Funding for Each Life Cycle Phase

As the system is developing a long-term funding plan, funds should be planned for each phase of an asset’s life cycle. The table below outlines where those funds are likely to come from so that the system can think through each source as they are developing their plan.

When planning for a new project, a feasibility study may be needed. A feasibility study is an assessment of the practicality of a proposed project. A feasibility study should be completed after a business case evaluation has been completed. This study can help answer questions about the resources needed to complete the project and the possible return on investment.

The feasibility study can be especially important when considering infrastructure that is new to the system and relatively new to the industry as a whole.  In these cases, the system should research the successes and failures of similar infrastructure uses in other locations and also may want to consider testing the infrastructure in a pilot project. Implementing a project as a “demonstration” or “pilot” project may help in getting the project approved. In this way, not all of the money is at risk if the project fails.

During the planning phase, it is very important to consider the operation and maintenance needs of the future infrastructure. These costs will be on-going and must be paid by the system after the project is completed. If the system is going to require a higher level operator or expensive maintenance, it is very important that these considerations occur at the front end instead of the back end. These types of detailed considerations often are left out of the planning phase, which can create funding problems later on.

The long-term funding plan needs to consider incremental investment in the assets. Part of this incremental investment is the amount of money needed for day to day operation and maintenance but another part is the average annual incremental investment needed to replace assets at the end of their useful lives without creating a backlog of deferred replacements or allowing catastrophic failures to occur. In order to determine if the system is investing enough it must be able to answer the question, “Based on current investments, what is the current replacement cycle?” In other words, how many years would it take to replace the whole system? A follow-on question is, “What would it cost to replace the entire system today?” This information is necessary to calculate the “replacement cycle” of the utility or the number of years it would take to fully replace the system at the given average annual investment rate. It can be calculated by taking the total cost of replacement divided by the annual amount of expenditures per year on replacement. For example, if the total replacement cost for a wastewater system was $500,000,000 and the system invested $2.5 Million per year on average for replacement, the replacement cycle would be 200 years. If the system is expected to last fewer years than 200 (a likely scenario), the system is not investing sufficient funds and the utility is likely to have significant issues going forward. If on the other hand, the system was investing $7.5 Million per year, the replacement cycle would be 67 years. This length of time is closer to how long the system might be expected to last, although it may still be too long for a decaying system. The replacement budget should be such that the replacement cycle does not exceed the longest lived assets in the system and it is best if a weighted average approach (based on replacement cost by asset classes) is used to calculate the useful life of the overall system. This is a good time for the system to review the replacement budget and the Capital Improvement Plan.

If the system determined that it was necessary to move from the 200 year cycle to a cycle closer to 67 years, a significant increase in replacement costs ($5 Million) would be necessary each year. It is unlikely that a system could move quickly from $2.5 Million to $7.5 Million in investments because internal and external capacity to manage these additional expenditures have to be expanded in addition to the funding increases. It may take 5 to 15 years to ramp up slowly to the level required.

The system must also determine if they are investing enough in the operation and maintenance activities. The operation and maintenance program investment should be looked at as a percentage of the cost to replace the entire system. If the maintenance budget does not seem appropriate when making that comparison, the system must determine what is reasonable

For drinking water systems, the SW EFCSouthwest Environmental Finance Center developed a replacement valuation tool to help answer the question of what it would cost to replace the system today. It is meant to provide an order of magnitude estimate, not a construction type estimate. It can be found here.

Listed below are some additional Replacement Budget Resources

• https://greenvalues.cnt.org/index.php
• https://www.cnt.org/sites/default/files/publications/CNT_Value-of-Green-Infrastructure.pdf
• World Resources Institute: Green-Gray Assessment: How to Assess the Costs and Benefits of Green Infrastructure for Water Supply Systems
  • Tool: https://files.wri.org/s3fs-public/green-gray-assessment.pdf
  • Blog: https://www.wri.org/blog/2019/08/insider-green-infrastructure-can-save-water-suppliers-money-now-you-can-estimate-how

Systems need to develop a comprehensive funding strategy that clearly defines the sources of funding for all the system’s current and future needs, both operational and capital. At a minimum, the funding plan should look 5 years into the future. However, the funding plan should tie very closely to the capital improvement plan, and since capital projects require long-range planning (ideally 50 to 100 years), this portion of the funding strategy will need to encompass the next 10 years at least and ideally would extend even further. If the community has a business plan, the funding strategy might be a part of that plan.