HWU 2020-2021 Budget – Executive Summary
Presented here are the Henderson Water Utility 2021-2022 Operating and Capital Budgets. We will discuss this in appropriate detail and seek your approval at the 17 May 2021 Board Meeting.
Our budgeting and forecasting over the last several years have served us well. Our cash position has improved thru the implementation of fixed charges for water and wastewater customers. These changes generated needed revenue and cash flow resulting in an improved cash position which has allowed for needed capital projects to proceed. Continuing issues including urgent and significant capital needs, including the South Water Intake and new System Operation Center along with increased utility and sludge disposal costs. Ongoing concerns related to pension and health benefit costs put additional pressures on budget preparation. However, even with these issues, overall budgeted operating expenses increased only 2.06% which met our annual goal of 3% or less.
The Operating Budget includes estimated operating revenues of $24,026,740, which shows an increase of approximately 1.55% from last year’s budget. Revenues were budgeted projecting static usage from our major contractual customers and factoring the continuing trend of usage decrease from non-contract customers.
Operating expenses are budgeted at $21,269,297, a 2.06% increase when compared to last year’s budget. The increase is due primarily to higher projected costs for pension and benefit costs, and utilities.
This budget includes a significant increase in capital expenditures to fund several critical projects and does include expected additional borrowings for these major projects. Capital expenditures in this budget will be paid from cash generated from operations, new debt, and existing reserves. Operating Income is projected to decrease slightly while overall Net Position is anticipated to improve, however cash position is budgeted to decrease due to capital needs.
- Salaries and wages are based upon the 102 full-time budgeted positions identified below. With Commissioners, temporary/seasonal employees and interns, our total budgeted complement is 117. FICA and Medicare are determined by salaries and overtime charged at the applicable statutory rates.
- Life Insurance, Employee Assistance Program, and Cancer Insurance expenses are based on the number of eligible employees and rates supplied by the City.
- Medical Benefits expense is based on the number of eligible employees and the rate per employee supplied by the City, projected at a cost of $19,000 per employee and is based on experience in the self-insured plan from prior fiscal years.
- Workers Compensation charges are based upon 2020 – 2021 charges to date.
- Unemployment Insurance expense is based on 2021 projected rates from the City.
- Retirement Expense is based upon the required contributions of 26.95% of gross wages for non-hazardous duty employees. This rate is up 12% from last year due to the lapse of Senate Bill 249, which held the rate unchanged since fiscal year 2020. Change in required contribution rate moving forward will be capped at 12% annually.
- The Payment in Lieu of Taxes (PILOT) to the City of Henderson will increase by $50,000 this year to $550,000 for FY 2021-2022.
- Contractual Services is largely made up of miscellaneous consulting services that are not associated and charged to specific projects and other general contractual services related to maintenance of facilities and properties.
Changes in some items compared to last year’s budget:
Utilities: We have increased our planned expenditures by approximately 3% compared to last year’s budget due to continued additional costs incurred at the South Water Treatment Plant (SWTP). The additional electric costs from Big Rivers continue to increase annually. The Intake project currently in planning will reduce this cost significantly upon completion.
Sludge Hauling and Disposal: Based on projected increase upon contract term renewal, and current trends in volumes, we have budgeted this expenditure to increase by less than 1% from prior year budget levels.
Repairs to Vehicles, Equipment and Structures: These numbers tend to vary annually, since expenditures depend on what breaks and when, along with normal maintenance of equipment and facilities. Decreased budgeted cost in this fiscal year relates primarily to completing the multi-year hydrant painting and nozzle maintenance and reducing SOC projected repairs and maintenance due to moving to new facility.
Chemicals: We have increased the chemical budget based on increasing costs along with current trends in usage which are variable annually based on water and wastewater conditions. Overall increase is budgeted at a modest 4.6% for the upcoming fiscal year.
Administration Fee from City: In addition to the annual increase in PILOT payment, we have also been projected with a $50,000 increase to the administration fee we pay the City for services provided for utility billing, IT, accounts payable, human resources and safety. Current fiscal year level was $680,000 (actual) with next year projecting to be approximately $730,000. Increase in current fiscal year relates to increased budgeted costs of City/departments, no changes in allocation methods.
Last year’s personnel budget (after amendment during the year) contained 102 full-time classified employees, 5 Water & Sewer Commissioners and 10 interns and seasonal employees, for a total of 117 budgeted positions.
In this year’s budget, we will maintain the same total number of budgeted positions, with a few changes to categories and titles. This equates to 85 full-time and one part-time employees at full staff. This is a result of eliminating currently unfilled positions and restructuring in some areas.
