10-19_RPM.ppt

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10-19_RPM.ppt

  1. 1. Funding Asset Replacement: One Agency’s Experience WEFTEC 2000 Anaheim, California October 18, 2000
  2. 2. SRP’s Purpose <ul><li>SRP: “System Replacement Planning </li></ul><ul><li>Help water/wastewater utility management formulate financial policy for long-term system replacement needs </li></ul>
  3. 3. Why? <ul><li>CMOM “long-term spill mitigation” </li></ul><ul><li>GASB 34 “modified approach” compliance </li></ul><ul><li>Establish effective reserve policy </li></ul><ul><li>Defend existing reserves (“Little Hoover” issues) </li></ul><ul><li>Maintain integrity of infrastructure (WIN Report) </li></ul><ul><li>Position for upcoming federal funding </li></ul><ul><li>Key component of good asset management! </li></ul>
  4. 4. Who? <ul><li>Irvine Ranch Water District </li></ul><ul><li>Orange County Sanitation District </li></ul><ul><li>Orange County Water District </li></ul><ul><li>Maui Board of Water Supply </li></ul><ul><li>Roseville Water and Sewer </li></ul><ul><li>City of Oxnard </li></ul>
  5. 5. Elements of an SRP System Replacement Plan Pipe inventory Replacement costs Plant inventory Useful lives Earnings rate Inflation rate
  6. 6. Orange County Water District <ul><li>Major groundwater management agency </li></ul><ul><li>Manages groundwater for 2.2 million people in Orange County </li></ul><ul><li>Significant infrastructure assets (pipes, reclamation plants, wells, etc.) </li></ul><ul><li>Planning (with Orange County Sanitation District) a very large reclamation/recharge project, “GWRS” </li></ul><ul><li>Asset management considered a key issue </li></ul>
  7. 7. Inventories in General <ul><li>Need to inventory assets: </li></ul><ul><ul><li>Plant </li></ul></ul><ul><ul><li>Pipe </li></ul></ul><ul><ul><li>Equipment </li></ul></ul><ul><li>Each asset needs: </li></ul><ul><ul><li>Useful life in years </li></ul></ul><ul><ul><li>Current replacement cost </li></ul></ul>
  8. 8. Useful Life <ul><li>Remaining useful life can be based on assessed condition plus engineering judgment </li></ul><ul><li>If there is no assessment, it can also be based on year in service and “typical” useful life for the type of asset </li></ul>
  9. 9. Replacement Cost <ul><li>What would it cost to replace now? </li></ul><ul><li>This may be higher than original cost, especially pipe (right-of-way issues) </li></ul><ul><li>Changes in standards and technology can also affect replacement cost </li></ul>
  10. 10. Refurbishments <ul><li>Each asset class can have several types of capital refurbishment – for instance: </li></ul><ul><ul><li>Painting </li></ul></ul><ul><ul><li>Electrical rehab </li></ul></ul><ul><ul><li>Mechanical rehab </li></ul></ul><ul><ul><li>New pumps </li></ul></ul><ul><li>Each needs a cost and an interval </li></ul><ul><li>Cost can be a percentage of replacement cost </li></ul>
  11. 11. Tying Assets to the Fund <ul><li>Replacement Fund is the fundamental tool for accumulating replacement money </li></ul><ul><li>Need: </li></ul><ul><ul><li>Starting balance, earnings rate </li></ul></ul><ul><ul><li>Annual replenishment amount(s) </li></ul></ul><ul><ul><li>Percent of replacements funded </li></ul></ul><ul><ul><li>Annual “miscellaneous” costs </li></ul></ul>
  12. 12. Other Funding Sources <ul><li>Rate surcharges </li></ul><ul><li>Special bond issues </li></ul><ul><li>Misc. cash flows </li></ul>
  13. 13. Replacement Planning Model <ul><li>The RPM takes the inventories and financial data and creates reports </li></ul><ul><li>Calculates future replacement costs and facilitates replacement fund analysis </li></ul>
  14. 14. RPM Reports <ul><li>Fund expenditures by year </li></ul><ul><li>Fund balances by year </li></ul><ul><li>Cash flow from bond issuances </li></ul><ul><li>Replacement needs (various categories) </li></ul><ul><li>System replacement value, in aggregate or by sub-system </li></ul><ul><li>Others </li></ul>
  15. 15. RPM’s “Control Panel”
  16. 16. Pattern of Future Costs
  17. 17. Expected Fund Performance
  18. 18. Value of System Assets
  19. 19. Making policy <ul><li>Replacement policy will be a mix of: </li></ul><ul><ul><li>Establishing the initial fund balance </li></ul></ul><ul><ul><li>Setting annual transfers from operations </li></ul></ul><ul><ul><li>Issuing bonds (as needed) </li></ul></ul><ul><ul><li>Assessing user surcharges (as needed) </li></ul></ul><ul><li>Best mix of these four will have smoothest rate impact and will avoid accumulation of large fund balances </li></ul>
