ARE WE MINDING THE STORE ON OUR PROPRIETARY FUNDS?
Transcript of ARE WE MINDING THE STORE ON OUR PROPRIETARY FUNDS?
© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC
ARE WE MINDING THE STORE ON OUR PROPRIETARY FUNDS?UTIL ITY RATES AND OTHER REVENUE RECOVERY STRATEGIES
November 4, 2021
2© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC
AGENDA
• Sample Poll and Introductions
• What Store?
• Whose Job is it?
• How to Manage Any Store
• What is Trending?
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SAMPLEPOLL
Join by text message:
Text NEWGEN920 to 22333
Join online:
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We would like to encourage audience participation in this presentation. Please scan the QR code with your smartphone to respond to our polls. Please just join as a guest; you do not need to create an account.
© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC
INTRODUCTIONS
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Chris EkrutPartner and
Chief Financial Officer
Matthew GarrettPartner and
Managing Director
Megan KirklandSenior
Consultant
WHAT STORE?We just serve the public good, right?
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WHAT ARE PROPRIETARY FUNDS?
• Proprietary funds define operating revenues and expenses consistent with the precepts of GASB No. 9 paragraphs 16 – 19 and 31.
Cash receipts from customers, cash receipts from interfund services provided and used with other funds and other operating cash receipts. All other revenues or expenses recognized are non-operating.
https://www.gfoa.org/materials/basis-of-accounting-versus-budgetary-basis
• Proprietary funds use the full accrual basis of accounting.
Revenues are recognized when earned.
Expenses are recognized when they are incurred.
• Often expected to “Pay for Themselves”
Not always the case
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PROPRIETARY FUNDS(INTERNAL AND ENTERPRISE)
• Airport
• Building Inspections
• Convention Center
• Electric
• Environmental Services
• Fiber
• Health Services
• Internal Services
• Long-term Disability
• Municipal Radio
• Natural Gas
• Sanitation
• Stormwater
• Street Maintenance
• Water
• Wastewater
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POLL
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Text NEWGEN920 to 22333
Join online:
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INTERNAL SERVICES
• Between a Rock and a Hard Place SB2 has caused more General Fund pressure and likely increased need for
appropriately sharing Internal Service expenses
Cost allocations already have increase pressures from operational increases and capital demands
• Direct and Indirect Cost Allocations Should be Reviewed Annually
Key personnel for each service providing department should be asked if and how operational changes are expected to revise costs to serve others.
“…doing the allocation across all departments, even if the government does not actually charge those departments in the same fund, will assist in ensuring the government will not overcharge other funds for costs beyond their share.”
• https://www.gfoa.org/materials/measuring-the-full-cost-of-government-service
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WHOSE JOB IS IT?Don’t we have Directors in charge of these enterprises?
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POLL
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Text NEWGEN920 to 22333
Join online:
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IMPORTANCE OF LOCAL OFFICIALS IN UTILITY MANAGEMENT
Utilities operate like a business, though the product being sold is a vital resource shared by all members of the community.
Just like any business, Council is the “Board of Directors” who must be able to address complex industry challenges including rising costs, aging infrastructure, and customer affordability.
As the utility’s Board, Council must ensure the viability of the enterprise by setting projected revenues to match or exceed expenses and confirming that financial metrics are met.
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• Everyone Listed Plays a Part! From Council to the Budget
Analyst Assigned to the Function
• Finance Plays a Vital Role Monitoring for Council
Objectives Bubbling Up Any Concerns Promoting Emerging Best
Practices
WHO ELSE IS RESPONSIBLE FOR “MINDING THE STORE?”
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City Council
City Manager
ACMAdministration
Finance Director/Staff
ACMOperations
Operations Director/Staff
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FINANCE OFFICER’S ROLE IN FISCAL SUSTAINABILITY
1. Promote the consideration of full lifecycle costs in making investment decisions.
2. Promote preventative investments.3. Supplement budgeting with methods to systematically improve efficiency.4. Create the right incentives.5. Promote analysis of intergenerational equity and socio-economic equity in
capital investment and financing.6. Integrate resiliency into capital project evaluations.7. Regularly update long-range financial plans and forecasts.
