Water Treatment Upgrade & Water System Improvement Questions

At the 2/26 Finance Committee, discussion of the Mayor's 2 water-related requests were deferred until the Committee's next meeting on 3/25. The Mayor requested this, in order to give more time to the Water Department and the firm hired in 2006 to finalize a recommendation on the Treatment Plant upgrade. Here are some updates from my end regarding these requests.

A number of the Councilors took publicly-posted tour of the Water Treatment Plant on Newton Road on 2/19. This was extremely helpful for us to a) better understand the operation of the facility itself and b) understand what/where the proposed upgrades will be. The system consists of 2 'trains' of filtration that pull in water from the Powow River on one end and deliver treated and filtered water on the other end. There are 2 primary justifications for the upgrade: a) we need to comply with new EPA regulations (and before the Commonwealth comes in and imposes a solution on us) and b) we need to increase the processing capacity of the plant. At peak seasons/hours--during the summer--the system is at full capacity. If any repairs or maintenance need to be done, they can only be done overnight. The system only has 2 'trains' and can't afford to take one down during daytime use, especially in the summer. The upgrades would fit 4 'trains' into the same space, giving the plant more flexibility in taking any given train off-line if necessary and the 4 trains combined would be able to process water at a higher rate than current, meaning we'd have more flex capacity built into the system. Regarding the EPA requirements, check out the 2/28 Daily News for a story on the Town of Seabrook facing the exact same thing.

I've submitted the following question to the Mayor's Office in anticipation of the Finance Committee's deliberations. Please let me know if you have any additional questions you'd like to have asked.

Sent 2/24:

First, I note that debt service is currently about 25% of the Water Department's operating budget (based on a review of the FY08 budget). Can you get me/us a breakdown of the composition of that debt, including terms, purpose and rates? This will help us to understand the context for increasing the debt service for the water dept's enterprise fund.

Second, could you produce an overall breakdown of its current debt service of general obligations out of general operations (same data--terms, rates, purpose)? This will help understand how new general obligations will fit in with the timing of other debt, etc. and would be helpful for processing future requests. It will also be helpful if that kind of debt forecasting could be incorporated more into the Capital Improvement Plan, to help plan and manage the rolling wave of our debt service in concert with our capital needs.

Sent 2/29:

1) Water Treatment Upgrade:
* For the SRF loan, what is the term and the rate?
* What is the anticipated annual debt service for the 2 solutions?
* For the proposed solutions, what is the anticipated effect/increase on median water bill?
* Separating water bills into commercial, industrial and residential, what would the increase be for the 'average' bill in each category?
* Would would the operating costs of the proposed solutions be, in comparison with current costs: staffing required to operate, electricity use, chemicals, maintenance?
* What would the expected operational life be of the major new components and what significant replacement/upgrades would be expected in during that span?
* Would either of the proposed solutions be more adaptable for possible future EPA/DEP requirements? What might those future requirements be? Would the final filtration step of either solution be able to be enhanced in the future, if need be?
* What are the Town's anticipated water demands 5, 10 and 20 years out? And what will the functional volumes be for the solution(s)?
* At the tour, concern was expressed regarding the ability of the 'multi-train' system that we currently have to operate if one or more trains is 'down'. How will the solution(s) be able to better handle that? At what point will the flexibility that we build in now to take trains off-line be lost in the future, as demand crosses capacity?

2) General Water Department budget:
* In the Water Dept's annual budget, what comprises 'other expenses'? This represents 20% of the Department's budget; this percentage of 'other' seems high; can it be clarified?
* The 'management assessment' paid to the Town is 6.8% of the Water Dept's budget. This doesn't seem high off hand but how is it derived? Do all departments/programs pay this assessment on the same rate or is it based on actual administrative demand on the Town administration (and pro-rated based on that demand)?

