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Minutes 10/19/2011 Colter County Public Utilities Division Productivity Committee's Subcommittee Capital Projects Review October 19, 2011 Agenda Productivity Subcommittee Members Vlad Ryziw Jim Gibson Gina Downs Janet Vasey Doug Fee (Absent) County Public Utilities Division Staff Tom Wides, Director, Operations Support Tom Chmelik, Director, Planning & Project Management Sheree Mediavilla, Administrative Assistant Public Participation Don Holder, Fixed Assets Accountant Clerk of Courts Staff The intent of the meeting was for the sub-committee to work on a draft of their findings. Janet Vasey prepared an initial draft, which she reviewed in the meeting. The document is comprehensive, in that it will cover water, wastewater, solid waste, reserves, debt service, and impact fees. 1. Call to Order Janet Vasey called the meeting to order at 12:00 p.m. Janet presented an overview of the sub-committee's review of the FY12 Capital Improvement Programs for the Public Utilities Division. The committee spent four months and attended five meetings reviewing the scope of capital projects and the dollars associated with these projects. Janet's notes will be incorporated in these meeting minutes. G�LLIF�i' (-Aro Administration Department•3339 Tamiami Trail East,Suite 301 •Naples,Florida 34112-5361 •239-252-2540•FAX 239-252-6474 2. Capital Project Review The subcommittee reviewed individual water and wastewater capital projects and: • Discussed the pros and cons of replacing capital equipment on a cyclical basis versus waiting until equipment failure. • Discussed whether a proactive (possibly more costly) program to restore rehab and replace equipment prior to failure is preferable to a (possibly less costly) program that selectively allows some components to fail in order to fully use their effective life. • Evaluated the consequences of periodic equipment failure and potential disruption in the delivery of water and sewer services and related federal, state and local regulatory issues. • Addressed the benefits/costs of the asset management contract to manage their $1 billion assets. Once operational, this asset management program would have the added benefit of being exportable to other county programs. • Participated in three "audiovisual tours" of a Wastewater treatment plant and master pump station, a Water treatment facility and the landfill. The video tours were designed to explain the need for some of the more expensive one-time and recurring projects in the FY12 capital budget, and they overcame the legal sunshine law objections to an advisory committee touring a facility. • Evaluated the water and wastewater impact fee programs to determine the recurring funding shortfalls and the cumulative funding borrowed to pay annual impact fee debt service. • Analyzed the current level of reserves, to determine whether there are excess reserves or insufficient reserves currently and projecting into the future. • Reviewed the individual capital project summary forms used during the budget process and suggested improvements. • Discussed PUD's Risk Management Matrix, which is used to balance acceptable risk with limited resources. The impact of equipment failure in the water and wastewater programs has serious consequences, such as insufficient drinking water or wastewater overflows. Discussion Vlad Ryziw: To what extent does the utility restore, rehab, or assess the facilities to avoid an equipment failure? I do not know the procedure. Tom Chmelik: When assessing underground, we are looking at reinforcement pipe. An example of this was the deep injection well that was previously inspected with a camera and within six months it failed. When we inspect wastewater pipes, we need to shut down the area. It will take 20 years to inspect the entire network. Gina Downs: What Tom Chmelik said brings to mind how I reached a new comfort level to justify redundancies in the systems. This review totally justified the the division's planned redundancies. Janet Vasey presented the Wastewater Capital Project Review. Below are her notes she read to the sub-committee. 