• https://www.gfoa.org/materials/role-of-the-finance-officer-in-supporting-fiscal-sustainability
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HOW TO MANAGE ANY STOREAre there general best practices we can use?
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THE GOLDEN GOOSE
• Protect the asset that produces the good or service
• Starving Enterprise Funds from needed reinvestment has the same outcome
• Texas Section ASCE 2021 Report Card
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ASSET MANAGEMENTEXAMPLE BURIED ASSETS REPLACEMENT CYCLE ANALYSIS
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$0
$2
$4
$6
$8
$10
$12
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065
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Replacement Year
$0
$2
$4
$6
$8
$10
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2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065
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Replacement Year
Planned Reinvestment (Buried Assets CIP)
$0
$2
$4
$6
$8
$10
$12
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Replacement Year
Cast Iron Planned Reinvestment (Buried Assets CIP)
$0
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$4
$6
$8
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Replacement Year
PVC Cast Iron Planned Reinvestment (Buried Assets CIP)
$0
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Transite PVC Cast Iron Planned Reinvestment (Buried Assets CIP)
$0
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Replacement Year
Ductile Iron Transite PVC Cast Iron Planned Reinvestment (Buried Assets CIP)
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FORECASTING EXPENSES
• Know your major cost drivers Personnel
Contracts
Fixed vs. Variable Costs
• Immediate needs may require debt structuring to make CIP feasible
• Visit with operations and management
• Forecast for most realistic future expenses possible
https://www.gfoa.org/materials/inflationary-indices-in-budgeting
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MHI, CPI AND WATER AND SEWER SERVICE INCREASES
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• Median household income (MHI) increased 61% (2.4% per year)
• Inflation (CPI) increased 50% (2.0% per year)
• Water and sewer service costs increased 157% (4.8% per year)
Index: 2000 = 100; Bureau of Labor Statistics (BLS), Bureau of the Census
Water and Sewer Service Cost Index257
Consumer Price Index
150100
Median Household Income 161
2000 2005 2010 2015 2020
From 2000 to 2020:
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FORECASTING REVENUES
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• Know your customers and third-party funding Customer usage and trend analysis
Contract terms and market options
Outside funding, especially if significantly subsidized
• Visit with operations and management
• Forecast realistically but with a bias toward conservative estimates
Easier to slightly exceed targets than miss them
• Anticipate effect of rate design on your objectives
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POLL
Join by text message:
Text NEWGEN920 to 22333
Join online:
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Please respond with your Top 3 Water Rate Objectives
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EXPLORE AND MAXIMIZE ALTERNATE REVENUE SOURCES
• Grants ARPA, Coronavirus Local Fiscal Recovery Funds (CLFRFs) and many others
• Impact Fees 50% or Credit Method
• Make sure credit calculation is used to maximize potential for growth to pay for growth
Update at least every 5 Years• Do it sooner if growth and capital demands change
• Miscellaneous Fees If not reviewed periodically, you’re likely losing money on each transaction!
