Sculpting Cash

 

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By David Clamage


Nineteenth century French sculptor Auguste Rodin once said, “Even with all the documents, you can never forge nature.” In delivering water to your communities, you don’t so much forge nature as sculpt it to the goals of your community defined by their needs, your budget, the external influences of the economy and so much more. You actually don’t buy equipment as much as “use” equipment and complex systems translating their function and cost into the tangible results of storage, delivery and treatment within the constraints of your economy. And while your community may often have “eyes bigger than its stomach,” there are the tools of the sculptor available to serve your task.

In Water Finance & Management’s February issue, we discussed how projects are funded: Bucks are your own capital; bonds come from the will of the voter; and, borrowing via the Tax-Exempt Lease Purchase (TELP) or similar financing are the most common methods used to finance your infrastructure as well as periodic and reactive repair and replacement. Much like water, money is always in finite supply. However, one solution available more commonly in the TELP, or “muni-lease” is the ability to sculpt repayment intra-year for things like seasonal usage, tax and fee collection timing and inter-year for events such as inflation, system growth, tariff increases and more.

RELATED: Bucks, Bonds or Borrowing

A simple example of this technique is where you anticipate a combination of 3 percent rate inflation and 3 percent community growth “year-to-year” — your fees for water are rising 3 percent per year and you are adding new ratepayers at the same pace. And, you need to finance a $500,000 piece of equipment today to both address your current system operations and planned growth. A generic 10-year fixed interest rate today for such a project might be 3 percent and paid monthly that would cost your system $57,936 per year. That may not be affordable to you today, particularly since you’re trying to take advantage of a lower installed cost today for equipment and its utility you plan to use over time.

However, taking the approach that your rates and ratepayers may grow at a combined rate of 6 percent per year, you can lock in a 3 percent cost of funds with an escalating payment starting out at only $44,591 in year one — a cash flow savings of over $13,345 in your first year, or just over 23 percent. Then, over time, your payment grows at the pace your rates and ratepayers do:

While the lower payments in the early years do cost you a bit more in total interest, the ability to match these payments to your cash flows can often offset that additional expense at the full term. Your interest rates are fixed, your payments are known and you’ve applied Rodin’s hammer and chisel to your costs and budget.

There are even more complex models you can consider where you may apply energy savings from the use of new technology such as variable frequency drives, reduced O&M from the deployment of new equipment and an annuity or capital plan in your budget to purchase that needed equipment in year five. You will soon see that your appropriated dollars can be reduced even further.

The key here is to apply all the tools available to your budget to make your equipment acquisitions affordable to match your economic capacity. As is often said of the energy efficiency business by performance contracting finance pioneer Dennis Haynes, “You are not buying chillers and boilers and lighting – you’re buying cash flow and comfort.”

There are a host of other sources of repayment you can consider, as well as specific timing issues. For example, you may want to have lower payments in the winter month when your ratepayer revenue is lower as compared to summer’s irrigation season and the Tax-Exempt Lease Purchase, (TELP), or “muni-lease” can very often address those challenges more flexibly than bonds. Careful analysis of your inter- and intra- year(s) budgets can often unlock your ability to purchase newer equipment for growth, repair and replacement, enhanced energy and operational efficiency and more by matching payments to savings and revenue.


David Clamage is the founder of Saulsbury Hill Financial, based in Denver. Saulsbury Hill Financial specializes in large project and lease financing for virtually all terms and asset types as well “small-ticket” and equipment for municipal finance with quotes and more, available for immediate delivery. Clamage can be reached at davidc@saulhill.com or 888-MUNILEASE.

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