2 3. Wastewater Capital Project Review There are 41 wastewater capital projects with FY12 funding amounting to $26.7 million. There are also many capital projects funded in prior years that will also be executed in FY12. Fund 413 growth-related wastewater capital projects There are only 7 new projects, for a total of $267 thousand, in the FY12 wastewater development capital fund, plus $5.5 million for debt payment for prior growth-related wastewater capital improvements and $5.7 million held in reserves. Fund 414 user fee-related wastewater capital projects There are 34 projects in the FY12 wastewater user fee capital fund, amounting to $26.4 million, with $13.6 million held as a reserve for contingencies and a reserve for future capital projects and potential debt service and contingency for short fall in wastewater impact fee collections. Of these 34 projects, 9 are $1 million or more, for a total of$21 million or 80% of the FY12 capital program. General Comments The subcommittee meeting held at the North County Water Reclamation Facility viewed a videotape of the North County facility and a master pump station to see the problems that are being encountered and the reasons for the large capital expenditures. The video includes a wealth of information on: • How wastewater is collected, treated and disposed at the North County facility, which contains 3,000 components and treats 3 billion gallons of wastewater per year. • How the facility reclaims 99% of water treated and, with the South County facility, provides 1/3 of total pumped water supply within the Collier County Water-Sewer District. • The problems encountered in the aging infrastructure, which includes 16,000 manholes, 685 miles of pipe, 20 master pump stations and 750 pump stations. • The need to maintain compliance with the Florida Department of Environmental Protection (FDEP) to keep facilities and equipment operational provide uninterrupted service 24/7/365 and avoid wastewater spills and severe environmental impacts. • The specific structural deficiencies that currently exist, as well as the need to replace similar failures on a cyclical basis throughout the extensive aging system. The subcommittee project reviews, the video tour and subsequent discussions made a compelling case for the validity of the projects funded in the FY12 capital budget. The County's Water Reclamation System and capital project requirements were clearly explained, well-justified and well-managed. The program is pro-active and cautious to 3 avoid facility and equipment failures that could result in wastewater spillage and the very serious regulatory and environmental consequences. Many of the projects require on-going replacement of aging infrastructure with some changes to improve efficiencies and reduce operating costs. The programs in general are designed to achieve Level Two of the Regulatory Compliance Risk Management Matrix for cost contained operations . . . "where the County takes reasonable risks, which results in deferred planned maintenance and asset management, and taking risk for potential non-compliance letters and enforcement letters where level of service is sustained based on resources available." Level Two is a good cost effective compromise between Level One (which has little risk, no deferrals or compliance issues and would cost significantly more to achieve) and Level Three (which has much higher risk, with reliability problems, service interruptions and consent orders). Conclusion Janet Vasey: The video provided a wealth of information and statistics. The result is a managed program that does a very good job of balancing risks against available resources. Vlad Ryziw: This is a very good summary; I gained a lot of knowledge reviewing the video and on the field tour. The proposed expenditures are warranted, justified and reasonable. I did not see anything extraordinary, whether using user fees or impact fees. Those expenditures are necessary. Janet Vasey: When you look at the rates compared to the user fees, you guys are doing a very good job. Gina Downs: Regarding the Fitch ratings, are the commissioners aware of the AA+ rating? Tom Wides insert: This has been discussed at budget workshops, and rate study presentations. Janet Vasey: The level of debt is higher, 30% higher than a normal AA, but the cash reserve level is much stronger and warrants the AA+ rating. We will cover this topic when we discuss the reserves. We have no problem with the projected projects. 4. Water Capital Project Review There are 43 water capital projects with FY12 funding amounting to $28.3 million. There are also many capital projects funded in prior years that will also be executed in FY12. 4 Fund 411 growth-related water capital projects There are only 8 new projects, for a total of$287 thousand, in the FY12 water development capital fund, plus $5.7 million for debt payment for prior growth-related water capital improvements and $5.3 million held in reserves. Fund 412 user fee-related water capital projects There are 35 projects in the FY12 water user fee capital fund, amounting to $28.0 million, with $13.6 million held as a reserve for contingencies and a reserve for future capital projects and potential debt service and contingency for short fall in water impact fee collections. Of these 35 projects, 9 are $1 million or more, for a total of $22.5 million or 80% of the FY12 capital program. General Comments The third subcommittee meeting was held at the South County Regional Water Treatment Plant