3) Water System Upgrades:
* What are the justifications for rehabilitating the Powwow Street water storage tack and upgrading the Challis Hill water pump station?
* What will the effect on operating costs be for each of these facilities?
* Please detail which parts of this request could be folded into the SRF monies and which would not? Also, how would the debt would be distributed (e.g. to Water Enterprise Fund and General Fund)?

UPDATE: Response from Kendra Amaral, clarifying "other expenses" in the Water Dept. budget for FY08:

Jonathan,

I will forward the additional questions on to the team.

Relative to the budget, if you look at the detail of the "Other
Expenses" for water in the budget document you should be able to see the
breakdown of costs. The Other expenses include such items as sludge
disposal, chemicals, and lab work. If this information isn't in the doc
you have, I will be happy to send the detail to you.

Thanks and have a good weekend,
Kendra

Mayor's Bond Request and the Capital Improvement Plan

At the February 12, 2008 MC meeting, the Mayor submitted bond requests for 2 separate items:

• $5,076,000 for Water System Improvements
• $22,500,000 for Waste Water Treatment Plant Upgrades

I look forward to getting more information on these requests at the Finance Committee but here are a few initial observations. I noted in another post the background for the larger Waste Water Treatment Plant upgrades. From the 1/09/08 Daily News article and the orders submitted by the Mayor, it appears that both of these requests would be rolled into the low-rate (2% interest) bonds issued through the MA Water Pollution Abatement Trust award that we were recently given. The DN article in fact mentions that the award covered both the Treatment Plant upgrades required by the US Environmental Protection Agency and "water mains, pump stations and water tanks" for our system.

I looked at Amesbury's Capital Improvement Plan (CIP) from 2007, covering 2008-12, to see if any or all of the items in the Mayor's request were in the CIP. Major capital expenses such as these should be part of a well-developed capital plan and an overall debt management strategy. Click here for a comparison of what was in the CIP versus the Mayor's request.

For Bill 2008-012 ($22.5M), the CIP planned for $13.5M in costs. That's a $9,000,000 or 66% variance/increase. For Bill 2008-011 ($5.076M), the CIP planned for $3.62M. That's a $1.45M or 42% variance/increase.

At the top of questions regarding both of these requests will be the large gap between planned costs (CIP) and these requests.

Only some of the improvements in the Mayor's bills are planned for FY2008. Others are spaced out to 2009 and 2010. The capital improvements in the Mayor's requests are all included in Amesbury's immediate and near term capital planning. The approval of this or any bond does not mean that Amesbury would draw against the bond authority all at once or even up to the limit approved. As I understand it, we'd have quite awhile to actually draw on the monies from the MA Abatement Fund. And I assume that it is likely prudent, if possible, to bundle these planned improvements under the good interest terms from the MA Abatement Fund while we can.

So, the improvements fall squarely within our Capital Improvement Plan. The interest rate for this debt is good. However, the large gap between planned costs and request costs is a significant concern and such large discrepancies would need to be well explained and justified. As ever, the Finance Committee will need to evaluate if Amesbury can afford these particular debts in the larger context of our overall debt service and debt plan.

At the MMA, pt. 2---Cash Flow and Planning Debt

As reported previously, a majority of Amesbury's Municipal Councilors made it to the annual meeting of the MA Municipal Association in January. Here are some of the things that I learned there:

"Sound Financial Practices" session with DOR staff:

This workshop covered a lot of ground. They talked a bit about using cash vs. borrowing. Much like in a home economy, cash makes sense for smaller needs. Making cash available in the flow of budgets takes planning: make conservative estimates of receipts (e.g. excise tax) and liberal estimates of real costs. The result is a positive cash flow ("free cash" after expenses and receipts have been certified at years end) that can be capitalized into community needs. The presenters emphasized that having a reasonable level of free cash at the end of the year is a positive, giving a community fiscal flexibility for unplanned costs (think snow removal!). As you would at home, put resources into a few pots: 1/3 for operations, 1/3 for capital improvements, 1/3 for reserve.