Extra Positions to Allow Promotions: Over the last few years, we’ve added several slots that allow us to test and promote from within, calling these “ghost” positions. They are summarized in this table:
|Position||Number Available||Not-To-Exceed (Filled)|
|Water Treatment Operator I||5||10|
|Water Treatment Operator II||9|
|Wastewater Treatment Operator I||6||8|
|Wastewater Treatment Operator II||8|
|Maintenance Tech I||3||10|
|Maintenance Tech II||9|
|Maintenance Tech Sr.||1|
|Utility System Worker I||8||18|
|Utility System Worker II||6|
|Utility System Worker III||7|
As an example, there are 14 total classified positions listed in the Water Treatment Operator I and II classifications; however, there will never be more than 10 of those positions permanently filled. Five Water Treatment Plant Operator I positions exist, allowing us to hire and train new operators due to turnover or vacancy; but these positions are only filled when new, untrained operators are hired, and as they gain certification and experience, they will test up into the higher classification, never expanding our total working complement of 10 water operators.
All of these “ghost” slots taken together overstate our actual full-time complement by sixteen positions, so that the authorized grand total of 102 full-time positions overall will never actually exceed 86 actual employees, excluding our Commissioners, seasonal employees, and interns.
The following briefly discusses some changes to personnel in this Budget:
In the area of Secretarial and Administrative Assistant positions, we previously had five employees. After retirements, promotions, and reassignment of duties, we are proposing 3 fulltime and 1 part-time positions in this area, reducing headcount by 1-1/2 positions.
We are adding an additional Utility System Worker III (Operator) position and will assign that person as primary operator of the VAC Truck, one of the most expensive and complicated pieces of equipment we own. The idea is to give this Operator the primary responsibility for this vital equipment.
In comparing our positions, grades, and classifications to the City’s, we noticed a discrepancy between our USW II, light equipment operator position, and that of the Gas Department. We are proposing to upgrade our USW II position from Grade 11 to Grade 12.
Currently, one USW I, entry-level field position at Grade 9, is assigned to our Vehicle Shop as a mechanic/helper, and this has assisted greatly in keeping up with the workload. We propose to add a position of Vehicle Mechanic I, and reclassify our current Vehicle Mechanic position to Vehicle Mechanic II, which fits with what we’ve done in other areas, and gives our employees a clearer path to promotion, and makes clear the hierarchy.
This is a small number of changes compared to recent years. As far as number of positions, their duties, and the coverage we have for vital functions, the Personnel front is relatively stable. With all these changes, including adding the Project Engineer position, our head count is increasing by one.
Our Capital Budget for this year includes a total allocation of $11,800,000 for capital projects and new equipment. This represents an increase of $7,300,000 compared to the previous fiscal year budget. This increase was requested due to urgent infrastructure needs and available reserve funds. We have included detailed descriptions of some of the items listed; more details available on request. Several projects that were budgeted in the 2020-2021 fiscal year are being carried over into next year’s budget as incomplete.
Completion of the North Wastewater Plant (Headworks) project in the last quarter of CY 2016 was the last piece necessary to complete our Long-Term Control Plan (LTCP) as amended, as required under a Consent Judgment with the Commonwealth of Kentucky. As we completed that long process, we were able to terminate that judgment and are released from those obligations.
Our focus continues on Water System projects, including planning for expansion/renovation at the South Water Plant. We have completed the first five of a series of projects to renovate our nine water storage tanks with the Frontier, College, Vine Street, Green River Road Tank and FourStar Tank projects in recent years, and the Tyson Tank is ready to be bid and awarded next spring. Funds for the Graham Hill Tank project are being earmarked in planning for the 2022-2023 Capital Budget.
Funds for completion of the Clearwell Project at the South Water Treatment Plant in an amount of $ 493,323 are included in this budget. This rounds out the $1.575 million needed for this project, which is being partially offset by a $500,000 grant from Delta Regional Authority.
Additional funds for design and construction of the South Water Treatment Plant Raw Water Intake and Pipeline in an amount of $ 4,500,000 are included in this budget. Additional funds will be needed in the 2022-2023 fiscal year. Design of this large project will be completed near the end of this calendar year, with bidding and construction starting in the spring of 2022. This project is a high priority due to greatly increased electric power costs at the current intake on the Big Rivers property, due to shut down of portions of the power generators on that site, on which we depend for raw water. Some of this expenditure will be paid from bonding, and we continue to explore options for utilizing grant funds or other sources to offset this large expenditure.
