Training Module 7 Budgeting and Capital Improvements Program Overview

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

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

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

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

5. 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!

6. 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

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

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

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

10. 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

11. 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

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

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

14. 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

15. 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!

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

17. Budgets – Exercise 2 • Exercise 2 – Smallville Water Company • Fiscal year: 1-1 to 12-31 • Customers: 200 • Gallons billed last year (000’s): 15,000 • Water rate (base): $15.00/month • Water rate (usage): $2.00/1000 gals • Delinquency rate: 5% • New customers (July 1): 3 • Tap fee: $1,500 • Bulk sales in gallons (000’s): 500

18. 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

19. Budgets – Exercise 2 • This all gives us the following: • User fees: $63,170.25 • Tap fees $ 4,500 • Bulk sales: $ 1,000 • Total projected revenue: $68,670.25

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

21. Budgets – Exercise 3 • Did you get the following? • Salaries/benefits: $15,000 * 1.05 = 15,750 • O&M: $ 5,000 * 1.02 = 5,100 • Chemicals/Testing: $ 4,000 + (50 * 12) = 4,600 • Prof. Services: $ 5,000 + 200 = 5,200 • Debt service: $20,000 = 20,000 • Debt reserve: $ 2,000 = 2,000 • Admin/Office: $ 2,400 + 1000 = 3,400 • System insurance: $ 2,500 + 500 = 3,000 • Electricity: $ 3,600 * 1.04 = 3,744 • Vehicle: $ 1,200 * 1.02 = 1,224 • Miscellaneous: $ 1,200 * 1.02 = 1,224 • Total expense: = 65,242

22. Budgets • Combine that with the revenue and you get the following: • Revenue: $68,670.25 • Expense: $65,242.00 • Total: 3,428.25 • Is the system in good shape? • NO!

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

24. 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

25. 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.

26. 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

27. 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

28. 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

29. 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

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

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

32. 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

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

34. 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

35. 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

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

37. Summary • Key points

38. 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