For larger projects (think: buying your own house), borrowing makes sense--we'll never be able to build a school building with cash, of course. Manage debt with a combination of 1-time 'debt exclusions' (which don't get added to the new Prop. 2 1/2 limit) and a rolling debt balance of 8-12% of total annual budget to create perpetual re-investment. 5% debt service (as % of budget) reflects a weak investment in the infrastructure of a community and will only add to costs in the future.

"Debt Management for the Generalist":

This workshop had a Director of Finance (Needham) and a Chair of a Finance Committee (Arlington) leading it. 2 main themes: make sure your community has CLEAR debt policies in place and forecasting, forecasting, forecasting.

Debt policy: Have a policy that articulates how cash and borrowing will be balanced (see above), sets a limit for debt service as % of budget, term of debts, and relation to Capital Improvement Plans. Needham has an ordinance that articulates these items and sets parameters administrative and legislative decision-making on debt. Both presenters emphasized the need for both branches to coordinate policy and decision-making, in order to have effective planning. Which brings us to....

Forecasting capital needs and debt: Policy and planning come together in a good Capital Improvement Plan that not only lays out capital needs and estimates costs but puts this data into a spreadsheet tool that shows the timing and long-term rolling effect of every given project on levels of debt service. The presenters gave us sample debt forecasting tools from other communities that clearly demonstrated how debt service forecasts over time (as obligations are paid off, as annual budget increases) and thus from year to year exactly what the capacity was to take on new debt and how specific capital needs fit into that.

Conclusions: In the context of these key ideas--established debt policy and good debt/capital expense forecasting--I think Amesbury still has a ways to go. The quality of our Capital Improvement Plan has improved but the 2008-2012 CIP released last year does not go beyond a simple cataloging of capital needs. Though needs are listed and priced, there is not even a simple totaling of what the needs are in each category. It tells the reader very little about how the cataloged capital needs fit into the planning of either direct cash expenditure or debt financing within the annual budget and future budgets. Contrast that with the CIP covering the same period from the City of Portsmouth, NH (posted on Amesbury's website by the Master Plan Implementation & Oversight Committee). Portsmouth's plan not only catalogs capital needs but also places those needs in the dynamic context of future budgets and levels of debt service.

Amesbury--starting with the Mayor's Office but working with the Council--should develop and articulate a debt policy and it should improve its capital need and debt forecasting. Successfully anticipating and planning for costly capital needs saves money in the long run and spares a community the budgetary (and social) shocks that come when big costs suddenly appear on the horizon. Perhaps the library improvements would have been approved in 2005 if residents had felt more confident about the Town's overall capital and debt planning.

Finance Committee, pt. 2

Yesterday's Amesbury News article on this proposed change reminded me of the fundamental reason that the Council is proposing to have the Finance Committee as a 'committee of the whole'--the MA Department of Revenue suggested that we do so in a 2001 report. Here is the relevant excerpt, in the context of 2000 Council Rules and Procedures:

We recommend that the Municipal Council act as an Appropriations and Audit Committee of the whole. The practice of assigning fiscal matters to a subcomittee of eight, which already includes five of the nine council members appears counter-productive. We suggest a more practical and efficient structure would have the 9-member Municipal council replace the current committee of eight, three of whom are non-elected participants. In essence, the Municipal council would act as an appropriation and audit committee of the whole. Council rules affording opportunities for participation by residents could remain in effect.

The report went on to recommended that the Council meet twice monthly, in order to be able to effectively discharge its responsibilities. This is what the proposed Rules change would do, create a financial committee of the whole, dedicating 1 meeting a month to appropriations and budget matters and the other 'regular' meeting, to initial and final approval of all measures, etc.

I note that the DOR report also continued the possibility of additional resident involvement, and the Council should consider that option, an expanded Committee of the whole.

[Note: I'd post the full DOR report, if I had it electronically but I don't.]