10-19_RPM.ppt
Transcript of 10-19_RPM.ppt
Funding Asset Replacement:One Agency’s Experience
WEFTEC 2000Anaheim, CaliforniaOctober 18, 2000
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SRP’s Purpose
SRP: “System Replacement Planning
Help water/wastewater utility management formulate financial policy for long-term system replacement needs
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Why?
CMOM “long-term spill mitigation”
GASB 34 “modified approach” compliance
Establish effective reserve policy
Defend existing reserves (“Little Hoover” issues)
Maintain integrity of infrastructure (WIN Report)
Position for upcoming federal funding
Key component of good asset management!
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Who?
Irvine Ranch Water District
Orange County Sanitation District
Orange County Water District
Maui Board of Water Supply
Roseville Water and Sewer
City of Oxnard
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Elements of an SRP
SystemReplacement
Plan
Pipe inventory
Replacement costs
Plant inventory
Useful lives
Earnings rate
Inflation rate
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Orange County Water District
Major groundwater management agencyManages groundwater for 2.2 million people in Orange CountySignificant infrastructure assets (pipes, reclamation plants, wells, etc.)Planning (with Orange County Sanitation District) a very large reclamation/recharge project, “GWRS”Asset management considered a key issue
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Inventories in General
Need to inventory assets: Plant Pipe Equipment
Each asset needs: Useful life in years Current replacement cost
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Useful Life
Remaining useful life can be based on assessed condition plus engineering judgment
If there is no assessment, it can also be based on year in service and “typical” useful life for the type of asset
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Replacement Cost
What would it cost to replace now?
This may be higher than original cost,
especially pipe (right-of-way issues)
Changes in standards and technology
can also affect replacement cost
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Refurbishments
Each asset class can have several types of capital refurbishment – for instance: Painting Electrical rehab Mechanical rehab New pumps
Each needs a cost and an interval
Cost can be a percentage of replacement cost
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Tying Assets to the Fund
Replacement Fund is the fundamental tool for accumulating replacement money
Need: Starting balance, earnings rate Annual replenishment amount(s) Percent of replacements funded Annual “miscellaneous” costs
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Other Funding Sources
Rate surcharges
Special bond issues
Misc. cash flows
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Replacement Planning Model
The RPM takes the inventories and
financial data and creates reports
Calculates future replacement costs and
facilitates replacement fund analysis
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RPM Reports
Fund expenditures by yearFund balances by yearCash flow from bond issuancesReplacement needs (various categories)System replacement value, in aggregate or by sub-systemOthers
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RPM’s “Control Panel”
Pattern of Future Costs
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Expected Fund Performance
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Value of System Assets
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Making policy
Replacement policy will be a mix of: Establishing the initial fund balance Setting annual transfers from operations Issuing bonds (as needed) Assessing user surcharges (as needed)
Best mix of these four will have smoothest rate impact and will avoid accumulation of large fund balances
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OCWD’s Experience
OCWD established an asset replacement fund (balance and replenishment amount)
To control fund expenditures, procedures were needed and questions had to be answered
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Typical Questions (1)
“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?”
“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?”
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Typical Questions (2)
“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?”
“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?”
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Typical Questions (3)
“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?”
“We want to extend the lives of some of our pipes by interior coating. Is this a qualifying cost?”
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Responding to the Questions
Clear policies were needed for expenditures qualifying for the replacement fund
These policies were built around definitions of key terms: Replacements Refurbishments Upgrades Additions
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Replacement Criteria
“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.”
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Refurbishment Criteria
“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.”
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Upgrade Criteria
An upgrade will qualify for funding if:
The functionality of the new asset includes the functionality of the asset being replaced
Management agrees that the added functionality is required or desirable; and
The cost of the new asset does not exceed 130% of the original cost of the asset being replaced on an inflation-adjusted basis.
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Asset additions
“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.”
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Accounting Effects of Funding
Separate funds were set up to account for replacement and refurbishment expenses
Because of OCWD’s fund structure, this became somewhat complex
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Assignment of Expendituresto Funds
Purchase item orservice
Is it a project?
Is it a newproject?
PROJECT(system asset or
infrastructure)
901 CapitalFund
60-01 account70-01 account
991 ReplacementFund
60-01 account70-01 account
A NEW PROJECT
Is it replacing aretired asset?
NOT A PROJECT(fixed asset or
service & supply)
REPLACING AFIXED ASSET
Is it a Replacementor a refurbishment?
NOT A NEW PROJECT
A NEWFIXED ASSET
991 RefurbishmentFund
60-02 account
REFURBISHMENT(on-going repairs)
REPLACEMENT(one-time)
881 GeneralFund
Service & Supplies14-01 to 39-99
accounts
901 CapitalFund
40-01 account40-02 account
991 ReplacementFund
40-01 account40-02 account
Is it less than$1,000?
LESS THAN $1,000service or supply
GREATER THANOR EQUAL TO
$1,000
Amount aboveoriginal operational
level?
Amount aboveoriginal operational
level?
AMOUNT ABOVEORIGINAL
OPERATINGVALUE
AMOUNT OFORIGINAL
OPERATINGVALUE
AMOUNT OFORIGINAL
OPERATINGVALUE
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RPM Calibration
Finally, the RPM needed to be “calibrated” against real-life replacement costs
For two years, replacement costs have been somewhat lower than RPM forecasts
Staff is considering adjusting (lengthening) some useful lives to increase forecast accuracy
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Summary
Orange County Water District has established a replacement fund based on its actual infrastructure inventory
Policies required for this fund and its use have been put into place
Staff is dealing with replacement funding programmatically, measuring results, and adjusting policies on an ongoing basis
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An Unexpected Benefit
OCWD’s bond rating, already high, was upgraded last year
The rating firm stated that the replacement fund, and staff’s seriousness about its application, contributed to this upgrade
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Questions/Discussion
Andrew V. CzornyAssociate General Manager/CFOOrange County Water DistrictFountain Valley, CA(714) [email protected]
V. Kenneth HarlowDirector of Management ServicesBrown and CaldwellIrvine, CA(949) [email protected]