Finance: Capital Planning and Budgeting for Small Water Systems

Transcription

1 Finance: Capital Planning and Budgeting for Small Water Systems Shadi Eskaf Environmental Finance Center at UNC School of Government Water System Management and Operations Workshop and Q&A April 1, 2015 Winston-Salem, NC efc.sog.unc.edu

2 Housed at the UNC School of Government. Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective and financially sustainable ways.

3 How do you plan to keep your water system operational?

4 Start by listing what you have

5 Add a little more detail to the inventory 1. Name 2. Description, specifications 3. Location 4. Age or installation date 5. Expected useful life 6. Notes

6 Example of an Asset Inventory Source: A.M. KAN Work!

7 Another example of an Asset Inventory Source: EPA s Asset Management: A Handbook for Small Water Systems

8 Now add assessment of each asset 7. Condition (and service history) 8. Criticality (how important it is) Group Exercise!

9 Group Exercise: Assess the condition and criticality of the following assets Based on description of the asset, give your opinion on its condition, thinking about how likely/soon the asset might fail Horizontal axis. 1 = very low, 5 = very high Give your opinion on its importance, thinking about consequence or cost if failure occurs Vertical axis. 1 = very low, 5 = very high

10 Asset 1: Elevated Storage Tank The only storage tank in small groundwater system. Installed in Inspected, sand blasted and repainted in Annual visual inspection shows no observable problems. No structural issues noted. Don t know how long it will last. Many customers complaining of low pressure. Possible to pump water directly to customers but would have problems meeting peak demands and will have no fire flow Source: A.M. KAN Work!

11 Asset 2: Well Pump #1 1 of 2 well pumps. Each can supply entire system, but system uses this pump more frequently (the second pump is less reliable). Pump located in the well. Installed in No major rehab work since then. Manufacturer expects pump to last 25 years. Operating within design specifications but is not as efficient as it used to be. Operator not noticing any other visible or audible problems. Routine maintenance is being performed. Source: A.M. KAN Work!

12 Asset 3: Water Main on Elm St. Main serving half of the system s customers. No record of when it was installed. Homes in that area were built in the 1950s. Operator and owner cannot recall any major rehab or replacement work since they took over in the 1990s. Had 5 breaks in the past 2 years, and numerous leaks.

13 Asset 4: Your Choice! Pick any asset from YOUR water system. Describe it to the group and decide on an appropriate condition and criticality score.

14 Place the assets on the risk analysis chart High Low High Source: A.M. KAN Work!

15 Place the assets on the risk analysis chart High Aggressive Monitoring Program Immediate Work Regular Monitoring Schedule for Rehab/ Replacement Low High Source: A.M. KAN Work!

16 Determine timeline for rehabilitating or replacing assets Using inventory and risk assessment, prioritize which assets to work on first and create a timeline to rehab/replace all assets Asset management plans can be long (5-20 years). Adjust the plan regularly. Then focus on next few years (5-10). Identify capital projects and price out each project. This is a capital improvement plan.

17 Example of a Simple Capital Improvement Plan (CIP) 18

18 Plan how you will pay for capital projects (Exercise) Privately owned water system serves 500 customers (nearly all residential). $200,000 in annual revenues. Annual O&M expenses varied between $170,000 and $200,000 in last five years. Have $30,000 saved up (i.e.: in reserves) Operating costs expected to rise in next couple of years. Created a capital improvement plan. Decided to replace well pump and some pipes in 3 years. Will cost $400,000. How will you pay for it?

19 Options for how to pay for it Do nothing. Figure it out when the time comes. Put it on your credit card Start saving ahead of time. Raise rates, lower costs. Take out a bank loan Apply for subsidized loans from the State (see Apply for a grant Mix of the above Sell your water system?

20 Debt versus Cash Debt: $400,000 loan at 2%/year for 20 years: Annual debt service payment of $24,500 (after 20 years, totals to $489,250).

21 Debt versus Cash Cash: how much will you have to raise? Need to pay $400,000 in 3 years. Already saved $30k now Net revenues expect to save another $10k/year, so $30k total in 3 years. So after 3 years will have saved $60k total But want to keep at least $25,000 in reserves at all times. So will have $35,000 to work with. Need to raise $400k - $35k = $365,000 in three years Split evenly across 500 customers and across time: $365,000 / 500 customers / 3 years = $243/customer/year Need to ask customers to pay $20/month more than they already are.

22 What if you don t charge rates? BUDGET FOR YOUR WATER SYSTEM INDEPENDENTLY! Owners of small, privately owned systems can set up a separate account for the water system, or keep detailed records that distinguish water system revenues and costs from the rest of the business. Think of your water system as separate from your other businesses. Track your water system expenses separately. Track your water revenues. A portion of the charges customers are paying for other business (e.g.: rent). Set that money aside for the water system.

23 Track Your Actual Revenues and Expenses Every Year Keep good records Create a multi-year cash flow model. List every year s revenues, expenses and reserve allocations. Last year s ending balance = this year s starting balance. Starting balance + revenues expenses = this year s ending balance. Always keep it above your reserve target.

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25 s/pdfs/final_asset_inventory_for_small_sys tems.pdf

26 Guidebooks on Setting Rates/Financial Planning

27 Water & Sewer Rates Analysis Model Find it in Resources / Tools Free, simplified Excel tool allowing you to model and compare two rate structures on your projected fund balance Funded by NC DENR Public Water Supply Section

28 User-Friendly C.I.P. Tool Find it in Resources / Tools Free, simplified Excel tool allowing you to list your capital projects and plans for funding them, and automatically estimates rate increases Funded by NC DENR Public Water Supply Section

29 EFC Resources for Water Systems to Help with Rate Setting Guidebooks on designing appropriate rate structures based on utility objectives Do-it-yourself tools in Excel to allow you to analyze your rates and try out scenarios Benchmarking rates and financial performance (Rates Dashboard) Documents that provide information and data on NC rates, tap & impact fees, financial practices, etc. Capital planning reference guide Trainings and workshops Direct assistance Weekly blog posts on related financial and managerial issues And more

30 We Can Assist NC Water Systems for free* *thanks to Public Water Supply Section of NCDENR and U.S. EPA! Water systems in NC can contact us for free, in-depth direct assistance on rates and finance issues: Rate setting Fiscal planning Budgeting Capital Improvement Plans Asset Management Plans Affordability Financial performance assessment Benchmarking your rates Access to subsidized capital funding sources Regionalization options Etc. Please let me know if you would like to sign up for direct assistance

31 Acknowledgement Public Water Supply Section (Division of Water Resources, NC DENR) U.S. Environmental Protection Agency 35

32 Shadi Eskaf Environmental Finance Center at the University of North Carolina School of Government, Knapp-Sanders Building CB #3330 Chapel Hill, NC USA efc.sog.unc.edu