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WHAT IS TRENDING?What is Impacting Utility Costs and Revenue Recovery Strategies
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TRENDS A-TO-Z GUIDE – THE VERY ABRIDGED VERSION
• “A” -ations Conservation
Deterioration
Expectation
Inflation
Legislation
Litigation
Population Migration
Resignation
Stratification
• “Z” -zations Capitalization
Municipalization
Optimization
Prioritization
Privatization
Regionalization
Reorganization
Subsidization
Visualization
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WATER
• Source Water Scarcity, Especially in Fast-growing Areas Some looming moratoriums on growth and/or significant capital investments
Wholesale contracts for compliance and planned shortages
CCN/Service Area Battles
• SB3 Compliance
• Gradualism in Rate Design Cost of Service, Inclining Blocks, Meter Equivalency
Multifamily and Major Industrial Rate Revisions
Affordability Concerns
• Growth Funding via Impact Fees Average impact fees are increasing
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Texas ASCE Score (2021) C-
EPA’s Drinking Water and Wastewater Utility Customer Assistance Programs
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WASTEWATER
• Treatment New Per- and Polyfluoroalkyl Substances (PFAS) Regulations
Proliferation of small systems and package plants to facilitate development
• SB3 Compliance
• Rate Design Residential Winter Average or Caps are Expected
Strength Surcharging - Often desired, but not as common as expected
• Reuse and Cogeneration Applications are Expanding
• Growth Funding via Impact Fees Average impact fees are increasing
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Texas ASCE Score (2021) D
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STORMWATER
• Growing in Adoption Statewide
Residential fees range from $1 to over $22, with an average of $5.62
Impervious area is the standard, shown in the chart
Use of discretionary exemptions vary
• Fees in Lieu of Detention
• Growth Funding via Impact Fees
Not commonly used, but allowed under LGC 395
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Texas ASCE Score (2021) C-
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AIRPORT
• $100 Hamburgers !!
Expression for Pilots on Day Travel
Also lend itself Known Subsidies of Operations for the Economic Impact
• Common Fee Review
Hangar Leases
Fuel
• Significant FAA and TxDOT Capital Funding with Average of Only 10% Local Match
Draft Plan: https://ftp.txdot.gov/pub/txdot-info/avn/capital-improvement/2022-2024-cip.pdf
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Texas ASCE Score (2021) B-
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ENERGY – ELECTRIC AND NATURAL GAS
• Winter Storm Uri Funding the colossal energy bills from the event
SB3 Compliance• Emergency Preparedness and Critical Customer and System Information
• Renewables and Sustainability Can be a tough balancing act with Affordability
• Natural Gas Cast iron, wrought iron and steel line replacement requirements
• Electric Distributed Generation Pricing
Reviews and Updates to Transmission Cost of Service
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Texas ASCE Score (2021) B+
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SOLID WASTE
• Process Improvement, including Route Planning
• 3rd Party Contracts are Common Renegotiating or Competitive Procurements
Recovering More of Billing Administration Costs
Service Level Reviews Balancing Service and Fees
• Evaluating Economics of Recycling
• Waste to Energy
• Resource: https://www.gfoa.org/materials/municipal-solid-waste-management-and-full-cost-accounting
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Texas ASCE Score (2021) B
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STREET MAINTENANCE &TRANSPORTATION UTILITY
• Dedicating Portion of Sales Tax
• Committing Part or All of Franchise for Road Improvements
• User Fee Based on Trip Generation Factors
• Growth Funding via Impact Fees
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Texas ASCE Score (2021) D+
© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC
BUILDING INSPECTIONS • Fee Resets – Partially Legislative
Response
• Fees may also warrant adjustment as wages increase
• Staff Augmentation with 3rd Party Plan Review and Inspections
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IN SUMMARY
• Proprietary Funds are Distinct from General Government They require different accounting and management practices
Finance should play a key role
• Best Practices for Finance Inventory, maintain and plan for replacement of infrastructure
Get to know the core business and enterprise leadership
Forecast conservatively – Bias realistically higher cost and lower revenues
Know how your rate decisions affect customers and align to policy objectives
• Monitor Industry and Local Trends to Better Inform Revenue Strategies Communicate these in plain language to decision-makers early and often
Avoid financial surprises at the top, especially when foreseeable
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© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC
THANK YOU FOR YOUR TIME AND BEST OF LUCK WITH YOUR PROPRIETARY FUNDS!
Chris EkrutOffice: (972) 232-2234
Matthew GarrettOffice: (972) 675-7699
Megan KirklandOffice: (972) 432-6218