nitrogen, phosphorus) Correction of historic issues

9 Successful WWTP Upgrade Strategies Reuse Older/excellent technologies Lots more miles of treatment capability!

10 Asset Capitalization Purchase Price + capital improvements Depreciation (wear & tear) Asset life = Years? Maintenance vs. Replacement

11 It s About Dollars - Community Investment Take Ownership Sewer Enterprise Fund How did it get to be so low? Did someone try to save money? Not Spending IS NOT An Option Fuel it Up!

12 Determine & Prioritize Needs Convert 2 ndry Trt to Algae System Location of New 2ndary Treatment Location of New Odor Control Increase Biogas Energy Production

13 Determine & Prioritize Needs Your 5-10yr Plan is used to justify the most appropriate Rates & Charges to keep the town s old truck running TABLE 11 CITY OF 5-YEAR WWPF CAPITAL IMPROVEMENTS SUMMARY Year Item Estimated Cost 1 Chemical Feed Evaluation & Improvements $11,000 RBC Loading Study & Flow Splitter Evaluation $3,000 Biosolids Decant Improvements Design & Construct $80,000 Lift Stn Generator Replacement $60,000 Biosolids Storage Improvements; Design $36,000 2 Secondary Clarifier; Rehabilitation $20,000 Life-Cycle Replacement Fund Evaluation $4,000 Biosolids Storage Improvements; Construct $414,000 3 Digester Improvements; Design & Construct $250,000 4 Digester Improvements; Construct $950,000 5 Digester Improvements; Construct $400,000 Flow Peaking Factor Study $4,000 Develop New 5-Year WWPF Plan $6,000 Total $2,238,000 5 yr Yearly Average $447,600 7 yr Yearly Average $319,700

14 Older Wastewater Utilities Currently known CIP vs Surprises How do you Plan for the Surprises?

Collection System 75 years Calculate Depreciation Rate WWTP + Collection System $945,000/year Fund at

15 Capital Planning UTILITY DEPRECIATION ESTIMATE (COMPARE TO 5YR PLAN) Calculate Utility Value example WWTP $20 million Collection System $28 million Estimate Useful Life WWTP 35 years (dollar-wtd average) Collection System 75 years Calculate Depreciation Rate WWTP + Collection System $945,000/year Fund at Least Half of Estimated Depreciation Common Benchmark i.e. Run the Facilities Twice as Long as estimated

16 Population Paying Customers 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 City of Township2 Township Village Year Source: W.Mich Regional Planning Commission, Customer Communities, US Census Bureau

17 Billable WW Flow Projections City of Village Of Township Township Avg. Daily Flow (MGD) Year Projected Annual Increase 1.0% 0.0% 0.2% 5.0% 2028 Projected Avg. Daily Flow (MGD) Service Capacity Allocation (MGD) *Estimated population based on respective trend projections. Assumes population experiences no change from 2000 to 2028

18 Capital Planning 5-10yr Plans & Cash Financing Plan to Use Cash for everything possible! Develop 5-10yr Plans Adjust Rates & Charges Build the Sewer Fund to a level that will allow this Keep Critical Low Balance Subsidized Financing if the cash is gone SRF (2.5% interest rate) USDA (1.78% 3.125% interest rate) Optimize grant components, each source

19 No more Loans!? Cash financing: Depreciation (~50%) Real Wear & Tear Repair & Replacement

20 Inflation!

21 SEWER CHARGES Sewer Fund Consumed by Inflation $40.00 $35.00 Inflation (Dept. of Labor Bureau of Labor Statistics; CPI) $31.58 $33.23 $35.05 $36.85 Gap $4.75 $30.00 $25.00 $27.00 $27.00 $28.67 $27.00 $30.14 $27.90 $27.90 $27.90 $32.10 $27.84 Proposed Historical Rate Adjustments $ Proposed YEAR

Adjust Rates & Charges FY2010/11 User Charges: $32.46/family/month @ 6,000 gal (City resident) Inflation Adjusted 2003/4*: $41.

22 Adjust Rates & Charges FY2010/11 User Charges: 6,000 gal (City resident) Inflation Adjusted 2003/4*: 6,000 gal (City resident) *Based on C.P.I. We are suggesting: 1.Correct the current rates & charges 2.Tie the future rates & charges to a well-established gage of inflation

23 What is the Condition of the Fund? Critical low balance = $ Preferred balance = $ Current balance. How did it get to be so low? Plan to counteract these issues Enough for the 5-10yr Plan?

Build the Fund Balance ABOVE CRITICAL LOW FUND BALANCE: Cost of Service Basis - Fund balance amount tied to identified needs - Enterprise Fund dedicated

24 Build the Fund Balance ABOVE CRITICAL LOW FUND BALANCE: Cost of Service Basis - Fund balance amount tied to identified needs - Enterprise Fund dedicated for this utility Enough for: - Major equipment replacement (specific units) - Emergency actions (foreseeable, planned) - Unplanned actions, contingencies

25 What s next for Rates & Charges? OR

26 Summary Most Utility Charge Systems are out of date The Utility Value and Reliability will be depleted without sufficient $ Enough User Charge developed by Cost-of-Service specific to your town Process of User Charge Adjustment need not kill the messenger Process: 1. Develop 5-yr and 10-yr plans 2. Correct the current rates & charges 3. Tie future rates & charges to a well-established gage of inflation

27 Discussion & Comment Rich Grant, PE

WHAT IS ASSET MANAGEMENT?

Annual Collections Seminar September 6, 2012 Basic Essentials Plus THE ROMANS HAD PUBLIC UTILITIES HOW ASSET MANAGEMENT CAN PREVENT A FALL Richard P. Grant, PE Jeff Pugh, PE WHAT IS ASSET MANAGEMENT? maintaining