  20. 20. OCWD’s Experience <ul><li>OCWD established an asset replacement fund (balance and replenishment amount) </li></ul><ul><li>To control fund expenditures, procedures were needed and questions had to be answered </li></ul>
  21. 21. Typical Questions (1) <ul><li>“We need to replace meters and pump impellors as they are drawn from stock for routine maintenance. Should these be funded from the Replacement Fund?” </li></ul><ul><li>“We’re replacing a pickup, but want the new one to be four-wheel drive with an extended cab. It will cost 50 percent more. How do we handle this?” </li></ul>
  22. 22. Typical Questions (2) <ul><li>“ We’re replacing several desktop computers. The new computers will be far more powerful than the old ones, but the costs will be about the same. Which fund should we charge to?” </li></ul><ul><li>“ Some of our analytical equipment is obsolete, even though it’s only three years old. It cannot detect contaminants at the levels required by new regulations. Does this qualify as a Replacement Fund expenditure?” </li></ul>
  23. 23. Typical Questions (3) <ul><li>“One of our injection wells is failing. We want to replace it with a new one, but to leave the old well in place with limited capacity. Is this a replacement?” </li></ul><ul><li>“We want to extend the lives of some of our pipes by interior coating. Is this a qualifying cost?” </li></ul>
  24. 24. Responding to the Questions <ul><li>Clear policies were needed for expenditures qualifying for the replacement fund </li></ul><ul><li>These policies were built around definitions of key terms: </li></ul><ul><ul><li>Replacements </li></ul></ul><ul><ul><li>Refurbishments </li></ul></ul><ul><ul><li>Upgrades </li></ul></ul><ul><ul><li>Additions </li></ul></ul>
  25. 25. Replacement Criteria <ul><li>“A qualifying investment will replace the functionality of an existing asset, and the existing asset will be taken out of service or remain in a state of severely impaired functionality.” </li></ul>
  26. 26. Refurbishment Criteria <ul><li>“A qualifying investment will maintain an existing asset’s functionality, will have a value of greater that $3,000, and will extend the asset’s life by three years or more.” </li></ul>
  27. 27. Upgrade Criteria <ul><li>An upgrade will qualify for funding if: </li></ul><ul><li>The functionality of the new asset includes the functionality of the asset being replaced </li></ul><ul><li>Management agrees that the added functionality is required or desirable; and </li></ul><ul><li>The cost of the new asset does not exceed 130% of the original cost of the asset being replaced on an inflation-adjusted basis. </li></ul>
  28. 28. Asset additions <ul><li>“An addition is the placing in service of an asset that does not replace the functionality of an existing asset being taken out of service or extend the life of an existing asset. The Replacement Fund does not pay for additions.” </li></ul>
  29. 29. Accounting Effects of Funding <ul><li>Separate funds were set up to account for replacement and refurbishment expenses </li></ul><ul><li>Because of OCWD’s fund structure, this became somewhat complex </li></ul>
  30. 30. Assignment of Expenditures to Funds
  31. 31. RPM Calibration <ul><li>Finally, the RPM needed to be “calibrated” against real-life replacement costs </li></ul><ul><li>For two years, replacement costs have been somewhat lower than RPM forecasts </li></ul><ul><li>Staff is considering adjusting (lengthening) some useful lives to increase forecast accuracy </li></ul>
  32. 32. Summary <ul><li>Orange County Water District has established a replacement fund based on its actual infrastructure inventory </li></ul><ul><li>Policies required for this fund and its use have been put into place </li></ul><ul><li>Staff is dealing with replacement funding programmatically, measuring results, and adjusting policies on an ongoing basis </li></ul>
  33. 33. An Unexpected Benefit <ul><li>OCWD’s bond rating, already high, was upgraded last year </li></ul><ul><li>The rating firm stated that the replacement fund, and staff’s seriousness about its application, contributed to this upgrade </li></ul>
  34. 34. Questions/Discussion Andrew V. Czorny Associate General Manager/CFO Orange County Water District Fountain Valley, CA (714) 378-3271 [email_address] V. Kenneth Harlow Director of Management Services Brown and Caldwell Irvine, CA (949) 260-6152 [email_address]

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