where we primarily discussed the million dollar projects. We viewed a videotape of the major water facilities, from well fields to treatment facilities. The video showed repairs and modifications needed for compliance with Florida Administrative Code, replacement of deteriorated pipes, pumps and motors, and the need for periodic restoration and rehab of the 101 wells and nearly 900 miles of water mains. Particularly disturbing was the unanticipated 2010 catastrophic failure of the raw water transmission main at the South Reverse Osmosis Wellfield, which will require $11 million to repair (approximately $6 million in FY11, and an additional $5 million in FY12). Hopefully there will be some cost recovery through the legal system. We discussed multiyear projects to replace equipment with decreasing reliability where repair parts are no longer available. Some projects, like the interstate booster pump installation are designed to improve water treatment efficiency and save money. Many of the facilities and equipment date back to the 1980's and need major rehabilitation. Florida DEP, in a compliance inspection, noted the degrading condition and need for corrective action. The subcommittee was concerned by the need to replace the casing of Deep Injection Well #1 at the South County facility in FY12 since the Deep Injection Well #2 is being restored this year. There are only two (2) wells to dispose of the Reverse Osmosis waste stream and if both wells were out of service, no water could be treated at the South facility. The committee could see that the water infrastructure is massive -- with the 3 wellfields, 101 wells, 2 treatment facilities, 900 miles of pipe for underground transmission and 5 water mains — and all of it is aging. Combine that with the critical need for potable water —without interruption — and the large capital program is understandable. The program looks to be very well managed, balancing needs to • repair, replace and upgrade facilities and equipment • meet all regulatory standards • and avoid any disruption of water delivery All with limited resources and uncertainty regarding system failures. Gina Downs: Another appropriate use of technology is the smart meter program. Tom Chmelik: We have a meter replacement program in the FY12 budget and we are replacing the old meters on a regular basis. Tom Wides: We do not serve the whole county and many multi-family residences only have one meter. If a customer has a concern about water consumption, we can tell them by the hour how much water was used. Gina Downs: This improved technology benefits the end user. Conclusion Janet Vasey: This is a comprehensive, very well managed repair and replacement program meeting regulatory standards and all with limited resources. It is a Level 2 risk management matrix. Vlad Ryziw: The conclusion is good; the capital expenditures for the FY12 budget are primarily for repair and replacement at existing facilities verses expansion and growth projects. We are not in a high growth period. You are doing an excellent job maintaining these facilities. 5. Solid Waste Review Janet Vasey: I was not at the Solid Waste review. Jim, do you have any conclusions I can use? Jim Gibson: The Solid Waste projects are no different than Water and Wastewater, it is maintenance and repair. However, it is unique in that it is a partnership with private industry. I reviewed the history of the landfill closure fund and retrieved an analysis from the 2003 budget and the CAFR reserve liability was $3.6 million and budgeted reserves were at $5.7 million. It was our recommendation at that time to draw down the reserves to be consistent with the liability. The county has made use of the reserves in a proactive manner in a negative economic environment. Loans made from this fund are being paid back. Jim referred to the solid waste chart for FY11. The closure fund in the 2010 CAFR had $1.9 million and the budgeted closure reserve is $2.9 million. 6 Tom Wides: As a note, a recent study conducted by R. W. Beck, and a prior study conducted by Malcolm Pirnie, estimated that the landfill closure exposure could be as great as $25 million in a worst case scenario. Jim Gibson: In summary, this program is innovative and proactive for the Public Utilities Division. Generally public and private partnerships work exceptionally well. I still can't get over that Waste Management is willing to renew the contract as it. Hammerheads Discussion Janet Vasey: What is the appropriate funding source and why isn't transportation paying for this project? Tom Wides: EMS, Collier County Public Schools, FedEx; take your choice, they all benefit from this program. However, the blame seems to fall to WMIF for driveway damage and road damage. WMIF likely uses the roads most frequently; therefore, it is a solid waste collection