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

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Text NEWGEN920 to 22333

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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?


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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https://www.gfoa.org/materials/basis-of-accounting-versus-budgetary-basis


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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8© 2021 NEWGEN STRATEGIES AND SOLUTIONS, LLC 8

POLL



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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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https://www.gfoa.org/materials/measuring-the-full-cost-of-government-service

WHOSE JOB IS IT?Don’t we have Directors in charge of these enterprises?


POLL



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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


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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https://www.gfoa.org/materials/role-of-the-finance-officer-in-supporting-fiscal-sustainability

HOW TO MANAGE ANY STOREAre there general best practices we can use?


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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https://infrastructurereportcard.org/wp-content/uploads/2021/07/TxIRC_2021_Brief.pdf


ASSET MANAGEMENTEXAMPLE BURIED ASSETS REPLACEMENT CYCLE ANALYSIS

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$0

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PVC Cast Iron Planned Reinvestment (Buried Assets CIP)

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Replacement Year

Ductile Iron Transite PVC Cast Iron Planned Reinvestment (Buried Assets CIP)


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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https://www.gfoa.org/materials/inflationary-indices-in-budgeting


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:


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


POLL



Join online:

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Please respond with your Top 3 Water Rate Objectives


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


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


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


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-


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-

https://ftp.txdot.gov/pub/txdot-info/avn/capital-improvement/2022-2024-cip.pdf


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+


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

https://www.gfoa.org/materials/municipal-solid-waste-management-and-full-cost-accounting


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+


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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THANK YOU FOR YOUR TIME AND BEST OF LUCK WITH YOUR PROPRIETARY FUNDS!

Chris EkrutOffice: (972) 232-2234

[email protected]

Matthew GarrettOffice: (972) 675-7699

[email protected]

Megan KirklandOffice: (972) 432-6218

[email protected]

are we minding the store on our proprietary funds?

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