18843_Authority_Dec

54 The Authority │ December how often you purchase chemicals can influence their cost in any given year but an average of several years can provide a better annual cost. Equipment Maintenance Costs There are many other operation and maintenance costs that can be analyzed, but authorities will know which ones will have the biggest impact and whether a history of those costs will benefit projecting them over a three-to-five-year period. Equipment maintenance tends to be cyclical, meaning that major maintenance projects are needed every three to ten years. Knowing the maintenance schedule is more important than simply recording the annual costs . However, if a detailed schedule is not readily available, looking at historical expenditures can be useful in estimating future costs. Using the Forecast to Plan for Capital Replacements and Upgrades The focus of the detailed analysis described above is to assist in the preparation of more accurate revenue and expense projections over a three-to-five-year period so that those projections can be used for long-term capital planning. Capital replacements and system upgrades are usually described in an overall capital plan; however, those plans often do not specify definite dates for these projects, but user rates need to be established in advance to fund these investments. Smaller projects may be funded internally by increasing user rates and creating a project fund from which the cost of the project can be paid. Larger projects will likely need some form of external financing for them to be undertaken and completed. This may take the form of a grant or a loan. Both grant agencies and lenders look at the authority’s financials before committing funds to a project. They look for assurance that the users are contributing some portion of the cost, sometimes a matching amount, while lenders want to be assured that a loan can be repaid. Cash and Debt The long-range projection helps identify and quantify the annual cash flow that supports the authority’s important priorities, generally a safety margin to meet unexpected major expenses or funding capital replacements, system improvements, and upgrades. Progress toward these goals is measured by the amount of cash available to achieve them. Generally, the capital plan will estimate the costs of needed projects while the cash flow helps determine the optimal timing. Estimated cash balances should be included in the expanded budget information. Year-end cash balances, actual and estimated, should be presented to demonstrate that the current year’s budget supports the authority’s long-term goals. Corollary to the cash balance is the amount of outstanding debt. Annual debt service that supports existing debt becomes available for funding new capital projects once the debt is retired. Knowing when that occurs is an important factor in undertaking new projects. If existing debt can be refinanced, and if there is urgency in completing a new project, tracking the current amount of debt becomes even more important. A table showing the amount of debt outstanding, by issue if there are multiple issues, for each year of the long-range projection should be included with the annual budget analysis. In fact, retiring existing debt may be one of the authority’s strategic goals. Hopefully, some of the items discussed above will help you to develop a multi-year financial projection that funds all the authority’s needs including adequate operating reserves and capital replacements. The key is the ability to anticipate changes in normal operating costs, fund necessary capital projects, and adjust user fees accordingly. There are many unknowns and much uncertainty when developing these projections but with the right tools and historical data, the task becomes manageable and more accurate. The financial model suggested here is a great demonstration of your authority’s fiscal strength. S