problem. There are some roads that WMIF cannot get down. We could not wait to roll out this program without running the risk of liability. Staff talked to Transportation and there is a funding issue. Solid Waste has to have it, so we initiated this program. There are approximately 200 roads in the estates that are difficult to navigate. It is a health, safety, and liability issue. Vlad Ryziw: This cost should be shared. Tom Chmelik: No one was coming forward to assist. Transportation was going to do the designs, and that did not work out. There was good intent, but we had to run with it. We will be doing 25 to 30 hammerheads a year and it will take eight (8) years to complete the project with a cost of half a million dollars a year ($4 million total). 6. Impact Fee Analysis Janet Vasey covered in detail her notes below. The subcommittee evaluated the water and wastewater impact fee programs, and we share PUD concerns that annual impact fee collections are substantially less than expenses. The projects were originally funded with impact fees, revenue bonds and the State Revolving Fund line of credit. It is not financially wise to borrow any further from revenue bonds, or SRF. As a result, the outstanding revenue bond and SRF debt service will need to be paid from user fees for the foreseeable future. Annual impact fee collections are insufficient to cover the annual debt, much less new growth-related program expenditures each year. Water Impact Fees A total of$12.2 million has been transferred from the State Revolving Fund (SRF) into the water impact fee account in FY09 and FY10 to meet growth-related project costs as well as debt service payments of about $5.7 million per year. Impact fee revenue projections are only about $3 million per year until new construction picks up. The water impact fee account will need another infusion of cash in FY15 under current projections. Wastewater Impact fees Wastewater is in a similar situation. This fund required a transfer of a total of $11 million from wastewater user fees into the impact fee account in FY10 and FY11 to meet small growth-related project costs and an annual debt service cost of$5.5 million. Estimated impact fee revenue of $3.2 million is expected until new construction picks up, leaving a significant annual shortfall each year. Like water, the wastewater impact fee account will need another infusion of cash in FY15, using current projections. Impact Fee Policies As money has been loaned from user fees and the State Revolving Fund, it was always intended that future impact fee collections would be used to repay these loans. Right now the loans total $23 million to cover the impact fee-related costs through FY14. It should be noted that the plan to repay these loans is conditional on a continuing impact fee program. In recent years, the Florida Legislature has attempted to limit the ability of counties to collect impact fees. There could be a serious attempt in the near future to limit or even eliminate impact fees. To the extent that future legislation reduces Collier County impact fee collections, user fees will be the ultimate source of funding to repay the $23 million in loans to the impact fee funds and all future impact fee debt service (currently amounting to $11.2 million per year) out to FY2035. The annual debt service payments start to decline after 2015. 7. Reserves Janet Vasey: Utility studies have assumed certain things and now they have changed substantially. We find the $74.1 million in reserves for FY12 acceptable considering the following: The subcommittee reviewed the level of reserves carried in the water and wastewater funds. While user fee rates are expected to remain constant for the next 5 years, there are some potentially large, additional costs that were not included in the last rate study, that are already reducing reserves. Relocation Costs An impact fee decision made in February 2011 has created a water and wastewater funding issue in FY11 and future years. 8 In the past, road construction projects that required water and wastewater pipe relocations had the utility costs included in the road impact fees. Money to pay for these relocations was then transferred to Public Utilities to pay for the work. During the FY11 Water and Wastewater Impact Fee Study Update, the utility relocation costs were moved from Road Impact Fees to Water and Wastewater Impact Fees and the study was completed. In the final review by the County's impact fee counsel, he insisted that the utility relocation charges could not be paid by impact fees and should be paid by water and wastewater user fees starting in FY11. This decision, made after the latest FY11 Utility Rate Study, has already shifted a total of $12.4 million of costs into user fees (water $4.7 million in FY11 and $4.5 million in FY12; wastewater $1.4 million in FY11 and $4.5 million in FY12). In the future, about $6 million in additional costs will be charged to the water and wastewater user fee accounts annually for relocation charges, putting upward pressure on user fees in the FY13 rate study. Discussion Jim Gibson: Historically, this would have been paid from impact fees. Now they have to be paid out of user fees. Tom Wides: The logic is that these were not expansion projects. Janet's statement for the determination of impact fees or not, had nothing to do where the project was located in the county. The attorney stated that we should not pay for any relocates project if it is outside of the district. Vlad Rywiz: Why was it okay to pay for the same work out of the Transportation impact fees? Tom Wides: We never received a good answer to this question, other than the projects were not growth related for the utility — opening legal liability. Jim Gibson: FDOT is a separate consideration. What happened to the FDOT funds? Tom Wides: They are FDOT projects, but funded through the Transportation programs. Required funding from the Transportation impact fees. The Transportation folks managed the projects. Factors Influencing Reserve Levels The subcommittee also discussed overall Public Utility reserves of $74.1 million in FY12 and found them to be acceptable, considering: 1. Relative uncertainty in possible facility and equipment failure. Given the advancing age of capital items and unacceptability of failure to provide water or safely treat wastewater. 2. Need for Statutory Reserves -- $18.5 million 3. Need for next year's user fee debt service -- $17.3 million 4. Need for next year's impact fee debt service -- $11.0 million 9 5. Reserve of 50% Depreciation Expense -- $16.7 million — recognizes the need for unanticipated repair and replacement over and above level of funding included in the budget, possible catastrophic failure and contingency for hurricanes and other disasters 6. Need for hedge against inflation since budget uses COLA increase of 2.4% while more recent inflation in utility supplies and equipment is closer to ??% -- $1.0 million 7. Two future years of funding impact fee collection shortfalls ($6 million per year for FY13 and FY14) -- $12 million 8. Need to maintain an acceptable level of reserves to keep our AA+ rating with Fitch and other agencies to protect our ability to borrow and refinance at reasonable rates. There are several factors that will/could eventually add to the reserve balances in the future. 1. The utility loaned $18.6 million (currently outstanding at approximately $15 million) to the County's General Fund in FY09 for the cash funding of the failed surety for the County's general revenue bonds. The County's Finance Committee is currently evaluating refinancing the outstanding revenue bonds. The intent would be to eliminate many of the surety issues, freeing approximately half of the $15 million to be returned to the utility. This IOU is not included in the $74.1 million reserve in FY12. 2. The loan to impact fees from the user fees of $11 million and counting. Total repayment of these loans is not certain. [ Conclusion Janet Vasey: We think the levels are fine, but have some concerns when we do the FY13 Rate Study. Jim Gibson: Unlike the tax levy you adjust every year, the rate study is for a multi-year operation. Gina Downs: In reading the Fitch report, it talked about the rates being low. TomWides: That statement is for affordability indexing and in different parts of the country. We are below the affordability threshold for the Water/Sewer District. Janet Vasey: The fees look good as compared to other counties. Jim Gibson: I like the detail you provided and the multi-year projections for CIP formulations. The utility has a good concept and handle on these projects. We may want to consider this approach county-wide. Gina Downs: Every department should be as transparent as the Public Utilities Division. Jim Gibson: The detail gets lost by the time it gets to the commissioners. Referring to the GovMax CIP descriptions, the commissioners get a very bad document. GovMax is a one year document. Janet Vasey will mention that GovMax should use multi-year projections. Janet Vasey: You seem comfortable and not requesting that you need more money. You are going after the age old facilities and user fees in a reasonable manner. It is a pretty good balance. so Tom Wides: We have been doing quarterly cost containment reports since 2007. The departments have done a good job in reducing expenditures where possible. It keeps us on track. Janet Vasey: The capital looks good, the philosophy is good, and the risk management level is good. Are there any public comments? Janet will revise her report and provide it to the sub-committee in a week. The meeting was adjourned at 1:40 p.m. 11.