Training Module 7 Budgeting and Capital Improvements Program

Training Module 7 Budgeting and Capital Improvements Program Overview Prepared by RCAP Solutions for the PA Department of Environmental Protection

Introduction • Elements of a budget and rate implications • Revenue and expense projections • Elements of Capital Improvements Planning (CIP) 1

Budgets • Defined: • A projection of revenues and expenses • Revenues – funds received • Expenses – funds expended 2

Budgets • Effective management tool • May be required by funding agency • Revenue projections need: – Rate structure – Number of customers – Amount of water billed for 3

Budgets – Exercise 1 • Exercise 1 – Smallville Water Co – Customers: 200 – Gallons billed last year (000’s): 15, 000 – Water rate (base): $15. 00/month – Water rate (usage): $ 2. 00/1000 gallons • Project their maximum user revenue! 4

Budgets – Exercise 1 • Here’s the most the system can expect next year in user revenue: • (200 cust. * 12 mths * $15/mth) + ($2/water unit * 15, 000 water units) = $36, 000 + $30, 000 = $66, 000 5

Budgets - Revenues • This is likely the maximum amount the water system can expect in user revenue because… • It assumes everyone will pay 6

Budgets - Revenues • Modify this projection by the delinquency rate • This rate can be determined from the past or can be assumed 7

Budgets - Revenues • Other types of revenue to project: – Tap fees – Bulk sales – Late fees – Interest income • Knowledge of local officials and personnel 8

Budgets - Revenues • These projections form the Revenues section of your budget • This section will tell you the amount of funds you will likely have without a rate restructuring 9

Budgets - Expenses • Some expenses don’t change such as amortized loan payments (think car loan or mortgage payment) • For RUS loans, don’t forget to include the debt reserve payment if you have one 10

Budgets - Expenses • Other expenses can vary such as: – Utilities and chemicals – Salaries – Office expense – Equipment and repairs – Vehicle expense – System insurance – Professional services 11

Budgets - Expenses • Utilities and chemicals vary along with consumption • A well-designed rate structure is critical to prevent financial shortfalls 12

Budgets - Expenses • You can use some of last year’s expenses after adjusting them for inflation and increases • Ask a lot of forward-thinking questions 13

Budgets - Expenses • Asking and answering those questions will help you to better picture your water system in the future • That’s what a budget is all about! 14

Budgets - Expenses • Involve the local officials and personnel, the more the better • Don’t rely solely on your engineer or other single party 15

Budgets – Exercise 2 • Exercise 2 – Smallville Water Company – – – – – Fiscal year: Customers: Gallons billed last year (000’s): Water rate (base): Water rate (usage): Delinquency rate: New customers (July 1): Tap fee: Bulk sales in gallons (000’s): 1 -1 to 12 -31 200 15, 000 $15. 00/month $2. 00/1000 gals 5% 3 $1, 500 16

Budgets – Exercise 2 • Did you get the following? – (15, 000 water units / 12 mths ) / 200 cust. = 6. 25 water units – (3 cust. * 6 mths * $15/mth) + (3 cust. * 6. 25 water units * $2/unit * 6 mths) = $270 + $225 = $495 – $495 * (1. 0 – 0. 05) = $470. 25 – $1500 * 3 = $4500 – $2 * 500 = $1000 17

Budgets – Exercise 2 • This all gives us the following: – User fees: – Tap fees – Bulk sales: – Total projected revenue: $63, 170. 25 $ 4, 500 $ 1, 000 $68, 670. 25 18

Budgets – Exercise 3 • Exercise 3 – Smallville Water Company • Use the information in your workbook to determine the projected expenses for the upcoming budget period 19

Budgets – Exercise 3 • Did you get the following? – – – Salaries/benefits: O&M: Chemicals/Testing: Prof. Services: Debt service: Debt reserve: Admin/Office: System insurance: Electricity: Vehicle: Miscellaneous: Total expense: $15, 000 * 1. 05 $ 5, 000 * 1. 02 $ 4, 000 + (50 * 12) $ 5, 000 + 200 $20, 000 $ 2, 400 + 1000 $ 2, 500 + 500 $ 3, 600 * 1. 04 $ 1, 200 * 1. 02 = 15, 750 = 5, 100 = 4, 600 = 5, 200 = 20, 000 = 2, 000 = 3, 400 = 3, 000 = 3, 744 = 1, 224 = 65, 242 20

Budgets • Combine that with the revenue and you get the following: – Revenue: – Expense: – Total: $68, 670. 25 $65, 242. 00 3, 428. 25 • Is the system in good shape? • NO! 21

Budgets - Conclusion • Pretty basic example • Budget aids – “one-size fits all” does not apply • Completed budget for Smallville in Appendix 1 22

Capital Improvements Planning • Smallville’s budget is good for that time period but what about major purchases beyond then? • That’s where Capital Improvements Planning or CIP comes in 23

Capital Improvements Planning • Defined: • Capital Improvements Planning (CIP) is a five step planning process where the necessary future acquisition or replacement of expensive parts, repairs, or procedures (capital improvements) are considered. 24

Capital Improvements Planning • Reasons for CIP include: – – – Avoid budget shortfalls Protect public health and welfare Provide a window into the future Reduce needless or frivolous spending Reveal that the current rate structure is inadequate Provide the necessary time to apply for funding 25

Capital Improvements Planning • Decisions to make before you start: – Who to include on the CIP team and who is to be the lead – How to include public input – How long to plan for and what constitutes a capital improvement – How often to update the CIP program and schedule 26

Capital Improvements Planning • Five steps of CIP: – Inventory existing capital equipment conditions – Evaluate existing capital equipment conditions – Prioritize the capital improvement needs – Identify the funding and/or rate restructuring options – Schedule the capital improvements to match the funding 27

Capital Improvements Planning • Step 1 - Inventory existing capital equipment conditions – New or replacement mains or lines – Pumps – Vehicles – Tank painting – New or replacement equipment at the plant 28

Capital Improvements Planning • Step 2 - Evaluate existing capital equipment conditions • How long? • How much? • How important? 29

Capital Improvements Planning • Step 3 - Prioritize the capital improvement needs • Based on your evaluations from the last step, prioritization should not be difficult. 30

Capital Improvements Planning • Step 4 - Identify the funding and/or rate restructuring options • Show me the money! • Options if surplus funds are limited – Rate restructuring – Debt funding 31

Capital Improvements Planning • Limited grants may be available • Budget for capital improvements 32

Capital Improvements Planning • Keep the improvements as affordable as possible • Avoid “wish-list” items • Capital improvements may need to be made regardless of their effect on affordability 33

Capital Improvements Planning • Step 5 - Schedule the capital improvements to match the funding • This schedule becomes the Capital Improvements Program • Not set in stone and doesn’t obligate the system 34

Exercise • Take a few minutes to complete the exercise in the workbook 35

Summary • Key points 36

References • Dennis Lee , PA Department of Environmental • • • Protection Don Schwartz, PA/NJ Program Manager, RCAP Solutions Jean Holloway, Training Manager, University System of Maryland, Environmental Finance Center “Capital Improvements Planning” presentation by Jean Holloway 37