An additional project funded in this year’s budget is the Atkinson Park Force Main, which will replace an aging line that travels through Atkinson Park and the old Municipal Golf Course. The final segment of this project will include a new Atkinson Park sewer pump station.
After accepting Proposals in early 2021, we are working on implementing an Advanced Metering Infrastructure (AMI) project that will replace most of our residential water meters over the next few years. An allocation of $450,000 from the new Capital Budget will continue implementation of this system into the new fiscal year.
We are also continuing funding for the Countryview Subdivision stormwater projects that are being constructed as a joint venture with the City. We have committed to continued joint funding of this project in segments as funds become available and have worked with the City and a consultant on final design of several more sections, moving street by street to address longstanding drainage issues.
The new Systems Operation Center plans are progressing, and we have set aside $ 2,800,000 in this budget for completion of that project. We hope to occupy the new building by April 2022.
In the Capital Budget section, $10,454,323 is being allocated to ongoing projects, $445,000 is being dedicated to new projects in the coming year, leaving $900,677 in unobligated funds for various projects in our Strategic Plan. You have received a copy of our updated Capital Improvement Program and Strategic Plan separately, which outlines our plans in the short and long terms for capital construction. This plan was first produced in 2014, and we’ll continue to revise this blueprint yearly at about this time, to better tailor our budgeted capital expenditures to the needs identified in the plan, and to provide justification for our capital spending priorities.
We will replace a few vehicles as the year progresses but will keep these expenditures to a minimum since funding is so tight. This is necessary to keep us on an even keel, as we rely heavily on our fleet to provide the services our customers demand.
Equipment Replacements scheduled for this year include a trackhoe/excavator, and a minibackhoe, totaling $ 320,000.
An unknown amount of funding will be available to us through the American Rescue Plan Act (Biden/Covid) passed by Congress in March 2021. At this time, we don’t know the exact amounts or sources of these funds, but plan to utilize them in a fashion that maximizes benefits to the Utility. Uses may include projects outlined above, or other projects in our long-term plans, depending on needs and issues at the time the funding comes to fruition.
Due to the significance of the current capital projects, additional borrowings of $6 million are currently projected for the upcoming fiscal year, this is will be in addition to the approximately $2 million the Utility utilized from the City’s 2020 bond issue. Current debt service mainly consists of notes to City of Henderson for funds associated with General Obligation bonds, issued in their name, which were issued to fund various capital projects over time. All have varying fixed rates ranging from 1.0% to 3.5% with maturities ranging from fiscal year 2024 to 2035. The Utility borrowed funds during a mostly advantageous period in interest rates and have wisely refinanced issues when financially beneficial. Additionally, we entered a capital lease in FY 2019, to finance the purchase of a vital piece of equipment, a new sewer vacuum truck.
We continually, in conjunction with the City, explore the potential savings and benefits of refinancing our outstanding debt issues considering the current interest rate markets. However, due to the volatility of these markets and the current economic conditions, final determination for any potential refinancing will be carefully studied and brought forward for discussion and action later, if warranted.
A Final Note:
The operating margin presented in this budget continues to be sound, considering some specific challenges related to sludge disposal and electric costs. Previous implementation of fixed charges, along with our previous comprehensive review of expenses, have allowed us to continue to generate cash from operations to adequately fund our debt service and a significant portion of our needed capital expenditures in conjunction with a sensible use of cash reserves. Based on our required debt service and substantial budgeted increase in capital expenditures, we are projecting to decrease cash position by approximately $2.9 million during the 2022 fiscal year, including the projected additional borrowing of $6 million.
Constant prudent examination of operating costs and future capital needs will be required. Additional adjustment to our rate structure will likely be necessary in the future to sufficiently fund operations and capital projects. Furthermore, possible refinancing of outstanding debt and additional borrowings for critical capital needs may still be warranted beyond fiscal year 2022, especially if advantageous interest rates continue.
In conclusion, the budget continues to be frugal. Needed actions have been taken to improve the overall financial position of the Utility but additional measures will likely be needed to ensure that future operating and capital needs are sufficiently met. Continuous examination of operations and capital infrastructure, both in the short and long term, considering ever evolving economic, regulatory, and environmental conditions will be essential.
We want to thank our Administrative Staff for their diligence and professionalism in working on this document. It represents a combined effort of many people. This group has an ongoing commitment to providing safe, clean, dependable, and reasonably priced water, wastewater, and stormwater services, from intake to outfall, for the citizens of Henderson and our service area.