What Is A Capital Plan?

A capital plan is a tool which identifies capital equipment needs and projects, the years in which each project is anticipated to occur, and the sources of funding. Development and maintenance of a capital plan is intended to ensure that the Pine Brook Water (PBW) Board and management team are responsible to residents of the Pine Brook Hills community with respect to the collection and expenditure of public funds. It is also a basis for community discussion regarding the tradeoffs necessary to ensure that the PBW is financially sustainable into the future.

While a capital plan may be designed to forecast any period of time, it generally extends beyond the current operating cycle and usually covers a three to five-year time frame. That said, the majority of PBW’s equipment has very long expected lives; thus, we chose to extend our draft plan for four decades.

What A Capital Plan Is NOT

A capital plan is not a budget, nor are expenditures described in a plan approved. Each element (component) of the plan includes a series of estimates: the expected remaining useful life of the existing asset, its current estimated replacement cost, and the inflation rate between now and the year of anticipated replacement. The plan does not incorporate future technological changes that might impact replacement costs (such as for water mains), nor does it anticipate extraordinary events arising from major fires or floods (both of which have occurred in the last decade).

Developing The Capital Plan

Development of PBW’s capital plan involves the following steps:

  • Organizing the Parties Involved: The PBW Board requested members Signe Hawley and Bob Loveman to work with PBW staff Bob DeHaas, Shawn Beauprez, and Andrew Churnside in the development of the plan. After a rough first draft was created, the team was expanded to include a community member, Sarah Wahlert.

  • Identifying & Inventorying Capital Assets: The team developed an inventory of all PBW assets with current replacement costs in excess of $5,000, including structures (buildings and tanks), major filtration equipment, distribution assets, dam/reservoir components, and vehicles.

  • Preparing Financial Forecasts: For each item, we estimated expected remaining life, current replacement cost, expected useful life of replacement, and annual inflation rate for that component. While we have attempted to be conservative in our assumptions, we realize that assumptions beyond a 3 to 5-year time period are highly speculative. Thus, the plan will be reviewed annually to update cost estimates and estimated component lifespans.

  • Factors in Estimating Water Main Replacement: For PBW, as for most water districts, by far the most expensive asset is the water mains. Predicting the timing and cost of replacement of these mains is a challenge. There are a number of factors that influence when mains will need to be replaced including: (1) the current condition of each main section; (2) the geology of rock formations in which the mains lie; (3) the chemistry of soil; (4) the original quality of installation of the mains; and (5) the impact of major exogenous events, such as floods, on the ground in which pipes lie. While there is a general view that mains have a 50-year life, soil and rock conditions such as exist in Pine Brook Hills may extend the life to 100+ years. Management estimates a current replacement cost of $500,000 per mile, but many factors could cause this estimate to be too high or too low.

    There are several potential strategies for replacing mains. Due to the difficulty in determining the appropriate timing of replacements due to the aforementioned reasons, future water main replacement will likely occur in small segments (measured in fractions of a mile). However, replacing mains in larger sections would allow PBW to take advantage of economies of scale in pricing.

    At this point, there are no immediate plans or need to replace any mains. Thus, the current draft of the capital plan highlights the need to build adequate reserves for water main replacement over the years. It can be easily modified to compare the financial impact of various funding and timing options for main replacement, serving as the basis for discussion among the PBW Board, PBW management, and the community regarding the best way to approach and finance this significant expense.

  • Sources of Funds for the Capital Reserve: As part of the 2019 restructuring of water rates, PBW included in its budget the goal of adding $100,000 annually to a capital reserve, from which funds could be budgeted for future capital replacements. Our plan includes this amount as an annual source of funds. In addition, PBW currently pays $50,000 annually from water sales revenue toward a revenue note to fund construction of the filter plant, which will be retired in 2027. At that point, the money that was previously used for the revenue note will be applied to the capital reserve. As a result, starting in 2028, $150,000 annually from water sales will be applied to the capital reserve.

    Other possible funding sources include new property taxes, increases in water rates, or redirecting money from operations to the capital reserve. The capital plan does not a anticipate rate increases as a source of funding for the capital reserve. It also does not assume cuts to operations that would allow more money to be put in the capital reserve fund. That said, the bonds sold years ago to fund construction of the dam and reservoir will be fully retired in 2030. District residents currently pay about $320,000 annually in real estate taxes to service this debt. One possible source of funding for water main replacement would be to ask voters to approve a new property tax after the current one expires. The capital plan helps inform discussion of whether this is an appropriate funding method and how much should be collected via this method.

  • Next Steps: Your PBW Board and management, along with a community member, have developed this draft of a Capital Plan. We presented the plan to the community to gather feedback and facilitate discussion about the path forward on May 16th, 2019. We are incorporating next steps from the community meeting into the plan in the coming weeks.

Any Capital Plan needs to be a “living, breathing” document that is revisited frequently to incorporate new information. Just as annual budgets are necessary and useful planning tools, we expect the long-term plan to help guide future operations of the District.